Case: 13-10325 Document: 00512495212 Page: 1 Date Filed: 01/09/2014
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 13-10325 FILED
January 9, 2014
In the Matter of: JAMES H. MOORE, III, Lyle W. Cayce
Clerk
Debtor
------------------------------
THE CADLE COMPANY,
Appellant
v.
JAMES H. MOORE, III; ELIZABETH A. MOORE; JHM PROPERTIES,
INCORPORATED; BRUNSWICK HOMES, L.L.C.,
Appellees
Appeal from the United States District Court
for the Northern District of Texas
Before DAVIS, GARZA, and DENNIS, Circuit Judges.
EMILIO M. GARZA, Circuit Judge:
The Cadle Company (“Cadle”) is a creditor of the bankruptcy estate of
James H. Moore, III (“Moore”). Cadle originally brought suit against Moore in
state court. After Moore filed for bankruptcy, Cadle removed its action to the
bankruptcy court and allowed the estate’s trustee to assert its claims. Over
Cadle’s protests, the trustee sought to settle the claims, and Cadle ultimately
re-acquired them at auction. But the bankruptcy court then found that Cadle
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had paid the trustee’s attorney’s fees even after the two had become adverse
over the settlement issue, and dismissed the adversary proceeding based on its
inherent power to sanction a party for abuse of judicial process. The district
court affirmed, and Cadle appeals. We reverse the district court, vacate the
order of dismissal, and remand to the bankruptcy court.
I
Cadle, an Ohio corporation, is the largest creditor of Moore’s bankruptcy
estate. Prior to Moore’s filing for bankruptcy, Cadle sued Moore, Brunswick
Homes, LLC (“Brunswick”), Moore’s spouse, and JHM Properties (collectively,
“defendants”) in Texas state court. Under state-law theories of fraudulent
conveyance, constructive trust, and reverse veil piercing, Cadle alleged that
Moore had used Brunswick and the other entities to shield assets and avoid
payment of debts. The law firm of Bell Nunnally & Martin LLP (“BNM”)
represented Cadle in this suit. 1
Moore subsequently filed for bankruptcy. Cadle then removed its action
to the bankruptcy court, where Cadle and Brunswick each filed proofs of claim.
Cadle allowed the estate’s trustee to assert the company’s claims; the trustee
was substituted as plaintiff in the adversary proceeding (“avoidance action”)
and engaged Cadle’s counsel at BNM to serve as special counsel. Accordingly,
Attorney Bruce Akerly (“Akerly”) of BNM filed a special employment
application indicating that BNM would represent the trustee on a contingency
basis and that BNM owed fiduciary duties to only the trustee, not Cadle. Yet
soon thereafter, in November 2006, BNM sent Cadle a letter confirming that
Cadle would pay BNM’s fees for its representation of the trustee, which fees
would be reimbursed by BNM in the event of a positive outcome.
1The facts of this case were recounted in our opinion disposing of the previous appeal.
See The Cadle Co. v. Mims, 608 F.3d 253, 255–57 (5th Cir. 2010).
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Also at this time, BNM began representing Cadle in a separate,
ultimately successful action to deny Moore’s discharge (“discharge action”).
See 11 U.S.C. § 727. Toward the end of the discharge action, BNM filed a
motion to withdraw as special counsel to the trustee in the avoidance action.
BNM’s stated reason was that Cadle had refused to pay certain expenses—
namely, fees for retaining an expert forensic accountant. As the bankruptcy
court later noted, BNM’s claim that Cadle had a duty to cover expenses in the
avoidance action was inconsistent with both the special employment
application, which stated that BNM would work only on a contingent-fee basis,
and the (yet undisclosed) November 2006 letter, which obligated Cadle to pay
only BNM’s fees, not expenses. At the hearing on BNM’s motion to withdraw,
a BNM attorney explained that “Cadle instructed [BNM] that they didn’t want
[BNM] to do anything that would benefit the trustee from a cost and expense
standpoint.” The bankruptcy court denied BNM’s motion to withdraw, noting
the absence of any agreement obligating Cadle to pay either BNM’s fees or
litigation expenses, and expressing suspicion that Cadle cared more about
success in the discharge action than in the avoidance action. 2
A half-year later, the trustee announced a settlement agreement in the
avoidance action. Under the agreement, the defendants would collectively pay
the trustee $37,500. Subsequently, Cadle, through a new attorney, objected to
the settlement and offered to buy back its claims for $50,000. At a hearing on
the settlement motion, a Cadle employee testified about Cadle’s $60,000 fee
payments to BNM for its representing the trustee. The trustee later testified
that he was “shocked” at learning about the fees and promptly requested
2 Unless otherwise noted, all proceedings discussed below occurred in the avoidance
action.
