Glatter v. Mroz

United States Court of Appeals,

Eleventh Circuit.

No. 94-4316.

In re David G. MROZ, Debtor.

Eric S. GLATTER and Houston & Shahady, P.A., Plaintiffs-
Appellants,

v.

Lynn MROZ, Defendant-Appellee.

Oct. 10, 1995.

Appeal from the United States District Court for the Southern
District of Florida. (No. 92-0921-BKC-AJC-A), A. Jay Cristol,
Judge.

Before COX, Circuit Judge, HILL and GARZA*, Senior Circuit Judges.

REYNALDO G. GARZA, Senior Circuit Judge:

This appeal involves sanctions imposed by the bankruptcy court

against the law firm of Houston & Shahady, P.A. ("H & S") and Eric

S. Glatter ("Glatter"), one of its associates. The district court

below affirmed the sanctions. For the reasons stated below we

reverse the judgment and remand the case for an evidentiary

hearing.

BACKGROUND

On August 10, 1990, David Mroz ("Debtor") filed a voluntary

Chapter 7 bankruptcy petition. Milton G. Friedman ("Trustee") was

appointed interim Chapter 7 trustee in the bankruptcy case but

eventually became the permanent trustee by virtue of 11 U.S.C. §

702(d). On September 18, 1992, the Trustee, with H & S as counsel,

filed a Complaint for Recovery of a Preferential Transfer against

*
Honorable Reynaldo G. Garza, Senior U.S. Circuit Judge for
the Fifth Circuit, sitting by designation.
Lynn Mroz ("Mroz"), the Debtor's ex-wife.1 The complaint was based

on discussions with the Debtor and an affidavit that he provided.

The affidavit alleged that prior to the filing of the bankruptcy,

the Debtor received several checks, totaling $39,000, from Martin

Tool, Inc. The Debtor allegedly converted these checks to cash and

transferred different sums of this money to various individuals,

including his ex-wife.

The bankruptcy court set a hearing on May 5, 1993 to resolve

this dispute. Before the hearing date, Mroz denied the allegations

1
With certain exceptions, see, e.g., 11 U.S.C. § 547(c), a
trustee may avoid any transfer of an interest of the debtor in
property—

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the
debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made—

(A) on or within 90 days before the date of the
filing of the petition; or

(B) between ninety days and one year before the
date of the filing of the petition, if such
creditor at the time of such transfer was an
insider; and

(5) that enables such creditor to receive more than
such creditor would receive if—

(A) the case were a case under chapter 7 of this
title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to
the extent provided by the provisions of this
title.

11. U.S.C. § 547(b).
in the Trustee's complaint. She provided an affidavit

affirmatively claiming that she in fact had not received any such

monies from her ex-husband. Along with this steadfast denial, she

requested sanctions against the Trustee and his attorneys for

failing to make a reasonable inquiry into the charges set forth in

the complaint. Approximately two and a half months before the date

of the hearing, Mroz also took limited discovery from the Trustee.

The discovery established that the Trustee had no other evidence

apart from the Debtor's affidavit and testimony to prosecute the

complaint. Furthermore, during this period neither the Trustee or

H & S attempted to engage in any form of discovery to further

explore the factual basis of the complaint.

At the designated time, Mroz and her able counsel flew to

Miami (from Detroit) for the bankruptcy hearing but neither the

Trustee or Bart Houston ("Houston"), the attorney handling the case

for the Trustee, were present. The hearing was to commence at 1:30

p.m., but Houston contacted the bankruptcy court and informed it

that he was appearing before another court in Ft. Lauderdale at

that time. In an effort to accommodate Houston's conflicts, the

bankruptcy court postponed the hearing until 2:30 that afternoon.

