In re Rainbow Magazine, Inc.
| Decision Date | 13 February 1992 |
| Docket Number | CC-90-1835-POV,BAP No. CC-90-1829-POV,Bankruptcy No. SB 89-04627 DN. |
| Citation | 136 BR 545 |
| Parties | In re RAINBOW MAGAZINE, INC., Debtor. Craig E. CALDWELL, Appellant, v. Timothy J. FARRIS, Trustee, Unified Capital Corporation, Robert P. Mosier, Chapter 11 Trustee, Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
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David J. Fischer, Chicago, Ill., for appellant.
Theodore Graham, San Diego, Cal., for appellees.
Before PERRIS, OLLASON and VOLINN, Bankruptcy Judges.
The bankruptcy court assessed sanctions against the appellants Rainbow Magazine, Inc. ("the debtor") and Craig E. Caldwell, its principal, pursuant to Bankruptcy Rule 9011 as a result of their conduct in filing the petition. The debtor (BAP No. CC-90-1835) and Caldwell (BAP No. CC-90-1829) filed these timely appeals.3 We AFFIRM the bankruptcy court's decision to impose sanctions against the debtor, but REVERSE the imposition of sanctions against Craig Caldwell. We REMAND for a determination of the sanction award, if any, against Caldwell for his signature on the false statement of affairs and for a redetermination of the amount of sanctions against the debtor.
The debtor was formed in September of 1987 and immediately thereafter conducted a short-lived business. Caldwell, the sole shareholder and chief executive officer of the debtor, subsequently purchased the stock of the debtor in 1987. From that time until February of 1989, the debtor conducted no business, owned no property, had no employees, and had no business records other than a checking account opened in January of 1989. The only other officer of the debtor, its president, the Reverend Sam Steel, was not involved in any business operations of the debtor. Caldwell has been involved as a principal in several other entities that have gone through bankruptcy.
The debtor's primary asset at the time it filed its bankruptcy petition was a 384 unit apartment project in Palm Desert, California ("the property"). Prior to February of 1989, One Quail Place ("One Quail"), a limited partnership controlled by Dennis Martin, owned the property as its primary asset. The property was encumbered by a first deed of trust in favor of the appellee, Unified Capital Corp. ("Unified") securing a debt in the approximate sum of $17,000,000 and a second deed of trust in favor of Gibraltar Federal Savings and Loan Association ("Gibraltar") securing a note in the original principal amount of $2,000,000. Mr. Martin was a partner of Caldwell in other enterprises.
One Quail filed a Chapter 11 petition in October of 1987. In August of 1988, Gibraltar obtained relief from the automatic stay in the One Quail bankruptcy and subsequently scheduled a sale under the trust deed for February 24, 1989. In November of 1988, Unified obtained relief from the automatic stay in the One Quail bankruptcy and subsequently commenced proceedings in state court for, inter alia, foreclosure and appointment of a receiver. Also in November of 1988, the bankruptcy court converted the One Quail case to Chapter 7. Martin continued to manage the property for One Quail's bankruptcy trustee. On March 13, 1989, Unified obtained the appointment of a state court receiver.
On February 22, 1989, the debtor purchased Gibraltar's interest, under the note and trust deed, in the real property and associated personal property and Martin's guaranty of the note, for $250,000 in cash. The source of funds used to pay the $250,000 was a $15,000 loan from Caldwell, a $55,000 loan or repayment of a debt from the debtor's attorney, Clint Hubbard,5 and $180,000 diverted by Martin, without authority, from the One Quail bankruptcy estate. In return for the $180,000 and an additional $200,000 to be paid from Martin's share of the proceeds of another enterprise in which Martin and Caldwell were involved, Caldwell agreed to release Martin from his guaranty of the $2,000,000 Gibraltar note.
On February 24, 1989, the debtor proceeded with the scheduled foreclosure sale under the Gibraltar deed of trust and purchased the property with a credit bid. Shortly after purchasing the property, and before filing its bankruptcy petition, the debtor paid to Caldwell $157,000 in consulting fees and loan payments. In addition, the debtor transferred $600,000 worth of personal property to C & W Imports, a corporation owned and controlled by Caldwell, and transferred Martin's guaranty of the Gibraltar note, worth between $380,000 and $500,000, to Caldwell.
