Rule 11 Motion That Would Require Court to Decide Substance of Motion Subject to Bankruptcy Stay Is Properly Deferred until Stay Lifted

Wolgast v. Richards, 2012 U.S. Dist. LEXIS 5704 (E.D. Mich. Jan. 18, 2012):

Plaintiff's argument presents an issue of first impression: May a debtor, after filing a Chapter 13 bankruptcy petition, move for Rule 11 sanctions in a pending case when the subject matter of the motion has been automatically stayed? Under the particular circumstances of this case, the Court concludes that Plaintiff should not be permitted to do so. Notwithstanding the nominal designation as a Rule 11 motion, in substance Plaintiff is challenging Defendant's Rule 68 motion as not only lacking merit, but wholly lacking merit. As Defendant's motion has been stayed by the bankruptcy proceedings, however, Plaintiff's challenge to the merits of that motion ought to be deferred until the stay is lifted or the bankruptcy proceedings are terminated. Accordingly, until that time, Defendant's Rule 68 motion is stayed and Plaintiff's Rule 11 motion is held in abeyance. ***

The law is now well-settled that Rule 11 is designed to curb "abusive litigation practices" through certification requirements and sanctions for violations. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393(1990). But designed for whom? That is, is the rule designed to protect private parties, thus creating an entitlement, a property interest, to be free from frivolous pleadings? Cf. Bd. of Regents v. Roth, 408 U.S. 564, 577 (1972) (noting that property interests involve "legitimate claim[s] of entitlement"). Or is it designed to protect public interests, in effect authorizing litigants to act as private attorneys general to police the rule's requirements? See generally Jeffrey A. Parness, The New Method of Regulating Lawyers: Public and Private Interest Sanctions During Civil Litigation for Attorney Misconduct, 47 La. L. Rev. 1305, 1305-06 (1987), quoted in Wright & Miller, Federal Practice & Procedure § 1332. The answer, prior to 1993, was generally thought to be both, with the emphasis on the private interests. ***

In 1993, however, the rule was revised to clarify that its central purpose is deterrence, not compensation, with the revised Rule 11***.

As revised, therefore, the rule protects private interests, but this protection is incident to its primary purpose of policing pleadings. ***

The law is now well-established that a court need not have subject matter jurisdiction over the principal cause of action to order Rule 11 sanctions, as a motion for sanctions raises a "collateral issue: whether the attorney has abused the judicial process." Willy v. Coastal Corp., 503 U.S. 131, 138 (1992). ***

In this case, both parties correctly conclude that Defendant's Rule 68 motion is automatically stayed pursuant to 11 U.S.C. § 362. That section provides that the filing of a bankruptcy petition "operates as a stay, applicable to all entities, of . . . the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy] case." § 362(a)(1). The automatic stay is intended to assist the bankruptcy court by permitting the debtor to organize his affairs. Indeed, to that same end, the bankruptcy court may grant relief from the automatic stay in order to resolve or liquidate claims.

Defendant's Rule 68 motion, which seeks nearly $87,000 in attorney fees from Plaintiff, was filed a month before Plaintiff commenced the bankruptcy case. Thus, the continuation of Defendant's proceeding against Plaintiff is automatically stayed because of the bankruptcy filing. This much is settled law.

The open question — one which no reported decision has addressed — is whether the stay also divests a court of jurisdiction over a debtor's Rule 11 motion alleging that a stayed motion should be sanctioned. That is, if § 362 stays the potential creditor's motion (frivolous or not), does it also stay the potential judgment debtor's response to the motion, if the response takes the form of a Rule 11 motion? On the particular facts of this case, the Court concludes that the question must be answered in the affirmative. The Rule 11 motion will be held in abeyance.

Not only did the 1993 amendments to Rule 11 clarify its purpose, they substantively (and controversially2) revised its application, changing a significant "shall" to a "may." Formerly, Rule 11 provided: "If a pleading, motion, or other paper is signed in violation of this rule, the court . . . shall impose . . . an appropriate sanction." Fed. R. Civ. P. 11 (repealed 1993). The revised rule, in contrast, provides: "[T]he court may impose an appropriate sanction." Fed. R. Civ. P. 11(c)(1). As amended, the rule thus "affords the district court the discretion to award sanctions." First Bank of Marietta v. Hartford Underwriters Ins. Co., 307 F.3d 501, 510 (6th Cir. 2002). See generally Robert Kohn, U.S. Judicial Conference Against Legislation to Encourage Sanctions Motions, 59 Fed. Law. 1, 4 (2012) (noting that a bill is pending to repeal parts of Rule 11 that provide the twenty-one day safe harbor provision and afford the court discretion regarding the imposition of sanctions).

Moreover, "the judge need not impose them posthaste." Wright & Miller, supra, § 1336. The advisory committee notes explain: "The revision leaves for resolution on a case-by-case basis, considering the particular circumstances involved, the question as to when a motion for violation of Rule 11 should be served and when, if filed, it should be decided." Fed. R. Civ. P. 11 advisory committee note (1993 amend.).

In this case, deferring a decision on the motion until the bankruptcy stay has been lifted is particularly appropriate as Plaintiff's Rule 11 motion is, substantively, simply a means to challenge the merits of Defendant's Rule 68 motion. Contending that Defendant lacks standing to seek attorney fees that he did not personally pay, Plaintiff asks the Court to strike Defendant's motion. Essentially, Plaintiff argues that the motion should be dismissed for failure to state a claim. He argues that "Defendant, by his own admission, now agrees that it was [the insurer] who 'incurred' the attorney's fees . . . . Plaintiff argues that this admission, by its very nature, is an admission that Defendant's factual claim . . . is indeed frivolous."***

In sum, Plaintiff contends that accepting the factual assertions of Defendant's Rule 68 motion as true, as a matter of law he is not entitled to relief. Yet Plaintiff agrees that the Rule 68 motion is subject to the automatic stay. Awarding Plaintiff the relief he seeks in his Rule 11 will necessarily rule on the merits of Defendant's motion. That is, to decide the "collateral issue: whether the attorney has abused the judicial process," the Court must decide the principal issue: the merits of the Rule 68 motion. This is not the type of collateral review that the Court contemplated in Willy. Therefore, in light of the particular circumstances of this case, a decision on the Rule 11 motion will be deferred pending the resolution of the bankruptcy proceeding.

Footnote 3. As an aside, it should be noted that because Plaintiff's motion simply challenges the merits of Defendant's motion, rather than stating an independent claim for relief, the Supreme Court decision in Stern v. Marshall, 131 S. Ct. 2594 (2011) is not implicated. In Stern, the widowed Ms. Vickie Lynn Marshall (popularly known as Anna Nicole Smith) sought bankruptcy protection. Her late husband's adult son filed a complaint in the bankruptcy proceeding, alleging Ms. Marshall had defamed him. Ms. Marshall filed a counterclaim for tortious interference with the gift she expected from her late husband, half of his estate. The bankruptcy court granted judgment in Ms. Marshall's favor, awarding her than $425 million in damages. The son appealed, contending that the bankruptcy court lacked jurisdiction over the counterclaim. Agreeing, the Supreme Court wrote: "When a suit is made of 'the stuff of the traditional actions at common law tried by the courts at Westminster in 1789,' and is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts." Id. at 2609 (quoting Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 90 (1982) (Rehnquist, J., concurring in judgment)). The Court concluded: "The Bankruptcy Court below lacked the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim." Id. at 2621. In this case, Plaintiff's Rule 11 motion raises not a counterclaim, but a defense to Defendant's motion. Accordingly, the limitation articulated in Stern is not implicated in this case.

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