FILED MAY 22 2013 1 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. EC-12-1471-JuMkD ) BAP No. EC-12-1485-JuMkD 6 WEST COAST REAL ESTATE & ) BAP No. EC-12-1493-JuMkD MORTGAGE INC., ) BAP No. EC-12-1498-JuMkD 7 ) (cross appeals) Debtor. ) 8 ______________________________) Bk. No. 12-30686 DON SMITH; HOWARD BROWN, III; ) 9 WEST COAST REAL ESTATE & ) MORTGAGE INC., ) 10 ) Appellants/Cross-Appellees,) 11 ) v. ) M E M O R A N D U M* 12 ) SA CHALLENGER, INC., ) 13 ) Appellee/Cross-Appellant, ) 14 ) DOUGLAS M. WHATLEY, Trustee; ) 15 UNITED STATES TRUSTEE, ) ) 16 Appellees. ) ______________________________) 17 Argued and Submitted on March 22, 2013 18 at Sacramento, California 19 Filed - May 22, 2013 20 Appeal from the United States Bankruptcy Court for the Eastern District of California 21 Honorable Robert S. Bardwil, Bankruptcy Judge, Presiding 22 _______________________ 23 Appearances: Garland O’Bryan Bell, Jr., Esq. argued for Appellants Don Smith, Howard Brown, III, and West 24 Coast Real Estate & Mortgage Inc.; Joshua D. Wayser, Esq. of Katten Muchin Rosenman LLP, 25 argued for Appellee SA Challenger, Inc. _________________________ 26 27 * This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may 28 have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.
-1- 1 Before: JURY, MARKELL and DUNN, Bankruptcy Judges. 2 3 These appeals and cross-appeals arise from two sanctions 4 orders in favor of Appellee, SA Challenger, Inc. (SACI), and 5 against Appellants, Don Smith (Smith), Howard Brown, III (Brown) 6 and chapter 111 debtor, West Coast Real Estate & Mortgage Inc. 7 (West Coast)(collectively, Appellants), in the amount of $20,000 8 to be paid jointly and severally. 9 Appellants argue that the bankruptcy court abused its 10 discretion in awarding the sanctions under § 105 because the 11 $20,000 award was punitive in nature and the amount arbitrary 12 and lacking evidentiary support. SACI cross-appeals,2 also 13 arguing that the bankruptcy court abused its discretion in 14 determining the amount of the sanctions. According to SACI, the 15 record supports an award of $134,885.82, which includes 16 $33,459.82 in attorneys’ fees and $101,436.00 in missing rents 17 that were unaccounted for and constituted SACI’s cash 18 collateral. 19 We agree with Appellants that the sanctions award appears 20 arbitrary because the bankruptcy court did not explain how it 21 arrived at the $20,000 amount which it based on SACI’s 22 23 1 Unless otherwise indicated, all chapter and section 24 references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. “Rule” references are to the Federal Rules of Bankruptcy 25 Procedure and “Civil Rule” references are to the Federal Rules of 26 Civil Procedure. 2 27 Appellees, Douglas M. Whatley, the chapter 7 trustee for West Coast, and the United States Trustee (UST) have not 28 participated in these matters.
-2- 1 reasonable attorneys’ fees. As a result, we are unable to 2 determine how the court exercised its discretion and thus cannot 3 conduct a meaningful review of the award. We therefore VACATE 4 the sanctions orders and REMAND to the bankruptcy court so that 5 it can make additional findings and explain its conclusions 6 regarding the amount of the award. We do not express any 7 opinion whether the amount of the sanctions previously awarded 8 based on SACI’s attorneys’ fees should or should not be changed. 9 Because of our remand, we conclude that SACI’s cross- 10 appeals challenging the amount of the sanctions awarded based on 11 its attorneys’ fees are moot. However, on the issue of 12 sanctions based on the missing rents, we AFFIRM the bankruptcy 13 court’s decision for the reasons discussed below. 14 I. FACTS AND PROCEDURAL BACKGROUND 15 The facts leading up to the entry of the sanctions orders 16 are a textbook example of bad faith. Appellants’ conduct that 17 gave rise to the sanctions involved the transfer of real 18 property owned by chapter 11 debtor, Sundance Eldorado Self- 19 Storage LP (Sundance). Sundance, through Brown, transferred the 20 property by grant deed to West Coast after U.S. Bank (Bank) 21 obtained relief from the automatic stay in Sundance’s bankruptcy 22 and on the eve of the Bank’s foreclosure. The transfer of the 23 property was immediately followed by West Coast’s filing of a 24 chapter 11 petition, signed by Smith, the 100% owner of West 25 Coast and its president. Needless to say, West Coast’s 26 bankruptcy filing halted the Bank’s efforts to foreclose on the 27 property due to the imposition of the automatic stay. The facts 28 relating to the transfer of the real property are not disputed
-3- 1 on appeal3 and are as follows. 2 Sundance was a self storage business located in Eldorado 3 Hills, California. On January 12, 2007, Pacific National Bank 4 (PNB) loaned $5.95 million (Loan) to Sundance. The Loan was 5 secured by a deed of trust, assignment of rents, security 6 agreement, and fixture filing recorded against Sundance’s real 7 property. At Sundance’s request, PNB modified the Loan three 8 times over two years. After the last modification, the Federal 9 Deposit Insurance Corporation placed PNB into receivership and 10 the assets of PNB, including the Loan, were sold to the Bank. 11 Sundance defaulted on the Loan in February 2010. 12 Sundance’s First Bankruptcy Case 13 On May 31, 2010, Sundance filed a chapter 11 petition. The 14 bankruptcy court dismissed the case because Sundance did not 15 file the required documents. After dismissal, the Bank filed a 16 Notice of Default and Election to Sell Under Deed of Trust with 17 respect to the property. 18 Sundance’s Second Bankruptcy Case 19 On June 25, 2010, Sundance filed a second chapter 11 20 petition, Case No. 10-36676 (Second Sundance Bankruptcy). Smith 21 signed the petition as manager of operations. On July 19, 2010, 22 the Bank filed its first motion for relief from the automatic 23 stay. 24 Sundance then filed a motion to use the Bank’s cash 25 collateral. Because Sundance was in the process of finding a 26 27 3 Many of the facts are taken from the bankruptcy court’s 28 written rulings dated June 27, 2012, and August 29, 2012.
