Dated: September 17, 2021 □ □□ Dene ( @@ 2 Daniel P. Collins, Bankruptcy Judge 3
4 UNITED STATES BANKRUPTCY COURT 5 DISTRICT OF ARIZONA 6 || In re ) Chapter 7 Proceedings ) 7 ) — Case No.: 2:19-bk-15555-DPC g || BCB CONTRACTING SERVICES, LLC, ) ) ORDER GRANTING MOTION FOR 9 ) SANCTIONS UNDER § 105(a) AND Debtor. ) RULE 9011(c) AGAINST 10 ) ATTORNEY BRIAN K. STANLEY ) i ) (Not for Publication — Electronic 12 ) Docketing ONLY)! 13 Before this Court is the chapter 7 trustee’s, Anthony Mason (“Trustee”), Motion 14 || for Sanctions Pursuant to 11 U.S.C. § 105(a) and Fed. R. Bankr. P. 9011(c)? (“Sanctions 15 || Motion’’) against attorney Brian K. Stanley (“Stanley”), BCB Contracting Services, LLC 16 || (“Debtor”), BCB Excavating Services, LLC (“BCB Excavating”), Philip Holbrook (“Mr. 17 || Holbrook”), and Barbara Holbrook (“Mrs. Holbrook,” together with Mr. Holbrook, the 18 || “Holbrooks’’). Creditor Payam D. Khoshbin (“Khoshbin’”) filed a Joinder in the Trustee’s 19 || Sanctions Motion. Stanley filed a Response? in opposition to the Sanctions Motion on 20 || behalf of himself, the Holbrooks, and BCB Excavating. The Trustee filed a Reply.° 21 Because the Court approved a settlement agreement® between the Trustee, Debtor, 22 ||BCB Excavating, and the Holbrooks, the Trustee no longer seeks sanctions against 23 24 ||! This decision sets forth the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. (“Rule”) 7052. Pursuant to Rule 9014(c), Rule 7052 is applicable to this contested matter. 25 > DE 143. “DE” references a docket entry in the administrative proceeding in chapter 7 case 2:19-bk-15555-DPC. 3DE 148. 4DE 149. 26 |Is DE 157. © DE 260, Settlement Agreement; DE 274, Order Approving Settlement Agreement.
1 Debtor, BCB Excavating, or the Holbrooks. The Sanctions Motion remains outstanding
2 as to Stanley. 3 The Court held an evidentiary hearing on the Sanctions Motion on July 15, 2021 4 (the “Evidentiary Hearing”). On August 6, 2021, the parties filed post-trial briefs.7 The 5 Court then took the matter under advisement. The Court now grants the Motion for 6 Sanctions against Stanley. 7 8 I. BACKGROUND 9 The following facts were stipulated to by the Trustee and Stanley8: 10 1. On or about May 15, 2012, Debtor was organized as a limited liability 11 company in the State of Arizona. 12 2. On or about July 26, 2012, Mrs. Holbrook became a member of Debtor. 13 3. On or about December 22, 2016, Mrs. Holbrook became the sole member 14 of Debtor and no person, other than Mrs. Holbrook, was a member of Debtor thereafter. 15 4. At all material times, the Holbrooks were a married couple. 16 5. Approximately nine months before filing Debtor’s December 11, 2019 17 (“Petition Date”) bankruptcy petition, Mrs. Holbrook resigned her membership interest 18 in Debtor. 19 6. On or about March 27, 2019, Mrs. Holbrook submitted to the Arizona 20 Corporation Commission (“ACC”) an Amendment to Articles of Organization reflecting 21 her removal as a member of Debtor. 22 7. A “General Commercial A. General Engineering” license (license number 23 ROC 281204) was held by Debtor. Mr. Holbrook was the sole qualifying party on that 24 license at all material times. The license was suspended on or about October 10, 2019. 25 1 Mrs. Holbrook applied for renewal of Debtor’s contractor’s license on or around
2 September 29, 2020.9 3 8. On or about June 13, 2018, BCB Excavating was organized as a limited 4 liability company in the State of Arizona. 5 9. A “General Commercial A. General Engineering” license (license number 6 ROC 323621) was first issued to BCB Excavating on or about February 19, 2019. Mr. 7 Holbrook was and is the sole qualifying party on that license. The license remained active 8 as of the date the Evidentiary Hearing. 9 10. In November and December 2019, one of Debtor’s judgment creditors 10 obtained, by garnishment, funds in Debtor’s bank account totaling $252.41. 11 11. As of the Petition Date, Debtor was insolvent and was subject to at least 12 two outstanding unsatisfied judgments totaling $275,866.74. 13 12. Trustee is the duly appointed chapter 7 trustee of Debtor’s bankruptcy 14 estate (“Bankruptcy Estate”). 15 13. Stanley, a single man, is an attorney licensed in the State of Arizona. He 16 represented Debtor in BCB Contracting Services, LLC v. Payam D. Khosbin, CV 2017- 17 014105, which was filed on or about October 23, 2017 in the Arizona Superior Court, 18 Maricopa County (“State Court Action”). 19 14. Mrs. Holbrook signed, as Debtor’s sole member, Debtor’s bankruptcy 20 petition10 (“Petition”), statement of financial affairs11 (“SOFA”), Amended SOFA,12 and 21 Second Amended SOFA13 (collectively, the “Statements”), and the schedules14 22 (“Schedules”). 23
