In re JOHN RICHARDS HOMES BUILDING COMPANY, L.L.C., Debtor. Kevin Adell, Appellee/Cross-Appellant, v. John Richards Homes Building Company, L.L.C., Appellant/Cross-Appellee, and Honigman, Miller, Schwartz & Cohn LLP, Appellee.
Nos. 12-2012, 12-2013, 12-2014, 12-2015
United States Court of Appeals, Sixth Circuit
Nov. 20, 2013
401
Before: ROGERS, STRANCH, and DONALD, Circuit Judges.
BERNICE B. DONALD, Circuit Judge.
The parties, Kevin Adell and John Richards Homes Building Co., cross-appeal the district court‘s decision affirming in part and reversing in part an order of the bankruptcy court. The bankruptcy court‘s order granted counsel for the alleged debtor, John Richards Homes Building Co., $1,854,192.73 in attorney‘s fees for costs
I.
This appeal marks the second time these pаrties, John Richards Homes Building Co., L.L.C. (“JRH“) and Kevin Adell (“Adell“), have come before this Court over the course of an acrimonious eleven-year dispute that has been litigated, at various times, in seven different federal courts and two different state court systems.1 Accordingly, this section begins with the facts as described by this Court in the prior appeal, supplemented by a description of the parties’ conduct in the Florida litigation that followed the 2003 judgment of the bankruptcy court and the litigation that led to the instant appeal.
In Adell v. John Richards Homes Bldg. Co., L.L.C. (In re John Richards Homes Bldg. Co., L.L.C.) (“In re JRH I“), 439 F.3d 248 (6th Cir.2006), this Court summarized the initial factual background of the litigation in the bankruptcy court as follows:
As the bankruptcy court found, in December 2001, Adell and JRH entered into a Residential Building and Purchase Agreement whereby JRH, in exchange for $3,030,000, agreed to sell Adell a 1.8 acre parcel of property in Bloоmfield Hills, Michigan, and to construct a home for Adell on the property, with construction to begin “within a reasonable time after the completion of building plans and issuance of permits.” On February 28, 2002, the deal closed. The closing documents allocated $1,750,000 out of the $3,030,000 for the land purchase. Over the next few months, Adell‘s relationship with JRH and its principal, John Shekerjian, soured.... He told Shekerjian that he wanted another builder to build his house and, apparently, barred JRH from the property. He also became upset about the amount he had paid for the land, contending that it was only worth $1 million instead of $1.75 million.
On June 6, 2002, after a number of conversations, meetings, letters and other interactions between Adell or his representatives and JRH or its representatives, Adell filed a civil suit against JRH and Shekerjian in the Oakland County Circuit Court. The complaint included a number of claims, all of which essentially rested on two allegations: (1) that Shekerjian and JRH had orally told Adell that the land was worth $1,000,000, and that the home they would construct for him would have a value of $2,000,000, despite the fact that the executed sale documents allocated $1,750,000 to the value of the land, leaving at most $1,280,000 for the home construction; and (2) that Shekerjian for JRH had told Adell that construction would begin immediately after the sale closed, even though they knew that was impossible because there were “water problems”
with the property, and that the resulting delay in commencing construction was not “reasonable.” On June 18, 2002, JRH and Shekerjian jointly filed an answer, denying the substance of all of Adell‘s claims, stating affirmative defenses, and including a verified counter-complaint. On June 24, 2002, less than a week after JRH and Shekerjian filed their responses in the state court case and without any further discussion or communication, Adell, as the sole petitioning creditor, filed an involuntary bankruptcy petition against JRH pursuant to
