FILED 1 NOT FOR PUBLICATION AUG 09 2017 SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. CC-16-1376-KuLTa ) 6 RUBYE E. TAYLOR, ) Bk. No. 2:14-bk-31128-NB ) 7 Debtor. ) Adv. No. 2:15-ap-01183-NB ______________________________) 8 ) RUBYE E. TAYLOR; ANDRE ) 9 DEL MONTE FREEMAN; MATTHEW D. ) RESNIK, ) 10 ) Appellants, ) 11 ) v. ) MEMORANDUM* 12 ) JAMES B. NUTTER & COMPANY; ) 13 JAMES B. NUTTER; FEDERAL ) NATIONAL MORTGAGE ASSOCIATION,) 14 ) Appellees. ) 15 ______________________________) 16 Argued and Submitted on June 22, 2017 at Pasadena, California 17 Filed – August 9, 2017 18 Appeal from the United States Bankruptcy Court 19 for the Central District of California 20 Honorable Neil W. Bason, Bankruptcy Judge, Presiding 21 Appearances: M. Jonathan Hayes of Simon Resnik Hayes LLP argued for appellants; Whitney Heafner of Alston & Bird 22 LLP argued for appellees. 23 Before: KURTZ, LAFFERTY and TAYLOR, Bankruptcy Judges. 24 25 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8024-1. 1 INTRODUCTION 2 This appeal concerns an adversary proceeding challenging the 3 foreclosure of a residence in Los Angeles, California formerly 4 owned by decedent, Lawrence Taylor. The two plaintiffs are 5 chapter 131 debtor Rubye E. Taylor – the decedent’s longtime 6 companion and cohabitant – and Andre Del Monte Freeman – 7 Rubye Taylor’s son. Both claim to have held a pre-foreclosure 8 interest in the residence. Matthew D. Resnik was the attorney 9 for the plaintiffs in the adversary proceeding. 10 A couple of weeks after the defendants filed a motion to 11 dismiss and a request for sanctions, the plaintiffs voluntarily 12 dismissed their adversary proceeding. The bankruptcy court then 13 heard and determined the sanctions request of the defendants, 14 James B. Nutter & Company, James B. Nutter and the Federal 15 National Mortgage Association. The bankruptcy court ultimately 16 awarded, as inherent power sanctions, virtually all of the 17 attorney fees the defendants incurred in preparing and filing a 18 motion to dismiss and in seeking sanctions against the plaintiffs 19 and their counsel. The total fees awarded to the defendants 20 exceeded $150,000. 21 The first instance of alleged litigation misconduct – the 22 plaintiffs’ delay in requesting voluntary dismissal of their 23 adversary proceeding – was not sanctionable under the court’s 24 1 Unless specified otherwise, all chapter and section 25 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 26 all "Rule" references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. All "Civil Rule" references are to 27 the Federal Rules of Civil Procedure, and all “Local Rule” references are to the Local Rules of the United States Bankruptcy 28 Court for the Central District of California.
2 1 inherent power. As a matter of law, plaintiffs’ delay could not 2 be sanctioned under the court’s inherent power when there was no 3 statute, Rule, Civil Rule, Local Rule, ethical rule or court 4 order requiring more expeditious action. 5 Nor did the second instance of alleged litigation misconduct 6 – plaintiffs’ defense against the imposition of sanctions – 7 justify inherent power sanctions. This aspect of the bankruptcy 8 court’s sanctions ruling was based almost entirely on the 9 bankruptcy court’s assessment of the efficacy and quality of the 10 arguments the plaintiffs raised in their sanctions defense. As a 11 matter of law, this was an insufficient ground (by itself) to 12 impose inherent power sanctions. 13 Accordingly, we REVERSE. 14 FACTS 15 Plaintiffs commenced their adversary proceeding in April 16 2015 alleging fraud, forgery and civil conspiracy against Nutter 17 and his company and seeking to invalidate the foreclosure sale 18 and the underlying deed of trust with respect to all defendants. 19 According to the plaintiffs, in January 2015, they 20 investigated the reverse mortgage transaction supposedly entered 21 into by the decedent in September 2007 – at the age of 83 and a 22 few years before his death. Based on this investigation, the 23 plaintiffs allegedly determined that the reverse mortgage 24 transaction “was fraudulent and fraught with forged documents” 25 including the fraudulent misappropriation of the transaction 26 proceeds. Rubye and Freeman further alleged that Nutter and his 27 company diverted the reverse mortgage transaction proceeds to 28 themselves or to some unknown third party with whom they were
3 1 acting in conspiracy. The Federal National Mortgage Association 2 – or Fannie Mae – is identified in the complaint as the successor 3 in interest under the deed of trust.2 4 In May 2015, before defendants responded to the complaint, 5 counsel for the parties met and conferred and agreed that 6 defendants would informally produce for plaintiffs’ review 7 transaction documentation with the expectation that, if the 8 plaintiffs were satisfied that the documentation demonstrated the 9 bona fides of the transaction, plaintiffs would voluntarily 10 dismiss the adversary proceeding. 11 On July 1, 2015, at the offices of their counsel, defendants 12 made available for the plaintiffs’ review a large number of 13 transaction documents. Resnik’s colleague, David Kritzer, 14 attended the document review on behalf of the plaintiffs.3 As 15 the bankruptcy court later noted, the documents presented for 16 review included (among others): 17 (a) pre-loan disclosures and counseling certifications 18 2 19 The complaint mentions in passing that, in 2004, decedent granted a joint tenancy interest in his residence to a 20 Ms. Latanya Hill and that, in 2007, just before the reverse mortgage transaction allegedly was entered into, Hill 21 relinquished her joint tenancy interest, and the decedent once 22 again became the sole holder of legal title to the residence. The complaint does not mention it, but elsewhere in the record, 23 Hill is identified as the decedent’s daughter and “next of kin” and as being aware of or somehow involved in the reverse mortgage 24 transaction. The extent of her awareness and involvement and her potential knowledge of what happened to the transaction proceeds 25 apparently never was ascertained. 26 3 While Resnik presumably was the most senior attorney 27 representing plaintiffs, Resnik identified Kritzer as “lead counsel” for the plaintiffs in correspondence sent to defendants’ 28 counsel.
