EDWARD ELLINGTON, Bankruptcy Judge.
THIS MATTER came before the Court on the request for sanctions contained in the Emergency Motion To Dismiss Chapter 7 Voluntary Petition (Dkt. #6) and the Supplemental Motion for Sanctions (Dkt. #134) filed by Mary E. McAlister; Derek Wyatt's Response to Supplemental Motion for Sanctions (Dkt. #140); and the Reply in Support of Supplemental Motion for Sanctions (Dkt. #143) filed by Mary E. McAlister. After considering the pleadings, the Court finds that the request for sanctions in the Emergency Motion To Dismiss Chapter 7 Voluntary Petition (Dkt. #6) and the Supplemental Motion for Sanctions (Dkt. #134) filed by Mary E. McAlister should be granted in part and denied in part.
On December 10, 2009, a voluntary petition under Chapter 7 of the Bankruptcy Code was filed for the law firm of Wyatt & McAlister, PLLC. The petition was filed by attorney Vann F. Leonard, and was signed by a member of Wyatt & McAlister, PLLC, Derek A. Wyatt.
After the petition was filed, the only other member of Wyatt & McAlister, Mary E. McAlister, filed an Emergency Motion To Dismiss Chapter 7 Voluntary Petition (Dkt. #6). The following recitation of facts is from the Court's Findings of Fact and Conclusions of Law on the Emergency Motion to Dismiss Chapter 7 Voluntary Petition (Dkt. #88) (Dismissal Opinion), In re Wyatt & McAlister, PLLC, 09-04354EE, 2010 WL 1709920 (Bankr. S.D. Miss. April 23, 2010).
While all of the facts are not pertinent to the pleadings currently before the Court, they detail what occurred in this case up to the entry of the Dismissal Opinion:
In re Wyatt & McAlister, PLLC, 2010 WL 1709920, at *1-3.
In its Dismissal Opinion, the Court granted McAlister's request to dismiss the Wyatt & McAlister bankruptcy case. The Court found that under the Mississippi Limited Liability Company Act, a member may only withdraw from a PLLC if the certificate of formation or the operating agreement so provides.
Wyatt & McAlister (W&M) did not have an operating agreement, and the Certificate of Formation did not provide for the voluntary withdrawal of a member. Therefore, the Court found that when Wyatt filed the bankruptcy petition for W&M, McAlister was still a member. Since McAlister did not vote in favor of W&M filing bankruptcy, Wyatt did not have the authority to file the petition on behalf of W&M. Consequently, the Court granted the Emergency Motion to Dismiss Chapter 7 Voluntary Petition (Dismissal Motion) and dismissed the bankruptcy case. However, the Court held that the request for sanctions and attorneys' fees contained within the Dismissal Motion would be reserved for decision at a later date.
On June 9, 2010, W&M by and through its attorney, Vann F. Leonard, filed its Notice of Appeal (Dkt. #103) (Debtor's Appeal) of the Dismissal Opinion. On June 23, 2010, Wyatt filed his Notice of Appeal (Dkt. #109)
W&M filed a Designation of Record (Dkt. # 110) and a Supplemental Designation of Record (Dkt. #115). Wyatt filed a Designation of Record (Dkt. #118) on July 8, 2010. McAlister filed her Appellee's Supplemental Designation of Record (Dkt. #119) and her Appellee's Amended Designation of Record (Dkt. #122).
Thereafter, the records were transmitted to the United States District Court for the Southern District of Mississippi. Wyatt's Appeal was given case number 3:10-cv-436-HTW-LRA and assigned to the Honorable Henry T. Wingate. W&M's Appeal was given case number 3:10-cv-449-DPJ-FKB and was assigned to the Honorable Daniel P. Jordan, III. On October 22, 2010, in accordance with the local rules, Judge Wingate signed an order consolidating the appeals under the lower-numbered case, 3:10-cv-436-HTW-LRA.
