No. 02-12339.United States Bankruptcy Court, N.D. California.
November 22, 2004
Memorandum re Sanctions
ALAN JAROSLOVSKY, Bankruptcy Judge
The matter of sanctions, pursuant to a motion by Chapter 7 Trustee Charles Sims and the court’s own motion, is now before the court. The objects of the sanctions are Christopher Egan, the debtor’s former principal, the law firm of Lanahan Reilley, and attorney Jennifer E. Torbohn. The consideration of sanctions was triggered by blatant misrepresentations made to a state court regarding procedural deficiencies in the bankruptcy proceedings. While the state court eventually saw through the lies, considerable expense to the bankruptcy estate was involved in setting things right.
This case was originally commenced as a Chapter 11 on September 27, 2002. The filing was caused by a pending foreclosure by the San Rafael Unified School District, which held a deed of trust to the debtor’s real property at 1565 Vendola Drive, San Rafael, California, its only significant asset.
The Vendola Drive property was sold to debtor Santa Venetia Center for the Arts and Humanities, Inc., in 1994 for a purchase price of $900,000.00 plus Santa Venetia’s agreement to provide 20 years of qualified professional artistic services to the District’s students at a minimum of 300 hours per year to assist the District in its educational program. The District took back a deed of trust securing both a note for $810,000.00 and the obligation to provide the artistic services.
Before bankruptcy, Santa Venetia had fallen into default and the District had engaged in
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negotiations with Christopher Egan, Santa Venetia’s sole director and officer, about a workout. Negotiations broke down, and Egan commenced a state court action seeking to enjoin the District’s foreclosure. When that action was unsuccessful, he commenced this bankruptcy case on behalf of Santa Venetia.
The case remained in Chapter 11 until July 30, 2003, when the court converted the case to Chapter 7 after determining that the plan proposed by Santa Venetia was insufficient to cure the non-monetary defaults to the District and lacked the required votes. The District had opposed confirmation arguing, among other things, that the sale to Santa Venetia was subject to rescission due to the failure of Santa Venetia to perform legitimate public benefit functions. Sims was then appointed Chapter 7 Trustee.
In September, 2003, Sims and the District reached a compromise regarding their mutual rights. Under the terms of the agreement, the District would pay the Trustee $40,000.00 and subordinate its claims in return for an agreement to rescind the purchase. Rule 2002(a)(3) of the Federal Rules of Bankruptcy Procedure requires that notice of a proposed compromise be given to all creditors and parties in interest; Local Rule 2002-1(c) of the Northern District of California requires that when notice is given by a party he must use a current set of mailing labels supplied by the court. Proper notice was given in full compliance with these rules on September 30, 2003.
At about the same time Egan, on behalf of Santa Venetia, moved to dismiss the bankruptcy. His motion was served using exactly the same mailing labels. On October 24, 2003, the court approved the compromise and denied the motion to dismiss.
The conduct which has led to the consideration of sanctions occurred in state court in mid-2004, when the District sought to recover possession of the premises from Egan and five artists who claimed lease rights through Santa Venetia. Their attorney, Jennifer Torbohn of Lanahan Reilly, attacked the validity of the compromise this court had approved on the grounds that the compromise had not been properly noticed.
On June 6, 2004, Torbohn filed her declaration in the state court stating that she had reviewed the
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bankruptcy file and it showed that the artists had been “removed as creditors” in the bankruptcy.[1] She failed to inform the state court that the bankruptcy files reflected that five of her six clients, including Egan, had at all times been on the bankruptcy court’s mailing list and had been served with every
notice in the case, including the initial notice to creditors, the plan and disclosure statement, the notice of compromise and Egan’s own motion to dismiss. Based on her blatant omission of these facts, she argued to the state court that her clients had never had the opportunity to contest the compromise and it was ineffective as to them and that the District’s (correct) argument that her clients had been given proper notice “belies the facts of the case.” (Emphasis added).
It was at this point that the bankruptcy estate began to incur unexpected expenses. Egan and his cohorts, through Lanahan Reilley, collaterally attacked this court’s order in state court by arguing that they had been deprived of their “day in court.” Sims’ counsel was forced to prepare a declaration pointing out that the bankruptcy file reflected service on Egan and the artists and explain to the state court that they had not been removed from the official mailing list, and appear in state court on August 3, 2004. On August 25, 2004, the state court rejected Lanahan Reilley’s argument regarding notice and ruled that any attack on the compromise had to be made in bankruptcy court.