4 1 and acknowledgment by the Decedent, including that he had been advised to discuss the reverse mortgage with 2 his family members and those upon whom he relied for financial advice; (b) notary certifications of the 3 Decedent’s signatures (including one in the Home); (c) photographs inside the Home; (d) photocopies of the 4 Decedent’s driver’s license and Social Security card; (e) escrow records showing the disbursement to the 5 Decedent in cash; (f) the Decedent’s acknowledgment of receipt of the funds in cash; (g) post-closing 6 correspondence including annual confirmations of the reverse mortgage; and (h) the Decedent’s repeated 7 representations that Ms. Hill was his next of kin. 8 Amd. Findings of Fact and Conclusions of Law (Oct. 13, 2016) at 9 9:14-23. 10 During the month of July 2015, defendants repeatedly 11 inquired by email whether plaintiffs were prepared to dismiss the 12 adversary proceeding. Kritzer variously responded on behalf of 13 plaintiffs that their consideration and investigation was not yet 14 complete, and he was having trouble contacting and getting a 15 decision from his clients. Kritzer also asked follow-up 16 questions regarding ownership of the escrow bank account, 17 identified in the wire instructions, into which the lender 18 apparently funded the transaction proceeds. 19 Also during July 2015, defendants more than once asserted 20 that plaintiffs were prosecuting the action in bad faith as a 21 delaying tactic, that the transaction documentation demonstrated 22 the adversary proceeding was meritless and groundless, and that 23 they would seek sanctions unless plaintiffs immediately agreed to 24 dismiss the matter. 25 On or about August 11, 2015, Kritzer telephoned defendants 26 and informed them that the plaintiffs were not prepared to 27 dismiss the adversary proceeding because they still did not know 28 what happened to the transaction proceeds. In an email dated
5 1 August 11, 2015, defendants confirmed plaintiffs’ unwillingness 2 to dismiss and pointed out that the defendants had no way of 3 knowing what the decedent (or his daughter Hill) might have done 4 with the transaction proceeds after the transaction was funded. 5 On August 14, 2015, the defendants filed their Civil 6 Rule 12(b)(6) motion to dismiss, which included a request for 7 sanctions. The accompanying notice of motion specifies that 8 defendants were seeking to recover roughly $90,000 in attorney 9 fees against both the plaintiffs and their counsel under 10 28 U.S.C. § 1927, Rule 9011(c)(1)(B), Local Rule 7054-1, and the 11 court's inherent power. The notice of motion sums up the grounds 12 for the sanctions request: 13 Plaintiffs and their counsel have needlessly and improperly compounded the costs of this litigation. 14 They have maintained this frivolous lawsuit in bad faith and for nothing other than the improper purposes 15 of harassing Defendants and needlessly increasing the costs of litigation for Defendants. 16 Defendants attempted in good faith to meet and confer 17 with Plaintiffs’ counsel on numerous occasions in the weeks and months leading up to this Motion in a lengthy 18 and exceedingly costly effort to informally resolve this matter and persuade Plaintiffs to dismiss their 19 meritless action, but to no avail. 20 Amd. Notice of Motion and Motion to Dismiss and Request for 21 Sanctions (Aug. 17, 2015). 22 The motion to dismiss was not based on the bona fides of the 23 reverse mortgage transaction. Instead, defendants asserted in 24 the motion that the statute of limitations had run on the 25 plaintiffs’ claims and that the plaintiffs lacked standing. The 26 bankruptcy court never ruled on the merits of these arguments and 27 later concluded in its final ruling that these arguments did not 28 support its sanctions ruling. In fact, the bankruptcy court
6 1 indicated that plaintiffs had stated colorable claims in spite of 2 these arguments. 3 On September 1, 2015, roughly two weeks after the filing of 4 the defendants’ Civil Rule 12(b)(6) motion, plaintiffs filed a 5 request for voluntary dismissal of the adversary proceeding under 6 Civil Rule 41(a), which is made applicable in adversary 7 proceedings by Rule 7041. The request also contained an 8 opposition to the defendants’ sanctions request. According to 9 the plaintiffs, they finally decided on August 31, 2015 – just 10 before their opposition to the motion to dismiss was due – that 11 dismissal of the adversary proceeding was in their best 12 interests. In the weeks leading up to their August 31, 2015 13 decision to dismiss, plaintiffs claim, they and their counsel 14 were plagued with disagreement and indecision regarding whether 15 the adversary proceeding should be dismissed. 