Again, Houston failed to arrive at the designated time. However,

the Trustee appeared in court and informed the bankruptcy court

that Houston would not be able to attend the hearing and that his

associate, Glatter, would stand in for him.2
At the hearing Glatter immediately requested a continuance

2
Houston apparently called Glatter at the latter's car, via
a cellular phone, and directed him to appear in court and handle
the case on his behalf.
because he had been unable to serve the Debtor, its key witness,

with a subpoena to compel him to appear at trial. The bankruptcy

judge agreed to a continuance, but only if the Trustee would

compensate Mroz and her attorney for air fare, cab fare and ten

hours of attorney fees. The Trustee refused this offer so the

hearing continued. Without the Debtor's testimony the Trustee was

unable to introduce the Debtor's affidavit into evidence.

Furthermore, the Trustee's testimony reflected that H & S took no

steps to investigate the allegations against Mroz outside of

securing the Debtor's affidavit. Indeed, the Trustee could not

answer any specific questions about the alleged transfer of money

from the Debtor to his ex-wife.

At the hearing, Mroz made an unopposed motion to dismiss the

action for failure to set out all the elements of a preferential

transfer. The motion was granted. Mroz also made an ore tenus

motion for sanctions, which the court granted. The bankruptcy

court justified the sanctions because, "between October 8, 1990 and

the date that [the] lawsuit was brought, September 18, 1992, which

is 23 months, and then continuing to the date of the response by

the plaintiff to defendant's interrogatories, and that is dated

February 16, 1993, so from the date of October the 8th of "90 to

February 16 of 1993, no more information was obtained, and yet the

lawsuit was brought." The bankruptcy court stated, "[t]his is, to

be candid, outrageous." The court was outraged because the Trustee

proceeded with trial on a simple affidavit which did not even

identify the specific date of the alleged transfer, the debt the

transfer was to repay, or the manner in which the transfer was
made.

The sanctions awarded amounted to $2,590, or the sums expended

by Mroz to transport herself and counsel to the Miami hearing, and

her attorney's fees. The bankruptcy court levied the sanctions

under Bankruptcy Rule 9011 against Glatter, as the individual who

signed the complaint, and H & S, as the law firm representing the

Trustee. The district court affirmed these sanctions without

discussion.

DISCUSSION

As the second court in review of the bankruptcy court's

judgment, we review the bankruptcy court's factual findings for

clear error, and its legal conclusions de novo. Georgian Villa,

Inc. v. United States (In re Georgian Villa, Inc.), 55 F.3d 1561,

1562 (11th Cir.1995). When reviewing the imposition of sanctions,

the primary question before us is whether the sanctioning court

abused its discretion. See, e.g., Cooter & Gell v. Hartmarx Corp.,

496 U.S. 384, 405, 110 S.Ct. 2447, 2461, 110 L.Ed.2d 359, 369

(1990) ("[A]n appellate court should apply an abuse-of-discretion

standard in reviewing all aspects of a district court's Rule 11

determination."); Chambers v. NASCO, Inc., 501 U.S. 32, 55, 111

S.Ct. 2123, 2138, 115 L.Ed.2d 27, 58 (1991) ("We review a court's

imposition of sanctions under its inherent power for abuse of

discretion.").

I.

On appeal Glatter and H & S claim that the bankruptcy court

erred in assessing sanctions against them because the complaint was

filed only after a reasonable investigation into the factual
allegations had been conducted. Appellants state that at the time

of its filing counsel acted prudently pursuant to information

obtained in discussions with the Debtor and from facts alleged in

his affidavit. Additionally, H & S argues that even if the

individual associate was sanctionable under Bankruptcy Rule 9011,

the bankruptcy court erred in imposing sanctions on the law firm in

light of the Supreme Court's decision in Pavelic & LeFlore v.

Marvel Entertainment Group, 493 U.S. 120, 110 S.Ct. 456, 107

L.Ed.2d 438 (1989).

