In the bankruptcy case involving Gregory and Tammy Miller, Ettinger and Associates, LLC filed an adversary complaint contesting the discharge of legal fees owed by the Millers, arguing that the debt was nondischargeable due to fraud. The Bankruptcy Court dismissed the complaint and sanctioned Ettinger and his counsel, Demetrios Tsarouhis, with a $20,000 penalty. The District Court overturned this sanction, citing violations of the procedural "safe harbor" requirements of Federal Rule of Bankruptcy Procedure 9011, but declined to remand for further consideration due to the inability to rectify the violation. The District Court also refrained from evaluating whether sanctions could be applied under different legal standards. The Third Circuit agreed with the District Court's interpretation of Rule 9011 but remanded the case, instructing the Bankruptcy Court to explore alternative methods for imposing sanctions.
The Millers had hired Ettinger in January 2008 for a landlord-tenant dispute, accruing around $43,000 in fees while settling the matter for $9,500. Despite receiving approximately $20,000 in payments, Ettinger sought court intervention to expedite payment of the remaining amount. He filed two petitions to withdraw as counsel, both denied, leading to his March 2010 lawsuit against the Millers for breach of contract and quantum meruit. Following this, the Millers filed for Chapter 7 bankruptcy, prompting Ettinger's adversary proceeding to challenge the discharge of the remaining legal debt, wherein he alleged fraud and misrepresentation despite previously framing the issue as a contractual matter.
In April 2011, the Bankruptcy Court found in favor of the Millers regarding the dischargeability of their debt following a trial on the adversary complaint. The issue of potential sanctionable behavior by Ettinger and Tsarouhis was significant throughout the proceedings.
On January 31, 2011, the Millers filed a Rule 9011 Motion for Sanctions, claiming Ettinger's complaint was intended to harass them and was retaliatory. The Millers withdrew this motion the next day without explanation. On February 23, 2011, they re-filed a similar motion, which the Bankruptcy Court ruled was premature and would be held in abeyance until the merits of the adversary proceeding were resolved.
During the litigation, it surfaced that Ettinger believed the Millers were advised by a bankruptcy attorney about avoiding payment of his fees through bankruptcy. However, during discovery, the Millers clarified that they had consulted with attorney James Kutkowski regarding refinancing, not bankruptcy. Kutkowski's deposition indicated uncertainty about discussing bankruptcy but acknowledged the possibility.
After the trial on April 19, 2011, the Bankruptcy Court ruled against Ettinger, stating that his claims regarding the nondischargeability of the Millers' prepetition legal fees were unfounded. Following this ruling, the Millers were instructed to file a revised 9011 Motion.
Subsequently, the Millers complied with the Bankruptcy Court's order and filed an amended sanctions motion. Ettinger and Tsarouhis contested it, claiming the Millers had not adhered to Rule 9011's "safe harbor" provision, which allows a 21-day period for corrective action before filing. The Bankruptcy Court dismissed this argument, asserting that the safe harbor requirement was satisfied by the Millers' initial filings. The Court concluded that all actions taken by Ettinger and Tsarouhis after Kutkowski’s deposition on March 18 were sanctionable, establishing that the Millers did not attempt to fraudulently discharge their legal fees through bankruptcy.
Kutkowski's deposition was identified as the key factor in the Court's decision, leading to a finding that the complaint lacked factual support. Consequently, sanctions were imposed on Ettinger and Tsarouhis, requiring them to pay $20,000, which was to be held in escrow pending a review of the Millers' attorneys' fees application. This amount would be distributed according to a stipulated agreement approved by the Court.
In June 2012, the District Court reversed the Bankruptcy Court's sanction on procedural grounds, determining that the Millers did not meet the notice requirements of Rule 9011. The District Court noted that the Millers' actions—specifically, the withdrawal and re-filing of their Initial Motion—failed to provide adequate notice to Ettinger and Tsarouhis regarding the alleged misconduct. It also highlighted that the Millers did not observe the required waiting period after service before re-filing and criticized the Bankruptcy Court for basing its decision on conduct introduced too late for a remedy. Given that the safe harbor violation could not be cured, the District Court declined to remand the issue back to the Bankruptcy Court for further action.
The jurisdiction for the proceedings stemmed from 28 U.S.C. 1334, with the District Court reviewing the bankruptcy appeal under 28 U.S.C. 158(a). Appellate jurisdiction over the District Court's ruling was provided by 28 U.S.C. 158(d) and 1291. The standard of review included de novo for legal determinations, clear error for factual findings, and abuse of discretion for sanctions. The necessity for the court to articulate a rationale for sanctions and provide a basis for reviewing its discretion was emphasized. In cases lacking record support for sanctions, remand to the Bankruptcy Court was deemed appropriate to clarify the basis for any sanctions imposed.
