NNN 400 Capital Center: Reconsidering Fee-Shifting

Courts rarely grant motions for reconsideration, but the U.S. Bankruptcy Court for the District of Delaware did just that in the context of fee-shifting sanctions in In re NNN 400 Capital Center 16, LLC.[1] While the court ultimately upheld the sanctions, it provided a thorough analysis of a court’s ability to shift fees.

Preliminarily, the court expressed concern regarding the accuracy of disclosures made by plaintiffs’ counsel, Rubin & Rubin (“the Rubins”). At the court’s behest, the defendants in the underlying action filed a motion for an order to show cause. Following the full briefing on the show-cause motion and a hearing, the court sanctioned the Rubins — shifting the defendants’ attorneys’ fees and costs in bringing the show-cause motion onto the Rubins pursuant to the court’s inherent authority. Subsequently, the Rubins moved for the court to reconsider its order imposing the fee-shifting sanction.[2] The Rubins’ co-counsel, Cozen O’Connor, moved separately for the court to reconsider its order to the extent it denied Cozen’s fees related to defending against the show-cause motion.

The court first considered the Rubins’ motion. The Rubins asserted that, according to the Supreme Court’s decision in Chambers v. Nasco Inc., only three exceptions to the American Rule of attorneys’ fees exist: (1) the common fund exception, in which the party’s litigation effort benefited others; (2) willful disobedience of a court order; and (3) where the party acted in bad faith, vexatiously, wantonly or for oppressive reasons.[3] Because the court did not find that the Rubins had acted in bad faith, the court determined that it could not shift fees onto them based on its inherent power. The court agreed that it had not made a finding of bad faith, so it granted the motion to correct the error of law.

Nevertheless, the court found that it could impose sanctions pursuant to § 105 of the Bankruptcy Code and Bankruptcy Rule 9011 — neither of which require a finding of bad faith. Section 105 provides that a court “may issue any order, process or judgment that is necessary to carry out the provisions of this title.”[4] Additionally, Bankruptcy Rule 9011 allows a court to sanction attorneys, including by shifting fees, if the court finds “objectively unreasonable conduct.”[5] Material factual omissions are considered sanctionable under Rule 9011.[6] The court concluded that the Rubins’ conduct, which was determined to be at least negligent in the previous order, was objectively unreasonable and ultimately allowed the sanctions under Rule 9011.

The Rubins argued two additional points: that the imposition of the attorneys’ fees violated their right to due process because they were unaware that the court was considering fee-shifting, and that the fees imposed were unreasonable. The court quickly concluded that the Rubins were afforded due process, as they were continuously on notice of the possibility of fee-shifting from the time the court suggested that the defendants file the show-cause motion. The defendants’ motion expressly requested that the court shift fees, and that motion was later fully briefed and orally argued, leaving no possibility that the Rubins were not on notice. As to the reasonableness of the fees, the court agreed with the Rubins that $238,000 billed by three law firms for 30 pages of briefing and 90 minutes of oral argument was unreasonable. The court emphasized that the purpose of fee-shifting is to deter abuse of the bankruptcy system, not to fully compensate the opponent.

The court then turned to Cozen’s motion, which sought reconsideration of the court’s sanction denying Cozen any fees for defending against the show-cause motion. The court granted this motion to prevent manifest injustice and explained that its order was not intended to sanction Cozen. Instead, the court clarified that it will consider the appropriateness of Cozen’s asserted fees when the fees related to the defense of the Rubins’ disclosure violation are requested.

Motions to reconsider, while not often successful, provide a court with an opportunity to expand or correct its analysis. Here, the decision clarifies and reaffirms a court’s ability to award fee-shifting sanctions.