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*

 This disposition is not appropriate for publication.

Although it may be cited for whatever persuasive value it may

have (see Fed. R. App. P. 32.1), it has no precedential value. 

See 9th Cir. BAP Rule 8013-1.

-1-

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. EC-12-1471-JuMkD

) BAP No. EC-12-1485-JuMkD

WEST COAST REAL ESTATE & ) BAP No. EC-12-1493-JuMkD

MORTGAGE INC., ) BAP No. EC-12-1498-JuMkD

) (cross appeals)

 Debtor. )

______________________________) Bk. No. 12-30686

DON SMITH; HOWARD BROWN, III; )

WEST COAST REAL ESTATE & )

MORTGAGE INC., )

)

 Appellants/Cross-Appellees,)

)

v. ) M E M O R A N D U M*

)

SA CHALLENGER, INC., )

)

 Appellee/Cross-Appellant, )

)

DOUGLAS M. WHATLEY, Trustee; )

UNITED STATES TRUSTEE, )

)

 Appellees. )

______________________________)

Argued and Submitted on March 22, 2013

at Sacramento, California 

Filed - May 22, 2013

Appeal from the United States Bankruptcy Court

for the Eastern District of California

Honorable Robert S. Bardwil, Bankruptcy Judge, Presiding _______________________

Appearances: Garland O’Bryan Bell, Jr., Esq. argued for

Appellants Don Smith, Howard Brown, III, and West

Coast Real Estate & Mortgage Inc.; Joshua D.

Wayser, Esq. of Katten Muchin Rosenman LLP,

argued for Appellee SA Challenger, Inc. _________________________

FILED

MAY 22 2013

SUSAN M SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT
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1

 Unless otherwise indicated, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 

“Rule” references are to the Federal Rules of Bankruptcy

Procedure and “Civil Rule” references are to the Federal Rules of

Civil Procedure.

2

 Appellees, Douglas M. Whatley, the chapter 7 trustee for

West Coast, and the United States Trustee (UST) have not

participated in these matters.

-2-

Before: JURY, MARKELL and DUNN, Bankruptcy Judges.

These appeals and cross-appeals arise from two sanctions

orders in favor of Appellee, SA Challenger, Inc. (SACI), and

against Appellants, Don Smith (Smith), Howard Brown, III (Brown)

and chapter 111 debtor, West Coast Real Estate & Mortgage Inc.

(West Coast)(collectively, Appellants), in the amount of $20,000

to be paid jointly and severally. 

Appellants argue that the bankruptcy court abused its

discretion in awarding the sanctions under § 105 because the

$20,000 award was punitive in nature and the amount arbitrary

and lacking evidentiary support. SACI cross-appeals,2

 also

arguing that the bankruptcy court abused its discretion in

determining the amount of the sanctions. According to SACI, the

record supports an award of $134,885.82, which includes

$33,459.82 in attorneys’ fees and $101,436.00 in missing rents

that were unaccounted for and constituted SACI’s cash

collateral.

We agree with Appellants that the sanctions award appears

arbitrary because the bankruptcy court did not explain how it

arrived at the $20,000 amount which it based on SACI’s
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reasonable attorneys’ fees. As a result, we are unable to

determine how the court exercised its discretion and thus cannot

conduct a meaningful review of the award. We therefore VACATE

the sanctions orders and REMAND to the bankruptcy court so that

it can make additional findings and explain its conclusions

regarding the amount of the award. We do not express any

opinion whether the amount of the sanctions previously awarded

based on SACI’s attorneys’ fees should or should not be changed. 

Because of our remand, we conclude that SACI’s crossappeals challenging the amount of the sanctions awarded based on

its attorneys’ fees are moot. However, on the issue of

sanctions based on the missing rents, we AFFIRM the bankruptcy

court’s decision for the reasons discussed below.

I. FACTS AND PROCEDURAL BACKGROUND

The facts leading up to the entry of the sanctions orders

are a textbook example of bad faith. Appellants’ conduct that

gave rise to the sanctions involved the transfer of real

property owned by chapter 11 debtor, Sundance Eldorado SelfStorage LP (Sundance). Sundance, through Brown, transferred the

property by grant deed to West Coast after U.S. Bank (Bank)

obtained relief from the automatic stay in Sundance’s bankruptcy

and on the eve of the Bank’s foreclosure. The transfer of the

property was immediately followed by West Coast’s filing of a

chapter 11 petition, signed by Smith, the 100% owner of West

Coast and its president. Needless to say, West Coast’s

bankruptcy filing halted the Bank’s efforts to foreclose on the

property due to the imposition of the automatic stay. The facts

relating to the transfer of the real property are not disputed
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3 Many of the facts are taken from the bankruptcy court’s

written rulings dated June 27, 2012, and August 29, 2012.

-4-

on appeal3 and are as follows.

Sundance was a self storage business located in Eldorado

Hills, California. On January 12, 2007, Pacific National Bank

(PNB) loaned $5.95 million (Loan) to Sundance. The Loan was

secured by a deed of trust, assignment of rents, security

agreement, and fixture filing recorded against Sundance’s real

property. At Sundance’s request, PNB modified the Loan three

times over two years. After the last modification, the Federal

Deposit Insurance Corporation placed PNB into receivership and

the assets of PNB, including the Loan, were sold to the Bank. 

Sundance defaulted on the Loan in February 2010. 

Sundance’s First Bankruptcy Case

On May 31, 2010, Sundance filed a chapter 11 petition. The

bankruptcy court dismissed the case because Sundance did not

file the required documents. After dismissal, the Bank filed a

Notice of Default and Election to Sell Under Deed of Trust with

respect to the property.

