In re: Richard E. Maris and Deborah Harris

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: June 20, 2012
• Docket: NV-11-1628-DKiPa
• Status: Unpublished

Opinion

FILED JUN 20 2012 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 1 2 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. NV-11-1628-DKiPa ) 6 RICHARD E. MARIS and ) Bk. No. 09-12172-MKN DEBORAH HARRIS, ) 7 ) Debtors. ) 8 ________________________________ ) ) 9 BARRY LEVINSON, Esq., ) ) 10 Appellant, ) ) 11 v. ) M E M O R A N D U M1 ) 12 PENGILLY, ROBBINS, SLATER & ) BELL; JAMES F. LISOWSKI, ) 13 Chapter 7 Trustee; UNITED STATES ) TRUSTEE, ) 14 ) Appellees. ) 15 ________________________________ ) 16 Argued and Submitted on June 15, 2012 at Las Vegas, Nevada 17 Filed - June 20, 2012 18 Appeal from the United States Bankruptcy Court 19 for the District of Nevada 20 Honorable Mike K. Nakagawa, Bankruptcy Judge, Presiding 21 Appearances: Appellant, Barry Levinson, Esq., in pro per; Robert T. Robbins, Esq. of Pengilly, Robbins, Slater & 22 Bell, for the Appellee, Pengilly, Robbins, Slater & Bell. 23 24 1 25 This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have 26 (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.

1 1 Before: DUNN, KIRSCHER, and PAPPAS, Bankruptcy Judges. 2 3 After his former employer, Western Pride Construction, LLC 4 (“WPC”), obtained a state court judgment (“Judgment”) in excess of 5 $1,000,000 against him, Richard Maris filed a chapter 72 bankruptcy 6 petition (“Bankruptcy Case”) and stipulated that the Judgment was 7 nondischargeable pursuant to § 523(a)(9). Thereafter, the 8 bankruptcy court approved the chapter 7 trustee’s (“Trustee”) 9 application to employ WPC’s counsel, the law firm of Pengilly 10 Robbins Slater & Bell (“Pengilly”), pursuant to § 327(e), as special 11 counsel to file and prosecute a malpractice claim (“Malpractice 12 Claim”) against Barry Levinson, the attorney who had represented 13 Mr. Maris in the litigation which led to the entry of the Judgment. 14 On Mr. Levinson’s motion, the bankruptcy court vacated the order 15 authorizing the trustee’s employment of Pengilly under § 327(e), 16 with leave to reapply under § 327(c). Because the bankruptcy court 17 denied Mr. Levinson’s additional request that it impose monetary 18 sanctions on Pengilly, Mr. Levinson appealed. 19 We AFFIRM. 20 I. FACTS 21 Until 2005, Mr. Maris owned an electrical contracting 22 business, Regency Electric, Inc. (“Regency”). On March 25, 2005, 23 2 Unless otherwise specified, all chapter and section 24 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 25 all “Rule” references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The Federal Rules of Civil Procedure 26 are referred to as “Civil Rules.”

2 1 Mr. Maris entered into a purchase agreement and employment agreement 2 (“Employment Agreement”) with WPC, pursuant to which WPC purchased 3 Regency from Mr. Maris and hired Mr. Maris as the Vice President of 4 WPC’s electrical division for an initial period of three years. 5 Under the Employment Agreement, Mr. Maris was provided a vehicle 6 (“Vehicle”) for use in performing his services for WPC. The 7 Employment Agreement authorized WPC to terminate Mr. Maris’ 8 employment during the first year of employment without full 9 severance pay for the remaining term “only in the event of a serious 10 moral, ethical, criminal or libelous act.” 11 Mr. Maris’ employment with WPC commenced on April 4, 2005. 12 On July 8, 2005, while driving WPC’s Vehicle, Mr. Maris was involved 13 in an automobile accident (“Collision”) which resulted in the death 14 of Monica Meily, the driver of the vehicle with which he collided. 15 At the time of the Collision, which occurred at 11:40 p.m., 16 Mr. Maris was intoxicated, having just left a bar where he had been 17 drinking. 18 On September 5, 2005, Mr. Maris was charged with Involuntary 19 Manslaughter in connection with Ms. Meily’s death in the Collision. 20 Mr. Maris signed an “Agreement to Appear in Court and to Waive 21 Extradition After Admission to Bail” in the criminal matter on 22 September 10, 2005. Mr. Maris pled guilty to the Involuntary 23 Manslaughter charge on April 11, 2007. 24 When he returned to work at WPC after the Collision, 25 Mr. Maris reported to WPC that he was not at fault for the 26 Collision. At no time did Mr. Maris inform WPC of the true facts of

