Ackerman v. Pilipiak
Filing
29
MEMORANDUM AND ORDER denying 11 Motion for Sanctions. For the foregoing reasons, the Bankruptcy Court's August 24, 2010 Order is AFFIRMED in its entirety. The Trustee's appeal and Defendant's cross-appeals are dismissed, and Defend ant shall recover the costs of the appeal from the Trustee. See FED. R. BANKR. PROC. 8014. Defendant's Rule 11 motion (Docket Entry 11) is DENIED. So Ordered by Judge Joanna Seybert on 8/25/11. E.D. Bankr. Adv. Proc. No. 06-08416. C/ECF (Valle, Christine)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
---------------------------------X
NEIL H. ACKERMAN, Chapter 7
Trustee of Marine Risks, Inc.,
E.D. Bankr. Adv. Proc.
No. 06-08416
Appellant,
-againstWALTER PILIPIAK,
MEMORANDUM & ORDER
10-CV-4851 (JS)
Appellee.
---------------------------------X
APPEARANCES:
For Appellant:
Kevin R. Toole, Esq.
Meltzer Lippe Goldstein& Breitstone LLP
190 Willis Avenue
Mineola, NY 11501
For Appellee:
John R. Keough, III, Esq.
Casey D. Burlage, Esq.
Waesche, Sheinbaum & O'Regan, P.C.
111 Broadway, 4th Fl.
New York, NY 10006
Tracy L. Klestadt, Esq.
Klestadt & Winters, LLP
570 Seventh Avenue, 17th Fl.
New York, NY 10018
SEYBERT, District Judge:
In
this
bankruptcy
appeal,
Neil
H.
Ackerman
(“Appellant” or the “Trustee”), the Chapter 7 Trustee of Debtor
Marine Risks, Incorporated (“Debtor” or “MRI”), challenges the
Bankruptcy Court’s decision (1) denying in part the Trustee’s
request
to
amend
his
Adversary
Complaint
against
Defendant
Walter Pilipiak (“Appellee” or “Defendant”) and (2) dismissing
the Complaint pursuant to Federal Rule of Civil Procedure 52 and
Federal
Rule
of
Bankruptcy
Procedure
7052
(the
“Bankruptcy
Order”).
Defendant cross-appeals, arguing that the Bankruptcy
Court erred by amending portions of the Trustee’s Complaint to
conform with the evidence at trial and by not including an award
of costs and fees in the Bankruptcy Order.
Also pending is
Defendant’s
Trustee
Rule
11
motion
to
sanction
the
for
his
Order
is
alleged bad faith in prosecuting this appeal.
For
AFFIRMED
the
following
in
its
entirety
Defendant’s
cross-appeal
reasons,
and
are
the
the
Bankruptcy
Trustee’s
dismissed.
appeal
Defendant’s
and
Rule
11
motion is DENIED.
BACKGROUND
MRI was a New York insurance brokerage, specializing
in
marine
and
automobile
insurance.
Bruce
Keyes
was
its
majority shareholder and, at all relevant times, a director of
the company and its president.
Defendant, also a shareholder,
was an officer and director of MRI.
In
increased
Defendant
to
1997,
after
include
learned
his
responsibilities
oversight
that
MRI
belonging to MRI’s clients.
of
was
MRI’s
at
general
retaining
MRI
were
operations,
premium
(See Bankr. Order at 7.)
checks
When
Defendant confronted Keyes about his discovery, Keyes directed
that false memo bills be drawn up to hide the discrepancies.
Id.
Defendant thereafter conducted an internal investigation of
MRI’s billing processes, eventually concluding that MRI had been
2
improperly retaining funds that belonged to its clients.
Id. at
8.
In
late
1997--not
long
after
Defendant
confronted
Keyes about the questionable billing practices--MRI underwent a
restructuring
and
Defendant’s
role
reduced
his
objection.
Id.
over
in
at
MRI’s
operations
8-9.
In
early
was
1998,
Defendant was interviewed by the New York State Department of
Insurance about his internal investigation into MRI’s billing
irregularities.
Id.