Sundance’s Second Bankruptcy Case

On June 25, 2010, Sundance filed a second chapter 11

petition, Case No. 10-36676 (Second Sundance Bankruptcy). Smith

signed the petition as manager of operations. On July 19, 2010,

the Bank filed its first motion for relief from the automatic

stay.

Sundance then filed a motion to use the Bank’s cash

collateral. Because Sundance was in the process of finding a
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buyer for the property, the Bank agreed that Sundance could use

its cash collateral with the qualification that such use

terminated if the Bank obtained relief from stay. The Bank also

required Sundance to pay 60% of its monthly interest payment on

its Loan. Sundance could not secure a buyer. 

After an unsuccessful second motion for relief from stay,

the Bank sought relief from stay for a third time on June 15,

2011. The latter motion was continued several times to give

Sundance the opportunity to reorganize the property. 

On January 17, 2012, Sundance filed its third amended plan

and disclosure statement. Peninsula Capital Group Inc.

(Peninsula) was the general partner for Sundance and a joint

proponent of the plan along with Brown, who was the owner and

sole officer of Peninsula. Peninsula was seen as a potential

source of new funding and guarantor of the plan. 

On March 28, 2012, the bankruptcy court held an evidentiary

hearing on plan confirmation and took the matter under

submission.

On April 12, 2012, the bankruptcy court issued a Memorandum

Decision granting the Bank relief from stay and denying

confirmation of Sundance’s plan of reorganization. In granting

the Bank relief from stay, the court found, among other things,

that: (1) Sundance defaulted under the terms of the Loan

documents; (2) Sundance’s plan was not feasible and likely would

be followed by liquidation; and (3) Sundance lacked equity in

the property, a plan was unlikely to be confirmed, and the

property was not necessary to an effective reorganization. The

court entered the order granting the Bank relief from stay on
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4 In their opening brief, Appellants contend that the

injunction was not granted because their attorney was unable to

obtain the documents and declarations that would have shown that

the Bank had “probably” made misrepresentations of the Loan

obligation to Sundance and the bankruptcy court. None of those

documents or declarations are in the record on appeal.

-6-

April 12, 2012.

The Bank scheduled the foreclosure sale on June 5, 2012.

On April 23, 2012, the UST filed a motion to dismiss or

convert Sundance’s case to chapter 7. Brown filed a response in

favor of dismissal and opposing conversion and Sundance

submitted declarations asking the bankruptcy court to stop the

Bank’s foreclosure.

The State Court Lawsuit

On April 30, 2012, two weeks after the bankruptcy court

entered its Memorandum Decision, Sundance filed a complaint and

application for injunctive relief in the El Dorado County

Superior Court (State Court) to enjoin the Bank’s then-scheduled

June 5, 2012 foreclosure sale. Smith filed a declaration in

support of the application and served as Sundance’s

representative at the related hearings. Following two hearings,

on May 24, 2012, the State Court denied injunctive relief.4 The

Bank continued with its foreclosure efforts.

The Transfer of Sundance’s Property

On May 24, 2012, the same day that the State Court denied

Sundance injunctive relief, Sundance transferred its real

property by grant deed to West Coast. Brown, in his individual

capacity, signed the grant deed on Sundance’s behalf. The grant

deed was recorded on May 29, 2012, in the County of El Dorado as
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5 Brown’s attorney, Mr. Isley, later stated at the

August 29, 2012 sanctions hearing that at the time of the hearing

on the dismissal or conversion of Sundance’s Second Bankruptcy

case, he had “no clue” that “any of this stuff had happened” and

that he “didn’t hear about it until probably several weeks

later.” Hr’g Tr. 8/29/12 at 11:15-23.

-7-

DOC-2012-0025784-00.

The Conversion Hearing

On May 30, 2012, the bankruptcy court heard the UST’s

motion to dismiss or convert the Second Sundance Bankruptcy

case. The court granted the UST’s request for conversion. 

Although Brown’s attorney appeared at the hearing, he did not

inform the bankruptcy court, the Bank, or the UST’s office that

the property had been transferred.5

 The bankruptcy court

entered a minute order dated June 4, 2012, converting the case

to chapter 7.

West Coast’s Bankruptcy Case

The same day that Sundance’s case was converted, West Coast

filed a chapter 11 petition, which Smith signed as President. 

Smith was also the 100% owner of West Coast. The schedules

listed the property transferred by Sundance as West Coast’s only

asset and listed as creditors only the Bank and a few others

with minor debts. The income listed in the past two years was

“Debtor Loss on Property.” West Coast described the nature of

its business as real estate and mortgage without mentioning a

self-storage facility or relationship to the Second Sundance

Bankruptcy.

The next day, the Bank filed a Notice of Claim to Rents,

alerting all interested parties that the rents from the property
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could not be used for any purpose. 

On June 8, 2012, the Bank filed an Expedited Motion for

Relief From the Automatic Stay and For Sanctions Against Don

Smith and West Coast. The motion sought relief from the

automatic stay based upon the transfer of the property followed

by West Coast’s bad faith bankruptcy filing. The Bank sought

sanctions against Smith and West Coast, with the amount left for

later determination, on the grounds that Smith had willfully

disobeyed the bankruptcy court’s relief from stay order in the

Second Sundance Bankruptcy case when he transferred the property

outside the ordinary course to West Coast one week before the

foreclosure and West Coast then, in bad faith, filed the

bankruptcy to hinder and delay the Bank’s foreclosure. The Bank

also sought dismissal of West Coast’s case under the bankruptcy

court’s inherent power to sanction.

In support of its motion, the Bank submitted the

declaration of Jessica M. Mickelsen. Mickelsen — one of the

attorneys representing the Bank — declared that as a result of

West Coast’s filing, the Bank had incurred approximately $15,000

in attorneys’ fees and costs.

