In re: John Badea

FILED
MAR 5 2019
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. NV-18-1183-BKuTa
JOHN BADEA, Bk. No. 2:15-bk-10638-GS
Debtor.
JOHN BADEA,
Appellant,
v. MEMORANDUM*
LENARD SCHWARTZER, Chapter 7
Trustee,
Appellee.
Argued and Submitted on February 21, 2019
at Las Vegas, Nevada
Filed – March 5, 2019
Appeal from the United States Bankruptcy Court
for the District of Nevada
*
This disposition is not appropriate for publication. Although it may be cited
for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no
precedential value, see 9th Cir. BAP Rule 8024-1.
Honorable Gary A. Spraker, Bankruptcy Judge, Presiding
Appearances: Appellant John Badea argued pro se; James Imes of
Schwartzer & McPherson Law Firm argued for Appellee
Lenard Schwartzer, Chapter 7 Trustee.
Before: BRAND, KURTZ and TAYLOR, Bankruptcy Judges.
INTRODUCTION
Appellant John Badea appeals an order awarding the chapter 7
trustee, Lenard E. Schwartzer ("Trustee"), $4,581.50 in attorney's fees as a
compensatory sanction for Badea's violation of the Barton doctrine. We
AFFIRM in part and VACATE and REMAND in part.
I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
A. Events leading to the subject motion
Badea filed his chapter 7 bankruptcy case on February 12, 2015. After
a trial on a dischargeability complaint filed by creditors, the court denied
Badea's discharge under § 727(a)(2)(A)1 and (a)(4)(A). The BAP affirmed
the § 727 judgment and denied Badea's request for rehearing.
One reason for denial of Badea's discharge was his fraudulent
transfer of his condominium to his brother George shortly before the
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101-1532, and all "Rule" references are to the Federal
Rules of Bankruptcy Procedure.
2
petition date. When Trustee attempted to recover the condominium for the
benefit of the bankruptcy estate, Badea engaged in a series of additional
transfers of the property. Voiding and unwinding these additional
transfers required litigation. Once Trustee recovered possession of the
condominium, he discovered that Badea had leased it to a third party and
was collecting rent without authorization from Trustee.
During Trustee's efforts to sell the condominium, Badea filed a
complaint against Trustee and Trustee's investigator in the Nevada state
court on January 2, 2018 ("State Court Complaint"). Badea alleged that
Trustee had taken the condominium by "fraud and deception," and that he
had breached his fiduciary duty. Badea sought compensatory damages
directly from Trustee (and his investigator), as well as punitive damages.
Badea did not seek or obtain authority from the bankruptcy court prior to
filing the State Court Complaint.
Badea did not serve the State Court Complaint and summons on
Trustee; rather, he handed Trustee a copy of the complaint during an
unrelated hearing at the bankruptcy court. Later that same day, Trustee
sent Badea a letter informing him of the Barton doctrine and demanding
that he dismiss the State Court Complaint within five business days. If
Badea refused to do so, Trustee would seek sanctions from the bankruptcy
court. Badea did not dismiss the complaint.
A few weeks later, Trustee questioned Badea about the State Court
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Complaint and Trustee's letter at a Rule 2004 examination. Badea
acknowledged that he had received the letter, said he understood it, and
said that he had not yet dismissed the State Court Complaint and did not
intend to do so.
Another two months later, Trustee sent a second letter to Badea
demanding dismissal of the State Court Complaint. Trustee warned that if
Badea did not file the dismissal by April 2, he would move for an order to
dismiss it and for sanctions of attorney's fees.
B. Trustee's motion for dismissal of the State Court Complaint and for
sanctions
When Badea failed to dismiss the State Court Complaint by the
April 2 deadline, Trustee filed his Motion for Order Dismissing State Court
Complaint and for Sanctions ("Dismissal and Sanctions Motion"). Trustee
maintained that, because the actions about which Badea complained were
actions taken in his and his investigator's official capacities, the Barton
doctrine required Badea to obtain bankruptcy court approval prior to filing
the State Court Complaint. Trustee argued that Badea should be sanctioned
for his Barton violation in the form of attorney's fees incurred for the
motion. Trustee argued that Badea's refusal to dismiss the State Court
Complaint after he was notified of the Barton doctrine was an additional
basis for sanctions.
Alternatively, Trustee argued that he and his investigator were
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entitled to quasi-judicial immunity for the acts Badea alleged resulted in
injury. Trustee maintained that all actions he and his investigator took to
obtain title to the condominium were pursuant to bankruptcy court orders.
