Third Circuit Rejects Non-Precedential Opinion Triggering Rule 11 Safe Harbor Period via Letter — Post-Motion Conduct Not Sanctionable Due to Lack of Notice

In re Miller (Ettinger & Assocs. LLC v. Miller), 2013 U.S. App. LEXIS 19090 (3d Cir. Sept. 16, 2013):

1. Initial Motion for Sanctions

On January 31, 2011, the Millers filed and served on Ettinger and Tsarouhis a Rule 9011 Motion for Sanctions ("Initial Motion"). It asserted that Ettinger's complaint was "filed to harass and cause [them] to incur additional fees and further delay" and "for absolutely no reason other than . . . to retaliate against [them]." Millers' Mot. for Rule 9011 Sanctions ¶ 13, Jan. 31, 2011. The following day, February 1, 2011, the Millers withdrew the Initial Motion without explanation and served a copy of their withdrawal request on Ettinger and Tsarouhis.

On February 23, 2011, the Millers re-filed and re-served a motion substantively the same as their Initial Motion. The Bankruptcy Court ruled shortly thereafter that "the 9011 Motion is premature, shall be held in abeyance, and shall not be heard until after the merits of this adversary proceeding have been determined." Scheduling Order at 2, Feb. 25, 2011. ***

3. Amended Rule 9011 Motion

In accord with the Bankruptcy Court's order, the Millers filed and served an amended motion for sanctions against Ettinger and Tsarouhis. [Footnote 3. The Millers filed a second amended motion days later, which was essentially identical to the first. We refer to these motions jointly as an "Amended Motion."] They responded by arguing in part that the Millers' Amended Motion did not comply with Rule 9011's "safe harbor" provision. That provision requires 21 days between serving and filing a sanctions motion, during which period the challenged conduct may be remedied.

The Bankruptcy Court granted the Amended Motion. Rejecting Ettinger and Tsarouhis' procedural argument that Rule 9011's safe harbor was violated, the Court found that the 21-day notice requirement was satisfied by the first filing (on January 31) and re-filing (on February 23) of the Millers' Initial Motion, during which period Ettinger and Tsarouhis could have taken--yet elected not to take--corrective action with respect to their sanctionable conduct.

On the merits, the Bankruptcy Court concluded that all actions taken by Ettinger and Tsarouhis after Kutkowski's March 18 deposition were sanctionable. That deposition testimony, the Court concluded, established that the Millers had not attempted to discharge fraudulently their legal fees by filing for bankruptcy protection. It described Kutkowski's deposition as the "linchpin" on which its decision turned. Because this left the complaint without factual support, the Court found that the continued prosecution by Ettinger and Tsarouhis warranted sanctions. Subsequently, it ordered them to pay an aggregate sanction of $20,000. That sum was to be held in escrow pending approval of the Millers' attorneys' fees application, then be distributed between the Millers and their counsel in accord with a stipulated agreement submitted to and approved by the Court. ***

B> B. Compliance with Safe Harbor Requirements

As an initial matter, we address the technical prerequisites for satisfaction of Rule 9011's procedural safe harbor provision. The District Court concluded correctly that strict compliance with the safe harbor rule is required. As we explained in Schaefer Salt, "[i]f the twenty-one day period is not provided, the motion must be denied." 542 F.3d at 99. Rule 9011 "imposes mandatory obligations upon the party seeking sanctions, so that failure to comply with the procedural requirements precludes the imposition of the requested sanctions." Brickwood Contractors, Inc. v. Datanet Eng'g, Inc., 369 F.3d 385, 389 (4th Cir. 2004) (en banc).

Footnote 5. The Millers argue our more recent decisions indicate that "substantial compliance" with the safe harbor is sufficient, citing In re Mondelli, 508 F. App'x 131 (3d Cir. 2012). Not only is this a not precedential opinion on which reliance for legal rulings is unavailing, Mondelli is distinguishable, as it involved not the period of the safe harbor but rather the form of notice--i.e., a "notification letter" sent in lieu of formal service of the Rule 9011 motion. Id. at 135. Moreover, several courts of appeals have disagreed with the proposition that such notification letters may satisfy the safe harbor's procedural requirements. See, e.g., Roth, 466 F.3d at 1192; Barber v. Miller, 146 F.3d 707, 710 (9th Cir. 1998); Ridder v. City of Springfield, 109 F.3d 288, 296 (6th Cir. 1997).

We note, as did the District Court, that there is a split of authority regarding whether re-filing an initially noncompliant Rule 9011 motion after 21 days provides fair notice for such sanctions. Compare Tahfs v. Proctor, 316 F.3d 584, 589 (6th Cir. 2003) (suggesting re-filing may cure previous safe harbor noncompliance), Jefferson v. Mass. Mut. Life Ins. Co., No. 3:07-0715, 2008 WL 4724326, at *6 (M.D. Tenn. Oct. 24, 2008) (same), and Muhammad v. Louisiana, Nos. 99-3742/2694, 2000 WL 1876350, at *2-3 (E.D. La. Dec. 21, 2000) (same), with In re New River Dry Dock, Inc., 461 B.R. 642, 646 (Bankr. S.D. Fla. 2011) (rejecting reliance on premature filing to satisfy safe harbor), and Xiangyuan Zhu v. Fed. Hous. Fin. Bd., No. 04-2539-KHV, 2007 WL 675646, at *4 (D. Kan. Mar. 1, 2007) (same). The District Court sided with the courts that have found this type of withdrawal-and-refiling fails to satisfy Rule 9011's safe harbor. We need not resolve this issue, however, because even if the Millers' Initial Motion started the safe harbor clock, they nonetheless failed to wait the requisite period before re-filing.