16 Based on the plaintiffs’ dismissal request, the bankruptcy 17 court entered an order on September 3, 2015 dismissing the 18 complaint but setting a status conference and preliminary hearing 19 to address defendants’ sanctions request. The bankruptcy court 20 held status conferences in September and November, 2015, at which 21 it opined that, in order to save the parties time and money, the 22 parties should present all of their evidence and legal argument 23 regarding the sanctions issue in written form. The bankruptcy 24 court further opined that the court’s inherent power was the only 25 sanctions authority that might apply to permit the defendants to 26 recover their attorney fees as sanctions. The bankruptcy court 27 also directed the parties to mediate the sanctions dispute. 28 Neither party objected to these procedures or the absence of an
7 1 evidentiary hearing. After the unsuccessful mediation, in 2 November 2015, the bankruptcy court issued a scheduling order 3 setting deadlines for the parties to submit to the court their 4 papers on the sanctions issue. Once again, no one objected to 5 the briefing schedule or the bankruptcy court’s determination of 6 the matter on the papers, and both parties duly submitted their 7 declarations and documentary evidence in support of their 8 respective positions. 9 The defendants included with their papers much of the 10 transaction documentation they had presented to plaintiffs’ 11 counsel Kritzer on July 1, 2015, and reiterated their argument 12 that the plaintiffs knew after Kritzer’s review of the documents 13 that the reverse mortgage transaction was legitimate and that the 14 lender duly had funded the transaction. As defendants put it, 15 plaintiffs then dragged their feet for six more weeks after the 16 document review and ultimately refused to dismiss, thereby 17 forcing defendants to incur the cost of preparing and filing the 18 Civil Rule 12(b)(6) motion. Defendants further complained that 19 plaintiffs lacked a valid basis from the outset for filing their 20 complaint and that the complaint filing as well as many other 21 actions of the plaintiffs and their accomplices were all part of 22 a scheme to delay the plaintiffs’ eviction from the residence and 23 to increase defendants’ litigation costs. 24 In their papers in opposition to the sanctions request, 25 plaintiffs included, among other evidence, the declarations of 26 Resnik and Kritzer, which for the most part told the same story 27 as told by defendants regarding what they learned from the 28 transaction documents and when they learned it.
8 1 Resnik and Kritzer asserted in their declarations, in 2 effect, that their clients’ request for voluntary dismissal on 3 September 1, 2015 was the result of their clients’ sudden 4 realization, on August 31, 2015, that “they no longer had the 5 stomach and resources to finance this proceeding and needed to 6 dedicate their funds to moving expenses and locating a new 7 residence” in light of their pending eviction. 8 After hearing oral argument on the matter on February 2, 9 2016, the bankruptcy court issued in May 2016 what it designated 10 as proposed findings of fact and conclusions of law pursuant to 11 28 U.S.C. § 157(c)(1); the court at the time was uncertain 12 whether the sanctions litigation was a core matter over which it 13 had authority under 28 U.S.C. § 157(a) and (b) to enter a final 14 decision. 15 According to the court, the defendants had not established 16 by clear and convincing evidence, or even by a preponderance of 17 evidence, that plaintiffs or their counsel had engaged in conduct 18 sanctionable under the court’s inherent power when they commenced 19 the adversary proceeding. The court similarly found a lack of 20 evidence of conduct tantamount to bad faith in conjunction with 21 plaintiffs’ opposition to the defendants’ motion to obtain relief 22 from the automatic stay and in conjunction with the parties’ 23 mediation efforts. 24 On the other hand, the bankruptcy court found that, on and 25 after July 28, 2015, plaintiffs and their counsel knew that they 26 had no chance of prevailing in the litigation without a great 27 deal of additional work, including substantial formal discovery, 28 which might or might not have shown anything tending to support
