Renee S. Williams v. David K. Stephens ( 2015 )

United States Bankruptcy Appellate Panel
For the Eighth Circuit
___________________________
No. 14-6030
___________________________
In re: Living Hope Southwest Medical Services, LLC
lllllllllllllllllllllDebtor
------------------------------
Renee S. Williams, Trustee
lllllllllllllllllllll Plaintiff - Appellee
v.
Living Hope Southeast, LLC
lllllllllllllllllllll Defendant
David Kimbro Stephens
llllllllllllllllllllllInterested Party - Appellant
____________
Appeal from United States Bankruptcy Court
for the Western District of Arkansas - Texarkana
____________
Submitted: December 8, 2014
Filed: January 29, 2015
____________
Before FEDERMAN, Chief Judge, SCHERMER and SHODEEN, Bankruptcy
Judges.
____________
FEDERMAN, Chief Judge
David Kimbro Stephens appeals from the Order of the Bankruptcy Court1
denying his Motion for Reconsideration of the Court’s Memorandum Opinion and
Judgment ordering sanctions against him under Federal Rule of Bankruptcy
Procedure 9011. For the reasons that follow, the Order of the Bankruptcy Court is
AFFIRMED.
FACTUAL BACKGROUND
The appellant, David Kimbro Stephens, is an attorney. He is an owner and
the controlling principal of Living Hope Southwest Medical Services, LLC, the
debtor in this bankruptcy case filed in the Western District of Arkansas (“the
Debtor”). Mr. Stephens also has an interest in Living Hope Southeast, LLC
(“Southeast”), which is the debtor in a separate bankruptcy case filed in the Eastern
District of Arkansas.2
The Debtor’s case has a long and difficult history, but, as relevant to this
appeal, in February 2009, the Chapter 7 Trustee in the Debtor’s case, Renee S.
Williams, filed an adversary proceeding against Southeast and Stephens (the
“Adversary Proceeding”), seeking a judgment or claim for the value of assets
which were transferred postpetition by the Debtor to Southeast. The Trustee also
sought the imposition of a constructive trust against the transferred assets. By
1
The Honorable Richard D. Taylor, United States Bankruptcy Judge for the
Western District of Arkansas.
2
Case No. 4:12-bk-11082, initially presided over by the Honorable Audrey
Evans, now retired. That case has since been transferred to Judge Taylor, who also
presides over the Debtor’s case.
2
virtue of a joint stipulation signed by Stephens, he was dismissed as a defendant in
the Adversary Proceeding prior to trial.
On January 18, 2013, following a trial against Southeast, the Bankruptcy
Court3 entered several orders in the Adversary Proceeding, including an Order
Denying David Kimbro Stephens’ Motion to Intervene in it, and an Order
Approving Unsecured Claim in which the Court, inter alia, allowed the Trustee in
the Debtor’s case an unsecured claim against Southeast in the amount of
$1,190,000.4 The Court later denied the Trustee’s request for a constructive trust
against Southeast’s assets. Stephens appealed those Orders, and others, to the
United States District Court for the Western District of Arkansas.
On January 17, 2014 – while Stephens’ appeal to the District Court was
pending, and on the last day before the one-year limitation period under Federal
Rule of Civil Procedure 60(b) was to lapse – Stephens, pro se, filed a Motion for
Relief from Judgment or Order (the “Rule 60 Motion”) and a Brief in Support (the
3
At that time, the Debtor’s bankruptcy case and the Adversary Proceeding
were presided over by the Honorable James G. Mixon, United States Bankruptcy
Judge for the Western District of Arkansas, now deceased. Judge Taylor took over
the Debtor’s case and its related adversary proceedings after Judge Mixon passed
away.
4
Mr. Stephens moved to reconsider and then appealed both of these Orders,
and others, to the United States District Court for the Western District of Arkansas.
See Stephens v. Williams (In re Living Hope Southwest Medical Services, LLC),
Case No. 4:13-CV-04055, in the United States District Court for the Western
District of Arkansas. The District Court affirmed, holding, inter alia, that since
Stephens was properly denied permission to intervene in the Adversary
Proceeding, he, in effect, lacked standing to appeal the judgment against
Southwest. See Opinion and Order (Doc. No. 304 in the Debtor’s bankruptcy
case), entered July 10, 2014. Mr. Stephens has appealed that ruling to the Eighth
Circuit Court of Appeals.
