in re: west coast real estate & mortgage inc., 9th cir. bap (2013)

7/25/2019 In re: West Coast Real Estate & Mortgage Inc., 9th Cir. BAP (2013)

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* Thi s di sposi t i on i s not appr opr i at e f or publ i cat i on.Al t hough i t may be ci t ed f or what ever per suasi ve val ue i t mayhave ( see Fed. R. App. P. 32. 1) , i t has no pr ecedent i al val ue.See 9t h Ci r . BAP Rul e 8013- 1.

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UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

I n r e: ) BAP No. EC- 12- 1471- J uMkD) BAP No. EC- 12- 1485- J uMkD

WEST COAST REAL ESTATE & ) BAP No. EC- 12- 1493- J uMkDMORTGAGE I NC. , ) BAP No. EC- 12- 1498- J uMkD

) ( cr oss appeal s) Debt or . )______________________________) Bk. No. 12- 30686DON SMI TH; HOWARD BROWN, I I I ; )WEST COAST REAL ESTATE & )MORTGAGE I NC. , )

)

Appel l ant s/ Cr oss- Appel l ees, ))v. ) M E M O R A N D U M*

)SA CHALLENGER, I NC. , )

) Appel l ee/ Cross- Appel l ant , )

)DOUGLAS M. WHATLEY, Trust ee; )UNI TED STATES TRUSTEE, )

) Appel l ees. )______________________________)

Ar gued and Submi t t ed on Mar ch 22, 2013at Sacr ament o, Cal i f or ni a

Fi l ed - May 22, 2013

Appeal f r om t he Uni t ed St at es Bankrupt cy Cour tf or t he Easter n Di str i ct of Cal i f or ni a

Honor abl e Rober t S. Bar dwi l , Bankrupt cy J udge, Pr esi di ng_______________________

Appear ances: Gar l and O Br yan Bel l , J r . , Esq. ar gued f or

Appel l ant s Don Smi t h, Howard Br own, I I I , and WestCoast Real Est ate & Mort gage I nc. ; J oshua D.Wayser , Esq. of Kat t en Muchi n Rosenman LLP,ar gued f or Appel l ee SA Chal l enger , I nc.

_________________________

FILED

MAY 22 2013

SUSAN M SPRAUL, CLERKU.S. BKCY. APP. PANELOF THE NINTH CIRCUIT


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Unl ess ot her wi se i ndi cat ed, al l chapt er and sect i onr ef er ences ar e t o t he Bankrupt cy Code, 11 U. S. C. 101- 1532.Rul e r ef er ences ar e t o t he Feder al Rul es of Bankrupt cyPr ocedur e and Ci vi l Rul e r ef er ences are t o t he Feder al Rul es ofCi vi l Pr ocedur e.

2 Appel l ees, Dougl as M. What l ey, t he chapt er 7 t r ust ee f orWest Coast , and the Uni t ed St ates Trust ee ( UST) have notpar t i ci pat ed i n t hese mat t er s.

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Bef ore: J URY, MARKELL and DUNN, Bankr upt cy J udges.

These appeal s and cr oss - appeal s ar i se f r om t wo sanct i ons

or der s i n f avor of Appel l ee, SA Chal l enger , I nc. ( SACI ) , andagai nst Appel l ant s, Don Smi t h ( Smi t h) , Howar d Br own, I I I ( Br own)

and chapt er 111 debt or , West Coast Real Est ate & Mort gage I nc.

( West Coast ) ( col l ect i vel y, Appel l ant s) , i n t he amount of $20, 000

t o be pai d j oi nt l y and sever al l y.

Appel l ant s argue t hat t he bankrupt cy cour t abused i t s

di scr et i on i n awar di ng t he sanct i ons under 105 because t he

$20, 000 award was puni t i ve i n natur e and the amount arbi t r ary

and l acki ng evi dent i ar y suppor t . SACI cr oss- appeal s, 2 al so

ar gui ng t hat t he bankrupt cy cour t abused i t s di scr et i on i n

det er mi ni ng t he amount of t he sanct i ons. Accordi ng t o SACI , t he

r ecor d support s an award of $134, 885. 82, whi ch i ncl udes

$33, 459. 82 i n at t or neys f ees and $101, 436. 00 i n mi ssi ng r ent s

t hat wer e unaccount ed f or and const i t ut ed SACI s cashcol l at eral .

We agr ee wi t h Appel l ant s t hat t he sanct i ons award appear s

ar bi t r ar y because the bankr upt cy cour t di d not expl ai n how i t

arr i ved at t he $20, 000 amount whi ch i t based on SACI s


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r easonabl e at t or neys f ees. As a r esul t , we ar e unabl e t o

det er mi ne how t he cour t exer ci sed i t s di scr et i on and t hus cannot

conduct a meani ngf ul r evi ew of t he award. We t heref ore VACATE

t he sanct i ons or ders and REMAND t o the bankr uptcy cour t so t hati t can make addi t i onal f i ndi ngs and expl ai n i t s concl usi ons

r egardi ng t he amount of t he award. We do not expr ess any

opi ni on whether t he amount of t he sanct i ons pr evi ousl y awarded

based on SACI s at t or neys f ees shoul d or shoul d not be changed.

Because of our r emand, we concl ude t hat SACI s cr oss-

appeal s chal l engi ng t he amount of t he sanct i ons awarded based on

i t s at t or neys f ees ar e moot . However , on t he i ssue of

sanct i ons based on t he mi ss i ng r ent s, we AFFI RM t he bankrupt cy

cour t s deci si on f or t he r easons di scussed bel ow.

I. FACTS AND PROCEDURAL BACKGROUND

The f act s l eadi ng up t o t he ent r y of t he sanct i ons or der s

ar e a t extbook exampl e of bad f ai t h. Appel l ant s conduct t hat

gave r i se t o t he sanct i ons i nvol ved t he t r ansf er of r ealpr oper t y owned by chapt er 11 debt or , Sundance El dorado Sel f -

St orage LP ( Sundance) . Sundance, t hr ough Br own, t r ansf err ed t he

pr oper t y by gr ant deed t o West Coast af t er U. S. Bank ( Bank)

obt ai ned r el i ef f r om t he aut omat i c st ay i n Sundance s bankrupt cy

and on t he eve of t he Bank s f or ecl osur e. The t r ansf er of t he

pr oper t y was i mmedi at el y f ol l owed by West Coast s f i l i ng of a

chapt er 11 pet i t i on, si gned by Smi t h, t he 100% owner of West

Coast and i t s pr esi dent . Needl ess t o say, West Coast s

bankr upt cy f i l i ng hal t ed t he Bank s ef f or t s t o f or ecl ose on t he

pr oper t y due t o t he i mposi t i on of t he aut omat i c st ay. The f act s

r el at i ng t o t he t r ansf er of t he r eal pr oper t y ar e not di sput ed


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3 Many of t he f act s are t aken f r om t he bankrupt cy cour t swr i t t en rul i ngs dat ed J une 27, 2012, and August 29, 2012.

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on appeal 3 and ar e as f ol l ows.

Sundance was a sel f st or age busi ness l ocated i n El dor ado

Hi l l s, Cal i f or ni a. On J anuar y 12, 2007, Paci f i c Nat i onal Bank

( PNB) l oaned $5. 95 mi l l i on ( Loan) t o Sundance. The Loan wassecur ed by a deed of t r ust , assi gnment of r ent s, secur i t y

agr eement , and f i xtur e f i l i ng r ecor ded agai nst Sundance s r eal

pr oper t y. At Sundance s r equest , PNB modi f i ed t he Loan t hr ee

t i mes over t wo year s. Af t er t he l ast modi f i cat i on, t he Feder al

Deposi t I nsurance Cor por at i on pl aced PNB i nt o r ecei ver shi p and

t he asset s of PNB, i ncl udi ng t he Loan, wer e sol d t o the Bank.

Sundance def aul t ed on t he Loan i n Febr uary 2010.

Sundances First Bankruptcy Case

On May 31, 2010, Sundance f i l ed a chapt er 11 pet i t i on. The

bankr upt cy cour t di smi ssed t he case because Sundance di d not

f i l e t he r equi r ed document s. Af t er di smi ssal , t he Bank f i l ed a

Not i ce of Def aul t and El ect i on t o Sel l Under Deed of Tr ust wi t h

r espect t o t he pr oper t y.Sundances Second Bankruptcy Case

On J une 25, 2010, Sundance f i l ed a second chapt er 11

pet i t i on, Case No. 10- 36676 ( Second Sundance Bankr upt cy) . Smi t h

si gned t he pet i t i on as manager of oper at i ons. On J ul y 19, 2010,

t he Bank f i l ed i t s f i r st mot i on f or r el i ef f r om t he aut omat i c

st ay.

