In re W.A.R. LLP

• Decision Date: 25 September 2012
• Docket Number: Case No. 11-00044
• Parties: In re W.A.R. LLP, Debtor.
• Court: United States Bankruptcy Courts – District of Columbia Circuit

In re W.A.R. LLP, Debtor.

Case No. 11-00044

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLUMBIA

Dated: September 25, 2012

The document below is hereby signed.

______________

S. Martin Teel, Jr.

U.S. Bankruptcy Judge

(Chapter 7)

Not for publication in

West's Bankruptcy Reporter.

MEMORANDUM DECISION ADDRESSING MOTIONS

OF TY CLEVENGER AND WADE A. ROBERTSON TO RECONSIDER

THE ORDERS IMPOSING A $10,000 SANCTION AGAINST EACH OF THEM

Wade A. Robertson and Ty Clevenger have filed motions seeking relief from the court's Order Imposing Rule 9011 Sanctions Against Wade A. Robertson, directing Robertson to pay to the clerk $10,000 as a sanction under Rule 9011, and the Order Imposing Rule 9011 Sanctions Against Ty Clevenger, directing Clevenger to pay to the clerk $10,000 as a sanction under Rule9011.¹ The motions will be granted in part by reducing the sanction to $5,000 each and by deferring the deadline to pay the $5,000.

I

This court issued an order directing Robertson and Clevenger to show cause:

why the court ought not impose sanctions against them under Rule 9011 of the Federal Rules of Bankruptcy Procedure for pressing the frivolous argument that the bulk of the funds in the registry of the district court were property of the debtor's estate, and for doing so in an apparent effort to cause unnecessary delay in the enjoyment by William C. Cartinhour, Jr., of his right to those funds and to cause him an increase in the cost of litigation.

After a hearing, the court issued its Memorandum Decision re Imposition of Sanctions Against Wade A. Robertson, Ty Clevenger, and Ray Connolly (signed on May 3, 2012, and entered on May 4, 2012). I will assume that the reader has familiarity with the portions of that Memorandum Decision that address imposing Rule 9011 sanctions against Robertson and Clevenger. In summary, the court found:

Robertson's and Clevenger's complete disregard for the facts and law in advancing their frivolous argument generated a staggering amount of work for the court, and has put Cartinhour and his attorney to the unnecessary burden of defending against frivolous arguments in this and in other courts. In order to deter similar conduct by Clevenger and Robertson in the future, and likewise to deter other attorneys from advancing frivolous arguments merely to keep a bankruptcy case pending or to cause unnecessary expense for an opponent, the court will impose monetary sanctions against Clevenger and Robertson in the amount of $10,000 each, payable to the clerk of the court.

Mem. Dec. at 56. The court issued orders requiring that $10,000 be paid by each of them to the clerk within 21 days, but stayed those orders when Robertson and Clevenger moved for reconsideration.

The court also announced that with respect to Robertson's filing papers on behalf of Ray Connolly, the court, pursuant to its inherent powers, would award to Cartinhour his attorney's fees arising from that misconduct. In imposing Rule 9011 sanctions against Robertson and Clevenger for pressing their frivolous argument regarding ownership of the funds at issue, the court has been careful to distinguish between, on the one hand, the Connolly filings, and, on the other hand, the filings Clevenger made for the debtor and the filings that Robertson filed or signed on his own behalf. It was only with respect to the latter misconduct that the court imposed the Rule 9011 sanctions.

II

Clevenger raises two preliminary arguments that I readily reject.

A.

The court imposed sanctions for Clevenger's asserting ownership by the debtor of the funds at issue,² when it was clear that the debtor had long ago ceased to be the owner of the funds by lending them to Robertson. Moreover, Clevenger's filings for which sanctions are being imposed were made after the district court had entered its judgment of February 25, 2011, imposing an equitable trust upon those funds in favor of Cartinhour (who hadbeen W.A.R. LLP's original source of the funds).³

In seeking reconsideration, Clevenger contends, first, that he "argued in absolute good faith that the Debtor had a legitimate claim to the funds being held in custodia legis in Robertson v. Cartinhour, Case No. 1:09-cv-1642-ESH (D.D.C.)." He premises this on an argument that only W.A.R. LLP, as the affected partnership, had a right to sue Robertson for breach of fiduciary duty and to obtain a disgorgement of the funds that had been lent to him. That argument might have furnished grounds for Robertson to seek a dismissal of Cartinhour's district court action, but the argument was not raised in the district court, which entered its judgment long after the bankruptcy automatic stay had been lifted to permit the district court litigation togo forward. Clevenger's argument does not affect who had present ownership of the funds at issue when he made the filings at issue.

