Opinion
Bankruptcy Case No. 02-32634-TC
April 11, 2003
MEMORANDUM RE SANCTIONS
On March 14, 2003, the court held a hearing regarding Timea Terestyak's motion for sanctions, and regarding the court's order to show cause why sanctions should not be imposed. Albert M. Kun appeared for respondents Jozsefne Bajkai, Zoltan Gyula, Kinga Spanitz, and Albert M. Kun (Respondents). Lawrence D. Murray appeared for movant Timea Terestyak.
Upon due consideration, and for the reasons set forth below, which shall constitute the court's findings of fact and conclusions of law, the court determines that Respondent Albert M. Kun has violated Rule 9011 of the Federal Rules of Bankruptcy Procedure, and has also attempted to deceive this court in violation of Civil Local Rule 11-4(a)(1)-(4) and Rule 5-200(B) of the Rules of Professional Conduct of the State Bar of California. Kun shall pay Terestyak the sum of $7,500. I determine that the other Respondents have not been properly served, and deny relief against those parties without prejudice.
BACKGROUND
In the course of handling a marital dissolution proceeding between Timea Terestyak and Zoltan Gyula, the San Mateo Superior Court made certain findings and orders regarding Studio 2000 USA, Inc., the corporation that later became the debtor in this case (the Corporation).
In November 2001, Neiman's Coffee Shop, previously held in the name of the Corporation, was placed under the control of Terestyak by stipulation of the parties. See Superior Court Order, at 2, ¶ 1.
In August 2002, the Superior Court found that both the Corporation and its parent corporation, Studio 2000 Hungary Wholesale Inc. (the Hungarian Corporation), were alter egos of Gyula and assets of the marital community.
Respondent Gyula is and has been the sole owner of the Studio 2000 Hungary Wholesale, (Hungarian corporation) as well as its subsidiary, Studio 2000 U.S.A. Inc, and has acted consistently in the past [sic] treated the assets of both corporations as if it were his personal property, commingling such funds, failing to act in the corporate format, and using the corporate assets to pay for his own expenses and not the expenses of the corporation.
Id. at ¶ 2.
Shortly thereafter, Gyula caused the Corporation "as though it were a separate entity" to file an action against Terestyak asserting an interest in Neiman's Coffee Shop. Id. at ¶ 3.
In June 2002, the Superior Court entered orders directing the sale of two parcels of real property in Hillsborough owned by the marital community. Attorney Craig Collins represented the Corporation at those hearings. An order of June 27, 2002 provided that "Craig Harris Collins would act in the capacity of the agent for the corporation as numerous outsiders were acting to defeat the redemption of the property and prevent the community from realizing any of the equity in the property." Id. at 3, ¶¶ 4-7.
In July and August 2002, Collins asked to be relieved both as attorney and agent for the Corporation, "because those who claim to act on behalf of the corporation are countermanding the order of the court, including, but not limited to Kinga Spantz [sic]. In his declaration he stated that Spantiz, on behalf of ZOLTAN GYULA, has taken it upon herself to attempt to sabotage in any manner possible the quick and ordered [sic] sale of Hillsborough properties." Id. at 4, ¶ 8-9.
On August 19, 2002, the Superior Court granted Collins' motion to be relieved and appointed Terestyak to act as sole agent for the Corporation.
1. The other member of the community, Petitioner Timea Terestyak, formerly a Vice President of Studio 2000 USA, Inc., shall take charge of the corporation known as Studio 2000 USA, Inc., act as the agent for Studio 2000 USA, Inc., secure the sale of all properties in California in which Studio 2000 USA, Inc. holds any interest, and render an accounting to this court for all such properties and the sale of such properties. She shall represent the corporation known as Studio 2000 USA, Inc. before all government bodies and this court, to the exclusion of all others, including the Internal Revenue Service, and shall execute and sign in the name of Studio 2000 USA, Inc., all necessary documents, deeds and other papers. Any and all documents and property in the State of California for Studio 2000 USA, Inc. shall be delivered to her forthwith.
