Opinion ID: 3009882
Heading Depth: 2
Heading Rank: 1

Heading: Inherent Power to Sanction

Text: In Chambers v. Nasco, Inc., 501 U.S. 32 (1991), the Supreme Court addressed the nature and scope of the federal courts' inherent power to control the conduct of those who appear before them. The Court began by surveying its long history of case law in this area: It has long been understood that '[c]ertain implied powers must necessarily result to our Courts of justice from the nature of their institution,' powers 'which cannot be dispensed with in a Court, because they are necessary to the exercise of all others.' Id. at 43 (quoting United States v. Hudson, 7 Cranch 32, 34 (1812)) (other citation omitted). Among the implied and 'incidental' powers of a federal court is the power to discipline attorneys who appear before it. Id. (quoting Ex parte Burr, 9 Wheat. 529, 531 (1824)). Included among the types of sanctionable conduct discussed by Chambers are those cases where a party has 'acted in bad faith, vexatiously, wantonly, or for oppressive reasons.' . . . The imposition of sanctions in this instance transcends a court's equitable power concerning relations between the parties and reaches a court's inherent power to police itself, thus serving the dual purpose of vindicat[ing] judicial authority without resort to the more drastic sanctions available for contempt of court and mak[ing] the prevailing party whole for expenses caused by his opponent's obstinacy. Id. at 45-46 (internal citations and quotations omitted). See also Gillette Foods Inc. v. Bayernwald-Fruchteverwertung, 977 F.2d 809, 813 (3d Cir. 1992) (quoting Chambers). Because of their very potency, however, the federal courts must be careful to exercise their inherent powers with restraint and discretion. Chambers, 501 U.S. at 44. A primary aspect of that discretion is the ability to fashion an appropriate sanction for conduct which abuses the judicial process. Id. at 44-45. In this case, the bankruptcy court determined that denying FE&B's entire fees application constituted an appropriate sanction. We first note here that the advent of Rule 11 and the other statutory sanctions did not eviscerate the courts' inherent power to sanction: [W]hereas each of the other mechanisms reaches only certain individuals or conduct, the inherent power extends to a full range of litigation abuses. At the very least, the inherent power must continue to exist to fill in the interstices. Id. at 46. Moreover, we have previously rejected the proposition that once a claim is held not to violate Rule 11, the court is prevented from imposing sanctions under its inherent power. Gillette Foods, 977 F.2d at 813. Against this backdrop, FE&B challenges the bankruptcy court's exercise of its inherent sanction power on two main grounds. First, FE&B argues that this result deprives FE&B of due process because the bankruptcy court indicated that it was exclusively acting pursuant to Rule 11 and Bankruptcy Rule 9011. Second, FE&B argues on the merits that the record is insufficient to support the finding that it acted in bad faith during the course of its representation of the Debtor.