Sundance t hen f i l ed a mot i on t o use t he Bank s cash

col l at er al . Because Sundance was i n t he pr ocess of f i ndi ng a


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buyer f or t he pr opert y, t he Bank agr eed t hat Sundance coul d use

i t s cash col l at er al wi t h t he qual i f i cat i on t hat such use

t er mi nat ed i f t he Bank obt ai ned r el i ef f r om st ay. The Bank al so

r equi r ed Sundance t o pay 60% of i t s mont hl y i nt erest payment oni t s Loan. Sundance coul d not secur e a buyer .

Af t er an unsuccessf ul second mot i on f or r el i ef f r om st ay,

t he Bank sought r el i ef f r om st ay f or a t hi r d t i me on J une 15,

2011. The l at t er mot i on was cont i nued sever al t i mes t o gi ve

Sundance t he oppor t uni t y t o r eor gani ze t he pr oper t y.

On J anuary 17, 2012, Sundance f i l ed i t s t hi r d amended pl an

and di scl osur e st at ement . Peni nsul a Capi t al Gr oup I nc.

( Peni nsul a) was t he gener al par t ner f or Sundance and a j oi nt

proponent of t he pl an al ong wi t h Br own, who was t he owner and

sol e of f i cer of Peni nsul a. Peni nsul a was seen as a pot ent i al

sour ce of new f undi ng and guar ant or of t he pl an.

On March 28, 2012, t he bankr upt cy cour t hel d an evi dent i ary

hear i ng on pl an conf i r mat i on and t ook t he mat t er undersubmi ss i on.

On Apr i l 12, 2012, t he bankr upt cy cour t i ssued a Memorandum

Deci si on gr ant i ng t he Bank r el i ef f r om st ay and denyi ng

conf i r mat i on of Sundance s pl an of r eor gani zat i on. I n gr ant i ng

t he Bank r el i ef f r om st ay, t he cour t f ound, among ot her t hi ngs,

t hat : ( 1) Sundance def aul t ed under t he t er ms of t he Loan

document s; ( 2) Sundance s pl an was not f easi bl e and l i kel y woul d

be f ol l owed by l i qui dat i on; and ( 3) Sundance l acked equi t y i n

t he pr oper t y, a pl an was unl i kel y t o be conf i r med, and t he

pr oper t y was not necessary t o an ef f ect i ve r eor gani zat i on. The

cour t ent er ed t he or der gr ant i ng t he Bank rel i ef f r om st ay on


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4 I n t hei r openi ng br i ef , Appel l ant s cont end t hat t hei nj unct i on was not gr ant ed because t hei r at t or ney was unabl e t oobt ai n t he document s and decl arat i ons t hat woul d have shown t hatt he Bank had pr obabl y made mi sr epr esent at i ons of t he Loanobl i gat i on t o Sundance and t he bankr upt cy cour t . None of t hosedocument s or decl ar at i ons ar e i n t he recor d on appeal .

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Apr i l 12, 2012.

The Bank schedul ed t he f or ecl osur e sal e on J une 5, 2012.

On Apr i l 23, 2012, t he UST f i l ed a mot i on t o di smi ss or

conver t Sundance s case t o chapt er 7. Br own f i l ed a r esponse i nf avor of di smi ssal and opposi ng conver si on and Sundance

submi t t ed decl ar at i ons aski ng t he bankrupt cy cour t t o st op t he

Bank s f or ecl osur e.

The State Court Lawsuit

On Apr i l 30, 2012, t wo weeks af t er t he bankr upt cy cour t

ent ered i t s Memorandum Deci si on, Sundance f i l ed a compl ai nt and

appl i cat i on f or i nj unct i ve r el i ef i n t he El Dor ado Count y

Super i or Cour t ( St at e Cour t ) t o enj oi n t he Bank s t hen- schedul ed

J une 5, 2012 f or ecl osur e sal e. Smi t h f i l ed a decl ar at i on i n

suppor t of t he appl i cat i on and served as Sundance s

r epr esent at i ve at t he r el at ed hear i ngs. Fol l owi ng t wo hear i ngs,

on May 24, 2012, t he St at e Cour t deni ed i nj unct i ve r el i ef . 4 The

Bank cont i nued wi t h i t s f or ecl osur e ef f or t s.The Transfer of Sundances Property

On May 24, 2012, t he same day that t he Stat e Cour t deni ed

Sundance i nj unct i ve r el i ef , Sundance t r ansf er r ed i t s r eal

pr oper t y by gr ant deed t o West Coast . Br own, i n hi s i ndi vi dual

capaci t y, si gned t he gr ant deed on Sundance s behal f . The gr ant

deed was r ecorded on May 29, 2012, i n the County of El Dorado as


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5 Br own s at t or ney, Mr . I sl ey, l at er st at ed at t heAugust 29, 2012 sanct i ons hear i ng t hat at t he t i me of t he hear i ngon t he di smi ssal or conver si on of Sundance s Second Bankr upt cycase, he had no cl ue t hat any of t hi s s t uf f had happened andt hat he di dn t hear about i t unt i l pr obabl y sever al weeksl at er . Hr g Tr . 8/ 29/ 12 at 11: 15- 23.

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DOC- 2012- 0025784- 00.

The Conversion Hearing

On May 30, 2012, t he bankr upt cy cour t hear d the UST s

mot i on t o di smi ss or convert t he Second Sundance Bankr upt cycase. The cour t gr ant ed t he UST s request f or conver si on.

Al t hough Br own s at t orney appear ed at t he hear i ng, he di d not

i nf or m t he bankrupt cy cour t , t he Bank, or t he UST s of f i ce t hat

t he pr oper t y had been t r ansf er r ed. 5 The bankr upt cy cour t

ent ered a mi nut e order dated J une 4, 2012, conver t i ng t he case

t o chapt er 7.

West Coasts Bankruptcy Case

The same day t hat Sundance s case was conver t ed, West Coast

f i l ed a chapt er 11 pet i t i on, whi ch Smi t h si gned as Presi dent .

Smi t h was al so the 100% owner of West Coast . The schedul es

l i st ed the pr oper t y t r ansf er r ed by Sundance as West Coast s onl y

asset and l i st ed as cr edi t or s onl y t he Bank and a f ew ot her s

wi t h mi nor debt s. The i ncome l i st ed i n t he past t wo year s wasDebt or Loss on Propert y. West Coast descr i bed t he natur e of

i t s busi ness as r eal est at e and mor t gage wi t hout ment i oni ng a

sel f - st or age f aci l i t y or r el at i onshi p t o t he Second Sundance

Bankr upt cy.

The next day, t he Bank f i l ed a Not i ce of Cl ai m t o Rent s,

al er t i ng al l i nt er est ed par t i es t hat t he r ent s f r om t he pr oper t y


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coul d not be used f or any pur pose.

On J une 8, 2012, t he Bank f i l ed an Expedi t ed Mot i on f or

Rel i ef Fr om t he Aut omat i c St ay and For Sanct i ons Agai nst Don

Smi t h and West Coast . The mot i on sought r el i ef f r om t heaut omat i c st ay based upon t he t r ansf er of t he pr oper t y f ol l owed

by West Coast s bad f ai t h bankrupt cy f i l i ng. The Bank sought

sanct i ons agai nst Smi t h and West Coast , wi t h t he amount l ef t f or

l at er det er mi nat i on, on t he gr ounds t hat Smi t h had wi l l f ul l y

di sobeyed t he bankr upt cy cour t s r el i ef f r om st ay or der i n t he

Second Sundance Bankr upt cy case when he t r ansf er r ed t he pr oper t y

out si de the or di nary cour se t o West Coast one week bef ore the

f or ecl osur e and West Coast t hen, i n bad f ai t h, f i l ed t he

bankrupt cy t o hi nder and del ay t he Bank s f or ecl osure. The Bank

al so sought di smi ssal of West Coast s case under t he bankrupt cy

cour t s i nher ent power t o sanct i on.

I n suppor t of i t s mot i on, t he Bank submi t t ed t he

decl ar at i on of J essi ca M. Mi ckel sen. Mi ckel sen one of t heat t or neys repr esent i ng t he Bank decl ar ed t hat as a resul t of

West Coast s f i l i ng, t he Bank had i ncur r ed appr oxi mat el y $15, 000

i n at t or neys f ees and cost s.

On J une 12, 2012, West Coast f i l ed a mot i on t o use t he

Bank s cash col l at er al . The mot i on di d not ment i on t he hi st or y

of Sundance s pr evi ous use of t he Bank s cash col l at er al nor di d

i t ment i on t hat t he Bank s per mi ssi on t o use the cash col l at er al

had expi r ed when t he bankr upt cy cour t gr ant ed t he Bank s mot i on

f or r el i ef f r om st ay i n t he Second Sundance Bankrupt cy. The

mot i on al so f ai l ed t o di scl ose t he t r ansf er of t he r eal pr oper t y

f r om Sundance t o West Coast .