3
“Original Brief”). As relevant here, Stephens sought relief from the Order
approving the unsecured claim against Southeast under Rules 60(b)(3), 60(b)(6),
60(d)(1), and 60(d)(3).5 In sum, Stephens alleged that the Trustee’s attorney,
Thomas S. Streetman, had colluded with Southeast’s attorneys, James Smith and
Kimberly Woodyard, and that this collusion resulted in the judgment against
Southeast. Stephens alleged that the attorneys’ conduct amounted to a “fraud on
the court” warranting relief from the Order.
After Stephens filed the Rule 60 Motion and Original Brief, Streetman sent,
on the Trustee’s behalf, a Rule 9011 safe harbor letter to Stephens.6 Stephens
responded by filing a Corrected and Amended Brief in Support of the Rule 60
Motion (the “Corrected Brief”). He did not withdraw or amend the Rule 60
Motion itself. Unsatisfied by that amendment, the Trustee filed a Motion for
Imposition of Rule 9011 Sanctions Against David Kimbro Stephens (the “Rule
9011 Motion”), as well as a Motion to Strike Kimbro Stephens’ Corrected and
Amended Brief and for Imposition of Sanctions (the “Motion to Strike”).
The Bankruptcy Court scheduled a hearing for April 2, 2014, on Stephens’
Rule 60 Motion, the Trustee’s Rule 9011 Motion, and the Trustee’s Motion to
Strike. At the beginning of the hearing, the Court announced that it was going to
5
Fed. R. Civ. P. 60(b) and (d), made applicable to this bankruptcy case by
Fed. R. Bankr. P. 9024. Stephens also asserted “surprise” under Rule 60(b)(1),
based on the allegation that Southeast’s attorneys opposed his intervention in the
Adversary Proceeding, after allegedly representing to Stephens they would not do
so. The Rule 60(b)(1) allegation is not at issue in this appeal.
6
As discussed below, Rule 9011 provides for sanctions against a party who
files a frivolous pleading, but requires that the filing party be given a twenty-one
day “safe harbor” period in which to withdraw or correct the offending pleading
before sanctions are sought.
4
deny Stephens’ Rule 60 Motion because, in essence, he was not a party in the
Adversary Proceeding, and only parties can bring a motion for post-judgment
relief.7 After that announcement, the parties proceeded to present evidence on the
Trustee’s Rule 9011 Motion. At the conclusion of the evidence, the Court held that
Stephens’ allegations of fraud on the court violated Rule 9011(b)(2) and (b)(3) and
directed the Trustee to submit a fee request. After the Trustee did so, and Stephens
responded, the Court entered a Memorandum Opinion and a Judgment against
Stephens on May 29, 2014 (collectively, the “Sanctions Order”). The Court
incorporated its oral findings and conclusions from the hearing, and ordered
Stephens to pay the Trustee $19,188.42 in attorney fees as the prevailing party on
the Rule 9011 Motion under Rule 9011(c)(1)(A), plus $1,659.10 as a sanction
under Rule 9011(c)(2) to deter Stephens from repeating the offending conduct.
Meanwhile, shortly after the hearing, on April 5, 2014, Stephens moved to
withdraw and expunge from the record both the Original Brief and the Corrected
Brief, with their attachments. On April 9, 2014, the Court entered an Order placing
those documents under seal.8
On June 12, 2014, Stephens timely filed a Motion for Reconsideration of the
Sanctions Order,9 which the Bankruptcy Court denied on July 28, 2014. On
7
The Court subsequently entered a written Order denying Stephens’ Rule 60
Motion on April 9, 2014.
8
Although those documents were placed under seal, the parties discuss them
at length, and do not dispute what they say. A review of both the Original Brief
and the Corrected Brief was necessary in order to determine whether the filing of
the Corrected Brief was an effective withdrawal of the Original Brief under the
safe harbor rule, as Stephens asserts it was, discussed below.
9
Because this Motion was filed on the fourteenth day after the May 29
Orders, it was timely under Federal Rule of Bankruptcy Procedure 9023 and
5
August 11, 2014, Stephens timely appealed the July 28, 2014 Order denying
reconsideration.10 Stephens did not appeal the denial of the Rule 60 Motion itself.
