Gioioso, In re

• Decision Date: 16 November 1992
• Docket Number: No. 92-5176,92-5176
• Parties: , 24 Fed.R.Serv.3d 199, 23 Bankr.Ct.Dec. 1094, Bankr. L. Rep. P 74,989 In re Joseph GIOIOSO; Carol Jean Gioioso, Debtors. Chester J. STUEBBEN; Westfield Home News Service, Inc., Appellants, v. Joseph GIOIOSO; Carol Jean Gioioso. Third Circuit
• Court: U.S. Court of Appeals — Third Circuit

Page 956

979 F.2d 956

61 USLW 2319, 24 Fed.R.Serv.3d 199,

23 Bankr.Ct.Dec. 1094,

Bankr. L. Rep. P 74,989

In re Joseph GIOIOSO; Carol Jean Gioioso, Debtors Chester J. STUEBBEN; Westfield Home News Service, Inc., Appellants, v. Joseph GIOIOSO; Carol Jean Gioioso.

No. 92-5176.

United States Court of Appeals,Third Circuit.

Argued Sept. 24, 1992.

Decided Nov. 16, 1992.

Richard F. Collier, Jr. (argued), Evelyn P. Mitchell, Collier, Jacob & Mills, Somerset, N.J., for appellants.

David A. Ast (argued), Wahl & Ast, Morristown, N.J., for appellees.

Before: MANSMANN, ROTH and ROSENN, Circuit Judges.

OPINION OF THE COURT

MANSMANN, Circuit Judge.

This appeal arises from the bankruptcy court's denial of motions to assess attorney's fees and costs against debtors who filed false affidavits in opposition to summary judgment and the district court's affirmance of that denial. We determine that a violation of Bankruptcy Rule 9011 requires the imposition of an appropriate sanction and that Bankruptcy Rule 7056 requires the imposition of fees and costs associated with bad faith litigation. Thus, we will reverse and remand for the imposition of sanctions and an award of fees and costs.

I.

Joseph and Carol Jean Gioioso purchased a newspaper distribution business, the Westfield Home News Service, Inc., from Chester J. Stuebben. When the business failed to deliver profits, the Gioiosos ceased paying monthly installments to Stuebben and commenced a contract action in the state courts of New Jersey. Stuebben counterclaimed, seeking judgment on an $841,285.50 promissory note, which represented a portion of the purchase price, and seeking the return of the business, which secured the promissory note. During this same time, the Gioiosos transferred funds from their business and personal accounts to other accounts and to their relatives. In the midst of the contract action, the Gioiosos filed a petition for relief pursuant to Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et seq.

Stuebben responded by commencing an adversary proceeding in the bankruptcy case, requesting that the bankruptcy court deny the debtors (the Gioiosos) discharge. Pursuant to § 727, a court shall grant a debtor a discharge unless the debtor has acted deceptively with respect to property transfers, records, court filings, or explanations as to property loss. 11 U.S.C. § 727(a)(2)-(5). The bankruptcy court resolved the adversary proceeding in Stuebben's favor, determining that each subsection of 11 U.S.C. § 727(a)(2)-(5) warranted denial of discharge. ¹

In the course of its opinion denying discharge, the bankruptcy court concluded that the debtors had committed various wrongs. The following excerpts are indicative of the court's findings.

[T]here is testimony given by one (or both) debtors to the effect that the initial transfers were accomplished specifically to hinder, delay, or prevent [Stuebben] from obtaining assets of the later created estate....

This court finds the evidence offered through use of deposition testimony given [by the debtors] close in time to the events complained of to be more credible than the certifications now relied upon by the debtors.... The facts are such that the earlier testimony regarding the funds is the only credible testimony.

... The series of transfers unearthed by [Stuebben] and not disclosed by the debtors is sufficient proof of debtors' intent to defraud....

....

... [T]he debtors knowingly and fraudulently failed to disclose information material to this case, and, in so doing, knowingly and fraudulently uttered a false oath and account when their Schedules and Statement were submitted....

....

[In determining the debtors' failure to adequately explain their loss or deficiency of assets], the court is again struck by the discrepancies appearing between sworn testimony taken near in time to the loss and the sworn statements offered in opposition to this motion [for summary judgment]. Even if those discrepancies did not exist and the sworn statements were wholly credible, the only explanation offered for the loss is that debtors cannot remember why money was transferred to others, where money retained was spent, nor for what purpose it was spent. This explanation is actually no explanation at all, and the court concludes it is totally inadequate.

Stuebben v. Gioioso (In re Gioioso), No. 86-01383 at 11-17 (Bankr.D.N.J. Jan. 30, 1991). These excerpts strongly suggest that the bankruptcy court found that the debtors had proceeded in bad faith by filing false schedules and by providing incredible, or at least frivolous, explanations for their deficiency of assets.