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Akerly to disclose the arrangement. Akerly never did so, and the issue was not
explored further at the time.
The bankruptcy court approved the settlement, and the district court
affirmed. On appeal, BNM represented the trustee, and the new, non-BNM
attorneys represented Cadle. Akerly departed BNM, and in his stead, a first-
year BNM associate presented oral argument on behalf of the trustee before
the panel. The panel reversed the district court’s judgment and remanded,
holding that the bankruptcy court erred by refusing to consider as an available
option the sale of the claims to Cadle for an amount greater than the settlement
offer. Mims, 608 F.3d at 266. On remand, the bankruptcy court permitted an
auction, and Cadle acquired the claims for $41,500.
At the sale order hearing following the auction, the bankruptcy court’s
suspicions about conflicts of interest resurfaced. Akerly, purportedly on behalf
of the trustee, sought a continuance in the adversary proceeding’s trial date.
The trustee had not instructed Akerly to seek a continuance, which appeared
to benefit Cadle, who wanted more time to prepare for trial as the new plaintiff.
The bankruptcy court approved the sale but ordered a short continuance and
requested that Cadle address the apparent conflict of interest. At a hearing
later that month, a Cadle employee testified that the company had continued
to pay BNM’s fees for approximately one year after becoming adverse to the
trustee on the settlement issue. The employee explained that, in December
2008, a Cadle manager had discovered the payments and informed BNM that
they would stop, and that the last payments were made in February 2009.
Thereafter, Moore and Brunswick filed a motion to dismiss on grounds
of abuse of judicial process. They alleged, in addition to the improper fee
payments, that BNM might have taken a “dive” during oral arguments on the
previous appeal by having the first-year associate present oral argument.
After a three-day evidentiary hearing, the bankruptcy court dismissed the
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adversary proceeding based on its inherent power to sanction a party for abuse
of judicial process. The district court affirmed, and Cadle now appeals.
II
Cadle first contends that the bankruptcy court had no constitutional
authority to enter final judgment in this case.
“We review a district court’s affirmance of a bankruptcy court decision
by applying the same standard of review to the bankruptcy court decision that
the district court applied.” In re Frazin, 732 F.3d 313, 317 (5th Cir. 2013)
(citation omitted). We review conclusions of law de novo and factual findings
for clear error. Id.
Article III of the Constitution places certain constraints on the statutory
powers of bankruptcy courts. The Supreme Court recently clarified these
Article III constraints in Stern v. Marshall, 131 S. Ct. 2594 (2011). The Court
held that notwithstanding the bankruptcy court’s statutory authority under §
157(b)(2)(C) to adjudicate an estate’s counterclaim against a creditor, the
bankruptcy court had no constitutional authority to enter final judgment on a
state-law counterclaim because it would “not [be] resolved in the process of
ruling on a creditor’s proof of claim.” Id. at 2620; see also In re Frazin, 732 F.3d
at 317–320.
Cadle contends that under Stern, the bankruptcy court lacked
constitutional authority to enter final judgment because the avoidance action
originated from and is based entirely upon state law and is thus wholly
independent of the bankruptcy proceeding. We disagree. The bankruptcy
court had authority to enter final judgment because Cadle’s state-law claims
“would necessarily be resolved in the claims allowance process.” Id. at 2618.
In Stern, the trustee asserted counterclaims to augment the estate apart from
the bankruptcy proceeding. Here, Cadle is a creditor who has filed a proof of
claim for debts owed by the debtor, and resolving the state-law claims is
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necessary to adjudicating its proof of claim. Such claims by creditors against
debtors are the very reason the claims allowance process exists. Cf. In re
Frazin, 732 F.3d at 320–24 (concluding that two of three counterclaims would
necessarily be resolved in bankruptcy court’s award of attorney’s fees and were
therefore within court’s constitutional authority under Stern).
Contrary to Cadle’s submission, the state-law basis of the claims is not
dispositive. Here, while Cadle’s claims rest on state-law theories and were
originally brought in state court, after Moore’s filing for bankruptcy, the
Bankruptcy Code governed the avoidance action. See, e.g., 11 U.S.C. §§ 544
(strong-arm powers), 548 (fraudulent transfers by debtor). Accordingly, the
bankruptcy court had constitutional authority to enter final judgment in this
adversary proceeding.
