Sofris v. Maple-Whitworth Inc. ( 2009 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In the Matter of: MAPLE- 
WHITWORTH, INC.,
Debtor
No. 07-56537
MICHAEL N. SOFRIS, aka Sofris BAP No.
APC, CC-06-01098-KNB
Appellant,  Central District of
v. California,
Los Angeles
MAPLE-WHITWORTH, INC.; UNITED
STATES TRUSTEE; LARRY OPINION
WEINSTOCK; MICA BINTU-BROWN;
and EMANUEL PEREZ,
Appellees.

Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Klein, Nielsen, and Brandt, Bankruptcy Judges, Presiding
Argued and Submitted
December 9, 2008—Pasadena, California
Filed February 10, 2009
Before: John T. Noonan and Barry G. Silverman,
Circuit Judges, and Suzanne B. Conlon,* District Judge.
Opinion by Judge Conlon
*The Honorable Suzanne B. Conlon, United States District Judge for
the Northern District of Illinois, sitting by designation.
1619
IN THE MATTER OF MAPLE-WHITWORTH 1621
COUNSEL
Michael N. Sofris, Michael N. Sofris APC, Beverly Hills,
California, for appellant Michael N. Sofris, aka Sofris APC.
Jerry Kaplan; David Scott Kadin, Kaplan, Kenegos & Kadin,
Beverly Hills, California, for appellee Maple-Whitworth, Inc.
OPINION
CONLON, District Judge:
This appeal involves an award of $42,257 in attorneys’ fees
and costs pursuant to 11 U.S.C. § 303(i)(1), after dismissal of
an involuntary bankruptcy petition. The purported debtor,
Maple-Whitworth, Inc., sought fees and costs against only
one petitioner, appellant Michael N. Sofris. But the bank-
ruptcy court entered the award against some of the other peti-
1622 IN THE MATTER OF MAPLE-WHITWORTH
tioners who were served with the motion, under a theory of
joint and several liability. The bankruptcy court failed to rule
on a challenge to the award based on a waiver theory. A
divided Bankruptcy Appellate Panel (BAP) affirmed the
award to fewer than all petitioners. The majority held that
§ 303(i)(1) is governed by the common law theory of joint
and several liability. The BAP also found that the bankruptcy
court properly handled the waiver issue.
We have jurisdiction pursuant to 28 U.S.C. § 158(d)(1).
The § 303(i)(1) award is affirmed in part, reversed in part, and
remanded to the bankruptcy court for resolution of the waiver
issue.
The Bankruptcy Court Proceedings
This litigation arose from a dispute over control and owner-
ship of a Maple-Whitworth apartment building in Beverly
Hills, California. Two groups claimed control. Sofris was
aligned with the Mayman-Nathan faction, while appellee
Maple-Whitworth sided with the Marlowe-Shlush faction.
Sofris, joined by others in the Mayman-Nathan faction, filed
an involuntary Chapter 7 petition against Maple-Whitworth
under 11 U.S.C. § 303(a)-(b). The bankruptcy court dismissed
the petition.
Maple-Whitworth viewed Sofris as the ringleader of the
Mayman-Nathan faction and sought attorneys’ fees and costs
only against him under § 303(i). In opposing the motion,
Sofris offered evidence that Robert Nathan, a Mayman-
Nathan faction member, executed a release on behalf of
Maple-Whitworth, waiving its right to costs and fees. Maple-
Whitworth contested Nathan’s authority to waive its rights.
Initially, the bankruptcy court ruled that fees and costs must
be awarded against all petitioners as a class, and ordered
Maple-Whitworth to serve all petitioners with its § 303(i)
motion. The bankruptcy court’s award was entered against all
IN THE MATTER OF MAPLE-WHITWORTH 1623
petitioners effectively served with the motion. The court
based its decision on the tort theory of joint and several liabil-
ity. The court did not make findings regarding the validity of
Nathan’s release, but rather observed that the issue of control
over Maple-Whitworth would be resolved in pending state
court proceedings.
The Bankruptcy Appellate Panel Decision
A divided BAP affirmed the bankruptcy court’s award of
attorneys’ fees and costs. Michael N. Sofris, APC v. Maple-
Whitworth, Inc. (In re Maple-Whitworth, Inc.), 375 B.R. 558
(B.A.P. 9th Cir. 2007). The majority agreed liability under
§ 303(i) is governed by the common law tort doctrine of joint
and several liability. It also held that a debtor may bring a
§ 303(i) motion against fewer than all petitioners. The BAP
concluded that the bankruptcy court correctly handled Sofris’
waiver claim based on the Nathan release. Sofris timely
appeals.
Standard of Review
The bankruptcy court’s conclusions of law are reviewed de
novo, and its factual findings for clear error. Hanf v. Summers
(In re Summers), 332 F.3d 1240, 1242 (9th Cir. 2003). The
bankruptcy court’s interpretation of bankruptcy statutes are
conclusions of law subject to the de novo standard. Beam v.
IRS (In re Beam), 192 F.3d 941, 943 (9th Cir. 1999). A deci-
sion whether to award attorneys’ fees and costs under
§ 303(i)(1) is reviewed for an abuse of discretion. Higgins v.
