Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-08-56587/USCOURTS-ca9-08-56587-0/pdf.json

Parties Involved:
Banyan Limited Partnership
Appellant
Birch International Limited Partnership
Appellant
CTM Limited Partnership
Appellant
DTG Limited Partnership
Appellant
Gallery I Inc.
Appellant
Don W. Grammer
Appellant
Hampton Limited Partnership
Appellant
Key Enterprises Inc.
Appellant
Orange Blossom Limited Partnership
Appellant
Pear Tree Limited Partnership
Appellant
Showthunder Inc.
Appellant
Slevin Limited Partnership
Appellant
Southern California Sunbelt Developers, Inc.

David Tedder
Appellant
Trails End Limited Partnership
Appellant
Van Dan Limited Partnership
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In the Matter of: SOUTHERN 

CALIFORNIA SUNBELT DEVELOPERS,

INC.,

Debtor,

ORANGE BLOSSOM LIMITED

PARTNERSHIP; PEAR TREE LIMITED

PARTNERSHIP; BANYAN LIMITED

PARTNERSHIP; DON W. GRAMMER;

TRAILS END LIMITED PARTNERSHIP;

SHOWTHUNDER INC.; HAMPTON No. 08-56570

LIMITED PARTNERSHIP; DAVID D.C. Nos.  TEDDER; BIRCH INTERNATIONAL 8:06-cv-00269-DDP

LIMITED PARTNERSHIP; VAN DAN 8:06-cv-00270-DDP

LIMITED PARTNERSHIP; CTM

LIMITED PARTNERSHIP; DTG LIMITED

PARTNERSHIP; GALLERY I INC.; KEY

ENTERPRISES INC.; SLEVIN LIMITED

PARTNERSHIP,

Appellants,

v.

SOUTHERN CALIFORNIA SUNBELT

DEVELOPERS, INC.,

Appellee. 

8415

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In Re: IBT INTERNATIONAL, INC. 

DON GRAMMER; BANYAN LIMITED

PARTNERSHIP; PEAR TREE

PARTNERSHIP; ORANGE BLOSSOM

LIMITED PARTNERSHIP; DAVID

TEDDER; BIRCH INTERNATIONAL

LIMITED PARTNERSHIP; VAN DAN

LIMITED PARTNERSHIP; CTM No. 08-56576

LIMITED PARTNERSHIP; DTG LIMITED  D.C. No. PARTNERSHIP; GALLERY I INC.;

H 8:06-cv-00275-DDP AMPTON LIMITED PARTNERSHIP;

KEY ENTERPRISES, INC.; SLEVIN

LIMITED PARTNERSHIP;

SHOWTHUNDER INC.; TRAILS END

LIMITED PARTNERSHIP,

Plaintiffs-Appellants,

v.

IBT INTERNATIONAL, INC.,

Defendant-Appellee. 

8416 IN THE MATTER OF SOUTHERN CALIFORNIA SUNBELT

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In the Matter of: IBT 

INTERNATIONAL, INC.,

Debtor,

DON GRAMMER; BANYAN LIMITED

PARTNERSHIP; PEAR TREE

PARTNERSHIP; ORANGE BLOSSOM

LIMITED PARTNERSHIP; DAVID

TEDDER; BIRCH INTERNATIONAL

LIMITED PARTNERSHIP; VAN DAN No. 08-56580

LIMITED PARTNERSHIP; CTM  D.C. No. LIMITED PARTNERSHIP; DTG LIMITED

8:06-cv-00276-DDP PARTNERSHIP; GALLERY I INC.;

HAMPTON LIMITED PARTNERSHIP;

KEY ENTERPRISES, INC.; SLEVIN

LIMITED PARTNERSHIP;

SHOWTHUNDER INC.; TRAILS END

LIMITED PARTNERSHIP,

Appellants,

v.

IBT INTERNATIONAL, INC.,

Appellee. 