The key to FE&B's due process claim is the distinction between Rule 11 sanctions and inherent power sanctions--if these sanctions were identical in all respects, particularized notice as to one sanction would arguably suffice to fully inform FE&B as to the pendency of the other sanction. Rule 11 sanctions and inherent power sanctions do, of course, differ markedly in at least one aspect pertinent to this case: Invocation of a federal court's inherent power to sanction requires a finding of bad faith. Chambers, 501 U.S. at 49; Landon v. Hunt, 938 F.2d 450, 454 (3d Cir. 1991). The imposition of Rule 11 sanctions, on the other hand, requires only a showing of objectively unreasonable conduct. E.g., Lony v. E.I. Du Pont de Nemours & Co., 935 F.2d 604, 616 (3d Cir. 1991). We have previously held that [p]rior to sanctioning an attorney, a court must provide the party to be sanctioned with notice of and some opportunity to respond to the charges in order to satisfy the requirements of due process. Jones v. Pittsburgh Nat'l Corp., 899 F.2d 1350, 1357 (3d Cir. 1990) (citations omitted). Moreover, we have stated that we think particularized notice is required to comport with due process. Id. (citation omitted). FE&B has raised a fairly significant argument here as the bankruptcy court never indicated that it was acting under its inherent sanction power in this case. Indeed, neither the motion for sanctions nor the bankruptcy court ever mentioned any ground for sanctions other than Rule 11 and Bankruptcy Rule 9011. As discussed above, it was the district court that first justified the bankruptcy court's conduct on the ground of the inherent power to sanction. Nonetheless, we agree with the district court's reasoning and we likewise find that justifying the bankruptcy court's conduct on that ground does not violate FE&B's right to due process on the record of this case. We do not intend to disturb the line of case law cited to by FE&B in its brief. See Simmerman v. Corino, 27 F.3d 58, 64 (3d Cir. 1994); Landon, 938 F.2d at 454; Jones, 899 F.2d at 1357-58; Gagliardi v. McWilliams, 834 F.2d 81, 83 (3d Cir. 1987); Eavenson, Auchmuty & Greenwald, 775 F.2d at 540-41; Eash v. Riggins Trucking Inc., 757 F.2d 557, 570-71 (3d Cir. 1985). Rather, our holding is a narrow one, compelled by our finding that FE&B was provided with sufficient, advance notice of exactly which conduct was alleged to be sanctionable and, furthermore, that FE&B was aware that it stood accused of having acted in bad faith.
In Jones we stated that the reason behind the particularized notice requirement was to put a party . . . on notice as to the particular factors that he must address if he is to avoid sanctions. Jones, 899 F.2d at 1357. Generally speaking, particularized notice will usually require notice of the precise sanctioning tool that the court intends to employ. In Jones, as was the case here, the sanctioned attorney was initially informed that only Rule 11 sanctions were being considered. Id. Only when the sanctioned attorney received the district court's order was he informed that sanctions were also being imposed pursuant to 28 U.S.C. § 1927,7 which has been interpreted to require a finding of bad faith conduct. Id. On appeal, we vacated the imposition of sanctions under § 1927 because the sanctioned 7 § 1927. Counsel's liability for excessive costs 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. attorney had not been provided with sufficient notice that his subjective bad faith was in question.8 The situation confronting the sanctioned attorney in Jones is to be contrasted with the situation facing FE&B: First, the sanction motion filed by Mr. Fustine, the Knox firm, and the Committee explicitly charges FE&B with bad faith in the filing of the complaint on behalf of the debtor. Specifically, the 8 The motion for sanctions filed by the sanctioned attorney's opponents pursuant to Rule 11 was hinged primarily upon procedural noncompliance: [The motion] alleged that plaintiff had failed to file a pre-trial statement, to submit a RICO case statement, to answer interrogatories, to produce documents requested and to conduct any discovery and that plaintiff had had no factual basis for the RICO count. Id. at 1353. This request for sanctions was reiterated on at least two occasions, but again these requests were insufficient to put the attorney on notice of the fact that he stood accused of having acted in subjective bad faith: The first reiteration recited that it sought dismissal and fees based upon plaintiff's 'conduct of [the] litigation in general,' including the failure to answer interrogatories, failure to file a RICO case statement or pretrial statement and failure to produce requested documents. Id. at 1354. The sanctioned attorney's answer to his opponent's motion for counsel fees--which constituted his sole opportunity to respond to the question of sanctions--was insufficient to demonstrate that he was on notice that he stood accused of more than objectively unreasonable conduct. His response merely repeated the requirements of Rule 11: In response to the charge of having violated Rule 11, appellant asserted that he believed throughout a large portion of the instant litigation . . . that the Complaint was