Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


6-22-1995

Fellheimer v Charter Tech
Precedential or Non-Precedential:

Docket 94-3461




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                 UNITED STATES COURT OF APPEALS
                     FOR THE THIRD CIRCUIT
                         -------------
                          No. 94-3461
                         -------------

             FELLHEIMER, EICHEN & BRAVERMAN, P.C.,

                                v.

              CHARTER TECHNOLOGIES, INCORPORATED,
                    d.b.a. ELGIN ELECTRONICS;
           KNOX, McLAUGHLIN, GORNALL & SENNETT, P.C.;
                  and GUY C. FUSTINE, ESQUIRE,

                               Fellheimer, Eichen, Braverman
                               and Kaskey, P.C.,
                                              Appellants

     ------------------------------------------------------
        On Appeal From the United States District Court
            For the Western District of Pennsylvania
                     (D.C. Civ. No. 93-345E)
     ------------------------------------------------------

                     Argued:   March 7, 1995

                 Before:   BECKER, SCIRICA, and
                           WOOD, JR.,* Circuit Judges

                    (Filed:    June 22, 1995)

                        DAVID L. BRAVERMAN, ESQUIRE (ARGUED)
                        MAIA CAPLAN, ESQUIRE
                        KENNETH S. GOODKIND, ESQUIRE
                        MATTHEW A. NYMAN, ESQUIRE
                        W. THOMAS TITHER, ESQUIRE
                        2100 One Liberty Place
                        Philadelphia, PA 19103

                        Attorneys for Appellant

                        GUY C. FUSTINE, ESQUIRE
                        RICHARD A. LANZILLO, ESQUIRE (ARGUED)
                        120 West Tenth Street
                        Erie, PA 16501

     * The Honorable Harlington Wood, Jr., United States Circuit
Judge for the Seventh Circuit, sitting by designation.
                          Attorneys for Appellees.


                    -----------------------------
                        OPINION OF THE COURT

                    -----------------------------

WOOD, JR., Circuit Judge.

     Fellheimer, Eichen & Braverman, P.C. ("FE&B") appeals the

denial of its entire fees application.   The bankruptcy court

found that during the course of FE&B's representation of Charter

Technologies, Incorporated, d.b.a. Elgin Electronics ("the

Debtor"), in the context of the Debtor's Chapter 11 proceedings,

that FE&B had wrongfully represented the interests of the

Debtor's president and principal shareholder, Joseph Burke.     The

bankruptcy court found that FE&B had sought to further Mr.

Burke's interests over the interests of the Debtor by, among

other things, filing a patently false $4,250,000 lawsuit against

the counsel to the Official Committee of Unsecured Creditors, and

by making repeated and knowing misrepresentations to the

bankruptcy court.   The bankruptcy court further found that FE&B

was motivated throughout its representation of the Debtor by

subjective bad faith.   Consequently, the bankruptcy court

sanctioned FE&B by denying its fees application in its entirety.

On appeal, the district court upheld the denial of FE&B's fees

application.   The district court did, however, substitute its own

justifications for the bankruptcy court's action.    Because we

feel that the bankruptcy court's factual findings are not clearly

erroneous, and because we find the district court's
justifications for the sanctions to be acceptable, we affirm the

denial of FE&B's entire fees application.

                            I. BACKGROUND

     On January 20, 1993, the Debtor filed a voluntary petition

under Chapter 11 of the Bankruptcy Code.    The Debtor also filed a

motion at this time to employ FE&B as its counsel.    On February

17, 1993, the bankruptcy court conducted a hearing regarding the

employment of FE&B.   Based, in part, on the testimony of Alan

Fellheimer that FE&B would seek to file a reorganization plan for

the Debtor between March 15 and March 30, 1993, and that FE&B had

"already arranged . . . a significant equity infusion into the

company, seven figure infusion, a million dollars," the

bankruptcy court approved the employment of FE&B.

     Despite these confident assertions, neither a reorganization

plan nor a large equity infusion was forthcoming by the end of

March 1993, and a meeting was subsequently arranged to discuss

the future of the Debtor.    This meeting, which took place on May

20, 1993, was attended by Mr. Fellheimer; Mr. Burke; Guy Fustine

of Knox, McLaughlin, Gornall & Sennett, P.C. ("the Knox Firm"),

counsel to the Official Committee of Unsecured Creditors ("the

Committee"); and certain representatives of the Committee.    The

representatives of the Committee indicated that the Committee was

willing to work with the Debtor to solve its financial woes, to

wit, the Committee would be willing to accept a plan in which the

unsecured creditors as a whole exchanged debt for equity, or a

plan in which two members of the Committee--REM Electronics and
Advacom, Incorporated--would extend credit to the Debtor or

invest cash in the Debtor.

     The representatives of the Committee also made it clear that

they lacked confidence in the managerial skills of Mr. Burke:     If

the Debtor's reorganization plan was hinged upon the long-term

viability of the Debtor, the Committee pledged to withhold its

support unless the Debtor's top-level management was replaced--

particularly Mr. Burke.   At this point, Mr. Burke and Mr.

Fellheimer left the meeting to confer privately.   Upon their

return, Mr. Fellheimer presented the representatives of the

Committee with Mr. Burke's demands.   According to Mr. Fellheimer,

Mr. Burke would agree to leave the management of the Debtor only

if the reorganization plan provided him with:   (1) a written

employment contract with the Debtor; (2) an equity position in

the Debtor; and (3) a release from the personal guarantees Mr.

Burke had previously executed which secured certain obligations

of the Debtor.

     Following this meeting, in a letter dated June 4, 1993, Mr.