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6 The bankrupt cy cour t deni ed West Coast s cash col l at er almot i on by mi nut e or der ent ered J ul y 2, 2012.

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The Bank opposed t he cash col l at er al mot i on on several

gr ounds: ( 1) t he bad f ai t h t r ansf er of t he pr oper t y; ( 2) West

Coast s bad f ai t h f ai l ur e t o account f or at l east $23, 895. 82 of

cash col l at er al as of J une 2012, whi ch West Coast appar ent l yacqui r ed f r om Sundance as a resul t of t he t r ansf er of t he

pr oper t y; and ( 3) t he f l awed budget t hat West Coast submi t t ed,

i ncl udi ng subst ant i al l y decr eased payment s t o t he Bank ( f r om

$23, 500 per mont h, whi ch i s what Bank r ecei ved bef ore Sundance

st opped payi ng, t o $13, 167 per mont h) .

I n t he end, t he Bank ar gued t hat West Coast s bad f ai t h

act s i n hi di ng cash col l at er al war r ant ed sanct i ons under 105,

i ncl udi ng t he di smi ssal of t he case. I n suppor t of t hi s l at t er

r equest and al l egat i ons r egar di ng t he mi ssi ng r ent s, t he Bank

submi t t ed Mi ckel sen s decl ar at i on whi ch st at ed that Sundance had

not f i l ed mont hl y oper at i ng r epor t s si nce Mar ch 2012.

On J une 27, 2012, t he bankr upt cy cour t hear d the Bank s

expedi t ed mot i on f or r el i ef f r om st ay and sanct i ons and WestCoast s mot i on t o use cash col l at er al . 6 Pr i or t o t he hear i ng,

t he cour t had i ssued a tent at i ve rul i ng gr ant i ng t he mot i on.

Af t er hear i ng or al ar gument , t he bankrupt cy cour t adopt ed i t s

t ent at i ve r ul i ng and i ssued an amended wr i t t en r ul i ng. Ther e,

t he cour t concl uded t hat t he at t empt ed t r ansf er of t he pr oper t y

by Sundance t o West Coast was i n bad f ai t h as t o t he Bank and

t he ot her cr edi t or s and r ent er s of Sundance. The cour t f ound

t hat as t o t he Bank, t he pur por t ed t r ansf er was an at t empt t o


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hi nder and del ay i t s f or ecl osur e pr oceedi ng af t er Sundance s

t wo- year at t empt t o conf i r m a pl an whi l e under t he pr ot ect i on of

t he aut omat i c st ay. As t o t he r ent er s, t he bankrupt cy cour t

obser ved t hat t he t r ansf er of t he pr oper t y put t hose par t i es i na posi t i on of owi ng r ent t o Sundance s bankrupt cy est at e, whi l e

at t he same t i me, West Coast woul d be at t empt i ng t o col l ect

t hei r r ent . As t o t he ot her cr edi t or s, t he cour t f ound t he

t r ansf er was an at t empt t o r et ai n t he pr oper t y and i t s benef i t s

whi l e di vest i ng t he pr oper t y owner of any obl i gat i ons t o t hose

cr edi t or s. Fi nal l y, t he bankrupt cy cour t f ound West Coast s

f ai l ur es t o gi ve not i ce of i t s case t o any of t he r ent er s or

credi t or s as f ur t her i ndi ci a of bad f ai t h.

I n addi t i on, t he cour t di d not over l ook Smi t h s r ol e i n

f aci l i t at i ng t he t r ansf er of t he pr oper t y. The cour t obser ved

t hat Smi t h was t he pr esi dent of West Coast whi l e si mul t aneousl y

act i ng as operat i ons manager f or Sundance and had f ul l knowl edge

t hat Sundance was a chapt er 11 debt or - i n- possessi on when heor chest r at ed t he t r ansf er .

For al l t hese r easons, t he bankrupt cy cour t f ound i t

appr opr i at e t o i ssue sanct i ons agai nst West Coast and Smi t h i n

t he amount of t he Bank s r easonabl e at t or neys f ees and cost s

i ncur r ed i n connect i on wi t h West Coast s case. I n t he end, t he

cour t st at ed t hat i t woul d al so awar d sanct i ons agai nst Br own

f or hi s compl i ci t y i n t hese act s. The bankrupt cy cour t set a

f ur t her hear i ng t o det er mi ne t he amount of t he sanct i ons f or

August 29, 2012.

Af t er t he Bank obt ai ned r el i ef f r om st ay, i t assi gned t he

deed of t r ust and l oan document s t o SACI , a rel at ed ent i t y t o


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7 Herei naf t er when we ref er t o the Bank such r ef erencesappl y equal l y t o SACI and vi ce ver sa.

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t he Bank. 7 SACI f or ecl osed on t he pr oper t y by cr edi t bi d on

J une 29, 2012.

On J ul y 31, 2012, Smi t h f i l ed opposi t i on t o t he Bank s

mot i on f or sanct i ons. Smi t h admi t t ed t hat t he t r ansf er t ookpl ace but cl ai med t hat he di d not know t hat t he pr oper t y coul d

not be sol d subj ect t o exi st i ng f i nanci ng wi t hout cour t

appr oval . Smi t h al so mai nt ai ned t hat he pai d expenses f r om hi s

pr i vat e f unds t o r un t he busi ness so as not t o use any cash

col l at er al . As f ur t her j ust i f i cat i on f or hi s conduct, Smi t h

cont ended t hat he bel i eved t he t r ansf er of t he pr oper t y was t he

onl y way t o br i ng t he Bank s f r audul ent act i ons bef or e t he

cour t . Fi nal l y, Smi t h asser t ed t hat t her e was no compet ent

evi dence bef ore t he bankr upt cy cour t t o suppor t an award of

at t or neys f ees t o t he Bank. Smi t h f i l ed a separ at e pl eadi ng

obj ect i ng t o Mi ckel sen s decl ar at i on on t he gr ounds t hat

( 1) t her e was no f oundat i on t o suppor t her asser t i on t hat t he

Bank had i ncur r ed appr oxi matel y $15, 000 i n f ees and (2) herst at ement was hear say.

On August 1, 2012, SACI f i l ed a mot i on f or sanct i ons i n

West Coast s bankrupt cy agai nst Br own f or hi s compl i ci t y i n t he

bad f ai t h t r ansf er of t he pr oper t y based on t he bankrupt cy

cour t s i nher ent aut hor i t y under 105. SACI al l eged t hat Br own

( 1) si gned t he gr ant deed t hat document ed t he t r ansf er of t he

pr oper t y f r om Sundance t o West Coast on t he same day t hat t he

St at e Cour t deni ed Sundance s r equest t o enj oi n t he f or ecl osur e


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- 12-

of t he pr oper t y and si x days bef or e t he UST s mot i on t o di smi ss

or conver t hear i ng i n t he Second Sundance Bankr upt cy; ( 2) f ai l ed

t o di scl ose t he t r ansf er t o t he bankrupt cy cour t at t he

di smi ssal / conver si on hear i ng, despi t e t he f act s t hat t het r ansf er occur r ed si x days ear l i er , was r ecor ded t he day bef or e

t he hear i ng, and counsel f or Br own appear ed at t he hear i ng and

pr esent ed ar gument ; and ( 3) f ai l ed t o seek appr oval f r om t he

bankrupt cy cour t bef or e t r ansf er r i ng t he pr oper t y. Based on

t hese act s, SACI sought sanct i ons agai nst Br own i n t he amount of

$147, 078. 82 t hat consi st ed of i t s l egal f ees and cost s and

mi ssi ng r ent s f or t he mont hs of J une, J ul y, and August 2012,

whi ch const i t ut ed i t s cash col l at er al .

SACI submi t t ed the decl ar at i on of J oshua D. Wayser , counsel

f or SACI , i n conj unct i on wi t h i t s mot i on. Wayser decl ar ed t hat

he r evi ewed hi s f i r m s bi l l s f or t he mont hs of J une and J ul y

2012 and as of J ul y 27, 2012, t he f ees t ot al ed $33, 459. 82.

At t ached t o Wayser s decl ar at i on wer e r edact ed bi l l s evi denci ngt he char ges. Wayser f ur t her sought as sanct i ons the mi ssi ng

r ent s i n t he est i mated amount of $113, 619. That amount was

subsequent l y r educed t o $101, 436 based upon $12, 183 SACI

r ecei ved af t er t aki ng possessi on of t he pr oper t y on August 6,

2012. Wayser decl ared t hat SACI was seeki ng t he mi ss i ng r ent s

as sanct i ons because i t ot her wi se woul d have been ent i t l ed t o

col l ect t he r ent s f or t hose mont hs had t he t r ansf er of t he

proper t y and subsequent bankrupt cy not occur r ed and had SACI

been al l owed t o t i mel y f or ecl ose on t he pr oper t y.

