In re Schaefer Salt Recovery, Inc.

• Citation: 542 F.3d 90
• Decision Date: 09 September 2008
• Docket Number: No. 06-4574.,06-4574.
• Parties: In re SCHAEFER SALT RECOVERY, INC., Debtor. Carol Segal, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

542 F.3d 90

In re SCHAEFER SALT RECOVERY, INC., Debtor Carol Segal, Appellant.

No. 06-4574.

United States Court of Appeals, Third Circuit.

Argued: June 25, 2008.

Opinion Filed: September 9, 2008.

Stephen V. Falanga, Esq. (Argued), Connell Foley, Roseland, NJ, for Appellant.

Nicholas Khoudary, Esq. (Argued), East Brunswick, NJ, for Appellees.

Before: SLOVITER, BARRY and ROTH, Circuit Judges.

OPINION OF THE COURT

BARRY, Circuit Judge.

A distinguished judge of the United States Bankruptcy Court for the District of New Jersey found that petitions filed seriatim under Chapter 11 and Chapter 7 of the Bankruptcy Code, and quickly dismissed, were filed in bad faith in a blatant abuse of the Bankruptcy Code and the Bankruptcy Court. Refusing to allow the Court "to be used as a litigation tool," sanctions were imposed under 28 U.S.C. § 1927 on a finding that the "reprehensible" conduct of counsel fell well within that statute by having multiplied the proceedings unreasonably and vexatiously.

We will shortly turn our attention to the specific conduct which led to the imposition of sanctions, and simply note at this juncture that any suggestion that sanctions were not warranted or should not have been awarded would be absurd. The question before us, however, is not as simple as whether sanctions were in order; rather, the question before us is this: did the Bankruptcy Court err when it reversed itself after it came to believe that we would invalidate the award under our "Pensiero supervisory rule" — and more about that later — because the motion seeking sanctions was not filed until after the entry of final judgment. Although convinced that sanctions were warranted, the Bankruptcy Court "regretfully" vacated the award, and the District Court affirmed.

We have not in a precedential opinion addressed certain of the issues the Bankruptcy Court and the District Court so thoughtfully addressed. Because we have not done so, it is not surprising that those Courts did not accurately predict what we would do. We will vacate the order of the District Court and remand for further proceedings.

I.

On May 12, 2004, a mere eight days after it was formally incorporated as a business entity, appellee Schaefer Salt Recovery, Inc. ("SSR") filed a bare bones petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey. SSR's only assets were mortgages on three properties as to which tax lien foreclosure actions brought by appellant Carol Segal ("Segal") were pending in the Superior Court of New Jersey. SSR's Vice President and counsel, appellee Nicholas Khoudary ("Khoudary"), advised Segal's counsel that the foreclosure actions were stayed as a result of the filing and concomitantly filed Notices of Bankruptcy Filing in Segal's foreclosure actions. Presumably the automatic stay was one of the reasons why Khoudary advised Segal's counsel that "Segal was skunked." (A.111.)

On June 10, 2004, Segal moved to dismiss the Chapter 11 petition for cause pursuant to 11 U.S.C. §§ 1112(b) and 105(a), arguing that the petition had been filed for the sole purpose of frustrating Segal's efforts to conclude the pending foreclosure actions. By order dated July 6, 2004, the Bankruptcy Court granted the motion, dismissing the petition on a finding that it had been filed in bad faith, but striking language in the proposed order that would have barred SSR from filing another petition for one hundred and eighty days.

Following the dismissal, the foreclosure actions were reinstated in the Superior Court. On August 13, 2004, in response to what Segal describes as "this latest stalling tactic," (Br. at 8), the Superior Court granted Segal's motion to strike SSR's answers, finding that they set forth no genuine issue of material fact and no legally sufficient defense, and ordered the foreclosure actions to go forward as uncontested matters. That same day, SSR filed a new petition in the Bankruptcy Court, this time pursuant to Chapter 7, for no apparent reason other than to cause the automatic stay to again kick in.

On August 7, 2004, Segal filed a motion to dismiss the Chapter 7 petition for cause pursuant to 11 U.S.C. §§ 707(a) and 105(a). In support of his motion for a short return date, Segal argued that SSR had no creditors and no assets other than the purported mortgages, and that this latest filing was nothing more than a transparent litigation strategy to delay the foreclosure actions then scheduled to take place in three days.

A hearing date was set for August 24, 2004. On that date, Khoudary advised the Bankruptcy Court that SSR consented to the dismissal of the Chapter 7 petition and that he saw no need to appear. The Court placed its ruling on the record in the presence of Segal's counsel.