IN THE MATTER OF SOUTHERN CALIFORNIA SUNBELT 8417

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In the Matter of: SOUTHERN 

CALIFORNIA SUNBELT DEVELOPERS,

INC.,

Debtor,

DON W. GRAMMER; BANYAN

LIMITED PARTNERSHIP; PEAR TREE

LIMITED PARTNERSHIP; ORANGE

BLOSSOM LIMITED PARTNERSHIP;

DAVID TEDDER; BIRCH

INTERNATIONAL LIMITED No. 08-56587

PARTNERSHIP; VAN DAN LIMITED D.C. No. PARTNERSHIP; CTM LIMITED  8:06-cv-00270-DDP PARTNERSHIP; DTG LIMITED

PARTNERSHIP; GALLERY I INC.; OPINION

HAMPTON LIMITED PARTNERSHIP;

KEY ENTERPRISES INC.; SLEVIN

LIMITED PARTNERSHIP;

SHOWTHUNDER INC.; TRAILS END

LIMITED PARTNERSHIP,

Appellants,

v.

SOUTHERN CALIFORNIA SUNBELT

DEVELOPERS, INC.,

Appellee. 

Appeal from the United States District Court

for the Central District of California

Dean D. Pregerson, District Judge, Presiding

Argued and Submitted

February 2, 2010—Pasadena, California

Filed June 9, 2010

8418 IN THE MATTER OF SOUTHERN CALIFORNIA SUNBELT

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Before: Mary M. Schroeder, Raymond C. Fisher and

N. Randy Smith, Circuit Judges.

Opinion by Judge Fisher

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COUNSEL

Thomas W. Dressler (argued), the Dressler Law Group, LLP,

Los Angeles, California, Stella A. Havkin, Litwak & Havkin,

Woodland Hills, California, for the appellants.

William Miles Burd, Burd & Naylor, Santa Ana, California,

C. Michael Chapman, Laguna Niguel, California, Todd Carl

Ringstad (argued), Ringstad & Sanders LLP, Irvine, California, for the appellees.

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OPINION

FISHER, Circuit Judge:

Thirteen entities filed involuntary bankruptcy petitions

against two alleged debtors. After the petitions were dismissed, the alleged debtors filed motions against the petitioning creditors for costs, attorney’s fees and punitive damages

under § 303(i) of the Bankruptcy Code, 11 U.S.C. § 303(i).

The United States Bankruptcy Court for the Central District

of California, Judge Robert W. Alberts presiding, awarded

$745,000 in costs and fees, including costs and fees incurred

by the alleged debtors in litigating the § 303(i) motions themselves (so-called “fees on fees”), and $130,000 in punitive

damages — $65,000 in each action. Relying on its inherent

power, the court also awarded sanctions against Donald

Grammer and David Tedder, two individuals who exercised

control over the petitioning creditors. The court held Grammer and Tedder jointly and severally liable for the alleged

debtors’ costs and attorney’s fees, including the costs and fees

incurred by the alleged debtors in litigating the § 303(i)

motions. Appellants are Grammer, Tedder and the 13 petitioning creditors.

We affirm the judgments against the 13 petitioning creditors. The bankruptcy court properly concluded that § 303(i)

permits an award of attorney’s fees for a § 303 action as a

whole, including fees incurred to litigate claims for fees and

damages under § 303(i)(1) and (2). The court also properly

concluded that § 303(i) permits an award of punitive damages

under § 303(i)(2)(B) in the absence of an award of actual

damages under § 303(i)(2)(A). 

We affirm in part and reverse in part the judgments against

Grammer and Tedder. The bankruptcy court properly held

Grammer and Tedder jointly and severally liable for the costs

and attorney’s fees the debtors incurred in obtaining dismissal

of the involuntary petitions. The bankruptcy court erred, how8422 IN THE MATTER OF SOUTHERN CALIFORNIA SUNBELT

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ever, by holding Grammer and Tedder liable for the debtors’

costs and fees incurred on the § 303(i) motions themselves.