On August 13, 2012, t he UST f i l ed a st atement r egardi ng t he

Bank s mot i on f or sanct i ons and r el at ed decl ar at i on of Smi t h.


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- 13-

The UST st at ed t hat t he unaut hor i zed t r ansf er of t he proper t y

was an egr egi ous breach of dut y on t he par t of t he responsi bl e

r epr esent at i ves of Sundance. Beyond t hi s, t he UST di d not t ake

a posi t i on on t he mot i on. However , t he UST poi nt ed out t hatSmi t h s decl ar at i on shoul d not be read t o i mpl y t hat Smi t h di d

not know t hat t he t r ansf er of t he pr opert y had been r ecor ded at

t he t i me he met wi t h t he UST. Smi t h decl ared t hat he l ear ned

about t he recor di ng on t he af t ernoon of May 30, 2012, but he met

wi t h t he UST af t er t hat dat e and di d not i nf or m counsel f or t he

UST about t he t r ansf er of t he pr oper t y. At t ached t o t he UST s

st at ement of posi t i on was t he decl ar at i on of J ason Bl umber g

whi ch ver i f i ed t he meet i ng date between Smi t h and t he UST.

On t he same dat e, SACI f i l ed a repl y i n suppor t of t he

mot i on f or sanct i ons agai nst Smi t h. SACI poi nt ed out t hat Smi t h

cont i nued t o t hwar t SACI s exer ci se of owner shi p r i ght s over t he

f or ecl osed pr oper t y. SACI mai nt ai ned t hat due t o Smi t h s

act i ons, i t f i l ed an adver sar y pr oceedi ng agai nst hi m seeki ng at empor ar y r est r ai ni ng or der ( TRO) and pr el i mi nar y i nj unct i on

whi ch t he bankrupt cy grant ed on August 1, 2012, and August 13,

2012, r espect i vel y. Based on Smi t h s conduct , SACI ar gued t hat

si gni f i cant sanct i ons wer e war r ant ed t o det er hi s conduct .

Accor di ng t o SACI , t her e wer e no mi t i gat i ng f act or s Smi t h had

been t hr ough t wo personal bankr upt ci es and t hus pl ai nl y had

knowl edge of t he bankr upt cy pr ocess and t he necess i t y f or

obt ai ni ng cour t appr oval f or cer t ai n t r ansact i ons. I n t he end,

SACI r equest ed t he bankrupt cy cour t t o awar d i t not onl y t he

f ul l amount of i t s at t or neys f ees and cost s, but al so t he

amount f or t he mi ssi ng r ent s.


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On August 15, 2012, Br own f i l ed an opposi t i on t o SACI s

mot i on f or sanct i ons. Br own asser t ed t hat t he bankrupt cy cour t

shoul d abst ai n f r om exer ci si ng j ur i sdi ct i on over t he t or t

( sanct i ons) cl ai m of SACI . Br own ar gued t hat he and Peni nsul awere out si de thi r d part i es and had no i nvol vement wi t h t he West

Coast proceedi ngs and t hat a j udgment agai nst Br own woul d have

no possi bl e ef f ect on West Coast s r i ght s or t he handl i ng of i t s

est at e. Accor di ng t o Br own, t he t hi r d par t y act i on shoul d be

t aken i n st at e cour t . He f ur t her ar gued t hat t he sanct i ons

mot i on r equi r ed an adver sar y pr oceedi ng because SACI sought t o

essent i al l y have Br own t ur n over al l i ncome f r om t he pr oper t y

al l egedl y r ecei ved by Sundance and West Coast f or t he mont hs of

J une, J ul y and August 2012. Br own al so mai ntai ned t hat he di d

not have any personal i nvol vement because he si gned t he gr ant

deed i n hi s capaci t y as pr esi dent of Peni nsul a.

Fi nal l y, Br own argued t hat t here was no evi dence submi t t ed

t o suppor t SACI s cl ai m of damages f or t he mi ssi ng r ent s nor wasSACI ent i t l ed t o asser t a cash col l at er al cl ai m af t er t he

t r ust ee s sal e whi ch ext i ngui shed t he not e and deed of t r ust .

Wi t h r espect t o t he at t or neys f ees, Br own compl ai ned t hat

Wayser s hour l y r ate of $675 was f ar above sums awarded t o

at t or neys i n t he East er n Di st r i ct of Cal i f or ni a. Br own f ur t her

poi nt ed out t hat t he bi l l i ng st at ement s wer e i mpr oper because

t he ser vi ces wer e l umped t oget her , t he descr i pt i ons i nsuf f i ci ent

t o under st and what ser vi ces were per f ormed, and t he hour s were

not r evi sed despi t e some ent r i es bei ng r edact ed.

On August 15, 2012, West Coast al so f i l ed opposi t i on t o t he

Bank s sanct i ons mot i on. West Coast s opposi t i on si mpl y


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- 15-

i ncor por at ed Smi t h s and Br own s ar gument s set f or t h i n t hei r

memor anda.

On August 20, 2012, Smi t h f i l ed a sur - r epl y t o t he Bank s

mot i on f or sanct i ons. Smi t h ar gued t hat Wayser s decl ar at i onshoul d be st r i cken because Wayser had not st ated f act s t hat

woul d est abl i sh a f oundat i on f or t he est i mat ed at t or neys f ees

and f ur t her mor e, t he decl ar at i on const i t ut ed hear say. Smi t h

al so r ei t er at ed some of Br own s ar gument s; i . e. , t hat Wayser s

hour l y r at e was t oo hi gh and t he bi l l i ng st at ement s di d not have

det ai l ed t i me and expense ent r i es. I n addi t i on, Smi t h cont ended

t hat SACI s cl ai m of mi ssi ng r ent s was a new mat t er because i t

was not cont ai ned i n t he Bank s or i gi nal mot i on f or sanct i ons

and t hus shoul d be st r i cken. On t he same day, Smi t h f i l ed a

separ at e pl eadi ng cont ai ni ng hi s evi dent i ar y obj ect i ons t o

Wayser s decl ar at i on.

The bankrupt cy cour t t hen i ssued a t ent at i ve r ul i ng

f i ndi ng, among ot her t hi ngs, t hat SACI i ncur r ed at t or neys f eesof at l east $20, 000 due t o Smi t h s and Br own s act i ons, and t hat

such amount shoul d be payabl e j oi nt l y and sever al l y by Smi t h,

Br own and the debt or .

At t he August 29, 2012 sanct i ons hear i ng, Smi t h s at t or ney,

Mr . Bel l , r equest ed t he bankrupt cy cour t t o r ul e on Smi t h s

evi dent i ar y obj ect i ons. Bel l al so mai nt ai ned t hat Smi t h was

unabl e t o pay the $20, 000 award due t o Smi t h s personal

bankrupt cy whi ch he had f i l ed a f ew year s bef or e. Fi nal l y, Bel l

asser t ed that $5, 000 woul d be appr opr i at e due t o t he l ack of

evi dence support i ng t he l arger award and t he ci r cumst ances of

t he case. Br own s at t or ney, I sl ey, essent i al l y r ei t er at ed t he


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8 Recal l t hat t he adver sar y rel at ed t o SACI s mot i on f or aTRO and prel i mi nar y i nj unct i on agai nst Smi t h who cont i nued t ot hwar t SACI s at t empt s t o gai n possessi on of t he pr oper t y af t erSACI f or ecl osed.

- 16-

argument s set f or t h i n Br own s pl eadi ngs as ment i oned above.

Wayser r esponded by f i r st not i ng t hat hi s f i r m gave a 15%

di scount on al l t he f ees so t hat t he $675 hour l y rat e was not

accur ate. Next , Wayser argued t hat as t o t he amount of t hef ees, t hey pr ovi ded t he bi l l s and di d not seek any of t he

at t or neys f ees i n t he r el at ed adver sary pr oceedi ng agai nst

Smi t h. 8

The bankrupt cy cour t st at ed t hat none of t he ar gument s had

changed i t s pr evi ous vi ew of t he case. The cour t t ook t he

mat t er under submi ss i on and, on t he same day, i ssued f i nal

r ul i ngs i n t he mat t er s. Wi t h r espect t o Br own, t he bankrupt cy

cour t f ound: ( 1) Br own s conduct i n si gni ng t he gr ant deed i n

f avor of West Coast const i t ut ed bad f ai t h and wi l l f ul mi sconduct

suf f i ci ent t o j ust i f y an awar d of sanct i ons agai nst hi m under

t he cour t s i nher ent power ; ( 2) Br own br eached hi s f i duci ar y

dut i es t o the Sundance bankrupt cy est at e and i t s cr edi t or s; and

( 3) no adver sar y pr oceedi ng was needed because t he mat t er di dnot i nvol ve t ur nover of f unds, but was i nst ead a r equest f or an

awar d of sanct i ons under t he cour t s i nher ent power . The

bankrupt cy cour t gr ant ed SACI s mot i on i n par t by awar di ng i t s

r easonabl e at t or neys f ees i n t he sum of $20, 000 agai nst

Appel l ant s, j oi nt l y and sever al l y. The cour t st at ed t hat t he

f ees i ncur r ed wer e f or t he Bank s mot i on f or r el i ef f r om st ay

and t o di smi ss West Coast s case, f or seeki ng sanct i ons agai nst


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- 17-

West Coast and Smi t h, and f or SACI s mot i on f or sanct i ons

agai nst Br own. The bankrupt cy cour t di d not f ur t her el abor at e

as t o how i t arr i ved at t he $20, 000 amount .

