Opinion
Case No. CV 15-00084 DDP
12-07-2015
IN RE DEBTOR: KATHLEEN KELLOGG-TAXE; KATHLEEN KELLOGG-TAXE; RONALD TAXE; JOHN SABA; GREGORY GRANTHAM, Plaintiffs, v. CAROLYN A. DYE, CHAPTER 7 TRUSTEE, Defendant.
[2:12-bk-51208 RN]
[2:13-ap-01781 RN]
ORDER DENYING APPEAL AND AFFIRMING BANKRUPTCY COURT'S SANCTIONS
[Dkt. Nos. 2, 24]
Presently before the Court is Debtor Kathleen Kellogg-Taxe's appeal from the Bankruptcy Court's December 19, 2014, Order Granting Chapter 7 Trustee's Motion for Sanctions Pursuant to 11 U.S.C. § 105(a) ("Order"). Having considered the parties' submissions, the Court adopts the following Order. cc: US Bankruptcy Court & US Trustee's Office
I. BACKGROUND
The facts of this case are quite convoluted, as the parties and the Bankruptcy Court have noted. (See Order at 3; Appellant's Opening Brief at 4-5; Appellee's Reply Brief at 1-2.) This factual complexity is, however, driven primarily by what the Bankruptcy Court termed a "family fraud." (Order at 14.) That is to say, the facts are only complex in so far as they tell the long and winding story of the Taxe family's fraudulent lien on their own property, which was meant to shield the property from creditors. (Id. at 3-12; see also Appellant's Opening Brief at 4-8 (statement of facts); Appellee's Reply Brief at 4-19 (same).) The Bankruptcy Court and the parties have explained the story in detail after many hearings and much briefing, so the Court does not labor over the details here.
On appeal before this Court is the Bankruptcy Court's Order granting the Chapter 7 Trustee's motion for $150,000 in sanctions jointly and severally against the Debtor Kathleen Kellogg-Taxe, Debtor's brother-in-law Ronald Taxe, and attorneys for Kellspin, Inc., Gregory Grantham and John Saba. Kellspin is a closely held company of the Taxe family that was alleged to hold a senior lien on real property owned by the Debtor at 10535 Vestone Way, Los Angeles, California ("Vestone Property"). (Order at 2.)
The Trustee's sanction motion arose out of litigation in the Bankruptcy Court about the Vestone Property. Debtor filed Amended Schedules in her Chapter 7 bankruptcy (Debtor's fifth bankruptcy) that disclosed for the first time "an undisputed secured claim of $1,465,815" for Kellspin as assignee of a judgment lien from the Omni Group. (Id. at 9; Amended Schedules.) Debtor asserted in the bankruptcy proceeding that the Vestone Property was subject to Kellspin's lien, and that the lien was senior to the liens recorded by First Federal Bank, Countrywide Financial, and Astoria Federal Savings on the same property. (See Order at 9.) Debtor filed a Proof of Claim for Kellspin, which Kellspin later amended when it filed its own Proof of Claim. The Kellspin lien was not disclosed in any prior bankruptcy or in the applications for loans from First Federal Bank, Countrywide Financial, and Astoria Federal Savings. (Id. at 7-9.)
Investigation into the alleged Kellspin lien led to the Trustee filing an adversary proceeding in the Bankruptcy Court to quiet title to the Vestone Property. Kellspin filed an Answer claiming that Kellspin had a secured, first priority lien against the Vestone Property. (Id. at 9-10.) Back in the bankruptcy proceeding, Debtor fought the Trustee's motions for access to the property, to employ a broker to sell the property, and to sell the property free and clear of liens. Debtor alleged that these actions could not be taken because of the Kellspin lien. (Id.)
In the end, several courts — state and federal bankruptcy courts — have found the Kellspin lien to be fraudulent and that the actions taken by the Kellspin attorneys and the Taxe family in defense of that lien have all been in the knowing service of that fraud. (Id. at 10-12, 14.) The Trustee sought sanctions against Debtor, Ronald Taxe, Gregory Grantham, and John Saba for their conduct in relation to the lien. (Id. at 12.) The Bankruptcy Court granted the motion.
All the sanctioned parties appealed the Order. (Dkt. No. 2.) This Order only reviews Debtor's appeal, however, because John Saba and Gregory Grantham never filed an appeal brief, and Ronald Taxe's late and oversized brief was struck from the docket pursuant to Trustee's unopposed motion. (See Dkt. No. 45.)
