Opinion
20-11068
01-06-2022
IN THE MATTER OF: BRIANA ASH, DEBTOR(S)
NOT INTENDED FOR PUBLICATION
DECISION ON TRUSTEE'S MOTION FOR SANCTIONS
Robert E. Grant Chief Judge, United States Bankruptcy Court
At Fort Wayne, Indiana, on January 06, 2022
In this Chapter 7 case, the debtor (who at all times has been represented by counsel) previously filed a motion to convert from chapter 7 to chapter 13, which the Chapter 7 trustee opposed. At the hearing on the motion the debtor withdrew it, rather than go to trial on the trustee's objections. After the United States Trustee, acting on information provided by the trustee, objected to the debtor's discharge, the debtor cried foul, blamed the trustee and claimed the trustee improperly induced her to withdraw the motion to convert. Based on the concept that the trustee's actions had caused "injury the debtor's interests" by forcing her to have to defend her right to a discharge, she filed an adversary proceeding, seeking damages from both the trustee and her attorney, a demand for a jury trial, together with a motion for the District Court to withdraw the reference for that proceeding, and a separate motion asking this court to remove the trustee. The adversary and its associated motion for withdrawal of the reference were voluntarily dismissed and the motion to remove the trustee was denied after the court heard arguments at the initial hearing on the motion.After those submissions were disposed of, the trustee filed a motion for sanctions, pursuant to Rule 9011 of the Federal Rules of Bankruptcy Procedure, 28 U.S.C. § 1927, and § 105 of the Bankruptcy Code, arguing the debtor's submissions were frivolous, vexatious, etc. That is the matter presently before the court and, to a large extent, is addressed to the court's discretion. See, Corley v. Rosewood Care Center, Inc. of Peoria, 388 F.3d 990,1014 (7th Cir. 2004); Kotsilieris v. Chalmers, 966 F.2d 1181, 1183 (7th Cir. 1992); Walter v. Fiorenzo, 840 F.2d 427, 433 (7th Cir. 1988).
Debtor complained the trustee's actions constituted fraud, breach of contract, fraudulent inducement, and bad faith litigation tactics. See, Ash v. Kleven, Adv. Pro. No. 21-1028, Complaint filed June 11, 2021 (ECF. No. 1).
Ash v. Kleven, Adv. Pro. No. 21-1028, Notice of Dismissal, filed June 25, 2021. Matter of Ash, Case No. 20-11068, Order Denying Motion, dated July 23, 2021; Transcript of Hearing held July 22, 2021, pg. 44-59 (ECF No. 64).
To be sanctionable under § 1927 an attorney's conduct must be both unreasonable and vexatious. This requires some sort bad faith, whether objective or subjective. Pacific Dunlop Holdings, Inc. v. Barosh, 22 F.3d 113, 120 (7th Cir. 1994) citing, Kotsilieris v. Chambers, 966 F.2d 1181, 1184 (7th Cir. 1992); In re TCI Ltd., 769 F.2d 441, 445 (7th Cir. 1985).
As to the adversary proceeding, it was voluntarily dismissed within 21 days after the trustee served notice that it was considered sanctionable under Rule 11. Because it was voluntarily dismissed during the safe harbor provided by the rule, see, Fed.R.Bankr.P. Rule 9011(c)(1)(A) (motion for sanctions may not be filed unless within 21 days after service of the motion the challenged paper is not withdrawn), the court does not believe that sanctions are appropriate, whether under Rule 11 or § 1927. That, after all, is what the safe harbor is for. While the trustee argues that, because of the 14-day time limit established by the District Court's local rules for responding to motions to withdraw the reference, see, N.D. Ind. L.R. 200-1(b)(1), she was forced to incur attorney fees responding to that motion before the time allotted by the safe harbor expired, she never sought an extension of the time set by the local rule. Having failed to seek one, we will never know what might have happened had she done so.