Bankruptcy Rule 9011 is substantially identical to Federal

Rule of Civil Procedure 11.3 Like Rule 11, Bankruptcy Rule 9011

ties sanctions to an attorney's signature on a particular pleading

or document which is filed with the court. Thus, authorities
4
applying these standards under Rule 11, prior to its amendment,

3
Bankruptcy Rule 9011 provides, in relevant part, as
follows:

The signature of an attorney or a party constitutes a
certificate that the attorney or party has read the
document; that to the best of the attorney's or
party's knowledge, information, and belief formed after
reasonable inquiry it is well grounded in fact and is
warranted by existing law or a good faith argument for
the extension, modification, or reversal of existing
law, and that is not interposed for any improper
purpose, such as to harass or to cause unnecessary
delay or needless increase in the cost of litigation or
administration of the case.... If a document is signed
in violation of this rule, the court on motion or on
its own initiative, shall impose on the person who
signed it, the represented party, or both, an
appropriate sanction, which may include an order to pay
to the other party or parties the amount of the
reasonable expenses incurred because of the filing of
the document, including a reasonable attorney's fee.
4
Recent amendments to Rule 11, effective December 1, 1993,
have not yet been duplicated in Rule 9011. These amendments have
no impact on our discussion in this section, however, they become
may be useful in applying Bankruptcy Rule 9011.

Sanctions under Bankruptcy Rule 9011 are warranted when (1)

the papers are frivolous, legally unreasonable or without factual

foundation, or (2) the pleading is filed in bad faith or for an

improper purpose. In re Smith, 82 B.R. 113, 114

(Bankr.D.Ariz.1988); Bankruptcy Rule 9011. Like Rule 11, the

bankruptcy code permits sanctions only if the objectionable court

paper is signed in violation of the rule. See Bankruptcy Rule

9011; Jones v. International Riding Helmets, Ltd., 49 F.3d 692,

694 (11th Cir.1995). "Accordingly, the court's inquiry should only

focus on the merits of the pleading gleaned from the facts and law

known or available to the attorney at the time of filing." Jones,

49 F.3d at 694-95 (original emphasis); Corp. of the Presiding

Bishop v. Assoc. Contractors, Inc., 877 F.2d 938, 943 (11th

Cir.1989), cert. denied, 493 U.S. 1079, 110 S.Ct. 1133, 107 L.Ed.2d

1038 (1990); In re General Plastics Corp., 170 B.R. 725, 732

(Bankr.S.D.Fla.1994). "The court is expected to avoid using the

wisdom of hindsight and should test the signer's conduct by

inquiring what was reasonable to believe at the time the pleading,

motion, or other paper was submitted." Souran v. Travelers Ins.

Co., 982 F.2d 1497, 1506 (11th Cir.1993) (quoting Fed.R.Civ.P. 11,

Advisory Committee Note).

Furthermore, this Circuit has determined that Rule 11 does

not impose a "continuing obligation " on a party to amend a

complaint, so long as, at the very least, the complaint was
reasonably interposed in the first place. Bishop, 877 F.2d at 943.

more relevant in Section II.2., discussed infra.
Because Bankruptcy Rule 9011 tracks the present tense language of

Rule 11,5 the former also does not impose a continuing obligation

on the party to amend the complaint. In re General Plastics Corp.,

170 B.R. at 732 (citing Bishop, 877 F.2d at 943).

When a court is confronted with a motion for sanctions under

Rule 11 or Bankruptcy Rule 9011, it must first determine whether

the party's claim is objectively frivolous, in view of the law or

facts, and then, if it is, whether the person signing the document

should have been aware that it was frivolous. Jones, 49 F.3d at

695 (citing McGuire Oil Co. v. Mapco, Inc., 958 F.2d 1552, 1563

(11th Cir.1992)). In other words, we must inquire whether she

would have been aware that it was frivolous if she had conducted a

reasonable inquiry. Id. If an attorney has failed to conduct a

reasonable inquiry into the matter, then the court is obligated to

impose sanctions even if the attorney had a good faith belief that

the claim was sound. Id. The reasonableness of the prefiling

inquiry may depend on the following factors: the time available to

the signer for investigation, whether he had to rely on a client

for information as to the underlying facts, and whether the paper

was based on a plausible view of the law. Id. (citing Donaldson v.