11 U.S.C. § 303(b)(2) . According to the petition, Adell‘s own claim against JRH for fraud and breach of contract was in the amount of $800,000. Adell sought to maximize the publicity attending his filing by hiring a public relations firm, Marx Layne, to publicize alleged defects in JRH‘s performance of its construction and financial obligations.On July 1, 2002, JRH filed a motion to dismiss the petition. Noting that Adell‘s claim against JRH cited in the petition was also the basis for Adell‘s state court civil complaint against JRH and Shekerjian, and that JRH and Shekerjian had recently filed pleadings denying all of Adell‘s claims, JRH argued that Adell‘s claim was the subject of a “bona fide dispute,” precluding its use as the basis for the petition. JRH also argued that Adell was required to have at least three petitioning creditors because JRH was an entity with 12 or more creditors. Should the petition be dismissed, JRH asked the bankruptcy court to award it fees, costs and damages pursuant to
11 U.S.C. § 303(i) . On July 12, 2002, Adell‘s bankruptcy attorneys filed a notice that three additional creditors had joined in the filing of the petition.On July 15, 2002, the bankruptcy court held a hearing on JRH‘s motion to dismiss. Ruling from the bench, the court granted the motion, concluding that Adell was not qualified to serve as a creditor in an involuntary bankruptcy because his claim against JRH was not undisputed. The court explained:
The record that is before the Court overwhelmingly establishes that there is a bona fide dispute concerning this petitioning creditor‘s claim against the Alleged Debtor ... [and] ... that there are significant genuine issues of material fact concerning any disposition of the issues raised in the [state court case], ... such fundamental issues as which of the parties breached the contraсt, which of the parties was the first to breach the contract. There are clear issues of fact concerning particularly the fraud claim and the statutory claim.
Having rejected the sole petitioning creditor, Adell, the bankruptcy court ruled that it could not permit the joinder of other putative creditors. Adell did not appeal the bankruptcy court‘s dismissal of the petition.
After a period of discovery, followed by a two-day evidentiary hearing, the bankruptcy court granted JRH‘s [
§ 303(i) ] motion on April 25, 2003. In a thorough opinion, the court found that Adell filed the involuntary bankruptcy petition against JRH in bad faith and awarded JRH compensatory damages in the amount of $4,100,000, punitive damages in the amount of $2,000,000, and attorneys’ fees and costs in the amount of $313,230.68.Adell appealed to the district court. On August 5, 2004, in another thorough opinion, the district court ratified the bankruptcy cоurt decision.
Id. at 252-54 (citations omitted).
While Adell‘s direct appeals were pending in the District Court for the Eastern
After this Court affirmed the initial Michigan bankruptcy court judgment on the involuntary petition on March 1, 2006, Adell paid the $6.4 million judgment in full on April 3, 2006. In re JRH II, 405 B.R. at 206. Subsequently, on April 21, 2006, Honigman, Miller, Schwartz, & Cohn (“HMSC“), counsel for JRH, filed two motions in the Eastern District of Michigan Bankruptcy Court: one for additional punitive damages and a “Second Application for Compensation of Attorney Fees and Expenses” seeking an additional $2 million in fees and costs—mostly incurred during the Florida litigation—under
On remand, the bankruptcy court entered the order at issue in this appeal, granting JRH‘s second motion for attorney‘s fees and motion for additional punitive damages. See In re JRH III, 461 B.R. at 14, 22. The bankruptcy court awarded JRH $1,854,192.73 in attorney‘s fees and $2.8 million in punitive damages. Id. Adell appealed to the district court, which affirmed the award of attorney‘s fees and reversed the award of punitive damages. (PageID 9308.) Both parties timely appealed to this Court. (Page ID 9338, 9373.)
II.
A.