Fustine reiterated the Committee's views regarding Mr. Burke's

long-term future in the Debtor's management.1   In response, in
     1
         In the June 4th letter, Mr. Fustine stated that

          [t]he position of the Committee with respect to
     Joe Burke is clear. It will not accept any Plan of
     Reorganization which provides for payments over time or
     which provides for the conversion of debt to equity if
     the Plan also provides that Joe Burke will continue in
     a management role. Joe Burke is believed to be a part
     of the problem and not a part of the cure. I am
     telling you this again now so that there is no
     confusion in the future.
letters dated June 8 and June 14, 1993, Mr. Fellheimer charged

Mr. Fustine with representing individual members of the Committee

and demanded that the Knox Firm withdraw as counsel to the

Committee and, moreover, that certain members of the Committee

also withdraw from the Committee.   Mr. Fellheimer furthermore

threatened to file a motion with the bankruptcy court seeking the

dismissal of the Knox Firm if the Knox Firm did not voluntarily

withdraw.   Mr. Fustine and the Knox Firm responded by again

restating the position of the Committee in a letter to FE&B dated

June 16, 1993.   That same day, Mr. Fustine and the Knox Firm also

filed a motion on behalf of the Committee to ratify the

appointment of Mr. Fustine and the Knox Firm as the Committee's

counsel.

     FE&B filed the Debtor's response to the Committee's motion

to ratify its counsel on June 28, 1993.   FE&B also filed a seven-

count complaint on behalf of the Debtor against Mr. Fustine and

the Knox Firm seeking $4,250,000 in damages and a preliminary

injunction to prevent Mr. Fustine and the Knox Firm from

representing the Committee ("the complaint").   The complaint made

the following allegations:   Count One charged Mr. Fustine and the

Knox Firm with breaching their fiduciary duty to the Committee by

representing individual members of the Committee; Counts Two and

Three charged Mr. Fustine and the Knox Firm with breaching a

contract that they had allegedly entered into with the Debtor

which required them to refrain from communicating with potential

investors in the Debtor; Counts Four and Five charged Mr. Fustine

and the Knox Firm with libeling and slandering the Debtor in
their letters of June 4 and June 16, 1993; Count Six charged Mr.

Fustine and the Knox Firm with intentionally and negligently

interfering with the Debtor's existing and prospective

contractual relations; and Count Seven charged Mr. Fustine and

the Knox Firm with unfairly competing with the Debtor by

representing individual members of the Committee.   The complaint

was signed by Jeffrey Eichen of FE&B.

    Viewing the complaint as an insurmountable barrier to a

successful reorganization effort, the bankruptcy court quickly

scheduled a hearing for July 8, 1993.   Mr. Fellheimer telephoned

the court on July 6, 1993, however, and requested that the

hearing be rescheduled as Mr. Burke--whose testimony Mr.

Fellheimer characterized as essential to the complaint--was out

of the country and would not return before the hearing.    The

bankruptcy court consequently rescheduled the hearing for August

3, 1993.   In fact, Mr. Burke was not out of the country and Mr.

Fellheimer was aware of Mr. Burke's actual whereabouts on the

same day--July 6, 1993--that he telephoned the bankruptcy court.

On July 19, 1993, FE&B again sought to delay the hearing by

filing a motion to postpone the hearing.   In this motion, FE&B

asserted that Vito Casoni, another allegedly essential witness,

would be unavailable on the new date of the hearing.   The

bankruptcy court, however, refused to further reschedule the

hearing.

     On July 20, 1993, the Knox Firm, Mr. Fustine, and the

Committee filed a Motion for Sanctions Pursuant to Bankruptcy
Rule 9011 and Rule 11 of the Federal Rule of Civil Procedure2

against FE&B ("the sanction motion").       The sanction motion

alleged that sanctions were appropriate in that the complaint

filed by FE&B lacked a reasonable basis in law and in fact and

that the complaint was filed for improper tactical purposes.

     In one last salvo before the hearing, FE&B filed a Motion to

Disqualify Defendants from Acting as Legal Counsel to Witnesses

("motion to disqualify").       The motion to disqualify alleged that

Mr. Fustine and the Knox Firm suffered from an irreconcilable

conflict of interests due to their representation of individual

members of the Committee and due to their status as parties and

material witnesses in the litigation on the complaint.

     On August 3, 1993, the hearing on the Debtor's complaint was

held.       At the conclusion of the first day of the hearing, Mr.

Fellheimer sought to withdraw the complaint on behalf of the

Debtor and to terminate the entire adversary proceeding.        In the

words of Mr. Fellheimer, the Debtor decided to withdraw the

complaint "[b]ecause it doesn't see any benefit . . . in

proceeding in the long run."       Mr. Fellheimer further stated:    "I

don't want to burden the Court any further with this.       And I also

feel that . . . the best interest of the debtor would be served

by ending it and working towards a reorganization."       The

bankruptcy court then withdrew the complaint and chastised Mr.

Fellheimer for, in its view, representing the interests of Mr.


        2
        Bankruptcy Rule 9011 essentially tracks Rule 11 in all
pertinent respects, as those rules then existed.
Burke over the interests of the Debtor.3   The Committee reserved

its right to proceed with its sanction motion at a later date.

     On August 25, 1993, FE&B filed an interim fees and expenses

application for the period January 20, 1993, through August 21,

1993 ("fees application").   FE&B requested $200,275.50 in

compensation and $21,916.83 for the reimbursement of expenses.

The Committee thereafter filed an objection to FE&B's fees

application on September 23, 1993.

                     II. THE PROCEEDINGS BELOW

                      A. The Bankruptcy Court

     The bankruptcy court held a hearing on the fees application

and on the sanction motion on October 20, 1993, and issued its
     3
         The bankruptcy court warned:

     [Y]ou're on a knife's edge, Mr. Fellheimer. You're
     representing Mr. Burke, he has no independent counsel.
     He may be a lawyer himself, but he met with you outside
     the Erie Club in order to determine what he should
     personally get out of the reorganization for him to
     step out as manager. In that instance you're acting as
     his lawyer. And that's adverse to the interests of the
     [Debtor].

           . . . .

          . . . You have to be very careful about how you
     represent Mr. Burke. Because to the extent that you
     represent him to the detriment of the [Debtor] and the
     creditors, you're violating your fiduciary duty to the
     [Debtor]. And you're representing him individually and
     you're risking whatever fee you might get out of this.

          . . . And for Mr. Burke to get upset because the
     creditors committee thinks that he's incompetent, is
     unfortunate. You as a lawyer, as a practicing lawyer
     have to tone him down. You can't file this kind of
     lawsuit that you filed here just because Mr. Burke is
     upset. That's ridiculous.
opinion and order regarding these matters on November 2, 1993.

