Behrmann et al v. National Heritage Foundation, Inc.
Filing
43
MEMORANDUM OPINION. Signed by District Judge Leonie M. Brinkema on 5/5/14. (gwalk, )
IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF VIRGINIA
Alexandria Division
In re:
NATIONAL HERITAGE FOUNDATION,
INC. ,
Debtor.
I:13cv01180
JOHN R.
BEHRMANN and NANCY
(LMB/TCB)
09-10525-BFK
BEHRMANN,
Appellants,
V.
NATIONAL HERITAGE FOUNDATION,
INC. ,
Appellee.
In
re:
NATIONAL HERITAGE FOUNDATION,
INC. ,
Debtor.
1:13CV01181(LMB/TCB)
JOHN R.
BEHRMANN and NANCY
BEHRMANN,
Appellants,
V.
NATIONAL HERITAGE FOUNDATION,
INC. ,
Appellee.
CONSOLIDATED WITH
In
re:
NATIONAL HERITAGE FOUNDATION,
INC. ,
Debtor.
09-10525-BFK
1:13CV01182
JONATHAN D. MILLER,
Appellant,
(LMB/TCB)
09-10525-BFK
V,
NATIONAL HERITAGE FOUNDATION,
INC. ,
Appellee.
CONSOLIDATED WITH
In r e :
NATIONAL HERITAGE FOUNDATION,
INC. ,
Debtor.
1:13CV01183
DANIEL J.
SCHENDZIELOS,
Appellant,
(LMB/TCB)
09-10525-BFK
V.
NATIONAL HERITAGE FOUNDATION,
INC. ,
Appellee.
MEMORANDUM OPINION
Before the Court are multiple appeals from decisions of the
bankruptcy court.
In the first appeal. Civil Action No.
I;13cv01180, Appellants John and Nancy Behrmann ("the
Behrmanns")/ who donated funds to Appellee National Heritage
Foundation, Inc.
or "Debtor"), appeal the bankruptcy
court's decision denying their Renewed Motion for Leave to
pursue litigation against NHF in the Central District of
California.
In the second appeal, Civil Action No. I:13cv01181,
which consolidated the appeals of the Behrmanns and their
counsel, Jonathan D. Miller and his law firm, Nye, Peabody,
Stirling, Hale & Miller, LLP,
("Miller"), and Daniel J.
Schendzielos and his law firm, Schendzielos & Associates, LLC,
C'Schendzielos") (collectively "Appellants")/ the appellants
attack the bankruptcy court's decision holding all of them
jointly and severally in contempt.
Independent of those appeals
are NHF's motion for sanctions against all of the appellants
under Fed. R. Bankr. P. 8020 for raising allegedly frivolous
issues in these appeals and appellants' cross-motion for
sanctions.
For the reasons that follow, the bankruptcy court's
decisions will be affirmed, NHF's motion for sanctions will be
denied without prejudice, and appellants' cross-motion for
sanctions will be denied.
I.
BACKGROUND
NHF is a nonprofit, public charity incorporated in Georgia
and headquartered in Falls Church, Virginia.
578.^
Bankr. Dkt. No.
NHF's officers and board of directors include Dr. John T.
Houk, II (Chairman and CEO); his wife. Dr. Marian M. Houk (COO);
his son, John T. Houk (President); his daughter, Jan H. Ridgely
(Vice President); and his daughter-in-law, Julie L. Houk ("the
^ Citations to the docket of the bankruptcy court will be
indicated as "Bankr. Dkt. No.
."
3
Houk Family") .
Id.
NHF is a ^'sponsoring organization" that
maintains donor advised funds ("DAFs").
§ 4966(d).
Id.; see also 26 U.S.C.
DAFs are funds or accounts ''owned and controlled by
a sponsoring organization."
Id.
Donors to DAFs receive a
dollar-for-dollar income tax deduction for their donations.
Although donors such as the Behrmanns give up control over the
funds in exchange for that favorable tax benefit, they have
"advisory privileges with respect to the distribution or
investment of amounts held" in the DAFs.
26 U.S.C. §
4966(d)(2)(A).
Through NHF, the Behrmanns created the Highbourne
Foundation, a DAF intended to fund scholarships for low-income
students.
Bankr. Dkt. No. 832-1.
The Behrmanns and NHF enjoyed
a 15-year relationship with no record of dissatisfaction until
January 24, 2009, when NHF filed a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code.
Dkt. No. 1.
Bankr.
That filing was precipitated by a September 2008
jury verdict in Texas against NHF, in which $6.2 million in
damages was awarded against NHF.^
On behalf of the Highbourne Foundation, the Behrmanns filed
both original and amended claims against NHF in the Chapter 11
2
As explained during the oral argument of these appeals, NHF's
insurance carrier declined coverage, resulting in NHF incurring
significant legal fees as well as the multimillion-dollar
judgment.
NHF sought bankruptcy protection as a result.
4
proceeding, seeking to recover $649,138.35 they claimed NHF
"appropriated . . . from the Highbourne Foundation" when those
monies were placed in NHF's operating account.
1, 142-2; Bankr. Dkt. Nos. 341,
657, 811.
Claim Nos. 142-
The Behrmanns also
alleged that "these monies were subsequently paid to one or more
lenders in partial satisfaction of the Debtor's secured
indebtedness" and that "[t]his action robbed monies that the
Behrmanns had been induced to contribute for charitable puirposes
of the ability to be used for the purposes for which they had
been provided."
Id.
NHF objected to the Behrmanns' claims.
On October 13, 2009, NHF proposed its Fourth Amended and
Restated Plan of Reorganization of the Debtor ("Plan") that
included the sections that are relevant to these appeals.
Section 7.19 released NHF's officers and directors, including
the Houk family, from any claims relating to their actions
before NHF filed for bankruptcy protection (the "Release
Provision").
Bankr. Dkt. No. 665.
Section 7.21 required that
any claims against NHF's officers and directors, again including
the Houk family, for actions relating to their conduct in the
bankruptcy proceeding, be approved in advance by the bankruptcy
court (the "Exculpation Provision").^
Id.
Lastly, section 7.18
The Exculpation Provision of the Plan is modelled in part after
the Supreme Court's decision in Barton v. Barbour, 104 U.S. 126
(1881), which held "that before another court may obtain
5
discharged claims against NHF for activity occurring before the
Plan's effective date; that is, October 16, 2009, which is the
date of the bankruptcy court's order confirming the Plan (the
''Discharge Provision")/
id.
The Behmanns objected to confirmation of the Plan,
challenging its "good faith" and arguing that
[t]his reorganization evidences a concerted effort by
the
Houk
family
to
patch
and
continue
--
for
the
family's
collective
benefit
and
profit
reprehensible
practices
of
soliciting
charitable
donations via ruse and deception. . . . [C] entral to
[NHF's]
fraudulent
charitable
"business"
donations
is
based
the
solicitation of
upon
material
misrepresentations and omissions.
Bankr. Dkt. No. 585.
On October 16, 2009, the bankruptcy court
confirmed the Plan over the Behrmanns' objection after a hearing
in which the Behrmanns and their bankruptcy counsel
participated.
Bankr. Dkt. No. 687 ("Confirmation Order").
In
the Confirmation Order, the bankruptcy court found that the Plan
had been proposed in good faith.
Id.
The Confirmation Order
siibject-matter jurisdiction over a suit filed against a receiver
for acts committed in his official capacity, the plaintiff must
obtain leave of the court that appointed the receiver."
McDaniel v. Blust, 668 F.3d 153, 156 (4th Cir. 2012).
The
Barton doctrine also applies to suits against bankruptcy
trustees.
Id. at 157. Because the Plan's Exculpation Provision
is intended to provide the same protections to NHF's officers .
and directors as Barton provides to bankruptcy trustees, the
Houk family are treated as trustees for purposes of the analysis
here.
^ Section 7.20 implemented the Release and Exculpation
provisions.
Bankr. Dkt. No.
665.
6
included the Release, Exculpation, and Discharge provisions
discussed above.
Id.
On October 23, 2009, the Behrmanns appealed the
Confirmation Order to the district court, explicitly challenging
the good faith of NHF and the Houk family in proposing the Plan
and, specifically, the propriety of the Release and Exculpation
provisions.
Behrmann v. Nat^l Heritage Found.,
I:10cv40 CMH/IDD (E.D. Va.
Inc., No.
2010).
On November 13, 2009, while that appeal was pending, the
Behrmanns moved for a stay of the Confirmation Order to enable
them to file a civil complaint against the Houk family.
Dkt. No. 732.
Bankr.
The bankruptcy court granted the motion on
December 17, 2009, staying those provisions of the Confirmation
Order "as would bar the movants from commencing—solely in order
to toll the running of the statute of limitations—a civil action
against any of the debtor's officers, directors, or employees in
a court of appropriate jurisdiction for causes of action arising
out of payments made by the movants to the debtor."
No. 800.
Bankr. Dkt.
The bankruptcy court explicitly limited the scope of
the Order by providing that "no other provision of the
confirmation order or plan is stayed other than the provisions
specifically referenced in this order."
that Order,
Id.
In accordance with
the Behrmanns filed a civil action against the Houk
family, but not NHF, in this court on January 22, 2010.
Behrmann v. Houk, No. I:10cv64 AJT/TRJ (E.D. Va. 2010).
That
action was in turn stayed pending resolution of the Behrmanns'
appeal of the Confirmation Order.
In June 2010, while their appeal of the Confirmation Order
was pending before the district court, the Behrmanns settled
their dispute with NHF and withdrew their claim from the
bankruptcy proceedings after NHF agreed to contribute
$590,000.00 to a charity (or charities) of the Behrmanns' choice
in exchange for a release of all claims against it.
Nos. 948, 1023-3.
Bankr. Dkt.
The settlement agreement did not release any
claims against the Houk family.
On August 17, 2010,
Bankr. Dkt. No. 1023-3.
the district court affirmed the
bankruptcy court's entry of the Confirmation Order.