When we confront an appeal that originated in bankruptcy court, our review takes a different form than an appeal that originated in district court. See Alfes v. Educ. Credit Mgmt. Corp. (In re Alfes), 709 F.3d 631, 636 (6th Cir.2013). “We evaluate the bankruptcy court decision directly, without being bound by the district court‘s determinations, and conduct an independent examination of the record.” In re JRH I, 439 F.3d at 254. This Court reviews the bankruptcy court‘s factual findings for clear error and its conclusions of law de novo. Hills v. McDermott (In re Wicker), 702 F.3d 874, 877 (6th Cir.2012). “We will not disturb the bankruptcy court‘s findings of fact unless there is the ‘most cogent evidence of mistake of justice.‘” WesBanco Bank of Barnesville, Ohio v. Rafoth (In re Baker & Getty Fin. Servs. Inc.), 106 F.3d 1255, 1259 (6th Cir. 1997) (quoting Newton v. Johnson (In re Edward M. Johnson & Assocs., Inc.), 845 F.2d 1395, 1401 (6th Cir.1988)). The issue of whether bankruptcy courts have the authority to impose punitive damages under
Additionally, because Adell has not argued that the bankruptcy court‘s award of punitive damages violates the United States Constitution, we review both the assessment of and amount of punitive damages for abuse of discretion. Cooper Indus., Inc. v. Leatherman Tool Grp., Inc., 532 U.S. 424, 433 (2001) (“If no constitutional issue is raised, the role of the appellate court, at least in the federal system, is merely to review the trial court‘s ‘determination under an abuse-of-discretion standard.‘” (quoting Browning-Ferris Indus. of Vt., Inc. v. Kelco Disposal, Inc., 492 U.S. 257, 279 (1989))). This Court also reviews for abuse of discretion both a lower court‘s award of sanctions under
B.
This appeal requires us to answer the following question: does
1.
The starting point for any exercise in statutory interpretation is the language of the statute itself. Barnhart v. Sigmon Coal Co., Inc., 534 U.S. 438, 450 (2002). “The first step is to determine whether the language at issue has a plain and unambiguous
The particular dispute at this point concerns whether
The existence of ambiguity in
In re Landmark Distributors represents one of the well-reasoned cases holding that
In overruling the creditors’ objections, the bankruptcy court reasoned that it “would fly in the face of legislative intent and common sense” to deny the fees rеquested for the damages phase of the case. Id. There was “nothing in the Code or case authority limiting an award to the date of dismissal,” id. (quoting In re Advance Press & Litho, Inc., 46 B.R. 700, 703 (D.Colo.1984)) (internal quotation marks omitted), and, due to the length of the damages trial, approximately 87% of the fees requested were incurred after the dismissal of the involuntary petition. Id. The bankruptcy court‘s reasoning also took into account that Landmark was “truly a case of first reported impression, not only insofar as the filing of an involuntary petition in extreme bad faith caused the alleged debtor‘s financial demise, but because the compensatory and punitive damages award under
The leading case holding that
Although the Ninth Circuit affirmed the bankruptcy court‘s grant of summary judgment “on the issue of initial litigation attorney‘s fees and costs pursuant to
The Ninth‘s Circuit‘s decision in Higgins, however, suffers from a crucial flaw: the opinion relied on previous Ninth Circuit holdings from Vasseli v. Wells Fargo Bank, National Association (In re Vasseli), 5 F.3d 351 (9th Cir.1993), and In re Del Mission, 98 F.3d 1147, which addressed
The plain language of the statute presents only two prerequisites for an award of fees, costs, or damages under
§ 303(i)(1) : 1) the court must have dismissed the petition on some ground other than consent by the parties; and 2) the debtor must not have waived its right to recovery under the statute.
Higgins, 379 F.3d at 705. Higgins did not explain why
Another flaw in Higgins is that it frustrates the plain intent of Congress to provide a complete remedy for debtors who successfully defend against an involuntary petition. The Ninth Circuit‘s opinion explicitly acknowledges this problem:
This holding creates a discrepancy that only Congress can rectify. Despite Congress‘s clear intent to award attorney‘s fees and costs to an alleged debtor who successfully defends an involuntary bankruptcy bid, the debtor remains exposed to appellate attorney‘s fees unless it can be demonstrated that the appeal was frivolous under
Rule 38 .
Id. at 709 n. 3. Adell argues, primarily based on Higgins, that a “broad construction [of
The Supreme Court‘s decision in Cooter & Gell v. Hartmarx Corp., 496 U.S. 384 (1990)—cited by Adell for support in his brief—is not to the contrary. In Cooter & Gell, the Supreme Court considered the propriety of awarding appellate costs as sanctions under
But Cooter & Gell is distinguishable because, unlike the Federal Rules of Civil Procedure,
Adell also argues that the literal language of
Accordingly,
2.