9 1 their claims. The court further found that plaintiffs and their 2 counsel knew from the transaction documents Kritzer reviewed on 3 July 1, 2015, that the reverse mortgage transaction appeared on 4 its face to have been properly documented and duly funded – by 5 the lender wiring into escrow roughly $266,000 in transaction 6 proceeds. 7 In other words, the bankruptcy court in essence found that, 8 by the end of July 2015, the plaintiffs and their counsel knew 9 that it would be all but impossible for them to build a case 10 tying any of the defendants to an alleged scheme to fraudulently 11 divest the decedent of his interest in his residence. Even 12 though the plaintiffs and their counsel claimed that plaintiffs 13 did not realize until one month later – August 31, 2015 – that 14 they lacked the “stomach” and the finances to further pursue 15 their adversary proceeding, the bankruptcy court effectively 16 concluded that they already realized the adversary proceeding was 17 a dead end by no later than July 28, 2015; consequently, the 18 court found the plaintiffs and counsel “made a conscious decision 19 to impose the subsequent costs of a motion to dismiss on the 20 defendants, because they were unwilling to concede they could not 21 prosecute their complaint (regardless whether that was due to 22 lack of funds or lack of merit, or both).” Based on these 23 subsidiary findings, the bankruptcy court ultimately found that, 24 in purposefully imposing unnecessary litigation costs on 25 defendants, plaintiffs and their counsel acted “in bad faith, 26 vexatiously, wantonly or for oppressive reasons.” 27 This by no means ended the sanctions litigation. The 28 bankruptcy court’s proposed findings and conclusions left open
10 1 certain issues regarding what portion of the fees defendants 2 incurred were recoverable as inherent power sanctions. Among 3 other things, the court indicated that it would need more detail 4 regarding the fees incurred in order to arrive at the appropriate 5 amount of fees. In addition, the plaintiffs filed a motion for 6 reconsideration. The lingering issues concerning the appropriate 7 amount of attorney fees to award, the plaintiffs’ reconsideration 8 motion, and the court’s order for another round of mediation led 9 to two more hearings and several more months’ worth of 10 supplemental briefing. 11 In October 2016, the bankruptcy court made minor revisions 12 to its proposed findings and conclusions. The court also 13 determined that it had core bankruptcy jurisdiction over the 14 sanctions dispute, so it redesignated that document as its 15 findings of fact and conclusions of law, and simultaneously 16 entered a final judgment awarding the defendants roughly $150,000 17 in sanctions. The court also issued a separate memorandum 18 decision explaining why it considered the $150,000 the 19 appropriate amount of fees to award to defendants. In that 20 decision, the court adopted the reasoning on fees stated in its 21 tentative ruling for the August 2, 2016 sanctions hearing and 22 also adopted as persuasive most of defendants’ arguments 23 explaining why they should be entitled to recover virtually all 24 of their fees incurred prosecuting their sanctions request. 25 Roughly $78,000 of the sanctions amount was awarded against 26 plaintiffs and Resnik for fees incurred between July 28, 2015 and 27 May 3, 2016. Another $75,000 (roughly) was awarded only against 28 Resnik for fees incurred between May 3, 2016 and the conclusion
11 1 of the sanctions litigation.4 2 The court’s thinking regarding the appropriate sanctions 3 amount evolved quite a bit over the course of the sanctions 4 litigation. Initially, the court suggested that fees likely 5 would be awarded only in a relatively small amount – perhaps 6 limited to the amount incurred in preparing the Civil 7 Rule 12(b)(6) motion. The court subsequently opined that 8 defendants could not recover fees incurred in prosecuting their 9 sanctions litigation against plaintiffs, citing Orange Blossom 10 Ltd. P'Ship v. Southern California Sunbelt Devs., Inc. 11 (In re Southern California Sunbelt Devs., Inc.), 608 F.3d 456 12 (9th Cir. 2010). Ultimately, however, the court concluded that 13 roughly $150,000 in fees – virtually all of the fees the 14 defendants had requested – “flowed” from the plaintiffs’ and 15 (Resnik’s) bad faith conduct. According to the court, this 16 conduct included not only the plaintiffs’ initial refusal (after 17 July 28, 2015) to dismiss the adversary proceeding, but also the 18 entirety of the plaintiffs’ litigation of the sanctions issue: 19 Suffice it to say that the Resnik firm’s litigation regarding fees was itself brought “in bad faith, 20 vexatiously, wantonly, or for oppressive reasons” (see adv. dkt. 107, Ex. A: tentative ruling, adopted as the 21 actual ruling) and therefore the defendants are entitled to an award of their reasonable fees and 22 expenses in litigating over fees. 23 Mem. Dec. (Oct. 13, 2016) at 2:20-23. 24 25 4 In sanctioning Resnik specifically (and not any of the 26 plaintiffs’ other attorneys), the bankruptcy court relied on Resnik’s concession made during the February 2, 2016 fees hearing 27 that he – and he alone – was responsible for any misconduct by counsel for plaintiffs. Neither the plaintiffs nor Resnik have 28 challenged on appeal this aspect of the court’s ruling.
