In re Pemstein

          SEPARATE STATEMENT OF DECISION DENYING DEFENDANT'S MOTION FOR SANCTIONS AGAINST PLAINTIFF

          Robert Kwan United States Bankruptcy Judge

         Defendant Harold Pemstein has moved for an award of sanctions under Rule 9011 of the Federal Rules of Bankruptcy Procedure against plaintiff Martin Pemstein for filing the complaint in this adversary proceeding.

         In its initial statement of decision on the motion, filed on May 30, 2013, the court stated that because it was ruling in favor of defendant on the merits of the adversary complaint and granting defendant's motion to dismiss based on the doctrines of claim or issue preclusion (res judicata or collateral estoppel) and of judicial estoppel, the court also stated its conclusion that plaintiff's claims were not warranted under existing law and its preliminary opinion that defendant's sanctions motion should be granted in favor of defendant and against plaintiff under Rule 9011(b). Separate Statement of Decision on Defendant's Motion for Sanctions against Plaintiff, filed on May 30, 2013, at 1-2. In making this initial statement of decision, the court stated that its orders determining the validity of defendant's creditor claim and confirming debtor's Chapter 11 reorganization plan are final orders, which bar any further action by plaintiff contesting defendant's creditor claim. Id. at 2, citing, e.g., United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct. 1367, 1380 (2010); Siegel v. Federal Home Loan Mortgage Corp., 143 F.3d 525, 529 (9th Cir. 1998). The court also stated that plaintiff was thus not free to assert a new claim contesting defendant's creditor claim. Id. Accordingly, the court stated in its initial statement of decision that it was determining that it would be appropriate to grant defendant's Rule 9011 motion against plaintiff because there was no reasonable basis in fact or law to relitigate the validity of defendant's creditor claims in this case and noted that plaintiff was afforded an opportunity to withdraw the offending adversary complaint under the safe harbor provisions of Rule 9011(c) and failed to do so. Id.

         In its initial statement of decision, the court also observed that Rule 9011(b) expressly provides that if there is a violation under the rule, sanctions are discretionary as the court may, but is not required, to impose sanctions. Id., citing, Fed. R. Bankr. P. 9011(b). The court also noted that in considering whether sanctions should be imposed and what sanction to impose, the 1997 Advisory Committee note suggests various factors for a court to consider: (1) whether the improper conduct was willful or negligent; (2) whether it was part of a pattern of activity or an isolated event; (3) whether it infected the entire pleading or only one particular count or defense; (4) whether the person has engaged in similar conduct in other litigation; (5) whether it was intended to injure; (6) what effect it had on the litigation process in time or expense; (7) whether the responsible person is trained in the law; (8) that amount, given the financial resources of the responsible person, is needed to deter that person from repetition in the same case; and (9) the amount is needed to deter similar activity by other litigants. Id., citing, 1997 Advisory Committee Note to Fed.R.Bankr.P. 9011, reprinted in 10 Resnick and Sommer, Collier on Bankruptcy, ¶ 9011.RH[4] at 9011-29 - 9011-30 (16^th ed. 2013). In the initial statement of decision, the court further observed that while the parties briefed Rule 9011 in their papers in support and in opposition to defendant's motion for sanctions, their briefing focused on whether there was a Rule 9011 violation and not on the appropriateness of sanctions under Rule 9011. Id. Thus, in its initial statement of decision the court stated that in order for the court to consider the appropriateness of Rule 9011 sanctions against plaintiff, the court would order the parties to file supplemental briefing addressing the propriety of sanctions and the type of sanctions which should be imposed. Id.

         The parties have now filed their supplemental briefing as ordered by the court, and the court has heard further argument from the parties on the motion at the hearing conducted on August 6, 2013. Having considered the moving and opposing papers as supplemented by the parties and the other papers and pleadings in this case, and having heard the oral arguments of the parties at the hearing on the motion on August 6, 2013, the court concludes that the motion should be denied.