That spring, he discussed his findings
with prosecutors from the Manhattan District Attorney’s office.
Id.
Keyes was indicted on fraud and larceny charges in November
1998, and he was arrested on November 12, 1998.
In
a
post-indictment
letter
to
Id. at 10.
MRI’s
shareholders,
Keyes characterized the indictment as a grave threat to MRI’s
business: “At this writing, we have over 50% of our clients’
renewals coming up within the next thirty days and can safely
say that most, if not all, of these renewals are in serious
jeopardy due solely to the criminal indictment brought by the
District Attorney’s office.”
Almost
clients
and
questions.
called
immediately
other
parties
Id. at 16 (quoting Def. Ex. W-2).
after
began
Keyes
was
contacting
arrested,
the
company
MRI’s
with
An officer of Cosmos, a rival insurance broker,
Defendant
and
asked
whether
Keyes
was
interested
selling MRI in light of his impending prosecution.
3
in
Id. at 10.
Defendant
Keyes.
responded
that
Cosmos
has
to
1998,
Keyes,
speak
directly
with
Id.
On
December
2,
who
had
declined
his
employees’ pleas to step down while his prosecution was pending,
told MRI’s management that he planned on selling MRI’s assets to
Id. at 11.
a competitor, Nausch, Hogan and Murray (“NHM”).
Keyes said that he had agreed to the following terms of a letter
of intent (“Letter of Intent”) between the parties: beginning
January 1, 1999, NHM would acquire all of MRI’s ongoing business
interests and would receive any clients that wanted to transfer
from MRI to NHM.
In return, NHM would pay MRI’s shareholders
20% of the commissions generated by MRI’s former clients for the
following
five
years.
MRI
exchange for its assets.1
The
NHM-MRI
itself
would
receive
contingent
on
nothing
in
Id. 11-12.
deal
was
satisfied with its due diligence on MRI.
NHM’s
Id. at 12.
being
Keyes
signed the Letter of Intent on behalf of MRI and added “subject
to shareholder approval.”
Id.
The deal provided that NHM would
hire “all key employees and branch office personnel currently
employed
by”
MRI;
Keyes
explained
at
the
meeting
that
Bill
Murray, one of NHM’s founding members, would determine which MRI
employees would be kept by NHM.
Id. at 13.
1
According to Kevin Mullady, MRI’s former vice president, had
the NHM-MRI deal been finalized, MRI would have been dissolved
shortly thereafter. Bankr. Order at 18.
4
At the December 2, 1998 meeting, Defendant told Keyes
that Cosmos was interested in doing a transaction with MRI, but
Keyes told Defendant that MRI would not deal with Cosmos because
Id. at 13-
MRI’s largest client, Nippon Express, would object.
14.
The
next
opportunity.
day,
Defendant
contacted
Cosmos
about
a
job
A few days later, he offered to join Cosmos as
president and as a director.
As part of the employment package,
Defendant offered to bring six key employees and a book of MRI’s
business with him to Cosmos.
Id. at 15.
Between December 3 and December 21, 1998, Defendant
continued to meet with MRI’s clients to negotiate renewals of
their insurance contracts, which were scheduled to expire at
year’s end.
Id. at 14.
According to an email between employees
of ACL, an MRI client, Defendant provided ACL with a renewal
contract but told ACL that he would decide shortly whether to
leave MRI.
The email explained that the reason for Defendant’s
impending decision “is that Bruce Keyes has announced the sale
of [MRI] to [NHM] selling Walter down the river.
in Walter’s control as the Broker of Record.
appointment
Wednesday:
here
12/9.”
with
Id.
a
broker
at
14
from
(quoting
Policies are
I have scheduled
Marsh-Sedgwick,
Trustee’s
Ex.
on
87).
Although he had contact with MRI’s clients during this time,
Defendant testified that he did not advise clients that he was
seeking employment with Cosmos.
Id. at 17.
5
Defendant resigned from MRI on December 21, 1998 and
began working for Cosmos on the same day.
Id.
Several MRI
employees and twelve MRI clients followed Defendant to Cosmos.
