In re VIII South Michigan Associates, Bankruptcy No. 91 B 25677.
| Decision Date | 16 December 1994 |
| Docket Number | Bankruptcy No. 91 B 25677. |
| Citation | 175 BR 976 |
| Parties | In re VIII SOUTH MICHIGAN ASSOCIATES, An Illinois Limited Partnership, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
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John Anderson, Gus Paloian for Seyfarth, Shaw, Fairweather & Geraldson, Chicago, IL, Northern Trust Co., movant.
Douglas Gowan, The Capital Group, Inc., Milwaukee, WI, for respondent and counter-movant.
The matter before the court is a motion for sanctions by the Northern Trust Company ("Northern") against Douglas Gowan ("Gowan"), Gowan's motion to dismiss the Northern's motion, and Gowan's counter-motion for sanctions against the Northern and its attorneys.
VIII South Michigan Associates ("Debtor") is a limited partnership which held a leasehold estate interest in certain improved commercial real estate located at 8 South Michigan Avenue in Chicago. The Northern was the Debtor's secured lender, with a security interest in, amongst other collateral, the Debtor's leasehold interest and the improvements thereon. Gowan was employed as an expert witness by (i) the Debtor, (ii) Eight South Development Corporation ("Eight South"), the Debtor's general partner, and (iii) the four individuals who had personally guaranteed the Northern's loan. These individuals are James Loewenberg, Marvin Fitch, Paul Cocose, and William Cocose (collectively "Guarantors"). The Guarantors were also officers and shareholders in Eight South as well as limited partners of the Debtor.
For the reasons set forth below, the court will (i) deny as a matter of law the Northern's motion for sanctions; (ii) grant Gowan's motion to dismiss, which the court treats1 as one to deny the relief requested as a matter of law; and (iii) deny Gowan's counter-motion for sanctions, which the court treats as one invoking FED.R.BANKR.P. 9011 and the court's inherent authority.
This court has jurisdiction pursuant to 28 U.S.C. § 1334 and General Rule 2.33(A) of the United States District Court for the Northern District of Illinois. This matter is a core proceeding, as "proceedings for sanctions are core proceedings when the sanctioned conduct occurs in the course of a core proceeding." In re VIII South Michigan Associates, No. 94 C 5593, slip op. at 9, 1994 WL 698489, at *5 (N.D.Ill. Nov. 29, 1994) (citing, inter alia, In re Memorial Estates, Inc., 950 F.2d 1364, 1370 (7th Cir.1991), cert. denied, ___ U.S. ___, 112 S.Ct. 2969, 119 L.Ed.2d 589 (1992)). Gowan's involvement in the proceedings pertained to the settlement between the Trustee on behalf of the Debtor's estate and the Northern. The "settlement clearly concerned the administration of the estate see 28 U.S.C. § 157(b)(2)(A), and was thus a core proceeding for Section 157 purposes." Id. (footnote omitted).
The Debtor commenced a Chapter 11 proceeding under Title 11 of the United States Code on December 3, 1991. Judge Robert Ginsberg presided over the case at the outset. On July 27, 1992, Judge Ginsberg granted the Northern's motion to convert the case to Chapter 7 and William Grabscheid was appointed trustee ("Trustee"). The Trustee employed Ronald R. Peterson, David M. Neff, and the law firm of Jenner & Block as his attorneys. On February 13, 1992, Gowan was retained by James Loewenberg as an expert witness in this bankruptcy case on behalf of the Debtor and the Guarantors.2
On January 7, 1992, the Northern filed a motion to lift the automatic stay pursuant to 11 U.S.C. § 362(d), in order to proceed with the foreclosure proceedings it had initiated in state court one month prior to the commencement of this case. Judge Ginsberg granted the Northern's motion to lift the stay on July 21, 1992. Meanwhile, the Debtor and the Guarantors filed affirmative defenses and counterclaims in the state foreclosure action, which were subsequently dismissed with prejudice, with leave to amend as to only one defense. The Northern proceeded with its foreclosure action and the Debtor was held in default for failure to answer or otherwise plead. Gowan has admitted that he was retained as an expert witness in the state court proceedings.