The
Behirmanns moved to stay the Confirmation Order, but both the
district court and the Fourth Circuit denied the Behrmanns'
request.
On March 16,
2011,
the Behrmanns dismissed their
pending civil action against the Houk family in the district
court "only as the result of the compulsion of the October 16,
2009 Order (the 'Confirmation Order') of the Bankruptcy Court
confirming the Fourth Amended Plan of Reorganization."
In their appeal of the Confirmation Order to the Fourth
Circuit, the Behrmanns again challenged the good faith of NHF
8
and the Houk family in proposing the Plan and again asserted
their theory that the Houk family confiscated donated funds by
using them to pay off debts in the bankruptcy proceeding.
Behrmann v. Nat^l Heritage Found., 663 F,3d 704 {4th Cir. 2011).
The Behrmanns were partially successful on appeal.
Although the Fourth Circuit rejected their "broadside" attack on
the good faith of the Plan, i t found that the record did not
allow i t to assess "whether NHF's circumstances entitle i t to
the benefit of the" Release and Exculpation provisions.
710-13.
Accordingly,
Id. at
the Fourth Circuit vacated the district
court's decision affirming the Release and Exculpation
provisions and remanded the case to allow the bankruptcy court
"to set forth specific factual findings supporting its
conclusions."
Id.
at 713.
After the case was remanded, the bankruptcy court held a
status conference on March 6,
2012.
Bankr. Dkt. No.
997.
At
that hearing, the Behrmanns' bankruptcy counsel, Glenn Merrick,
asked the court to vacate the Release and Exculpation provisions
in light of the Fourth Circuit's decision.
Id.
Concerned about
the prospect of "piecemeal" litigation, the bankruptcy court
asked Merrick directly whether or not the Behrmanns would "run
off to state court and sue" the Houk family if it granted his
request.
Bankr. Dkt. No. 1047 at 14-17.
Merrick replied,
[N] o, there is no plan or intent to go file an action against
[NHF's] principals prior to this court ruling.
direct answer to your question.''
Id.
That's the
Merrick later reported
this exchange to Mr. Behrmann, as well as to appellants Miller
and Shendzielos.
Bankr. Dkt. No.
1064.
Despite Merrick's response, on June 28, 2012 - while the
bankruptcy court was still considering the remanded issues and
without first seeking leave to lift the automatic stay or leave
to file a civil action against the debtor - Miller and
Schendzielos filed suit on behalf of the Behrmanns against
several defendants, including both NHF and the Houk family in
the Central District of California.
Behrmann v. Goldstein, No.
2;12cv5636 DMG/CW (C.D. Cal. June 28, 2012)
("California
Action"); see also Bankr. Dkt. No. 1043-2 ("Original
Complaint").
Among the claims in the Original Complaint were
allegations that the Behrmanns' Highbourne Foundation donations
had been improperly confiscated when NHF made payments to
creditors during the bankruptcy proceedings.^
Neither NFH, the
Houk family, nor the bankruptcy court was aware of the
^ The Behrmanns filed the Original Complaint in their individual
capacities and as assignees of the claims of Dr. Robert Griego
and Dr. Carole Griego; John Goodson; and Terry P. Gillett and
Brendan A. Gillett, all of whom were contributors to other DAFs
sponsored by NHF (the "Assignors").
8.
10
Original Complaint at
3-
California action because the Behrmanns never served the
Original Complaint.
On August 27, 2012, in a written opinion, the bankruptcy
court struck the Plan's Release Provision but upheld the
Exculpation Provision, explaining that the Exculpation Provision
was "limited to acts or omissions taken in connection with the
bankruptcy case itself" and "does not purport to release any
pre-petition claims against the officers or directors."
Dkt, Nos. 1015, 1016 ("Reinstatement Order'') .
Bankr.
The Discharge
Provision of the Plan, which was incorporated in the
Confirmation Order,
remained undisturbed.
On October 22, 2012, again without obtaining a lift of the
automatic stay or leave of the bankruptcy court, the Behrmanns
filed an amended complaint in the California action, which
included, as defendants, both NHF and the Houk family.
Dkt. No. 1043-3 ("Amended Complaint").®
Bankr.
The Amended Complaint
included a disclaimer that the Behrmanns were not bringing
claims against NHF for conduct that pre-dated July 1, 2010,
which was the effective date of the Behrmanns'
agreement with NHF,
232, 239.
settlement
Amended Complaint at tH 49, 186, 216, 223,
The Amended Complaint also provided that "[n]one of
®The Amended Complaint added two new assignors, William P.
O'Connell and Jinan O'Connell, dropped Goodson as an assignor,
and, unlike the Original Complaint, omitted the claim that the
assignors had not received notice of the bankruptcy proceedings.
11
the Plaintiffs are bringing this claim against NHF or the Houk
Defendants for the period of January 24, 2009 through October
16, 2009 (the reorganization period), until the bankruptcy
court, this Court, or a competent Court of Appeals, authorizes •
such action, at which point, this claim shall be deemed
pursued."
Id.; see also HH 194, 202.
Notwithstanding this ''disclaimer language," the Amended
Complaint contained a number of allegations concerning NHF's
conduct that pre-dated both the Behrmanns' settlement of their
claims against NHF and the date of the Confirmation Order.
The
Amended Complaint also included a section titled "Specific Facts
Involving Bankruptcy Fraud".
Id. at
135-50
On the same day they filed the Amended Complaint, the
Behrmanns filed in the bankruptcy court a Motion for Leave to
Pursue Litigation Claims Against Members of the Houk Family for
Claims Arising During the Bankruptcy Exculpation Period, to
which they attached a copy of the already-filed Amended
Complaint.
Bankr. Dkt. No. 1035 ("Motion for Leave").
This was
the first time NHF, the Houk family, and the bankruptcy court
had notice of the California action, which had been pending for
nearly four months.
No party appealed the bankruptcy court's decision to
maintain the Exculpation Provision in the Plan; however, NHF
12
appealed the decision to strike the Release Provision.
Nat'l
Heritage Found., Inc. v. Behrmann, No. I:12cvl329 AJT/JFA (E.D.
Va. 2012).
On October 25, 2012, as a result of that appeal, the
bankruptcy court stayed its Order striking the Release Provision
while NHF appealed that decision.^
Bankr. Dkt. No. 1039.
As a
result of the court's granting the stay, the Houk family
remained protected from suit for pre-petition conduct involving
NHF.
Within two weeks of receiving notice of the Amended
Complaint, specifically on November 6, 2012, NHF demanded that
the claims in the California action against NHF and the Houk
family be dismissed.
Appellants refused, although they later
agreed to move for a stay of. the litigation as to the Houk
family, but not as to NHF.®
On November 14, 2012, NHF filed a Motion for Contempt and
Sanctions ("Motion for Contempt") against the Behrmanns, in
which it argued that the Behrmanns had violated the Discharge
and Exculpation provisions of the Plan by bringing the
California action.
For relief, NHF requested that the Court
"require the Behrroanns to dismiss the California Action with
On April 3, 2013, the district court affirmed the bankruptcy
court but continued the stay while NHF appealed that decision to
the Fourth Circuit, where it is still pending.
® The district court in California entered the entire action on
February 6,
2013.
13
prejudice against NHF and its Directors and Officers, and impose
sanctions in the form of both compensatory and punitive
damages."
Bankr. Dkt. No. 1043.
On December 4, 2012, after conducting a hearing on NHF's
Motion for Contempt and the Behrmanns' Motion for Leave, the
bankruptcy court denied the Behrmanns' motion without prejudice,
expressly allowing them to renew the motion if the district
court affirmed the decision striking the Release Provision and
declined to stay the decision pending appeal to the Fourth
Circuit.
Bankr. Dkt. No. 1056.
The Behrmanns did not appeal
this decision.
As to NHF's Motion for Contempt, on December 20, 2012, the
bankruptcy court ordered both the Behrmanns as well as the
counsel who filed the California action, appellants Miller and
Schendzielos, to show cause why they should not be held in
contempt of court for filing the Original and Amended
complaints.
Although NHF's Motion for Contempt had been
directed only at the Behrmanns, the bankruptcy court sua sponte
found that the prima facie showing of contempt applied to
appellants Miller and Schendzielos, as well, because they had
filed the Original and Amended complaints on behalf of the
Behrmanns, and those filings were the basis for issuing the
14
Order to Show Cause.
Bankr. Dkt. Nos. 1071 ("Order to Show
Cause").
An evidentiary hearing to address the Motion for Contempt
and the Order to Show Cause was scheduled for March 5, 2012;
however, in response to appellants' motion requesting more time
to respond, the hearing was continued to May 1, 2013.
Dkt.
No.
Bankr.
1097.
On April 9,
2013, the Behrmanns filed a Renewed Motion for
Leave to Pursue Litigation Claims Against Members of the Houk
Family for Claims Arising During the Bankruptcy Exculpation
Period, to which they attached a Proposed Second Amended
Complaint.
Bankr. Dkt. No. 1143 ("Renewed Motion for Leave");
Bankr. Dkt. No. 1180 ("Proposed Second Amended Complaint").
As
had the Amended Complaint, the Proposed Second Amended Complaint
included several allegations of bankruptcy fraud, specifically
accusing the Houk family of deceiving DAP donors and the
bankruptcy court during the bankruptcy proceedings and proposing
the Plan in bad faith.
See Proposed Second Amended Complaint at
flt 206-63.
On May 1 and 2, 2013, the bankruptcy court held an
evidentiary hearing during which it heard testimony from
appellants Miller and Schendzielos; the Behrmanns' bankruptcy
counsel Merrick; NHF's counsel David Goroff and Brittany Nelson;
15
and expert witnesses Benjamin Ackerly and Bruce Henry.
Bankr,
Dkt. Nos. 1175, 1176.