III
Cadle next contends that the bankruptcy court erred by not abstaining
from hearing the avoidance action under the mandatory abstention provision
of 28 U.S.C. § 1334(c)(2).
We review a bankruptcy court’s decision not to abstain under § 1334(c)(2)
for abuse of discretion. In re TXNB Internal Case, 483 F.3d 292, 299 (5th Cir.
2007). § 1334(c)(2) explains the conditions under which a district court must
abstain from hearing a bankruptcy case:
Upon timely motion of a party in a proceeding based
upon a State law claim or State law cause of action,
related to a case under title 11 but not arising under
title 11 or arising in a case under title 11, with respect
to which an action could not have been commenced in
a court of the United States absent jurisdiction under
this section, the district court shall abstain from
hearing such proceeding if an action is commenced,
and can be timely adjudicated, in a State forum of
appropriate jurisdiction.
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28 U.S.C. § 1334(c)(2). We have interpreted § 1334(c)(2) to mandate federal
court abstention where “(1) [t]he claim has no independent basis for federal
jurisdiction, other than § 1334(b); (2) the claim is a non-core proceeding . . . ;
(3) an action has been commenced in state court; and (4) the action could be
adjudicated timely in state court.” In re TXNB Internal Case, 483 F.3d at 300
(citation omitted). 3
Here, the bankruptcy court did not abuse its discretion in refusing to
abstain under § 1334(c)(2). First, there was no “timely motion of a party.” 28
U.S.C. § 1334(c)(2). The filing that Cadle cites as its “motion” requesting
abstention was actually a motion challenging the court’s constitutional
authority under Stern. That the bankruptcy court construed the motion as a
request to abstain does not rectify Cadle’s failure. Moreover, timeliness is
lacking. Cadle filed this motion nearly five years after removing the veil-
piercing action to the bankruptcy court. 4 28 U.S.C. § 1334(c)(2); cf. In re
Marshall, 257 B.R. 35, 39 (Bankr. C.D. Cal. 2000) (finding untimely a motion
for abstention filed eight months after adversary proceeding commenced).
Second, because the proceeding at issue is “core” under 28 U.S.C. §
157(b)(2) and not merely “related to” a title 11 case, it is not eligible for
mandatory abstention under § 1334(c)(2). Cadle contends that the proceedings
3 Under the second TXNB Internal Case prong, we defined “non-core” proceedings
eligible for mandatory abstention as those “related or in a case under title 11.” In re TXNB
Internal Case, 483 F.3d at 300. This is not entirely correct. The statute provides that
proceedings eligible for mandatory abstention must be “related to” a title 11 case, but not
“arising in” such a case. 28 U.S.C. § 1334(c)(2). In Stern, too, the Supreme Court determined
that the universe of “non-core” proceedings is co-extensive with that of “related to”
proceedings; “core” proceedings are those “arising under” and “arising in” title 11 cases.
Stern, 131 S. Ct. 2604–2605.
4 Cadle implies that the motion was timely because it was filed “after [Cadle’s]
reacquiring the claims.” But Cadle initially owned the claims and filed no motion then.
Neither did the trustee file such a motion during the many years it owned the claim. In short,
Cadle and the trustee had ample opportunity to request mandatory abstention but did not do
so.
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cannot be “core” because its purchase of the claims in 2011 nullified their
connection to the estate. This argument is without merit. When Cadle
originally removed the action to the bankruptcy court, Cadle itself represented
that the proceedings were “core.” And the change in the claims’ ownership has
no bearing on the proceeding’s “core” status: Before the sale, the trustee
asserted claims on behalf of a creditor, and after the sale, Cadle, the original
creditor, asserted the same claims. 5
Because Cadle failed to file a timely motion requesting the bankruptcy
court to abstain, and because the claims at issue are “core” in nature, the
court’s decision not to abstain was not error.
IV
Cadle finally contends that the court erred in dismissing the adversary
proceeding under its inherent sanction power.
“We review de novo a district court’s invocation of its inherent power and
the sanctions granted under its inherent power for an abuse of discretion.”
