Daniel Zazove (“Zazove”), a Chicago attorney, filed a complaint on behalf of Ex-cello Press, Inc. (“Excello”), debtor and plaintiff, against defendant Associated Agencies, Inc. (“Associated”) for recovery of three allegedly preferential payments Excello made to Associated. Those payments made were for insurance coverage. The first two, totalling $6,116.52, were for one month’s coverage and the third for
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$5,963.94 was for two months’ coverage. All the payments were for coverage that Associated had already provided to Excello and included payment of finance charges due to the delinquency. Associated responded to Excello’s complaint by filing a motion for summary judgment which contended that the payments were made in the ordinary course of business and therefore not recoverable as preferential transfers under 11 U.S.C. § 547(c)(2). The bankruptcy court granted Associated’s motion for summary judgment with respect to the first two payments but denied its motion as to the third payment, concluding that an issue of material fact existed regarding whether that payment for two-months’ coverage was made in the ordinary course of business. On a second motion for summary judgment filed after this Court’s opinion in
Bonded Financial Services, Inc. v. European American Bank,
Bankruptcy Judge Thomas James sanctioned Zazove in the amount of $11,916.52 for 1) filing the claim regarding the first two payments without adequate investigation and 2) failing to dismiss the claim regarding the third payment after Zazove learned of this Circuit’s decision in
Bonded Financial Services, supra,
On appeal, Zazove alleges that the district court erred in upholding sanctions against him for failing to conduct adequate pre-filing investigation. Associated does not cross-appeal from the district court’s reversal of Rule 9011 sanctions against Za-zove for failing to withdraw its claim; however, Associated now claims that this Court should impose such sanctions under 28 U.S.C. § 1927. This Court assumes jurisdiction under 28 U.S.C. § 158(d) and addresses the merits of these claims in turn.
A. Jurisdiction
28 U.S.C. § 158(d) provides for appeal from a final judgment issued by a district court pursuant to 28 U.S.C. § 158(a). In this case, the district court’s judgment is final even though that judgment remanded a matter to the bankruptcy court. As stated in
In re Fox,
B. Discussion of Bankruptcy Rule 9011
Rule 9011 of the Federal Rules of Bankruptcy Procedure, analogous to Rule 11 of the Federal Rules of Civil Procedure, provides that an attorney’s signature on a filed document certifies, among other things, that “to the best of the attorney’s or party’s knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by *1112 existing law or a good faith argument for the extension, modification, or reversal of existing law.” 1 In Zazove’s case, the bankruptcy judge imposed sanctions on the ground that Zazove had failed to make a reasonable pre-filing inquiry into the law and the facts even though the bankruptcy judge considered that Zazove’s complaint for Excello was not itself frivolous. Indeed, the bankruptcy judge explicitly said that if Zazove had first conducted a reasonable inquiry, he might have then appropriately filed the same claim. Thus the judge stated in his opinion “[i]t may well be that after a reasonable investigation of the ordinary course of business a lawyer might still bring an action and let the court decide” (App. 00010).
The bankruptcy court asked precisely the right question—not whether the claim itself was frivolous or nonfrivolous, but whether Zazove conducted an adequate inquiry into the facts and the law before he filed the claim. In
Mars Steel Corp. v. Continental Bank, N.A.,
This Court therefore addresses the same question as that addressed by the bankruptcy court—whether Zazove’s pre-filing investigation was reasonable. However, we do not examine that question
de novo.
Instead, on appeal we review the bankruptcy court’s imposition of Rule 9011 sanctions for abuse of discretion.
Cooter & Gell v. Hartmarx Corporation,
The bankruptcy court imposed Rule 9011 sanctions against Zazove because it found that he had not conducted any inquiry into the ordinary course of business defense. Zazove argues that the sanctions imposed against him were an abuse of discretion because 1) he had no duty to investigate potential affirmative defenses and 2) even if he had such an obligation, he did conduct an objectively reasonable pre-filing investigation.
First, Zazove urges this Court to adopt a
per se
rule that courts can never impose Rule 9011 sanctions for counsel’s failure to investigate an affirmative defense. We decline to do so. Under Rule 9011 an attorney is required to make a “reasonable inquiry” before filing a document. The determination of the reasonableness of an attorney’s inquiry neeessar-
*1113
ily depends upon the circumstances of the particular case.
Mars Steel Corp. v. Continental Bank, N.A.,
Because we decline to adopt a per se rule, we address the reasonableness of Za-zove’s pre-filing inquiry, given the circumstances of this case. The bankruptcy court held that Zazove failed to conduct a reasonable pre-filing inquiry regarding the ordinary course of business defense. The judge based his holding on the fact that Zazove had already investigated a different defense, and that he had easy access to all of the information necessary in order to prove that the ordinary course of business defense, if successful, would bar his suit. (App. 00025-00026). Examination of one affirmative defense does not necessarily require examination of another; however, given the context of this case, Zazove may have had a responsibility to examine the ordinary course of business defense if all of the information necessary to conclusively establish that defense was in Excello’s control.
