In re Crofford, No. 02-6075 EA (8th Cir. 12/8/2003)
| Decision Date | 08 December 2003 |
| Docket Number | No. 02-6075 EA.,02-6075 EA. |
| Parties | In re: Curtis A. Crofford, and Maria E. Crofford, Debtors. Curtis A. Crofford, and Maria E. Crofford, Appellants, v. Conseco Finance Servicing Corporation, Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Before SCHERMER, DREHER, and FEDERMAN, Bankruptcy Judges.
The debtors, Curtis A. Crofford and Maria E. Crofford ("Debtors"), appeal the bankruptcy court order denying the Debtors' motion to reopen their case and imposing monetary sanctions on the Debtors' counsel. We have jurisdiction over the appeal from the final order of the bankruptcy court denying the motion to reopen and imposing sanctions. See 28 U.S.C. § 158(b). For the reasons set forth below, we partially affirm and partially reverse and remand
The issue on appeal is whether the court properly imposed monetary sanctions on the Debtors' counsel payable to Conseco Finance Servicing Corp. ("Creditor") pursuant to 11 U.S.C. § 105 and Federal Rule of Bankruptcy Procedure 9011. We conclude that: (1) the court failed to provide notice of its intent to impose sanctions pursuant to 11 U.S.C. § 105 and therefore could not rely on such provision for the award of sanctions; (2) the court gave proper notice authorizing an award of sanctions pursuant to Federal Rule of Bankruptcy Procedure 9011; (3) the court properly exercised its discretion to determine that sanctions were appropriate under Rule 9011; and (4) the court's ability to award monetary sanctions was limited by Rule 9011(c)(2) to an award payable to the court and not payable to an opponent.
On January 25, 2000, the Debtors executed two promissory notes in the principal amounts of $13,000 and $61,858.50 in favor of the Creditor. The two promissory notes were secured by real estate mortgages.
On August 20, 2000, the Debtors filed a petition for relief pursuant to Chapter 7 of the Bankruptcy Code. On December 14, 2000, the Debtors received a discharge and on January 16, 2001, the Debtors' bankruptcy case was closed.
In 2001, the Creditor filed a complaint in equity in the Circuit Court of Pulaski County, Arkansas ("State Court") seeking a reformation of the legal descriptions and foreclosure of its interest under the mortgages. Thereafter the Debtors filed a motion to reopen their bankruptcy case to address the issue of the impact of their discharge on the Creditor's claims raised in the State Court litigation. The bankruptcy court denied the motion to reopen. The Debtors filed a motion to reconsider the denial of the motion to reopen which the bankruptcy court also denied. The Debtors appealed the orders denying the motion to reopen and denying the motion to reconsider to this court which denied as untimely the appeal with respect to the order denying the motion to reopen and affirmed the order denying the motion to reconsider. Crofford v. Conseco Finance Servicing Corp. (In re Crofford), 277 B.R. 109 (B.A.P. 8th Cir. 2002).1
On July 23, 2003, the Debtors filed another motion to reopen their bankruptcy case. In the second motion, the Debtors sought to reopen the case to file an adversary proceeding against the Creditor requesting damages for violation of the discharge injunction of 11 U.S.C. § 524 and seeking a determination regarding the dischargeability of a certain indebtedness of the Debtors to the Creditor created by the deed reformation litigation pending before the State Court. On August 16, 2002, the bankruptcy court entered its order denying the motion to reopen. The court determined that the allegations in the second motion to reopen were substantially the same as the allegations the Debtors had made in the first motion, which was the subject of the prior appeal to this court. The court raised the issue of a possible violation of Federal Rule of Bankruptcy Procedure 9011 and directed the Debtors and their counsel to show cause why they should not be sanctioned under Rule 9011(c)(1)(B) for raising legal issues that had previously been raised and decided.
On August 26, the Debtors filed a motion to alter or amend the order denying the second motion to reopen. After the Creditor filed its response to such motion and the Debtors filed their reply, the Debtors filed a motion to amend the motion to alter or amend. A hearing was held on September 18, 2002, on the motion to alter or amend, the motion to amend the motion to alter or amend, and the show cause. The Creditor orally moved for an award of attorneys' fees and costs at the hearing. The court denied the motion to alter or amend and the motion to amend the motion to alter or amend. The court ruled that it would enter sanctions and took that matter under advisement. On November 14, 2002, the court entered its order denying the motion to alter or amend judgment, denying the motion to amend the motion to alter or amend, and imposing monetary sanctions on the Debtors' counsel in the amount of $3,000 payable to the Creditor.
