In a sternly-worded, sixty-page opinion last week, the Sixth Circuit’s Bankruptcy Appellate Panel affirmed a bankruptcy court’s $200,000 sanctions order against an attorney that arose from a plethora of litigation over an ultimately disallowed claim in what became a complicated bankruptcy. We have previously posted about the Circuit’s trend in upholding sanctions, and this bankruptcy case followed that trend. However, the litigation also implicated issues of statutory construction and circuit precedent, as well as provided what was essentially a roadmap for sanctionable conduct in bankruptcy.
The case of In re Royal Management, Inc. began ordinarily enough, with a Chapter 11 petition and a liquidation trust in 2008. The attorney at the heart of the conflict—Dennis Grossman—first appeared in late 2008, a month after his clients’ asserted unsecured claim against the bankruptcy estate was denied. A flurry of motions by Grossman followed every step of the process of disallowing the claim and a new claim, including a merits appeal to the district court, the Sixth Circuit itself, and eventually to the Supreme Court (which denied certiorari in 2012).
The first sanctions motion was filed by the liquidation trustee of the bankruptcy estate in 2009, largely because of Grossman’s voluminous motions practice and because of his misrepresentations of the claim against the estate, including his failure to disclose key facts that characterized the claim as a personal loan rather than a loan to the bankrupt. In response, Grossman sought the bankruptcy judge’s recusal. Ultimately, the bankruptcy judge sanctioned Grossman $207,004, mostly for expenses incurred by the trustee in litigating Grossman’s innumerable motions through 2012.
On appeal, the bankruptcy appellate panel spent twenty-eight pages detailing Grossman’s behavior and “dilatory practices” during the litigation. Citing Sixth Circuit precedent, the panel first observed that the bankruptcy court possessed the inherent power to sanction Grossman under 28 U.S.C. § 1927. Noting that sanctions are imposed in order to “punish aggressive tactics that far exceed zealous advocacy” and require a finding of bad faith, the court went on to hold that a “comparison of Grossman’s arguments to the record shows he is second-guessing actions of the Trustee to justify his own vexatious conduct.” Furthermore, because he “repeatedly interjected substantive arguments previously briefed into routine procedural motions,” thereby requiring a response from the liquidation trustee, Grossman unnecessarily drained the trust of its funds and was required to pay those back.
In rejecting Grossman’s numerous claims of error, the bankruptcy appellate panel clearly demonstrated the line between “zealous advocacy” and “vexatious litigation.” This case at the very least shows that throwing out every argument or assignment of error is not always worth the cost, and that at the worst, excessively zealous representation can hurt the client, the case, and even the attorney.