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The Security National Bank of Sioux City, IA v. Vera T. Welte Testamentary Trust

Summarizing by Amir Shachmurove

In re JJE & MM Group LLC

Case Type:
Case Status:
Reversed and Remanded
16-1408-bk (2nd Circuit, Jun 05,2017) Not Published
The Second Circuit reversed the decisions of the District Court and Bankruptcy Court imposing sanctions on a debtor's attorney for a repeat chapter 11 filing on the eve of a foreclosure sale and in violation of a prior bankruptcy court order enjoining further filings within a one year period. The Second Circuit determined that because neither the Bankruptcy Court nor the District Court made any finding of bad faith on the part of Appellant or any determination that there was a Bankruptcy Rule 9011(b) violation, the District Court order should be reversed and remanded for further proceedings.
Procedural context:
Appellant, an attorney who filed a chapter 11 petition for an entity that was the subject of a prior dismissal order enjoining future filings within a year, appeals (i) the District Court's Decision and Order affirming the Bankruptcy Court's orders for contempt and sanctions and (ii) the District Court's Memorandum and Order denying his motion for reconsideration.
The Debtor, JJE & MM Group LLC ("Debtor"), filed a petition for relief under chapter 11 of the Bankruptcy Code on July 11, 2013 ("First Filing"), the date of a scheduled foreclosure sale of the Debtor's real properties. The mortgagee filed a motion to dismiss the First Filing based on Debtor bad faith. The Bankruptcy Court (Craig, J.) determined that the First Filing was made in bad faith and dismissed the case on September 9, 2013 with an order barring the Debtor from filing another case under chapter 11 for a period of one year from the date of the order and permitting the Debtor to seek a modification of the dismissal order in the event the Debtor could demonstrate a change in circumstances that would enable the Debtor to reorganize. Following the Dismissal of the Initial Filing, the mortgagee proceeded with its foreclosure action and a sale of the Debtor's real properties was scheduled for January 9, 2014. Just prior to the scheduled foreclosure sale and on January 9, 2014, the Debtor filed a second petition for relief under chapter 11 of the Bankruptcy Code (the "Second Filing"). The Debtor, however, was represented this time by new counsel, the Appellant. On January 15, 2014, the Bankruptcy Court issued an order to show cause directing appellant and the debtor to show cause why (1) they should not be held in civil contempt and sanctioned for violating the dismissal order entered in the First Filing, (2) counsel should not be sanctioned under Bankruptcy Rule 9011(c), and (3) the case should not be dismissed because it was barred by the dismissal order entered in the First Filing. After a hearing and further written submissions by the parties, the Bankruptcy Court issued an order imposing sanctions in the amount of $9,786.67, representing the total amount of legal fees and advertising expenses that the mortgagee incurred in connection with the foreclosure sale cancelled due to the Second Filing. On appeal, the District Court affirmed the Bankruptcy Court's order awarding sanctions based on Appellant's "wholly unreasonable behavior in filing for bankruptcy . . . in the face of an order prohibiting his client from making such a filing." The District Court specifically held that it did not matter whether counsel did so purposefully or carelessly as Bankruptcy Rule 9011(c) provided the Bankruptcy Court with the power to impose sanctions upon counsel. On appeal to the Second Circuit, the Court reversed. The Second Circuit acknowledged that bankruptcy courts are vested with inherent sua sponte contempt power and may issue a contempt order after notice and hearing; however, a bad faith finding is required when a court imposes attorneys' fees as a sanction or when the court sanctions an attorney for conduct integrally related to the attorney's role as advocate. The Second Circuit also acknowledged that sanctions may be imposed for a violation of Bankruptcy Rule 9011, but a finding of subjective bad faith on the part of the attorney is required to impose Rule 11 sanctions sua sponte. The Second Circuit concluded that the Bankruptcy Court erred by holding Appellant in civil contempt sua sponte and imposing sanctions because it made no finding of bad faith for the Second Filing. The Second Circuit further held that because the Bankruptcy Court made no determination of a Bankruptcy Rule 9011(b) violation, compensatory sanctions should not have been imposed. The Court vacated the District Court's order of civil contempt and imposition of sanctions and remanded to the District Court with directions to remand to the Bankruptcy Court for consideration of the imposition of compensatory sanctions pursuant to Bankruptcy Rule 9011(c).
Jon O. Newman, Jose A. Cabranes, Gerard E. Lynch

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