warranted by existing law; that, alternatively, it was warranted by good faith arguments for extension, modification or reversal of existing laws; and that it was not interposed for delay or needless increase in cost of litigation. Id. sanction motion charges that FE&B was actually aware of, or had at least remained deliberately indifferent to, the factual and legal baselessness of the complaint. Second, and much more importantly, the bankruptcy court also made it clear that it suspected FE&B of having acted in bad faith both in its representation of the debtor's interests and in the filing of the complaint. At the conclusion of the August 3, 1993 hearing on the Debtor's complaint, after Mr. Fellheimer had sought to withdraw the complaint, the bankruptcy court first stated that it believed that FE&B was representing the interests of Mr. Burke over the interests of the Debtor: [Y]ou're on a knife's edge, Mr. Fellheimer. You're representing Mr. Burke . . . . And that's adverse to the interests of the [Debtor]. . . . [T]o the extent that you represent [Mr. Burke] to the detriment of the [Debtor] and the creditors, you're violating your fiduciary duty to the [Debtor]. The bankruptcy court then stated its belief that FE&B had filed the complaint in bad faith: [F]or Mr. Burke to get upset because the creditors committee thinks that he's incompetent, is unfortunate. You . . . have to tone him down. You can't file this kind of lawsuit that you filed here just because Mr. Burke is upset. That's ridiculous. . . . [T]his whole litigation is a lot of nonsense. The bankruptcy court even indicated the nature of the sanction that it was considering: [Y]ou're representing [Mr. Burke] individually and you're risking whatever fee you might get out of this. If the bankruptcy court had then and there conducted a hearing on the sanction motion, FE&B would arguably possess a stronger due process argument--this is the key factor which distinguishes this case from Jones. In Jones, the record was insufficient to demonstrate that the sanctioned attorney had advance notice that the sanctioning court was contemplating the imposition of sanctions which hinged upon a finding of bad faith. In this case, FE&B had over eleven weeks once it had learned of the bankruptcy court's leanings on this matter--until October 20, 1993--to prepare for the hearing on the sanctions motion. In the words of our Jones opinion, we can say with reasonable assurance on this record that FE&B was on notice as to the particular factors that [it had to] address if [it was] to avoid sanctions. Jones, 899 F.2d at 1357. Furthermore, it appears evident from Mr. Fellheimer's soliloquy at the October 20, 1993 hearing that he was fully aware of what he and FE&B were up against: I have been searching in vain for a way to stop it or to get away from it. I want to tell the Court. I don't want this Court to think that I'm standing here, that I believe what happened was right. I believe it was wrong. If I had it to do over again, I would do it differently. And I can promise you, whatever you decide to do, it won't happen again. I would approach it differently and I would make sure my firm approaches it differently. I'm very unhappy with the way it came out. I will tell you that there were a lot better ways to resolve that problem than the one we selected. And I want to acknowledge that to you and admit that to Your Honor and admit to Your Honor that the result was bad. For that I apologize. . . . . . . . I would like to step aside. Whatever I'm to pay, I'll pay. Whatever fee I'm paid, I'll take, and step aside in the interest of all. I don't think it's good for this to just go on and on. It doesn't accomplish anything for this debtor. . . . . . . . And I want to publicly say to Guy Fustine in the courtroom, I think we were wrong in filing the Complaint. And maybe I'm handing it to Mr. Lanzillo. And I will, if that's what it is. I apologize to you publicly. I think we got carried away with the problem and we went too far, and for that I apologize. And whatever the Court decides to do, I will accept. Therefore, we hold that the record adequately demonstrates that FE&B was sufficiently on notice that it faced allegations of having acted in subjective bad faith.
The requirements of due process also require a meaningful opportunity to be heard. See, e.g., Simmerman, 27 F.3d at 64. This requirement is especially important in cases such as this where a law firm's reputation is at stake: Sanctions are not to be assessed without full and fair consideration by the court. They often entail a fine which may have more than a token effect upon an attorney's resources. More importantly, they act as a symbolic statement about the quality and integrity of an attorney's work--a statement which may have tangible effect upon the attorney's career. Id. As discussed above, once the bankruptcy court had made its position regarding FE&B's conduct clear, FE&B had over eleven weeks before the hearing to further brief the issue. FE&B was then afforded ample opportunity to be heard at the hearing itself--the transcript of the October 20, 1993 hearing stretches on for 321 pages. Based on this record, we cannot find that FE&B was denied a meaningful opportunity to be heard.
