This is the final installment of our investigation into the Michigan elections case and the three forms of sanctions awarded as well as how the same principles apply in Bankruptcy Court. This installment discusses sanctions under the court's inherent authority.
The Court’s Inherent Authority
The final type of sanction available arises under the Court’s inherent authority. In Chambers v. NASCO, Inc., 501 U.S. 32, 49-50 (1991), the Supreme Court held that courts have an inherent authority to sanction bad faith conduct in litigation. In the Sixth Circuit (where the Michigan elections case was pending), the test is: (i) the claims advanced were meritless; (ii) counsel knew or should have known this; and (iii) the motive for filing the suit was for an improper purpose such as harassment. Opinion, p. 42.
An award under the Court’s inherent authority is limited to compensating the opposing party for fees incurred solely because of the misconduct. Prior to awarding sanctions, the court must give the offending party notice that sanctions are being considered and the opportunity to respond.
The plaintiffs in the Michigan case argued that the comments to Fed.R.Civ.P. 11 suggested that Rule 11 displaced the court’s inherent authority. However, Judge Payne found that sanctions under Rule 11 could exist side by side with the power to sanction under the Court’s inherent authority.
Unlike 28 U.S.C. §1927, which can apply to counsel and to persons admitted to conduct cases, sanctions under the court’s inherent authority may be applied to counsel and parties to litigation. As with section 1927, sanctions under the court’s inherent authority are compensatory rather than punitive, meaning that the opposing party may recover its fees and costs incurred.
The Michigan Court did not have difficulty finding that it could award sanctions under its inherent authority.
As discussed in the preceding subsections, Plaintiffs’ counsel advanced claims that were not well-grounded in the law, as demonstrated by their: (i) presentment of claims not warranted by existing law or a nonfrivolous argument for extending, modifying, or reversing the law; (ii) assertion that acts or events violated Michigan election law, when the acts and events (even if they occurred) did not; and (iii) failure to inquire into the requirements of Michigan election law. Plaintiffs’ counsel advanced claims that were also not well-grounded in fact, as demonstrated by their (i) failure to present any evidentiary support for factual assertions; (ii) presentment of conjecture and speculation as evidentiary support for factual assertions; (iii) failure to inquire into the evidentiary support for factual assertions; (iv) failure to inquire into evidentiary support taken from other lawsuits; and (v) failure to inquire into Ramsland’s outlandish and easily debunked numbers.
And, for the reasons discussed above, Plaintiffs’ counsel knew or should have known that these claims and legal contentions were not well-grounded in law or fact. Moreover, for the reasons also discussed above, the Court finds that Plaintiffs and their counsel filed this lawsuit for improper purposes.
Opinion, p. 102.
Sanctions Under The Court’s Inherent Authority in Bankruptcy Court
When bankruptcy courts award sanctions under their inherent authority, they do so under 11 U.S.C. §105, which allows the court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”
In re Cochener, 360 B.R. 542 (Bankr. S.D. Tex. 2007), aff’d, Cochener v. Barry, 297 Fed.Appx. 382 (5th Cir. 2008) illustrates sanctions under section 105 in bankruptcy. In the Cochener case, a less experienced bankruptcy attorney recognized that there were problems with a case he was handling and asked a more experienced bankruptcy counsel to step in. Attorney Barry realized that the debtor may have omitted assets from her schedules and that the trustee and the debtor’s ex-husband were both concerned about this.
Attorney Barry attempted to extricate the debtor from the case. He filed a motion to dismiss the case in which he asserted that (1) "No creditor in this case would suffer any legal prejudice by its dismissal;" and (2) "The interests of the creditors and Debtor would be better served by the dismissal of this bankruptcy proceeding rather than its continuation and adjudication." This was problematic because creditors would be better off if the trustee discovered undisclosed assets and administered them.
Attorney Barry then informed the trustee that he assumed that the continued 341 meeting would be adjourned based on the motion to dismiss. He advised the debtor not to attend the meeting and neither he nor the debtor did attend. They then failed to attend a second continued meeting.
When the trustee requested that the debtor appear at a Rule 2004 examination, attorney Barry did not respond. However, when an examination was noticed, attorney Barry responded that the trustee was overreaching by requesting documents on transactions that took place more than one year prior to bankruptcy. In fact, a fraudulent transfer action could be brought under state law for transactions going back four years. The Rule 2004 exam was reset several times. The debtor did not produce documents and did not attend the examination. When the debtor failed to appear, attorney Barry filed a motion to withdraw. At this point, he had been involved in the case for approximately five months.
When attorney Barry withdrew, the Trustee filed a response stating that he reserved the right to seek sanctions. Nearly five years later, the Trustee filed his motion for sanctions. At the hearing on motion for sanctions it came out that attorney Barry had been sanctioned twice before in the prior year.
The court denied sanctions under Rule 9011 for the reason that the Trustee did not send a safe harbor letter until after it was too late to withdraw the offending pleading. However, the court found that it could award sanctions under its inherent authority.
