In re: Knight

Filing 30

MEMORANDUM Opinion and Order Signed by the Honorable Virginia M. Kendall on 9/2/2011.(tsa, )

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

BANK OF AMERICA,
Plaintiff-Appellant,
v.
JAMES A. KNIGHT,
Defendant-Appellee.

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Case Nos. 11 C 1635
11 C 1637
Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER
Plaintiff-Appellant Bank of America, N.A. (“Bank of America”) appeals two orders entered
by the bankruptcy court—(1) the January 13, 2011 grant of a Motion to Enforce; and (2) the January
26, 2011 Sanctions Order—and also contends that its due process rights were violated when the
bankruptcy court refused to provide notice or an opportunity to respond before imposing sanctions
pursuant to 28 U.S.C. § 1927. For the following reasons, the Court finds that the bankruptcy court
imposed sanctions without allowing Bank of America a meaningful opportunity to respond and,
accordingly, reverses the imposition of those sanctions. Because Bank of America has already filed
its civil complaint in district court, its challenge to that portion of the Motion to Enforce is dismissed
as moot.
STATEMENT OF FACTS
Bank of America contends that Defendants-Appellees James Knight (“Knight”) and his
affiliated companies (“Knight Companies”) defaulted on $34 million in financing obligations. While
in bankruptcy proceedings, Bank of America filed a motion on November 12, 2010 to lift the
automatic stay imposed by § 362(a) of the Bankruptcy Code and to permit Bank of America to name

Knight as a defendant in a new civil action relating to alleged misconduct when he was a director
of the Knight Companies. Knight objected on November 26, 2010, arguing that the bankruptcy court
should deny the motion to lift the stay because Bank of America failed to demonstrate that it had a
“probability of prevailing on the merits” of the proposed case. Bank of America filed a reply to
Knight’s response on December 7; Knight filed a proposed sur-reply on December 10. The
bankruptcy court held a hearing on the motion to lift the stay on December 14, 2010.
At the December 14th hearing, Knight argued that the court could not lift the automatic stay
without a finding that Bank of America was likely to succeed on the merits. Knight further noted
that Bank of America had yet to file a complaint setting forth the charges in the proposed civil action
and that, as such, Knight did not “know what the claims are.” (R. 14, Ex. I at 7:6-7.) Bank of
America responded that the standard was not as Knight alleged and that its previous filings included
the necessary letters regarding director and officer insurance and liability to sufficiently put the court
and Knight on notice of the proposed charges. The court then asked Bank of America: “Is it your
feeling that I can know exactly what you’re talking about from your papers?” (Id. at 7:21-23.) Bank
of America responded affirmatively, stating “I believe you can rule on it based upon the papers, Your
Honor.” (Id. at 8:5-6.) After further discussion, Bank of America stated that it was “prepared to file
a complaint [in the proposed civil action], once we get relief, promptly.” (Id. at 9:23-24.) Knight
interjected, asking the court: “Don’t you want to see the complaint, Judge?” The court responded
that it did, stating that seeing the proposed complaint would make the court’s “analysis a lot easier.”
(Id. at 10:1-8.) Noting that Bank of America had just declared that it was prepared to file the
complaint as soon as the court issued its ruling, the court asked Bank of America if it would attach
the complaint as an exhibit. (Id. at 10:9-11.) Bank of America responded that the complaint was
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not “ready” but that it should be ready “in a day or two, and we can certainly file it.” (Id. at 10:1215.)
The court then set a briefing schedule and the clerk stated “December 24th for the
complaint.” (Id. at 11:11-12.) The court summarized the briefing schedule by stating: “December
24th for . . . a reply with, hopefully, a complaint attached so I can look at that.” (12:14-16.) Knight’s
response brief was set for January 7th. (Id. at 12: 21-23.) The bankruptcy court then entered a
minute order stating “Leave given Bank of America to file a reply or Complaint on or before
December 24, 2010.” (R. 14, Ex. J.)
After the hearing, Bank of America determined that there were additional claims and factual
issues it needed to analyze before finalizing and publicly filing its complaint. Accordingly, on
December 23, 2010, Bank of America filed a reply brief and submitted a draft version of the
complaint to chambers for in camera review. In its reply, Bank of America cited Seventh Circuit
precedent establishing that the complaint was not relevant to the court’s analysis on the motion to
lift the stay. Bank of America also alleged that “[s]ince the complaint has been prepared by counsel
for Bank of America in anticipation of litigation, the complaint is subject to the work product
privilege” that Bank of America did not wish to waive. (R. 14, Ex. K at 10.)
Knight corresponded with Bank of America and sought a copy of the complaint. Bank of
America informed Knight that the complaint was not finalized and that, as such, it was submitted
to the court for in camera review and not filed publicly.
On January 10, 2011, Knight filed a Motion to Enforce, arguing that the court should compel
Bank of America to publicly file its draft complaint and that Knight was entitled to reimbursement
for fees and expenses. Knight noticed his motion for January 13th.
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On January 13, 2011, the bankruptcy court held a hearing and at the outset instructed Bank
of America to “respond.” (R. 14, Ex. B at 2:17.) The following colloquy ensued:
BANK:

Well, Your Honor, I guess my first response is that I don’t believe that you directed
us to file a complaint. Your order quite clearly says –

COURT:

Well, let’s say I didn’t. Let’s say that it’s not officially an order, okay? We all
assumed you were going to supply the complaint. We were all going to have a
chance to look at it. And then I set the response time based on that, okay? So setting
aside the order, to me, you have multiplied the proceedings here, because if you were
going to raise a privilege or something, you should have raised it then. You didn’t.
When that thing came in under seal, I was out of town, and I said, “what? Why?”
I mean, I even remembered that that wasn’t right. You didn’t ask for leave to do it
that way. You didn’t ask to come in and rebrief it. You didn’t ask to – you know,
I mean, you – you know, I don’t think you have a privilege anyway, by the way.

BANK:

Your Honor –

COURT:

So I think this whole thing is an unnecessary multiplication of proceedings. I won’t
necessarily say that you violated an order. I mean, it was clearly understood by
everyone that this complaint was going to be produced and that Mr. Knight was
going to get a chance to look at it and respond. That was clear.

BANK:

Your Honor, when we were here on December 14th, we were here for a ruling on the
motions that were pending, and Your Honor said that you weren’t ready to rule. Mr.
Knight filed, you know, another reply just before that date. The issue about the
complaint was not pending that day. It came up during the course of the hearing.
And yes, I didn’t –

COURT:

Okay. And if you got put on the spot, then you needed to come in immediately. You
don’t get to just disregard the understandings and do what you want, which is what
you did. So I’m going to grant the motion. The complaint is going to be filed. And
I’m going to ask you [Knight] to submit your time to bring this motion and your time
calling up, because you gave them a chance, according to the allegations in your
motion, to produce the complaint. And I understand that the bank had the transcript
[of the December 14th hearing].

KNIGHT:

Right.

COURT:

So everything was well-known. So submit your time, and I’ll take it under
advisement.

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KNIGHT:

Your Honor, can we have a –

BANK:

Your Honor –

KNIGHT:

Oh, we’ll just file it. We’ll just take –

BANK:

Your Honor, two things I’d like to address. One, I’d like time to respond to the
motion. And, number two –

COURT:

No. No. It’s clear. There’s nothing to argue here. It was fully understood by
everyone that this complaint was going to be produced. And if you had an issue with
it, if you had second thoughts on it, you needed to come in. You don’t get to just do
what you think you want to do and then everybody just accept it. I mean, I was like
shocked when it was filed under seal –

BANK:

Your Honor –

COURT:

– because I knew that the whole idea was for them to look at it. So I’m not giving
you a chance to respond. I’m not multiplying the proceedings more than –

BANK:

Well –

COURT:

– they’ve been multiplied in this case. The fees in this case are getting really high.
And, you know, when things like this happen, we’re going to stop it, okay?

(Id. at 2:18-5:20.) Bank of America then voluntarily withdrew its motion. The court ordered that
Bank of America file its complaint “[t]omorrow. There’s no reason why it can’t be filed by
tomorrow, the 14th [of January].” (Id. at 9:5-6.) The court instructed Knight to submit the time
incurred in preparation for his motion and the court reiterated that “I’m not really giving them [Bank
of America] a chance to respond” and cautioned Knight to be reasonable in the fees sought. (Id. at
9:12-17.)
The court entered Knight’s Motion to Enforce and sanctioned Bank of America pursuant to
28 U.S.C. § 1927. The court concluded by telling Bank of America: “if I issue an award that you
absolutely hate from a monetary standpoint, you can come in on that and argue why. But I’m not