DISCUSSION
The Rule 9011 Standard
Federal Rule of Bankruptcy Procedure 9011(b) provides, in relevant part,
that in presenting a pleading to the Court, an attorney or unrepresented party is
certifying that to the best of the person’s knowledge, information, and belief,
formed after an inquiry reasonable under the circumstances, that:
(2) the claims, defenses, and other legal contentions therein are
warranted by existing law or by a nonfrivolous argument for the
extension, modification, or reversal of existing law or the
establishment of new law; [and]
(3) the allegations and other factual contentions have
evidentiary support or, if specifically so identified, are likely to
have evidentiary support after a reasonable opportunity for
further investigation or discovery. . . .11
Rule 9011 further provides that, if, after notice and a reasonable opportunity to
respond, the court determines that subdivision (b) has been violated, the court may,
Federal Rule of Civil Procedure 59. Note that the Motion for Reconsideration and
associated Brief were later placed under seal at the Trustee’s request.
10
Because the Notice of Appeal was filed on the fourteenth day after the July
28 Order was entered, it is timely under Federal Rule of Bankruptcy Procedure
8002.
11
Fed. R. Bankr. P. 9011(b)(2) and (3).
6
subject to certain stated conditions, impose an appropriate sanction upon the
attorneys, law firms, or parties that have violated subdivision (b) or are responsible
for the violation.12 “Violations of Rule 9011 are determined by applying an
objective standard of reasonableness under the circumstances.”13
We review an award of sanctions for an abuse of discretion.14
An award of sanctions involves a consideration of three types of
issues: factual, legal, and discretionary. First, a court must consider
factual questions regarding the nature of the attorney’s inquiry prior to
filing the pleading and the factual basis for the pleading. Next, a court
must consider legal issues to determine if the pleading is warranted by
existing law or a good faith argument for a change in the law and
whether the attorney’s conduct violated Rule 9011. Finally, if a court
determines that sanctions are warranted, it must exercise discretion to
ensure the sanction is appropriately tailored to the situation.15
The review of the imposition of sanctions under Rule 9011 “necessarily requires an
examination of the underlying factual and legal claims.”16 We will reverse an
12
Fed. R. Bankr. P. 9011(c).
13
In re KTMA Acquisition Corp., 153 B.R. 238, 248 (Bankr. D. Minn. 1993);
Black Hills Institute of Geological Research v. South Dakota School of Mines and
Technology, 12 F.3d 737, 745 (8th Cir. 1993); N.A.A.C.P. v. Atkins, 908 F.2d 336,
339 (8th Cir. 1990).
14
In re Crofford, 301 B.R. 880, 884 (B.A.P. 8th Cir. 2003) (citations omitted).
15
Id. at 883-84 (citing Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 399,
110 S.Ct. 2447, 2457, 110 L.Ed.2d 359 (1990)).
16
Id. at 884 (citations omitted).
7
award of sanctions only if it was based on an erroneous view of the law or on a
clearly erroneous assessment of the evidence.17
As stated above, the pleadings which became the subject of the Rule 9011
Motion were Stephens’ Rule 60 Motion and related briefs, where he sought relief
from the judgment against Southeast because, Stephens asserted, it was obtained
through “fraud upon the court.” The Trustee asserted in her Rule 9011 Motion that
Stephens’ factual allegations concerning the attorneys’ conduct were flagrantly
false and malicious and, in essence, that the real purpose of Stephens’ pleadings
was to place allegations of attorney misconduct in front of the District Court where
the appeal of the judgment was pending.
Procedural Issues
At the outset, Stephens asserts that the Trustee’s Rule 9011 Motion was
procedurally flawed. Specifically, Rule 9011(c)(1)(A) provides a mandatory safe-
harbor provision requiring that a motion for sanctions “may not be filed with or
presented to the court unless, within 21 days after service of the motion . . . the
challenged paper, claim, defense, contention, allegation, or denial is not withdrawn
or appropriately corrected . . . .”18
17
Id. (citations omitted).
18
Fed. R. Bankr. P. 9011(c)(1)(A). See also In re Stephens, 2013 WL 950822at *1 (D. Minn. March 12, 2013) (“Under Federal Rule of Bankruptcy Procedure
9011, a party cannot file a motion for sanctions if the challenged pleading is
withdrawn or corrected within twenty-one days after service of the motion on the
party against whom sanctions are sought. . . . Providing notice and allowing the
offending party the opportunity to withdraw the challenged document ‘is
mandatory.’”) (citations omitted).