12 1 In turn, in its August 2, 2016 tentative ruling, on which 2 its October 13, 2016 fee memorandum decision was based, the 3 bankruptcy court specifically found that all papers filed and 4 arguments made by Resnik and his firm after May 3, 2016, were 5 made for the improper purpose of forcing defendants to incur 6 additional unnecessary litigation costs. But there is nothing in 7 the court’s ruling specifically finding that any of plaintiffs’ 8 litigation activity prior to May 3, 2016 was undertaken for the 9 improper purpose of increasing the defendants’ litigation 10 expenses.5 11 The plaintiffs and Resnik timely appealed the bankruptcy 12 court’s sanctions judgment on October 26, 2016. 13 JURISDICTION 14 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 15 §§ 1334 and 157, and we have jurisdiction under 28 U.S.C. § 158.6 16 ISSUE 17 Did the bankruptcy court err when it sanctioned the 18 plaintiffs and Resnik under its inherent power? 19 20 5 Nor did the bankruptcy court’s comments at the August 2, 2016 hearing add any clarity to this issue. Among other things, 21 the bankruptcy court stated that some – but not all – of the 22 plaintiffs’ sanctions defense arguments were themselves sanctionable. 23 6 Neither party has challenged the bankruptcy court’s 24 determination that it had authority under 28 U.S.C. § 157(a) and (b) to enter a final inherent power sanctions judgment based on 25 conduct that took place in the bankruptcy court before dismissal 26 of the plaintiffs’ adversary proceeding, and afterwards, during the pendency of defendants’ post-dismissal sanctions request. 27 Additionally, both parties effectively have consented to the bankruptcy court’s exercise of this authority. See Wellness 28 Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1948–49 (2015).
13 1 STANDARDS OF REVIEW 2 The bankruptcy court’s sanctions award generally is reviewed 3 for an abuse of discretion. See B.K.B. v. Maui Police Dep't, 4 276 F.3d 1091, 1106 (9th Cir. 2002) (citing Chambers v. NASCO, 5 Inc., 501 U.S. 32, 55, (1991)). However, the bankruptcy court's 6 predicate findings are reviewed under the clearly erroneous 7 standard. Id. 8 The bankruptcy court abuses its discretion if it applies an 9 incorrect legal standard or its factual findings are clearly 10 erroneous. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 11 820, 832 (9th Cir. 2011) (citing United States v. Hinkson, 12 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)). 13 DISCUSSION 14 A. Inherent Power Sanctions – Generally 15 Federal courts, including bankruptcy courts, have inherent 16 power to impose sanctions for a broad range of willful or 17 improper litigation conduct. Knupfer v. Lindblade (In re Dyer), 18 332 F.3d 1178, 1196 (9th Cir. 2003); Fink v. Gomez, 239 F.3d 989, 19 992–94 (9th Cir. 2001). Before imposing such sanctions, however, 20 the court must explicitly find bad faith or conduct tantamount to 21 bad faith. Fink, 239 F.3d at 993; Primus Auto. Fin. Servs. v. 22 Batarse, 115 F.3d 644, 650 (9th Cir. 1997). Something more than 23 mere negligence or recklessness is required. Rodriguez v. U.S., 24 542 F.3d 704, 709 (9th Cir. 2008) (citing Fink, 239 F.3d at 993- 25 94). A finding that the litigant engaged in litigation for an 26 improper purpose will suffice, even if the litigant advanced 27 claims or objections that were colorable on their face. See id.; 28 Fink, 239 F.3d at 992 (quoting In re Itel Sec. Litig., 791 F.2d
14 1 672, 675 (9th Cir. 1986)). For instance, when the litigant 2 pursues litigation to harass the adverse party, or to increase 3 its costs or to delay the resolution of other litigation, such 4 motivations have been held to be improper for purposes of 5 imposing inherent power sanctions. See Fink, 239 F.3d at 994; 6 Primus Auto. Fin. Servs., 115 F.3d at 649. 