On June 12, 2012, West Coast filed a motion to use the

Bank’s cash collateral. The motion did not mention the history

of Sundance’s previous use of the Bank’s cash collateral nor did

it mention that the Bank’s permission to use the cash collateral

had expired when the bankruptcy court granted the Bank’s motion

for relief from stay in the Second Sundance Bankruptcy. The

motion also failed to disclose the transfer of the real property

from Sundance to West Coast.
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6 The bankruptcy court denied West Coast’s cash collateral

motion by minute order entered July 2, 2012.

-9-

The Bank opposed the cash collateral motion on several

grounds: (1) the bad faith transfer of the property; (2) West

Coast’s bad faith failure to account for at least $23,895.82 of

cash collateral as of June 2012, which West Coast apparently

acquired from Sundance as a result of the transfer of the

property; and (3) the flawed budget that West Coast submitted,

including substantially decreased payments to the Bank (from

$23,500 per month, which is what Bank received before Sundance

stopped paying, to $13,167 per month). 

In the end, the Bank argued that West Coast’s bad faith

acts in hiding cash collateral warranted sanctions under § 105,

including the dismissal of the case. In support of this latter

request and allegations regarding the missing rents, the Bank

submitted Mickelsen’s declaration which stated that Sundance had

not filed monthly operating reports since March 2012.

On June 27, 2012, the bankruptcy court heard the Bank’s

expedited motion for relief from stay and sanctions and West

Coast’s motion to use cash collateral.6 Prior to the hearing,

the court had issued a tentative ruling granting the motion. 

After hearing oral argument, the bankruptcy court adopted its

tentative ruling and issued an amended written ruling. There,

the court concluded that the attempted transfer of the property

by Sundance to West Coast was in bad faith as to the Bank and

the other creditors and renters of Sundance. The court found

that as to the Bank, the purported transfer was an attempt to
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hinder and delay its foreclosure proceeding after Sundance’s

two-year attempt to confirm a plan while under the protection of

the automatic stay. As to the renters, the bankruptcy court

observed that the transfer of the property put those parties in

a position of owing rent to Sundance’s bankruptcy estate, while

at the same time, West Coast would be attempting to collect

their rent. As to the other creditors, the court found the

transfer was an attempt to retain the property and its benefits

while divesting the property owner of any obligations to those

creditors. Finally, the bankruptcy court found West Coast’s

failures to give notice of its case to any of the renters or

creditors as further indicia of bad faith.

In addition, the court did not overlook Smith’s role in

facilitating the transfer of the property. The court observed

that Smith was the president of West Coast while simultaneously

acting as operations manager for Sundance and had full knowledge

that Sundance was a chapter 11 debtor-in-possession when he

orchestrated the transfer.

For all these reasons, the bankruptcy court found it

appropriate to issue sanctions against West Coast and Smith in

the amount of the Bank’s reasonable attorneys’ fees and costs

incurred in connection with West Coast’s case. In the end, the

court stated that it would also award sanctions against Brown

for his complicity in these acts. The bankruptcy court set a

further hearing to determine the amount of the sanctions for

August 29, 2012.

After the Bank obtained relief from stay, it assigned the

deed of trust and loan documents to SACI, a related entity to
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7 Hereinafter when we refer to the Bank such references

apply equally to SACI and vice versa.

-11-

the Bank.7 SACI foreclosed on the property by credit bid on

June 29, 2012.

On July 31, 2012, Smith filed opposition to the Bank’s

motion for sanctions. Smith admitted that the transfer took

place but claimed that he did not know that the property could

not be sold subject to existing financing without court

approval. Smith also maintained that he paid expenses from his

private funds to run the business so as not to use any cash

collateral. As further justification for his conduct, Smith

contended that he believed the transfer of the property was the

only way to bring the Bank’s fraudulent actions before the

court. Finally, Smith asserted that there was no competent

evidence before the bankruptcy court to support an award of

attorneys’ fees to the Bank. Smith filed a separate pleading

objecting to Mickelsen’s declaration on the grounds that

(1) there was no foundation to support her assertion that the

Bank had incurred approximately $15,000 in fees and (2) her

statement was hearsay.

On August 1, 2012, SACI filed a motion for sanctions in

West Coast’s bankruptcy against Brown for his complicity in the

bad faith transfer of the property based on the bankruptcy

court’s inherent authority under § 105. SACI alleged that Brown

(1) signed the grant deed that documented the transfer of the

property from Sundance to West Coast on the same day that the

State Court denied Sundance’s request to enjoin the foreclosure
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of the property and six days before the UST’s motion to dismiss

or convert hearing in the Second Sundance Bankruptcy; (2) failed

to disclose the transfer to the bankruptcy court at the

dismissal/conversion hearing, despite the facts that the

transfer occurred six days earlier, was recorded the day before

the hearing, and counsel for Brown appeared at the hearing and

presented argument; and (3) failed to seek approval from the

bankruptcy court before transferring the property. Based on

these acts, SACI sought sanctions against Brown in the amount of

$147,078.82 that consisted of its legal fees and costs and

missing rents for the months of June, July, and August 2012,

which constituted its cash collateral. 

SACI submitted the declaration of Joshua D. Wayser, counsel

for SACI, in conjunction with its motion. Wayser declared that

he reviewed his firm’s bills for the months of June and July

2012 and as of July 27, 2012, the fees totaled $33,459.82. 

Attached to Wayser’s declaration were redacted bills evidencing

the charges. Wayser further sought as sanctions the missing

rents in the estimated amount of $113,619. That amount was

subsequently reduced to $101,436 based upon $12,183 SACI

received after taking possession of the property on August 6,

2012. Wayser declared that SACI was seeking the missing rents

as sanctions because it otherwise would have been entitled to

collect the rents for those months had the transfer of the

property and subsequent bankruptcy not occurred and had SACI

been allowed to timely foreclose on the property. 

