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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF ALASKA
REGINALD J. CHRISTIE, JR. Appellant, vs. POINT POSSESSION, INC., Appellee. |
Case No. A01-0014 CV (JKS) O R D E R |
INTRODUCTION
Presently before the Court is a bankruptcy appeal filed by Appellant Reginald J. Christie, Jr., to reverse a decision of the United States Bankruptcy Court for the District of Alaska, which awarded monetary and nonmonetary sanctions against Christie. See Docket Nos. 9 (Appellant's Br.); 19 (Appellee's Br.); 21 (Appellant's Reply).
FACTUAL AND PROCEDURAL BACKGROUND
The underlying facts do not appear to be in dispute. See Docket Nos. 9; 19. The Honorable Donald MacDonald, IV, United States Bankruptcy Judge for the District of Alaska, made the following findings:
In May of 1998, [Point Possession, Inc. (“Possession”)] sold the debtor 4,480 acres of unimproved real property located on the Kenai peninsula near Nikiski for $3.9 million. The debtor's down payment was approximately $700,000.00. Annual payments of $465,898.00 were due thereafter on May 29 of 1999 and 2000. The remaining balance was payable in a lump sum due on May 29, 2001. After the debtor failed to make the first annual payment, Possession initiated a nonjudicial foreclosure on September 1, 1999. The foreclosure sale was scheduled for December of 1999. It was postponed until January 28, 2000, in exchange for the debtor's payment of $50,000.00 to Possession and $28,000.00 in delinquent real property taxes to the Kenai Peninsula Borough.
One day before the scheduled foreclosure sale, on January 27, 2000, the debtor filed its first chapter 11 petition. Christie signed the petition as the debtor's attorney. The debtor's managing partner, Ralph Ritteman, signed the petition on its behalf. On its schedules, [Pathfinders' Properties International, LLC (“Pathfinders”)] investors were listed as unsecured creditors. Possession was the only true creditor listed. The debtor didn't file a chapter 11 plan, nor did it make interest payments to Possession. Possession moved for relief from stay on June 2, 2000, and the United States Trustee moved for dismissal or conversion three days later. The debtor objected to both motions. Possession received relief from stay on July 3, 2000. The debtor consented to dismissal at a hearing held on July 6, 2000.
Following dismissal, Christie sought a continuance of the foreclosure sale from Possession. The debtor paid $20,000.00 to get the sale date extended from July 10 to July 28, 2000. On July 27, Pathfinders filed its second chapter 11 petition. As with the previous petition, Christie again signed as the 7 ABR 214
debtor's attorney and Ralph Ritteman signed on behalf of the debtor. Ritteman had consulted with one of the debtor's other partners, Elmer L. Cook, Jr., before filing the petition. Ritteman would take no action without Cook's consent. Possession and the United States Trustee filed motions to dismiss the case. After a hearing on August 17, 2000, the United States Trustee's motion to dismiss was granted based on the court's finding that the second petition was filed in bad faith.
Two minutes prior to a foreclosure sale scheduled for August 21, 2000, at 3:00 p.m., Pathfinders filed its third bankruptcy petition, this one a chapter 7. Although Christie did not sign the petition as the debtor's attorney this time, his secretary typed it and he drove Ritteman to court so the petition could be filed. The case was dismissed on August 30, 2000, on an expedited basis.
See Docket No. 3, Vol. 1, Ex. 48 at 1–3 (footnote omitted). Possession then sought “to recover sanctions for Pathfinders' second and third bankruptcy filings.” See id. at 3. The bankruptcy court found that Christie was responsible for the second and third filings. See id. at 11. The bankruptcy court further determined that Christie acted in bad faith, the petitions were frivolous, not warranted by law, and were filed for an improper purpose—that is, to cause unnecessary delay of Possession's foreclosure sale. See id. at 9.
Pursuant to Federal Rule of Bankruptcy Procedure 9011, the bankruptcy court awarded sanctions. Specifically, as stated by Judge MacDonald:
I will award Possession $5,297.00 in attorney's fees and costs as a sanction for the filing of the second chapter 11 petition. $2,648.50 shall be allocated against [Pathfinders], [Ritteman] and [Cook], as managing partners of Pathfinders, and Christie, Pathfinders' attorney, jointly and severally for violation of Rule 9011(b)(1). An additional $2,648.50 in attorney's fees shall be allocated against [Christie] for violation of Rule 9011(b)(2). Christie is also liable for the attorney's fees under 28 U.S.C. § 1927. As sanctions for Pathfinders' third bankruptcy filing, $3,060.50 in attorney's fees and costs will be recoverable, jointly and severally from the debtor and its managing partners, [Ritteman] and [Cook]. As a further sanction, nonmonetary in nature, for both the second and third filing, [Christie] will be prohibited for representing debtors in any proceeding arising under Title 11, United States Code, until January 1, 2004. Nor shall anyone employed by [Christie] be permitted to prepare petitions or schedules for debtors in cases arising under Title 11.