I. Background

Thirteen entities filed involuntary bankruptcy petitions

against IBT International, Inc. (IBT) and Southern California

Sunbelt Developers, Inc. (SCSD) under Chapter 11 of the

Bankruptcy Code, 11 U.S.C. § 303. The petitioning creditors

are Banyon Limited Partnership, Birch International Limited

Partnership, Van Dan Limited Partnership, CTM Limited

Partnership, DTG Limited Partnership, Gallery I, Inc., Hampton Limited Partnership, Key Enterprises, Inc., Orange Blossom Limited Partnership, Pear Tree Limited Partnership,

Slevin Limited Partnership, Showthunder, Inc. and Trails End

Limited Partnership. They are controlled by two individuals,

Donald Grammer and David Tedder. 

The bankruptcy court dismissed the involuntary petition

against SCSD after finding that petitioners’ claims were the

subject of a bona fide dispute. See 11 U.S.C. § 303(b). The

court subsequently dismissed the involuntary petition against

IBT on a motion by petitioning creditors. In its response to

that motion, IBT reserved its right to recover costs, attorney’s

fees and damages under § 303(i) in the event the motion was

granted.

SCSD and IBT thereafter filed motions for costs, attorney’s

fees and punitive damages against petitioning creditors under

§ 303(i). They also sought sanctions against Grammer and

Tedder under Bankruptcy Rule 9011 and the court’s inherent

power. Section 303(i) states:

If the court dismisses a petition under this section

other than on consent of all petitioners and the

debtor, and if the debtor does not waive the right to

judgment under this subsection, the court may grant

judgment — 

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(1) against the petitioners and in favor of

the debtor for — 

(A) costs; or

(B) a reasonable attorney’s fee; or 

(2) against any petitioner that filed the petition in bad faith, for — 

(A) any damages proximately caused by

such filing; or 

(B) punitive damages.

11 U.S.C. § 303(i). SCSD and IBT did not seek damages

under § 303(i)(2)(A).

After a month-long evidentiary hearing on the motions, the

bankruptcy court entered judgment against Grammer, Tedder

and the petitioning creditors and in favor of SCSD and IBT

as follows:

1. Under § 303(i)(1), the court held the 13 petitioning

creditors jointly and severally liable for $745,318 in costs and

attorney’s fees incurred by SCSD and IBT, including costs

and fees they incurred during the post-dismissal proceedings

on the § 303(i) motions themselves. 

2. Under § 303(i)(2)(B), the court found that the petitioning creditors filed the involuntary petitions in bad faith and

held them jointly and severally liable for $130,000 in punitive

damages — $5,000 per creditor per petition. 

3. Finally, under its inherent power to impose sanctions,

the court held Grammer and Tedder jointly and severally liable for the costs and attorney’s fees awarded against the petitioning creditors.

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Grammer, Tedder and the petitioning creditors appealed to

the district court, which affirmed the bankruptcy court’s judgments. We have jurisdiction under 28 U.S.C. § 158(d). We

affirm in part and reverse in part.

II. Standard of Review

We review decisions of the bankruptcy court independently

without deference to the district court’s determinations. Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 705 (9th Cir.

2004). The bankruptcy court’s conclusions of law, including

its interpretation of the Bankruptcy Code, are reviewed de

novo. See In re Salazar, 430 F.3d 992, 994 (9th Cir. 2005);

Higgins, 379 F.3d at 705. We will not disturb a bankruptcy

court’s award of attorney’s fees unless the court abused its

discretion or erroneously applied the law. Higgins, 379 F.3d

at 705.

III. Discussion

Appellants raise three issues: (1) whether the bankruptcy

court erred by awarding attorney’s fees incurred by SCSD and

IBT to litigate the § 303(i) motions; (2) whether the bankruptcy court erred by awarding punitive damages under

§ 303(i)(2)(B) in the absence of an award of actual damages

under § 303(i)(2)(A); and (3) whether the bankruptcy court

erroneously held Grammer and Tedder liable for the attorney’s fees incurred by SCSD and IBT to litigate the motions

for sanctions imposed under the court’s inherent power. We

affirm with respect to the first and second issues. On the third

issue, we agree with appellants.

