The opinion of the court was delivered by: Dolly M. Gee United States District Judge
ORDER RE BANKRUPTCY APPEAL
This matter is before the Court on an appeal from the Bankruptcy Court. 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 Bankruptcy Court's Practice and Procedure
In early 2008, due to the state of the real estate and mortgage markets at that time, the Bankruptcy Court, the Honorable Samuel Bufford presiding, notified all counsel and parties that relief-from-stay moving parties could no longer present a copy of a promissory note to establish their rights to enforce the note as real parties in interest. (Appellant's Request for Judicial Notice ("RJN"), Ex. A).*fn1 Specifically, on January 9, 2008, the Bankruptcy Court issued the following notice to all counsel and parties filing relief from stay motions:
Beginning January 22, 2008 (and until further notice), Judge Bufford will require that a moving party on a relief from stay motion based on a promissory note bring to court for inspection the original promissory note. (Note: do not file the note with the court-bring it to the hearing). Production of the note will be excused only under circumstances such as those provided in Evidence Code Rule 1004 or Cal. Comm. Code § 3301 (as shown by competent evidence).
This requirement will apply because developments in the secondary market for mortgages and other security interests cause the court to lack confidence that presenting a copy of a promissory note is sufficient to show that movant has a right to enforce the note or that it qualifies as a real party of interest . . . . (Id.)
The Bankruptcy Court expressed concern about the increased number of foundational defects in declarations filed in support of real estate relief-from-stay motions. (Sanctions Order, Excerpts of Record ("E.R.") 1.26 at 2.) The Bankruptcy Court found that such declarations were often insufficient to establish declarants' competency to testify and to authenticate the business records on which the declarants relied in their testimony. (Id.) (citing In re Vin Vinhnee, 336 B.R. 437, 444 (9th Cir. B.A.P. 2005) (setting forth requirements to admit such statements under the hearsay exception and to authenticate business records)). As a result, Judge Bufford began to exercise his discretion under Local Bankruptcy Rule ("LBR") 9013-1(i)(1),*fn2 to require declarants who submitted declarations in conjunction with real estate relief-from-stay motions to appear and testify at the relief-from-stay hearings. (Id.) Unlike the notice to all parties and counsel regarding the new promissory note requirements, however, JudgeBufford did not issue a similar notice or standing order to notify all parties and counsel of this new requirement.
B. The Underlying Chapter 7 Bankruptcy Cases
From February 2006 through March 2009, Appellant served as counsel of record for over 90 cases pending before Judge Bufford. (RJN, Ex. B.) On January 10, 2008- one day after receiving Judge Bufford's January 9, 2008 notice-Appellant sent a memorandum to its clients with cases pending before Judge Bufford, informing them of Judge Bufford's new requirement that relief-from-stay moving parties present original promissory notes at hearings. (Declaration of David McAllister ("McAllister Decl."), E.R. 1.14 at Ex. A.)
Between December 21, 2007 and April 8, 2008, Appellant filed 20 relief-from-stay motions on behalf of home mortgage creditor clients ("first group") before Judge Bufford. (Sanctions Order, E.R. 1.26 at 2.) The Bankruptcy Court issued Orders for Declarant to Testify ("ODT") for each of the motions in the first group, requiring the declarants to appear and testify at the respective relief-from-stay hearings. (Id.) Appellant ultimately withdrew each of the motions from the first group. (Id.) Appellant became increasingly aware of Judge Bufford's practice to require declarants to testify at relief-from-stay hearings, and on March 6, 2008, Appellant sent another memorandum to its clients to (1) remind the clients of Judge Bufford's requirement regarding original promissory notes, and (2) inform them of Judge Bufford's new ODT practice, requiring declarants to testify at relief-from-stay hearings. (McAllister Decl., E.R. 1.14 at Ex. B.)