Positive Software Solutions, Inc. v. New Century Mortg. Corp., 619 F.3d 458,
460 (5th Cir. 2010) (citation omitted). A decision to invoke the inherent power
to sanction requires a finding of “bad faith or willful abuse of the judicial
process,” which finding we review de novo. Gonzalez v. Trinity Marine Grp.,
Inc., 117 F.3d 894, 898 (5th Cir. 1997) (citation omitted). 6 “[T]he finding of bad
faith must be supported by clear and convincing proof.” Crowe v. Smith, 261
F.3d 558, 563 (5th Cir. 2001). In sum, we uphold a lower court’s decision to
invoke its inherent sanctioning power only if clear and convincing evidence
5 As the post-auction Sale Order explains, the sale simply “substituted [Cadle] into
the Adversary Proceeding as plaintiff in place of the Trustee . . . .”
6 See also In re Yorkshire, LLC, 540 F.3d 328, 332 (5th Cir. 2008) (court must find “bad
faith conduct” before imposing sanctions under inherent power); Goldin v. Bartholow, 166
F.3d 710, 722–23 (5th Cir. 1999) (same).
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supports the court’s finding of bad faith or willful abuse of the judicial process. 7
If this high threshold for invoking inherent powers is surmounted, we review
the substance of the sanction itself more deferentially, for an abuse of
discretion. See Chambers v. NASCO, Inc., 501 U.S. 32, 55 (1991) (concluding
that sanction of attorney’s fees was not abuse of discretion).
We hold that because the bankruptcy court failed to find by clear and
convincing evidence that Cadle acted in bad faith, it erred in invoking its
inherent sanction power. Crowe, 261 F.3d at 563. Akerly and BNM’s potential
misconduct notwithstanding, the record does not establish that Cadle
deliberately abused the judicial process—either before or after it became
adverse to the trustee.
First and foremost, the bankruptcy court faulted Cadle for BNM’s
inadequate and inconsistent fee disclosures early on in the adversary
proceeding. The parties do not dispute that BNM never disclosed to the court
in its employment application Cadle’s commitment to paying BNM’s fees. The
employment application claimed that any fees from the trustee would be
contingent in nature, but just months later, BNM memorialized its fee
arrangement with Cadle in the “smoking gun” November 2006 letter.
Additionally, the bankruptcy court noted that BNM’s claim at the May 2007
motion to withdraw hearing that Cadle had promised to cover litigation
expenses—not fees—was “inconsistent” with both BNM’s employment
7 At the October 2011 hearing on the motion to dismiss, the bankruptcy court
suggested that certain cases apply lower thresholds to the application of inherent power
sanctions, such as a finding that the “very temple of justice has been defiled,” Bartholow, 166
F.3d at 722–23, or that a party shows “callous disregard of its responsibilities” to the court,
Smith v. Smith, 145 F.3d 335, 344 (5th Cir. 1998). In fact, these standards are not more lax;
we explained in those same cases that a sanctioning court must find bad faith. Bartholow,
166 F.3d at 722–23; Smith, 145 F.3d at 344.
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application, which did not mention Cadle’s role, and with Cadle’s (then
undisclosed) commitment to paying only BNM’s fees.
Yet BNM’s nondisclosure and inconsistency, while justifying scrutiny,
are not alone clear and convincing evidence of Cadle’s bad faith or willful
misconduct. 8 Cadle account officer Jeanne Isler specifically testified that she
had no knowledge of any separate fee agreement between BNM and the
trustee. Moreover, at this stage in the proceeding, the interests of Cadle and
the trustee had not yet become adverse, so Cadle’s fee payments were not yet
problematic. See Mims, 608 F.3d at 256 (noting that Cadle “advanced over
$60,000 in attorneys’ fees to the trustee’s attorneys” after the trustee took over
Cadle’s claims). Even under Moore and Brunswick’s premise that Cadle had
an affirmative duty to disclose the trustee’s attorney’s potential conflict of
interest, 9 the record bears out no clear and convincing evidence of any bad-
faith violation of this duty. To the contrary, Cadle representatives candidly
testified about fee payments to BNM at hearings in 2007 and 2008. In fact,
during the sale order hearing, the bankruptcy court even recalled its earlier
knowledge of the fee arrangement.
The bankruptcy court next took issue with BNM’s 2007 attempt to
withdraw as counsel to the trustee in the avoidance action. Suggesting that a
conflict between Cadle and the trustee had materialized even at this early
stage, the court cited a BNM attorney’s testimony that “Cadle instructed
[BNM] that they didn’t want [BNM] to do anything that would benefit the
trustee from a cost and expense standpoint . . . .” The bankruptcy court noted
8 The bankruptcy court issued a separate show-cause order concerning sanctions
against Akerly. Under Bankruptcy Code Section 327 and Bankruptcy Rule 2014, the
trustee’s attorney clearly has disclosure obligations. See also In re West Delta Oil Company,
432 F.3d 347 (5th Cir. 2005).
9 We need not decide today whether the legal duty of disclosure belongs solely to the
trustee’s attorney, as Cadle submits.
