Commercial Litigation and Arbitration

Bankruptcy Court Has Jurisdiction to Award 16(f) Sanctions after Dismissing for Lack of Subject Matter Jurisdiction — 16(f) Sanctions Apt for Failure to Prepare for and Participate in Mediation in Good Faith—Abuse of Discretion Defined (6th Cir.)

Spradlin v. Richard, 2014 U.S. App. LEXIS 13756 (6th Cir. July 15, 2014):

PEG argues that the bankruptcy court lacked jurisdiction to award sanctions against them for bad faith and lack of preparedness in the mediation. Their argument rests on the timing of various motions and rulings by the bankruptcy court. PEG moved to dismiss Spradlin and THC's second amended complaint for lack of jurisdiction; the entities attempted to mediate the dispute; Spradlin and THC moved for sanctions against PEG, Banner, and Richard for conduct during mediation; the bankruptcy court granted PEG's motion to dismiss for lack of subject-matter jurisdiction; and then the bankruptcy court awarded sanctions under Federal Rule of Civil Procedure 16(f).8 R. 649 at 6-8. PEG argues that the bankruptcy court lost jurisdiction to award sanctions when it concluded that it lacked jurisdiction over Spradlin and THC's second amended complaint.

8   Federal Rule of Civil Procedure 16(f) allows the court to order sanctions "if a party or its attorney: (A) fails to appear at a scheduling or other pretrial conference; (B) is substantially unprepared to participate--or does not participate in good faith--in the conference; or (C) fails to obey a scheduling or other pretrial order." Federal Rule of Bankruptcy Procedure 7016 provides that "Rule 16 F.R. Civ. P. applies in adversary proceedings."

The federal courts maintain jurisdiction over certain collateral issues even after the underlying action is dismissed for lack of jurisdiction. "Just because a federal court is later found to lack subject matter jurisdiction in a particular matter does not give litigants a free pass with respect to any and all prior indiscretions they may have committed before the court." River City Capital, L.P. v. Bd. of County Comm'rs, Clermont Cnty., Ohio, 491 F.3d 301, 310 (6th Cir. 2007). A court may award attorney fees, contempt sanctions, and Rule 11 sanctions after the action has been terminated because those issues all "require[] the determination of a collateral issue: whether the attorney has abused the judicial process, and if so, what sanction would be appropriate." Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 396 (1990). The ability to issue sanctions "empower[s] the court to command obedience to the judiciary and to deter and punish those who abuse the judicial process. Thus, a court's jurisdiction to issue sanctions under 28 U.S.C. § 1927 or pursuant to a court's inherent authority is ever present." Red Carpet Studios Div. of Source Advantage, Ltd. v. Sater, 465 F.3d 642, 645 (6th Cir. 2006).  [*20] Like costs, attorney fees, and Rule 11 sanctions, Rule 16 sanctions are a wholly collateral issue that does not bear on the merits of the claims. Therefore, the bankruptcy court retained jurisdiction to award sanctions even after dismissing the complaint for lack of subject-matter jurisdiction.

The award of sanctions by the bankruptcy court is a collateral order that the district court had, and we have, jurisdiction to review. The federal district court has jurisdiction to hear appeals from the bankruptcy court "from final judgments, orders, and decrees" and certain interlocutory orders and decrees. 28 U.S.C. § 158(a)(1), (2). Of those appeals from the bankruptcy court, we "shall have jurisdiction of appeals from all final decisions, judgments, orders, and decrees" by the district court. 28 U.S.C. § 158(d)(1). Finality under § 158(d)(1) "largely mirror[s] our understanding of finality under [28 U.S.C.] § 1291." Lindsey v. Pinnacle Nat'l Bank (In re Lindsey), 726 F.3d 857, 859 (6th Cir. 2013). "A  [*21] final decision does not normally occur until there has been a decision by the district court that ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Armisted v. State Farm Mut. Auto. Ins. Co., 675 F.3d 989, 993 (6th Cir. 2012) (internal quotation marks omitted). Where a court has ordered sanctions but "has not determined or imposed its sanction . . . its decision to sanction [the party] is not yet a final order subject to appellate review under § 1291." Id. Here, though, the bankruptcy court not only has declared its intention to sanction PEG, Banner, and Richard, but also has determined the amount of sanctions and has imposed the sanctions order. Therefore, this is a final decision that the district court had, and we have, jurisdiction to review.

