Court Opinion

ID: 4194674
Source: CourtListenerOpinion
Date Created: 2017-08-10 00:01:36.610686+00
Date Added: 2024-06-11T14:13:41.396606
License: Public Domain

FILED
 1                         NOT FOR PUBLICATION                 AUG 09 2017
                                                           SUSAN M. SPRAUL, CLERK
 2                                                           U.S. BKCY. APP. PANEL
                                                             OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )      BAP No.     CC-16-1376-KuLTa
                                   )
 6   RUBYE E. TAYLOR,              )      Bk. No.     2:14-bk-31128-NB
                                   )
 7                  Debtor.        )      Adv. No.    2:15-ap-01183-NB
     ______________________________)
 8                                 )
     RUBYE E. TAYLOR; ANDRE        )
 9   DEL MONTE FREEMAN; MATTHEW D. )
     RESNIK,                       )
10                                 )
                    Appellants,    )
11                                 )
     v.                            )      MEMORANDUM*
12                                 )
     JAMES B. NUTTER & COMPANY;    )
13   JAMES B. NUTTER; FEDERAL      )
     NATIONAL MORTGAGE ASSOCIATION,)
14                                 )
                    Appellees.     )
15   ______________________________)
16                   Argued and Submitted on June 22, 2017
                            at Pasadena, California
17
                             Filed – August 9, 2017
18
                 Appeal from the United States Bankruptcy Court
19                   for the Central District of California
20            Honorable Neil W. Bason, Bankruptcy Judge, Presiding
21   Appearances:     M. Jonathan Hayes of Simon Resnik Hayes LLP argued
                      for appellants; Whitney Heafner of Alston & Bird
22                    LLP argued for appellees.
23
     Before: KURTZ, LAFFERTY and TAYLOR, Bankruptcy Judges.
24
25
26        *
           This disposition is not appropriate for publication.
27   Although it may be cited for whatever persuasive value it may
     have (see Fed. R. App. P. 32.1), it has no precedential value.
28   See 9th Cir. BAP Rule 8024-1.
 1                                INTRODUCTION
 2        This appeal concerns an adversary proceeding challenging the
 3   foreclosure of a residence in Los Angeles, California formerly
 4   owned by decedent, Lawrence Taylor.    The two plaintiffs are
 5   chapter 131 debtor Rubye E. Taylor – the decedent’s longtime
 6   companion and cohabitant – and Andre Del Monte Freeman –
 7   Rubye Taylor’s son.    Both claim to have held a pre-foreclosure
 8   interest in the residence.    Matthew D. Resnik was the attorney
 9   for the plaintiffs in the adversary proceeding.
10        A couple of weeks after the defendants filed a motion to
11   dismiss and a request for sanctions, the plaintiffs voluntarily
12   dismissed their adversary proceeding.       The bankruptcy court then
13   heard and determined the sanctions request of the defendants,
14   James B. Nutter & Company, James B. Nutter and the Federal
15   National Mortgage Association.    The bankruptcy court ultimately
16   awarded, as inherent power sanctions, virtually all of the
17   attorney fees the defendants incurred in preparing and filing a
18   motion to dismiss and in seeking sanctions against the plaintiffs
19   and their counsel.    The total fees awarded to the defendants
20   exceeded $150,000.
21        The first instance of alleged litigation misconduct – the
22   plaintiffs’ delay in requesting voluntary dismissal of their
23   adversary proceeding – was not sanctionable under the court’s
24
          1
           Unless specified otherwise, all chapter and section
25   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
26   all "Rule" references are to the Federal Rules of Bankruptcy
     Procedure, Rules 1001-9037. All "Civil Rule" references are to
27   the Federal Rules of Civil Procedure, and all “Local Rule”
     references are to the Local Rules of the United States Bankruptcy
28   Court for the Central District of California.