I n a separ at e rul i ng concer ni ng West Coast and Smi t h, t hebankrupt cy cour t f ound: ( 1) Smi t h s expl anat i ons regar di ng t he

t r ansf er of t he pr oper t y wer e not cr edi bl e; ( 2) West Coast s and

Smi t hs conduct i n i ni t i at i ng and compl et i ng t he t r ansf er of t he

pr oper t y and t he f i l i ng of t he chapt er 11 pet i t i on const i t ut ed

bad f ai t h and wi l l f ul mi sconduct suf f i ci ent t o j ust i f y an awar d

of sanct i ons agai nst t hem; and ( 3) t he amount of $20, 000 t o be

pai d j oi nt l y and sever al l y wi t h Br own was an appr opr i at e

sanct i on.

I n addr essi ng SACI s r equest f or sanct i ons i n t he amount of

t he mi ssi ng r ent s, t he bankrupt cy cour t not ed t hat af t er t he

f or ecl osur e, t he r eal pr oper t y and r i ght s t o i t s r ent s wer e no

l onger pr oper t y of t he est at e. Due t o t hi s f act and r el yi ng on

Fi et z v. Gr eat W. Sav. ( I n r e Fi et z) , 852 F. 2d 455, 457 ( 9t hCi r . 1988) , t he bankrupt cy cour t st at ed i t was not per suaded

t hat i t had j ur i sdi ct i on t o awar d sanct i ons f or conduct t hat

i nt er f er ed wi t h SACI s r i ght s t o t he r eal pr oper t y and t he

r ent al i ncome post - f or ecl osur e.

However , t he bankr upt cy cour t , assumi ng f or t he pur pose of

r ul i ng t hat i t had j ur i sdi ct i on, deni ed SACI s r equest f or

sanct i ons i n t he amount of t he mi ssi ng r ent s. The cour t

r easoned t hat any damages ar i si ng f r om post - f orecl osure conduct

were bet ween SACI , on t he one hand, and West Coast , Smi t h and

Br own, on t he ot her , and any connect i on wi t h t he bankr upt cy

est at e was t angent i al at best . The bankrupt cy cour t s deci si on


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9 The orders provi ded t hat t he sanct i ons were payabl e nol ater t han Sept ember 20, 2012. I t does not appear t hatAppel l ant s obt ai ned a st ay pendi ng appeal and t here i s noi ndi cat i on i n t he recor d t hat any of t he sanct i ons awar d has beenpai d by ei t her Smi t h or Br own.

- 18-

was wi t hout pr ej udi ce t o SACI s r i ght t o seek, i n anot her cour t ,

an award of addi t i onal amount s on account of r ent s l ost as a

r esul t of West Coast s and Smi t h s post - f or ecl osur e conduct , and

wi t hout pr ej udi ce t o SACI s r i ght t o seek, i n anot her cour t , anawar d of damages or ot her r el i ef on any ot her basi s.

The bankrupt cy cour t ent er ed t he t wo or ders grant i ng

sanct i ons i n f avor of SACI and agai nst Appel l ant s on August 30,

2012. 9 The or der ent er ed i n connect i on wi t h t he Bank s mot i on

awarded sanct i ons agai nst West Coast and Smi t h ( Smi t h Or der) .

The or der ent er ed wi t h r espect t o SACI s mot i on awar ded

sanct i ons agai nst Br own ( Br own Or der ) . Bot h or der s i ndi cat e

t hat a si ngl e sanct i on i n the amount of $20, 000 was i mposed

agai nst t he Appel l ant s and i s payabl e j oi nt l y and sever al l y.

Appel l ant s f i l ed a si ngl e not i ce of appeal f or bot h t he

sanct i ons order s on September 12, 2012. The Smi t h Or der was

ass i gned BAP No. EC- 12- 1471 and the Br own Or der was assi gned BAP

No. EC- 12- 1485.SACI f i l ed a not i ce of cross- appeal f r om bot h or der s on

Sept ember 26, 2012. The cr oss- appeal of t he Smi t h Or der was

assi gned BAP No. EC- 12- 1493 and t he cross- appeal of t he Br own

Or der was assi gned BAP No. EC- 12- 1498.

II. JURISDICTION

The bankrupt cy cour t had j ur i sdi ct i on over t hi s proceedi ng

under 28 U. S. C. 1334 and 157( a) and ( b) ( 1) . We have


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j ur i sdi ct i on under 28 U. S. C. 158.

III. ISSUES

A. Whet her t he bankr upt cy cour t abused i t s di scret i on i n

awar di ng sanct i ons i n t he amount of $20, 000 agai nst Appel l ant s;and

B. Whet her t he bankr upt cy cour t abused i t s di scret i on i n

denyi ng SACI s r equest f or sanct i ons based on t he amount of

mi ssi ng r ent s whi ch const i t ut ed SACI s cash col l at er al .

IV. STANDARDS OF REVIEW

An awar d or deni al of sanct i ons under 105( a) i s r evi ewed

f or abuse of di scret i on. Nash v. Cl ar k Cnt y. Di st . At t or ney s

Of f i ce ( I n r e Nash) , 464 B. R. 874, 878 ( 9t h Ci r . BAP 2012) . The

appr opr i at eness of t he amount of t he sanct i ons i mposed al so i s

r evi ewed f or an abuse of di scr et i on. Asher v. Fi l m Vent ur es

I nt l , I nc. ( I n re Fi l m Vent ures I nt l , I nc. ) , 89 B. R. 80, 83

( 9t h Ci r . BAP 1988) .

We r evi ew t he bankrupt cy cour t s evi dent i ar y r ul i ngs f or anabuse of di scr et i on. Lat man v. Bur det t e, 366 F. 3d 774, 786 ( 9t h

Ci r . 2004) . To r ever se on t he basi s of an er r oneous evi dent i ar y

r ul i ng, we must concl ude not onl y t hat t he bankrupt cy cour t

abused i t s di scret i on, but al so t hat t he er r or was pr ej udi ci al .

I d.

A bankr upt cy cour t abuses i t s di scret i on i f i t appl i ed t he

wr ong l egal st andar d or i t s f i ndi ngs wer e i l l ogi cal ,

i mpl ausi bl e, or wi t hout suppor t i n t he recor d.

Tr af f i cSchool . com, I nc. v. Edr i ver I nc. , 653 F. 3d 820, 832 ( 9th

Ci r . 2011) .


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V. DISCUSSION

Bankr upt cy cour t s have i nherent sanct i on power under

105( a) whi ch st at es i n r el evant par t : The cour t may i ssue

any or der , pr ocess, or j udgment t hat i s necessar y or appr opr i at et o car r y out t he pr ovi s i ons of t hi s t i t l e. . . . See al so

Mi l l er v. Car di nal e ( I n r e DeVi l l e) , 361 F. 3d 539 ( 9t h Ci r .

2004) ; Cal dwel l v. Uni f i ed Capi t al Cor p. ( I n r e Rai nbow

Magazi ne) , 77 F. 3d 278, 284 ( 9t h Ci r . 1996) . The cour t s

i nher ent aut hor i t y t o sanct i on i ncl udes not onl y t he aut hor i t y

t o sanct i on a par t y, but al so t he aut hor i t y t o sanct i on t he

conduct of a nonpar t y who par t i ci pat es i n abusi ve l i t i gat i on

pr act i ces, or whose act i ons or omi ssi ons cause t he par t i es t o

i ncur addi t i onal expenses. I n r e Avon Townhomes Vent ur e,

433 B. R. 269, 304 ( Bankr . N. D. Cal . 2010) ( ci t i ng Chamber s v.

NASCO, I nc. , 501 U. S. 32, 5051 ( 1991) ( af f i r mi ng i mposi t i on of

sanct i ons on an i ndi vi dual f or conduct bef or e ot her t r i bunal s

t hat const i t ut ed an abuse of pr ocess, even t hough t he i ndi vi dualwas not a par t y when t he mi sconduct occur r ed) ; and I n r e Rai nbow

Magazi ne, I nc. , 77 F. 3d at 278 ( uphol di ng sanct i ons l evi ed under

t he cour t s i nher ent power s agai nst cor por at e debt or s pr i nci pal

who or chest r at ed t he bad f ai t h f i l i ng of t he bankrupt cy

pet i t i on) ) .

