In re: Kathleen Kellogg-Taxe
Filing
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ORDER DENYING APPEAL AND AFFIRMING BANKRUPTCY COURT' SANCTIONS 2 , 24 by Judge Dean D. Pregerson. For all the reasons discussed above, this Court DENIES Debtor Kathleen Kellogg-Taxe's appeal and AFFIRMS the award of sanctions. IT IS SO ORDERED. (Made JS-6. Case Terminated.) (lom) Modified on 12/8/2015 (lom).
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UNITED STATES DISTRICT COURT
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CENTRAL DISTRICT OF CALIFORNIA
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IN RE DEBTOR: KATHLEEN
KELLOGG-TAXE; KATHLEEN
KELLOGG-TAXE; RONALD TAXE;
JOHN SABA; GREGORY GRANTHAM,
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Plaintiffs,
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v.
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CAROLYN A. DYE, CHAPTER 7
TRUSTEE,
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Defendant.
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___________________________
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Case No. CV 15-00084 DDP
[2:12-bk-51208 RN]
[2:13-ap-01781 RN]
ORDER DENYING APPEAL AND
AFFIRMING BANKRUPTCY COURT’S
SANCTIONS
[Dkt. Nos. 2, 24]
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Presently before the Court is Debtor Kathleen Kellogg-Taxe’s
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appeal from the Bankruptcy Court’s December 19, 2014, Order
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Granting Chapter 7 Trustee’s Motion for Sanctions Pursuant to 11
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U.S.C. § 105(a) (“Order”).
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submissions, the Court adopts the following Order.
Having considered the parties’
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cc: US Bankruptcy Court & US Trustee's Office
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I.
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BACKGROUND
The facts of this case are quite convoluted, as the parties
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and the Bankruptcy Court have noted.
(See Order at 3; Appellant’s
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Opening Brief at 4-5; Appellee’s Reply Brief at 1-2.)
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complexity is, however, driven primarily by what the Bankruptcy
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Court termed a “family fraud.”
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facts are only complex in so far as they tell the long and winding
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story of the Taxe family’s fraudulent lien on their own property,
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which was meant to shield the property from creditors.
(Order at 14.)
This factual
That is to say, the
(Id. at 3-
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12; see also Appellant’s Opening Brief at 4-8 (statement of facts);
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Appellee’s Reply Brief at 4-19 (same).)
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the parties have explained the story in detail after many hearings
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and much briefing, so the Court does not labor over the details
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here.
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The Bankruptcy Court and
On appeal before this Court is the Bankruptcy Court’s Order
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granting the Chapter 7 Trustee’s motion for $150,000 in sanctions
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jointly and severally against the Debtor Kathleen Kellogg-Taxe,
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Debtor’s brother-in-law Ronald Taxe, and attorneys for Kellspin,
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Inc., Gregory Grantham and John Saba.
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company of the Taxe family that was alleged to hold a senior lien
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on real property owned by the Debtor at 10535 Vestone Way, Los
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Angeles, California (“Vestone Property”).
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Kellspin is a closely held
(Order at 2.)
The Trustee’s sanction motion arose out of litigation in the
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Bankruptcy Court about the Vestone Property.
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Schedules in her Chapter 7 bankruptcy (Debtor’s fifth bankruptcy)
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that disclosed for the first time “an undisputed secured claim of
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$1,465,815” for Kellspin as assignee of a judgment lien from the
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Omni Group.
(Id. at 9; Amended Schedules.)
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Debtor filed Amended
Debtor asserted in the
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bankruptcy proceeding that the Vestone Property was subject to
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Kellspin’s lien, and that the lien was senior to the liens recorded
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by First Federal Bank, Countrywide Financial, and Astoria Federal
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Savings on the same property.
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Proof of Claim for Kellspin, which Kellspin later amended when it
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filed its own Proof of Claim.
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in any prior bankruptcy or in the applications for loans from First
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Federal Bank, Countrywide Financial, and Astoria Federal Savings.
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(Id. at 7-9.)
(See Order at 9.)