         In reaching this conclusion, the court discusses below the various factors in determining the appropropriateness of sanctions under Rule 9011 based on the 1997 Advisory Committee Note:

         (1) Whether the improper conduct was willful or negligent - Defendant's comments on this factor in his supplemental briefing assert that plaintiff deliberately filed this adversary against defendant, who is his brother, knowing that his retained counsel refused to file it on his behalf. Defendant's Supplemental Brief, filed on June 28, 2013, at 2. Plaintiff in his supplemental brief was non-responsive on this factor, arguing that he has a legitimate claim that defendant violated the stipulation, or contract, in the bankruptcy case involving their businesses. Plaintiff's Supplemental Brief, filed on June 27, 2013, at 4-5. Although plaintiff is a layperson and not an attorney, he filed the adversary action to stop his brother to collect on the claims allowed by this court in this bankruptcy case and provided for in the confirmed plan of reorganization proposed by plaintiff and his wife in this case. See Plaintiff's Motion for Preliminary Injunction, filed on November 29, 2012, at 3-4 ("Plaintiff Martin Pemstein will suffer irreparable injury without the injunction. I have lost my means of support, and my retirement plan. I will loose [sic] my home of 20 years. It is extremely unlikely that the Harold Pemstein will have the funds to pay any award ordered by the court when I prevail on my Adversary Case."). The court determines that the conduct was willful because it was intended to stop defendant from collecting on his allowed claims provided for by plaintiff and his wife in their reorganization plan confirmed by order of this court. This factor supports the imposition of sanctions.

         (2) Whether it was part of a pattern of activity or an isolated event - No showing has been made that the improper conduct was part of a pattern of activity. Defendant's comments on this factor in his supplemental briefing was non-specific and merely invited the court to take a "cursory" look at the docket in this bankruptcy case, and the adversary actions within it. Defendant's Supplemental Brief, filed on June 28, 2013, at 2. For the most part, plaintiff was represented by retained competent bankruptcy counsel in this bankruptcy case and the other adversary proceedings. Plaintiff proposed a plan of reorganization that provided for payment of defendant's claims, though plaintiff had objected to defendant's claims, which objections are successful in part and unsuccessful in part. Pursuant to the reorganization plan, plaintiff has made substantial payments of defendant's allowed claim by selling his business real properties and his residence and using the sales proceeds to pay creditors' claims, including those of defendant. In two other adversary proceedings, plaintiff prevailed in avoiding defendant's liens in one adversary proceeding, and he initially prevailed before the court in the other adversary proceeding to determine dischargeability of debt, but this matter will have to be relitigated because defendant succeeded in his appeal of the court's ruling in favor of plaintiff. This record of litigation as defendant has asked the court to examine does not indicate a pattern of improper conduct. Accordingly, this factor militates against the imposition of sanctions.

         (3) Whether it infected the entire pleading or only one particular count or defense - The improper conduct of raising claims that are barred by claim or issue preclusion and judicial estoppel infected the entire pleading, the adversary complaint. This factor supports the imposition of sanctions.

         (4) Whether the person has engaged in similar conduct in other litigation - No showing has been made that plaintiff has engaged in similar conduct in other litigation. Defendant's comments on this factor in his supplemental briefing was non-responsive and simply referred to his comments on factor (3). Defendant's Supplemental Brief, filed on June 28, 2013, at 2. The court is unaware of similar conduct by plaintiff. This factor militates against the imposition of sanctions.

