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May 09, 2016 Practice Points

BAP of the Ninth Circuit Reiterates Higher Standard for Court-Initiated Sanctions

The case is In re Nakhuda.

By Alexander G. Najemy

In In re Nakhuda, Case No. 14-41156 (9th Cir. BAP Feb. 4, 2016), the Bankruptcy Appellate Panel (BAP) for the Ninth Circuit Court of Appeals, or BAP, ruled that the bankruptcy court used the incorrect standard when imposing court-initiated sanctions against a party. In its decision, the BAP reiterated previous courts’ rulings that, under Bankruptcy Rule 9011, the standard for a bankruptcy court to impose sanctions initiated by a party motion was “objective reasonableness” while the standard for a bankruptcy court to impose sanctions sua sponte was higher and was more “akin to contempt.” The BAP justified this difference, in part, because unlike the party-initiated motions, court-initiated sanctions do not involve the 21-day safe harbor provision allowing for the offending party to correct or withdraw its submission. The BAP then noted that the factual findings by the bankruptcy court did not support the heightened standard of “akin to contempt” and reversed the lower court’s decision regarding sanctions under Bankruptcy Rule 9011.

The BAP subsequently determined that the bankruptcy court correctly interpreted 11 U.S.C. § 329 when it ordered the disgorgement of $4,000 in legal fees paid to the appellant by the debtor. The BAP agreed with the bankruptcy court that the applicable standard was whether the $4,000 the appellant was paid was excessive for what he accomplished for the debtor, not whether the amount was equal to the time and expense incurred by the appellant. The bankruptcy court’s decision was not illogical, implausible, or without support in the record and therefore the BAP affirmed it. Finally, the BAP addressed the appropriateness of the bankruptcy court’s suspending the appellant’s electronic case filing privileges. The appellant argued that his failure to obtain the debtor’s signature on documents was a genuine oversight, was not done in bad faith and was therefore not sanctionable under 11 U.S.C. § 105. The BAP noted that, in failing to secure the debtor’s signature on numerous filings, the appellant had violated the bankruptcy court’s local rules and the bankruptcy court had, therefore, the authority to suspend the appellant’s privileges. The BAP noted that the bankruptcy court did not rely on 11 U.S.C. § 105 in order to justify the sanction and that the issue of the appellant’s “bad faith” was therefore irrelevant.

Alexander G. Najemy – May 9, 2016