Opinion
NOT FOR PUBLICATION
Argued and Submitted at San Francisco, California: January 20, 2012
Appeal from the United States Bankruptcy Court for the Northern District of California. Bk. No. 11-41750. Honorable Roger L. Efremsky, Bankruptcy Judge, Presiding.
Joe Guerra argued, Appellant, Pro se.
Raymundo Lujano argued, Appellant, Pro se.
Scott Tate of Schnader Harrison Segal & Lewis LLP argued for appellee, Mohamed Poonja, Chapter 7 Trustee.
Before: HOLLOWELL, DONOVAN and DUNN, Bankruptcy Judges.
MEMORANDUM
Joe Guerra (Guerra) and Raymundo Lujano (Lujano) (collectively, the Appellants) each appeal the order of the bankruptcy court that imposed over $200,000 in sanctions against them, jointly and severally, for concealing an insider connection between the debtor and the purchaser of the debtor's main asset. We AFFIRM.
I. FACTUAL BACKGROUND
In 2001, Luis Aguilar (Aguilar) purchased real property in Lathrop, California (the Property) with two single family residences, which he rented out for income. Aguilar's ultimate goal was to construct townhomes on the Property. He sought a partner to assist him in developing the Property. Aguilar placed an advertisement for a developer and met Guerra as a result. He later entered into an agreement with Guerra to move the project forward. To that end, Aguilar and Guerra formed Avon Townhomes Venture (Avon).
Aguilar agreed to transfer the Property to Avon and to continue to make mortgage payments; Guerra agreed to take sole management control of Avon and was tasked with obtaining financing for the project, preparing construction plans, and obtaining building permits and approvals. Aguilar and Guerra were the sole shareholders of Avon, but Aguilar's interest in Avon was subordinated to the stock held by Guerra.
When Guerra made little progress in developing the Property, the relationship between Aguilar and Guerra soured. Aguilar had the rents from the residences paid to him directly and Guerra responded by " terminating" Aguilar's interest in Avon. Aguilar sued Guerra in October 2004, alleging damages for breach of contract and fraud.
On May 26, 2005, Guerra filed a chapter 11 bankruptcy petition for Avon. Postpetition, Avon continued to act as the debtor-in-possession with Guerra serving as Avon's responsible individual. On November 10, 2005, Avon filed a motion seeking authority to sell the Property, as is, free and clear of ownership interests, to an entity known as Metricz, Inc. (Metricz) for $400,000 (Sale Motion).
Lujano is Metricz's Chief Financial Officer and sole shareholder. Robert Jaramillo (Jaramillo) is Metricz's President. Jaramillo executed the proposed purchase contract for the Property on behalf of Metricz.
In its Sale Motion, Avon stated that it and its equity owners were unrelated to Metricz. Additionally, Guerra stated in his declaration in support of the Sale Motion that neither he, Aguilar, nor Avon had any relationship or connection with Metricz.
Aguilar filed a limited objection to the Sale Motion. He consented to the sale, but proposed a competing bid by Thomas Sayles (Sayles). On December 7, 2005, the bankruptcy court conducted an auction for the Property, at which Metricz and Sayles participated (the Sale Hearing). Jaramillo made the bids on behalf of Metricz. Metricz was the highest bidder at $610,000. At the Sale Hearing, Sayles and the United States Trustee (UST) expressed concerns that Guerra had some connection with Metricz. The bankruptcy court addressed the issue:
If there are any connections between anybody, then that becomes a concern. . . . From my perspective the absolutely most important thing is that a sale is done fairly; it's legitimate; everybody has a fair shot at buying; that there's no shenanigans; there's no inside deals; there's no undisclosed relationships; there's none of this stuff. . . . There's an integrity of the process that to me is the most important. And I'd rather lose a sale than have one - one tainted by some wrongdoings.
Hr'g Tr. (Dec. 5, 2005) at 27:20-28:17.
The bankruptcy court offered to continue the Sale Hearing; however, after a recess, the parties decided to go forward with the auction. During the recess, Guerra represented to the UST that there was no connection between Avon or Guerra and Metricz or Metricz's officers or agents, and that Metricz had been located through a real estate broker named Jim McClenehan (McClenehan) of a firm called Eagle Home Loan. The UST put that representation on the record.
The bankruptcy court then approved the sale. However, as a condition of the sale, it required Metricz to make two non-refundable deposits, $25,000 and $100,000, respectively, to Avon's attorney to be held in his trust account in advance of the close of escrow, or risk forfeiting its funds and losing the Property to Sayles for a back-up bid of $550,000. The final order authorizing the sale free and clear of interests and approving the sale to Metricz was entered on December 30, 2005. The sale closed on February 3, 2006.