8
As stated above, Stephens filed the Rule 60 Motion on January 17, 2014,
along with the Original Brief. On January 21, 2014, Mr. Streetman sent Mr.
Stephens a safe harbor letter on behalf of the Trustee, and included a copy of the
Rule 9011 Motion they intended to file. The letter advised Stephens that he had
twenty-one days in which to withdraw the Rule 60 Motion and Original Brief, or
they would file the Rule 9011 Motion with the Court. Although the letter focused
on the inappropriate filing of a Rule 60 motion while an appeal of the subject order
was pending, the Rule 9011 Motion focused on Stephens’ allegations of collusion
between attorneys Streetman and Smith in obtaining the judgment against
Southeast.
In response to the safe harbor letter, on February 7, 2014, Stephens filed the
Corrected Brief to replace the Original Brief. He did not withdraw or amend the
actual Rule 60 Motion, however. On February 20, the Trustee filed four
documents: the Rule 9011 Motion and a brief in support; and a Motion to Strike
the Corrected Brief and a brief in support. The Trustee’s Motion to Strike the
Corrected Brief repeated the request for imposition of sanctions under Rule
9011(b)(1).
On March 6, 2014, Stephens filed responses to the Rule 9011 Motion and
the Motion to Strike, also with briefs in support.
Stephens asserts that he did, in fact, withdraw the “offending” pleading (the
Original Brief) when he filed the Corrected Brief and that he did not receive a new
safe harbor letter relating to the Corrected Brief. He asserts, in effect, that the
Trustee continues to improperly rely on the allegations he had withdrawn or
corrected through the filing of the Corrected Brief.
9
We reject that argument. First, Stephens did not withdraw or correct the
Rule 60 Motion, which itself alleged “misconduct” by Streetman, “collusion”
between Streetman, Smith, and Woodyard, and “fraud on the court” under Rules
60(b)(3), 60(b)(6), 60(d)(1), and 60(d)(3).
Second, as to the briefs, the Corrected Brief removed only a few of the many
allegations which the Trustee asserted were offensive in the Original Brief.
Specifically, Stephens had only removed allegations which the Trustee felt
implicated the then-presiding judge in the collusion between the attorneys.
Although the Rule 9011 Motion filed with the Court referred to the Original Brief
(which had, by then, been replaced), such Motion pointed to as many as 21
additional statements Stephens had made concerning the attorneys (and not the
judge) which the Trustee alleged were “flagrantly false,” most or all of which
remained in the Corrected Brief. Filing a “corrected” pleading which retains the
substance of the allegedly-offensive material does not “withdraw[ ] or
appropriately correct[ ]” a pleading under the Rule, and does not trigger a new safe
harbor period. Moreover, although the Bankruptcy Court mentioned the Original
Brief, it did not consider the allegations Stephens had implied against the judge in
making its ruling; rather, as discussed more fully below, the Court carefully
focused on the allegations of misconduct and collusion Stephens had made against
Streetman, which were present in the Rule 60 Motion, and both the Original and
Corrected Briefs. We therefore reject Stephens’ argument that the Trustee violated
the safe harbor provision in Rule 9011(c)(1)(A) when she filed her Rule 9011
Motion.
Next, Stephens asserts that, because the Trustee’s Motion to Strike the
Corrected Brief also asked for sanctions under Rule 9011, the Trustee violated
Rule 9011(c)(1) because the request for sanctions was not “made separately from
10
other motions or requests,” as required by the Rule. Although the Motion to Strike
did repeat the request for sanctions, there was, indeed, a separate motion for
sanctions under Rule 9011. Stephens’ point on that issue is, therefore, denied.
