Memorandum Opinion — Panthera Enterprises, LLC (2:19-bk-00787 Doc 312)

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SIGNED: April
No.           1st, 2021
    2:19-bk-00787             Doc 312        Filed 04/01/21         Entered 04/01/21    15:46:59 Page 1 of
                                                                         ________________________________
THIS ORDER HAS BEEN ENTERED ON THE DOCKET.
                                        12                                      Paul M. Black
PLEASE SEE DOCKET FOR ENTRY DATE.                                     UNITED STATES BANKRUPTCY JUDGE




                        IN THE UNITED STATES BANKRUPTCY COURT
                      FOR THE NORTHERN DISTRICT OF WEST VIRGINIA

IN RE:                                                          )
                                                                )        CHAPTER 7
PANTHERA ENTERPRISES, LLC                                       )
                                                                )        Case No. 2:19-bk-00787
      Debtor.                                                   )
                                                                )

                                         MEMORANDUM OPINION

           Before the Court is a Motion for Award of Fees Against Bernstein-Burkley, P.C. filed by

Panthera Training, LLC pursuant to Federal Rule of Bankruptcy Procedure 9011 (the

“Motion”). 1 Panthera Training alleges that Bernstein-Burkley, counsel for the Debtor, Panthera

Enterprises, LLC (the “Debtor”), filed a complaint in bad faith and advanced it without first

conducting a reasonable investigation. The Court held hearings on the matter on February 25,

2021 and March 15, 2021. At the conclusion of the second hearing, the Court took the matter

under advisement. 2 Although the concerns expressed by Panthera Training about the actions

taken by Debtor’s counsel are not without merit, if not outright disturbing, the Court will deny

the Motion as untimely.




1
 The individual attorneys at Bernstein-Burkley representing the Debtor were Robert S. Bernstein, who signed the
Complaint, and John J. Richardson and Mark A. Lindsey, who advanced the litigation and defended the sanctions
motion. No request for sanctions was made against any of them individually.
2
    United States Bankruptcy Judge Paul M. Black, Western District of Virginia, sitting by designation.
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                        FACTUAL AND PROCEDURAL BACKGROUND

        A brief summary of the history and background of this matter is set forth below. A more

detailed discussion of the various allegations in the Complaint will follow. The Debtor owns

certain real property in Old Fields, West Virginia. AP ECF 1, p.2. 3 The property and its

improvements (“the Facility”) are used to conduct military and law enforcement personnel

trainings. Pursuant to a 2018 lease (the “Lease”), Panthera Training assumed operation of the

Facility. AP ECF 1, Ex. A. The Lease required Panthera Training to pay the Debtor $52,000.00

a month in “Base Rent” as well as “Additional Rent” according to a formula described in section

four of the Lease. Id. It is uncontested that Panthera Training timely paid the Base Rent but the

Debtor disputed the amount of Additional Rent due, along with other alleged defaults under the

Lease. Notwithstanding express audit rights granted to it under the Lease, the Debtor did not

undertake an audit of the Additional Rent calculations before filing the Complaint, nor did it hire

a professional to do so on its behalf.

        On September 13, 2019, the Debtor filed a voluntary Chapter 11 petition. Bankr. ECF 1.

On October 17, 2019, the Debtor filed a Complaint for Turnover and Possession of Real and

Personal Property and for Preliminary Injunction Against Possession of Property (the

“Complaint”) against Panthera Training which commenced Adversary Proceeding No. 2:19-ap-

00051 (the “Adversary Proceeding”). AP ECF 1. Panthera Training filed an answer which

asserted counterclaims of fraud, breach of contract, tortious interference, and included a request

for a preliminary injunction. AP ECF 10. After it came to the attention of the parties that one of

the Debtor’s principals, James Punelli, was diverting funds of the estate, the Debtor’s case was

converted to Chapter 7 on July 21, 2020. Bankr. ECF 202. Aaron C. Amore was appointed the


3
  All references to documents filed in Adversary Proceeding 2:19-ap-00051 will be preceded by “AP ECF” and
references to documents filed in the in underlying bankruptcy case will be preceded by “Bankr. ECF”.

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Chapter 7 Trustee (the “Trustee”). Shortly after being appointed, the Trustee filed an application

to employ Kelly T. Smith, CPA of Smith, Elliot, Kearns & Company, LLC to investigate the

allegations contained in the Adversary Proceeding. Bankr. ECF 216. The accountant

investigated the allegations in detail and found them baseless. The Trustee then engaged in

settlement discussions with Panthera Training, and a Rule 9019 motion to compromise was filed

and properly noticed, requesting that the Court dismiss the Complaint and the parties’ various

claims against each other with prejudice. The Order of dismissal with prejudice was entered on

December 15, 2020. AP ECF 100. The Adversary Proceeding was administratively closed on

January 4, 2021.