3 1 the Collision. 2 Following the Collision, Mr. Maris’ job performance declined. 3 In an effort to get pending electrical contracts “back on track,” 4 WPC required Mr. Maris to supervise from the field rather than from 5 his desk. 6 On September 12, 2005, Mr. Maris requested a meeting 7 (“September 12 Meeting”) with Romy Pantea, the Managing Member of 8 WPC, to discuss the Employment Agreement. In the week prior to the 9 request, Mr. Maris had consulted with Mr. Levinson for advice on 10 enforcing the Employment Agreement. At the September 12 Meeting, 11 Mr. Maris told Mr. Pantea he no longer would supervise the pending 12 electrical jobs except from his desk. Because WPC refused to 13 authorize Mr. Maris to perform his supervisory role other than in 14 the field, Mr. Maris resigned. On September 22, 2005, Mr. Maris 15 sued WPC in state court (“State Court Litigation”) for breach of the 16 Employment Agreement. Mr. Levinson represented Mr. Maris in the 17 State Court Litigation. 18 WPC, represented by Pengilly, filed counterclaims against 19 Mr. Maris in the State Court Litigation for implied and equitable 20 indemnity with respect to its potential liability to Ms. Meily’s 21 estate, and for other damages it incurred as a result of the 22 Collision. WPC had been notified on July 26, 2005, that Ms. Meily’s 23 heirs intended to bring legal action against WPC and its principals, 24 based upon their alleged liability with respect to the Collision. 25 WPC settled the threatened litigation in August of 2006, by paying, 26 with funds provided by its insurance carrier, $1 million to

4 1 Ms. Meily’s estate and her heirs. In addition, after the Vehicle 2 was determined to be a total loss and not reparable as a result of 3 the Collision, WPC also paid $25,394.03 to satisfy the secured 4 obligation on the Vehicle. 5 A nonjury trial was held in the State Court Litigation on 6 February 8, 2008, following which the state court, on April 8, 2008, 7 issued its findings of fact and conclusions of law, as part of the 8 Judgment. The state court found that Mr. Maris, not WPC, had 9 breached the Employment Agreement, (1) when he took the Vehicle, 10 “went drinking at a bar,” and thereafter drove the Vehicle and 11 caused the Collision that resulted in Ms. Meily’s death; and 12 (2) when he became incapable of performing his job duties because he 13 entered a state of depression following the Collision. 14 The state court also determined that WPC had an absolute 15 right to indemnity from Mr. Maris as a result of his tortious 16 conduct in relation to the Collision, and entered the Judgment in 17 favor of WPC in the amount of $1,034,738.30, which represented the 18 $1 million WPC paid (through its insurer) to Ms. Meily’s heirs, 19 $25,394.03 to pay off the Vehicle Mr. Maris had wrongfully converted 20 to his own use, and $9,344.27 to reimburse WPC for attorneys fees 21 incurred to the law firm that had defended WPC against the claims of 22 Ms. Meily’s heirs. 23 On behalf of Mr. Maris, Mr. Levinson filed an appeal (“State 24 Court Appeal”) from the Judgment on May 7, 2008. However, after 25 Mr. Maris filed his Bankruptcy Case on February 19, 2009, 26 Mr. Levinson withdrew from his representation of Mr. Maris in the

5 1 State Court Appeal. The State Court Appeal thereafter was 2 dismissed, without prejudice, on May 20, 2009. 3 On May 21, 2009, Pengilly filed a complaint in the Bankruptcy 4 Case (“Adversary Proceeding”) seeking a determination that 5 Mr. Maris' debt to WPC represented by the Judgment was 6 nondischargeable pursuant to § 523(a)(9) and/or § 523(a)(6). The 7 Adversary Proceeding was dismissed February 10, 2010, on the 8 stipulation of WPC and Mr. Maris ("Stipulation"). 9 In the course of negotiating the Stipulation, Mr. Maris 10 became aware for the first time that he held the Malpractice Claim 11 against Mr. Levinson in connection with the Judgment. On 12 December 10, 2009, Mr. Maris filed an amended Schedule B to include 13 the Malpractice Claim, with an unknown value, as an asset of his 14 bankruptcy estate. The Stipulation provided that Mr. Maris' debt to 15 WPC was nondischargeable pursuant to § 523(a)(9), but that WPC 16 agreed to dismiss the Adversary Proceeding with prejudice based upon 17 "a settlement agreement heretofore reached between the parties" 18 ("Settlement Agreement"). 19 The Settlement Agreement was not attached to the Stipulation, 20 nor was it ever filed in the Adversary Proceeding. In fact, the 21 Settlement Agreement never was reduced to writing: 22 [Mr. Maris] agreed that if the [Malpractice Claim] reverted to him, he would pursue it and pay an unspecified 23 portion of any proceeds to [WPC]. [Mr. Maris] also agreed that he would consider employing [Pengilly] to pursue the 24 [Malpractice Claim]. However, this agreement was never memorialized in writing. In the [Stipulation], 25 [Mr. Maris] stipulated that the debt was nondischargeable. The [adversary proceeding] was dismissed with prejudice 26 and no judgment of nondischargeability was entered.