                                       2
 1   inherent power.   As a matter of law, plaintiffs’ delay could not
 2   be sanctioned under the court’s inherent power when there was no
 3   statute, Rule, Civil Rule, Local Rule, ethical rule or court
 4   order requiring more expeditious action.
 5        Nor did the second instance of alleged litigation misconduct
 6   – plaintiffs’ defense against the imposition of sanctions –
 7   justify inherent power sanctions.      This aspect of the bankruptcy
 8   court’s sanctions ruling was based almost entirely on the
 9   bankruptcy court’s assessment of the efficacy and quality of the
10   arguments the plaintiffs raised in their sanctions defense.     As a
11   matter of law, this was an insufficient ground (by itself) to
12   impose inherent power sanctions.
13        Accordingly, we REVERSE.
14                                   FACTS
15        Plaintiffs commenced their adversary proceeding in April
16   2015 alleging fraud, forgery and civil conspiracy against Nutter
17   and his company and seeking to invalidate the foreclosure sale
18   and the underlying deed of trust with respect to all defendants.
19        According to the plaintiffs, in January 2015, they
20   investigated the reverse mortgage transaction supposedly entered
21   into by the decedent in September 2007 – at the age of 83 and a
22   few years before his death.   Based on this investigation, the
23   plaintiffs allegedly determined that the reverse mortgage
24   transaction “was fraudulent and fraught with forged documents”
25   including the fraudulent misappropriation of the transaction
26   proceeds.   Rubye and Freeman further alleged that Nutter and his
27   company diverted the reverse mortgage transaction proceeds to
28   themselves or to some unknown third party with whom they were

                                        3
 1   acting in conspiracy.    The Federal National Mortgage Association
 2   – or Fannie Mae – is identified in the complaint as the successor
 3   in interest under the deed of trust.2
 4        In May 2015, before defendants responded to the complaint,
 5   counsel for the parties met and conferred and agreed that
 6   defendants would informally produce for plaintiffs’ review
 7   transaction documentation with the expectation that, if the
 8   plaintiffs were satisfied that the documentation demonstrated the
 9   bona fides of the transaction, plaintiffs would voluntarily
10   dismiss the adversary proceeding.
11        On July 1, 2015, at the offices of their counsel, defendants
12   made available for the plaintiffs’ review a large number of
13   transaction documents.   Resnik’s colleague, David Kritzer,
14   attended the document review on behalf of the plaintiffs.3    As
15   the bankruptcy court later noted, the documents presented for
16   review included (among others):
17        (a) pre-loan disclosures and counseling certifications
18
          2
19         The complaint mentions in passing that, in 2004, decedent
     granted a joint tenancy interest in his residence to a
20   Ms. Latanya Hill and that, in 2007, just before the reverse
     mortgage transaction allegedly was entered into, Hill
21   relinquished her joint tenancy interest, and the decedent once
22   again became the sole holder of legal title to the residence.
     The complaint does not mention it, but elsewhere in the record,
23   Hill is identified as the decedent’s daughter and “next of kin”
     and as being aware of or somehow involved in the reverse mortgage
24   transaction. The extent of her awareness and involvement and her
     potential knowledge of what happened to the transaction proceeds
25   apparently never was ascertained.
26        3
           While Resnik presumably was the most senior attorney
27   representing plaintiffs, Resnik identified Kritzer as “lead
     counsel” for the plaintiffs in correspondence sent to defendants’
28   counsel.

                                       4
 1        and acknowledgment by the Decedent, including that he
          had been advised to discuss the reverse mortgage with
 2        his family members and those upon whom he relied for
          financial advice; (b) notary certifications of the
 3        Decedent’s signatures (including one in the Home);
          (c) photographs inside the Home; (d) photocopies of the
 4        Decedent’s driver’s license and Social Security card;
          (e) escrow records showing the disbursement to the
 5        Decedent in cash; (f) the Decedent’s acknowledgment of
          receipt of the funds in cash; (g) post-closing
 6        correspondence including annual confirmations of the
          reverse mortgage; and (h) the Decedent’s repeated
 7        representations that Ms. Hill was his next of kin.
 8   Amd. Findings of Fact and Conclusions of Law (Oct. 13, 2016) at
 9   9:14-23.
10        During the month of July 2015, defendants repeatedly
11   inquired by email whether plaintiffs were prepared to dismiss the
12   adversary proceeding.   Kritzer variously responded on behalf of
13   plaintiffs that their consideration and investigation was not yet
14   complete, and he was having trouble contacting and getting a
15   decision from his clients.   Kritzer also asked follow-up
16   questions regarding ownership of the escrow bank account,
17   identified in the wire instructions, into which the lender
18   apparently funded the transaction proceeds.
19        Also during July 2015, defendants more than once asserted
20   that plaintiffs were prosecuting the action in bad faith as a
21   delaying tactic, that the transaction documentation demonstrated
22   the adversary proceeding was meritless and groundless, and that
23   they would seek sanctions unless plaintiffs immediately agreed to
24   dismiss the matter.
25        On or about August 11, 2015, Kritzer telephoned defendants
26   and informed them that the plaintiffs were not prepared to
27   dismiss the adversary proceeding because they still did not know
28   what happened to the transaction proceeds.    In an email dated

