The Bankruptcy Court as a “court of the United States” – A Warning to Attorneys

In Bankruptcy by Coolidge Wall

In the unreported decision of Grossman v. Wehrle (In re Royal Management, Inc.), the Sixth Circuit joined ranks with the Second, Third and Seventh Circuits in holding that “a bankruptcy court is a ‘court of the United States’ within the meaning of 28 U.S.C. § 1927,” opposing the position taken by the Ninth and Tenth Circuits.

The real story is not the existence of the split in authority, but rather the verification that bankruptcy courts in the Sixth Circuit (which is comprised of Kentucky, Michigan, Ohio and Tennessee) have augmented authority to issue sanctions against attorneys who increase expenses and attorneys fees for other parties by “unreasonably and vexatiously” multiplying the proceedings in any case. In the legal trade, the actions that warrant sanctions against attorneys under 28 U.S.C. § 1927 are sometimes referred to as “scorched earth” tactics – an approach to litigation described by one author as “the inundation of one’s adversary with tons of motions, interrogatories, document requests, deposition notices and other pre-trial disputes as a way to run up the costs of litigation so that eventually the opposing party will want to settle the dispute for relatively little money or go broke trying the case.”

While there are rules that are intended to curtail scorched earth tactics (for example, there are limits on the number of interrogatories and depositions and Rule 11 imposes liability for frivolous filings), 28 U.S.C. § 1927 is the only provision that addresses the harm of scorched earth tactics head-on and across the board in any form it may take. Grossman v. Wehrle warns attorneys on a couple of points: (1) scorched earth tactics should not be tolerated in any court and particularly not in bankruptcy court where it can harm all of the creditors of the bankruptcy estate, and (2) attorneys need to learn to read the judge in a case (in this instance, the opinion highlights the many times the trial judge warned against the harm the litigation tactics were causing).

Ethically, attorneys owe a duty to zealously represent their clients. We also owe a duty to the court system to not pervert justice by using the rules to avoid having a dispute properly determined by the court. Most of the time, attorneys are able to do both. Now, it’s clear, in the Sixth Circuit, that bankruptcy courts can take action when attorneys fail to properly balance these duties.

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