The Merits of the Rule 9011 Sanctions
Turning to the merits, Stephens asserts that the Bankruptcy Court applied the
wrong standard in considering whether his allegations of “fraud on the court”
violated Rule 9011. Stephens’ Rule 60 Motion was pled under both Rule 60(b)(3),
which provides that a court may relieve a party or its legal representative from a
final judgment, order or proceeding for “fraud . . . , misrepresentation, or
misconduct by an opposing party,” and Rule 60(d)(3), which provides that a court
has the power to “set aside a judgment for fraud on the court.” A motion under
Rule 60(b) must be brought within a year after the relevant order or judgment –
which Stephens’ Rule 60 Motion was – but a Rule 60(d) motion may be brought at
any time.19
Stephens asserts that the standard under Rule 60(d) for “fraud on the court”
is stricter than that under Rule 60(b) for “fraud, misrepresentation, or misconduct
by an opposing party,” and that the Bankruptcy Court erred in applying the stricter
standard. Indeed, the Eighth Circuit has said:
The “fraud on the court” standard [now found in Rule 60(d)(3)] is
distinct from the more general fraud standard of Rule 60(b)(3) . . . . A
finding of fraud on the court is justified only by the most egregious
misconduct directed to the court itself, such as bribery of a judge or
jury or fabrication of evidence by counsel . . . . To prevail under Rule
60(b)(3), the movant must show . . . that his opponent engaged in a
19
Fed. R. Civ. P. 60(c)(1) and (d).
11
fraud or misrepresentation that prevented the movant from fully and
fairly presenting his case.20
Although the Bankruptcy Court did mention Rule 60(b)(3) in its rulings, the bulk
of its discussion involved the allegations of fraud on the court under the Rule
60(d)(3) standard.
As stated, Stephens acknowledges that a higher standard applies under Rule
60(d)(3), but asserts that, because his Rule 60 Motion was brought within the one
year timeframe, only the lower standard applicable under Rule 60(b)(3) applied.
That is simply incorrect: Stephens’ Rule 60 Motion pled Rule 60(d)(3) as an
alternative to Rule 60(b)(3), and expressly alleged “fraud on the court,” a phrase
used only in Rule 60(d)(3). A motion under Rule 60(d) is not subject to the one
year limitation, but Stephens cites no authority which prohibits a motion under
Rule 60(d) from being brought less than one year after the judgment. And,
Stephens cites no authority for the notion that pleading one of the two rules is to
the exclusion of the other. Nor does he cite any authority for the proposition that
the standard under Rule 60(b)(3) applies to a Rule 60(d)(3) motion if it is brought
within a year – which, he now asserts, was his nonfrivolous argument for the
extension, modification, or reversal of existing law or the establishment of new law
under Rule 9011(b)(2). Such argument is, indeed, frivolous. In sum, Stephens’
brought his Rule 60 Motion under both rules, and his assertion that his pleading
20
Greiner v. City of Champlin, 152 F.3d 787, 789 (8th Cir. 1998) (citations
and internal quotation marks omitted). Greiner was decided under the prior
version of Rule 60, in which Rule 60(b) itself provided the savings clause, namely
that “[t]his rule does not limit the power of a court to entertain an independent
action to relieve a party from a judgment, order, or proceeding, . .. or to set aside a
judgment for fraud upon the court.”
12
did not seek relief for fraud on the court under Rule 60(d)(3) – and the standard
that imposes – is disingenuous.
Thus, even if Stephens’ Rule 60(b) Motion might have survived Rule 9011
scrutiny under its lower standard (which we do not conclude it did), since Stephens
pled both alternative grounds for relief from the judgment, his factual allegations
of misconduct and collusion, and his claim for fraud on the court under Rule
60(d)(3), still had to have been objectively reasonable under the circumstances,21
apart from the Rule 60(b)(3) claim. In other words, even if one claim in a pleading
may survive a Rule 9011 challenge, the remaining claims are not thereby insulated
from Rule 9011 scrutiny. As a result, the Bankruptcy Court did not err in directing
its primary focus on the allegations of fraud on the court under Rule 60(d)(3), as
well as the factual allegations concerning collusion and corruption.
In doing so, the Bankruptcy Court focused on the allegations Stephens had
made against Mr. Streetman in colluding with Southeast’s attorneys, particularly
Smith, in obtaining the judgment against Southeast. For these purposes, the
Bankruptcy Court essentially assumed the facts Stephens alleged against Smith in
handling Southeast’s case were true (because Smith was not challenging the
allegations against him), but directed Stephens to present evidence supporting his
allegation that Streetman had colluded with Smith and engaged in fraud on the
court in obtaining the judgment against Southeast.