On June 21, 2013, the court denied the Behmanns' Renewed
Motion for Leave, after finding that they were unable to
establish the prima facie case required to obtain leave to sue
the Houk family for matters relating to the administration of
the Debtor's estate.
Specifically, the court found that the
bankruptcy fraud allegations in the Proposed Second Amended
Complaint were barred by the doctrine of res judicata because
they amounted to a renewed attack on the good faith of the Plan,
a claim the Behrmanns had already fully litigated and lost
before the bankruptcy, district, and appellate courts.
The
court also found that the allegations in the Proposed Second
Amended Complaint were frivolous because they could not
plausibly allege any injury arising out of the Houk family's
conduct during the bankruptcy proceedings.
Bankr. Dkt. No. 1186
("Leave Order").
On the same day, the bankruptcy court entered an Opinion
and Order finding all of the appellants in contempt of court,
based on their filing the Original and Amended complaints in
violation of the Confirmation Order (including the Discharge
Provision), the Reinstatement Order (including the Exculpation
Provision), and 11 U.S.C.
§ 1141(d)(1).
16
Bankr. Dkt. No. 1187
("Contempt Order").
The court also found that the filing of the
Original Complaint was a violation of the automatic stayprovision in 11 U.S.C. § 362(a)(1).
The court's decision denying the Behrmanns leave to pursue
claims against the Houk family and NHF is the subject of the
Behrmanns' appeal in Civil Action No. I:13cv01180; the decision
holding all appellants in contempt is the subject of the appeals
consolidated in Civil Action No.
II.
I:13cv01181.
DISCUSSION
Under 28 U.S.C. § 158(a), a district court has jurisdiction
to consider appeals from final judgments, orders, and decrees of
a bankruptcy court.
A district court sitting as an appellate
court reviews the bankruptcy court's conclusions of law de novo.
See In re Merry-Go-Round Enters., Inc., 400 F.3d 219, 224 (4th
Cir. 2005)
(citing Three Sisters Partners, L.L.C. v. Harden (In
re Shangra-La, Inc.), 167 F.3d 843, 847 (4th Cir. 1999)).
Factual findings of the bankruptcy court are reviewed for clear
error.
I^; Fed. R. Bankr. P. 8013.
Findings of fact will be
overturned as ''clearly erroneous" if consideration "of the
entire record leaves [the reviewing court] with the definite and
firm conviction that a mistake has been committed."
Levin, 772 F.2d 1150 (4th Cir. 1985).
Harman v.
"[D]ue regard shall be
given to the opportunity of the bankruptcy court to judge the
17
credibility of the witnesses."
Fed. R. Bankr. P. 8013.
Finally, decisions committed to the discretion of the bankruptcy
court are reviewed for abuse of discretion.
Robbins v. Robbins
(In re Robbins), 964 F.2d 342, 345 (4th Cir. 1992).
A. Appeal in Civil Action No.
I;13cv01180
In this appeal, the Behrmanns attack the bankruptcy court's
Order denying their Renewed Motion for Leave to file a Second
Amended Complaint in the California action, which continued to
include claims against the Houk family and NHF.
The abuse of discretion standard applies to a bankruptcy
court's decision to deny a motion for leave to sue a trustee,®
see, e.g.. In re USA Baby, Inc., 520 F. App'x 446, 448 (7th Cir.
2013); In re VistaCare Grp., LLC, 678 F.3d 218, 224 {3d Cir.
2012); In re Marinkovic, 350 F. App'x 156, 158 (9th Cir. 2009);
In re Beck Indus., Inc., 725 F.2d 880, 889 (2d Cir. 1984);
however, ''such permission ordinarily should be granted unless it
is clear that the claim is without foundation.'" McDaniel v.
Blust, 668 F.3d 153, 157 n.l {4th Cir. 2012)
(quoting Anderson
V. United States, 520 F.2d 1027, 1029 (5th Cir. 1975)).
In deciding whether to grant leave to sue a trustee, a
bankruptcy court must first determine whether a prospective
®Although members of the Houk family are not trustees, as
officers and directors of NHF they are treated as trustees for
purposes of this analysis.
18
plaintiff has established a prima facie case against the
trustee.
If a prima facie case is established, the court must
then balance the interests of the parties.
In re Cutright, 2012
WL 1945703, at *10-*11 (Bankr. E.D, Va. 2012)
(citing Kashani v.
Fulton (In re Kashani), 190 B.R. 875 (B.A.P. 9th Cir. 1995)).
'VThe prima facie case requirement requires a 'pre-screening' of
the allegations by the appointing court to determine if the
plaintiff can present adequate grounds upon which to proceed
against the trustee in another forum."
Id. at *10.
The bankruptcy court found that the Behrmanns failed to
satisfy the prima facie requirement for two reasons.^®
First,
the court found that the bankrtupcy fraud allegations included
in the Proposed Second Amended Complaint were barred under the
doctrine of res judicata.because on appeal, both the district
and appellate courts had found that the Plan was proposed in
good faith.
Leave Order at 5-8.
Second, the court found that
it was "just frivolous for the Behrmanns to say that they were
somehow defrauded in connection with the bankruptcy case,"
Because i t found that the Behrmanns failed to establish a
prima facie case, the bankruptcy court did not proceed to
balance the parties' interests.
Both the Behrmanns and NHF
advance arguments as to how the balance should be struck, see
Appellants' Opening Brief at 16-18; Brief of Appellee National
Heritage Foundation, Inc. at 21-24; Appellants' Reply Brief at
7-10; however, those arguments will not be considered, given the
bankruptcy court's sound conclusion that the Behrmanns have not
established a prima facie case.
19
because "the Behrmanns cannot plausibly allege that they were
injured by reason of anything that occurred during the course of
the bankruptcy case."
Id. at 5, 8-10.
1. Res Judicata
The doctrine of res judicata bars a plaintiff from re-
litigating claims already considered by a courts
See, e.g..
United States v. Mumford, 630 F.2d 1023, 1027 (4th Cir. 1980).
The res judicata bar applies when "(1) a judgment on the merits
in a prior suit resolv[es]
(2) claims by the same parties or
their privies" and a plaintiff files (or attempts to file) "(3)
a subsequent suit based on the same cause of action."
Aliff v.
Joy Mfg. Co., 914 F.2d 39, 42 (4th Cir. 1990).
The bankruptcy court applied the res judicata bar after
finding that the Proposed Second Amended Complaint effectively
alleged "that the Officers and Directors deceived the Donors and
the Court in connection with the filing of the case and
confirmation of the Debtor's Plan."
Leave Order at 7 (citing
Proposed Second Amended Complaint at Kt 206-63)Based on
those allegations in the Proposed Second Amended Complaint, the
court concluded that "[t]he Behrmanns' current claim, that the
bankruptcy case was a sham, is nothing more than an attempt to
In its analysis, the bankruptcy court reviewed the allegations
in the Behrmanns' Amended and Proposed Second Amended Complaints
11
and properly concluded that the allegations in both were the
same or substantively similar.
See Leave Order at 7.
20
re-litigate what was litigated and lost" before the bankruptcycourt in 2009, the district court in 2010, and the Fourth
Circuit in 2011, when these courts rejected the Behrmanns'
attack on the bona fides of the bankruptcy proceedings and the
Plan.
Id.
. The Behrmanns first argue that the application of res
judicata is incorrect because the two causes of action do not
arise out of the same transaction or the same core of operative
facts.
Appellants' Opening Brief ("Appellants' Br.") at 13.
In
this argument, the Behrmanns try to distinguish their previous,
unsuccessful challenge to the good faith of the Plan by arguing
that the conduct at issue in that challenge arose out of the
Houk family's pre-petition conduct, whereas the California
action is based on the Houk family's post-petition conduct,
specifically focusing on conduct involving the ''confiscation" of
appellants' "monies" during the bankruptcy proceedings.
Id.;
Appellants' Reply Brief ("Reply Br.") at 2-3 ("Appellants allege
that during NHF's bankruptcy case, and without notice to
Appellants, the Houk Family wrongfully collaborated to embezzle
monies that Appellants had contributed to their Foundation.")
(emphasis in original).
In other words, the Behrmanns argue
that their attack in the bankruptcy court on the good faith of
the Plan and the confiscation claims they wanted to raise in the
21
Second Amended Complaint "involve different transactions[] and
different operative facts," which makes the claims "wholly
distinct" and, therefore, not barred by res judicata.
Appellants' Br. at 13.
The bankruptcy.court correctly determined that the
bankruptcy fraud claims in the Proposed Second Amended Complaint
"arise out of the same transaction or series of transactions or
the same core of operative facts" as the claims raised in the
Behrmanns' unsuccessful challenge to the Plan's good faith.
Among the allegations in the Proposed Second Amended Complaint
were claims that one "facet" of NHF and the Houk family's RICO
"Enterprise" was NHF's voluntary petition in the bankruptcy
court, and that "[d]uring the ensuing 'reorganization'
proceedings, NHF and the Houk Defendants converted to NHF
absolute ownership and control of approximately $175 million in
monies, property and assets that had been contributed to NHF-
sponsored Foundations."
11.
Proposed Second Amended Complaint at H
The Proposed Second Amended Complaint also alleged that NHF
and the Houk family concealed information regarding donor assets
from the bankruptcy court, and misrepresented NHF's ownership
interest and control over DAF assets.
also id.
at 206-14.
22
Id. at
14, 16-20; see
The Proposed Second Amended Complaint's allegation that DAF
assets were wrongly confiscated is premised solely on NHF and
the Houk family's alleged fraud on the bankruptcy court,
and
the Behrmanns' attempt to distinguish their challenge to the
Plan's good faith and their confiscation claim is therefore
wholly unavailing.
The Behrmanns' attempt to distinguish their
challenge to the Plan's good faith based on "pre-petition"
conduct from claims based on "post-petition" conduct, that is,
the illegitimate confiscation of funds, is also unpersuasive in
light of the Proposed Second Amended Complaint's repeated
allegations that both before and after NHF filed for bankruptcy,
NHF and the Houk family conspired to defraud the bankruptcy
court in order to "seize" donor assets.
