Circuit Upholds $257,000 in Sanctions for Failure to Disclose a Claim Assignment

When a bankruptcy court imposes sanctions on counsel for “egregious” conduct, the Sixth Circuit will give “substantial deference” to the findings of fact, even when it means upholding more than $250,000 in sanctions under the more stringent test adopted by the Supreme Court in 2017 in Goodyear Tire & Rubber Co. v. Haeger, 137 S. Ct. 1178 (2017).

In a November 19 opinion, Circuit Judge Eugene E. Siler, Jr., said the lawyer had “indisputably engaged” in what Bankruptcy Judge John E. Hoffman, Jr., of Columbus, Ohio, characterized as “egregious, bad-faith conduct.” More specifically, the lawyer had repeatedly lied to his adversary and to the court.

The creditor had a $14 million claim based on a note. Anticipating that he debtor would object to the debt as having been fraudulently induced, the creditor’s principal sold the note to an unrelated third party for $1.8 million. The purchaser, the creditor’s principal and the lawyer for the creditor agreed not to disclose the sale or assignment of the claim to either the debtor or the bankruptcy court.

The lawyer continued prosecuting the claim in bankruptcy court in the name of the creditor, not the purchaser of the claim. According to Judge Hoffman, the lawyer failed to disclose the transfer of the claim in response to numerous discovery requests where disclosure would have been proper. Needless to say, the lawyer was signing pleadings on behalf of an entity he knew to have no interest in the claim.

More than two years after assignment of the claim, while the litigation was ongoing, the debtor’s lawyer discovered that the claim had been sold.

After the claim was expunged, the debtor sought sanctions from the buyer and the seller of the claim, and also from the attorney who effectively represented both of them. In addition to sanctions against the clients, Judge Hoffman decided that discovery sanctions were inadequate against the lawyer, who not only failed to produce documents but also made misrepresentations to conceal the transfer of the claim.

Under 28 U.S.C. § 1927, Judge Hoffman separately ordered the lawyer to pay the debtor’s excess costs, expenses and attorneys’ fees incurred as a result of the conduct. Section 1927 authorizes the imposition of sanctions personally against a lawyer who “unreasonably and vexatiously” multiplies litigation.

Two days before the hearing to determine the amount of the sanction, the Supreme Court handed down Haeger, where the unanimous Court prescribed a “but for” causation standard. More specifically, Justice Elena Kagan allowed the recovery of “‘only the portion of his fees that he would not have paid but for’ the misconduct.” Id. at 1187.

Meticulously applying Haeger, Judge Hoffman allowed about $257,000 of the $500,000 sought by the debtor. The decision by Judge Hoffman was upheld in district court.

In the circuit court’s opinion, Judge Siler said the attorney did not seriously argue that his conduct was not sanctionable. Instead, he proffered several creative but ultimately unsuccessful arguments about the calculation of the sanction under the Haeger test.

For instance, Judge Siler rejected the argument that the bankruptcy court could not rely on its inherent powers to sanction when Rule 37 allows sanctions for discovery misconduct. He said that Haeger itself upheld sanctions under the district court’s inherent power, even though the misconduct was related to discovery.

After analyzing the bankruptcy court’s fact findings with regard to causation, Judge Siler again quoted Haeger for saying that the trial “court’s superior understanding of the litigation, [is] entitled to substantial deference on appeal.” Id.

Finding no abuse of discretion, Judge Siler upheld the award of sanctions.