Trustee disputed any breach of fiduciary duty claim; neither he nor his
investigator had any such duty to Badea, a debtor with a non-surplus case.
Badea opposed the Dismissal and Sanctions Motion. He argued that,
because he had not served Trustee and his investigator with the summons
and State Court Complaint within the 120 days required by Nevada law,
the complaint was going to be dismissed; thus, he did not need to dismiss
it. Badea also argued that the claims raised in the State Court Complaint —
breach of fiduciary duty and actions taken outside the scope of a
bankruptcy trustee's authority — were not protected by quasi-judicial
immunity. Badea argued that Trustee had failed to discharge his duties by
(1) failing to notify the bankruptcy court of the purchase agreement
between Badea and George for the condominium, (2) obtaining fraudulent
transfer judgments against George and Nina Sarau by improper service of
process, and (3) making sworn false statements against Badea's interest.
At the hearing on the Dismissal and Sanctions Motion, the
bankruptcy court ruled that the actions Badea complained about in his
State Court Complaint were within the scope of Trustee's administrative
duties, that Badea's failure to obtain leave from the bankruptcy court before
filing the State Court Complaint violated the Barton doctrine, and that
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Badea's conduct warranted sanctions. The court's written order (the
"Dismissal and Sanctions Order") provided that (1) Badea had 14 days to
dismiss the State Court Complaint, (2) that he was ordered to pay Trustee
compensatory sanctions of attorney's fees and costs incurred for the
motion, and (3) that within 14 days Trustee would submit an affidavit of
attorney's fees and costs, along with a proposed order for the amount of
compensatory sanctions awarded.
Trustee timely submitted his affidavit requesting $4,581.50 in
attorney's fees for prosecuting the Dismissal and Sanctions Motion. One
week later, the bankruptcy court entered an order awarding Trustee his
attorney's fees in the requested amount of $4,581.50 ("Fee Order"). Badea
timely appealed the Fee Order.
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A). We discuss our jurisdiction below.
III. ISSUES
1. Do we have jurisdiction to review the Dismissal and Sanctions
Order even though Badea did not appeal it?
2. Did the bankruptcy court err in determining that Badea violated the
Barton doctrine or abuse its discretion in sanctioning him under its inherent
authority for that violation?
3. Did the bankruptcy court abuse its discretion in entering the Fee
6
Order when Badea was not given a meaningful opportunity to object?
IV. STANDARDS OF REVIEW
We review our jurisdiction de novo. Ellis v. Yu (In re Ellis), 523 B.R.
673, 677 (9th Cir. BAP 2014).
"We review the bankruptcy court's conclusions of law de novo and its
factual findings for clear error." Carrillo v. Su (In re Su), 290 F.3d 1140, 1142
(9th Cir. 2002).
The bankruptcy court's award of sanctions and the amount of the
award are reviewed for abuse of discretion. B.K.B. v. Maui Police Dep't., 276
F.3d 1091, 1106 (9th Cir. 2002) (citing Chambers v. NASCO, Inc., 501 U.S. 32,
55 (1991)). A bankruptcy court abuses its discretion if it applies the wrong
legal standard, misapplies the correct legal standard, or if its factual
findings are clearly erroneous. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d
820, 832 (9th Cir. 2011).
Whether a party's due process rights were violated is a question of
law we review de novo. Miller v. Cardinale (In re Deville), 280 B.R. 483, 492
(9th Cir. BAP 2002).
V. DISCUSSION
A. We have jurisdiction to review the Dismissal and Sanctions Order.
Before we address the merits of the Fee Order, we must first
determine whether we have jurisdiction over the Dismissal and Sanctions
Order, which was not appealed but Badea contests. Badea argues that the
7
bankruptcy court erred in finding that he violated the Barton doctrine and
sanctioning him for that violation. Trustee contends that Badea should not
be allowed to brief and argue these issues because they were not presented
in his statement of issues on appeal and were therefore waived. In Wages v.
J.P. Morgan Chase, N.A. (In re Wages), 508 B.R. 161, 164 (9th Cir. BAP 2014),
we recognized the Ninth Circuit's holding in Office of the U.S. Trustee v.
Hayes (In re Bishop, Baldwin, Rewald, Dillingham & Wong, Inc.), 104 F.3d 1147,
1148 (9th Cir. 1997), that arguments not specifically listed in a statement of
issues are not waived.
In any case, the question is whether Badea can dispute the court's
ruling in the Dismissal and Sanctions Order when he did not appeal it.
