Konop v. Hawaiian Airlines, Inc.
Filing
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ORDER: (1) AFFIRMING IN PART AND VACATING IN PART THE BANKRUPTCY COURT'S ORDER GRANTING SANCTIONS AGAINST KONOP AND (2) REMANDING THIS MATTER TO THE BANKRUPTCY COURT. Signed by JUDGE DAVID ALAN EZRA on 10/28/2011. (afc) CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications will be served by first class mail on October 31, 2011.
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
In re
HAWAIIAN AIRLINES, INC.,
Debtor.
____________________________
ROBERT C. KONOP,
Appellant,
vs.
HAWAIIAN AIRLINES, INC.,
Appellee.
____________________________
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CV. NO. 08-00405 DAE-BMK
BK. NO. 03-00817
ORDER: (1) AFFIRMING IN PART AND VACATING IN PART
THE BANKRUPTCY COURT’S ORDER GRANTING SANCTIONS
AGAINST KONOP AND (2) REMANDING THIS MATTER
TO THE BANKRUPTCY COURT
Pursuant to Local Rule 7.2(d), the Court finds this matter suitable for
disposition without a hearing. After reviewing Appellant Robert C. Konop’s
(“Konop”) appeal and the supporting and opposing memoranda, the Court
AFFIRMS IN PART and VACATES IN PART the Bankruptcy Court’s Order
Granting Sanctions Against Konop and REMANDS this matter to the Bankruptcy
Court with instructions to amend the sanctions award in accordance with this
Order.
BACKGROUND
I.
Representations to the Bankruptcy Court
On March 21, 2003, Appellee Hawaiian Airlines, Inc. (“Hawaiian
Airlines”) filed a voluntary petition for bankruptcy under Chapter 11. (Bk. No. 0300817, Doc. # 1.) Konop, Hawaiian Investment Partners Group LLC, and
Hawaiian Reorganization Committee LLC (collectively, “Konop and the CoProponents”) filed a plan of reorganization for Hawaiian Airlines and multiple
disclosure statements describing, among other things, the details of that plan and
the means for implementing it. Hawaiian Airlines alleges that beginning in
September 2004, Konop signed and filed three separate disclosure statements and
various supporting documents that he knew to contain material misstatements of
fact regarding the existence of financing to support his plan of reorganization.
(Doc. # 64 at 3.)
First, on September 9, 2004, Konop and the Co-Proponents filed a
Third Amended Plan of Reorganization. (Bk. No. 03-00817, Doc. # 3249.) They
filed a disclosure statement for the Third Amended Plan on September 20, 2004.
(Bk. No. 03-00817, Doc. # 3306.) The September 2004 disclosure statement stated
2
that the plan “recapitalizes the Debtor with an immediate equity infusion of $200
million in cash, with Plan associated financial resources of more than $300
million.” (Id. at 46.) It further stated in bold font that the plan sponsors “have
obtained a commitment from financial institutions and accredited investors to
purchase new debt to be issued by Reorganized Debtor that generates net proceeds
to the Reorganized Debtor in excess of $100,000,000.” (Id. at 48.) The disclosure
statement also stated the following:
The Hawaiian Investment Partners Group LLC has funds and funding
available, in cash, to the levels which are called for within the Plan.
Proof of funds is attached herewith as Exhibit H.
(Id. at 82.) However, nothing was attached as Exhibit H to the September
disclosure statement.
Second, on November 11, 2004, Konop and the Co-Proponents filed a
Fourth Amended Plan of Reorganization and another disclosure statement. (Bk.
No. 03-00817, Docs. ## 3713, 3714.) The November disclosure statement
contained the same representations as the September disclosure statement
regarding the availability of funding to the levels called for within the plan. (Bk.
No. 03-00817, Doc. # 3714 at 50.) However, this time an affidavit from Mr. Paul
Boghosian was attached as Exhibit H. (Id. Ex. H.) That affidavit stated the
following with respect to funding:
3
Hawaiian Air Joint Venture will make available $300,000,000 as, and
for equity investment and financing, $200,000,000 will be made
available for acquisition of stock in the reorganized Hawaiian
Airlines, Inc. and $100,000,000 will be made available as financing
for senior secured debt to be loaned to the reorganized Hawaiian
Airlines Inc. I hereby affirm and declare that Hawaiian Air Joint
Venture has readily available to it the funds necessary for fulfillment
of the transactions set forth above with the reorganized Hawaiian
Airlines, Inc.
(Id.)
Third, on December 8, 2004, Konop and the Co-Proponents filed a
Fifth Amended Plan of Reorganization and disclosure statement. (Bk. No. 0300817, Docs. ## 3894, 3896.) The December disclosure statement contained the
exact same representations about the availability of funds as the November 2004
statement and attached as Exhibit H the same affidavit from Boghosian. (Bk. No.
03-00817, Doc. # 3896 at 50; id. Ex. H.)
On January 13, 2005, Konop and the Co-Proponents filed another
exhibit to the December 2004 disclosure statement. (Bk. No. 03-00817, Doc. #
4150.) It contained an affidavit from Dr. William H. Spencer stating that “if funds
are not otherwise available, E&M will utilize the $500,000,000 United States
dollars as evidenced in the attached documentation to fund the above-referenced
transactions with Hawaiian Airlines, Inc.” (Id.) Attached to Spencer’s declaration
was a copy of a document referring to an account at the “ABN-AMRO Bank”
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entitled “E&M Trust” with a deposit of $500 million dollars in the name of “Dr.