2. Her powers to sign documents for the sale or transfer of any interest in any and all properties in the State of California shall be concurrent with the same power remaining with the Clerk of the Superior Court for the County of San Mateo.
3. It is further ordered that any and all escrow officers shall, until further ordered by this court, disregard any and all communications from anyone else proporting [sic] to act in the interest of, in the name of, or as an agent for Studio 2000 USA, Inc., and Studio 2000 Hungary Wholesale Inc., including Kinga Spanitz, Zoltan Gyula and or [sic] anyone else retained for such a representation.
On September 17, 2002, the Corporation filed a chapter 11 petition in this court. The petition was signed by Jozsefne Bajkai, as president for the Corporation, and by Kun, as bankruptcy counsel for the Corporation. Kun does not deny knowledge of the Superior Court Order at the time he filed the petition.
For the reasons explained on pages 10-11, infra, Kun's failure to deny knowledge of the Order should be deemed to establish such knowledge for purposes of this proceeding.
On September 23, 2002, Terestyak's attorney, Lawrence D. Murray, sent a letter to M. Kun, demanding that the chapter 11 petition be withdrawn. Enclosed with the letter was a copy of the Superior Court Order.
On October 18, 2002, Kun, on behalf of the Corporation, filed a motion against Terestyak for turnover of property known as Neiman's Coffee Shop. Kun set the turnover motion for hearing on November 15, 2002. The moving papers, signed by Kun, asserted that the Coffee Shop was property of the Corporation, but failed to disclose in any way the Superior Court Order.
The failure to disclose the Superior Court Order was not the result of a general failure to address the circumstances in which Terestyak came to have possession of Neiman's Coffee Shop. The motion for turnover stated in relevant part: Among the assets that constitute property of this Chapter 11 bankruptcy estate (the "Estate') is a certain property named NEIMAN'S COFFEE SHOP located at 580 California Street, San Francisco, California.
Debtor is informed and believes that the above-mentioned property is currently under the control of TIMEA TERESTYAK.
TIMEA TERESTYAK has refused to return control of the property and continue to refuse to return control of the property to the Estate.
The declaration of Kinga Spanitz stated in relevant part: The corporation operated NEIMAN'S COFFEE SHOP until approximately September 2001 when, through a stipulation between TIMEA TERESTYAK and ZOLTON GYULA, TIMEA TERESTYAK operated NEIMAN'S COFFEE SHOP on a temporary basis.
The memorandum of points and authorities even more directly addresses the status of the Coffee Shop without disclosing the Superior Court Order. The memorandum mentions the Superior Court Action, and states that a trial date has been set, but does not disclose the Order.
Debtor operated NEIMAN'S COFFEE SHOP continuously until approximately September 2001 when Debtor temporarily relinquished custody of the operation pursuant to a stipulation between ZOLTAN GYULA and TIMEA TERESTYAK in a San Mateo County Family Court proceeding. Trial in that matter is set for December 8, 2002. The operation by TIMEA TERESTYAK has not been financially successful and the Internal Revenue Service ("IRS") has threatened to seize the operation. Debtor demanded return of the operation but TIMEA TERESTYAK refused to turnover the operation of NEIMAN'S COFFEE SHOP. Debtor is now seeking a turnover of the property.
On October 22, 2002, Terestyak filed a motion to dismiss the chapter 11 petition on the basis that Bajkai was not authorized to act on behalf of the Corporation in light of the Superior Court Order. The motion also sought sanctions under Bankruptcy Rule 9011 against Bajkai, Spanitz, Gyula, and Kun.
On October 28, 2002, the court dismissed the chapter 11 petition on the basis that the filing of the petition had not been properly authorized by the Corporation in light of the Superior Court Order. The court declined to rule on the motion for sanctions, because no separate motion for sanctions had been filed, and because there was no need for an expedited ruling regarding sanctions. The court stated orally that Terestyak could file a separate motion, and reserved jurisdiction to consider such a motion. On October 29, 2002, Terestyak filed and served a separate sanctions motion, which was set for hearing on December 6, 2002.
