The federal Bankruptcy Code gives wide discretion to individual bankruptcy judges to issue orders, including the authority to impose sanctions on a debtor or other party for acts that it finds to be unlawful or otherwise counter to the purpose of a bankruptcy case. A “sanction” is a punishment for conduct that takes place during the litigation process. A federal district court recently affirmed a bankruptcy court’s sanctions order in a Chapter 7 case, which found bad faith on the part of the debtors and assessed monetary damages. In re Kellogg-Taxe (“K-T I”), No. 2:15-cv-00084, order (C.D. Cal., Dec. 7, 2015).
Multiple federal statutes and rules permit courts to impose sanctions. The Bankruptcy Code gives courts broad power to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a). See also, e.g. Fed. R. Civ. P. 11; Fed. R. Bankr. P. 9011; Chambers v. Nasco, Inc., 501 U.S. 32 (1991). In the order under appeal in the Kellogg-Taxe case, the bankruptcy court reviewed the caselaw interpreting § 105(a), which recognized “the inherent power to sanction vexatious conduct presented before the court.” In re Kellogg-Taxe (“K-T II”), No. 2:13-ap-01781, mem. of dec. at 13 (Bankr. C.D. Cal., Dec. 16, 2014), quoting In re Rainbow Magazine, Inc., 77 F.3d 278, 284 (9th Cir. 1996).
To sanction a party or its counsel, a court must find that the conduct in question “constituted or was tantamount to bad faith.” K-T II at 13, quoting Leon v. IDX Sys. Corp., 464 F.3d 951, 961 (9th Cir. 2006). A bankruptcy court’s “inherent sanction authority,” however, differs from federal district courts’ “civil contempt power.” K-T I at 6, citing In re Dyer, 322 F.3d 1178, 1196 (9th Cir. 2003). While civil contempt authority allows a court to impose sanctions for violations of specific orders, inherent sanction authority goes further, “allow[ing] a bankruptcy court to deter and provide compensation for a broad range of improper litigation tactics.” Dyer, 322 F.3d at 1196.