Clark, 819 F.2d 1551, 1556 (11th Cir.1987) (en banc)). The

reasonableness of the inquiry may depend on the extent to which

factual development necessitates discovery. Id.

A complaint is factually groundless and merits sanctions

5
Bankruptcy Rule 9011 provides that the signing of a
pleading or other paper is a certificate that the paper "is well
grounded in fact and is warranted by existing law or a good faith
argument for the extension, modification, or reversal of existing
law...."
where the plaintiff has absolutely no evidence to support its

allegations. In re General Plastics Corp., 170 B.R. at 731.

Although the failure of proof at trial is not necessarily

sufficient to support the imposition of sanctions, the lack of

evidence to support a plaintiff's factual assertions or legal

theories is an important element in the sanction analysis. See

Davis v. Carl, 906 F.2d 533, 536-537 (11th Cir.1990) (weak evidence

does not usually justify sanctions, unlike the case where no

evidence is presented to support the factual allegations); In re

General Plastics Corp., 170 B.R. at 732.

In re Inter-America Minerals, Inc., 107 B.R. 543

(N.D.Tex.1989), dealt with a situation similar to the one before

us. In that case, the attorney for the trustee filed a complaint

to recover preferential payments allegedly made to the appellee.

The appellee filed a counterclaim alleging that the trustee and his

attorney had not made a reasonable inquiry into the law and the

facts before signing and filing the complaint, and that they were

therefore in violation of Bankruptcy Rule 9011. The bankruptcy

court found that sanctions were proper against the attorney and the

trustee. On appeal, the district court reversed the sanctions

ruling. Before signing the document, the attorney and the trustee

had discussed the basis for the complaint on several occasions.

The attorney had also taken limited discovery from the president of

the debtor corporation to establish that the debtor was several

months behind in its debt payments. There was also evidence before

the court showing that the appellee had received payment of 100% of

the debtor's debt within the 90 day period prior to the filing of
the debtor's bankruptcy. Based on these facts, the court held that

the trustee and his attorney had sufficient reason to believe that

the payment made by the debtor to the appellee may have been a

preferential transfer. Id. at 546. The sanctions were erroneously

imposed because the filing of the complaint appeared to be a good

faith effort to investigate what seemed to be a preferential

payment. Id.

As Inter-America demonstrates, our focus under Bankruptcy

Rule 9011 is what was known by the signing attorney at the time the

pleading was filed. We conclude that at the time of the filing,

Glatter had a good faith belief after reasonable inquiry that the

complaint was well grounded in fact. There was nothing known to

Glatter at that time he signed the complaint to lead him to believe

that the factual allegations were frivolous. As in Inter-America,

the Trustee had several discussions with its counsel concerning the

alleged preferential transfers. The appellants also discussed the

alleged preferential transfers with the Debtor and secured an

affidavit from him, under penalty of perjury, concerning the money

transfers. Regarding Mroz, the affidavit stated that the Debtor,

while insolvent,6 had received significant funds from a third party
ninety days prior to the filing of the bankruptcy, that some of

those funds were transferred for the benefit of his ex-wife, and

that this was done in satisfaction of his support obligations to

6
For purposes of section 547, the debtor is presumed to have
been insolvent on and during the 90 days immediately preceding
the date of the filing of the petition." § 547(f).
her.7 These factual allegations, if true, would likely establish

a preferential transfer to Mroz. Thus, although the affidavit (and

the Debtor's testimony) may have been insufficient to succeed at

trial, under Bankruptcy Rule 9011 it was sufficient to warrant the

filing of the complaint. In fact, the Trustee had a duty to act

based on the Debtor's affidavit which provided at that time the

sole evidence of the alleged preferential transfer. 8 Indeed, we

note that this same affidavit led to the filing of several actions

which allowed the Trustee to avoid over $18,000 in preferential

transfers. The complaint against Mroz was reasonably interposed in

the first place. Therefore, sanctions were improper against the

signer of the complaint.