As an aside, as noted above, Mr. Leonard filed the appeal on behalf of W&M. However, after all of the pleadings and briefs were filed in District Court, Mr. Leonard tendered his Notice of Irrevocable Resignation to the Mississippi State Bar on July 22, 2011. On January 9, 2012, United States District Court Judge for the Northern District of Mississippi, Sharion Aycock, sentenced Mr. Leonard to 37 months in a federal penitentiary for conduct in an unrelated case in the Northern District of Mississippi. (Case No. 1:10-cr-172-SA-DAS). Since July of 2011, Mr. Leonard has not represented W&M in any capacity.
On September 18, 2012, the appeal was reassigned from Judge Wingate to the Honorable Keith Starrett. The case number was changed to: 3:10-cv-436-KS-MTP.
On October 12, 2012, Judge Starrett entered an Opinion and Order
As noted above, McAlister filed her Dismissal Motion on December 14, 2009. In paragraph four (4), McAlister states "pursuant to Federal Rule of Bankruptcy Procedure 9011 and/or the Court's inherent power, McAlister respectfully requests that the Court sanction Wyatt and/or his counsel of Record for falsely and fraudulently certifying the Petition."
On March 18, 2013, McAlister filed a Supplemental Motion for Sanctions (Dkt. #134). (Supplemental Motion). In the Supplemental Motion, McAlister reiterated that she sought sanctions and/or attorneys' fees under Federal Rule of Bankruptcy Procedure 9011
By and through his attorney, C. York Craig, III, Wyatt filed Derek Wyatt's Response to Supplemental Motion for Sanctions (Dkt. #140) (Wyatt's Response) on April 22, 2013. Prior to Mr. Craig filing Wyatt's Response in April of 2013, Wyatt had signed the pleadings he had filed as "Derek A. Wyatt, pro se". In Wyatt's Response, one of Wyatt's contentions is that Rule 9011 sanctions are not warranted because he did not file the bankruptcy petition in order to harass, cause unnecessary delay or cause a needless increase in litigation costs. Wyatt further contends that when the W&M petition was filed, he was a represented party, and therefore, he was not subject to monetary sanctions under Rule 9011(b)(2).
McAlister filed her Reply in Support of Supplemental Motion for Sanctions (Dkt. #143) (Reply) on April 26, 2013. In her Reply, McAlister states that Mr. Leonard did not represent Wyatt individually, rather, Wyatt represented himself pro se. Therefore, McAlister alleges that Wyatt is subject to Rule 9011 sanctions. McAlister reiterated her request for $105,442.75 in attorney fees.
The matter was set for hearing on May 21, 2013. At the hearing, the parties announced to the Court that they were unable to resolve their differences. All parties agreed that the Court could make its decision based upon the pleadings, and the Court took the matter under advisement.
This Court has jurisdiction of the subject matter and of the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. This is a core proceeding as defined in 28 U.S.C. § 157(b)(2)(A).
Within its Dismissal Motion and Supplemental Motion,
The Sanctions Request does not specify the particular subsection(s) of Rule 9011 under which McAlister is requesting the Court to award her sanctions and/or attorneys' fees. It is only when McAlister filed her Reply to Wyatt's Response that McAlister states that she is requesting sanctions and/or attorneys' fees under subsections (b)(1), (b)(2) and (b)(3) of Rule 9011. Rule 9011 provides in pertinent part:
Fed. R. Bankr. P. 9011.
In Nelson v. Nationwide Mutual Ins. Co., United States District Court Judge, Daniel P. Jordan, III, recently addressed a similar situation in which a request for sanctions under Rule 11 of the Federal Rules of Civil Procedure was not filed in a separate motion nor was the safe harbor provision followed. Judge Jordan found that:
Nelson v. Nationwide Mut. Ins. Co., 2012 WL 393242, at *5 (S.D. Miss. Feb. 6, 2012) (footnote omitted).
The Court of Appeals for the Fifth Circuit has consistently "held that strict compliance with Rule 11 is mandatory,"
As noted previously, McAlister's request for Rule 9011 sanctions is contained within her Dismissal Motion and her Supplemental Motion. McAlister's inclusion of the request for Rule 9011 sanctions within her Dismissal Motion and her Supplemental Motion fails to comply with the procedural requirement of Rule 9011(c)(1)(A) that "[a] motion for sanctions under this rule shall be made separately from other motions or requests." Fed. R. Bankr. P. 9011(c)(1)(A). Consequently, McAlister's Sanctions Request does not strictly comply with Rule 9011's requirement of a separate motion as required by the Fifth Circuit.