Trustee does not address this in his brief but, rather, presents argument
supporting the court's ruling. We conclude that the Dismissal and
Sanctions Order is properly before us, because it was not final until the Fee
Order assessing the amount of the sanction was fixed. See Jensen Elec. Co. v.
Moore, Caldwell, Rowland & Dodd, Inc., 873 F.2d 1327, 1329 (9th Cir. 1989)
("An order 'finding appellant liable for attorney's fees and costs but
without determining the specific amount of that award is not a final and
appealable order.'") (quoting Gates v. Cent. States Teamsters Pension Fund,
788 F.2d 1341, 1343 (8th Cir. 1986) (holding that district court's order
imposing sanctions but not setting an amount was not a final or appealable
order)); Pioneer Lumber Treating, Inc. v. Cty. of Haw., 940 F.2d 669 (9th Cir.
8
1991) (unpublished table case) (citing Jensen Electric and dismissing appeal
of interlocutory order imposing sanctions but not fixing the amount). See
also Kennedy v. Applause, Inc., 90 F.3d 1477, 1483 (9th Cir. 1996) (holding that
order stating that court would award attorney fees and costs was not a
final, appealable order where the amount had yet to be determined and the
court had requested further submissions from both parties to aid that
determination).
The interlocutory Dismissal and Sanctions Order, which imposed
sanctions but did not fix the amount, did not become final and appealable
until the Fee Order was entered. Once that occurred, the Dismissal and
Sanctions Order merged into the Fee Order and could be challenged on
appeal. See United States v. Real Prop. Located at 475 Martin Lane, Beverly
Hills, Cal., 545 F.3d 1134, 1141 (9th Cir. 2008) (interlocutory orders entered
prior to the judgment merge into the judgment and may be challenged on
appeal). This is true even though the Dismissal and Sanctions Order was
not designated in Badea's notice of appeal. Disabled Rights Action Comm. v.
Las Vegas Events, Inc., 375 F.3d 861, 872 n.7 (9th Cir. 2004) (appeal of final
judgment draws into question all earlier, non-final orders and rulings
which produced the judgment).
Accordingly, we have jurisdiction under 28 U.S.C. § 158(a)(1) to
review the Dismissal and Sanctions Order and Badea's related arguments.
////
9
B. The bankruptcy court did not err in determining that Badea
violated the Barton doctrine or abuse its discretion in sanctioning
him under its inherent authority for that violation.
1. Badea violated the Barton doctrine.
For nearly 140 years, the United States Supreme Court has barred
suits against a court-appointed receiver in a non-appointing court for acts
within the receiver's official capacity if brought without the appointing
court's prior permission. Barton v. Barbour, 104 U.S. 126, 128 (1881). The
Ninth Circuit has extended the Barton doctrine to bankruptcy trustees and
their professionals. Beck v. Fort James Corp. (In re Crown Vantage, Inc.), 421
F.3d 963, 970-71 (9th Cir. 2005) ("We join our sister circuits in holding that a
party must first obtain leave of the bankruptcy court before it initiates an
action in another forum against a bankruptcy trustee or other officer
appointed by the bankruptcy court for acts done in the officer's official
capacity.").
Although not addressed by the bankruptcy court, quasi-judicial
immunity protected Trustee and his investigator against Badea's claims.
Trustee's efforts to recover and sell the condominium, which are the acts
about which Badea complains, were within the scope of Trustee's and his
investigator's official duties and were carried out with bankruptcy court
approval. See Lonneker Farms, Inc. v. Klobucher, 804 F.2d 1096, 1097 (9th Cir.
1986) (a trustee or an official acting under the authority of the bankruptcy
10
judge is entitled to derived judicial immunity because he is performing an
integral part of the judicial process); Kashani v. Fulton (In re Kashani), 190
B.R. 875, 883-84 (9th Cir. BAP 1995).
The Barton doctrine also applied. The bankruptcy court determined
that the actions Badea raised in his State Court Complaint — Trustee's
alleged wrongful taking of the condominium and his alleged breach of
fiduciary duty in carrying out the administration of the estate relating to
the condominium — fell squarely within the Barton doctrine. Therefore,
Badea was required to get prior approval from the bankruptcy court before
filing the State Court Complaint in the Nevada state court.