In sum, the Behrmanns' unsuccessful appeal of the Plan's
good faith and the allegations in the Proposed Second Amended
Complaint that NHF and the Houk family improperly used the
bankruptcy proceedings to confiscate donor funds arise out of
the same series of transactions and core operative facts - that
is, the activities of the Houk family and NHF in the bankruptcy
This fraud on the bankruptcy court appears to be based on
NHF's alleged misrepresentations to the court regarding the
relationship of DAF donors and DAF funds, given the September
2008 jury verdict in Texas state court, which awarded damageis
against NHF.
For the reasons explained below, however, NHF's
representation to the bankruptcy court that DAF donors have no
right,
title,
or interest in the DAF's assets once the donation
is made was an accurate description of the law in this circuit.
23
proceedings.
Accordingly, the bankruptcy court did not err in
concluding that the allegations in the Proposed Second Amended
Complaint are barred as a matter of law under the doctrine of
res judicata.
The Behnnanns also argue that res judicata does not apply
because their challenge to the Plan's good faith was not, in
fact, finally decided on appeal.
They base this argument on the
Fourth Circuit's finding that the Release and Exculpation
provisions of the Plan were not supported by sufficient specific
factual findings, and the bankruptcy court's subsequent
deteinnination on remand that the Release Provision (but not the
Exculpation Provision) was not necessary for implementation of
the Plan.
Appellants' Br. at 13-14
('Ml]t cannot be said that
the prior confirmation challenge (involving the 'good faith' of
incorporating into the Plan an unjustified non-debtor release)
was finally decided against Appellants.").
The record fully supports the bankruptcy court's conclusion
that the Behnnanns' "good faith" challenge to the Plan was fully
adjudicated on the merits, and that the Fourth Circuit very
clearly decided the good faith issue when it explicitly
"reject [ed]" the Behrmanns'
''contention that the Confirmed Plan
fails to satisfy the good faith requirement."
F.3d at 710.
Behrmann, 663
Although the Fourth Circuit vacated two provisions
24
of the Plan and remanded the case for further fact finding as to
just those two provisions, the good faith issue was fully
resolved.
Accordingly, under the doctrine of res judicata, the
Behrmanns are barred from re-litigating the Plan's good faith.
2. Frivolousness
The bankruptcy court also determined that the claims in the
Proposed Second Amended Complaint as to the Houk family and NHF
were frivolous because the Behrmanns cannot establish that they
were injured by reason of NHF and the Houk family's conduct in
connection with the bankruptcy case.
After stressing that the
Behrmanns had withdrawn their claim against NHF in the
bankruptcy proceedings upon entering into a settlement
agreement, the bankruptcy court found itself '*at a loss" to
understand how the BehtTnanns could claim they were harmed by any
fraud or misrepresentation during the course of the bankruptcy
case when the Behrmanns had already "parted with the entirety of
their donated funds well before the bankruptcy case was ever
filed."
Leave Order at 9.
The Behrmanns argue that the bankruptcy court misread the
Proposed Second Amended Complaint, which they describe as
specifically alleging that misconduct by the Houk family during
the course of the bankruptcy proceedings resulted in a
substantial monetary loss, that is, the confiscation of DAF
funds.
Appellants' Br. at 15t16; Reply Br. at 6.
25
NHF responds
that the Behrmanns parted with ownership of the funds in
question when they made their contributions to the Highbourne
Foundation; consequently, when the bankruptcy proceedings began,
"there was nothing belonging to them that could be 'taken' from
them."
Appellee's Br. at 20.
It is well established in this circuit that a donor to a
DAF has no right, title, or interest in the DAF's assets
following the donation.
See Behrmann, 663 F.3d at 707 n.l
('^DAFs are funds that are owned and controlled by a sponsoring
charitable organization. . . . Donors may make non-binding
recommendations regarding how their donations are invested or
distributed, but otherwise relinquish all right and interest in
the donated assets." (emphasis added)); Nat'l Heritage Found.
Inc. V. Behrmann, No. I:12cv01329 AJT/JFA, 2013 WL 1390822, at
*1 (E.D. Va. Apr. 3, 2013)
(^'When a donor contributes to a
particular DAF, the donor must relinquish all right, title, and
interest in the assets, in exchange for a 100% dollar for dollar
tax deduction at the time the donation is made." (emphasis
added)
(citing 26 U.S.C. § 4966(d) (2))); Nat'l Heritage Found.,
Inc. V. Philadelphia Indem. Ins. Co., No. I:12cv00447 TSE/IDD,
2012 WL 5331570, at *1 (E.D. Va. Oct. 25, 2012) ("The donors may
advise the sponsoring foundation how they would like their
26
contributions distributed or invested, but those recommendations
are not binding on the sponsoring foundation.").
The Behrmanns cite three cases in an attempt to support
their contention that the bankruptcy court incorrectly found
that they had no ownership interest in the Highbourne
Foundation's assets."
Reply Br. at 6-7.
None of these cases is
from this circuit, and none involved DAFs, which afford a unique
tax advantage by providing donors with a dollar-for-dollar
deduction.
Without a legal claim to ownership in the assets of
the Highbourne Foundation, the Behrmanns can have no claim
" The first. In re Parkview Hosp,, 211 B.R. 619, 630 (Bankr.
N.D. Ohio 1997), quotes Comment F to the Restatement (Second) of
Trusts § 348 for the general proposition that
[w] here property
is given to a charitable coi^oration without restrictions as to
the disposition of the property, the corporation is under a duty
. . . not to divert the property to other purposes but to apply
it to one or more of the charitable purposes for which it is
organized." The second, St. Joseph's Hosp. v. Bennett, 22
N.E.2d 305, 308 (N.Y. 1939), stands for the proposition that a
charitable corporation may not "receive a gift made for one
.purpose and use it for another, unless the court applying the cy
pres doctrine so commands," notwithstanding that the making of a
gift does not technically create a fiduciary relationship
between a donor and a trustee (as the "trustee and beneficiary
are one").
Finally, in Hobbs v. Bd. of Educ. of N. Baptist
Convention, 253 N.W. 627, 635 (Neb. 1934), the court decided
that donations made by the Baptist Education Society to the
endowment fund of Grand Island College "constituted a charitable
trust, regardless of the fact that they were made direct to the
college; and that the college did not acquire absolute title to
the principal of such fund but only to the income thereof."
Importantly, none of these cases addressed DAFs under the
relevant provisions of the Internal Revenue Code, which have
special.features and are, therefore, distinguishable from mere
contributions to a charitable organization.
27
against NHF or the Houk family for any alleged confiscation of
those assets, either before or after NHF filed for bankruptcy.
When the Behrmanns accepted the special tax advantages derived
•from contributing to a DAF, they gave up their right to make" the
kinds of claims they raise in the Proposed Second Amended
Complaint.
Accordingly, the bankruptcy court correctly
determined that the claims in the Proposed Second Amended
Complaint were frivolous and did not abuse its discretion when
it denied the Behrmanns' Renewed Motion for Leave.
reasons,
For these
that decision will be affirmed.
B. Consolidated Appeals in Civil Action No.
I;13cv01181
In their consolidated appeals, the Behrmanns, Miller, and
Schendzielos, respectively, attack the bankruptcy court's
decision to hold all of them in contempt and to impose joint and
several sanctions on them.
For the reasons that follow, that
decision will also be affirmed.
1. Standard of Review
Under 11 U.S.C. § 105(a), a bankruptcy court "may issue any
order, process, or judgment that is necessary or appropriate to
carry out the provisions of" the Bankruptcy Code.
"No provision
of [the Bankruptcy Code] providing for the raising of an issue
by a party in interest shall be construed to preclude the court
from, sua sponte, taking any action or making any determination
28
necessary or appropriate to "enforce or implement court orders or
rules."
Id.
The Fourth Circuit has seen ''no reason to read into
[Section 105] anything other than its plain meaning that a court
of bankruptcy has authority to issue any order necessary or
appropriate to carry out the provisions of the bankruptcy code,"
including contempt orders.
In re Walters, 868 F.2d 665, 669
{4th Cir. 1989); see also In re Kestell, 99 F.3d 146, 149 (4th
Cir. 1996).
A bankruptcy court's decision to impose sanctions
for contempt is within its sound discretion and is, therefore,
reversible only if that discretion has been abused.
Walters,
See
868 F.2d at 666.
2. Analysis
Civil contempt must be shown by "clear and convincing"
evidence
(1) of the existence of a valid decree of which the
alleged contemnor had actual or constructive knowledge;
(2) that
the decree was in the movant's "favor"; (3) that the alleged
contemnor by its conduct violated the terms of the decree, and
had knowledge (at least constructive knowledge) of such
violations; and (4)
that the movant suffered harm as a result.
In re Grand Jury Subpoena (T-112), 597 F.3d 189, 202
(4th Cir.
2010); Ashcraft v. Conoco, Inc., 218 F.3d 288, 301 (4th Cir.
2000).
"Willfulness is not an element of civil contempt."
29
In
re Gen. Motors Corp., 61 F.3d 256, 258 (4th Cir. 1995)
(citing
McComb V. Jacksonville Paper Co., 336 U.S. 187, 191 (1949)).
Appellants do not dispute that they had actual or
constructive notice of the Confirmation and Reinstatement
orders.
''favor."
There is also no dispute that both orders were in NHF's
Accordingly, the relevant issues to be resolved are
whether appellants' filing of the Original and Amended
complaints knowingly violated valid orders of the bankruptcy
court and the automatic stay and whether appellants' violations,
if any, harmed NHF.
Before addressing the relevant issues, two frivolous
arguments by appellants Miller and Schendzielos need discussion.