       After the Adversary Proceeding was closed, on January 8, 2021, Panthera Training filed

the Motion in the main bankruptcy case asserting that Bernstein-Burkley failed to conduct a

reasonable investigation before filing the Complaint and that they filed the Complaint for

improper purposes. Bankr. ECF 265. Bernstein-Burkley filed an objection to the Motion asking

the Court to deny the Motion for various reasons, including that the movant did not comply with

Rule 9011(c) and that Bernstein-Burkley had ample bases on which to file the Complaint.

Bankr. ECF 278. The Court held an initial hearing on February 25, 2021 and gave the parties

time to attempt to resolve the dispute. At the second hearing on March 15, 2021, the parties

advised that they were unable to reach an agreement and asked the Court to resolve the

controversy, which it now does.

                                        JURISDICTION

       This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§

1334(a) and 157(a). The Court concludes that this matter is a “core” bankruptcy proceeding

within the meaning of 28 U.S.C. § 157(b)(2)(A). Venue is proper pursuant to 28 U.S.C. § 1409.



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                                    CONCLUSIONS OF LAW

         I.     Federal Rule of Bankruptcy Procedure 9011 (“Rule 9011”)

         All attorneys before a federal court, including those representing the estate of a debtor in

possession, have duties under Federal Rule of Civil Procedure 11 (“Rule 11”). Rule 9011

conforms to Rule 11, and accordingly, “[c]ourts may look to case law interpreting Rule 11 when

deciding cases under Bankruptcy Rule 9011.” In re Babcock, 258 B.R. 646, 651 (Bankr. E.D.Va.

2001) (citing McGahren v. First Citizens Bank & Trust Co. (In re Weiss), 111 F.3d 1159, 1170

(4th Cir. 1997)); In re Atlas Mach. & Iron Works, Inc., 190 B.R. 796, 806 (Bankr. E.D.Va.

1995).

         Rule 9011 provides, among other things, that the signature of an attorney on a pleading

constitutes a certificate that the content of the document is well grounded in fact and is warranted

by existing law. The “well grounded in fact” requirement demands, at least, that the attorney not

accept the client’s version of certain facts “on faith.” At a minimum, the attorney has a duty to

probe the client carefully for the facts before including them in any document signed by the

attorney or in any other way presented to the court. See Fleming Sales Co., Inc. v. Bailey, 611

F.Supp. 507, 519 (D.C.Ill. 1985).

         The primary purpose of Rule 11 is “to deter baseless filings ... and thus, … streamline the

administration and procedure of the federal courts.” Cooter & Gell v. Hartmarx Corp., 496 U.S.

384, 393, 110 S.Ct. 2447, 2454 (1990). The focus of Rule 11 “is ex ante (what should have been

done before filing) rather than ex post (how things turned out)”. Mars Steel Corp. v. Continental

Bank N.A., 880 F.2d 928, 932 (7th Cir. 1989). Rule 9011, like Rule 11, “only applies to acts

undertaken in a case before the court.” Davant v. Bailey (In re Bailey), No. 09–2564, Adv. No.




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10–15, 2010 WL 3277908, at *2, (Bankr. N.D.W.Va. Aug. 13, 2010). Rule 9011 provides in

part:

        (a) Signature. Every petition, pleading, written motion, and other paper, except a
        list, schedule, or statement, or amendments thereto, shall be signed by at least one
        attorney of record in the attorney’s individual name. …
        (b) Representations to the Court. By presenting to the court (whether by signing,
        filing, submitting, or later advocating) a petition, pleading, written motion, or other
        paper, an attorney or unrepresented party is certifying that to the best of the person’s
        knowledge, information, and belief, formed after an inquiry reasonable under the
        circumstances,
               (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 nonfrivolous 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.
        (c) Sanctions. If, after notice and a reasonable opportunity to respond, the court
        determines that subdivision (b) has been violated, the court may, subject to the
        conditions stated below, impose an appropriate sanction upon the attorneys, law
        firms, or parties that have violated subdivision (b) or are responsible for the
        violation.
Fed. R. Bankr. P. 9011(a)-(c).