24 9 This was, of course, after the Petition Date. 10 DE 1. 25 11 DE 1. 12 DE 42. 1 15. The Schedules failed to report all equipment owned by the Debtor as of
2 the Petition Date.15 3 16. The following transfers were made prior to the Petition Date by Mrs. 4 Holbrook from the Debtor’s bank account (ending in numbers 6626) to BCB 5 Excavating’s bank accounts (ending in account numbers 0256 and 0155, respectively): 6 A. $29,000 on April 17, 2019; and 7 B. $5,000 on April 17, 2019.16 8 17. The following deposit was made prior to the Petition Date by Mrs. 9 Holbrook to BCB Excavating’s bank account (ending in account 0256): 10 A check of $5,608.12 made payable to Debtor on October 5, 2019.17 11 18. The Statements reported the Debtor had $24,000 in gross revenues in 2019. 12 The Holbrooks’ 2019 federal tax return reflected $480,927.00 in gross receipts or sales 13 for the Debtor for 2019.18 14 19. The Statements reported the Debtor had $0 in gross revenues for 2018. The 15 Holbrooks’ 2018 federal tax return reflected $430,542.00 in gross receipts or sales for 16 the Debtor for 2018. 17 18 II. JURISDICTION 19 This Court has jurisdiction over this bankruptcy proceeding pursuant to 28 U.S.C. 20 §§ 157 and 1334.19 Stanley did not consent to entry of final orders or judgments by this 21 Court.20 Stanley’s non-consent is immaterial because the events upon which sanctions 22 15 Only after the Trustee discovered the unreported equipment were the Schedules amended to reflect this additional 23 equipment owned by Debtor. Compare DE 1, the Schedules, with DEs 43–45, the Amended Schedules. 16 These transfers were not reported in the Schedules or Statements but were eventually reported in the Amended 24 Schedules after they were discovered by the Trustee. 17 This transfer was not reported in the Schedules or Statements but was eventually reported in the Amended 25 Schedules after it were discovered by the Trustee. 18 As an LLC, Debtor’s revenues and expenses were passed through to its sole member, Mrs. Holbrook. 1 are being considered occurred in the course of Stanley’s representation of the Debtor in
2 matters central to the administration of this bankruptcy proceeding. This sanctions 3 contested matter is a “core” proceeding.21 4 5 III. ANALYSIS 6 The Trustee seeks sanctions against Stanley under Rule 9011 and § 105(a) for his 7 bad faith conduct and for the express misrepresentations and material omissions in the 8 Petition, Schedules, and Statements filed by him with the Court. Specifically, the Trustee 9 seeks an award of $15,523.31 for attorney’s fees and costs, as well as $50,000 as a 10 deterrent measure. 11 12 A. Rule 9011 13 1. Authority 14 Bankruptcy courts have the express authority to sanction under Rule 9011 if the 15 court determines Rule 9011(b) has been violated.22 16 17 2. Due Process 18 Procedurally, Rule 9011(c) requires “notice and a reasonable opportunity to 19 respond.” A court proposing to impose sanctions notifies the person charged both of the 20 particular alleged misconduct and of the particular disciplinary authority under which the 21 court is planning to proceed.23 22 The Sanctions Motion broadly cited Rule 9011 and § 105(a) as the disciplinary 23 authority and provided a detailed account of Stanley’s alleged misconduct in connection 24 21 In re Lehtinen, 564 F.3d 1052, 1057 (9th Cir. 2009) (“Although Price argues that the proceeding is non-core, the 25 acts and events upon which his suspension was predicated occurred in the course of his representation of debtor in matters central to the administration of her case. As such, the disciplinary hearing fits well within the ambit of a 1 with the Petition, Schedules, and Statements. The Trustee specifically referenced Rule
