In Re: SK Foods, LP

Filing 8

ORDER signed by Judge John A. Mendez on 12/20/12 AFFIRMING the Bankruptcy Court's March 27th order and AFFIRMING AS MODIFIED the May 18th Order. CASE CLOSED. (Meuleman, A)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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In Re:

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SK FOODS, L.P., A CALIFORNIA
PARTNERSHIP,

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Debtor,

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NAGELEY, MEREDITH & MILLER,
INC.,

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Bankruptcy No. 09-29162-D-11
ORDER AFFIRMING THE MARCH 27TH
ORDER AND AFFIRMING THE MAY 18TH
ORDER AS MODIFIED.

Appellant,

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Case Nos. 2:12-CV-00940-JAM
2:12-CV-00942-JAM
2:12-CV-00943-JAM

v.
BRADLEY D. SHARP, CHAPTER 11
TRUSTEE,

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Appellee.

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Appellant Nageley, Meredith & Miller, Inc., (“Appellant”)

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appeals the Bankruptcy Court’s March 27, 2012, and May 18, 2012,

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orders (Doc. #14). Appellant contests the Bankruptcy Court’s

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decision to award sanctions against Appellant and the amount of

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sanctions awarded.

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(“Appellee”) opposes the appeal (Doc. #16) and Appellant replied

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(Doc. #23).

Appellee Bradley D. Sharp, Chapter 11 Trustee

For the reasons stated below, the March 27th order
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is AFFIRMED and the May 18th order is AFFIRMED as MODIFIED.1

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I. FACTUAL AND PROCEDURAL BACKGROUND

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This appeal arises from the bankruptcy proceedings of SK

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Foods, an entity previously owned and controlled by Scott Salyer

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(“Salyer”).

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bankruptcy proceeding below.

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Salyer also controlled SCC Farming, Defendant in the

On March 20, 2012, the Bankruptcy Court entered a

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preliminary injunction, enjoining the Slayer entities, including

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SCC Farming, from using any of their assets for any purpose other

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than for payments in the ordinary course of business.

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Appellant’s Excerpts of Record, Doc. #15, (“AER”) at 1-6.

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preliminary injunction was amended on October 13, 2010, and

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January 20, 2011.

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preliminary injunction, SCC Farming was allowed to pay reasonable

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attorneys’ fees incurred in connection with the bankruptcy

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proceeding.

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Appellee, among others, with an accounting of these expenditures.

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Id. at 62.

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Id. at 47, 61-63.

Id. at 61-63.

The

Pursuant to the amended

SCC Farming was required to provide

On April 7, 2011, Skadden, Arps, Slate, Meagher & Flom LLP,

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one of the law firms representing SCC Farming, provided an

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accounting to Appellee.

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a billing statement prepared by Appellant, who was counsel of

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record at the time for SCC Farming.

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Id. at 23, 165.

The accounting included

Id. at 23, 77-102.

On January 17, 2012, after Farella Braun + Martel LLP

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This motion was determined to be suitable for decision without
oral argument. E.D. Cal. L.R. 230(g). The hearing was scheduled
for December 5, 2012.
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(“Farella”) replaced Appellant as SCC Farming’s counsel of

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record, Appellant wrote to Appellee’s counsel.

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In the letter, Appellant claimed that the billing statement had

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been inadvertently disclosed.

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2012, Appellee’s counsel responded to the letter, explaining the

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reasons Appellee believed the billing statement had not been

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inadvertently produced and raising several questions regarding

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Appellant’s argument.

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Id.

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Id. at 119, 535.

Id. at 119, 535.

Id. at 536.

On January 18,

Appellant did not respond.

Appellee then filed an Ex Parte Application for an Order

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Addressing the Inadvertent Production Claim (“Ex Parte

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Application”), which the Bankruptcy Court denied on January 19,

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2012.

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Appellant wrote to Appellee requesting Appellee to retrieve all

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copies of the billing invoice, but Appellant did not address the

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January 18 letter.

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Id. at 19.

Following the Bankruptcy Court’s decision,

Id. at 536.

On January 26, 2012, Appellee again wrote to Appellant,

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requesting a response to the questions raised in the January 18

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letter.

