In re Wonder Corp. of America, Bankruptcy No. 5-86-00436.

• Decision Date: 20 January 1988
• Docket Number: Bankruptcy No. 5-86-00436.
• Citation: 81 BR 221
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re WONDER CORPORATION OF AMERICA, Debtor.

81 B.R. 221 (1988)

In re WONDER CORPORATION OF AMERICA, Debtor.

Bankruptcy No. 5-86-00436.

United States Bankruptcy Court, D. Connecticut.

January 20, 1988.

Christopher R. Belmonte, Lane & Mittendorf, New York City, for Waldco.

Douglas A. Strauss, David A. Greenberg, Pullman, Comley, Bradley & Reeves, Bridgeport, Conn., for Wonder Corp. of America.

Edward F. Hennessey, Janet C. Hall, Robert A. Izard, Jr., Robinson & Cole, Hartford, Conn., for Chase Manhattan Bank, N.A. and Robinson & Cole.

MEMORANDUM OF DECISION ON AMENDED MOTION FOR IMPOSITION OF SANCTIONS

ALAN H.W. SHIFF, Bankruptcy Judge.

This court must decide whether it has jurisdiction over a motion for sanctions awarding attorney's fees when its earlier decision concerning attorney's fees under Code § 506(b) is on appeal to the District Court.

I

On June 27, 1986, Wonder Corporation of America filed for protection under chapter 7 of the Bankruptcy Code. On September 18, 1986, the case was converted to chapter 11. From the inception of this case, Chase Manhattan Bank N.A., along with two other banks,¹ were oversecured creditors. Notwithstanding that status, Chase vigorously opposed Wonder's attempt to reorganize. As noted in In re Wonder Corporation of America, 72 B.R. 580 (Bankr.D. Conn.1987), Chase's opposition continued even after February 3, 1987 when Wonder and Waldco, Inc. filed a disclosure statement and plan, and Chase knew that it was to be paid in full on the effective date of the plan. Id. at 590. "Accordingly, there was never any appreciable risk at any time that Chase would not be paid in full in accordance with applicable bankruptcy law." Id. I therefore disallowed 515 of the requested 1,290 hours claimed by Chase under § 506(b)² "as blatant and totally unproductive obstruction in the administration of this case." Id. at 592.

Such "time was attributable to motions for relief from the automatic stay; opposition to administrative expenses of the chapter 7 trustee; opposition to the Withdrawal of Wonder\'s original attorneys; services in connection with the disclosure statements and plans; time spent with respect to an interbank letter of credit dispute; and time spent on a frivolous and procedurally flawed appeal from the court\'s scheduling order on § 503 and § 506(b) fees and expenses . . .

None of those activities served any legitimate purpose. For example, . . . attempts to obtain relief from the automatic stay had no realistic chance of success, but Wonder was required to meet that challenge . . . Similarly, despite the fact that the Proponents proposed to pay the full amount of Chase\'s allowed claims on the effective date of the plan, the attorneys for Chase performed . . . excessive hours in connection with the disclosure statement and plan, the effect of which was to delay the process by which their client was to be paid. . . . In addition, opposition to the chapter 7 trustee\'s expenses, which have a lower priority than Chase\'s secured claim and which are in any event de minimis was unlikely to succeed and added nothing to Chase\'s protection.

Id. at 592-3.

I then found that a large number of the 775 remaining hours had "not only strong overtones of unnecessary services but were also tainted by excessive duplication, both of which have resulted in grossly inflated fees," Id. at 593. I accordingly reduced those hours by 66 2/3%, which resulted in an allowance of 258 hours of attorney's fees under § 506(b).

Perhaps buoyed by that decision, Wonder and Waldco, Inc. collectively "Wonder" have filed a motion for the imposition of sanctions in the form of assessment of attorney's fees against Chase and its counsel, Robinson & Cole, collectively "Chase" under Bankr.Rule 9011,³ 28 U.S.C. § 1927,⁴ and this court's inherent equity powers, for ". . . a course of conduct, . . . often employed without legal or factual basis, with the purpose and effect of harassing the joint proponents, delaying the resolution of this case, the reorganization of the debtor and the payment of all creditors — including Chase itself — and increasing the costs of litigating this case." Amended Motion, ¶ 7.

Specifically, Wonder identifies nine categories of sanctionable conduct designated as paragraphs II-A through H and III and summarized here as follows:

II-A — "Cash Collateral Matters." Although fully secured, Chase opposed Wonder\'s attempts to use cash collateral and to borrow money from Waldco.

II-B — "Motion for Appointment of Trustee." On January 8, 1987, Chase filed a motion for appointment of a trustee or appointment of an examiner. "Because the claims of Chase . . . already were secured by interests in virtually all of Wonder\'s real and personal property, this motion was unreasonable and had no chance of success on the merits." Amended Motion ¶ 18. A hearing was never held on the motion.

