FEDERMAN, Chief Judge.
David Kimbro Stephens appeals from the Order of the Bankruptcy Court
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.
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
On January 18, 2013, following a trial against Southeast, the Bankruptcy Court
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 "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).
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.
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 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.
On June 12, 2014, Stephens timely filed a Motion for Reconsideration of the Sanctions Order,
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:
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, 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.
We review an award of sanctions for an abuse of discretion.
The review of the imposition of sanctions under Rule 9011 "necessarily requires an examination of the underlying factual and legal claims."
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.
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 ...."
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.
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
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 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.
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.
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:
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
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,
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 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
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."
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 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."
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 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).
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."
Second, as the Bankruptcy Court said, Rule 9011(c)(2) contains a separate reference to attorney's fees in the context of sanctions:
"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)."
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.
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.
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.
The cases Stephens cites are inapposite. In both Reynolds v. East Dyer Development Co.,
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,
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.
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.