William H. Apencer [sic] and Mr. Richard E. Warren.” (Id.) The document stated
that “these assets were legally obtained from non-criminal business or actions.”
(Id.)
On February 4, 2005, Konop and the Co-Proponents filed a
declaration from Spencer further attesting to the availability of funds and
commitment to finance Konop’s reorganization plan. (Bk. No. 03-00817, Doc.
# 4309.) Attached to that declaration was a letter from ABN-AMRO bank
purporting to confirm the $500 million on deposit in the E&M Trust account. (Id.)
The letter stated that “we, ABN-AMRO Bank, N.V., confirm the amount USD
500,000,000.00 (Five hundred Millions Dollars) on deposit in account number
16/00-1119 are clean, clear and free of non-criminal origin . . . .” (Id.) The letter
also contained several spelling and grammatical errors. (Id.)
On March 28, 2005, the Bankruptcy Court entered an Order
disapproving with prejudice Konop and the Co-Proponents’ Fifth Amended Plan
of Reorganization and the accompanying disclosure statement. (Bk. No. 03-00817,
Doc. # 4671.) That Order states, in pertinent part, that “it appear[s] that the
proponents of that proposed [Fifth Amended] Plan have no available financing to
fund their Plan and have misrepresented the availability of such funding.” (Id.)
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Subsequently, Paul Boghosian and William Spencer were both convicted of
conspiracy to commit bankruptcy fraud, and Boghosian was also convicted of one
count of commercial bribery. United States v. Boghosian, et al., Case No. 05-cr00351 (S.D.N.Y. Oct. 20, 2005).
II.
The Sanctions Motion
On April 11, 2005, Joshua Gotbaum, the Chapter 11 Trustee of
Hawaiian Airlines, Hawaiian Holdings, Inc., HHIC, Inc., and RC Aviation LLC
(collectively, “HHI Parties”) filed a motion requesting that the Bankruptcy Court
hold Konop, Randal Yoshida (“Yoshida”), and Timothy Philipp (“Philipp”)1 in
contempt of court and order them to pay sanctions for making knowing
misrepresentations to the court regarding the existence of financing to support
Konop’s Reorganization Plan (“Sanctions Motion”). (Bk. No. 03-00817, Doc.
# 4739.) On June 17, 2005, Konop filed an Opposition to the Sanctions Motion.
(Bk. No. 03-00817, Doc. # 5159.) On July 22, 2005, Hawaiian Airlines filed a
Reply in support of its Sanctions Motion. (Bk. No. 03-00817, Doc. # 5297.)
In support of its Sanctions Motion, Hawaiian Airlines submitted
substantial amounts of evidence, including an email sent from Konop to Boghosian
1
Yoshida and Philipps were counsel for the Co-Proponents of Konop’s
Reorganization Plan.
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on November 5, 2004. In that email, Konop tells Boghosian that “your document
provides no nexus between your stated intent to provide funds and the funds.” (Id.
Ex. D.) Konop goes on to state that Boghosian’s documents provide “no ‘proof of
funds’” and accuses Boghosian of “putting us all on the brink of a Rule 11 action.”
(Id.)
A.
July 2005 Hearing
On July 29, 2005, the Bankruptcy Court held the first of several
hearings on the Sanctions Motion. (Bk. No. 03-00817, Doc. # 5442.) At the
conclusion of oral argument, the court determined that the record supported a
finding that Konop made knowing misstatements of fact. (Id. at 29.) The specific
misrepresentations identified by the court were as follows.
First, the Bankruptcy Court explained that there was “that plain, bald,
unconditional statement in the body of the disclosure statement that the money was
there and that the truth now apparently is that there wasn’t the money there.” (Id. at
30:3–6 (referring to the September 2004 disclosure statement).) In reaching this
conclusion, the court rejected the argument that a purported commitment from
USA Capital could provide the basis for the assertion that the money was there.
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[W]e had the – the commitment from USA Capital for $60 million
which isn’t close to what the plan needed. Also, that commitment
itself, I have to say, is a little bit suspicious. I mean, it’s basically a
one sentence document promising to provide $60 million without any
contingencies, or conditions, or representations, or warranties. It just
isn’t credible and it went away, apparently. It was withdrawn for
whatever it was worth to begin with.
(Id. at 30:6–14).
Second, the court addressed the Boghosian affidavit and concluded
that Konop himself did not believe Boghosian’s statements regarding the
availability of financing. The court stated as follows:
Mr. Boghosian came along and got involved and made his promises
that he would make the money available, but Captain Konop’s emails
that he sent to Mr. Boghosian makes it pretty clear that he didn’t
really believe Mr. Boghosian either, that he hadn’t been convinced
that there was actual money behind Mr. Boghosian’s promises. But,
nevertheless, Captain Konop kept those concerns to himself and Mr.
Boghosian certainly didn’t tell the Court about it or tell any of the
other creditors about it and continued to proceed as if he had the
money available knowing full well that he didn’t.
(Id. at 30:15–25.)
Based on those factual findings, the Bankruptcy Court determined that
Hawaiian Airlines had “made the case for sanctions against Captain Konop” and
scheduled a conference for August 15, 2005 to address, among other things, the
amount of sanctions to be imposed. (Id. at 32:2–14, 35–38.)
