IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 07-20644

In the Matter of: YORKSHIRE LLC

Debtor

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TRACY KNIGHT; JOHN A. LEONARD

Appellants

v.

TERRY LUEDTKE; GEORGE LUEDTKE

Appellees

In the Matter of: TAGT LP

Debtor

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TRACY KNIGHT; JOHN A. LEONARD

Appellants

v.

TERRY LUEDTKE; GEORGE LUEDTKE

Appellees 

United States Court of Appeals

Fifth Circuit

F I L E D

August 8, 2008

Charles R. Fulbruge III

Clerk
* Chief Judge of the Northern District of Mississippi, sitting by designation. 

** Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not

be published and is not precedent except under the limited circumstances set forth in 5TH CIR.

R. 47.5.4.

2

Appeal from the United States District Court 

for the Southern District of Texas

4:06-CV-3350

Before GARZA and DENNIS, Circuit Judges, and MILLS,* District Judge.

PER CURIAM:**

Appellants Tracy Knight (“Knight”) and John A. Leonard (“Leonard”)

(together, “Appellants”) appeal from a Final Judgment of the District Court,

which adopted and affirmed an order of the Bankruptcy Court sanctioning

Appellants for filing two bankruptcy petitions in bad faith. The Bankruptcy

Court’s order granted the motion for sanctions filed by Appellees Terry Luedtke

(“Terry”) and George Luedtke (“George”) (together, “Luedtkes”). Because we

conclude that the Bankruptcy Court did not abuse its discretion, we AFFIRM.

I

In 2003, the Luedtkes and Knight started a custom slaughterhouse in

Houston, Texas. In essence, the business sold livestock to customers and then

slaughtered it according to their specifications. Because the slaughterhouse

processed only livestock that its customers already owned, it did not need to

comply with the same meat-inspection regulations as entities selling processed

meat. Several legal entities were formed to provide various functions in the

business, including: Harris Country Farms, the processor (“HCF”); TAGT, L.P.,

the facility owner (“TAGT”); and Yorkshire, LLC, the sole general partner of

TAGT, L.P. (“Yorkshire”). Knight served as president and a manager of

Yorkshire. The record is unclear, but it appears that some member of the
3

Luedtke family also served as a manager of Yorkshire. This appeal deals with

the bankruptcy petitions of Yorkshire and TAGT. 

The initial business was undercapitalized, but at no time was it insolvent.

When additional capital was needed, Terry contributed it. For his part, Knight

made an initial investment and one additional investment but backed out of

commitments to make further investments. Instead, Knight contributed only his

labor or “sweat equity.” Eventually, Knight insisted that he be paid a salary.

When Terry refused to put additional cash into the business to fund that salary,

Knight refused to work and distanced himself from the daily operations. These

disagreements caused significant discord between Knight and the Luedtkes.

The business disagreements between Knight and the Luedtkes came to a

head in the spring of 2005, when Knight sued the Luedtkes, HCF, Yorkshire,

and TAGT, among others, in state court in Wichita County, Texas. Although

Wichita County was a proper forum,the defendants moved to transfer the action

to Harris County, which they argued was a more convenient forum and also a

legally-acceptable forum because the company’s operations were in Houston.

The court scheduled a venue hearing for March 10, 2006.

In February 2006, the Luedtkes called a meeting on behalf of the various

business entities. The Luedtkes sent a proper notice to Knight indicating that

the meeting would be held on March 3, 2006 and that during the meeting they

would consider removing Knight from any position of authority at Yorkshire.

Knight requested that the meeting be postponed until March 8. The Luedtkes

agreed, and it was.

On March 3, 2006, less than one week before the meeting and the venue

hearing, Knight filed for bankruptcy on behalf of both Yorkshire and TAGT.

Knight hired Attorney Leonard as bankruptcy counsel for Yorkshire and TAGT.
1 Knightlater admitted the Luedtkes exercised almost absolute authority over corporate

affairs.

2 The parties dispute the correctness of the certificate. We need not resolve the dispute.

4

Knight informed Leonard that Knight was the President and sole Manager,1

which allegedly was substantiated by a corporate certificate listing him as such.2

Leading up to the bankruptcy filing, the record shows that Leonard conducted

little diligence on the financial status of the entities and no diligence on their

ownership and management so as to reach an informed decision as to whether

a bankruptcy filing was warranted, and, if so, who had authority to file it.