        Determining whether an investigation was reasonable pursuant to Rule 9011(b)(3)

requires a case-by-case, fact intensive analysis dependent on all the circumstances. Cooter &

Gell, 496 U.S. at 404. If a court finds that Rule 9011(b) has been violated, Rule 9011(c) permits

the court, within its discretion, to impose sanctions upon the offending attorney or party. See

Perez v. Posse Comitatus, 373 F.3d 321, 325 (2d Cir. 2004) (“Even if the district court concludes

that the assertion of a given claim violates Rule 11, however, the decision whether or not to




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impose sanctions is a matter for the court’s discretion.”). That same discretion applies to a

bankruptcy court.

II.    Rule 9011(c)(1)(A): Safe-harbor Provision

       If Rule 9011 sanctions are sought by motion, the movant must comply with the safe-

harbor provision contained in Rule 9011(c)(1)(A) which requires the offending party be given

notice and an opportunity to cure the offending conduct. “The safe-harbor provision is a strict

procedural requirement.” Star Mark Mgmt., Inc. v. Koon Chun Hing Kee Soy & Sauce Factory,

Ltd., 682 F.3d 170, 175 (2d Cir. 2012). Specifically, the safe-harbor provision requires:

       The motion for sanctions may not be filed with or presented to the court unless,
       within 21 days after service of the motion (or such other period as the court may
       prescribe), the challenged paper, claim, defense, contention, allegation, or denial is
       not withdrawn or appropriately corrected.

Fed. R. Bankr. P. 9011(c)(1)(A).

       Rule 9011(c)(1)(A) grants “a time period between the time of service and the time for

filing, [which] is designed to allow for the correction of the alleged violation.” 10 Collier on

Bankruptcy ¶ 9011.06[1][b] (15th ed. rev. 2010). In Rector v. Approved Federal Savings Bank,

265 F.3d 248 (4th Cir. 2001), the Fourth Circuit noted that “[t]he primary purpose for [the 1993

amendment that added the safe-harbor provision] was to provide immunity from sanctions to

those litigants who self-regulate by withdrawing potentially offending filings or contentions

within the 21–day period.” Id. at 251 (citing Ridder v. City of Springfield, 109 F.3d 288, 294 (6th

Cir. 1997)). Consistent with that purpose, the court held in Brickwood Contractors, Inc. v.

Datanet Engineering, Inc., 369 F.3d 385, 396 (4th Cir. 2004), that an award of sanctions was not




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permissible where the party who filed the offending motion was not provided an opportunity to

withdraw the motion in question before the court ruled on the motion. 4

III.     Analysis

         Panthera Training alleges that Bernstein-Burkley filed the Complaint in bad faith and for

improper purposes without first conducting a reasonable investigation as Rule 9011 requires.

Bankr. ECF 265, p.1. Panthera Training seeks sanctions, in the total amount of $63,556.00, as

reimbursement for attorneys’ fees incurred by Panthera Training in defense of the Complaint. Id.

at 13.

         A. Application of Rule 9011

         This case pivots on the procedural requirements of Rule 9011. Rule 9011(c)(1)(A)

requires a party seeking Rule 11 sanctions first to serve a proposed motion on the opposing party

and to give that party at least 21 days to withdraw or correct the offending matter. Only after 21

days has passed may the motion be advanced. As the Seventh Circuit put it: “[t]o mix naval

metaphors, the party seeking sanctions must first fire a warning shot that gives the opponent time

to find a safe harbor.” N. Illinois Telecom, Inc. v. PNC Bank, N.A., 850 F.3d 880, 882 (7th Cir.

2017).

         Here, the party seeking sanctions failed to comply with that procedure. First, Panthera

Training fired no warning shot. Counsel did not send the proposed motion for sanctions or even a

notice to Bernstein-Burkley before filing it with the Court. 5 See Brickwood, 369 F.3d at 396



4
 Other courts similarly have concluded that a failure to comply with the safe-harbor provision contained in Rule 11
and Rule 9011 precludes the imposition of sanctions pursuant to subparagraph (c)(1)(A). See, e.g., Gordon v.
Unifund CCR Partners, 345 F.3d 1028, 1030 (8th Cir. 2003); Radcliffe v. Rainbow Constr. Co., 254 F.3d 772, 789
(9th Cir. 2001); Aero–Tech, Inc. v. Estes, 110 F.3d 1523, 1528–29 (10th Cir. 1997); Elliott v. Tilton, 64 F.3d 213,
216 (5th Cir. 1995); Hadges v. Yonkers Racing Corp., 48 F.3d 1320, 1328 (2d Cir. 1995).
5
 Whether a notice is sufficient to comply with the warning-shot/safe-harbor requirement is controversial. Most
circuits, including the fourth, say no. See Penn, LLC v. Prosper Business Dev. Corp., 773 F.3d 764, 767–68 (6th Cir.

