In re Endrex Investments, Inc., Bankruptcy No. 87 B 12005 M
| Decision Date | 19 March 1990 |
| Docket Number | Civ. A. No. 88-K-1178.,Bankruptcy No. 87 B 12005 M |
| Citation | 111 BR 939 |
| Parties | In re ENDREX INVESTMENTS, INC., a Hawaii corporation, Debtor. ENDREX INVESTMENTS, INC., a Hawaii corporation, Sterling and Miller, P.C., and Nancy D. Miller, Appellants, v. MAUNA LANI RESORT, INC., Appellee. |
| Court | U.S. District Court — District of Colorado |
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Nancy Miller, Denver, Colo., for Endrex Investments.
Thomas C. Seawell, Denver, Colo., for Mauna Lani Resort.
In this appeal, the debtor, Endrex Investments, Inc., and its attorneys, Sterling & Miller, P.C. and Nancy D. Miller (collectively, the appellants), appeal the imposition of sanctions against them. They raise five issues in this appeal: (1) whether the imposition of sanctions violated their right to due process, (2) whether sanctions under Bankr.R. 9011 were erroneous because no improper pleading was filed, (3) whether sanctions under 28 U.S.C. § 1927 were erroneous because the court made no finding of subjective bad faith, (4) whether the bankruptcy judge acted as a party in interest and violated his duty to rule impartially, and (5) whether the court's finding that this bankruptcy case was filed in bad faith warranted the imposition of sanctions. I reverse the award of sanctions.
The material facts of this case are undisputed. Endrex was a Hawaii corporation owned entirely by Mrs. Clyde Brannan. Mr. Brannan was the corporation's president, and its secretary/treasurer was Mike VanderLann, who also served as Endrex's accountant. Endrex's primary assets were a luxury condominium unit in Hawaii and an 80 percent interest in a corporation known as LaMer, Inc. LaMer, Inc. was a privately held corporation engaged in the development of production facilities in Hawaii for the growth of high protein algae to be sold for commercial and agricultural use. The financing of LaMer, Inc. was to be through a private placement which was expected to generate approximately $3 million in new funds for the operation.
The condominium unit was subject to a mortgage securing a promissory note in the original principal amount of $700,000 to Mauna Lani Resorts, Inc. (Mauna Lani). Endrex leased the unit to Mr. Brannan, with the rental on the unit being equal to the mortgage payment. In addition, Endrex was responsible to the Mauna Lani Homeowner's Association for certain condominium association fees and assessments. By June, 1987, Mr. Brannan had failed to make several rental payments, and Endrex fell behind in its payment of the mortgage and the condominium association fees, forcing the homeowner's association and Mauna Lani to commence foreclosure proceedings. On October 7, 1987, before the scheduling of the foreclosure sale, Endrex filed for bankruptcy under Chapter 11.
On January 21, 1988, Mauna Lani moved under 11 U.S.C. § 362 for relief from the automatic stay to proceed with foreclosure. Mauna Lani argued that relief from the stay was justified because the condominium property was not necessary to the debtor's reorganization, the debtor had no equity in the property, and the debtor's bankruptcy was filed in bad faith. Endrex, through its attorneys, opposed this motion, claiming that there was equity in the property, that it was necessary to its reorganization, and that the bankruptcy was filed in good faith.
On February 16, 1988, the bankruptcy court held a hearing on the motion for relief from the stay. After hearing argument from counsel, the court granted the § 362 motion. First, the court found that there was an insufficient equity cushion to merit continuance of the stay. R.Vol. II at 18. Next, it held that, while the property was the major asset of the bankruptcy estate, it was not necessary to an effective reorganization, if such a reorganization were possible. Id. at 18-19. Finally, as to debtor's bad faith filing, the court stated:
The Court is not able to, at this moment, cite the case law that knows — that the Court knows exists, but the Court is, under the right circumstances, sometimes entitled sua sponte to observe the good faith nature of a filing, or the lack of good faith in the nature of a filing by a Chapter 11 debtor. This Court has not had sufficient facts presented or offers of proof, if you will, because that\'s the nature of this hearing, and suffice it to say, however, that I think this Court is not reluctant to venture the observation that the totality of the circumstances involved in this case does raise a question as to whether or not this is, indeed, a legitimate Chapter 11 business reorganization or an attempt to do so.
Id. at 22. The court then requested counsel to prepare a draft order containing proposed findings of fact on the matter. On February 18, 1988 nunc pro tunc February 17, 1988, the court entered an order incorporating the above conclusions, but declining to make a final determination as to the bad faith issue until a later hearing on a motion to dismiss the debtor's Chapter 11 petition, which Mauna Lani filed concurrently with its § 362 motion.
Although there is some dispute as to when Endrex's counsel received a copy of the motion to dismiss, notice regarding the motion pursuant to Local Bankruptcy Rule 23 was issued on or about January 22, 1988. The notice provided that any opposition to the motion to dismiss and request for a hearing must have been filed on or before February 8, 1988 and that in the absence of any such request, the Court would grant the motion on or after February 15, 1988. Although Endrex filed no opposition to the motion to dismiss, by notice dated February 18, 1988, the court scheduled a hearing on the motion for March 10, 1988. On March 9, 1988, one day before the scheduled hearing, Endrex filed its consent to the motion to dismiss and its request that the court vacate the hearing.
Despite Endrex's request to vacate the hearing, it went forward as scheduled. Both parties presented evidence regarding the debtor's filing of the case, although counsel for Endrex reiterated that it was not opposing the motion. See R.Vol. III at 31. At the conclusion of the hearing, the following colloquy between the court and counsel for Endrex took place:
On March 31, 1988, the bankruptcy court entered a written order granting the motion to dismiss and assessing attorney fees as sanctions against the appellants. See Mauna Lani Resort, Inc. v. Endrex Investments, Inc. (In re Endrex Investments, Inc.), 84 B.R. 207 (Bankr.D.Colo. 1988). The court found that the debtor's bankruptcy was filed in bad faith and dismissed the case under 11 U.S.C. § 1112(b). Id. at 210-11. It also concluded that sanctions were justified under Bankr.R. 9011, 28 U.S.C. § 1927 and the court's inherent power to manage it affairs. Analyzing the appellants' conduct under Bankr.R. 9011, the court stated:
The initial filing might be construed or could be deemed not in bad faith, but rather the product of urgent last minute maneuvers by a debtor scrambling to legitimately salvage assets. This is not an uncommon occurrence. Nonetheless, at some point after filing, the debtor and counsel must carefully evaluate and honestly assess the debtor\'s reorganization prospects.
Id. at 212. The court cited counsel's continued opposition to the motion for relief from stay and the debtor's failure to comply with discovery requests and reporting requirements as further justification for the Rule 9011 sanctions and for sanctions under § 1927. Id. Unable to determine precisely the allocation of fault between the defendant and counsel, the court required that each pay one-half of the fee and expenses awarded as sanctions. Id. at 213.
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