The bankrupt cy cour t s i nher ent sanct i on power al l ows i t t o

det er and pr ovi de compensat i on f or bad f ai t h l i t i gat i on. See

Knupf er v. Li ndbl ade ( I n r e Dyer ) , 322 F. 3d 1178, 1196 ( 9t h Ci r .

2003) . Bef or e t he bankrupt cy cour t i mposes sanct i ons under i t s

i nher ent power , i t must make an expl i ci t f i ndi ng of bad f ai t h or

wi l l f ul mi sconduct . I d. [ B] ad f ai t h or wi l l f ul mi sconduct


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consi st s of somethi ng more egr egi ous t han mere negl i gence or

r eckl essness. I d.

Once a f i ndi ng of bad f ai t h or wi l l f ul mi sconduct has been

made, a cour t may award at t orneys f ees and cost s as a sanct i ont o compensat e t he pr evai l i ng par t y f or expenses i ncur r ed by hi s

or her opponent s bad f ai t h l i t i gat i on t act i cs. Chamber s,

501 U. S. at 45- 46. However , t he l ong- set t l ed r ul e i s t hat

i nher ent power s must be exer ci sed wi t h r est r ai nt and di scr et i on.

I d. at 44. Thus, t he cour t shoul d be caut i ous i n exer t i ng i t s

i nherent power and must compl y wi t h the mandat es of due

pr ocess, bot h i n det er mi ni ng t hat t he r equi si t e bad f ai t h exi st s

and i n assessi ng f ees. I d. at 50.

A. The Merits: Appeals EC-12-1471 and EC-12-1485

Her e, t he bankrupt cy cour t made expr ess f i ndi ngs r egar di ng

Appel l ant s bad f ai t h and wi l l f ul mi sconduct whi ch i s t he

pr i mar y pr er equi si t e f or sanct i ons under t he cour t s i nher ent

power . I n r e Dyer , 322 F. 3d at 1196. I ndeed, t he sanct i onabl econduct of West Coast , Smi t h and Br own i ncl uded compl i ci t y i n

t r ansf er r i ng Sundance s pr oper t y t o West Coast f ol l owed by West

Coast s bankrupt cy f i l i ng on t he eve of t he Bank s schedul ed

f or ecl osur e. Accor di ng t o t he bankrupt cy cour t , t hese act s wer e

part of a scheme t o harass, del ay and i ncr ease t he Bank s and

SACI s l i t i gat i on cost s. Appel l ant s do not chal l enge any of t he

bankrupt cy cour t s bad f ai t h f i ndi ngs on appeal , i nst ead

compl ai ni ng t hat t he sanct i ons awar d was puni t i ve i n nat ur e,

ar bi t r ar y i n amount and l acked evi dent i ar y suppor t .

The Punitive Nature of the Sanctions

Because the cour t l i f t ed t he st ay and voi ded t he t r ansf er


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of t he pr oper t y, Appel l ant s asser t t hat t hi s was a suf f i ci ent

sanct i on agai nst Smi t h and West Coast . Ther ef or e, any sanct i ons

beyond thi s, Appel l ant s ar gue, wer e puni t i ve and t hus exceeded

t he bankrupt cy cour t s i nher ent aut hor i t y.Smi t h had made t hi s same argument i n t he bankrupt cy cour t ,

whi ch t he cour t r ej ect ed not i ng t hat t he or der l i f t i ng t he st ay

oper at ed i n conj unct i on wi t h t he Bank s f or ecl osur e t o depr i ve

Smi t h and West Coast of pr oper t y t hat shoul d not have been

t hei r s i n t he f i r st pl ace. We agr ee wi t h t he bankrupt cy cour t s

concl usi on t hat not hi ng of val ue was t aken f r omSmi t h or West

Coast and, t her ef or e, t hei r asser t ed l oss di d not oper at e as a

sanct i on agai nst t hem.

Mor eover , t he bankrupt cy cour t expl i ci t l y st at ed t hat t he

sanct i ons awar d was based on SACI s at t or neys f ees i ncur r ed as

a r esul t of Appel l ant s bad f ai t h conduct . Sanct i ons based on

at t or neys f ees ar e compensat or y and wi t hi n t he bankrupt cy

cour t s i nher ent aut hor i t y. I n r e DeVi l l e, 361 F. 3d at 546;see al so Chamber s, 501 U. S. at 44 ( t he l ess sever e sanct i on of

an assessment of at t or neys f ees i s undoubt edl y wi t hi n a cour t s

i nherent power) . Fur t hermore, compensat ory sanct i ons are not

consi der ed cr i mi nal penal t i es: Ci vi l penal t i es must ei t her be

compensat ory or desi gned t o coer ce compl i ance. I n r e Dyer ,

322 F. 3d at 1192 ( ci t i ng F. J . Hanshaw Ent er s. , I nc. v. Emer al d

Ri ver Dev. , I nc. , 244 F. 3d 1128, 113738 ( 9t h Ci r . 2001) ) ; see

al so Lasar v. For d Mot or Co. , 399 F. 3d 1101, 1110 ( 9t h Ci r .

2005) ( sanct i ons t hat compensat e f or har m caused ar e ci vi l ) .

Accor di ngl y, t he sanct i ons awar ded based on SACI s at t or neys

f ees were compensat ory and not puni t i ve i n natur e.


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10 I ndeed, at or al ar gument , Appel l ant s at t or ney emphasi zedt hat t he pr i mar y r eason, i f not t he sol e r eason, f or seeki ngr ever sal of t he sanct i ons awar d was t he l ack of evi dent i ar ysuppor t .

11 Al t hough Smi t h had al so obj ected t o Mi ckel sen sdecl arat i on on t he same gr ounds, SACI suppl ement ed t he r ecor dwi t h Wayser s decl ar at i on.

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The Amount of the Sanctions

Appel l ant s next compl ai n that t he bankrupt cy cour t abused

i t s di scr et i on i n awar di ng sanct i ons because ( 1) t her e was no

admi ssi bl e evi dence to suppor t t he awar d of at t or neys f ees10

and( 2) t he awar d was ar bi t r ar y because t he cour t f ai l ed t o expl ai n

how i t ar r i ved at t he $20, 000 amount . We addr ess each of t hese

argument s i n t ur n bel ow.

Smi t h obj ect ed t o Wayser s decl ar at i on whi ch at t ached hi s

l aw f i r m s bi l l i ng r ecor ds on t he gr ounds t hat ( 1) i t was not

admi ssi bl e under Fed. R. Evi d. 602 f or l ack of per sonal

knowl edge, and ( 2) i t const i t ut ed hear say and t hus was not

admi ssi bl e under Fed. R. Evi d. 803( 6) , t he busi ness r ecor ds

except i on. 11 Appel l ant s cont end t he bankrupt cy cour t er r ed

because i t di d not r ul e on t hese obj ect i ons. Appel l ant s

cont ent i on i s i ncor r ect . I n i t s wr i t t en r ul i ng dat ed August 29,

2012, t he bankrupt cy cour t expl i ci t l y f ound t hat Wayser s

decl ar at i on suf f i ci ent l y est abl i shes a f oundat i on f or t het est i mony t hat t r ue and cor r ect copi es of t he f i r m s bi l l i ng

st at ement s ar e f i l ed as exhi bi t s. The cour t f ur t her opi ned:

I t i s di f f i cul t t o under st and what f ur t her evi denceSmi t h woul d r equi r e [ - ] a decl ar at i on f r om eachi ndi vi dual who worked on t he case? I n any event , t hecour t i s sat i sf i ed t hat t he bi l l i ng st at ement sdemonst r at e, by cl ear and convi nci ng evi dence, t o t heext ent t hat i s necessar y, t hat at t or neys f ees of at


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l east $20, 000 wer e r easonabl y i ncur r ed as a di r ectr esul t of Smi t h[ ] s unconsci onabl e act i ons det ai l edabove.

Mor eover , at t he ver y l east , t he bankrupt cy cour t was awar e of

t he obj ect i ons at t he August 29, 2012 hear i ng and i mpl i ci t l yover r ul ed t hem when i t st at ed t hat I di dn t hear anyt hi ng t oday

t hat changed my posi t i on i n r egar ds t o t he t ent at i ve.

We t hus concl ude t hat t he obj ect i ons were over r ul ed and t he

evi dence was admi t t ed.