Debtor filed a
The Kellspin lien was not disclosed
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Investigation into the alleged Kellspin lien led to the
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Trustee filing an adversary proceeding in the Bankruptcy Court to
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quiet title to the Vestone Property.
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claiming that Kellspin had a secured, first priority lien against
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the Vestone Property.
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proceeding, Debtor fought the Trustee’s motions for access to the
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property, to employ a broker to sell the property, and to sell the
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property free and clear of liens.
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actions could not be taken because of the Kellspin lien.
(Id. at 9-10.)
Kellspin filed an Answer
Back in the bankruptcy
Debtor alleged that these
(Id.)
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In the end, several courts — state and federal bankruptcy
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courts — have found the Kellspin lien to be fraudulent and that the
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actions taken by the Kellspin attorneys and the Taxe family in
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defense of that lien have all been in the knowing service of that
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fraud.
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Debtor, Ronald Taxe, Gregory Grantham, and John Saba for their
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conduct in relation to the lien.
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Court granted the motion.
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(Id. at 10-12, 14.)
The Trustee sought sanctions against
(Id. at 12.)
The Bankruptcy
All the sanctioned parties appealed the Order.
(Dkt. No. 2.)
This Order only reviews Debtor’s appeal, however, because John Saba
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and Gregory Grantham never filed an appeal brief, and Ronald Taxe’s
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late and oversized brief was struck from the docket pursuant to
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Trustee’s unopposed motion.
(See Dkt. No. 45.)
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II.
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LEGAL STANDARD
The Bankruptcy Court’s findings of fact are reviewed under the
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clearly erroneous standard and conclusions of law are reviewed de
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novo.
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also In re Lazar, 83 F.3d 306, 308 (9th Cir. 1996).
In re Brown, 235 B.R. 644, 646 (Bankr. C.D. Cal. 1999); see
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sanctions are reviewed for an abuse of discretion.
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564 F.3d 1052, 1058 (9th Cir. 2009).
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Awards of
III. DISCUSSION
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In re Lehtinen,
The sole issue on appeal is the Bankruptcy Court’s imposition
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of sanctions against Debtor.
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appeal, but all six ask the question of whether the Bankruptcy
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Court abused its discretion in sanctioning Debtor.
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Opening Br. at 3.)
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Debtor’s brief states six issues on
(Appellant’s
Debtor argues that she was not a party to the adversary
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proceeding to quiet title to the Vestone Property and so she cannot
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be sanctioned for actions taken in that suit.
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also argues that the Bankruptcy Court’s award of sanctions under 11
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U.S.C. § 105 was improper and excessive, and that any sanction
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should have been under Federal Rule of Bankruptcy Procedure 9011,
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which is equivalent to Federal Rule of Civil Procedure 11.
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10-12, 22-26.)
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erroneously based its ruling on a statutory section limiting a co-
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creditor filing a proof of claim for another creditor, instead of a
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debtor filing a proof of claim for a creditor.
(Id. at 9-10.)
She
(Id. at
Debtor further claims that the Bankruptcy Court
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(Id. at 13-22.)
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The Trustee responds that sanctions are available to the
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Bankruptcy Court under both Rule 9011 and Section 105(a), and that
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the use of Section 105(a) was proper here.
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19-21.)
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Debtor’s behavior in her bankruptcy proceeding as well as Ronald
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Taxe’s and the Kellspin attorneys’ acts in the adversary
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proceeding, thus it does not matter that Debtor was not a party to
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the adversary proceeding.
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claim, at no point, the Trustee says, did the Bankruptcy Court
(Appellee Reply Br. at
She argues that the sanctions were meant for both the
(Id. at 21-22.)
As for the proof of
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state that Debtor could not file a proof of claim for a creditor —
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it simply found that Debtor’s doing so was in bad faith.
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22-23.)
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the Bankruptcy Court’s finding of bad faith was clearly erroneous.
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(Id. at 23.)
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A.
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A bankruptcy court has sanctioning power under both Section
(Id. at
Lastly, the Trustee argues that Debtor failed to show that
Section 105 versus Rule 9011
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105 and Rule 9011, but the two statutes entail different standards.