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B.
August 2005 Conference
At the August 15, 2005 conference, Konop’s counsel requested leave
to conduct additional discovery and supplement the record on the issue of Konop’s
beliefs about the availability of funding at the time that the disclosure statements
were filed. (Bk. No. 03-00817, Doc. # 5700 at 8–10.) The court granted this
request in light of the “very serious collateral consequences” of the imposition of
sanctions. (Id. at 20.) On August 31, 2005, Konop filed a detailed supplemental
declaration along with numerous additional exhibits. (Bk. No. 03-00817, Doc. #
5492.)
On November 15, 2005, Hawaiian Airlines filed a Motion for Partial
Summary Judgment against Konop on the ground that there was no triable issue of
material fact as to whether Konop made knowing misrepresentations to the court.
(Bk. No. 03-00817, Doc. # 5731.) Specifically, Hawaiian Airlines argued in its
Motion that Konop’s supplemental declaration and accompanying exhibits failed to
provide any facts to explain away the specific evidence relied upon by the court at
the July 29th hearing as the basis for imposing sanctions against Konop. (Id. at 5.)
Based on that contention, Hawaiian Airlines requested that the court enter an order
consistent with the findings made by the court at the July 29th hearing. (Id. at 8-9.)
On November 23, 2005, Konop filed an Opposition to that Motion, attaching
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another supplemental declaration and additional exhibits. (Bk. No. 03-00817,
Docs. ## 5742–5744.) Hawaiian Airlines filed a Reply on December 2, 2005.
(Bk. No. 03-00817, Doc. # 5752.)
C.
December 2005 Hearing
At a hearing held on December 13, 2005, the Bankruptcy Court issued
a tentative ruling granting Hawaiian Airlines’ Motion for Partial Summary
Judgment. (Bk. No. 03-00817, Doc. # 5885.) The court’s ruling was based on a
finding that Konop repeatedly made knowing misrepresentations to the court.
First, the court identified five specific misrepresentations contained in
the September 2004 disclosure statement, including the representation that there
would be more than $200 million in available new cash. (Id. at 4–5.) The court
concluded that the evidence submitted by Konop failed to show that this amount of
funding was available to finance his plan of reorganization. (Id. at 5–6.)
Second, the court observed that the November 2004 disclosure
statement made many of the same misrepresentations as the September disclosure
statement, the only significant difference being that Boghosian’s affidavit was
attached as Exhibit H to the November statement. (Id. at 6.) With respect to that
affidavit, Konop argued that he intended for Exhibit H to have two parts, with the
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first part being Boghosian’s affidavit and the second part being proof of the
availability of funds. The court rejected this contention, stating:
[I]f you look at the disclosure statement and you look at Exhibit H,
that’s just not what it says. Page 50 of the disclosure statement says
proof of funds and the funds commitment is attached herewith as
Exhibit H. So, it seems to me that this statement that there was
supposed to be a second part just isn’t consistent with the
representations that he made to the Court and the creditors at the time.
(Id. at 6.) The court also reiterated its previous determination that “the emails that
Mr. Konop exchanged with Mr. Boghosian earlier in November 2004 make it
pretty clear that he didn’t believe Boghosian either.” (Id. at 6–7.)
Third, the court observed that in the December 2004 disclosure
statement, “the same representations are repeated and at that point there was, as far
as the record shows, no more available money.” (Id. at 7.) Further, with respect to
the subsequent declaration of Dr. Spencer filed by Konop and the Co-Proponents,
the court explained:
January 13th of 2005, we have Dr. Spencer’s declaration filed and by
that time Captain Konop had already three times represented the
money was already available when it wasn’t and I think he knew it
wasn’t. And, of course, as I’ve mentioned before, Dr. Spencer’s
declaration seems to me basically had phony written all over it. In
any event, it came too late to really change the situation.
After issuing its tentative ruling, the court heard oral argument from
both sides. Thereafter, the court adopted its tentative ruling and granted the
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Motion for Partial Summary Judgment. (Id. at 11.) The court concluded that the
subsequent amendments to the September 2004 disclosure statement demonstrate
that Konop “repeated representations that were false the first time he made them
and . . . he knew were false the first time he made them.” (Id.) The court further
explained that it “continue[s] to think that there’s just no basis for [Konop] to
believe what he was saying to the Court in September or November or early
December and I think that the issues were properly noticed for today’s hearing.”
(Id.)
Following the December 2005 hearing, the parties briefed the issue of
the amount of sanctions that should be imposed against Konop. Hawaiian Airlines
sought sanctions based on the amount of fees and expenses incurred in responding
to each of the three false disclosure statements as well as fees incurred in preparing
and prosecuting the Sanctions Motion. (Bk. No. 03-00817, Doc. # 5836.) In
response, Konop argued that the sanctions should be limited to the fees and
expenses incurred by Hawaiian Airlines in opposing the September 2004
disclosure statement. (Bk. No. 03-00817, Doc. # 5853.) Specifically, Konop
objected to the inclusion of any fees incurred before September 20, 2004 and after
October 6, 2004. (Id. at 19–20, 27.) Konop also objected to the inclusion of fees
and expenses related to Hawaiian Airlines’ Sanctions Motion, stating that “[t]hese
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are not charges which were necessarily incurred with respect to plan or disclosure
statement opposition.” (Id. at 23.)
