Zeddun v. Fiore (In re Szadziewicz)

In re: CONCETTA J. SZADZIEWICZ, Debtor.

BRENDA L. ZEDDUN, Plaintiff, v. FRANK F. FIORE, Defendant.

Case Number: 14-10716-7

Adversary Number: 16-15

UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF WISCONSIN

April 17, 2017

DECISION

This matter is before the Court on the motion of Francis F. Fiore, Jr. ("Fiore") for sanctions against Brenda L. Zeddun ("Trustee" or "Zeddun") and her law firm, Law Advisors, S.C., in her capacity both as Chapter 7 trustee and as attorney for the trustee, for bringing this adversary proceeding. For the reasons stated below, Fiore's motion for sanctions is denied.

FACTS

Fiore moves for sanctions against the Trustee under Fed. R. Bankr. P. 9011 arguing the Trustee's Complaint lacked an evidentiary foundation. Fiore is the son of Concetta Szadziewicz ("Debtor"). Fiore's father created a revocable living trust. Fiore was a beneficiary of that trust and received trust proceeds when his father died. He deposited those proceeds in a joint account with the Debtor.

In 2003, the Debtor used proceeds from the joint account to purchase real estate in Janesville, Wisconsin. The Debtor took title to the real estate. She then quitclaimed title to the Connie J. Szadziewicz Trust dated June 18, 2001 ("Revocable Trust"). The Debtor acted as both the trustee and settlor of the Revocable Trust. Fiore was a beneficiary.

By deed dated February 7, 2012, and recorded February 10, 2012, the Debtor conveyed the real estate from the Revocable Trust to Fiore. Fiore had lived in the property for some period and apparently paid the 2012 real estate taxes and such taxes thereafter. He also insured the property and paid utilities and any repair costs. Other than these payments, Fiore did not pay consideration for the conveyance of the real estate.

The Debtor filed a Chapter 7 on February 26, 2014 ("Petition Date"). The Debtor's Schedules did not list any interest in the Revocable Trust. The Statement of Financial Affairs ("SFA") did disclose that the Debtor transferred the real estate to the Revocable Trust in 2003 and that it was deeded to her son in 2012.

On February 22, 2016, the Trustee commenced an adversary proceeding seeking recovery from Fiore for the transfer of the real estate. The Trustee asserted the conveyance constituted a fraudulent conveyance pursuant to Wis. Stat. §§ 242.04(1)(b)2, 242.04(1)(a), and 242.05(1) and pursuant to 11 U.S.C. § 544(b). Fiore represented himself in the adversary proceeding. The real estate was not titled in the Debtor's name at the time of the conveyance. Fiore argues this confirms she did not own it and it was not an asset in the Debtor'sbankruptcy. Fiore acknowledged the Debtor was the settlor of a revocable trust and had the legal capacity to create, amend, revoke, or add property to the trust. It is also undisputed that the transfer occurred within four years of the Petition Date.

On February 22, 2016, a notice was sent to the creditors in the Debtor's case telling creditors there was a claim deadline of May 25, 2016. Ten claims¹ totaling $60,338.38 were filed. On August 23, 2016, the Trustee moved to dismiss the adversary proceeding with prejudice. The Trustee concluded that the economic costs of litigation would exceed the benefit to the estate based on the claims filed. The motion to dismiss was granted.

DISCUSSION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. In accordance with 28 U.S.C. § 157(a), the District Court for the Western District of Wisconsin has referred all of its bankruptcy cases to the Bankruptcy Court for the Western District of Wisconsin. W.D. Wis. Admin. Order 161 (July 12, 1984). A motion for sanctions under Bankruptcy Rule 9011 is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O). In re Semrau D.D.S., Ltd., 356 B.R. 677, 688-89 (Bankr. N.D. Ill. 2006).

Fed. R. Bankr. P. 9011, adopting Fed. R. Civ. P. 11, establishes standards of conduct for attorneys and parties when filing pleadings or other documents in court. The Rule subjects attorneys to sanctions when he/shesubmits a petition, pleading, written motion, or other paper to the court that falls into one of four categories:

(1) the document was submitted for an improper purpose (i.e., to harass one's adversary or to delay or drive up the costs of litigation);

(2) the claims contained in the document are frivolous because they lack support under existing law;

(3) the allegations contained in the document lack evidentiary support or are unlikely to have evidentiary support upon further investigation; or

(4) the denials in the document are unwarranted based on the evidence.

Fed. R. Bankr. P. 9011(b)(1)-(4); see also First Weber Grp., Inc. v. Horsfall (In re Horsfall), Case No. 10-12596, Adv. No. 10-00179, 2011 Bankr. LEXIS 4570, at *5 (Bankr. W.D. Wis. Nov. 17, 2011). "Rule 11 sanctions are only to be granted sparingly, and should not be imposed lightly." Lefkovitz v. Wagner, 219 F.R.D. 592, 592-593 (N.D. Ill. 2004) (citation omitted).