“Collusion,” “corruption,” and “fraud on the court” are extremely serious
allegations to make against an attorney. In essence, Stephens asserts that
Streetman “colluded” with Southeast’s attorneys, and committed fraud on the
21
Fed. R. Bankr. P. 9011(b)(2) and (3); In re KTMA Acquisition Corp., 153
B.R. at 248.
13
court, primarily because: (i) they lured him into signing a stipulation of dismissal
and then used that dismissal to preclude his intervention in the Adversary
Proceeding; (ii) Smith did not object to a motion for relief from stay in Southeast’s
bankruptcy case to allow the Adversary Proceeding to proceed and then did not
object when Streetman filed the Complaint before the fourteen-day stay under Rule
4001(a)(3) expired; (iii) the attorneys agreed at a pretrial conference to a quick trial
date; (iv) Smith did not argue that the Adversary Proceeding was filed more than
two years after the transfer of assets from the Debtor to Southeast (even though
Streetman had asserted that the limitations period had been tolled); (v) Smith
stipulated to certain facts at trial; and (vi) they withheld information and presented
false facts at trial, apparently referring primarily to Streetman’s assertion that a
particular bank account belonged to the Debtor as opposed to Southeast.
After a two-day hearing, the Court found that the allegations of collusion
were “unfounded assumptions” and “blatant illogical fallacies.” The Bankruptcy
Court did not clearly err in so holding. Exchanging documents, stipulating to their
admissibility, uniting in a particular argument against a third party (such as
opposing Stephens’ motion to intervene), waiving procedural discrepancies (such
as the 14-day stay under Rule 4001(a)(3)), and the like, do not support a plausible
assertion that the attorneys colluded in obtaining the ultimate judgment. Indeed,
attorneys routinely extend these kinds of courtesies to each other and to the court,
and should be encouraged to do so in appropriate circumstances. Moreover, as the
Court held, the remainder of Stephens’ complaints against Streetman, particularly
those relating to legal and evidentiary arguments, have to do with Streetman
representing his client, the Trustee, in performing her duties. That he obtained
some favorable results, whether due to agreement by opposing counsel or court
rulings, does not mean there was collusion, corruption, or fraud.
14
Indeed, although Stephens continues to accuse Streetman of misconduct in
his briefs on appeal, in response to the Court’s directive to Stephens at the hearing
to produce evidence that Streetman had engaged in some actual misconduct, even
Stephens backed off his allegations against Streetman, in essence saying that the
only reason he used the term “collusion” was that is what Rule 60 requires, and it
appeared to him that they attorneys were “working together.”22 But, he said, he did
“not mean to imply that they were doing something, I guess, inappropriate in that
regard from Mr. Streetman’s standpoint, he’s just representing his client.”23
Also, Stephens continues to point to filings made by another attorney, Craig
Henry, who made similar allegations of fraud on the court and collusion in the
Debtor’s and Southeast’s bankruptcy cases. However, as the Trustee points out in
her brief, both of the bankruptcy judges faced with those filings had very strong
reactions to the allegations he made before them, and Mr. Henry withdrew his
filings with prejudice before the Trustee’s Rule 9011 Motion was filed. Indeed,
according to the Trustee, one of the judges referred Henry to the Committee on
Professional Conduct as a result of the filing. Nevertheless, after that occurred,
Stephens pressed on with his allegations.
And finally, while not determinative, it is notable that the result about which
Stephens complains – namely the judgment against Southeast – is similar to what
Stephens had agreed to in two settlement agreements. The lawsuit was settled
22
Transcript of Hearing Held April 2, 2014 and April 3, 2014 on Motion for
Sanctions, Motion for Relief from Order or Judgment, and Motion to Strike Before
the Honorable Richard D. Taylor, United States Bankruptcy Judge, Vol. I, at 120-
21.
23
Id. at 122.
15
twice – both times for $1.15 million to be paid by Southeast over time with an
early payment discount, and giving the Trustee a lien on the assets of Southeast
until the amount was paid. Both of those settlements were rejected by the Court
due to objections by another creditor. The Judgment about which Stephens
complained was an unsecured claim for only a slightly higher amount, $1.19
million.
