The opinion of the court was delivered by: Legrome D. Davis, J.
AND NOW, this 28th day of June, 2012, upon consideration of (1) Ettinger et al.'s Initial Appeal Brief (12-cv-503, Doc. No. 4), (2) the Millers' Reply Brief (12-cv-503, Doc. No. 8), and (3) the Millers' Brief in Support of their own appeal (12-cv-830, Doc. No. 6), and after careful review of the record on appeal, it is hereby ORDERED that the U.S. Bankruptcy Court for the Eastern District of Pennsylvania's decision to impose a $20,000 sanction on Neil Ettinger; his law firm (Ettinger & Associates, LLC); and his counsel in the underlying adversary proceedings (Demetrios Tsarouhis) is REVERSED and the Court's Order of December 19, 2011 is VACATED accordingly.
The Millers failed to comply with the so-called "safe harbor" provision of Federal Rule of Bankruptcy Procedure 9011, so the sanctions awarded by the Bankruptcy Court cannot stand. Because it is too late to cure the safe harbor violation, we see no reason to remand this matter for further proceedings. The Clerk of Court is directed to close these two matters (12-cv-503 and 12-cv-830) for statistical purposes.
I. Factual Background and Procedural History*fn1
These two related bankruptcy appeals (12-cv-503 and 12-cv-830) arise out of a $20,000 sanction levied by the U.S. Bankruptcy Court for the Eastern District of Pennsylvania ("Bankruptcy Court" or "the Court") pursuant to Federal Rule of Bankruptcy Procedure 9011, the Bankruptcy Rules' equivalent to Civil Rule 11. In essence, the Bankruptcy Court sanctioned Neil Ettinger ("Ettinger"), his law firm (Ettinger & Associates, LLC), and his counsel in the underlying bankruptcy matter (Demetrios Tsarouhis) for continuing to press an adversary proceeding they knew to be meritless against debtors-seeking-discharge Gregory and Tammy Miller ("the Millers"). In one appeal, Ettinger proclaims that any sanction was too much. In the other, the Millers urge that $20,000 was too little. We agree with Ettinger, but solely on procedural grounds; we do not reach the merits of the Bankruptcy Court's decision to sanction.
The parties have some history, which we recount as necessary for the purposes of these appeals. Neil Ettinger is an attorney. In January of 2008, Mrs. Miller hired Ettinger's law firm (Ettinger & Associates, LLC) to handle a landlord-tenant matter involving Mrs. Miller's mother and stepfather (the Brauns). In December of 2009, after almost two years of litigation, the Millers paid the Brauns $9,500 to resolve the dispute. Unfortunately for the Millers, they had run-up a $43,000 bill, give or take, with Ettinger & Associates.*fn2 Although the Millers had already paid Ettinger close to $20,000 for his services, Ettinger wanted the rest of the money he believed the Millers owed him (approximately $23,000).
Hard times had befallen the Millers, and they found themselves unable to pay Ettinger as promptly as he would have liked. Pursuant to a state court order, the Millers were making "good faith" payments to Ettinger of $100 to $200 per month, but Ettinger was not satisfied. In March of 2010, Ettinger sued the Millers in Pennsylvania state court for his unpaid legal fees, asserting claims for breach of contract and quantum meruit. ('830 R. at 7 Ex. D). The next month, in April of 2010, the Millers filed for Chapter 7 bankruptcy in the Eastern District of Pennsylvania's Bankruptcy Court. ('830 R. at 2). Ettinger, worried that the Millers' $23,000 debt to his law firm would be discharged, filed an adversary complaint in the Millers' bankruptcy proceedings. ('830 R. at 6). Demetrios Tsarouhis represented Ettinger in these adversary proceedings. (Id.). According to Ettinger's complaint, the Millers fraudulently induced Ettinger into continuing to provide them with legal services, and this fraud rendered the Millers' debt non-dischargeable. (Id.).
Ettinger's adversary complaint was filed on August 20, 2010. On January 31, 2011, before the completion of discovery, the Millers (through counsel) filed their first Rule 9011 motion for sanctions. ('830 R. at 9). Specifically, the Millers' motion alleged that, in violation of Rule 9011(b)(1):
[Not] only was the adversary filed to harass and cause the Debtors [the Millers] to incur additional fees and further delay, said action was taken with malice and for absolutely no reason other than to allow Attorney Ettinger the opportunity to retaliate against the Debtors based upon his anger and the disagreements that he and the Debtors had over the excessive fees he charged them during the litigation process which he turned a mole hill into a mountain for no other reason than to bill the clients for services that were both unnecessary and taken for the sole purpose of generating legal fees. (Id. ¶ 13). The Millers served this Rule 9011 motion on the parties-to-be-sanctioned via mail at about the same time they filed the motion with the court. (No. 10-2110 (Bankr. E.D. Pa.), Doc. No. 34).
The next day, on February 1, 2011, the Millers' lawyer filed a "Praecipe to Withdraw Motion for Sanctions" with the Bankruptcy Court and also sent a copy to Ettinger and Tsarouhis.