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(“Failure to timely raise the safe-harbor issue amounts to a forfeiture of the issue” and “a district

court exceeds its authority by imposing sanctions requested through a procedurally-deficient

Rule 11 motion”). Assuming for present purposes the Complaint was frivolous, more on that

later, Bernstein-Burkley was not afforded the opportunity to self-regulate. This contravenes the

entire purpose of the safe-harbor provision. See Rector, 265 F.3d 248. This procedural defect

alone is fatal.

         Second, in the circumstances of this case, the Motion is untimely. As to timing, the

Fourth Circuit has observed that a motion for sanctions should be “served promptly after the

inappropriate paper is filed, and, if delayed too long, [it] may be viewed as untimely.” Hunter v.

Earthgrains Co. Bakery, 281 F.3d 144, 152 (4th Cir. 2002) (quoting Fed. R. Civ. P. 11 advisory

committee’s note). Moreover, “the ‘safe harbor’ provisions of Rule 11(c)(1)(A) preclude the

serving and filing of any Rule 11 motion after conclusion of the case.” Id.; see also In re Pennie

& Edmonds LLP, 323 F.3d 86, 89 (2nd Cir. 2003) (“[T]he ‘safe harbor’ provision functions as a

practical time limit, and motions have been disallowed as untimely when filed after a point in the

litigation when the lawyer sought to be sanctioned lacked an opportunity to correct or withdraw

the challenged submission.”). 6 Here, the Motion was filed after the Adversary Proceeding was

already settled, dismissed with prejudice, and closed. 7 If the Adversary Proceeding was as




2014) (reviewing circuit split: Second, Third, Fourth, Fifth, Sixth, Eighth, Ninth, and Tenth Circuits have rejected
“substantial compliance,” and only Seventh Circuit has adopted it).

6
  Consistent with Hunter, the Northern District of West Virginia has previously interpreted this “safe harbor”
provision to not only provide a party the opportunity to cure a defect, but also to preclude Rule 11 motions once a
matter has been ultimately decided by the court. Balcar v. Bell & Assocs., LLC, 295 F.Supp.2d 635, 638–39
(N.D.W.Va. 2003); Givens v. Criswell, No. 5:08CV25, 2010 WL 10862445, at *3 (N.D.W. Va. June 24, 2010), aff'd
sub nom. Givens v. Main St. Bank, No. 5:08CV25, 2010 WL 2949621 (N.D.W. Va. July 22, 2010).

7
  In bankruptcy, adversary proceedings generally are viewed as “stand-alone lawsuits,” and final judgments issued
in adversary proceedings are usually appealable as if the dispute had arisen outside of bankruptcy. See generally 16
Wright, Miller & Cooper, Federal Practice and Procedure, Jurisdiction 2d § 3926.2 (2d ed.1996). In re Boca Arena,

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baseless as Panthera Training contends, it should have acted sooner. Much sooner. To follow

the Seventh Circuit’s lead and use another naval metaphor, that ship has sailed. 8

         While the Court shares many of Panthera Training’s misgivings about Bernstein-

Burkley’s conduct, and will address those deficiencies in the subsequent section, the Court will

not contravene the plain language of Rule 9011. The Motion’s procedural defects preclude the

Court from granting the relief requested.

         B. Counsel’s Conduct of the Case

         Though Bernstein-Burkley has avoided sanctions under Rule 9011, the Court is troubled

by the Motion and what transpired in this case. The Court would be remiss if it did not address

those concerns. Had the Motion abided by the Rule 9011(c)(1)(A) procedural safeguards, and

had the Court been on the case at the time, the Motion may well have been granted. The record

reveals a scant, if any at all, investigation by the Chapter 11 debtor’s counsel into the facts. A

great deal of time, effort, and money was expended in this litigation that easily could have been

avoided.

         At a minimum, Rule 9011(b)(3) places on attorneys a duty to make some affirmative

investigation into the facts represented in documents submitted to the court. In re Obasi, No.

10–10494 SHL, 2011 WL 6336153 at *5 (Bankr. S.D.N.Y. Dec. 19, 2011). While “the

investigation performed by a signatory need not be to the point of certainty to be reasonable,” a

“signer must explore readily available avenues of factual inquiry.” Id. Though an attorney may



Inc., 184 F.3d 1285, 1286 (11th Cir. 1999). A request for Rule 11 sanctions in stand-alone litigation is one that
should have been brought in the stand-alone litigation.

