The bankruptcy court has constitutional power to sanction an attorney for conduct occurring during the administration of a bankruptcy case. A sanction proceeding is not an independent ethics investigation implicating only state ethics rules, the Eighth Circuit said in an April 25 opinion.
The case involved a lawyer with a history of ethics violations. In the matter leading to the appeal, he had been ordered by the bankruptcy court to disgorge fees he received in several cases.
After the lawyer told the bankruptcy court that he received no fees and worked for free, the bankruptcy judge ordered him to turn over documents supporting his allegations. When he failed to comply, the bankruptcy court ordered him to show cause why he should not be sanctioned.
After the hearing on sanctions, the bankruptcy court found the lawyer in contempt for making deliberately deceptive and misleading representations to the court. For sanctions, the bankruptcy court barred him from the bankruptcy court for six months, required him to take 12 hours of CLE on ethics, and permanently banned him from associating professionally with another lawyer and petition preparer, who were separately sanctioned.
The lawyer lost his first appeal in district court and lost again when Circuit Judge Duane Benton handed down his opinion for the court of appeals.
In the circuit, the lawyer relied to no avail on Stern v. Marshall, 564 U.S. 462 (2011), contending that an Article I court does not have constitutional authority to impose sanctions. Clothing his theory in the language of Stern, the lawyer bolstered his argument by contending that the sanctions had nothing to do with the claims allowance process or restructuring the debtor/creditor relationship.
Judge Benton said that Stern dealt with a common law cause of action, asserted as a counterclaim, that did not derive from a regulatory scheme. Stern taught that Congress may not bypass Article III courts simply because the “‘proceeding has some bearing on a bankruptcy case,’” Judge Benton said, quoting Stern.
Again quoting Stern, Judge Benton said that the “‘question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.’”
Judge Benton said that the sanctions grew from an earlier order calling for disgorgement. He said that the “bankruptcy court based the sanctions order on events that occurred while trying to enforce the show-cause orders . . . and the order compelling turnover.” Therefore, he said, “All the orders here are matters ‘arising in’ a case under title 11.”
Furthermore, Judge Benton distinguished Stern because the sanctions “do not implicate a common law claim.”
Judge Benton therefore held that the “bankruptcy court had authority to enter sanctions for events that occurred while trying to enforce the order compelling turnover and the show cause orders.”