6 1 Pengilly Opposition to the Levinson Motion at 4:4-9. 2 On March 24, 2010, Pengilly filed a motion to compel the 3 Trustee to abandon the Malpractice Claim (“Abandonment Motion”), 4 which the Trustee opposed. The bankruptcy court denied the 5 Abandonment Motion by its order entered on April 12, 2010; however, 6 that order permitted the Trustee to file an application to employ 7 Pengilly to pursue the Malpractice Claim. 8 On behalf of Mr. Maris and the Trustee, Pengilly commenced 9 litigation against Mr. Levinson on the Malpractice Claim on April 7, 10 2010, immediately prior to the expiration of the limitations period, 11 without having obtained the approval of the bankruptcy court for its 12 employment. On September 18, 2010, the Trustee filed, pursuant to 13 § 327(e), his ex parte application to employ (“Employment 14 Application”) Pengilly as special counsel, nunc pro tunc as of 15 April 6, 2010. No disclosure was made in the Employment Application 16 that the litigation on the Malpractice Claim had been commenced. On 17 September 22, 2010, the bankruptcy court authorized the employment 18 of Pengilly as requested (“Employment Order”). Under the fee 19 agreement approved in the Employment Order, any recovery in the 20 litigation on the Malpractice Claim was to be divided: 3% to the 21 Trustee, 33-40% to Pengilly, and the balance to WPC on account of 22 its nondischargeable unsecured claim.3 23 On April 20, 2011, Mr. Levinson filed a motion ("Levinson 24 25 3 WPC’s Judgment represents approximately 89% of the 26 unsecured claims Mr. Maris scheduled in the Bankruptcy Case.

7 1 Motion") to disqualify Pengilly as special counsel on the basis that 2 Pengilly was not eligible for employment pursuant to § 327(e) as 3 provided in the Employment Order, because Pengilly never had 4 represented Mr. Maris as is required by the express terms of 5 § 327(e). In the Levinson Motion, Mr. Levinson also preemptively 6 asserted there was no basis upon which the bankruptcy court could 7 approve the employment of Pengilly as special counsel under either 8 § 327(a) or § 327(c). Finally, the Levinson Motion requested that 9 the bankruptcy court impose monetary sanctions pursuant to Rule 9011 10 against Pengilly and the Trustee based upon their alleged bad faith 11 in connection with the Employment Application, and on the basis that 12 Pengilly had violated several ethical rules, including those 13 relating to honesty and as to conflicts of interest, in connection 14 with the request for entry of the Employment Order. 15 Following extensive briefing by the partes, the Levinson 16 Motion was heard on July 20, 2011. On October 25, 2011, the 17 bankruptcy court entered its order ("October 25 Order") vacating the 18 Employment Order. However, the October 25 Order authorized the 19 Trustee to seek approval of the employment of Pengilly, nunc pro 20 tunc as of April 6, 2010, as special counsel pursuant to § 327(c). 21 Finally, the October 25 Order provided that no sanctions against 22 Pengilly or the Trustee were awarded to Mr. Levinson. In support of 23 its determination to deny a sanctions award to Mr. Levinson, the 24 bankruptcy court stated that “sanctions against Pengilly or the 25 Trustee are not appropriate as the record does not sufficiently 26 establish that their prior efforts to employ Pengilly was [sic] in

