Opinion ID: 769369
Heading Depth: 2
Heading Rank: 1

Heading: Appeal From Sanctions in the District Court

Text: 16 Title 28, section 1927 of the United States Code provides that a court may impose sanctions on an attorney who so multiplies the proceedings in any case unreasonably and vexatiously. 28 U.S.C. § 1927. Sanctions may be imposed, however, only when there is a finding of conduct constituting or akin to bad faith. Sakon v. Andreo, 119 F.3d 109, 114 (2d Cir. 1997). We have held that an award under § 1927 is proper when the attorney's actions are so completely without merit as to require the conclusion that they must have been undertaken for some improper purpose such as delay. United States v. International Bhd. of Teamsters, 948 F.2d 1338, 1345 (2d Cir. 1991) (internal quotation marks omitted); see Keller v. Mobil Corp., 55 F.3d 94, 99 (2d Cir. 1995). We review the District Court's decision to impose sanctions for abuse of discretion. See Ted Lapidus, S.A. v. Vann, 112 F.3d 91, 96 (2d Cir), cert. denied, 522 U.S. 932 (1997).
17 As both the Bankruptcy Court and the District Court concluded repeatedly, the Debtor's challenge to the sale of the assets, pursued through attorney Papapanayotou in Bankruptcy Court and in District Court, was completely without merit. 18 First, the Debtor clearly lacked standing to challenge the sale. It is well-established that a Chapter 7 debtor is a party in interest and has standing to object to a sale of the assets, or otherwise participate in litigation surrounding the assets of the estate, only if there could be a surplus after all creditors' claims are paid. See, e.g., L. King, Collier on Bankruptcy § 721.02[2] (15th ed. rev. 1996) (explaining that a Chapter 7 Trustee has a duty to provide notice to creditorsof the Trustee's intention to use, sell, or lease property outside the normal course of the debtor's prepetition business); id. at § 502.02[2][c] (stating that a debtor is a party in interest and has standing to object to a claim where there could be a surplus after all claims are paid); In re Vebeliunas, 231 B.R. 181, 189-90 (Bankr. S.D.N.Y. 1999) (explaining that a debtor retains an equity security interest in the estate of the property only when the debtor can demonstrate that there would be a surplus for his estate), appeal dismissed, 246 B.R. 172 (S.D.N.Y. 2000); In re Roussopoulos, 198 B.R. 33, 44 n.9 (E.D.N.Y. 1996) (noting that an insolvent Chapter 7 debtor lacks standing to challenge a proposed sale of estate property because he lacks a pecuniary interest in such property); cf. In re Gucci, 126 F.3d 380, 388 (2d Cir. 1997) (To have standing to appeal from a bankruptcy court ruling in this Circuit, an appellant must be an 'aggrieved person,' a person 'directly and adversely affected pecuniarily' by the challenged order of the bankruptcy court. (quoting Kabro Assocs. v. Colony Hill Assocs., 111 F.3d 269, 273 (2d Cir. 1997)). Both the Bankruptcy Court and the District Court in this case found that there was no evidence that a surplus is a reasonable possibility in these proceedings, App. at 653, nor that the Debtor had any equitable interest whatsoever in the Judgments since the sole owner's fraudulent conduct undermined the value of the Debtor's sole asset and gave rise to the Judgments in the first place. These findings of fact are not clearly erroneous, cf. Bankr. R. 8013 ([The Bankruptcy Court's] [f]indings of fact shall not be set aside unless clearly erroneous . . . .), and, accordingly, we find that the Debtor lacked standing. 19 Second, the Trustee's sale of the Judgments to Dorlexa was, as the Bankruptcy Court concluded, a valid and good faith exercise of business judgment [that] benefitted the [Debtor's] estate more than any other potential disposition of the Judgments. Bankr. Decis. at 7. Both courts noted that the Debtor's argument that the sale to Dorlexa was a breach of the Trustee's duty was frivolous in light of the fact that it was inconceivable that anybody would or could outbid Dorlexa for the Judgments, Bankr. Decis. at 7. These findings, together with the controlling legal authority, clearly support the lower courts' conclusions that the challenge to the sale of assets, and the appeal from the denial of that challenge, was without basis in law or fact. 20 Furthermore, it was not an abuse of the District Court's discretion to conclude that the appeal of the Bankruptcy Court's decision was pursued in bad faith. First, as stated above, bad faith may be inferred where the action is completely without merit. See International Bhd. of Teamsters, 948 F.2d at 1345. Here, not only were the claims meritless, but Papapanayotou was warned of their frivolity by the Bankruptcy Court before he filed the appeal to the District Court. See Bankr. Decis. at 4-6 (bankruptcy court's labeling of the claims as without support in logic or the law, absurd, frivolous, implaus[ible], and inconceivable); see also Fox v. Boucher, 794 F.2d 34, 37-38 (2d Cir. 1986) (affirming a district court's imposition of sanctions under Rule 11 after the attorney filed a motion to vacate the judgment under Fed. R. Civ. P. 60(b) in the face of a written decision by the district judge that concluded plaintiff's action was frivolous and brought in bad faith). In addition, the claim asserted in the District Court-that the Trustee had not even attempted to collect from the Judgment Debtors before selling the estate-is particularly frivolous in the face of the more than $27,000,000 in unsatisfied judgments of record against Slabakis, of which Papapanayotou must have been aware. 21 Papapanayotou's bad faith and vexatiousness are most evident, however, in the nature of his arguments to the District Court, in which he disparaged and made unsubstantiated allegations impugning the integrity of the Bankruptcy Court Judge and the Trustee-claims which had absolutely nothing to do with the merits of his case. Though the full extent of his slanderous vitriol has been recounted above, some of the more outrageous comments bear repeating. He accused a federal judge and a fellow member of the bar of engaging in civil and criminal misconduct, stating in his papers, for example, that the Trustee had the helping hand of an approvingly winking Bankruptcy Court, App. at 477; that the court applied double standards, App. at 486; that the sale at issue was a judicially sanctioned grand larceny, App. at 489; and that the Trustee and Dorlexa engaged in a judicially sanctioned fraud. He called the Trustee an idiot, App. at 641-42, and accused the Bankruptcy Judge of fundamental ignorance, App. at 488. Such comments cross the line from passionate advocacy and disagreement with a court's decision into sanctionable conduct evincing bad faith. Cf. Tony Mauro, Pondering the Right to Practice Law, N.Y.L.J., June 26, 2000 at 2 (discussing the Supreme Court's disbarment of an attorney who filed petitions for writ of certiorari with invective against the U.S. Court of Appeals for the Second Circuit, including personal attacks against its Chief Judge and statements that the Court could be declared a corrupt enterprise under RICO). 22 Thus, bad faith here may be inferred from the clear lack of merit of the claims, a fact of which Papapanayotou was well aware before he filed the appeal, and the numerous attempts to impugn the integrity of a federal judge and fellow attorney through totally unsubstantiated abusive and slanderous statements. Cf. Eisemann v. Greene, 204 F.3d 393, 397 (2d Cir. 2000) (per curiam) (noting that bad faith may be inferred from the meritlessness of a motion).
