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In re Sills 250 B.R. 675 (Bankr. N.D. Ill.
2000); 36 Bankr.Ct.Dec. 112 U.S. Bankruptcy Court, Northern
District of Illinois July 21, 2000 [*676] COUNSEL: Leon E. Lindenbaum,
Lindenbaum Coffman Kurlander & Brisky, Ltd., Chicago, IL, for Lindenbaum,
Coffman, Kurlander & Brisky, Ltd.Theodore W. Grippo, Jr., Pembroke &
Brown, Park Ridge, IL, for Stephen H. Sills. Michael
T. Hanafan, Cory A. Johnson, Nicholas A. Pavich, Michael T. Hanafan &
Associates, Ltd., Chicago, IL, for The Society of Lloyd’s. MEMORANDUM
OPINION JUDGE: ERWIN I. KATZ, Bankruptcy
Judge. This
matter comes before the Court on the motion of the Society of Lloyd’s
(“Lloyd’s”) for sanctions against Stephen Hartwell
Sills (“Sills”), a debtor under Chapter 7 of the United
States Bankruptcy Code, 11 U.S.C. § 101 et seq. (hereinafter
the “Bankruptcy Code”), and his attorneys Whitman H. Brisky
(“Brisky”) and the firm Lindenbaum, Coffman, Kurlander &
Brisky (the “Firm”). Following Sills’ voluntary
dismissal of his bankruptcy petition, Lloyd’s seeks an award of costs
and attorneys fees, in the amount of $15,573.75, incurred by it in contesting
Sills’ bankruptcy case. Lloyd’s moves for sanctions under 11
U.S.C. § 105(a) and under Federal Rule of Bankruptcy
Procedure 9011. For the reasons that follow, the Court finds that sanctions
should not be imposed upon either Sills or his attorneys. JURISDICTION The
Court has jurisdiction over this matter pursuant to 28 U.S.C.
§ 157(b)(1) and 28 U.S.C. § 1334. This
matter arises both under title 11 and in a case under title 11. Venue lies
under 28 U.S.C. § 1409. BACKGROUND This
background statement has been compiled from the Sills bankruptcy file as a
whole and from the submissions of the parties in regards to the requested sanctions. The
Relationship Between Sills and Lloyd’s The
Society of Lloyd’s operates and regulates Lloyd’s of London,
the British insurance market that began as a marine insurer over 300 years ago
and has now insured everything from Betty Grable’s [*677] “million
dollar legs” to natural disasters and asbestos disease. Unlike
traditional American insurance companies, Lloyd’s does not directly
insure its customers solely with its assets, nor does it earn profits from
premiums and pay claims for losses to insureds under its policies. Rather,
through individuals known as Members’ Agents, Lloyd’s
solicits individuals of substantial means to become Names or underwriters.
Often, these Names form groups known as Syndicates to insure large risks. When
an individual becomes a Lloyd’s Name, that individual agrees to put
his entire net worth at risk to meet the claims that may be made against him or
his Syndicate. In exchange, the Names expect to profit from the premiums paid
by the policy-holders and from investment of the Syndicate’s capital.
The obvious hope is that no policy holder will make a claim and that the Names
will reap handsome profits from their investments. Sills
was a Lloyd’s Name for the years 1986 through 1992. (Bankruptcy
Petition Schedule F). He claims that his investment in Lloyd’s has
been a “disaster by any objective standard.” (Sills Memo at
p. 2). He claims that, to date, he has paid Lloyd’s approximately
$140,000. (Memorandum of Stephen Hartwell Sills in Opposition to
Lloyd’s Motion for Sanctions (hereinafter the “Sills
Memo”) at p. 2). Other than asserting that “the financial
disaster was one of which [he] was entirely innocent,” (Sills Memo at
p. 2), Sills offers no explanation of what the nature of the disaster was or
how it came about. Sills
was one of the defendants in The Society of Lloyd’s v. Berkos, et al.,
No. 99 C 2651, filed in the United States District
Court for the Northern District Of Illinois. The Berkos case commenced when
Lloyd’s filed for Registrations of Foreign Money Judgments against
Sills and several other Lloyd’s Names against whom judgments had been
entered in English courts. The judgment against Sills (the “English
Judgment”) was in the approximate amount of $213,618, but it has been
accruing interest since its entry on March 11, 1998. Sills estimates that the
English Judgment now amounts to approximately $250,000, including interest and
costs. The
Sills Bankruptcy Filing On
October 29, 1999, the District Court granted judgment on the pleadings in
Lloyd’s favor in the Berkos case. On November 16, 1999, the
District Court entered final judgment against Sills and other Berkos defendants. Also on