Moreover, Knight and Leonard prepared for the bankruptcy in secret: they did

not consult with or inform any other owner, officer, employee, or creditor.

Leonard signed each petition as “attorney for the debtor,” and Knight signed

each petition as “President, Manager.”

The Luedtkes held the March 8 meeting, and removed Knight from any

position of authority. Knight did not attend. On March 9, Attorney Yandell

substituted as counsel for the debtor, and the state court action was removed to

the Bankruptcy Court as an adversary proceeding. Leonard represented Knight

in the adversary proceeding against his former clients, the debtors. Eventually,

all parties stipulated that Yorkshire and TAGT were solvent and in no way in

default. Accordingly, the Bankruptcy Court dismissed the petitions but reserved

jurisdiction to consider motions for sanctions. The Luedtkes moved for sanctions

against Knight and Leonard. Following a hearing during which the Court heard

testimony from the parties and witnesses, the Bankruptcy Court granted their

motion. The District Court affirmed. Knight and Leonard appeal that decision.

II

This appeal requires us to decide two related questions: first, whether the

Bankruptcy Court erred in deciding to sanction Appellants for filing two

bankruptcy petitions in bad faith; and second, whether the Bankruptcy Court
5

erred in the amount of sanctions it imposed. We review a Bankruptcy Court’s

order imposing sanctions for abuse of discretion, In re First City of

Bancorporation of Texas, Inc., 282 F.3d 864, 867 (5th Cir. 2002) (citations

omitted), applying the same standards as did the District Court, In re

Armstrong, 206 F.3d 465, 469 (5th Cir. 2000). A Bankruptcy Court does not

abuse its discretion unless “its ruling is based on an erroneous review of the law

or on a clearly erroneous assessment of the evidence.” Chaves v. M/V Medina

Star, 47 F.3d 153, 156 (5th Cir. 1995) (citations omitted). We review findings of

fact under the clearly erroneous standard and conclusions of law de novo. First

City Banc., 282 F.3d at 867.

A

The Bankruptcy Court held, “[a]fter considering the testimony of the

witnesses and considering the documentary evidence,” that “the two petitions

were filed in bad faith.” Specifically, the Bankruptcy Court concluded that “the

bankruptcy cases were filed when Knight got dissatisfied with his state law

remedies and decided to inflict injury on the Luedtkes. Accordingly, the

bankruptcy cases were filed with a bad motive and with no meaningful thought

being given to the actual purposes of chapter 11 bankruptcy.” Based on these

findings, the Bankruptcy Courtimposed sanctions against Knight and Leonard.

The Bankruptcy Court identified two sources of its authority to impose

sanctions on Appellants: its “inherent authority to regulate the practice of

litigants and lawyers appearing before it[]” and FED. R. BANK. P. 9011(c).

Appellants raise three arguments in support of their contention that the

Bankruptcy Court erred. Their arguments are confusing to say the least; none

go to the issue of subjective bad faith, the basis of the Bankruptcy Court’s order.

First, Appellants contend that the Bankruptcy Court erred in holding that the

reason they asserted for filing for bankruptcy was illegitimate. According to

Appellants, they filed the bankruptcy petitions to comply with federal law
3 18 U.S.C. § 4 provides:

Misprision of felony. Whoever, having knowledge of the actual

commission of a felony cognizable by a court ofthe United States,

conceals and does not as soon as possible make known the same

to some judge or other person in civil or military authority under

the United States, shall be fined under this title or imprisoned

not more than three years, or both.

4 As to Knight, Appellants contend that he was represented by counsel and thus any

error in the determination that he had authority to file for bankruptcy was a legal one and

should be attributed to counsel, not Knight. As to Leonard, Appellants argue that he

thoroughly researched the facts and the law and formed a non-frivolous legal conclusion that

Knight had authority to file for bankruptcy. Moreover, Appellants contend that Knight, as

President, had authority to file for bankruptcy.

6

requiring them to reporttwo felonies: bank fraud and selling uninspected meat.3

Second, Appellants contend that the Bankruptcy Court’s order rested on two

erroneous legal conclusions. According to Appellants, the Bankruptcy Court

erroneously concluded that filing for bankruptcy would stop both the venue

hearing in the state court and the meeting at which the Luedtkes planned to

remove Knight from any position of authority at Yorkshire. Third, Appellants

contend that the Bankruptcy Court relied on a finding that Knight lacked

authority to file for bankruptcy, and that its finding in that regard was

erroneous.4 All of Appellants’ contentions lack merit.