See id. at 11–12 (footnote omitted).
Christie appealed the bankruptcy court's award of sanctions to this Court. See Docket No. 1. Given the similarity of issues, this case was consolidated with Christie v. Point Possession, Inc., A01-0017 CV (JKS). See Docket No. 18. The parties have fully briefed the issues before the Court and the matter is now ripe. See Docket Nos. 9 (Appellant's Br.); 19 (Appellee's Br.); 21 (Appellant's Reply). As the matter before the Court is an appeal of a United States Bankruptcy Court's final order and judgment, this Court has jurisdiction. See 28 U.S.C. § 158(a).
DISCUSSION
7 ABR 215I. Standard of Review
A district court reviews a bankruptcy court's order of sanctions under Federal Rule of Bankruptcy Procedure 9011 for an abuse of discretion. See In re Grantham Bros., 922 F.2d 1438, 1441 (9th Cir. 1991). “A district court would necessarily abuse its discretion if it based its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence.” Id. (quoting Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990)). “Under this standard, a reviewing court cannot reverse unless it has a definite and firm conviction that the court below committed a clear error of judgment in the conclusion it reached upon a weighing of the relevant factors.” Barona Group of Capitan Grande Band of Mission Indians v. Am. Mgmt. & Amusement, Inc., 824 F.2d 710, 724 (9th Cir. 1987).
II. Bankruptcy Rule 9011
Bankruptcy Rule 9011 states that:
By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;
(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and
(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief.
See Fed. R. Bankr. P. 9011(b) (West Supp. 2001).
Bankruptcy Rule 9011 further provides that
[i]f, after notice and a reasonable opportunity to respond, the court determines that subdivision (b) has been violated, the court may, subject to the conditions stated below, impose an appropriate sanction upon the attorneys, law firms, or parties thathave violated subdivision (b) or are responsible for the violation.
(1) How initiated
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(A) By motion
A motion for sanctions under this rule shall be made separately from other motions or requests and shall describe the specific conduct alleged to violate subdivision (b). It shall be served as provided in Rule 7004. The motion for sanctions may not be
filed with or presented to the court unless, within 21 days after service of the motion (or such other period as the court may prescribe), the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected, except that this limitation shall not apply if the conduct alleged is the filing of a petition in violation of subdivision (b). If warranted, the court may award to the party prevailing on the motion the reasonable expenses and attorney's fees incurred in presenting or opposing the motion. Absent exceptional circumstances, a law firm shall be held jointly responsible for violations committed by its partners, associates, and employees.
(B) On court's initiative
On its own initiative, the court may enter an order describing the specific conduct that appears to violate subdivision (b) and directing an attorney, law firm, or party to show cause why it has not violated subdivision (b) with respect thereto.
(2) Nature of sanction; limitations
A sanction imposed for violation of this rule shall be limited to what is sufficient to deter repetition of such conduct or comparable conduct by others similarly situated. Subject to the limitations in subparagraphs (A) and (B), the sanction may consist of, or include, directives of a nonmonetary nature, an order to pay a penalty into court, or, if imposed on motion and warranted for effective deterrence, an order directing payment to the movant of some or all of the reasonable attorneys' fees and other expenses incurred as a direct result of the violation.
(A) Monetary sanctions may not be awarded against a represented party for a violation of subdivision (b)(2).
(B) Monetary sanctions may not be awarded on the court's initiative unless the court issues its order to show cause before a voluntary dismissal or settlement of the claims made by or against the party which is, or whose attorneys are, to be sanctioned.
(3) Order
When imposing sanctions, the court shall describe the conduct determined to constitute a violation of this rule and explain the basis for the sanction imposed.
See Fed. R. Bankr. P. 9011(c) (West Supp. 2001).
7 ABR 217III. 11 U.S.C. § 105
Courts have an inherent power to “fashion an appropriate sanction for conduct which abuses the judicial process.” See Chambers v. NASCO, Inc., 501 U.S. 32, 44–45 (1991). Moreover, bankruptcy courts
may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
See 11 U.S.C. § 105(a) (West 1993). Thus, “[t]here can be little doubt that bankruptcy courts have the inherent power to sanction vexatious conduct presented before the court. The inherent power is recognized in the statutory grant Congress has provided the bankruptcy courts.” See In re Rainbow Magazine, Inc., 77 F.3d 278, 284 (9th Cir. 1996).
IV. Monetary Sanctions
Bankruptcy Rule 9011, like its sister rule, Federal Rule of Civil Procedure 11, calls for the imposition of sanctions on litigants and attorneys who file pleadings and papers in violation of the rule's requirements. These requirements are two-fold: First, the signer of the pleading must certify it isn't frivolous, i.e., that it 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. Second, the signer must ensure that the paper or pleading is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.