The Millers contest the District Court’s procedural dismissal, claiming they "substantially complied" with Rule 9011's safe harbor requirements. They argue that their Initial Motion sufficiently informed Ettinger and Tsarouhis of the conduct warranting sanctions and that the District Court incorrectly added three days to the safe harbor period due to service by mail. The Millers further contend the District Court erred in deciding they could not seek recovery for actions occurring after their Initial Motion was filed. Alternatively, they suggest that, even if they failed to meet Rule 9011's procedural requirements, the District Court should have remanded the matter, allowing the Bankruptcy Court to impose sanctions through other means.
Rule 9011 mandates that attorneys’ submissions must not be for improper purposes, must have legal backing, and must be supported by factual evidence. Courts can impose sanctions for violations after giving notice and an opportunity to respond. The safe harbor provision requires that a motion for sanctions cannot be filed until 21 days after the service of the motion, providing the opposing party time to correct any alleged errors. This rule aims to protect litigants from sanctions and encourage the withdrawal of improper submissions without court involvement. The District Court emphasized the necessity of strict compliance with the safe harbor rule, noting that failure to adhere to the procedural requirements precludes sanctions. There is also a noted split in authority regarding whether re-filing a noncompliant Rule 9011 motion after the 21-day period can provide adequate notice for sanctions.
Re-filing a motion may not remedy prior noncompliance with safe harbor rules, as indicated by various case precedents. The District Court aligned with those holdings, ruling that even if the Millers' Initial Motion triggered the safe harbor clock, they failed to adhere to the required waiting period before re-filing. The Millers filed their motion on January 31, 2011, which set the safe harbor deadline as February 21, 2011; however, due to February 21 being a federal holiday, the deadline extended to February 22. The Millers' motion for sanctions, served by mail, necessitated an additional three days for compliance, extending the safe harbor to February 25. Consequently, the earliest permissible re-filing date was February 26, yet they re-filed on February 23, rendering the Initial Motion procedurally defective and invalidating any associated sanctions.
The Millers contended that the additional three days should not apply because they served certain parties electronically; however, they failed to present authority to support this claim against the Bankruptcy Court's procedural rules. The District Court also highlighted a procedural issue regarding due process in sanctioning, noting that the sanctions were based on facts unrelated to the Initial Motion. The Millers' Amended Motion did not comply with the safe harbor provision, and the conduct for which sanctions were imposed occurred after the initial filing. The Court stressed that due process requires particularized notice, meaning that parties must be informed of the specific reasons for sanctions and the conduct in question. Adequate notice includes informing the party of the potential sanctions under consideration and the reasons behind them.
Rule 9011's purpose is undermined if sanctions can be imposed without giving a party the opportunity to correct their behavior, as established in Schaefer Salt. A party must not delay filing a Rule 9011 motion until after a case concludes, as this prevents timely withdrawal or correction of the alleged misconduct. Other sanctioning options exist outside Rule 9011, such as the court’s inherent power, 11 U.S.C. § 105, and 28 U.S.C. § 1927, which allows for costs against attorneys who unreasonably prolong proceedings. The District Court identified these alternatives but did not assess them initially, as the Bankruptcy Court based its sanctions solely on Rule 9011. This omission was a shortcoming since the other sanctioning mechanisms do not require a safe harbor period. Sanctions could still be valid under these alternatives, necessitating a remand for the Bankruptcy Court to evaluate them, ensuring due process through adequate notice and response opportunities.
In conclusion, the Bankruptcy Court's Rule 9011 sanctions order was procedurally flawed and must be vacated due to the Millers' failure to follow required notice periods. Despite this, multiple sanctioning options remain available that do not face the same procedural issues, warranting a remand to explore these alternatives. The dissenting opinion does not find merit in remanding, citing the Bankruptcy Court's earlier decisions, but the majority believes the record indicates that sanctions were justified, thus supporting the remand.
Judge Nygaard concurs with Judge Ambro’s opinion but argues against granting a "second bite of the apple" regarding procedural failures under Rule 9011(c)(1)(A) that would otherwise prevent sanctions. He advocates for a remand due to Ettinger's misconduct towards the Millers, who, despite paying almost $20,000 of their $43,000 bill and making ongoing payments under a court order, faced financial difficulties. Ettinger's decision to file an adversarial complaint during the Millers' bankruptcy aimed to ensure his debt to them survived the bankruptcy's purpose of providing a fresh start. The Bankruptcy Court deemed Ettinger's conduct warranting sanctions. Judge Nygaard believes no leniency should be afforded due to a minor procedural error.
In dissent, Judge Nygaard disagrees with the majority's remand order, asserting that the Bankruptcy Judge already considered and rejected other sanction options, opting solely for Rule 9011 sanctions of $20,000. He emphasizes that the judge’s intent was to deter similar misconduct, not to shift fees or repay debts. Nygaard notes that the Appellants did not pursue alternative sanctions and contends that the majority's remand implies the necessity for different sanctions, which is not within their jurisdiction to decide. He concludes by advocating for the affirmation of the District Court's decision in all respects.