November 16, 1999, Sills and several other Berkos defendants filed a notice
of appeal to the Seventh Circuit Court of Appeals. The next day, November 17,
1999, Sills filed his Chapter 7 petition. Sills was not required to post a
supersedeas bond for the Berkos appeal because he was under the protection of the
automatic stay imposed by 11 U.S.C. § 362. On
February 29, 2000, this Court entered an order modifying the automatic stay
imposed by § 362 for the limited purpose of allowing Sills to
pursue his appeal. The appeal is still pending as of this date. On
May 1, 2000, Sills filed a motion to dismiss his bankruptcy case. In that
motion, he stated that he sought dismissal because he was unable to give actual
notice of the bankruptcy proceedings to any significant portion of the policy
holders insured by his Syndicates and because Lloyd’s did not wish him
to proceed by way of Chapter 7. (Debtor’s Motion to Dismiss Under
Section 707(a), ¶¶ 5, 10). Lloyd’s alleges
that Sills sought voluntary dismissal only because the Court dismissed the
Chapter 7 case of another Berkos defendant, Patrick J. Collins, No. 99
B 31891, as a bad faith filing on April 12, 2000. (The Society of
Lloyd’s Petition for Award of Sanctions (hereinafter the
“Sanctions Motion”), ¶ 3); see also, In
re Collins,
250 B.R. 645 (Bankr.N.D.Ill.2000) (imposing sanctions on the debtor
and his attorneys following the dismissal as a bad faith filing).
Lloyd’s further alleges that Sills recognized that “his
petition presents an even more egregious abuse of the bankruptcy laws.”
(Sanctions Motion, ¶ 3). On June [*678] 13, this Court granted
Sills’ motion and dismissed his case. On June 15, 2000, Sills posted a
supersedeas bond for the Berkos appeal in the amount of $255,539.77. Sills’
Debts In
his petition, Sills scheduled two secured debts. The first, in the amount of
$141,081.95, is for a mortgage held by Bank of America FSB on the Chicago
condominium (the “Condominium”) he owns with his wife, Lyn M.
Sills (“Lyn”), as tenants by the entireties. The second is a
home equity line of credit with the Harris Bank (“Harris”),
good for up to $25,000, on which Sills owes $21,548.39. The line of credit is
also secured by the Condominium. Sills reaffirmed the Harris debt within two
weeks of filing the Chapter 7 petition. He is jointly liable with Lyn on both
debts. Sills
and Lyn are also jointly liable on a $48,267.95 debt to PHH Mortgage Services
(“PHH”). They incurred the debt to finance a new driveway for
a waterfront vacation home in Lake Geneva, Wisconsin (the “Vacation
Home”) that Lyn individually has owned since 1985. Sills estimates
that the Vacation Home is worth $1 million. The Vacation Home secures the debt,
but because Sills has no ownership interest in the Vacation Home, the debt is
unsecured to him. Sills
scheduled unsecured debts in the total amount of $459,585.02, including the
debt to PHH. The total also includes Sills’ debt or debts to
Lloyd’s, which he schedules at $400,000. There are only two other
unsecured debts scheduled in amounts greater than zero. The first is to
Ameritech, in the amount of $5,307.07, for Yellow Pages advertising for
Sills’ business. The second is to the American Names Association (the
“ANA”), a group of Lloyd’s Names whose purpose is to
gather information about Lloyd’s and to develop tactics to defend
against Lloyd’s. Collins, * * * * * * *. The ANA has accumulated and
disseminated information on the bankruptcy process to its Names. Sills scheduled
dues owed to the ANA in the amount of $4,750. Sills’
Assets Sills
scheduled personal property having a total value of $88,003.32. He claimed
exemptions of $52,753.32 in the personal property. Sills scheduled two pieces
of real property: his one-half interest in the Condominium and a one-third
undivided interest as a tenant in common in 112 acres of vacant land in Fremont
County, Idaho (the “Idaho Property”). Sills valued the
Condominium at $225,000 and his half interest in it at $112,500. He scheduled
the Condominium as exempt property because he and his wife hold title as
tenants by the entireties. Lloyd’s
initially objected to Sills’ exemptions, alleging that Sills might
have transferred the Condominium in tenancy by the entireties for the sole
purpose of avoiding creditors, in violation of Illinois law. (The Society of
Lloyd’s Objections to Exemption Statement of Debtor (the
“Objections”), ¶ 4). Lloyd’s also
objected to Sills’ claim that certain investment accounts were exempt
as retirement or pension accounts. (Objections, ¶ 9).