Schendzielos argues that because NHF moved for sanctions only
against the Behrmanns, the bankruptcy court's exercise of
contempt jurisdiction over him and Miller through the Order to
Show Cause violated their constitutional due process rights.
Opening Brief of Appellants Daniel J. Schendzielos and
.Schendzielos & Associates, LLC,
("Schendzielos Br.") at 13-15.
There is no merit to this argument.
The bankruptcy court is
empowered to "sua sponte[] tak[e] any action or mak[e] any
determination necessary or appropriate to enforce or implement •
court orders or rules."
11 U.S.C.
§ 105(a).
Both Miller and
Schendzielos were served with the Order to Show Cause and then
30
had five months to prepare for an evidentiary hearing^ during
which time they both conducted discovery.
participated in the two-day hearing.
Both also fully
Therefore^ they received
the notice and the opportunity to be heard guaranteed under the
Due Process Clause of the United States Constitution.
Miller and Schendzielos also frivolously argue that the
Noerr-Pennington doctrine immunizes the Behrmanns from any
finding of contempt because the filing of the Original and
Amended complaints in California is "petitioning activity."
Brief of Appellants Jonathan D. Miller, Nye, Peabody, Stirling,
Hale Sc Miller, LLP ("Miller Br.") at 34-35; Schendzielos Br. at
28-29.
"The Noerr-Pennington doctrine guarantees citizens their
First Amendment right to petition the government for redress
without fear of antitrust liability."
Baltimore Scrap Corp. v.
David J. Joseph Co., 237 F.3d 394, 398 (4th Cir. 2001)
added).
(emphasis
The doctrine has no application here, where the
liability appellants seek to avoid is not antitrust liability,
but a finding of contempt.
a. Filing of the Original Complaint
The bankruptcy court found that the filing of the Original
Complaint without leave of the bankruptcy court violated the
Discharge Provision of the Confirmation Order, as well as 11
31
U.S.G. § 1141(d) (1)" and the automatic stay under 11 U.S.C. §
362(a).
Contempt Order at 25-27.
The Discharge Provision, included in both the Plan and the
Confirmation Order, provides that
[u]pon the entry of the Confirmation Order, any holder
of the discharged Claim or interest will be precluded
from asserting against the Debtor or Reorganized
Debtor or any of its assets or properties any other or
further claim or interest based on any document,
instrument,
act,
omission,
transaction
or
other
activity of any kind or nature that occurred before
the Effective Date, The Confirmation Order will be a
judicial determination of discharge of all liabilities
• of
the
Debtor,
and
Reorganized
Debtor
will
not
be
liable for any Claims or interests and will only have
the obligations as are specifically provided for in
this Plan.
Bankr. Dkt. No. 665.
Appellants do not dispute that the
Discharge Provision precludes the Behrmanns from bringing any
action against NHF for conduct occurring before October 16,
2009, which is the date when the Confirmation Order was entered.
Except as otherwise provided in this subsection, in the plan,
or in the order confirming the plan, the confirmation of a plan(A) discharges the debtor from any debt that arose
before the date of such confirmation, and any debt of
a kind specified in section 502(g), 502(h), or 502(i)
of this title,
whether or not--
(i) a proof of the claim based on such debt is filed
or deemed filed under section 501 of this title;
(ii) such claim is allowed iinder section 502 of this
title; or
(iii)
the holder of such claim has accepted the
plan; and
(B) terminates all rights and interests of equity
security holders and general partners provided for by
the plan."
32
Appellants also acknowledge that the Original Complaint
contained allegations relating to NHF's conduct occurring before
October 16, 2009.
See Original Complaint at
("The NHF Bankruptcy Filing and Proceedings").
36-44, 53-61
Instead, they
erroneously argue that the Confizmation Order was not a valid
order when they filed the Original Complaint because "the
Confirmation Order remained uncertain in the face of the
judgment of the Fourth Circuit."
Appellants' Opening Brief
("Behrmanns Br.") at 8-10; Miller Br. at 19-22 {"Appellants
cannot be held in contempt for filing the Initial Complaint
because it was done during a period that the bankruptcy court
itself described as an 'admittedly gray area' following
remand."); Schendzielos Br. at 16-20.
When read in context, it is clear that the bankruptcy
court's reference to a "gray area" related only to the two
provisions of the Plan that had been vacated by the Fourth
Circuit.
Bankr. Dkt. No. 1047 at 15 {"So there are
practical problems to doing that while we're in this admittedly
gray area of a remand and a determination of whether the release
provisions should be included [in the Confirmation Order] or
not.").
The bankruptcy court correctly rejected appellants'
argument because the Discharge Provision was not challenged by
33
the Behrmanns in their appeal of the Confirmation Order and was,
therefore, clearly in e.ffect when appellants filed the Original
Complaint.
Contempt Order at 25.
The bankruptcy court also
correctly found that appellants acknowledged as much when they
argued during their appeals before the district and appellate
courts that the Release and Exculpation provisions were
severable from the Plan.
12.2 (^'Severability")
See Bankr. Dkt. No. 665 at Section
see also Behrmann, 663 F.3d at 714
(stating that "the Confirmed Plan expressly provides that any
clause may be severed should it be determined to be
unenforceable, which suggests that the plan would remain viable
absent" the Release and Exculpation provisions.).
At the
hearing before the bankruptcy court on the Motion for Contempt,
the Behrmanns' bankruptcy counsel also acknowledged that the
Fourth Circuit did not vacate the Confirmation Order in its
entirety.
Bankr. Dkt. No. 1063 at 68-69.
The severability provision reads in full:
Should any provision in this Plan be determined to be
unenforceable, that determination will in no way limit
or affect the enforceability and operative effect of
any other provision of
this
Order
a
shall
constitute
Plan.
judicial
The
Confinnation
determination and
shall provide that each term and provision of this
Plan, as it may have been altered or interpreted in
accordance
with
the
foregoing,
enforceable pursuant to its terms.
34
is
valid
and
The appellants' views of what was at issue in their appeal
before the Fourth Circuit are disingenuous.
The Fourth Circuit
clearly defined the appeal as one addressing ''the circumstances
under which a bankruptcy court may approve nondebtor release,
injunction and exculpation provisions as part of a final plan of
reorganization under Chapter 11 of the Bankruptcy Code."
Behrmann,.663 F.3d at 706 (emphasis added); see also id. at 710
(concluding that "the bankruptcy court erred in entering an
order approving the Release Provisions as part of the Confirmed
Plan, and the district court erred in affirming that order
insofar as it included the Release Provisions" (emphasis
added)); id. at 713 (reasoning that
record does not allow us to assess
[b] ecause the present
.
.
. whether NHF's
circumstances entitle it to the benefit of the Release
Provisions, we must vacate the district court's judgment and
remand the case to allow the bankruptcy court . . . to set forth
specific factual findings supporting its conclusions").
As
observed by the bankruptcy court and argued by NHF, the Fourth
Circuit expressly acknowledged that under the Plan's
severability clause, the infirmity or unenforceability of any
one provision did not affect the viability of any other
provision.
Id. at 714.
35
Given the language of the Fourth Circuit's decision alone,
it is clear that the bankruptcy court correctly found that only
two portions of the Confirmation Order, the Release and
Exculpation provisions, had been vacated.
Moreover, because it
is uncontested that only those two provisions were challenged by
the Behrmanns on appeal, appellants' argument that the Fourth
Circuit's decision somehow vacated the entire Confirmation Order
is clearly meritless.
It is also clear that vacatur of the
Confirmation Order as to these two provisions had no effect on
the enforceability of the Discharge Provision, given the Plan's
severability clause.
Moreover,
after the case had been remanded to the
bankruptcy court, the Behrmanns requested that the bankruptcy
court vacate the entire Confirmation Order.
If the Behrmanns
had honestly believed that the Fourth Circuit had, in fact,
vacated the entire Plan and the Confirmation Order, such a
request would have been meaningless.
Filing that motion clearly
establishes that appellants had actual knowledge of a valid
order of the bankruptcy court - the Confirmation Order.
When
the bankruptcy court denied their motion to vacate that order,
that decision made it even clearer that the Confirmation Order
was operative.
36
Even if it had been reasonable for appellants to believe
that the Fourth Circuit had somehow vacated the entire
Confirmation Order, including the Discharge Provision, the
bankruptcy court properly reasoned that the automatic stay
imposed under 11 U.S.C.
§ 362(a) would still have been
applicable and appellants would not have been entitled to file
claims against NHF without seeking permission to lift the stay.
Contempt Order at 26-27.
Under § 362(a), NHF's voluntary
petition ''operate [d] as a stay, applicable to all entities, of
the commencement or continuation . . . of a judicial,
administrative, or other action or proceeding against the debtor
that was or could have been commenced before the commencement of
the case."
11 U.S.C. § 362(a)(1).
The bankruptcy court found
it ''inarguabl [e] " that NHF was still in bankruptcy when the
Fourth Circuit remanded the matter; accordingly, the automatic
stay remained in full force and effect, notwithstanding the
"uncertain" status of the Confirmation Order.
Contempt Order at
26-27.
Miller argues that the bankruptcy court's finding that the
automatic stay precluded the filing of the Original Complaint is
"hindsight analysis" and a "last ditch effort to justify its
actions" that deprived appellants of "sufficient notice of this
allegation or an opportunity to respond, all of which are
37
required under the law."
Miller Br. at 22-23.
At oral argument
before the Court, Merrick also repeatedly asserted that this was
"not a
[section]
362 case."
Appellants' argument is meritless.
bankruptcy case is a ''362 case."
Simply put, every
See, e.g.. In re Gordon
Properties, LLC, 460 B.R. 681, 699 (Bankr. E.D. Va. 2011)
(stating that
[o] ne cardinal rule of bankruptcy practitioners
is, if there is doubt as to whether the automatic stay applies,
file a motion").
And notwithstanding their more recent
position, the Behrmanns acknowledged as much in the course of
this litigation when they requested - and received - leave of
the bankruptcy court to lift the stay so that they could file a
civil action in this district in November 2009, while their
appeal of the Confirmation Order was pending.
