In re Inc.

• Decision Date: 18 October 2011
• Docket Number: Bankruptcy No. 04 B 31669.,Adversary No. 07 A 00838.
• Citation: 55 Bankr.Ct.Dec. 173,458 B.R. 473
• Parties: In re CMGT, INC., Debtor.David E. Grochocinski, Trustee, Plaintiff,v.Spehar Capital, LLC, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

458 B.R. 473

55 Bankr.Ct.Dec. 173

In re CMGT, INC., Debtor.David E. Grochocinski, Trustee, Plaintiff,

v.Spehar Capital, LLC, Defendant.

Bankruptcy No. 04 B 31669.

Adversary No. 07 A 00838.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Oct. 18, 2011.

Kathleen M. McGuire, Esq., Orland Park, IL, for Plaintiff.John G. Lamb, Esq., for Defendant.David E. Grochocinski, Orland Park, IL, Esq., Trustee.

MEMORANDUM OPINION

JOHN H. SQUIRES, Bankruptcy Judge.

This matter comes before the Court on the motion of Spehar Capital, LLC (“Spehar”) for sanctions and fees against David E. Grochocinski, the Chapter 7 trustee (the “Trustee”) of the bankruptcy estate of CMGT, Inc. (“CMGT”), and his attorneys, Grochocinski, Grochocinski & Lloyd (the “Firm”). For the reasons set forth herein, the Court denies Spehar's motion to sanction the Trustee and the Firm.

I. JURISDICTION AND PROCEDURE

The Court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O).

II. FACTS AND BACKGROUND

A brief recitation of the history and background that led to the litigation in this adversary proceeding (the “Adversary Proceeding”) is necessary. The Trustee and Spehar negotiated a post-petition financing agreement that outlined a plan whereby Spehar agreed to loan CMGT litigation funds for the Trustee to prosecute a malpractice claim on behalf of the estate.¹ The Trustee then filed a motion before this Court to allow him to enter into post-petition secured financing with Spehar. On September 2, 2005, the Court, adopting the language of the parties' agreed proposed order, entered an order (the “Financing Order”) that provided in part that “Spehar has a valid and perfected lien on the proceeds of any ... [malpractice action] recovery” and that the “Trustee shall take all reasonable and appropriate actions to void all liens that are asserted to be superior to Spehar's valid and perfected lien in CMGT's assets....” (04 B 31669 Bankr.Docket No. 20 ¶¶ 6 & 8.)

On July 26, 2007, the Trustee filed a motion to vacate the Financing Order because Spehar had not advanced the sums that it was required to under that Order. (04 B 31669 Bankr.Docket No. 80.) On August 30, 2007, the Trustee filed the Adversary Proceeding seeking to determine the validity, extent, and priority of Spehar's pre-petition lien. On October 5, 2007, the Court denied the Trustee's motion to vacate the Financing Order. (04 B 31669 Bankr.Docket No. 112.) The Court denied the motion on the bases that the Financing Order was a final and appealable order entered almost two years before the motion was filed and that there were no valid, timely grounds for vacating the Order under Federal Rule of Bankruptcy Procedure 9024 or Federal Rule of Civil Procedure 60(b). (Resp. to Mot. for Sanctions, Trustee Aff., Ex. No. 4.) Specifically, this Court noted that the denial of the motion to vacate the Financing Order was without prejudice to the Trustee's challenge of Spehar's lien in the Adversary Proceeding. ( Id. at p. 10.)

The Adversary Proceeding moved forward with several pre-trial motions. First, Spehar filed a motion for judgment on the pleadings, which the Court denied. Grochocinski v. Spehar Capital, LLC (In re CMGT, Inc.), 384 B.R. 497 (Bankr.N.D.Ill.2008). In that decision, the Court noted that it was denying the motion “because material issues of fact exist with respect to whether Spehar had a valid lien on CMGT's personal property....” Id. at 506. The Court also stated that “it does not appear beyond a doubt that the Trustee cannot prove any facts in support of his claims.” Id. The parties then filed cross-motions for summary judgment which the Court also denied. Grochocinski v. Spehar Capital, LLC (In re CMGT, Inc.), Bankr.No. 04 B 31669, Adv. No. 07 A 00838, 2008 WL 4767434 (Bankr.N.D.Ill. Oct. 30, 2008). Again, the Court reiterated that there were material issues of fact regarding whether Spehar's lien should be afforded secured status. Id. at *12. Further, the Court found issues of fact with respect to whether the terms of the Financing Order constituted admissions by the Trustee that Spehar had a valid, pre-petition secured claim against CMGT's assets and whether the Trustee's position on the status of Spehar's lien claim was the product of mistake, either unilateral or bilateral. Id. at *14.

Thereafter, the Court held a two-day trial on November 24 and 25, 2008, and entered judgment on March 17, 2009 in favor of the Trustee on the basis that Spehar did not have a valid pre-petition citation lien on the assets of CMGT. Grochocinski v. Spehar Capital, LLC (In re CMGT, Inc.), 402 B.R. 262 (Bankr.N.D.Ill.2009). The Court subsequently denied Spehar's motion for relief from that judgment. Grochocinski v. Spehar Capital, LLC (In re CMGT, Inc.), 417 B.R. 69 (Bankr.N.D.Ill.2009). Spehar filed an appeal from the judgment in the District Court for the Northern District of Illinois, and the action was assigned to Judge Robert W. Gettleman.