-4- 1 buyer for the property, the Bank agreed that Sundance could use 2 its cash collateral with the qualification that such use 3 terminated if the Bank obtained relief from stay. The Bank also 4 required Sundance to pay 60% of its monthly interest payment on 5 its Loan. Sundance could not secure a buyer. 6 After an unsuccessful second motion for relief from stay, 7 the Bank sought relief from stay for a third time on June 15, 8 2011. The latter motion was continued several times to give 9 Sundance the opportunity to reorganize the property. 10 On January 17, 2012, Sundance filed its third amended plan 11 and disclosure statement. Peninsula Capital Group Inc. 12 (Peninsula) was the general partner for Sundance and a joint 13 proponent of the plan along with Brown, who was the owner and 14 sole officer of Peninsula. Peninsula was seen as a potential 15 source of new funding and guarantor of the plan. 16 On March 28, 2012, the bankruptcy court held an evidentiary 17 hearing on plan confirmation and took the matter under 18 submission. 19 On April 12, 2012, the bankruptcy court issued a Memorandum 20 Decision granting the Bank relief from stay and denying 21 confirmation of Sundance’s plan of reorganization. In granting 22 the Bank relief from stay, the court found, among other things, 23 that: (1) Sundance defaulted under the terms of the Loan 24 documents; (2) Sundance’s plan was not feasible and likely would 25 be followed by liquidation; and (3) Sundance lacked equity in 26 the property, a plan was unlikely to be confirmed, and the 27 property was not necessary to an effective reorganization. The 28 court entered the order granting the Bank relief from stay on
-5- 1 April 12, 2012. 2 The Bank scheduled the foreclosure sale on June 5, 2012. 3 On April 23, 2012, the UST filed a motion to dismiss or 4 convert Sundance’s case to chapter 7. Brown filed a response in 5 favor of dismissal and opposing conversion and Sundance 6 submitted declarations asking the bankruptcy court to stop the 7 Bank’s foreclosure. 8 The State Court Lawsuit 9 On April 30, 2012, two weeks after the bankruptcy court 10 entered its Memorandum Decision, Sundance filed a complaint and 11 application for injunctive relief in the El Dorado County 12 Superior Court (State Court) to enjoin the Bank’s then-scheduled 13 June 5, 2012 foreclosure sale. Smith filed a declaration in 14 support of the application and served as Sundance’s 15 representative at the related hearings. Following two hearings, 16 on May 24, 2012, the State Court denied injunctive relief.4 The 17 Bank continued with its foreclosure efforts. 18 The Transfer of Sundance’s Property 19 On May 24, 2012, the same day that the State Court denied 20 Sundance injunctive relief, Sundance transferred its real 21 property by grant deed to West Coast. Brown, in his individual 22 capacity, signed the grant deed on Sundance’s behalf. The grant 23 deed was recorded on May 29, 2012, in the County of El Dorado as 24 25 4 In their opening brief, Appellants contend that the 26 injunction was not granted because their attorney was unable to obtain the documents and declarations that would have shown that 27 the Bank had “probably” made misrepresentations of the Loan obligation to Sundance and the bankruptcy court. None of those 28 documents or declarations are in the record on appeal.
-6- 1 DOC-2012-0025784-00. 2 The Conversion Hearing 3 On May 30, 2012, the bankruptcy court heard the UST’s 4 motion to dismiss or convert the Second Sundance Bankruptcy 5 case. The court granted the UST’s request for conversion. 6 Although Brown’s attorney appeared at the hearing, he did not 7 inform the bankruptcy court, the Bank, or the UST’s office that 8 the property had been transferred.5 The bankruptcy court 9 entered a minute order dated June 4, 2012, converting the case 10 to chapter 7. 11 West Coast’s Bankruptcy Case 12 The same day that Sundance’s case was converted, West Coast 13 filed a chapter 11 petition, which Smith signed as President. 14 Smith was also the 100% owner of West Coast. The schedules 15 listed the property transferred by Sundance as West Coast’s only 16 asset and listed as creditors only the Bank and a few others 17 with minor debts. The income listed in the past two years was 18 “Debtor Loss on Property.” West Coast described the nature of 19 its business as real estate and mortgage without mentioning a 20 self-storage facility or relationship to the Second Sundance 21 Bankruptcy. 22 The next day, the Bank filed a Notice of Claim to Rents, 23 alerting all interested parties that the rents from the property 24 25 5 Brown’s attorney, Mr. Isley, later stated at the 26 August 29, 2012 sanctions hearing that at the time of the hearing on the dismissal or conversion of Sundance’s Second Bankruptcy 27 case, he had “no clue” that “any of this stuff had happened” and that he “didn’t hear about it until probably several weeks 28 later.” Hr’g Tr. 8/29/12 at 11:15-23.
-7- 1 could not be used for any purpose. 2 On June 8, 2012, the Bank filed an Expedited Motion for 3 Relief From the Automatic Stay and For Sanctions Against Don 4 Smith and West Coast. The motion sought relief from the 5 automatic stay based upon the transfer of the property followed 6 by West Coast’s bad faith bankruptcy filing. The Bank sought 7 sanctions against Smith and West Coast, with the amount left for 8 later determination, on the grounds that Smith had willfully 9 disobeyed the bankruptcy court’s relief from stay order in the 10 Second Sundance Bankruptcy case when he transferred the property 11 outside the ordinary course to West Coast one week before the 12 foreclosure and West Coast then, in bad faith, filed the 13 bankruptcy to hinder and delay the Bank’s foreclosure. The Bank 14 also sought dismissal of West Coast’s case under the bankruptcy 15 court’s inherent power to sanction. 16 In support of its motion, the Bank submitted the 17 declaration of Jessica M. Mickelsen. Mickelsen — one of the 18 attorneys representing the Bank — declared that as a result of 19 West Coast’s filing, the Bank had incurred approximately $15,000 20 in attorneys’ fees and costs. 21 On June 12, 2012, West Coast filed a motion to use the 22 Bank’s cash collateral. The motion did not mention the history 23 of Sundance’s previous use of the Bank’s cash collateral nor did 24 it mention that the Bank’s permission to use the cash collateral 25 had expired when the bankruptcy court granted the Bank’s motion 26 for relief from stay in the Second Sundance Bankruptcy. The 27 motion also failed to disclose the transfer of the real property 28 from Sundance to West Coast.
