Fifth Circuit Clarifies Requirements of Rule 9011

The Fifth Circuit has written a new opinion requiring strict compliance with Rule 9011 prior to awarding sanctions. The Cadle Company v. Pratt, No. 07-10457 (4/8/08). Specifically, the Fifth Circuit held that prior to seeking sanctions under Rule 9011, the movant must serve a copy of the actual motion on the respondent 21 days prior to filing it and that a mere letter threatening sanctions was inadequate.

In Pratt, the Cadle Company objected to a debtor's discharge. The debtor failed to disclose his right to receive payments under his mother's will, but testified persuasively that he owed more in loans received from his mother than the distribution he would have received from her estate. Subsequently, the Cadle Company learned that the debtor had received loans from his mother's estate after her death. It is not clear from the opinion why this fact was significant. Perhaps Cadle viewed the estate loans as disguised distributions or perhaps they contradicted the testimony that loans were made during the mother's lifetime. At any rate, the Cadle Company blamed the debtor's lawyer for the non-disclosure of this fact.

Prior to filing a motion for sanctions, the Cadle Company sent not one but two letters to the debtor's lawyer alleging a Rule 9011 violation. However, when the motion came up for hearing, the Bankruptcy Court denied it because: (a) the Cadle Company had not served its proposed motion on the debtor's lawyer 21 days before filing it; and (b) the debtor's lawyer did not do anything sanctionable. The Bankruptcy Court then went on to award sanctions against the Cadle Company for bringing a frivolous motion for sanctions.

On appeal, the District Court affirmed the denial of the Cadle sanctions motion, but remanded the award of sanctions against Cadle for further consideration. Cadle appealed to the Fifth Circuit.

The Fifth Circuit affirmed the denial of the Cadle sanctions motion. It held that an informal notice did not meet the requirements of Rule 9011. In pertinent part Rule 9011 provides:

"The motion for sanctions may not be filed with or presented to the court unless, within 21 days after service of the motion (or such other period as the court may prescribe), the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected, except that this limitation shall not apply if the conduct alleged is the filing of a petition in violation of subdivision (b)."

While the rule is not a model of drafting clarity, the Fifth Circuit sided with the Fourth, Eighth, Ninth and Tenth Circuits and rejected an opinion from the Seventh Circuit to hold that Rule 9011 requires that the party to be sanctioned be served with the actual motion 21 days before it is filed.

The practical difficulty lies in reconciling the language "may not be filed with or presented to the court" with "after service of the motion." On the one hand "service of the motion" is typically understood to refer to service of a motion which has been filed with the court. On the other hand, the preceeding language, says that the motion may not be filed until 21 days after it has been served. The Fifth Circuit reconciles this conflict (without expressly addressing it) by holding that the motion must be served before filing (and presumably then served again after filing).

The ruling of the Court of Appeals smooths over a difficultly worded rule. It adopts a policy position that sanctions should be an exceptional remedy and not just an added bonus for a victorious party. By requiring pre-filing "service" of the proposed motion, it requires the aggrieved party to stop and methodically lay out why the pleading is sanctionable rather than merely firing off a letter in anger or an excess of testosterone.

In addition to its main focus, the opinion contains an interesting discussion of finality for purposes of appeal. In this case, the District Court reversed and remanded. Only final orders may be appealed from the District Court to the Fifth Circuit. In this case, the Fifth Circuit held that the portion of the District Court opinion which affirmed the denial of sanctions to the Cadle Company was final and could be appealed, while the portion which remanded the sanctions against the Cadle Company was interlocutory and could not be appealed. The fact that a single order could be partially appealable and partially non-appealable provides a trap for the unwary. Here, appellate practice is like voting in Chicago or South Texas: appeal early and often.