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Cinema Service Corp. v. Edbee Corp.

October 9, 1985



Author: Weis


Before: ADAMS, GIBBONS, and WEIS, Circuit Judges

WEIS, Circuit Judge.

The Bankruptcy Rules, like the Federal Rules of Civil Procedure encourage the use of sanctions to put a damper on litigation tactics that pervert the judicial system. In this case, after finding that a chapter 11 petitioner had wrongfully invoked the court's process, a bankruptcy judge directed the payment of counsel fees to a creditor. We agree with the district court that the order was proper and will affirm.

After dismissing appellant Edbee's chapter 11 reorganization petition, the bankruptcy judge conducted a hearing to determine if sanctions should be imposed. Finding that Edbee had filed the petition for the purpose of delay and not for reorganization, the bankruptcy judge directed the debtor to pay as a sanction the sum of $3,000 in attorneys' fees to its creditor Cinema Service. The district court, on appeal, affirmed the order of the bankruptcy judge.

The debtor Edbee is a Pennsylvania corporation, having as its sole asset a movie theater which it leased to Cinema Service in 1971 for a term of twenty years. Edbee assigned the lease to its mortgagee, the Union National Bank, and Cinema thereafter paid a portion of the rent equal to the mortgage payments to the Bank. The remainder was remitted to Edbee.

When Cinema's demands for repairs were not resolved to its satisfaction, it began withholding the portion of the rental payments due Edbee. A series of suits and countersuits in the state court followed over a period of years, with each party securing judgments against the other. Cinema sought and obtained execution on its judgment, and the theater was scheduled for a sheriff's sale on Monday, February 6, 1984. However, Edbee filed its chapter 11 petition on Friday, February 3, 1984, automatically staying the sale.

Both Cinema and the Bank urged the bankruptcy judge to dismiss the petition under 11 U.S.C. ยง 305, and Edbee asked for the appointment of an auditor to examine Cinema's records. The bankruptcy judge was determined not to allow the proposed audit to "be a collateral attempt to open the state court judgment." He therefore directed debtor to post a bond in the amount of the judgment. The bond was imposed to "simulate the circumstances which the debtor would be required to meet under a [reorganization] plan. "The petition was dismissed on April 30, 1984 when Edbee was unable to secure a bond.

In May 1984, Edbee filed a petition in the state court to stay execution and apply setoff. The Common Pleas Court reduced the amount of Cinema's judgment, and the Pennsylvania Superior Court affirmed that order.

In June 1984, the bankruptcy judge held a hearing on Cinema's request for attorneys' fees and costs in the amount of $4,000. Cinema argued that sanctions were appropriate because Edbee had "filed its petition only to harass and delay its secured creditor in the exercise of its lawful collection rights . . . it had absolutely no realistic possibility of reorganizing . . . was not operating a business . . . and had no unsecured business creditors."

In a Memorandum Opinion, the bankruptcy judge reviewed the history of the proceedings. In discussing the automatic stay provisions of chapter 11, he wrote, "When this stay is used for purposes other than reorganizing, this judicial process has been abused." He continued, "The court concludes in this case that the debtor filed this case for purposes of delay and not for the purpose of reorganizing. Delay is not a proper purpose and it has served to increase the costs of petitioner." The bankruptcy judge then ordered debtor to pay the sum of $3,000 as an appropriate sanction under the circumstance.

Determining that the bankruptcy court's findings were not clearly erroneous, the district court affirmed the order awarding attorneys' fees. The district judge concluded that Bankruptcy Rule 9011 authorizes the payment of the adversary's fees when a bankruptcy petition is filed for improper purposes.

Edbee has appealed, as stated in its notice, from the order "awarding attorneys' fees to Cinema Service Corporation in Edbee's bankruptcy case." In its brief in this court, Edbee raises several contentions which could be read as challenges to other orders of the bankruptcy judge, including the one directing the posting of a bond as a precondition to an audit. On this appeal, however, we consider only the propriety of the order for sanctions under Bankruptcy Rule ...

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