8 1 bad faith.” 2 Mr. Levinson timely filed his Notice of Appeal on 3 November 4, 2011. 4 II. JURISDICTION 5 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 6 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158. 7 III. ISSUE 8 Whether the bankruptcy court abused its discretion when it 9 denied Mr. Levinson’s motion for the imposition of monetary 10 sanctions against Pengilly.4 11 IV. STANDARDS OF REVIEW 12 We review the bankruptcy court's refusal to impose sanctions 13 4 In his Opening Brief on Appeal, Mr. Levinson asserted 14 seven issues on appeal. The first six issues relate to the alleged 15 error or abuse of discretion by the bankruptcy court in allowing the Trustee to continue to seek to employ Pengilly, rather than 16 disqualifying Pengilly as ineligible for employment outright. As contemplated by the October 25 Order, the Trustee filed an 17 application for the nunc pro tunc employment of Pengilly pursuant to 18 § 327(c). On January 30, 2012 (“January 30 Order”), the bankruptcy court denied the Trustee’s subsequent application to employ Pengilly 19 and directed the Trustee to hire alternate counsel. Thereafter, on April 3, 2012, our motions panel entered an order which provided 20 that any issue relating to further efforts to employ Pengilly was 21 moot, and limiting the issue on appeal to the denial of Mr. Levinson’s request for sanctions only. 22 In his Reply Brief on Appeal, Mr. Levinson concedes that the only remaining issue on appeal is “Whether the Bankruptcy Court 23 committed an error of law or an abuse of discretion in not awarding sanctions against [Pengilly] for entering into an obviously 24 conflicted and unethical relationship.” It thus appears that 25 Mr. Levinson is not appealing the bankruptcy court’s failure to enter a sanctions award against the Trustee, as requested in the 26 Levinson Motion.

9 1 for an abuse of discretion. See Classic Auto Refinishing v. Marino 2 (In re Marino), 37 F.3d 1354, 1358 (9th Cir. 1994)(reviewing denial 3 of sanctions under Rule 9011). We apply a two-part test to 4 determine whether the bankruptcy court abused its discretion. 5 United States v. Hinkson, 585 F.3d 1247, 1261-62 (9th Cir. 2009) 6 (en banc). First, we consider de novo whether the bankruptcy court 7 applied the correct legal standard to the relief requested. Id. 8 Then, we review the bankruptcy court’s fact findings for clear 9 error. Id. at 1262 & n.20. We must affirm the bankruptcy court’s 10 fact findings unless we conclude that they are “(1) ‘illogical,’ 11 (2) ‘implausible,’ or (3) without ‘support in inferences that may be 12 drawn from the facts in the record.’” Id. at 1262. The bankruptcy 13 court has “broad fact-finding powers with respect to sanctions, and 14 its findings warrant great deference . . . .” Primus Auto. Fin. 15 Serv., Inc. v. Batarse, 115 F.3d 644, 649 (9th Cir. 1997)(quoting 16 Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1366 (9th Cir. 17 1990)(en banc))(internal quotation marks omitted). 18 We review for clear error the bankruptcy court’s fact 19 findings related to the existence of bad faith. Leavitt v. Soto 20 (In re Leavitt), 171 F.3d 1219, 1223 (9th Cir. 1999). 21 V. DISCUSSION 22 In the Levinson Motion, Mr. Levinson requested that the 23 bankruptcy court impose monetary sanctions against Pengilly, either 24 pursuant to Rule 9011 (the Civil Rule 11 analog applicable in 25 bankruptcy contested matters), or pursuant to the bankruptcy court’s 26 equitable powers under § 105(a).

10 1 A. Mr. Levinson is not entitled to an award of sanctions under Rule 9011. 2 3 Rule 9011(b) provides: 4 By presenting to the court (whether by signing, filing, submitting, or later advocating) a . . . pleading, written 5 motion, or other paper, an attorney . . . is certifying that to the best of the person’s knowledge, information, 6 and belief, formed after an inquiry reasonable under the circumstances, -- 7 (1) it is not being presented for any improper purpose, 8 such as to harass or to cause unnecessary delay or needless increase in the cost of litigation; 9 (2) the claims, defenses, and other legal contentions 10 therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of 11 existing law or the establishment of new law; 12 (3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are 13 likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and 14 (4) the denials of factual contentions are warranted on 15 the evidence or, if specifically so identified, are reasonably based on a lack of information or belief. 16 17 On the record before us, we are unable to conclude that the 18 bankruptcy court erred when it did not find a basis to impose 19 sanctions under Rule 9011(b). First, nothing in the record reflects 20 that the Employment Application was presented for an “improper 21 purpose.” The Trustee merely was seeking to hire counsel to 22 prosecute the Malpractice Claim. Second, the bankruptcy court 23 approved the Employment Application in the first instance, arguably 24 precluding a determination that the legal contention presented in 25 the Employment Application, i.e., that Pengilly met the requirements 26 for employment pursuant to § 327(e), was not warranted by existing