On April 3, 2008, the Bankruptcy Court granted a relief-from-stay motion filed by Appellant-in connection with In re Edwards, Bankruptcy Case No. 08-11531-without requiring the declarant to testify at the hearing. (Tr. of July 9 Hr'g re Sanctions, E.R. 1.25 at 3.) This led Appellant to believe that Judge Bufford did not have a blanket practice of issuing ODTs for relief-from-stay hearings. (Id.) During the Order to Show Cause Hearing discussed infra, Appellant notes that, in hindsight, it realized that the Bankruptcy Court granted the relief-from-stay motion in In re Edwards without declarant testimony because the case involved personal property, not real property, and therefore the motion did not raise the same concerns that led Judge Bufford to issue OTDs for real estate relief-from-stay hearings. (Id. at 3--4.)
Between April 1 and May 6, 2008-after the Bankruptcy Court granted the relief-from-stay motion in In re Edwards-Appellant filed 21 additional relief-from-stay motions on behalf of home mortgage creditor clients ("second group") before Judge Bufford; this second group of motions is the subject of the Sanctions Order and the instant appeal. (Sanctions Order, E.R. 1.26 at 2.) The Bankruptcy Court subsequently issued ODTs for each of the 21 motions in the second group, requiring the declarants to appear and testify at the respective relief-from-stay hearings. (Id. at 2.) At this point, it became clear to Appellant that Judge Bufford's ODT practice was essentially a blanket requirement for all relief-from-stay motions filed in his court (Appellant's Op. Br. at 7), and beginning April 30, 2008, Appellant sent notifications to its clients, informing them that all relief-from-stay motions filed before Judge Bufford would require declarant appearance and testimony. (McAllister Decl., E.R. 1.14 at Ex. D.) Additionally, Appellant implemented new internal procedures, requiring clients to provide written confirmation of declarants' ability to appear and testify at the relief-from-stay hearings before the motions would be filed. (McAllister Decl., E.R. 1.14 at Ex. E.)
Appellant requested continuances for several second-group hearings in order to allow out-of-state declarants to have additional time to make travel arrangements. (Sanctions Order, E.R. 1.26 at 2.) After further preparing its clients for the relief-from-stay hearings, however, Appellant determined that it could no longer recommend to its clients that they proceed with the motions due to the additional travel costs, attorneys' fees, and evidentiary requirements, especially when weighed against the anticipated termination of the stays by operation of law. (Tr. of July 9 Hr'g re Sanctions, E.R. 1.25 at 6--7.) Once Appellant's clients fully realized Judge Bufford's stringent electronic business records authentication standard under In re Vin Vinhnee,*fn3 they had a greater appreciation for the additional witnesses and associated costs required to proceed with the hearings. (Id. at 9--10.) Specifically, the clients would incur travel, lodging, and lost productivity costs in sending not just declarants but also representatives from their respective information technology departments, to testify at the hearings. (Id.)
As a result, the clients instructed Appellant to withdraw 19 of the 21 motions from the second group. (Sanctions Order, E.R. 1.26 at 2.). Appellant's clients assert they made a business decision-that proceeding to the hearings was not in their best economic interest-in withdrawing the motions prior to the hearings, and therefore they instructed Appellant to withdraw their respective motions. (Tr. of July 8 Hr'g re Sanctions, E.R. 1.24 at 7--12, 15--19, 21--23, 43--45.) The two motions that proceeded to a hearing were ultimately denied. (Sanctions Order, E.R. 1.26 at 2.)
C. The Bankruptcy Court's Order To Show Cause
On June 5, 2008, the Bankruptcy Court issued an Amended Order to Show Cause ("OSC") to Appellant and its clients:
YOU ARE HEREBY ORDERED TO APPEAR before this court on July 8, 2008 at
11:00 a.m. and to show cause, if any you have, why sanctions should
not be imposed on you in the amount of $5,000 for each of the above
cases for filing relief from stay motions, as to which you were party
with no intent to proceed to a hearing on the merits. . . .
*fn4 Such lack of intent appears from the failure to produce
a witness, as required by Local Rule 9013-1(a)(13)(A)*fn5
and court orders issued pursuant thereto in each of these
cases, and the subsequent withdrawal (or attempted withdrawal) of each
motion before or at the hearing on the merits.
