The opinion of the court was delivered by: Judge Virginia M. Kendall
MEMORANDUM OPINION AND ORDER
Plaintiff-Appellant Bank of America, N.A. ("Bank of America") appeals two orders entered by the bankruptcy court-(1) the January 13, 2011 grant of a Motion to Enforce; and (2) the January 26, 2011 Sanctions Order-and also contends that its due process rights were violated when the bankruptcy court refused to provide notice or an opportunity to respond before imposing sanctions pursuant to 28 U.S.C. § 1927. For the following reasons, the Court finds that the bankruptcy court imposed sanctions without allowing Bank of America a meaningful opportunity to respond and, accordingly, reverses the imposition of those sanctions. Because Bank of America has already filed its civil complaint in district court, its challenge to that portion of the Motion to Enforce is dismissed as moot.
Bank of America contends that Defendants-Appellees James Knight ("Knight") and his affiliated companies ("Knight Companies") defaulted on $34 million in financing obligations. While in bankruptcy proceedings, Bank of America filed a motion on November 12, 2010 to lift the automatic stay imposed by § 362(a) of the Bankruptcy Code and to permit Bank of America to name Knight as a defendant in a new civil action relating to alleged misconduct when he was a director of the Knight Companies. Knight objected on November 26, 2010, arguing that the bankruptcy court should deny the motion to lift the stay because Bank of America failed to demonstrate that it had a "probability of prevailing on the merits" of the proposed case. Bank of America filed a reply to Knight's response on December 7; Knight filed a proposed sur-reply on December 10. The bankruptcy court held a hearing on the motion to lift the stay on December 14, 2010.
At the December 14th hearing, Knight argued that the court could not lift the automatic stay without a finding that Bank of America was likely to succeed on the merits. Knight further noted that Bank of America had yet to file a complaint setting forth the charges in the proposed civil action and that, as such, Knight did not "know what the claims are." (R. 14, Ex. I at 7:6-7.) Bank of America responded that the standard was not as Knight alleged and that its previous filings included the necessary letters regarding director and officer insurance and liability to sufficiently put the court and Knight on notice of the proposed charges. The court then asked Bank of America: "Is it your feeling that I can know exactly what you're talking about from your papers?" (Id. at 7:21-23.) Bank of America responded affirmatively, stating "I believe you can rule on it based upon the papers, Your Honor." (Id. at 8:5-6.) After further discussion, Bank of America stated that it was "prepared to file a complaint [in the proposed civil action], once we get relief, promptly." (Id. at 9:23-24.) Knight interjected, asking the court: "Don't you want to see the complaint, Judge?" The court responded that it did, stating that seeing the proposed complaint would make the court's "analysis a lot easier." (Id. at 10:1-8.) Noting that Bank of America had just declared that it was prepared to file the complaint as soon as the court issued its ruling, the court asked Bank of America if it would attach the complaint as an exhibit. (Id. at 10:9-11.) Bank of America responded that the complaint was not "ready" but that it should be ready "in a day or two, and we can certainly file it." (Id. at 10:12-15.)
The court then set a briefing schedule and the clerk stated "December 24th for the complaint." (Id. at 11:11-12.) The court summarized the briefing schedule by stating: "December 24th for . . . a reply with, hopefully, a complaint attached so I can look at that." (12:14-16.) Knight's response brief was set for January 7th. (Id. at 12: 21-23.) The bankruptcy court then entered a minute order stating "Leave given Bank of America to file a reply or Complaint on or before December 24, 2010." (R. 14, Ex. J.)
After the hearing, Bank of America determined that there were additional claims and factual issues it needed to analyze before finalizing and publicly filing its complaint. Accordingly, on December 23, 2010, Bank of America filed a reply brief and submitted a draft version of the complaint to chambers for in camera review. In its reply, Bank of America cited Seventh Circuit precedent establishing that the complaint was not relevant to the court's analysis on the motion to lift the stay. Bank of America also alleged that "[s]ince the complaint has been prepared by counsel for Bank of America in anticipation of litigation, the complaint is subject to the work product privilege" that Bank of America did not wish to waive. (R. 14, Ex. K at 10.)
Knight corresponded with Bank of America and sought a copy of the complaint. Bank of America informed Knight that the complaint was not finalized and that, as such, it was submitted to the court for in camera review and not filed publicly.
On January 10, 2011, Knight filed a Motion to Enforce, arguing that the court should compel Bank of America to publicly file its draft complaint and that Knight was entitled to reimbursement for fees and expenses. Knight noticed his motion for January 13th. On January 13, 2011, the bankruptcy court held a hearing and at the outset instructed Bank of America to "respond." (R. 14, Ex. B at 2:17.) The following colloquy ensued: BANK: Well, Your Honor, I guess my first response is that I don't believe that you directed us to file a complaint. Your order quite clearly says --
COURT: Well, let's say I didn't. Let's say that it's not officially an order, okay? We all assumed you were going to supply the complaint. We were all going to have a chance to look at it. And then I set the response time based on that, okay? So setting aside the order, to me, you have multiplied the proceedings here, because if you were going to raise a privilege or something, you should have raised it then. You didn't. When that thing came in under seal, I was out of town, and I said, "what? Why?" I mean, I even remembered that that wasn't right. You didn't ask for leave to do it that way. You didn't ask to come in and rebrief it. You didn't ask to -- you know, I mean, you -- you know, I don't think you have a privilege anyway, by the way. BANK: Your Honor --
COURT: So I think this whole thing is an unnecessary multiplication of proceedings. I won't necessarily say that you violated an order. I mean, it was clearly understood by everyone that this complaint was going to be produced and that Mr. Knight was going to get a chance to look at it and respond. That was clear.
BANK: Your Honor, when we were here on December 14th, we were here for a ruling on the motions that were pending, and Your Honor said that you weren't ready to rule. Mr. Knight filed, you know, another reply just before that date. The issue about the complaint was not pending that day. It came up during the course of the hearing. And yes, I didn't --
COURT: Okay. And if you got put on the spot, then you needed to come in immediately. You don't get to just disregard the understandings and do what you want, which is what you did. So I'm going to grant the motion. The complaint is going to be filed. And I'm going to ask you [Knight] to submit your time to bring this motion and your time calling up, because you gave them a chance, according to the allegations in your ...