Mroz, In re, 94-4316

• Citation: 65 F.3d 1567
• Decision Date: 10 October 1995
• Docket Number: No. 94-4316,94-4316
• Parties: , Bankr. L. Rep. P 76,678 In re David G. MROZ, Debtor. Eric S. GLATTER and Houston & Shahady, P.A., Plaintiffs-Appellants, v. Lynn MROZ, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1567

65 F.3d 1567

32 Fed.R.Serv.3d 1244, Bankr. L. Rep. P 76,678

In re David G. MROZ, Debtor.

Eric S. GLATTER and Houston & Shahady, P.A., Plaintiffs-Appellants, v. Lynn MROZ, Defendant-Appellee.

No. 94-4316.

United States Court of Appeals, Eleventh Circuit.

Oct. 10, 1995.

Eric S. Glatter, Bart A. Houston, Kevin C. Gleason, Houston & Shahady, P.A., Ft. Lauderdale, FL, for appellants.

James Carl Steffl, Kemp, Klein, Umphrey & Endelman, P.C., Troy, MI, for appellee.

Appeal from the United States District Court for the Southern District of Florida.

Before COX, Circuit Judge, HILL and GARZA ^*, Senior Circuit Judges.

REYNALDO G. GARZA, Senior Circuit Judge:

This appeal involves sanctions imposed by the bankruptcy court against the law firm of Houston & Shahady, P.A. ("H & S") and Eric S. Glatter ("Glatter"), one of its associates. The district court below affirmed the sanctions. For the reasons stated below we reverse the judgment and remand the case for an evidentiary hearing.

BACKGROUND

On August 10, 1990, David Mroz ("Debtor") filed a voluntary Chapter 7 bankruptcy petition. Milton G. Friedman ("Trustee") was appointed interim Chapter 7 trustee in the bankruptcy case but eventually became the permanent trustee by virtue of 11 U.S.C. Sec. 702(d). On September 18, 1992, the Trustee, with H & S as counsel, filed a Complaint for Recovery of a Preferential Transfer against Lynn Mroz ("Mroz"), the Debtor's ex-wife. ¹ The complaint was based on discussions with the Debtor and an affidavit that he provided. The affidavit alleged that prior to the filing of the bankruptcy, the Debtor received several checks, totaling $39,000, from Martin Tool, Inc. The Debtor allegedly converted these checks to cash and transferred different sums of this money to various individuals, including his ex-wife.

The bankruptcy court set a hearing on May 5, 1993 to resolve this dispute. Before the hearing date, Mroz denied the allegations in the Trustee's complaint. She provided an At the designated time, Mroz and her able counsel flew to Miami (from Detroit) for the bankruptcy hearing but neither the Trustee or Bart Houston ("Houston"), the attorney handling the case for the Trustee, were present. The hearing was to commence at 1:30 p.m., but Houston contacted the bankruptcy court and informed it that he was appearing before another court in Ft. Lauderdale at that time. In an effort to accommodate Houston's conflicts, the bankruptcy court postponed the hearing until 2:30 that afternoon. Again, Houston failed to arrive at the designated time. However, the Trustee appeared in court and informed the bankruptcy court that Houston would not be able to attend the hearing and that his associate, Glatter, would stand in for him. ²

affidavit affirmatively claiming that she in fact had not received any such monies from her ex-husband. Along with this steadfast denial, she requested sanctions against the Trustee and his attorneys for failing to make a reasonable inquiry into the charges set forth in the complaint. Approximately two and a half months before the date of the hearing, Mroz also took limited discovery from the Trustee. The discovery established that the Trustee had no other evidence apart from the Debtor's affidavit and testimony to prosecute the complaint. Furthermore, during this period neither the Trustee or H & S attempted to engage in any form of discovery to further explore the factual basis of the complaint.

At the hearing Glatter immediately requested a continuance because he had been unable to serve the Debtor, its key witness, with a subpoena to compel him to appear at trial. The bankruptcy judge agreed to a continuance, but only if the Trustee would compensate Mroz and her attorney for air fare, cab fare and ten hours of attorney fees. The Trustee refused this offer so the hearing continued. Without the Debtor's testimony the Trustee was unable to introduce the Debtor's affidavit into evidence. Furthermore, the Trustee's testimony reflected that H & S took no steps to investigate the allegations against Mroz outside of securing the Debtor's affidavit. Indeed, the Trustee could not answer any specific questions about the alleged transfer of money from the Debtor to his ex-wife.

At the hearing, Mroz made an unopposed motion to dismiss the action for failure to set out all the elements of a preferential transfer. The motion was granted. Mroz also made an ore tenus motion for sanctions, which the court granted. The bankruptcy court justified the sanctions because, "between October 8, 1990 and the date that [the] lawsuit was brought, September 18, 1992, which is 23 months, and then continuing to the date of the response by the plaintiff to defendant's interrogatories, and that is dated February 16, 1993, so from the date of October the 8th of '90 to February 16 of 1993, no more information was obtained, and yet the lawsuit was brought." The bankruptcy court stated, "[t]his is, to be candid, outrageous." The court was outraged because the Trustee proceeded with trial on a simple affidavit which did not even identify the specific date of the alleged transfer, the debt the transfer was to repay, or the manner in which the transfer was made.

