Prince v. MacDonald, Docket No. 204615.

• Citation: 602 N.W.2d 834,237 Mich. App. 186
• Decision Date: 01 December 1999
• Docket Number: Docket No. 204615.
• Parties: Patricia Gormely PRINCE, Plaintiff/Counter-Defendant-Appellee/Cross-Appellant, v. Harold MacDONALD, Defendant/Counter-Plaintiff-Appellant/Cross-Appellee, and MacDonald Group, P.C. and MacDonald & Goren, P.C., Defendants/Counter-Plaintiffs.
• Court: Court of Appeal of Michigan (US)

602 N.W.2d 834

237 Mich. App. 186

Patricia Gormely PRINCE, Plaintiff/Counter-Defendant-Appellee/Cross-Appellant, v. Harold MacDONALD, Defendant/Counter-Plaintiff-Appellant/Cross-Appellee, and MacDonald Group, P.C. and MacDonald & Goren, P.C., Defendants/Counter-Plaintiffs.

Docket No. 204615.

Court of Appeals of Michigan.

Submitted August 3, 1999, at Detroit.

Decided August 13, 1999, at 9:25 a.m.

Released for Publication December 1, 1999.

The Law Office of Dennis A. Dettmer (by Dennis A. Dettmer and Gary L. Hermanson), Detroit, for Patricia G. Prince.

Schafer and Weiner, P.C. (by Arnold Schafer and Max J. Newman), Bloomfield Hills, for Harold MacDonald.

Before: HOOD, P.J., and FITZGERALD and COLLINS, JJ.

PER CURIAM.

Plaintiff Patricia Gormely Prince alleged several theories of liability against defendants after the parties' employment relationship ended acrimoniously. Plaintiff prevailed on her breach of contract claim and her stock valuation claim. She did not, however, prevail on her religious discrimination claim and she cross appeals, raising evidentiary issues with regard to that claim. While defendant MacDonald & Goren, P.C., prevailed on its counterclaim against plaintiff for breach of fiduciary duty, it was sanctioned jointly and severally with defendant Harold MacDonald for litigant misconduct. Defendant Harold MacDonald¹ appeals as of right from the order granting sanctions. We affirm.

On May 23, 1996, the day before the scheduled trial date, defendant MacDonald filed a bankruptcy petition on behalf of MacDonald & Goren, P.C. The next morning he informed the trial court about the filing of the petition. According to plaintiff, defendant MacDonald also represented to the court, and convinced the court, that the trial could not proceed against him personally because of the bankruptcy. He then offered a nominal amount in an attempt to settle the case, which amount plaintiff refused to accept. The trial was adjourned.

On May 31, 1996, MacDonald & Goren, P.C., filed a motion to dismiss its own bankruptcy petition, claiming that it unexpectedly received money and the bankruptcy filing was no longer necessary. The bankruptcy court did not grant the motion, but instead dismissed the case because of defects in the filing of the petition, including a failure to include the necessary matrix, schedules, and statements. Plaintiff subsequently moved in the bankruptcy court to reopen the case and make a determination regarding whether the filing was in bad faith. The bankruptcy court denied plaintiff's motion.² Plaintiff then moved for sanctions in the trial court. A hearing with regard to the sanction motion was held and, after trial in the underlying matter, the trial court issued its findings of fact and awarded sanctions to plaintiff in the amount of $43,203. The trial court stated, in part:

The Bankruptcy Petition was hastily put together by Defendants, the rules were not followed, a limited disclosure was attempted by listing only two of the firm's creditors, and the Defendants misrepresented the firm's assets in the Petition. The bankruptcy filing was in bad faith. The permissible and appropriate inferences are that (a) the bankruptcy proceeding was used in an attempt to reach a nominal settlement of this case through misrepresentation, or (b) the bankruptcy was filed to otherwise delay these proceedings, cause increased expense and hardship to the Plaintiff and causing unnecessary burden to this Court, under circumstances where the Defendants had no intention of following through with the bankruptcy.

Further, Defendant Harold C. MacDonald suggested the filing was because of a cash flow problem and because of his firm's pending eviction. The facts do not support these claims. The Court finds that Defendant's testimony is not credible. Finally, the Court finds that Defendants deliberately and improperly delayed the trial.

For its wrongful conduct, the Court finds the Defendants' action is sanctionable.

In sanctioning defendants, the trial court relied on its inherent authority to sanction litigant misconduct. Cummings v. Wayne Co., 210 Mich.App. 249, 252-253, 533 N.W.2d 13 (1995). It also noted that courts have inherent power to sanction the bad-faith or vexatious use of collateral proceedings. See In re Powell Estate, 160 Mich.App. 704, 718-719, 408 N.W.2d 525 (1987).