2 9011(b)(3) as the provision Stanley violated in connection with his filing of the Schedules 3 and Statements. Although the Trustee focused on the Petition’s improper purpose with 4 under § 105(a), the Court may also consider it under Rule 9011(b)(1). The notice 5 requirements have been satisfied because the Sanctions Motion broadly cited the 6 disciplinary authority as both Rule 9011 and § 105(a) and detailed Stanley’s misconduct 7 with respect to the Petition. Furthermore, Stanley twice responded to the Sanctions 8 Motion.24 The Court held an evidentiary hearing where Stanley testified and presented 9 his defense. Rule 9011(c)’s procedural requirements have been satisfied. 10 11 3. Rule 9011(b)(1) Analysis 12 Rule 9011(b)(1) states: 13 By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written 14 motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, 15 information, and belief, formed after an inquiry reasonable 16 under the circumstances, — (1) it is not being presented for any improper purpose, such 17 as to harass or to cause unnecessary delay or needless increase in the cost of litigation 18 19 In determining whether sanctions are warranted under Rule 9011(b), the Court 20 “must consider both frivolousness and improper purpose on a sliding scale, where the 21 more compelling the showing as to one element, the less decisive need be the showing as 22 to the other.”25 In Silberkraus, the 9th Circuit held the debtor’s bankruptcy petition was 23 not well-ground in law and was frivolous because the bankruptcy could not have 24 benefited the debtor. 26 The Silberkraus court also held the bankruptcy petition was filed 25 1 in bad faith and for an improper purpose because the debtor filed the petition to subject
2 a state court proceeding to an automatic stay and used the bankruptcy to alter the results 3 that could have been achieved by continuing the state court action.27 4 The Trustee asserts that Stanley filed the Petition not for the purpose of 5 appropriately addressing the Debtor’s debts through the bankruptcy process but, rather, 6 it was filed for the improper purpose of unnecessarily delaying the ultimate enforcement 7 of two judgments and avoiding subpoenas entered in the State Court Action.28 8 In the State Court Action, Khoshbin served subpoenas duces tecum upon Mrs. 9 Holbrook, Debtor, and BCB Excavating.29 Stanley filed a Motion to Quash Subpoenas 10 on behalf of Mrs. Holbrook, Debtor, and BCB Excavating which motion was denied by 11 the State Court on December 2, 2019.30 The following day, Stanley emailed Mrs. 12 Holbrook stating: 13 As you might have guessed, I'm asking because the state superior court judge ruled against us on the subpoenas. 14 We could challenge his ruling by means of a special action 15 (cost, $2 to 5K) and if we prevailed there Csontos would have to go back and pursue a more difficult path toward seeking 16 information from you. Alternatively, we could just go ahead 17 with putting BCB Contracting into Ch. 7 bankruptcy ($1,250 to start - and that should be about it unless Csontos/Khoshbin 18 gets involved in the bankruptcy case and succeeds in getting the bankruptcy trustee to try to pursue you for money or 19 property allegedly diverted from BCB Contracting).31 20 21 The next day, on December 4, 2019, Stanley stated in a follow-up email to Mrs. 22 Holbrook: “We should file the bankruptcy by the end of next week to avoid the need to 23 24
25 27 Id. 28 DE 143, pg. 5; DE 157, pg. 4. 1 comply with the subpoenas.”32 Mrs. Holbrook testified at the Evidentiary Hearing that