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Rule 9011 is modeled after Federal Rule of Civil Procedure 11,
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which means it is a limited sanctioning power for attorneys or
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unrepresented parties that make misrepresentations to the court.
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See Fed. R. Bankr. Pro. 9011; Fed. R. Civ. P. 11.
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requires that a party to be sanctioned receive notice and a
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reasonable opportunity to correct the misrepresentation before
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sanctions are granted.
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The Rule
Fed. R. Bankr. Pro. 9011.
By contrast, 11 U.S.C. § 105(a) contains a broad grant of
inherent power:
The court may issue any order, process, or judgment that is
necessary or appropriate to carry out the provisions of
this title. No provision of this title providing for the
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raising of an issue by a party in interest shall be
construed to preclude the court from, sua sponte, taking
any action or making any determination necessary or
appropriate to enforce or implement court orders or rules,
or to prevent an abuse of process.
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11 U.S.C. § 105(a).
This broad grant of power includes the ability
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to sanction bad faith conduct conducted in bankruptcy courts by a
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party, a non-party, and attorneys.
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Magazine, Inc., 77 F.3d 278, 284 (9th Cir. 1996) (“There can be
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little doubt that bankruptcy courts have the inherent power to
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sanction vexatious conduct presented before the court.” (citing 11
See, e.g., In re Rainbow
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U.S.C. § 105(a))).
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(9th Cir. 2003), the Ninth Circuit explained that there is a
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difference between the civil contempt power of bankruptcy courts
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under 11 U.S.C. § 105(a) and the inherent sanctioning power of
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courts, and that earlier decisions of the Circuit had confused the
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two.
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conduct, which could be upheld under either the inherent
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sanctioning power or 11 U.S.C. § 105(a), this Court will not focus
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on this jurisprudential point of difference.
However, in In re Dyer, 322 F.3d 1178, 1196
Since the issue in this case is about bad faith litigation
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Here, the Trustee alleged, and the Bankruptcy Court found, bad
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faith conduct by Debtor, Ronald Taxe, and the Kellspin attorneys in
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the various proceedings that involved the Vestone Property and the
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fraudulent lien.
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use of Section 105 and/or the inherent sanctioning power instead of
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Rule 9011 was appropriate in this case because Debtor was involved
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in litigation concerning the fraudulent lien and took actions in
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that litigation that the Trustee alleged were in bad faith.
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Therefore, contrary to Debtor’s assertions, the
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B.
Bad Faith
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Debtor argues that her conduct in asserting the existence and
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validity of the Kellspin lien was in good faith and thus not
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sanctionable.
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Appellant’s Reply Br. at 4-5.)
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Bankruptcy Court considered Debtor’s argument that she filed the
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proof of claim for Kellspin in good faith based on her title report
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investigation and the Bankruptcy Court properly found this argument
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unpersuasive.
(Appellant’s Opening Br. at 13-17, 24-25;
The Trustee argues that the
(Appellee’s Reply Br. at 21-22.)
The Trustee
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details the entire course of conduct that the Bankruptcy Court
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found as evidence of Debtor’s involvement in the fraudulent scheme
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and of Debtor’s bad faith.
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(Id. at 23-27.)
“The inherent sanction authority allows a bankruptcy court to
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deter and provide compensation for a broad range of improper
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litigation tactics.”
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2003).
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faith or willful misconduct” in order to exercise its inherent
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sanctioning power.
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misconduct is “something more egregious than mere negligence or
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recklessness.”
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“improper purpose” or intent, and “even if the act consists of
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making a truthful statement or a non-frivolous argument or
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objection,” there can be sanctionable conduct based on the bad
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faith.
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In re Dyer, 322 F.3d 1178, 1196 (9th Cir.
The bankruptcy court must “make an explicit finding of bad
Id.
Id.
The standard for bad faith or willful
For bad faith, there must be some kind of
Fink v. Gomez, 239 F.3d 989, 992 (9th Cir. 2001).
