Keiter v. StrackaKeiter v. Stracka
AMENDED ORDER 1
This is аn appeal from the bankruptcy court. In the proceedings below, Michael and Laurie Easton (“the Eastons”), appellants, filed an involuntary bankruptcy petition against James and Rhonda Stracka (“the Strackas”), appellees. Upon motion by the Straekas, United States Bankruptcy Judge William Greendyke vacated the order for relief and retained the case for an additional period to consider the propriety of awarding damages and sanctions against the Eastons and their lawyer, Aaron Keiter (“Keiter”), also an appellant. Hеarings concerning the issue of damages and sanctions were held before the bankruptcy court on March 2, April 15, and April 22, 1994. The bankruptcy court, pursuant to
Both the Eastons and Keiter separately appeal several issues on the imposition of damages and sanctions against them. This Court affirms in all respects.
I. Facts
In 1989, the Eastons leаsed residential property in Fort Bend County, Texas from the Straekas. The lease terminated in late 1990, and thereafter the Eastons remained on the premises as tenants-at-will. From 1983 to 1993, the Strackas owned the relevant property subject to a mortgage from Shearson, Lehman, Hutton Mortgage Company. The Strackas contend that for over three years the Eastons did not pay rent on the property.
In 1992, the Strackas gave written notice to the Eastons to vacate the property. The Eastons assert that they had a lease/purchase optiоn agreement with the Strackas, which the Straekas deny. This disagreement
On April 5, 1993 one day before the foreclosure of the disputed property, the Ea-stons, through attorney Keiter, filed an involuntary bankruptcy petition against the Strackas. As a result of the petition, the foreclosure was stayed. In filing the bankruptcy petition, the Eastons claimed to have a judgment lien against the Strackas in the amount of $25,250.00, which the Strackas strenuously deny.
Arguing that the Eastons improperly placed them in involuntary bankruptcy, the Strackas filed motions in the bankruptcy court seeking damages against the Eastons for bad fаith and perjury under
Pursuant to Bankruptcy Rule 7052, Judge Greendyke found the following facts and made the following conclusions in support of his grant of damages and sanctions:
1) A finding of bad faith is necessary to support actual damages and punitive damages.
2) The Eastons filed their involuntary petition against the Strackas in order to collect on a debt; and as such, the Eastons’ purpose was an improper use of the Bankruptcy Code.
3) The Easton’s filed the involuntary petition to stop the mortgagor’s foreclosure on the property. 3
4) The Eastons did not have an enforceable debt against the Strackas, or in the alternative, the debt was at most subject to dispute. Moreover, the Eastons had other remedies available at law which they failed to utilize to recover the alleged debt.
5) The Eastons never assessed whether the Strackas had other creditors.
6) The Eastons’ actions in filing the involuntary pеtition were malicious and in bad faith.
7) A finding of malice is not necessary to support sanctions against Keiter under Bankruptcy Rule 9011.
8) Neither Keiter nor the Eastons attempted to settle the dispute with the Strackas before fifing the involuntary petition.
9) Keiter failed to adequately investigate and research the causes of action against the Strackas.
II. Standard of Review
Both the imposition of sanctions under Bankruptcy Rule 9011 and damages under
III. Appellant Keiter’s Points of Error
Keiter: ISSUE # 1
Did the Bankruptcy Court Err in Applying Bankruptcy Rule 9011 Instead of Federal Civil Procedure Rule 11?
Keiter asserts that the bankruptcy court should have applied
Keiter: ISSUE # 2
Did the Bankruptcy Court Err in Ruling That Keiter’s Actions Violated Bankruptcy Rule 9011 and Were Thus Sanctionable?
Bankruptcy Rule 9011 states in relevant part that documents signed and filed with the bankruptcy court “constitute[ ] a certifícate that the attorney ... has read the document; that to the best of the attorney’s ... knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing lаw 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 or to cause unnecessary delay or needless increase in the cost of the litigation or administration of the case.” Bankruptcy Rule 9011(a).