                                      5
 1   August 11, 2015, defendants confirmed plaintiffs’ unwillingness
 2   to dismiss and pointed out that the defendants had no way of
 3   knowing what the decedent (or his daughter Hill) might have done
 4   with the transaction proceeds after the transaction was funded.
 5        On August 14, 2015, the defendants filed their Civil
 6   Rule 12(b)(6) motion to dismiss, which included a request for
 7   sanctions.   The accompanying notice of motion specifies that
 8   defendants were seeking to recover roughly $90,000 in attorney
 9   fees against both the plaintiffs and their counsel under
10   28 U.S.C. § 1927, Rule 9011(c)(1)(B), Local Rule 7054-1, and the
11   court's inherent power.   The notice of motion sums up the grounds
12   for the sanctions request:
13        Plaintiffs and their counsel have needlessly and
          improperly compounded the costs of this litigation.
14        They have maintained this frivolous lawsuit in bad
          faith and for nothing other than the improper purposes
15        of harassing Defendants and needlessly increasing the
          costs of litigation for Defendants.
16
          Defendants attempted in good faith to meet and confer
17        with Plaintiffs’ counsel on numerous occasions in the
          weeks and months leading up to this Motion in a lengthy
18        and exceedingly costly effort to informally resolve
          this matter and persuade Plaintiffs to dismiss their
19        meritless action, but to no avail.
20   Amd. Notice of Motion and Motion to Dismiss and Request for
21   Sanctions (Aug. 17, 2015).
22        The motion to dismiss was not based on the bona fides of the
23   reverse mortgage transaction.   Instead, defendants asserted in
24   the motion that the statute of limitations had run on the
25   plaintiffs’ claims and that the plaintiffs lacked standing.     The
26   bankruptcy court never ruled on the merits of these arguments and
27   later concluded in its final ruling that these arguments did not
28   support its sanctions ruling.   In fact, the bankruptcy court

                                      6
 1   indicated that plaintiffs had stated colorable claims in spite of
 2   these arguments.
 3        On September 1, 2015, roughly two weeks after the filing of
 4   the defendants’ Civil Rule 12(b)(6) motion, plaintiffs filed a
 5   request for voluntary dismissal of the adversary proceeding under
 6   Civil Rule 41(a), which is made applicable in adversary
 7   proceedings by Rule 7041.   The request also contained an
 8   opposition to the defendants’ sanctions request.   According to
 9   the plaintiffs, they finally decided on August 31, 2015 – just
10   before their opposition to the motion to dismiss was due – that
11   dismissal of the adversary proceeding was in their best
12   interests.   In the weeks leading up to their August 31, 2015
13   decision to dismiss, plaintiffs claim, they and their counsel
14   were plagued with disagreement and indecision regarding whether
15   the adversary proceeding should be dismissed.
16        Based on the plaintiffs’ dismissal request, the bankruptcy
17   court entered an order on September 3, 2015 dismissing the
18   complaint but setting a status conference and preliminary hearing
19   to address defendants’ sanctions request.   The bankruptcy court
20   held status conferences in September and November, 2015, at which
21   it opined that, in order to save the parties time and money, the
22   parties should present all of their evidence and legal argument
23   regarding the sanctions issue in written form.   The bankruptcy
24   court further opined that the court’s inherent power was the only
25   sanctions authority that might apply to permit the defendants to
26   recover their attorney fees as sanctions.   The bankruptcy court
27   also directed the parties to mediate the sanctions dispute.
28   Neither party objected to these procedures or the absence of an