In this case, the Bankruptcy Court found Debtor engaged in bad
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faith litigation conduct in her bankruptcy proceeding.
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Bankruptcy Court found that Debtor applied for multiple loans
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without disclosing the alleged Kellspin lien as encumbering the
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The
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Vestone Property.
Order at 7-8.
Further, Debtor filed four prior
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Chapter 13 bankruptcy cases, none of which disclosed the Vestone
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Property as being encumbered by the Kellspin lien.
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The Kellspin lien was only disclosed in the current Chapter 7
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bankruptcy proceeding, and only in Debtor’s amended schedules.
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at 9.
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settlement or action taken by the Chapter 7 Trustee that would
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dispose of the Vestone Property because Debtor claimed this lien
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was undisputed and senior to all the other liens on the home.
Id. at 8-9.
Id.
Debtor used this lien to object to any proposed creditor
Id.
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As the Bankruptcy Court noted, Debtor filed a proof of claim for
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Kellspin in order to thwart the Trustee’s attempt to sell the
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Vestone Property clear of any liens.
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filed a separate adversary proceeding in the Bankruptcy Court to
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quiet title to the Vestone Property against Kellspin with evidence
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that the lien was fraudulent, Debtor continued to use the Kellspin
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lien to fight against any action taken by the Trustee to sell the
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home.
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Id.
Even after the Trustee
Id. at 10.
Based on these facts, and others as described in the Order,
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the Bankruptcy Court found “that Richard Taxe, Debtor, and Ronald
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Taxe participated in perpetuating a scheme that has been found to
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be fraudulent by several state court rulings since 1994, when the
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state court in the Fernandez v. Ronald Taxe, et al. case found the
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Omni Group Judgment was part of a fraudulent scheme and therefore
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void.”
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engaged in bad faith by filing several documents “including at
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least four oppositions/objections” that relied on the fraudulent
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lien even though “a review of state court records would [have]
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reveal[ed] that the judgment ha[d] been extinguished.”
Order at 14.
The Bankruptcy Court found Debtor knowingly
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Id. at 14.
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Most revealingly, the court found that Debtor’s filing of a proof
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of claim on Kellspin’s behalf asserting the lien despite Debtor
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hiding such a lien in prior bankruptcies was in bad faith, and was
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unnecessary as “Debtor d[id] not personally appear to be liable for
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the underlying judgment” for the Kellspin lien.
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Thus, there was no benefit to the bankruptcy estate in disclosing
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the lien or in filing a proof of claim, other than to attempt to
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thwart the sale of the Vestone Property in settling other debts
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that the Debtor was most certainly personally liable for.
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Id. at 14-15.
See id.
at 15-16.
The Bankruptcy Court expressly held that Debtor’s conduct as
alleged was in bad faith:
Because the Debtor failed to initially disclose the
existence of Kellspin’s lien in her schedules; because she
filed a very detailed but false proof of claim; and because
she blindly condoned and/or participated in the fraudulent
attempts to advance the validity of the lien during the
course of this case after it had been declared invalid by
several courts; this Court finds that the Debtor’s actions
were done in bad faith with the intent to perpetuate a
fraudulent scheme to the creditors of this estate and to
this Court.
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Id. at 16.
Thus, based on this finding of fact and application of
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the law to these facts, the Bankruptcy Court granted the Trustee’s
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motion for sanctions against the Debtor.
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Debtor’s argument that she was not a party to the adversary
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proceeding where the legitimacy of the Kellspin lien was determined
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and thus should not be sanctioned fails because as described above,
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the conduct sanctioned relates to Debtor’s conduct in her
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bankruptcy proceeding.
(See Appellant’s Opening Br. at 9-10.)
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most importantly, Debtor’s argument that she filed the proof of
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claim for Kellspin “in good faith and after a reasonable
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And
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investigation and review of the title records” was properly found
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by the Bankruptcy Court to not be true.
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the Bankruptcy Court are not clearly erroneous based on the record
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developed.
