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California District Court Affirms Bankruptcy Court’s Order Imposing Sanctions on Debtors

Legal News GavelThe federal Bankruptcy Code gives wide discretion to individual bankruptcy judges to issue orders, including the authority to impose sanctions on a debtor or other party for acts that it finds to be unlawful or otherwise counter to the purpose of a bankruptcy case. A “sanction” is a punishment for conduct that takes place during the litigation process. A federal district court recently affirmed a bankruptcy court’s sanctions order in a Chapter 7 case, which found bad faith on the part of the debtors and assessed monetary damages. In re Kellogg-Taxe (“K-T I”), No. 2:15-cv-00084, order (C.D. Cal., Dec. 7, 2015).

Multiple federal statutes and rules permit courts to impose sanctions. The Bankruptcy Code gives courts broad power to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a). See also, e.g. Fed. R. Civ. P. 11; Fed. R. Bankr. P. 9011; Chambers v. Nasco, Inc., 501 U.S. 32 (1991). In the order under appeal in the Kellogg-Taxe case, the bankruptcy court reviewed the caselaw interpreting § 105(a), which recognized “the inherent power to sanction vexatious conduct presented before the court.” In re Kellogg-Taxe (“K-T II”), No. 2:13-ap-01781, mem. of dec. at 13 (Bankr. C.D. Cal., Dec. 16, 2014), quoting In re Rainbow Magazine, Inc., 77 F.3d 278, 284 (9th Cir. 1996).

To sanction a party or its counsel, a court must find that the conduct in question “constituted or was tantamount to bad faith.” K-T II at 13, quoting Leon v. IDX Sys. Corp., 464 F.3d 951, 961 (9th Cir. 2006). A bankruptcy court’s “inherent sanction authority,” however, differs from federal district courts’ “civil contempt power.” K-T I at 6, citing In re Dyer, 322 F.3d 1178, 1196 (9th Cir. 2003). While civil contempt authority allows a court to impose sanctions for violations of specific orders, inherent sanction authority goes further, “allow[ing] a bankruptcy court to deter and provide compensation for a broad range of improper litigation tactics.” Dyer, 322 F.3d at 1196.

The facts of the Kellogg-Taxe case are, in the bankruptcy court’s words, “extremely complex and involv[ing] numerous parties and prior court decisions spanning nearly 30 years.” K-T II at 3. The issues surrounding the debtors appear to have begun with a lawsuit filed in Los Angeles Superior Court in the 1980s, resulting in a judgment against the debtors in excess of $2 million in 1989. A series of lawsuits followed, as well as multiple loans taken out by the debtors that were secured by various properties. The debtors filed for Chapter 7 bankruptcy in December 2012, identifying only one secured creditor in their petition. After some disputes emerged between the debtors and several creditors, the trustee filed an adversary proceeding to quiet title to one property.

In 2014, the trustee moved for sanctions against the debtors and several non-parties. The bankruptcy court granted the motion, finding that the individuals in question “participated in perpetuating a scheme that has been found to be fraudulent by several state court rulings since 1994.” K-T II at 14. The district court affirmed the ruling, noting that it could only review the lower court’s order “under the abuse of discretion and clearly erroneous standards,” and it found that the debtor did not “overcome this high standard.” K-T I at 11.

Since 1997, bankruptcy lawyer Devin Sawdayi has advocated for individuals and families in the Los Angeles area who are dealing with financial distress. We help our clients obtain relief in Chapter 7 and Chapter 13 bankruptcy cases. To schedule a free and confidential consultation with a knowledgeable, experienced, and compassionate financial advocate, contact us today online or at (310) 475-939.

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