Charter Techs., Inc., d.b.a. Elgin Elecs. v. Knox, McLaughlin,

Gornall & Sennett, P.C. (In re Charter Techs., Inc.), 

(Bankr. W.D. Pa.).      The bankruptcy court granted the sanction

motion and denied FE&B's entire fees application, except for

$15,000 which the court allowed for reimbursement of expenses.

The bankruptcy court also granted the motion of the Committee for

the appointment of a Chapter 11 trustee.     In reaching its

decision, the bankruptcy court made the following factual

findings.

       First, the bankruptcy court found that "[t]he evidence

establishing that Fustine and the Knox Firm represented the

Committee, and only the Committee, is overwhelming."      Charter

.     In this regard, the bankruptcy court

further found that "[t]he Debtor failed to present any evidence

that Fustine and the Knox Firm represented any individual member

of the Committee."    

bankruptcy court found that "[t]he overwhelming

evidence supports the fact that the language of the June 4th

letter accurately reflected the Committee's position."     

   The bankruptcy court found that the Debtor's allegations to

the contrary were based upon "a complete lack of evidence."     

had attempted to prove that the June 4th letter was a

vehicle designed to further the interests of individual members

of the Committee, rather than a statement of the consensus of the

Committee.    Towards this end, the Debtor alleged in its complaint

that two Committee members--Robert E. Miller and Frank
Slurkanich--telephoned Mr. Burke and "stated that Fustine and the

Knox Firm were not authorized to send the June 4th letter and

that it does not represent the position or opinion of the

Committee."   

court found, however, that Mr.

Slurkanich--a former employee of the Debtor--never denied the

authority of Mr. Fustine to send the June 4th letter.     Instead,

Mr. Slurkanich merely indicated that he did not personally "put

out" the letter.    Furthermore, the bankruptcy court found that

"Slurkanich did not call in response to the June 4th letter, but

rather in response to a notice of termination as a sales

representative which Slurkanich received from Burke on June 7,

1993, which Burke had issued in retaliation for the Committee's

June 4th letter!"     

court found, moreover,

that the Committee had objectively sound reasons for wishing to

replace Mr. Burke.4

     Third, the bankruptcy court summarily rejected the Debtor's

defamation allegations.      The Debtor had claimed that Mr. Fustine

and the Knox firm stated falsely that the Debtor had accumulated

$1,600,000 in pre-tax losses since October 1989 and that the

Debtor had nonetheless paid $315,000 in stock dividends over that

same time period.     The bankruptcy court found that it was

"readily determin[able]" through the Debtor's own financial



     4
        The bankruptcy court cited a draft report prepared by the
accounting firm of Ernst & Young for a potential investor which
"identified numerous management deficiencies from which it would
have been reasonable for the Committee to determine the need to
replace Burke." 

these statements were "true and accurate."          

       Fourth, the bankruptcy court found that there was

"absolutely no evidence" to support the Debtor's allegation that

Mr. Fustine breached an agreement that he had allegedly entered

into that forbade him from meeting with potential investors in

the Debtor.    

the complaint, Mr. Fustine

breached this agreement when he met with Vito Casoni and George

Leone of SMG Control Systems.      As the bankruptcy court found,

this meeting took place on May 20, 1993.     The earliest date that

Mr. Fellheimer discussed such an agreement with Mr. Fustine,

however, according to Mr. Fellheimer's own time sheets, was May

21, 1993--one day after the alleged breach of the agreement took

place.

       Fifth, the bankruptcy court found that, contrary to the

assertion in the Debtor's complaint, the statements of Mr.

Fustine to Mr. Casoni of SMG Control Systems did not cause SMG

Control Systems to lower its bid for the Debtor.     

bankruptcy court noted, the affidavit of Mr. Casoni submitted by

the Debtor explicitly states that "the session of May 20th with

Mr. Fustine did not alter SMG's offer as to price."        The

bankruptcy court also found that Mr. Fustine did not, as further

asserted in the complaint, cause Kulicke & Soffa to withdraw its

business from the Debtor.    

by the affidavit of

Jim King of Kulicke & Soffa, that firm "retracted business from

the debtor as a result of the debtor's inability to fulfill

Kulicke & Soffa's production schedule on time and serious
problems we perceive in the debtor's quality and recycling

procedure."    The bankruptcy court found that FE&B had not

bothered to contact Mr. Casoni, or anyone at Kulicke & Soffa, to

ascertain the veracity of these allegations before filing the

complaint.    

bankruptcy court was greatly offended by Mr.

Fellheimer's misrepresentation to it that Mr. Burke would be out

of the country and unable to attend the hearing on the complaint

on the day it was originally scheduled.   

   After

noting that FE&B had made six telephone calls to the Debtor on

July 6, including at least one direct call between Mr. Fellheimer

and Mr. Burke, the bankruptcy court concluded:    "There is no

rational basis favorable to Fellheimer as to why he would

represent to the Court on July 6 that he thought Burke was in

England and unavailable for the scheduled hearing on July 8."

     On the strength of these preliminary findings, the

bankruptcy court determined that sanctions against FE&B were

appropriate:
     Debtor's counsel failed to make any reasonable inquiry
     into the underlying facts before filing the within
     Complaint. Debtor's counsel knew or should have known
     that many of the allegations were baseless without any
     inquiry. . . .

          . . . .

          . . . The conclusion is inescapable that the
     purpose of the Complaint was to separate the Committee
     from its chosen counsel due to the fact that counsel
     for the Committee was advocating the Committee's
     position that it would be appropriate to remove Burke
     from upper-level management.
            . . . .

            In short, Fellheimer filed a lawsuit against the
       attorneys for the Creditors' Committee seeking $4.25
       million in damages for the sole purpose of protecting
       his real client, Burke, from the legitimate actions of
       the Creditors' Committee in opposing Burke's management
       of the Debtor's business. . . .

            We further conclude that Fellheimer never had any
       intent to proceed with a trial on the merits of this
       complaint. He knew when he filed the Complaint that
       the allegations were unsupported. His scheme was to
       file the Complaint, demand the $4.25 million from the
       Creditors' Committee counsel, and then delay a hearing
       on the merits while he used the lawsuit as a wedge to
       intimidate the Creditor's Committee and its counsel for
       the benefit of Burke. . . . That illicit purpose plus
       the total lack of any evidentiary basis for the serious
       accusations made in the Complaint cry out for judicial
       recognition and appropriate sanction.