On August 13, 2012, the UST filed a statement regarding the

Bank’s motion for sanctions and related declaration of Smith. 
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The UST stated that the unauthorized transfer of the property

was an egregious breach of duty on the part of the responsible

representatives of Sundance. Beyond this, the UST did not take

a position on the motion. However, the UST pointed out that

Smith’s declaration should not be read to imply that Smith did

not know that the transfer of the property had been recorded at

the time he met with the UST. Smith declared that he learned

about the recording on the afternoon of May 30, 2012, but he met

with the UST after that date and did not inform counsel for the

UST about the transfer of the property. Attached to the UST’s

statement of position was the declaration of Jason Blumberg

which verified the meeting date between Smith and the UST. 

On the same date, SACI filed a reply in support of the

motion for sanctions against Smith. SACI pointed out that Smith

continued to thwart SACI’s exercise of ownership rights over the

foreclosed property. SACI maintained that due to Smith’s

actions, it filed an adversary proceeding against him seeking a

temporary restraining order (TRO) and preliminary injunction

which the bankruptcy granted on August 1, 2012, and August 13,

2012, respectively. Based on Smith’s conduct, SACI argued that

significant sanctions were warranted to deter his conduct. 

According to SACI, there were no mitigating factors — Smith had

been through two personal bankruptcies and thus plainly had

knowledge of the bankruptcy process and the necessity for

obtaining court approval for certain transactions. In the end,

SACI requested the bankruptcy court to award it not only the

full amount of its attorneys’ fees and costs, but also the

amount for the missing rents. 
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On August 15, 2012, Brown filed an opposition to SACI’s 

motion for sanctions. Brown asserted that the bankruptcy court

should abstain from exercising jurisdiction over the tort

(sanctions) claim of SACI. Brown argued that he and Peninsula

were outside third parties and had no involvement with the West

Coast proceedings and that a judgment against Brown would have

no possible effect on West Coast’s rights or the handling of its

estate. According to Brown, the third party action should be

taken in state court. He further argued that the sanctions

motion required an adversary proceeding because SACI sought to

essentially have Brown turn over all income from the property

allegedly received by Sundance and West Coast for the months of

June, July and August 2012. Brown also maintained that he did

not have any personal involvement because he signed the grant

deed in his capacity as president of Peninsula. 

Finally, Brown argued that there was no evidence submitted

to support SACI’s claim of damages for the missing rents nor was

SACI entitled to assert a cash collateral claim after the

trustee’s sale which extinguished the note and deed of trust. 

With respect to the attorneys’ fees, Brown complained that

Wayser’s hourly rate of $675 was far above sums awarded to

attorneys in the Eastern District of California. Brown further

pointed out that the billing statements were improper because

the services were lumped together, the descriptions insufficient

to understand what services were performed, and the hours were

not revised despite some entries being redacted.

On August 15, 2012, West Coast also filed opposition to the

Bank’s sanctions motion. West Coast’s opposition simply
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incorporated Smith’s and Brown’s arguments set forth in their

memoranda.

On August 20, 2012, Smith filed a sur-reply to the Bank’s

motion for sanctions. Smith argued that Wayser’s declaration

should be stricken because Wayser had not stated facts that

would establish a foundation for the estimated attorneys’ fees

and furthermore, the declaration constituted hearsay. Smith

also reiterated some of Brown’s arguments; i.e., that Wayser’s

hourly rate was too high and the billing statements did not have

detailed time and expense entries. In addition, Smith contended

that SACI’s claim of missing rents was a “new matter” because it

was not contained in the Bank’s original motion for sanctions

and thus should be stricken. On the same day, Smith filed a

separate pleading containing his evidentiary objections to

Wayser’s declaration.

The bankruptcy court then issued a tentative ruling

finding, among other things, that SACI incurred attorneys’ fees

of at least $20,000 due to Smith’s and Brown’s actions, and that

such amount should be payable jointly and severally by Smith,

Brown and the debtor. 

At the August 29, 2012 sanctions hearing, Smith’s attorney,

Mr. Bell, requested the bankruptcy court to rule on Smith’s

evidentiary objections. Bell also maintained that Smith was

unable to pay the $20,000 award due to Smith’s personal

bankruptcy which he had filed a few years before. Finally, Bell

asserted that $5,000 would be appropriate due to the lack of

evidence supporting the larger award and the circumstances of

the case. Brown’s attorney, Isley, essentially reiterated the
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8

 Recall that the adversary related to SACI’s motion for a

TRO and preliminary injunction against Smith who continued to

thwart SACI’s attempts to gain possession of the property after

SACI foreclosed.

-16-

arguments set forth in Brown’s pleadings as mentioned above. 

Wayser responded by first noting that his firm gave a 15%

discount on all the fees so that the $675 hourly rate was not

accurate. Next, Wayser argued that as to the amount of the

fees, they provided the bills and did not seek any of the

attorneys’ fees in the related adversary proceeding against

Smith.8

The bankruptcy court stated that none of the arguments had

changed its previous view of the case. The court took the

matter under submission and, on the same day, issued final

rulings in the matters. With respect to Brown, the bankruptcy

court found: (1) Brown’s conduct in signing the grant deed in

favor of West Coast constituted bad faith and willful misconduct

sufficient to justify an award of sanctions against him under

the court’s inherent power; (2) Brown breached his fiduciary

duties to the Sundance bankruptcy estate and its creditors; and

(3) no adversary proceeding was needed because the matter did

not involve turnover of funds, but was instead a request for an

award of sanctions under the court’s inherent power. The

bankruptcy court granted SACI’s motion in part by awarding its

reasonable attorneys’ fees in the sum of $20,000 against

Appellants, jointly and severally. The court stated that the

fees incurred were for the Bank’s motion for relief from stay

and to dismiss West Coast’s case, for seeking sanctions against
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West Coast and Smith, and for SACI’s motion for sanctions

against Brown. The bankruptcy court did not further elaborate

as to how it arrived at the $20,000 amount.