7 One form of sanction the court may impose under its inherent 8 power is an award of the opposing party’s legal fees. 9 Goodyear Tire & Rubber Co. v. Haeger, 137 S. Ct. 1178, 1186 10 (2017); Chambers, 501 U.S. at 45. These awards are a well- 11 recognized exception to the “American rule” which generally 12 requires each litigant to bear its own legal fees. Chambers, 13 501 U.S. at 45; Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 14 421 U.S. 240, 258-59 (1975). Exceptions to the American rule are 15 narrowly defined in order to ensure, among other things, that the 16 exceptions do not swallow the entire rule. See Chambers, 17 501 U.S. at 45. Moreover, inherent power attorney fees awards 18 should be imposed with caution and restraint because of the broad 19 range of conduct potentially covered and because of the “potency” 20 of the court’s inherent power. See Snowden v. Check Into Cash of 21 Wash. Inc. (In re Snowden), 769 F.3d 651, 660 (9th Cir. 2014) 22 (citing Chambers, 501 U.S. at 44); see also Chambers, 501 U.S. at 23 50 (“A court must, of course, exercise caution in invoking its 24 inherent power”). 25 B. Appellants’ Delay Is Not Sanctionable Under Bankruptcy 26 Court’s Inherent Power 27 Among other things, plaintiff and Resnik argue on appeal 28 that bad faith litigation conduct sanctionable under the
15 1 bankruptcy court’s inherent power requires some “act” – something 2 more than passive inactivity – to qualify as bad faith litigation 3 conduct. As the plaintiffs and Resnik bluntly put it, the 4 bankruptcy court assailed them for “doing nothing” when they were 5 faced with the defendants’ demands that they dismiss their 6 complaint. In other words, the plaintiffs and Resnik maintain 7 that their short-term delay of several weeks in requesting a 8 voluntary dismissal of their adversary proceeding could not have 9 constituted bad faith – or conduct tantamount to bad faith – when 10 there was no statute, Rule, Civil Rule, Local Rule or ethical 11 rule specifically requiring them to act sooner. 12 We consider this argument persuasive. Typically, litigation 13 conduct sanctioned under the court’s inherent power includes 14 either affirmative actions or a combination of action and 15 inaction (delay) as part of an ongoing scheme of improper 16 litigation conduct. See, e.g., Chambers, 501 U.S. at 50-51 17 (litigant’s entire course of conduct throughout the lawsuit); 18 Leon v. IDX Sys. Corp., 464 F.3d 951, 959 (9th Cir. 2006) 19 (litigant's intentional and knowing spoliation of evidence); Maui 20 Police Dep't, 276 F.3d at 1106 (litigant’s reckless and knowing 21 violation of Fed. R. Evid. 412); In re Itel Sec. Litig., 791 F.2d 22 672, 675-76 (9th Cir. 1986) (litigant’s filing of objections to 23 settlement proposal to extract fee concessions in other 24 litigation). Sometimes, a failure or refusal to act, by itself, 25 can be sanctionable under the court’s inherent power, but the 26 only examples we found involved the litigants’ failure to act in 27 the face of a specific affirmative duty to act. See, e.g., 28 Haeger v. Goodyear Tire & Rubber Co., 813 F.3d 1233, 1245 (9th
16 1 Cir. 2016), rev'd on other grounds, 137 S. Ct. 1178 (2017) 2 (inherent power sanctions imposed based on litigants’ failure to 3 produce relevant documents despite their affirmative duty to do 4 so under Civil Rules 26 and 34); Gomez v. Vernon, 255 F.3d 1118, 5 1134 (9th Cir. 2001) (inherent power sanctions imposed based on 6 counsel’s failure to remedy knowing violation of opposing party’s 7 attorney-client privilege). 8 Here, the bankruptcy court sanctioned the plaintiffs and 9 Resnik solely based on their delay in dismissing the adversary 10 proceeding. The bankruptcy court explicitly found that they 11 delayed for the improper of purpose of increasing the defendants’ 12 litigation costs and in the hopes of hindering the defendants’ 13 efforts to complete their post-foreclosure eviction of Rubye and 14 Freeman. Importantly, the delay was the only contemporaneous 15 litigation conduct the bankruptcy court cited in support of its 16 initial inherent power sanctions ruling. 17 We hold that an isolated incident of delay in taking action 18 should not lead to inherent power sanctions, particularly when 19 there is no statute, Rule, Civil Rule, Local Rule, ethical rule 20 or court order requiring more expeditious action. Absent an 21 affirmative duty to act quicker, the expectations on future 22 litigants would be too unclear to reasonably enforce – when they 23 can afford to bide their time before acting and when they are 24 obliged to act immediately. The imposition, here, of inherent 25 power sanctions was inconsistent with the principle, stated 26 above, that inherent power sanctions only should be imposed with 27 caution and restraint. In re Snowden, 769 F.3d at 660; Chambers, 28 501 U.S. at 50.
