Point Possession, Inc. ("Possession"), has filed a motion for sanctions against the debtor and its partners, Ralph A. Ritteman and Elmer L. Cook II, as well as its attorney, Reginald J. Christie, Jr. This court has jurisdiction pursuant to 28 U.S.C. § 1334(b) and the district court's order of reference. I find for Possession and award monetary sanctions of $5,759.50 for the chapter 11 proceeding and $3,523.00 for the chapter 7 case. I will also impose nonmonetary sanctions against Reginald J. Christie, Jr., by prohibiting him from representing debtors under any chapter of Title 11, United States Code, for a period of three years.

Background

In May of 1998, 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        7 ABR 56  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' 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.⁽¹⁾ As with the previous petition, Christie again signed as the 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.

Possession seeks to recover sanctions for Pathfinders' second and third bankruptcy filings. It has filed motions for sanctions in each case.

Analysis

[T]he requirement of good faith has been held to be an implicit condition to the filing and maintenance of a bankruptcy case for over a century. As the Court of Appeals for the Fifth Circuit explained: "Every bankruptcy statute since 1898 has incorporated literally, or by judicial interpretation, a standard of good faith for the commencement, prosecution, and confirmation of bankruptcy proceedings."⁽²⁾

This standard has been consistently enforced by courts in the Ninth Circuit. In the 1937 case of Lemm v. Northern California National Bank,⁽³⁾ for example, the Ninth Circuit found that a farmer's second bankruptcy petition had been filed in bad faith. The second plan was not feasible because it did not fully provide for payment of the creditor secured by farm property. The court concluded "that the presentation of the second petition was prompted solely by a purpose on the part of the debtor further to delay her creditors in the enforcement of their rights." ⁽⁴⁾ Since Lemm, courts in the Ninth Circuit have continued to recognize the validity of the good faith requirement in chapter 11 cases. ⁽⁵⁾

Several recurring conditions usually accompany a bad faith chapter 11 filing, including: (1) The debtor has but one asset, such as a tract of undeveloped or developed real        7 ABR 58  property, which is encumbered to the secured creditor; (2) There are generally no employees and little or no cash flow; (3) There are only a few, if any unsecured creditors; (4) The property has been posted for foreclosure and bankruptcy offers the only possibility of forestalling loss of the property; (5) The "new debtor syndrome" occurs, in which a one-asset entity is created to isolate a property from its creditors. ⁽⁶⁾

Resort to the protection of the bankruptcy laws is not proper under these circumstances because there is no going concern to preserve, there are no employees to protect, and there is no hope of rehabilitation, except according to the debtor's "terminal euphoria." . . . Neither the bankruptcy courts nor the creditors should be subjected to the costs and delays of a bankruptcy proceeding under such conditions.⁽⁷⁾

Because bad faith chapter 11 filings frequently involve single asset cases, the Bankruptcy Code was amended in 1994 to deal with the problems generated by such cases.⁽⁸⁾ Section 101(51B), which defines "single asset real estate," was added to the Bankruptcy Code.⁽⁹⁾ Section 362(d)(3) of the Code was added to provide for automatic relief from stay to creditors secured by single asset real estate 90 days after the filing of a chapter 11 petition, unless the debtor has filed a reasonable plan or commenced making fair market interest rate payments to such creditors. ⁽¹⁰⁾ Further protections for creditors in single asset cases were contemplated in the Bankruptcy Reform Act of 2000,⁽¹¹⁾ which passed the House and Senate by wide margins before        7 ABR 59  being vetoed by President Clinton on December 19, 2000. Section 444 of the 2000 Act would have modified the fair market interest rate currently provided for creditors in § 362(d)(3) to the nondefault contract rate of interest. Single asset real estate cases remain unpopular in Congress.

Sanctions may be imposed under Rule 9011, ⁽¹²⁾ which provides, in part:

 

(a) Signature. Every petition, pleading, written motion, and other paper, except a list, schedule, or statement, or amendments thereto, shall be signed by at least one attorney of record in the attorney's individual name. A party who is not represented by an attorney shall sign all papers. Each paper shall state the signer's address and telephone number, if any. An unsigned paper shall be stricken unless omission of the signature is corrected promptly after being called to the attention of the attorney or party.

 

(b) Representations to the Court. 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.⁽¹³⁾

The Ninth Circuit has adopted a sliding scale approach to Rule 9011(b). "[B]ankruptcy courts must consider both frivolousness and improper purpose on a sliding scale, where the more compelling the showing as to one element, the less decisive need be the showing as to the other." ⁽¹⁴⁾

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 and no 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        7 ABR 61  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. ⁽¹⁵⁾ 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.