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letter, stating that the attorneys involved in the case could not

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respond for at least a week or until February 3.

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31, 2012, Appellee once again requested a response to the January

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18 letter.

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Inadvertent Production Motion, Appellee had received no response.

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Id.

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Id.

An attorney employed by Appellant responded to the

Id.

Id.

On January

As of February 10, 2012, when Appellee filed an

In the March 27 order, the Bankruptcy Court granted

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Appellee’s Inadvertent Production Motion, holding that the

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billing statement was not inadvertently produced and awarding
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sanctions against Appellant and SCC Farming jointly and severally

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for their failure to meet and confer to resolve the inadvertent

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disclosure issue.

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Bankruptcy Court set the sanction amount.

Id. at 22-23.

In the May 18 order, the
Id. at 532-33.

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II. APPLICATION TO SUPPLEMENT THE RECORD
Both parties have submitted an Application to Supplement the

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Record on Appeal (Doc. #16, 18).

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the Bankruptcy Court for its consideration when it made the

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decision being appealed may not be included in the record on

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appeal.

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(citation omitted) (depositions and a declaration taken after the

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bankruptcy court granted summary judgment are not part of the

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record on appeal of that decision and cannot be considered).

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Here, the standing order submitted by Appellee was before the

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Bankruptcy Court when it made its determination with respect to

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the present appeal, but the tentative ruling submitted by

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Appellant was not.

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Documents that were not before

In re Yepremian, 116 F.3d 1295, 1297 (9th Cir. 1997)

Accordingly, the Court grants Appellee’s Application to

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Supplement the Record on Appeal and denies Appellant’s

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Application.

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III. JURISDICTION

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A district court has jurisdiction to hear appeals from a

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bankruptcy court pursuant to 28 U.S.C. 158(a).

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that this Court does not have jurisdiction over the May 18 fee

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order because Appellant filed no notice of appeal with respect to

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that order and therefore the fee order is not properly before the
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Appellee contends

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Court.

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the fee award issue because there is no prejudice to the opposing

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party.

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Appellant argues that the Court should reach and decide

The Court finds that the fee order is properly before this

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Court.

“[A] mistake in designating the judgment appealed from

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should not bar appeal as long as the intent to appeal a specific

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judgment can be fairly inferred and the appellee is not

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prejudiced or misled by the mistake.”

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Evangelical Alliance Mission, 930 F.2d 764, 772 (9th Cir. 1991)

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(quoting United States v. One 1977 Mercedes Benz, 708 F.2d 444,

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451 (9th Cir. 1983)).

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Appellant’s intent to appeal the fee order because the opening

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brief addresses this order in detail, and there is no prejudice

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because Appellee has fully briefed all the issues raised.

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Accordingly, the Court has jurisdiction to hear the appeal of the

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fee order.

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1173 (9th Cir. 1996) (holding that the appellee had notice that

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the appellant intended to appeal both the order imposing

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sanctions and the order setting the amount based on the opening

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brief).

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argument for jurisdiction.

Lockman Found. v.

In this case, Appellee had notice of

See Simpson v. Lear Astronics Corp., 77 F.3d 1170,

The Court need not address Appellant’s alternative

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IV. LEGAL STANDARD
A bankruptcy court’s interpretations of the Bankruptcy Code

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and conclusions of law are reviewed de novo by the district

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court.

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(9th Cir. 2009) (citations omitted).

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factual findings are reviewed for clear error.

Blausey v. United States Trustee, 552 F.3d 1124, 1132

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A bankruptcy court’s
Id.

Factual

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review under this standard requires deference to a bankruptcy

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court.

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decision to impose sanctions under an abuse-of-discretion

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standard.

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(citation omitted); see also Payne v. Exxon Corp., 121 F.3d 503,

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507 (9th Cir. 1997).

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“when it bases the award on clearly erroneous legal or factual

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findings.”

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Inc., 963 F.2d 1171, 1173 (9th Cir. 1992)).

Moreover, a district court reviews bankruptcy court’s

In re Dinubilo, 177 B.R. 932, 937 (E.D. Cal. 1993)

A bankruptcy court abuses its discretion

Id. (quoting Drucker v. O’Brien's Moving and Storage,

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V. ISSUES ON APPEAL
Appellant raises eight issues on appeal.