D.
March 2006 Hearing
On March 28, 2006, the court held a hearing to address the calculation
of the sanctions award. (Bk. No. 03-00817, Doc. # 5859.) The court identified
certain fees that would not be included, such as fees incurred before the filing of
the September 2004 disclosure statement and fees related to Konop’s appeal. (Id.
at 5–7.) On May 10, 2006, the Bankruptcy Court entered an Order Granting
Sanctions Against Konop in the amount of $379,340.11, less any amounts paid by
attorneys Randal Yoshida and Timothy Philipp. (Bk. No. 03-00817, Doc. # 5873.)
That amount reflects the costs of investigating and opposing the September,
November, and December 2004 disclosure statements, and the costs of bringing
and prosecuting the Sanctions Motion.
III.
The Instant Appeal
Following the Bankruptcy Court’s December 13, 2005 bench ruling
granting the Motion for Partial Summary Judgment against Konop as to Sanctions
Motion (Bk. No. 03-00817, Doc. # 5769), Konop filed his initial Notice of Appeal
on December 22, 2005 (Bk. No. 03-00817, Doc. # 5773). On May 15, 2006,
Konop filed a Supplemental Notice of Appeal after the Bankruptcy Court issued its
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Order Granting Sanctions against Konop. (Bk. No. 03-00817, Doc. # 5881.)
On August 25, 2008, Judge Faris approved the parties’ Stipulation for Dismissal
With Prejudice of the Motion for Contempt and Payment of Attorneys Fees as to
Timothy Philipp. (Bk. No. 03-00817, Doc. # 6034.) Thereafter, on September 8,
2008, Konop filed his Second Supplemental Notice of Appeal. (Bk. No. 03-00817,
Doc. # 6045.) On June 6, 2011, Konop filed his opening brief. (Doc. # 56.) On
July 14, 2011, Appellee Hawaiian Airlines filed its Brief. (Doc. # 64.) On August
1, 2011, Konop filed his Reply. (Doc. # 66.)
STANDARD OF REVIEW
A district court applies the same standard of review applied by an
appellate court in reviewing a bankruptcy appeal. In re JTS Corp., 617 F.3d 1102,
1109 (9th Cir. 2010). “The court reviews the Bankruptcy Court’s findings of fact
under the clearly erroneous standard and its conclusions of law de novo.” In re
Kimura, 969 F.2d 806, 810 (9th Cir. 1992); see also JTS Corp., 617 F.3d at 1109
(“The Bankruptcy Court’s findings of fact are reviewed for clear error, while its
conclusions of law are reviewed de novo.” (quotations omitted)); In re Marquam
Inv. Corp., 942 F.2d 1462, 1465 (9th Cir. 1991) (“We review the Bankruptcy
Court’s findings of fact under the clearly erroneous standard and its conclusions of
law de novo.”). The court “must accept the Bankruptcy Court’s findings of fact,
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unless ‘the court is left with the definite and firm conviction that a mistake has
been committed.’” JTS Corp, 617 F.3d at 1109 (quoting In re Greene, 583 F.3d
614, 618 (9th Cir. 2009). “‘Mixed questions of law and fact are reviewed de
novo.’” Id. (quoting In re Chang, 163 F.3d 1138, 1140 (9th Cir. 1998)).
A bankruptcy court’s award of sanctions is reviewed under the abuse
of discretion standard. In re S. Cal. Sunbelt Developers, Inc., 608 F.3d 456, 461
(9th Cir. 2010) (citing Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 705 (9th
Cir.2004)). A court abuses its discretion if its decision is based on “an erroneous
view of the law or on a clearly erroneous assessment of the evidence.” Holgate v.
Baldwin, 425 F.3d 671, 675 (9th Cir. 2005) (citing Retail Flooring Dealers of Am.,
Inc. v. Beaulieu of Am., LLC, 339 F.3d 1146, 1150 (9th Cir. 2003)).
DISCUSSION
In the instant appeal, Konop contends that: (1) the Bankruptcy Court
improperly sanctioned him without a necessary conclusion of bad faith; (2) the
Bankruptcy Court deprived him of due process by sanctioning him without
providing adequate notice and an opportunity to be heard; (3) the Bankruptcy
Court abused its discretion in determining the amount of sanctions awarded; (4) the
Bankruptcy Court erred in granting Hawaiian Airlines’ Motion for Partial
15
Summary Judgment; and (5) Hawaiian Airlines had an improper purpose in
bringing the Sanctions Motion.
I.
The Bankruptcy Court’s Inherent Authority to Sanction
The Ninth Circuit has held that Bankruptcy Courts possess the
inherent power to sanction bad faith or willful misconduct even in the absence of
express statutory authority to do so. In re Dyer, 322 F.3d 1178, 1196 (9th Cir.
2003); Hale v. U.S. Trustee, 509 F.3d 1139, 1148 (9th Cir. 2007) (“[B]ankruptcy
courts have the inherent power to sanction vexatious conduct presented before the
court.” (internal quotation and citation omitted).) This inherent authority is
recognized in section 105(a) of the Bankruptcy Code, which states:
No provision of [the Bankruptcy Code] providing for the 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.