                                      7
 1   evidentiary hearing.    After the unsuccessful mediation, in
 2   November 2015, the bankruptcy court issued a scheduling order
 3   setting deadlines for the parties to submit to the court their
 4   papers on the sanctions issue.    Once again, no one objected to
 5   the briefing schedule or the bankruptcy court’s determination of
 6   the matter on the papers, and both parties duly submitted their
 7   declarations and documentary evidence in support of their
 8   respective positions.
 9        The defendants included with their papers much of the
10   transaction documentation they had presented to plaintiffs’
11   counsel Kritzer on July 1, 2015, and reiterated their argument
12   that the plaintiffs knew after Kritzer’s review of the documents
13   that the reverse mortgage transaction was legitimate and that the
14   lender duly had funded the transaction.    As defendants put it,
15   plaintiffs then dragged their feet for six more weeks after the
16   document review and ultimately refused to dismiss, thereby
17   forcing defendants to incur the cost of preparing and filing the
18   Civil Rule 12(b)(6) motion.    Defendants further complained that
19   plaintiffs lacked a valid basis from the outset for filing their
20   complaint and that the complaint filing as well as many other
21   actions of the plaintiffs and their accomplices were all part of
22   a scheme to delay the plaintiffs’ eviction from the residence and
23   to increase defendants’ litigation costs.
24        In their papers in opposition to the sanctions request,
25   plaintiffs included, among other evidence, the declarations of
26   Resnik and Kritzer, which for the most part told the same story
27   as told by defendants regarding what they learned from the
28   transaction documents and when they learned it.

                                       8
 1        Resnik and Kritzer asserted in their declarations, in
 2   effect, that their clients’ request for voluntary dismissal on
 3   September 1, 2015 was the result of their clients’ sudden
 4   realization, on August 31, 2015, that “they no longer had the
 5   stomach and resources to finance this proceeding and needed to
 6   dedicate their funds to moving expenses and locating a new
 7   residence” in light of their pending eviction.
 8        After hearing oral argument on the matter on February 2,
 9   2016, the bankruptcy court issued in May 2016 what it designated
10   as proposed findings of fact and conclusions of law pursuant to
11   28 U.S.C. § 157(c)(1); the court at the time was uncertain
12   whether the sanctions litigation was a core matter over which it
13   had authority under 28 U.S.C. § 157(a) and (b) to enter a final
14   decision.
15        According to the court, the defendants had not established
16   by clear and convincing evidence, or even by a preponderance of
17   evidence, that plaintiffs or their counsel had engaged in conduct
18   sanctionable under the court’s inherent power when they commenced
19   the adversary proceeding.   The court similarly found a lack of
20   evidence of conduct tantamount to bad faith in conjunction with
21   plaintiffs’ opposition to the defendants’ motion to obtain relief
22   from the automatic stay and in conjunction with the parties’
23   mediation efforts.
24        On the other hand, the bankruptcy court found that, on and
25   after July 28, 2015, plaintiffs and their counsel knew that they
26   had no chance of prevailing in the litigation without a great
27   deal of additional work, including substantial formal discovery,
28   which might or might not have shown anything tending to support

                                      9
 1   their claims.   The court further found that plaintiffs and their
 2   counsel knew from the transaction documents Kritzer reviewed on
 3   July 1, 2015, that the reverse mortgage transaction appeared on
 4   its face to have been properly documented and duly funded – by
 5   the lender wiring into escrow roughly $266,000 in transaction
 6   proceeds.
 7        In other words, the bankruptcy court in essence found that,
 8   by the end of July 2015, the plaintiffs and their counsel knew
 9   that it would be all but impossible for them to build a case
10   tying any of the defendants to an alleged scheme to fraudulently
11   divest the decedent of his interest in his residence.   Even
12   though the plaintiffs and their counsel claimed that plaintiffs
13   did not realize until one month later – August 31, 2015 – that
14   they lacked the “stomach” and the finances to further pursue
15   their adversary proceeding, the bankruptcy court effectively
16   concluded that they already realized the adversary proceeding was
17   a dead end by no later than July 28, 2015; consequently, the
18   court found the plaintiffs and counsel “made a conscious decision
19   to impose the subsequent costs of a motion to dismiss on the
20   defendants, because they were unwilling to concede they could not
21   prosecute their complaint (regardless whether that was due to
22   lack of funds or lack of merit, or both).”   Based on these
23   subsidiary findings, the bankruptcy court ultimately found that,
24   in purposefully imposing unnecessary litigation costs on
25   defendants, plaintiffs and their counsel acted “in bad faith,
26   vexatiously, wantonly or for oppressive reasons.”
27        This by no means ended the sanctions litigation.   The
28   bankruptcy court’s proposed findings and conclusions left open