II. LEGAL STANDARD
The Bankruptcy Court's findings of fact are reviewed under the clearly erroneous standard and conclusions of law are reviewed de novo. In re Brown, 235 B.R. 644, 646 (Bankr. C.D. Cal. 1999); see also In re Lazar, 83 F.3d 306, 308 (9th Cir. 1996). Awards of sanctions are reviewed for an abuse of discretion. In re Lehtinen, 564 F.3d 1052, 1058 (9th Cir. 2009).
III. DISCUSSION
The sole issue on appeal is the Bankruptcy Court's imposition of sanctions against Debtor. Debtor's brief states six issues on appeal, but all six ask the question of whether the Bankruptcy Court abused its discretion in sanctioning Debtor. (Appellant's Opening Br. at 3.)
Debtor argues that she was not a party to the adversary proceeding to quiet title to the Vestone Property and so she cannot be sanctioned for actions taken in that suit. (Id. at 9-10.) She also argues that the Bankruptcy Court's award of sanctions under 11 U.S.C. § 105 was improper and excessive, and that any sanction should have been under Federal Rule of Bankruptcy Procedure 9011, which is equivalent to Federal Rule of Civil Procedure 11. (Id. at 10-12, 22-26.) Debtor further claims that the Bankruptcy Court erroneously based its ruling on a statutory section limiting a co-creditor filing a proof of claim for another creditor, instead of a debtor filing a proof of claim for a creditor. (Id. at 13-22.)
The Trustee responds that sanctions are available to the Bankruptcy Court under both Rule 9011 and Section 105(a), and that the use of Section 105(a) was proper here. (Appellee Reply Br. at 19-21.) She argues that the sanctions were meant for both the Debtor's behavior in her bankruptcy proceeding as well as Ronald Taxe's and the Kellspin attorneys' acts in the adversary proceeding, thus it does not matter that Debtor was not a party to the adversary proceeding. (Id. at 21-22.) As for the proof of claim, at no point, the Trustee says, did the Bankruptcy Court state that Debtor could not file a proof of claim for a creditor — it simply found that Debtor's doing so was in bad faith. (Id. at 22-23.) Lastly, the Trustee argues that Debtor failed to show that the Bankruptcy Court's finding of bad faith was clearly erroneous. (Id. at 23.)
A. Section 105 versus Rule 9011
A bankruptcy court has sanctioning power under both Section 105 and Rule 9011, but the two statutes entail different standards. Rule 9011 is modeled after Federal Rule of Civil Procedure 11, which means it is a limited sanctioning power for attorneys or unrepresented parties that make misrepresentations to the court. See Fed. R. Bankr. Pro. 9011; Fed. R. Civ. P. 11. The Rule requires that a party to be sanctioned receive notice and a reasonable opportunity to correct the misrepresentation before sanctions are granted. Fed. R. Bankr. Pro. 9011.
By contrast, 11 U.S.C. § 105(a) contains a broad grant of inherent power:
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the
raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.11 U.S.C. § 105(a). This broad grant of power includes the ability to sanction bad faith conduct conducted in bankruptcy courts by a party, a non-party, and attorneys. See, e.g., In re Rainbow Magazine, Inc., 77 F.3d 278, 284 (9th Cir. 1996) ("There can be little doubt that bankruptcy courts have the inherent power to sanction vexatious conduct presented before the court." (citing 11 U.S.C. § 105(a))). However, in In re Dyer, 322 F.3d 1178, 1196 (9th Cir. 2003), the Ninth Circuit explained that there is a difference between the civil contempt power of bankruptcy courts under 11 U.S.C. § 105(a) and the inherent sanctioning power of courts, and that earlier decisions of the Circuit had confused the two. Since the issue in this case is about bad faith litigation conduct, which could be upheld under either the inherent sanctioning power or 11 U.S.C. § 105(a), this Court will not focus on this jurisprudential point of difference.
