In re Wonder Corp. of America

• Decision Date: 27 December 1989
• Docket Number: Bankruptcy No. 5-86-00436,Adv. No. 5-88-0070.
• Citation: In re Wonder Corp. of America, 109 B.R. 18 (Bankr. Conn. 1989)
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re WONDER CORPORATION OF AMERICA, Debtor. WONDER CORPORATION OF AMERICA and Waldco, Inc., Plaintiffs, v. CHASE MANHATTAN BANK, N.A. and Robinson & Cole, Defendants/Counterclaimants, v. WONDER CORPORATION OF AMERICA, Waldco, Inc., Pullman, Comley, Bradley & Reeves and Lane & Mittendorf, Counterdefendants.

109 B.R. 18 (1989)

In re WONDER CORPORATION OF AMERICA, Debtor.

WONDER CORPORATION OF AMERICA and Waldco, Inc., Plaintiffs, v. CHASE MANHATTAN BANK, N.A. and Robinson & Cole, Defendants/Counterclaimants, v. WONDER CORPORATION OF AMERICA, Waldco, Inc., Pullman, Comley, Bradley & Reeves and Lane & Mittendorf, Counterdefendants.

Bankruptcy No. 5-86-00436, Adv. No. 5-88-0070.

United States Bankruptcy Court, D. Connecticut.

December 27, 1989.

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

Christopher R. Belmonte, Lane & Mittendorf, New York City, for Waldco, Inc., plaintiff/counterdefendant.

Edward F. Hennessey, Robert A. Izard, Jr., Robinson & Cole, Hartford, Conn., for Chase Manhattan Bank, N.A., defendant/counterclaimant.

MEMORANDUM AND DECISION ON SANCTIONS UNDER 28 U.S.C. § 1927 AND BANKRUPTCY RULE 9011

ALAN H.W. SHIFF, Bankruptcy Judge.

It is hoped that this core proceeding¹ is the last of a series of unproductive battles waged by the attorneys on both sides in what has been an unnecessarily prolonged and too often vitriolic war.² Wonder Corporation of America ("Wonder") and Waldco, Inc., the joint proponents of a confirmed chapter 11 plan, seek sanctions pursuant to 28 U.S.C. § 1927 and Bankruptcy Rule 9011 against Chase Manhattan Bank, N.A. ("Chase") and Robinson & Cole ("R & C"), its attorneys. Chase counterclaims under Rule 9011 for sanctions in an unspecified amount against the plaintiffs and their attorneys, Pullman, Comley, Bradley & Reeves ("P, C, B & R") and Lane & Mittendorf ("L & M"),³ for prosecuting this action and related motions.⁴

BACKGROUND

On June 23, 1986, Wonder filed a petition under chapter 7 of the Bankruptcy Code. On September 18, 1986, the case was converted to chapter 11. The genesis of this controversy is the overzealous opposition by R & C⁵ to Wonder's reorganization efforts.

On April 28, 1987, I noted in ruling on Chase's § 506(b) application for attorneys' fees and costs that

there was never any appreciable risk at any time that . . . Chase would not be paid in full in accordance with applicable bankruptcy law.

. . . .

Although creditors are entitled to engage counsel and pay for constant, comprehensive, and aggressive representation, . . . where services are not reasonably necessary or where action is taken because of an attorney\'s excessive caution or overzealous advocacy, courts have the right and the duty, in the exercise of their discretion, to disallow fees and costs under § 506(b). Indeed such activity might cross the line of conduct sanctionable under F.R.Civ.P. 11 and Bankr.R. 9011 if it is "interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation."

In re Wonder Corp. of America, 72 B.R. 580, 590-91 (Bankr.D.Conn.1987), aff'd, 82 B.R. 186 (D.Conn.1988) (the "Fee Order").⁶ I disallowed 515 of the 1,290 hours sought by Chase "as blatant and totally unproductive obstruction in the administration of this case. . . . None of . . . the activities attributable to those hours served any legitimate purpose." Id. at 592. I then determined that "a large number of the remaining . . . 775 hours not only have strong overtones of unnecessary services but are also tainted by excessive duplication, both of which have resulted in grossly inflated fees." Id. at 593. Accordingly, I discounted those hours by a factor of 66 2/3%, which resulted in the allowance of 258 compensable hours under § 506(b).

On July 9, 1987, the plaintiffs moved for the imposition of sanctions against Chase and R & C under 28 U.S.C. § 1927 and Bankruptcy Rule 9011. On October 8, 1987, they filed an amended motion. On November 3, 1987, Chase moved to dismiss the plaintiffs' amended motion, asserting that, in light of its pending appeal from the Fee Order, this court lacked jurisdiction over some matters, the interests of judicial economy dictated that other matters be referred to the district court, and that only the district court could exercise jurisdiction over Chase's appellate conduct. I granted the motion in part but decided that those matters over which this court retained jurisdiction should be retained here. In re Wonder Corp. of America, 81 B.R. 221, 226-27 (Bankr.D.Conn.1988). On February 5, 1988, the district court affirmed the Fee Order, finding

that substantial evidence exists on the record to support the conclusion that a large portion of Chase\'s claim reflected unreasonably excessive duplication and a determined effort to frustrate the bankruptcy proceedings. The decision to disallow a significant portion of Chase\'s claim, therefore, was quite appropriate under the circumstances.

