Opinion ID: 769369
Heading Depth: 3
Heading Rank: 1

Heading: Lack of Merit and Bad Faith

Text: 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).