Appellant’s

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Opening Brief (“AOB”) at 2-4.

However, its opening brief does

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not contain separate or distinct arguments with respect to most

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issues raised.

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Indep. Towers of Washington v. Washington, 350 F.3d 925, 929 (9th

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Cir. 2003) (stating that courts “review only issues which are

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argued specifically and distinctly in a party’s opening brief”).

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Accordingly, based on Appellant’s opening brief, the Court

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concludes that the issues on appeal are appropriately stated as

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follows:

Therefore, the Court will not address them all.

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A.

Does Federal Rule of Civil Procedure (“FRCP”) 37 apply?

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B.

Was Appellant’s position substantially justified?

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Did the Bankruptcy Court abuse its discretion in

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awarding sanctions pursuant to its inherent powers?
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Was the fee award an abuse of discretion?

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VI. ANALYSIS

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A.

Whether FRCP 37 Applies

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Appellant argues that the Bankruptcy Court had no authority

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to award attorneys’ fees under FRCP 37, because Appellant was

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neither a party nor currently representing a party in the

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bankruptcy proceedings.

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because the rule extends to the attorney advising the conduct.

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Appellant argues that FRCP 37 does apply

Pursuant to FRCP 37, made applicable to the Bankruptcy Court

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by Federal Rule of Bankruptcy Procedure 7037, a party may move

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for an order compelling disclosure and discovery as long as the

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party has in good faith conferred or attempted to confer.

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R. Civ. Proc. 37(a)(1).

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attorneys’ fees incurred in a motion regarding discovery or

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disclosure against, “the party whose conduct necessitated the

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motion . . . or [the] attorney advising that conduct.”

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Civ. Proc. 37(a)(5).

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Fed.

Moreover, FRCP 37 authorizes an award of

Fed. R.

Here, the Bankruptcy Court found that Appellant “put itself

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in the position of being the firm with whom [Appellee] was to

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meet and confer and maintained itself in that position.”

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537.

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initiated the meet and confer process with its letter, insisted

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that the billing statement should be returned, and Appellant

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never informed Appellee that the matter was turned over to the

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current counsel.

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“attorney advising the conduct,” the Bankruptcy Court had

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authority to award attorneys’ fees pursuant to FRCP 37.

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This Court agrees with the Bankruptcy Court.

Id.

AER at

Appellant

Therefore, because Appellant was the

Accordingly, the Court affirms Bankruptcy Court’s finding
that FRCP 37 applies.
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B.

Whether Appellant’s Position Was Substantially
Justified

Appellant argues that sanctions were not warranted pursuant
to FRCP 37 because the Bankruptcy Court did not measure its claim
to determine whether it was substantially justified. Appellee
responds that Appellant’s argument misses the point because
Appellee was not sanctioned for making its inadvertent disclosure
claim.

In the reply, Appellant argues that it was Farella and

Appellee who failed to follow the meet and confer rules not
Appellant.
FRCP 37(a)(5) permits courts to award sanctions when it
grants motions compelling discovery or disclosures unless the
party against whom sanctions are awarded forwarded a substantial
justification for its position.

Fed. R. Civ. Proc. 37(a)(5)(ii).

A discovery request is “substantially justified” if “reasonable
people could differ as to whether the party requested must
comply.”

Srinivasan v. Devry Inst. of Tech., 53 F.3d 340 (9th

Cir. 1995) (quoting Reygo Pacific Corp. v. Johnston Pump Co., 680
F.2d 647, 649 (9th Cir. 1982)).
When a court grants a motion to compel discovery, it may
not award sanctions pursuant to FRCP 37(a)(5) against a party if
the party made a showing that the claim was substantially
justified.

See Srinivasan, 53 F.3d at 340; see also Unigard Sec.

Ins. Co. v. Lakewood Eng’g & Mfg. Corp., 982 F.2d 363, 368 (9th
Cir. 1992) (holding that FRCP 37 sanctions do not apply in cases
when the discovery-related misconduct is not encompassed by the
language of rule).

However, Appellant did not make such a

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showing.