As stated, “[v]iolations of Rule 9011 are determined by applying an
objective standard of reasonableness under the circumstances.”24 “Indeed, signers
cannot avoid the sting of Rule 11 sanctions by operating under the guise of a pure
heart and empty head.”25 “Unfortunately, sanctions that deter are necessary to
remind those who need reminding that a court is not a place to vent unsupported
frustration. There is judicial protocol which must be followed. Abuses are not
tolerated.”26 The focus in the Rule 11 context should be on the plausibility of the
allegations and argument at the pleading stage.27
As the Bankruptcy Court held, Stephens made extremely serious allegations
against Streetman in his pleadings which did not have plausibility, were not
objectively reasonable, and were not supported by the evidence. His backing off
from the statements at the hearing was insufficient and came too late. As the
24
In re KTMA Acquisistion Corp.,153 B.R. at 248.
25
Id. (citation, internal quotation marks and modifications omitted).
26
Id.27
Black Hills Institute of Geological Research v. South Dakota School of
Mines and Technology, 12 F.3d 737, 745 (8th Cir. 1993).
16
Bankruptcy Court said, “when you pull the sword and say that someone colluded,
and all that implies, and then testify that your belief was it was not intentional, then
I think you are violating Rule 9011.” We agree. The Bankruptcy Court did not
clearly err in concluding that Stephens violated Rule 9011(b)(2) and (3).
The Sanctions Award
Having found that Stephens violated Rule 9011(b), the Bankruptcy Court
then turned to the question of whether to award attorneys’ fees and impose
sanctions.
As the Court said, Rule 9011 contains two references to attorney fees and
costs – subsections (c)(1)(A) and (c)(2). First, Rule 9011(c)(1)(A) provides that
once the court rules that Rule 9011(b) has been violated, then “[i]f warranted, the
court may award to the party prevailing on the motion the reasonable expenses and
attorneys’ fees incurred in presenting or opposing the motion.”28 “Attorney’s fees
awarded under Rule 9011(c)(1)(A) are characterized in terms of the prevailing
party. These are fees incurred in presenting or opposing a motion for sanctions and
are awarded ‘if warranted.’”29 A fee award under Rule 9011(c)(1)(A) is not a
sanction.30
Second, as the Bankruptcy Court said, Rule 9011(c)(2) contains a separate
reference to attorney’s fees in the context of sanctions:
28
Fed. R. Bankr. P. 9011(c)(1)(A).
29
Cox v. Swiss-American, Inc. (In re Affiliated Foods Southwest, Inc.), 472
B.R. 538, 550 (Bankr. E.D. Ark. 2012).
30
Id.17
A sanction imposed for violation of this rule shall be limited to what
is sufficient to deter repetition of such conduct or comparable conduct
by others similarly situated. Subject to the limitations in
subparagraphs (A) and (B), the sanction may consist of, or include,
directives of a nonmonetary nature, an order to pay a penalty into
court, or, if imposed on motion and warranted for effective deterrence,
and order directing payment to the movant of some or all of the
reasonable attorneys’ fees and other expenses incurred a s a direct
result of the violation.31
“This second reference to attorney’s fees is solely in the context of sanctions.
Before a court may impose sanctions, certain conditions must be met under both
sections (c)(1)(A) and (c)(2).”32 “Under section (c)(2), which concerns an award of
attorney’s fees or other expenses in the context of sanctions, there are requirements
of: (1) ‘on motion’; (2) ‘and warranted’; (3) ‘for effective deterrence’; and (4)
‘incurred as a direct result of the violation.’”33
Thus, each attorney’s fee section serves a different purpose. One
section is a prevailing party award “if warranted” for fees incurred in
presenting or opposing the motion for Rule 9011 sanctions. The other
section is a sanction itself that, prior to imposition, must comply with
the procedural safeguards set forth in Rule 9011 and is limited to the
fees and expenses incurred as a direct result of the violation, i.e., the
offensive pleading.34
As to Rule 9011(c)(1)(A), the Bankruptcy Court held that fees were
warranted in the amount of $19,813 in favor of the Trustee, as the prevailing party.
31
Fed. R. Bankr. P. 9011(c)(2).
32
Cox v. Swiss-American, 472 B.R. at 550.
33
Id at 551 (citing Fed. R. Bankr. P. 9011(c)(2); emphasis in original).
34
Id.