       After discussing the nature and scope of Rule 11 of the

Federal Rules of Civil Procedure and Bankruptcy Rule 9011, the

bankruptcy court decided to deny FE&B its entire fee in the case.

Although FE&B had arguably performed some services of value to

the Debtor, the bankruptcy court did not allow it any

compensation because "Fellheimer's inappropriate conduct affected

and continues to affect this entire case.      Both the Debtor and

its counsel have exhibited conduct of dishonesty, incompetency

and gross mismanagement of the affairs of the Debtor."     

                       B. The District Court

       FE&B then appealed the imposition of sanctions to the

district court.    Before the district court, FE&B argued primarily
that the bankruptcy court's decision to impose Rule 11 and

Bankruptcy Rule 9011 sanctions was factually unsupported and that

FE&B's filing of the complaint was justified.   FE&B also argued

that the bankruptcy court had erred by imposing Rule 11 and

Bankruptcy Rule 9011 sanctions upon the entire firm of FE&B,

instead of merely upon the individual attorney who had signed the

complaint, Mr. Eichen.

     The district court first found that the record supported the

bankruptcy court's findings regarding the factual baselessness of

each of the complaint's material allegations.   The district court

also found that the record supported the finding that FE&B filed

the complaint for an improper purpose and in subjective bad

faith.

     The district court did, however, agree with FE&B that Rule

11 and Bankruptcy Rule 9011 sanctions, as they then existed,5

could only be imposed upon the individual attorney who had signed

the offending document.   See Pavelic & LeFlore v. Marvel

Entertainment Group, 

(1989).   The district court

nonetheless affirmed the imposition of sanctions on the following

alternative grounds:   (1) FE&B waived the right to contest the

imposition of sanctions against it as a firm by failing to raise

the issue in the bankruptcy court and by failing to include the

issue in its Bankruptcy Rule 8006 statement of issues for


     5
        Effective December 1, 1993, after the bankruptcy court
had issued its opinion and order in this case, Rule 11 of the
Federal Rules of Civil Procedure was amended to explicitly allow
the imposition of sanctions against law firms.
appellate review; (2) the imposition of sanctions represented a

proper exercise of the bankruptcy court's inherent power to

sanction; and (3) the imposition of sanctions represented a

proper exercise of the bankruptcy court's authority under 11

U.S.C. § 328(c)6 to deny professional fees in appropriate cases.

Appeal to this court followed.

                      III. STANDARD OF REVIEW

     Because the district court sat as an appellate court in

reviewing this matter, our own review of that court's factual and

legal determinations is plenary.    Universal Minerals, Inc. v.

C.A. Hughes & Co., 

, 101-02 (3d Cir. 1981).   In

reviewing the bankruptcy court's determinations, we exercise the

same standard of review as the district court.    Brown v.

Pennsylvania State Employees Credit Union, 

, 84 (3d

Cir. 1988).

     We may not set aside the bankruptcy court's factual findings

unless we first conclude that they are clearly erroneous.

Bankruptcy Rule 8013; 

(citation omitted).

As we have stated before in other contexts, the clearly erroneous

standard is fairly stringent:    "It is the responsibility of an
     6
         Section 328(c) provides:

     [T]he court may deny allowance of compensation for
     services and reimbursement of expenses of a
     professional person employed under section 327 or 1103
     of this title if, at any time during such professional
     person's employment under section 327 or 1103 of this
     title, such professional person is not a disinterested
     person, or represents or holds an interest adverse to
     the interest of the estate with respect to the matter
     on which such professional person is employed.
appellate court to accept the ultimate factual determination of

the fact-finder unless that determination either is completely

devoid of minimum evidentiary support displaying some hue of

credibility or bears no rational relationship to the supportive

evidentiary data."   Hoots v. Pennsylvania, 

, 725 (3d

Cir. 1983) (citation omitted).    Furthermore, in reviewing the

bankruptcy court's factual findings we are to give "due regard"

to the opportunity of that court to judge first-hand the

credibility of witnesses.    Bankruptcy Rule 8013.   Our review of

the bankruptcy court's legal determinations is plenary.    

.

     In our review of the imposition of sanctions, the primary

question before us is whether the sanctioning court abused its

discretion.    See, e.g., Cooter & Gell v. Hartmarx Corp., 

, 405 (1990) ("[A]n appellate court should apply an abuse-of-

discretion standard in reviewing all aspects of a district

court's Rule 11 determination."); Chambers v. Nasco, Inc., 

, 55 (1991) ("We review a court's imposition of sanctions

under its inherent power for abuse of discretion.").    We do not

seek to determine whether we would have applied the sanction

ourselves in the first instance.    See Eavenson, Auchmuty &
Greenwald v. Holtzman, 

, 540 (3d Cir. 1985)

                            IV. DISCUSSION

     As discussed above, the bankruptcy court acted pursuant to

Rule 11 of the Federal Rules of Civil Procedure and Bankruptcy

Rule 9011 when it sanctioned FE&B by denying FE&B's fees

application.   All parties are in agreement, however, that
sanctions could not properly be imposed against law firms under

the Supreme Court's interpretation of the version of Rule 11 then

in effect.   See Pavelic & LeFlore v. Marvel Entertainment Group,

(1989) (holding that Rule 11 sanctions may only be

imposed upon the attorney who actually signs the documents in

question).   The district court affirmed the bankruptcy court's

denial of FE&B's fees application despite that court's

misapplication of Rule 11 by finding three alternative grounds

for upholding the sanction.   The district court did so after

noting the Supreme Court's long-standing holding that "'[i]n the

review of judicial proceedings the rule is settled that if the

decision below is correct, it must be affirmed, although the

lower court relied upon a wrong ground or gave a wrong reason.'"

Brown v. Allen, 

, 459 (1953) (quoting Helvering v.