Here, the Millers filed and served the Initial Motion on January 31, 2011, making 21 days from service February 21, 2011. However, because February 21 was a federal holiday, the safe harbor was extended until the following day (February 22), see Fed. R. Bankr. P. 9006(a)(1)(C), (a)(6)(A). The Millers served their motion for sanctions by mail in accord with the Bankruptcy Court's rules of procedure. See id. 9011(c)(1)(A) (indicating sanctions motions must comply with Fed. R. Bankr. P. 7004's service requirements); id. 7004(b) (requiring service by mail). When computing time for service by mail, three additional days are added after the prescribed period would otherwise expire. Id. 9006(f). Adding three days extended the safe harbor period to February 25, meaning the earliest the Millers could have re-filed in compliance with Rule 9011's notice requirements was February 26, 2011. Because they re-filed on February 23--days before the safe harbor period had expired--their Initial Motion was procedurally defective, and any sanction based thereon was invalid.

The Millers argue the additional three days for mail service should not be added to the 21-day period because they served Ettinger and Tsarouhis electronically as well as by mail. They rely solely on the Eastern District of Pennsylvania's local rules, however, and do not cite any authority indicating these rules trump the Bankruptcy Court's rules of procedure. Absent such support, we agree with the computation of time made by the District Court (which is surely familiar with its local rules) of the safe harbor period.

C. Sanctioning Post-Motion Conduct

The District Court also found another procedural problem with the sanctions imposed, this time regarding due process notice requirements. In particular, the Court expressed concern because the sanctions were based on facts additional to and different from those in the Initial Motion, yet the Millers' Amended Motion, standing alone, undisputedly did not comply with the safe harbor provision. See Dist. Ct. Mem. Order at 18 (noting "the Bankruptcy Court sanctioned Ettinger and Tsarouhis for conduct that had not even occurred at the time the Millers filed and served their initial Rule 9011 motions, but allowed the Millers to rely on these motions to satisfy the safe harbor [notice] requirement"). And by the time the Millers filed their Amended Motion, Ettinger and Tsarouhis had already lost at trial on their adversary proceeding, and thus lost as well the chance to rectify their offending conduct.

Permitting a court to sanction a party for conduct occurring after the service and filing of a Rule 9011 motion is contrary to our recognition that "[d]ue process in the imposition of Rule 9011 sanctions requires 'particularized notice.'" In re Taylor, 655 F.3d 274, 286 (3d Cir. 2011) (quoting Jones v. Pittsburgh Nat'l Corp., 899 F.2d 1350, 1357 (3d Cir. 1990)). "Particularized notice" sufficient to comport with due process is provided where "a party is on notice as to the particular factors that he must address if he is to avoid sanctions." Jones, 899 F.2d at 1357; see also Simmerman v. Corino, 27 F.3d 58, 64 (3d Cir. 1994) (identifying three prerequisites of adequate notice as "1) the fact that Rule [90]11 sanctions are under consideration, 2) the reasons why sanctions are under consideration, and 3) the form of sanctions under consideration" (citation omitted)).

In addition, the purpose of Rule 9011 would not be advanced if a party could be sanctioned without ever having the opportunity to correct the offending behavior. See, e.g., Schaefer Salt, 542 F.3d at 99. Thus, "'a party cannot delay serving its Rule [90]11 motion . . . until conclusion of the case (or judicial rejection of the offending contention),'" id. (quoting Rule 11 Advisory Committee Notes), as it would effectively be too late to withdraw or correct the offending act(s). To conclude otherwise would allow a party seeking sanctions to deprive the target of the opportunity to escape them by withdrawal or correction, a crucial component of Rule 9011.

D. Other Available Sanctioning Tools

Aside from Rule 9011, however, there are various sources of authority by which bankruptcy courts may impose sanctions. The District Court identified some of these sanctioning tools, including "(1) on the Court's own initiative pursuant to Rule 9011(c)(1)(B); (2) using the Court's inherent power to sanction; or (3) under 11 U.S.C. § 105." Dist. Ct. Mem. Order at 20; see also 28 U.S.C. § 1927 (permitting courts to award costs against attorneys who "unreasonably and vexatiously" multiply proceedings). Notwithstanding its recognition of other avenues by which sanctions could have been imposed in this case--none of which contains a safe harbor timing provision, see, e.g., Brickwood Contractors, Inc., 369 F.3d at 389 n.2--the District Court refused to decide "in the first instance . . . whether sanctions grounded in some other authority would have been appropriate." Dist. Ct. Mem. Order at 22. It did so apparently because "the Bankruptcy Court based its decision to sanction on Rule 9011" solely. Id.

Not taking the next step--to remand for "first instance" review--is where the District Court came up short. Because the aforementioned grounds for sanctions do not require compliance with any safe harbor provision, we conclude it erred by refusing to remand to allow the Bankruptcy Court to consider imposing sanctions a different way. Sanctions may be upheld, notwithstanding a safe harbor violation, if they are "clearly valid" under a different sanctioning mechanism. See Ginsberg v. Evergreen Sec., Ltd. (In re Evergreen Sec., Ltd.), 570 F.3d 1257, 1273 (11th Cir. 2009). Remand is necessary, however, to satisfy the due process requirements of adequate notice and an opportunity to respond before considering these alternate approaches.

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