II-C — "Opposition to Motions to Substitute Attorneys for Debtor and to Admit Attorney for Waldco Pro Hac Vice." Wonder contends that Chase unreasonably opposed a motion to admit Christopher R. Belmonte, Esq., of the law firm of Lane & Mittendorf, pro hac vice as attorney for Waldco and a motion by Wonder\'s original attorneys seeking permissive withdrawal from the case and appointment of the law firm of Pullman, Comley, Bradley & Reeves in their place. Wonder also maintains that Chase\'s attorneys unreasonably subjected Douglas A. Strauss, Esq. of Pullman, Comley, Bradley & Reeves to lengthy cross-examination regarding his firm\'s relationship with Waldco.

II-D — "Impairment and Objections to Disclosure Statement and Amended Plan." On March 4, 1987, at a hearing continued from March 3, 1987, Chase filed an objection to the February 2, 1987 Plan of Reorganization, even though the plan provided that Chase was to be paid in full on the effective date of the plan.⁵

II-E — "Issuance of Defective Subpoenas." On February 27, 1987, Chase purported to serve eight subpoenas to depositions and subpoenas decus tecum on non-parties to the case. Wonder maintains that the subpoenas were invalid as a matter of law and were meant to delay a resolution of the case.

II-F — "Chase\'s Fee Application." On March 19, 1987, Chase submitted an application for § 506(b) fees which sought reimbursement of $197,437.94 for attorney\'s fees and disbursements which it had paid to its attorneys. Chase\'s attorneys admitted during a hearing that only a portion of those billed fees had actually been paid.

II-G — "Post-Confirmation Conduct." Wonder contends that Chase unreasonably opposed a modification of the April 7, 1987 confirmation order which would allow Wonder to close on a sale of real property and pay Chase\'s allowed claims. Chase and the other banks required Wonder to fund an escrow account with the difference of the amount of their requested § 506(b) fees and the amount allowed by this court. Subsequently, only Chase and Old Stone appealed this court\'s decision concerning § 506(b) fees, and Old Stone eventually withdrew its appeal. Nevertheless, Chase objected to Wonder\'s later motion to reduce the escrow amount to reflect the withdrawn appeals.

II-H — "Improvident Appeals." "Despite the fact that the Plan provided for payment in full of its allowed claim, and despite the fact that the court ruled as a matter of law that it lacked standing to object to the confirmation of the Plan, Chase took a number of appeals from orders of the Court approving the Disclosure Statement and confirming the Plan, as well as other orders." Amended Motion ¶ 66.

III—"Motion and Amended Motion for Imposition of Sanctions." On June 5, 1987, Wonder filed a Motion for Imposition of Sanctions against Chase and its attorneys. "Despite the fact that the memorandum fully detailed the activities of Chase for which sanctions are sought, at a pretrial conference . . . Robinson & Cole demanded that Wonder detail these activities in the motion itself." Amended Motion ¶ 75. Wonder was therefore required to file an Amended Motion for Imposition of Sanctions and an additional memorandum.

On November 3, 1987, Chase moved to dismiss Wonder's amended motion, asserting lack of jurisdiction over paragraphs II-A through F because they involve the same subject matter as this court's ruling on § 506(b) fees now on appeal. Chase concedes that this court has jurisdiction over paragraphs II-G and III,⁶ but argues that the entire motion should be referred sua sponte to the District Court in the interest of judicial economy. Finally, Chase maintains that only the District Court may exercise jurisdiction over paragraph II-H because appellate conduct may only be sanctioned by an appellate court.

II

A Paragraphs II-A Through F

"The filing of a notice of appeal is an event of jurisdictional significance — it confers jurisdiction on the court of appeals and divests the district court of its control over those aspects of the case involved in the appeal." Griggs v. Provident Consumer Discount Co., 459 U.S. 56, 58, 103 S.Ct. 400, 402, 74 L.Ed.2d 225 (1982) (per curiam); see also, Leonhard v. United States, 633 F.2d 599 (2d Cir.1980), cert. denied, 451 U.S. 908, 101 S.Ct. 1975, 68 L.Ed.2d 295 (1981). Similarly, the filing of a notice of appeal to a district court divests a bankruptcy court of jurisdiction to proceed with respect to matters raised by such appeal. In re Neuman, 67 B.R. 99, 101 (S.D.N.Y.1986); In re Emergency Beacon Corp., 58 B.R. 399, 402 (Bankr.S.D.N.Y. 1986); In re Overmyer, 53 B.R. 952, 954 (Bankr.S.D.N.Y.1985); In re Kendrick Equipment Corp., 60 B.R. 356, 358 (Bankr. W.D.Va.1986); In re Hardy, 30 B.R. 109, 111 (Bankr.S.D.Ohio 1983). The divestment of jurisdiction is meant to preserve the integrity of the appellate process by avoiding the needless confusion which would assuredly flow from putting the same issue before two courts at once. In re Emergency Beacon Corp., supra, 58 B.R. at 402, citing, 9 Moore's Federal Practice, ¶ 203.11 (2d Ed.1985); In re Kendrick, 60 B.R. at 358; Matter of Urban Development...