Filing of Complaint May Violate § 1927 — Circuit Split

From Schaefer Salt Recovery, Inc., 2011 Bankr. LEXIS 1778 (Bankr. D.N.J. Jan. 21, 2011):

Sanctions may be properly awarded against Khoudary and SSR under ... § 1927, as the Chapter 7 petition was plainly filed for an improper purpose. The Chapter 7 case was filed only 37 days after the dismissal of SSR's Chapter 11 case. Khoudary and SSR were well aware that the Chapter 11 case was dismissed because it was not a proper use of Chapter 11. The Chapter 7 case was filed on the very same day that the State Court (i) struck SSR's answers in the tax foreclosure proceeding, (ii) directed that the tax foreclosure proceed as an uncontested matter, and (iii) barred SSR from continuing its efforts to sell the SPI property. The Chapter 7 filing, consisting of a bare petition, and was obviously filed solely to obtain the benefit of the automatic stay. In short, SSR and Khoudary once again used a bankruptcy filing as a litigation weapon to delay the State Court Action. ***

This intentional and calculated misuse of the bankruptcy process is what caused this court to determine that Khoudary's filing of the SSR Chapter 7 petition unreasonably and vexatiously multiplied the proceeding before the court.

It is well established in this circuit that four elements are required for the assessment of sanctions under § 1927. Sanctions may be imposed "where an attorney has (1) multiplied proceedings; (2) unreasonably and vexatiously; (3) thereby increasing the cost of the proceedings; (4) with bad faith or intentional misconduct." LaSalle Nat'l Bank v. First Connecticut Holding Group, 287 F.3d 279, 288 (3d Cir. 2002) (citing In re Prudential Ins. Co. Am. Sales Practice Litig. Agent Actions, 278 F.3d 175, 188 (3d Cir. 2002)). These criteria easily apply to Khoudary's misuse of the bankruptcy process by filing the Chapter 7 case. Regrettably, the sanction is limited to the costs resulting from the vexatious conduct. Zuk v. Eastern Pennsylvania Psychiatric Institute of the Medical College of Pennsylvania, 103 F.3d 294, 297 (3d Cir. 1996). Here, the excess costs are those incurred by Segal as a result of SSR's Chapter 7 case. Segal would have incurred no legal fees "but for" Khoudary's improper filing of the SSR Chapter 7 petition.

Though not raised by Khoudary in his opposition to Segal's post-remand request for sanctions, the court notes that there is authority which holds that § 1927 is designed to merely prevent multiplication of proceedings within a particular lawsuit. See, DeBanche v. Trani, 191 F.3d 499, 511-12 (4th Cir. 1999) ("we conclude as a matter of law that the filing of a single complaint cannot be held to have multiplied the proceedings unreasonably and vexatiously and therefore that § 1927 cannot be employed to impose sanctions"); In re Yagman, 796 F.2d 1165, 1187 (9th Cir. 1986) ("It is only possible to multiply or prolong proceedings after the complaint is filed."(citation omitted)).

However, other courts have imposed sanctions under § 1927 where a second action was commenced by the losing party in the first action. In Hagerty v. Succession of Clement, Hagerty argued to the Louisiana Supreme Court that the trial court's refusal to grant a fourth adjournment of the trial deprived him of due process of law. 749 F.2d 217, 219 (5th Cir. 1984). Both appellate courts rejected his arguments. Id. As a result, Hagerty then commenced an "action under 42 U.S.C. § 1983 in the United States District Court asserting the same alleged deprivation of due process." Id. The District Court dismissed the complaint and Hagerty filed an appeal with the Fifth Circuit Court of Appeals, which affirmed the District Court. Id. at 219-20. The Fifth Circuit also granted the defendants request for sanctions against Hagerty's attorney under § 1927. Id. at 222. The court found the appeal frivolous because the attorney completely failed to address the primary basis of the district court's decision. Id. at 223. Additionally, it held that the appeal "unreasonably and vexatiously multiplied the proceedings in a case that has been in the courts for more than six years." Id. See also Kansas Public Employees Retirement Sys v. Reimer Kroger Assocs., 165 F.3d 627, 629-30 (8th Cir. 1999) (sanctions under § 1927 imposed for commencing state court suit after losing on the same issue in the United States District Court). In both of the matters just described, the courts seem to have viewed the "case" broadly. "In these contexts ‘case’ might fairly be interpreted to refer to the cause of action, rather than the court docket filing." Gregory P. Joseph, Sanctions: the Federal Law of Litigation Abuse § 23(A)(2) 3-20 (4th ed. 2010).

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