Badea maintains that simply filing the State Court Complaint, but not
serving it, did not violate the Barton doctrine. Badea fails to cite any
authority that only filing a violative complaint but not serving it does not
violate the Barton doctrine. "The essence of the Barton doctrine is that
parties may not commence or maintain unauthorized litigation." In re
Crown Vantage, Inc., 421 F.3d at 976 (emphasis added). Similar to Rule 3 of
the Federal Rules of Civil Procedure, applicable in bankruptcy courts by
Rule 7003, Rule 3 of the Nevada Rules of Civil Procedure provides: "A civil
action is commenced by filing a complaint with the court." (Emphasis
added). Thus, filing a complaint without serving it is enough to violate the
Barton doctrine.
Badea's claims in his State Court Complaint required leave from the
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bankruptcy court.2 In re Crown Vantage, Inc., 421 F.3d at 972 (liquidating
assets of the estate is precisely the type of activity the Barton doctrine was
designed to protect); In re Kashani, 190 B.R. at 884-85 (debtors had to obtain
leave from the bankruptcy court for suit in non-appointing court alleging
trustee's breach of fiduciary duty in the administration of the estate). The
Nevada state court was an improper venue for Badea's complaint, which
named Trustee and his investigator for acts done within their official
capacities, and Badea did not obtain leave from the bankruptcy court to file
it. The bankruptcy court correctly held that Badea's filing of the State Court
Complaint violated the Barton doctrine.
2. Sanctioning Badea for his violation of the Barton doctrine
was appropriate.
Sanctions are an appropriate remedy for a violation of the Barton
doctrine. Allard v. Weitzman (In re DeLorean Motor Co.), 991 F.2d 1236, 1241-
42 (6th Cir. 1993) (trustee entitled to recover actual damages, including
costs and attorney's fees incurred as a result of the filing of the Barton
violating suit to include the filing of trustee's complaint with the
bankruptcy court); Ace Ins. Co. v. Smith (In re BCE West, L.P.), 2006 WL
8422206, at *8 (D. Ariz. Sept. 20, 2006); In re Sea Hawaii Rafting Co., 2018 WL
2
It does not appear, and Badea has never alleged, that the narrow exception to
the Barton doctrine applies here. See 28 U.S.C. § 959(a) (excepting from the Barton
doctrine a trustee's "acts or transactions" in carrying on the debtor's business
operations); In re Crown Vantage, Inc., 421 F.3d at 971-72.
12
2422388, at *7 (Bankr. D. Haw. May 21, 2018); Steffen v. Berman (In re
Steffen), 406 B.R. 148, 153 (Bankr. M.D. Fla. 2009) (imposing damages for
violation of Barton doctrine after noting the "elementary requirement prior
to filing a suit against a party is that the filer needs to determine whether or
not he or she has the right to sue the party, especially a court-appointed
Trustee, and his court-approved attorneys").
Badea contends that the bankruptcy court should not have imposed
sanctions because he was ignorant of the Barton doctrine. Ignorance of the
Barton doctrine is no excuse for violating it. In re Sea Hawaii Rafting Co.,
2018 WL 2422388, at *7; In re Steffen, 406 B.R. at 153. Even if ignorance of the
law could provide a defense against sanctions here, Badea's actions negate
his alleged ignorance. Trustee warned Badea about the Barton doctrine's
existence and gave him several opportunities to dismiss the State Court
Complaint before seeking sanctions. Trustee sent his first letter to Badea on
January 22, 2018, giving him five business days to dismiss it. He did not.
Badea was warned again at his Rule 2004 examination on February 8, but
he insisted that he was not dismissing the offending complaint. Trustee
sent Badea a second letter on March 29, notifying him of the Barton doctrine
violation and of his intent to seek sanctions if Badea failed to dismiss the
State Court Complaint by April 2. Badea ignored the warning. He did not
dismiss the State Court Complaint until after Trustee filed the Dismissal
and Sanctions Motion and the court orally ordered dismissal. By that time,
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the damage had been done, costing the estate significant attorney's fees.
Badea also argues that because the State Court Complaint was not
served within the 120 days as required, it was already "legally terminated,"
so he should not have been sanctioned for something that had already been
dismissed. The bankruptcy court correctly rejected this argument, noting
that the case was still active regardless of Badea's failure to serve the
complaint within the required time period; he had to take some affirmative
action to dismiss it. Badea's eventual dismissal did not negate the fact that
his own actions necessitated Trustee's motion. His eventual compliance
with the Dismissal and Sanctions Order simply protected him from an
additional sanction of civil contempt.
The bankruptcy court sanctioned Badea in the form of attorney's fees
for his violation of the Barton doctrine and willful failure to dismiss the
State Court Complaint. To do so, the court relied on its inherent authority.
