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In Re 450 S. Burlington Partners, LLC v. 450 S. Burlington Partners

June 20, 2011

IN RE 450 S. BURLINGTON PARTNERS, LLC, DEBTOR, KATHLEEN P. MARCH, ET AL., APPELLANTS,
v.
450 S. BURLINGTON PARTNERS, LLC, APPELLEE.



The opinion of the court was delivered by: Dolly M. Gee United States District Judge

-NOT FOR PUBLICATION-

ORDER RE BANKRUPTCY APPEAL

This matter is before the Court on an appeal from the Bankruptcy Court's August 6, 2009 Sanctions Order. The Court deems this matter suitable for decision without oral argument. Fed. R. Civ. P. 78(b); C.D. Cal. L.R. 8012-7. For the reasons set forth below, the decision of the Bankruptcy Court is REVERSED.

I.

FACTUAL AND PROCEDURAL BACKGROUND

A. The Underlying Chapter 11 Bankruptcy Case

Debtor 450 S. Burlington Partners, LLC owns an undivided 55% interest in a 17-unit residential apartment building located in Los Angeles, California ("Property").*fn1

(Sanctions Order, Excerpt of Record ("E.R.") Ex. 2 at 2.) Joseph Kurn purportedly has an undivided 45% interest in the Property. (Id.) Kurn claims his undivided interest is as a tenant-in-common or, in the alternative, as a secured creditor. (Tr. of April 28, 2009 Hr'g re Cash Collateral Order ("Tr. of April 28 Hr'g"), E.R. Ex.12 at 5--6.) The only evidence of the purported tenant-in-common or secured creditor interest is a grant deed. (Sanctions Order, E.R. Ex. 2 at 2.) Neither party has provided a tenant-in-common agreement or a partnership agreement to the Bankruptcy Court. (Id.) In 2006, Debtor and Kurn signed "Amendment #1 to Tenant in Common Agreement" ("Amendment #1"), requiring Debtor to pay Kurn approximately $1,625 per month.*fn2 (Id.) Debtor complied with the terms of Amendment #1 for approximately three years, until commencing the underlying bankruptcy proceeding. (Id.)

Debtor filed for Chapter 11 bankruptcy on March 10, 2009. (Sanctions Order, E.R. Ex. 2 at 2.) Debtor subsequently filed a motion requesting initial authorization to use cash collateral. (Id.) Over Kurn's opposition, the Bankruptcy Court authorized Debtor's initial use of cash collateral through April 30, 2009. (Id.) Kurn specifically opposed Debtor's use of cash collateral unless Debtor paid Kurn approximately $1,625 per month from Debtor's gross proceeds pursuant to the purported tenant-in-common agreement. (Id.)

B. The Bankruptcy Court Order Authorizing Continued Use

On April 28, 2009, the Bankruptcy Court heard oral arguments on a second cash collateral motion ("April 28 hearing"), following which the court orally announced its ruling, approving Debtor's use of cash collateral through July 31, 2009. (Order for Continued Use, E.R. Ex. 4 at 1.) On April 30, 2009, the Bankruptcy Court issued Supplemental Conclusions ("Supplemental Conclusions") to its April 28 order, finding that Kurn was entitled to a portion of the net profits, not gross profits, pursuant to the default rule under Dabney-Johnston Oil Corp. v. Walden, 4 Cal. 2d 637 (1935). (Supplemental Conclusions, E.R. Ex. 5 at 2.) The Bankruptcy Court disagreed with Appellants' position that Kurn was entitled to 45% of the gross profits (rent in the Property) under Dabney-Johnston. (Id. at 1.) Rather, the Bankruptcy Court found Dabney-Johnston to stand for the proposition that Kurn's purported entitlement to a 45% interest in the Property revenue is subject to a charge or deduction for Debtor's operational expenses, and "[u]nder the budget approved by the court, these expenses are projected to use all of the revenue in rents received by the debtor." (Id. at 2.)

In its Supplemental Conclusions, the Bankruptcy Court made several other observations. (Id.) First, it noted that while there is an exception under Dabney-Johnston, allowing co-tenants to contract around the default rule, the exception did not apply to Kurn because Kurn failed to establish the parties had contracted around the rule. (Id.) Appellants contend-in previous motions and in this appeal-that the exception did apply because Debtor and Kurn did in fact contract around the default rule in the tenant-in-common agreement. (Id.; see also Appellants' Opening Br. at 7.)