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Appellant’s failure to meet and confer, the Bankruptcy Court also

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found that the substantive arguments with regard to the

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inadvertent disclosure claim were neither persuasive nor

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reasonable.

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substantially justified.

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this finding.

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Even though the Bankruptcy Court based the sanction on

AER at 23.

As a result, Appellant’s claim was not
The Court finds no clear error with

Moreover, the Court finds that Appellant’s contention that
Farella and Appellee were the ones who failed to follow the meet

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and confer rules unpersuasive.

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that sanctions were warranted because Appellant “failed to meet

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and confer in good faith to resolve the issue, thus requiring the

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[Appellee] to bring the Inadvertent Production Motion.”

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537.

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finding that Appellant never responded to the questions Appellee

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raised in its January 18 letter.

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evidence in the record to suggest that Appellee failed to meet

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and confer.

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Farella, who was under the obligation to meet and confer because

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Appellant put itself in that position by initiating this dispute

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through its January 17, 2012 letter.

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The Bankruptcy Court concluded

AER at

The Bankruptcy Court based its decision on the factual

Id.

In contrast, there is no

Further, as mentioned above, it was Appellant, not

Accordingly, the Bankruptcy Court did not abuse its
discretion by awarding sanctions pursuant to FRCP 37.
C.

Whether the Bankruptcy Court Abused Its Discretion in
Awarding Sanctions Pursuant to Its Inherent Powers

In the alternative, the Bankruptcy Court awarded sanctions

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under its inherent authority.

Appellant argues that the

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Bankruptcy Court abused its discretion by awarding sanctions
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pursuant to its inherent powers without making a finding of bad

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faith or willfulness and by awarding sanctions against a

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nonparty.

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finding of bad faith by finding that Appellant willfully failed

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to meet and confer.

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Appellee responds that the Bankruptcy Court did make a

A Bankruptcy Court has the inherent authority to sanction

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bad faith or willful conduct.

In re Dyer, 322 F.3d 1178, 1196

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(9th Cir. 2003) (citing Chambers v. NASCO, Inc., 501 U.S. 32, 42-

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47 (1991)).

Here, the Bankruptcy concluded that Appellant’s

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“role in asserting the privilege, insisting the trustee retrieve

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copies of and return the documents, and failing to meet and

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confer constitute willful conduct that warrants the issuance of

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sanctions.”

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on the same factual findings mentioned above: Appellant never

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responded to Appellee’s questions even though it put itself in

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the position of being the firm with whom Appellee was to meet and

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confer.

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of willfulness.

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Id.

AER at 537.

The Bankruptcy Court based its decision

Therefore, the Bankruptcy Court did make a finding

Further, Appellant’s argument that a court cannot sanction a

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nonparty except in strictly limited circumstances lacks merit

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because the Bankruptcy Court found that Appellant was the

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attorney advising the party’s conduct.

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without merit because a court has the inherent power to impose

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sanctions against a nonparty to curb abusive litigation practices

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and against a nonparty whose actions or omissions cause the

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parties to incur additional expenses.

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Co., 53 F.3d 225, 232 (9th Cir. 1994).

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The argument is also

Corder v. Howard Johnson &

Accordingly, the Bankruptcy Court’s decision to award
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sanctions in the alternative pursuant to its inherent authority

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was not an abuse of discretion and therefore, is affirmed.

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D.

Whether the Fee Award Is Appropriate

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Appellee requested $35,280 in fees but the Bankruptcy Court

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reduced the fee award to $29,557.75 because it found the hours

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spent on the Ex Parte Application and reply brief to be

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excessive.

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was an abuse of discretion because the award was based on San

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Francisco rates and not community rates and because the fee award

Appellant argues that the award amount in this case

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included fees for the Ex Parte Application, which was not

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successful.

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discretion because there is nothing in the record to dispute the

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Bankruptcy Court’s finding that it is within local customs to

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have San Francisco attorneys handle Sacramento bankruptcy matters

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and because the Bankruptcy Court reduced the fees for the Ex

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Parte Application.

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Appellee responds that the award was not an abuse of

“Reasonableness is the benchmark for sanctions based on

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attorneys’ fees.”