In ruling that “a bankruptcy court may award attorney fees and costs in post-judgment proceedings under
Balark v. Curtin is a representative example of these cases and bears some resemblance to the facts of the instant appeal. 655 F.2d 798 (7th Cir.1981). In Balark, the plaintiff, Bertha Balark, had become a judgment creditor of the defendants, six City of Chicago police officers, after winning her
Relying on its decision in Bond v. Stanton, where that court held attorneys are generally entitled to collect fees “incurred in litigating and establishing their entitlement to fees” under
Plaintiff seeks fees for her efforts to collect the judgment awarded her in her successful action under the civil rights laws. Congress has determined that attorneys’ fees are necessary to fulfill the purposes of the civil rights laws by transferring the costs of litigation to those who infringe upon basic civil rights. The compensatory goals of the civil rights laws would thus be undermined if fees were not also available when defendants oppose the collection of civil rights judgments. An award of compensation for injuries sustained as a result of unconstitutional state action would be “diluted” if fees were denied to plaintiffs required to contest substantial efforts to resist or obstruct the collection of civil rights judgments. The victory would be hollow if plaintiffs were left with a paper judgment not negotiable into cash except by undertaking burdensome and uncompensated litigation.
Balark, 655 F.2d at 803 (citations omitted). This reasoning is applicable to the fee-shifting provision of
In enacting
Our reasoning here does not suffer from the same defect as the Ninth Circuit‘s in Higgins. While Higgins was bound by cases that did not allow awards of attorney‘s fees because Rule 38 already provides a procedure for awarding fees in frivolous appeals,
Accordingly,
III.
On October 27, 2011, the bankruptcy court issued its ruling on JRH‘s “Motion for Assessment of Additional Punitive Damages Based on Post-Award Conduct.” See In re JRH III, 461 B.R. at 15. The motion sought “an award оf sanctions for Adell‘s continuing pattern of abuse of the judicial process in evading the
JRH alleged, and the bankruptcy court found, that the following facts supported a second award of sanctions against Adell:
- Adell‘s perjury in repeatedly testifying in objection to JRH‘s request for an order requiring the sale of his new home in Florida that he had become a resident of Florida, which was the basis of his claim that he was entitled to the Florida homestead exemption.
- Adell‘s active participation with STN.com and Adell Broadcasting Corp. in evading the post-judgment garnishment process by falsely stating in their disclosures that they owed Adell no money due to their setoff rights arising from loans that they had made to him.
- Adell‘s filing and prosecution of his unnecessary and abusive bankruptcy petition in Florida to obtain a stay of the judgment when he could afford to post a bond to obtain a stаy.
Id. The bankruptcy court also considered that Adell “took his assets to Florida to escape this court‘s punishment, and has so admitted.” Id. at 19. Adell testified on August 17, 2010: “I moved to Florida to protect my assets, and I took certain steps. And I just wanted to protect my assets while we waited on appeal.” Id. (internal quotation marks omitted).
As directed by the Supreme Court in State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003), the bankruptcy court then weighed “(1) the degree of reprehensibility of the defendant‘s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; [and] (3) the difference between the punitive damages awarded by the [judge] and the civil penalties authorized or imposed in comparable cases” to ensure that the award of punitive damages complied with due process. In re JRH
For filing the involuntary bankruptcy petition in bad faith, the Court punished Adell in an amount that was approximately half of the compensatory damages. The Court now concludes that an enhanced sanction in an amount that is approximately 50% more than the compensatory damages [or fee award] of $1,854,192.73 is necessary and appropriate in this case. The Court therefore fixes the sanction against Adell in the amount of $2,800,000.
A.
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce оr implement court orders or rules, or to prevent an abuse of process.
B.
