Commercial Litigation and Arbitration

Bankruptcy Court Power to Impose Inherent Power and § 1927 Sanctions

From In re Green, 2010 Bankr. LEXIS 195, 2010 WL 346090 (Bankr. S.D.N.Y. Feb. 2, 2010):

The Court has the power to sanction Farinella for this conduct pursuant to (1) its inherent power, (2) 28 U.S.C. § 1927, and (3) Local Bankruptcy Rule 9020-1. “Bankruptcy courts, like Article III courts, enjoy inherent power to sanction parties for improper conduct.” Mapother & Mapother, P.S. C. v. Cooper (In re Downs ), 103 F.3d 472, 477 (6th Cir.1996); In re 680 Fifth Ave. Assoc., 218 B.R. 305, 323 (Bankr.S.D.N.Y.1998) (“Bankruptcy courts have the same inherent sanction authority as district courts....”). Similarly, bankruptcy courts may sanction attorneys who unreasonably and vexatiously multiply court proceedings pursuant to 28 U.S.C. § 1927. In re Cohoes Indus. Terminal, Inc., 931 F.2d 222, 230 (2d Cir.1991) (observing that bankruptcy courts “may impose sanctions pursuant to 28 U.S.C. § 1927”); In re Truong, No. 07-12194, 2008 WL 1776227, at *5 (Bankr. S.D.N.Y. Apr. 14, 2008) (“A bankruptcy court may impose sanctions pursuant to 28 U.S.C. § 1927 under the same standard as a district court.”) (Peck, J.). Finally, Local Bankruptcy Rule 9020-1 permits a court to award sanctions when counsel has failed to appear or to complete preparations necessary for a hearing.***

Here, there was no colorable reason for Farinella to omit disclosure of the judgment of possession obtained by the Landlord before Farinella filed Debtor's second chapter 13 petition. Cf. Energy Brands Inc. v. Spiritual Brands, Inc., 571 F.Supp.2d 458, 472-73 (S.D.N.Y.2008) (“A claim is colorable when it has some legal and factual support, considered in light of the reasonable beliefs of the individual making the claim.”) (quoting Nemeroff v. Abelson, 620 F.2d 339, 348 (2d Cir.1980)) (internal quotation marks omitted). Section 362(l)(5)(A) of the Bankruptcy Code clearly requires the debtor to state in his petition when “a judgment for possession of residential property in which the debtor resides as a tenant under a lease or rental agreement has been obtained by the lessor.” 11 U.S.C. § 362(l)(5)(A). Farinella knew about the judgment of possession before he filed the Debtor's second chapter 13 petition. The effect of a prepetition judgment of possession is to deprive a debtor of the benefit of the automatic stay. See 11 U.S.C. § 362(b)(22). If the petition discloses the judgment of possession, and the debtor fails to comply with 11 U.S.C. § 362(l)(1) and (l)(2), the Clerk of the Court “shall immediately serve upon the lessor and the debtor a certified copy of the docket indicating the absence of a filed certification and the applicability of the exception to the stay under subsection (b)(22).” 11 U.S.C. § 362(l)(4)(B). The landlord could then proceed with a state court-ordered eviction without delay or the necessity and expense of a motion to lift the stay or for an order confirming the absence of a stay. There is simply no legitimate reason knowingly to omit this information from the bankruptcy petition. The Court can discern no reason, other than delay, why Farinella failed to list the Landlord's judgment of possession in the bankruptcy petition.

Farinella's intent to delay is also clear from his failure to amend the petition once the Landlord filed a motion to lift the stay. The Landlord's motion to lift the automatic stay alerted Farinella to the missing information required by section 362(l)(5)(A). At the very least, Farinella should have contacted the Landlord's counsel to explain the omission and to consent to the requested relief. Farinella did not do so. In fact, Farinella failed to appear at the hearing on the Landlord's motion. Attorneys are under a continuing duty to correct erroneous filings and the Court may sanction counsel for a bad faith failure to do so pursuant to its inherent power and 28 U.S.C. § 1927. See Jolly Group, Ltd. v. Medline Indus., Inc., 435 F.3d 717, 720 (7th Cir.2006) (“We have also interpreted § 1927 to impose a continuing duty upon attorneys to dismiss claims that are no longer viable.”) (citation and internal quotation marks omitted); Jeffreys v. Rossi, 275 F.Supp.2d 463, 482 (S.D.N.Y.2003) (observing that courts may impose sanctions when attorneys continue to pursue meritless litigation avenues); see generally GREGORY P. JOSEPH, SANCTIONS: THE FEDERAL LAW OF LITIGATION ABUSE §§ 23(A)(3), 26(E)(3) (2000).

The Court awards sanctions of $4,353.00 in attorneys' fees and $150.00 in costs incurred in this Court resulting from Farinella's failure to comply with 11 U.S.C. § 362(l)(5)(A). This sanction shall be payable to the Landlord. ***

The Court declines to award as sanctions attorneys' fees and costs incurred by the Landlord in state court. See U.S. v. Int'l Bhd. of Teamsters, 948 F.2d 1338, 1345 (2d Cir.1991) (observing that courts should use discretion and restraint when ordering sanctions). The Court also declines to award as sanctions the $3,237.72 in missed rent payments while this matter has been pending. The Landlord seemingly argues that if not for Farinella's actions, it would have received access to the apartment in November and leased the apartment to another tenant shortly thereafter. This portion of the Landlord's damages' claim is speculative. Cf. Three Crown Ltd. P'ship v. Salomon Bros., Inc., 906 F.Supp. 876, 890 (S.D.N.Y.1995) (refusing to award consequential damages on speculative claims). While in an appropriate case with a stronger showing than the Landlord has made here unpaid rent might be recoverable as sanctions based on the inherent power of the Court, they would not be recoverable under 28 U.S.C. § 1927 which limits a sanctions award to “the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.” 28 U.S.C. § 1927; see generally JOSEPH, supra, at § 28(A) (observing that courts have discretion to impose a wide variety of sanctions, including fines, award of attorneys' fees, dismissal of actions, and entering default judgments).

The Court will also order an additional sanction of $250 payable by Farinella to the Clerk of the Bankruptcy Court because Farinella failed to appear at the December 10, 2009 hearing. By failing to appear Farinella violated Local Rule 9020-1 and negligently carried out his duties as an officer of the Court.

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