2 Stanley advised her to file the Debtor’s bankruptcy even though she did not want to.33 3 In Marsch, the 9th Circuit held a bankruptcy petition was filed for an improper 4 purpose because it was filed solely to delay collection of the judgment and to avoid 5 posting an appeal bond.34 The court reasoned the petition had a “flimsy legal basis” and 6 the debtor’s actions were a transparent attempt to use the bankruptcy petition and the 7 resulting stay as an inexpensive substitute for the bond required under state law.35 8 The emails and Mrs. Holbrook’s testimony support this Court’s finding that 9 Stanley filed the Petition in bad faith and for the improper purpose of avoiding subpoenas 10 in the State Court Action, delaying Khoshbin from collecting on his judgment, and acting 11 as a substitute for appealing the State Court’s order denying the Motion to Quash the 12 Subpoenas and posting a bond for the appeal. Moreover, Stanley failed to make a 13 reasonable inquiry as to the information in the Schedules and Statements (outlined in 14 Subsection 5 below). Taken together, these facts support the Court finding Stanley’s 15 filing of the Petition, Schedules, and Statements were frivolous.36 16 17 4. Rule 9011 Safe Harbor 18 Rule 9011(c)(1)(A) states: 19 The motion for sanctions may not be filed with or presented to the court unless, within 21 days after service of the motion 20 (or such other period as the court may prescribe), the challenged paper, claim, defense, contention, allegation, or 21 denial is not withdrawn or appropriately corrected, except 22
23 32 Trial Exhibit 9. 33 DE 321, pg. 92, lines 3–5 and lines 8–11: “Q: Did Mr. Stanley advise you to have BCB Contracting Services file 24 for bankruptcy? A: Yes. … Q: Did you want BCB Contracting Services to file for bankruptcy? A: Before we did it, no, because I was a sole member and I did not want it to affect my credit.” 25 34 Marsch v. Marsch, 36 F.3d at 831. 35 Id. that this limitation shall not apply if the conduct alleged is 1 the filing of a petition in violation of subdivision (b). 2 3 The procedural requirements of Rule 9011(c)(1)(A)’s “safe harbor” are mandatory and 4 noncompliance precludes an award of sanctions.37 The Rule 9011(c)(1)(A) safe harbor 5 rule does not apply to the filing of an initial bankruptcy petition.38 6 The Trustee acknowledges the Sanctions Motion was not served on Stanley prior 7 to filing it with the Court.39 The Trustee argues the Rule 9011(c) safe harbor provision 8 does not apply to conduct in connection with the filing of Debtor’s Petition. While this 9 contention is correct, the Trustee fails to recognize the Sanctions Motion also points to 10 Stanley’s misconduct in connection with the Schedules and Statements, not just the 11 Petition.40 The Trustee did provide Stanley a warning that sanctions would be sought 12 under Rule 9011.41 This warning, however, was given only 9 days before the Sanctions 13 Motion was filed.42 Furthermore, warnings alone do not satisfy the safe harbor 14 requirement.43 15 The purpose of the Rule 9011(c) safe harbor is “[t]o give the offending party the 16 opportunity, within 21 days after service of the motion for sanctions, to withdraw the 17 offending pleading and thereby escape sanctions.”44 When the Sanctions Motion was 18 filed, Mrs. Holbrook was no longer a member of Debtor and Stanley was no longer 19
20 37 Radcliffe v. Rainbow Constr. Co., 254 F.3d 772, 789 (9th Cir. 2001); Barber v. Miller, 146 F.3d 707, 710 (9th Cir. 1998). 21 38 In re Silberkraus, 336 F.3d 864, 868 (9th Cir. 2003). 39 DE 143, fn.9. 40 Even though the Statements and Schedules were filed with the Petition at DE 1, these documents are treated 22 separately for purposes of the safe harbor provision. The safe harbor provision is designed to allow a party to withdraw or correct its actions allegedly in violation of Rule 9011(b). Since a bankruptcy petition cannot be 23 withdrawn and the only available remedy is a court order allowing dismissal, the bankruptcy petition is excepted from the safe harbor provision. FED. R. BANKR. P. 9011 advisory committee’s notes to 1997 amendment. 24 41 DE 142, pg. 2, lines 1–6. 42 DE 142 was filed on August 12, 2020 and the Sanctions Motion was filed on August 21, 2020. 25 43 The 9th Circuit concluded in Barber v. Miller that, although a defendant had given informal warnings to the plaintiffs threatening to seek Rule 9011 sanctions, these warnings did not satisfy the strict safe harbor requirement 1 counsel for Debtor.45 Compliance with the safe harbor provision could be argued as an