Although
client,
Nippon
did
Express,
not
renew
MRI’s
its
largest
business
and
with
most
MRI
important
following
the
See id. at
indictment, it did not take its business to Cosmos.
15, 17-18.
On the same day that Defendant left MRI, NHM decided
not to follow through with the proposal to buy MRI’s assets.
Id. at 18.
those
for
MRI’s revenues for 1999 were sharply lower than
1998.
Keyes
was
convicted
of
fraud,
and
MRI
officially went out of business in 2001 after its and Keyes’
insurance
licenses
convictions
Keyes’).
and
were
MRI’s
revoked
because
its
(Keyes’
license
because
was
of
predicated
his
on
Id. at 18-19.
PROCEDURAL HISTORY
This case began when MRI filed a third-party complaint
against
Defendant
in
New
York
Supreme
Court.
The
case
was
eventually removed to the Southern District of New York and
later closed for lack of prosecution.
In September 2005, MRI
filed for Chapter 7 relief and the Trustee was appointed trustee
in MRI’s bankruptcy case.
This action was then re-opened and
transferred to the Bankruptcy Court.
Id. at 3-4.
By the time
the case was tried, the Complaint had three remaining claims:
6
that
Defendant
(1)
breached
his
fiduciary
duty
to
MRI
by
soliciting MRI’s clients for his own benefit while employed by
MRI; (2) breached his fiduciary duty to MRI by appropriating for
his own benefit a business opportunity belonging to MRI while
employed by MRI; and (3) tortiously interfered with a proposed
transaction between the Debtor and a third party.2
Id. at 1.
The Bankruptcy Court tried these claims without a jury over
twelve days in 2009 and 2010.
Id. at 5.
At the close of the Trustee’s case, Defendant moved
for a directed verdict pursuant to Federal Rule of Bankruptcy
Procedure 52.
At that point, the Trustee asked the Bankruptcy
Court to amend his Complaint to reflect the trial evidence.
Trustee
was
apparently
not
specific
in
his
request
The
for
an
amended pleading, see id. at 20 n.4, so the Bankruptcy Court
construed his proposed amendments as follows: as to his first
claim,
(1)
in
addition
to
soliciting
clients
of
MRI,
that
Defendant solicited key MRI employees for his own benefit and
(2) that Defendant solicited clients and key MRI employees for
the benefit of another (i.e., Cosmos); as to his second claim,
that Defendant breached his fiduciary duty by usurping MRI’s
right to enter into a deal with Cosmos.
Id. at 20.
Also, as to
both counts, the Bankruptcy Court considered whether to amend
2
A fourth claim was dismissed by the Southern District in 2003.
See Bankr. Order at 4 n.1.
7
the claims to include Defendant’s post-resignation conduct.
Id.
at 20.
The Bankruptcy Court granted in part the Trustee’s
request to amend the Complaint and granted Defendant’s motion to
dismiss the Complaint, as amended, pursuant to Bankruptcy Rule
7052.
Id. at 46.
The motion to amend the Complaint was granted
in all respects except to the extent that it sought to include
Defendant’s post-resignation conduct in the allegations.
This
appeal followed, and Defendant then moved for sanctions under
Federal Rule of Civil Procedure 11.
DISCUSSION
The Court first addresses the appeal and cross-appeal
and then considers Defendant’s Rule 11 motion.
I.
The Bankruptcy Order Is Affirmed
On
appeal,
the
Trustee
argues
that
the
Bankruptcy
Court incorrectly (1) denied his motion to amend his Complaint
to
add
allegations
conduct;
and
(2)
appeals,
arguing
concerning
Defendant’s
dismissed
the
that
Bankruptcy
the
Complaint.
Court
post-resignation
Defendant
should
cross-
not
have
permitted any amendments to the Trustee’s Complaint and that the
Bankruptcy
Court
erred
by
not
awarding
him
costs
and
fees.
(Def. Resp. at 33.)
Federal
district
courts
have
jurisdiction
to
hear
appeals from final judgments, orders, and decrees of bankruptcy
8
FED.
judges.
“[f]indings
evidence,
of
shall
R.
BANKR.
fact,
not
P.