In Chambers, the Supreme Court addressed “whether the District Court, sitting in diversity, properly invoked its inherent power in assessing as a sanction for a party‘s bad-faith conduct attorney‘s fees and related expenses paid by the party‘s opponent to its attorneys.” Chambers, 501 U.S. at 35. The litigation began when Chambers agreed to sell his television and radio station, CTR, to NASCO for $18 million. Id. at 35-36. Six weeks later, Chambers decided that he no longer wanted to go through with the deal. Id. at 36. Chambers refused to file the necessary paperwork with the Federal Communications Commission, so NASCO filed suit for specific performance. Id.
Pursuant to a local rule in the Western District of Louisiana, NASCO notified Chambers on a Friday that NASCO would file suit on the following Monday to obtain specific performance and a temporary restraining order (TRO). Id. Chambers’ response to this notice was to attempt to deprive the court of jurisdiction through a sham sale of the property at issue in the dispute. Id. Chambers and his attorney
The district eventually granted judgment to NASCO, and the Fifth Circuit rejected Chambers’ appeal from the bench, held the appeal frivolous within the meaning of
On the subsequent appeal to the Supreme Court, the Chambers Court began its reasoning with the following proposition: “Courts of justice are universally acknowledged to be vested, by their very creation, with power to impose silence, respect, and decorum, in the presence, and submission to their lawful mandates.” Id. at 43 (quoting Anderson v. Dunn, 19 U.S. 204, 227 (1821)) (internal quotation marks omitted). The majority went on to acknowledge that the “power to punish for contempts is inherent in all courts,” id. at 44 (quoting Ex parte Robinson, 86 U.S. 505, 510 (1873) (internal quotation marks omitted)), and that “[t]his power reaches both conduct before the court and that beyond the court‘s confines.” Id. “Because of their very potency, inherent powers must be exercised with restraint and discretion. 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 (citation omitted). The Chambers court reasoned that because the “particularly severe sanction” of outright dismissal of a lawsuit is within the court‘s discretion, “the ‘less severe sanction’ of an assessment of attorney‘s fees is undoubtedly within a court‘s inherent power as well.” Id. at 45 (quoting Roadway Express, Inc. v. Piper, 447 U.S. 752, 765 (1980)). Furthermore, “when a party ‘shows bad faith by delaying or disrupting the litigation or by hampering enforcement of a court order,‘” sanctions are entirely appropriate under a court‘s inherent authority. Id. at 46 (quoting Hutto v. Finney, 437 U.S. 678, 689 n. 14 (1978)) (internal quotation marks omitted). Applying these principles, the Supreme Court held that the district court did not abuse its discrеtion in granting NASCO the full amount of its attorney‘s fees. Id. at 55.
The Sixth Circuit has held that these inherent powers recognized by Chambers extend to bankruptcy courts. Mapother &
Additionally, this Court did not dispute—though it also did not hold—that bankruptcy courts may award punitive damages pursuant to this inherent power in Tenn-Fla Partners v. First Union Nat‘l Bank of Fla. (In re Tenn-Fla Partners), 226 F.3d 746 (6th Cir.2000). In Tenn-Fla Partners, the bankruptcy court awarded attorney‘s fees and costs to First Union after the debtor used fraud to obtain an order of confirmation. Id. at 751. The district court affirmed this grant of fees, citing Chambers. Id. This Court likewise affirmed that award, stating that “[w]hile we agree that attorney‘s fees should be awarded only in rare circumstances, our conclusion that Tenn-Fla Partners perpetrated fraud upon the court justifies their award in this instance.” Id. First Union had cross-appealed the bankruptcy court‘s denial of punitive damages, and this Court did not question the bankruptcy court‘s authority to make such an award:
In its cross-appeal, First Union contends that the bankruptcy court should have awarded punitive damages. As First Union acknowledges, however, such an award lies within the discretion of the trial court. In our view, the bankruptcy court did not abuse that discretion in denying punitive damages for the reasons set forth in its order.
Id. (citations omitted). In this Circuit, then, bankruptcy courts appear to have some authority to award punitive damages for abuse of process and fraud on the court under both
C.