However, the problem with the instant case, as noted by the

bankruptcy court, is that after the filing of the complaint,

neither the Trustee nor H & S took any steps to gather evidence to

conclusively establish the preferential transfer. They conducted

absolutely no discovery in preparation for trial. H & S did not

7
The Debtor's affidavit was filed October 8, 1990. In it he
specifically alleged having transferred $6,660.00 to Ms. Mroz—

2. Within ninety (90) days prior to the filing of the
bankruptcy proceedings, I received funds from Martin
Tool & Machine Co., which funds were disbursed for the
below indicated reasons as follows:

(b) Lynn Mroz (Ex-Wife) Back support and
separation obligations $4,400.00.

(1) Miscellaneous house repairs on house awarded
to Ex-Wife in divorce proceedings $2,260.00.
8
A trustee in bankruptcy has a statutory duty to "collect
and reduce to money the property of the estate ...", and to
"avoid any transfer of an interest of the debtor in property made
on or within 90 days before the date of the filing of the
petition...." 11 U.S.C. §§ 704(1), 547(b)(4)(A).
even depose Ms. Mroz or the Debtor. Moreover, H & S did not

produce the Debtor at trial nor introduce his affidavit in

evidence. More importantly, Mroz denied receiving such monies and

filed a motion for sanctions because H & S allegedly did not

inquire into the facts of the affidavit. At the very least, H & S

was put on notice that the affidavit may have been inaccurate as to

the Debtor's ex-wife.

This Court cannot determine from the record whether H & S

discovered at some point that the factual allegations against Mroz

were false, or if they believed them to be true throughout the

litigation. Unfortunately, Rule 9011 did not impose a continuing

obligation on H & S to obtain more information or revaluate its

position as the case developed. Nevertheless, this rule is not the

only basis for imposing sanctions against an attorney or other

party; sanctions may be justified under the bankruptcy court's

inherent power. See, e.g., Fellheimer, Eichen & Braverman, P.C. v.

Charter Technologies, Inc., 57 F.3d 1215, 1224 (3rd Cir.1995)

(bankruptcy court imposed sanctions under Rule 11 and Bankruptcy

Rule 9011 but district court affirmed them under bankruptcy court's

inherent power to sanction and appellate court affirmed). If so,

the rule is settled "that if the decision below is correct, it must

be affirmed, although the lower court relied upon a wrong ground or

gave a wrong reason." Brown v. Allen, 344 U.S. 443, 459, 73 S.Ct.

397, 408, 97 L.Ed. 469, 490 (1953) (quoting Helvering v. Gowran,

302 U.S. 238, 245, 58 S.Ct. 154, 158, 82 L.Ed. 224, 230 (1937))

(other citation omitted).

II.
 In Chambers v. NASCO, Inc., 501 U.S. 32, 111 S.Ct. 2123, 115

L.Ed.2d 27 (1991), the Supreme Court addressed the nature and scope

of a federal court's inherent power to control the proceedings and

the conduct of the parties involved. The Court acknowledged that

" "certain implied powers must necessarily result to our Courts of

justice from the nature of their institution,' powers "which cannot

be dispensed with in a Court, because they are necessary to the

exercise of all others.' " Id., 501 U.S. at 43, 111 S.Ct. at 2132,

115 L.Ed.2d at 44 (quoting United States v. Hudson, 11 U.S. (7

Cranch) 32, 34, 3 L.Ed. 259, 260 (1812)) (other citation omitted).

These powers are necessarily vested in courts to manage their

affairs to "achieve the orderly and expeditious disposition of

cases." Id. These inherent powers, which are incidental to a

federal court, include the power to control and discipline

attorneys appearing before it. Id. (citing Ex parte Burr, 22 U.S.