8013.
whether
be
set
The
based
aside
on
Bankruptcy
oral
unless
Court’s
or
documentary
clearly
erroneous.”
Id.; see also In re Momentum Mfg. Co., 25 F.3d 1132, 1136 (2d
Cir. B.A.P. 1994); In re PCH Assocs., 949 F.2d 585, 597 (2d Cir.
B.A.P.
1991).
The
Bankruptcy
however, are reviewed de novo.
F.3d at 1136.
Court’s
legal
conclusions,
See In re Momentum Mfg. Co., 25
As the following discussion makes clear, the
Bankruptcy Order must be affirmed in all respects.
A.
Amending the Complaint to Add Post-Resignation Conduct
As an initial matter, the Bankruptcy Court did not
abuse its discretion in denying the Trustee’s motion to amend
his complaint to include Defendant’s alleged post-resignation
conduct.
Under Federal Rule of Civil Procedure 15(b)(2), a
court must amend a pleading to include claims that were tried by
the parties’ express or implied consent.
Here,
the
Bankruptcy
Court
did
not
FED. R. BANKR. P. 7015.
abuse
its
discretion
in
finding that Defendant neither expressly nor impliedly consented
to trying the issue of Defendant’s post-resignation conduct.
As
the Bankruptcy Court noted, Defendant emphasized in the parties’
Joint
Pretrial
Memorandum
that
the
Trustee’s
case
should
be
confined to Defendant’s pre-resignation conduct, and Defendant
objected
at
trial
resignation conduct.
to
evidence
concerning
the
alleged
(See Bankr.) Order at 22-23.
9
post-
The Trustee
did
not
object
Memorandum
these
findings,
(See,
erroneous.
to
e.g.,
Docket
at
3
(Defendant’s
and
Entry
they
are
1-128,
italicizing
not
Joint
of
clearly
Pretrial
“before
he
resigned”).)
Instead, the Trustee argues that the Bankruptcy Court
erred by not addressing whether Defendant would be prejudiced by
the amendment.
(Trustee Br. at 17.)
If a motion to amend a
pleading “is made during trial . . . it may be granted if the
party
against
whom
the
amendment
is
offered
will
not
be
prejudiced by the amendment, and it should be granted in the
absence of prejudice if the interests of justice so require.”
Hillburn
v.
Maher,
795
F.2d
252,
264
(2d
Cir.
1986).
The
Bankruptcy Court did not expressly find that Defendant would be
prejudiced by the proposed amendment, but it did not abuse its
discretion in denying the Trustee’s request.
this conclusion for two reasons.
The Court reaches
First, the Trustee did not
specify how he thought his Complaint should be amended--leaving
it to the Bankruptcy Court “to determine the contours of” his
proposed amendments, Bankr. Order at 20--and the Court is loath
to say the Bankruptcy Court abused its discretion in denying a
Second, the Bankruptcy
request that the Trustee never made.
Court could have properly found that the interests of justice
did
not
require
allegations.
that
As
is
the
Trustee
discussed
10
be
permitted
later
in
this
to
add
Order,
these
the
Bankruptcy Court justifiably took a dim view of the Trustee’s
decision to pursue this case.
(See Bankr. Order at 21 n. 3
(expressing doubt that the Debtor’s estate stood to gain from
this lawsuit).)
B. Rule 52 Motion
Federal Rule of Civil Procedure 52, made applicable to
adversary
proceedings
through
Federal
Rule
of
Bankruptcy
Procedure 52, provides in relevant part that, in nonjury trials,
the court may enter judgment against a party if it finds that a
claim “can be maintained only with a favorable finding on that
FED. R. CIV. P. 52(c).
issue.”
A judgment pursuant to Rule 52(c)
is appropriate where the plaintiff fails to make out a prima
facie case or where the Court determines that “the preponderance
of the evidence goes against the plaintiff’s claim.”
Matis v.