11 U.S.C. § 105(a). By granting Bankruptcy Courts authority to “issue orders
necessary ‘to prevent an abuse of process,’ Congress impliedly recognized that
Bankruptcy Courts have the inherent power to sanction that ... exists within Article
III courts.” In re Rainbow Magazine, 77 F.3d 278, 284 (9th Cir. 1996). This
inherent sanction authority “allows a Bankruptcy Court to deter and provide
compensation for a broad range of improper litigation tactics.” Dryer, 322 F.3d
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1178, 1196 (9th Cir. 2003) (citing Fink v. Gomez, 239 F.3d 989, 992–93 (9th Cir.
2001).
In order to impose sanctions under its inherent authority, a
Bankruptcy Court “must make an explicit finding of bad faith or willful
misconduct.” In re Lehtinen, 564 F.3d 1052, 1058 (9th Cir. 2009) (citing Dyer, 322
F.3d at 1196). “Bad faith or willful misconduct consists of something more
egregious than mere negligence or recklessness.” Id. Courts have found bad faith
where a party makes knowing misrepresentations to the court. See Deigert v.
Baker, No. RDB-09-00392, 2010 WL 3860639 at *3-4 (D. Md. Sept. 30, 2010)
(finding bad faith based on knowing misrepresentations to the court regarding the
plaintiff’s residence); see also In re Dubrowsky, 244 B.R. 560, 579 (E.D.N.Y.
2000) (affirming sanctions award based on finding of bad faith where debtor
knowingly made false statements in his petition and schedules).
II.
Bankruptcy Court’s Finding of Bad Faith
Here, the Bankruptcy Court made clear that it was sanctioning Konop
pursuant to its inherent powers. (Bk. No. 03-00817, Doc. # 5873.) In order to
impose sanctions under its inherent authority, the Bankruptcy Court was required
to make a finding of bad faith or willful misconduct. Lehtinen, 564 F.3d at 1058
(9th Cir. 2009). Konop contends that the Bankruptcy Court committed clear error
17
by failing to make a finding of bad faith before granting the Sanctions Motion.
(Doc. # 56 at 22–25.) However, contrary to his contention, the record indicates
that the Bankruptcy Court did in fact find that Konop acted in bad faith.
The Bankruptcy Court’s Order Granting Sanctions states that Konop
is held in contempt and ordered to pay sanctions based, in part, on the reasons
stated orally on the record at the hearings held on July 29, 2005, December 13,
2005, and March 28, 2006. (Bk. No. 03-00817, Doc. # 5873.) At the hearing held
on July 29, 2005, the court stated the following with respect to the grounds for
imposing sanctions against Konop:
As to Captain Konop, the bad faith that’s alleged is basically
knowingly making misrepresentations to the Court about the
availability of financing for this plan, and . . . it seems to me that the
record here does support the finding that there were knowing
misstatements of fact.
(Bk. No. 03-00817, Doc. # 5873 at 29). At the hearing held on March 28, 2006,
the Bankruptcy Court reiterated its conclusion regarding Konop’s knowing
misrepresentations as follows:
I’ve already ruled on the issue of liability and that is that Mr. Konop
signed three disclosure statements that had statements in them,
material statements in them, that were false and that he knew were
false . . . . I think he knew at the time he made it that they were not
then true and that sanctions are appropriate under inherent powers.
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Therefore, although the Court did not explicitly state that Konop acted in bad faith,
it impliedly did so by finding that Konop engaged in conduct amounting to bad
faith, i.e., knowingly making misrepresentations to the Court. See Lehtinen, 564
F.3d at 1061 (“‘[S]anctions are available if the court specifically finds bad faith or
conduct tantamount to bad faith.’” (emphasis in original) (quoting Fink, 239 F.3d
at 994); see also Optyl Eyewear Fashion Intern. Corp. v. Style Companies, Ltd.,
760 F.2d 1045, 1051 (9th Cir. 1985) (holding that express findings were not
necessary where the record supports a finding that the sanctioned attorney acted in
bad faith). Indeed, to hold otherwise would elevate form over substance. The
record makes clear that the Bankruptcy Court necessarily found that Konop acted
in bad faith by concluding that he made knowing misrepresentations to the court.
Moreover, the court’s finding that Konop made knowing
misrepresentations to the court was not clearly erroneous. The record contained
more than sufficient evidence to support a finding that Konop knew that the factual
representations made in the disclosure statements were false at the time that those
documents were filed. That evidence included Konop’s deposition testimony,
wherein he acknowledges that he did not have funding by the time that he filed the
September 2004 disclosure statement, as well as Konop’s emails to Boghosian
demonstrating that he had clear misgivings about the availability of funding prior
19
to the filing of the November and December disclosure statements. (Bk. No. 0300817, Doc. # 4569 Ex. D at 150, Doc. # 5298 Exs. D, E.) Further, after the
Bankruptcy Court gave Konop an opportunity to pursue additional discovery and
supplement the record regarding his alleged knowing misrepresentations, Konop
failed to come forward with evidence of financing commitments sufficient to
support the representations made in the various disclosure statements. To be sure,
the statements in his declaration regarding his reliance on funding from USA
Capital Bank is controverted by his own prior deposition testimony. (Bk. No. 0300817, Doc. # 4569 Ex. D. at 75–76; see also Bk. No. 03-00817, Doc. # 5492-5
Exs. 51, 58, 59.) In light of the evidence before the Bankruptcy Court, this Court
concludes that the Bankruptcy Court’s finding that Konop knew that the
representations were false at the time that they were made was not clearly
erroneous. See JTS Corp, 617 F.3d at 1109 (“[t]he Bankruptcy Court’s findings of
fact are reviewed for clear error” and the court “must accept the Bankruptcy
Court’s findings of fact, unless the court is left with the definite and firm
conviction that a mistake has been committed”).