As for the safe harbor provision of Rule 9011, the Court acknowledges that the safe harbor provision of Rule 9011 does not apply to the filing of a bankruptcy petition: when Rule 9011 sanctions are requested for the filing of the actual bankruptcy petition, a movant is not required to serve a Rule 9011 motion on the debtor twenty-one (21) days before filing the Rule 9011 motion with the court.
If McAlister's Supplemental Motion could be considered to be a separately filed motion which complies with Rule 9011(c)(1)(A), the Court declines to issues sanctions and/or attorneys' fees against Wyatt for the signing and filing of the bankruptcy petition. In neither her Supplemental Motion nor her Reply did McAlister cite any case law to support her position that Wyatt was unrepresented at the time the bankruptcy petition was filed. The Court finds that at the time the petition was filed, Wyatt was represented by Mr. Leonard, and therefore, was a represented party as contemplated by Rule 9011(a) and (b). Consequently, Wyatt is not subject to Rule 9011 sanctions for signing and filing the bankruptcy petition.
As noted previously, in her Dismissal Motion, McAlister requests Rule 9011 sanctions and attorneys' fees against Mr. Leonard and Wyatt for improperly filing the bankruptcy petition of W&M. In her Supplemental Motion, McAlister renewed her request for sanctions and attorneys' fees against Wyatt for the filing of the bankruptcy petition, and also included an additional request for sanctions and attorneys' fees related to the litigation of the dismissal of the bankruptcy case before this Court and in District Court.
In order for the Court to consider an award for Rule 9011 sanctions and attorneys' fees related to the litigation of the Dismissal Motion, McAlister must comply with the safe harbor provision of Rule 9011. In order to comply with the safe harbor provision, McAlister had to serve a copy of a separate motion requesting sanctions under Rule 9011 on Wyatt twenty-one (21) days before the request was filed with the Court.
Assuming for the sake of argument that McAlister's request for sanctions contained within her Supplemental Motion satisfies the separate-motion requirement of Rule 9011, McAlister has not submitted any proof that her request for Rule 9011 sanctions was served on Wyatt in compliance with the safe harbor provision of Rule 9011(c)(1)(A).
Sanctions for the Filing of the W&M Bankruptcy Petition: If the Supplemental Motion is considered to be a separate motion and thereby complies with Rule 9011(c)(1)(A), the Court finds that Wyatt is not subject to sanctions under Rule 9011 because at the time he signed and filed the bankruptcy petition of W&M, he was a represented party as contemplated by Rule 9011(a) and (b).
Sanctions for the Litigation of the Dismissal Motion: Since McAlister failed to strictly comply with Rule 9011 by filing her Rule 9011 request separately from other motions and failed to strictly comply with the safe harbor provision, the Court finds that her request for Rule 9011 sanctions and attorneys' fees against Wyatt for the litigation of the Dismissal Motion is not well taken and should be denied.
In addition to requesting sanctions under Rule 9011, McAlister requested in her Sanctions Request that the Court sanction Wyatt under its inherent power "for falsely and fraudulently certifying the Petition"
The case at bar involves an unusual fact situation. W&M was a professional company created for the sole purpose of allowing Wyatt and McAlister to practice law together. Wyatt signed the petition as a member of W&M and as the authorized individual. Wyatt is an attorney licensed to practice law in the State of Mississippi, and prior to 2009, he had practiced law for approximately twenty-six (26) years.
As noted above, in her Reply, McAlister contends that because Wyatt filed pleadings on his own behalf, he was not a represented party and is subject to sanctions under Rule 9011(b)(2). However, the Court found that Wyatt was a represented party at the time the petition of W&M was signed and filed with the Court, and therefore, Wyatt is not subject to Rule 9011 sanctions for signing and filing the petition.