The debtor filed its Chapter 11 petition on March 15, 1989, one day after the receiver obtained by Unified took possession of the property. Following the filing of the petition, the debtor paid $10,000 monthly rent to C & W Imports for the personal property that was transferred to C & W prior to the petition. The debtor also paid, without authority, at least $45,000 from cash collateral to Caldwell or companies he controlled. In addition, having effectively removed One Quail's bankruptcy trustee and the state court receiver from the property by the foreclosure sale and the bankruptcy petition, the debtor retained Martin's company to manage the property. When Unified insisted that Martin's company be terminated, the debtor hired and paid 5% of the gross rents, without bankruptcy court approval, to a new management company controlled by Caldwell.
Unified filed a motion to dismiss the bankruptcy case under 11 U.S.C. § 1112(b),6 on the basis that the debtor filed the petition in bad faith.7 Unified also filed a motion for an order assessing sanctions against the debtor, its counsel and Caldwell under Fed.R.Civ.P. 11 ("Rule 11"), Fed.R.Bankr.P. 9011 ("Rule 9011") and 11 U.S.C. § 105 on the grounds that the bankruptcy petition was filed in bad faith and for an improper purpose. The United States Trustee joined in both of these motions and also moved to convert the case. Effective August 31, 1989, the bankruptcy court converted the case to Chapter 7.
Following hearings on the sanctions motion, the bankruptcy court filed a Memorandum of Decision on September 5, 1989, assessing sanctions against the debtor and Caldwell in the sum of $261,000, jointly and severally, determining that the filing of the petition was an abuse of the bankruptcy process on the basis of the above described conduct.8 Following the entry of the order imposing the sanctions on August 21, 1990, the appellants filed these timely appeals.
1. Whether the bankruptcy court abused its discretion in determining that the filing of the petition was sanctionable conduct under Rule 9011 in light of the surrounding circumstances.
2. Whether the bankruptcy court abused its discretion in imposing sanctions against the debtor and Caldwell.
3. Whether the bankruptcy court abused its discretion in imposing $261,000 in attorney's fees as sanctions without taking evidence and making findings as to the reasonableness of the fees.
We apply an abuse of discretion standard in reviewing all aspects of a bankruptcy court's imposition of sanctions under Rule 9011. In re Grantham Brothers, 922 F.2d 1438, 1441 (9th Cir.1991); Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 110 S.Ct. 2447, 2461, 110 L.Ed.2d 359 (1990). A bankruptcy court would necessarily abuse its discretion if it bases its ruling upon an erroneous view of the law or a clearly erroneous assessment of the evidence. Id.
The appellants contend that the bankruptcy court abused its discretion in determining that the filing of the petition was sanctionable conduct because it did not follow the standards set forth for Rule 9011 sanctions in the Ninth Circuit, because it erroneously applied the standard for dismissal rather than the standard for sanctions and because their intent to reorganize made the filing a good faith one.
The bankruptcy court based the award of sanctions on Rule 9011(a)9 and Rule 11. Because the pertinent language of these rules is virtually identical, authorities analyzing Rule 11 are applicable to the Rule 9011 analysis, In re Chisum, 847 F.2d 597, 599 (9th Cir.1988), cert. denied, 488 U.S. 892, 109 S.Ct. 228, 102 L.Ed.2d 218 (1988), and this opinion will use authorities under Rule 9011 and under Rule 11 interchangeably.
Rule 11 provides two bases for the imposition of sanctions: (a) if the paper is frivolous in the sense that after reasonable inquiry, the sanctioned party could not form a reasonable belief that the paper is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; or (b) if the paper is filed for an improper purpose. See, e.g., Grantham Brothers, 922 F.2d at 1441; Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1362 (9th Cir.1990) (en banc); Zaldivar v. City of Los Angeles, 780 F.2d 823, 830-31 (9th Cir.1986). Both the frivolousness and improper purpose components are measured by an objective standard that looks to the reasonableness of the conduct under the circumstances. E.g., Zaldivar, 780 F.2d at 829-30. Thus, the signer's subjective intent is irrelevant to the Rule 11 analysis. Id.
In the context of a bad faith filing of a bankruptcy petition, the imposition...
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