-8- 1 The Bank opposed the cash collateral motion on several 2 grounds: (1) the bad faith transfer of the property; (2) West 3 Coast’s bad faith failure to account for at least $23,895.82 of 4 cash collateral as of June 2012, which West Coast apparently 5 acquired from Sundance as a result of the transfer of the 6 property; and (3) the flawed budget that West Coast submitted, 7 including substantially decreased payments to the Bank (from 8 $23,500 per month, which is what Bank received before Sundance 9 stopped paying, to $13,167 per month). 10 In the end, the Bank argued that West Coast’s bad faith 11 acts in hiding cash collateral warranted sanctions under § 105, 12 including the dismissal of the case. In support of this latter 13 request and allegations regarding the missing rents, the Bank 14 submitted Mickelsen’s declaration which stated that Sundance had 15 not filed monthly operating reports since March 2012. 16 On June 27, 2012, the bankruptcy court heard the Bank’s 17 expedited motion for relief from stay and sanctions and West 18 Coast’s motion to use cash collateral.6 Prior to the hearing, 19 the court had issued a tentative ruling granting the motion. 20 After hearing oral argument, the bankruptcy court adopted its 21 tentative ruling and issued an amended written ruling. There, 22 the court concluded that the attempted transfer of the property 23 by Sundance to West Coast was in bad faith as to the Bank and 24 the other creditors and renters of Sundance. The court found 25 that as to the Bank, the purported transfer was an attempt to 26 27 6 The bankruptcy court denied West Coast’s cash collateral 28 motion by minute order entered July 2, 2012.
-9- 1 hinder and delay its foreclosure proceeding after Sundance’s 2 two-year attempt to confirm a plan while under the protection of 3 the automatic stay. As to the renters, the bankruptcy court 4 observed that the transfer of the property put those parties in 5 a position of owing rent to Sundance’s bankruptcy estate, while 6 at the same time, West Coast would be attempting to collect 7 their rent. As to the other creditors, the court found the 8 transfer was an attempt to retain the property and its benefits 9 while divesting the property owner of any obligations to those 10 creditors. Finally, the bankruptcy court found West Coast’s 11 failures to give notice of its case to any of the renters or 12 creditors as further indicia of bad faith. 13 In addition, the court did not overlook Smith’s role in 14 facilitating the transfer of the property. The court observed 15 that Smith was the president of West Coast while simultaneously 16 acting as operations manager for Sundance and had full knowledge 17 that Sundance was a chapter 11 debtor-in-possession when he 18 orchestrated the transfer. 19 For all these reasons, the bankruptcy court found it 20 appropriate to issue sanctions against West Coast and Smith in 21 the amount of the Bank’s reasonable attorneys’ fees and costs 22 incurred in connection with West Coast’s case. In the end, the 23 court stated that it would also award sanctions against Brown 24 for his complicity in these acts. The bankruptcy court set a 25 further hearing to determine the amount of the sanctions for 26 August 29, 2012. 27 After the Bank obtained relief from stay, it assigned the 28 deed of trust and loan documents to SACI, a related entity to
-10- 1 the Bank.7 SACI foreclosed on the property by credit bid on 2 June 29, 2012. 3 On July 31, 2012, Smith filed opposition to the Bank’s 4 motion for sanctions. Smith admitted that the transfer took 5 place but claimed that he did not know that the property could 6 not be sold subject to existing financing without court 7 approval. Smith also maintained that he paid expenses from his 8 private funds to run the business so as not to use any cash 9 collateral. As further justification for his conduct, Smith 10 contended that he believed the transfer of the property was the 11 only way to bring the Bank’s fraudulent actions before the 12 court. Finally, Smith asserted that there was no competent 13 evidence before the bankruptcy court to support an award of 14 attorneys’ fees to the Bank. Smith filed a separate pleading 15 objecting to Mickelsen’s declaration on the grounds that 16 (1) there was no foundation to support her assertion that the 17 Bank had incurred approximately $15,000 in fees and (2) her 18 statement was hearsay. 19 On August 1, 2012, SACI filed a motion for sanctions in 20 West Coast’s bankruptcy against Brown for his complicity in the 21 bad faith transfer of the property based on the bankruptcy 22 court’s inherent authority under § 105. SACI alleged that Brown 23 (1) signed the grant deed that documented the transfer of the 24 property from Sundance to West Coast on the same day that the 25 State Court denied Sundance’s request to enjoin the foreclosure 26 27 7 Hereinafter when we refer to the Bank such references 28 apply equally to SACI and vice versa.
-11- 1 of the property and six days before the UST’s motion to dismiss 2 or convert hearing in the Second Sundance Bankruptcy; (2) failed 3 to disclose the transfer to the bankruptcy court at the 4 dismissal/conversion hearing, despite the facts that the 5 transfer occurred six days earlier, was recorded the day before 6 the hearing, and counsel for Brown appeared at the hearing and 7 presented argument; and (3) failed to seek approval from the 8 bankruptcy court before transferring the property. Based on 9 these acts, SACI sought sanctions against Brown in the amount of 10 $147,078.82 that consisted of its legal fees and costs and 11 missing rents for the months of June, July, and August 2012, 12 which constituted its cash collateral. 13 SACI submitted the declaration of Joshua D. Wayser, counsel 14 for SACI, in conjunction with its motion. Wayser declared that 15 he reviewed his firm’s bills for the months of June and July 16 2012 and as of July 27, 2012, the fees totaled $33,459.82. 17 Attached to Wayser’s declaration were redacted bills evidencing 18 the charges. Wayser further sought as sanctions the missing 19 rents in the estimated amount of $113,619. That amount was 20 subsequently reduced to $101,436 based upon $12,183 SACI 21 received after taking possession of the property on August 6, 22 2012. Wayser declared that SACI was seeking the missing rents 23 as sanctions because it otherwise would have been entitled to 24 collect the rents for those months had the transfer of the 25 property and subsequent bankruptcy not occurred and had SACI 26 been allowed to timely foreclose on the property. 27 On August 13, 2012, the UST filed a statement regarding the 28 Bank’s motion for sanctions and related declaration of Smith.