17 1 Referring to similar concerns, the Ninth Circuit Court of 2 Appeals has held that a trial court should not have imposed 3 inherent power sanctions against an attorney for an isolated 4 failure to appear when “there is nothing in the local rules or 5 norms of professional conduct ‘which would have placed [the 6 attorney] on reasonable notice’ that his [failure to appear] was 7 not in conformance with the court’s requirements.” Mendez v. 8 Cty. of San Bernardino, 540 F.3d 1109, 1132 (9th Cir. 2008), 9 partially overruled on other grounds by Arizona v. ASARCO LLC, 10 773 F.3d 1050 (9th Cir. 2014) (quoting In re Richardson, 793 F.2d 11 37, 40 (1st Cir. 1986)). 12 Even more so than the Ninth Circuit, the First Circuit Court 13 of Appeals has been particularly active in this area, repeatedly 14 reversing inherent power sanctions awards based on isolated 15 incidents of inaction or delay when there was no affirmative duty 16 to act (or act more quickly) imposed by Rule, Civil Rule, Local 17 Rule, ethical rule or court order. See, e.g., United States v. 18 Agosto-Vega, 731 F.3d 62, 65 (1st Cir. 2013) (reversing inherent 19 power sanctions imposed for the filing of last-minute motions in 20 limine); Boettcher v. Hartford Ins. Grp., 927 F.2d 23, 26 (1st 21 Cir. 1991) (reversing inherent power sanctions imposed against a 22 litigant and her attorney for last-minute settlement on day of 23 trial after jury already had been empaneled); In re Richardson, 24 793 F.2d at 40-41 (reversing sanctions award because the trial 25 court sanctioned attorneys for violating an unwritten rule 26 requiring their appearance at a class certification hearing). 27 The Ninth Circuit in Mendez explicitly relied upon and 28 approved of In re Richardson. In light of this reliance and
18 1 approval, we have no reason to doubt that the Ninth Circuit also 2 would find persuasive Agosto-Vega and Boettcher. 3 Restricting the bankruptcy court’s use of inherent power 4 sanctions in this manner would not have left defendants without 5 any recourse. Defendants clearly believed that Resnik and the 6 plaintiffs violated Rule 9011 by, among other things, not doing 7 adequate investigation before commencing their adversary 8 proceeding and that, once Resnik and the plaintiffs had received 9 evidence of the bona fides of the reverse mortgage transaction, 10 they should have immediately dismissed the adversary proceeding. 11 Even so, defendants chose not to initiate sanctions proceedings 12 under Rule 9011(c)(1)(A) or to trigger that Rule’s safe harbor 13 provisions, which likely would have forced the plaintiffs and 14 Resnik to withdraw their complaint within the 21-day safe harbor 15 period provided for in the rule. Instead, the only part of 16 Rule 9011 the defendants invoked was Rule 9011(c)(1)(B) – which 17 permits the court to impose sanctions sua sponte and does not 18 involve any sort of safe harbor period. See Shalaby v. Mansdorf 19 (In re Nakhuda), 544 B.R. 886, 899 (9th Cir. BAP 2016). The 20 bankruptcy court correctly determined that the monetary sanctions 21 defendants were seeking could not be recovered under 22 Rule 9011(c)(1)(B). See Miller v. Cardinale (In re Deville), 23 280 B.R. 483, 493-94 (9th Cir. BAP 2002), aff’d, 361 F.3d 539 24 (9th Cir. 2003). As a result, the defendants effectively boxed 25 themselves into a position where they needed to persuade the 26 bankruptcy court to fit the square peg of Resnik’s and the 27 plaintiffs’ delay into the round hole of inherent power 28 sanctions. While the defendants were successful in so persuading
19 1 the bankruptcy court, we are convinced that the above-referenced 2 limitations on inherent power sanctions render them unsuitable to 3 address the challenged litigation conduct at issue herein. 4 Therefore, we conclude that the bankruptcy court committed 5 reversible error when it imposed inherent power sanctions against 6 the plaintiffs and Resnik for not earlier filing their request 7 for voluntary dismissal of their adversary proceeding. 8 C. Appellants’ Sanctions Defense Is Not Sanctionable Under 9 Bankruptcy Court's Inherent Power 10 The bankruptcy court ruled that the entirety of Resnik’s 11 sanctions defense was independently sanctionable under the 12 bankruptcy court’s inherent power. The court found that all of 13 his efforts undertaken on and after May 3, 2016, were part of an 14 improper scheme to force defendants to incur additional 15 unnecessary attorney fees. The court did not make a similar 16 express finding for the period before May 3, 2016, but such a 17 finding is implicit in the court’s ultimate determination that 18 the entirety of the plaintiffs’ litigation of the sanctions issue 19 “was itself brought in bad faith, vexatiously, wantonly, or for 20 oppressive reasons.” Memorandum Decision Awarding Additional 21 Attorney Fees (October 13, 2016) at 2:20-21 (citations and 22 internal quotation marks omitted). 23 There are a number of considerations that undermine the 24 bankruptcy court’s conclusion that Resnik’s sanctions defense was 25 sanctionable under the bankruptcy court’s inherent power. As a 26 threshold matter, we are troubled that a sanctions defense 27 necessitated by the bankruptcy court’s legally erroneous use of 28 its inherent power ultimately lead to a large attorney fee award
