- BAP No. NC-15-1149-JuKuW (BAP 9th Cir. Feb. 4, 2016)(published)
- The BAP for the 9th Circuit affirmed in part and reversed in part the ruling of the bankruptcy court (N.D. Cal.), sanctioning chapter 7 debtor's counsel by ordering payment to the bankruptcy court of an $8k sanction, plus disgorgement of all fees ($4k) for the case, as well as suspending counsel's admission to practice before the court pending additional CLE classes, and suspension of his e-filer privileges pending further training. The BAP approved of the disgorgement of $4k in fees, plus suspension of his e-filer privileges pending additional training, however reversed the bankruptcy court's $8k sanction and removal from admission sanction under Rule 11. The BAP concluded the bankruptcy court applied the wrong legal standard and failed to adequately support the sanction with factual findings. The BAP ruled that when a court initiates a Rule 11 sanction proceeding sua sponte, the party ordered to show cause has no "safe harbor" for conduct, and consequently the court's standard for imposing sanctions must be akin to contempt standards. Rule 11 sanction proceedings initiated by another party have a distinct "reasonableness" standard. The bankruptcy court failed to apply the "akin to contempt" standard, and the factual findings did not support an "akin to contempt" conclusion. The bankruptcy court's factual findings did not support finding that debtor's counsel's frivolous legal positions had an "improper purpose," or were "knowingly or intentionally" contemptuous, but instead were merely negligent.
- Procedural context:
- The bankruptcy court issued an order to show cause to chapter 7 debtor's counsel. Following hearing, the bankruptcy court issued decision finding that counsel violated Rule 11, and imposing sanctions. Counsel appealed to BAP for 9th Circuit.
- Counsel filed a "skeletal" chapter 7 case for debtor. At the time, debtor was operating five laundromats, either as sole proprietorships or partnerships. The petition failed to list trade names for the debtor, and indicated that debts were primarily consumer, rather than business debts. The schedules listed no executor leases, interests in partnerships, or payments to landlords. The schedules were rife in accuracies, and subsequent amendments failed to properly identify certain assets and liabilities, while continuing to incorrectly assert homestead and personal exemptions in business assets. At the meeting of creditors, it was apparent that debtor, under counsel's advice, was continuing to operate sole proprietorship laundromats. Chapter 7 trustee filed motion for turnover of business assets and revenues, which debtor opposed. Debtor also sought to have chapter 7 trustee removed based on trustee's "conduct" at meeting of creditors, including asserting a vague due process argument. The bankruptcy court denied debtor's motion. Debtor filed a motion to set aside turnover order, asserting it was in violation of 5th and 14th Amendments of US Constitution. Debtor filed an amended motion the next day proposing that the bankruptcy court amend its local rules to provide for ex parte hearings, and repeating vague due process arguments. The bankruptcy court denied the motions. Debtor's counsel filed a motion for return of "exempt" property and removal of trustee, asserting that seizure of sole proprietorship Laundromats and "exempt" property were unlawful. Trustee, in opposition, detailed numerous examples of debtor's counsel's ignorance of fundamental bankruptcy law and incompetent representation of debtor, and noting debtor had failed to deliver any property to trustee under turnover order. Debtor's counsel filed multiple additional pleadings withdrawing portions of argument as "moot" or "on grounds of obsolescence." Debtor's counsel appealed various rulings related to turnover order, while filing additional objections to turnover in the bankruptcy court. The BAP 9th Circuit affirmed the turnover order and rejected all of debtor's counsel's arguments. Debtor's counsel filed additional appeal documents with the 9th Circuit, before requesting dismissal due to a settlement with the trustee. Debtor's counsel filed multiple amendments to debtor's schedules, revising, but no abandoning claims to personal exemptions in business assets, as well as asserting that cash was an exempt "tool of the trade." Debtor continued with a plethora filings to the bankruptcy court in support of the claimed exemptions, while the trustee repeated his consistent objections. Through innumerable additional filings, debtor continued to oppose turnover, while the trustee continued to pursue turnover. Ultimately, the bankruptcy court rejected debtor's arguments with respect to the exemptions, and issued an order to show cause to debtor's counsel to show cause why he should not be sanctioned under Rule 11 for comprehensive failures in representation of the debtor and based upon unsupported legal positions taken throughout case. After various additional filings and orders, debtor's counsel filed a motion proposing disgorgement of his $4k fee as satisfaction of the OSC. The trustee opposed, citing damages to the estate in excess of $30k. At the OSC hearing, the trustee presented evidence that debtor's counsel's positions had caused fees in excess of $58k, including $14k attributable to dealing with the OSC. Debtor's counsel filed a motion for the judge to recuse himself, claiming evidence of bias. The bankruptcy court ultimately issued a sanction order with sanctions of: (1) $8k payable to the bankruptcy court as a "non-compensable monetary sanction"; (2) disgorgement of the $4k fee paid to him by the debtor; (3) suspension of practice from practice in the bankruptcy courts for the N.D. of California until he had completed 24 hours of CLE in bankruptcy law and 3 hours of continuing legal education; and (4) suspension of his e-filing privileges.
- Jury, Kurtz, Wanslee
3616 in the system
1 Being Processed