-12- 1 The UST stated that the unauthorized transfer of the property 2 was an egregious breach of duty on the part of the responsible 3 representatives of Sundance. Beyond this, the UST did not take 4 a position on the motion. However, the UST pointed out that 5 Smith’s declaration should not be read to imply that Smith did 6 not know that the transfer of the property had been recorded at 7 the time he met with the UST. Smith declared that he learned 8 about the recording on the afternoon of May 30, 2012, but he met 9 with the UST after that date and did not inform counsel for the 10 UST about the transfer of the property. Attached to the UST’s 11 statement of position was the declaration of Jason Blumberg 12 which verified the meeting date between Smith and the UST. 13 On the same date, SACI filed a reply in support of the 14 motion for sanctions against Smith. SACI pointed out that Smith 15 continued to thwart SACI’s exercise of ownership rights over the 16 foreclosed property. SACI maintained that due to Smith’s 17 actions, it filed an adversary proceeding against him seeking a 18 temporary restraining order (TRO) and preliminary injunction 19 which the bankruptcy granted on August 1, 2012, and August 13, 20 2012, respectively. Based on Smith’s conduct, SACI argued that 21 significant sanctions were warranted to deter his conduct. 22 According to SACI, there were no mitigating factors — Smith had 23 been through two personal bankruptcies and thus plainly had 24 knowledge of the bankruptcy process and the necessity for 25 obtaining court approval for certain transactions. In the end, 26 SACI requested the bankruptcy court to award it not only the 27 full amount of its attorneys’ fees and costs, but also the 28 amount for the missing rents.
-13- 1 On August 15, 2012, Brown filed an opposition to SACI’s 2 motion for sanctions. Brown asserted that the bankruptcy court 3 should abstain from exercising jurisdiction over the tort 4 (sanctions) claim of SACI. Brown argued that he and Peninsula 5 were outside third parties and had no involvement with the West 6 Coast proceedings and that a judgment against Brown would have 7 no possible effect on West Coast’s rights or the handling of its 8 estate. According to Brown, the third party action should be 9 taken in state court. He further argued that the sanctions 10 motion required an adversary proceeding because SACI sought to 11 essentially have Brown turn over all income from the property 12 allegedly received by Sundance and West Coast for the months of 13 June, July and August 2012. Brown also maintained that he did 14 not have any personal involvement because he signed the grant 15 deed in his capacity as president of Peninsula. 16 Finally, Brown argued that there was no evidence submitted 17 to support SACI’s claim of damages for the missing rents nor was 18 SACI entitled to assert a cash collateral claim after the 19 trustee’s sale which extinguished the note and deed of trust. 20 With respect to the attorneys’ fees, Brown complained that 21 Wayser’s hourly rate of $675 was far above sums awarded to 22 attorneys in the Eastern District of California. Brown further 23 pointed out that the billing statements were improper because 24 the services were lumped together, the descriptions insufficient 25 to understand what services were performed, and the hours were 26 not revised despite some entries being redacted. 27 On August 15, 2012, West Coast also filed opposition to the 28 Bank’s sanctions motion. West Coast’s opposition simply
-14- 1 incorporated Smith’s and Brown’s arguments set forth in their 2 memoranda. 3 On August 20, 2012, Smith filed a sur-reply to the Bank’s 4 motion for sanctions. Smith argued that Wayser’s declaration 5 should be stricken because Wayser had not stated facts that 6 would establish a foundation for the estimated attorneys’ fees 7 and furthermore, the declaration constituted hearsay. Smith 8 also reiterated some of Brown’s arguments; i.e., that Wayser’s 9 hourly rate was too high and the billing statements did not have 10 detailed time and expense entries. In addition, Smith contended 11 that SACI’s claim of missing rents was a “new matter” because it 12 was not contained in the Bank’s original motion for sanctions 13 and thus should be stricken. On the same day, Smith filed a 14 separate pleading containing his evidentiary objections to 15 Wayser’s declaration. 16 The bankruptcy court then issued a tentative ruling 17 finding, among other things, that SACI incurred attorneys’ fees 18 of at least $20,000 due to Smith’s and Brown’s actions, and that 19 such amount should be payable jointly and severally by Smith, 20 Brown and the debtor. 21 At the August 29, 2012 sanctions hearing, Smith’s attorney, 22 Mr. Bell, requested the bankruptcy court to rule on Smith’s 23 evidentiary objections. Bell also maintained that Smith was 24 unable to pay the $20,000 award due to Smith’s personal 25 bankruptcy which he had filed a few years before. Finally, Bell 26 asserted that $5,000 would be appropriate due to the lack of 27 evidence supporting the larger award and the circumstances of 28 the case. Brown’s attorney, Isley, essentially reiterated the
-15- 1 arguments set forth in Brown’s pleadings as mentioned above. 2 Wayser responded by first noting that his firm gave a 15% 3 discount on all the fees so that the $675 hourly rate was not 4 accurate. Next, Wayser argued that as to the amount of the 5 fees, they provided the bills and did not seek any of the 6 attorneys’ fees in the related adversary proceeding against 7 Smith.8 8 The bankruptcy court stated that none of the arguments had 9 changed its previous view of the case. The court took the 10 matter under submission and, on the same day, issued final 11 rulings in the matters. With respect to Brown, the bankruptcy 12 court found: (1) Brown’s conduct in signing the grant deed in 13 favor of West Coast constituted bad faith and willful misconduct 14 sufficient to justify an award of sanctions against him under 15 the court’s inherent power; (2) Brown breached his fiduciary 16 duties to the Sundance bankruptcy estate and its creditors; and 17 (3) no adversary proceeding was needed because the matter did 18 not involve turnover of funds, but was instead a request for an 19 award of sanctions under the court’s inherent power. The 20 bankruptcy court granted SACI’s motion in part by awarding its 21 reasonable attorneys’ fees in the sum of $20,000 against 22 Appellants, jointly and severally. The court stated that the 23 fees incurred were for the Bank’s motion for relief from stay 24 and to dismiss West Coast’s case, for seeking sanctions against 25 26 8 Recall that the adversary related to SACI’s motion for a 27 TRO and preliminary injunction against Smith who continued to thwart SACI’s attempts to gain possession of the property after 28 SACI foreclosed.