That bankruptcy courts have both statutory and inherent punitive sanction powers does not, however, mean they are without limits. Those powers are circumscribed and have most often been limited to compensatory punitive awards of attorney‘s fees after findings of bad faith or contempt. See, e.g., In re Downs, 103 F.3d at 477; see also Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178 (9th Cir.2003); Griffith v. Oles (Matter of Hipp), 895 F.2d 1503 (5th Cir.1990).
Where bankruptcy courts have awarded substantial noncompensatory punitive damages, such as the initial punitive damages awarded in this case after Adell‘s bad faith filing of the involuntary bankruptcy petition, Congress explicitly granted them authority to award such damages for some limited purpose. See, e.g., In re John Richards Homes Bldg. Co., L.L.C., 291 B.R. 727, 736-40 (Bankr.E.D.Mich.2003) (awarding substantial noncompensatory punitive damages under
1.
Because of these concerns and the lack of explicit statutory authority, bankruptcy courts do not have a general statutory power to impose serious noncompensatory punitive damages. While
2.
Likewise, no other circuit has found that bankruptcy courts have a broad, inherent power to impose substantial noncompensatory punitive sanctions. Bankruptcy courts’ inherent powers are limited, in part, because they are not Article III courts. Matter of Hipp, 895 F.2d at 1510-11. Congress has not clearly given bankruptcy judges equal powers to those of Article III judges, and the Supreme Court has alluded to limits on bankruptcy courts’ authority. Id. (citing Granfinanciera, 492 U.S. at 52-53). The Fifth Circuit and the Ninth Circuit have both held that bankruptcy courts do not have the authority to impose serious criminal sanctions, which are noncompensatory, though both allow bankruptcy courts to award relatively minor noncompensatory finеs. In re Dyer, 322 F.3d at 1193, 1189-97; Matter of Hipp, 895 F.2d at 1509-21. In Isaacson v. Manty, 721 F.3d 533 (8th Cir.2013), the Eighth Circuit allowed noncompensatory, criminal sanctions of $5,000, but did not consider whether the bankruptcy court could have imposed more substantial sanctions. Id. at 538. A $5,000 sanction is not considered a serious punitive sanction. See In re Dyer, 322 F.3d at 1193-94.
Due process concerns, arising in part from the bankruptcy courts’ limited jurisdiction, limit their inherent powers; bankruptcy courts do not have the capability to provide all of the procedural protections necessary to impose noncompensatory punitive damages. In re Dyer, 322 F.3d at 1197. “[D]ue process guarantees need to be observed when a court resorts to its inherent power to punish misconduct simply because those powers are enormous; the procedural guarantees are the restraint that protects against intended or unintended abuse of that power.” Id. (internal quotation marks omitted). The Ninth Circuit dеtermined that bankruptcy courts lack punitive inherent powers because of this inability to provide sufficient procedural protections. Id.
The exercise of certain powers requires greater procedural protections than others. See Hicks ex rel. Feiock v. Feiock, 485 U.S. 624, 633 (1988). Serious noncompensatory punitive damages require greater procedural protections than mild noncom-
In addition, there are constitutional concerns with bankruptcy courts having broad inherent powers beyond those given to them by Congress. Matter of Hipp, 895 F.2d at 1510-11. If Congress had wanted bankruptcy courts to have such broad power, it could have authorized it. Congress has discussed at length what powers bankruptcy courts should have but has not statutorily established noncompensatory punitive sanction powers. Id. at 1510-15. The constitutional concerns related to extending such powers to bankruptcy courts support our holding that their powers are limited.
In sum, bankruptcy courts lack the statutory authority to impose serious noncompensatory punitive damages. They also lack the inherent authority to impose such damages. We need not decide at this juncture what defines a “serious” noncompensatory award of punitive damages because the $2.8 million awarded below is serious under any definition.
IV.
For the foregoing reasons, we AFFIRM the judgment of the district court.
BERNICE B. DONALD
CIRCUIT JUDGE
Notes
If a creditor requests a determination of dischargeability of a consumer debt ... and such debt is discharged, the court shаll grant judgment in favor of the debtor for the costs of, and a reasonable attorney‘s fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.
In any action or proceeding to enforce a provision of