It is well-settled that a federal court, acting under its inherent authority,

may impose sanctions against litigants or lawyers appearing before the court so

long as the court makes a specific finding thatthey engaged in bad faith conduct.

See Eliot v. Tilton, 64 F.3d 213, 217 (5th Cir. 1995) (citing Resolution Trust Corp.

v. Bright, 6 F.3d 336, 340 (5th Cir. 1993); In re Thalheim, 853 F.2d 383, 389 (5th

Cir. 1988)); see also Roadway Express, Inc. v. Piper, 447 U.S. 752, 765-66 (1980).

In this case, following an extensive hearing in which the Bankruptcy Court

heard testimony from the parties and witnesses and made certain credibility

determinations, the Bankruptcy Court made specific findings that Appellants
5 At a minimum, they caused the Luedtkes to expend nearly $60,000 in legal fees. 

7

acted in bad faith: Appellants filed the bankruptcy petitions “to inflict injury on

the Luedtkes . . . with a bad motive and with no meaningful thought being given

to the actual purposes of chapter 11 bankruptcy.” 

Appellants’ contentions miss the point. Indeed, even if they are

correct))Knight had a legal duty to report two felonies; the bankruptcy would

stop neither the venue hearing nor the meeting; and Knight had legal authority

to file for bankruptcy))we would not disturb the Bankruptcy Court’s decision.

In finding bad faith, the Bankruptcy Court saw these arguments for what they

were: before-or-after-the-fact attempts to cloak Appellants’ bad faith conduct

with legal arguments. The point is that Appellants filed for bankruptcy with the

subjective intent to harm the Luedtkes and that they actively concealed their

efforts from the company and its creditors. Whether and how Appellants could

accomplish their goal is another question.5 We find it telling that for all

Appellants’ purported justifications, one is noticeably absent from the briefing

in this Court: that they filed for bankruptcy in the best interests of the

company. 

The Bankruptcy Court did notimpose sanctions lightly. It acted only after

a hearing and after making the specific findings required by law. Therefore, we

hold that the Bankruptcy Court did not abuse its discretion in imposing

sanctions against Appellants under its inherent authority. Since we hold that

the Bankruptcy Court did not abuse its discretion in imposing sanctions under

its inherent authority, we need not decide whether sanctions also were

appropriate under Fed. R. Bank. P. 9011(c).

B

In determining the appropriate sanctions against Knight and Leonard, the

Bankruptcy Court first noted that it “should limit the sanction to what is
8

sufficient to deter repetition of such conduct by others similarly situated.” After

reviewing sanctions imposed by other courts, the Bankruptcy Court determined

that it should use the Luedtke’s attorneys’ fees as a starting point and then

order additional sanctions, if necessary, to assure proper deterrence. The

Bankruptcy Court determined that the Luedtke’s attorneys’ fees totaled

approximately $60,000. Then, after considering the annual income and net

worth of both Knight and Leonard along with their intentional and surreptitious

conduct,the Bankruptcy Court ordered $50,000 in sanctions against Knight and

$40,000 in sanctions against Leonard, with amounts in excess of attorneys’ fees

to be paid to the United States, including any insurance or indemnification

payments that either Appellant received.

Appellants ask this Court to vacate the amount of sanctions. Knight

contends that the Bankruptcy Court erred in determining the amount of

sanctions because its determination rested on the erroneous conclusion that

Knight was in the best position to inform Leonard that Knight lacked authority

to file for bankruptcy. This contention goes more to the issue of whether

sanctions should have been imposed rather than to the amount. Leonard

contends that the Bankruptcy Court erred in determining the amount of

sanctions because it failed to consider whether the Luedtkes mitigated their

damages and because its findings thatthe amount of sanctions were appropriate

to advance the goal of deterrence were erroneous. We disagree. Having

reviewing the record, we believe that the Bankruptcy Court’s order was wellfounded. Accordingly, we reject Appellants’ request to vacate the amount of

sanctions imposed.

III

For the reasons set forth above, we AFFIRM the Final Judgment of the

District Court, which AFFIRMED the Bankruptcy Court’s order imposing

sanctions on Appellants.