Gowran, 

, 245 (1937)) (other citation omitted).     Of

the three grounds provided by the district court, we find the

characterization of this sanction as an exercise of the

bankruptcy court's inherent power to be the most appropriate

justification under these circumstances and it is to this ground

that we first turn.

                   A. Inherent Power to Sanction
     In Chambers v. Nasco, Inc., 

(1991), the Supreme

Court addressed the nature and scope of the federal courts'

inherent power to control the conduct of those who appear before

them.   The Court began by surveying its long history of case law

in this area:   "It has long been understood that '[c]ertain

implied powers must necessarily result to our Courts of justice
from the nature of their institution,' powers 'which cannot be

dispensed with in a Court, because they are necessary to the

exercise of all others.'"   

(quoting United States v.

Hudson, 7 Cranch 32, 34 (1812)) (other citation omitted).       Among

the implied and "'incidental'" powers of a federal court is the

power "to discipline attorneys who appear before it."     

parte Burr, 

, 531 (1824)).    Included

among the types of sanctionable conduct discussed by Chambers are

those cases where
     a party has "'acted in bad faith, vexatiously,
     wantonly, or for oppressive reasons.'" . . . The
     imposition of sanctions in this instance transcends a
     court's equitable power concerning relations between
     the parties and reaches a court's inherent power to
     police itself, thus serving the dual purpose of
     "vindicat[ing] judicial authority without resort to the
     more drastic sanctions available for contempt of court
     and mak[ing] the prevailing party whole for expenses
     caused by his opponent's obstinacy."

(internal citations and quotations omitted).       See

also Gillette Foods Inc. v. Bayernwald-Fruchteverwertung, 

, 813 (3d Cir. 1992) (quoting Chambers).     "Because of

their very potency," however, the federal courts must be careful

to exercise their inherent powers "with restraint and

discretion."   

.   "A primary aspect of

that discretion is the ability to fashion an appropriate sanction

for conduct which abuses the judicial process."    

In this case, the bankruptcy court determined that denying FE&B's

entire fees application constituted an appropriate sanction.

     We first note here that the advent of Rule 11 and the other

statutory sanctions did not eviscerate the courts' inherent power
to sanction:    "[W]hereas each of the other mechanisms reaches

only certain individuals or conduct, the inherent power extends

to a full range of litigation abuses.     At the very least, the

inherent power must continue to exist to fill in the

interstices."    

  Moreover, we have previously rejected

the proposition "that once a claim is held not to violate Rule

11, the court is prevented from imposing sanctions under its

inherent power."    Gillette 

.

     Against this backdrop, FE&B challenges the bankruptcy

court's exercise of its inherent sanction power on two main

grounds.    First, FE&B argues that this result deprives FE&B of

due process because the bankruptcy court indicated that it was

exclusively acting pursuant to Rule 11 and Bankruptcy Rule 9011.

Second, FE&B argues on the merits that the record is insufficient

to support the finding that it acted in bad faith during the

course of its representation of the Debtor.

     1. Due Process

     The key to FE&B's due process claim is the distinction

between Rule 11 sanctions and inherent power sanctions--if these

sanctions were identical in all respects, particularized notice

as to one sanction would arguably suffice to fully inform FE&B as

to the pendency of the other sanction.     Rule 11 sanctions and

inherent power sanctions do, of course, differ markedly in at

least one aspect pertinent to this case:     Invocation of a federal

court's inherent power to sanction requires a finding of bad

faith.     

; Landon v. Hunt, 

,
454 (3d Cir. 1991).    The imposition of Rule 11 sanctions, on the
other hand, requires only a showing of objectively unreasonable

conduct.   E.g., Lony v. E.I. Du Pont de Nemours & Co., 

, 616 (3d Cir. 1991).

     We have previously held that "[p]rior to sanctioning an

attorney, a court must provide the party to be sanctioned with

notice of and some opportunity to respond to the charges" in

order to satisfy the requirements of due process.    Jones v.

Pittsburgh Nat'l Corp., 

, 1357 (3d Cir. 1990)

(citations omitted).    Moreover, we have stated that "we think

particularized notice is required to comport with due process."

   FE&B has raised a fairly significant

argument here as the bankruptcy court never indicated that it was

acting under its inherent sanction power in this case.    Indeed,

neither the motion for sanctions nor the bankruptcy court ever

mentioned any ground for sanctions other than Rule 11 and

Bankruptcy Rule 9011.     As discussed above, it was the district

court that first justified the bankruptcy court's conduct on the

ground of the inherent power to sanction.     Nonetheless, we agree

with the district court's reasoning and we likewise find that

justifying the bankruptcy court's conduct on that ground does not

violate FE&B's right to due process on the record of this case.

     We do not intend to disturb the line of case law cited to by

FE&B in its brief.   See Simmerman v. Corino, 

, 64 (3d
Cir. 1994); 

; 

;

Gagliardi v. McWilliams, 

, 83 (3d Cir. 1987);

Eavenson, Auchmuty & 

; Eash v.
Riggins Trucking Inc., 

, 570-71 (3d Cir. 1985).
Rather, our holding is a narrow one, compelled by our finding

that FE&B was provided with sufficient, advance notice of exactly

which conduct was alleged to be sanctionable and, furthermore,

that FE&B was aware that it stood accused of having acted in bad

faith.

     (a) Particularized Notice

     In Jones we stated that the reason behind the particularized

notice requirement was to put "a party . . . on notice as to the

particular factors that he must address if he is to avoid

sanctions."   

.   Generally speaking,

particularized notice will usually require notice of the precise

sanctioning tool that the court intends to employ.    In Jones, as

was the case here, the sanctioned attorney was initially informed

that only Rule 11 sanctions were being considered.    

the sanctioned attorney received the district court's order

was he informed that sanctions were also being imposed pursuant

to 28 U.S.C. § 1927,7 which has been interpreted to require a

finding of bad faith conduct.    

we vacated the

imposition of sanctions under § 1927 because the sanctioned




     7
         § 1927.   Counsel's liability for excessive costs

          Any attorney or other person admitted to conduct
     cases in any court of the United States or any
     Territory thereof who so multiplies the proceedings in
     any case unreasonably and vexatiously may be required
     by the court to satisfy personally the excess costs,
     expenses, and attorneys' fees reasonably incurred
     because of such conduct.
attorney had not been provided with sufficient notice that his

subjective bad faith was in question.8

      The situation confronting the sanctioned attorney in Jones

is to be contrasted with the situation facing FE&B:   First, the

sanction motion filed by Mr. Fustine, the Knox firm, and the

Committee explicitly charges FE&B with bad faith in the filing of

the complaint on behalf of the debtor.   Specifically, the


      8
        The motion for sanctions filed by the sanctioned
attorney's opponents pursuant to Rule 11 was hinged primarily
upon procedural noncompliance: "[The motion] alleged that
plaintiff had failed to file a pre-trial statement, to submit a
RICO case statement, to answer interrogatories, to produce
documents requested and to conduct any discovery and that
plaintiff had had no factual basis for the RICO count." 

