Rainbow Magazine, Inc., In re, 94-55634

• Decision Date: 20 February 1996
• Docket Number: No. 94-55634,94-55634
• Citation: 77 F.3d 278
• Parties: , Bankr. L. Rep. P 76,830, 96 Cal. Daily Op. Serv. 1085, 96 Daily Journal D.A.R. 1831 In re RAINBOW MAGAZINE, INC., Debtor. Craig E. CALDWELL, Appellant, v. UNIFIED CAPITAL CORP., Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 278

77 F.3d 278

28 Bankr.Ct.Dec. 871, Bankr. L. Rep. P 76,830,

96 Cal. Daily Op. Serv. 1085,

96 Daily Journal D.A.R. 1831

In re RAINBOW MAGAZINE, INC., Debtor.

Craig E. CALDWELL, Appellant, v. UNIFIED CAPITAL CORP., Appellee.

No. 94-55634.

United States Court of Appeals,

Ninth Circuit.

Argued and Submitted Oct. 18, 1995.

Decided Feb. 20, 1996.

Craig E. Caldwell, pro. per., Long Beach, California; Clinton L. Hubbard, Fischer, Brown, Huddleson & Gunn, Fort Collins, Colorado, for appellant.

Maria K. Pum and Jeffrey Garfinkle, Brobeck, Phleger & Harrison, San Diego, California, for appellee.

Appeal from the United States District Court for the Central District of California.

Before: HUG and LEAVY, Circuit Judges, and MUECKE, ^* District Judge.

Opinion by Judge HUG.

HUG, Circuit Judge:

This case requires us to define the authority of a bankruptcy court to sanction an individual that is not a party, an attorney, or a signatory to any documents filed before the court. Craig Caldwell appeals the district court's order affirming the bankruptcy court's sanctions against him in the Chapter 11 bankruptcy proceedings of debtor Rainbow Magazine, Inc. The Bankruptcy Appellate Panel ("BAP") reversed a prior award of sanctions against Caldwell noting that he could not be sanctioned under the bankruptcy court's inherent power. The BAP remanded for further consideration of possible sanctions against Caldwell for signing an inaccurate Statement of Affairs for Rainbow Magazine under Bankruptcy Rule 9011. On remand, the bankruptcy court imposed sanctions under Rule 9011 for the inaccurate statement and also resanctioned Caldwell under the court's inherent powers. Caldwell asserts that the sanctions are against the ruling of the BAP, exceed the authority of the bankruptcy court, and are not supported by the facts.

FACTS

Caldwell does not dispute the facts as presented by the bankruptcy court in its unpublished memorandum which are as follows:

On March 15, 1989, the Debtor petitioned the bankruptcy court of the Central District of California for protection under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. In an apparent attempt to manipulate the jurisdiction of the local courts, the Debtor filed a misleading and inaccurate petition. Instead of identifying its long-time headquarters in Long Beach (Los Angeles County) on the petition, the Debtor listed its address as that of the legal offices of Caldwell's personal attorney in Orange County. Furthermore, the Debtor filed a false Local Rule 104 statement which failed to disclose a related proceeding pending in San Bernadino or Riverside County, In re One Quail Place, Case No. SB 87-06972. These actions produced the initial assignment of the Debtor's case to a bankruptcy judge sitting in Orange County, a "home court" advantage for the 10-50 Chapter 11 case veteran Caldwell.

On the petition date the primary asset of the Debtor was a 384 unit apartment complex located in Palm Desert, California ("the property"). The Debtor had acquired the property merely three weeks earlier at a foreclosure sale held on February 24, 1989. Before and after the sale, the property was encumbered by a first deed of trust in favor of Unified Capital Originally, an entity called One Quail Place ("OQP"), a limited partnership controlled by Dennis Martin, owned the property. That entity filed for Chapter 11 protection in October of 1987 and the case was converted to Chapter 7 one year later. Both UCC and Gibraltar requested relief from the automatic stay in the OQP bankruptcy. Gibraltar obtained relief in August of 1988 and scheduled the foreclosure sale for February 24, 1989. Two days prior to this sale, Caldwell arranged a purchase of Gibraltar's interest, under the deed of trust and note, in the property. For a price of $250,000 Gibraltar sold its interest in the apartment complex, certain personal property located on the premises, and a personal guarantee of Gibraltar's note which Gibraltar had obtained from Martin.

                Corporation ("UCC") that secured a debt of $17,000,000.   Prior to foreclosure, the property had been encumbered by a second deed of trust in favor of Gibraltar Federal Savings and Loan Association ("Gibraltar") securing a debt of $2,000,000
                

Caldwell decided to cause the Debtor--one of his many corporate entities--to make the purchase from Gibraltar. Thus, on February 22, 1989, the Debtor obtained Gibraltar's interest in the real property, the personal property and Martin's personal guarantee. At the foreclosure sale Caldwell caused the Debtor to credit bid in the amount of $2,000,000. As a result, the Debtor obtained title to the property and recorded a deed on February 28, 1989.

