The opinion of the court was delivered by: Barry Ted Moskowitz, Chief Judge United States District Court
ORDER AFFIRMING IN PART, VACATING IN PART JUDGMENT OF THE BANKRUPTCY COURT, PROCEEDINGS AND REMANDING FOR FURTHER
Geraldine A. Valdez and Enrique Hernandez-Pulido appeal under 28 U.S.C. § 158(a)(1) from a March 10, 2009 memorandum decision and order of the United States Bankruptcy Court for the Southern District of California assessing sanctions against Ms. Valdez and Mr. Hernandez under the authority of 11 U.S.C. § 105(a). The Court AFFIRMS in part, VACATES in part, and REMANDS for further proceedings.
The Court recently decided the related appeals from the bankruptcy court's imposition of sanctions for civil contempt against Alejandro Diaz-Barba and Martha Margarita Barba de la Torre (the "Diaz defendants" or the "Diazes"). See Order re Consolidated Bankruptcy Appeals (Nos. 2 through 6), Doc. 95 in Case No. 08cv02326, dated June 15, 2012 ("Order re Consolidated Bankruptcy Appeals"). The Court assumes familiarity with this Order, and incorporates by reference the facts set forth therein.
Appellants were sanctioned pursuant to the bankruptcy court's inherent authority to sanction an attorney who vexatiously multiplies the proceedings before it. The bankruptcy court found that Appellants had engaged in bad faith conduct related to their representation of Alejandro Diaz-Barba following the entry of judgment in an avoidance action.
In the present appeal, Ms. Valdez was found by clear and convincing evidence to have taken actions in bad faith to delay performance of the bankruptcy court's amended consolidated judgment ("ACJ"). She was held jointly and severally liable with her client, Mr. Diaz, for sanctions ordered against him at a November 13, 2008 hearing.
The bankruptcy court found that Mr. Hernandez acted in bad faith, but that he did not have enough control over the handling of the proceedings to warrant a joint and several liability sanction against him. Instead, the court required him to attend at least twenty hours of continuing legal education in ethics.
The bankruptcy court's factual findings as to each attorney are set forth in the following two sections.
1. Association of Counsel and Initial Assessment of Appeal
In 2008, Ms. Valdez was a senior counsel at the law firm of Procopio, Cory, Hargreaves & Savitch LLP ("Procopio"). On July 24, 2008, her firm entered a notice of appearance as counsel for the Diaz defendants. Ms. Valdez was the primary bankruptcy specialist in charge of representing Mr. Diaz.
Following the entry of the ACJ, the Diaz defendants unsuccessfully sought a stay of enforcement from the bankruptcy judge. They then made the same motion before this Court, and a hearing was held on August 28, 2008. At that hearing, Kismet argued that, pursuant to Brady v. Brown, 51 F.3d 810 (9th Cir. 1995), an order from a United States court directing the transfer of Mexican real property to a fideicomiso trust does not violate Mexican law. The next day, Ms. Valdez reviewed Brady v. Brown and concluded by way of an email to her client and co-counsel that "[i]t is not a good case so I just wanted to give you the heads up." [ER 1698.] On September 2, 2008, while the motion for stay was still under submission, Ms. Barba Diaz's counsel, Tony Gaston, emailed the following to his client, Ms. Valdez, and Mr. Hernandez:
The case [Brady v. Brown] is a 9th Circuit opinion that basically says the judgment that Judge Adler entered against you and Alex does not violate either US or Mexican law. There are some minor factual differences, but taken as a whole, it appears to validate Judge Adler's order requiring you to recreate the fidecomsio [sic] to the benefit of Kismet. . . .
It is essential that the Mexican Government now take a position on this judgment . . . . The draft of the declaration [to be signed by Joel Hernandez Garcia, Legal Advisor in the Mexican Ministry of Foreign Affairs] is very rough and really just a specimen of what I would like to have if Judge Moskowitz refuses to extend the stay and we are forced to object to contempt sanctions. [ER 1692-93.]
The bankruptcy court found that there was nothing in the record to show that Ms. Valdez disagreed with Mr. Gaston's analysis of the Brady case or his assessment of their appeal. [ER 6.] Although in her later testimony, Ms. Valdez disavowed that she agreed with Mr. Gaston's email, the bankruptcy court did not find her after-the-fact testimony to be credible. Id.
2. Objections to Transfer Instruments
As set forth in the Order re Consolidated Bankruptcy Appeals, the Diaz defendants rejected three proposed transfer instruments drafted by Kismet to effectuate the amended consolidated judgment. Ms. Valdez drafted the first two objections to those instruments.
The bankruptcy court found that Ms. Valdez's motive for objecting to these transfer documents was tainted by bad faith because her client had no intention of signing any transfer documents, regardless of their form. [ER 8-10.] In support of this conclusion, the bankruptcy court pointed to email correspondence dated September 5, 2008, where Ms. Valdez informed her co-counsel at Procopio that Ms. Barba de la Torre is "putting her affairs in order and planning on returning to Mexico[,]" and that Mr. Diaz is "considering this avenue as well." [ER 8.] Further, in response to Mr. Diaz's September 8, 2008 email stating that he "will not sign anything that executes a trust agreement to Mr. Hahn [Kismet's principal], any of his companies, etc.," Ms. Valdez wrote:
I understand that but we don't need to reveal it to Mojdehi [Kismet's counsel] yet. Better to let him think we are preparing to cooperate while we get our ducks in a row in Mexico. Therefore, [to] the extent Arturo [Mr. Diaz's Mexican counsel] can point to defects, we can send back the draft document and make them change it again causing delay. [ER 1921.] The bankruptcy court observed that this email explicitly set forth Ms. Valdez's bad faith motive of objecting to the form of documents in order to cause delay.*fn1 [ER 8.]
