Pham v. Golden (In re Pham)

In re Pham, No. CC-14-1342-KiBrD (9th Cir. B.A.P. Sep. 2, 2015).
The bankruptcy court could not rely on three local bankruptcy rules of the Central District of California to impose discovery sanctions on nonparties and their lawyer.
Procedural context:
In this chapter 7 case of two individuals, the trustee brought an adversary proceeding against nondebtor defendants. In the adversary proceeding, the bankruptcy court granted the trustee’s motion for monetary sanctions against the debtors and their lawyer in connection with disputes over the trustee’s depositions of the debtors. On appeal, the B.A.P. reversed and remanded.
Debtors and their lawyer could have been sanctioned for attorney fees under Civil Rule 37(a)(5) for any failure to comply with subpoenas issued to debtors. But the bankruptcy court relied not on that rule, but rather on three local bankruptcy rules, to impose sanctions. The first local rule, LBR 9011-3, allows the bankruptcy court to impose sanctions for any infraction of a local or federal bankruptcy rule. But Bankruptcy Rule 9011(d) (which incorporates Civil Rule 11) expressly prohibits use of Rule 9011 to sanction violations of “discovery and discovery requests, responses, objections, and motions that are subject to the provisions of Rules 7026 through 7037.” A local bankruptcy rule may not be applied in an manner that conflicts with the federal rules; it must be consistent with the Code, the Rules, and the Civil Rules. To the extent LBR 9011-3 conflicts with Rule 11 in authorizing sanctions for discovery violations, it is invalid. If it is not intended to be used to support a sanction for attorney fees respecting discovery abuse, the bankruptcy court abused its discretion in applying it to debtors and their lawyer. The second local rule, LBR 7026-(c)(4), allows the bankruptcy court to impose sanctions on counsel who fail to cooperate in disclosure or discovery, to attend the meeting of counsel, or to provide the moving party the information necessary to prepare the stipulation required by LBR 7026-1. For awarding the sanction of attorney fees, LBR 7026-1(c)(4) relies, in part, on the sanction authority authorized by LBR 9011-3, which conflicts with Rule 9011’s express prohibition of sanctions relating to discovery abuse. Civil Rule 26, which is incorporated into Rule 7026, provides for the imposition of sanctions in but one circumstance: improper certification in signing disclosure and discovery requests. See Civil Rule 26(g)(3). Rule 7026 does not provide for sanctions for discovery abuse, in particular attorney fees for a motion for a protective order, opposition thereto, or a motion to compel. To the extent LBR 7026-1(c)(4) is inconsistent with Rule 7026, it is invalid and cannot support the sanction of attorney fees. Also, LBR 7026-1 imposes obligations on parties, but not on nonparties. Finally, the court made no findings of fact to support a decision to sanction debtors and their lawyer for abusive conduct in the course of discovery. The third local rule, LBR 1001-1(f), provides for the sanction of attorney fees for the failure of counsel or of a party to comply with the LBRs, the Civil Rules, or the Rules, or with any order of the bankruptcy court. LBR 1001-1(f) is inconsistent with Rule 1001 in that it grants the court sanction authority not provided for in Rule 1001. The bankruptcy court could have sanctioned debtors and their lawyer under Rule 7037, the insufficient findings made by the bankruptcy court prevent the BAP from affirming under Rule 7037. The bankruptcy court made erroneous assumptions that may have caused it to err in awarding sanctions in the first place: that debtors were parties to the adversary proceeding and that because they are debtors they are not entitled to the protections afforded nonparties in discovery under the Rules.
Ralph B. Kirscher and Randall L. Dunn, Bankruptcy Judges, and Philip H. Brandt, United States Bankruptcy Judge for the Western District of Washington, sitting by designation.

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