On February 2, 2010, Judge Gettleman vacated the judgment and remanded the matter to this Court. Spehar Capital, LLC v. Grochocinski (In re CMGT, Inc.), 424 B.R. 355 (N.D.Ill.2010). Judge Gettleman specifically stated that “[w]hile it may not have been the intention of the bankruptcy court to make any factual findings in relation to Spehar's pre-petition lien, the language of the Financing Order unambiguously found that Spehar had a valid perfected lien, and the court never clarified a contrary intention in a timely amended order.” Id. at 361. He further concluded that “[b]y allowing the Adversary Proceeding to be prosecuted by the Trustee, the bankruptcy court in effect vacated the Financing Order after ruling that there were insufficient reasons to do so under Rule 60(b).” Id. On March 26, 2010, the Court dismissed the Adversary Proceeding, including Spehar's counterclaim. (07 A 00838 Adv. Docket No. 253.) Spehar subsequently appealed the Court's dismissal of the Adversary Proceeding.

On March 21, 2011, Judge Gettleman issued a Memorandum Opinion and Order wherein he vacated this Court's order of dismissal and instructed the Court to reinstate the Adversary Proceeding in order to rule on Spehar's counterclaim and to allow Spehar to file a petition for sanctions and attorneys' fees. Spehar Capital, LLC v. Grochocinski (In re CMGT, Inc.), No. 10 C 6330, 2011 WL 1044280 (N.D.Ill. Mar. 21, 2011). On July 21, 2011, the Court ruled on Spehar's counterclaim awarding it nominal damages. Grochocinski v. Spehar Capital, LLC (In re CMGT, Inc.), Bankr.No. 04 B 31669, Adv. No. 07 A 00838, 2011 WL 2945768 (Bankr.N.D.Ill. July 21, 2011).

On July 12, 2011, just a few days before the Court ruled on its counterclaim, Spehar filed its motion for sanctions and fees against the Trustee and the Firm. Spehar contends that it should be awarded its attorneys' fees and costs in the sums of $231,685.46 and $14,805.42, respectively, for a total of $246,490.88 ² as sanctions against both the Trustee personally and the Firm for what Spehar maintains was reasonable and necessary to defend this allegedly frivolous Adversary Proceeding. According to Spehar, this action was nothing more than an impermissible attack on the Financing Order that had already determined the validity and scope of Spehar's secured lien. During the course of the litigation between Spehar and the Trustee in this Adversary Proceeding, Spehar engaged five law offices to perform services on its behalf at various stages of the litigation. Spehar attached to its motion affidavits from these five law offices and one from its principal, Robert Gerard Spehar (“Mr. Spehar”), as well as supporting documentation for the expenses and fees that were incurred.³

In response to the motion, the Trustee and the Firm contend that Spehar's only basis for an award of fees is that it prevailed on the appeal before Judge Gettleman from the judgment entered by this Court on March 17, 2009.⁴ As such, they argue that Spehar is attempting to shift its attorneys' fees in violation of the “American Rule.” The Trustee and Kathleen M. McGuire (“McGuire”), an attorney with the Firm, executed affidavits wherein they explain the facts and principles of bankruptcy law that they considered as they pursued and litigated this Adversary Proceeding. The Court will further discuss these affidavits in connection with each basis under which Spehar seeks sanctions. The parties waived their opportunity to submit additional evidence into the record and rested on their briefs.⁵

III. DISCUSSION

A. Sanctions Under Federal Rule of Bankruptcy Procedure 9011

First, Spehar seeks sanctions against the Trustee and the Firm under Federal Rule of Bankruptcy Procedure 9011. Rule 9011 is modeled after Federal Rule of Civil Procedure 11 and is the bankruptcy equivalent of Rule 11. In re Excello Press, Inc., 967 F.2d 1109, 1111 (7th Cir.1992). Rule 11 was amended in 1993 to add certain notice requirements, and the same amendments were later made to Rule 9011, effective in 1997. Thus, courts frequently look to cases that interpret Rule 11 when construing Rule 9011. In re Famisaran, 224 B.R. 886, 894 (Bankr.N.D.Ill.1998). Further, some Rule 11 cases decided prior to the procedural amendment are still applicable in analyzing Rule 9011 because the substantive provisions were not altered. See In re Collins, 250 B.R. 645, 659 (Bankr.N.D.Ill.2000); State Bank of India v. Kaliana (In re Kaliana), 207 B.R. 597, 601 (Bankr.N.D.Ill.1997).

“The central goal of Rule 11 is to deter abusive litigation practices.” Corley v. Rosewood Care Ctr., Inc. of Peoria, 388 F.3d 990, 1013 (7th Cir.2004). The Rule is not intended to function as a fee-shifting statute that requires the losing party to pay fees and costs. Kaliana, 207 B.R. at 601 ( citing Mars Steel Corp. v. Cont'l Bank...