The factual findings of
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Debtor attempts to use Bankruptcy Code Section 501(c) to
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demonstrate that she legally could make a proof of claim on behalf
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of a creditor.
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claims, the Bankruptcy Court made an error of law because it found
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that her filing a proof of claim was part of her bad faith conduct
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(Appellant’s Opening Br. at 17-19.)
Thus, she
but it was expressly allowed under the Bankruptcy Code.
Section 501(c) does allow a debtor to file a proof of claim
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for a creditor.
11 U.S.C. § 501(c).
However, as the Bankruptcy
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Court in this case noted, Kellspin was not a creditor of the
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Debtor, so under Sections 501 and 502, there were no grounds for
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the Debtor to file that proof of claim.
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Debtor’s point that the Bankruptcy Court was focused on the section
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relating to another creditor filing a proof of claim on behalf of a
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creditor who failed to do so is inapposite.
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to Kellspin, and the Kellspin lien was not a personal obligation to
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be discharged in bankruptcy.
See id. §§ 501, 502.
Debtor was not in debt
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Lastly, Debtor’s further arguments that she made “an
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objectively reasonable inquiry” into the Kellspin lien fail to
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engage with the abuse of discretion and clearly erroneous standards
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of review that control this appellate review.
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Opening Br. at 14-15.)
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her family were using the Kellspin lien in furtherance of a fraud,
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that Debtor knowingly filed a proof of claim that was false and
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unsupported by the state court record, and that this conduct
(See Appellant’s
The Bankruptcy Court found that Debtor and
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amounted to bad faith.
This Court can review the Bankruptcy
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Court’s findings only under the abuse of discretion and clearly
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erroneous standards, and based on the facts found and the reasoning
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of the Bankruptcy Court, this Court cannot find that Debtor’s
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arguments overcome this high standard.
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C.
Amount of Damages
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Debtor argues that the amount of sanctions imposed are
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disconnected from any compensatory or deterrence justification and
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are instead motivated by an attempt to get attorneys’ fees where
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none are warranted and to coerce settlement.
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Br. at 22-26; Appellant’s Reply Br. at 9-10.)
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that the Bankruptcy Court was presented with evidence regarding the
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fees Trustee’s attorneys incurred based on the litigation
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surrounding the fraudulent Kellspin lien.
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28-29.)
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based on compensatory damages as well as deterring future bad
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conduct.
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(Appellant’s Opening
The Trustee responds
(Appellee’s Reply Br. at
Thus, the Trustee argues, the amount of the sanctions was
(Id.)
The amount of damages imposed in an inherent sanction
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authority or Section 105 case is limited to compensatory damages —
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the Ninth Circuit has found Bankruptcy Courts and the procedures
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they follow do not provide sufficient procedural safeguards for
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imposing punitive damage awards.
In re Dyer, 322 F.3d at 1197.
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Here, the Bankruptcy Court awarded $150,000 jointly and
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severally in sanctions against Debtor, Ronald Taxe, John Saba, and
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Gregory Gantham.
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$10,000 out of his own funds to be released from the remainder of
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the sanction award.
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justified by the purpose of compensating the Court and the Trustee
John Saba, however, had the option of paying
Order at 19 n.9.
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This amount must be
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for the bad faith conduct of these parties.
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evidence to the Bankruptcy Court that “the fees of her attorneys in
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the effort to combat the fraudulent Kellspin claim were in the sum
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of $361,595.”
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limited to solely the adversary proceeding, but also included fees
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from the bankruptcy proceeding itself.
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awarded in sanctions is not an abuse of discretion considering the
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amount of time and work required by the Trustee to fight the
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fraudulent lien and the conduct committed by the parties.
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IV.
(Appellant’s Br. at 29.)
The Trustee presented
These fees were not
(Id.)
Thus, the amount
CONCLUSION
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For all the reasons discussed above, this Court DENIES Debtor
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Kathleen Kellogg-Taxe’s appeal and AFFIRMS the award of sanctions.
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IT IS SO ORDERED.
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Dated: December 7, 2015
DEAN D. PREGERSON
United States District Judge
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