Meanwhile, UCC obtained relief from the automatic stay in November of 1988 in the OQP case and commenced litigation in state court to obtain, inter alia, appointment of a receiver. The receiver was appointed on March 14, 1989, only to be displaced the following day when the Debtor filed for bankruptcy.

This court concluded ... that the Debtor filed for bankruptcy in bad faith. The Debtor's petition represented an elaborate effort by Caldwell and Martin, Caldwell's occasional partner and confederate, to frustrate UCC's collection efforts and misuse UCC funds. Specifically, the evidence showed that Martin--who had been retained by the Chapter 7 trustee in the OQP bankruptcy to manage the apartment complex and collect rents--diverted $180,000 out of the OQP bankruptcy estate in direct violation of the instructions of the trustee. Since UCC had perfected its interest in those rents, UCC had a direct interest in the $180,000 Martin misappropriated. Adding insult to injury, Martin then made these funds available to Caldwell and his entity the Debtor, who used the amount to purchase Gibraltar's interest. Following foreclosure, Caldwell then arranged to have the Debtor retain Martin's management company as the managing agent of the property. Thus, the series of actions by Martin and Caldwell had the effect of displacing both the OQP Chapter 7 trustee and the state court receiver while leaving Martin and Caldwell in control of the property and its rental income, a classic case of "apartment house hijacking." The fact that UCC funds were used to finance the entire transaction only made the bad faith filing of the Debtor all the more egregious. Unfortunately, the abuse of bankruptcy law did not end there.

After the foreclosure sale and prior to the Debtor filing for bankruptcy, Caldwell had the Debtor transfer to him personally Martin's guarantee of the note. He also induced the Debtor to transfer the personal property acquired from Gibraltar to another of Caldwell's corporate entities, C & W Imports, Inc. These transfers were essentially undocumented and without consideration. Caldwell then forced the Debtor to lease the personal property (worth $600,000 according to his testimony) from C & W Imports for $10,750 per month. Furthermore, once the Debtor obtained the apartment complex and access to its rents, Caldwell proceeded to pay himself $157,250 in "Compensation, consulting fees" and "loan payment[s]" immediately pre-petition.

Following the bankruptcy petition, UCC again properly perfected its interest in the rents of the apartment complex thereby converting all of the Debtor's funds into "cash collateral" within the meaning of 11 U.S.C. § 363. But despite that statute's Approximately three and a half months after filing the petition, UCC succeeded in wresting control of the property away from Caldwell by securing appointment of a Chapter 11 trustee. Nevertheless, Caldwell managed to deplete all the cash collected by the Debtor while under Caldwell's control--nearly one-half million dollars in rent. These expenditures were without court approval and beyond any consent by UCC.

                clear prohibition against using cash collateral without court approval or the consent of the secured creditor, Caldwell caused the Debtor to pay his related companies nearly $45,000 in managing fees or rent.   At one point, UCC demanded that the Debtor terminate employment of Martin and his managing company.   Caldwell responded by replacing Martin with another entity owned by Caldwell
                

In re Rainbow Magazine, Inc., No. SB 87-04627-DN, at 2-6 (Bankr.C.D.Ca. Feb. 11, 1993) (footnotes omitted). Even though Caldwell orchestrated the bad faith filing of the bankruptcy petition, Caldwell only signed one document presented to the court--a Statement of Affairs.

Based upon these facts, the bankruptcy court sanctioned Rainbow and Caldwell, jointly and severally, in the amount of $261,000 for the bad faith filing on August 21, 1990. Caldwell and Rainbow appealed to the BAP. See In re Rainbow Magazine, Inc. (Caldwell v. Farris), 136 B.R. 545 (9th Cir. BAP 1992). On February 13, 1992, the BAP affirmed the sanctions against Rainbow. However, the sanctions against Caldwell were reversed. The court determined that a nonparty, nonattorney, and nonsignatory could not be sanctioned by the bankruptcy court regardless of the egregiousness of their actions. Id. at 554. However, the court remanded for a determination of the appropriateness of sanctions against Caldwell for the false filing of a Statement of Affairs. We declined to review the BAP ruling due to the interlocutory nature of the remand.

On February 11, 1993, the bankruptcy court issued a new decision resanctioning Caldwell. First, the court sanctioned Caldwell $45,000 for the false filing of the Statement of Affairs. Then the court sanctioned Caldwell $249,389.31 under its inherent powers for orchestrating Rainbow's bad-faith bankruptcy. The court reasoned that the intervening decision in Lockary v. Kayfetz, 974 F.2d 1166 (9th Cir.1992), cert. denied sub nom. Pacific Legal Foundation v. Kayfetz, 508 U.S. 931, 113 S.Ct. 2397, 124 L.Ed.2d 298 (1993), allowed for sanctions against Caldwell. On June 2, 1993, UCC filed an objection to the referral of the appeal to the...