In re Marsch, 36 F.3d 825, 829 (9th Cir. 1994) (quotations and citations omitted). 1.
Id. at 831. “[W]hen the rule is violated, the imposition of sanctions is mandatory, not discretionary. . . . Under [Bankruptcy Rule] 9011, sanctions are required if the petitioner's actions are not ‘warranted by . . . law.'” In re Chisum, 847 F.2d 597, 599 (9th Cir. 1988).
7 ABR 218Reviewing the record before the Court reveals that there was ample evidence that Christie acted in bad faith, his actions were not warranted by law, his actions were frivolous, and he acted for an improper purpose. See generally Docket No. 3. As is evident from the evidence before the Court, and correctly explained by the bankruptcy court,
Pathfinders' second chapter 11 petition satisfies both prongs of the sliding scale test. First, the petition was presented for an improper purpose: to unnecessarily delay Possession's foreclosure sale of July 28, 2000. The petition was also frivolous, since Pathfinders had no real prospects for reorganization under chapter 11. It had not paid Possession any interest, nor had it filed a plan in its prior chapter 11 case. Nothing had occurred since dismissal of that case to improve Pathfinders' reorganization prospects. Virtually all of the elements of a bad faith filing were present in its second filing. Pathfinders had but one asset: unimproved real property which was encumbered to Possession. Pathfinders had no employees or cash flow. There were no true unsecured creditors. Pathfinders' listing of its investors as unsecured creditors was improper and another indication of bad faith. Pathfinders' real property had been posted for foreclosure and bankruptcy offered the only possibility of forestalling a loss. The “new debtor syndrome” was inapplicable in Pathfinders' case. There was no need to transfer the property to a new entity because the debtor had no business and no true creditors other than Possession. Moreover, Pathfinders had just received a five month stay of the foreclosure sale due to the delay caused from its first unsuccessful chapter 11 petition, and managed to retain control of the property despite the explicit requirements of 11 U.S.C. § 362(d)(3). Pathfinders' second chapter 11 filing was not warranted by existing law.
Following the dismissal of Pathfinders' second chapter 11 petition, Pathfinders filed for chapter 7 relief on August 21, 2000. This third petition was signed by Ritteman alone. It was again filed for an improper purpose: to delay Possession's foreclosure sale. The petition was frivolous in two ways. First, a limited liability company may not appear in bankruptcy unless it is represented by an attorney. Pathfinders had no attorney. Second, there were no unencumbered assets for a trustee to administer and there were no unsecured creditors to pay. Pathfinders' third petition was simply a litigation tactic used to again delay the inevitable foreclosure.
. . .
The provisions of Rule 9011(b) were violated through the filing of both petitions.
. . .
[Christie] was also responsible for Pathfinders' second and the third filings. Although Christie did not sign the third filing, he allowed his secretary to prepare the necessary documents and he drove [Ritteman] to the Clerk's office to file the petition [and as such was responsible for violating Rule 9011].
See Docket No. 3, Vol. 1, Ex. 48 at 7–11 (footnote omitted). 2.
V. Nonmonetary Sanctions
[A] federal court has the power to control admission to its bar and to discipline attorneys who appear before it. The power of courts to disbar or otherwise discipline attorneys must be exercised consistent with the requirements of the Due Process Clause. This means that the attorney must be afforded fair notice of the charge and a meaningful opportunity to respond.
In re Poole, 222 F.3d 618, 620 (9th Cir. 2000) (citations and quotations omitted). “Disbarment, designed to protect the public, is a punishment or penalty imposed on the lawyer.” In re Ruffalo, 390 U.S. 544, 550 (1968).
“[A] sanctioned attorney must receive specific notice of the conduct alleged to be sanctionable and the standard by which that conduct will be assessed, and an opportunity to be heard on that matter.” Nuwesra v. Merrill Lynch, Fenner & Smith, Inc., 174 F.3d 87, 92 (2d Cir. 1999) (emphasis in original); see also In re MPM Enters., Inc., 231 B.R. 500, 504–05 (E.D.N.Y. 1999) (quoting Ted Lapidus, S.A. v. Vann, 112 F.3d 91, 97 (2d Cir. 1997)) (finding that appellant did not receive adequate notice because “the Order to Show Cause did not advise the appellant that the [c]ourt was considering the severe sanction of disbarment” only that the court was considering monetary sanctions).