The court found that attorney Barry had engaged in bad faith conduct in five instances:
(1) Barry concocted a reason for the Debtor not to attend the continued Meeting of Creditors, and then instructed her not to attend this meeting; (2) Barry himself did not attend the continued Meeting of Creditors; (3) Barry filed a Motion to Dismiss the Debtor's case, which included blatantly false factual and legal contentions, for the purpose of delaying and hindering the Trustee's further examination of the Debtor at the continued Meeting of Creditors; (4) Barry drafted a letter to the Trustee, dated October 17, 2001, grossly misstating the law regarding the allowable reach-back period for fraudulent transfers under the Bankruptcy Code in an attempt to mislead the Trustee and avoid having to produce documents; and (5) Barry instructed the Debtor not to produce the documents requested by the Trustee on June 6, 2001, which both prior counsel to the Debtor (i.e., Hawks) and the Debtor herself had already committed to produce.
360 B.R. at 574.
The Court awarded sanctions of $25,121.89. This award was affirmed on appeal.
How the Cases are the Same and Different
The Michigan Elections case and the Cochener case are substantially different. In the Michigan case, the sanctions under the court’s inherent authority largely duplicated the court’s analysis under the other forms of sanctions and related to the pleadings filed in the case. In the Cochener case, sanctions were not available under any other basis and primarily involved conduct outside of court as opposed to filing frivolous pleadings. The Cochener case is particularly tragic because the attorney was trying to extricate the client from the client’s bad deeds. None of the five incidents were particularly egregious in and of themselves. However, as in the Grossman case discussed yesterday, it was the cumulative pattern of conduct which proved sanctionable. The commonality between King v. Whitmer and Cochener was that both cases involved a bad faith attempt to manipulate the court system. While the Michigan case was an attempted assault on democracy, Cochener was more an attempt to blur the lines a little bit which went on too long to be ignored.
Conclusion
In the ordinary course, attorney conduct is regulated by professionalism and self-interest. Sanctions are available for cases that fall outside the bounds of zealous advocacy, cases in which the judicial process has been misused. Sanctions differ from punitive damages in that they are primarily intended to compensate parties injured by bad faith litigation. The Michigan case involved an attempt to derail democracy while the various bankruptcy examples involved more mundane cases of debtor-creditor relationships gone amuck. The three forms of sanctions may all be appropriate in the same case, as shown by King v. Whitmer, or there may only be a single remedy available as shown in some of the bankruptcy examples.
The final question is what should the attorneys have done differently to avoid being sanctioned. The lazy answer is to say they should never have filed frivolous pleadings. However, sometimes even good attorneys show bad judgment. The lesson to be learned from the four cases in this series of posts is that there are frequently moments when the attorney could have stepped aside and blunted the consequences of rash decisions.
In King v. Whitmer one such lost opportunity was when the City of Detroit sent its Rule 11 safe harbor letter on January 5, 2021. Some of the attorneys, particularly local counsel, played a small role in submitting the scandalous pleadings. If they had filed a notice with the court disavowing the pleadings filed under their signature (or their signature block) by January 26, 2021, they would not have been subject to sanctions under Rule 11.
When the District Court denied the request for preliminary injunction on December 7, 2020 and the self-described mootness date of December 14, 2020 passed, the plaintiffs could have non-suited their claims. Waiting until January after motions to dismiss had been filed was the conduct which led the court to conclude that the attorneys had unreasonably and vexatiously multiplied the proceedings.
In re Taylor is a bit more difficult. In that case, the debtor’s lawyer never sent a safe harbor letter (and was in fact sanctioned himself) so that sanctions were initiated on the court’s own initiative. It may be that the firm dealing with a volume lift stay practice didn’t recognize its peril until it was too late. However, it could have at least apologized to the debtor and offered to work with the debtor instead of blaming the black box.
The Grossman case is much more obvious. At some time during the four years that the attorney flooded the court with pleadings, he could have just said no.
The Cochener case contains a detail I did not discuss above. The Trustee’s counsel contacted attorney Barry on numerous occasions over the years to try to work out a resolution. Maybe attorney Barry didn’t think he had done anything that egregious. Maybe he thought the trustee’s attorney was being a pest. However, with the benefit of hindsight, he most likely could have settled for much less prior to the time the motion for sanctions was filed. Another detail I didn’t mention was that when the trustee finally recovered the debtor’s hidden assets, one of them had been vandalized by the debtor. At that point, the attorney’s instinct for self-preservation might have kicked in and saved himself a lot of trouble down the road.
I was going to end with the saying, when you find yourself in a hole, stop digging. However, I think I will close with a different saying: there is no bad situation you can find yourself in which can’t be made worse by doubling down on your original bad decisions.
Many thanks to Eliana Jimenez for her editorial assistance with this series and my other recent blog posts.
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