We review an award of sanctions under Rule 16(f) for an abuse of discretion. Clarksville-Montgomery Cnty. Sch. Sys. v. U.S. Gypsum Co., 925 F.2d 993, 998 (6th Cir. 1991). We conclude that the bankruptcy court's award of sanctions was not an abuse of discretion. The bankruptcy court awarded sanctions because "the Pikeville Defendants, and in particular Richard, were unprepared and failed to participate  [*22] in good faith in the mediation process as required by the Mediation Order and Rule 16." A.P. 649 (Sanctions Order at 7). The ruling was based largely on the conclusions of the mediator in his report. A.P. 549 (Mediator's Report at 1-4). Richard represented himself and purportedly represented PEG and Banner in the mediation. A.P. 649 (Sanctions Order at 3). The bankruptcy court noted the fact that Richard arrived to the mediation approximately three hours late due to flight delays; tardiness was not, alone, a basis for sanctions but "arriving late was only one of Richard's actions that caused the mediation to fall apart." A.P. 649 (Sanctions Order at 5). First, the bankruptcy court concluded that Richard was unprepared for the mediation because counsel informed the mediator that they needed to start the August 10, 2011, mediation late so they could have time to confer. Id. Second, the bankruptcy court noted that Richard did not have full settlement authority as required by the order to mediate, demonstrated by his need to make phone calls regarding THC's offer before proceeding with the mediation. Id. Third, the bankruptcy court determined that Richard's conduct was "not conducive to  [*23] a successful mediation," noting Richard's insistence on meeting with Halle alone [note:  the opinion does not identify Halle], even though Fleischman (attorney for THC) had full settlement authority, and Richard's decision to email a draft complaint of state law claims the day before the June 23, 2011 mediation meeting. Id. at 5-6. Finally, the bankruptcy court noted that the day after the failed August 10, 2011 mediation, PEG, Banner, and Richard filed suit in state court, even though the agreed-upon deadline to reach a settlement in mediation was over a month away and the mediator had not yet formally ended the mediation process. Id. at 6.

PEG, Banner, and Richard argue that the bankruptcy court's determinations that they were unprepared for the mediation and failed to participate in good faith were clearly erroneous. PEG Br. at 31-39. They do not dispute the facts in the bankruptcy court's order, but disagree with the characterization of their conduct. For example, they argue that any appearance of unpreparedness resulted from Richard's flight delays, a fact that was not in Richard's control. Id. at 33. However, they do not dispute the fact that even prior to learning of the delays, counsel asked to begin the mediation late  [*24] so he could confer with Richard. Additionally, they argue that they sent the draft complaint before the June 23, 2011 mediation not to sabotage the session but simply to inform THC of claims that were not a part of the mediation. Regardless of their intent, the mediator determined that the effect of this action was disruptive to the goals of the mediation, a conclusion that PEG, Banner, and Richard do not dispute. And importantly, PEG, Banner, and Richard do not dispute the fact that they filed a complaint in state court well before the date to conclude mediation and before the mediator officially ended the mediation.

"An abuse of discretion is defined as a definite and firm conviction that the trial court committed a clear error of judgment." Trepel v. Roadway Express, Inc., 194 F.3d 708, 716 (6th Cir. 1999). Because PEG, Banner, and Richard have not shown that the bankruptcy court relied on clearly erroneous facts, and because the undisputed facts provide a sufficient basis for the award of sanctions, we are not left with a "definite and firm conviction" that the bankruptcy court erred by awarding sanctions. Therefore, we affirm the award of sanctions.

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