                                     10
 1   certain issues regarding what portion of the fees defendants
 2   incurred were recoverable as inherent power sanctions.   Among
 3   other things, the court indicated that it would need more detail
 4   regarding the fees incurred in order to arrive at the appropriate
 5   amount of fees.    In addition, the plaintiffs filed a motion for
 6   reconsideration.   The lingering issues concerning the appropriate
 7   amount of attorney fees to award, the plaintiffs’ reconsideration
 8   motion, and the court’s order for another round of mediation led
 9   to two more hearings and several more months’ worth of
10   supplemental briefing.
11        In October 2016, the bankruptcy court made minor revisions
12   to its proposed findings and conclusions.   The court also
13   determined that it had core bankruptcy jurisdiction over the
14   sanctions dispute, so it redesignated that document as its
15   findings of fact and conclusions of law, and simultaneously
16   entered a final judgment awarding the defendants roughly $150,000
17   in sanctions.   The court also issued a separate memorandum
18   decision explaining why it considered the $150,000 the
19   appropriate amount of fees to award to defendants.   In that
20   decision, the court adopted the reasoning on fees stated in its
21   tentative ruling for the August 2, 2016 sanctions hearing and
22   also adopted as persuasive most of defendants’ arguments
23   explaining why they should be entitled to recover virtually all
24   of their fees incurred prosecuting their sanctions request.
25        Roughly $78,000 of the sanctions amount was awarded against
26   plaintiffs and Resnik for fees incurred between July 28, 2015 and
27   May 3, 2016.    Another $75,000 (roughly) was awarded only against
28   Resnik for fees incurred between May 3, 2016 and the conclusion

                                      11
 1   of the sanctions litigation.4
 2        The court’s thinking regarding the appropriate sanctions
 3   amount evolved quite a bit over the course of the sanctions
 4   litigation.   Initially, the court suggested that fees likely
 5   would be awarded only in a relatively small amount – perhaps
 6   limited to the amount incurred in preparing the Civil
 7   Rule 12(b)(6) motion.   The court subsequently opined that
 8   defendants could not recover fees incurred in prosecuting their
 9   sanctions litigation against plaintiffs, citing Orange Blossom
10   Ltd. P'Ship v. Southern California Sunbelt Devs., Inc.
11   (In re Southern California Sunbelt Devs., Inc.), 608 F.3d 456
12   (9th Cir. 2010).   Ultimately, however, the court concluded that
13   roughly $150,000 in fees – virtually all of the fees the
14   defendants had requested – “flowed” from the plaintiffs’ and
15   (Resnik’s) bad faith conduct.   According to the court, this
16   conduct included not only the plaintiffs’ initial refusal (after
17   July 28, 2015) to dismiss the adversary proceeding, but also the
18   entirety of the plaintiffs’ litigation of the sanctions issue:
19        Suffice it to say that the Resnik firm’s litigation
          regarding fees was itself brought “in bad faith,
20        vexatiously, wantonly, or for oppressive reasons” (see
          adv. dkt. 107, Ex. A: tentative ruling, adopted as the
21        actual ruling) and therefore the defendants are
          entitled to an award of their reasonable fees and
22        expenses in litigating over fees.
23   Mem. Dec. (Oct. 13, 2016) at 2:20-23.
24
25        4
           In sanctioning Resnik specifically (and not any of the
26   plaintiffs’ other attorneys), the bankruptcy court relied on
     Resnik’s concession made during the February 2, 2016 fees hearing
27   that he – and he alone – was responsible for any misconduct by
     counsel for plaintiffs. Neither the plaintiffs nor Resnik have
28   challenged on appeal this aspect of the court’s ruling.