('830 R. at 10). The praecipe asked the Bankruptcy Court Clerk to "[k]indly withdraw the Motion for Sanctions . . ." without explaining why. (Id.). On February 23, 2011, the Millers refiled and re-served their Rule 9011 motion. ('830 R. at 12). This second motion for sanctions was substantively identical to the first. (Compare '830 R. at 9 with '830 R. at 12). Two days later, on February 25, 2011, the Bankruptcy Court issued a Scheduling Order which, in part, informed the parties that "the 9011 Motion is premature, shall be held in abeyance, and shall not be heard until after the merits of this adversary proceeding have been determined." ('830 R. at 14).
Although not stated in the adversary complaint, Ettinger apparently believed (or at least guessed) that the Millers had consulted with a bankruptcy attorney at some point during Ettinger's representation of the Millers, and this bankruptcy attorney might have told the Millers that they could file bankruptcy to avoid paying Ettinger's bill. After some initial confusion, the Millers revealed that they had, in fact, previously met with a Pennsylvania bankruptcy attorney named James Kutkowski ('830 R. at 11). According to the Millers, they consulted Kutkowski in the context of refinancing, not to discuss filing for bankruptcy. (Id.).
Kutkowski was deposed on March 18, 2011. ('503 R. at 23 (Exhibit to Motion)). In his deposition, Kutkowski admitted that he's "a bankruptcy attorney." (Id. at 5:14-16). Regarding his interaction with the Millers, Kutkowski initially stated that, while he "might" have discussed bankruptcy with Mr. Miller, he "really truthfully [did not] remember." (Id. at 17:7-18:3). After a short break, Kutkowski reversed course. In response to a follow-up question ("you state that you may have lightly touched upon bankruptcy?"), Kutkowski testified that "I probably, I'm fairly confident that I did discuss briefly the option of bankruptcy with [Mr. Miller]." (Id. at 18:6-22). As discussed infra, in the eyes of the Bankruptcy Court, Kutkowski's March 18th deposition marked the turning point from "obnoxious, obstreperous, unprofessional behavior to sanctionable behavior" on the part of Ettinger and Tsarouhis. (Hearing Tr. 19:15-19, Oct. 24, 2011). According to the Bankruptcy Court:
The linchpin, the pivot on which my decision will turn, is March 18, 2011. That's the date Mr. Kutkowski was deposed. That's the date the plaintiffs knew full well that he didn't talk to the Millers about bankruptcy. And so the result of this . . . I grant the motion for sanctions [for plaintiff's actions] taken after March 18, 2011 . . . (Id. at 14:18-24).
The trial on Ettinger's adversary complaint took place on April 19, 2011. Kutkowski testified that he did not remember whether or not he discussed bankruptcy with Mr. Miller, but "it is reasonable that it may have come up." (Trial Tr. 41:4-8, Apr. 19, 2011). At the end of the trial, the Bankruptcy Court ruled from the bench in favor of the Millers and against Ettinger on the dischargeability issue. (Id. at 191). The Court recounted "twelve reasons" Ettinger and his attorney gave for nondischargeability, "all of them wrong." (Id. at 191-94).*fn3 Regarding Mr. Miller's meeting with Kutkowski, the Court found that Kutkowski "didn't recall whether he talked to them about bankruptcy. Maybe he did; maybe he didn't; that's a non-issue." (Id. at 192:2-6). After handing down the decision, the Court then set a hearing date for the Millers' pending Rule 9011 motion. (Id. at 197-98).
The next day, April 20, 2011, the Court issued a Scheduling Order confirming the hearing date for the Rule 9011 motion and ordering the Millers to "file a revised 9011 Motion on or before May 6, 2011," with Ettinger's response due by May 23, 2011. (No. 10-2110 (Bankr. E.D. Pa.), Doc. No. 85). The Millers did as instructed, filing (and serving) an "Amended Motion for Sanctions" on May 6th. (No. 10-2110 (Bankr. E.D. Pa.), Doc. Nos. 91, 91-1). Several days later, on May 10th, the Millers filed (and served) a "Second Amended Motion for Sanctions." ('830 R. at 34). These amended motions significantly supplemented the Millers' original Rule 9011 motion. Remember, the Millers first moved for sanctions relatively early-on, before Kutkowski had even been deposed. For example, the amended motions contained numerous arguments based on deposition testimony (including Kutkowski's) that had not yet been given at the time of the original motion. (See id.).
Ettinger and Tsarouhis responded to the Second Amended Motion for Sanctions on May 23, 2011, and June 6, 2011. In opposing the motion, Ettinger and Tsarouhis argued, in part, that the Millers had not complied with Rule 9011's safe harbor requirement, which is designed to give parties an opportunity to correct their errors before facing sanctions:
A . . . Rule 9011 Motion . . . cannot be made unless there is some paper, claim or contention that can be withdrawn with [sic] the 21 day safe harbor. At this point, after the hearing, there is no paper to be withdrawn or action that can be ...