That request
unequivocally demonstrates that the Behirmanns and their counsel
knew that the bankruptcy court's permission was required before
they could.begin litigation against NHF in any other court.
The determinations that filing the Original Complaint
violated the plain language of an enforceable Confirmation Order
The Proposed Second Amended Complaint also includes an
explicit reference to the automatic stay.
See Proposed Second
Amended Complaint at H 19 ("NHF and the Houk Defendants
consented to Motion and Order granting the commercial lender
relief from the automatic stay contained in 11 U.S.C. §362(a) to
enable the commercial lender to appropriate and confiscate
Founders' contributions to their Foundations.").
38
as well as the automatic stay and that appellants knew or should
have known that they were in violation of the Confirmation Order
and the automatic stay when they filed the Original Complaint
without leave from the bankruptcy court were sound, and these
elements of civil contempt are therefore satisfied.
b. Filing of the Amended Complaint
The bankruptcy court found that appellants' filing the
Amended Complaint violated the August 21, 2012, Reinstatement
Order (reinstating the Exculpation Provision), as well as its
Confirmation Order (containing the Discharge Provision) and 11
U.S.C. § 1141(d)(1).
Contempt Order at 22-24, 27-32.
The Exculpation Provision of the Plan provides that NHF and
the Houk family (as officers and directors of NHF)
shall
have
Parties
.
no
.
.
liability
connection with,
Case,
the
formulation,
to
any
of
the
Releasing
for any act taken or omission made in
or arising out of,
Disclosure
Statement,
negotiation,
this
preparation,
the Bankruptcy
Plan
or
the
dissemination,
implementation or the administration of this Plan, any
instrument or agreement created or entered into in
connection with this Plan, any other act taken or
omitted to be taken in connection with,
or in
contemplation of, any of the restructuring or other
transactions
contemplated by this
Plan,
and the
property
to
be
distributed
or
otherwise
transferred
under this Plan; unless such person obtains the prior
approval of the Bankruptcy Court to bring such a
claim.
Bankr. Dkt. No. 665.
The Exculpation Provision precludes the
Behrmanns from bringing claims against NHF and the Houk family
that ^'aris [e] out of [] the Bankruptcy Case" (that is, claims for
39
misconduct occurring between the date NHF filed for bankruptcy
protection in January 2009 and confirmation of the Plan in
October 2009) without first obtaining permission from the
bankruptcy court.
Although the Amended Complaint contains certain language
attempting to ^^disclaim" the claims that would be barred by
either the Exculpation or Discharge provisions of the Plan,^''
that language does not absolve them of contempt.
The Amended Complaint also states that the Behrmanns, *^in their
individual capacities, are not bringing [these claims] against
NHF for conduct that pre-dates July 1, 2010," which was the
effective date of the Behrmanns' settlement agreement with NHF.
Id. at nil 49, 186, 216, 223, 232, 239.
Notwithstanding the disclaimer language, the bankruptcy
court correctly found that the Amended Complaint was "replete"
with allegations relating to NHF's conduct that did pre-date
both July 1, 2010, and the date the Confirmation Order was
17
The Amended Complaint states that
[n]one of the Plaintiffs are bringing this claim
against NHF or the Houk Defendants for the period of
January
24,
2009
through
October
16,
2009
(the
reorganization period), until the bankruptcy court,
this
Court,
or a
competent
Court of Appeals,
authorizes such action, at which point, this claim
shall be deemed pursued.
Amended Complaint at
135-50; see also
40
194, 202.
entered, and which arose out of NHF's conduct during the
bankruptcy proceedings, all in violation of the Confirmation
Order.
Contempt Order at 9-11.
From this finding, the court
concluded that the Amended Complaint was "an attempt to collect
on a pre-petition and pre-confirmation debt" against NHF and
that, there were "no allegations in the Amended Complaint that
the Behrmanns or their Assignors were harmed by the Debtor,
post-confirmation, at all"; rather, "the entirety of the claimed
harm to the Behrmanns is alleged to have occurred well before
the bankruptcy filing, or during the course of the bankruptcy
case (where, it must be remembered, they ultimately withdrew
their claim)."
Id.
at 10-11.
Citing to a section in the Amended Complaint actually
titled "Specific Facts Involving Bankruptcy Fraud," the court
also found that the Amended Complaint "iinquestionably includes
Exculpated claims," again notwithstanding the disclaimer
language.
Id. at 9-11, 22; see Amended Complaint at HH 135-50.
Indeed, the bankruptcy court found that the Amended Complaint
contained only four allegations based on post-confirmation
conduct.
Contempt Order at 11; Amended Complaint at HH 9, 156-
58 (alleging that in late 2010 and 2011, the Houk family
transferred funds from NHF to two new charitable organizations).
41
Further, the bankruptcy court found no support for
appellants' argument that alleging post-confirmation
continuation of a RICO enterprise was pennissible under the
Discharge Provision and rejected appellants' contention that the
disclaimer language avoids a finding of contempt because the
^^allegations are in the Amended Complaint precisely because
[appellants] intend to present evidence of the same to the
jury."
Contempt Order at 28-30.
Lastly, the court correctly found that the Amended
Complaint was filed without leave several months after
reinstatement of the Exculpation Provision, a decision that has
not been appealed.
Id. at 22.
Given the Amended Complaint's
inclusion of "unquestionably" exculpated claims against the Houk
family (as well as discharged claims against NHF), filing those
claims without leave of the bankruptcy court after the court
reinstated the Exculpation Provision was in ''direct violation"
of the Confirmation and Reinstatement orders, and filing claims
against NHF which had been discharged clearly violated the
Confirmation Order.
Id. at 22-23, 27-28.
The Behrmanns argue that references in the Amended
Complaint to the Houk family's conduct during the bankruptcy
proceedings are distinguishable from claims based on that
conduct.
Behrmanns Br. at 11-13; see also Miller Br. at 23-29;
42
Schendzielos Br. at 20-22.
Miller goes on to argue that because
the Amended Complaint alleges a RICO enterprise, under Federal
Rule of Civil Procedure 9, the Behrmanns were required to plead
their bankruptcy fraud claims against the other defendants named
in the Amended Complaint, as well as those defendants'
relationship to the Houk family,, with specificity.
at 25-27.
Miller Br.
What the appellants have totally failed to explain is
why they did not seek permission from the bankruptcy court to
lift the automatic stay or to be released from the requirement
of the Exculpation Provision before they filed the Amended
Complaint.
The bankruptcy court's findings that the allegations in the
Amended Complaint clearly involved pre-petition conduct as well
as conduct during the bankruptcy proceedings are sound.
The
court was fully justified in rejecting appellants' attempts to
''plead around" the Exculpation Provision and to explain away the
overwhelming number of post-petition, pre-confirmation
allegations leveled at the Houk family and NHF.
In sum, the bankruptcy court correctly concluded that the
claims asserted in the Amended Complaint against the Houk family
and NHF are barred by the Exculpation and Discharge provisions
of the valid Confirmation Order, and that the record
demonstrates that appellants knew that the Amended Complaint was
43
filed in violation of that order as well as the Reinstatement
Order.In fact, the inclusion of the disclaimer language in
the Amended Complaint is conclusive proof that appellants knew
that many of their allegations as to the Houk family and NHF
were in violation of the bankruptcy court's orders.
Accordingly, the bankruptcy court's finding that appellants
violated the two valid Confirmation and Reinstatement orders by
filing the Amended Complaint was correct, as was the conclusion
that appellants knew that the claims included in the Amended
Complaint violated the bankruptcy court's orders.
c. Harm t o NHF
Lastly, the bankruptcy court found that NHF was harmed by
appellants' filing the Original and Amended complaints and then
refusing to dismiss NHF from them, putting NHF to the expense of
having to file its Motion for Contempt to secure> the dismissal
to which it was entitled.
Contempt Order at 32-33 ("[NHF]
should not have had to litigate a two-day contempt hearing
Although the bankruptcy court did not cite appellants for an
additional violation of the automatic stay, that violation also
occurred. To find otherwise - as appellants argue in their
appeal of the bankruptcy court's Order as to the Original
Complaint - would jeopardize the efficacy of bankruptcy
proceedings, which the automatic stay is designed to protect.
44
before this Court to gain that result [dismissal of the claims
against NHF]
Appellants argue that NHF and the Houk family have suffered
no harm as a result of the filing of the Original Complaint
because neither NHF nor the Houk family were required to defend
against it; indeed, NHF and the Houk family did not even know
about the California litigation until appellants filed and
served the "superseding" Amended Complaint, a full year after
filing the Original Complaint.
Br.
at
Behrmanns Br. at 10-11; Miller
17-19.
NHF responds that "[e]very day that NHF remained a
defendant in the California Action was a continuing violation of
its legal rights."
NHF Br, at 34-35.
Consequently, "[e]very
dime in legal fees that NHF spent to obtain dismissal of the
improper claims constituted harm that i t would not have suffered
absent Appellants' violations of the Bankruptcy Court's orders."
Id.
To cure the violation, NHF was obligated to incur extensive
Appellants later dismissed the claims in the California
litigation that the bankruptcy court determined were
impermissible.
See Behrmanns Br. at 7; Miller's Br. at 38
(asking the Court to take.judicial notice that "the motion to
lift the California stay and dismiss the claims at issue was
made on August 19, 2013"); Schendzielos Br. at 9
("The
California Federal Action has been stayed since [February 6,
2013] but for a momentary lifting to enter further orders
regarding the dismissal of certain claims because of the
[appellants'] actions taken under the cannon of the Bankruptcy
Court's contempt order").
45
legal expenses to seek relief from the bankruptcy court and^ at
the same time, guard against harm in the California action.
at
Id.
36.