11 1 law or by a non-frivolous extension of existing law. The simple 2 reality is that the Trustee, Pengilly, and the bankruptcy court each 3 omitted from their reading of § 327(e) the requirement that the 4 proposed special counsel previously must have represented Mr. Maris. 5 Third, the Declaration of Robert T. Robbins, a Pengilly partner, 6 filed in support of the Employment Application, (1) disclosed 7 Pengilly’s prior representation of WPC both in the State Court 8 Litigation and in the Adversary Proceeding; (2) disclosed that 9 Pengilly “appears on Schedule F as a representative of [WPC] holding 10 a claim totaling $1,037,738.30”; (3) affirmatively acknowledged that 11 Pengilly represented an interest adverse to Mr. Maris in the State 12 Court Litigation; and (4) stated the belief that in the proposed 13 representation, Pengilly did not hold an interest adverse to 14 Mr. Maris or the bankruptcy estate “with respect to the matter on 15 which [Pengilly] is to be employed.” Thus, Pengilly’s connection 16 with WPC was substantially disclosed to the bankruptcy court. 17 The bankruptcy court acknowledged in the October 25 Order 18 that the Employment Order had been entered in error and vacated that 19 order. The bankruptcy court, right or wrong, made a further finding 20 that Pengilly’s concurrent representation of WPC did not appear to 21 create an actual conflict of interest with the bankruptcy estate, 22 and further determined, that “Pengilly’s employment as special 23 counsel to represent the bankruptcy estate for the limited purpose 24 of prosecuting the [Malpractice Claim] likely would be permitted by 25 Section 327(c).” Ultimately, however, after this appeal was filed, 26 the bankruptcy court denied the employment of Pengilly altogether

12 1 and directed the Trustee to find other counsel to prosecute the 2 Malpractice Claim. Under these facts, where the bankruptcy court, 3 once explicitly and once implicitly, determined that it had erred in 4 its interpretation of § 327, we cannot see a basis under 5 Rule 9011(b) to impose sanctions against Pengilly. 6 In addition, in the Rule 9011 context, precise procedures 7 must be followed. Polo Bldg. Grp., Inc. v. Rakita (In re Shubov), 8 253 B.R. 540, 545 (9th Cir. BAP 2000). Specifically and primarily 9 relevant in this appeal, the “safe harbor” provision of 10 Rule 9011(c)(1)(A) required Mr. Levinson to provide Pengilly with an 11 opportunity to withdraw or correct the alleged improper Employment 12 Application before submitting his motion for sanctions to the 13 bankruptcy court. Nothing in the record reflects that Mr. Levinson 14 complied with Rule 9011(c)(1)(A) prior to filing the Levinson 15 Motion. 16 B. Mr. Levinson is not entitled to an award of sanctions under § 105(a). 17 18 The bankruptcy court had the inherent authority, implicitly 19 recognized in § 105(a),5 to impose sanctions for any bad faith 20 21 5 Section 105(a) provides: 22 The court may issue any order, process, or judgment that 23 is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the 24 raising of an issue by a party in interest shall be 25 construed to preclude the court from, sua sponte, taking any action or making any determination necessary or 26 appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.

13 1 conduct engaged in by Pengilly. Caldwell v. Unified Capital Corp. 2 (In re Rainbow Magazine, Inc.), 77 F.3d 278, 284 (9th Cir. 1996). 3 In order to do so, however, the bankruptcy court was required to 4 make an explicit finding that Pengilly had engaged in conduct 5 tantamount to bad faith. Knupfer v. Lindblade (In re Dyer), 6 332 F.3d 1178, 1196 (9th Cir. 2003). Bad faith includes a broad 7 range of willful, improper conduct, but requires something more 8 egregious than mere negligence or recklessness. Fink v. Gomez, 9 239 F.3d 989, 992-94 (9th Cir. 2001). 10 It is clear that the bankruptcy court understood and applied 11 the correct legal standard in ruling on Mr. Levinson’s request that 12 monetary sanctions be imposed against Pengilly. As we noted 13 previously, the bankruptcy court made an express finding that the 14 record did not sufficiently establish that Pengilly’s prior efforts 15 to obtain the Employment Order were in bad faith. Where the 16 bankruptcy court has applied the correct legal standard, we must 17 affirm the bankruptcy court’s finding with respect to the bad faith 18 issue unless we conclude that finding is “(1) ‘illogical,’ 19 (2) ‘implausible,’ or (3) without ‘support in inferences that may be 20 drawn from the facts in the record.’” United States v. Hinkson, 21 585 at 1262. For the reasons set forth above in our discussion of 22 sanctions under Rule 9011(b), we conclude that the bankruptcy court 23 did not clearly err when it found that Pengilly did not act in bad 24 faith in seeking court-authorized employment to prosecute the 25 Malpractice Claim. 26

14 1 VI. CONCLUSION 2 The bankruptcy court did not abuse its discretion when it 3 denied Mr. Levinson’s request that monetary sanctions be awarded 4 against Pengilly. We AFFIRM. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26