However, Lloyd’s withdrew the Objections on February 22, 2000. In
his schedules, Sills valued his one-third interest in the Idaho Property at $500,000.
The Idaho Property is currently listed for sale at the price of $6.3 million,
but has been on the market since May 22, 1997. Two offers on the property, one
for $6 million and another for $2.76 million, have been made and withdrawn. A
third offer, for $2.8 million, was made on March 28, 2000, but was rejected by
at least one of the other tenants in common. Sills’ interest in the
Idaho Property, while illiquid, is non-exempt property, available for payment
of his creditors. On
March 14, 2000, and pursuant to 11 U.S.C. § 363, the Court
authorized the Chapter 7 trustee to sell Sill’s non-exempt personal
property, including a boat, a gun, and two cars that Sills keeps at the
Vacation [*679] Home, to Lyn, free
and clear of all liens, for the sum of $12,500. Sills’
Income and Expenses Sills
earns yearly gross income of $156,000, or $13,000 per month. He nets $8,920 per
month after deduction of payroll taxes and a $780 monthly contribution to his
401(k) plan. He scheduled $7,411.75 in monthly expenses. Those expenses include
telephone expenses of $400 per month, clubs and recreation at $1,350 per month,
and charitable contributions of $700 per month. However, Sills claims to spend
a mere $125 per month on food. DISCUSSION Lloyd’s
argument seems to be that because the Court dismissed the Collins case as a bad faith filing,
Collins, 250 B.R. 645, it should sanction Sills for filing his
voluntarily-dismissed petition. Lloyd’s asks the Court to infer that
Sills voluntarily dismissed his petition because he feared that otherwise his
case would also be dismissed as a bad faith filing. In large part,
Lloyd’s is asking the Court to treat Collins and Sills as fungible.
Lloyd’s characterizes Sills’ petition as a “bad
faith filing” (Sanctions Motion, ¶ 5), but the Court
has never so held. Nor has it ever been asked to determine whether Sills filed
his petition in bad faith. Sills voluntarily dismissed his bankruptcy case. All
that is now before the Court are two issues. The first is whether sanctions
should be imposed on Sills or his attorneys for violations of Federal Rule of
Bankruptcy Procedure 9011. The second is whether Sills and his attorneys should
be sanctioned under either the statutory authority to prevent abuse of process
granted in 11 U.S.C. § 105(a) or the Court’s
inherent powers to sanction arising from the same statutory section. Rule
9011 Federal Rule of Bankruptcy Procedure
9011 provides in pertinent part: (b) Representations to the court By presenting to the court (whether by
signing, filing, submitting, or later advocating) a petition, pleading, written
motion, or other paper, an attorney or unrepresented party is certifying that
to the best of the person’s knowledge, information, and belief, formed
after an inquiry reasonable under the circumstances,— (1) it is not being presented for any
improper purpose, such as to harass or to cause unnecessary delay or needless
increase in the cost of litigation; (2) the claims, defenses, and other legal
contentions therein are warranted by existing law or by a nonfrivolous argument
for the extension, modification, or reversal of existing law or the
establishment of new law…. Fed. R. Bankr.P. 9011(b). Unlike
the Collins petition, Sills’ bankruptcy filing is not sanctionable for
improper purpose under Rule 9011(b)(1). Collins filed a legally frivolous
petition for the improper purpose of delaying and harassing Lloyd’s,
and attempted to manipulate the bankruptcy system to avoid paying a single,
disfavored creditor. If Collins had received a bankruptcy discharge, he would
have retained more than $2 million in personal wealth, while receiving a
discharge of his $525,000 debt to Lloyd’s resulting from the Berkos
judgment. Sills, on the other hand, filed knowing that his most significant
asset, the one-third interest in the Idaho Property, would become property of
the estate and would be liquidated for the benefit of his creditors, including
Lloyd’s. Even if sold at Sills’ seemingly lowball valuation
of $500,000, the Idaho Property would have yielded sufficient funds to pay all
of Sills’ unsecured debts, including the Berkos Judgment, in full. The
biggest similarity between Sills and Collins is that during the pendency of
their respective bankruptcies, each was allowed to proceed with the Berkos
appeal without posting what has turned out to be a substantial [*680] supersedeas bond.