                                     12
 1        In turn, in its August 2, 2016 tentative ruling, on which
 2   its October 13, 2016 fee memorandum decision was based, the
 3   bankruptcy court specifically found that all papers filed and
 4   arguments made by Resnik and his firm after May 3, 2016, were
 5   made for the improper purpose of forcing defendants to incur
 6   additional unnecessary litigation costs.   But there is nothing in
 7   the court’s ruling specifically finding that any of plaintiffs’
 8   litigation activity prior to May 3, 2016 was undertaken for the
 9   improper purpose of increasing the defendants’ litigation
10   expenses.5
11        The plaintiffs and Resnik timely appealed the bankruptcy
12   court’s sanctions judgment on October 26, 2016.
13                             JURISDICTION
14        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
15   §§ 1334 and 157, and we have jurisdiction under 28 U.S.C. § 158.6
16                                 ISSUE
17        Did the bankruptcy court err when it sanctioned the
18   plaintiffs and Resnik under its inherent power?
19
20        5
           Nor did the bankruptcy court’s comments at the August 2,
     2016 hearing add any clarity to this issue. Among other things,
21   the bankruptcy court stated that some – but not all – of the
22   plaintiffs’ sanctions defense arguments were themselves
     sanctionable.
23
          6
           Neither party has challenged the bankruptcy court’s
24   determination that it had authority under 28 U.S.C. § 157(a) and
     (b) to enter a final inherent power sanctions judgment based on
25   conduct that took place in the bankruptcy court before dismissal
26   of the plaintiffs’ adversary proceeding, and afterwards, during
     the pendency of defendants’ post-dismissal sanctions request.
27   Additionally, both parties effectively have consented to the
     bankruptcy court’s exercise of this authority. See Wellness
28   Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1948–49 (2015).

                                    13
 1                             STANDARDS OF REVIEW
 2          The bankruptcy court’s sanctions award generally is reviewed
 3   for an abuse of discretion.    See B.K.B. v. Maui Police Dep't,
 4   276 F.3d 1091, 1106 (9th Cir. 2002) (citing Chambers v. NASCO,
 5   Inc., 501 U.S. 32, 55, (1991)).    However, the bankruptcy court's
 6   predicate findings are reviewed under the clearly erroneous
 7   standard.    Id.
 8          The bankruptcy court abuses its discretion if it applies an
 9   incorrect legal standard or its factual findings are clearly
10   erroneous.    TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d
11   820, 832 (9th Cir. 2011) (citing United States v. Hinkson,
12   585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)).
13                                 DISCUSSION
14   A.   Inherent Power Sanctions – Generally
15          Federal courts, including bankruptcy courts, have inherent
16   power to impose sanctions for a broad range of willful or
17   improper litigation conduct.    Knupfer v. Lindblade (In re Dyer),
18   332 F.3d 1178, 1196 (9th Cir. 2003); Fink v. Gomez, 239 F.3d 989,
19   992–94 (9th Cir. 2001).    Before imposing such sanctions, however,
20   the court must explicitly find bad faith or conduct tantamount to
21   bad faith.    Fink, 239 F.3d at 993; Primus Auto. Fin. Servs. v.
22   Batarse, 115 F.3d 644, 650 (9th Cir. 1997).     Something more than
23   mere negligence or recklessness is required.    Rodriguez v. U.S.,
24   542 F.3d 704, 709 (9th Cir. 2008) (citing Fink, 239 F.3d at 993-
25   94).    A finding that the litigant engaged in litigation for an
26   improper purpose will suffice, even if the litigant advanced
27   claims or objections that were colorable on their face.    See id.;
28   Fink, 239 F.3d at 992 (quoting In re Itel Sec. Litig., 791 F.2d
14
 1   672, 675 (9th Cir. 1986)).    For instance, when the litigant
 2   pursues litigation to harass the adverse party, or to increase
 3   its costs or to delay the resolution of other litigation, such
 4   motivations have been held to be improper for purposes of
 5   imposing inherent power sanctions.     See Fink, 239 F.3d at 994;
 6   Primus Auto. Fin. Servs., 115 F.3d at 649.
 7        One form of sanction the court may impose under its inherent
 8   power is an award of the opposing party’s legal fees.
 9   Goodyear Tire & Rubber Co. v. Haeger, 137 S. Ct. 1178, 1186
10   (2017); Chambers, 501 U.S. at 45.     These awards are a well-
11   recognized exception to the “American rule” which generally
12   requires each litigant to bear its own legal fees.     Chambers,
13 501 U.S. at 45; Alyeska Pipeline Serv. Co. v. Wilderness Soc'y,
14   421 U.S. 240, 258-59 (1975).    Exceptions to the American rule are
15   narrowly defined in order to ensure, among other things, that the
16   exceptions do not swallow the entire rule.     See Chambers,
17 501 U.S. at 45.   Moreover, inherent power attorney fees awards
18   should be imposed with caution and restraint because of the broad
19   range of conduct potentially covered and because of the “potency”
20   of the court’s inherent power.    See Snowden v. Check Into Cash of
21   Wash. Inc. (In re Snowden), 769 F.3d 651, 660 (9th Cir. 2014)
22   (citing Chambers, 501 U.S. at 44); see also Chambers, 501 U.S. at
23   50 (“A court must, of course, exercise caution in invoking its
24   inherent power”).
25   B.   Appellants’ Delay Is Not Sanctionable Under Bankruptcy
26        Court’s Inherent Power
27        Among other things, plaintiff and Resnik argue on appeal
28   that bad faith litigation conduct sanctionable under the

