Unpublished Dispositionin Re Delorean Motor Company, Debtor,john Z. De Lorean, Plaintiff-appellant,mayer Morganroth, Attorney-appellant, v. David Allard, Trustee, Delorean Motor Company, Unsecuredcreditors Committee of Delorean Motor Company, Andprice Water-house, Defendants-appellees, 821 F.2d 649 (6th Cir. 1987)

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US Court of Appeals for the Sixth Circuit - 821 F.2d 649 (6th Cir. 1987) June 23, 1987

Before JONES and NELSON, Circuit Judges, and CELEBREZZE, Senior Circuit Judge.


Mayer Morganroth, counsel for the debtor John Z. DeLorean in this bankruptcy action, personally appeals the district court's affirmance of the bankruptcy judge's order imposing sanctions under Fed. R. Civ. P. 11. Because we find that the imposition of sanctions was not an abuse of discretion or otherwise legally erroneous, we affirm.

In October of 1982, John Z. DeLorean filed a voluntary petition for reorganization under Chapter 11. Prior to the formation of the 'Chapter 11 Creditors' Committee,' the law firm of Honigman Miller Schwartz and Cohn (Honigman) appeared as local counsel for four of the unsecured creditors including the French Renault corporation, the Industrial Development Board of Northern Ireland, and the Joint Receivers of DeLorean Motor Cars Ltd. When the Chapter 11 Committee was formed on November 15, 1982, these three creditors were appointed to it. The Committee then voted unanimously to select Honigman to represent it, and stated in its application to the Bankruptcy court:

8. Honigman Miller Schwartz and Cohn acted as local counsel for the Joint Receivers of DeLorean Motor Cars, Ltd., Regie Nationale des Usines Renault, Industrial Development Board for Northern Ireland, and F. J. Boutell Driveaway Co., Inc. in the initial stages of these proceedings, prior to the formation of the Creditors' Committee. Honigman Miller Schwartz and Cohn have withdrawn as counsel for the aforementioned creditors and will solely represent the Creditors' Committee in these proceedings.

App. 400. In his November 18, 1982 order approving Honigman's appointment, the Bankruptcy Judge stated:

Having considered the Application of Creditors' Committee to Employ Attorneys, . . . it appear [s] that the appointment of Honigman Miller Schwartz and Cohn to act as attorneys for the Creditors' Committee in this case would be in the best interests of all of Debtor's creditors; and

It appear [s] that Honigman Miller Schwartz and Cohn has no connection with the Debtor, the creditors, or any party in interest, except as set forth in said Application, and does not hold or represent any interest adverse to the creditors in this case in matters upon which it is to be engaged; . . .

App. 397 (emphasis added).

In December of 1983, DeLorean caused the Chapter 11 reorganization proceeding to be converted to a Chapter 7 liquidation. A consequence of that conversion was that the Chapter 11 Creditor's Committee was disbanded and Honigman's authority to act as its counsel and prosecute pending adversary proceedings on its behalf was terminated. An interim trustee was appointed and he filed an application to have Honigman act as his attorneys. This application was contested by DeLorean and various enterprises under his control due to Honigman's alleged conflicts of interest, and was the subject of an extensive evidentiary hearing on January 10, 1984, before Bankruptcy Judge Graves. Judge Graves approved the appointment, specifically finding that no conflict of interest hampered Honigman's ability to effectively represent the trustee. He noted that all of the major creditors of the estate--including the ones who would be directly and adversely affected by the existence of any conflict--supported Honigman's appointment. Neither DeLorean nor any of the other objectors appealed this appointment.

The accounting firm of Price Waterhouse had been retained as the Chapter 11 Examiner. Prior to its completion of its investigation and issuance of the Examiner's Report, the proceedings were converted to Chapter 7 and Price Waterhouse lost its authorization. In February 1984, the new Chapter 7 Committee requested leave to employ Price Waterhouse as its accountants so that it could make the firm's services available to the trustee pursuant to its right under 11 U.S.C. § 705(b). Again, a DeLorean-controlled company objected to the application. Judge Graves, on April 24, 1984, entered an order authorizing Price Waterhouse 'to serve as the accounting firm for the [Chapter 7] Committee in order to assist the Committee, and, by agreement, the trustee in the orderly liquidation of the estate.' The DeLorean company unsuccessfully appealed this order to the district court and subsequently to this court--the latter appeal being voluntarily dismissed.