“[A] court may not summarily disbar an attorney without notice and hearing, even when the disbarment results from a charge of contempt for which the court gave the attorney notice, an opportunity to prepare, and a hearing.” Miranda v. S. Pac. Transp. Co., 710 F.2d 516, 522 (9th Cir. 1983); see also Pan-Pacific and Low Ball Cable Television Co. v. Pac. Union Co., 987 F.2d 594 (9th Cir. 1993) (superceded by rule on other grounds). The Ninth Circuit has
explained the reasons why notice and an opportunity to be heard are required before an attorney may be sanctioned:
These procedural requirements will ensure that: (1) the attorneys will have an opportunity to prepare a defense and to explain their questionable conduct at a hearing; (2) the judge will have time to consider the severity and propriety of the proposed sanction in light of the attorneys' explanation for their conduct; and (3) the facts supporting the sanction will appear in the record, facilitating appellate review.
See Tom Growney Equip., Inc. v. Shelley Irrigation Dev., Inc., 834 F.2d 833, 836 (9th Cir. 1987) (citing Miranda, 710 F.2d at 522–23) (emphasis added). Implicit in the Ninth Circuit's analysis is that for the judge to properly consider the severity and propriety of the proposed 7 ABR 220
However, the parties have not cited, and independent research has not revealed, a Ninth Circuit case directly addressing whether a party receives due process and is properly put on notice when it is aware it may face attorney fees but is not aware it faces any type of nonmonetary sanction, such as that in the case at bar. The Third Circuit Court of Appeals has addressed the issue and concluded that “[t]he party sought to be sanctioned is entitled to particularized notice including, at a minimum, 1) the fact that Rule 11 sanctions are under consideration, 2) the reasons why sanctions are under consideration, and 3) the form of sanctions under consideration.” See Simmerman v. Corino, 27 F.3d 58, 64 (3d Cir. 1994) (emphasis added) (citing Gagliardi v. McWilliams, 834 F.2d 81, 83 (3d Cir. 1987)). In Gagliardi v. McWilliams, the Third Circuit explained that
[i]n this case, defendants in their motion for dismissal and Rule 11 sanctions sought only attorney's fees and ‘other appropriate relief which the court deems just and proper.' The general request for "other appropriate relief" was insufficient notice to Gagliardi, who was proceeding pro se, of the possibility that his resort to the courts would be precluded without initial scrutiny by the district court. Even an experienced attorney would not have expected this type of injunctive sanction without some more specific notice.
See Gagliardi, 834 F.2d at 83 (citation omitted).
In the case at bar, Christie was not on specific notice that he would be subject to any non-monetary sanction as Possession was only seeking monetary sanctions (i.e., attorney fees, costs, expenses and interest). See Docket No. 3, Vol. 1, Ex. 27 at 8. Possession did not specifically request a nonmonetary sanction, nor did it even request “other appropriate relief which the court deems just and proper,” which might have provided Christie the requisite notice regarding the potential nonmonetary sanction. See id. Given the severity of the nonmonetary sanction imposed (i.e., disbarment from practicing in front of the bankruptcy court for three years) Christie should have been provided notice that he faced a sanction of that magnitude. 4.
IT IS THEREFORE ORDERED:
Christie's appeal at Docket No. 9 is GRANTED IN PART AND DENIED IN PART. The bankruptcy court's award of sanctions is AFFIRMED IN PART AND REVERSED IN PART. The portion of the order awarding monetary sanctions against Christie is AFFIRMED. The portion of the order disbarring Christie from practicing in front of the United States Bankruptcy Court for the District of Alaska is REVERSED AND VACATED. This case is remanded to the United States Bankruptcy Court for the District of Alaska for proceedings consistent with this Order. This Order makes no determination regarding what nonmonetary sanctions, if any, should be awarded against Christie.
Dated at Anchorage, Alaska, this 16 day of January 2002.
/s/ JAMES K. SINGLETON, JR.
United States District Judge
N O T E S:
1. Given the similarity of Federal Rule of Civil Procedure 11 and Bankruptcy Rule 9011, courts may “often rely on cases interpreting the former when construing the latter.” See In re Marsch, 36 F.3d at 830. The standard governing review of sanctions is the same under both rules. See In re Chisum, 847 F.2d 597, 599 (9th Cir. 1988).
2. Contrary to Christie's argument that the bankruptcy court was relying on 28 U.S.C. \ § 1927, a review of the bankruptcy court's decision, see Docket No. 3, Vol. 1, Ex. 48 at 11, reveals that it principally relied on Rule 9011 and this rule provides ample authority for its decision. See Fed. R. Bankr. P. 9011.
3. The amount of fees at issue is reasonable. See, e.g., Docket No. 3, Vol. 1, Ex. 36.
4. As there already was extensive briefing and a hearing regarding the underlying factual situation, see, e.g., Docket No. 3, Vol. 1, Ex. 59, and the propriety of sanctions for that behavior, it is not immediately evident that Christie could present any evidence that would change the outcome. However, it is possible Christie may have presented a more vigorous defense if he had notice of the potential nonmonetary sanction which obviously might have changed the outcome.