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In re Kuttner

United States District Court, N.D. Illinois, Eastern Division

June 8, 2015



EDMOND E. CHANG, District Judge.

This bankruptcy appeal is brought not by one of the parties, but rather one of their attorneys, Appellant Maurice J. Salem, who represents debtor Susan Kuttner. As part of Kuttner's Chapter 7 case, Salem filed motions on his client's behalf against Appellee 620 South Hough Condominium Association. Salem, for Kuttner, argued that the Condo Association was improperly trying to collect assessments related to an apartment that Kuttner had intended to surrender in bankruptcy. In a number of hearings, the bankruptcy court expressed its skepticism about Salem's legal arguments, but Salem persisted. Salem filed a motion for sanctions against the Condo Association and a motion for summary judgment. The bankruptcy court not only denied the motions, it also imposed sanctions against Salem personally (Kuttner herself was spared), specifically in the form of $3, 000 in attorney's fees to be paid to the Condo Association. Salem now appeals, but for the reasons discussed below, the sanctions order is affirmed.[1]

I. Background

A. Proceedings Leading to Sanctions

The underlying facts, which are essentially not in dispute, are mostly drawn from the bankruptcy court's order granting the Condo Association's motion for sanctions. R. 7-4, Sanctions Order, Case No. 12 B 14212, dated Jan. 20, 2015. When Susan Kuttner filed her Chapter 7 petition in April 2012, she listed in her schedules a condominium she owned at 620 South Hough Street in Barrington, Illinois, which she declared in a statement of intention that she would surrender. Id. at 1. The trustee in Kuttner's case issued a "no asset" report and her petition was discharged and the case closed in August 2012. Id. Three months later, however, counsel for the 620 South Hough Street Condominium Association, which had not been listed as a creditor on Kuttner's schedules, filed an appearance. Id.

Early in 2013, Kuttner moved the bankruptcy court to hold an evidentiary hearing on whether the Condo Association and its counsel should be sanctioned for violating the automatic stay triggered by bankruptcy proceedings by repeatedly calling and sending letters to Kuttner demanding fees. Id. at 1-2. Kuttner alleged that she had never occupied the condo in question, which she said had been surrendered to the mortgage-holder, Bank of America. Id. at 2. After the parties conducted discovery on the issue, the bankruptcy court held a hearing in September 2013, where it explained that the "key issue" was whether the Condo Association, by sending the payment notices, had attempted to collect on pre -rather than post -petition assessments. R. 7-2, Sept. 26, 2013 Hrg. Tr. at 3:13-17 ("If they were attempting to collect on pre-petition, arguably they have [violated the stay]."). Also central to the bankruptcy court's analysis was whether Kuttner had in fact surrendered the condo (cutting off the Condo Association's rights to any fees from Kuttner), with the court repeatedly expressing its concern that, contrary to Salem's view, Kuttner's statement of intention that she would transfer the property was not sufficient for that purpose. See, e.g., id. at 6:22-25 ("I'm having trouble accepting that the mere statement in the filing of the schedules that I surrender the property effects a title transfer."); 11:5-9 ("The issue comes down to what does the piece of paper saying I surrender, what legal effect does that have, does that somehow cut off ownership. And I told counsel that I was very doubtful that that was sufficient."); 13:24-25 ("[T]here is case law that's on point that says that that is not the law."). At a subsequent hearing in October, 2013, the bankruptcy court noted that the Condo Association had been "entitled to rely on the fact that [Kuttner] still had an interest" in the property when it sent her the notices, which were an attempt to collect post-petition assessments. R. 7-2, Oct. 24, 2013 Hrg. Tr. at 5:12-14 ("[T]hat's what the statute says."); see also id. 7:7-9 ("[A]s long as she has title, it's not dischargeable, and I told you that the last time.").

Nevertheless, Kuttner (or, more specifically for present purposes, Salem) pressed on, moving for summary judgment against the Condo Association and its counsel for seeking post-petition assessments, which violated "Debtor's right to a fresh start." Sanctions Order at 3-4 (quoting Kuttner's brief); see R. 7-3, Debtor's Mot. Summ. J., dated Dec. 9, 2013. Salem's rationale was that Kuttner had done "all she can possibly do to remove her name from the deed, " having repeatedly and unsuccessfully asked Bank of America to take possession and ownership, or enter a consent judgment. Id. at 4 (quoting brief and citing Kuttner's affidavit). Between the September and October 2013 hearings, Kuttner had also moved a state court for entry of a consent judgment, but that motion was also, for unknown reasons, denied. Id. In short, Kuttner remained stuck with legal title to the condo.

For its part, the Condo Association moved for sanctions against both Kuttner and Salem. R. 7-4, Creditor's Mot. Sanctions, dated Feb. 12, 2014. After briefing from the parties and a February 2014 hearing, the bankruptcy court denied Kuttner's original request for relief based on an alleged violation of the automatic stay and denied her motion for summary judgment. R. 7-4, Order Denying Debtor's Mot. Summ. J., dated Feb. 27, 2014. The court noted that it was "just glaring from" the applicable statute as well as case law that Salem's argument that Kuttner's statement of intention to surrender the condo had legally effectuated a transfer was untenable. Sanctions Order at 4 (citing February 27 hearing). The court accordingly asked for an itemized petition for attorney's fees and costs as an award of sanctions, which the Condo Association submitted in the amount of $8, 067.50. Id. at 5.

B. Reasoning Behind Sanctions

The bankruptcy court premised its grant of sanctions on Fed.R.Bankr.P. 9011, which requires that claims and other legal contentions made to the court in motions be warranted by law or based on a non-frivolous argument. Sanctions Order at 5. The court took issue with Salem having filed his sanctions motion for alleged post-petition assessments by the Condo Association in April 2013, when the automatic stay preventing collection attempts would have ended with the discharge of her petition in August 2012; the alleged demands, at least those initially identified, occurred well after that date, in early 2013. Id. at 6-7. The "proper basis" for Kuttner's requested relief, the court noted, "would have been a violation of the discharge injunction, " which also would have prohibited improper collection attempts. Id. at 7. But even on this basis, the problem was that post-petition condominium assessments, as the court had hinted and stressed repeatedly in the hearings, are "excepted from discharge" by statute, making Salem's argument that the Condo Association should be sanctioned for levying these fees a "position that is directly contradictory to existing law." Id. at 7-8. Additionally, the bankruptcy court found that Salem's insistence that Kuttner's statement of intention that she would surrender the condominium legally accomplished a transfer was frivolous, again based on clear statutory language. Id. at 9. The court noted that Salem had cited no case law in support of his "unorthodox argument." Id.

After chiding Salem for not heeding repeated warnings that his positions were not warranted by law, including from opposing counsel, the court set sanctions at $3, 000 against Salem only, describing the purpose as "not to reimburse the Association in full for its attorney's fees" but to "deter counsel from pursuing a frivolous argument." Id. at 11 ("I think your heart is in the right place. I know you're trying very aggressively to help your client here, but you still have to do it within the balance of the law....") (quoting prior hearing).

II. Standard of Review

A federal district court has jurisdiction, under 28 U.S.C. ยง 158(a), to hear appeals from the rulings of a bankruptcy court. On appeal, the district court reviews the bankruptcy court's legal findings de novo and its factual findings for clear error. In re Miss. Valley Livestock, Inc., 745 F.3d 299, 302 (7th Cir. 2014). A bankruptcy court's decision to impose sanctions is reviewed for an abuse of discretion. In re Hancock, 192 F.3d 1083, 1085 (7th Cir. 1999). "Unless the sanctioning court has acted contrary to the law or ...

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