In June 2006, Metricz filed an adversary proceeding against Avon, claiming Avon had represented that the Property had been granted valuable sewer rights from the City of Lathrop (Adversary Proceeding). It turned out that prior to the sale, Aguilar had the sewer rights terminated without Guerra's knowledge. Metricz alleged that without the sewer hook-ups it was deprived of the opportunity to sell the Property for over $1 million. Avon sought a compromise of the Adversary Proceeding, which included paying the City of Lathrop $50,500 for reinstatement of the sewer hook-up rights.
The UST objected to the compromise because she was concerned there was an undisclosed relationship between Avon or Guerra and Metricz and possible collusion or misconduct related to the sale of the Property. Her concern was based on her discovery that incorporation documents showed that Metricz and Avon shared the same street address in San Jose, California, and the attorney representing Metricz, Samuel Goldstein (Goldstein), had represented Guerra on prior (unrelated) matters. Additionally, the UST was concerned that under the compromise, the estate would be required to pay for the sewer rights even though the Property had been sold " as is."
Thereafter, the UST sought conversion of Avon's case to chapter 7. Rather than converting the case, on May 11, 2007, the bankruptcy court appointed a trustee, Mohamed Poonja (the Trustee), to investigate the facts surrounding Metricz's purchase of the Property.
As part of his investigation, the Trustee conducted Rule 2004 examinations of Guerra and Lujano, as well as Jaramillo and McClenehan. At those examinations, Guerra testified that he had no communication or contact with anyone connected to Metricz prior to the Sale Hearing.
On January 24, 2008, the Trustee filed a report summarizing his investigation (Investigation Report). The Investigation Report concluded that Guerra had concealed a relationship with Metricz that preceded the sale of the Property. The Trustee found that Guerra had, in fact, played a role in Metricz's formation and directed the sale transaction to Metricz.
In March 2008, the Trustee discovered that funds drawn on Guerra's son's bank account might have been used to pay the non-refundable deposits for the purchase price of the Property. The Trustee conducted additional Rule 2004 examinations to determine if Guerra or Metricz was concealing Guerra's involvement in the purchase of the Property.
On April 8, 2008, the Trustee filed a motion requesting that the bankruptcy court issue show cause orders based on his investigation, which " uncovered irrefutable evidence" confirming that Guerra committed a fraud on the bankruptcy court when he denied in his declaration supporting the Sale Motion, as well as his statements at the Sale hearing, that he did not have any connection to Metricz (the OSC Motion). The Trustee asserted that the Appellants were aware of the relationship between Guerra and Metricz but conspired to give false testimony at their Rule 2004 examinations to conceal Guerra's insider purchase of the Property. The Trustee requested the Appellants " show cause why the [bankruptcy court] should not impose sanctions jointly and severally against them in amounts sufficient to make the estate whole for the costs of uncovering their fraudulent scheme."
in perpetuating the fiction that Metricz had purchased the Property and that [Guerra] had no connection with the sale or with Metricz. This led directly to the [Trustee's] and his counsel's expenditure of hours upon hours of time and expense, in an attempt to figure out what really happened.
Memorandum Decision at 2. Consequently, the bankruptcy court determined that, pursuant to its inherent authority to sanction bad faith conduct, sanctions were warranted in an amount necessary to compensate the estate for the expenses incurred in conducting the investigation, in uncovering the Appellants' bad faith conduct, and in participating in the OSC Proceeding. The bankruptcy court, therefore, directed the Trustee to file a fee application setting forth those fees and costs.
The bankruptcy court also entered, pursuant to its Memorandum Decision, an order holding the Appellants jointly and severally liable for the fees and costs awarded to the Trustee and his counsel for the investigation into their conduct, the exact amount of which the bankruptcy court would determine following a hearing on the Trustee's fee application.
Thereafter, the Trustee filed his third fee application (Fee Application). The Fee Application requested $64,794.50 in fees and $6,794.06 in costs, which represented the expenses incurred between September 1, 2008 through July 31, 2010, in conjunction with the investigation and OSC Proceeding. Furthermore, it set out the amount of fees and costs previously approved by the bankruptcy court that were attributable to the investigation into the Appellants' conduct with respect to the sale of the Property, which amounted to $190,202.00 in fees and $21,726.30 in costs.
The Fee Application was noticed to all parties and stated that a hearing would be held and the parties could file " any objection to the necessity and/or reasonableness of the fees and costs incurred . . . from the inception of the investigation and OSC Proceeding, regardless of whether such fees and costs were previously allowed and paid." The Appellants did not file an objection to the Fee Application or appear at the hearing on the Fee Application. The bankruptcy court approved the Fee Application on October 18, 2010.
In their Reply brief on appeal, the Appellants raise the argument that the entire OSC Proceeding was tainted by an alleged ex parte communication between the Trustee and the bankruptcy court.
II. ISSUES
Did the bankruptcy court abuse its discretion in entering the Sanctions Order?