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likely to make it very, very large, but I am going to do something. So that’s why I didn’t really want
to nit-pick through the hours and what you have. But I will give you an opportunity, if you can take
a look at what I do, and respond to that. You can come in to vacate not on the basis of the ruling to
assess something for the multiplication of the proceedings, but maybe on the amount, okay?” (Id.
at 14:23-15:9.)
On January 14, 2011, Bank of America filed the unfinished complaint in the district court
and, pursuant to Federal Rule of Civil Procedure 15, filed a final complaint in the district court on
February 15, 2011.
On January 21, 2011, Knight filed an application for fees, requesting $6,515 in fees and costs.
On January 26th, the court entered an order requiring Bank of America to reimburse Knight $4,000
for fees and costs. Bank of America paid Knight $4,000 on January 28, 2011.
STANDARD OF REVIEW
This Court reviews legal decisions from a bankruptcy court de novo. See Meyer v. Rigdon,
36 F.3d 1375, 1378 (7th Cir. 1994); Aetna Bank v. Dvorak, 176 B.R. 160, 163 (N.D. Ill. 1994). This
Court reviews the decision to impose sanctions for an abuse of discretion. In re Rimsat, Ltd., 212
F.3d 1039, 1046 (7th Cir. 2000). “Unless the sanctioning court has acted contrary to the law or
reached an unreasonable result, we will affirm the sanctions decision.” Id.
DISCUSSION
Bank of America raises three issues on appeal: (1) the validity of the bankruptcy court’s
January 13, 2011 order granting Knight’s Motion to Enforce; (2) the validity of the bankruptcy
court’s January 26, 2011 order imposing sanctions; and (3) a constitutional violation stemming from
the bankruptcy court’s decision to impose sanctions without providing notice or an opportunity to
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respond.
I.

Sanctions
The Court first considers Bank of America’s due process challenge, which this Court reviews

de novo. See Meyer, 36 F.3d at 1378.
Bank of America alleges that the bankruptcy court deprived it of its due process rights to
have an adequate opportunity to be heard before imposing sanctions. “Providing an opportunity to
be heard includes giving an attorney against whom a court is considering imposing sanctions the
chance to present his or her case at a meaningful time in a meaningful manner, but a hearing is not
invariably required before sanctions may be imposed.” Rimstat, 212 F.3d at 1046.
Here, the motion for fees was raised in Knight’s Motion to Enforce, filed on January 10th
and noticed for a hearing on January 13th. Therefore, the Court finds that Bank of America had
notice of the motion and that the decision to impose sanctions was not made sua sponte. See, e.g.,
Prosser v. Prosser, 186 F.3d 403 (3d Cir. 1999) (reversing a sua sponte sanctions order that was
entered after final judgment). Nonetheless, Bank of America was also entitled to a meaningful
opportunity to be heard. While the bankruptcy court was not obligated to hold a hearing on the
sanctions, it was obligated to allow Bank of America the chance to meaningfully present its case.
The transcript of the December 14th hearing demonstrates that Bank of America attempted to
respond to the sanctions issue several times but was not permitted to do so before it had a chance to
defend its decision to file the unfinished complaint for in camera review. Moreover, Bank of
America explicitly sought the opportunity to respond to Knight’s Motion to Enforce in writing, but
the bankruptcy court denied that request. Although the imposition of the sanctions may have been
warranted under the circumstances, Bank of America was sanctioned without a meaningful
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opportunity to respond, and under the law, must be given that opportunity. Because the Court finds
that the imposition of sanctions violated due process, it need not address whether the sanctions were
meritoriously imposed, an analysis that would have been governed by an abuse of discretion
standard. See Rimsat, 212 F.3d at 1046.
II.

Motion to Enforce
Bank of America challenges the bankruptcy court’s entry of Knight’s Motion to Enforce,

which required Bank of America to publicly file its proposed civil complaint and to reimburse
Knight for fees and costs. Given this Court’s finding of a due process violation relating to the
sanctions, that portion of the Motion to Enforce must be vacated. The Court also finds that the
portion of the motion requiring Bank of America to file its complaint was rendered moot when Bank
of America filed its complaint in district court. See Porco v. Trs. of Ind. Univ., 453 F.3d 390, 394
(7th Cir. 2006) (“[i]t is well-settled that a federal court has no authority to give opinions upon moot
questions or abstract propositions, or to declare principles or rules of law which cannot affect the
matter in issue in the case before it. If at any stage of the proceedings, an event occurs which renders
it impossible for the court to provide any effectual relief whatever, to the prevailing party, the case
must be dismissed.”) (internal citations and quotations omitted). Bank of America has already
publicly filed a final version of its civil complaint and, as such, the order requiring it to file a
complaint is no longer at issue.

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CONCLUSION AND ORDER
For the reasons stated, the Court finds that the imposition of sanctions without affording
Bank of America a meaningful opportunity to present its case violated its due process rights.
Accordingly, the Court reverses the January 26th Sanctions Order and dismisses the remaining
portion of the Motion to Enforce as moot.

So ordered.

________________________________________
Virginia M. Kendall
United States District Court Judge
Northern District of Illinois
Date: September 2, 2011

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