What began as a garden variety bankruptcy claims objection has ended with a sharply-worded, sixty-page opinion, in which the Sixth Circuit’s Bankruptcy Appellate Panel ( “BAP”) affirmed a bankruptcy court’s $200,000 sanctions order entered against the creditor’s attorney.
The case of In re Royal Management, Inc. began ordinarily enough, with a Chapter 11 petition filed in February of 2008. This was later followed by confirmation of a liquidating plan and the creation of a liquidation trust to administer claims objections and plan distributions.
The attorney at the heart of the conflict (“Counsel”) first appeared a month after the bankruptcy court disallowed his clients’ asserted unsecured claim (the “Claim”). The initial objection to the Claim was filed by the Unsecured Creditors Committee (the “Committee”). When no response to the objection was filed, the bankruptcy court entered its order disallowing the Claim. The initial motion filed by Counsel was to vacate the order disallowing the Claim, citing technical notice issues and “excusable neglect.”
What followed was a five-year avalanche of pleadings filed by Counsel at every step of the process. The odyssey included discovery disputes, a host of emergency motions for extension of time, efforts to recast the basis for the Claim, fee objections, and multiple recusal motion disparaging the bankruptcy court. It also included appeals of orders disallowing the Claim (and a subsequently-filed claim), including a merits appeal to the district court, the Sixth Circuit, and eventually to the Supreme Court (which denied certiorari in 2012).
The initial sanctions motion was filed by the liquidating trustee (the “Trustee”), who took over the proceedings from the Committee, largely because of Counsel’s voluminous motions practice and alleging his misrepresentation of the nature of the Claim. Ultimately, the bankruptcy judge sanctioned Counsel $207,004, mostly for expenses incurred by the Trustee in litigating Counsel’s innumerable motions.
On appeal, the BAP spent twenty-eight pages detailing Counsel’s behavior and “dilatory practices” during the litigation. The BAP panel first addressed the question whether the bankruptcy court possessed the inherent power to sanction Counsel under 28 U.S.C. § 1927 or 11 U.S.C. § 105. While the BAP acknowledged a split in the Circuits as to whether a bankruptcy court was a “court of the United States” for the purposes of § 1927, it noted Sixth Circuit precedent holding the sanctions under that section were within the power of the Bankruptcy Court. The BAP also held that sanctions under § 105 were within the “inherent authority” of the Bankruptcy Court.
Noting that sanctions are imposed in order to “punish aggressive tactics that far exceed zealous advocacy” and require a finding of bad faith, the BAP went on to hold that a “comparison of Counsel’s arguments to the record shows he is second-guessing actions of the Trustee to justify his own vexatious conduct.” Furthermore, because he “repeatedly interjected substantive arguments previously briefed into routine procedural motions,” thereby requiring a response from the Trustee, Counsel unnecessarily drained the trust of its funds and was required to pay those back.
In rejecting Counsel’s numerous claims of error, the BAP clearly demonstrated the line between “zealous advocacy” and “vexatious litigation.” Some older bankruptcy lawyers are nostalgic for the time when proceedings in bankruptcy cases were less litigation-focused. Royal Management shows at the very least that throwing out every argument or assignment of error is not always worth the cost, and that at the worst, excessively zealous representation can hurt the client, the case, and even the attorney.