United States, 236 B.R. 562, 569 (E.D.N.Y. 1999) (quotation and
citations omitted).
draw
any
consider
special
the
This rule “does not require that the court
inferences
evidence
nonmoving party.”
in
in
the
the
light
nonmovant's
most
favor,
favorable
to
or
the
Id. (quotations and citations omitted); see
also Akerley v. N. Country Stone, Inc., 620 F. Supp. 2d 591, 593
(D. Vt. 2009).
weighing
where
the
the
“Instead, the court acts as both judge and jury,
evidence,
resolving
preponderance
lies.”
(quotations and citations omitted).
11
any
conflicts,
Matis,
236
and
B.R.
deciding
at
569
1. Clients and Key Employees
The Bankruptcy Court properly dismissed the Trustee’s
claim that Defendant breached his fiduciary duty by diverting
MRI’s clients and key employees to Cosmos because, among other
things, the Trustee failed to prove that Defendant caused MRI
any harm.
To prevail on this claim, the Trustee would have had
to establish that Defendant (1) owed MRI a fiduciary duty; (2)
knowingly
breached
that
result of the breach.
duty;
and
(3)
caused
MRI
harm
as
a
See, e.g., Grund v. Del. Charter Guar. &
Trust Co., __ F. Supp. 2d __, 2011 WL 2118754, at *16 (S.D.N.Y.
May 26, 2011).
On appeal, the Trustee maintains that Defendant
caused MRI to suffer financial losses by diverting its clients
and poaching its employees.
The Court finds that the Bankruptcy
Court’s factual findings were free from clear error and that its
legal conclusions were sound.
Like the Bankruptcy Court, the
Court thinks that the Trustee’s attempt to blame Defendant for
the demise of MRI--a company whose president had been indicted
for stealing from its clients and whose board was plotting to
sell
its
assets
disingenuous.
to
Below,
a
competitor
the
Court
for
no
addresses
consideration--is
specifically
the
Trustee’s allegations that the Defendant diverted clients and
stole top employees.
a. Clients
The Bankruptcy Court could have properly found that
12
Defendant did not wrongfully divert MRI’s clients to Cosmos.
In
his brief, the Trustee pulls together bits of circumstantial
evidence that he argues compels the opposite conclusion (see
Trustee Br. at 21-23); for example, he argues that an email
chain from one of MRI’s clients establishes that (1) Defendant
falsely
told
the
client
that
he
was
the
client’s
broker
of
record (2) in order to give the incorrect impression that the
client had only two choices: follow Defendant to his new company
or find another broker (a time-consuming process that clients
would have been reluctant to undertake as their renewals came
due).
(See
considered
plausible
thought
id.
at
these
23.)
emails
conclusions:
Defendant
that
was
its
The
and
Bankruptcy
reached
although
Court,
different,
this
client
broker-of-record,
however,
entirely
incorrectly
there
was
no
indication that Defendant was responsible for the misimpression
and that, in any event, the client was already exploring new
brokers even before it learned Defendant was leaving MRI.
(See
Bankr. Order at 31.)
In
inferences
rejecting.
short,
that
the
the
Trustee
Bankruptcy
implores
Court
this
had
Court
good
to
reason
draw
for
(See Trustee Br. at 23; Bankr. Order at 30-31.)
Obviously, MRI’s clients had plenty of incentive to take their
business
elsewhere:
MRI’s
president
had
been
indicted
for
stealing from clients, and MRI’s management was attempting to
13
transfer its business to a third party.
(Bankr. Order at 30.)
Further, as the Bankruptcy Court noted, there was a glaring
absence of testimony from any of MRI’s former clients suggesting
that Defendant solicited their business while he was at MRI or
asked them to follow him to a new firm.
(See id. at 31-32.)
This alone distinguishes this case from American Federal Group,
Ltd. v. Rothenberg, No. 91-CV-7860, 2003 WL 22349673, at *8
(S.D.N.Y. 2003), an opinion on which the Trustee relies.
(See
Trustee Br. at 20.)
b. Key Employees
The Bankruptcy Court could also have properly found
that the Trustee failed to show that Defendant harmed MRI by
taking
certain
“key
employees”
with
him
to
Cosmos.
The
Bankruptcy Court gave this aspect of the Trustee’s case less
attention
than
allegations,
failed
to
it
but
it
show
did
the
Trustee’s
nonetheless
determined
that
quantifiable harm.