Zazove advanced two reasons in support of Excello’s claim that its two one-month insurance coverage payments to Associated were not made in the ordinary course of business. First, he argued that the payments were late and therefore presumptively outside the ordinary course of business under this Court’s opinion in
In the Matter of Xonics Imaging, Inc.,
But even though Zazove believed that the payments were late and might be considered non-ordinary under Xonics, Excello possessed evidence which showed that Ex-cello and Associated had established a continuing pattern of late payment, evidence which rebuts the Xonics presumption. In fact, Zazove supported his cross-motion for summary judgment as to the September 20, 1985, payment with the affidavit of Eugene Laster, former executive vice president of Excello. In that affidavit Laster stated that he was familiar with Excello’s practices regarding payment of its debt to Associated based upon his personal supervision of such payment. The evidence showed that over a three-year period Excello made payment within 30 to 90 days of the invoice date and the July and August payments were made within 60 days of invoice. (Aff. of Schrayer, Tr. at 19-21, June 30, 1988). In Excello’s response to the motion for sanctions and to the first motion for summary judgment, it stated that during the year immediately preceding the bankruptcy filing the payment was late and finance charges were assessed six times. [Three times prior to the payments at issue.] (R. at 46 & 127). Judge James found that even though such information was easily available, Zazove made no factual inquiry regarding this course of conduct between the parties, seeming to justify sanctions against him.
*1114 However, Zazove also advanced a second reason why the payments should have been considered outside the ordinary course of business. The ordinary course of business defense, set forth in 11 U.S.C. § 547(c)(2) (1988), prohibits the trustee from avoiding a transfer to the extent that it was:
(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee;
(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and
(C) made according to ordinary business terms. (Id.)
Although
Xonics
addressed the requirements of subparagraph (B),
At the time Zazove filed his complaint (September 15, 1987), the majority of published bankruptcy court decisions interpreted subparagraph (C) to require substantially the same showing as that required by subparagraph (B),
i.e.,
evidence of the ordinary practice
between the parties.
See,
e.g., In re Ewald Bros., Inc.,
Yet a minority of bankruptcy court decisions followed an approach that required separate evidence under subparagraph (C) — evidence that the manner and timing of the payments were consistent with ordinary practice in
the parties’ industry.
See,
e.g., In re Production Steel, Inc.,
A district court in the Northern District of Illinois appeared to have employed the minority approach in
In re Energy Cooperative, Inc.,
Relying upon the then minority approach, in his response to the first motion for summary judgment, Zazove argued that a material issue of fact remained as to the ordinary practice in the industry. 4 Za-zove argued that information regarding ordinary insurance industry terms was in the exclusive control of Associated and was, therefore, unavailable at the time of filing his complaint. Thus, reasonable pre-filing inquiry by Excello would not have established whether late payments were ordinary within the insurance industry. Given the law of this Circuit, Zazove had a viable argument that he did not have access to all of the information necessary to show that *1115 the transfers were made within the ordinary course of business. In particular, Associated, Excello’s insurance company, possessed information regarding insurance industry custom as to the ordinary manner and timing of payments.
A reasonable pre-filing inquiry does not require pre-filing investigation of an affirmative defense when subsequent discovery would be beneficial to the development of the underlying facts and to evaluation of the legal validity of that affirmative defense. See
Brown v. Federation of State Medical Bds. of U.S.,
Although we can appreciate Judge James’ feeling of frustration that counsel did not make inquiry of relevant facts which were readily available to him regarding the course of conduct between the parties, it was an abuse of discretion to impose Rule 9011 sanctions against Zazove for his reliance upon the then minority approach when there was a split of authority and neither this Court nor the bankruptcy judges for the Northern District of Illinois had addressed the question. Pursuant to Rule 9011, Zazove may rely on any proposition warranted by existing law or some arguable modification or extension. He should have been able to argue, without fear of sanctions, that Judge James should adopt the minority approach, under which Associated would be required to establish that the payments were consistent with ordinary industry practice, information known only by Associated.
C. Discussion of 28 U.S.C. § 1927
Although Associated did not cross-appeal from the district court’s reversal of Rule 9011 sanctions for Excello’s failure to withdraw its claim after this Court’s decision in
Bonded Financial Services, Inc. v. European American Bank,
D. Conclusion
The judgment of the district court upholding the imposition of sanctions against Zazove for supposed failure to conduct reasonable pre-filing inquiry is reversed. 5
Notes
. In pertinent part, Rule 9011 provides: "Every * * * pleading * * * served or filed in a case under the Code on behalf of a party represented by an attorney * * * shall be signed by at least one attorney of record * * * The signature of an attorney * * * constitutes a certificate that the attorney or party has read the document; that to the best of the attorney’s or party’s knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; and that it is not interposed for any improper purpose, such as to harass, to cause delay, or to increase the cost of litigation * * * If a document is signed in violation of this rule, the court on motion or on its own initiative, shall impose on the person who signed it * * * an appropriate sanction.”
. Burbank notes two approaches that courts have taken when determining Rule 11 sanctions—a "conduct” approach which examines whether an attorney conducted reasonable pre-filing inquiry, and a “product" approach which examines whether the document ultimately filed by the attorney was well grounded in fact and law. See also Stephen B. Burbank, The Transformation of American Civil Procedure: The Example of Rule 11, 137 U.Pa.L.Rev.1925 (1989).
. Since 1987, at least two bankruptcy judges of the Northern District of Illinois have addressed the question and chosen to follow the "minority” approach. See
In re Fin. Partners, Ltd.,
. Despite Excello’s argument in response to the first motion for summary judgment, at the hearing on that motion Excello conceded that Associated had presented sufficient evidence to establish that the matter and timing of the payments was consistent with the ordinary practice in the insurance industry and had established a valid Section 547(c)(2) defense to avoidance of the July and August payments. (Tr. at 22-23 June 30, 1988). Judge James relied on the concession and, thus, did not resolve any further underlying issue with regard to the July and August payments.
. As mentioned supra, there was no cross-appeal as to Judge Conlon’s denial of sanctions for failure to withdraw Excello's complaint.