Defendant recognizes that trial courts generally have power to sanction litigant misconduct. He argues, however, that a trial court does not have jurisdiction under circumstances where the litigant misconduct involves the filing of a bankruptcy petition.³ We disagree that in circumstances such as those present here, a trial court has no authority to sanction a defendant for engaging in dilatory tactics aimed at interfering with a state court proceeding.

This is an issue of first impression, and we note that there is no law to support preemption of a state court's right to sanction a defendant for engaging in misconduct in an underlying state-law case. Defendant cites Koffman v. Osteoimplant Technology, Inc., 182 B.R. 115 (D.Md., 1995), to support his position that the trial court could not order him to pay sanctions. Our reading of Koffman leads to a contrary conclusion.

In Koffman, the plaintiff filed an action against the defendant in the district court after several involuntary bankruptcy petitions against the defendant were dismissed by the bankruptcy court. The defendant filed counterclaims for civil conspiracy, abuse of process, and malicious prosecution arising out of the plaintiff's conduct while the bankruptcy was proceeding. Specifically, the plaintiff had previously filed a district court action in violation of the automatic stay that was in effect because of the involuntary petitions. The plaintiff had also filed an emergency motion for a restraining order and injunction in the bankruptcy court, which motion was allegedly supported by a false affidavit. Id. at 119.

The plaintiff argued that the defendant's claims of abuse of process and malicious prosecution were preempted by federal bankruptcy law. Id. at 123. Thus, the court addressed "whether federal remedies... preempt [ed] the state law causes of action alleged in the counterclaim." Id. (emphasis added). In ruling that the state-law causes of action were preempted, the court stated:

Because Congress has the constitutional power to preempt state law, ... as well as the constitutional power to enact laws governing bankruptcies, ... a number of courts have concluded that, by enacting the Bankruptcy Code, Congress has preempted some state activity on matters affecting bankruptcy.... On the other hand, because the common law of the various states provides much of the legal framework for the operation of the bankruptcy system, it cannot be said that Congress has completely preempted all state regulation which may affect the actions of parties in bankruptcy court. "Where the Bankruptcy Code is silent, and no uniform bankruptcy rule is required, the rights of the parties are governed by the underlying non-bankruptcy law." ... Remedies and sanctions for improper behavior and filings in bankruptcy court, however, are matters on which the Bankruptcy Code is far from silent and on which uniform rules are particularly important. [Id. at 123-124 (citations omitted; emphasis added).]

The court discussed the two specific sections of the Bankruptcy Code, 11 USC 101 et seq., pertinent to the case, including 11 USC 303(i), the statutory subsection that addresses sanctions against creditors who file involuntary petitions in bad faith, and 11 USC 362(h), which addresses individuals who are injured by violations of an automatic stay. In addition, it noted:

[T]he Bankruptcy Code contains numerous other provisions directed toward regulating the use of the bankruptcy process and the conduct of the parties in bankruptcy court. For example, 11 USC § 105(a) provides that the court "may issue any order, process, or judgment that is necessary or appropriate... to prevent an abuse of process." Other remedies include 11 USC § 727(a)(4)(B), which authorizes a denial of discharge for presenting fraudulent claims, Rule 1008 of the Federal Rules of Bankruptcy Procedure, which requires filings to "be verified or contain an unsworn declaration" of truthfulness under penalty of perjury, and Rule 9011, which authorizes sanctions for signing certain documents not "well grounded in fact and ... warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law." [Id. at 124.]

While indicating that the Bankruptcy Code and bankruptcy rules include remedies and sanctions, the Koffman court explicitly determined that not all state court remedies are preempted:

Although the Bankruptcy Code includes all the remedies described above, as well as others, these provisions, standing alone, are insufficient to imply congressional intent to preempt all state activity in the area. The mere existence of a detailed and extensive regulatory scheme does not by itself imply an intent to preempt state remedies.... In addition, courts must consider whether there are "special features" which warrant preemption. [Id. at 125.]

The court then concluded that there were special features that warranted the preemption of the common law causes of action. Id. (emphasis added). Specifically, the court noted that "allowing state law tort suits to go forward would prejudice the operation of the Bankruptcy Code in an impermissible manner. Parties could be deterred from exercising their rights in bankruptcy if, by filing a bankruptcy petition, they risk being faced with a state court lawsuit and liability for substantial damages." Id. at 125-126. The Koffman court found the reasoning set forth in Gonzales v. Parks, 830 F.2d 1033, 1035 (C.A.9, 1987), to be persuasive.

The [Gonzales] court reasoned that allowing such claims to go forward would result in a state court determining whether

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