Restructuring

Contributed by Edward Wu
Without the guidance of an attorney, pro se claimants sometimes have difficulty in assessing the merits of their claims against a chapter 11 debtor.  Even where it may be clear to a seasoned practitioner that a particular claim lacks merit, a pro se claimant may, understandably, be wary of any suggestion by debtor’s counsel that his or her proof of claim should be withdrawn voluntarily.  For that reason, it is often necessary for debtor’s counsel to formally object to such claims.  While such a process may prove somewhat costly for the estate in certain instances, pro se claimants are entitled to, and deserve, all the protections of due process.  Occasionally, however, certain pro se claimants unjustifiably cause the estate to incur significant costs by repeatedly filing frivolous pleadings and repeatedly engaging in other inappropriate conduct.  What can a court do to discourage such pleadings while at the same time preserve the claimant’s right to be heard?
Judge Glenn of the United States Bankruptcy Court for the Southern District of New York recently faced this issue in In re MF Global Holdings Ltd.  The pro se claimant in that case, Ms. Coe, previously had filed several unsecured and administrative claims asserting millions of dollars in damages in the Refco chapter 11 cases.  After Ms. Coe’s claims were disallowed and expunged, certain assets of the Refco debtors were sold to a predecessor of one of the debtors in the MF Global cases.  Notwithstanding that the assets were sold “free and clear” of all claims and interests, Ms. Coe later filed substantially the same claims in the chapter 11 cases of MF Global, which were also then disallowed and expunged.  Although the MF Global court denied a request by the chapter 11 trustee for an order preventing Ms. Coe from filing further claims, the court explained to Ms. Coe why her claims were expunged and warned that sanctions would be imposed if she continued filing frivolous pleadings.
Not to be deterred, Ms. Coe later filed a motion seeking allowance of an administrative expense against the MF Global debtors in the amount of $35 million, which the court found to be unsupported in fact or law.  The court was none too pleased.  The court expunged Ms. Coe’s administrative expense and further stated that frivolous claims require an objection by the trustee and a decision by the court, which increases the administrative costs of the case and diminishes the recoveries of legitimate creditors of the estate.
The court then granted the request of the chapter 11 trustee for sanctions against Ms. Coe, which were later vacated because the sanctions request was not made pursuant to a separate pleading as required under Bankruptcy Rule 9011.  Ms. Coe, however, would not be let off the hook so easily.
The court proceeded to enter an order to show cause that required Ms. Coe to appear at a sanctions hearing.  Ms. Coe requested that her personal appearance be excused because of the expense of traveling from another state, but the court denied the request on the reasoning that Ms. Coe should not be able to repeatedly file frivolous pleadings from afar without now appearing in person before the court.
After Ms. Coe failed to attend the hearing, the court imposed sanctions against her in the amount of $250.  The court stated that, like Article III courts, bankruptcy courts may exercise the inherent power to sanction parties for improper conduct taken in bad faith.  Even though Ms. Coe is a pro se litigant, the court said that fact alone cannot excuse her misconduct.  The court also noted that the sanctions are modest in amount and intended to deter future misconduct.  Any future frivolous conduct, the court warned, would result in substantially higher sanctions.
Ms. Coe has filed a notice of appeal with respect to Judge Glenn’s order imposing sanctions against her.
It is not uncommon for debtor’s counsel to be required to address repeated frivolous pleadings by certain claimants at a time when other issues of greater importance to the estate need to be addressed.  Debtor’s counsel is often reluctant to seek, and courts are reluctant to grant, an order enjoining a pro se claimant from filing further pleadings.  For a claimant who may otherwise feel that he or she has nothing to lose and everything to gain in filing frivolous pleadings to obtain a recovery from the estate, modest sanctions may deter future misconduct.