At the December 6th hearing, the court very clearly advised Kun that it believed the petition was filed in subjective bad faith.
As I often do, I'm going to give you a tentative ruling in this case, and I'll be glad to let you respond to it.
I think there has been a significant Rule 11 violation here. On the record I have in front of me, I am prepared to find that the petition was filed in subjective [bad] faith and that sanctions are appropriate.
Transcript of December 6, 2002 Hearing, at 1:9-15. The court did not, however, rule on Terestyak's motion immediately following the December 6th hearing. Instead, the court issued an order to show cause why sanctions should not be imposed upon Respondents under Rule 9011 of the Federal Rules of Bankruptcy Procedure for filing the chapter 11 petition and the motion for turnover on behalf of the Corporation after the Superior Court had ordered that only Terestyak could act on behalf of that entity. The court also directed Kun to show cause why sanctions should not be imposed upon him under Civil Local Rule 11-4(a)(1)-(4) and Rule 5-200(B) of the Rules of Professional Conduct of the State Bar of California for seeking through the motion for turnover in substance to undo the Superior Court Order without disclosing the existence of that order. The reasons for issuing the order to show cause were: (a) sanctions could not otherwise be imposed for the filing of the turnover motion because Terestyak did not comply with the safe harbor provisions of Rule 9011; and (b) the court believed that the turnover motion likely represented serious misconduct. Terestyak's motion was continued to the March 14, 2003 hearing on the order to show cause.
DISCUSSION
A. Are all the Respondents Properly Before this Court?
Terestyak's motion for sanctions was served upon Kun, who has appeared as counsel for the Corporation, and upon Dana Mendelson, who apparently represents Gyula in the Superior Court action but has not appeared in this court. The proof of service lists Kun as counsel for Bajkai and Spanitz, but there is no indication in the record that Kun has purported to represent those parties before this court or that those parties have authorized Kun to accept service on their behalf. The court's order to show cause was served only on the persons served with Terestyak's motion.
The court concludes that Bajkai, Spanitz, and Gyula have not properly been served and have not properly been made respondents to Terestyak's motion or the order to show cause. The motion is thus denied without prejudice, and the order to show cause discharged, regarding these parties. The court will consider the motion and order to show cause only as they apply to Kun and the Corporation.
B. Do the "Safe Harbor" Provisions Bar Sanctions?
Kun argues that sanctions cannot be granted under Rule 9011 because Terestyak did not comply with the "safe harbor" provisions of that rule. The safe harbor provisions specify that a motion for sanctions must be served upon the respondent 21 days before it may be filed with the court. If the respondent withdraws the pleading in question within that 21-day period, no sanctions may be imposed. F.R.Bankr.P. 9011(c)(1)(A).
The safe harbor provisions do not bar imposition of sanctions here. First, one of the pleadings upon which the motion is based is the chapter 11 petition itself. The safe harbor provisions expressly do not apply to the filing of petitions. Id. Second, this court considers the imposition of sanctions regarding the second pleading at issue (Debtor's turnover motion) pursuant to its own order to show cause. The safe harbor provisions apply only to motions filed by a party, and do not limit the issuance of an order to show cause by the court. F.R.Bankr.P. 9011(c)(1)(B).
C. Has Kun Violated Rule 9011?
This court previously ruled that the bankruptcy petition must be dismissed because it was not authorized by the Corporation and that Debtor's motion for turnover must be denied for the same reason. The central question at issue here is whether that result was so certain that Kun should be sanctioned under Rule 9011 for signing the petition and turnover motion.
Rule 9011(b) provides that an attorney who signs a pleading filed in a bankruptcy case certifies that, to the best of his knowledge, information and belief, formed after reasonable inquiry, 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. The test for whether a pleading meets this standard is an objective one, determined in light of what a reasonable inquiry regarding the applicable facts and law conducted at the time the pleading was filed would have disclosed. Golden Eagle Distributing Corp. v. Burroughs Corp., 801 F.2d 1531, 1536-38 (9th Cir. 1986).