Defendant’s
conduct
client-diversion
that
the
caused
Trustee
MRI
any
Bankr. Order at 35-36.
On appeal, the Trustee has not pointed to anything to
suggest that the Bankruptcy Court got it wrong.
Specifically,
the Trustee did not show how the departure of these employees
led to decreased revenue or some other financial harm.
To the
extent the Trustee argues that the departure of these employees
prompted
MRI’s
former
clients
14
to
switch
their
business
to
Cosmos, this theory is undercut by the absence of testimony from
MRI’s former clients.
discussed
already,
See Bankr. Order at 31-32.
MRI’s
former
clients
had
Further, as
ample
reason
to
leave MRI, not least that its chief had been indicted for fraud.
To
the
extent
the
Trustee
maintains
that
the
employees’
departure was responsible for blowing up the MRI-NHM deal, (see
Trustee Br. at 28), this is a dead end because the Trustee
abandoned his effort to quantify the damages that MRI or its
shareholders
suffered
Bankr. Order at 35.
when
the
NHM
sale
fell
through.
See
More to the point, there seems to be no
evidence that NHM’s decision not to consummate the proposed sale
was
prompted
by
these
employees’
departures.
In
fact,
one
witness testified that the NHM deal died when Nippon Express-MRI’s most important client--left MRI as a result of the Keyes
indictment.
(See Def. Br. at 30.)
2. Corporate Opportunities
The
Trustee
also
argues
that
the
Bankruptcy
Court
erred by dismissing his claim that Defendant wrongfully usurped
several
corporate
opportunities
belonging
to
MRI.
The
Bankruptcy Court found that the Trustee failed to prove this
claim with respect to all three of the alleged “opportunities”:
(1) MRI’s clients’ renewal business; (2) the MRI-NHM deal; and
(3) Cosmos’s proposal to Defendant that it buy MRI’s assets.
See
Bankr.
Order
at
37.
The
15
Trustee
devotes
much
of
this
section
of
his
brief
to
arguing
that
MRI
had
a
“tangible
expectancy” that its former clients would renew their policies
with
MRI
rather
than
take
Trustee Br. at 32-33.)
their
business
to
Cosmos.
(See
As discussed already, the Bankruptcy
Court could have properly found that the Trustee did not prove
that Defendant improperly caused MRI’s clients to decamp for
Cosmos.
See supra 12-13.
The
Bankruptcy
Court
also
could
have
properly
determined that the Trustee failed to establish that Defendant
usurped the Cosmos and NHM deals.
As to the Cosmos deal, the
Bankruptcy Court found that, when he was approached by Cosmos
with a proposal to buy MRI, Defendant referred Cosmos to Keyes.
Defendant eventually told Keyes about his conversation with the
Cosmos
representative,
and
both
Keyes
and
Frank
Marcigliano
(MRI’s in-house counsel) said that a Cosmos deal was a nonstarter because Nippon Express--MRI’s most important client-opposed
findings
the
idea.
were
not
See
Bankr.
clearly
Order
erroneous,
at
and
14,
they
39-40.
These
undercut
any
determination that Defendant somehow diverted the Cosmos deal
for his own benefit.
The delay in informing Keyes about the
Cosmos inquiry is not an issue; had Defendant promptly told
Keyes about his first conversation with Cosmos, MRI would still
not have pursued the opportunity because Nippon Express remained
an influential client until December 10, 1998--more than a week
16
after
Keyes
and
Marcigliano
rejecting Cosmos’s overture.
cited
Nippon’s
reluctance
in
See Bankr. Order at 15.
As to the NHM deal, the Court construes this portion
of the Trustee’s appeal to argue that Defendant usurped the NHM
deal for his own benefit by diverting MRI’s clients to Cosmos,
thereby
causing
transaction.
NHM
to
lose
interest
in
finalizing
the
This is not altogether clear from the Trustee’s
brief, which does not specifically refer to Defendant’s alleged
usurping of the NHM deal until its last page, where the Trustee
writes that Defendant breached his duty “by appropriating the
essential elements of the NHM Transaction.”