[We] received some calls from Mr. Khoudary indicating that he would voluntarily dismiss the bankruptcy proceeding due to his health and so on, that he couldn't be here. Now I have no problem accepting that offer, with this proviso in light of the dismissal of the case by the Court ... [not] quite eight weeks ago[.]

[I]n light of the timing of the most recent filing, I am going to do a court order which dismisses the case and imposes [a] 180 day bar on the filing of any petition under any chapter of the Bankruptcy Code. I found the last filing to be a bad faith filing. I warned the parties and indeed I indicated I expected that knowing the Court's position ... Mr. Khoudary well knew the law [and] would not be so foolish as to file a case that did not meet the requirements of a good faith filing despite — and so I struck the 180 day bar order language in the prior order while the old adage, fool me once, shame on you, fool me twice, shame on me, is that to be put into effect here. I'll take a voluntary dismissal, I'll reflect that in my order that I'm imposing [a] 180 day bar order. I will not allow this bankruptcy court to be used as a litigation tool by a party who in truth has not so much a reorganizational intent, but intends to use the bankruptcy court as an offensive weapon. That kind of use, frankly, offends not only the Court but the Bankruptcy Code.

(A.42-43.) The Court promptly entered an order granting the motion to dismiss, noting that SSR "consents to dismissal," and prohibiting SSR from filing another petition under the Bankruptcy Code for one hundred and eighty days. (A.145-46.)

Nine days later, on September 2, 2004, Segal moved under Rule 9011 of the Federal Rules of Bankruptcy Procedure and the Court's inherent power for costs and attorneys' fees against SSR and Khoudary for filing successive, frivolous bankruptcy petitions. On September 27, 2004, the Court heard argument, and concluded that although it had "some question as to whether [Rule] 9011 applie[d] ..." given that "the matter is already adjudicated," (A.51), that did not end the matter.

[W]hat frustrates me about this case is on its face, in my view, both the 11 filing and most particularly the 7 filing were, in fact, abuse of the bankruptcy process.

Bankruptcy — use of bankruptcy petition is a proper defensive weapon both for a debtor to preserve an asset and to insure payment to creditors. It's not an offensive weapon, and in both instances that's what Schaefer Salt Recovery did. Let us not forget that Schaefer Salt Recovery was rapidly created to hold this mortgage, filed the first 11 without the benefit of counsel, notwithstanding it's a corporation, and indeed filed this second filing. It's not clear to me whether you, Mr. Khoudary, was [sic] acting as the counsel for your own corporation or not, but it strikes me that this falls well within the purview of the statute dealing with vexatious litigation where the filings are designed and do, in fact, unreasonably multiply litigation that has resulted not only in the consumption of Bankruptcy Court resources but a back and forth in the State Court.

(A.51-52.) The Court, therefore, awarded attorneys' fees and costs against Khoudary under 28 U.S.C. § 1927, but only for the "unnecessary return trip to Bankruptcy Court in the context of the Chapter 7" because the Court did not believe that the statute would cover the earlier filing. (A.52.) The Court directed counsel for Segal to submit a certification of fees and costs, and counsel did so, but the certification inexplicably fell through the cracks and an order granting sanctions in a specific amount was not entered.

By opinion and order dated August 24, 2005, the Bankruptcy Court reversed the award of sanctions, having determined, after further review, that the request for sanctions was first made after the entry of final judgment and thus was untimely under the supervisory rule we adopted in Mary Ann Pensiero, Inc. v. Lingle, 847 F.2d 90 (3d Cir.1988), for violations of Rule 11 of the Federal Rules of Civil Procedure. The Bankruptcy Court, relying on a not-precedential opinion of this Court which held that the Pensiero supervisory rule applies to bankruptcy court proceedings even where a de minimis period of time had elapsed after final judgment, found that the supervisory rule was a bright line rule from which deviation — here, nine days after final judgment, i.e., the second dismissal — is not appropriate.¹ The Bankruptcy Court concluded that it "would be reasonable to expect" us to view sanctions under § 1927 in the same manner as we viewed Rule 11 sanctions and sanctions under a court's inherent power.

Segal moved for reconsideration, a motion the Bankruptcy Court "regretfully" denied. The Court explained:

[B]elieve me, Schaefer Salt and the attorney, Mr. Khoudary richly deserved a sanction, the problem is, the timing with which it was done ... I wasn't thinking, frankly, when I awarded sanctions as to whether I was within the scope of my authority to do so, because frankly I was so aggravated at the blatant, blatant misuse of the bankruptcy code, that I didn't think about the fact that as I put it before,...