Court Threatens Bankruptcy Pro Se Litigant with Sanctions

Have you ever asked yourself: “How many frivolous appeals does it take before the Seventh Circuit Court of Appeals threatens to sanction a pro se litigant?” The answer is 13.

This week, the Seventh Circuit rejected another appeal from Scott Wallis, who is contesting USA Baby, Inc.’s liquidation, and warned that Wallis would be sanctioned if he continued to waste the courts’ time with frivolous appeals.

USA Baby was formed in 2003 to franchise stores that sell children's products. It wasn't successful by business standards, and creditors forced the company to reorganize under Chapter 11 bankruptcy.

A bankruptcy court-appointed trustee moved to convert the Chapter 11 proceeding to a Chapter 7 bankruptcy, and liquidate the company. Scott Wallis, who was both a 5 percent shareholder and the president of USA Baby at the time the trustee took over the debtor's management, opposed the motion, and asked the bankruptcy court to grant equitable relief to compel the franchisees to pay USA Baby what they owed. The bankruptcy judge rejected Wallis' requests.

In his most recent appeal to the Seventh Circuit, (Wallis has filed eight appeals with the district court and five appeals with the Seventh Circuit), Wallis didn't attach the bankruptcy judge's reasons for denying his claims; instead, he argued that USA Baby's agreements with its largest creditors were subject to arbitration clauses and outside the scope of the bankruptcy court, so the court did not have jurisdiction over them.

We're just as baffled by this argument as the Seventh Circuit Court of Appeals was. The appellate court concluded that arbitration doesn't affect bankruptcy jurisdiction any more than lifting the automatic stay and letting USA Baby sue would, and that, regardless, none of USA Baby's contracts required arbitration.

Judge Richard Posner, who wrote the opinion for the three-judge panel, was equally perplexed by Wallis' repeated citations to Stern v. Marshall throughout the appeal, noting that the principle that "federal bankruptcy judges may not enter final judgments on common law claims that are independent of federal bankruptcy law" had no bearing on the USA Baby case. (Sidebar: This one's not so confusing for us, Judge Posner: it's a Supreme Court bankruptcy case involving Anna Nicole Smith and bankruptcy. Who cares if it's relevant?)

When we think of frivolous appeal sanctions, we think of people like the 9/11 Truther attorneys, who questioned the integrity of the entire Second Circuit bench in the course of the appellate process. That's an incomplete picture, in light of this Seventh Circuit opinion. Whether a licensed attorney or proceeding pro se, anyone can be sanctioned for a frivolous appeal.

Related Resources:

• In Re: USA Baby (FindLaw's CaseLaw)
• Seventh Circuit Threatens Attorney Sanctions for Frivolous Appeal (FindLaw's Seventh Circuit Blog)
• Creditor Loses Bankruptcy Settlement Challenge (FindLaw's Seventh Circuit Blog)