Nor does Clevenger's argument that only the partnership could sue for a breach of fiduciary duty alter the fact that the funds, as Robertson's funds, were being held in custodia legis for the benefit of Cartinhour as the party seeking relief against Robertson.⁴

In summary, Clevenger's argument does not change the fact that at all relevant times when Clevenger's improper filings were made in the bankruptcy case:

• W.A.R. LLP had lost ownership of the funds at issue once it lent them to Robertson;

• the funds had become Robertson's upon their being lentto him, and W.A.R. LLP had not obtained any order changing that ownership;

• the funds were being held in the court registry for the benefit of Cartinhour, not W.A.R. LLP; and

• the funds were subject to an equitable trust imposed by a final judgment of the district court in favor of Cartinhour.

My finding that Clevenger proceeded in bad faith is fully explained by the Memorandum Decision at 4-22, 27 n.9, 35-52, and 54 n.23.⁵ To add insult to injury, Clevenger then opposed the imposition of sanctions by pointing to a decision, In re Don/Mark Partnership, 14 B.R. 830 (D. Colo. 1981), as supporting his assertion that the debtor owned the funds, when In re Don/Mark Partnership plainly did not suffice to show that his argument of ownership was "warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law" as required by Rule 9011(b)(2).

Shepherd v. Am. Broad. Cos., 62 F.3d 1469, 1478 (D.C. Cir. 1995), requires a finding of bad faith based on clear andconvincing evidence before the court may impose sanctions pursuant to its inherent power. See also Ali v. Tolbert, 636 F.3d 622, 627 (D.C. Cir. 2011). The sanctions here are being imposed under Rule 9011, and I need not decide whether the same standard applies, or, whether, instead, a standard of the preponderance of evidence applies. All of my findings regarding Robertson's and Clevenger's bad faith in my Memorandum Decision of May 3, 2012, rested on an application of the standard of clear and convincing evidence, and I have applied that same standard in rejecting Clevenger's motion's attempts to demonstrate good faith.

B.

Clevenger also argues that the $10,000 sanction (apparently even if he has the ability to pay a $10,000 sanction) "is clearly punitive, and on par with a finding of contempt or conviction of a felony." A criminal contempt fine is intended as a punishment, would require utilization of criminal contempt procedures, and would be beyond this bankruptcy court's authority to adjudicate, as only civil bankruptcy proceedings may be referred to the bankruptcy court. The court's order, however, is being entered as a Rule 11 or Rule 9011 sanction for deterrence purposes, not as a punishment, and is being entered pursuant to the standards and procedures applicable to Rule 11 and Rule 9011 sanctions. The $10,000 amount was deemed to be the least severe sanctionadequate to deter Clevenger and to deter others from engaging in similar misconduct in the future, and was not intended as punishment. See In re Letourneau, 422 B.R. 132 (Bankr. N.D. Ill. 2010). The $10,000 sanction was not a criminal contempt fine. See Miller v. Cardinale (In re DeVille), 361 F.3d 539 (9th Cir. 2004) (holding that a bankruptcy court's imposition of a monetary Rule 9011 sanction payable to clerk was not the equivalent of a criminal contempt proceeding); Eisenberg v. Univ. of New Mexico, 936 F.2d 1131, 1137 (10th Cir. 1991) (same under Rule 11); Donaldson v. Clark, 819 F.2d 1551, 1558 (11th Cir. 1987) (same); Wayland v. McVay (In re Tbyrd Enters., LLC.), 354 Fed. Appx. 837, 839 (5th Cir. 2009) (stating that "there is no legal basis for equating" Rule 9011 sanctions and criminal contempt sanctions); In re Yehud-Monosson USA, Inc., 472 B.R. 795, 803 (D. Minn. 2012).

III

Both Robertson and Clevenger invoke inability to pay their respective $10,000 awards. Robertson and Clevenger failed to raise the defense of inability to pay when they responded to the court's order to show cause and participated in the hearing on the order to show cause. They arguably have waived the defense. See White v. Gen. Motors Corp., 908 F.2d 675, 685 (10th Cir. 1990) ("Inability to pay what the court would otherwise regard as an appropriate sanction should be treated as reasonably akin toan affirmative defense, with the burden upon the parties being sanctioned to come forward with evidence of their financial status."); Multiserv. Joint Venture, LLC v. United States, 374 F. App'x 963, 967 (Fed. Cir. 2010) ("The [trial] court found that she waived this argument when she failed to raise it as a mitigating factor in response to the government's application for attorney fees and costs. We agree.").

The court's order to show cause did not specify any amount of a sanction that the court was contemplating imposing, but only required Robertson and Clevenger to show cause why the court ought not impose Rule 9011 sanctions against them. They might argue that the order to show cause was but the first step towards imposing sanctions, namely, the step of...