The Bankruptcy Court also observed:

It may be that Kurn is entitled to a 45% share of the net profits from the rents received from the real estate involved in his case. This is not the time in this chapter 11 case for such owners to receive distributions from this bankruptcy estate. Payment to a co-owner of the real estate here at issue must await the generation of net profits.

Insofar as Kurn contends that his status is that of a secured creditor, his interest in rents received from the real estate is limited by [11 U.S.C.] § 552, which provides that "property acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before commencement of the case." While [11 U.S.C.] § 552(e)*fn3 [sic] provides certain exceptions to this rule, Kurn has not shown that he qualifies for any such exception. (Supplemental Conclusions, E.R. Ex. 2 at 2.)

C. Appellants' Motion To Reconsider

On May 7, 2009, Appellants, on Kurn's behalf, filed a motion to reconsider the cash collateral order and Supplemental Conclusions.*fn4 (Mot. to Reconsider, E.R. Ex. 28.) The Bankruptcy Court heard oral arguments on Kurn's motion on June 2, 2009, at which time the Bankruptcy Court denied the motion in its entirety. (Tr. of Hr'g on June 2, E.R. Ex. 11 at 12--14.) Specifically, the Bankruptcy Court denied the motion because Appellants did not present any new facts or new evidence that were not previously available to the court when it ruled on the cash collateral motions. (Id.) The oral ruling was reflected in a written ruling issued on July 2, 2009. (Order Denying Mot. to Reconsider, E.R. Ex. 3.)

D. The Bankruptcy Court's Sanctions Order

On June 23, 2009, Debtor filed a motion seeking sanctions against both Kurn and Appellants pursuant to 11 U.S.C. § 105 and Federal Rule of Bankruptcy Procedure 9011.*fn5

(Sanctions Order, E.R. Ex. 2 at 3.) Debtor argued that Kurn's motion to reconsider needlessly increased Debtor's litigation costs and wasted the court's time because it was frivolous and merely rehashed Kurn's opposition to the cash collateral motion. (Debtor's Mot. Seeking Sanctions, E.R. Ex. 31.)

The Bankruptcy Court held a hearing on Debtor's sanctions motion on July 14, 2009. (Tr. of Hr'g on July 14, 2009, E.R. Ex. 9.) On August 6, 2009, the Bankruptcy Court issued the Sanctions Order at issue here:

Under the facts of this case, the court finds that Joseph Kurn and his counsel [Appellants] . . . filed [their] motion [to reconsider] in bad faith. Pursuant to 11 U.S.C. § 105(a) and the court's inherent authority, the court orders that Kurn and his counsel pay sanctions to the debtor . . . in the amount of $10,000: $5,000 of this payment is due to counsel of record for the debtor thirty days from the date of entry of this order; the remaining $5,000 is suspended, pending further decision of this court. (Sanctions Order, E.R. Ex. 2 at 1.) With respect to its inherent authority, the Bankruptcy Court found as follows:

Kurn and his counsel filed the reconsideration motion in bad faith. The voluminous motion lacked any new facts or new competent evidence and made no new arguments not previously made to the court. In addition to causing detriment to debtor, Kurn's filing unnecessarily drained the court's time and resources. (Id. at 4.) With respect to Section 105(a), the Bankruptcy Court found that "Kurn and his counsel filed a frivolous reconsideration motion, which constitutes a violation of the integrity of the bankruptcy process." (Id. at 6.)

II.

STANDARD OF REVIEW

A reviewing court will not disturb the bankruptcy court's entry of sanctions unless the bankruptcy court abused its discretion. See 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)).

Before awarding sanctions under its inherent powers, the Bankruptcy Court is required to make an explicit finding that counsel's conduct "constituted or was tantamount to bad faith." Primus Auto. Fin. Servs. v. Batarse, 115 F.3d 644, 648 (9th Cir. 1997) (quoting Roadway Express, Inc. v. Piper, 447 U.S. 752, 767, 100 S.Ct. 2455, 2463, 65 L.Ed.2d 488 (1980)); see also In re Keegan Mgmt. Co., Sec. Litig., 78 F.3d 431, 436 (9th Cir. 1996); United States v. Stoneberger, 805 F.2d 1391, 1393 (9th Cir. 1986).

III.

DISCUSSION

Appellants contend that the Sanctions Order was erroneous for three reasons: (1) the Bankruptcy Court erroneously relied on Section 105(a) and its inherent power in issuing the Sanctions Order; (2) Appellants' motion to reconsider was meritorious; and (3) the Bankruptcy Court improperly issued the Sanctions Order to chill Appellants' future advocacy of the underlying ...


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