Ms. Valdez recognized that she had an ethical dilemma in representing a client who did not intend to sign the transfer documents. On September 23, 2008, she contacted Procopio's professional standards partner, Robert Russell, for advice. Mr. Russell asked whether "the reputation of Procopio, Cory [is] likely to be tarnished by our representation of an individual who refuses to comply with the Bankruptcy Court's order and is held in contempt[.]" [ER 1977.] Ms. Valdez responded that she was comfortable with the objections she made to the form of the documents. However, she was not comfortable raising these objections if Mr. Diaz did not intend to sign the documents even if they were revised. The next day, Mr. Russell emailed asking "but if your client has no intention of complying, then how do you respond when Louise [the bankruptcy court judge] asks [why] you made everyone go through the hoops if your client had no intention of complying anyway." [ER 1976.] Ms. Valdez responded that Mr. Diaz had filed an amparo suit in Mexico and explained that "[i]t makes me much more comfortable now that a Mexican court has exercised jurisdiction over the property." Id. She stated her belief that the suit would result in a court determination that Mr. Diaz cannot transfer the villa and concluded, "I think this makes a much more credible case as to why Alex has been unable to comply with the order." Id. The bankruptcy court observed that this exchange did not resolve Ms. Valdez's ethical dilemma, as Ms. Valdez's belief that the filing of an amparo would result in a determination that her client could not transfer the property merely "shift[ed] the focus from one of noncompliance to that of impossibility." [ER 10.]
Despite Ms. Valdez's bad faith, the bankruptcy court found that Ms. Valdez had made some effort to persuade her client to comply with the amended consolidated judgment and that the objections raised by Ms. Valdez "were, for the most part, facially meritorious." [ER 7.] Accordingly, the bankruptcy court concluded that it would not impose the sanction of joint and several liability for this conduct alone. [ER 10.]
3. Advice to Obtain an Injunction in Mexico
The bankruptcy court found that Ms. Valdez initially encouraged her client to obtain "opinions" from a Mexican court, in the nature of declaratory relief, to the effect that the transfer under the amended consolidated judgment could not be accomplished. [ER 7.] However, the court found that as the prospect of a contempt citation ripened, Ms. Valdez's advice shifted to advising Mr. Diaz to obtain an "injunction" to block performance of the amended consolidated judgment. [ER 11.] This finding was based largely on Ms. Valdez's writings. Specifically, the bankruptcy court pointed to four pieces of correspondence where Ms. Valdez discussed obtaining an "injunction":
1. Ms. Valdez's September 12, 2008 email to Mr. Diaz with Procopio co-counsel copied: "Is this the lawsuit that we are planning to get the injunction in?" [ER 1941.]
2. A second September 12, 2008 email to Mr. Diaz with Procopio co-counsel copied: "In the meantime we must immediately get the lawsuit going in Mexico so we can get that injunction." [ER 1940.]
3. A third September 12, 2008 email to Mr. Diaz with Procopio co-counsel copied: "[W]e must get a Mexican court to issue an injunction preventing you from transferring the property. This should be the priority right now because we will not be able to stave off a motion for contempt much longer." [ER 1937.]
4. Ms. Valdez's September 23, 2008 formal strategy letter to Mr. Diaz with Procopio co-counsel copied: "You are ultimately going to have to deal with the inevitability that Judge Adler will likely issue sanctions against you unless you can provide an injunction or order from a Mexican court demonstrating that it is impossible for you to comply under Mexican law. . . . [O]ne thing is clear . . . , it is imperative that you commence an action in the Mexican Courts to obtain some kind of an injunction prohibiting the transfer for the Villa Property as a matter of Mexican law. . . . I cannot stress how important it is to get such an action in motion immediately because we are running out of time." [ER 809-10 (emphasis added).]
Additionally, the bankruptcy court found that Ms. Valdez erroneously believed that the amparo proceeding would result in an injunction, preventing the transfer of the villa. [ER 15.] The bankruptcy court relied on several sets of emails to support this conclusion.
First, on September 26, 2008, Mr. Diaz sent Ms. Valdez an email stating, "The Amparo has been admitted, and we were granted a cautionary measure (injunction), which consists in [sic] an order from a [Mexican] federal judge to that the transmission of the property not be carried out." [ER 1984.] Ms. Valdez replied, "This appears to be good news. . . . Until we have . . . determined what our next steps should be, it is imperative that we do not do anything to alert Kismet or Ali Mojdehi of this development." Id.
Second, in a September 30, 2008 email to Mr. Diaz to summarize a meeting between Ms. Valdez, Mr. Hernandez and two other attorneys, Mr. Hernandez wrote:
I explained to them the amparo resolution you obtained and how the injunction order can be recorded in the Public Recorder's Office. We concluded that:
(1) We will not let the US court nor Kismet's attorneys at this point know that the amparo was filed and the injunction was obtained. We want to avoid Kismet arguing against it until we have it recorded. We will want to have the certificate of the recording of the amparo judge's order handy when it is available to present it as an obstacle for transferring title. [ER 1870-71.] Although Ms. Valdez was not copied on this email, the bankruptcy court found that the characterization of the amparo as an "injunction" that they could "present as an obstacle for transferring title" is consistent with Ms. Valdez's earlier emails, and her understanding of what an injunction does. [ER 14.] This email will be discussed in further detail in connection with the bankruptcy court's findings as to Mr. Hernandez.
Finally, on October 1, 2008, the Diaz defendants and their legal team had a conference call. In an email sent the same day, ...