In re Villa Madrid
| Decision Date | 26 February 1990 |
| Docket Number | BAP No. CC-89-1333 VJMe,Bankruptcy No. SA 88-07693 JW,Adv. No. M9-0034 JW. |
| Citation | 110 BR 919 |
| Parties | In re VILLA MADRID, a California limited partnership, Debtor. BLAKE, BARNETT, MILMAN & BELL, INC., a professional corporation, Appellant, v. Gerald T. CHALMERS and Josephine M. Rudine, Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Rose Pyle, Jennings, Engstrand & Henrikson, San Diego, Cal., for appellant.
Lee Cohen, Rutter, O'Sullivan, Greene & Hobbs, Inc., Los Angeles, Cal., for appellees.
Before VOLINN, JONES and MEYERS, Bankruptcy Judges.
OVERVIEW
The debtor filed a bankruptcy in Texas, which was dismissed on August 3, 1988, by stipulation between the debtor and the appellees. The appellant, Blake, Barnett, Milman & Bell, Inc., is the law firm which represented the debtor in filing a second bankruptcy case in California approximately five months later on December 30, 1989. The California bankruptcy court found that the second case was filed in bad faith and dismissed it, assessing monetary sanctions against the debtor and the appellant under Bankruptcy Rule 9011.1 The appellant appeals from the award of sanctions. We affirm.
The debtor is a limited partnership whose principal asset was a 172-unit apartment complex in Brownsville, Texas. The debtor purchased the apartments in 1979 from the appellees for $3,025,000, consisting of $625,000 in cash and two $1,200,000 promissory notes secured by the apartments. The two notes "wrapped" a senior deed of trust in the amount of $1,600,000.
The debtor encountered financial difficulties in October 1986, eventually filing a chapter 11 petition that year in Texas. That case was dismissed by a stipulated order ("the Dismissal Order") which was entered on or about August 1, 1988, after the debtor had filed a plan and disclosure statement, but without any plan having been confirmed. The Dismissal Order provided that the debtor would make certain payments to the appellees and on senior encumbrances. It provided further that in the event of the debtor's default the appellees would "have the absolute right to post the subject property for foreclosure in December, 1988 and to subsequently foreclose on the subject property by Trustee's Sale in January, 1989." Finally, the Dismissal Order provided that the case was "dismissed with prejudice."
The debtor asserts that it agreed to the Dismissal Order in reliance on the representations of the apartments' management company that it could sell or refinance the apartments.
The debtor defaulted under the terms of the Dismissal Order, and the appellees notified the debtor of the default on approximately November 22, 1988. On approximately December 12, 1988, the appellees notified the debtor that the apartments would be sold at a foreclosure sale on January 3, 1989.
On Friday, December 30, 1988, the debtor met with the appellant for the first time to engage the appellant as legal counsel to file this bankruptcy case in California. The appellant determined that the apartments were scheduled to be sold at the foreclosure sale the next business day, Tuesday, January 3, 1989, and therefore that there was limited time to verify the facts and procedural history behind the bankruptcy case that the debtor was proposing to file.
According to the appellant's uncontroverted declarations, the debtor informed the appellant that the property was generating net profits monthly. The appellant then telephoned the debtor's former Texas counsel, who corroborated the information given by the debtor concerning the economic viability of the apartments. The appellant also specifically inquired whether anything about the dismissal of the Texas bankruptcy would preclude a new filing in California, and specifically whether § 1092 was implicated, and received negative replies. Finally, the appellant telephoned the debtor's California state court counsel and received a positive reference as to the debtor's character and credibility. The appellant then agreed to represent the debtor.
The debtor then telephoned the appellees' Texas counsel to inform them of the intention to file a bankruptcy petition that day, and were informed of the appellees' opinion that such a filing was inconsistent with the Dismissal Order. The appellant then obtained a telecopied facsimile of the Dismissal Order, and although there was not sufficient time to do extensive research on its effect, concluded that it did not preclude the filing of a new bankruptcy case in California. Accordingly, the appellant filed a petition on behalf of the debtor in the California bankruptcy court.
The appellees proceeded with the foreclosure sale as scheduled on January 3, 1989. The appellants contend that a conformed copy of the filed petition was telecopied to the office of the appellees' Texas counsel on December 30, while the appellees contend that their counsel did not receive notice of the bankruptcy until after the foreclosure sale on January 3, 1989.
