No Right to Attorneys’ Fees on Appeal for Defending Sanctions Award, Absent Sanctionable Conduct on Appeal — Appellate Fees Not “Caused” by Sanctionable Conduct Below — Sources of Bankruptcy Court Sanctions Power

From Franken v. Mukamal (In re Creative Desperation Inc.), 2011 U.S. App. LEXIS 20306 (11th Cir. Oct. 5, 2011):

Section 105 of Tile 11 of the United States Code imbues bankruptcy courts with the same inherent powers as federal district courts to sanction abusive conduct. In re Porto, 645 F.3d 1294, 1304 n.6 (11th Cir. 2011). The key to awarding sanctions under a court's inherent powers is a finding of bad faith by the sanctioned person. Id. at 1304. Here, the bankruptcy judge awarded sanctions pursuant to his inherent powers under 11 U.S.C. § 105.

On appeal to a district court from a bankruptcy court, a party can seek sanctions in manners similar to those available in a court of appeals. A party can be sanctioned under 28 U.S.C. § 1927 for actions taken on appeal. See Reynolds v. Roberts, 207 F.3d 1288, 1302 (11th Cir. 2000); Bonfiglio v. Nugent, 986 F.2d 1391, 1394-95 (11th Cir. 1993). In addition, a district court may order sanctions for a frivolous bankruptcy appeal under Bankruptcy Rule 8020, the bankruptcy equivalent of Rule 38 of the Federal Rules of Appellate Procedure. Finally, a court's inherent power to sanction extends to the conduct of parties during appeals. See Gallop v. Cheney, 642 F.3d 364, 370 (2d Cir. 2011); Wheeler v. C.I.R., 528 F.3d 773, 782 (10th Cir. 2008); Stalley v. Methodist Healthcare, 517 F.3d 911, 920 (6th Cir. 2008); FEC v. Toledano, 317 F.3d 939, 953 (9th Cir. 2002); Perry v. Pogemiller, 16 F.3d 138, 140 (7th Cir. 1993).

Despite the extensive number of available methods to seek and obtain attorneys' fees as a sanction in the district court, the Trustee did not ground his request in any of them. Instead, the Trustee sought an attorneys' fee award by requesting an extension of the public-policy rationale outlined in Norelus.

Norelus involved a district court's award of sanctions under 28 U.S.C. § 1927. 628 F.3d at 1297. The sanctioned attorneys argued that the district court abused its discretion by including in the sanctions award the costs, expenses, and attorneys' fees incurred in prosecuting the sanction proceedings. Id. Relying on the plain language of 28 U.S.C. § 1927, the Norelus court upheld the award. Id. at 1298. The statute allows for recovery of costs "incurred because of such conduct," and the court reasoned that without the sanctionable conduct, no sanction procedures would have been required. Thus, the sanctionable conduct caused the costs of obtaining sanctions. Id. In addition, the court gave in to "temptation" and provided an additional reason for allowing discretion to award the costs of prosecuting a sanctions motion, specifically that not allowing such an award would "undercut" the purposes of sanctions by preventing full compensation to the harmed party. Id. Because an aggrieved party should not be discouraged from pursuing sanctions, recovery of the costs associated with pursuing sanctions must be possible. Id. at 1298-99.

Norelus did not involve the recovery of costs associated with defending a sanction award on appeal. However, the Trustee urges this court to find that the district court abused its discretion in refusing to extend Norelus to appellate attorneys' fees. Such an extension is precluded by the Supreme Court's holding in Cooter & Gell v. Hartmarx, Corp., 496 U.S. 384, 407 (1990).

In Cooter & Gell, the Court overturned an award of attorneys' fees incurred in defending a Rule 11 sanction award on appeal. Id. at 405-06. The Court rejected the very same causation argument advocated by the Trustee in this case. The Court held that the costs of an appeal of a Rule 11 sanction order is not directly caused by the underlying sanctionable conduct, but rather by the district court's sanction order. Id. at 407. The court recognized that additional rules safeguard against frivolous appeals from sanction orders, that meritorious appeals should never be discouraged, and that the traditional American Rule generally prevents prevailing litigants from collecting attorneys' fees from the losing party. Id. at 407-09.

This court continues to apply Cooter & Gell to appeals from Rule 11 sanction orders, even in the bankruptcy context. In re Porto, 645 F.3d at 1306-07. Other courts of appeals have applied Cooter & Gell's bright-line rule to cases ordering sanctions under 28 U.S.C. § 1927 and a court's inherent powers. Manion v. Am. Airlines, Inc., 395 F.3d 428, 433-34 (D.C. Cir. 2004) (§ 1927); In re Kujawa, 270 F.3d 578, 582-83 (8th Cir. 2001) (inherent powers); Conner v. Travis County, 209 F.3d 794, 801 (5th Cir. 2000) (inherent powers). The only court to adopt the Trustee's causation argument by distinguishing between Rule 11 sanctions and a court's inherent powers was overturned on appeal. In re Kujawa, 256 B.R. 598, 612 (8th Cir. BAP 2000), rev'd, 270 F.3d 578 (8th Cir. 2001). In reversing, the Eighth Circuit relied solely on Cooter & Gell. Each case cited by the Trustee in support of his position either pre-dates Cooter & Gell or does not involve an award of appellate attorneys' fees.

Here, the Trustee did not argue Franken's appeal itself was frivolous, but instead argued that the causal link between Franken's sanctionable conduct in the bankruptcy court was sufficient alone to justify an award of attorneys' fees by the district court. This argument contradicts binding Supreme Court precedent, and the district court did not abuse its discretion by declining to adopt this incorrect legal standard.

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