20 1 against the adverse party. While the arguments Resnik focused on 2 in his sanctions defense are not the ones leading us to reverse, 3 his underlying position – that his and his client’s conduct did 4 not justify inherent power sanctions – was meritorious, as 5 explained above. 6 In addition, Resnik’s filings before May 3, 2016, were duly 7 filed in December 2015 in accordance with the briefing schedule 8 the bankruptcy court set, so that plaintiffs and Resnik would 9 have an opportunity to tell their side of the story and explain 10 their litigation conduct to the best of their ability, by way of 11 declarations and exhibits. These filings primarily focused on 12 why, in plaintiffs’ view, plaintiffs’ and Resnik’s conduct was 13 not sanctionable as a factual matter. They also challenged as 14 unreasonable the defendants’ request to recover $140,000 in 15 attorney fees. Under these circumstances, we do not understand 16 how the bankruptcy court could have determined that Resnik filed 17 all of these papers solely for the purpose of increasing 18 defendants’ litigation expenses. 19 Similarly, many of the papers Resnik filed after May 3, 2016 20 were filed in accordance with and pursuant to the bankruptcy 21 court’s specific questions, concerns and directives regarding 22 litigation of the sanctions issue. With the exception of 23 Resnik’s reconsideration motion papers, the bankruptcy court 24 encouraged and/or ordered these filings – as well as a second 25 round of mediation. 26 To permit blanket inherent power sanctions for the entirety 27 of a sanctions defense on a procedural history like this would 28 unduly interfere with (or chill) the litigants’ right to respond
21 1 to allegations of sanctionable conduct. See generally Cole v. 2 U.S. Dist. Court, 366 F.3d 813, 821 (9th Cir. 2004) (explaining 3 importance of litigants’ due process rights to notice and an 4 opportunity to be heard before sanctions can be imposed). 5 The bankruptcy court arguably was justified in its 6 assessment of the efficacy and quality of Resnik’s sanctions 7 litigation defense. As the bankruptcy court noted, Resnik’s 8 efforts in response to the court’s questions, concerns and 9 directives were lacking in a number of respects. Nonetheless, 10 there is a critical disconnect between the litigants’ lackluster 11 litigation efforts and the bankruptcy court’s conclusion that the 12 filings the court directed Resnik to file were filed for an 13 improper purpose. Something more than poor quality, invective 14 and repetitive arguments is required before inherent power 15 sanctions can or should be awarded. See Rodriguez, 542 F.3d at 16 709 (citing Fink, 239 F.3d at 993-94). A higher standard is 17 essential to ensure that inherent power sanctions are imposed 18 only with caution and restraint. See Chambers, 501 U.S. at 50; 19 In re Snowden, 769 F.3d at 660. 20 To hold otherwise would not give enough weight to the dire 21 consequences significant inherent power sanctions potentially can 22 have on litigants and their counsel. As the Ninth Circuit has 23 explained, “‘[s]anctions not only may have a severe effect on the 24 individual attorney sanctioned,’ potentially damaging the 25 attorney’s career, reputation and livelihood, but they ‘also may 26 deter future parties from pursuing colorable claims.’” Mendez, 27 540 F.3d at 1133 (quoting Primus Auto. Fin. Servs., 115 F.3d at 28 650).
22 1 At bottom, the bankruptcy court’s determination that 2 Resnik’s sanctions defense was sanctionable largely hinged on 3 Resnik’s repetition of his Rule 9011 arguments – repetition which 4 occurred after the court, multiple times, told Resnik that 5 Rule 9011 sanctions were not being considered. We understand 6 that the bankruptcy court was very frustrated with Resnik based 7 on his repeated attempts to present the same arguments for 8 consideration. Yet there was nothing so egregious about them (or 9 their repetition) that justified the court’s imposition of 10 inherent power sanctions. 11 Indeed, Resnik has contended that, by analogy, the standards 12 applied to Rule 9011 sanctions issues should be applied to the 13 court’s imposition of inherent power sanctions. While we 14 disagree with Resnik’s contention, there is nothing that far- 15 fetched, or frivoulous, in making it under the facts of this 16 case. The contention is particularly apropos when, as here, the 17 defendants persuaded the bankruptcy court to sanction litigation 18 conduct under its inherent authority that more naturally fits the 19 rubric for Rule 9011 sanctions. We are not saying that 20 defendants were obliged to exhaust their Rule 9011 remedies first 21 before seeking inherent power sanctions;7 we are saying that 22 their failure to avail themselves of Rule 9011 sanctions led the 23 bankruptcy court to make a legally erroneous decision regarding 24 the scope of inherent power sanctions and the applicability of 25 7 26 See In re DeVille, 361 F.3d at 545 (“The Chambers Court was at pains to point out that the fact that certain statutes and 27 rules of procedure authorize the imposition of sanctions does not foreclose a court's invocation of its inherent sanctioning 28 authority when that appears to be the better instrument”).
23 1 its inherent power to address the alleged litigation misconduct 2 of the plaintiffs and Resnik. 3 In sum, the first instance of so-called litigation 4 misconduct – the delay in requesting voluntary dismissal of the 5 adversary proceeding – was not as a matter of law sanctionable 6 under the bankruptcy court’s inherent power. And the second 7 instance of alleged litigation misconduct – Resnik’s entire 8 sanctions defense – did not justify inherent power sanctions 9 either. Accordingly, we will REVERSE the bankruptcy court’s 10 sanctions judgment. 11 CONCLUSION 12 For the reasons set forth above, the bankruptcy court’s 13 judgment awarding inherent power attorney fee sanctions to the 14 defendants is REVERSED. 15 16 17 18 19 20 21 22 23 24 25 26 27 28