Whether Mr. Kun violated Rule 9011 by signing the bankruptcy petition and the turnover motion turns upon the effect of the Superior Court Order. If he can make a plausible argument that the Order did not bar Bajkai from acting on behalf of the Corporation, sanctions should not be imposed.
Kun does not dispute that state law governs whether a corporation has authorized the filing of a bankruptcy petition on its behalf. Price v. Gurney, 324 U.S. 100, 106 (1945). Kun also does not contest generally the power of a state court, acting pursuant to state law, to order that only a specified party may file a bankruptcy petition on behalf of a corporation.
Kun also does not deny that he knew of the Superior Court Order when he filed the petition. For the following reasons, it is appropriate to expect Kun rather than Terestyak to bear the burden of coming forward regarding his knowledge of the Superior Court Order, and to construe Kun's silence as an admission that he knew of the Order on the petition date. First, Kun has unique access to information regarding his knowledge of the Superior Court Order, and discovery is generally not allowed for preparation of Rule 9011 motions. Second, Kun had a duty under Rule 9011 to investigate whether there was a basis to file the petition. It is appropriate to expect him to describe his state of knowledge regarding the Superior Court Order in response to a motion for sanctions and an order to show cause. Third, the court expressly suggested at the December 6, 2002 hearing that Kun may have filed the petition in bad faith. Kun had a strong incentive to assert any lack of knowledge of the Order, because such lack of knowledge would obviously cause the court to reexamine the issue of subjective bad faith. Fourth, it is not reasonable to infer that Kun would have acted in conformity with the Superior Court Order if he had known about it, because he filed the turnover motion after he had indisputable knowledge of that Order.
The 1983 Advisory Committee Notes regarding Rule 11 of the Federal Rules of Civil Procedure state in relevant part:
To assure that the efficiencies achieved through more effective operation of the pleading regimen will not be offset by the cost of satellite litigation over the imposition of sanctions, the court must to the extent possible limit the scope of sanction proceedings to the record. Thus, discovery should be conducted only by leave of the court, and then only in extraordinary circumstances.
Kun does, however, suggest four separate reasons why it is at least arguable in this case that the Superior Court Order did not bar him from filing a bankruptcy petition on behalf of the Corporation.
Kun first contends that he had reason to question whether the Superior Court Order was genuine. Kun's declaration states that Gyula's attorney told him there was no hearing before the Superior Court on August 16, 2002, the hearing date recited in the Order. This argument is unpersuasive. There is no doubt the Order was filed on August 16, 2002. Terestyak's attorney produced a certified copy of the Order at the October 28, 2002 hearing on Terestyak's motion to dismiss. Kun's reliance on the comments of Gyula's attorney was not reasonable. Kun should have contacted the Superior Court to determine whether the Order was genuine before taking any action that would violate that Order.
Kun also argues that he acted reasonably in filing the bankruptcy petition on behalf of the Corporation because the Superior Court had no jurisdiction to enjoin the shareholders of the Corporation from filing the petition. The sole basis for this argument is Kun's contention that the Corporation's sole share-holder (the Hungarian Corporation) was not properly before the Superior Court. This argument is unpersuasive. The key provision of the Superior Court Order is the one that directs the Corporation to act only through Terestyak. The relevant question is not whether the shareholder was properly enjoined from filing a petition, but whether a petition filed at the direction of the shareholder was an effective act on behalf of the Corporation in the face of the Order directing the Corporation to act only through Terestyak. Kun acknowledges that the Corporation had appeared in the Superior Court through its attorney, Craig Collins. Moreover, Gyula, the sole shareholder of the Hungarian Corporation, was a party to the Superior Court Action and had appeared through counsel. Kun cites no authority whatsoever suggesting that the provision of the Superior Court Order specifying that only Terestyak could act on behalf of the Corporation is not entitled to full faith and credit.