In a separate ruling concerning West Coast and Smith, the

bankruptcy court found: (1) Smith’s explanations regarding the

transfer of the property were not credible; (2) West Coast’s and

Smiths’ conduct in initiating and completing the transfer of the

property and the filing of the chapter 11 petition constituted

bad faith and willful misconduct sufficient to justify an award

of sanctions against them; and (3) the amount of $20,000 to be

paid jointly and severally with Brown was an appropriate

sanction.

In addressing SACI’s request for sanctions in the amount of

the missing rents, the bankruptcy court noted that after the

foreclosure, the real property and rights to its rents were no

longer property of the estate. Due to this fact and relying on

Fietz v. Great W. Sav. (In re Fietz), 852 F.2d 455, 457 (9th

Cir. 1988), the bankruptcy court stated it was not persuaded

that it had jurisdiction to award sanctions for conduct that

interfered with SACI’s rights to the real property and the

rental income post-foreclosure. 

However, the bankruptcy court, assuming for the purpose of

ruling that it had jurisdiction, denied SACI’s request for

sanctions in the amount of the missing rents. The court

reasoned that any damages arising from post-foreclosure conduct

were between SACI, on the one hand, and West Coast, Smith and

Brown, on the other, and any connection with the bankruptcy

estate was tangential at best. The bankruptcy court’s decision
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9

 The orders provided that the sanctions were payable no

later than September 20, 2012. It does not appear that

Appellants obtained a stay pending appeal and there is no

indication in the record that any of the sanctions award has been

paid by either Smith or Brown.

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was without prejudice to SACI’s right to seek, in another court,

an award of additional amounts on account of rents lost as a

result of West Coast’s and Smith’s post-foreclosure conduct, and

without prejudice to SACI’s right to seek, in another court, an

award of damages or other relief on any other basis.

The bankruptcy court entered the two orders granting

sanctions in favor of SACI and against Appellants on August 30,

2012.9

 The order entered in connection with the Bank’s motion

awarded sanctions against West Coast and Smith (Smith Order). 

The order entered with respect to SACI’s motion awarded

sanctions against Brown (Brown Order). Both orders indicate

that a single sanction in the amount of $20,000 was imposed

against the Appellants and is payable jointly and severally. 

Appellants filed a single notice of appeal for both the

sanctions orders on September 12, 2012. The Smith Order was

assigned BAP No. EC-12-1471 and the Brown Order was assigned BAP

No. EC-12-1485. 

SACI filed a notice of cross-appeal from both orders on

September 26, 2012. The cross-appeal of the Smith Order was

assigned BAP No. EC-12-1493 and the cross-appeal of the Brown

Order was assigned BAP No. EC-12-1498.

II. JURISDICTION

The bankruptcy court had jurisdiction over this proceeding

under 28 U.S.C. §§ 1334 and 157(a) and (b)(1). We have
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jurisdiction under 28 U.S.C. § 158.

III. ISSUES

A. Whether the bankruptcy court abused its discretion in

awarding sanctions in the amount of $20,000 against Appellants;

and

B. Whether the bankruptcy court abused its discretion in

denying SACI’s request for sanctions based on the amount of

missing rents which constituted SACI’s cash collateral. 

IV. STANDARDS OF REVIEW

An award or denial of sanctions under § 105(a) is reviewed

for abuse of discretion. Nash v. Clark Cnty. Dist. Attorney’s

Office (In re Nash), 464 B.R. 874, 878 (9th Cir. BAP 2012). The

appropriateness of the amount of the sanctions imposed also is

reviewed for an abuse of discretion. Asher v. Film Ventures

Int’l, Inc. (In re Film Ventures Int’l, Inc.), 89 B.R. 80, 83

(9th Cir. BAP 1988). 

We review the bankruptcy court’s evidentiary rulings for an

abuse of discretion. Latman v. Burdette, 366 F.3d 774, 786 (9th

Cir. 2004). To reverse on the basis of an erroneous evidentiary

ruling, we must conclude not only that the bankruptcy court

abused its discretion, but also that the error was prejudicial.

Id.

A bankruptcy court abuses its discretion if it applied the

wrong legal standard or its findings were illogical,

implausible, or without support in the record. 

TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832 (9th

Cir. 2011).
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V. DISCUSSION

Bankruptcy courts have inherent sanction power under

§ 105(a) which states in relevant part: “The court may issue

any order, process, or judgment that is necessary or appropriate

to carry out the provisions of this title. . . .” See also

Miller v. Cardinale (In re DeVille), 361 F.3d 539 (9th Cir.

2004); Caldwell v. Unified Capital Corp. (In re Rainbow

Magazine), 77 F.3d 278, 284 (9th Cir. 1996). “The court’s

inherent authority to sanction includes not only the authority

to sanction a party, but also the authority to sanction the

conduct of a nonparty who participates in abusive litigation

practices, or whose actions or omissions cause the parties to

incur additional expenses.” In re Avon Townhomes Venture,

433 B.R. 269, 304 (Bankr. N.D. Cal. 2010) (citing Chambers v.

NASCO, Inc., 501 U.S. 32, 50–51 (1991) (affirming imposition of

sanctions on an individual for conduct before other tribunals

that constituted an abuse of process, even though the individual

was not a party when the misconduct occurred); and In re Rainbow

Magazine, Inc., 77 F.3d at 278 (upholding sanctions levied under

the court’s inherent powers against corporate debtor’s principal

who orchestrated the bad faith filing of the bankruptcy

petition)).

