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In re Schaefer Salt Recovery

September 27, 2006


The opinion of the court was delivered by: Katharine S. Hayden, U.S.D.J.

Chapter 7



Carol Segal ("Segal") appeals an order of the United States Bankruptcy Court for the District of New Jersey dated August 24, 2005 that denied a motion for the imposition of sanctions against Schaefer Salt Recovery, Inc. ("Schaefer Salt") and its attorney, Nicholas Khoudary, Esq. ("Khoudary"), for filing frivolous and bad faith bankruptcy petitions, and from an order entered October 4, 2005 denying a motion for reconsideration of the August 24, 2005 order. The bankruptcy court concluded that Khoudary's conduct was sanctionable under 28 U.S.C. § 1927, but nonetheless denied both motions because the motion for sanctions was filed nine days after the court had involuntarily dismissed the underlying bankruptcy petition. The bankruptcy court held that the Third Circuit's "supervisory rule" requiring certain motions for sanctions to be filed before dismissal of the underlying case is applicable to motions for sanctions pursuant to both Rule 9011 of the Federal Rules of Bankruptcy Procedure and 28 U.S.C. § 1927. For the reasons that follow, the decisions of the bankruptcy court on these motions are affirmed.


On May 12, 2004, only eight days after being formally incorporated as a business entity, Schaefer Salt filed a petition for bankruptcy under Chapter 11 of the bankruptcy code. Khoudary, acting as Schaefer Salt's Vice-President, filed the bankruptcy petition on behalf of the company.

At the time of Chapter 11 filing, Schaefer Salt's only assets were three mortgage liens against certain real property in Union, New Jersey. The bankruptcy filing automatically stayed tax foreclosure actions on the properties that Segal had initiated in state court. Segal filed a brief in support of its motion to dismiss Schaefer Salt's Chapter 11 case for cause, claiming that Schaefer Salt's bankruptcy filing was "a 'strategy' to delay [Segal's] lawful right to complete his tax foreclosure actions and then to 'skunk' him by acquiring his interests at a reduced price." Appellant's Desig. of R. at Ex. 40 (Reply Brief in Further Support of Motion to Dismiss Chapter 11 Case). Within a few weeks, the bankruptcy court involuntarily dismissed the bankruptcy filing as a bad faith filing.

Approximately five weeks later on August 13, 2004, Schaefer Salt, with Khoudary acting as counsel, filed another petition for bankruptcy, but this time under Chapter 7 of the bankruptcy code. This filing also had the effect of automatically staying Segal's state court foreclosure proceedings on the real property inUnion, New Jersey in which Schaefer Salt held interests. Segal immediately filed a motion to dismiss and a hearing was scheduled for August 24, 2004. On the morning of the hearing, Khoudary notified the bankruptcy court that he was unable to attend due to health issues. Khoudary also indicated that he was willing to voluntarily dismiss the Chapter 7 petition. The bankruptcy judge informed Segal's counsel on the record of what had transpired and entered an order granting Segal's motion to dismiss that same day.

On September 2, 2004, nine days after the entry of the order of involuntary dismissal, Segal filed a motion for sanctions to be levied against Schaefer Salt and Khoudary pursuant to either Federal Rule of Bankruptcy Procedure 9011 or the court's inherent power for filing frivolous and bad faith bankruptcy petitions. After a hearing on September 27, 2004, the bankruptcy court found that sanctionable conduct had occurred, and awarded Segal the costs of filing the motion to dismiss the Chapter 7 case under 28 U.S.C. § 1927. An order to this effect was never entered, however. After several months, Segal's counsel inquired as to the status of the sanction order. On August 24, 2005 the bankruptcy court issued an opinion reversing its September 27, 2004 award of sanctions.

In its opinion the bankruptcy court relied upon the "supervisory rule" announced by the Third Circuit in Pensiero, Inc. v. Lingle, 847 F.2d 90 (3d Cir. 1988), which requires all motions requesting Rule 11 sanctions to be filed before entry of final judgment of the underlying case. The bankruptcy court recognized that Pensiero was not directly controlling on the issue because it had initially awarded sanctions under 28 U.S.C. § 1927, and Pensiero involved only Rule 11 sanctions. However, the court stated that "it would be reasonable to expect the Third Circuit to view sanctions under § 1927 in the same manner as they treated Rule 11 sanction[s] in Pensiero." Appellant's Desig. of R. at Ex. 20 (Bankruptcy Court Letter Opinion Dated August 24, 2005). The bankruptcy court also stated that although "the motion was filed only nine days after dismissal, case law suggests that the supervisory rule is a bright line rule from which deviation is not appropriate." Id.

Segal filed a motion for reconsideration of the August 24, 2005 order on September 2, 2005. The bankruptcy court entered an order denying this motion on October 3, 2005. Segal appeals both the denial of the motion for sanctions and the denial of the motion for reconsideration.


This Court has jurisdiction to hear an appeal from an order of the bankruptcy court pursuant to 28 U.S.C. § 158(a)(1), which states that "[t]he district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees . . . of bankruptcy judges entered in cases and proceedings referred to bankruptcy judges under section 157 of this title [28 U.S.C. § 157]."

The district court exercises de novo review over the bankruptcy court's legal conclusions, Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999), but will not disturb the bankruptcy ...

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