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its suspicion that Cadle, like many large creditors, cared only about the
discharge action and not the trustee’s success in the avoidance action.
Again, the bankruptcy court’s mere suspicions do not add up to clear and
convincing evidence of Cadle’s bad faith. Cadle’s “instructing” BNM not to
incur certain litigation expenses suggests disagreement between Cadle and
BNM regarding litigation strategy and expense allocation in the avoidance
action, but does not constitute clear and convincing evidence of Cadle’s bad
faith. At this time, Cadle and the trustee were aligned in their objective of
recovering assets for the estate. In fact, Cadle continued to pay BNM’s fees in
connection with motions and trial preparation; the company refused only to
pay for an expert forensic accountant. 10
The bankruptcy court further suggests that bad faith can be deduced
from evidence of the benefits reaped by Cadle after it became directly adverse
to the trustee. The court suggests that the company sabotaged BNM’s
representation of the trustee and purposefully obtained privileged information
revealing the trustee’s litigation strategy. But both allegations find
insufficient support in the record. As to the first claim that Cadle influenced
BNM’s representation of the trustee, the court relies only on the facts that
Akerly left BNM, that the firm had no definite plans for identifying his
replacement, and “a decision was made” to allow a first-year associate to
present arguments. 11 None of these facts indicates that Cadle “willful[ly]”
10 At the hearing that explored the history of Cadle’s fee payments, even counsel for
Moore explained that at the point of BNM’s 2007 motion to withdraw, there “wasn’t an actual
conflict . . . between trustee and . . . Cadle . . . .” Moreover, Jeanne Isler, Cadle’s account
officer, testified that Cadle did not refuse to pay for the expert “for the purpose of gaining
some sort of leverage over the [t]rustee in negotiating” Cadle’s buy-back of the claims.
11 We have reviewed the oral argument from the previous appeal. The first-year
associate’s performance did not suggest any purposeful sabotage of the appeal by Cadle.
Cadle also points out an awkward reversal: Before oral argument in the previous appeal,
Moore and Brunswick had claimed that oral argument would be a wasteful exercise, but now,
they contend that the botched argument was a critical factor in our decision. Additionally,
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tainted the judicial process. Trinity Marine Grp., 117 F.3d at 898. Neither
does the bankruptcy court substantiate its suggestions that Cadle purposefully
obtained privileged information appearing on BNM’s bills for its work for the
trustee. Finally, the bankruptcy court’s narrative is factually inconsistent.
Cadle indeed continued to pay BNM’s fees after Cadle became adverse to the
trustee on the settlement issue, but far from obtaining any benefit, Cadle
actually lost in the bankruptcy court and then again in the district court. Cadle
ultimately prevailed on the previous appeal before us, but Cadle’s payments to
BNM had stopped well before the appeal was filed; no clear and convincing
evidence links the victory to Cadle’s fee payments or influence. 12
Finally, the bankruptcy court imputes BNM’s alleged misconduct to
Cadle. The court’s theory is that because the company is a “sophisticated party
that regularly hires lawyers to monetize assets,” Cadle was accountable for
“its” lawyers, who represented the trustee. Thus, the nondisclosures and
conflicts of interest are “attributable” not only to BNM, but also to Cadle.
The bankruptcy court’s approach controverts well-established rules of
agency law. An agent’s acts and mental states are imputed to his principal
when the agent acts on behalf of the principal. See U.S. ex rel. Vavra v. Kellogg
Brown & Root, Inc., 727 F.3d 343, 348 (5th Cir. 2013). Here, at all relevant
times in the avoidance action, BNM was the agent of the trustee, not of Cadle.
In both BNM’s employment application and its November 2006 letter to Cadle,
the law firm explained to Cadle that the trustee was its sole client in the
we are troubled by the bankruptcy court’s use of indirect inferences. The court claims that
“some ambiguous person” decided to task the first-year associate with oral argument, but
Akerly unambiguously testified that he made this “good” decision himself. Similarly, the
court suggests that Cadle’s termination of fee payments to BNM was surreptitious (“None of
us . . . know who exactly said what to whom when Creditor-Cadle stopped paying BNM’s
bills”); in fact, testimony established that in December 2008, a Cadle manager discovered the
incorrect payments and promptly notified BNM that the payments would end.