(9 Wheat.) 529, 531, 6 L.Ed. 152, 152 (1824)).9 However, because

of their potent nature, "inherent powers must be exercised with

restraint and discretion." Id., 501 U.S. at 42-43, 111 S.Ct. at

2131-32, 115 L.Ed.2d at 45 (citing Roadway Express, Inc. v. Piper,

447 U.S. 752, 764, 100 S.Ct. 2455, 2463, 65 L.Ed.2d 488, 499-500

(1980)). "A primary aspect of that discretion is the ability to

fashion an appropriate sanction for conduct which abuses the

9
These incidental powers also include, for example, the
power of a federal court to control admission to its bar, punish
parties for contempt, vacate its own judgment upon proof that a
fraud has been perpetrated upon the court, bar a disruptive
criminal defendant from the court room, dismiss an action on
grounds of forum non conveniens, act sua sponte to dismiss a suit
for failure to prosecute, and assess attorney's fees against
counsel. Chambers, 501 U.S. at 43-44, 111 S.Ct. at 2132-33, 115
L.Ed.2d at 44-45.
judicial process." Id. For example, circumstances which may

dictate the exercise of inherent power to assess attorney's fees

against counsel, include those where a party has acted in "bad

faith, vexatiously, wantonly, or for oppressive reasons." Id.

(citations omitted). The imposition of sanctions in that

circumstance "transcends a court's equitable power concerning

relations between the parties and reaches a court's inherent power

to police itself, thus serving the dual purpose of "vindicat[ing]

judicial authority without resort to the more drastic sanctions

available for contempt of court and mak[ing] the prevailing party

whole for expenses caused by his opponent's obstinacy.' " Id., 501

U.S. at 46, 111 S.Ct. at 2133, 115 L.Ed.2d at 46 (citation

omitted).

The fact that rules such as Rule 11 and Bankruptcy Rule 9011

have been promulgated by Congress does not displace a court's

inherent power to impose sanctions for a parties' bad faith

conduct. See id., 501 U.S. at 46, 111 S.Ct. at 2133, 115 L.Ed.2d

at 46; Fellheimer, Eichen & Braverman, P.C. v. Charter

Technologies, Inc., 57 F.3d 1215, 1224 (3rd Cir.1995). Indeed, the

"inherent power of a court can be invoked even if procedural rules

exist which sanction the same conduct," Chambers, 501 U.S. at 49,

111 S.Ct. at 2135, 115 L.Ed.2d at 47, for these rules are not

substitutes for the inherent power. Id., 501 U.S. at 46, 111 S.Ct.

at 2133, 115 L.Ed.2d at 46. The inherent power to sanction is both

broader and narrower than these other means of imposing sanctions:

"[W]hereas each of the other mechanisms reaches only certain

individuals or conduct, the inherent power extends to a full range
of litigation abuses." Id. Therefore, although certain conduct

may or may not be violative of Rule 11 or Bankruptcy Rule 9011, it

does not necessarily mean that a party will escape sanctions under

the court's inherent power. See id., 501 U.S. at 49, 111 S.Ct. at

2135, 115 L.Ed.2d at 48; Charter, 57 F.3d at 1224 ("Moreover, we

have previously rejected the proposition "that once a claim is held

not to violate Rule 11, the court is prevented from imposing

sanctions under its inherent power.' ") (quoting Gillette Foods

Inc. v. Bayernwald-Fruchteverwertung, 977 F.2d 809, 813 (3rd

Cir.1992)).

Invocation of a court's inherent power requires a finding of

bad faith. Chambers, 501 U.S. at 49, 111 S.Ct. at 2135, 115

L.Ed.2d at 48. The court must afford the sanctioned party due

process, both in determining that the requisite bad faith exists

and in assessing fees. Id. Due process requires that the attorney

(or party) be given fair notice that his conduct may warrant

sanctions and the reasons why. Donaldson v. Clark, 819 F.2d 1551,

1559-60 (11th Cir.1987) (discussing Rule 11 sanctions). Notice can

come from the party seeking sanctions, from the court, or from

both. Id. at 1560. In addition, the accused must be given an

opportunity to respond, orally or in writing, to the invocation of

such sanctions and to justify his actions. Id.