The bankruptcy court’s inherent sanction power allows it to 

deter and provide compensation for bad faith litigation. See

Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1196 (9th Cir.

2003). Before the bankruptcy court imposes sanctions under its

inherent power, it must make an explicit finding of bad faith or

willful misconduct. Id. “[B]ad faith or willful misconduct
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consists of something more egregious than mere negligence or

recklessness.” Id.

Once a finding of bad faith or willful misconduct has been

made, a court may award attorneys’ fees and costs as a sanction

to compensate the prevailing party for expenses incurred by his

or her opponent’s bad faith litigation tactics. Chambers,

501 U.S. at 45-46. However, the long-settled rule is that

inherent powers must be exercised with restraint and discretion. 

Id. at 44. Thus, the “court should be cautious in exerting its

inherent power and ‘must comply with the mandates of due

process, both in determining that the requisite bad faith exists

and in assessing fees.’” Id. at 50.

A. The Merits: Appeals EC-12-1471 and EC-12-1485

Here, the bankruptcy court made express findings regarding

Appellants’ bad faith and willful misconduct which is the

primary prerequisite for sanctions under the court’s inherent

power. In re Dyer, 322 F.3d at 1196. Indeed, the sanctionable

conduct of West Coast, Smith and Brown included complicity in

transferring Sundance’s property to West Coast followed by West

Coast’s bankruptcy filing on the eve of the Bank’s scheduled

foreclosure. According to the bankruptcy court, these acts were

part of a scheme to harass, delay and increase the Bank’s and

SACI’s litigation costs. Appellants do not challenge any of the

bankruptcy court’s bad faith findings on appeal, instead

complaining that the sanctions award was punitive in nature,

arbitrary in amount and lacked evidentiary support.

The Punitive Nature of the Sanctions

Because the court lifted the stay and voided the transfer
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of the property, Appellants assert that this was a sufficient

sanction against Smith and West Coast. Therefore, any sanctions

beyond this, Appellants argue, were punitive and thus exceeded

the bankruptcy court’s inherent authority. 

Smith had made this same argument in the bankruptcy court,

which the court rejected noting that the order lifting the stay

operated in conjunction with the Bank’s foreclosure to deprive

Smith and West Coast of property that should not have been

theirs in the first place. We agree with the bankruptcy court’s

conclusion that nothing of value was taken from Smith or West

Coast and, therefore, their asserted “loss” did not operate as a

sanction against them.

Moreover, the bankruptcy court explicitly stated that the

sanctions award was based on SACI’s attorneys’ fees incurred as

a result of Appellants’ bad faith conduct. Sanctions based on

attorneys’ fees are compensatory and within the bankruptcy

court’s inherent authority. In re DeVille, 361 F.3d at 546; 

see also Chambers, 501 U.S. at 44 (the less severe sanction of

an assessment of attorneys’ fees is undoubtedly within a court’s

inherent power). Furthermore, compensatory sanctions are not

considered criminal penalties: “Civil penalties must either be

compensatory or designed to coerce compliance.” In re Dyer,

322 F.3d at 1192 (citing F.J. Hanshaw Enters., Inc. v. Emerald

River Dev., Inc., 244 F.3d 1128, 1137–38 (9th Cir. 2001)); see

also Lasar v. Ford Motor Co., 399 F.3d 1101, 1110 (9th Cir.

2005) (sanctions that compensate for harm caused are civil). 

Accordingly, the sanctions awarded based on SACI’s attorneys’

fees were compensatory and not punitive in nature. 
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10 Indeed, at oral argument, Appellants’ attorney emphasized

that the primary reason, if not the sole reason, for seeking

reversal of the sanctions award was the lack of evidentiary

support.

11 Although Smith had also objected to Mickelsen’s

declaration on the same grounds, SACI supplemented the record

with Wayser’s declaration.

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The Amount of the Sanctions

Appellants next complain that the bankruptcy court abused

its discretion in awarding sanctions because (1) there was no

admissible evidence to support the award of attorneys’ fees10 and

(2) the award was arbitrary because the court failed to explain

how it arrived at the $20,000 amount. We address each of these

arguments in turn below.

Smith objected to Wayser’s declaration which attached his

law firm’s billing records on the grounds that (1) it was not

admissible under Fed. R. Evid. 602 for lack of personal

knowledge, and (2) it constituted hearsay and thus was not

admissible under Fed. R. Evid. 803(6), the business records

exception.11 Appellants contend the bankruptcy court erred

because it did not rule on these objections. Appellants’

contention is incorrect. In its written ruling dated August 29,

2012, the bankruptcy court explicitly found that Wayser’s

declaration “sufficiently establishes a foundation for the

testimony that true and correct copies of the firm’s billing

statements are filed as exhibits.” The court further opined: 

It is difficult to understand what further evidence

Smith would require [-] a declaration from each

individual who worked on the case? In any event, the

court is satisfied that the billing statements

demonstrate, by clear and convincing evidence, to the

extent that is necessary, that attorneys’ fees of at
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least $20,000 were reasonably incurred as a direct

result of Smith[’]s unconscionable actions detailed

above.

Moreover, at the very least, the bankruptcy court was aware of

the objections at the August 29, 2012 hearing and implicitly

overruled them when it stated that “I didn’t hear anything today

that changed my position in regards to the tentative.” 

We thus conclude that the objections were overruled and the

evidence was admitted.

