In re California Fidelity, Inc.
| Decision Date | 28 June 1996 |
| Docket Number | BAP No. NC-95-2136-RAsV. Bankruptcy No. 95-10110-AJ. |
| Parties | In re CALIFORNIA FIDELITY, INC., Debtor. Raymond J. DUFF, Appellant, v. UNITED STATES TRUSTEE and Committee of Unsecured Creditors, Appellees. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Gerald F. Ellersdorfer, San Francisco, CA, for Appellant.
Patricia A. Cutler, San Francisco, CA, for Appellees.
Before: RUSSELL, ASHLAND, and VOLINN, Bankruptcy Judges.
This appeal arises from the bankruptcy court's order granting the United States Trustee's motion for sanctions against the debtor's principal for soliciting votes within the meaning of § 1125(b)1. The debtor's principal appeals. We AFFIRM.
On January 19, 1995, California Fidelity, Inc., ("CFI" or "debtor"), a real estate mortgage company, filed for chapter 11 bankruptcy relief. The debtor's bankruptcy petition was signed by its president, Raymond J. Duff ("Duff" or "appellant").
On May 1, 1995, the debtor filed it first plan and disclosure statement. The hearing for approving the debtor's disclosure statement was set for June 6, 1995.
Upon motion by the United States Trustee ("UST"), the bankruptcy court entered an order appointing a chapter 11 trustee on June 27, 1995.
Both the UST and the reconstituted creditors' committee2 filed objections to the debtor's disclosure statement. At the debtor's request, the bankruptcy court continued the hearing for 30 days. A series of continuances were granted over the next several months resulting in a fourth disclosure statement hearing which was scheduled for September 6, 1995.
On August 2, 1995, Duff attended a creditors' committee meeting to seek the committee's support for his amended liquidating plan. The chapter 11 trustee was also at the meeting to negotiate a competing plan. At the conclusion of the meeting, the committee rejected Duff's proposal and agreed to jointly file the trustee's plan and disclosure statement ("joint disclosure statement/joint plan"). The hearing on the adequacy of the joint disclosure statement was set for September 6, 1995, the same date as the continued hearing on the debtor's disclosure statement.
On August 24, 1995, thirteen days before the disclosure statement hearing, Duff disseminated a letter to three hundred (300) of the debtor's unsecured creditors attacking the Department of Justice, the committee, the trustee and the bankruptcy court. Attached to Duff's letter was a letter from Leo Larson, the chair of the creditors' committee, to the other members of the committee advising them, inter alia, to reject the joint plan.
On August 31, 1995, after learning about Duff's letter, the UST filed an ex parte application for an order shortening time for hearing on a motion for an order limiting communications with creditors and for sanctions. According to the UST, Duff had violated § 1125(b)3 by soliciting votes from holders of impaired claims or interests before a disclosure statement had been approved.
At the ex parte hearing on September 1, 1995, the debtor's attorney, Gerald F. Ellersdorfer, appeared to argue Duff's position.4 Ellersdorfer also filed a response to the UST's motion on Duff's behalf.
After considering the pleadings and the oral argument presented by both sides, the bankruptcy court orally granted the UST's motion and as a curative measure, instructed the court clerk to immediately send a copy of the bankruptcy court's decision to all three hundred (300) creditors who had received Duff's letter.
In its Memorandum of Decision, dated September 1, 1995, the bankruptcy court found that Duff had violated § 1125(b) by soliciting votes against the joint plan with false or misleading information and by touting his own plan before a disclosure statement had been approved. The bankruptcy court also ruled that it would assess monetary sanctions against Duff at a later hearing.
Prior to a second hearing on the UST's motion, the UST filed a memorandum requesting sanctions in an amount equal to the costs and fees incurred by the various parties as a result of Duff's letter. In addition, each of the five parties seeking compensation5 filed declarations with the bankruptcy court indicating the amount of time they expended in connection with Duff's letter and their billable hourly rate.
Before the second hearing, Duff and Ellersdorfer each filed responses in opposition to the UST's request for sanctions. Duff continued to contend that no solicitation had occurred and Ellersdorfer argued that sanctions were inappropriate because the joint plan was ultimately confirmed and, therefore, Duff's actions did not cause any actual harm.