34.)
To
the
Transaction”
extent
was
“the
intended
to
essential
mean
(Trustee Br. at
elements
MRI’s
former
of
the
NHM
clients,
the
Court has already concluded that the Bankruptcy Court could have
properly found that the Trustee did not prove that Defendant
engaged in any wrongdoing vis-à-vis MRI’s clients.
12-13.
To
the
extent,
however,
that
the
See supra
Trustee
meant
“essential elements” to mean that Defendant usurped the NHM deal
by poaching MRI’s employees, the Court notes again that the
evidence
showed
that
the
bolted for another broker.
NHM
deal
died
when
Nippon
Express
See supra 15.
C. The Trustee’s Cross-Appeal is Dismissed
Defendant’s
cross-appeal
challenges
the
Bankruptcy
Court’s decision to amend the complaint and its failure to award
17
Defendant his costs and fees as the prevailing party in the
adversary
already
proceeding.
concluded
(Def.
that
the
Br.
at
33-35.)
Complaint
was
The
properly
Court
has
dismissed,
thus the first portion of Defendant’s cross-appeal is dismissed
as
moot.
Defendant’s
request
for
costs
and
fees
is
also
dismissed for Defendant’s apparent failure to raise these issues
first with the Bankruptcy Court.
B.R.
448,
454
(E.D.N.Y.
1999)
See, e.g., In re Pappas, 239
(noting
that,
in
bankruptcy
appeals, district courts do not generally address arguments that
were not initially presented to the lower court).
For clarity’s
sake, the Court notes that its decision here is independent from
its discussion of Defendant’s pending Rule 11 motion, below.
II. The Defendant’s Rule 11 Motion is Denied
Having decided that the Trustee’s appeal is meritless,
the Court now turns to Defendant’s Rule 11 motion, which seeks
to impose sanctions on the Trustee for his alleged bad faith in
pursuing this appeal.
Trustee’s
prosecuting
Essentially, Defendant argues that the
this
matter
well
past
the
point
of
prudence, coupled with repeated attempts to mischaracterize the
bankruptcy
record
in
his
“Statement
of
Issues
for
Appeal,”
compels the conclusion that the Trustee lodged this appeal for
the sole improper purpose of twisting Defendant’s arm into a
post-trial settlement.
Defendant’s motion is DENIED.
18
A. Rule 11
Rule 11 requires that an attorney sign every pleading,
written motion, and other paper filed with the courts.
CIV. P. 11(a).
FED. R.
By doing so, the attorney certifies
that to the best of [his or her] knowledge,
information, and belief, formed after an
inquiry reasonable under the circumstances,(1) it is not being presented for any
improper purpose, such as to harass or to
cause unnecessary delay or needless increase
in the cost of litigation;
(2) the claims, defenses, and other legal
contentions
therein
are
warranted
by
existing law or by a nonfrivolous argument
for the extension, modification, or reversal
of existing law or the establishment of new
law;
(3)
the
allegations
and
other
factual
contentions have evidentiary support or, if
specifically so identified, are likely to
have evidentiary support after a reasonable
opportunity for further investigation or
discovery; and
(4) the denials of factual contentions are
warranted
on
the
evidence
or,
if
specifically so identified, are reasonably
based on a lack of information or belief.
FED. R. CIV. P. 11(b).
The 1993 Advisory Notes to subsections (b)
and (c) state that the rule requires “litigants to ‘stop and
think’ before initially making legal or factual contentions” and
“emphasizes
the
duty
of
candor
by
subjecting
litigants
to
potential sanctions for insisting upon a position after it is no
19
longer tenable.”
FED. R. CIV. P. 11 Advis. Comm. notes (1993
Amendments).
The touchstone of Rule 11 is whether an attorney’s
conduct
objectively
was
unreasonable.
See
In
re
Pennie
&
Edmonds, LLP, 323 F.3d 86, 91 (2d Cir. 2003)
Rule 11(c), empowers the court to impose “appropriate
sanctions”
for
violations
of
Rule
11(b).
FED.
R.
CIV.
P.
11(c)(1).