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III.
Due Process
Notice and opportunity to be heard are indispensable prerequisites for
monetary sanctions imposed pursuant to the court’s inherent powers. Lasar v. Ford
Motor Co., 399 F.3d 1101, 1109–10 (9th Cir. 2005) (citing Cole v. U.S. Dist. Court
for the Dist. of Idaho, 366 F.3d 813, 821 (9th Cir. 2004). “‘Ordinarily a court
proposing to impose sanctions notifies the person charged both of the particular
alleged misconduct and of the particular disciplinary authority under which the
court is planning to proceed.’” Lehtinen, 564 F.3d at 1060 (quoting In re DeVille,
361 F.3d 539, 548 (9th Cir. 2004)). However, the rule is not absolute. Id. The
Ninth Circuit has held that “when using the inherent sanction power, due process is
accorded as long as the sanctionee is ‘provided with sufficient, advance notice of
exactly which conduct was alleged to be sanctionable, and [was] furthermore
aware that [he] stood accused of having acted in bad faith.’” Id. (quoting Miller v.
Cardinale, 361 F.3d 539, 547 (9th Cir.2004)).
Konop argues that the Bankruptcy Court did not provide him adequate
notice of “the allegations asserted to support its grant of sanctions.” (Doc. # 56 at
19.) Konop also claims that there was “neither a fair hearing, nor a reasonable
opportunity to be heard.” (Doc. # 66 at 13.) The record belies this argument.
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First, the Sanctions Motion put Konop on notice that Hawaiian
Airlines was seeking sanctions for the “pattern of misrepresentations [that] began
in September 2004 with the deceptive disclosure statement filed by Konop and
others, and continued for a period of six months.” (Bk. No. 03-00817, Doc. # 4739
at 2.) The Motion identified with specificity the various alleged misrepresentations
made by Konop and set forth evidence supporting those allegations. (Id. at 2–14.)
To this end, the Motion incorporated by reference the Supplemental Memorandum
of Points and Authorities in Opposition to Konop’s Reorganization Plan filed by
the Chapter 11Trustee of Hawaiian Airlines on March 7, 2005, along with all the
declarations, deposition transcripts and exhibits accompanying that brief. (Id. at
14; Bk. No. 03-00817; Doc. # 4568–69.) That Supplemental Memorandum
describes in detail all the alleged misrepresentations for which Konop was
ultimately sanctioned, including the representations found in the three disclosure
statements, Boghosian’s affidavit, Spencer’s declaration and affidavit, and the
documents relating to the E&M Trust account. (Bk. No. 03-00817; Doc.
# 4568–69.)
Next, at the July 29, 2005 hearing on the Sanctions Motion, Konop’s
attorney, David Gierlach, Esq., was given an opportunity to present oral argument
to the Court. Following oral argument, the Bankruptcy Court issued a bench
22
ruling that detailed the sanctionable conduct committed by Konop. (Bk. No. 0300817, Doc. # 5442.) Specifically, the Bankruptcy Court pointed to the
misrepresentations made in the September 2004 disclosure statement and the
continued misrepresentations made to the court following Konop’s emails to
Boghosian. (Id. at 29–30.) The court also made clear in its ruling that the
sanctionable conduct did not include Konop’s discovery conduct as well as his outof-court efforts to avoid ratification of the modified collective bargaining
agreement. (Id. at 31.)
At the status conference held a couple weeks later, pursuant to Mr.
Gierlach’s request, the Bankruptcy Court granted Konop the opportunity to
conduct additional discovery and present evidence to show that he had a good faith
belief that committed financing existed. (Bk. No. 03-00817, Doc. # 5700 at 8–10,
20.) In other words, Konop was given yet another chance to explain himself after
the Sanctions Motion was fully briefed, hearing was held on that Motion, and the
Court issued a bench ruling on that Motion. Konop took full advantage of this
opportunity by filing a detailed supplemental declaration containing 545
paragraphs to which he attached 74 exhibits. (Bk. No. 03-00817, Docs. # 5492.)
After Konop submitted this additional evidence, Hawaiian Airlines
filed its Motion for Partial Summary Judgment, which set forth all the conduct for
23
which Hawaiian was seeking sanctions based upon the record that had been
developed. (Bk. No. 03-00817, Doc. # 5731.) Konop was then given an
opportunity to respond and submit yet another declaration to show that he did not
act in bad faith.
At the hearing on the Partial Summary Judgment motion, the Court
issued a lengthy tentative ruling that identified numerous knowing
misrepresentations made by Konop, including five specific misrepresentations in
the September 2004 disclosure statement, the same misrepresentations repeated in
the November 2004 and December 2004 disclosure statements, and the false and
misleading statements in the Boghosian affidavit and the Spencer declaration. (Bk.
