On Sept. 9, in In re Schaefer Salt Recovery Inc ., the 3rd U.S. Circuit Court of Appeals published a precedential opinion on two issues of first impression. The first issue was whether, in light of the Pensiero supervisory rule, sanctions may be imposed under 28 U.S.C. Section 1927 after the entry of final judgment. The second issue was whether a bankruptcy court has the power to impose sanctions under 28 U.S.C. Section 1927, an issue which the circuit courts of appeal have not uniformly decided. As discussed below, the 3rd Circuit answered both questions in the affirmative.

Factual And Procedural Background

On May 4, 2004, Schaefer Salt Recovery Inc., or SSR, was incorporated as a business entity. Eight days later, it filed a “bare-bones” petition under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of New Jersey. SSR’s only assets were mortgages on three properties which were each the subject of pending tax lien foreclosure actions. By virtue of the automatic stay provisions of Section 362 of the Bankruptcy Code, the foreclosure actions were stayed. On June 10, 2004, the foreclosing creditor moved the bankruptcy court to dismiss SSR’s Chapter 11 petition for cause pursuant to sections 1112(b) and 105(a), arguing that the petition was filed in bad faith, i.e., the sole purpose was to hinder, delay and frustrate the foreclosure proceedings. On July 6, 2004, the bankruptcy court granted the foreclosing creditor’s motion and dismissed SSR’s Chapter 11 petition. Following the dismissal, the foreclosure actions were reinstated.

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