The sanctions awarded amounted to $2,590, or the sums expended by Mroz to transport herself and counsel to the Miami hearing, and her attorney's fees. The bankruptcy court levied the sanctions under Bankruptcy Rule 9011 against Glatter, as the individual who signed the complaint, and H & S, as the law firm representing the Trustee. The district court affirmed these sanctions without discussion.

DISCUSSION

As the second court in review of the bankruptcy court's judgment, we review the bankruptcy court's factual findings for clear error, and its legal conclusions de novo. Georgian Villa, Inc. v. United States (In re Georgian Villa, Inc.), 55 F.3d 1561, 1562 (11th Cir.1995). When reviewing the imposition of sanctions, the primary question before us is whether the sanctioning court abused its discretion. See, e.g., Cooter & Gell v. Hartmarx

Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 2461, 110 L.Ed.2d 359, 369 (1990) ("[A]n appellate court should apply an abuse-of-discretion standard in reviewing all aspects of a district court's Rule 11 determination."); Chambers v. NASCO, Inc., 501 U.S. 32, 55, 111 S.Ct. 2123, 2138, 115 L.Ed.2d 27, 58 (1991) ("We review a court's imposition of sanctions under its inherent power for abuse of discretion.").

I.

On appeal Glatter and H & S claim that the bankruptcy court erred in assessing sanctions against them because the complaint was filed only after a reasonable investigation into the factual allegations had been conducted. Appellants state that at the time of its filing counsel acted prudently pursuant to information obtained in discussions with the Debtor and from facts alleged in his affidavit. Additionally, H & S argues that even if the individual associate was sanctionable under Bankruptcy Rule 9011, the bankruptcy court erred in imposing sanctions on the law firm in light of the Supreme Court's decision in Pavelic & LeFlore v. Marvel Entertainment Group, 493 U.S. 120, 110 S.Ct. 456, 107 L.Ed.2d 438 (1989).

Bankruptcy Rule 9011 is substantially identical to Federal Rule of Civil Procedure 11. ³ Like Rule 11, Bankruptcy Rule 9011 ties sanctions to an attorney's signature on a particular pleading or document which is filed with the court. Thus, authorities applying these standards under Rule 11, prior to its amendment, ⁴ may be useful in applying Bankruptcy Rule 9011.

Sanctions under Bankruptcy Rule 9011 are warranted when (1) the papers are frivolous, legally unreasonable or without factual foundation, or (2) the pleading is filed in bad faith or for an improper purpose. In re Smith, 82 B.R. 113, 114 (Bankr.D.Ariz.1988); Bankruptcy Rule 9011. Like Rule 11, the bankruptcy code permits sanctions only if the objectionable court paper is signed in violation of the rule. See Bankruptcy Rule 9011; Jones v. International Riding Helmets, Ltd., 49 F.3d 692, 694 (11th Cir.1995). "Accordingly, the court's inquiry should only focus on the merits of the pleading gleaned from the facts and law known or available to the attorney at the time of filing." Jones, 49 F.3d at 694-95 (original emphasis); Corp. of the Presiding Bishop v. Assoc. Contractors, Inc., 877 F.2d 938, 943 (11th Cir.1989), cert. denied, 493 U.S. 1079, 110 S.Ct. 1133, 107 L.Ed.2d 1038 (1990); In re General Plastics Corp., 170 B.R. 725, 732 (Bankr.S.D.Fla.1994). "The court is expected to avoid using the wisdom of hindsight and should test the signer's conduct by inquiring what was reasonable to believe at the time the pleading, motion, or other paper was submitted." Souran v. Travelers Ins. Co., 982 F.2d 1497, 1506 (11th Cir.1993) (quoting Fed.R.Civ.P. 11, Advisory Committee Note).

Furthermore, this Circuit has determined that Rule 11 does not impose a "continuing obligation " on a party to amend a complaint, so long as, at the very least, the complaint was reasonably interposed in the first place. Bishop, 877 F.2d at 943. Because Bankruptcy Rule 9011 tracks the present tense language of Rule 11, ⁵ the former When a court is confronted with a motion for sanctions under Rule 11 or Bankruptcy Rule 9011, it must first determine whether the party's claim is objectively frivolous, in view of the law or facts, and then, if it is, whether the person signing the document should have been aware that it was frivolous. Jones, 49 F.3d at 695 (citing McGuire Oil Co. v. Mapco, Inc., 958 F.2d 1552, 1563 (11th Cir.1992)). In other words, we must inquire whether she would have been aware that it was frivolous if she had conducted a reasonable inquiry. Id. If an attorney has failed to conduct a reasonable inquiry into the matter, then the court is obligated to impose sanctions even if the attorney had a good faith belief that the claim was sound. Id. The reasonableness of the prefiling inquiry may...