In the instant ease, the bankruptcy court found that the involuntary petition was filed by Keiter for an improper purpose in violation of Rule 9011. Ample findings were made by the bankruptcy court in support of this conclusion, as noted in the above Statement оf Facts. First, the court found that the involuntary petition was filed for an impermissible purpose — to collect on an alleged debt against the Straekas. The court also found that other appropriate legal avenues for collection were available but had not been pursued. Second, the court found that the debt was not enforceable against the Strae-kas; or at most, that it was subject to reasonable dispute. Third, the court found that the filing of the petition was not motivated to ensure an equitable distribution to creditors. Fourth, the court found that Keiter and the Eastons made no attempt to adduce the existence of other creditors of the Straekas. Fifth, the court found that the involuntary petition was filed as an attempt to forestall the foreclosure.
The findings support the conclusion that the involuntary petition was filed for an improper purpose which could be punished by sanctions under Rule 9011. Therefore, the bankruptcy court did not abuse its discretion in issuing sanctions pursuant to Bankruptcy Rule 9011.
See, e.g., Landon v. Hunt,
As an additional ground for imposing sanctions under Rule 9011, the bankruptcy court concluded that Keiter failed to adequately investigate and research the basis for filing the involuntary petition against the Straekas. Keiter argues that he adequately researched the propriety of filing the involuntary petition. Specifically, Keiter claims that prior to filing the petition, he reviewed
In re Sims
and concluded that he had eon-
Keiter further аrgues that the bankruptcy court erred by not setting forth its reasons for imposing sanctions on Keiter for his failure to research. Keiter cites
Federal Deposit Ins. Corp. v. Calhoun
in support of his argument that the bankruptcy court failed to specify the basis for imposing sanctions.
Keiter: ISSUE #3
Did the Bankruptcy Court Err in Failing to Allow Keiter to Testify Regarding the Failure of the Strackas to Mitigate their Damages?
Keiter contends that the bankruptcy court should have allowed him to put on evidence at thе sanctions hearing concerning the Strackas’ failure to mitigate their damages. Specifically, Keiter wanted to testify that by notifying the Credit Bureau of the dismissal of the involuntary petition, the Strackas could have restored their good credit standing. However, Keiter cites no law in support of his argument on mitigation. Furthermore, the bankruptcy court’s decision not to consider the issue of mitigation of damages is not an abuse of discretion.
See, e.g., In re Film Ventures Int’l, Inc.,
Keiter: ISSUE #4
Did the Bankruptcy Court Err in Measuring the Amount of Sanctions by Referring to the Strackas’ Attorney’s Fees?
Keiter next asserts that the sanctions award was improperly based on the legal fees spent by the Strackas. Keiter relies on
In re Omega Trust
in support of his argument.
Keiter: ISSUE #5
Did the Bankruptcy Court Err in Not Imposing the Minimum Sanctions Necessary to Deter the Alleged Improper Conduct?
Keiter contends that the bankruptcy court abused its discretion by imposing a sanction of attorney’s fees rather than rеquiring the minimum sanction of a letter of apology. Keiter correctly notes that the purpose of Bankruptcy Rule 9011 is to award the minimal sanction that will properly deter an attorney’s wrongful conduct.
See, e.g., In re Cedar Tide Corp.,
The Court finds no abuse of discretion under the facts of this case. The bankruptcy court was reasonable in determining that a sanction of attorney’s fees against Keiter would act as a proper deterrent. As already noted, the filing of the involuntary petition was done with an improper purpose and without adequate research. The result was that the Straekas incurred, amongst other expenses, attorney’s fees. Accordingly, the sanction of attorney’s fees was proper.
See Seneca Resources Corp. v. Moody,
Keiter: ISSUE #6
Did the Bankruptcy Court Err in Failing to Consider What Effect Monetary Sanctions Would Have on Keiter?
Keiter’s final contention is that the bankruptcy court should considered Keiter’s ability to pay the $26,371.96 sanction imposed on him. Again, Keiter cites no law in support of this proposition. However, it is true that the ability of a Rule 9011 violator to pay may be a proper factor in a court’s determination of sanctions.
See, e.g., In re Omega Trust,
IV. Appellants Eastons’ Points of Error
Eastons: ISSUE # 1
Did the Bankruptcy Court Err in Failing to Dismiss Laurie P. Easton?
Appellant Laurie Easton asserts that damages were inappropriately assessed against her and that her motion to dismiss the imposition of damages should have been granted.