                                      15
 1   bankruptcy court’s inherent power requires some “act” – something
 2   more than passive inactivity – to qualify as bad faith litigation
 3   conduct.   As the plaintiffs and Resnik bluntly put it, the
 4   bankruptcy court assailed them for “doing nothing” when they were
 5   faced with the defendants’ demands that they dismiss their
 6   complaint.   In other words, the plaintiffs and Resnik maintain
 7   that their short-term delay of several weeks in requesting a
 8   voluntary dismissal of their adversary proceeding could not have
 9   constituted bad faith – or conduct tantamount to bad faith – when
10   there was no statute, Rule, Civil Rule, Local Rule or ethical
11   rule specifically requiring them to act sooner.
12        We consider this argument persuasive.   Typically, litigation
13   conduct sanctioned under the court’s inherent power includes
14   either affirmative actions or a combination of action and
15   inaction (delay) as part of an ongoing scheme of improper
16   litigation conduct.   See, e.g., Chambers, 501 U.S. at 50-51
17   (litigant’s entire course of conduct throughout the lawsuit);
18   Leon v. IDX Sys. Corp., 464 F.3d 951, 959 (9th Cir. 2006)
19   (litigant's intentional and knowing spoliation of evidence); Maui
20   Police Dep't, 276 F.3d at 1106 (litigant’s reckless and knowing
21   violation of Fed. R. Evid. 412); In re Itel Sec. Litig., 791 F.2d
22   672, 675-76 (9th Cir. 1986) (litigant’s filing of objections to
23   settlement proposal to extract fee concessions in other
24   litigation).   Sometimes, a failure or refusal to act, by itself,
25   can be sanctionable under the court’s inherent power, but the
26   only examples we found involved the litigants’ failure to act in
27   the face of a specific affirmative duty to act.   See, e.g.,
28   Haeger v. Goodyear Tire & Rubber Co., 813 F.3d 1233, 1245 (9th

                                     16
 1   Cir. 2016), rev'd on other grounds, 137 S. Ct. 1178 (2017)
 2   (inherent power sanctions imposed based on litigants’ failure to
 3   produce relevant documents despite their affirmative duty to do
 4   so under Civil Rules 26 and 34); Gomez v. Vernon, 255 F.3d 1118,
 5   1134 (9th Cir. 2001) (inherent power sanctions imposed based on
 6   counsel’s failure to remedy knowing violation of opposing party’s
 7   attorney-client privilege).
 8        Here, the bankruptcy court sanctioned the plaintiffs and
 9   Resnik solely based on their delay in dismissing the adversary
10   proceeding.   The bankruptcy court explicitly found that they
11   delayed for the improper of purpose of increasing the defendants’
12   litigation costs and in the hopes of hindering the defendants’
13   efforts to complete their post-foreclosure eviction of Rubye and
14   Freeman.   Importantly, the delay was the only contemporaneous
15   litigation conduct the bankruptcy court cited in support of its
16   initial inherent power sanctions ruling.
17        We hold that an isolated incident of delay in taking action
18   should not lead to inherent power sanctions, particularly when
19   there is no statute, Rule, Civil Rule, Local Rule, ethical rule
20   or court order requiring more expeditious action.   Absent an
21   affirmative duty to act quicker, the expectations on future
22   litigants would be too unclear to reasonably enforce – when they
23   can afford to bide their time before acting and when they are
24   obliged to act immediately.   The imposition, here, of inherent
25   power sanctions was inconsistent with the principle, stated
26   above, that inherent power sanctions only should be imposed with
27   caution and restraint.   In re Snowden, 769 F.3d at 660; Chambers,
28 501 U.S. at 50.

