In re Witt

• Decision Date: 18 October 2012
• Docket Number: No. 11–10609.,11–10609.
• Citation: 481 B.R. 468
• Parties: In the Matter of John Arthur WITT, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Indiana

481 B.R. 468

In the Matter of John Arthur WITT, Debtor.

No. 11–10609.

United States Bankruptcy Court,

N.D. Indiana,

Fort Wayne Division.

Oct. 18, 2012.

Eric D. Orr, Berne, IN, for Debtor.

DECISION REGARDING SANCTIONS

ROBERT E. GRANT, Chief Judge.

The trustee in this chapter 7 case previously filed a motion to compromise environmental litigation that arose out of real estate the debtor owned. The debtor and its environmental expert, HydroTech, objected to the motion. The issues raised by the motion and objection were the subject of a trial and the parties were then given the opportunity to file post-trial briefs, after which the matter was taken under advisement. By a decision issued on May 10, 2012, the objections were overruled. See, Matter of Witt, 473 B.R. 284 (Bankr.N.D.Ind.2012). Because it appeared that some of the arguments the debtor and HydroTech presented in their jointly filed post-trial brief were not warranted by existing law or a non-frivolous argument for its extension, and that a reasonable pre-filing inquiry would have revealed the lack of merit, the court, on its own initiative, scheduled a hearing to consider whether counsel for the objectors, Eric Orr and Mark Shere,¹ violated the requirements Rule 9011(b)(2) of the Federal Rules of Bankruptcy Procedure. See, Notice of Hearing dated June 14, 2012. Counsel filed a timely response to the court's inquiry and the matter was taken under advisement following the scheduled hearing.

The court's notice of hearing identified four aspects of the brief or arguments it contained that were of particular concern:

1. Failing to mention or attempting to apply the standard associated with approval of settlements and compromises in bankruptcy;

2. That the doctrine of promissory estoppel applied to the manner in which a trustee administers a bankruptcy estate and failing to acknowledge relevant Indiana authority that an expression of intent is not a promise;

3. Mischaracterizing the Supreme Court's decision in Schwab v. Reilly regarding the effect of the debtor's claimed exemption and ignoring the Court's holding in that decision, and;

4. Misrepresenting the Seventh Circuit's decision in Hoseman v. Weinschneider, by quoting it out of context, when arguing that the trustee had waived claims.

Rule 9011 is the bankruptcy equivalent of Rule 11 of the Federal Rules of Civil Procedure. Like Rule 11, it imposes an affirmative obligation upon counsel to conduct a reasonable investigation into both the law and the facts before presenting (“whether by signing, filing, submitting or advocating”) a particular position (“a petition, pleading, written motion, or other paper”) to the court. See, Fed. R. Bankr.P. Rule 9011(b). See also, Frantz v. United States Powerlifting Federation, 836 F.2d 1063, 1064 (7th Cir.1987); Fred A. Smith Lumber Co. v. Edidin, 845 F.2d 750, 751 (7th Cir.1988); McGhee v. Sanilac County, 934 F.2d 89, 93 (6th Cir.1991); Slater v. Skyhawk Transp., Inc., 187 F.R.D. 211, 220 (D.N.J.1999); Terminix Int'l Co. v. Kay, 150 F.R.D. 532, 538 (E.D.Pa.1993). The results of that investigation must lead to the conclusion that the position being taken by counsel is warranted by existing law or by a non-frivolous argument. Whether or not the obligations imposed by Rule 11 have been fulfilled “is an objective determination of whether [counsel's] conduct was reasonable under the circumstances.” Brown v. Federation of State Medical Boards of the U.S., 830 F.2d 1429, 1435 (7th Cir.1987). See also, In re Ronco, 838 F.2d 212, 217 (7th Cir.1988) (“litigation must be grounded in an objectively reasonable view of the facts and the law”). Consequently, the court must “undertake an objective inquiry into whether ... counsel ‘should have known his position was groundless'....” Dist. No. 8 International Association v. Clearing, 807 F.2d 618, 622 (7th Cir.1986) (quoting Coleman v. CIR, 791 F.2d 68, 71 (7th Cir.1986)). In determining whether an attorney's pre-filing inquiry was reasonable, the court must consider the circumstances of the particular case. Mars Steel Corp. v. Continental, 880 F.2d 928, 932 (7th Cir.1989)(en banc); In re Excello Press, 967 F.2d 1109, 1112–13 (7th Cir.1992). Nonetheless, “every lawyer must do the necessary work to find the law before filing....” Thornton v. Wahl, 787 F.2d 1151, 1154 (7th Cir.1986). See also, Chambers v. American Trans Air, Inc., 17 F.3d 998, 1007 (7th Cir.1994).