A bankruptcy court's inherent sanction authority is recognized under
§ 105(a). Caldwell v. Unified Capital Corp. (In re Rainbow Magazine, Inc.), 77
F.3d 278, 284 (9th Cir. 1996). Under that authority, the bankruptcy court
may sanction a "broad range" of conduct. Lindblade v. Knupfer (In re Dyer),
322 F.3d 1178, 1196 (9th Cir. 2003). Sanctionable conduct includes improper
litigation tactics (e.g., delaying or disrupting litigation), bad faith, vexatious
or wanton conduct, willful abuses of judicial process, or acting for
oppressive reasons. Fink v. Gomez, 239 F.3d 989, 991-92 (9th Cir. 2001). In
14
this context, bad faith or willful misconduct consists of something more
egregious than mere negligence or recklessness." In re Dyer, 322 F.3d at
1196. Sanctions under a court's inherent authority may include the
assessment of attorney's fees, but "the court can shift only those attorney's
fees incurred because of the misconduct at issue." Goodyear Tire & Rubber
Co. v. Haeger, 137 S. Ct. 1178, 1186 (2017); Chambers, 501 U.S. at 45.
Before imposing sanctions under its inherent sanctioning authority, a
court must make an explicit finding of bad faith or willful misconduct. In re
Dyer, 322 F.3d at 1196. "[S]pecific intent or other conduct in 'bad faith or
conduct tantamount to bad faith,' is necessary to impose sanctions under
the bankruptcy court's inherent power." Id. (internal citation omitted).
While the bankruptcy court did not utter the words "bad faith," it did make
explicit findings of fact as to Badea's conduct tantamount to bad faith,
finding (1) that he had been given multiple opportunities to dismiss the
offending complaint and, yet, chose not to do so, and (2) that his obstinance
required Trustee to take action to remedy the situation, which cost the
estate money. Furthermore, it is obvious that Badea would not have
dismissed the State Court Complaint had Trustee not filed the Dismissal
and Sanctions Motion. We perceive no abuse of the bankruptcy court's
discretion to impose compensatory sanctions.
////
////
15
C. The bankruptcy court erred when it assessed the amount of
attorney's fees without giving Badea an opportunity to object.
Although the imposition of sanctions is supported by the record, the
amount of the sanction is not. Badea contends that the bankruptcy court
erred by not affording him an opportunity to object to the amount of
attorney's fees awarded to Trustee, and further erred by not making any
finding that the fees were reasonable. We agree.
Due process requires notice and an opportunity to be heard before a
court imposes sanctions. See Roadway Express, Inc. v. Piper, 447 U.S. 752, 767
(1980). Badea was given sufficient, advance notice of his alleged bad faith
and what conduct was alleged to be sanctionable, and he presented his
defense to those allegations. However, Badea was not given a meaningful
opportunity to object to the reasonableness of the fees before the court
entered the Fee Order. He was not served with a copy of Trustee's fee
affidavit, no procedure for objection was set forth in the Dismissal and
Sanctions Order, and no local rule appears to establish a procedure in such
cases either. At the hearing on the Dismissal and Sanctions Motion, the
bankruptcy court told Badea that he would have an opportunity to object
to the reasonableness of the attorney's fees, but that was for another day.
Unfortunately, that day never came.
While a hearing was probably not required to determine the amount
of the sanction, as Badea suggests, due process required that he be
16
"provided a procedure for opposing the reasonableness and calculation of
the sanction based upon attorney fees incurred." Nicole Energy Mktg., Inc. v.
McClatchey (In re Nicole Energy Servs., Inc.), 2007 WL 328608, at *4 (6th Cir.
BAP Feb. 1, 2007). See United States v. Asay, 614 F.2d 655, 658 (9th Cir. 1980)
(awarding expenses for contempt after contemnor had an opportunity to
object to the reasonableness of the amount of expenses requested); Orton v.
Kayne (In re Kayne), 453 B.R. 372, 385 (9th Cir. BAP 2011) (awarding fees
and costs to trustee after sanctioned party had an opportunity to respond
to trustee's amount of requested fees and costs for prosecuting sanctions
motion). In addition, the bankruptcy court made no findings to support
that the fees were reasonable. Accordingly, because no such procedure was
provided, we must VACATE and REMAND the Fee Order.
VI. CONCLUSION
For the reasons stated above, we AFFIRM the Dismissal and
Sanctions Order. However, we VACATE and REMAND the Fee Order so
that Badea can be given a meaningful opportunity to object (or not) to the
amount of Trustee's requested fees.
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