Appeal from the United States District Court for the District of New Jersey. (D.C. Civ. No. 91-01286).
Before: Mansmann, Roth and Rosenn, Circuit Judges.
This appeal arises from the bankruptcy court's denial of motions to assess attorney's fees and costs against debtors who filed false affidavits in opposition to summary judgment and the district court's affirmance of that denial. We determine that a violation of Bankruptcy Rule 9011 requires the imposition of an appropriate sanction and that Bankruptcy Rule 7056 requires the imposition of fees and costs associated with bad faith litigation. Thus, we will reverse and remand for the imposition of sanctions and an award of fees and costs.
Joseph and Carol Jean Gioioso purchased a newspaper distribution business, the Westfield Home News Service, Inc., from Chester J. Stuebben. When the business failed to deliver profits, the Gioiosos ceased paying monthly installments to Stuebben and commenced a contract action in the state courts of New Jersey. Stuebben counterclaimed, seeking judgment on an $841,285.50 promissory note, which represented a portion of the purchase price, and seeking the return of the business, which secured the promissory note. During this same time, the Gioiosos transferred funds from their business and personal accounts to other accounts and to their relatives. In the midst of the contract action, the Gioiosos filed a petition for relief pursuant to Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et seq.
Stuebben responded by commencing an adversary proceeding in the bankruptcy case, requesting that the bankruptcy court deny the debtors (the Gioiosos) discharge. Pursuant to § 727, a court shall grant a debtor a discharge unless the debtor has acted deceptively with respect to property transfers, records, court filings, or explanations as to property loss. 11 U.S.C. § 727(a)(2)-(5). The bankruptcy court resolved the adversary proceeding in Stuebben's favor, determining that each subsection of 11 U.S.C. § 727(a)(2)-(5) warranted denial of discharge.*fn1
In the course of its opinion denying discharge, the bankruptcy court concluded that the debtors had committed various wrongs. The following excerpts are indicative of the court's findings.
There is testimony given by one (or both) debtors to the effect that the initial transfers were accomplished specifically to hinder, delay, or prevent [Stuebben] from obtaining assets of the later created estate . . . .
This court finds the evidence offered through use of deposition testimony given [by the debtors] close in time to the events complained of to be more credible than the certifications now relied upon by the debtors. . . . The facts are such that the earlier testimony regarding the funds is the only credible testimony.
[In determining the debtors' failure to adequately explain their loss or deficiency of assets], the court is again struck by the discrepancies appearing between sworn testimony taken near in time to the loss and the sworn statements offered in opposition to this motion [for summary judgment]. Even if those discrepancies did not exist and the sworn statements were wholly credible, the only explanation offered for the loss is that debtors cannot remember why money was transferred to others, where money retained was spent, nor for what purpose it was spent. This explanation is actually no explanation at all, and the court concludes it is totally inadequate.
Stuebben v. Gioioso (In re Gioioso), No. 86-01383 at 11-17 (Bankr. D.N.J. Jan. 30, 1991). These excerpts strongly suggest that the bankruptcy court found that the debtors had proceeded in bad faith by filing false schedules and by providing incredible, or at least frivolous, explanations for their deficiency of assets.
Stuebben, in addition to seeking the denial of discharge, had also sought attorney's fees and costs pursuant to Bankruptcy Rules 7054, 7056, and 9011, and pursuant to the court's "inherent power" to impose sanctions.*fn2 Notwithstanding the debtors' wrongful conduct, the bankruptcy court denied, without Discussion, Stuebben's request for attorney's fees. The bankruptcy court also denied, at a ...