In December of 1985, two years after Honigman's appointment as the trustee's counsel and eighteen months after Price Waterhouse's appointment, attorney Morganroth, on behalf of DeLorean, filed yet another motion to disqualify Honigman and Price Waterhouse from any further connection with the case due to alleged conflicts of interest. Bankruptcy Judge Graves--obviously running short on patience with such tactics--denied the motion, finding it to be 'frivolous, wholly without merit.' He subsequently imposed Rule 11 sanctions of over $11,000 on attorney Morganroth. Morganroth appeals this order.

The review standard for Rule 11 sanctions is quite limited. In Albright v. Upjohn Co., 788 F.2d 1217, 1221-22 (6th Cir. 1986), this court adopted the following standard of review as enunciated by the D.C. Circuit:

Under Rule 11, sanctions may be imposed if a reasonable inquiry discloses the pleading, motion, or paper is (1) not well grounded in fact, (2) not warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, or (3) interposed for any improper purpose such as harassment or delay. In determining whether factual (1) or dilatory or bad faith (3) reasons exist which may give rise to invocation of Rule 11 sanctions, the district court is accorded wide discretion. For the district court has tasted the flavor of the litigation and is in the best position to make these kinds of determinations. However, once the court finds that these factors exist, Rule 11 requires that sanctions of some sort be imposed. A refusal to invoke Rule 11 constitutes error. On the other hand, a decision whether the pleading or motion is legally sufficient (2) involves a question of law and receives this court's de novo review. The selection of the type of sanction to be imposed lies of course within the district court's sound exercise of discretion. Thus, we interpret Rule 11 not to have removed from the district court the discretion it needs to efficiently carry out its duties and manage its caseload, but rather to require that sanctions be imposed once the district court's exercise of discretion finds sanctionable circumstances.

Westmoreland v. CBS, Inc., 770 F.2d 1168, 1174-75 (D.C. Cir. 1985) (emphasis in original).

The bankruptcy court's opinion granting sanctions against attorney Morganroth stated in pertinent part that:

In this Court's order of January 30, 1986 denying the motion [to disqualify] in toto, we found no factual or legal foundation for the motion. In particular, we noted that all matters relating to conflicts of interest of the Honigman firm were presented to and resolved by this Court's order of January 10, 1984, designating the Honigman firm as the attorney for the trustee. Hence, the motion was limited to conflicts arising after January 10, 1984. Having listened to three and one half hours of testimony and reviewing the accompanying exhibits, we found no evidence of a conflict of interest existing after January 10, 1984. Nor did we find a conflict of interest between Price Waterhouse and the Honigman firm. Moreover, we found 'no clear evidence that the issues have been explored or that careful consideration was given to the filing of the motion.' In our view, the motion was frivolous and wholly without merit.



* * *

Having reviewed the objections presented here, we find no cause to retreat from our findings that 'the issues have not been explored or that careful consideration was not given to the filing of the motion.' Reasonable inquiry would have revealed that the January 10, 1984 order limited all discussion of conflicts of interest involving the Honigman firm to events subsequent to that date. Pages 17-68 of the transcript [of the January 30 hearing] manifest the complete inability of DeLorean's counsel to show even a potential conflict of interest arising after January 10, 1984.

App. 514-16. Upon finding a violation, Judge Graves correctly concluded that Rule 11 required that some sanction be imposed. See Albright, 788 F.2d at 1222. Morganroth now challenges the imposition of the sanction, not the nature of the sanction imposed.

The determination that the motion to disqualify was filed in violation of Rule 11 was, for the reasons quoted above, primarily factual--Judge Graves found that the motion was not well grounded in fact and had not been filed upon 'reasonable inquiry.' The legal aspect of the violation--that the evidence concerning the time period after January 10, 1984 did not establish a conflict of interest--was really quite straightforward. Under the Westmoreland standard of review, the bankruptcy court's factual conclusions do not amount to an abuse of discretion and its legal conclusions were not erroneous. We AFFIRM.