At the time the petition was filed and up until July of 2011 when Mr. Leonard was disbarred, W&M was represented by Mr. Leonard in both the Bankruptcy Court and the District Court. However, shortly after McAlister filed her Dismissal Motion, Wyatt began filing pleadings on his own behalf. Wyatt continued to file pleadings related to the litigation of the Dismissal Motion in both the Bankruptcy Court and the District Court. Indeed, as noted above, Wyatt also filed at least two (2) pleadings on behalf of W&M in the Bankruptcy Court. Therefore, Wyatt was not a represented party in the litigation involving the Dismissal Motion and could be subject to Rule 9011 sanctions.
Since Wyatt could be subject to Rule 9011 sanctions for the pleadings he filed regarding the Dismissal Motion, the Court must rely on Rule 9011, and not its inherent powers, as the possible source of authority available to sanction Wyatt. "`A sanctioning court should ordinarily rely on available authority conferred by statutes and procedural rules, rather than [any] inherent power, if the available source of authority would be adequate to serve the court's purpose.'"
The Court has previously found that McAlister failed to properly plead her Rule 9011 sanctions, and therefore, Wyatt may not be sanctioned under Rule 9011 for his actions in litigating the Dismissal Motion. Consequently, neither Rule 9011 nor the Court's inherent powers are available as avenues for sanctioning Wyatt for litigating the Dismissal Motion.
However, it is a different situation as to the signing and filing of the petition. The Court found that when Wyatt signed the petition, he was a represented party, and therefore, Rule 9011 may not be used as an avenue for sanctions for the signing and filing of the petition.
Since Wyatt cannot be sanctioned for filing the petition under Rule 9011, there is not an available statutory or procedural source of authority to sanction Wyatt for signing and filing the petition. "When other sources of authority are not available, courts may resort to their inherent powers, as `[t]here can be little doubt that bankruptcy courts have the inherent power to sanction vexatious conduct presented before the court.' In re Rainbow Magazine, Inc., 77 F.3d 278, 283-84 (9th Cir.1996) (citing § 105(a)); Conner v. Travis County, 209 F.3d 794 (5th Cir.2000))."
In addition to the inherent powers articulated by the United States Supreme Court in Chambers, "§ 105(a) of the Code specifically allows bankruptcy courts to issue any order that is `necessary or appropriate to carry out the provisions' of the Bankruptcy Code or `to prevent an abuse of process.' 11 U.S.C. § 105(a)."
However, before a court can impose such sanctions, the Fifth Circuit imposes specific requirements upon the court. First, "`the threshold for the use of inherent power sanctions is high.'"
The case of In re Stomberg explains the interplay between § 105 and a court's inherent power:
The case of In re Yorkshire is an almost identical fact situation as the one before this Court. In Yorkshire, Tracy Knight, who served as the president and a manager of Yorkshire, LLC, secretly filed a bankruptcy petition on behalf of Yorkshire, LLC and TAGT, L.P.
In affirming the bankruptcy court's award of sanctions under its inherent authority, the Fifth Circuit found that Knight filed the bankruptcy petitions "with the subjective intent to harm"
In looking to the case at bar, the Court finds helpful a case from the Court of Appeals for the Eleventh Circuit, Ginsberg v. Evergreen Sec., Ltd. (In re Evergreen Sec., Ltd.), 570 F.3d 1257 (11th Cir. 2009). In affirming an award of sanctions, the Eleventh Circuit discussed what warrants a finding of bad faith:
In re Evergreen, 570 F.3d at 1273-74.
Applying these guidelines to the case at bar, even though Wyatt was an experienced attorney who had been practicing law over twenty-six (26) years, the Court will give Wyatt the benefit of the doubt that when the W&M petition was filed on December 10, 2009, Wyatt did not knowingly raise a frivolous argument by asserting that he had the authority to file the bankruptcy petition on behalf of W&M. However, after this Court entered its Dismissal Opinion on April 23, 2010, it should have been very clear to an experienced attorney like Wyatt that under Mississippi law, he did not have the legal authority to file the bankruptcy petition. As a licensed attorney with his vast experience, Wyatt was not an unsophisticated or uneducated participant in these proceedings. Wyatt knew W&M did not have an operating agreement, and he also was well aware that W&M's Certificate of Formation did not contain provisions for the voluntary withdrawal of a member. And yet, Wyatt moved this Court for a new trial and/or reconsideration of its Dismissal Opinion, and Wyatt appealed this Court's ruling in the Dismissal Opinion to the District Court. The Court finds that Wyatt continued to advance the "groundless and patently frivolous"
Even if Wyatt's argument that McAlister had voluntarily withdrawn from W&M could be considered to be meritorious, the Court finds that Wyatt continued to pursue his claim for the purpose of harassing McAlister and to delay or disrupt the litigation in state court. Indeed, in Wyatt's Response, he states that he filed the W&M bankruptcy petition in order to "put a stop to McAlister's end-run attempt [in state court]"
"[R]egardless of whether a bankruptcy court chooses to impose sanctions under its inherent authority or under Section 105(a) of the Bankruptcy Code, it still must make a `specific finding of bad faith.' In re Parsley, 384 B.R. 138, 179 (Bankr. S.D. Tex.2008)."