Ideally, there would have been some explicit indication here that the bankruptcy court was acting pursuant to its inherent sanction power. We refuse, however, to go along with FE&B's argument and overturn the bankruptcy court's decision merely because that court applied the wrong label to the righteous use of its inherent sanction power. See Brown v. Allen, 344 U.S. 443, 459 (1953) (citations omitted). We do not expect, however, that the result reached here will be often justified in future cases where the sanctioned party was not explicitly informed beforehand of the precise ground for the imposition of sanctions. To summarize, our finding here was primarily driven by (1) the bankruptcy court's clear warning to FE&B eleven weeks prior to the hearing on the sanctions; and (2) the evidence pertaining to FE&B's actual awareness of the nature of the charges pending against it, such as Mr. Fellheimer's statements at the October 20, 1993 hearing.
FE&B also argues on the merits that the record is insufficient to support a finding of bad faith. As discussed above, a finding of bad faith is required to support a court's employment of its inherent sanction power. Chambers, 501 U.S. at 49 (citations omitted). We first note that, contrary to FE&B's assertions, the bankruptcy court did find that FE&B had acted in bad faith in the course of its representation of the debtor: The conclusion is inescapable that the purpose of the Complaint was to separate the Committee from its chosen counsel due to the fact that counsel for the Committee was advocating the Committee's position that it would be appropriate to remove Burke from upper-level management. . . . Fellheimer . . . abandoned his fiduciary obligations as counsel to the Debtor corporation and . . . undert[ook] representation of Burke, individually. As Burke's attorney in such circumstances, he was hostile to the Debtor corporation and its creditors. . . . . In short, Fellheimer filed a lawsuit against the attorneys for the Creditors' Committee seeking $4.25 million in damages for the sole purpose of protecting his real client, Burke, from the legitimate actions of the Creditors' Committee in opposing Burke's management of the Debtor's business. . . . Viewed in this light, the actions of Fellheimer as an officer of the Court in violating his fiduciary duties and in bringing such an action are absolutely not to be condoned. We view it as a disgrace to the legal community which we otherwise hold in high regard. We further conclude that Fellheimer never had any intent to proceed with a trial on the merits of this complaint. He knew when he filed the Complaint that the allegations were unsupported. His scheme was to file the Complaint, demand the $4.25 million from the Creditors' Committee counsel, and then delay a hearing on the merits while he used the lawsuit as a wedge to intimidate the Creditors' Committee and its counsel in his negotiations with it for the benefit of Burke. Charter Techs., 160 B.R. at 931. We may not disturb these findings, nor may we disturb the bankruptcy court's preliminary findings which led up to them, unless we first find that they are clearly erroneous. Brown, 851 F.2d at 84. Since FE&B offers nothing but tepid contradictions in rebuttal, we must affirm the bankruptcy court's findings, which are sufficient to support its conclusion that FE&B did act with bad faith in the proceedings below. Second, we take note of the Supreme Court's cautionary language in Chambers: [W]hen there is bad-faith conduct in the course of litigation that could be adequately sanctioned under the Rules, the court ordinarily should rely on the Rules rather than the inherent power. But if in the informed discretion of the court, neither the statute nor the Rules are up to the task, the court may safely rely on its inherent power. Chambers, 501 U.S. at 50. In this case, only Mr. Eichen of FE&B could be properly sanctioned under the versions of Rule 11 and Bankruptcy Rule 9011 then in effect as only Mr. Eichen actually signed the complaint. It is evident, however, that the bankruptcy court imposed firm-wide sanctions because it felt that other attorneys at FE&B, particularly Mr. Fellheimer, were primarily responsible for the sanctionable conduct.9 Indeed, Mr. Fellheimer himself testified as to his primary role in the filing of the complaint at the October 20, 1993 hearing: Your Honor told me what he thought of [the complaint] at the time when we withdrew it. And I bear full responsibility for it, Your Honor. We cannot conclude, after reviewing this record, that the bankruptcy court abused its discretion by employing its inherent power to sanction the entire firm of FE&B.