A. Recovery of Attorney’s Fees Incurred Litigating the

§ 303(i) Motions

The first issue is whether § 303(i) authorizes a recovery of

attorney’s fees incurred litigating a § 303(i) motion. We hold

that it does. We begin by examining whether § 303(i)(1) is a

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fee-shifting provision or a sanctions statute. Then, having

determined that it is a fee-shifting provision, we explain that

§ 303(i)(1) authorizes an award of attorney’s fees incurred litigating claims for attorney’s fees and damages under

§ 303(i)(1) and (2).

1. Section 303(i)(1) Is a Fee-Shifting Provision

[1] The Supreme Court drew a distinction between feeshifting provisions and sanctions statutes in Business Guides,

Inc. v. Chromatic Communications Enterprises, Inc., 498 U.S.

533, 553 (1991). In determining that Federal Rule of Civil

Procedure 11 was a sanctions statute, the Court emphasized

two considerations. First, Rule 11 sanctions were not “tied to

the outcome of [the] litigation.” Id. Instead, the availability of

sanctions turned on whether a “specific filing” was well

founded. Id. Second, Rule 11 sanctions shifted the costs of

only a “discrete” portion of the litigation, rather than the cost

of the litigation as a whole. Id. The Court also distinguished

Rule 11 from fee-shifting statutes in Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 409 (1990).

[2] Applying these and other relevant considerations here,

we hold that § 303(i)(1) is a fee-shifting provision rather than

a sanctions statute. Like other fee-shifting provisions and in

contrast to Rule 11, eligibility for fees turns on the merits of

the litigation as a whole, rather than on whether a “specific

filing” is well founded. In deciding whether to award fees, a

court considers the “totality of the circumstances,” including

“1) ‘the merits of the involuntary petition,’ 2) ‘the role of any

improper conduct on the part of the alleged debtor,’ 3) ‘the

reasonableness of the actions taken by the petitioning creditors,’ and 4) ‘the motivation and objectives behind filing the

petition.’ ” Higgins, 379 F.3d at 707 (quoting In re Scrap

Metal Buyers of Tampa, Inc., 233 B.R. 162, 166 (Bankr. M.D.

Fla. 1999)). Fees may not be awarded unless “the court dismisses a petition.” 11 U.S.C. § 303(i). That is, only a debtor

who has prevailed on the central issue in the proceedings is

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eligible for an award of fees. Fee eligibility is therefore inextricably linked to the proceedings’ dispositive adjudication.

Also, unlike Rule 11, § 303(i) shifts costs for the litigation as

a whole rather than a discrete portion. When a petition is dismissed, a court may grant a debtor “a reasonable attorney’s

fee” — a single fee award presumably covering the entire

action. Id.

[3] Two other considerations support treating § 303(i) as a

fee-shifting provision. First, § 303(i)(1) creates a presumption

in favor of an award of attorney’s fees. “When an involuntary

bankruptcy petition is dismissed, the debtor is presumed to be

entitled to reasonable fees and costs.” In re Maple-Whitworth,

Inc., 556 F.3d 742, 746 (9th Cir. 2009); see Higgins, 379 F.3d

at 707 (explaining that “ ‘any petitioning creditor in an involuntary case . . . should expect to pay the debtor’s attorney’s

fees and costs if the petition is dismissed’ ” and that “an

involuntary debtor’s motion for attorney’s fees and costs

under § 303(i)(1) raises a rebuttable presumption that reasonable fees and costs are authorized” (quoting In re Kidwell,

158 B.R. 203, 217 (Bankr. E.D. Cal. 1993))). Such a presumption is consistent with a fee shifting provision.1

 Second,

and tellingly, § 303(i)(1) does not require a showing of bad

faith. “[B]ad faith is not a prerequisite to awarding attorney’s

fees and costs under § 303(i)(1).” Higgins, 379 F.3d at 706.

2. Section 303(i)(1) Permits an Award of Fees on Fees

Given that § 303(i)(1) is a fee-shifting provision, the bankruptcy court did not err by awarding attorney’s fees incurred

by the alleged debtors in pursuing their claims for attorney’s

fees and damages under § 303(i)(1) and (2) respectively.