Fed. Rul e Evi d. 602 st at es t hat [ a] wi t ness may not

t est i f y t o a mat t er unl ess evi dence i s i nt r oduced suf f i ci ent t o

suppor t a f i ndi ng t hat t he wi t ness has per sonal knowl edge of t he

mat t er . See al so Uni t ed St at es v. Di bbl e, 429 F. 2d 598, 602

( 9t h Ci r . 1970) ( The f oundat i on i s l ai d f or r ecei vi ng a

document i n evi dence by t he t est i mony of a wi t ness wi t h personal

knowl edge of t he f act s who at t est s t o t he i dent i t y and due

execut i on of t he document and, wher e appr opr i ate, i t s

del i ver y. ) . I n hi s decl ar at i on, Wayser st at ed t hat he was oneof t he at t or neys at hi s f i r m r esponsi bl e f or r epr esent i ng SACI

i n t he bankr upt cy case and t he adver sar y pr oceedi ng. He f ur t her

st at ed t hat based on t hat r esponsi bi l i t y, he had per sonal

knowl edge of t he f act s cont ai ned i n hi s decl ar at i on. Wayser

al so summar i zed t he ser vi ces t hat hi s f i r m per f or med i n t he West

Coast bankrupt cy case and st at ed t hat he r evi ewed t he f i r m bi l l s

f or t he mont hs of J une and J ul y 2012. These st atement s

suf f i ci ent l y show t hat Wayser act ual l y per cei ved or observed

t hat whi ch he t est i f i ed t o. Lat man, 366 F. 3d at 786.

I n addi t i on, al t hough r easonabl e mi nds coul d di f f er ,

Wayser s t est i mony was suf f i ci ent t o est abl i sh t he accur acy and


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t r ust wor t hi ness of t he bi l l i ng st at ement s f or pur poses of t he

busi ness r ecor ds except i on t o hear say under Fed. R. Evi d.

803( 6) . See Uni t ed St ates v. Bonal l o, 858 F. 2d 1427, 1435 ( 9t h

Ci r . 1988) ( The busi ness r ecor ds except i on t o hear say under Fed.R. Evi d. 803( 6) i s avai l abl e wher e t he r ecor d i s ( 1) made or

based on i nf ormat i on t r ansmi t t ed by a person wi t h knowl edge at

or near t he t i me of t he t r ansact i on; ( 2) made i n t he or di nar y

cour se of busi ness; and ( 3) t r ust wor t hy, wi t h nei t her t he sour ce

of i nf or mat i on nor met hod or ci r cumst ances of pr epar at i on

i ndi cat i ng a l ack of t r ust wor t hi ness. ) .

I n sum, [ i ] n non- j ur y cases, t he [ bankrupt cy] j udge i s

gi ven gr eat l at i t ude i n t he admi ssi on or excl usi on of evi dence.

Hol l i ger v. Uni t ed St at es, 651 F. 2d 636, 640 ( 9t h Ci r . 1981) .

Accor di ngl y, we di scer n no r ever si bl e er r or on t he evi dent i ar y

gr ounds asser t ed by Appel l ant s.

However , we agr ee wi t h Appel l ant s t hat t he recor d i s

i nsuf f i ci ent f or us t o conduct a meani ngf ul r evi ew of t hecour t s deci si on t o awar d t he amount of $20, 000 i n sanct i ons

based on SACI s at t or neys f ees. I n Padget t v. Lovent hal ,

706 F. 3d 1205 ( 9t h Ci r . 2013) , t he Ni nt h Ci r cui t r ecent l y

r emi nded us t hat cour t s must show t hei r work when cal cul at i ng

at t or neys f ees. See al so Chal mer s v. Ci t y of L. A. , 796 F. 2d

1205, 1213 ( 9t h Ci r . 1986) , amended by 808 F. 2d 1373 ( 9t h Ci r .

1987) ( vacat i ng f ee award when t he or der cont ai ned no

expl anat i on of how t he cour t ar r i ved at t he awar d) . That was

not done by t he bankr upt cy cour t here.

Wher e monet ary sanct i ons ar e awarded, t he amount of t he

monetary sanct i ons must be r easonabl e. Leon v. I DX Sys.


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Cor p. , 464 F. 3d 951, 961 (9t h Ci r . 2006) ( ci t i ng Br own v. Baden

( I n r e Yagman) , 796 F. 2d 1165, 1184 ( 9t h Ci r . 1986) , amended by

803 F. 2d 1085 ( 1986) ) .

When t he sanct i ons award i s based upon at t orney s f eesand r el at ed expenses, an essent i al par t of det er mi ni ngt he r easonabl eness of t he awar d i s i nqui r i ng i nt o t her easonabl eness of t he cl ai med f ees. Recover y shoul dnever exceed t hose expenses and f ees t hat werer easonabl y necessar y t o r esi st t he of f endi ng act i on. . . t he cour t must make some eval uat i on of t he f eebreakdown submi t t ed by counsel .

I n r e Yagman, 796 F. 2d at 1184. The Ni nt h Ci r cui t has hel d i n

ot her cont ext s t hat t he l odest ar appr oach i s a pr oper met hod f or

det er mi ni ng t he r easonabl eness of at t or neys f ees. Bal l en v.

Ci t y of Redmond, 466 F. 3d 736, 745- 46 (9t h Ci r . 2006)

( char act er i zi ng t he l odest ar f i gur e as t he pr esumpt i vel y

accur ate measure of r easonabl e f ees when cal cul at i ng

per mi ssi bl e f ees under 42 U. S. C. 1988) ; see al so Gi sbr echt v.

Bar nhar t , 535 U. S. 789, 801 ( 2002) ( The l odest ar f i gur e has,

as i t s name suggest s, become the gui di ng l i ght of ourf ee- shi f t i ng j ur i spr udence. ) . The st ar t i ng poi nt f or comput i ng

t he l odest ar amount i s t o mul t i pl y t he number of hour s t he

pr evai l i ng par t y r easonabl y expended on t he l i t i gat i on by a

r easonabl e hour l y r at e. Caudl e v. Br i st ow Opt i cal Co. , I nc. ,

224 F. 3d 1014, 1028 ( 9t h Ci r . 2000) . The hour l y r ates used must

be i n l i ne wi t h t hose pr evai l i ng i n t he communi t y f or ser vi ces

by l awyer s of r easonabl y compar abl e ski l l , exper i ence and

r eput at i on. Bl um v. St enson, 465 U. S. 886, 895 ( 1984) .

Anot her f act or f or det er mi ni ng r easonabl eness i s t he

sanct i oned par t y s abi l i t y t o pay. I n r e Yagman, 796 F. 2d at

1184; see al so Haynes v. Ci t y and Cnt y. of S. F. , 688 F. 3d 984,


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12 The r ecord does not cont ai n any competent evi dence onwhat i s a r easonabl e rate f or t he communi t y.

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987 ( 9t h Ci r . 2012) ( awards under 28 U. S. C. 1927 are

di scr et i onar y such t hat t he cour t may per mi ssi bl y t ake abi l i t y

t o pay i nt o account , al t hough cour t s are not r equi r ed t o l i mi t

an award t o t he amount t hat t he sanct i oned at t or ney i s abl e t opay) ; and Whi t e v. Gen. Motor s Cor p. , I nc. , 908 F. 2d 675, 68485

( 10t h Ci r . 1990) ( f act or s r el evant t o det er mi ne an appr opr i at e

amount of monetary sanct i ons i ncl ude t he r easonabl eness of t he

amount r equest ed, t he mi ni mum necessar y t o det er a r epet i t i on of

t he conduct , and t he abi l i t y t o pay t he sanct i on. ) .

Her e, t her e i s no i ndi cat i on i n t he r ecor d as t o how t he

bankr upt cy cour t cal cul ated t he $20, 000 amount . The cour t does

not st at e the number of hour s t hat i t f ound r easonabl e f or t he

wor k per f or med nor does i t set f or t h t he hour l y rat e whi ch i t

appl i ed. See Tut or - Sal i ba Cor p. v. Ci t y of Hai l ey, 452 F. 3d

1055, 1065 ( 9t h Ci r . 2006) ( vacat i ng f ee awar d when or der f ai l ed

t o st ate, among ot her t hi ngs, t he number of hour s bei ng

compensat ed or t he hour l y r ate appl i ed) . The mandate t hatcour t s show t hei r wor k i s al l t he mor e i mpor t ant i n cases wher e,

as her e, some of t he ent r i es have been r edact ed and Wayser s

hour l y r at e appear s t o be f ar above t he pr evai l i ng communi t y

r ates even though di scount ed. 12 Fi nal l y, al t hough at t or ney Bel l

ar gued t hat Smi t h had l i t t l e abi l i t y t o pay si gni f i cant

sanct i ons because Smi t h f i l ed bankrupt cy i n 2009 and 2010, i t i s

uncl ear whet her t he bankrupt cy cour t t ook t hi s f act or i nt o


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13 Besi des Smi t h s t wo bankrupt ci es, we f ound no f i nanci alst atement s or other evi dence i n t he recor d whi ch demonst r atedSmi t h s cur r ent f i nanci al condi t i on.

