Conclusory Finding of Bad Faith Cannot Sustain Inherent Power Sanction — § 105(a) of Bankruptcy Code Codifies Inherent Power — Sins of Lawyer Not Visited on Client, Whose Bad Faith Must Separately be Found — Good Quotes

From DeLauro v. Porto (In re Porto), 2011 U.S. App. LEXIS 13941 (11th Cir. July 8, 2011):

"While bad faith is the key to unlocking the court's inherent power, a court must do more than conclude that a party acted in bad faith; it should make specific findings as to the party's conduct that warrants sanctions." Byrne v. Nezhat, 261 F.3d 1075, 1123 (11th Cir. 2001) (quotation marks and citation omitted).

Footnote 6. We recognize that the bankruptcy court in this case based its award of attorney's fees as a sanction on its statutory powers under § 105(a) of the Bankruptcy Code, whereas Byrne dealt with a district court's inherent authority to sanction misconduct. However, we agree with the Tenth Circuit "that § 105 [was] intended to imbue the bankruptcy courts with the inherent power recognized by the Supreme Court in [Chambers v. NASCO, Inc., 501 U.S. 32, 44-45, 111 S.Ct. 2123, 2133 (1991)]," in which the Supreme Court recognized the inherent power of a federal district court to sanction "conduct which abuses the judicial process." In re Courtesy Inns, Ltd., 40 F.3d 1084, 1089 (10th Cir. 1994).

In Byrne, although we affirmed a district court's imposition of sanctions against an attorney, id. at 1115-17, we reversed its sanctions against the plaintiff herself because the court had failed to make sufficiently specific factual findings to support a finding that the plaintiff had acted in bad faith, id. at 1121-27. *** The district court inferred from those findings about the attorney's conduct that he had acted in bad faith, and we affirmed its imposition of sanctions on the attorney. Id. at 1117.

*** While a client may be made to suffer litigation losses because of her attorney's missteps, the Byrne decision rejects the notion that an innocent client must also suffer sanctions because of misconduct by her attorney that is not fairly attributable to her. Without more, the rule that the sins of the lawyer are visited on the client does not apply in this context, and a court must specify conduct of the plaintiff herself that is bad enough to subject her to sanctions. See id. at 1124 (concluding that the finding of bad faith on the part of the plaintiff herself was clearly erroneous, and the district court's "failure to specify [the plaintiff's] sanctionable conduct render[ed] us unable to affirm.").

Those principles prevent us from affirming the award of sanctions against DeLauro in this case. After referring to its legal authority to impose sanctions, this is the entire explanation of the bankruptcy court for its decision to sanction DeLauro:

The Plaintiff's allegations have no factual or legal merit. He knew or should have known his Complaint has no factual or legal basis. This adversary proceeding was not brought in good faith and constitutes unreasonable, vexatious litigation.

...

The Plaintiff did not bring this action in good faith, but brought it to harass the Debtor and delay his bankruptcy case.

Without further elaboration, the bankruptcy court concluded that "[t]he Debtor is entitled to an award of his reasonable attorney's fees." That is not enough.

We reiterate what we have said before: a conclusory finding of bad faith is not sufficient to withstand appellate review. See Byrne, 261 F.3d at 1123 ("Unless the evidence on the issue of bad faith is uncontroverted, a district court should examine a party's conduct and make findings on that issue."); Rothenberg v. Sec. Mgmt. Co., 736 F.2d 1470, 1472-73 (11th Cir. 1984) (remanding for factual findings as to bad faith because "bald assertions provide no meaningful basis for this court to review the ultimate finding of 'bad faith.'"); cf. In re Sunshine Jr. Stores, Inc., 456 F.3d at 1304-05 (affirming award of sanctions pursuant to bankruptcy court's inherent powers where the court's "sanctions order contained a detailed chronology of [the creditor's] repeated failure to respond to court orders, its failure to appear before the court when ordered, and its refusal to provide discovery pursuant to the court's [order]").

Not only are the bankruptcy court's findings inadequate to support sanctions against DeLauro, but there is nothing in the record to support any findings about what DeLauro personally knew or did not know before his attorney filed the complaint containing the objections to Porto's discharge. The court seems to have reasoned that because the claims contained in DeLauro's complaint were not properly pleaded or were not proven at the hearing, DeLauro — not his attorney, but DeLauro personally — must have made them unreasonably, in bad faith, or to harass the defendant. That is, however, a leap in logic as large as any the court declined to make in favor of the allegations in the complaint. It equates lack of merit with bad faith, a fallacy that would lead to the conclusion that every losing party had litigated in bad faith. In the past we have reiterated the Supreme Court's warning that:

[I]t is important that courts not engage in post hoc reasoning by concluding that, because a plaintiff did not ultimately prevail, his action must have been unreasonable or without foundation. This kind of hindsight logic could discourage all but the most airtight claims, for seldom can a prospective plaintiff be sure of ultimate success.

Cordoba v. Dillard's, Inc., 419 F.3d 1169, 1181-82 (11th Cir. 2005) (quoting Christiansburg Garment Co. v. EEOC, 434 U.S. 412, 421-22, 98 S.Ct. 694, 700 (1978)).

There is another problem here. Apart from its failure to specify the conduct or knowledge of DeLauro himself that warranted a finding of bad faith on his part, much of the bankruptcy court's disapproving discussion of the objections to discharge emphasize that particular objections were brought under the wrong section or subsection of the Bankruptcy Code. That emphasis points away from a finding that DeLauro was culpable. The failure to cite the proper legal authority for a proposition is a failure of legal pleading; at most it is bad lawyering, and DeLauro was not the lawyer. The lawyer responsible for pleading all of the objections, and for all the errors of pleading that the court identified, escaped any sanctions, while the client who may have suffered an adverse judgment in part because of the pleading errors got sanctioned. That anomaly requires justification, and there is none in the court's order. We said in Byrne that "[s]anctionable conduct by a party's counsel does not necessarily parlay into sanctionable conduct by a party." Byrne, 261 F.3d at 1123 (citing Donaldson v. Clark, 819 F.2d 1551, 1557 n.6 (11th Cir. 1987)). All the more, unsanctioned conduct by a party's counsel should not be parlayed into a sanction against the party.

Without specific factual findings as to what constituted bad faith on DeLauro's part, the bankruptcy court characterized the filing of the complaint as a "final attempt to get his proverbial 'pound of flesh'" from Porto. As a matter of fact, the judgment debt in this case resulted from a personal injury lawsuit DeLauro filed against Porto involving a botched hair transplant. All these years later DeLauro might be more aptly described as still mourning his ravished locks instead of seeking a pound of flesh.

Footnote 7 Compare Alexander Pope, "The Rape of the Lock," Canto V, lines 141-42 (1712) ("Then cease, bright nymph! to mourn the ravish'd hair / Which adds new glory to the shining sphere!"), with William Shakespeare, The Merchant of Venice, Act IV, Scene I, lines 100-01 (1600) ("The pound of flesh, which I demand of him, / Is dearly bought; 'tis mine and I will have it.").

In any event, we must remand this case to the bankruptcy court so that it can either flesh out its reasons for sanctioning DeLauro or decide that he is not to be sanctioned.

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