Kun's Declaration in Opposition to Motion for Sanctions, at 2, ¶ 2.
The full extent of Kun's lack of care can be seen in the limited argument he submitted on this issue. The full text of his arguments regarding Superior Court jurisdiction is forth below.
"The San Mateo County Superior Court never had jurisdiction over STUDIO 2000 Hungary because it was never served with process and never joined in the proceedings. The jurisdiction of a Court can be attached [sic] anytime, even collaterally in a bankruptcy proceeding." Memorandum of Points and Authorities in Opposition to Motion for Sanctions, at 4-5.
"A quick review of the Family Court file will show that Studio 2000 Hungary Wholesale Inc. was never served, never make a party to, and never appeared in the Family Court proceedings. Judge Dylina was acting in excess of his jurisdiction enjoining Studio 2000 Hungary Wholesale Inc. or its officers who were not a party to the Family Court proceedings." Response re Order to Show Cause at 5.
Kun next argues that in ordering Terestyak to represent the Corporation "before all government bodies and this court, to the exclusion of all others," the Superior Court did not clearly preclude Bajkai from filing a bankruptcy petition, because the bankruptcy court is not a "government body." This is not a plausible interpretation of the Superior Court Order. The central findings of the Superior Court were: (a) that the Corporation should be disregarded as a separate entity and its assets treated as property of the marital community; and (b) that Gyula had frustrated efforts to sell these assets through his manipulation of the Corporation. The central purpose of the Order was to enable and direct Terestyak to sell all assets of the Corporation for the benefit of the marital community. To interpret the Order in a way that permits Gyula (through his control of the Hungarian Corporation) to file a bankruptcy petition on behalf of the Corporation and compel Terestyak to turnover assets of the Corporation would frustrate the central purpose of the Order. Against this backdrop, the only reasonable interpretation of the term "government body" is that it means any agency, board, court, department, etc., that might affect Terestyak's ability to sell property as directed by the Superior Court. That the bankruptcy court is such an agency is proved by the fact that Kun admits the petition was filed to prevent Terestyak from selling property pursuant to the Superior Court Order.
Superior Court Order, at 1-4, especially ¶¶ 9 10.
"Debtors filed for Chapter 11 to enable the corporation to: 1) avoid the sale of two Hillsborough properties at fireside [sic] sale prices, and 2) provide for the payment of approximately $1.6 million owed to the Internal Revenue Service." Response to Order to Show Cause, at 5.
Kun argues finally that it is inappropriate to impose sanctions under Rule 9011 because the authorities are split as to whether Bajkai had authority to file a bankruptcy petition on behalf of the corporation. This argument is unpersuasive, because the only case that Kun cites does not stand for the proposition that Bajkai had authority to file on behalf of the Corporation in the face of the Superior Court Order. Hager v. Gibson, 108 F.3d 35 (4th Cir. 1997), involved a petition filed by a corporation following a shareholder meeting at which only one of the two 50-percent shareholders was present. The court held that the other shareholder's twelve-month delay in filing a motion to dismiss the petition constituted a ratification of the filing. Id. at 40. Nothing in Hager suggests that the Superior Court Order did not prevent all persons except Terestyak from filing a voluntary petition on behalf of the Corporation. Hager actually supports the proposition that the Superior Court Order should be given full effect, because it holds that state law governs who has authority to file a bankruptcy petition on behalf of a corporation. Id. at 38.
In sum, it is apparent that even at this late date Kun is unable to assemble any plausible theory under which he and Bajkai had authority to file a chapter 11 petition on behalf of the Corporation. Reasonable investigation by Kun would have revealed Kun's lack of authority to file the chapter 11 petition and the motion for turnover.