2 exercise in futility because neither Stanley nor Mrs. Holbrook had authority to correct 3 the alleged violations. This, however, is inconsistent with 9th Circuit case law. 4 In Barber v. Miller, a defendant sought Rule 11 sanctions against the plaintiff in 5 connection with plaintiff’s complaint but failed to serve the sanctions motion 21 days 6 prior to filing the sanctions motion with the court.46 The district court stated that 7 observance of the safe harbor provision would have been futile because the offending 8 complaint had already been dismissed.47 The 9th Circuit disagreed and reversed the 9 imposition of sanctions and held the safe harbor provision must be strictly enforced.48 10 Similarly, in Rainbow Const. Co., the defendant filed a FRCP 11 motion in 11 response to the plaintiff’s first amended complaint but failed to comply with the safe 12 harbor provision.49 Three months passed between the filing of the FRCP 11 motion and 13 the court’s order imposing sanctions. During that period, the plaintiffs and their attorneys 14 had been given adequate notice and opportunity to withdraw the challenged allegation 15 but failed to do so.50 The district court ruled the safe harbor provision had been satisfied 16 notwithstanding the lack of advance service on the plaintiffs.51 The 9th Circuit, relying 17 on its decision in Barber v. Miller, held the procedural requirements of the safe harbor 18 provision are mandatory and noncompliance precluded an award of sanctions.52 19 20
21 45 DE 81, Motion to Withdraw as Attorney for Debtor; DE 94, Order Granting Motion to Withdraw as Attorney for Debtor (entered on June 3, 2020). 46 Barber v. Miller, 146 F.3d at 710. 22 47 Id. 48 Id. at 710–11. In its decision, the 9th Circuit also addressed the question of “whether the district court's retention 23 of jurisdiction in this case after judgment, for purposes of sanctions motions, could be the equivalent of an election by the court to impose sanctions on its own motion” and concluded that it is not the equivalent. Id. at 711. The safe 24 harbor provision is not applicable to court-initiated sanctions under Rule 9011 and courts must apply a higher standard “akin to contempt” before imposing sua sponte sanctions. Id. See also In re Nakhuda, 544 B.R. 886, 899 25 (B.A.P. 9th Cir. 2016), aff'd, 703 F. App'x 621 (9th Cir. 2017). 49 Radcliffe v. Rainbow Constr. Co., 254 F.3d at 789. 1 Because the Trustee did not serve the Sanctions Motion on Stanley 21 days prior
2 to filing it with the Court, sanctions are precluded with respect to Stanley’s violation of 3 Rule 9011(b)(3) in connection with his filing of the Schedules and Statements. However, 4 because the safe harbor provision does not apply to the Petition filed by Stanley, sanctions 5 may be awarded against Stanley for filing a frivolous Petition in bad faith and for an 6 improper purpose in violation of Rule 9011(b)(1).53 7 8 5. Rule 9011(b)(3) Analysis 9 Rule 9011(b)(3) states: 10 By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written 11 motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, 12 information, and belief, formed after an inquiry reasonable under the circumstances, — 13 (3) the allegations and other factual contentions have 14 evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for 15 further investigation or discovery 16 In addressing sanctions under Rule 9011, the court must measure the attorney’s 17 conduct “objectively against a reasonableness standard, which consists of a competent 18 attorney admitted to practice before the involved court.”54 “[FRCP] 11, for example, 19 imposes an objective standard of reasonable inquiry which does not mandate a finding of 20 bad faith.”55 21 Stanley contends his Rule 9011(b) obligations were satisfied when he asked the 22 Holbrooks if they correctly filled out the Petition, Schedules, and Statements and when 23 they signed the papers under the penalty of perjury. The Trustee’s Post-Trial Brief notes 24 53 Even though the Court considers post-petition filings in finding the Petition was frivolous and filed for an 25 improper purpose, the safe harbor provision is not required because “[c]ourts may infer the purpose of a filing from the consequences of a pleading or motion.” In re Silberkraus, 336 F.3d 864, 868 (9th Cir. 2003) (quoting In re Start 1 a “Declaration Under Penalty of Perjury of Non-Individual Debtors,”56 which states