As for the motion to remove, when courts recite the litany of things that may constitute "cause" to remove a trustee, 11 U.S.C. § 324(a), some decisions include the words "fraud and actual injury to the debtor interests . . ." In re IFS Financial Corp. 803 F.3d 195, 207 (5th Cir. 2015) quoting, In re Freeport Italian Bakery, Inc., 340 F.2d 50, 54 (2nd Cir. 1965). What they might mean by that statement is unexplained, and the court has never seen, or had its attention directed to, a decision where a trustee was removed for actions that harm the debtor - as opposed to actions which harm the estate. That is not surprising because, while pursuing their duties to the estate, see, 11 U.S.C. § 704, trustees will frequently take actions that might be seen as causing "injury to the debtor" such as seeking to compel the turnover of assets, objecting to claimed exemptions, and objecting to a debtor's discharge. Indeed, it is hard to protect the interests of creditors and the estate without diminishing or harming the interests of the debtor. Nonetheless, although they are unexplained, the words are there, and so it is not surprising that some enthusiastic litigant might seize upon them and use them as the basis for a motion to remove the trustee. Disappointing, no doubt; sanctionable not quite.
Despite the statement, neither IFS Financial nor Italian Bakery dealt with conduct harming the debtor's interests. In IFS Financial, the trustee was removed for intentionally charging the estate for substantial personal expenses. See, IFS Financial, 803 F.2d at 202. In Italian Bakery, the trustee was removed for a conflict of interest, lack of eligibility, asserting false claims against the estate and failing to prosecute claims belonging to the estate. See, Italian Bakery, 340 F.2d at 54-55. Tracing the statement to its origins leads to Schwartz v. Mills, 192 F.2d 727 (2nd Cir. 1951), a pre-Code case involving a dispute over the election of a trustee, who was entitled to vote for the trustee, and piercing of the corporate veil, and then to West 52nd Theatre Co. v. Tyler, 178 F.2d 123, 129 (2nd Cir. 1949), which stressed the need for "actual injury to the debtor" before subordinating a claim. Given its lineage, the statement's repetition resembles the children's game of telephone in which the message as reported by the last player bears little resemblance to the initial one. See, Chinese Whispers, https://en.wikipedia.org/wiki/ Chinese_whispers (last visited Dec. 10, 2021). For example, at least one decision substitutes "injury to the estate" for "injury to the debtor interests" but cites Italian Bakery for the proposition, even though that decision referred to "the debtor interests." See, In re AFI Holdings, Inc., 355 B.R. 139, 149 (9th Cir. BAP 2006).
There is a fine line between the zealous representation of one's client and unreasonably vexatious litigation. See, Browning v. Kramer, 931 F.2d 340, 344 (5th Cir. 1991) ("Strict construction of [§ 1927] is necessary so that the legitimate zeal of an attorney in representing her client is not dampened"); Balijewel, Inc. v. John Hardy Limited, 2008 WL 4425886 (N.D. Ill. Sept. 4, 2008) ("It is a fine line between zealous and unreasonable . . . ."). See also, H.R. Conf. Rep. 96-1234, 8, 1980 U.S.C.C.A.N. 2781, 2782 ("The high standard which must be met to trigger Section 1927 insures that the provision in no way will dampen the legitimate zeal of an attorney in representing his client."). Debtor's counsel have stepped right up to the very edge of that line and even peeked over it, but they have not yet crossed it. See e.g., Kpadeh v. Emmanuel, 261 F.R.D. 678, 687 (S.D. Fla. 2009) ("I do not condone Plaintiff's counsels' pugnacious, self-serving behavior and their zealousness and negligence was moving along the spectrum toward unreasonableness and vexatiousness."); Manion v. Nagin, 2004 WL 234402 *10 (D. Minn. Feb. 5, 2004) ("The line between being a zealous advocate and a vexatious lawyer has been stepped on in this case, but has not been stepped over.").
The motion for sanctions will be denied.