1We do not suggest that a presumption is a necessary characteristic of

fee-shifting provisions. See Martin v. Franklin Capital Corp., 546 U.S.

132, 137-39 (2005) (holding that the fee-shifting provision in the federal

removal statute, 28 U.S.C. § 1447(c), does not create a presumption of an

award of fees). 

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[4] First, with respect to fees incurred litigating claims for

attorney’s fees under § 303(i)(1), fees are plainly recoverable.

“In statutory fee cases, federal courts, including our own,

have uniformly held that time spent in establishing the entitlement to and amount of the fee is compensable.” In re Nucorp

Energy, Inc., 764 F.2d 655, 659-60 (9th Cir. 1985). “This is

so because it would be inconsistent to dilute a fees award by

refusing to compensate attorneys for the time they reasonably

spent in establishing their rightful claim to the fee.” Camacho

v. Bridgeport Fin., Inc., 523 F.3d 973, 981 (9th Cir. 2008)

(citing Nucorp, 764 F.2d at 660, and Kinney v. Int’l Bhd. of

Elec. Workers, 939 F.2d 690, 695 (9th Cir. 1991)). The bankruptcy court therefore properly permitted SCSD and IBT to

recover attorney’s fees incurred litigating their entitlement to

fees under § 303(i)(1). See 2 Collier on Bankruptcy

¶ 303.33[4][b] (Alan N. Resnick & Henry J. Sommer eds.,

16th ed. 2009) (explaining that it would be “inconsistent with

the apparent policy of section 303(i)” to preclude a recovery

of “attorney’s fees for collecting an award of costs and fees

under section 303(i)”).2

[5] Second, the bankruptcy court also properly permitted

SCSD and IBT to recover fees incurred litigating claims for

damages under § 303(i)(2). In Commissioner v. Jean, 496

U.S. 154 (1990), the Supreme Court addressed eligibility for

attorney’s fees under the Equal Access for Justice Act

(EAJA), 28 U.S.C. § 2412(d). The Court explained that, with

respect to fee-shifting statutes, a court should “treat[ ] a case

as an inclusive whole, rather than as atomized line-items.”

2

In so holding, we reject appellants’ contention that permitting recovery

of fees on fees fosters a “lottery mentality” and invites debtors to engage

in excessive fee litigation. See Commissioner v. Jean, 496 U.S. 154, 163

(1990) (Equal Access to Justice Act) (“Exorbitant, unfounded, or procedurally defective fee applications . . . are matters that the district court can

recognize and discount.”); Kinney, 939 F.2d at 695 (Labor-Management

Reporting and Disclosure Act) (“The concern that awarding fees for fee

litigation will lead to abuse is . . . groundless. Exorbitant claims can and

will be rejected in the exercise of the court’s broad discretion.”). 

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Jean, 496 U.S. at 161-62. “[O]nly one threshold determination [of fee eligibility] for the entire civil action is to be

made.” Id. at 159. “Thus, absent unreasonably dilatory conduct by the prevailing party in ‘any portion’ of the litigation,

which would justify denying fees for that portion, a fee award

presumptively encompasses all aspects of the civil action.” Id.

at 161 (emphasis added) (quoting 28 U.S.C. § 2412(d)(2)(D)).

Applying this principle here, a bankruptcy court should

make a single determination of fee eligibility under

§ 303(i)(1)(B). If the court finds that the debtor is eligible for

an award of fees, then under Jean the fee award presumptively encompasses all aspects of the § 303 action, including

proceedings on claims under § 303(i)(2).3See In re Glannon,

245 B.R. 882, 894 (D. Kan. 2000) (holding that § 303(i)(1)

“applies to all phases of a § 303 proceeding in which the

bankruptcy petition was dismissed”); In re Landmark Distribs., Inc., 195 B.R. 837, 845 (Bankr. D. N.J. 1996) (“[U]pon

dismissal of an involuntary petition pursuant to section 303(i),

the court may grant judgment against petitioning creditors and

in favor of the alleged debtor for costs and reasonable attorneys’ fees whether related to the alleged debtor’s efforts to

dismiss the petition pursuant to § 303(i)(1), or to prove bad

faith or establish damages pursuant to § 303(i)(2).”); In re

Advance Press & Litho, Inc., 46 B.R. 700, 703 (Bankr. D.