2 under oath that the schedules filed are true and correct, was never filed and undercuts 3 Stanley’s contention that his inquiry was complete upon a sworn statement of Mrs. 4 Holbrook.57 5 Along with the Petition and Schedules, Stanley signed and filed a Disclosure of 6 Compensation indicating he had agreed to analyze the Debtor’s financial situation and 7 render advice on whether to file a bankruptcy petition.58 By Stanley’s own admission, he 8 did not analyze or review any documentation concerning the Debtor’s financial 9 situation.59 If Stanley had simply examined the Debtor’s or the Holbrooks’ tax returns, 10 bank statements, or UCC filings with the Arizona Secretary of State, he would have 11 discovered misrepresentations in the Schedules and Statements. 12 An attorney may not delegate his duty to validate the truth and legal 13 reasonableness of papers filed with the court.60 The Court in Giebelhaus v. Spindrift 14 Yachts noted: 15 The signing attorney cannot leave it to [another] to satisfy himself that the filed paper is factually and legally 16 responsible; by signing he represents not merely the fact that it is so, but also the fact that he personally applied his own 17 judgment.... [T]he text [of Rule 9011] establishes a duty that 18 cannot be delegated. 19 By Stanley’s own admission, he failed to personally review any facts or documents to 20 verify the information given to him by the Holbrooks. The Court need not list all of the 21 due diligence Stanley needed to conduct to satisfy his Rule 9011 obligation. Suffice to 22 say that it was insufficient for Stanley to rely solely on Debtor’s verified signature and 23 56 United State Courts, Official Form 202: Declaration Under Penalty of Perjury for Non-Individual Debtors (Sept. 24 16, 2021, 4:20 PM), https://www.uscourts.gov/file/18698/download. 57 DE 317, pg. 7, lines 6–9. 25 58 DE 1, pg. 36. 59 Stanley contends that requiring a lawyer to obtain and examine documentation that would tend to prove or 1 an oral comment affirming the veracity of the Debtor’s Schedules and Statements.
2 Stanley failed to satisfy his Rule 9011(b)(1) obligations.61 3 Stanley failed to undertake an objectively reasonable inquiry into the facts 4 supporting the filing of the Petition, Schedules, and Statements, relying instead solely on 5 information the Holbrooks told him.62 6 7 6. Imposition of Sanctions 8 If the court determines Rule 9011(b) has been violated, the court may impose 9 appropriate sanctions upon the attorney that is responsible for the violation.63 Bankruptcy 10 courts have considerable discretion in determining the amount of the sanctions award.64 11 Rule 9011(c)(2) provides that “[a] sanction imposed for violation of this rule shall be 12 limited to what is sufficient to deter repetition of such conduct or comparable conduct by 13 others similarly situated.” Sanctions may consist of a directive of a nonmonetary nature, 14 a penalty paid into court, or, if imposed on motion and warranted for effective deterrence, 15 payment to the movant of all or some of the reasonable attorney’s fees and other expenses 16 incurred as a direct result of the violation.65 A court may not impose a deterrence penalty 17 that is a “serious penalty” in the nature of criminal contempt.66 The Court may only award 18 an amount necessary to deter the misconduct.67 19 The Trustee seeks an award of $15,523.31 for attorney’s fees and costs incurred 20 in this case and in investigating the misrepresentations in the Debtor’s Petition, 21
61 See In re Blue Pine Group, Inc., 457 B.R. 64 (B.A.P. 9th Cir. 2011). 22 62 In re Blue Pine Group, Inc., 457 B.R. 64 (B.A.P. 9th Cir. 2011) (the court found the attorney failed to undertake an objectively reasonable inquiry into the facts and law supporting the bankruptcy petition by instead relying on 23 information others told him. The court further found this conduct fell short of the standard set by Rule 9011). 63 Rule 9011(c). 24 64 In re DeVille, 361 F.3d 539, 553 (9th Cir. 2004) (quoting FED. R. CIV. P. 11 advisory committee’s note to 1993 amendment). FED. R. BANKR. P. 9011 advisory committee notes to the 1997 amendment directs us to Fed. R. Civ. 25 P 11 advisory committee notes to 1993 amendment. 65 Rule 9011(c)(2). 1 Schedules, and Statements. Because these fees and expenses were incurred as a direct