Stuebben, in addition to seeking the denial of discharge, had also sought attorney's fees and costs pursuant to Bankruptcy Rules 7054, 7056, and 9011, and pursuant to the court's "inherent power" to impose sanctions. ² Notwithstanding the debtors' wrongful conduct, the bankruptcy court denied, without discussion, Stuebben's request for attorney's fees. The bankruptcy court also denied, at a subsequent proceeding, Stuebben's motion for costs. At that proceeding, the bankruptcy court said only this:

I'm well aware of the facts of this matter not only because of the 17 page opinion, but the other numerous motions and appearances here.

I'm going to deny costs. The reason for that is that if my opinion is sustained on appeal, the Debtors have been denied their global discharge and any remedy from this Court--that is certainly a harsh sanction and I'm not going to add to it by adding costs to an already financially troubled Debtor.

R. at 2945. The district court reviewed the bankruptcy court's denial of fees and costs for "clear error" and sustained the denial as "not clearly erroneous" and as "reasonable." Stuebben v. Gioioso (In re Gioioso), No. 91-1236, slip op. at 24 (D.N.J. July 17, 1991). Stuebben's appeal followed.

II.

We have jurisdiction pursuant to 28 U.S.C. §§ 158(a) and 1291. The district court had jurisdiction pursuant to 28 U.S.C. §§ 158(a) and 1334.

We review the bankruptcy court's findings of fact for clear error, and we exercise plenary review over any conclusions of law. See Landon v. Hunt, 977 F.2d 829, 830 (3d Cir.1992). We review the denial of attorney fees and the denial of costs for abuse of discretion, which occurs if the court's ruling was founded on an error of law or clearly erroneous view of the facts or misapplication of law to the facts. See Marco v. Accent Pub. Co., 969 F.2d 1547, 1548 (3d Cir.1992) (abuse of discretion standard); Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240, 1242 (3d Cir.1983) (same), cert. dismissed, 464 U.S. 1033, 104 S.Ct. 690, 79 L.Ed.2d 158 (1984).

III.

Attorney's fees are expressly authorized by Bankruptcy Rule 9011 which tracks the language of Federal Rule of Civil Procedure 11, and by Bankruptcy Rule 7056, which makes Federal Rule of Civil Procedure 56(g) applicable in bankruptcy proceedings. Rule 9011--which provides for sanctions that include attorneys fees--applies generally to the filing of false certifications. ³ Rule 7056--which provides for reasonable expenses that include attorney's fees--applies specifically to the filing of false affidavits in the context of a summary judgment proceeding. ⁴ We address each rule in turn.

A.

Although we have directly addressed the application of Bankruptcy Rule 9011 on only two occasions, see Landon v. Hunt, 977 F.2d 829 (3d Cir.1992); Cinema Svs. Corp. v. Edbee Corp., 774 F.2d 584 (3d Cir.1985), we have indicated that cases decided pursuant to Federal Rule of Civil Procedure 11 apply to Rule 9011. See Landon, 977 F.2d at 833 & n. 3 (applying Rule 11 precedent to case involving Rule 9011); Cinema Svs. Corp., 774 F.2d at 586 (looking to Rule 11 advisory committee note for guidance in a Rule 9011 case).

We conclude that the bankruptcy court abused its discretion by refusing to impose any sanction against the debtors in the present case. The bankruptcy court found in its opinion that the debtors in fact falsified certifications, a violation of Rule 9011. When Rule 9011 is violated, the rule states that the court "shall impose" in the violating party "an appropriate sanction." In Cinema Svs. Corp., we emphasized that Rule 9011, like Rule 11 of the Federal Rules of Civil Procedure, focuses "the court's attention on the need to impose sanctions for pleading and motion abuses." 774 F.2d at 586 (quoting Committee Note to Rule 11); see also In re Powers, 135 B.R. 980, 998 (Bankr.C.D.Cal.1991) ("A bankruptcy court must impose sanctions when it finds a violation of Bankruptcy Rule 9011").

We have further refined this interpretation of the mandatory nature of the Rule 11/Rule 9011 "shall" in Lieb v. Topstone Indus., Inc., 788 F.2d 151, 157 (3d Cir.1986):

The use of "shall" was deliberate and carefully considered, and was intended to overcome the reluctance of courts to assess sanctions against erring counsel and parties. The tone of the rule makes clear that although trial judges still retain substantial discretion, its exercise is now directed more to the nature and extent of sanctions than to initial imposition.

(citations omitted); see also id. at 158 (sanctions influenced by the particular facts of the case; court may decide circumstances warrant imposition of only part of adversary's expenses or only a reprimand); Thomas v. Capital Security Svs., Inc., 836 F.2d 866, 877 (5th Cir.1988) (noting that the sanctioning court "is vested with considerable discretion in determining the 'appropriate' sanction to impose upon the violating party"); Mercury Service, Inc. v. Allied Bank of Texas, 117 F.R.D. 147 (C.D.Cal.1987) (imposing only a verbal admonition upon a party who violated Rule 11 but demonstrated good faith and candor to the court), aff'd, 907 F.2d 154 (9th Cir.1990) (table). We determine from the above reasoning that, where the court finds a violation of Rule 9011, the court must apply a sanction. Accord Thomas, 836 F.2d at 876 ("Once...