14 The bankrupt cy cour t st at ed i n i t s wr i t t en r ul i ngs t hati t s awar d was based on r easonabl e f ees and cost s i ncur r ed f or ,among ot her t hi ngs, t he mot i ons f or sanct i ons agai nst West Coast ,Smi t h and Br own.

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consi der at i on when det er mi ni ng the reasonabl eness of t he f ees. 13

See I n re Yagman, 796 F. 2d at 1184; Haynes, 688 F. 3d at 987.

We al so not e that when a bankr upt cy cour t i mposes sanct i ons

pur suant t o i t s i nher ent power , t he cour t shoul d l i mi tsanct i ons t o t he opposi ng par t y s mor e di r ect cost s, t hat i s,

t he cost s of opposi ng t he of f endi ng pl eadi ng or mot i on. Or ange

Bl ossom Ltd. P shi p v. S. Cal . Sunbel t Devs. , I nc. ( I n r e S.

Cal . Sunbel t Devs. , I nc. ) , 608 F. 3d 456, 466 ( 9t h Ci r . 2010)

( quot i ng Lockar y v. Kayf et z, 974 F. 2d 1166, 1178 ( 9t h Ci r .

1992) ) . Under t hi s pr ecedent , f ees and expenses i ncur r ed f or

pr epar i ng and pr osecut i ng t he sanct i ons mot i ons are gener al l y

not aut hor i zed. 14

I n sum, because t he bankr upt cy cour t di d not show i t s

work, we vacat e the sanct i ons or ders and r emand t o al l ow t he

cour t t o expl ai n i t s r easoni ng on t he r easonabl eness of t he

f ees.

B. The Merits: Cross-Appeals EC-12-1493 and EC-12-1498

Because of our deci si on t o vacate and r emand, SACI s cr oss-

appeal s on t he amount of t he sanct i ons based on i t s at t orneys

f ees are r ender ed moot . However , we st i l l must addr ess SACI s

cr oss- appeal s r el at i ng t o t he bankrupt cy cour t s deni al of

sanct i ons i n the amount of $101, 435. 00 based on the mi ss i ng


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r ent s.

SACI mai nt ai ns t hat i t woul d have r ecei ved t hi s amount i n

r ent f or t he mont hs of J une, J ul y and August 2012 ( at t he rat e

of $37, 873 per mont h) had i t been abl e t o t ake possessi on of t hepr oper t y at t he begi nni ng of J une 2012; as i t woul d have wi t hout

Appel l ant s bad f ai t h act s. Because of Appel l ant s conduct ,

SACI cont ends t hat i t was not abl e t o f or ecl ose unt i l J une 29,

2012, and, even t hen, i t was unabl e t o gai n possessi on of t he

pr oper t y unt i l August 6, 2012, al l egedl y due t o Smi t h s post -

f or ecl osure conduct . SACI ar gues t hat due t o t he out r ageousness

of Appel l ant s conduct , t he bankrupt cy cour t abused i t s

di scr et i on by awardi ng a de mi ni mi s amount i n sanct i ons whi ch

f ai l ed t o make i t whol e or det er r epeat conduct . We ar e not

per suaded.

We ment i on f i r st t hat gener al l y a bankrupt cy cour t has t he

i nher ent power t o r egul at e the conduct of t hose bef or e i t , even

i n t he absence of subj ect mat t er j ur i sdi ct i on. Wi l l y v. Coast alCor p. , 503 U. S. 131, 13738 ( 1992) ( uphol di ng Rul e 11 sanct i ons

bef or e cour t of appeal s det er mi ned di st r i ct cour t l acked subj ect

mat t er j ur i sdi ct i on) ; 5A Char l es Al an Wr i ght & Ar t hur R. Mi l l er ,

Feder al Pr act i ce and Pr ocedur e: Ci vi l 1336, at 632 ( 3d ed.

2005) . Here, t he bankr upt cy cour t assumed i t had subj ect mat t er

j ur i sdi ct i on t o awar d SACI sanct i ons i n t he amount of t he

mi ssi ng r ent s and, i n t he exer ci se of i t s di scr et i on, deni ed

SACI s r equest .

Rever sal on abuse of di scr et i on gr ounds i s not pr oper

unl ess we have a def i ni t e and f i r m convi ct i on t hat t he

bankrupt cy cour t commi t t ed a cl ear er r or of j udgment i n t he


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concl usi on i t r eached af t er wei ghi ng t he rel evant f act or s.

Uni t ed St at es v. Goul d ( I n r e Goul d) , 401 B. R. 415, 429 ( 9t h

Ci r . BAP 2009) , af f d on ot her gr ounds, 603 F. 3d 1100 ( 9t h Ci r .

2010) . By t he same t oken t hough, a bankr upt cy cour tnecessar i l y abuses i t s di scret i on i f i t bases i t s deci si on on an

er r oneous vi ew of t he l aw or cl ear l y er r oneous f act ual

f i ndi ngs. I d. ; Tr af f i cSchool . com, I nc. , 653 F. 3d at 832.

I n denyi ng SACI s r equest f or sanct i ons i n t he amount of

t he mi ssi ng r ent s, t he bankrupt cy cour t consi der ed t he f ol l owi ng

f act or s: ( 1) SACI s cl ai m f or t he mi ssi ng r ent s agai nst West

Coast , Smi t h and Br own was essent i al l y a t wo par t y di sput e

wi t h l i t t l e, or no, ef f ect on West Coast s bankr upt cy est at e;

( 2) t her e wer e f ew, i f any, r emai ni ng asset s bel ongi ng t o West

Coast s est at e af t er SACI obt ai ned r el i ef f r om st ay; and

( 3) SACI coul d pur sue i t s damage cl ai m agai nst Smi t h and Br own

f or t he mi ssi ng r ent s i n t he st at e cour t . Af t er car ef ul l y

wei ghi ng t hese f act or s, t he bankrupt cy cour t coul d r easonabl yconcl ude t hat SACI had not made a st r ong enough showi ng f or t he

i mposi t i on of sanct i ons under t he cour t s i nher ent power based

on t he amount of t he mi ss i ng rent s.

SACI does not ar gue i n i t s cr oss- appeal s t hat t he

bankr upt cy cour t s f i ndi ngs wer e i l l ogi cal , i mpl ausi bl e, or

wi t hout suppor t i n t he r ecor d. I ndeed, t he r el at i onshi p bet ween

SACI s damage cl ai m f or t he mi ssi ng r ent s and SACI s di r ect

cost s i n opposi ng t he t r ansf er of t he pr oper t y and West Coast s

bad f ai t h f i l i ng became t enuous at best af t er SACI f or ecl osed.

I n addi t i on, al t hough sanct i ons under 105 ser ve t he dual

pur poses of compensat i on and deter r ence, we ar e not convi nced


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t hat SACI s ci t at i ons t o I n re Si mmons, 2011 WL 3957439, at *1

( Bankr . N. D. Cal . 2011) , I n re Avon Townhomes Vent ur e, 433 B. R.

at 304, or Rent z v. Dynast y Appar el I ndus. , I nc. , 556 F. 3d 389,

399- 400 ( 6t h Ci r . 2009) , compel a di f f er ent r esul t . These casesar e f act ual l y di st i ngui shabl e and si mpl y r ei t er at e t he gener al

pr emi se t hat under cer t ai n ci r cumst ances an awar d i n t he f ul l

amount of t he at t orneys f ees i ncur r ed may be warr ant ed t o ser ve

t he dual pur pose of deterr ence and maki ng the part y whi ch

i ncur r ed t he f ees whol e. None of t hese cases addr esses an award

of sanct i ons f or mi ssi ng r ent s under 105 nor do they di scuss

any f act or s r el evant t o such an i nqui r y.

I n sum, SACI has not convi nced us t hat t he bankr upt cy cour t

abused i t s di scr et i on by basi ng i t s deci si on on an er r oneous

vi ew of t he l aw. Accor di ngl y, we di scer n no er r or wi t h t he

bankr upt cy cour t s exer ci se of r est r ai nt and di scret i on not t o

i mpose sanct i ons i n t he amount of t he mi ss i ng r ent s under t he

f act s and ci r cumst ances of t hi s case.VI. CONCLUSION

For t he reasons s t ated, we VACATE t he sanct i ons or ders and

REMAND on t he amount of t he sanct i ons based on SACI s at t orneys

f ees so t hat t he bankr upt cy cour t can show i t s work. We AFFI RM

t he deni al of SACI s r equest f or sanct i ons i n t he amount of t he

mi ssi ng r ent s as wi t hi n t he bankrupt cy cour t s broad di scr et i on.

in re: west coast real estate & mortgage inc., 9th cir. bap (2013)

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