2 result of Stanley’s violation of Rule 9011(b)(1) and are warranted for effective deterrence 3 of future misconduct, sanctions in the amount of $15,523.31 will be imposed against 4 Stanley. 5 The Trustee also seeks an award of $50,000 against Stanley as a deterrent measure. 6 The Court will not, however, impose sanctions in the amount of $50,000 as requested by 7 the Trustee. A sanction of $50,000 is more severe than reasonably necessary to deter 8 repetition of Stanley’s offending conduct.68 Under the circumstances of this case, a 9 sanction of $50,000 would be in the nature of a serious penalty tantamount to criminal 10 contempt because it would be punitive in nature.69 Such a sanction would not be remedial, 11 nor would it compensate the Trustee or this Bankruptcy Estate for damages sustained. 12 This Court is of the opinion (and hope) that the compensatory attorney’s fees awarded 13 herein will itself stand as a sufficient deterrent to prevent Stanley from repeating such 14 misconduct. 15 B. § 105(a) 16 In addition to seeking Rule 9011 sanctions, the Trustee seeks to have Stanley 17 sanctioned under § 105(a). 18 19 1. Authority 20 Federal courts’ have inherent authority to sanction for bad faith conduct.70 This 21
22 68 FED. R. CIV. P. 11 advisory committee’s note to 1993 amendment (“The court has significant discretion in determining what sanctions, if any, should be imposed for a violation, subject to the principle that the sanctions 23 should not be more severe than reasonably necessary to deter repetition of the conduct by the offending person or comparable conduct by similarly situated persons.”). 24 69 “[A] contempt sanction is considered civil if it ‘is remedial, and for the benefit of the complainant. But if it is for criminal contempt the sentence is punitive, to vindicate the authority of the court.’” Int'l Union, United Mine 25 Workers of Am. v. Bagwell, 512 U.S. 821, 827–28, 114 S. Ct. 2552, 2557 (1994) (quoting Gompers v. Bucks Stove & Range Co., 221 U.S. 418, 441, 31 S. Ct. 492, 498 (1911)). A flat, unconditional fine totaling even as little as $50 1 authority includes bankruptcy courts.71 § 105(a) provides a bankruptcy court with broad
2 authority to “exercise its equitable powers - where ‘necessary’ or ‘appropriate’ - to 3 facilitate the implementation of other Bankruptcy Code provisions.”72 This gives 4 bankruptcy courts the “inherent power to sanction abusive litigation practices.”73 5 However, § 105(a) does not “allow the bankruptcy court to override explicit mandates of 6 other sections of the Bankruptcy Code” or to “contravene specific statutory provisions.”74 7 8 2. Due Process 9 Due process considerations require that any party or attorney whose conduct is in 10 question be given notice of the alleged violation and an opportunity to respond or be 11 heard before any sanction is imposed.75 Ordinarily a court proposing to impose sanctions 12 notifies the person charged both of the particular alleged misconduct and of the particular 13 disciplinary authority under which the court is planning to proceed.76 Specifically, when 14 using the inherent power to sanction, due process is accorded as long as the target is 15 “provided with sufficient, advance notice of exactly which conduct was alleged to be 16 sanctionable, and [was] furthermore aware that [he] stood accused of having acted in bad 17 faith.”77 18 Notice was satisfied through the Sanctions Motion and subsequent proceedings on 19 the Sanctions Motion. The Sanctions Motion identified § 105(a) as the specific authority 20 under which sanctions were to be considered, it outlined the misconduct that was thought 21 to be sanctionable, and it accused Stanley as having acted in bad faith. Additionally, 22 Stanley was afforded an opportunity to respond. Stanley twice responded to the 23 71 In re Lehtinen, 564 F.3d 1052, 1058 (9th Cir. 2009). 24 72 Law v. Siegel, 571 U.S. 415, 421, 134 S. Ct. 1188, 1194 (2014). 73 Id. 25 74 Id. See also In re Rainbow Mag., Inc., 77 F.3d 278, 283 (9th Cir. 1996). 75 Chambers v. NASCO, Inc., 501 U.S. 32, 50, 111 S. Ct. 2123, 2136 (1991). See also Non v. Comcast, Inc., 697 F. 1 Sanctions Motion and appeared and testified on his own behalf at the Evidentiary