Christie, Cook and Ritteman argue that Pathfinders' second and third bankruptcy filings were justified because they had found a source of financing, through a man named Dr. Safar. Their argument is meritless. Dr. Safar, who allegedly had financial connections with a Saudi Arabian prince, had given them a check for the entire balance due on the property, over $3.5 million. However, there was some problem with the Federal Reserve Board in recognizing his foreign draft. Diane Vallentine, counsel for Possession, informed the debtor that the check was invalid on its face. Assuming Dr. Safar and his check existed, they provided no rational basis for the filing of the second and third petitions. The debtor and its agents failed to make any reasonable inquiry into the financial credibility of Dr. Safar before filing the second and third petitions. The instrument Dr. Safar gave them was obviously flawed. They were grabbing at straws in a desperate attempt to preserve their investment. Dr. Safar's prospective loan provided no realistic basis for any of the debtor's bankruptcy filings.

Cook and Ritteman also argue that they were simply trying to protect themselves and the other investors involved in Pathfinders, and had no intention of harming Possession. They say their good intentions in preserving their investment insulate them from a finding of bad faith. This argument is flawed. Good intentions must be exercised consistently with good faith and the        7 ABR 62  requirements of Rule 9011. Such intentions do not excuse actions which are frivolous or done for an improper purpose. As discussed above, both Pathfinders' second and third bankruptcy petitions were frivolous and filed for an improper purpose. Cook and Ritteman are not shielded by their "good intentions" under these circumstances.

Pathfinders' second and third petitions were both filed for an improper purpose: to cause unnecessary delay. Pathfinders' second chapter 11 petition was a bad faith filing and not warranted by existing law. While the filing of the chapter 7 petition may not weigh as heavily on the scale as Pathfinders' second chapter 11, filing it without counsel was directly contrary to existing law. The provisions of Rule 9011(b) were violated through the filing of both petitions.

(c) Sanctions. If, 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 that have violated subdivision (b) or are responsible for the violation.

 

. . . .

 

(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        7 ABR 63  against the party which is, or whose attorneys are, to be sanctioned. ⁽¹⁶⁾

The language of Rule 9011(c) is very broad. Sanctions can be imposed not only upon the attorneys or parties that have violated Rule 9011(b), but also upon those who "are responsible for the violation." Elmer J. Cook, Jr. and Ralph Ritteman were the controlling partners of the debtor. They were responsible for the debtor's second and third bankruptcy filings. Reginald J. Christie, Jr., was also responsible for Pathfinders' second and third filings. Although Christie did not sign the third filing, he allowed his secretary to prepare the necessary documents and he drove Ralph Ritteman to the Clerk's office to file the petition. Because Cook, Ritteman and Christie were responsible for the bankruptcy filings, they were also responsible for Pathfinders' violations of Rule 9011(b). Sanctions will be imposed upon them, individually, as well as upon the debtor.

Sanctions are apportioned as follows. 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 Properties, L.L.C., Ralph Ritteman and Elmer E. Cook, Jr. as managing partners of Pathfinders, and Reginald J. Christie, Jr., 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 Reginald J. Christie, Jr. for violation of Rule 9011(b)(2). Christie is also liable for the attorney's fees under 28 U.S.C. § 1927. ⁽¹⁷⁾ 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, Ralph Ritteman and Elmer E. Cook. Jr. As a further sanction, nonmonetary in nature, for both the second and third filing, Reginald J. Christie, Jr., will        7 ABR 64  be prohibited from representing debtors in any proceeding arising under Title 11, United States Code, until January 1, 2004. Nor shall anyone employed by Mr. Christie be permitted to prepare petitions or schedules for debtors in cases arising under Title 11.

Rule 9011(c)(1)(A) also allows the court to award reasonable attorney's fees and expenses to the prevailing party. I will award five hours of Ms. Vallentine's time at $185.00 an hour, or $925.00, solely against Elmer E. Cook, Jr. This sum will be apportioned equally between each of the two bankruptcy cases. Mr. Cook unduly prolonged the proceedings by repeatedly failing to answer specific and direct questions at the hearing, even after admonishment by the court. Additionally, Mr. Cook engaged in a series of malevolent and sexist verbal attacks against Ms. Vallentine that were entirely inappropriate and, again, unnecessarily prolonged the proceedings.

Conclusion

Bad faith filings have been condemned by courts throughout the nation for scores of years. The debtor's second chapter 11 filing was a classic bad faith filing, with all of the traditional earmarks of that genre. The debtor's chapter 7 filing was yet another device submitted to unnecessarily delay Possession's foreclosure sale. The debtor, its controlling partners and its attorney have repeatedly crossed a line well defined by case law. Because of their actions, they will pay Possession's attorney fees and costs and be subject to other sanctions as well.

An order and judgment will be entered consistent with this memorandum decision.

DATED: December 29, 2000

BY THE COURT



DONALD MacDONALD IV
United States Bankruptcy Judge

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