Like the Yorkshire bankruptcy court, the Court will use as a starting point the attorneys' fees requested by McAlister. In her Sanctions Request, McAlister requests as sanctions the sum of $105,442.75, which represents the attorney fees incurred in connection with McAlister obtaining the dismissal of the W & M bankruptcy case.
In his pleadings, Wyatt does not argue that these fees were unreasonable and/or unnecessary. The Court finds that the hours of labor provided were not unreasonable and that the work was actually performed by McAlister's attorneys. Further, the Court finds that the rates charged by McAlister's attorneys were reasonable and fair.
The Court finds that Wyatt should be sanctioned for the attorneys' fees incurred by McAlister after April 23, 2010-the date the Court entered its Dismissal Opinion. In reaching its decision on the amount of attorney fees to award, the Court considered the information contained in Wyatt's affidavit regarding his income.
Based upon Mr. Allison's Affidavit,
The Court finds that this amount is sufficient to deter repetition of such conduct by Wyatt and/or any other similarly situated parties. In re Yorkshire, 540 F.3d at 332.
McAlister filed her Sanctions Request seeking sanctions and attorneys' fees against Wyatt. The Court notes that neither side provided the Court with much assistance in deciding the issues before it: McAlister submitted no legal authority to support her position that sanctions were warranted against Wyatt under Rule 9011 and/or the Court's inherent power, and Wyatt offered very little legal authority to support his position that sanctions were not warranted.
As for her Rule 9011 request regarding Wyatt's litigation of the Dismissal Motion, McAlister failed to strictly comply with Rule 9011 by failing to file her Rule 9011 request separately from other motions and failed to strictly comply with the safe harbor provision. Therefore, her request for Rule 9011 sanctions as to the litigation of the Dismissal Motion is not well taken and should be denied. As to Wyatt's filing of the bankruptcy petition, even if her Sanctions Request had been properly filed in compliance with Rule 9011, the Court finds that sanctions under Rule 9011 are not warranted against Wyatt for signing and filing the petition because he was a represented party when he filed the W&M bankruptcy petition.
Whether under § 105 or under the Court's general inherent powers, the Court has "the inherent power to impose sanctions, particularly `when statutes or rules prove inadequate to remedy misconduct;' although bad faith must generally be found when sanctions are imposed under those general powers."
At the time the bankruptcy petition of W&M was filed, Wyatt was an experienced attorney who had been practicing law for twenty-six (26) years. After the entry of the Court's Dismissal Opinion, as an attorney with his many years of experience, it should have been clear to Wyatt that under Mississippi law, he lacked the authority to file the bankruptcy petition of W&M without McAlister's approval. Consequently, the Court finds that when Wyatt continued to litigate the issue of whether he had the authority to file the petition, Wyatt was acting "with a bad motive and with no meaningful thought being given to the actual purposes of chapter [7] bankruptcy." In re Yorkshire, 540 B.R. at 332. Therefore, under § 105 and/or the Court's inherent powers, the Court awards sanctions against Wyatt for his bad faith conduct. The Court finds that the appropriate sanction against Wyatt should be the amount of McAlister's attorney fees incurred after the Court entered its Dismissal Opinion on April 23, 2010, namely $31,635.00.
A separate judgment consistent with this opinion will be entered in accordance with Rule 7054 of the Federal Rules of Bankruptcy Procedure.