2 Hearing.78 3 4 3. § 105(a) Analysis 5 A bankruptcy court is allowed to exercise its inherent power under § 105(a) to 6 sanction when a party has acted in bad faith.79 Counsel’s goal to gain an advantage in 7 another case is sufficient to support a finding of bad faith and improper 8 purpose.80 Additionally, sanctions are permissible for an attorney's reckless 9 misstatements of law and fact when coupled with something more, such as an improper 10 purpose.81 A court may sanction a party who has engaged in bad faith behavior over the 11 course of a case.82 12 Stanley acted in bad faith by initiating this chapter 7 proceeding for the improper 13 purpose of gaining a tactical advantage against Khoshbin in the State Court Action and 14 through his reckless misstatements of fact in the Schedules and Statements. 15 4. Imposition of Sanctions 16 § 105(a) does not “allow the bankruptcy court to override explicit mandates of 17 other sections of the Bankruptcy Code” or to “contravene specific statutory provisions.”83 18 Because the Court finds Stanley violated Rule 9011, the Court will not impose additional 19 sanctions under § 105(a) against Stanley for his bad faith conduct. However, if an 20 21
78 DEs 149 and 170. 22 79 Chambers v. NASCO, Inc., 501 U.S. 32, 46, 111 S. Ct. 2123, 2133 (1991); Law v. Siegel, 571 U.S. 415, 421, 134 S. Ct. 1188, 1194 (2014). 23 80 In re Itel Securities Litigation, 791 F.2d 672, 675 (9th Cir. 1986). 81 Fink v. Gomez, 239 F.3d 989, 994 (9th Cir. 2001); In re Keegan Mgmt. Co., Sec. Litig., 78 F.3d 431, 435 (9th Cir. 24 1996). 82 Goodyear Tire & Rubber Co. v. Haeger, 137 S. Ct. 1178, 1184 (2017) (the Supreme Court upheld the Arizona 25 District Court’s finding that Goodyear engaged in a “years-long course” of bad-faith behavior and sanctions were thus appropriate). 1 Appellate Court finds Rule 9011 was not applicable, this Court would find Stanley’s
2 actions to be sanctionable under § 105(a) and would require his payment of $15,523.31. 3 4 IV. CONCLUSION 5 The Court finds Stanley violated Rule 9011(b)(1) and Rule 9011(b)(3) by acting 6 frivolously and filing the Petition for the improper purpose of subjecting the State Court 7 Action to the automatic stay, avoiding compliance with the subpoenas, and delaying the 8 collection by the judgment creditors. However, as to further pleadings filed, the Court 9 finds that while Stanley violated Rule 9011(b)(3), he was not given the full 21-day safe 10 harbor cure period. The Court, therefore, will not sanction Stanley’s conduct under Rule 11 9011(b)(3) for failing to undertake an objectively reasonable inquiry into the facts 12 supporting the Schedules and Statements and instead relying on the information provided 13 by the Holbrooks. Pursuant to Rule 9011(c), sanctions will be imposed against Stanley 14 for his violation of Rule 9011(b)(1). The Court further finds sanctions are appropriate 15 under § 105(a) because Stanley’s conduct throughout this proceeding was done in bad 16 faith. The sanctions under § 105(a) are not for amounts over and above the Rule 9011 17 sanction amounts. An award of the Trustee’s attorneys’ fees and costs in the amount of 18 $15,523.31 is an appropriate deterrent of a repetition of Stanley’s misconduct. 19 20 DATED AND SIGNED ABOVE
22 23 24 25 To be Noticed through the BNC to: 1
2 Keith M. Knowlton Keith M. Knowlton, L.L.C. 3 9920 S. Rural Road, Suite 108 PMB#117 4 Tempe, AZ 85284 Counsel for the Holbrooks and BCB Excavating Services LLC 5
6 Brian K. Stanley Law Office of Brian K. Stanley, PLLC 7 1938 E. Osborn Rd. Phoenix, AZ 85016 8 Office of the United States Trustee 9 230 N. First Ave., Suite 204 10 Phoenix, AZ 85003-1706
11 Ryan W. Anderson Guttilla Murphy Anderson 12 5415 E. High St., Suite 200 13 Phoenix, AZ 85054
14 Anthony H. Mason PO Box 22057 15 Phoenix, AZ 85028-0057
16 David L. Sandweiss 17 State Bar of Arizona 4201 N. 24th St., Ste 100 18 Phoenix, AZ 85016-6266 19 20 21 22 23 24 25