The Debtors appealed the November 14 order as well as the original order denying the second motion to reopen. The Debtors abandoned the appeal with respect to the denial of the motion to reopen and the reconsideration of such denial.2 The sole issue to be decided at this juncture is the propriety of the award of sanctions.3
An award of sanctions involves a consideration of three types of issues: factual, legal, and discretionary. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 399, 110 S.Ct. 2447, 2457, 110 L.Ed.2d 359 (1990) First, a court must consider factual questions regarding the nature of the attorney's inquiry prior to filing the pleading and the factual basis for the pleading. Next, a court must consider legal issues to determine if the pleading is warranted by existing law or a good faith argument for a change in the law and whether the attorney's conduct violated Rule 9011. Finally, if a court determines that sanctions are warranted, it must exercise discretion to ensure the sanction is appropriately tailored to the situation. Id.
We review the award of sanctions for an abuse of discretion. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 399-405, 110 S.Ct. 2447, 2457-2461, 110 L.Ed.2d 359 (1990); Gordon v. Unifund CCR Partners, 345 F.3d 1028, 1030 (8th Cir. 2003); MHC Inv. Co. v. Racom Corp., 323 F.3d 620, 624 (8th Cir. 2003); Coonts v. Potts, 316 F.3d 745, 753 (8th Cir. 2003); Schwartz v. Kujawa (In re Kujawa), 270 F.3d 578, 581-82 (8th Cir. 2001); Grunewaldt v. Mut. Life Ins. Co. of New York (In re Coones Ranch, Inc.), 7 F.3d 740, 743 (8th Cir. 1993); Ebersold v. DeLaughter (In re DeLaughter), 213 B.R. 839, 841 (B.A.P. 8th Cir. 1997). The review of the imposition of sanctions under Federal Rule of Bankruptcy Procedure Rule 9011 necessarily requires an examination of the underlying factual and legal claims. Cooter & Gell v. Hartmarx Corp., 496 U.S. at 405, 110 S.Ct. at 2461; MHC Inv. Co. v. Racom Corp., 323 F.3d at 624. We reverse the award of sanctions only if it was based on an erroneous view of the law or on a clearly erroneous assessment of the evidence. Cooter & Gell v. Hartmarx Corp., 496 U.S. at 405, 110 S.Ct. at 2461; MHC Inv. Co. v. Racom Corp., 323 F.3d at 624; DeLaughter, 213 B.R. at 841. The facts are not in dispute; however, whether the Debtors' motion was warranted by existing law or a non-frivolous argument for extension, modification, or reversal of the law is in dispute. Accordingly, we review the award of sanctions to determine if it was based on an erroneous view of the law and to ensure that the court did not abuse its discretion in tailoring the award.
A bankruptcy court can award sanctions pursuant to 11 U.S.C. § 105 or Federal Rule of Bankruptcy Procedure 9011. Section 105 of the Bankruptcy Code recognizes the bankruptcy court's inherent authority to issue any order that is necessary or appropriate to carry out the provisions of this title. 11 U.S.C. § 105(a). Rule 9011(c) authorizes a court to impose sanctions by motion or on its own initiative. In either event, due process requires notice and an opportunity to respond before the imposition of sanctions.
Every pleading filed by a represented party must be signed by an attorney of record. F.R.Bankr.P. 9011(a). By presenting a motion to the court, the signing attorney is certifying, to the best of the attorney's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, that the motion is not being presented for any improper purpose; the legal contentions therein are warranted by existing law or by a non-frivolous argument for the extension, modification, or reversal of existing law or the establishment of new law; and the factual allegations therein have or are likely to have evidentiary support. F.R.Bankr.P. 9011(b).
If, after notice and a reasonable opportunity to respond, a court determines that a motion was presented for an improper purpose, was not warranted by law or a non-frivolous argument for extension, modification, or reversal thereof or the establishment of new law, or lacks evidentiary support, the court may impose sanctions on the attorney who filed the motion. F.R.Bankr.P. 9011(c). A request for sanctions can be initiated by motion of a party or by a show cause order issued by the court. F.R.Bankr.P. 9011(c)(1). Any sanction imposed must be limited to what is sufficient to deter repetition of such conduct or comparable conduct by others similarly situated. F.R.Bankr.P. 9011(c)(2). Sanctions may be monetary or non-monetary; however, where the court initiates the award of sanctions by a show cause order, monetary sanctions are limited to the award of a penalty payable to the court. F.R.Bankr.P. 9011(c)(2).4 Furthermore, a court may not issue monetary sanctions on its own initiative unless the court issues a show cause order before a voluntary withdrawal or settlement of the offensive pleading. Fed.R.Civ.P....
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