Ms. Easton first contends that the bankruptcy court erred in imposing damages against her based on her failure to give
Ms. Easton also contends that she was a passive participant in any wrongdoing in this case. She argues that the underlying dispute was between Mr. Easton, the Strackas, and Mr. Keiter. She also contends that in signing the involuntary petition, she was merely following the advice of her lawyer, Mr. Keiter, and that she otherwise knew nothing about whether filing the involuntary petition was proper.
Despite her contentions, the bankruptcy court specifically found that Ms. Easton and her husband acted with malice in filing the involuntary petitiоn. The court supported this conclusion by finding that the purpose of the Eastons in filing their involuntary petition against the Strackas was to collect on a disputed debt and to forestall foreclosure on the property. The bankruptcy court’s conclusion, reached after three days of hearings, was not an abuse of discretion. Furthermore, since the court found that Ms. Easton acted with malice, her alleged reliance on her counsel’s advice does not insulate her from liability under
Eastons: ISSUE #2
Did the Bankruptcy Court Err in Imposing Damages against the Eastons After Finding that the Strackas had no Actual Damages?
The Eastons assert that the Strac-kas’ evidence of damages was too speculative to support the bankruptcy court’s imposition of damages. In support of this contention, they note that the bankruptcy court, at the conclusion of the sanctions hearing and after sеtting forth its findings of fact and conclusions of law, found that the Strackas’ evidence of damages was “not credible.” Transcript, Apr. 22, 1994, at 239. Moreover, the Eastons assert that “damages must be established with a reasonable degree of certainty; there can be no recovery for damages which are speculative in nature and/or conjectural.”
Richter, S. A. v. Bank of Am. Nat. Trust & Sav. Ass’n,
While the Eastons correctly state the law, the record establishes that the damage award was not speculative. The Eastons read the bankruptcy court’s statement out of context. While it is true that the bankruрtcy court found the evidence of damages “speculative” and “not credible,” the court specifically noted that damages had occurred in this case and that the main issue was quantifying the damages. Transcript, Apr. 22, 1994, at 240. Accordingly, the court deferred making its final decision on damages until after the hearing. After outlining basic guidelines concerning damages, the court asked John Maher, the Strackas’ attorney, to prepare an order on damages and to supply supporting affidavits. Id. at 246. The bankruptcy court also asked the Eastons and their lawyer, Gary Riеbschlager, and Keiter’s attorney, Allan Lazor, to submit additional proposed findings of fact if they wished. Id. The bankruptcy court considered the post-hear
This Court emphasizes that the assessment of damages under
Eastons: ISSUE # 3
Did the Bankruptcy Court Err in Overruling Two of the Eastons’ Affirmative Defenses: Good Faith and Res Judicata?
Ms. Easton argues that she filed the involuntary petition in good faith, and therefore the bankruptcy court erred in imposing sanctions on her. Specifically, she asserts that she had a legitimate claim against the Strackas at the time of filing based on the Strackas’ attempts to sue her in state court for malicious prosecution stemming from the filing of the involuntary petition. Ms. Easton asserts that the Strackas’ malicious prosecution suit was barred in state court by the statute of limitations and was dismissed. Since the malicious prosecution suit was dismissed, Ms. Easton argues that she was sued frivolously, and therefore had a valid, good faith claim against thе Strackas when she filed the involuntary petition.
To sustain an action under Texas law for malicious prosecution, plaintiff must prove that the lawsuit in question was filed without probable cause.
Ross v. Arkwright Mutual Ins. Co.,
The Eastons next assert that based on the doctrine of res judicata, the bankruptcy court erred in imposing sаnctions against them. In support of their contention, they note that the Strackas brought a state court action against them for malicious prosecution concerning the filing of the involuntary petition. The state court found this claim “without merit” and rendered a take nothing order, dated May 23, 1994, one month before the bankruptcy court’s order imposing damages on June 23, 1994. The state court enunciated no factual or legal conclusions in support of its order. Thus, the Eastons argue that because the state court dismissed the Stracka’s malicious prosecution сlaim against them, the doctrine of res judicata barred the bankruptcy court’s imposition of sanctions on them for the same conduct.
Under res judicata, “a final judgment on the merits bars further claims by parties ... based on the same cause of action.”
Brown v. Felsen,
Eastons: ISSUE #4
Did the Bankruptcy Court Err in Finding that the Eastons filed the Petition in Order to Stop a State Court Action?