-16- 1 West Coast and Smith, and for SACI’s motion for sanctions 2 against Brown. The bankruptcy court did not further elaborate 3 as to how it arrived at the $20,000 amount. 4 In a separate ruling concerning West Coast and Smith, the 5 bankruptcy court found: (1) Smith’s explanations regarding the 6 transfer of the property were not credible; (2) West Coast’s and 7 Smiths’ conduct in initiating and completing the transfer of the 8 property and the filing of the chapter 11 petition constituted 9 bad faith and willful misconduct sufficient to justify an award 10 of sanctions against them; and (3) the amount of $20,000 to be 11 paid jointly and severally with Brown was an appropriate 12 sanction. 13 In addressing SACI’s request for sanctions in the amount of 14 the missing rents, the bankruptcy court noted that after the 15 foreclosure, the real property and rights to its rents were no 16 longer property of the estate. Due to this fact and relying on 17 Fietz v. Great W. Sav. (In re Fietz), 852 F.2d 455, 457 (9th 18 Cir. 1988), the bankruptcy court stated it was not persuaded 19 that it had jurisdiction to award sanctions for conduct that 20 interfered with SACI’s rights to the real property and the 21 rental income post-foreclosure. 22 However, the bankruptcy court, assuming for the purpose of 23 ruling that it had jurisdiction, denied SACI’s request for 24 sanctions in the amount of the missing rents. The court 25 reasoned that any damages arising from post-foreclosure conduct 26 were between SACI, on the one hand, and West Coast, Smith and 27 Brown, on the other, and any connection with the bankruptcy 28 estate was tangential at best. The bankruptcy court’s decision
-17- 1 was without prejudice to SACI’s right to seek, in another court, 2 an award of additional amounts on account of rents lost as a 3 result of West Coast’s and Smith’s post-foreclosure conduct, and 4 without prejudice to SACI’s right to seek, in another court, an 5 award of damages or other relief on any other basis. 6 The bankruptcy court entered the two orders granting 7 sanctions in favor of SACI and against Appellants on August 30, 8 2012.9 The order entered in connection with the Bank’s motion 9 awarded sanctions against West Coast and Smith (Smith Order). 10 The order entered with respect to SACI’s motion awarded 11 sanctions against Brown (Brown Order). Both orders indicate 12 that a single sanction in the amount of $20,000 was imposed 13 against the Appellants and is payable jointly and severally. 14 Appellants filed a single notice of appeal for both the 15 sanctions orders on September 12, 2012. The Smith Order was 16 assigned BAP No. EC-12-1471 and the Brown Order was assigned BAP 17 No. EC-12-1485. 18 SACI filed a notice of cross-appeal from both orders on 19 September 26, 2012. The cross-appeal of the Smith Order was 20 assigned BAP No. EC-12-1493 and the cross-appeal of the Brown 21 Order was assigned BAP No. EC-12-1498. 22 II. JURISDICTION 23 The bankruptcy court had jurisdiction over this proceeding 24 under 28 U.S.C. §§ 1334 and 157(a) and (b)(1). We have 25 9 26 The orders provided that the sanctions were payable no later than September 20, 2012. It does not appear that 27 Appellants obtained a stay pending appeal and there is no indication in the record that any of the sanctions award has been 28 paid by either Smith or Brown.
-18- 1 jurisdiction under 28 U.S.C. § 158. 2 III. ISSUES 3 A. Whether the bankruptcy court abused its discretion in 4 awarding sanctions in the amount of $20,000 against Appellants; 5 and 6 B. Whether the bankruptcy court abused its discretion in 7 denying SACI’s request for sanctions based on the amount of 8 missing rents which constituted SACI’s cash collateral. 9 IV. STANDARDS OF REVIEW 10 An award or denial of sanctions under § 105(a) is reviewed 11 for abuse of discretion. Nash v. Clark Cnty. Dist. Attorney’s 12 Office (In re Nash), 464 B.R. 874, 878 (9th Cir. BAP 2012). The 13 appropriateness of the amount of the sanctions imposed also is 14 reviewed for an abuse of discretion. Asher v. Film Ventures 15 Int’l, Inc. (In re Film Ventures Int’l, Inc.), 89 B.R. 80, 83 16 (9th Cir. BAP 1988). 17 We review the bankruptcy court’s evidentiary rulings for an 18 abuse of discretion. Latman v. Burdette, 366 F.3d 774, 786 (9th 19 Cir. 2004). To reverse on the basis of an erroneous evidentiary 20 ruling, we must conclude not only that the bankruptcy court 21 abused its discretion, but also that the error was prejudicial. 22 Id. 23 A bankruptcy court abuses its discretion if it applied the 24 wrong legal standard or its findings were illogical, 25 implausible, or without support in the record. 26 TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th 27 Cir. 2011). 28
-19- 1 V. DISCUSSION 2 Bankruptcy courts have inherent sanction power under 3 § 105(a) which states in relevant part: “The court may issue 4 any order, process, or judgment that is necessary or appropriate 5 to carry out the provisions of this title. . . .” See also 6 Miller v. Cardinale (In re DeVille), 361 F.3d 539 (9th Cir. 7 2004); Caldwell v. Unified Capital Corp. (In re Rainbow 8 Magazine), 77 F.3d 278, 284 (9th Cir. 1996). “The court’s 9 inherent authority to sanction includes not only the authority 10 to sanction a party, but also the authority to sanction the 11 conduct of a nonparty who participates in abusive litigation 12 practices, or whose actions or omissions cause the parties to 13 incur additional expenses.” In re Avon Townhomes Venture, 14 433 B.R. 269, 304 (Bankr. N.D. Cal. 2010) (citing Chambers v. 15 NASCO, Inc., 501 U.S. 32, 50–51 (1991) (affirming imposition of 16 sanctions on an individual for conduct before other tribunals 17 that constituted an abuse of process, even though the individual 18 was not a party when the misconduct occurred); and In re Rainbow 19 Magazine, Inc., 77 F.3d at 278 (upholding sanctions levied under 20 the court’s inherent powers against corporate debtor’s principal 21 who orchestrated the bad faith filing of the bankruptcy 22 petition)). 23 The bankruptcy court’s inherent sanction power allows it to 24 deter and provide compensation for bad faith litigation. See 25 Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1196 (9th Cir. 26 2003). Before the bankruptcy court imposes sanctions under its 27 inherent power, it must make an explicit finding of bad faith or 28 willful misconduct. Id. “[B]ad faith or willful misconduct