The record clearly demonstrates a continuous pattern of
non-compliance with the bankruptcy court's orders, as well as
flagrant violations of the automatic stay, that is sufficient to
establish harm to NHF's right to be protected from suit while in
bankruptcy proceedings.
Appellants conduct also harmed the
integrity of the bankruptcy court and judicial proceedings.
See
Tattoo Art, Inc. v. Tat Int'l, LLC, Civil Action No. 2:10CV323,
2012 WL 3912572, at *5 (E.D. Va. Sept. 7, 2012)
(stating that
"because this is an action for contempt of court, not only the
Plaintiff but also the judicial system suffers harm as a result
of non-compliance"); Omega World Travel, Inc. v. Omega Travel,
Inc., 710 F.Supp. 169, 171 (E.D. Va. 1989) aff'd sub nom. Omega
World Travel, Inc. v. Omega Travel & Shipping Agencies, Inc.,
905 F.2d 1530 {4th Cir. 1990)
(stating that "the system as well
as the movant was harmed by World's neglect of its obligations
under the consent decree").
When the bankruptcy court issued
the Contempt Order in June 2013, appellants had been in
violation of the Confirmation Order since June 12, 2012, when
they filed the Amended Complaint.
That year-long violation
46
alone is more than sufficient to find harm to both NHF and the
judicial system.
Omega, 710 F. Supp, at 171-72.
Because all the elements of civil contempt were properly
found by the bankruptcy court, the next issue is whether the
bankruptcy court abused its discretion in imposing sanctions for
appellants' contempt and fashioning relief for NHF.
d. Relief
To purge their contempt, the bankruptcy court required
appellants to (1) dismiss with prejudice all claims against NHF
in the California action;
(2) move to further amend the Amended
Complaint in the California action to dismiss with prejudice all
exculpated claims against the Houk family; and (3) pay NHF
$278,098.53 in attorney's fees and costs, all within 10 days of
the issuance of the Contempt Order.
Contempt Order at 39-40.
The Contempt Order provided that if the appellants failed to
comply with the dismissal and amendment provisions of the Order
within 10 days, they would be fined $500.00 a day for each
provision of the Confirmation Order violated (for a total of
$1,000.00 a day), also payable to NHF.
Id.^°
The bankruptcy
court denied NHF's request for punitive damages.
Id. at 40.
NHF initially asked for $688,172 in attorney's fees and
punitive damages. The attorney's fees award was reduced and the
request for punitive damages was denied. Contempt Order at 3338.
47
i. Dismissal of NHF and the Exculpated Claims from
the California Action
The Behrmanns argue that the bankruptcy court erred in
ordering them to dismiss their post-confirmation claims against
NHF because the bankruptcy court's jurisdiction does not extend
to ''striking the claims against a reorganized debtor for acts or
omissions occurring in the post-confirmation period."
Br. at 15-16; Schendzielos Br. at 24.
Behrmanns
Miller and Schendzielos
argue that they cannot be required to dismiss any of the
Behrmanns' claims in the California action without their
clients' consent, because if they complied, their clients could
sue them for malpractice and they could be liable to the
California bar for sanctions.
Br. at 25-28.
Miller Br. at 35-36; Schendzielos
In addition. Miller argues that complying with
the Contempt Order would adversely affect the Behrmanns' right
to appeal, "as purging the contempt has the potential to render
a clients' appeal moot."
Miller Br. at 36.
Miller and Schendzielos also argue that the bankruptcy court's
Order requiring dismissal of any claims based on pre-
confiirmation conduct against NHF violates the due process rights
of the assignors,, given their purported lack of notice of the
bankruptcy proceedings. Miller Br. at 29-34; Schendzielos Br.
at 29-31. This argument is patently frivolous given the
evidence in the record that all of the assignors received notice
of the bankruptcy proceedings.
See Bankr. Dkt. No. 148.
Further, the bankruptcy court took notice that appellants did
not offer as evidence during the evidentiary hearing
''Declaration [s] or Affidavits from the Assignors" stating that
48
NHF responds that the court did not abuse its discretion by
ordering appellants to dismiss the Behrmanns' claims against it
and the Houk family.
NHF Br. at 36-44.
First, NHF argues that
Miller and Schendzielos's argument that without their clients'
consent they were somehow powerless to purge their contempt by
moving for a dismissal of the claims against NHF and the Houk
family "makes no sense," because they both acknowledge that they
have finally, in fact, complied with that provision of the
Contempt Order.
Id. at 37.
NHF also points out that neither
Miller nor Schendzielos asserts that the Behrmanns actually
refused to consent to dismissal - making any ethical "quandary"
they may have found themselves in "hypothetical."
Id.
"The appropriate remedy for civil contempt is within the
court's broad discretion."
Cir. 1995)
General Motors, 61 F.3d at 259 (4th
(citing McComb, 336 U.S. at 192).
"[R]emedies and
sanctions must be remedial and compensatory and, unlike criminal
contempt, nonpunitive."
Id.
The Fourth Circuit has seen "no
reason to read into [section 105] anything other than its plain
meaning that a court of bankruptcy has authority to issue any
order necessary or appropriate to carry out the provisions of
the bankruptcy code."
In re Walters, 868 F.2d at 669.
they did not receive notice of the bankruptcy proceedings.
No.
1241 a t
8.
49
Dkt.
The Behrmanns and their counsel were on clear notice of the
bankruptcy court's orders and were given an early opportunity to
avoid sanctions by promptly dismissing the offending claims from
the California action.
By unreasonably refusing to dismiss
those claims, and instead insisting on conducting discovery
before the contempt hearing, the Behrmanns and their counsel
caused NHF significant, unnecessary litigation expense.
Miller
and Schendzielos's arguments as to needing the Behrmanns'
consent to dismiss the offending claims are frivolous.
An
attorney cannot violate court orders simply because his client
withholds consent to compliance with those orders.
To allow
that excuse to justify non-compliance would turn the judicial
system on its head and undermine (if not destroy) the bankruptcy
court's ability to "cariry out the provisions of the bankruptcy
code."
As officers of the bankruptcy court,Miller and
Schendzielos were obligated to comply with its orders and to
advise their clients accordingly.
And if the Behrmanns refused
their consent to comply with an order. Miller and Schendzielos
were, as the bankruptcy court suggested, obliged to withdraw
Merrick and Schendzielos were admitted to practice before the
bankruptcy court pro hac vice on September 15, 2009. See Bankr.
Dkt. No. 621.
2014.
Miller was admitted pro hac vice on January 23,
See Bankr.
Dkt.
No.
1295.
50
from representing them.
That this particular alternative may be
unpalatable to appellants is irrelevant.
For all these reasons, the bankruptcy court's requirement
that all the claims asserted against NHF and the Houk family in
the California action be dismissed was not an abuse of its
discretion.
ii.
Attorney's Fees
In addition to requiring dismissal of the offending claims,
the bankruptcy court awarded NHF $278,098.53 in attorney's fees
and costs.
Appellants do not explicitly challenge the
bankruptcy court's findings as to NHF's counsel's hourly rates
or the ultimate calculation of the attorney's fees award.
Rather, appellants' primary argument is a "broadside" challenge
to the award of any attorney's fees.
Specifically, the
Behrmanns argue that the attorney's fees incurred by NHF and
awarded by the bankruptcy court were not caused by any
^ Miller argues that although NHF "submitted their fee
statements, and had an expert testify that their rates were
consistent with what other practitioners charged, they failed to
present any evidence that their fees were necessary to achieve
the desired result" or "any evidence of mitigation." Miller Br.
at 39-40; see also Schendzielos Br. at 31-33. This argument
completely ignores the bankruptcy court's careful consideration
of a.11 the evidence presented at the evidentiary hearing on this
issue, including mitigation evidence. See Contempt Order at 3338. Moreover, appellants' mere argument that the bankruptcy
court erred in its findings as to the attorney's fees award is
insufficient, without more, to show that the bankruptcy court's
award was an abuse of discretion.
51
contemptuous conduct attributable to them, but resulted from
appellee's counsel's failure to make "[a] few telephone calls"
and engage in ''open and candid communication and idea exchange,"
which was ''all that was required.Behrmanns Br. at 17.
The
Behrmanns argue that by not taking this "rational approach," NHF
failed to mitigate any harm it may have suffered from the filing
of. the California action, and, therefore, that the bankruptcy
court's award of attorney's fees is unjustified and should be
reversed.
Id.
Rather than blaming NHF's counsel. Miller shifts
the blame to the bankruptcy court by contending that NHF would
not have incurred substantial attorney's fees and costs if the
court had simply "instructed Appellants that the claims at issue
should be dismissed immediately."
Schendzielos Br.
Miller Br. at 38-39; see also
at 22-24.
NHF responds that awarding attorney's fees was not an abuse
of discretion because the bankruptcy court found appellants'
conduct to be willful, and that NHF had been harmed by the
California action.
NHF Br. at 44-46.
Moreover, appellants
The Behrmanns also argue that the bankruptcy court did not
make a finding that their conduct was "willful," and therefore
erred in awarding attorney's fees against them. Behrmanns Br.
at 16. The Behrmanns argument is baseless because the
bankruptcy court actually did find that their conduct was
"willful," Contempt Order at 38 ("On balance, while the Court
finds that the conduct of [appellants] was willful . . ."), even
though "[w]illfulness is not an element of civil contempt."
General Motors,
61 F.3d at 258.
52
could have avoided the attorney's fees award by promptly
dismissing the California action when the bankruptcy court
issued its Order to Show Cause in December 2012.
Id.
As to the
argument that NHF's Motion for Contempt "could (and should) have
been resolved with a few telephone calls, a few e-mails, and
perhaps some amended filings," NHF points out that the
bankruptcy court's opinion specifically recounts NHF's numerous,
unsuccessful attempts by phone and e-mail to seek dismissal
before it filed its Motion for Contempt.
Id. at 47-48.
