May. 12, 2022

Bankruptcy Courts' Powers to Sanction Attorneys, Others Expanded by New Appellate Ruling

As Published in the Daily Business Review

An Op-Ed featuring analysis from Tripp Scott's Chuck Tatelbaum and Corey Cohen

While it has been long recognized that bankruptcy courts have the power to sanction attorneys and litigants pursuant to Rule 9011 of the Bankruptcy Rules of Procedure (a rule that is almost identical in substance to Rule 11 of the Federal Rules of Civil Procedure), a recent appellate ruling clarifies and expands the power and authority of bankruptcy courts to sanction attorneys and litigants based upon the inherent power of the bankruptcy court as well as the broad authority granted by Section 105(a) of the Bankruptcy Code. 

On April 21, the Bankruptcy Appellate Panel for the Ninth Circuit (the equivalent of the U.S. District Court bankruptcy appellate ruling in the Eleventh Circuit) held in the case of In re BCB Contracting Services, (BAP No. AZ-21-1254-BSF) that the bankruptcy court’s power to sanction is derived from three separate sources—Bankruptcy Rule 9011, the statutory civil contempt authority under Section 105(a) of the Bankruptcy Code and the inherent sanction authority as promulgated by the U.S. Supreme Court in the case of Law v. Siegel, 571 U.S. 415 (2014). This is extremely significant in holding that a bankruptcy court has a virtual “cafeteria of choices” in order to mete out sanctions to attorneys and litigants as the case may be. 

For those unfamiliar with Section 105 of the Bankruptcy Code, it was originally known as the “all writs statute” portion of the Bankruptcy Code where the bankruptcy court has the statutory authority to issue any order, process or judgment that is necessary or appropriate to carry out the provisions of the Bankruptcy Code. Section 105 has been broadly interpreted by bankruptcy courts and appellate rulings to allow and authorize bankruptcy judges to create any relief that may be needed in a particular situation even if there is no specific statutory authority or provisions in the bankruptcy rules of procedure.

Significantly, notwithstanding the breadth of the scope of Section 105, the Bankruptcy Appellate Panel held that the bankruptcy court possesses the inherent power to sanction abusive litigation practices, with such inherent power in no way confined to the statutory scope of section 105 or the sanction procedure in Bankruptcy Rule 9011. The U.S. Court of Appeals for the Ninth Circuit has previously made it clear that there is an important distinction between the statutory and the inherent power to sanction abusive practices, and emphasized that they are not interchangeable, where it was stated:

“Civil contempt authority allows a court to remedy a violation of a specific order (including ‘automatic’ orders, such as the automatic stay or discharge injunction). The inherent sanction authority allows a bankruptcy court to deter and provide compensation for a broad range of improper litigation tactics.” See Knupfer v. Linblade (In re Dyer), 322 F. 3d 1178, 1196 (9th Cir. 2003). 

The court went on to state that the inherent power to sanction bad-faith conduct is broader than Rule 9011 sanctions and extends to a full range of litigation abuses. This means the court may sanction under its inherent power even when the same conduct may also be punishable under another sanction statute or rule, such as Bankruptcy Rule 9011. 

In order to further clarify the issue, the court stated that to impose sanctions under its inherent authority, the bankruptcy court must find either bad faith, conduct tantamount to bad faith, or recklessness with additional factors such as frivolousness, harassment, or an improper purpose. It was held that the counsel’s goal to gain a tactical advantage in another case is sufficient to support a finding of bad faith and improper purpose. Additionally, the court found a party who has engaged in bad faith conduct over the course of the case is subject to sanctions.

While this ruling may not be considered “breaking new ground,” it does clarify the expansive power of the bankruptcy court to sanction improper behavior by attorneys and litigants. With the increase in both consumer and business bankruptcy cases as the economy reacts to inflation and increased interest rates (a reported 34% increase in new case filings from February to March of this year), and with the continued expansion of the small business bankruptcy provision of the Bankruptcy Code to encompass businesses with debts of less than $7.5 million, the bankruptcy court’s clear expansive authority to sanction and punish bad behavior is a welcome and needed clarification

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