This request for sanctions was reiterated on at least two
occasions, but again these requests were insufficient to put the
attorney on notice of the fact that he stood accused of having
acted in subjective bad faith: The first reiteration "recited
that it sought dismissal and fees based upon plaintiff's 'conduct
of [the] litigation in general,' including the failure to answer
interrogatories, failure to file a RICO case statement or pre-
trial statement and failure to produce requested documents." 

     The sanctioned attorney's answer to his opponent's motion
for counsel fees--which constituted his sole opportunity to
respond to the question of sanctions--was insufficient to
demonstrate that he was on notice that he stood accused of more
than objectively unreasonable conduct. His response merely
repeated the requirements of Rule 11:

      In response to the charge of having violated Rule 11,
      appellant asserted that he "believed throughout a large
      portion of the instant litigation . . . that the
      Complaint was warranted by existing law; that,
      alternatively, it was warranted by good faith arguments
      for extension, modification or reversal of existing
      laws; and that it was not interposed for delay or
      needless increase in cost of litigation."

charges that FE&B was actually aware of, or had

at least remained deliberately indifferent to, the factual and

legal baselessness of the complaint.

     Second, and much more importantly, the bankruptcy court also

made it clear that it suspected FE&B of having acted in bad faith

both in its representation of the debtor's interests and in the

filing of the complaint.   At the conclusion of the August 3, 1993

hearing on the Debtor's complaint, after Mr. Fellheimer had

sought to withdraw the complaint, the bankruptcy court first

stated that it believed that FE&B was representing the interests

of Mr. Burke over the interests of the Debtor:    "[Y]ou're on a

knife's edge, Mr. Fellheimer.   You're representing Mr. Burke . .

. . And that's adverse to the interests of the [Debtor]. . . .

[T]o the extent that you represent [Mr. Burke] to the detriment

of the [Debtor] and the creditors, you're violating your

fiduciary duty to the [Debtor]."   The bankruptcy court then

stated its belief that FE&B had filed the complaint in bad faith:

"[F]or Mr. Burke to get upset because the creditors committee

thinks that he's incompetent, is unfortunate.    You . . . have to

tone him down.   You can't file this kind of lawsuit that you

filed here just because Mr. Burke is upset.   That's ridiculous. .

. . [T]his whole litigation is a lot of nonsense."   The

bankruptcy court even indicated the nature of the sanction that

it was considering:   "[Y]ou're representing [Mr. Burke]

individually and you're risking whatever fee you might get out of

this."
     If the bankruptcy court had then and there conducted a

hearing on the sanction motion, FE&B would arguably possess a

stronger due process argument--this is the key factor which

distinguishes this case from Jones.   In Jones, the record was

insufficient to demonstrate that the sanctioned attorney had

advance notice that the sanctioning court was contemplating the

imposition of sanctions which hinged upon a finding of bad faith.

In this case, FE&B had over eleven weeks once it had learned of

the bankruptcy court's leanings on this matter--until October 20,

1993--to prepare for the hearing on the sanctions motion.   In the

words of our Jones opinion, we can say "with reasonable assurance

on this record" that FE&B was "on notice as to the particular

factors that [it had to] address if [it was] to avoid sanctions."

.   Furthermore, it appears evident from

Mr. Fellheimer's soliloquy at the October 20, 1993 hearing that

he was fully aware of what he and FE&B were up against:
          I have been searching in vain for a way to stop it
     or to get away from it. I want to tell the Court. I
     don't want this Court to think that I'm standing here,
     that I believe what happened was right. I believe it
     was wrong. If I had it to do over again, I would do it
     differently. And I can promise you, whatever you
     decide to do, it won't happen again. I would approach
     it differently and I would make sure my firm approaches
     it differently. I'm very unhappy with the way it came
     out. I will tell you that there were a lot better ways
     to resolve that problem than the one we selected. And
     I want to acknowledge that to you and admit that to
     Your Honor and admit to Your Honor that the result was
     bad. For that I apologize.

          . . . .

          . . . I would like to step aside. Whatever I'm to
     pay, I'll pay. Whatever fee I'm paid, I'll take, and
     step aside in the interest of all. I don't think it's
      good for this to just go on and on. It doesn't
      accomplish anything for this debtor. . . .

           . . . .

           And I want to publicly say to Guy Fustine in the
      courtroom, I think we were wrong in filing the
      Complaint. And maybe I'm handing it to Mr. Lanzillo.
      And I will, if that's what it is. I apologize to you
      publicly. I think we got carried away with the problem
      and we went too far, and for that I apologize. And
      whatever the Court decides to do, I will accept.


      Therefore, we hold that the record adequately demonstrates

that FE&B was sufficiently on notice that it faced allegations of

having acted in subjective bad faith.

      (b) Opportunity to be Heard

      The requirements of due process also require a meaningful

opportunity to be heard.   See, e.g., 

.

