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Facts : Knight and Leonard appeal from the bankruptcy court's order sanctioning them for bad faith filing. In 2003, Knight, along with Terry and George Luedtke (the "Luedtkes"), started a company and formed several legal entities - HCF, TAGT, and Yorkshire - to provide functions in the company. Knight served as president and manager of Yorkshire and the Luedtkes provided the majority of the capital for the companies. Knight eventually insisted he be paid a salary and quit working when the Luedtkes refused to pay him a salary. Ultimately, the Luedtkes gave notice that they were holding a meeting to remove Knight as an executive of Yorkshire. Knight requested a week adjournment of such meeting and the Luedtkes agreed. During that interim period of time, Knight hired Leonard and they secretly researched and filed bankruptcy on behalf of Yorkshire and TAGT. The record shows that Leonard did little if any due diligence on the financial status of the entities and no diligence on the ownership and management of the companies he placed in bankruptcy. After the petition had been filed, the Luedtkes held the meeting and removed Knight from any position of authority. The Luedtkes then filed an adversary proceeding in the bankruptcy court and the court dismissed the petitions and sanctioned Leonard and Knight.
Issues: (1) Whether the bankruptcy court erred in sanctioning Knight and Leonard for filing the bankruptcies in bad faith and (2) whether the bankruptcy court erred in the amount of sanctions it imposed.
Holding: Affirmed.
Rule: A federal court may, when acting under its inherent authority, impose sanctions against litigants or lawyers so long as the court makes specific findings that they engaged in bad faith conduct.
Reasoning: The bankruptcy court specifically held that the bankruptcies were filed when Knight was dissatisfied with the remedies otherwise available to him and he wanted to inflict injury upon the Luedtkes. Thus, the bankruptcies were filed with a bad motive and with no meaningful thought as to the actual purpose of a chapter 11 bankruptcy (reorganization). Because the bankruptcy court acted only after a hearing and after making specific findings as it is required to do, it did not abuse its discretion in imposing sanctions. The bankruptcy court sanctioned Knight and Leonard for the Luedtkes attorneys' fees and added sanctions - which were to be paid to the U.S. - to each person based on their earnings and intentional conduct.
The order was well-founded and affirmed.
Facts: Pre-petition, AT&T bought from John Price a controlling portion of Channel Communications, Inc. ("Channel"). Also pre-petition, Cellular 101, Inc. (the "Debtor") was in litigation with AT&T with regard to its purchase of Channel (collectively, the "Channel Parties"). After the Debtor filed for chapter 11 but failed to file a plan of reorganization, the bankruptcy court awarded the Channel Parties attorneys' fees and costs - as administrative fees - from the Debtor's estate based upon costs incurred in filing the ultimately approved plan (the "Plan") of reorganization. The Plan allowed the Debtor to continue to prosecute its prepetition claim against AT&T. The bankruptcy court approved the administrative claim that was filed by the Channel Parties and the Debtor appealed (the "Claim Appeal") the bankruptcy court's ruling to both the district court and the Court of Appeals. After briefing the Claim Appeal, but prior to oral argument before the Court of Appeals, the Debtor settled (the "Settlement") its litigation with AT&T. According to the Debtor, the Settlement's broad language encompassed the administrative claim that was ultimately allowed by the Court of Appeals in the Claim Appeal. However, at oral argument of the Claim Appeal, the Debtor