Vortex Fishing Systems, Inc., 379 F.3d 701, 705 (9th Cir.
2004). Decisions of the BAP are reviewed de novo. In re
Summers, 332 F.3d at 1242.
Discretionary Relief under § 303(i)
[1] Section 303(i) provides that a court may grant a debtor
reasonable attorneys’ fees and costs upon dismissal of an
1624 IN THE MATTER OF MAPLE-WHITWORTH
involuntary bankruptcy petition. 11 U.S.C. § 303(i)(1)(A)-
(B). Statutory relief is unavailable only if all parties consent
or the debtor waives relief. Id. § 303(i).
The bankruptcy court erred by interpreting the unambigu-
ously discretionary language of the statute as requiring that
all petitioners be joined and served with the motion because
all were jointly and severally liable as a class. The BAP
majority correctly recognized that a debtor may seek costs
and fees from fewer than all petitioners. However, the major-
ity erroneously adopted the bankruptcy court’s interpretation
of § 303(i) as incorporating the common law doctrine of joint
and several liability. See In re Maple-Whitworth, 375 B.R. at
567-68 (citing only the Second and Third Restatements of
Torts as authority).
The BAP’s use of common law tort principles to interpret
§ 303(i) and to impose joint and several liability on all peti-
tioners as a class is contrary to the individualized exercise of
discretion unambiguously authorized by the statute, and
ignores the consideration of the totality of the circumstances
in imposing liability required by our precedent. Higgins, 379
F.3d at 705. As aptly observed in the BAP dissent:
The majority’s thorough discussion of joint and sev-
eral liability, contribution and indemnity highlights
the mischief that can occur by the wholesale applica-
tion of common law tort concepts into an exclusively
bankruptcy statutory cause of action.
In re Maple-Whitworth, 375 B.R. at 578-79 (Nielsen, B.J.,
dissenting).
[2] The BAP majority and dissent both recognized the
broad discretion delegated to bankruptcy courts by § 303(i).
Id. at 564-65, 577. In exercising its discretion, a bankruptcy
court must consider the totality of the circumstances, not prin-
ciples of tort liability. When an involuntary bankruptcy peti-
IN THE MATTER OF MAPLE-WHITWORTH 1625
tion is dismissed, the debtor is presumed to be entitled to
reasonable fees and costs. Higgins, 379 F.3d at 707. In exer-
cising its discretion whether to award fees and costs, the
bankruptcy court may consider factors such as relative culpa-
bility among the petitioners, the motives or objectives of indi-
vidual petitioners in joining in the involuntary petition, the
reasonableness of the respective conduct of the debtors and
petitioners, and other individualized factors. See id. Tort con-
cepts and class theories of liability are irrelevant to these dis-
cretionary and flexible considerations. In light of Higgins, a
bankruptcy court has discretion to hold all or some petitioners
jointly or severally liable for costs and fees, to apportion lia-
bility according to petitioners’ relative responsibility or culpa-
bility, or to deny an award against some or all petitioners,
depending on the totality of the circumstances.
[3] The involuntary bankruptcy petition against Maple-
Whitworth was dismissed.1 Accordingly, there was a rebutta-
ble presumption it was entitled to reasonable fees and costs.
Id. The burden was on Sofris to rebut the presumption by
establishing that fees and costs were unwarranted under the
totality of circumstances. Id. Sofris failed to do so. Even
though the bankruptcy court applied an incorrect standard, it
did not abuse its discretion in awarding attorneys’ fees and
costs against Sofris.
The Waiver Defense
Sofris argues the bankruptcy court erred by not ruling on
his defense that Maple-Whitworth waived § 303(i)(1) relief,
based on the Nathan release. Maple-Whitworth contested
Nathan’s authority to release or waive its rights. The bank-
ruptcy court declined to rule on this material issue of fact. If
resolved in Sofris’ favor, the Nathan release would preclude
§ 303(i) relief. The bankruptcy court deferred to pending state
1
The bankruptcy court denied Maple-Whitworth’s § 303(i)(2) claim for
$100,000 in punitive damages because bad faith was not established.
1626 IN THE MATTER OF MAPLE-WHITWORTH
court proceedings to resolve the issue of corporate control,
and thus determine Nathan’s authority to sign a release of the
company’s rights. At oral argument, Maple-Whitworth’s
counsel stated this issue is moot because the state court found
that Nathan’s faction did not own Maple-Whitworth, in prac-
tical effect nullifying his release. Sofris disputed whether the
issue is moot.
[4] Section 303(i)(1) precludes relief to a prevailing debtor
if it has waived that right. It was an abuse of discretion not
to resolve the contested waiver issue before awarding fees and
costs. This issue may well be moot in light of the intervening
outcome of state court proceedings concerning corporate con-
trol. Nonetheless, the bankruptcy court has a non-delegable
statutory obligation to make findings on this contested issue
because it directly affects Maple-Whitworth’s right to
§ 303(i)(1) relief. The case is remanded to the bankruptcy
court for findings on the waiver issue.
The parties shall bear their own costs on appeal. See Fed.
R. App. P. 39(a)(4).
AFFIRMED IN PART, REVERSED IN PART, AND
REMANDED.