 Fed. Rule Evid. 602 states that “[a] witness may not

testify to a matter unless evidence is introduced sufficient to

support a finding that the witness has personal knowledge of the

matter.” See also United States v. Dibble, 429 F.2d 598, 602

(9th Cir. 1970) (“The foundation is laid for receiving a

document in evidence by the testimony of a witness with personal

knowledge of the facts who attests to the identity and due

execution of the document and, where appropriate, its

delivery.”). In his declaration, Wayser stated that he was one

of the attorneys at his firm responsible for representing SACI

in the bankruptcy case and the adversary proceeding. He further

stated that based on that responsibility, he had personal

knowledge of the facts contained in his declaration. Wayser

also summarized the services that his firm performed in the West

Coast bankruptcy case and stated that he reviewed the firm bills

for the months of June and July 2012. These statements

sufficiently show that Wayser “actually perceived or observed

that which he testified to.” Latman, 366 F.3d at 786. 

In addition, although reasonable minds could differ,

Wayser’s testimony was sufficient to establish the accuracy and
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trustworthiness of the billing statements for purposes of the

business records exception to hearsay under Fed. R. Evid.

803(6). See United States v. Bonallo, 858 F.2d 1427, 1435 (9th

Cir. 1988) (The business records exception to hearsay under Fed.

R. Evid. 803(6) is available where the record is “(1) made or

based on information transmitted by a person with knowledge at

or near the time of the transaction; (2) made in the ordinary

course of business; and (3) trustworthy, with neither the source

of information nor method or circumstances of preparation

indicating a lack of trustworthiness.”). 

In sum, “[i]n non-jury cases, the [bankruptcy] judge is

given great latitude in the admission or exclusion of evidence.” 

Holliger v. United States, 651 F.2d 636, 640 (9th Cir. 1981). 

Accordingly, we discern no reversible error on the evidentiary

grounds asserted by Appellants. 

However, we agree with Appellants that the record is

insufficient for us to conduct a meaningful review of the

court’s decision to award the amount of $20,000 in sanctions 

based on SACI’s attorneys’ fees. In Padgett v. Loventhal,

706 F.3d 1205 (9th Cir. 2013), the Ninth Circuit recently

reminded us that courts must show their work when calculating

attorneys’ fees. See also Chalmers v. City of L.A., 796 F.2d

1205, 1213 (9th Cir. 1986), amended by 808 F.2d 1373 (9th Cir.

1987) (vacating fee award when the order contained no

explanation of how the court arrived at the award). That was

not done by the bankruptcy court here.

Where monetary sanctions are awarded, “the amount of the

monetary sanctions must be ‘reasonable.’” Leon v. IDX Sys.
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Corp., 464 F.3d 951, 961 (9th Cir. 2006) (citing Brown v. Baden

(In re Yagman), 796 F.2d 1165, 1184 (9th Cir. 1986), amended by

803 F.2d 1085 (1986)). 

When the sanctions award is based upon attorney’s fees

and related expenses, an essential part of determining

the reasonableness of the award is inquiring into the

reasonableness of the claimed fees. Recovery should

never exceed those expenses and fees that were

reasonably necessary to resist the offending action

. . . the court must make some evaluation of the fee

breakdown submitted by counsel.

In re Yagman, 796 F.2d at 1184. The Ninth Circuit has held in

other contexts that the lodestar approach is a proper method for

determining the reasonableness of attorneys’ fees. Ballen v.

City of Redmond, 466 F.3d 736, 745-46 (9th Cir. 2006)

(characterizing the lodestar figure as the “presumptively

accurate measure of reasonable fees” when calculating

permissible fees under 42 U.S.C. § 1988); see also Gisbrecht v.

Barnhart, 535 U.S. 789, 801 (2002) (“The ‘lodestar’ figure has,

as its name suggests, become the guiding light of our

fee-shifting jurisprudence.”). The starting point for computing

the lodestar amount is to multiply the number of hours the

prevailing party reasonably expended on the litigation by a

reasonable hourly rate. Caudle v. Bristow Optical Co., Inc.,

224 F.3d 1014, 1028 (9th Cir. 2000). The hourly rates used must

be “in line with those prevailing in the community for services

by lawyers of reasonably comparable skill, experience and

reputation.” Blum v. Stenson, 465 U.S. 886, 895 (1984).

Another factor for determining reasonableness is the

sanctioned party’s ability to pay. In re Yagman, 796 F.2d at

1184; see also Haynes v. City and Cnty. of S.F., 688 F.3d 984,
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12 The record does not contain any competent evidence on

what is a reasonable rate for the community.

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987 (9th Cir. 2012) (awards under 28 U.S.C. § 1927 are

discretionary such that the court may permissibly take ability

to pay into account, although courts are not required to limit

an award to the amount that the sanctioned attorney is able to

pay); and White v. Gen. Motors Corp., Inc., 908 F.2d 675, 684–85

(10th Cir. 1990) (factors relevant to determine an appropriate

amount of monetary sanctions include the reasonableness of the

amount requested, the minimum necessary to deter a repetition of

the conduct, and the ability to pay the sanction.).

Here, there is no indication in the record as to how the

bankruptcy court calculated the $20,000 amount. The court does

not state the number of hours that it found reasonable for the

work performed nor does it set forth the hourly rate which it

applied. See Tutor-Saliba Corp. v. City of Hailey, 452 F.3d

1055, 1065 (9th Cir. 2006) (vacating fee award when order failed

to state, among other things, the number of hours being

compensated or the hourly rate applied). The mandate that

courts show their work is all the more important in cases where,

as here, some of the entries have been redacted and Wayser’s

hourly rate appears to be far above the prevailing community

rates even though discounted.12 Finally, although attorney Bell

argued that Smith had little ability to pay significant

sanctions because Smith filed bankruptcy in 2009 and 2010, it is

unclear whether the bankruptcy court took this factor into
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13 Besides Smith’s two bankruptcies, we found no financial

statements or other evidence in the record which demonstrated

Smith’s current financial condition.

