In re Royal Manor Management

15 FED App. 0002P; Docket Nos. 13-8054; 14-8018
The Bankruptcy Appellate Panel (BAP) affirms the Bankruptcy Court for the Northern District of Ohio, which a) imposed sanctions of $207,004 against a creditor's counsel; b) denied a motion to recuse; c) allowed retention of special counsel to collect the sanctions; and d) ordered counsel to submit to a debtor's examination and respond to written discovery. The BAP found that the Bankruptcy Court had ample authority under Section 105 and 28 U.S.C. Sec. 1927 to impose the sanctions based on a frivolous claim and vexatious filings made on behalf of the creditor over a six year period. The BAP found the portions of the record cited in support of the recusal motion were taken out of context and insufficient grounds for recusal were shown. Finally, the BAP held that allowing discovery efforts, including an examination, under Bankruptcy Rule 7069 was within the Bankruptcy Court's discretion.
Procedural context:
After the Committee's objection to a claim was sustained and affirmed on appeal, the Liquidating Trustee, as successor to the Committee sought sanctions against creditor's counsel for frivolous and vexatious filings. The Bankruptcy Court granted the request after a hearing, and counsel appealed. While the appeal was pending, the Liquidating Trustee sought and obtained permission to retain special counsel to collect the sanctions and subject counsel to discovery and an examination. Counsel appealed those orders also, and the cases were combined on appeal.
Dennis Grossman represented the Gordons, who filed a unsecured claim for $2,142,000 against Darlington Nursing and Rehabilitation Center, Ltd., one of the jointly administered Chapter 11 debtors. The Committee objected on the grounds that the claim was a personal loan to the owner of Darlington, and that it was an equity investment. The objection was sustained and the claim disallowed when no one responded. Soon thereafter, Grossman filed a motion to vacate the order disallowing the claim, alleging a failure to comply with Bankruptcy Rule 3007 and excusable neglect. Thereafter, Grossman employed a variety of methods seeking to have the claim allowed over a period of years. These are set out at length in the BAP's 60 page opinion. Critically, payments from the Gordons were payable to individuals (not Darlington), and they received K-1 forms, indicating the funds were an investment rather than a loan. Grossman prosecuted an appeal to the district court, which affirmed, as did the Sixth Circuit. The Supreme Court denied certiorari. In October, 2009, the Liquidating Trustee sought sanctions in the Bankruptcy Court, which led to the rulings resolved by this appeal.
Harrison, Humphrey and Preston; opinion by Humphrey

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