Colo. 1984) (“Preparation for and attendance at the hearing on

attorney’s fees, costs and damages are also part of the matters

which are occasioned as a result of an Involuntary Petition.

As such, they are compensable under § 303(i).”); 2 Collier on

3This does not mean that a debtor will necessarily recover fees incurred

litigating a § 303(i)(2) claim for damages. The eligibility determination

“brings the plaintiff only across the statutory threshold. It remains for the

. . . court to determine what fee is ‘reasonable.’ ” Jean, 496 U.S. at 160-

61 (quoting Hensley v. Eckerhart, 461 U.S. 424, 433 (1983)). The court

retains broad discretion to fashion a fee award under § 303(i). In re MapleWhitworth, 556 F.3d at 746. For example, fees “should be excluded to the

extent that the applicant ultimately fails to prevail in such litigation.” Jean,

496 U.S. at 163 n.10. 

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Bankruptcy, supra, ¶ 303.33[4][b] (“[A] court has considerable discretion in determining fees under section 303(i), and

that discretion is sufficient to enable the court to award attorney’s fees in the right situation for services rendered in conjunction with section 303(i)(2).”).4

Our conclusion is consistent with our recent opinion in

Sternberg v. Johnston, 595 F.3d 937 (9th Cir. 2010), which

held that a debtor was not entitled to attorney’s fees incurred

in pursuing damages from a violation of the automatic stay

under 11 U.S.C. § 362(k)(1), because those damages were

“akin to an ordinary damages action, for which attorney fees

are not available under the American Rule.” Id. at 948. Sternberg is inapplicable here because § 303(i)(1) is a fee-shifting

provision, not a damages provision. The distinction here is

between those statutes which permit recovery of attorney’s

fees “as damages,” id. at 946, and which are therefore “consistent with the American Rule,” id., and those which permit

the recovery of attorney’s fees qua attorney’s fees and therefore create an exception to the American Rule. Section

303(i)(1) falls into the second category because, rather than

providing for an award of attorney’s fees as damages to compensate an individual injured by a wrongful act, its very function is to reallocate the costs of litigation to the prevailing

debtor and to thus supersede the American Rule. Unlike

§ 362(k)(1), which provides for recovery of “actual damages,

including . . . attorneys’ fees,” § 303(i) provides for an award

of “a reasonable attorney’s fee” or, if the petition was filed in

bad faith, “any damages proximately caused by such filing.”

Were § 303(i)(1) within the former category, it would be

“akin to an ordinary damages action,” and therefore subject to

the American Rule. Id. at 948. Because it is a fee-shifting provision, however, it is subject to the general rule that “[i]n stat4Having held that § 303(i) is a fee-shifting provision rather than a sanctions statute, we reject appellants’ contention that this case is controlled

by Cooter & Gell, 496 U.S. at 406-07, and Lockary v. Kayfetz, 974 F.2d

1166, 1178 (9th Cir. 1992), decisions addressing sanctions. 

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utory fee cases, . . . time spent in establishing the entitlement

to and amount of the fee is compensable.” In re Nucorp

Energy, Inc., 764 F.2d at 659-60.

Appellants do not challenge the fee awards on any other

bases. They do not contend that they successfully rebutted the

presumption in favor of fees or challenge the amount of the

fee awards. We therefore affirm the bankruptcy court’s

awards of attorney’s fees.

B. Punitive Damages

Appellants challenge the bankruptcy court’s award of punitive damages on two bases. First, they contend that federal

common law precludes an award of punitive damages in the

absence of an award of actual damages. Second, they argue

that, “in the absence of a compensatory damage award, the

ratio between punitive and compensatory damages is infinite,

and per se violative of the constitutional proportionality

requirement.” We reject appellants’ arguments and uphold the

bankruptcy court’s punitive damages awards.

