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The Security National Bank of Sioux City, IA v. Vera T. Welte Testamentary Trust

Summarizing by Amir Shachmurove


Case Type:
Case Status:
BAP No. AZ-21-1254-BSF (9th Circuit, Apr 21,2022) Not Published
The Ninth Circuit Bankruptcy Appellate Panel (BAP) affirmed the bankruptcy court's sanctions award against an attorney for the chapter 7 debtor company and its non-debtor principal based on the bankruptcy court's inherent authority even though the bankruptcy court had erroneously cited to section 105.
Procedural context:
Chapter 7 trustee moved for sanctions against debtor's counsel based on the trustee's contentions that debtor's counsel filed the bankruptcy in bad faith in order to avoid compliance with state-court subpoenas and delay enforcement of judgments rather than to address debtor's debts. The trustee requested sanctions of $15,523.31, plus an additional $50,000. A judgment creditor joined in the sanctions motion. The bankruptcy court granted the motion over the objection of debtor's counsel, awarding $15,523.31 to the trustee but declining to award the requested $50,000.
Debtor was a limited liability company organized for the purpose of excavating, grading, and oil surface contracting. At one point, Holbrook and Khoshbin were both members of the debtor. After Khoshbin withdrew as a member, debtor filed a lawsuit against Khoshbin and Khoshbin asserted a counterclaim. Debtor was represented by attorney Stanley. During the litigation, Stanley advised debtor to create a successor company and transfer essentially all of debtor's assets to the successor company. Subsequently, Stanley withdrew as the attorney for the debtor in litigation and a judgment was entered in Khoshbin's favor. Around the same time, Holbrook attempted to withdraw as debtor's sole member, on the advice of Stanley, but the Arizona Corporation Commission (ACC) rejected the withdrawal without a new member or manager. Khoshbin attempted to enforce his judgment against debtor by serving subpoenas on the successor company and the Holbrooks seeking information about transfers made to them from the debtor. Stanley filed objections to the subpoenas and moved to quash. The state court overruled the objections and denied the motions to quash. Rather than comply with the subpoenas, debtor, represented by Stanley, filed for chapter 7 bankruptcy. Debtor failed to report all assets and transfers and resisted providing information to the trustee, requiring the trustee to file motions to compel production. Debtor also failed to appear at the 2004 examination and trustee was forced to subpoena bank records. Stanley subsequently withdrew as debtor's counsel and filed a special action on behalf of Holbrook against the ACC, where he was successful in convincing the ACC that it should have allowed Holbrook to withdraw as debtor's member and that her withdrawal was effective retroactively pre-petition. Stanley had not informed trustee of the special action and, after trustee filed a notice of bankruptcy, Holbrook, represented by Stanley, sued the trustee in federal district court for declaratory relief that Holbrook did not violate the automatic stay. The district court granted the trustee's motion to dismiss under the Barton doctrine, and the bankruptcy court awarded sanctions. Stanley then filed two consecutive motions to dismiss debtor's bankruptcy based on a lack of authority for the filing due to the retroactive withdrawal, which were denied. Trustee moved for sanctions under Rule 9011 and the court's "inherent authority under section 105," and the awarded $15,523.31 in sanctions.

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