23 '[D]ue process requires that courts provide notice and opportunity to be heard before imposing any kind of sanctions.' Ted Lapidus, S.A., 112 F.3d at 96 (quoting In re Ames Dep't Stores, Inc., 76 F.3d 66, 70 (2d Cir. 1996)). More specifically, we have held that [a]n attorney whom the court proposes to sanction must receive specific notice of the conduct alleged to be sanctionable and the standard by which that conduct will be assessed, and an opportunity to be heard on that matter, and must be forewarned of the authority under which sanctions are being considered, and given a chance to defend himself against specific charges. Sakon, 119 F.3d at 114 (internal quotation marks omitted). At a minimum, the notice requirement mandates that the subject of a sanctions motion be informed of: (1) the source of authority for the sanctions being considered; and (2) the specific conduct or omission for which the sanctions are being considered so that the subject of the sanctions motion can prepare a defense. See id. at 114; Ted Lapidus, S.A., 112 F.3d at 96. The opportunity to respond is judged under a reasonableness standard: a full evidentiary hearing is not required; the opportunity to respond by brief or oral argument may suffice. See, e.g., Stein v. Ulster Sav. Bank, 127 F.3d 292, 295 (2d Cir. 1997) (per curiam) (collecting cases supporting this proposition but remanding to the district court to give attorney a chance to be heard on imposition of sanctions because none had been given). 24 As an initial matter, it is far from clear that Papapanayotou has not waived his right to challenge the District Court's imposition of sanctions as a violation of due process. He first raises the issue in a single sentence in his reply brief on appeal. Arguably, the argument has therefore been waived. See Thomas v. Roach, 165 F.3d 137, 146 (2d Cir. 1999). Even assuming Papapanayotou has not waived his due process challenge, we find no violation of his due process rights in any event. 25 There is no question Papapanayotou received adequate notice of both the conduct for which the court was considering the imposition of sanctions and the authority under which that conduct was to be judged. For example, the court asked Papapanayotou, why [it] should not conclude that [his] activities here in bringing this appeal and in making these allegations of dishonesty and idiocy which [he] made in [his] papers submitted here should not come within a finding that [he has] unreasonably and vexatiously multiplied the proceedings of the case within the standard of Section 1927 of Title 28, United States Code. App. at 655. Cf. Nuwesra v. Merrill Lynch, Fenner & Smith, Inc., 174 F.3d 87, 92 (2d Cir. 1999) (per curiam) (vacating a district court's imposition of sanctions where written order providing notice listed possible legal bases for sanctions but failed to apprise the attorney of the particular conduct for which the court was considering imposing sanctions). 26 Moreover, while ordinarily it is preferable for a court to provide an attorney with advance, written notice of the possibility of sanctions-a benefit not accorded to Papapanayotou here-we have not previously made such notice a requirement. In fact, in one instance we affirmed, without discussion, the imposition of sanctions under § 1927, where the court imposed the sanctions during trial after only several warnings from the bench that the continued playing of a videotape that had no evidentiary value would result in such sanctions. See New York v. Operation Rescue Nat'l, 80 F.3d 64, 72-73 (2d Cir.), cert. denied, 519 U.S. 825 (1996). Under the circumstances of this case, we conclude that the notice given in the District Court was reasonable and adequate. 3 27 With respect to Papapanayotou's opportunity to be heard, the District Court gave Papapanayotou repeated opportunities to explain his conduct once the issue of sanctions was raised in the courtroom. Not only did Papapanayotou not request any extension of time, or permission to file any written materials, but the substance of his argument was such that additional time would not have aided his cause. For example, in response to the District Court's inquiries, Papapanayotou simply contended, implausibly, that his personal attacks on the Bankruptcy Court and his adversary were within the bounds of permissible adversarial advocacy, App. at 642, and did not appear to comprehend that, whatever the merits of his case, they did not justify his personal attacks. In fact, he termed his behavior only an inconvenience to the Court, App. at 658, and continued to claim that his appeal, which had been deemed frivolous by two federal judges, was meritorious. Finally, after offering his entirely unsatisfactory explanation for his conduct, Papapanayotou explicitly told the District Court that he ha[d] concluded . . . in response to [the Court's] invitation to explain [his] actions. App. at 658. In short, it was entirely reasonable that the District Court sanctioned Papapanayotou after hearing Papapanayotou's response to its oral order to show cause.