“When a court determines that Rule 11 sanctions are
appropriate, it ‘has significant discretion in determining what
sanctions, if any, should be imposed for a violation.’”
E.
Gluck Corp. v. Rothenhaus, No. 08-CV-3466, 2008 WL 2944624, at
*3 (S.D.N.Y. July 31, 2008) (quoting FED. R. CIV. P. 11 Advis.
Comm. Note); see also Perez v. Posse Comitatus, 373 F.3d 321,
325 (2d Cir. 2004) (“[I]f the district court concludes that the
assertion of a given claim violates Rule 11 . . . the decision
whether or not to impose sanctions is a matter for the court’s
discretion.”).
But any sanctions imposed “must be limited to
what suffices to deter repetition of the conduct or comparable
conduct by others similarly situated.
The sanction may include
nonmonetary directives; an order to pay a penalty into court;
or, if imposed on motion and warranted for effective deterrence,
an order directing payment to the movant of part or all of the
reasonable attorney’s fees and other expenses directly resulting
from the violation.”
Lipin v. Hunt, 573 F. Supp. 2d 836, 843-44
(S.D.N.Y. 2008) (quoting FED. R. CIV. P. 11(c)(4)).
20
B. Sanctions are not Warranted
The thrust of Defendant’s motion is that the weakness
of the Trustee’s position, coupled with his attempt to mislead
the Court in its “Statement of Issues,” suggests unmistakably
that the Trustee brought this appeal in bad faith.
disagrees.
The Court
To be clear, the Court shares the Bankruptcy Court’s
concern that the Trustee’s dogged pursuit of this action seems
to have been ill-advised.
As the Bankruptcy Court explained,
“[t]he purpose of bringing this action seems to have been lost
in the fog of litigation, but at this point, it is obvious that
there is no body of creditors of the Debtor[] for whose benefit
this
action
Nevertheless,
was
prosecuted.”
the
question
of
Bankr.
whether
Order
the
at
21
Trustee
n.
3.
should
be
sanctioned for litigating the underlying adversary proceeding is
not
before
the
Court.
The
Trustee
having
prosecuted
the
adversary proceeding, the issue for the Court is whether the
Trustee acted unreasonably in appealing his defeat.
Although
the Court found the Trustee’s position on appeal extremely weak,
the Trustee’s arguments were not wholly devoid of evidentiary
support and, in the Court’s view, do not merit sanctions.
See
In re Carlton Concrete Corp., No. 08-CV-0242, 2008 WL 4443233,
at
*11
n.9
(E.D.N.Y.
2008)
(declining
to
sanction
appellant
under Bankruptcy Rule 8020 because, “[a]lthough the Court finds
EDS's
position
to
be
extremely
21
weak
on
this
appeal,
EDS
attempted (albeit unsuccessfully) to cite to case authority and
portions
of
the
record
that
it
believed
supported
its
position”); cf. In re Negosh, No. 06-CV-5617, 2007 WL 2445158,
at *6 (E.D.N.Y. 2007) (awarding sanctions under Bankruptcy Rule
8020 where appeal was “totally lacking in merit, framed with no
relevant
supporting
unsupported
by
the
law,
conclusory
evidence”).
In
in
nature,
and
so
deciding,
utterly
the
Court
rejects Defendant’s allegations that the Trustee attempted to
mislead the Court by misstating the record in his “Statement of
Issues.”
that
Although perhaps awkwardly worded, the Court finds
the
cited
paragraphs
fall
far
short
of
knowing
misrepresentations.
CONCLUSION
For
August
24,
the
2010
foregoing
Order
is
reasons,
AFFIRMED
the
in
Bankruptcy
its
Court’s
entirety.
The
Trustee’s appeal and Defendant’s cross-appeals are dismissed,
and Defendant shall recover the costs of the appeal from the
Trustee.
See FED. R. BANKR. PROC. 8014.
Defendant’s Rule 11
motion (Docket Entry 11) is DENIED.
SO ORDERED.
/s/ JOANNA SEYBERT______
Joanna Seybert, U.S.D.J.
Dated:
August
25 , 2011
Central Islip, New York
22
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