Here, the Trustee alleged, and the Bankruptcy Court found, bad faith conduct by Debtor, Ronald Taxe, and the Kellspin attorneys in the various proceedings that involved the Vestone Property and the fraudulent lien. Therefore, contrary to Debtor's assertions, the use of Section 105 and/or the inherent sanctioning power instead of Rule 9011 was appropriate in this case because Debtor was involved in litigation concerning the fraudulent lien and took actions in that litigation that the Trustee alleged were in bad faith. /// ///
B. Bad Faith
Debtor argues that her conduct in asserting the existence and validity of the Kellspin lien was in good faith and thus not sanctionable. (Appellant's Opening Br. at 13-17, 24-25; Appellant's Reply Br. at 4-5.) The Trustee argues that the Bankruptcy Court considered Debtor's argument that she filed the proof of claim for Kellspin in good faith based on her title report investigation and the Bankruptcy Court properly found this argument unpersuasive. (Appellee's Reply Br. at 21-22.) The Trustee details the entire course of conduct that the Bankruptcy Court found as evidence of Debtor's involvement in the fraudulent scheme and of Debtor's bad faith. (Id. at 23-27.)
"The inherent sanction authority allows a bankruptcy court to deter and provide compensation for a broad range of improper litigation tactics." In re Dyer, 322 F.3d 1178, 1196 (9th Cir. 2003). The bankruptcy court must "make an explicit finding of bad faith or willful misconduct" in order to exercise its inherent sanctioning power. Id. The standard for bad faith or willful misconduct is "something more egregious than mere negligence or recklessness." Id. For bad faith, there must be some kind of "improper purpose" or intent, and "even if the act consists of making a truthful statement or a non-frivolous argument or objection," there can be sanctionable conduct based on the bad faith. Fink v. Gomez, 239 F.3d 989, 992 (9th Cir. 2001).
In this case, the Bankruptcy Court found Debtor engaged in bad faith litigation conduct in her bankruptcy proceeding. The Bankruptcy Court found that Debtor applied for multiple loans without disclosing the alleged Kellspin lien as encumbering the Vestone Property. Order at 7-8. Further, Debtor filed four prior Chapter 13 bankruptcy cases, none of which disclosed the Vestone Property as being encumbered by the Kellspin lien. Id. at 8-9. The Kellspin lien was only disclosed in the current Chapter 7 bankruptcy proceeding, and only in Debtor's amended schedules. Id. at 9. Debtor used this lien to object to any proposed creditor settlement or action taken by the Chapter 7 Trustee that would dispose of the Vestone Property because Debtor claimed this lien was undisputed and senior to all the other liens on the home. Id. As the Bankruptcy Court noted, Debtor filed a proof of claim for Kellspin in order to thwart the Trustee's attempt to sell the Vestone Property clear of any liens. Id. Even after the Trustee filed a separate adversary proceeding in the Bankruptcy Court to quiet title to the Vestone Property against Kellspin with evidence that the lien was fraudulent, Debtor continued to use the Kellspin lien to fight against any action taken by the Trustee to sell the home. Id. at 10.
Based on these facts, and others as described in the Order, the Bankruptcy Court found "that Richard Taxe, Debtor, and Ronald Taxe participated in perpetuating a scheme that has been found to be fraudulent by several state court rulings since 1994, when the state court in the Fernandez v. Ronald Taxe, et al. case found the Omni Group Judgment was part of a fraudulent scheme and therefore void." Order at 14. The Bankruptcy Court found Debtor knowingly engaged in bad faith by filing several documents "including at least four oppositions/objections" that relied on the fraudulent lien even though "a review of state court records would [have] reveal[ed] that the judgment ha[d] been extinguished." Id. at 14. Most revealingly, the court found that Debtor's filing of a proof of claim on Kellspin's behalf asserting the lien despite Debtor hiding such a lien in prior bankruptcies was in bad faith, and was unnecessary as "Debtor d[id] not personally appear to be liable for the underlying judgment" for the Kellspin lien. Id. at 14-15. Thus, there was no benefit to the bankruptcy estate in disclosing the lien or in filing a proof of claim, other than to attempt to thwart the sale of the Vestone Property in settling other debts that the Debtor was most certainly personally liable for. See id. at 15-16.
The Bankruptcy Court expressly held that Debtor's conduct as alleged was in bad faith:
Because the Debtor failed to initially disclose the existence of Kellspin's lien in her schedules; because she filed a very detailed but false proof of claim; and because she blindly condoned and/or participated in the fraudulent attempts to advance the validity of the lien during the course of this case after it had been declared invalid by several courts; this Court finds that the Debtor's actions were done in bad faith with the intent to perpetuate a fraudulent scheme to the creditors of this estate and to this Court.Id. at 16. Thus, based on this finding of fact and application of the law to these facts, the Bankruptcy Court granted the Trustee's motion for sanctions against the Debtor.