[FN1] This was one of many factors the Court considered in sanctioning Collins
and his attorneys. If Collins’ filing had succeeded, Collins would not
only have evaded the supersedeas bond, but the underlying debt as well, while
retaining almost all of his wealth. Sills may have evaded the supersedeas bond,
but his bankruptcy would have resulted in full payment of the underlying debt. FN1. Following the dismissal of his
bankruptcy case, Collins was required to post a $300,000 supersedeas bond.
Sills has now posted a $255,539.77 bond. Where
a debtor filed a Chapter 11 petition to delay collection of a state court
judgment and avoid posting an appeal bond, both of which she was able to pay,
the Ninth Circuit found that her action was sanctionable as “a
transparent attempt to use a Chapter 11 petition and the resulting stay as an
inexpensive substitute for the bond required under state law.” Marsch
v. Marsch (In re Marsch), 36 F.3d 825, 831 (9th Cir.1994). Here, however, Sills’
filing was not an inexpensive substitute for bond or payment; it would have
cost him his most valuable asset, which would have been liquidated to his debts
in full. A
petition filed as a litigation tactic where the debtor had only one creditor,
its available assets could be liquidated outside bankruptcy, and where the
bankruptcy filing delayed completion of nonbankruptcy litigation was
sanctionable “[g]iven the timing of the bankruptcy, its delay of state
court action, and absence of anything to reorganize.” St. Paul Self
Storage Ltd. Partnership v. Port Authority of the City of St. Paul (In re St.
Paul Self Storage Ltd. Partnership), 185 B.R. 580, 584 (1995). Where a
Chapter 7 petition served no bankruptcy purpose because the debtor’s
available assets could be distributed without bankruptcy administration and the
filing benefitted only the debtor’s principals, the principals were
sanctioned for filing to hinder, delay, and frustrate the creditor and further
their own interests. Trizec Colony Square, Inc. v. Gaslowitz (In re Addon
Corp.), 231
B.R. 385, 390 (Bankr.N.D.Ga.1999). The Collins bankruptcy was sanctionable
because Collins had virtually nothing to reorganize; his few non-exempt assets
could easily have been distributed without bankruptcy administration. The Sills
situation is distinguishable from Collins, St. Paul, and Addon because Sills had available
assets that were more easily liquidated within the bankruptcy framework than
without and such a distribution would have benefitted Sills’
creditors. This is a proper purpose for filing a bankruptcy petition. Sills’
petition was also warranted by existing law. Unlike Collins, Sills did not rely
on obscure, discredited cases to establish his right to bankruptcy relief under
highly questionable circumstances. The circumstances of Sills’ case were
that he possessed sufficient, illiquid assets to pay his debts and sought to
liquidate them through bankruptcy for the benefit of his creditors. It would be
ludicrous to say that an attempt to pay creditors in full is unwarranted by
existing bankruptcy law. Section
105(a) “Section
105 grants broad powers to implement the provisions of Title 11 and to prevent
an abuse of bankruptcy process.” In re Volpert, 110 F.3d 494, 500 (7th
Cir.1997). The plain language of § 105 empowers bankruptcy
courts to sanction conduct that abuses the judicial process and vexatiously
multiplies bankruptcy proceedings. Id. at 501. When
a bankruptcy filing is motivated by a desire to delay a creditor from enforcing
its rights in an ongoing dispute, the filing is an abuse of process. Jones
v. Bank of Santa Fe (In re Courtesy Inns), 40 F.3d 1084, 1085, 1090 (10th
Cir.1994). Section 105(a) empowers bankruptcy courts to punish attorneys who
vexatiously multiply the proceedings before them. Volpert, 110 F.3d at 500 citing Courtesy [*681] Inns, 40 F.3d at 1089. Sanctions
are justified under § 105(a) where the sanctioning court has
clearly found that a litigant “intentionally abused the judicial
process in an unreasonable and vexatious manner.” In re Rimsat, 212 F.3d 1039, 1047 (7th
Cir.2000). A case filed for the purpose of delay is also a sanctionable abuse
of process. Hendrix v. Page, 986 F.2d 195, 201 (7th Cir.1993). The
Sills filing was neither vexatious nor abusive. It was not unreasonable or
manipulative. The record clearly indicates that Sills filed to liquidate assets
and pay his creditors. That is a legitimate goal under the Bankruptcy Code. As
all parties repeatedly urged in the Collins case, bankruptcy filings must be
reviewed on an ad hoc basis. Industrial Insurance Services v. Zick (In re Zick), 931 F.2d 1124, 1129 (6th
Cir.1991). Sills is not Collins and the outcome in Collins has little to do
with the facts of this case. The motion for sanctions is denied. |