This requirement is especially important in cases such as this

where a law firm's reputation is at stake:
          Sanctions are not to be assessed without full and
     fair consideration by the court. They often entail a
     fine which may have more than a token effect upon an
     attorney's resources. More importantly, they act as a
     symbolic statement about the quality and integrity of
     an attorney's work--a statement which may have tangible
     effect upon the attorney's career.

above, once the bankruptcy court had made its

position regarding FE&B's conduct clear, FE&B had over eleven

weeks before the hearing to further brief the issue.   FE&B was

then afforded ample opportunity to be heard at the hearing

itself--the transcript of the October 20, 1993 hearing stretches

on for 321 pages.    Based on this record, we cannot find that FE&B

was denied a meaningful opportunity to be heard.
     (c) Conclusion

     Ideally, there would have been some explicit indication here

that the bankruptcy court was acting pursuant to its inherent

sanction power.   We refuse, however, to go along with FE&B's

argument and overturn the bankruptcy court's decision merely

because that court applied the wrong label to the righteous use

of its inherent sanction power.   See Brown v. Allen, 

, 459 (1953) (citations omitted).   We do not expect, however,

that the result reached here will be often justified in future

cases where the sanctioned party was not explicitly informed

beforehand of the precise ground for the imposition of sanctions.

To summarize, our finding here was primarily driven by (1) the

bankruptcy court's clear warning to FE&B eleven weeks prior to

the hearing on the sanctions; and (2) the evidence pertaining to

FE&B's actual awareness of the nature of the charges pending

against it, such as Mr. Fellheimer's statements at the October

20, 1993 hearing.

     2. Sanctions Under the Court's Inherent Power

     FE&B also argues on the merits that the record is

insufficient to support a finding of bad faith.   As discussed

above, a finding of bad faith is required to support a court's

employment of its inherent sanction power.    

(citations omitted).

     We first note that, contrary to FE&B's assertions, the

bankruptcy court did find that FE&B had acted in bad faith in the

course of its representation of the debtor:
     The conclusion is inescapable that the purpose of the
     Complaint was to separate the Committee from its chosen
     counsel due to the fact that counsel for the Committee
     was advocating the Committee's position that it would
     be appropriate to remove Burke from upper-level
     management.

          . . . Fellheimer . . . abandoned his fiduciary
     obligations as counsel to the Debtor corporation and .
     . . undert[ook] representation of Burke, individually.
     As Burke's attorney in such circumstances, he was
     hostile to the Debtor corporation and its creditors.

          . . . .

          In short, Fellheimer filed a lawsuit against the
     attorneys for the Creditors' Committee seeking $4.25
     million in damages for the sole purpose of protecting
     his real client, Burke, from the legitimate actions of
     the Creditors' Committee in opposing Burke's management
     of the Debtor's business. . . . Viewed in this light,
     the actions of Fellheimer as an officer of the Court in
     violating his fiduciary duties and in bringing such an
     action are absolutely not to be condoned. We view it
     as a disgrace to the legal community which we otherwise
     hold in high regard.

          We further conclude that Fellheimer never had any
     intent to proceed with a trial on the merits of this
     complaint. He knew when he filed the Complaint that
     the allegations were unsupported. His scheme was to
     file the Complaint, demand the $4.25 million from the
     Creditors' Committee counsel, and then delay a hearing
     on the merits while he used the lawsuit as a wedge to
     intimidate the Creditors' Committee and its counsel in
     his negotiations with it for the benefit of Burke.


Charter 

.   We may not disturb these

findings, nor may we disturb the bankruptcy court's preliminary

findings which led up to them, unless we first find that they are

clearly erroneous.   

.   Since FE&B offers

nothing but tepid contradictions in rebuttal, we must affirm the

bankruptcy court's findings, which are sufficient to support its
conclusion that FE&B did act with bad faith in the proceedings

below.

     Second, we take note of the Supreme Court's cautionary

language in Chambers:
     [W]hen there is bad-faith conduct in the course of
     litigation that could be adequately sanctioned under
     the Rules, the court ordinarily should rely on the
     Rules rather than the inherent power. But if in the
     informed discretion of the court, neither the statute
     nor the Rules are up to the task, the court may safely
     rely on its inherent power.

.   In this case, only Mr. Eichen of FE&B

could be properly sanctioned under the versions of Rule 11 and

Bankruptcy Rule 9011 then in effect as only Mr. Eichen actually

signed the complaint.   It is evident, however, that the

bankruptcy court imposed firm-wide sanctions because it felt that

other attorneys at FE&B, particularly Mr. Fellheimer, were

primarily responsible for the sanctionable conduct.9    Indeed, Mr.

Fellheimer himself testified as to his primary role in the filing

of the complaint at the October 20, 1993 hearing:   "Your Honor

told me what he thought of [the complaint] at the time when we

withdrew it.   And I bear full responsibility for it, Your Honor."

We cannot conclude, after reviewing this record, that the

bankruptcy court abused its discretion by employing its inherent

power to sanction the entire firm of FE&B.

           B. Denial of Fees Under 11 U.S.C. § 328(c)

     9
        We have previously recognized that a court may employ its
inherent sanction power to reach attorneys who did not personally
sign the document in question. See Gillette 

.
     We also find that the denial of FE&B's fees application may

be upheld as a proper exercise of the bankruptcy court's

authority under 11 U.S.C. § 328(c).    Section 328(c) authorizes

the bankruptcy court, in its discretion, to deny a professional

person's request for fees if that person "represents or holds an

interest adverse to the interest of the estate with respect to

the matter on which such professional person is employed."     While

it is true that the bankruptcy court did not indicate that it was

acting pursuant to § 328(c), the bankruptcy court did explicitly

find that FE&B had represented the interests of Mr. Burke, which

were adverse to the Debtor's interests:    "Fellheimer . . .

abandoned his fiduciary obligations as counsel to the Debtor

corporation and . . . undert[ook] representation of Burke,

individually.   As Burke's attorney in such circumstances, he was

hostile to the Debtor corporation and its creditors."   Charter

.   Having already concluded that the

bankruptcy court's underlying factual findings in this regard are

not clearly erroneous, we find that the denial of FE&B's fees

application may be upheld as an exercise of the bankruptcy

court's authority under § 328(c).

     In light of our finding that the denial of FE&B's fees

application may be upheld as a proper exercise of the bankruptcy

court's inherent sanction power, and that the sanctions may

alternatively be upheld under 11 U.S.C. § 328(c), we need not

address the third ground provided by the district court for

upholding the sanctions--namely, that FE&B waived its right to

contest the imposition of sanctions.   In this regard, we note
only that we would require a fairly persuasive showing that FE&B

had waived the right to contest a matter as important as Rule 11

sanctions, given the effect that such sanctions may have upon a

law firm's primary stock in trade--its reputation.