12 Cadle filed the previous notice of appeal in June 2009.
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avoidance action. 13 No clear and convincing evidence shows that Cadle had
somehow appropriated BNM as its own agent. BNM’s attempt to withdraw
from representing the trustee in the avoidance action, in fact, manifested the
tension between its fiduciary duty to the trustee and its reliance on Cadle’s
payment of litigation expenses. And the fact that BNM received fees from
Cadle, unbeknownst to the trustee, did not destroy this agency relationship
and transform BNM into the agent of Cadle. Rather, under agency principles,
an agent must account to his principal for any gains beyond the agent’s agreed-
upon compensation. 14 Thus, BNM should have relinquished any fees received
from Cadle, but the agency relationship between BNM and the trustee—
established when BNM became the trustee’s special counsel—remained intact.
Cf. 11 U.S.C. § 328(c) (enabling court to require disgorgement of fees arising
from conflict of interest).
After Cadle and the trustee became adverse on the settlement issue,
there is even less basis for construing BNM as Cadle’s agent. BNM continued
to represent the trustee in directly opposing Cadle and was successful in these
efforts until our decision on the last appeal. Thus, because BNM was not acting
as Cadle’s agent before or after the settlement dispute arose, we cannot impute
the firm’s acts or mental states to Cadle. 15 Cf. Payne v. C.I.R., 224 F.3d 415,
13 The “smoking gun” November 2006 letter stated that “although The Cadle Company
is a creditor in this suit and its interests are clearly aligned with those of the Trustee, our
firm’s client in the adversary action is the Trustee and we are, therefore, required to take
direction solely from the Trustee.”
14 See RESTATEMENT (SECOND) OF AGENCY § 8.02 (“An agent has a duty not to acquire
a material benefit from a third party in connection with transactions conducted or other
actions taken on behalf of the principal or otherwise through the agent’s use of the agent’s
position.”).
15 The agency principles outlined here are relevant to our rejection of Cadle’s
additional claim that as a matter of law, nondisclosure is insufficient to establish fraud on
the court and thereby cannot warrant outright dismissal. Cadle relies on Fierro v. Johnson,
197 F.3d 147 (5th Cir. 1999), for the proposition that fraud on the court is established only
with “an unconscionable plan or scheme . . . designed to improperly influence the court in its
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420 (5th Cir. 2000) (refusing in civil tax fraud case to impute fraud, reviewed
under same “clear and convincing evidence” standard).
We are not unsympathetic to the bankruptcy court’s concerns about the
“unpleasant odor” of this adversary proceeding. The record suggests that BNM
made several miscommunications about fee arrangements. And after Cadle
became adverse to the trustee, it should have recognized immediately the
conflict of interest and ceased all fee payments to BNM. Cadle’s management
of the avoidance action was inept, at best. But even at its worst, the evidence
is not enough to sustain an inherent power dismissal. This appeal turns on
whether clear and convincing evidence demonstrates that Cadle, not the BNM
attorneys, willfully abused the judicial process. Neither imputed bad faith nor
suspicion alone justifies the invocation of the inherent power. In sum, all of
the bankruptcy court’s theories fall short of the stringent standard of clear and
convincing evidence of bad faith. 16 Crowe, 261 F.3d at 563.
V
For the foregoing reasons, we REVERSE the district court, VACATE the
order of dismissal, and REMAND to the bankruptcy court for further
proceedings.
discretion,” and that “less egregious misconduct, such as nondisclosure to the court of facts
allegedly pertinent to the matter before it, will not ordinarily rise to the level of fraud on the
court.” Id. at 154 (citation omitted). However, there, we held that because a nondisclosure
in a state criminal case was neither actually nor constructively known to the government’s
attorneys in the later federal habeas case, there was no fraud on the court in the latter case.
Id. at 155. We reasoned that we could not impute the police officer’s and prosecutor’s
knowledge of the perjury and the tainted evidence in the state court trial to the government
attorneys in the habeas case because the “relationship [between the parties] is too
attenuated.” Id. In short, the decisive factor in Fierro for our analysis of fraud on the court
was the imputation of knowledge (and resultant bad faith), not simply whether a
nondisclosure was at issue.
16Because the bankruptcy court had no legal authority in the first place to invoke its
inherent sanction power, we have no occasion to review the substance of the sanction for
abuse of discretion.
14