In re Wonder Corp. of America, 82 B.R. 186, 192 (D.Conn.1988). On June 1, 1988, the plaintiffs commenced the instant adversary proceeding.

A. Complaint

The complaint identifies the following eight categories of conduct allegedly sanctionable under 28 U.S.C. § 1927 and/or Bankruptcy Rule 9011⁷ for which the plaintiffs seek sanctions aggregating $199,893.50 for 1,486.1 hours spent responding to that conduct:⁸

(1) Cash Collateral and Borrowing.

On October 2, 1986, Wonder filed its first motion to use cash collateral. Plaintiffs' Outline, Exhibit F. The plaintiffs allege that the motion was initially opposed by Chase at the hearings which commenced on October 10, Complaint ¶ 20; Plaintiffs' Outline at 8,⁹ but that the parties thereafter agreed that Wonder could use a portion of the cash collateral and borrow other funds from Waldco. They also agreed that a portion of the cash collateral would be paid to Chase and another bank. Plaintiffs' Outline, Exhibit H.

On December 2, 1986, Chase filed an objection to Wonder's further use of cash collateral. Plaintiffs' Outline, Exhibit D. On December 10, Wonder filed a second motion for authority to use cash collateral. Plaintiffs' Outline, Exhibit I. On December 19, Wonder filed a motion for authorization to borrow funds from Waldco, Plaintiffs' Outline, Exhibit J, to which Chase objected at the hearing held on that date. Plaintiffs' Outline, Transcript of Dec. 12, 1986. At a December 20 hearing, Wonder was authorized to borrow $120,000 from Waldco. Defendants' Outline, Exhibit 2.

On January 7, 1987, Wonder filed a renewed second motion for authority to use cash collateral. Plaintiffs' Outline, Exhibit K. On February 4, 1987, Chase and another bank filed a memorandum of law in opposition to that motion. Plaintiffs' Outline, Exhibit E. On February 9, 1987, an agreement was reached under which Wonder was allowed to use $150,000 of cash collateral and borrow $150,000 from Waldco. Plaintiffs' Outline, Exhibit P.

The plaintiffs claim that as a consequence of Chase's opposition to their attempts to use cash collateral and borrow money, they incurred attorneys' fees of $48,951.25 for 331.7 hours. Plaintiffs' Outline at 15-17.

(2) Motion for Appointment of Trustee or Examiner.

On January 8, 1987, Chase filed, but did not pursue, a motion for the appointment of a trustee or, in the alternative, an examiner, alleging improprieties in the relationship between Waldco and Wonder and the commission of fraudulent acts by Wonder's management. Plaintiff's Outline, Exhibit Q. The plaintiffs claim that they incurred $1,184.25 in attorneys' fees for 5.05 hours spent opposing the motion. Plaintiffs' Outline at 17-18.

(3) Opposition to Motions to Substitute Attorneys for Debtor and to Admit Attorney for Waldco Pro Hac Vice.

On January 6, 1987, a motion for the admission pro hac vice of Attorney Christopher Belmonte, of L & M, to represent Waldco was filed and granted over Chase's objection. On January 9, 1987, a motion was filed for permission to substitute P, C, B & R for Zeisler & Zeisler as attorneys for Wonder. Chase objected on the ground that P, C, B & R's fee was guaranteed by Waldco, which was, inter alia, an equity security holder, Plaintiffs' Outline, Transcript of Jan. 22, 1987, an undersecured creditor,¹⁰ and a potential purchaser of Wonder. The motion was granted on January 22, 1987. The plaintiffs contend that Chase's opposition and its cross-examination of Attorney Douglas A. Strauss, of P, C, B & R, regarding his firm's relationship with Waldco was unreasonable and that as a result of that opposition they incurred attorneys' fees of $7,193.50 for 54.9 hours. Plaintiffs' Outline at 19-21.

(4) Impairment/Objections to Disclosure Statement and Plan.

On February 3, 1987, the plaintiffs filed a disclosure statement and plan of reorganization. Plaintiffs' Outline, Exhibits L and M. On February 18, they filed an amended disclosure statement and plan, Plaintiffs' Outline, Exhibits S and T, and on February 25 they further amended their disclosure statement and plan. The disclosure statements and plans provided, inter alia, that Chase would be paid in cash the full amount of its allowed claim on the effective date of the confirmed plan. On March 3, 1987, Chase and two other banks filed an objection to confirmation on a number of grounds, including their designation as unimpaired. Plaintiffs' Outline, Exhibit V. See 11 U.S.C. § 1124. A memorandum of law in support of their objection was filed on March 9. On March 18, the first date of the confirmation hearing, I ruled that Chase was unimpaired and therefore lacked standing to object to confirmation of the plan. In re Wonder Corp. of America, 70 B.R. 1018, 1022-24 (Bankr.D. Conn.1987). On March 20, notwithstanding that ruling, Chase filed a supplemental objection to the plan. Plaintiffs' Outline, Exhibit Y. The plan was confirmed at the hearing on March 20, and an order entered to that effect on April 7, 1987. The plaintiffs claim that as a result of Chase's opposition they incurred attorneys' fees of $37,499.50 for 256.4 hours. Plaintiffs' Outline at 22, 35.

(5) S...