Standards for Sanctions under Federal Rule of Bankruptcy Procedure 8020 = Those for FRAP 38 — While Court May Consider Offender’s Ability to Pay, It Is Not Required to Do So (Unlike under Rule 11)

WMS Motor Sales v. Reese (In re Reese), 2012 U.S. App. LEXIS 12134 (6th Cir. June 13, 2012):

Attorney-Appellant Irene K. M*** appeals the Bankruptcy Appellate Panel's ("BAP") imposition of sanctions for filing a frivolous appeal in bankruptcy proceedings involving WMS Motor Sales ("WMS"). After concluding that M***'s conduct was egregious enough to warrant sanctions under Federal Rule of Bankruptcy Procedure ("Bankruptcy Rule") 8020, the BAP remanded the case to the Bankruptcy Court for the Northern District of Ohio to conduct an evidentiary hearing to determine the appropriate amount of the award. Following the hearing, the Bankruptcy Court ordered M*** to pay WMS $7,613.85 to cover WMS's costs related to the appeal. ***

Although our circuit has never reviewed a BAP order imposing sanctions pursuant to Bankruptcy Rule 8020, the Eleventh and Seventh Circuits have both held that the applicable standard of review is abuse of discretion. See DeLauro v. Porto (In re Porto), 645 F.3d 1294, 1306 (11th Cir. 2011); Busson-Sokolik v. Milwaukee Sch. of Engr'g (In re Sokolik), 635 F.3d 261, 269 (7th Cir.), cert. denied, 131 S. Ct. 3039 (2011). Binding precedent in this circuit involving sanctions awards under analogous court rules provides further support for this standard of review. See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990) (mandating the abuse-of-discretion standard in cases involving Federal Rule of Civil Procedure 11); Mapother & Mapother, P.S.C. v. Cooper (In re Downs), 103 F.3d 472, 480 (6th Cir. 1996) (same under Bankruptcy Rule 9011). Accordingly, we review the BAP's order granting sanctions under Bankruptcy Rule 8020 for abuse of discretion.

Bankruptcy Rule 8020 permits the BAP to "award just damages and single or double costs" if, after providing the appellant reasonable opportunity to respond, the BAP determines that an appeal from a bankruptcy judge's order or judgment is frivolous. The rule is materially the same as Federal Rule of Appellate Procedure 38 ("Appellate Rule 38"),

Footnote 2. Specifically, Bankruptcy Rule 8020 provides:

If a district court or bankruptcy appellate panel determines that an appeal from an order, judgment, or decree of a bankruptcy judge is frivolous, it may, after a separately filed motion or notice from the district court or bankruptcy appellate panel and reasonable opportunity to respond, award just damages and single or double costs to the appellee.

Appellate Rule 38 similarly states:

If a court of appeals determines that an appeal is frivolous, it may, after a separately filed motion or notice from the court and reasonable opportunity to respond, award just damages and single or double costs to the appellee.

2 and is intended to provide the BAP and district courts hearing bankruptcy appeals with coextensive authority to award sanctions for a frivolous appeal. Fed. R. Bankr. P. 8020 Advisory Committee Notes (1997 Amendment). Thus, as guidance in determining the propriety of the BAP's sanctions under Bankruptcy Rule 8020, we look to our cases applying Appellate Rule 38. Cf. In re Downs, 103 F.3d at 480-81 (noting that Bankruptcy Rule 9011 "closely tracks" Federal Rule of Civil Procedure 11 and applying the standards under Rule 11 to review sanctions awarded by a bankruptcy court).

We have held that sanctions are warranted under Appellate Rule 38 "only in the rare case when an appeal involves an improper purpose, such as harassment or delay, or when . . . an appeal consists of baseless or improperly raised arguments." B & H Med., L.L.C. v. ABP Admin., Inc., 526 F.3d 257, 271 (6th Cir. 2008) (citation and internal quotation marks omitted). Frivolous appeals, such as those in which "the result is obvious or [the] appellant's argument is wholly without merit," also may warrant sanctions. Dubay v. Wells, 506 F.3d 422, 433 (6th Cir. 2007) (internal quotation marks omitted). Similarly, "[s]anctions are appropriate where the appeal was prosecuted with no reasonable expectation of altering the district court's judgment . . . or out of sheer obstinacy." Allinder v. Inter-City Prods. Corp. (USA), 152 F.3d 544, 552 (6th Cir. 1998) (internal quotation marks omitted), cert. denied, 525 U.S. 1178 (1999). The amount of damages that should be awarded for a frivolous appeal is a matter of discretion. 16AA Charles Alan Wright et al., Federal Practice and Procedure § 3984.1 (4th ed.).***

[I]t is clear that misinterpreting the rules governing the time for filing does not usually constitute excusable neglect.

Footnote 5. M***'s reply brief also appears to challenge--for the very first time--the propriety of the BAP's remand order directing the bankruptcy court to determine the amount of sanctions. Though we are not obligated even to consider such a belated argument, we note that remand orders in the Appellate Rule 38 context are hardly unprecedented. See, e.g., Wilton Corp. v. Ashland Castings Corp., 188 F.3d 670, 678 (6th Cir. 1999) (granting sanctions for a frivolous appeal under Appellate Rule 38 and remanding to the district court for a hearing on damages and costs); see also 16AA Charles Alan Wright et al., Federal Practice and Procedure § 3984.3 (4th ed.) (collecting cases and noting that appellate courts can and do remand to the district court for a hearing to determine the proper damages after granting sanctions under Appellate Rule 38). The BAP was thus well within its discretion in taking that approach.

Rule 11 and Bankruptcy Rule 9011 mandate that sanctions are "limited to what suffices to deter repetition" of the offending conduct "or comparable conduct by others similarly situated" and require the sanctioning court to "explain the basis for the sanction" levied. Fed. R. Civ. P. 11(c)(4), (c)(6); Fed. R. Bankr. P. 9011(c)(2), (c)(3). Appellate Rule 38 and Bankruptcy Rule 8020, in contrast, contain no such restrictions. Instead, although our precedents clearly consider reasonableness and deterrent value, an award of sanctions by an appeals court is wholly discretionary and limited only by the court's finding "that (1) the appeal is frivolous, and (2) sanctions are appropriate." Allinder, 152 F.3d at 552. Accordingly, appellate courts need not always affirmatively request information on the sanctioned party's ability to pay before determining a just award.

This is not to suggest that a court of appeals or the BAP cannot consider ability to pay when fashioning an appropriate sanction. To the contrary, if the party facing sanctions raises its inability to pay or the unreasonableness of a particular sanction in light of its deterrent value, the appellate court could consider those arguments when determining a "just" amount of damages. Here, however, M*** failed to raise these issues before either the bankruptcy court or the BAP. In fact, she concedes in her reply brief that she "has not presented any evidence on her ability to pay." Reply Br. at 9. Moreover, M*** presented no challenge to the amount or reasonableness of the costs incurred by WMS in defending the appeal. In light of M***'s failure to present any defense, the bankruptcy court found both that the hourly rate was "within the ordinary range of fees in this region" and that the hours spent on the case were reasonable. No. 08-04172 R. 82 (Bankr. Ct. Op. re Sanctions at 8-9 & n.3). That being the case, neither the bankruptcy court nor the BAP abused its discretion in failing to consider M***'s ability to pay before awarding WMS the full amount requested pursuant to Bankruptcy Rule 8020.