In considering a motion to compromise, the relevant inquiry is simple and straight-forward: Is the proposed settlement in the best interests of the bankruptcy estate? Matter of Energy Cooperative, Inc., 886 F.2d 921, 927 (7th Cir.1989). In answering that question, the court should determine whether the trustee adequately investigated the matter and made an informed decision when choosing between the available alternatives, see, In re Del Grosso, 106 B.R. 165, 168–69 (Bankr.N.D.Ill.1989); see also, In re Big Horn Land & Cattle Co., LLC, 2010 Bankr.LEXIS 1088 (Bankr.N.D.Ind.2010); if so, it should then decide whether the settlement's terms “fall within the reasonable range of litigation possibilities.” Energy Co–op., 886 F.2d at 929 (quoting In re New York, N.H. & H.R. Co., 632 F.2d 955 (2nd Cir.1980)). If they do, the settlement should be approved. Only if the proposed settlement falls below the lowest point in the range of those possibilities should the court withhold its approval. Energy Co–op., 886 F.2d at 929 (quoting In re W.T. Grant, Co., 699 F.2d 599, 608 (2nd Cir.1983)).

Despite the wealth of authority from the Seventh Circuit establishing this test as the governing legal standard, see e.g., In re Holly Marine Towing, Inc., 669 F.3d 796, 801 (7th Cir.2012); In re Doctors Hospital of Hyde Park, Inc., 474 F.3d 421 (7th Cir.2007); Depoister v. Mary M. Holloway Foundation, 36 F.3d 582, 585–86 (7th Cir.1994);Matter of Andreuccetti, 975 F.2d 413, 420–21 (7th Cir.1992); Matter of Energy Co–op., Inc., 886 F.2d 921, 929 (7th Cir.1989);In re American Reserve Corp., 841 F.2d 159, 162 (7th Cir.1987), in their brief on the issue counsel never mentioned or attempted to apply it to the case at hand. This is the court's first concern in its sanctions inquiry. Counsels' response to this concern confuses it with identifying and applying the applicable standard of review on appeal and they argue that Rules 27 and 28 of the Federal Rules of Appellate Procedure do not apply. They also claim the matter presented unusual facts and issues. As to the first point, the court agrees with counsel that appellate rules related to the contents of legal briefs and the applicable standard of review do not apply here, but those rules are not the basis for the court's concern. The issue is whether counsel can properly file a legal brief directed to a particular issue without ever mentioning or attempting to apply the governing legal standard.

In any brief, to any court, attorneys have a duty to acknowledge and address the legal standard that governs the matter before it. See, DeSisto College Inc. v. Line, 888 F.2d 755, 766 (11th Cir.1989) (“Counsel had a duty to acknowledge at some point ... the binding precedent of this circuit ...”); Jewelpak Corp. v. U.S., 297 F.3d 1326, 1333 n. 6 (Fed.Cir.2002) (“officers of this court have an unfailing duty to bring to our attention the most relevant precedent that bears on the case at hand—both good and bad—of which they are aware.”); Thornton v. Wahl, 787 F.2d 1151, 1154 (7th Cir.1986) ( “an advocate must represent his client within the existing structure of the law, and not some imagined version of it.”). To fail to do so renders the resulting brief irrelevant as an effective aid to help guide the court's decision, and that is the ultimate purpose of any brief—to educate and guide the court's decision. In re King, 2006 WL 1994679, 2006 Bankr.LEXIS 1416 (Bankr.N.D.Ind.2006). Counsel may not like the governing standard and its application may not produce an outcome to their client's liking, but that does not permit counsel to ignore it and pretend it does not exist.

Counsels' claim that this case presents unusual facts and issues does not excuse their failure to acknowledge the governing legal standard. Assuming they exist, unusual facts and issues might give counsel a basis for arguing that the governing standard is incomplete or inadequate, or that it should be changed or subject to some sort of proviso. In the language of Rule 11, “an argument for an extension, modification, or reversal of existing law or the establishment of new law.” Fed. R. Bankr.P. Rule 9011(b)(2). Yet, counsel never made such an argument.² To do so requires one to first acknowledge, not ignore, existing law. Szabo Food Service, Inc. v. Canteen Corp., 823 F.2d 1073, 1081–82 (7th Cir.1987); Thornton, 787 F.2d at 1154.See also, Matter of Hendrix, 986 F.2d 195, 200–01 (7th Cir.1993) (discussing Appellate Rule 38). Having acknowledged existing law, counsel are then free to argue that it should not apply or should be somehow changed. Thornton, 787 F.2d at 1154;Hendrix, 986 F.2d at 200;DeSisto College, 888 F.2d at 766. When they fail to proceed in that fashion, “then it is appropriate to conclude that counsel are not engaged in trying to change the law; counsel either are trying to buffalo the court or have not done their homework. Either way Rule 11 requires the court to impose a sanction....” Szabo Food Service, 823 F.2d at 1082.

The court's second concern involves counsels' argument that the doctrine of promissory estoppel required the trustee to abandon the asset. Their argument was that the trustee made a promise when he indicated he would be filing a motion for abandonment in a letter he submitted to the state court and, because that court acted upon it in connection with cancelling an upcoming hearing, he was bound to follow that course of action. Although counsel cited the elements related to promissory estoppel, their argument was not supported by a single bankruptcy...