8
 At argument on the Motion, counsel for Panthera Training alternatively asked that the Court exercise its inherent
authority and impose sanctions. However, that request was never made in Panthera Training’s pleading, and the
Court will neither award that relief now nor consider it in a second follow up. This matter has been fully briefed and
argued. The Court trusts that this opinion will give Bernstein-Burkley the opportunity to reflect on its litigation
conduct going forward.

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generally rely on objectively reasonable client representations, the attorney must independently

verify publicly available facts to determine if the client representations are objectively

reasonable. Hadges v. Yonkers Racing Corp. 48 F.3d 1320, 1329 (2d Cir. 1995). There is no

evidence that was done here.

       Here, even a perfunctory investigation by Bernstein-Burkley into Panthera Training’s

financial records could have stopped this litigation at the outset. The gravamen of the Complaint

is that Panthera Training owed the Debtor “Additional Rent … for the months of October 2018,

November 2018, December 2018, April 2019, May 2019, and June 2019 in the total amount of

$218,469.00.” AP ECF 1, p. 3. Section four of the Lease defines “Additional Rent” as “an

amount equal to fifty-percent (50%) of the Tenant’s prior month’s Profit” based upon Panthera

Training’s taxable income. AP ECF 1, Ex. A. Further, section four provides: “[u]pon request of

Landlord, Tenant shall fully cooperate with a request to audit Tenant’s books and records,

supplying all documents and backup requested.” AP ECF 1, Ex. A. At both the February 25,

2021 and March 15, 2021 hearings, counsel for Panthera Training advised the Court that he had

urged Bernstein-Burkley to inspect Panthera Training’s financials records. Panthera Training

contends it was apparent all along that no additional rents were owed based upon the formula set

out in the Lease. Yet, despite its ability to do so, the Debtor never exercised its audit rights.

       When the Trustee was appointed, he promptly hired Kelly T. Smith, CPA as an

independent accountant to conduct an audit. The Trustee’s audit revealed Panthera Training’s

taxable income did not merit any “Additional Rent” due under the Lease. The audit cost the

estate only $6,102.00, and tens of thousands of dollars of attorney’s fees have been attributed to

this litigation on both sides. The Court finds Bernstein-Burkley’s explanations for failure to




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audit Panthera Training’s books and records before filing the Complaint strain credibility. 9 It

had the express contractual right to do so and chose not to. To the extent it relied on James

Punelli as the primary basis for its factual investigation, that was clearly grossly deficient. 10 As

stated in In re Wilde Horse Enterprises, Inc., 136 B.R. 830, 841 (Bankr. C.D. Cal. 1991), “the

Rule provides, among other things, that the signature of an attorney on a petition, pleading or

motion constitutes a certificate that to the best of the attorney knowledge, information or belief

‘formed after reasonable inquiry,’ the content of the document is ‘well grounded in fact and is

warranted by existing law....’ The ‘well grounded in fact’ requirement demands, at least, that the

attorney not accept the client’s (or the client’s principal’s) version of certain facts ‘on faith,’ but

at a minimum the attorney has a duty to probe the client carefully for the facts before they are

included in any document signed by the attorney or in any other way presented to the Court.”

         The Court is also troubled by the Debtor’s misconduct documented elsewhere in this

case, and counsel’s failure to bring that to the surface in a timely manner. Such conduct has

caused substantial legal fees to be incurred by both the estate and other parties. This led the

Court to enter an order effectively reducing Bernstein-Burkley’s fee request as Chapter 11

counsel by approximately fifty percent in the main bankruptcy case. Bankr. ECF 311. However,

the procedural posture being as such, the Court will be guided by the Fourth Circuit’s admonition

in Brickwood that a trial court “exceeds it authority by imposing sanctions requested through a

procedurally-deficient Rule 11 motion.” Brickwood, 369 F.3d at 396.




9
  Panthera Training ascribes various ulterior motives to the Debtor’s conduct, including manufacturing a breach of
the Lease in an attempt to regain possession of the property, to which the Court expresses no opinions.
10
  The Debtor alleged other breaches of the Lease by Panthera Training, such as failure to pay real estate taxes and
failure to maintain proper insurance, which were also subsequently debunked and proven meritless.

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                                      CONCLUSION

      For all of the above reasons, the Motion is denied. A separate Order will be entered

contemporaneously herewith




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