Wednesday, June 29 2022

While it has long been recognized that bankruptcy courts have the power to sanction attorneys and litigants pursuant to Rule 9011 of the Bankruptcy Rules of Procedure (a rule that is nearly identical in substance to Rule 11 of the the Federal Rules of Civil Procedure), a recent appellate ruling clarifies and expands the power and authority of bankruptcy courts to punish attorneys and litigants based on the inherent power of the bankruptcy court, as well as the broad authority granted by Section 105(a) of the Bankruptcy Code.

On April 21, the Ninth Circuit Bankruptcy Appellate Panel (the equivalent of the US District Court’s bankruptcy appellate ruling for the Eleventh Circuit) held in the case of in re BCB contracting services, (BAP No. AZ-21-1254-BSF) that the sanctioning power of the bankruptcy court is derived from three separate sources: Bankruptcy Rule 9011, civil contempt statutory authority under Section 105(a) of the Code of Bankruptcy and the inherent sanctioning authority as enacted by the Supreme Court of the United States in the case of Law against Siegel, 571 US 415 (2014). This is extremely significant in holding that a bankruptcy court has a virtual “options cafe” to impose sanctions on attorneys and litigants, as the case may be.

For those unfamiliar with Section 105 of the Bankruptcy Code, it was originally known as the “status of all warrants” part of the Bankruptcy Code where the bankruptcy court has the legal authority to issue any order, process or judgment that is necessary or appropriate to carry out the provisions of the Bankruptcy Code. Section 105 has been widely interpreted by bankruptcy courts and appellate decisions to permit and authorize bankruptcy judges to create any remedy that may be necessary in a particular situation, even if there is no specific statutory authority or provisions in place. bankruptcy procedure rules.

Significantly, despite the breadth of Section 105’s scope, the Bankruptcy Appeals Panel held that the bankruptcy court possesses the inherent power to sanction abusive litigation practices, with such inherent power in no way limited to the statutory scope of the section. section 105 or the sanction procedure in Bankruptcy Rule 9011. The U.S. Court of Appeals for the Ninth Circuit has previously clarified that there is an important distinction between the statutory and inherent power to sanction abusive practices, emphasizing that there is no are interchangeable, where it was stated:

“Civil contempt authority allows a court to remedy a violation of a specific order (including ‘automatic’ orders, such as automatic suspension or termination order). The inherent sanctioning authority allows a bankruptcy court to deter and provide compensation for a wide range of improper litigation tactics.” Watch Knupfer vs. Linblade (In re Dyer), 322 F. 3d 1178, 1196 (9th Cir. 2003).

The court went on to state that the inherent power to sanction bad faith conduct is broader than the Rule 9011 sanctions and extends to a wide range of abuses in litigation. This means that the court may sanction under its inherent power even when the same conduct may also be punishable under another statute or sanction rule, such as Bankruptcy Rule 9011.

To further clarify the issue, the court stated that in order to impose sanctions under its inherent authority, the bankruptcy court must find bad faith, conduct amounting to bad faith, or recklessness with additional factors such as frivolity, harassment, or improper purpose. It was held that the attorney’s goal of gaining a tactical advantage in another case is sufficient to support a determination of bad faith and improper purpose. In addition, the court found that a party who has engaged in bad faith conduct in the course of the case is subject to sanctions.

While this ruling cannot be considered “groundbreaking”, it clarifies the expansive power of the bankruptcy court to sanction improper behavior by attorneys and litigants. With consumer and business bankruptcy cases on the rise as the economy reacts to inflation and rising interest rates (a reported 34% increase in new case filings from February to March this year), and with the continuing expansion of the Bankruptcy Code’s small business bankruptcy provision to encompass businesses with debts of less than $7.5 million, the clear and expansive authority of the bankruptcy court to sanction and punish misbehavior is a welcome and necessary clarification.

Charles M. Tatelbaum, director at Tripp Scott in Fort Lauderdale, directs the firm’s bankruptcy practice and corey d cohen He is an associate of the firm.

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