On August 3, 2004, Lanahan Reilley filed a motion in this court seeking to undo the settlement based, interestingly, on alleged fraud of the District. Aside from one statement that the settlement had been consummated “unbeknownst” to them, no argument was made that notice was deficient. The court rejected the motion, noting that Egan and the artists had full notice of the compromise, failed to object at the proper time, and that there was no valid argument for revisiting the matter at this late date. Sims then followed with his motion for sanctions pursuant to FRBP 9011, seeking to recover $2,600.00 in expenses incurred in the state court proceedings, $3,250.00 opposing the motion in this court and
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$325.00 for preparing the motion. The court also issued an order to show cause why it should not assess sanctions on its own motion.
While the court found the motion made in this court to be without merit, the court cannot say that it is so meritless as to justify sanctions. Unlike the state court pleadings, which contained outright falsehoods, the motion made in this court made only the “unbeknownst” comment without trying to ascribe any denial of rights to it. It is not this motion which offends the court and does serious damage to the administration of justice, but rather the false representations made to the state court that this court had made a ruling without affording anyone the opportunity to be heard.
Without authority, Lanahan Reilley argues that this court cannot assess sanctions for representations made in another court. There is no such authority for this assertion. If the action of counsel does damage to the administration of justice, it may be the subject of contempt proceedings even though committed far from the courtroom. Toledo Newspaper Co. v. United States, 247 U.S. 402, 38 S.Ct. 560, 62 L.Ed. 1186 (1918) McCann v. New York Stock Exchange, 80 F.2d 211, 213 (2nd
Cir. 1935). The fact that the offending conduct occurred in another courtroom means only that there are two courts with the power to set things right rather than just one.
It is the impact of counsel’s statements on the administration of justice which causes the court to treat this matter so seriously. Bankruptcy courts and state courts interact with each other on a frequent basis. It is imperative that each have faith in the judgments ands orders of the other in order to avoid situations where litigants can routinely collaterally attack the rulings of one court in the other. This court considers it of the highest importance that all of the state courts within its territory know that all rules regarding notice, and due process rights generally, are scrupulously enforced. Proper notice is th sine qua non of any order this court has ever made. The court itself checks the sufficiency of every service. Lanahan Reilley had no business falsely representing otherwise to another court.
The court does not believe that the conduct of Lanahan Reilley rises to the level of criminal contempt. It seems that the basic cause of the misrepresentations made to the state court were Torbohn’s lack of understanding of bankruptcy procedure and her naive acceptance of her clients’ story.
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Nonetheless, the bankruptcy docket clearly reflects due notice to her clients. It was her responsibility to ascertain that fact and disclose it to the state court when making her argument to it that her clients never got notice. Due to her failure to act properly, the estate incurred expense in having to pay for an appearance in state court and confidence in this court’s orders was diminished. The court determines it to be a proper exercise of its inherent civil contempt powers to set things right.
For the foregoing reasons, the court will order as follows:
1. The bankruptcy estate incurred $2,600.00 in legal fees when the Trustee’s attorney was forced to appear in state court and set the record straight regarding the bankruptcy notice. This would not have been necessary if Lanahan Reilley had made a proper review of the bankruptcy file and made the proper disclosures to the state court. The court finds it necessary to compensate the estate for this expense, plus $325.00 for making the motion. Lanahan Reilley shall therefore be ordered pay the Trustee the sum of $2,925.00, and shall be barred from appearance in this court until this sum has been paid.
2. The court will assess a fine against Jennifer E. Torbohn in the amount of $5,000.00, to be paid to the Clerk of the Court within 30 days of the entry of an appropriate order. Provided, however, that the court will remit and forgive all but $500.00 of this fine if within that 30-day period she writes a letter to the Honorable Michael B. Dufficy, Judge of the Marin County Superior Court, with a copy to the undersigned, admitting to him that the bankruptcy court docket reflected proper service of the notice of compromise on her clients, that she had a duty to ascertain that fact and disclose it when making her argument that her clients had not received notice, and that she breached her duty to that court by failing to so ascertain and disclose.
Counsel for the Trustee shall submit an appropriate form of order.