The opinion of the court was delivered by: Dora L. Irizarry, U.S. District Judge
On March 31, 2006, the Honorable Dennis E. Milton of the United States Bankruptcy Court for the Eastern District of New York issued a decision and order sanctioning S. Jerome Levey ("Levey") in the amount of $11,900 for violating Bankruptcy Rule 9011. Levey now appeals Judge Milton's sanction. The court has jurisdiction pursuant to 28 U.S.C. § 158. For the reasons set forth below, the sanction is affirmed to the extent that Levey is required to pay $5,000 to the Clerk of the Bankruptcy Court for the Eastern District.
The facts of the underling bankruptcy matter are set forth in Judge Milton's March 31, 2006 Order. See ECF Docket No. 42. With respect to this appeal, the facts are as follows. On September 9, 2002, Levey's client, Yossi Stern, entered a contract to purchase Kesser Cleaners Corp. ("Debtor") for $175,000. Id. As part of the contract, the Debtor was to assign the lease on the property upon which the business was located to Stern. Id. The contract required Stern to provide a $15,000 deposit, with the balance to be paid in periodic installments after the closing. Id. Stern paid $10,000 of the $15,000 deposit. Id.
The Debtor had fallen behind in lease payments to his landlord, putting the Debtor's lease in jeopardy. Id. Without the lease, Stern's purchase of the Debtor would be worthless. Thus, before the closing date, but after putting down the $10,000 deposit, Stern paid $32,010.96 to the Debtor's landlord. Id. This payment brought the lease payments current. Id. At the closing on June 18, 2003, Levey and the Debtor's counsel got into an argument -- presumably at least partially over a credit for the lease payment that Stern made on the Debtor's behalf -- and the closing was never completed. Id.
Stern had given a $10,000 deposit and had paid the Debtor's landlord $32,010.96 -- all for naught. Stern asked Levey to devise a way to get his money back. Id. Levey explained that the seller was judgment proof and therefore a state court judgment was worth little. Id. On July 11, 2003, Levey, on behalf of Stern, filed a Chapter 11 Involuntary Petition against the Debtor. ECF Docket No. 1. The Debtor moved to dismiss the petition on the grounds that an involuntary bankruptcy was not appropriate because Stern's claim was subject to a bonafide dispute and because the Debtor was paying its debts as they became due. ECF Docket No. 4. Levey, on behalf of Stern, opposed the motion. ECF Docket No.5. The bankruptcy court decided to hold a hearing on the motion to dismiss. ECF Docket No. 10. Prior to the hearing, Levey made a few discovery motions and opposed the hearing. ECF Docket Nos. 11, 13, 14. Eventually, Levey was replaced as counsel. ECF Docket Nos. 15-19.
On August 31, 2004, a hearing was held. At the hearing, Stern's new counsel withdrew the petition. However, the court continued the hearing on the motion to dismiss the petition and on the issue of damages. Levey and the Debtor submitted supplemental affidavits on the issue of damages and sanctions. ECF Docket Nos. 22-25, 27-28.
On January 7, 2005, after the parties had fully briefed the Debtor's motion to dismiss and motion for sanctions, the court issued an Order to Show Cause why it should not sanction Levey for filing the petition. ECF Docket No. 29. Levey submitted affidavits in opposition to the Order to Show Cause, asking that the court not sanction him. The Debtor submitted affidavits in support of the Order to Show Cause. ECF Docket Nos. 36-38.
A hearing was held on August 18, 2005. At the hearing, Levey was able to put forward little evidence that the Debtor had fewer than twelve creditors, that Stern's debt was not subject to a bonafide dispute and that the Debtor was not paying his debts as they became due. The decision to sanction Levey, upon which this appeal is taken, was issued on March 31, 2006.
Levey was sanctioned under Bankruptcy Rule 9011. This provision permits a court to "impose sanctions on attorneys or parties who assert frivolous claims and defenses in a bankruptcy proceeding." In re Who's Who Worldwide Registry, Inc., 232 B.R. 38, 48 (E.D.N.Y. 1999). More precisely, when filing the involuntary petition, Levey signed the petition, which indicated that "(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation; (2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivilous argument for the extension, modification, or reversal of existing law or the establishment of new law; (3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and (4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief." See Fed. R. Bankr. P. 9011. Bankruptcy Rule 9011 is modeled after Rule 11 of the Federal Rules of Civil Procedure ("Rule 11"), and is interpreted using Rule 11 precedents. See In re Highgate Equities, Ltd., 279 F.3d 148, 151 (2d Cir. 2002).
Judge Milton's sanction was based on his finding that Levey filed the involuntary petition to obtain an advantage over the Debtor in other litigation. Judge Milton further found that sanctions were appropriate because, viewed objectively, there was no evidentiary support for Levey's claims that the Debtor had fewer than twelve creditors, owed a debt that was not subject to a bonafide dispute and was not paying its debt as they became due. See Fed. R. Bankr. P. 9011(c)(2); see also In re Intercorp Intern., Ltd., 309 B.R. 686, 694 (Bankr. S.D.N.Y. 2004) (applying an objective standard to determine whether the facts of a case justify the sanction).
A district court reviews a Bankruptcy Court's findings of fact for clear error, its conclusions of law de novo, and its decision to award costs, attorneys' fees, and damages for abuse of discretion. In re Bayshore Wire Products Corp., 209 F.3d 100, 103 (2d Cir. 2000). Levey makes legal and factual challenges to Judge Milton's sanction. Levey argues (1) that he was entitled to the "safe harbor" provision of 9011(c)(1)(A) and should not be sanctioned since the petition was withdrawn; (2) the Order to Show Cause directing Levey to appear before the court to explain why sanctions should not be imposed lacked specificity; (3) the sanctions are an abuse of discretion; and (4) counsel fees are not permitted, as a matter ...