At the second hearing on September 29, 1995, neither Duff nor Ellersdorfer appeared. The bankruptcy court ordered sanctions against Duff for violating § 1125(b) in the amount of $4,422.24.6 Duff appeals.
A. Whether the letter sent by Duff to the unsecured creditors constituted an impermissible "solicitation" within the meaning of § 1125(b).
B. Whether Duff received adequate notice and a hearing on the UST's motion to limit Duff's communications with creditors and to impose sanctions for an alleged violation of § 1125(b).
C. Whether the bankruptcy court abused its discretion by imposing sanctions for a violation of § 1125(b) and whether the amount of the sanctions was appropriate.
Whether § 1125(b) has been violated is a mixed question of law and fact. Century Glove, Inc. v. First Am. Bank of New York, 860 F.2d 94, 97 (3d Cir.1988). Mixed questions of law and fact are reviewed de novo. Zeier v. IRS, 80 F.3d 1360, 1360 (9th Cir.1996). However, to the extent an issue within the mixed question can be identified as solely a question of fact, it is subject to a clearly erroneous standard of review. See Rose v. United States, 905 F.2d 1257, 1259 (9th Cir.1990).
Similarly, whether the bankruptcy court violated an individual's right to due process is a mixed question of law and fact which is reviewed de novo. Morrissey v. Brewer, 408 U.S. 471, 481, 92 S.Ct. 2593, 2600, 33 L.Ed.2d 484 (1972) (). In reviewing a mixed question, separate issues of fact are reviewed for clear error. Rose, 905 F.2d at 1259.
An order imposing sanctions is reviewed under an abuse of discretion standard. In re White, 186 B.R. 700, 703 (9th Cir. BAP 1995) (). An abuse of discretion occurs if the bankruptcy court applied an incorrect legal standard or its findings of fact are clearly erroneous. Allen v. Shalala, 48 F.3d 456, 457 (9th Cir.1995).
Duff's principal argument is that the debtor's bankruptcy filing did not suspend his First Amendment right to freedom of expression. According to Duff, his letter was merely "an expression of his views" and did not violate § 1125(b).
Duff also contends that the bankruptcy court denied him adequate notice and a hearing on the UST's ex parte motion to limit communications and for sanctions. With respect to the amount of sanctions, Duff contends that the bankruptcy court abused its discretion in awarding the amount of sanctions requested because he was not served with two of the five declarations submitted to the court and because the declarations were inadequate as they failed to itemize the amount of fees being requested.
The UST contends that Duff's letter clearly violated § 1125(b) because it solicited votes to reject the joint plan before a disclosure statement had been approved and, under the circumstances, sanctions were appropriate.
In response to Duff's due process argument, the UST contends that it was Duff's actions which created the exigent circumstances requiring the UST to request the hearing on shortened time. In addition, the UST notes that Duff had sufficient time to file a response and to have Ellersdorfer appear at the hearing on his behalf.
Lastly, the UST contends that the amount of the sanctions was appropriate because it reflected the actual cost incurred by the various individuals who were forced to respond to Duff's communication with the unsecured creditors and that by failing to appear at the hearing or have counsel appear on his behalf, Duff waived his opportunity to object to the amount of sanctions.
A. Whether Duff's Letter to Unsecured Creditors Constituted an Impermissible Solicitation Within the Meaning of § 1125(b)
The purpose of a disclosure statement is to give all creditors a source of information which allows them to make an informed choice regarding the approval or rejection of a plan. § 1125(a) and (b). Section 1125(b) provides that no one is permitted to "solicit" plan acceptances or rejections until a disclosure statement has been approved by the bankruptcy court and transmitted to creditors along with the proposed plan of reorganization. At a minimum, § 1125(b) seeks to guarantee that a creditor receives adequate information about the plan before the creditor is asked for a vote. Century Glove, 860 F.2d at 100 ().
In the instant case, it is undisputed that Duff transmitted a letter to all or nearly all of the debtor's unsecured creditors thirteen days before the scheduled hearing to approve the creditors' committee's and the chapter 11 trustee's joint disclosure statement. Thus, at the time the creditors received Duff's communication, the creditors were without any court approved information concerning the plan. The parties disagree, however, over the significance of Duff's letter and whether, as a matter of law, it constituted an impermissible "solicitation" under § 1125(b).
The term solicitation as used in § 1125(b) has...
To continue reading
Request your trial