Did the bankruptcy court fail to provide the Appellants due process protections?
Was there an ex parte communication between the Trustee and the bankruptcy court that tainted the OSC Proceeding?
III. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § 157(b)(2)(A), (N) and (O). We have jurisdiction under 28 U.S.C. § 158.
IV. STANDARDS OF REVIEW
We review all aspects of an award of sanctions for an abuse of discretion. Chambers v. NASCO, Inc., 501 U.S. 32, 55, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991); F.J. Hanshaw Enters., Inc. v. Emerald River Dev., Inc., 244 F.3d 1128, 1135 (9th Cir. 2001); Price v. Lehtinen (In re Lehtinen), 332 B.R. 404, 411 (9th Cir. BAP 2005), aff'd 564 F.3d 1052 (9th Cir. 2009). The bankruptcy court's choice of sanction is also reviewed for abuse of discretion. U.S. Dist. Ct. for E.D. Wash. v. Sandlin, 12 F.3d 861, 865 (9th Cir. 1993).
A bankruptcy court abuses its discretion if it bases a decision on an incorrect legal rule, or if its application of the law was illogical, implausible, or without support in inferences that may be drawn from the facts in the record. United States v. Hinkson, 585 F.3d 1247, 1261-63 (9th Cir. 2009) (en banc); Ellsworth v. Lifescape Med. Assocs. (In re Ellsworth), 455 B.R. 904, 914 (9th Cir. BAP 2011).
With respect to sanctions, a bankruptcy court's factual findings are reviewed for clear error and given great deference. F.J. Hanshaw, 244 F.3d at 1135. A factual finding is clearly erroneous if it is " illogical, implausible, or without support in the record." Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010). Moreover, when factual findings are based on determinations regarding the credibility of witnesses, we give great deference to the bankruptcy court's findings because the bankruptcy court, as the trier of fact, had the opportunity to note " variations in demeanor and tone of voice that bear so heavily on the listener's understanding of and belief in what is said." Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 575, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985); see also Rule 8013.
Whether the Appellants' due process rights were violated is a question of law that we review de novo. Miller v. Cardinale (In re DeVille), 280 B.R. 483, 492 (9th Cir. BAP 2002), aff'd, 361 F.3d 539 (9th Cir. 2004).
V. DISCUSSION
A. The Bankruptcy Court's Finding Of Bad Faith Conduct Was Supported By The Evidence.
The Appellants argue that there was " no evidence whatsoever" that Guerra directed his son to provide the non-refundable deposits for the purchase of the Property. However, the bankruptcy court's finding that the deposits were made by Guerra's son was only one of its many findings that led to its conclusion that Guerra concealed a relationship with Metricz and that the Appellants acted in bad faith with respect to the sale of the Property.
The testimonial evidence submitted at the OSC Proceeding revealed that Guerra chose McClenehan, with whom he (and his family members) had done business for over 20 years, to market the Property on behalf of Avon. However, Guerra did not seek approval to employ McClenehan as Avon's real estate broker, did not provide McClenehan details of the Property or its value, did not follow up with McClenehan, or ensure that the Property was listed or being marketed appropriately. The evidence indicated that Lujano was fortuitously introduced to McClenehan soon after Guerra sought McClenehan's assistance.
The connections between Guerra and Metricz do not end there. The non-refundable deposit money for the Property was paid by Guerra's son, Curtis. Curtis delivered a $25,000 check to McClenehan made payable to McClenehan's business. McClenehan then issued a check in the same amount to Guerra, who in turn purchased a cashiers' check for delivery to Avon's attorney. A similar scenario took place with respect to the second non-refundable deposit. Although Guerra contended that Curtis was investing in McClenehan's business, McClenehan denied that contention.
Thus, the evidence clearly demonstrated that Guerra had a prior relationship to Metricz and its officers and agents, which he concealed.
The bankruptcy court found that Lujano acted in bad faith because he refused to admit that he was a " willing pawn in Mr. Guerra's scheme to purchase the Property from the estate, " that " [h]is fabrications wasted judicial time and resources, forced the Trustee to conduct extensive investigation and incur significant expense, and violated the integrity of the bankruptcy system as a whole." Memorandum Decision at 66. The bankruptcy court's finding was based on testimonial evidence that demonstrated Lujano was not actively involved in selecting the Property and knew little about it. Lujano admitted he relied on Jaramillo or McClenehan to help him make decisions regarding Metricz, to facilitate all paperwork and to collect the rents from the Property. Lujano also testified that McClenehan managed the payments that Lujano personally owed on two mortgage loans that he had obtained in order to purchase the Property for Metricz. On the financing applications for those loans Lujano listed bank accounts belonging to Guerra's son, Joe, as among his financial resources.
Lujano was unable to produce documentation concerning Metricz's payment of the non-refundable deposits for the Property. Lujano contended that he had perso