1. Federal Common Law

[6] Under the federal common law, punitive damages are

recoverable in the absence of actual damages where authorized by statute. See Siddiqui v. United States, 359 F.3d 1200,

1203 (9th Cir. 2004) (explaining that punitive damages are

available where “Congress has expressly authorized an award

of punitive damages in the absence of proof of actual damages”); Anderson v. United Fin. Co., 666 F.2d 1274, 1278

(9th Cir. 1982) (holding that “punitive damages may be

awarded even absent a showing of actual damages” under the

Equal Credit Opportunity Act, 15 U.S.C. § 1691e(b)); see

also Van Alstyne v. Elec. Scriptorium, Ltd., 560 F.3d 199, 209

(4th Cir. 2009) (holding that the Stored Communications Act,

18 U.S.C. § 2707, authorizes an award of punitive damages

absent a showing of actual damages).

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[7] These authorities control here. Section 303(i)(2)

expressly authorizes a stand alone award of punitive damages.

Under § 303(i)(2), a court may award actual or punitive damages, without limitation; the sole precondition is a showing of

bad faith. 11 U.S.C. § 303(i)(2). As our Bankruptcy Appellate

Panel has explained, “[t]he Bankruptcy Code specifically

authorizes punitive damages ‘even in the absence of or in

addition to actual damages.’ ” In re Wavelength, Inc., 61 B.R.

614, 621 (B.A.P. 9th Cir. 1986) (quoting In Re Advance

Press, 46 B.R. at 706); see In re Macke Int’l Trade, Inc., 370

B.R. 236, 256 (B.A.P. 9th Cir. 2007) (“[T]he bankruptcy

court can allow punitive damages without having to award

compensatory or actual damages, or in addition to those damages.”); 2 Collier on Bankruptcy, supra, ¶ 303.33[3] (“A

debtor can recover punitive damages under section

303(i)(2)(B) even if there is no finding of actual damages

under section 303(i)(2)(A).”); H.R. Rep. No. 95-595, at 324

(1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6280 (“The

court may grant any or all of the damages provided for under

the provision.”); S. Rep. No. 95-989, at 34 (1978), reprinted

in 1978 U.S.C.C.A.N. 5787, 5820 (same).

[8] We therefore hold that punitive damages may be

awarded under § 303(i)(2)(B) even absent an award of actual

damages under § 303(i)(2)(A).

2. Due Process

Appellants also contend that an award of punitive damages

in the absence of an award of actual damages constitutes a

“per se” violation of due process because the ratio of punitive

to actual damages is infinite. We disagree.

In Mendez v. County of San Bernardino, 540 F.3d 1109,

1120-22 (9th Cir. 2008), we rejected a due process challenge

to $5,000 in punitive damages awarded despite only $1 in

nominal damages. We see no constitutionally significant dis8432 IN THE MATTER OF SOUTHERN CALIFORNIA SUNBELT

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tinction between the award in that case and the awards here

of $5,000 per petitioner as against $0 in actual damages.5

[9] Furthermore, we do not accept appellants’ premise that

the relevant ratio in this case is infinite. The due process

inquiry compares the punitive damages awarded to the harm

caused by the wrongful act, not merely to the actual damages

awarded. See Mendez, 540 F.3d at 1121 (“[W]e look to the

ratio between the punitive damages and the actual harm

inflicted on the plaintiff.”). In this case, the petitioners’ bad

faith filings caused SCSD and IBT to defend two involuntary

petitions. The costs of defense, which exceeded $170,000 and

which SCSD and IBT recovered as part of their fee award,

constitute tangible harm caused by the petitioners’ bad faith

filings. When we take those costs into account, the ratio of

punitive damages to the actual harm — $130,000 to $170,000

— is less than 1:1 and plainly falls within constitutional

bounds. We therefore reject appellants’ contention that the

award of punitive damages in this case is a per se violation of

due process based on the ratio of punitive to actual damages

awarded.