Debtor's argument that she was not a party to the adversary proceeding where the legitimacy of the Kellspin lien was determined and thus should not be sanctioned fails because as described above, the conduct sanctioned relates to Debtor's conduct in her bankruptcy proceeding. (See Appellant's Opening Br. at 9-10.) And most importantly, Debtor's argument that she filed the proof of claim for Kellspin "in good faith and after a reasonable investigation and review of the title records" was properly found by the Bankruptcy Court to not be true. The factual findings of the Bankruptcy Court are not clearly erroneous based on the record developed.
Debtor attempts to use Bankruptcy Code Section 501(c) to demonstrate that she legally could make a proof of claim on behalf of a creditor. (Appellant's Opening Br. at 17-19.) Thus, she claims, the Bankruptcy Court made an error of law because it found that her filing a proof of claim was part of her bad faith conduct but it was expressly allowed under the Bankruptcy Code.
Section 501(c) does allow a debtor to file a proof of claim for a creditor. 11 U.S.C. § 501(c). However, as the Bankruptcy Court in this case noted, Kellspin was not a creditor of the Debtor, so under Sections 501 and 502, there were no grounds for the Debtor to file that proof of claim. See id. §§ 501, 502. Debtor's point that the Bankruptcy Court was focused on the section relating to another creditor filing a proof of claim on behalf of a creditor who failed to do so is inapposite. Debtor was not in debt to Kellspin, and the Kellspin lien was not a personal obligation to be discharged in bankruptcy.
Lastly, Debtor's further arguments that she made "an objectively reasonable inquiry" into the Kellspin lien fail to engage with the abuse of discretion and clearly erroneous standards of review that control this appellate review. (See Appellant's Opening Br. at 14-15.) The Bankruptcy Court found that Debtor and her family were using the Kellspin lien in furtherance of a fraud, that Debtor knowingly filed a proof of claim that was false and unsupported by the state court record, and that this conduct amounted to bad faith. This Court can review the Bankruptcy Court's findings only under the abuse of discretion and clearly erroneous standards, and based on the facts found and the reasoning of the Bankruptcy Court, this Court cannot find that Debtor's arguments overcome this high standard.
C. Amount of Damages
Debtor argues that the amount of sanctions imposed are disconnected from any compensatory or deterrence justification and are instead motivated by an attempt to get attorneys' fees where none are warranted and to coerce settlement. (Appellant's Opening Br. at 22-26; Appellant's Reply Br. at 9-10.) The Trustee responds that the Bankruptcy Court was presented with evidence regarding the fees Trustee's attorneys incurred based on the litigation surrounding the fraudulent Kellspin lien. (Appellee's Reply Br. at 28-29.) Thus, the Trustee argues, the amount of the sanctions was based on compensatory damages as well as deterring future bad conduct. (Id.)
The amount of damages imposed in an inherent sanction authority or Section 105 case is limited to compensatory damages — the Ninth Circuit has found Bankruptcy Courts and the procedures they follow do not provide sufficient procedural safeguards for imposing punitive damage awards. In re Dyer, 322 F.3d at 1197.
Here, the Bankruptcy Court awarded $150,000 jointly and severally in sanctions against Debtor, Ronald Taxe, John Saba, and Gregory Gantham. John Saba, however, had the option of paying $10,000 out of his own funds to be released from the remainder of the sanction award. Order at 19 n.9. This amount must be justified by the purpose of compensating the Court and the Trustee for the bad faith conduct of these parties. The Trustee presented evidence to the Bankruptcy Court that "the fees of her attorneys in the effort to combat the fraudulent Kellspin claim were in the sum of $361,595." (Appellant's Br. at 29.) These fees were not limited to solely the adversary proceeding, but also included fees from the bankruptcy proceeding itself. (Id.) Thus, the amount awarded in sanctions is not an abuse of discretion considering the amount of time and work required by the Trustee to fight the fraudulent lien and the conduct committed by the parties.
IV. CONCLUSION
For all the reasons discussed above, this Court DENIES Debtor Kathleen Kellogg-Taxe's appeal and AFFIRMS the award of sanctions. IT IS SO ORDERED. Dated: December 7, 2015
/s/
DEAN D. PREGERSON
United States District Judge