                      C. Amount of the Sanction

     As discussed above, the bankruptcy court sanctioned FE&B by

denying FE&B's entire fees application, except for $15,000 for

reimbursement of expenses.    In its initial brief before this

court, FE&B claims that the total amount of compensation due to

it amounts to approximately $260,000.    This figure represents

$167,246.50 allegedly accrued from January 20, 1993, through

August 21, 1993,10 plus $92,169 which allegedly accrued from

August 22, 1993, through December 15, 1993.    As the district

court noted, however, there is nothing in the record to indicate

that FE&B ever submitted a fees application to the bankruptcy

court for this latter time period.    Therefore, FE&B's claim for

fees for this latter time period is not properly before this

court.    Thus, our review of the bankruptcy court's denial of

FE&B's fees application reaches only the amount attributable to

the period before August 22, 1993:    $167,246.50.   Needless to

say, absent the sanction, FE&B would not necessarily have

received even this reduced amount:    The Committee, for example,



     10
        FE&B had attempted to appease the bankruptcy court by
"sanctioning itself" for the filing of the complaint. FE&B had
accordingly subtracted $33,029--the amount attributable to the
filing of the complaint--from its original request of $200,275.50
for this time period.
had hotly contested FE&B's hourly rates as they exceeded those

normally charged in that area.

     FE&B contests the bankruptcy court's decision to deny its

entire fees application on the ground that it did perform at

least some services of value to the Debtor.    Assuming arguendo

that FE&B has performed services of value to the Debtor, we

nonetheless uphold the sanctions in their entirety.

     The bankruptcy court justified its decision to deny FE&B's

entire fees application as follows:   "[A]ny fees to be collected

by [Fellheimer] shall be collected from his real client, Burke. .

. . Fellheimer's inappropriate conduct affected and continues to

affect this entire case.   Both the Debtor and its counsel have

exhibited conduct of dishonesty, incompetency and gross

mismanagement of the affairs of the Debtor."   Charter 

.   Based on the extensive record of wrongdoing

documented by the bankruptcy court, which we have already upheld,

we cannot find this result to be clearly erroneous.    Accordingly,

we must affirm the denial of FE&B's entire fees application.

                           V. CONCLUSION

     For all of the foregoing reasons, the decision of the

district court upholding the decision of the bankruptcy court is

affirmed.
Fellheimer, Eichen & Braverman, P.C. v. Charter Technologies,
Inc., d/b/a Elgin Electronics; Knox, McLaughlin, Gornall &
Sennett, P.C.; and Guy C. Fustine, Esquire, No. 94-3461.

BECKER, Circuit Judge, concurring and dissenting.


     The majority opinion is quite powerful and thorough, and

almost entirely convincing.   It would have my full joinder were

the sanction it approves not so very large -- on this record it

could apparently amount to more than $167,000.   I cannot conceive

that we would approve a sanction which required FE&B to actually

pay anywhere near that amount under the facts of this case.

While I acknowledge that we deal here with deprivation of a fee

rather than an ordinary out-of-pocket payment, that difference is

not, to me, of great legal significance.   Accordingly, while I

agree with the majority that the bankruptcy court was warranted

in assessing a sanction against FE&B, and concur in the

majority’s opinion to that extent, I believe the court abused its

discretion if in fact the sanction imposed was as high as

$167,000 (the fees requested by FE&B), given the nature of the

conduct involved.

     I do not attempt to put a much different cast than does the

majority on FE&B's offending conduct (though I think the question

whether it was conflicted between its apparent representation of

Mr. Burke and the debtor to be far closer than does the

majority).11   My position is instead impelled by the fact that I


     11
      In my view, FE&B could have reasonably concluded that
successful reorganization of the debtor hinged on the retention
of Mr. Burke. Nevertheless, I cannot say that the bankruptcy
court's finding of a conflict was clearly erroneous.
find the opinions of the bankruptcy court, the district court,

and the majority to be either silent or unconvincing on one of

the most critical aspects of the decision to deny FE&B its fees -

- the contribution vel non of FE&B to the reorganization.     The

record is not sufficiently developed as to this point and I

suspect that the efforts of FE&B had far more to do with the

ultimately successful reorganization, albeit sans Mr. Burke, than

their adversaries admit or the other reviewing judges in this

case apparently believe.   Moreover, the bankruptcy court's

apparent finding that FE&B demonstrated "incompetency and gross

mismanagement of the affairs of the debtor," is, in my view,

unsupported on the record and clearly erroneous.   Indeed, the

majority's affirmance of that finding is wholly conclusory.

I agree that the filing of the lawsuit against the Knox firm was

outrageous.12   I also agree that the bankruptcy court’s finding

of a conflict by FE&B and Mr. Fellheimer's temporizing about the

availability of Mr. Burke justify a large sanction.   But, in view

of the totality of circumstances, I cannot agree that the

bankruptcy court could be justified in imposing a sanction

anywhere near as high as $167,000, even given our deferential

review.   Accordingly, I would vacate the challenged order, remand

the case to the bankruptcy court for a finding as to the value of

FE&B’s fee absent sanction, and then permit the court to take


     12
      I say this even though it is not as clear to me as it is
to the majority that FE&B lacked a colorable basis, at least at
one point, to allege a conflict in the Knox firm's
representation.
another look at the matter and appropriately reduce that award,

pursuant to its inherent authority,13 as a sanction for FE&B’s

conduct.   To this extent, I respectfully dissent.




     13
      The majority also rests its decision on the bankruptcy
court’s power to deny fees under 11 U.S.C.A. § 328(c) (1993),
which provides that "the court may deny allowance of compensation
for services . . . if, at any time . . . such professional person
is not a disinterested person, or represents or holds an interest
adverse to the interest of the estate with respect to the matter
on which such professional person is employed." While this
section might have justified a complete denial of FE&B’s fees in
this case, I cannot join in affirming this sanction as a proper
exercise of the bankruptcy court’s discretion under § 328(c),
since, as the majority recognizes the bankruptcy court did not
rely on § 328(c) in imposing this sanction on FE&B.