-20- 1 consists of something more egregious than mere negligence or 2 recklessness.” Id. 3 Once a finding of bad faith or willful misconduct has been 4 made, a court may award attorneys’ fees and costs as a sanction 5 to compensate the prevailing party for expenses incurred by his 6 or her opponent’s bad faith litigation tactics. Chambers, 7 501 U.S. at 45-46. However, the long-settled rule is that 8 inherent powers must be exercised with restraint and discretion. 9 Id. at 44. Thus, the “court should be cautious in exerting its 10 inherent power and ‘must comply with the mandates of due 11 process, both in determining that the requisite bad faith exists 12 and in assessing fees.’” Id. at 50. 13 A. The Merits: Appeals EC-12-1471 and EC-12-1485 14 Here, the bankruptcy court made express findings regarding 15 Appellants’ bad faith and willful misconduct which is the 16 primary prerequisite for sanctions under the court’s inherent 17 power. In re Dyer, 322 F.3d at 1196. Indeed, the sanctionable 18 conduct of West Coast, Smith and Brown included complicity in 19 transferring Sundance’s property to West Coast followed by West 20 Coast’s bankruptcy filing on the eve of the Bank’s scheduled 21 foreclosure. According to the bankruptcy court, these acts were 22 part of a scheme to harass, delay and increase the Bank’s and 23 SACI’s litigation costs. Appellants do not challenge any of the 24 bankruptcy court’s bad faith findings on appeal, instead 25 complaining that the sanctions award was punitive in nature, 26 arbitrary in amount and lacked evidentiary support. 27 The Punitive Nature of the Sanctions 28 Because the court lifted the stay and voided the transfer
-21- 1 of the property, Appellants assert that this was a sufficient 2 sanction against Smith and West Coast. Therefore, any sanctions 3 beyond this, Appellants argue, were punitive and thus exceeded 4 the bankruptcy court’s inherent authority. 5 Smith had made this same argument in the bankruptcy court, 6 which the court rejected noting that the order lifting the stay 7 operated in conjunction with the Bank’s foreclosure to deprive 8 Smith and West Coast of property that should not have been 9 theirs in the first place. We agree with the bankruptcy court’s 10 conclusion that nothing of value was taken from Smith or West 11 Coast and, therefore, their asserted “loss” did not operate as a 12 sanction against them. 13 Moreover, the bankruptcy court explicitly stated that the 14 sanctions award was based on SACI’s attorneys’ fees incurred as 15 a result of Appellants’ bad faith conduct. Sanctions based on 16 attorneys’ fees are compensatory and within the bankruptcy 17 court’s inherent authority. In re DeVille, 361 F.3d at 546; 18 see also Chambers, 501 U.S. at 44 (the less severe sanction of 19 an assessment of attorneys’ fees is undoubtedly within a court’s 20 inherent power). Furthermore, compensatory sanctions are not 21 considered criminal penalties: “Civil penalties must either be 22 compensatory or designed to coerce compliance.” In re Dyer, 23 322 F.3d at 1192 (citing F.J. Hanshaw Enters., Inc. v. Emerald 24 River Dev., Inc., 244 F.3d 1128, 1137–38 (9th Cir. 2001)); see 25 also Lasar v. Ford Motor Co., 399 F.3d 1101, 1110 (9th Cir. 26 2005) (sanctions that compensate for harm caused are civil). 27 Accordingly, the sanctions awarded based on SACI’s attorneys’ 28 fees were compensatory and not punitive in nature.
-22- 1 The Amount of the Sanctions 2 Appellants next complain that the bankruptcy court abused 3 its discretion in awarding sanctions because (1) there was no 4 admissible evidence to support the award of attorneys’ fees10 and 5 (2) the award was arbitrary because the court failed to explain 6 how it arrived at the $20,000 amount. We address each of these 7 arguments in turn below. 8 Smith objected to Wayser’s declaration which attached his 9 law firm’s billing records on the grounds that (1) it was not 10 admissible under Fed. R. Evid. 602 for lack of personal 11 knowledge, and (2) it constituted hearsay and thus was not 12 admissible under Fed. R. Evid. 803(6), the business records 13 exception.11 Appellants contend the bankruptcy court erred 14 because it did not rule on these objections. Appellants’ 15 contention is incorrect. In its written ruling dated August 29, 16 2012, the bankruptcy court explicitly found that Wayser’s 17 declaration “sufficiently establishes a foundation for the 18 testimony that true and correct copies of the firm’s billing 19 statements are filed as exhibits.” The court further opined: 20 It is difficult to understand what further evidence Smith would require [-] a declaration from each 21 individual who worked on the case? In any event, the court is satisfied that the billing statements 22 demonstrate, by clear and convincing evidence, to the extent that is necessary, that attorneys’ fees of at 23 24 10 Indeed, at oral argument, Appellants’ attorney emphasized that the primary reason, if not the sole reason, for seeking 25 reversal of the sanctions award was the lack of evidentiary 26 support. 11 27 Although Smith had also objected to Mickelsen’s declaration on the same grounds, SACI supplemented the record 28 with Wayser’s declaration.