In the ensuing days, the appellants and counsel for the appellees had conversations concerning their respective interpretations of the effect of the Dismissal Order on the debtor's right to file the pending bankruptcy. The appellants filed a declaratory action on behalf of the debtor to determine that issue, and the appellees filed a motion to dismiss the case, for nunc pro tunc relief from stay to validate the foreclosure sale, and for sanctions against the debtor and the appellant.
The bankruptcy court ultimately held a consolidated hearing on those matters. The parties filed several declarations, but no live testimony was taken. The court found that the California bankruptcy case was filed in bad faith and therefore granted the appellees' motions for dismissal and nunc pro tunc relief from stay.
The court also assessed sanctions against the appellant and its client (the debtor) in the amount of $15,509.70. The appellant appealed the sanctions award against it. No appeal was taken from the sanctions award against the debtor, the dismissal of the case, or the granting of relief from stay nunc pro tunc.
1. Did the bankruptcy court properly determine that the appellant violated Rule 9011 by filing the petition in the California bankruptcy case?
2. Was the amount of the sanction award proper?
LEGAL STANDARD FOR IMPOSITION OF SANCTIONS
Rule 9011 provides that an attorney's signature on a pleading constitutes a certificate that to the best of the attorney's knowledge, information, and belief formed after reasonable inquiry, the pleading is (1) well grounded in fact, (2) warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and (3) not interposed for any improper purpose, such as to harass, cause delay, or increase litigation costs.
The rule should not be applied so as to "chill an attorney's enthusiasm or creativity in pursuing factual or legal theories." In re Lewis, 79 B.R. 893, 896 (9th Cir. BAP 1987), citing Golden Eagle Dist. Corp. v. Borroughs Corp., 801 F.2d 1531, 1536-37 (9th Cir.1986), which itself was citing 97 F.R.D. at 199. Thus the relevant inquiry is whether "after reasonable inquiry, a competent attorney could not form a reasonable belief that the pleading is well grounded in fact and is warranted by existing law or modification or reversal of existing law." Lewis at 896, citing Eastway Const. Corp. v. City of New York, 762 F.2d 243, 254 (2nd Cir.1985) and Golden Eagle at 1537.
In summary, the question is not whether the second bankruptcy petition was filed in bad faith, but rather whether the appellant knew, or after reasonably diligent inquiry should have known, that the filing of the petition would be in bad faith.
Whether specific conduct violated Rule 9011 is a question of law that is reviewable de novo. Hudson v. Moore Business Forms, Inc., 836 F.2d 1156, 1159 (9th Cir.1987); Zaldivar v. City of Los Angeles, 780 F.2d 823, 828 (9th Cir.1986); In re Lewis, 79 B.R. 893, 895 (9th Cir. BAP 1987). The bankruptcy court's factual determinations stand unless they are clearly erroneous. Hudson at 1156; Zaldivar at 828. The amount of the sanctions is reviewed for an abuse of discretion. Hudson at 1156; Zaldivar at 828.
In its written findings of fact and conclusions of law, the bankruptcy court found that the appellant's filing of the California bankruptcy petition "was a knowing, intentional and clear violation of the dismissal with prejudice of the Texas Bankruptcy Case as set forth in the Settlement and Compromise Agreement and Order of Dismissal."3 The court then concluded that sanctions should be assessed against the appellant "based upon the bad faith filing of the Debtor's December 30, 1988, Chapter 11 petition. . . ."
The bankruptcy court thus at least implicitly found that given the circumstances surrounding the Texas dismissal and the California filing, the appellant knew or should have known when it filed the second petition on the debtor's behalf that the second petition was filed in bad faith. That finding is supported by the record.
The debtor initially filed in Texas, where its principal assets are located. After protracted proceedings in which no plan was confirmed, the debtor and the appellees reached an agreement, which was embodied in the stipulated Dismissal Order. Pursuant to that agreement, the bankruptcy case was dismissed and the appellees agreed to delay foreclosure for approximately five months to give the debtor a final opportunity to sell the apartments. During that time the debtor was to make specified payments to the appellees and on encumbrances against the...
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