Appellants do not challenge the bankruptcy court’s punitive

damages awards on any other bases. They do not dispute the

court’s findings of bad faith or contend that the awards are

unconstitutional under the remaining guideposts discussed in

State Farm Mutual Automobile Insurance Co. v. Campbell,

538 U.S. 408, 418 (2003). Accordingly, we affirm the bankruptcy court’s awards of punitive damages.

5The bankruptcy court awarded $65,000 in punitive damages to SCSD

and $65,000 to IBT. Given that there are 13 petitioning creditors, the

award is equivalent to an award of $5,000 against each petitioner for each

involuntary petition. 

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C. Sanctions Imposed under the Court’s

Inherent Power

Finally, appellants Grammer and Tedder contend that the

bankruptcy court improperly included the costs of litigating

the motions for sanctions in the costs and fees the court

ordered them to pay under its inherent power to impose sanctions. We agree.

[10] In Cooter & Gell v. Hartmarx Corp., 496 U.S. 384,

406-07 (1990), the Supreme Court held that Federal Rule of

Civil Procedure 11 did not authorize recovery of attorney’s

fees incurred to defend an award of Rule 11 sanctions on

appeal. Relying on language in the version of Rule 11 in

effect at that time, the Court reasoned that Rule 11 sanctions

were limited to “those expenses directly caused” by the

improper filing, which did not include costs of appeal. Id. We

extended that principle in Lockary v. Kayfetz, 974 F.2d 1166

(9th Cir. 1992). In Lockary, the district court imposed sanctions against the plaintiffs’ law firm under its inherent power

rather than Rule 11. Id. at 1170. The sanctions included not

only the costs incurred by the defendants to oppose the plaintiffs’ improper filings, but also “the defendants’ cost of preparing and supporting their motion for sanctions.” Id. at 1177.

The law firm appealed and, relying on Cooter & Gell, we

reversed:

Cooter & Gell suggests that the trial court should

limit sanctions to the opposing party’s more “direct”

costs, that is, the costs of opposing the offending

pleading or motion. We thus find that the district

court erred in including the defendants’ attorneys’

fees for preparing their motion for sanctions in the

sanctions it imposed.

Id. at 1178.6

6We reject appellees’ contention that Lockary has been overruled by

Margolis v. Ryan, 140 F.3d 850 (9th Cir. 1998), with respect to sanctions

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[11] As applied here, the bankruptcy court properly held

Grammer and Tedder jointly and severally liable for the costs

and attorney’s fees incurred by SCSD and IBT to secure dismissal of the involuntary petitions. The bankruptcy court

erred, however, by holding Grammer and Tedder liable for

the costs and fees incurred by SCSD and IBT on the postdismissal motions themselves. We therefore affirm in part and

reverse in part the judgments against Grammer and Tedder.

IV. Conclusion

The bankruptcy court properly awarded costs, attorney’s

fees and punitive damages against the 13 petitioning creditors.

The bankruptcy court properly held Grammer and Tedder

jointly and severally liable for the fees and costs SCSD and

IBT incurred to obtain dismissal of the involuntary petitions,

but erroneously held Grammer and Tedder jointly and severally liable for the fees and costs SCSD and IBT incurred to

litigate the post-dismissal motions. We therefore affirm in

part and vacate in part the order of the district court affirming

the opinion of the bankruptcy court. We remand to the district

court with instructions to remand to the bankruptcy court to

amend the judgments against Grammer and Tedder accordingly. 

Appellants’ request for judicial notice is DENIED. Appellees’ motion to strike is DENIED. 

Costs of appeal are awarded to appellees.

imposed under the court’s inherent power. In Margolis, the court interpreted Lockary as imposing a restriction on sanctions imposed under Rule

11. See Margolis, 140 F.3d at 854-55 (“Under Lockary, the attorneys’ fees

and costs associated with bringing a motion for sanctions under Fed. R.

Civ. P. 11 should not be included in the award because they are not direct

costs of opposing an offending pleading.”). Therefore, although Margolis

is binding circuit precedent, its conclusion that “[t]he rule in Lockary . . .

is no longer good law” has no effect here because this is not a Rule 11

case. 

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AFFIRMED IN PART, VACATED IN PART, and

REMANDED.

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