-23- 1 least $20,000 were reasonably incurred as a direct result of Smith[’]s unconscionable actions detailed 2 above. 3 Moreover, at the very least, the bankruptcy court was aware of 4 the objections at the August 29, 2012 hearing and implicitly 5 overruled them when it stated that “I didn’t hear anything today 6 that changed my position in regards to the tentative.” 7 We thus conclude that the objections were overruled and the 8 evidence was admitted. 9 Fed. Rule Evid. 602 states that “[a] witness may not 10 testify to a matter unless evidence is introduced sufficient to 11 support a finding that the witness has personal knowledge of the 12 matter.” See also United States v. Dibble, 429 F.2d 598, 602 13 (9th Cir. 1970) (“The foundation is laid for receiving a 14 document in evidence by the testimony of a witness with personal 15 knowledge of the facts who attests to the identity and due 16 execution of the document and, where appropriate, its 17 delivery.”). In his declaration, Wayser stated that he was one 18 of the attorneys at his firm responsible for representing SACI 19 in the bankruptcy case and the adversary proceeding. He further 20 stated that based on that responsibility, he had personal 21 knowledge of the facts contained in his declaration. Wayser 22 also summarized the services that his firm performed in the West 23 Coast bankruptcy case and stated that he reviewed the firm bills 24 for the months of June and July 2012. These statements 25 sufficiently show that Wayser “actually perceived or observed 26 that which he testified to.” Latman, 366 F.3d at 786. 27 In addition, although reasonable minds could differ, 28 Wayser’s testimony was sufficient to establish the accuracy and
-24- 1 trustworthiness of the billing statements for purposes of the 2 business records exception to hearsay under Fed. R. Evid. 3 803(6). See United States v. Bonallo, 858 F.2d 1427, 1435 (9th 4 Cir. 1988) (The business records exception to hearsay under Fed. 5 R. Evid. 803(6) is available where the record is “(1) made or 6 based on information transmitted by a person with knowledge at 7 or near the time of the transaction; (2) made in the ordinary 8 course of business; and (3) trustworthy, with neither the source 9 of information nor method or circumstances of preparation 10 indicating a lack of trustworthiness.”). 11 In sum, “[i]n non-jury cases, the [bankruptcy] judge is 12 given great latitude in the admission or exclusion of evidence.” 13 Holliger v. United States, 651 F.2d 636, 640 (9th Cir. 1981). 14 Accordingly, we discern no reversible error on the evidentiary 15 grounds asserted by Appellants. 16 However, we agree with Appellants that the record is 17 insufficient for us to conduct a meaningful review of the 18 court’s decision to award the amount of $20,000 in sanctions 19 based on SACI’s attorneys’ fees. In Padgett v. Loventhal, 20 706 F.3d 1205 (9th Cir. 2013), the Ninth Circuit recently 21 reminded us that courts must show their work when calculating 22 attorneys’ fees. See also Chalmers v. City of L.A., 796 F.2d 23 1205, 1213 (9th Cir. 1986), amended by 808 F.2d 1373 (9th Cir. 24 1987) (vacating fee award when the order contained no 25 explanation of how the court arrived at the award). That was 26 not done by the bankruptcy court here. 27 Where monetary sanctions are awarded, “the amount of the 28 monetary sanctions must be ‘reasonable.’” Leon v. IDX Sys.
-25- 1 Corp., 464 F.3d 951, 961 (9th Cir. 2006) (citing Brown v. Baden 2 (In re Yagman), 796 F.2d 1165, 1184 (9th Cir. 1986), amended by 3 803 F.2d 1085 (1986)). 4 When the sanctions award is based upon attorney’s fees and related expenses, an essential part of determining 5 the reasonableness of the award is inquiring into the reasonableness of the claimed fees. Recovery should 6 never exceed those expenses and fees that were reasonably necessary to resist the offending action 7 . . . the court must make some evaluation of the fee breakdown submitted by counsel. 8 9 In re Yagman, 796 F.2d at 1184. The Ninth Circuit has held in 10 other contexts that the lodestar approach is a proper method for 11 determining the reasonableness of attorneys’ fees. Ballen v. 12 City of Redmond, 466 F.3d 736, 745-46 (9th Cir. 2006) 13 (characterizing the lodestar figure as the “presumptively 14 accurate measure of reasonable fees” when calculating 15 permissible fees under 42 U.S.C. § 1988); see also Gisbrecht v. 16 Barnhart, 535 U.S. 789, 801 (2002) (“The ‘lodestar’ figure has, 17 as its name suggests, become the guiding light of our 18 fee-shifting jurisprudence.”). The starting point for computing 19 the lodestar amount is to multiply the number of hours the 20 prevailing party reasonably expended on the litigation by a 21 reasonable hourly rate. Caudle v. Bristow Optical Co., Inc., 22 224 F.3d 1014, 1028 (9th Cir. 2000). The hourly rates used must 23 be “in line with those prevailing in the community for services 24 by lawyers of reasonably comparable skill, experience and 25 reputation.” Blum v. Stenson, 465 U.S. 886, 895 (1984). 26 Another factor for determining reasonableness is the 27 sanctioned party’s ability to pay. In re Yagman, 796 F.2d at 28 1184; see also Haynes v. City and Cnty. of S.F., 688 F.3d 984,
-26- 1 987 (9th Cir. 2012) (awards under 28 U.S.C. § 1927 are 2 discretionary such that the court may permissibly take ability 3 to pay into account, although courts are not required to limit 4 an award to the amount that the sanctioned attorney is able to 5 pay); and White v. Gen. Motors Corp., Inc., 908 F.2d 675, 684–85 6 (10th Cir. 1990) (factors relevant to determine an appropriate 7 amount of monetary sanctions include the reasonableness of the 8 amount requested, the minimum necessary to deter a repetition of 9 the conduct, and the ability to pay the sanction.). 10 Here, there is no indication in the record as to how the 11 bankruptcy court calculated the $20,000 amount. The court does 12 not state the number of hours that it found reasonable for the 13 work performed nor does it set forth the hourly rate which it 14 applied. See Tutor-Saliba Corp. v. City of Hailey, 452 F.3d 15 1055, 1065 (9th Cir. 2006) (vacating fee award when order failed 16 to state, among other things, the number of hours being 17 compensated or the hourly rate applied). The mandate that 18 courts show their work is all the more important in cases where, 19 as here, some of the entries have been redacted and Wayser’s 20 hourly rate appears to be far above the prevailing community 21 rates even though discounted.12 Finally, although attorney Bell 22 argued that Smith had little ability to pay significant 23 sanctions because Smith filed bankruptcy in 2009 and 2010, it is 24 unclear whether the bankruptcy court took this factor into 25 26 27 12 The record does not contain any competent evidence on 28 what is a reasonable rate for the community.