18
Stephens first asserts that the Bankruptcy Court erred in making this award
because it was Streetman, and not the Trustee, who was the real party to the Rule
9011 Motion. The Bankruptcy Court acknowledged that some courts have held
that attorneys appearing pro se cannot recover under Rule 9011(c)(2) because a
party proceeding pro se cannot have incurred attorney’s fees as an expense.35 The
Court further acknowledged that it had extended that reasoning to deny fee awards
to pro se attorneys under Rule 9011(c)(1)(A) as well.36 However, the Court
concluded, that prohibition did not apply in this case because Streetman (and his
partner, Gibson), were not acting pro se, but instead had been appointed by the
Court as counsel to the Trustee. Stephens asserts this conclusion was error.
We disagree. The Rule 9011 Motion was filed by the Trustee, not
Streetman. Although the Rule 60 Motion focused on actions taken by Streetman
and the other lawyers in the case, and Streetman therefore was called upon to
defend his reputation, he was nevertheless acting as the Trustee’s attorney at all
stages of the litigation. The allegations Stephens made related to actions Streetman
took while so acting as the Trustee’s attorney. As the Bankruptcy Court held,
making unfounded allegations against the opposing party’s attorney, thus requiring
him to defend against them “do[es] not magically transform an attorney into a
party or movant.” And, if the Trustee had not prevailed in the Rule 9011 Motion,
the Debtor’s estate would have been liable to the Trustee for the fees he incurred
prosecuting it.
35
See, e.g., Massengale v. Ray, 267 F.3d 1298, 1250 (11th Cir. 2001).
36
See Cox v. Swiss-American, 472 B.R. at 559.
19
The cases Stephens cites are inapposite. In both Reynolds v. East Dyer
Development Co.,37 and Detabali v. St. Luke’s Hospital,38 it was the attorneys
against whom Rule 11 sanctions were awarded who was held to be the real party in
interest for purposes of appealing the sanctions order, because a judgment had been
entered against the attorney personally.39 That is not the case here: Although
Streetman’s conduct was a subject of Stephens’ Rule 60 Motion, he was never
exposed to having a judgment entered against him by virtue of the Rule 60 Motion.
Streetman is, simply, not a party in this action.
Finally, Stephens asserts that the Bankruptcy Court erred awarding the
amount it did, by failing to consider his ability to pay in making the award.
However, the $19,813 in attorney fees was awarded under Rule 9011(c)(1)(A),
which, as stated, is not a sanction provision.40 Rather, an award under (c)(1)(A) is
more properly characterized as a fee-shifting provision,41 which the Court has the
discretion to award. As the Bankruptcy Court held, ability to pay is not relevant
under Rule 9011(c)(1)(A). Further, the Court appropriately considered the lodestar
37
882 F.2d 1249 (7th Cir. 1989).
38
482 F.3d 1199 (9th Cir. 2007).
39
See also In re Crofford, 301 B.R. at 883 n.3 (noting that the Debtor’s
counsel, who was the target of the sanctions, was the true party-in-interest to the
appeal).
40
Cox v. Swiss-American, 472 B.R. at 550.
41
Id.
20
analysis to determine that the fees were reasonable.42 We find no error in that
analysis.
The award of $1,659.10 under Rule 9011(c)(2) was a sanction. The
Bankruptcy Court essentially awarded the Trustee the fees she incurred in
responding to the Rule 60 Motion, as a deterrent against repetition of the offending
conduct. Ability to pay may be a factor under this sanctions provision, but
Stephens had the burden of producing such evidence.43 The only statement he
offered relating to his ability to pay was that he, himself, was in a Chapter 7
bankruptcy case. However, as the Trustee points out, his Chapter 7 case was filed
in 2010 and is not an indication of his present ability to pay. The Bankruptcy
Court acknowledged the ability to pay argument and did not err in finding that it
lacked sufficient evidentiary support.
CONCLUSION
For the foregoing reasons, the Order of the Bankruptcy Court denying David
Kimbro Stephens’ Motion for Reconsideration of the Court’s Memorandum
Opinion and Judgment ordering sanctions against him under Federal Rule of
Bankruptcy Procedure 9011 is AFFIRMED.
42
Id. at 557 (“In the Eighth Circuit, the lodestar approach is generally used to
calculate reasonable attorney’s fees.”).
43
Gaskell v. Canatella, 10 F.3d 626, 629 (9th Cir. 1993).
21