This Amended Order is based on the court's inherent authority to impose sanctions before the court, 11 U.S.C. § 105, 28 U.S.C. § 1927 and Fed. R. Bankr. P. 9011(b)(1) and (3). (Am. OSC, E.R. Ex. 1.7 at 4.)*fn6
On June 24, 2008, Appellant filed a response to the OSC, together with 13 declarations from the clients associated with the relief-from-stay motions. (Sanctions Order, E.R. Ex 1.26 at 3.) The Bankruptcy Court characterized the declarations as attempting to establish that (1) the declarants were competent to testify as to the matters set forth in the relief-from-stay motions, and (2) the declarants did in fact intend to prosecute the relief-from-stay motions on the merits. (Id.) The Bankruptcy Court ultimately found that none of the declarations were sufficient to accomplish either of the two aforementioned objectives. (Id.) Appellant, on the other hand, characterized the declarations as an attempt to establish that each client fully intended to prosecute their respective relief-from-stay motions at the time they were filed-the sole issue the Bankruptcy Court raised in the OSC-and not to establish the merits of the underlying relief-from-stay motion declarations. (Appellant's Op. Br. at 11.)
The Bankruptcy Court ordered each declarant who submitted a declaration in support of Appellant's OSC response to appear and testify at the July 8, 2008, OSC hearing. (Sanctions Order, E.R. Ex 1.26 at 3.)
D. The July 8 and 9, 2008, Order To Show Cause Hearing
Each of the 13 declarants who submitted a declaration in support of Appellant's OSC response appeared to testify at the July 8, 2008, OSC hearing. (Id.) Only four declarants ultimately testified before the Bankruptcy Court.
William Haughton, Kristy Wagner, and Norman Shaw were the first three witnesses to testify. (Tr. of July 8 Hr'g re Sanctions, E.R. 1.24 at 3, 16, 26.) Each witness was an authorized representative for a moving party in an underlying relief-from-stay motion. (Id. at 3--4, 6--7, 16, 27.) Each witness testified to the following: at the time the underlying relief-from-stay motions were filed, the moving parties intended to proceed to the hearings on the motions; they ultimately decided to withdraw the motions upon determining that the cost in sending up to four employees to testify at the hearing outweighed the benefit in proceeding with the hearing; and thereafter they instructed Appellant to withdraw their respective motions. (Id. at 7--9, 16--18, 27--28.)
After the first three witnesses testified, Appellant offered to the Bankruptcy Court a stipulation that each of the remaining declarants at the OSC hearing would testify that Appellant advised the clients of the Bankruptcy Court's frequent and ongoing ODT practice and that the clients withdrew their relief-from-stay motions on the advice of Appellant. (Id. at 39.) As a final offer of proof, Kim Miller testified. (Id. 42--43.) Ms. Miller testified that she is the Vice President of Wells Fargo, the moving party for two of the underlying relief-from-stay motions, and she was also the declarant for those relief-from-stay motions. (Id.) She further testified that at the time the relief-from-stay motions were filed, Wells Fargo intended to prosecute the motions, and she had made arrangements to travel to Los Angeles for the hearing. (Id. at 43--44.) After Ms. Miller and other Wells Fargo representatives conferred with Appellant regarding the Bankruptcy Court's ODT, and Wells Fargo learned that it would definitely have to send additional witnesses to the hearing to authenticate the electronic business records, Wells Fargo instructed Appellant to withdraw the motion on the grounds that proceeding with the motion was no longer cost effective. (Id. at 44--45.)
The Bankruptcy Court then accepted Appellant's offer of proof as to what the remaining declarant-witnesses would testify. (Id. at 47.) The Bankruptcy Court heard testimony from attorneys David McAllister and Steven Pite, representatives for Appellant. Appellant's representatives testified and re-affirmed that it was not their intent to submit frivolous motions, and when they filed the second group of motions- after the Bankruptcy Court granted the In re Edwards relief-from-stay motion without declarant testimony-they believed, albeit incorrectly, that the Bankruptcy Court had relaxed its ODT practice. (Tr. of July 9 Hr'g re Sanctions, E.R. 1.25 at 1--2.) They further testified that after Appellant filed the second group of motions and received ODTs for each of them, Appellant realized the Bankruptcy Court's ODT practice was a blanket one, advising its clients accordingly and changing its own internal policies to insure full compliance with the ...