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In re Miller

United States Court of Appeals, Third Circuit

September 16, 2013


Argued: June 10, 2013

Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil Action Nos. 5-12-cv-00503 / 5-12-cv-00830) District Judge: Honorable Legrome D. Davis

Susan J. Deely, Esquire (Argued) Thomas L. Lightner, Esquire Lightner Law Offices Counsel for Appellants

Demetrios H. Tsarouhis, Esquire (Argued) Suite Counsel for Appellees

Before: McKEE, Chief Judge, AMBRO, and NYGAARD, Circuit Judges


AMBRO, Circuit Judge

In the underlying bankruptcy action, Neil Ettinger and Ettinger and Associates, LLC (jointly and severally, "Ettinger") filed an adversary complaint objecting to the discharge of legal fees owed by Tammy and Gregory Miller (the "Millers"), Ettinger's former clients and the debtors in bankruptcy. The Bankruptcy Court threw out the complaint, which asserted that the Millers' outstanding debt was nondischargeable because it was obtained via fraud, and imposed a $20, 000 sanction against Ettinger jointly with his bankruptcy counsel, Demetrios Tsarouhis. The District Court vacated this ruling on the ground that the sanctions order violated the procedural "safe harbor" requirements of Fed.R.Bankr.P. 9011, but it refused to remand the case for further consideration under Rule 9011 "[b]ecause it is too late to cure the safe harbor violation." Dist. Ct. Mem. Order at 22 (June 28, 2012). Moreover, because "the Bankruptcy Court based its decision to sanction on Rule 9011, " the District Court would "not opine in the first instance on whether sanctions grounded in some other authority would have been appropriate." Id. Yet it also refused to remand to the Bankruptcy Court for that consideration. We agree with the District Court's legal conclusion on Rule 9011, but remand the case with instruction to permit the Bankruptcy Court to consider alternative avenues to impose sanctions.


The Millers retained Ettinger in January 2008 to represent them in a landlord/tenant dispute. Over a 23-month period, Ettinger ran up a bill of approximately $43, 000, although the dispute was ultimately settled for $9, 500. During the course of this litigation, the Millers paid Ettinger approximately $20, 000 in legal fees. Even before the landlord-tenant matter had been resolved, however, Ettinger sought relief in Pennsylvania state court in an attempt to accelerate the speed at which he was being paid the outstanding amount owed—close to $23, 000. He twice petitioned the court to withdraw as a counsel, first based on the Millers' alleged failure to pay (in October 2009), and then due to their professed "lack of cooperation" in the underlying dispute (in December 2009).

Both petitions were rejected, though the Millers were ordered to make "good faith" payments in exchange for continued representation.[1] Despite their continued payments, Ettinger sued the Millers in March 2010, asserting claims for breach of contract and quantum meruit. The Millers filed for Chapter 7 bankruptcy protection the following month, giving rise to these proceedings.

A. Bankruptcy Court Proceedings

After the Millers filed for Chapter 7 bankruptcy, Ettinger—acting through Tsarouhis—filed an adversary proceeding in the Bankruptcy Court in August 2010 in an attempt to prevent the discharge of the Millers' remaining legal debt to him.[2] In his adversary complaint, Ettinger raised allegations of fraud and misrepresentation, though in previous proceedings he had characterized the Millers' alleged failure to pay as a purely contractual claim. The Bankruptcy Court held a trial on the adversary complaint in April 2011, immediately after which it found in favor of the Millers on the dischargeability of their debt. As outlined below, whether (and when) Ettinger and Tsarouhis may have engaged in sanctionable behavior during the litigation of the adversary complaint was a recurring issue throughout the bankruptcy proceedings.

1. Initial Motion for Sanctions

On January 31, 2011, the Millers filed and served on Ettinger and Tsarouhis a Rule 9011 Motion for Sanctions ("Initial Motion"). It asserted that Ettinger's complaint was "filed to harass and cause [them] to incur additional fees and further delay" and "for absolutely no reason other than . . . to retaliate against [them]." Millers' Mot. for Rule 9011 Sanctions ¶ 13, Jan. 31, 2011. The following day, February 1, 2011, the Millers withdrew the Initial Motion without explanation and served a copy of their withdrawal request on Ettinger and Tsarouhis.

On February 23, 2011, the Millers re-filed and reserved a motion substantively the same as their Initial Motion. The Bankruptcy Court ruled shortly thereafter that "the 9011 Motion is premature, shall be held in abeyance, and shall not be heard until after the merits of this adversary proceeding have been determined." Scheduling Order at 2, Feb. 25, 2011.

2. Litigation of Adversary Complaint

Although not asserted in his complaint, Ettinger apparently believed that, at some time during his representation of the Millers, a bankruptcy attorney advised them they could avoid paying Ettinger's bill by filing for bankruptcy. During discovery, the Millers admitted that they had met previously with Pennsylvania bankruptcy attorney James Kutkowski; however, they indicated that they had consulted him regarding refinancing rather than bankruptcy.

Kutkowski was deposed on March 18, 2011. In his deposition, Kutkowski first indicated that he "might" have discussed bankruptcy at a meeting with Gregory Miller but that he "really truthfully [did not] remember." In response to a follow-up question, Kutkowski testified that he was "fairly confident that [he] did discuss briefly the option of bankruptcy." Kutkowski also testified at the trial on Ettinger's adversary complaint, held on April 19, 2011, at which he indicated he did not remember whether he had discussed ...

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