         (5) Whether it was intended to injure - Defendant's comments on this factor in his supplemental briefing was somewhat non-specific and thereby non-responsive, simply referred to plaintiff's unspecified behavior in this bankruptcy case: "Circumstantial evidence consisting of Martin's behavior throughout this bankruptcy strongly suggests that he has nothing but contempt for his brother Harold and will do anything within his power to ruin Harold financially. Only when faced with absolutely no alternatively, has Martin ever paid a dime that he has owed Harold."). Defendant's Supplemental Brief, filed on June 28, 2013, at 2-3. Although the court has determined above that plaintiff's conduct was willful, the court is not so sure that plaintiff intended to injure. As indicated above, plaintiff brought this action to stop distributions to defendant on his allowed claims under the confirmed plan of reorganization. See Plaintiff's Motion for Preliminary Injunction, filed on November 29, 2012, at 3-4 ("Plaintiff Martin Pemstein will suffer irreparable injury without the injunction. I have lost my means of support, and my retirement plan. I will loose [sic] my home of 20 years. It is extremely unlikely that the Harold Pemstein will have the funds to pay any award ordered by the court when I prevail on my Adversary Case."). It appears that this action by plaintiff was more of a defensive move out of desperation because he was losing his home and other valuable real property assets through liquidation of such assets to pay creditors' claims. By bringing this action, plaintiff wanted an adjudication of his rights under the prior settlement in the bankruptcy case involving the parties' businesses before further collection on defendant's claims. See Complaint for Breach of Contract, Contempt of Court and Declaratory Relief, filed on November 15, 2012. While this action was misguided for the reasons stated in the court's decision in granting defendant's motion to dismiss, the court determines that the conduct was not intended to injure. Separate Statement of Decision on Defendant's Motion to Dismiss, filed on May 30, 2013. This factor militates against the imposition of sanctions.

         (6) What effect it had on the litigation process in time or expense - The improper conduct forced defendant to have engage counsel to represent him because plaintiff sought to enjoin him from collecting on his allowed claims under the confirmed plan of reorganization, resulting in additional expense to him. This factor supports the imposition of sanctions.

         (7) Whether the responsible person is trained in the law - The party responsible for the offending pleading, the adversary complaint, is plaintiff, who is a layperson and not a lawyer. This factor militates against the imposition of sanctions.

         (8) That amount, given the financial resources of the responsible person, is needed to deter that person from repetition in the same case - While defendant through counsel protested at the hearing on August 6, 2013 that the court should not consider plaintiff's financial circumstances due to alleged lack of evidence in the record, the court is aware of the record of litigation in this case from confirming the plan of reorganization and granting motions to sell property that plaintiff liquidated substantially all of his assets of value to pay creditors, such as defendant. The liquidated assets included plaintiff's longtime residence and his two business real properties, leaving plaintiff without a home and income and with plaintiff and his wife having to live with her elderly mother. The court determines that no further amount is needed to deter plaintiff from repetition in the same case because the court is granting defendant's other motion for reasonable attorneys' fees and costs of approximately $18, 000 incurred in this adversary proceeding based on the contract between the parties. Even though the court has already granted an award of fees and costs to defendant for defending this action and making plaintiff pay this award, this is not enough for defendant because at the hearing on August 6, 2013, defendant stated that by this motion for sanctions he wants the court to compel plaintiff to pay these expenses twice. In this court's view, to grant additional sums to defendant as sanctions would be "piling on" a litigant who has been reduced to penury and that such deterrence is unnecessary overkill. This factor militates against the imposition of sanctions.

         (9) The amount needed to deter similar activity by other litigants - The circumstances of this case do not indicate that sanctions in any amount are needed to deter similar activity by other litigants. It is not likely that anyone will want to emulate plaintiff, a self-represented litigant, in bringing this type of action against another party. The court also notes again that plaintiff is being held responsible for paying defendant his attorneys' fees and costs on defendant's separate motion for such an award based on the contract. This factor militates against the imposition of sanctions.

         The court concludes that it should exercise its discretion not to grant defendant's motion for sanctions against plaintiff based on its consideration of the factors identified in the 1997 Advisory Committee Note to Rule 9011. The court does not feel that it is appropriate to impose sanctions against plaintiff for bringing this adversary action, especially in considering their number (three factors supporting sanctions, six against) and relative weight (the court accords greater weight to the factors that plaintiff is a layperson and not a lawyer, the conduct in question is not part of a pattern of activity, and the deterrent effect of sanctions is limited based on plaintiffs financial circumstances).

         IT IS SO ORDERED.