No. 03-00817, Doc. # 5885 at 4–10.) The Court observes that these are the very
same misrepresentations set forth in the Supplemental Memorandum that was
incorporated by reference into Hawaiian Airlines’ original Sanctions Motion.
After issuing its tentative ruling, the Court gave both sides another opportunity to
be heard with respect to Konop’s knowing misrepresentations. Thereafter, the
court adopted its tentative ruling and granted the Motion for Partial Summary
Judgment.
In sum, the record clearly demonstrates that Konop received more
than adequate notice of exactly which conduct was alleged to be sanctionable and
24
was furthermore aware that he stood accused of having acted in bad faith. The
record further demonstrates that Konop was provided ample opportunity to be
heard with respect to those issues. Accordingly, the Court concludes that Konop’s
procedural due process rights were not violated in connection with the imposition
of sanctions.
IV.
Calculation of Sanctions
The Bankruptcy Court issued an Order Granting Sanctions Against
Konop in the amount of $379,340.11, less any amounts paid by Randal Yoshida
and Timothy Philipp. (Bk. No. 03-00817, Doc. # 5873.) This amount reflects the
costs incurred in investigating and opposing the September , November, and
December 2004 disclosure statements as well as the costs of bringing and
prosecuting the Sanctions Motion. Konop contends that the Bankruptcy Court
abused its discretion in determining the amount of sanctions awarded against him.
Specifically, he asserts that the sanctions award should have been limited to the
costs incurred by Hawaiian Airlines in responding to the September 2004
disclosure statement and that any sanctions beyond that amount are punitive and
exceed the Bankruptcy Court’s inherent authority.2
2
The Court rejects Appellee’s contention that Konop waived the argument
that the Bankruptcy Court lacked the inherent power to award sanctions for fees
and expenses incurred in pursuing sanctions. The record indicates that Konop
25
A reviewing court will not disturb the Bankruptcy Court’s entry of
sanctions unless the Bankruptcy Court abused its discretion. Sunbelt Developers,
608 F.3d at 461. A court abuses its discretion if its decision is based on “an
erroneous view of the law or on a clearly erroneous assessment of the evidence.”
Holgate, 425 F.3d at 675. The Ninth Circuit has held that when a Bankruptcy
Court imposes sanctions pursuant to its inherent power, the court “should limit
sanctions to the opposing party’s more ‘direct’ costs, that is, the costs of opposing
the offending pleading or motion.” Sunbelt Developers, 608 F.3d at 466 (9th Cir.
2010) (quoting Lockary v. Kayfetz, 974 F.2d 1166, 1178 (9th Cir. 1992)).3
As applied here, the Bankruptcy Court properly held Konop liable for
the attorneys’ fees and expenses incurred by Hawaiian Airlines in investigating and
argued before the Bankruptcy Court that “[s]anctions beyond [those directly related
to the September 2004 disclosure statement] exceed the Bankruptcy Court’s
inherent authority” and that the costs associated with the Sanctions Motion should
not be included because such costs “are not charges which were necessarily
incurred with respect to plan or disclosure statement opposition.” (Bk. No. 0300817, Doc. # 5853 at 1, 23.)
3
In reaching this conclusion, the Ninth Circuit rejected the contention that
Lockary has been overruled by Margolis v. Ryan, 140 F.3d 850 (9th Cir. 1998),
with respect to sanctions imposed under the court’s inherent power. Sunbelt
Developers, 608 F.3d at 467 n.6. The Ninth Circuit explained that “[i]n Margolis,
the court interpreted Lockary as imposing a restriction on sanctions imposed under
Rule 11.” Id. Therefore, the Ninth Circuit concluded that “although Margolis is
binding circuit precedent, its conclusion that ‘the rule in Lockary . . . is no longer
good law’ has no effect here because this is not a Rule 11 case.” Id.
26
opposing the three misleading disclosure statements since those constitute the
“costs of opposing the offending pleading or motion.” Id. at 466. Konop was
given more than adequate notice and opportunity to be heard with respect to the
allegation that he made knowing misrepresentations in each of the three disclosure
statements. Moreover, as discussed above, the Bankruptcy Court’s determination
that Konop made knowing misrepresentations in those three disclosure statements
was not clearly erroneous in light of the evidence before the court. The sanctions
award is thus supported by adequate factual findings of bad faith. Accordingly, the
Bankruptcy Court did not abuse its discretion in awarding sanctions for the costs
associated with opposing those three disclosure statements.
The Bankruptcy Court erred, however, by holding Konop liable for
the fees and expenses incurred by Hawaiian Airlines in preparing and prosecuting
the Sanctions Motion, as those are not costs directly incurred by Hawaiian in
opposing the misleading disclosure statements. See id. at 466 (holding that the
Bankruptcy Court erred by including the costs of litigating motions for sanctions in
the costs and fees awarded pursuant to the court’s inherent sanction power); see
also Lockary, 974 F.2d at 1178 (holding that the costs of preparing a motion for
sanctions should not be included in sanctions imposed by the district court under
its inherent powers), superseded by change in Rule 11 as stated in Margolis v.
27
Ryan, 140 F.3d 850 (9th Cir. 1998). Therefore, the Bankruptcy Court abused its
discretion in awarding sanctions for the costs associated with bringing the
Sanctions Motion.
V.