Safe Harbor

A motion for sanctions under Rule 9011 must adhere to a 21-day safe harbor provision. Fed. R. Bankr. P. 9011(c)(1)(A). Rule 9011(c)(1)(A) reads as follows:

A motion for sanctions under this rule shall not be made separately from other motions or requests and shall describe the specific conduct alleged to violate subdivision (b). It shall be served as provided in Rule 7004. The motion for sanctions may not be filed with or presented to the court unless, within 21 days after service of the motion (or such other period as the court may prescribe), the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected, except that this limitation shall not apply if the conduct alleged is the filing of a petition in violation of subdivision (b) . . . .

Fed. R. Bankr. 9011(c)(1)(A).

Simply stated, the "safe harbor" creates a 21-day grace period "between the time of service and the time for filing . . . ." 10 Collier on Bankruptcy ¶ 9011.05[1][b] (16th ed.). This safe harbor provision permits the non-moving party an opportunity to correct or withdraw the offending document. Baermann v. Ryan (In re Ryan), 411 B.R. 609, 616 (Bankr. N.D. Ill. 2009). "A court that imposes sanctions by motion without adhering to the twenty-one day 'safe harbor' provision abuses its discretion." Id.

Courts throughout the Seventh Circuit have reasoned that while a "party may file a Rule 11 motion after a court enters judgment, the party must have served the alleged violator at least 21 days before the entry of judgment." Ardisam, Inc. v. Ameristep, Inc., 343 F. Supp. 2d 726, 731 (W.D. Wis. 2004) (citing Divane v. Krull Elec. Co., 200 F.3d 1020, 1026 (7th Cir. 1999)); see also Hamil v. Mobex Managed Servs. Co., 208 F.R.D. 247 (N.D. Ind. 2002).

In Hamil, the court interpreted the Seventh Circuit's reasoning in Divane v. Krull Electric Co., Inc., and concluded:

A motion for sanctions may be filed with the court after judgment as long as the moving party has first served the motion for sanctions on the offending party twenty-one (21) or more days prior to final judgment. In this case, MMSC first served its motion for sanctions on April 11, 2002, nearly two months after the Court had dismissed the case. They did not serve the motion on [p]laintiffs before the Court had rendered its final judgment, and [p]laintiffs were unable to take any action to withdraw or correct the problematic affidavits.

Hamil, 208 F.R.D. at 250.

In Divane v. Krull Electric Co., Inc., the Seventh Circuit reasoned the 21-day safe harbor is not "an empty formality." Divane v. Krull Electric Co., Inc.,200 F.3d at 1026. Indeed, the Seventh Circuit has held that a simple letter informing opposing counsel of the possible imposition of Rule 11 sanctions adequately satisfied the safe harbor requirement. See Matrix IV, Inc. v. Am. Nat'l Bank & Trust Co., 649 F.3d 539, 552-53 (7th Cir. 2011). In addition, "[p]ost-judgment service does not satisfy the safe harbor provision for a good reason: the party facing sanctions is no longer able to withdraw or correct its allegedly flawed submission." Ardisam, Inc. v. Ameristep, Inc., 343 F. Supp. 2d at 731.

In his motion for sanctions, Fiore argues the Trustee violated Rule 9011 on February 22, 2016, when she filed an Adversary Complaint against him, and once more when she filed an Amended Complaint on May 2, 2016. ECF No. 23, p. 7. Fiore asserts the Trustee violated Rule 9011 because she lacked an evidentiary basis to bring a fraudulent transfer action under the Bankruptcy Code and applicable Wisconsin law.

However, Fiore's motion for sanctions does not contain an affidavit or some other form of proof of service indicating that he served the Trustee his motion for sanctions 21 days before filing that motion with the Court. ECF No. 23. Nor does Fiore's detailed itemized bill of costs attached to the motion contain an entry suggesting compliance with the safe harbor provision. Id. at 16-21. While on August 22, 2016, Fiore may have told the Trustee's law partner in a phone conversation it was Fiore's opinion the adversary proceeding "should never have been brought against him . . . and he expected to move the court to assess attorney fees against the [Trustee]," that was a mere 16 daysbefore filing his motion. ECF No. 29, pp. 16-17. Id. at 17. Such conversation does not satisfy the requirements of Rule 9011(c)(1)(A).

The Trustee's motion to dismiss resulted in the effective withdrawal of the pleading Fiore contends was a flawed submission. Because the Court entered an Order dismissing the Trustee's adversary proceeding with prejudice on August 24, 2016, no further "corrective action" regarding the Amended Complaint could or need be taken by the Trustee. By not serving the Trustee at least 21 days prior to this Court entering an Order dismissing the case, the Trustee was not afforded a full 21 days to correct or withdraw the offending Amended Complaint. Nonetheless, the pleading was effectively withdrawn by dismissal...