For the following reasons, the court finds that Kun filed both the petition and the motion for turnover in subjective bad faith. First, Kun filed those papers with the express purpose of frustrating the Superior Court Order, without any plausible theory under which he could act on behalf of the Corporation. Second, Kun failed to disclose in the turnover motion the existence of the Superior Court Order, or the fact that he was seeking to attack that Order collaterally. Kun acknowledges that the bankruptcy petition and turnover motion constituted a collateral attack on the Superior Court Order. It is worthy of note that Kun's moving papers explain in some detail how Terestyak came to have possession of the property to be turned over without mentioning the Superior Court Order. The Superior Court Order is a fact so clearly material to whether this court should grant the motion for turnover that the failure to disclose it must be considered an affirmative misrepresentation that violates Rule 5-200(B) of the Rules of Professional Conduct of the State Bar of California. Kun's failure to disclose the existence of the Order suggests a consciousness of the weakness of his claim to have the Order set aside, and negates the likelihood that the filing of the petition in the face of the Superior Court Order was the result of some innocent mistake. Kun's failure to disclose the Order also suggests an intent to achieve the desired result by stealth — to cause this court to take action in contradiction of the Superior Court Order without knowing that it was doing so.
See Memorandum of Points and Authorities in Opposition to Sanctions, at 4-5; Response to Order to Show Cause, at 5.
See quotations from Kun's moving papers on page 5 of this memorandum.
Rule 5-200(B) provides:
"In presenting a matter to a tribunal, a member:
. . .
(B) Shall not seek to mislead the judge, judicial officer, or jury by an artifice or false statement of fact or law[.]"
D. What Sanctions are Appropriate?
Rule 9011 provides that sanctions for violation of that rule "shall be limited to what is sufficient to deter repetition of such conduct or comparable conduct by others similarly situated." F.R.Bankr.P. 9011(c)(2). The court may order a violator to pay the injured party "the reasonable attorneys fees and other expenses incurred as a direct result of the violation," if the award is made upon motion of the injured party, but not when sanctions are imposed upon the court's own initiative. Id.
Terestyak seeks an order directing Kun to reimburse her $21,742 for attorneys fees she incurred in responding to the petition. To grant this relief, the court must find: (a) that the fees sought are reasonable, and (b) that the amount of the award is necessary for deterrence. Terestyak's request fails this test in part.
First, the fees sought were not all reasonably necessary to contest the petition. After consideration of the papers filed by Terestyak, the time records submitted by her attorney, and the nature and duration of the hearings before this court, the court determines that the fees reasonably incurred in contesting the petition do not exceed $10,000.
Second, the fees sought exceed the amount necessary for deterrence. The court determines that a sanction of $7,500 is necessary and sufficient for that purpose. Because the fee award is fully sufficient for deterrence, the court determines that it is not necessary to impose further sanctions under Rule 9011 payable to the court pursuant to the court's order to show cause.
The court notes that in failing to disclose the Superior Court Order in the turnover motion, Kun violated his duty of candor to the court and sought to frustrate the Superior Court Order in subjective bad faith. If it is for any reason inappropriate to impose the sanctions ordered here under Rule 9011, the court in the alternative orders Kun to pay Terestyak $7,500 pursuant to the court's inherent powers to remedy litigation abuses conducted in bad faith. In re DeVille, 280 B.R. 483, 495 (9th Cir. B.A.P. 2002).
It is not appropriate to award sanctions against Kun's purported client, the Corporation. This court has found that all the acts in question were under taken without authorization by the Corporation. Kun did not purport to act on behalf of any other client and, as noted above, the other Respondents were not properly served.
CONCLUSION
Kun shall pay Terestyak sanctions of $7,500 pursuant to Federal Rule of Bankruptcy Procedure 9011, as provided in the separate order entered on this date.
ORDER RE SANCTIONS
Upon due consideration, and for the reasons stated in the accompanying memorandum, the court hereby orders Albert M. Kun to pay Timea Terestyak $7,500, in care of her attorney Lawrence D. Murray, within twenty days of the date this order is filed. Kun's request for a stay of this order is denied.