The Northern and the Trustee proposed a settlement of any and all claims the estate may have had against the Northern. On March 22, 1993, the Trustee filed a motion for authority to enter into a settlement agreement with the Northern on behalf of the Debtor's estate. The Guarantors opposed the Trustee's motion. The Northern filed a reply in support of the Trustee's motion and the Guarantors responded. Prior to the hearing, Gowan was listed as an expert witness for the Guarantors. In addition, Gowan joined with James Loewenberg (signing on behalf of the Guarantors) in verifying supplemental answers to interrogatories.
Prior to the hearing on the settlement motion, Judge Ginsberg recused himself. On July 30, 1993, the case was reassigned to Chief Judge Schwartz. The Northern and the Trustee renegotiated the settlement, and, after notice and a hearing, this court granted the Trustee's motion and approved the renegotiated settlement agreement with the Northern. (Order of November 8, 1993.) The Guarantors appealed this order and the District Court for the Northern District of Illinois granted the Northern's motion to dismiss the appeal. In re VIII South Michigan Associates, 167 B.R. 877 (N.D.Ill.1994).
On February 7, 1994, the Northern filed its motion for sanctions against Gowan. Gowan, acting pro se, filed numerous responses to this motion for sanctions, including a response, a motion to dismiss, a counter-motion for sanctions, and various supplemental filings. The central legal issue is whether the court has the inherent authority to sanction a non-party expert witness who has not appeared in court, testified in any proceeding, nor violated a court order. Although there is some case authority on this subject, the precise issue appears to be one of first impression. Though not a "cow case," that is, one on all fours, the Supreme Court's decision in Chambers v. NASCO, Inc., 501 U.S. 32, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991), is determinative of the Northern's motion.
The Northern contends that this court, based upon the Supreme Court's opinion in Chambers v. NASCO, Inc., has the inherent authority to issue sanctions against Gowan. The Northern argues that amongst its inherent powers, a federal court has the power to impose sanctions for bad faith litigation abuses. In addition, the Northern argues that because a federal court can sanction non-parties for violation of its orders, this court can sanction Gowan for his conduct.
Essentially, the Northern argues that Gowan has acted like a party or like an attorney and should therefore be treated as such. Gowan, the Northern contends, has acted well beyond the normal role of an expert witness and has in effect been an advocate for the Guarantors. The Northern alleges that Gowan virtually directed the litigation on behalf of the Guarantors from the time he was retained. He allegedly developed the Guarantors' legal strategy, including citing cases to the Guarantors' attorneys and outlining responses to motions on behalf of the Guarantors. The Northern also argues that Gowan used his status as an expert witness to skirt the outer limits of the legal system and evade the typical strictures imposed on parties and their attorneys.
But, more simply, the Northern maintains that Gowan has engaged in bad faith litigation conduct. The Northern asserts that Gowan conducted a campaign of intimidation against the Northern and its counsel, with the alleged intent to prevent the Northern from pursuing its claims against the Guarantors. For example, Gowan threatened to sue some of the Northern's principal shareholders, directors, senior officers, and employees and made false allegations to the Federal Reserve Board. The Northern asserts that, in writing the Federal Reserve and in filing his pleadings in this matter, Gowan has ignored prior findings and orders of this court to the effect that his theories lack any basis under applicable law (Order of November 8, 1993).
In response to Gowan's contention that he is not properly before this court, the Northern responds with numerous examples in support of its position that Gowan was directly involved in the bankruptcy case, including that Gowan consulted with the Debtor's bankruptcy counsel regarding the conduct of the case, that Judge Ginsberg recognized Gowan as an expert witness for the Debtor, and that Gowan was identified and named as an expert witness on behalf of the Debtor for the hearing on the Debtor's proposed plan of reorganization. Finally, the Northern contends that even if this court lacks the authority to issue sanctions against Gowan, Gowan has nevertheless waived his jurisdictional defense by filing a counter-motion for sanctions.
The main thrust of Gowan's argument is that this court lacks the authority or jurisdiction to impose sanctions upon him as a non-party expert witness.3 In support of this argument, Gowan contends that he is neither a party nor an attorney for a party in the bankruptcy litigation and therefore he is not before this court for the purposes of the sanctions sought by the Northern. Gowan further argues that he has never appeared before nor testified in this court. Moreover, although he admits he was an expert witness in the state court litigation, he denies that he is or has been retained as an expert witness in the bankruptcy litigation.
Gowan further disputes the notion that he developed legal strategy or directed the litigation. Rather, he contends he merely furnished his opinion as to the state court litigation, promoted settlement, and expressed his views as an expert. He also argues that imposing sanctions against an expert witness for...
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