14 The bankruptcy court stated in its written rulings that

its award was based on reasonable fees and costs incurred for,

among other things, the motions for sanctions against West Coast,

Smith and Brown.

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consideration when determining the reasonableness of the fees.13

See In re Yagman, 796 F.2d at 1184; Haynes, 688 F.3d at 987. 

We also note 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.” Orange

Blossom Ltd. P’ship v. S. Cal. Sunbelt Devs., Inc. (In re S.

Cal. Sunbelt Devs., Inc.), 608 F.3d 456, 466 (9th Cir. 2010)

(quoting Lockary v. Kayfetz, 974 F.2d 1166, 1178 (9th Cir.

1992)). Under this precedent, fees and expenses incurred for

preparing and prosecuting the sanctions motions are generally

not authorized.14

In sum, because the bankruptcy court did not “show its

work,” we vacate the sanctions orders and remand to allow the

court to explain its reasoning on the reasonableness of the

fees.

B. The Merits: Cross-Appeals EC-12-1493 and EC-12-1498

Because of our decision to vacate and remand, SACI’s crossappeals on the amount of the sanctions based on its attorneys’

fees are rendered moot. However, we still must address SACI’s

cross-appeals relating to the bankruptcy court’s denial of

sanctions in the amount of $101,435.00 based on the missing
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rents. 

SACI maintains that it would have received this amount in

rent for the months of June, July and August 2012 (at the rate

of $37,873 per month) had it been able to take possession of the

property at the beginning of June 2012; as it would have without

Appellants’ bad faith acts. Because of Appellants’ conduct,

SACI contends that it was not able to foreclose until June 29,

2012, and, even then, it was unable to gain possession of the

property until August 6, 2012, allegedly due to Smith’s postforeclosure conduct. SACI argues that due to the outrageousness

of Appellants’ conduct, the bankruptcy court abused its

discretion by awarding a de minimis amount in sanctions which

failed to make it whole or deter repeat conduct. We are not

persuaded.

We mention first that generally a bankruptcy court has the

inherent power to regulate the conduct of those before it, even

in the absence of subject matter jurisdiction. Willy v. Coastal

Corp., 503 U.S. 131, 137–38 (1992) (upholding Rule 11 sanctions

before court of appeals determined district court lacked subject

matter jurisdiction); 5A Charles Alan Wright & Arthur R. Miller,

Federal Practice and Procedure: Civil § 1336, at 632 (3d ed.

2005). Here, the bankruptcy court assumed it had subject matter

jurisdiction to award SACI sanctions in the amount of the

missing rents and, in the exercise of its discretion, denied

SACI’s request. 

Reversal on abuse of discretion grounds is not proper

unless we have “a definite and firm conviction that the

bankruptcy court committed a clear error of judgment in the
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conclusion it reached after weighing the relevant factors.” 

United States v. Gould (In re Gould), 401 B.R. 415, 429 (9th

Cir. BAP 2009), aff’d on other grounds, 603 F.3d 1100 (9th Cir.

2010). By the same token though, “a bankruptcy court

necessarily abuses its discretion if it bases its decision on an

erroneous view of the law or clearly erroneous factual

findings.” Id.; TrafficSchool.com, Inc., 653 F.3d at 832.

In denying SACI’s request for sanctions in the amount of

the missing rents, the bankruptcy court considered the following

factors: (1) SACI’s claim for the missing rents against West

Coast, Smith and Brown was essentially a “two party” dispute

with little, or no, effect on West Coast’s bankruptcy estate;

(2) there were few, if any, remaining assets belonging to West

Coast’s estate after SACI obtained relief from stay; and

(3) SACI could pursue its damage claim against Smith and Brown

for the missing rents in the state court. After carefully

weighing these factors, the bankruptcy court could reasonably

conclude that SACI had not made a strong enough showing for the

imposition of sanctions under the court’s inherent power based

on the amount of the missing rents.

SACI does not argue in its cross-appeals that the

bankruptcy court’s findings were illogical, implausible, or

without support in the record. Indeed, the relationship between

SACI’s damage claim for the missing rents and SACI’s direct

costs in opposing the transfer of the property and West Coast’s

bad faith filing became tenuous at best after SACI foreclosed. 

In addition, although sanctions under § 105 serve the dual

purposes of compensation and deterrence, we are not convinced
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that SACI’s citations to In re Simmons, 2011 WL 3957439, at *1

(Bankr. N.D. Cal. 2011), In re Avon Townhomes Venture, 433 B.R.

at 304, or Rentz v. Dynasty Apparel Indus., Inc., 556 F.3d 389,

399-400 (6th Cir. 2009), compel a different result. These cases

are factually distinguishable and simply reiterate the general

premise that under certain circumstances an award in the full

amount of the attorneys’ fees incurred may be warranted to serve

the dual purpose of deterrence and making the party which

incurred the fees whole. None of these cases addresses an award

of sanctions for missing rents under § 105 nor do they discuss

any factors relevant to such an inquiry. 

In sum, SACI has not convinced us that the bankruptcy court

abused its discretion by basing its decision on an erroneous

view of the law. Accordingly, we discern no error with the

bankruptcy court’s exercise of restraint and discretion not to

impose sanctions in the amount of the missing rents under the

facts and circumstances of this case.

VI. CONCLUSION

For the reasons stated, we VACATE the sanctions orders and

REMAND on the amount of the sanctions based on SACI’s attorneys’

fees so that the bankruptcy court can show its work. We AFFIRM

the denial of SACI’s request for sanctions in the amount of the

missing rents as within the bankruptcy court’s broad discretion.