-27- 1 consideration when determining the reasonableness of the fees.13 2 See In re Yagman, 796 F.2d at 1184; Haynes, 688 F.3d at 987. 3 We also note that when a bankruptcy court imposes sanctions 4 pursuant to its inherent power, the court “should limit 5 sanctions to the opposing party’s more ‘direct’ costs, that is, 6 the costs of opposing the offending pleading or motion.” Orange 7 Blossom Ltd. P’ship v. S. Cal. Sunbelt Devs., Inc. (In re S. 8 Cal. Sunbelt Devs., Inc.), 608 F.3d 456, 466 (9th Cir. 2010) 9 (quoting Lockary v. Kayfetz, 974 F.2d 1166, 1178 (9th Cir. 10 1992)). Under this precedent, fees and expenses incurred for 11 preparing and prosecuting the sanctions motions are generally 12 not authorized.14 13 In sum, because the bankruptcy court did not “show its 14 work,” we vacate the sanctions orders and remand to allow the 15 court to explain its reasoning on the reasonableness of the 16 fees. 17 B. The Merits: Cross-Appeals EC-12-1493 and EC-12-1498 18 Because of our decision to vacate and remand, SACI’s cross- 19 appeals on the amount of the sanctions based on its attorneys’ 20 fees are rendered moot. However, we still must address SACI’s 21 cross-appeals relating to the bankruptcy court’s denial of 22 sanctions in the amount of $101,435.00 based on the missing 23 24 13 Besides Smith’s two bankruptcies, we found no financial statements or other evidence in the record which demonstrated 25 Smith’s current financial condition. 26 14 The bankruptcy court stated in its written rulings that 27 its award was based on reasonable fees and costs incurred for, among other things, the motions for sanctions against West Coast, 28 Smith and Brown.
-28- 1 rents. 2 SACI maintains that it would have received this amount in 3 rent for the months of June, July and August 2012 (at the rate 4 of $37,873 per month) had it been able to take possession of the 5 property at the beginning of June 2012; as it would have without 6 Appellants’ bad faith acts. Because of Appellants’ conduct, 7 SACI contends that it was not able to foreclose until June 29, 8 2012, and, even then, it was unable to gain possession of the 9 property until August 6, 2012, allegedly due to Smith’s post- 10 foreclosure conduct. SACI argues that due to the outrageousness 11 of Appellants’ conduct, the bankruptcy court abused its 12 discretion by awarding a de minimis amount in sanctions which 13 failed to make it whole or deter repeat conduct. We are not 14 persuaded. 15 We mention first that generally a bankruptcy court has the 16 inherent power to regulate the conduct of those before it, even 17 in the absence of subject matter jurisdiction. Willy v. Coastal 18 Corp., 503 U.S. 131, 137–38 (1992) (upholding Rule 11 sanctions 19 before court of appeals determined district court lacked subject 20 matter jurisdiction); 5A Charles Alan Wright & Arthur R. Miller, 21 Federal Practice and Procedure: Civil § 1336, at 632 (3d ed. 22 2005). Here, the bankruptcy court assumed it had subject matter 23 jurisdiction to award SACI sanctions in the amount of the 24 missing rents and, in the exercise of its discretion, denied 25 SACI’s request. 26 Reversal on abuse of discretion grounds is not proper 27 unless we have “a definite and firm conviction that the 28 bankruptcy court committed a clear error of judgment in the
-29- 1 conclusion it reached after weighing the relevant factors.” 2 United States v. Gould (In re Gould), 401 B.R. 415, 429 (9th 3 Cir. BAP 2009), aff’d on other grounds, 603 F.3d 1100 (9th Cir. 4 2010). By the same token though, “a bankruptcy court 5 necessarily abuses its discretion if it bases its decision on an 6 erroneous view of the law or clearly erroneous factual 7 findings.” Id.; TrafficSchool.com, Inc., 653 F.3d at 832. 8 In denying SACI’s request for sanctions in the amount of 9 the missing rents, the bankruptcy court considered the following 10 factors: (1) SACI’s claim for the missing rents against West 11 Coast, Smith and Brown was essentially a “two party” dispute 12 with little, or no, effect on West Coast’s bankruptcy estate; 13 (2) there were few, if any, remaining assets belonging to West 14 Coast’s estate after SACI obtained relief from stay; and 15 (3) SACI could pursue its damage claim against Smith and Brown 16 for the missing rents in the state court. After carefully 17 weighing these factors, the bankruptcy court could reasonably 18 conclude that SACI had not made a strong enough showing for the 19 imposition of sanctions under the court’s inherent power based 20 on the amount of the missing rents. 21 SACI does not argue in its cross-appeals that the 22 bankruptcy court’s findings were illogical, implausible, or 23 without support in the record. Indeed, the relationship between 24 SACI’s damage claim for the missing rents and SACI’s direct 25 costs in opposing the transfer of the property and West Coast’s 26 bad faith filing became tenuous at best after SACI foreclosed. 27 In addition, although sanctions under § 105 serve the dual 28 purposes of compensation and deterrence, we are not convinced
-30- 1 that SACI’s citations to In re Simmons, 2011 WL 3957439, at *1 2 (Bankr. N.D. Cal. 2011), In re Avon Townhomes Venture, 433 B.R. 3 at 304, or Rentz v. Dynasty Apparel Indus., Inc., 556 F.3d 389, 4 399-400 (6th Cir. 2009), compel a different result. These cases 5 are factually distinguishable and simply reiterate the general 6 premise that under certain circumstances an award in the full 7 amount of the attorneys’ fees incurred may be warranted to serve 8 the dual purpose of deterrence and making the party which 9 incurred the fees whole. None of these cases addresses an award 10 of sanctions for missing rents under § 105 nor do they discuss 11 any factors relevant to such an inquiry. 12 In sum, SACI has not convinced us that the bankruptcy court 13 abused its discretion by basing its decision on an erroneous 14 view of the law. Accordingly, we discern no error with the 15 bankruptcy court’s exercise of restraint and discretion not to 16 impose sanctions in the amount of the missing rents under the 17 facts and circumstances of this case. 18 VI. CONCLUSION 19 For the reasons stated, we VACATE the sanctions orders and 20 REMAND on the amount of the sanctions based on SACI’s attorneys’ 21 fees so that the bankruptcy court can show its work. We AFFIRM 22 the denial of SACI’s request for sanctions in the amount of the 23 missing rents as within the bankruptcy court’s broad discretion. 24 25 26 27 28
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