No Sanctions, Interest Award Despite Creditors' ‘Games'

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By Diane Davis

Jan. 13 — A bankruptcy court didn't abuse its discretion in failing to award prejudgment interest or sanctions beyond the post-judgment interest awarded to the debtor even though its creditors allegedly “played a shell game” with the money due to the debtor, a district court in Texas held Jan. 7.

Affirming the bankruptcy court's judgment, Judge Lee Yeakel of the U.S. District Court for the Western District of Texas concluded that the bankruptcy court is in a better position to determine the “propriety of sanctions and prejudgment interest.”

The bankruptcy court carefully considered all of the evidence and arguments and awarded the “least restrictive sanction necessary to deter the inappropriate behavior,” according to its discretion, the court said.

Debtor Seeks Attorneys' Fees

Debtor 804 Congress, LLC's property was sold at a foreclosure sale. The proceeds of the sale were divided among creditors, including mortgagee Wells Fargo Bank, N.A., which received $3.2 million from the sale, including $83,327 in attorneys' fees.

The debtor objected to Wells Fargo's claim for attorneys' fees. The bankruptcy court entered an order in the debtor's favor and it became final and unappealable.

Subsequently, the debtor asked the bankruptcy court to compel the creditors, including substitute trustee Greta Goldsby, Wells Fargo's attorney James Ruiz, and Ruiz's employer Winstead, P.C., to turn over the $83,327 in attorneys' fees plus interest from Sept. 10, 2010, until the date the amount is tendered to the debtor, a civil contempt fine of $500 per day from April 8, 2015, until the date the amount is tendered, costs and attorneys' fees, and sanctions.

Wells Fargo turned over $83,327 to the debtor. The bankruptcy court ordered Wells Fargo to pay the debtor interest on the $83,327 at the federal judgment rate from March 27, 2015, to June 18, 2015.

More Severe Sanctions Warranted

The debtor argued that the bankruptcy court failed to award prejudgment interest and more severe sanctions on the creditors' alleged refusal to turn over the attorneys' fees in an “expeditious and cooperative manner.”

According to the debtor, the parties allegedly lied to the court and multiplied proceedings.

The bankruptcy court found that Ruiz “prevaricated,” “played a shell game” with the money due to 804 Congress, and “needlessly and vexatiously increased the expense of litigation.”

The debtor also contended that the appellees' failure to pay the debtor the $83,327 was not only a violation of the order that became final March 27, 2015, but also of the distribution and plan confirmation order dated March 9, 2011.

‘Least Restrictive Sanction.'

According to the court, an award of prejudgment interest is generally discretionary with the trial court and isn't recovered according to a rigid theory of compensation for money withheld, but is “given in response to considerations of fairness.”

Further, the court noted that the bankruptcy court has broad authority under Bankruptcy Code Section 105 to “discipline attorneys and to award or disgorge fees paid in connection with bankruptcy proceedings.” When a bankruptcy court imposes a disciplinary sanction, it “must use the least restrictive sanction necessary to deter the inappropriate behavior,” the court said.

The bankruptcy court imposed sanctions that amounted to approximately $46 in interest on the $83,327 from March 27, 2015, until June 18, 2015, the court said.

The bankruptcy court is in the best position to determine the propriety of sanctions and prejudgment interest, the court said, and the court considered all of the evidence and arguments in the case.

Barbara M. Barron, and Stephen Wayne Sather, Barron Newburger Sinsley & Wier, PLLC, Austin, Texas, represented appellant 804 Congress, LLC; James G. Ruiz, Winstead PC, Austin, Texas, and Phillip L. Lamberson, Winstead PC, Dallas, represented appellee James Ruiz; James G. Ruiz, and Alexander S. Valdes, Winstead PC, Austin, Texas, Phillip L. Lamberson, and Weiting Hsu, Winstead PC, Dallas, represented appellee Greta Goldsby; James G. Ruiz, Winstead PC, Austin, Texas, Phillip L. Lamberson, and Weiting Hsu, Winstead PC, Dallas, represented appellee Winstead, P.C.; James G. Ruiz, Alexander S. Valdes, and Zeena T. Angadicheril, Winstead PC, Austin, Texas, Phillip L. Lamberson, and Weiting Hsu, Winstead PC, Dallas, represented appellee Wells Fargo Bank, N.A.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com