Opinion ID: 559885
Heading Depth: 2
Heading Rank: 2

Heading: Reassertion of the Undisclosed Principal Argument

Text: 37 The other ground on which the bankruptcy court premised its sanction was Baker's repeated contention that his wife was Cohoes' undisclosed principal in the Sparrowbush lease transaction. The court based this portion of the award on both Rule 9011 and 28 U.S.C. Sec. 1927. Section 1927 provides in pertinent part: 38 Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct. 39 A bankruptcy court may impose sanctions pursuant to 28 U.S.C. Sec. 1927 if it finds that [an] 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. Oliveri v. Thompson, 803 F.2d 1265, 1273 (2d Cir.1986), cert. denied sub nom., County of Suffolk v. Graseck, 480 U.S. 918, 107 S.Ct. 1373, 94 L.Ed.2d 689 (1987). Sanctions awarded on the basis of 28 U.S.C. Sec. 1927 are also reviewed under the abuse of discretion standard. See McMahon v. Shearson/American Express, Inc., 896 F.2d 17, 23 (2d Cir.1990); Apex Oil Co. v. Belcher Co., 855 F.2d 1009, 1020 (2d Cir.1988). 40 The bankruptcy court found that Baker's reassertion of the undisclosed principal argument was both vexatious and unfounded. According to the court, Baker raised this issue once before the state court and three separate times in the bankruptcy proceeding; the court also concluded that each time the argument had been raised, it was rejected. Further, the court found that there was no substantive evidence to support the claim. Thus, it determined that sanctions against Baker were warranted for continuing to advance this argument. We disagree. 41 The record reveals that no court squarely addressed the issue of Gloria Baker's beneficial ownership of the leasehold until the third time it was raised in bankruptcy court. When Gloria Baker initially applied to the New York Supreme Court for a declaratory judgment that the termination clause was invalid, the court dismissed her complaint for lack of standing. The court did not, therefore, expressly consider the merits of Gloria Baker's claim that she was an undisclosed principal. 42 Subsequently, Leon Baker attempted to assert the undisclosed principal argument in the bankruptcy proceeding by arguing that the Sparrowbush leasehold should be transferred to Gloria Baker because she was its beneficial owner. The bankruptcy court rejected this claim, finding that prior state court proceedings had divested Cohoes of any stake it might have had in the property. As a result, the court determined that even if Gloria Baker was the leasehold's beneficial owner, Cohoes had no interest to transfer to her. Therefore, the court did not address the merits of the undisclosed principal argument at that time. Soon thereafter, Leon Baker again attempted to raise the claim during the bankruptcy proceedings. Upon finding that Baker would face a conflict of interest if he, as Cohoes' advocate, was permitted to assert that his wife was the beneficial leaseholder of the property, the court prohibited him from advancing the argument. 43 Finally, Baker raised the argument in his capacity as special counsel to the Chapter 11 trustee. At that point, the bankruptcy court held a hearing to determine the validity of the claim. Baker called three witnesses and produced a number of documents to support his contention. The court recognized that a number of Cohoes' records were maintained in Gloria Baker's name and that Cohoes had also filed a certificate of doing business in her name. Although the court ultimately concluded that the claim had no merit, it cannot be said that there existed no evidence to support Leon Baker's position. 44 In light of the foregoing, we cannot find that Baker repeatedly reasserted the undisclosed principal argument to vexatiously multiply proceedings. Instead, we find that Baker only raised the claim until it was actually reviewed on the merits. While we certainly understand the bankruptcy court's frustration with Baker for reiterating this claim, we are unpersuaded that the undisclosed principal argument had no basis in law or in fact. Therefore, we find that the bankruptcy court abused its discretion by imposing sanctions on Baker for raising this argument.