A.

From the onset, Mroz has alleged that this action was

instituted without a reasonable inquiry into the underlying facts.

Arguably, she has also accused H & S and its attorneys of acting in

bad faith because the litigation continued after Mroz denied the
complaint without any attempts to verify the facts alleged.

Although these actions are not as egregious as in Fellheimer,

Eichen & Braverman, P.C. v. Charter Technologies, Inc., 57 F.3d

1215 (3rd Cir.1995) (bankruptcy court made several and specific

findings to support a conclusion that the law firm filed a

frivolous law suit without any factual foundation and that it was

filed for an improper purpose and in subjective bad faith), one

could possibly conclude that the law firm's conduct in handling

this litigation amounted to bad faith. On the other hand, one

might conclude that this conduct simply demonstrated a lack of

diligence on the part of the law firm. It is very clear that the

bankruptcy court was outraged at the events that transpired before

it, but we cannot glean from the record whether this outrage

stemmed from a belief that H & S and its attorneys acted in bad

faith, or whether it was due to a belief that they acted

negligently or without due diligence. Because the reputation of a

law firm and its attorneys is at stake, we believe it prudent to

remand this case to the bankruptcy court for an evidentiary hearing

to determine if these parties acted in bad faith. This hearing

will afford the parties involved due process.

B.

On remand, if the bankruptcy court finds that the litigation

below continued in bad faith after the complaint was filed, then

the question remains who to sanction. It would seem that Glatter

should not face any sanctions because he acted prudently at the

time the complaint was filed. However, it will be for the

bankruptcy court to decide which attorneys conducted the instant
litigation and thus determine if any should be sanctioned. 10 The

bankruptcy court may even find that the law firm itself should be

sanctioned, a finding that would clearly be proper under the law.

H & S maintains that Rule 11 and Bankruptcy Rule 9011 do not

allow sanctions to be imposed on law firms. That is partly

correct. In Pavelic & LeFlore v. Marvel Entertainment Group, 493

U.S. 120, 110 S.Ct. 456, 107 L.Ed.2d 438 (1989), the Supreme Court

held that Rule 11 could be used to sanction the individual attorney

(or party) who signed the pleading in question, but not the

attorney's law firm. However, Congress amended Rule 11 to change

that. Among other things, the amendments, which became effective

December 1, 1993, now allow a federal court to sanction a law firm

under Rule 11 as well as individual attorneys and parties. These

changes have not been duplicated in the Bankruptcy Code, yet, even

if they were, we would be bound to apply the law as it existed at

the time the events herein took place, which occurred prior to the

date of these amendments. Moreover, we have already found that

sanctions are not warranted under Bankruptcy Rule 9011. However,

notwithstanding this Rule,11 there is nothing preventing a federal

court from exercising its inherent power to sanction an attorney,

a party, or a law firm for their subjective bad faith. See, e.g.,

Fellheimer, Eichen & Braverman, P.C. v. Charter Technologies, Inc.,

10
The facts herein appear to indicate that Houston was the
attorney supervising all the actions commenced by the Trustee.
However, this is a question of fact for the bankruptcy court to
resolve.
11
We note that at least one court has found that law firms
themselves are not sanctionable under Bankruptcy Rule 9011. In
re Marcus Hook Development Park, Inc., 153 B.R. 693, 705
(Bankr.W.D.Pa.1993).
57 F.3d 1215 (3rd Cir.1995). For this reason, sanctions against H

& S may be properly imposed under the bankruptcy court's inherent

power.

CONCLUSION

For the foregoing reasons, we REVERSE the findings of the

bankruptcy and district courts, and REMAND the case for an

evidentiary hearing to determine if the law firm in question, H &

S, or its attorneys acted in bad faith.