Whether a court can award “fees on fees” is a hot topic, exemplified by the Supreme Court’s decision in Baker Botts LLP v. Asarco LLC, which holds that retained counsel cannot obtain compensation for successfully defending a fee application. In the appellate context, the Ninth Circuit laid down rules explaining when an injured party can recover fees incurred in obtaining a sanction against an adversary for a frivolous appeal.
Essentially, the expense of obtaining a monetary sanction can be recovered if the basis for the award is a fee-shifting statute. If the basis for the award is a rule that allows sanctions, “fees on fees” are not recoverable, according to a published-but-unsigned opinion by the Ninth Circuit on April 18.
In turn, the ability of a bankruptcy court to award “fees on fees” can depend on which side the circuit takes on the question of whether a bankruptcy court is a “court of the United States.”
The Blixseth-Yellowstone Bankruptcy
The April 18 opinion followed a Ninth Circuit decision in August 2015 involving Timothy Blixseth, the former owner of the bankrupt Yellowstone Mountain Club, who at the time was in jail for civil contempt. The appeals court sanctioned Blixseth and his Boston lawyer, Michael J. Flynn, for taking a frivolous appeal that hurled “19 accusations of misconduct at a bankruptcy judge who had ruled against” him. The circuit said they failed “to back up their accusations ‘with even a shred of credible evidence.’” The circuit judges also said that Flynn’s “conduct has been unprofessional throughout.”
The decision in August 2015 required Blixseth and his lawyer to pay $500 in costs plus the other side’s attorneys’ fees. The appeals court appointed an appellate commissioner to determine the amount to be paid.
After the commissioner decided that the sanction for the two amounted to almost $200,000, Flynn in effect appealed to the circuit judges on the panel that had called for the imposition of sanctions.
Section 1927 vs. Rule 11
In the Ninth Circuit, the pivotal precedent was In re Southern California Sunbelt Developers, Inc., 608 F.3d 456 (9th Cir. 2010), where the appeals court held that Section 303(i) of the Bankruptcy Code, allowing imposition of sanctions following dismissal of an involuntary petition, is “a fee-shifting provision rather than a sanctions statute such as Rule 11.”
Consequently, Section 303(i) permits awards of “fees on fees” in the Ninth Circuit, although a sanction under the court’s inherent power does not.
In the case at hand, client Blixseth and his attorney Flynn were both sanctioned under F.R.A.P. 38; Flynn was also sanctioned under 28 U.S.C. § 1927, where the court may require an attorney to pay “the excess costs, expenses, and attorneys’ fees reasonably incurred because of” vexatious conduct.
In contrast, Rule 38 of the appellate rules allows the court to award “just damages” for a frivolous appeal.
Because Section 1927 does not refer to “damages,” the Ninth Circuit held that the cost of obtaining sanctions can be awarded under Section 1927 but not under Rule 38. The San Francisco-based appeals court therefore agreed with Norelus v. Denny’s, Inc., 628 F.3d 1270 (11th Cir. 2010).
The Ninth and Eleventh Circuits agree that an injured party would not be fully compensated without reimbursement of the “costs of obtaining the sanctions award.”
Although Section 1927 has a “sanctions trigger,” the Ninth Circuit’s opinion says that the statute is properly “characterized as a fee-shifting provision.” Furthermore, the appeals court said, Section 1927 allows compensation “for the litigation as a whole.” [Emphasis in original.] Therefore, the Ninth Circuit held that “Section 1927 allows an award of attorneys’ fees incurred in obtaining a sanctions award.”
Bankruptcy Court & Section 1927
Is a bankruptcy court a “court of the United States” and therefore entitled to impose sanctions against counsel under Section 1927? On that question, the circuits are divided.
In June 2016, the Sixth Circuit joined the Second, Third and Seventh Circuits by holding that a bankruptcy court is a “court of the United States.” The Ninth and Tenth Circuits have held that bankruptcy courts are not courts of the U.S. To read ABI’s discussion of the Sixth Circuit case and the circuit split, click here.
In some circuits, therefore, a bankruptcy court could use Section 1927 to impose sanctions against counsel “for the litigation as a whole,” assuming the Ninth Circuit is correct in its new decision.
Fodder for the Supreme Court?
“The decision is a product of judicial protectionism at the appellate level and outright corruption at the bankruptcy level,” Flynn told ABI in an email in response to a request for comment.
Flynn went on to say, “I have been litigating for 47 years. The federal judiciary, like many institutions in our country, is broken. It is permeated with corrupt influences. [Circuit Judge] Kosinski has improperly shaped all of the Yellowstone decisions to protect [retired Bankruptcy Judge Ralph B.] Kirscher, including this latest. The truth will ultimately emerge notwithstanding judicial protectionism.”
Flynn vowed to appeal to the Supreme Court and flagged a decision handed down by the high court on April 18, Goodyear Tire & Rubber Co. v. Haeger, 15-1406. Resolving a split of circuits, the unanimous Supreme Court reversed the Ninth Circuit by holding that a federal court, in exercising its “inherent powers,” can impose a sanction, but one that is “limited to the fees that the innocent party incurred solely because of the misconduct.”
In other words, Justice Elena Kagan said, the court may not impose sanctions equal to the expenses incurred in the entire litigation. The sanctions “must be limited to the fees the innocent party incurred solely because of the misconduct.”
The ability of Flynn to rely on Goodyear may be limited, though, because the district court there utilized its inherent powers. Justice Kagan noted in a footnote that the district court could not use Section 1927 because the statute can only be employed against counsel and not against the company whose conduct was responsible for the wrongful withholding of documents in discovery.
Whether a court can award “fees on fees” is a hot topic, exemplified by the Supreme Court’s decision in Baker Botts LLP v. Asarco LLC, which holds that retained counsel cannot obtain compensation for successfully defending a fee application. In the appellate context, the Ninth Circuit laid down rules explaining when an injured party can recover fees incurred in obtaining a sanction against an adversary for a frivolous appeal.