Mirch v. Frank, 266 F. App’x 586, 588 (9th

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Cir. 2008) (citing Brown v. Baden (In re Yagman), 796 F.2d 1165,

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1184-85 (9th Cir. 1986) amended by 803 F.2d 1085 (9th Cir.

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1986)).

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were reasonably necessary to resist the offending action.”

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Yagman, 796 F.2d at 1185.

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reasonable attorneys’ fees is the lodestar figure, which

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represents the number of hours reasonably expended multiplied by

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a reasonable hourly rate.

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F.2d 1258, 1262 (9th Cir. 1987).

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“in line with those prevailing in the community for similar

Recovery should not exceed “those expenses and fees that
In re

The starting point for computing

See Jordan v. Multnomah County, 815

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A reasonable hourly rate is one

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services of lawyers of reasonably comparable skill and

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reputation.”

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“the forum in which the district court sits.”

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132 F.3d 496, 500 (9th Cir. 1997).

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forum may be used “if local counsel was unavailable, either

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because they are unwilling or unable to perform because they lack

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the degree of experience, expertise, or specialization required

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to handle properly the case.”

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987 F.2d 1392, 1405 (9th Cir. 1992)).

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Id. at 1263.

The relevant community is defined as
Barjon v. Dalton,

However, rates outside the

Id. (quoting Gates v. Deukmejian,

In this case, the Bankruptcy Court awarded Appellee

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attorneys’ fees based on the prevailing rates in the community in

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which counsel is located—the San Francisco area—rather than

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prevailing rates in the local forum—the Sacramento area.

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Bankruptcy Court found that in particularly large Chapter 11

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cases, such as this one, parties engage San Francisco counsel and

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therefore, San Francisco rates were appropriate.

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However, the Bankruptcy Court made no factual findings specific

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to this case showing that local counsel was unavailable because

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they were unwilling or unable to perform.

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findings, an award at rates outside the local forum is

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inappropriate.

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Court finds that the Bankruptcy Court abused its discretion by

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awarding fees at San Francisco rates.

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awards the blended rate of $350 per hour, suggested by Appellant,

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because it conforms to the prevailing rates in the local forum.

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See AOB at 18.

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The

AER at 537.

Without these

See Gates, 987 F.2d at 1406.

Accordingly, the

In its place, the Court

The Bankruptcy Court also awarded fees for the Ex Parte
Application.

However, the Bankruptcy Court denied the Ex Parte
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Application, stating that to the extent Appellee wanted relief

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from the requirement of Federal Rule of Civil Procedure

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26(b)(5)(B), Appellee should do so by motion on notice to all

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appropriate parties.

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Application was unsuccessful and unnecessary, the Court finds

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that those expenses and fees were not “reasonably necessary to

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resist the offending action” and should not have been awarded.

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In re Yagman, 796 F.2d at 1185.

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reduced the fees for the Ex Parte Application and reply brief by

AER at 17-20.

Because the Ex Parte

Although the Bankruptcy Court

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twenty-five percent because those fees were excessive, the

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Bankruptcy Court abused its discretion by awarding any fees for

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the Ex Parte Application.

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award of all other fees was not an abuse of discretion.

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at 538.

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Application and at the $350 per hour rate, is $16,345.

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However, the Court finds that the
See AER

Therefore, the total fee award, without the Ex Parte

Accordingly, the Court reduces the sanction amount to

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$16,345 and, as reduced, the Court affirms the Bankruptcy Court’s

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judgment.

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App’x 765, 766-67 (9th Cir. 2001) (affirming sanctions award as

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modified); Abdur-Rasheed v. Bellsouth Corp., 951 F.2d 358, at *2

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(9th Cir. 1991) (affirming attorneys’ fee award as modified).

See Rosensweig v. Bally Total Fitness Corp., 14 F.

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VII. ORDER
For the reasons stated above, the Bankruptcy Court’s

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March 27th order is AFFIRMED and the May 18th order is AFFIRMED

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as MODIFIED.

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IT IS SO ORDERED.
Dated: December 20, 2012

____________________________
JOHN A. MENDEZ,
13 UNITED STATES DISTRICT JUDGE