This Court fully agrees with NHF and the bankruptcy court
that i t was appellants - not NHF - who increased the cost of
litigating the Motion for Contempt and the Order to Show Cause
by opposing the motion and moving for a two-month continuance of
the evidentiary hearing.
Had appellants promptly dismissed the
offending claims in the California action, none of the costs of
discovery, brief writing, and participation in a two-day
evidentiary hearing would have been incurred.
On this record it is clear that the bankruptcy court did
not abuse its discretion in finding the appellants in contempt
and awarding reasonable attorney's fees of $250,000 and
$28,098.53 in costs to the appellees.
In making its award, the
bankruptcy court properly considered the 12 factors required
under Barber v. Kimbrell's, Inc., 577 F.2d 216, 226 {4th Cir.
53
1978),^^ and also correctly found that it was appellants' motion
to continue the evidentiary hearing for two months and their
decision to conduct discovery - including expert discovery - in
preparation for the hearing that added significantly to the
costs and fees NHF incurred in early 2013.
Further, just as
there is no question as to the appellants' ongoing pattern of
contempt, there is no question that NHF began its attempts to
mitigate the harm caused by the California action as soon as it
learned of the suit in October 2012, more than six months before
the evidentiary hearing.
Appellants' continued pattern of
knowing non-compliance with the bankruptcy court's orders
resulted in hamn to NHF and the Houk family that appellants were
always in the best position to remedy, which they could have
done at any time simply by complying with the bankruptcy court's
orders.
The factors include: (1) the time and labor expended; (2) the
novelty and difficulty of the questions raised; (3) the skill
required to properly perform the legal services rendered; (4)
the attorney's opportunity costs in pressing the instant
litigation; (5) the customary fee for like work; (6) the
attorney's expectations at the outset of the litigation; (7) the
time limitations imposed by the client or circumstances; (8) the
amount in controversy and the results obtained;
(9) the
experience, reputation and ability of the attorney; (10) the
undesirability of the case within the legal community in which
the suit arose; (11) the nature and length of the professional
relationship between attorney and client; and (12) attorneys'
fees awards in similar cases.
Barber, 577 F.2d at 226 n.28.
54
For all these reasons, the Court finds that the bankruptcycourt's order awarding $278,098.53 in attorney's fees and costs
to NHF, jointly and severally payable by appellants, was not an
abuse of i t s discretion.
iii.
Fines
Miller argues that subjecting appellants to a $1,000 perday fine for failure to comply with the Contempt Order rises to
the level of a criminal penalty, which in turn triggers certain
protections that appellants were not afforded, including ''notice
of the intent to seek criminal sanctions, the right to a jury
trial on the issues of contempt," and the opportunity "to
present evidence that would have negated the element of intent
necessary to reach a criminal contempt finding."
Miller Br. at
37-38.
A reviewing court must decide for itself whether a contempt
sanction was criminal or civil, regardless of how it was labeled
by the sanctioning court.
Cromer v. Kraft Foods N. Am., Inc.,
390 F.3d 812, 821 (4th Cir. 2004).
"[P]utatively civil contempt
sanctions will be held to be criminal sanctions in cases when
the fines were 'not conditioned on compliance with a court
order,' 'not tailored to compensate the complaining party,' but
instead 'initiated to vindicate the authority of the court and
to punish the actions of the alleged contemnor[ ] . "'
55
Id. at 822
(quoting Bradley v. Am. Household, Inc., 378 F.3d 373, 377 {4th
Cir. 2004)); see also Int^l Union, United Mine Workers of Am. v.
Bagwell,
512 U.S.
821,
828
(1994).
Here, only the threat of fines was imposed on appellants
because under the plain language of the Contempt Order, if
appellants timely complied, no fines would be imposed.
Contempt Order at 39 ("Should [appellants]
See
fail to [dismiss with
prejudice the California federal action against NHF], the Court
hereby imposes a daily fine in the amount of $500 per day. . . .
If the [appellants] fail to comply with this requirement, the
Court hereby imposes a daily fine in the amount of $500 per
day.").
Appellants' ability to purge their contempt is
sufficient to support a finding that any fines imposed by the
bankruptcy court would.be "civil," and not "criminal."
See
Bagwell, 512 U.S. at 829 ("Where a fine is not compensatory, it
is civil only if the contemnor is afforded an opportunity to
purge.").
Accordingly, the Court finds that the bankruptcy court held
appellants in civil and not criminal contempt.
For that reason,
and the reasons discussed above, the bankruptcy court's
imposition of daily fines for non-compliance with the Contempt
Order was not an abuse of its discretion.
56
III.
NHF'S MOTION FOR SANCTIONS
NHF has moved for sanctions against appellants under
Federal Rule of Bankruptcy Procedure 8020, arguing that the
appeals presently before the Court are frivolous as argued.
A. Standard of Review
Federal Rule of Bankruptcy Procedure 8020 provides that
[i] f a district court . . . determines that an appeal from an
order . . . of a bankruptcy judge is frivolous, it may, after a
separately filed motion . . . award just damages and single or
double costs to the appellee."
Fed. R. Bankr. P. 8020.
^^Because the language of Bankr [uptcy] Rule 8020 is materially
identical to Fed. R. App. P. 38, the sanctions provision for the
filing of frivolous appeals in the Court of Appeals, the
standard for imposing sanctions is similar."
In re Prop.
Movers, L.L.C., 31 F. App'x 81, 83 (4th Cir. 2002)
(citing
Pettey v. Belanger, 232 B.R. 543, 548 (D. Mass. 1999)).
A court considering a motion for sanctions for the filing
of a frivolous appeal must "first determine that the appeal is
frivolous, and then determine that this is an appropriate case
for the imposition of sanctions."
App'x at 84
In re Prop. Movers, 31 F.
(citing Williams v. United States Postal Service,
873 F.2d 1069, 1075 (7th Cir. 1989)). An appeal is frivolous
where "the result is obvious or when the appellant's argument is
wholly without merit."
Id.
(internal quotation marks omitted).
57
A finding of frivolity is appropriate where an appellant cites
no relevant cases in response to a lower court's accurate
exposition of the law, and where an appellant's arguments are
irrelevant to the issues in dispute.
Id.
It is particularly appropriate to hold not only the
appellant, but also his attorney, liable for a sanctions award
when the frivolity of an appeal is premised not only on the
filing of the appeal but also on the type of arguments used to
support it.
Dimgaree Realty, Inc. v. United States, 30 F.3d
122, 124-25 (Fed. Cir. 1994).
Sanctions for the filing of a
frivolous appeal are appropriate because "they compensate the
prevailing party for the expense of having to defend a wholly
meritless appeal, and by deterring frivolity, they preserve the
appellate calendar for cases truly worthy of consideration."
Id. at 125 (internal quotation marks omitted).
B, Analysis
NHF asserts that many of appellants' arguments, including
that the Fourth Circuit vacated the entire Confirmation Order;
that the disclaimer language in the Amended Complaint turned
their exculpated and discharged claims against the Houk Family
and NHF into "mere allegations" of pre-confirmation conduct;
that their ongoing violation of the bankruptcy court's orders
did not cause NHF any harm; that the Contempt Order imposed
criminal, rather than civil, penalties; and that the contempt
58
proceedings deprived appellants and the assignors of due
process, are meritless.
National Heritage Foundation, Inc.'s
Brief in Support of its Motion for Sanctions Under Federal Rule
of Bankruptcy Procedure 8020
("Motion for Sanctions") at 5-14.
In response, appellants contend that their arguments in
these appeals are not only valid, but made in good faith.
See
Omnibus Response in Opposition to "National Heritage Foundation,
Inc.'s Motion for Sanctions Under Federal Rule of Bankruptcy
Procedure 8020" and Cross-Motion for Sanctions at 3-19.^®
The Court finds that sanctions for many of the arguments
made by appellants would indeed be appropriate.
In particular,
and as explained above, appellants' arguments as to the effect
of the Discharge Provision in the Confirmation Order following
remand from the Fourth Circuit, as well as their arguments as to
the harm caused by appellants' ongoing violations of the
Confirmation Order, the lack of due process in the contempt
proceedings, the purportedly criminal nature of the Contempt
Order, and the purported application of the Noerr-Pennington
doctrine, are so lacking in merit as to be frivolous.
Having determined that many of the arguments in these
appeals are frivolous,
the Court also finds that this is not an
Appellants have cross-moved for sanctions against NHF for its
"manifestly unwarranted pursuit of Rule 8020 sanctions."
at 20-22.
For the reasons stated above,
denied.
59
0pp.
that motion will be
appropriate case for the imposition of sanctions at this time.
See In re Prop. Movers, 31 F. App'x at 84.
First, the sanctions
imposed by the bankruptcy court should be sufficient to remedy
the harm caused by appellants' contempt and fairly compensate
NHF for the reasonable expenses incurred in achieving a
dismissal of the improperly filed claims in the California
action.
Second, this litigation is now in its fifth year, and it
. has been nearly four years since the Behrmanns "settled" their
claim against NHF.
Imposing further sanctions may,
unfortunately, simply encourage rather than deter additional
litigation in a matter that should have been resolved years ago.
Of particular concern is the extraordinarily aggressive and farranging nature of this litigation, as well as the Behrmanns'
apparent insistence on pursuing claims regardless of the costs
of that pursuit,
to themselves or others.
For all these reasons, NHF's Motion for Sanctions will be
denied without prejudice.
Should appellants pursue any another
frivolous appeals, sanctions will be imposed for that appeal and
the instant motion for sanctions will be reconsidered.
IV.
CONCLUSION
For the reasons stated above, the bankruptcy court's
decisions will be AFFIRMED, NHF's Motion for Sanctions will be
60
DENIED WITHOUT PREJUDICE, and appellants' Cross-Motion for
Sanctions will be DENIED by an order to be issued with this
Memorandum Opinion.
Entered this ^
day of May, 2014.
Alexandria, Virginia
Leonie M. Brinkel^a
United States D^trict Judge
61
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