The Eastons next contend that the bankruptcy court was “clearly erroneous” in finding that the Eastons filed the involuntary petition to stall the foreclosure on the рroperty. The bankruptcy court’s finding is reviewed for an abuse of discretion.
Before the court entered its finding that the petition was filed in order to avoid
Eastons: ISSUE # 5
Did the Bankruptcy Court Err in Holding the Eastons Liable to a Greater Extent than Keiter?
The Eastons next argue that they cannot be held liable to an extent greater than appellant Keiter. They also protest that because Bankruptcy Rule 9011 sanctions assessed against Keiter were inappropriate, they also should not be sanctioned. This Court is not persuaded by either argument.
“There are clearly similarities between the standards utilized to measure ‘improper purpose’ under R. 9011 and those to measure ‘bad faith’ under§ 303(i)(2) ,.... However one difference between R. 9011 and§ 303(i) is that§ 303(i) is clearly a fee shifting statute, while R. 9011 is not. Therefore, the sanctions provided under R. 9011 may be different and of lesser financial impact than damages awarded under§ 303(i) .”
As to the Eastons’ arguments that sanctions against Keiter under Rule 9011 are improper, the Court’s discussion supra addressing Keiter’s appeal establishes that sanctions were proper against him. Thus, the argument that because sanctions were improper against Keiter, damages against the Eastons were also improper, is meritless. Eastons: ISSUE # 6
Did the Bankruptcy Court Err in Failing to Grant the Eastons’ Cross Motion for Rule 9011 Sanctions Against John Maher, the Strackas Attorney? 7
The Eastons allege that the bankruptcy сourt erred in failing to grant sanctions against John Maher, the Strackas’ attorney. The bankruptcy court denied the Eastons’ Rule 9011 cross motion for sanctions on June 7, 1994. The Eastons assert that the Strac-kas’ response to this motion was “insufficient” and “vituperative.” Accordingly, the Eastons argue that the Strackas’ insufficient reply to the Eastons’ motion for sanctions against Maher violated the local rules and warranted Rule 9011 sanctions. They further assert that the bankruptcy court effectively granted Maher “immunity” from Rule 9011 sanctions by holding Maher to a different standard than Keiter.
The impоsition of Rule 9011 sanctions is discretionary with the bankruptcy court.
Midwest Prop. No. Two v. Big Hill Investment Co.,
Eastons: ISSUE # 7
Did the Bankruptcy Court Err in Awarding Damages Under
Although the Eastons’ final allegation is not clear, they appear to argue that thе bankruptcy court erred by basing its award of damages on a finding that the Eastons committed perjury.
The Eastons cite
Briscoe v. LaHue,
Y. Conclusion
After reviewing the record, the applicable law, and the appellants’ points of error, this Court concludes that none of the bankruptcy court’s factual findings constituted an abuse of discretion. Furthermore, the bankruptcy court’s conclusions of law were proper. Accordingly, the bankruptcy court’s judgment is in all respects AFFIRMED.
Notes
. On February 5, 1996, this Court entered an order in the above-referenced cause affirming the judgment of the bankruptcy court. The instant order supersedes thе February 5, 1996 order in all respects.
. In re Stracka, Bankr. No. 93-4263 6-H4-7, Order, June 2nd, 1994 (amended June 24, 1994).
. The judge didn’t actually determine if Mr. Ea-ston knew about the foreclosure, but he stated that Mr. Easton "knew that it was a problem on the horizon that was going to come up.” Transcript, Apr. 22, 1994, at 238.
. In
Sims,
the court held that an attorney did not act in bad faith when he filed an involuntary bankruptcy petition. The court specifically found that the attorney did not act with malice, and that the attorney made a reasonable inquiry into the facts and the law prior to filing the petition.
. In
Calhoun,
the Fifth Circuit reversed an order of sanctions beсause the district court failed to sufficiently identify and explain what factual or legal grounds provided the basis for
. "[T]he court shall order relief against the debt- or in an involuntary case ..., only if (1) the debtor is generally not paying [its] debts as such debts become due
unless such debts are the subject of a bona fide dispute....
. In their brief the Eastons also address in their sixth point of error the issue of perjury. Because this Court sees the perjury issue as completely separate from the issue that is addressed in this section, this Court addresses the perjury issue under Issue # 7 infra.