Motion for Partial Summary Judgment
Konop argues that the Bankruptcy Court erred in granting Hawaiian
Airlines’ Motion for Partial Summary Judgment against Konop. Specifically,
Konop contends that there were genuine issues of material fact as to whether
Konop made knowing misrepresentations to the court.
A district court reviews de novo the Bankruptcy Court’s grant of
summary judgment. In re Sabban, 600 F.3d 1219, 1221–22 (9th Cir. 2010). In
reviewing a summary judgment, the task of an appellate court is the same as a trial
court under Federal Rule of Civil Procedure 56, which is applicable to bankruptcy
cases pursuant to Federal Rule of Bankruptcy Procedure 7056. In re SNTL Corp.,
571 F.3d 826, 834 (9th Cir. 2009). Viewing the evidence in the light most
favorable to the non-moving party, the court must determine whether there were
any genuine issues of material fact. Id. “A factual dispute is genuine only if a
reasonable trier of fact could find in favor of the nonmoving party.” McDonald v.
Sun Oil Co., 548 F.3d 774, 778 (9th Cir. 2008).
28
Here, the Court concludes that there were no genuine issues of
material fact as to whether Konop made knowing misrepresentations to the
Bankruptcy Court. As set forth above, Hawaiian Airlines presented overwhelming
evidence demonstrating that at the time that each of the three misleading disclosure
statements were filed, Konop did not believe that financing existed to support his
Reorganization Plan. Meanwhile, after being given several opportunities to
supplement the record with respect to his argument that the representations were
made in good faith, Konop failed to proffer competent, affirmative evidence
showing that he believed such financing existed. To be sure, Konop’s declaration
and exhibit addendum did not raise a genuine issue of fact as to whether Konop
believed that the specific representations he made in his disclosure statements were
true. See Villiarimo v. Aloha Island Air, Inc., 281 F.3d 1054, 1061 (9th Cir. 2002)
(citing Kennedy v. Applause, Inc., 90 F.3d 1477, 1481 (9th Cir. 1996) (stating that
the Ninth Circuit “has refused to find a ‘genuine issue’ where the only evidence
presented is ‘uncorroborated and self-serving’ testimony”); see also Addisu v. Fred
Meyer, Inc., 198 F.3d 1130, 1134 (9th Cir. 2000) (“a scintilla of evidence or
evidence that is merely colorable or not significantly probative does not present a
genuine issue of material fact”). Thus, based on the evidentiary record before the
Bankruptcy Court, a reasonable trier of fact could not have found in favor of
29
Konop. McDonald, 548 F.3d at 778; see also In re Ahaza Systems, Inc., 482 F.3d
1118, 1128 (9th Cir. 2007) (“Where the evidence is so one-sided that one party
must prevail as a matter of law, a trial is unnecessary.”). Accordingly, this Court
concludes that the Bankruptcy Court correctly granted Hawaiian Airlines’ Partial
Summary Judgment Motion.4
VI.
Improper Purpose
Lastly, Konop asserts that the Sanctions Motion should be dismissed
because of Hawaiian Airlines’ allegedly “unclean hands.” (Doc. # 56 at 29.)
According to Konop, Hawaiian Airlines had unclean hands because it brought the
Sanctions Motion for the improper purpose of “counter[ing] Konop’s lawful efforts
to promote a Reorganization Plan.” (Id.) This argument fails for two reasons.
First, Konop failed to raise this argument before the Bankruptcy Court and is thus
barred from asserting it on appeal. See In re Tamen, 22 F.3d 199, 205 (9th Cir.
1994) (citing In re E.R. Fegert, Inc., 887 F.2d 955, 957 (9th Cir. 1989)).
Moreover, even considering this argument, there is no evidence in the record to
support Konop’s contention that Hawaiian Airlines sought sanctions against Konop
4
As set forth above, this Court has determined that the Bankruptcy Court’s
ultimate finding that Konop in fact made knowing misrepresentations to the court
was not clearly erroneous. Therefore, regardless of this Court’s decision with
respect to the Partial Summary Judgment Motion, there exists an independently
sufficient ground on which to affirm the imposition of sanctions against Konop.
30
“for his protected, concerted labor activities.” (Doc. # 56 at 29.) Indeed, contrary
to this contention, the record indicates that Hawaiian Airlines sought sanctions for
Konop’s knowing misrepresentations to the Court, which obviously is not a
protected activity. (See Bk. No. 03-00817, Doc. # 4739.) Therefore, Konop’s
argument regarding Hawaiian Airlines’ allegedly improper purpose constitutes
pure speculation, which is insufficient to warrant dismissal of the Sanctions
Motion.
CONCLUSION
For the reasons stated above, the Court AFFIRMS IN PART and
VACATES IN PART the Bankruptcy Court’s Order Granting Sanctions Against
Konop. This matter is REMANDED to the Bankruptcy Court with instructions to
amend the sanctions award in accordance with this Order.
IT IS SO ORDERED.
DATED: Honolulu, Hawaii, October 28, 2011.
_____________________________
David Alan Ezra
United States District Judge
Konop v. Hawaiian Airlines, Inc., CV No. 08-00405 DAE-BMK; ORDER: (1) AFFIRMING IN PART
AND VACATING IN PART THE BANKRUPTCY COURT'S ORDER GRANTING SANCTIONS
AGAINST KONOP AND (2) REMANDING THIS MATTER TO THE BANKRUPTCY COURT
31
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