                                     17
 1        Referring to similar concerns, the Ninth Circuit Court of
 2   Appeals has held that a trial court should not have imposed
 3   inherent power sanctions against an attorney for an isolated
 4   failure to appear when “there is nothing in the local rules or
 5   norms of professional conduct ‘which would have placed [the
 6   attorney] on reasonable notice’ that his [failure to appear] was
 7   not in conformance with the court’s requirements.”   Mendez v.
 8   Cty. of San Bernardino, 540 F.3d 1109, 1132 (9th Cir. 2008),
 9   partially overruled on other grounds by Arizona v. ASARCO LLC,
10   773 F.3d 1050 (9th Cir. 2014) (quoting In re Richardson, 793 F.2d
11   37, 40 (1st Cir. 1986)).
12        Even more so than the Ninth Circuit, the First Circuit Court
13   of Appeals has been particularly active in this area, repeatedly
14   reversing inherent power sanctions awards based on isolated
15   incidents of inaction or delay when there was no affirmative duty
16   to act (or act more quickly) imposed by Rule, Civil Rule, Local
17   Rule, ethical rule or court order.   See, e.g., United States v.
18   Agosto-Vega, 731 F.3d 62, 65 (1st Cir. 2013) (reversing inherent
19   power sanctions imposed for the filing of last-minute motions in
20   limine); Boettcher v. Hartford Ins. Grp., 927 F.2d 23, 26 (1st
21   Cir. 1991) (reversing inherent power sanctions imposed against a
22   litigant and her attorney for last-minute settlement on day of
23   trial after jury already had been empaneled);   In re Richardson,
24 793 F.2d at 40-41 (reversing sanctions award because the trial
25   court sanctioned attorneys for violating an unwritten rule
26   requiring their appearance at a class certification hearing).
27        The Ninth Circuit in Mendez explicitly relied upon and
28   approved of In re Richardson.   In light of this reliance and

                                     18
 1   approval, we have no reason to doubt that the Ninth Circuit also
 2   would find persuasive Agosto-Vega and Boettcher.
 3        Restricting the bankruptcy court’s use of inherent power
 4   sanctions in this manner would not have left defendants without
 5   any recourse.   Defendants clearly believed that Resnik and the
 6   plaintiffs violated Rule 9011 by, among other things, not doing
 7   adequate investigation before commencing their adversary
 8   proceeding and that, once Resnik and the plaintiffs had received
 9   evidence of the bona fides of the reverse mortgage transaction,
10   they should have immediately dismissed the adversary proceeding.
11   Even so, defendants chose not to initiate sanctions proceedings
12   under Rule 9011(c)(1)(A) or to trigger that Rule’s safe harbor
13   provisions, which likely would have forced the plaintiffs and
14   Resnik to withdraw their complaint within the 21-day safe harbor
15   period provided for in the rule.      Instead, the only part of
16   Rule 9011 the defendants invoked was Rule 9011(c)(1)(B) – which
17   permits the court to impose sanctions sua sponte and does not
18   involve any sort of safe harbor period.      See Shalaby v. Mansdorf
19   (In re Nakhuda), 544 B.R. 886, 899 (9th Cir. BAP 2016).      The
20   bankruptcy court correctly determined that the monetary sanctions
21   defendants were seeking could not be recovered under
22   Rule 9011(c)(1)(B).   See   Miller v. Cardinale (In re Deville),
23   280 B.R. 483, 493-94 (9th Cir. BAP 2002), aff’d, 361 F.3d 539
24   (9th Cir. 2003).   As a result, the defendants effectively boxed
25   themselves into a position where they needed to persuade the
26   bankruptcy court to fit the square peg of Resnik’s and the
27   plaintiffs’ delay into the round hole of inherent power
28   sanctions.   While the defendants were successful in so persuading

                                      19
 1   the bankruptcy court, we are convinced that the above-referenced
 2   limitations on inherent power sanctions render them unsuitable to
 3   address the challenged litigation conduct at issue herein.
 4        Therefore, we conclude that the bankruptcy court committed
 5   reversible error when it imposed inherent power sanctions against
 6   the plaintiffs and Resnik for not earlier filing their request
 7   for voluntary dismissal of their adversary proceeding.
 8   C.   Appellants’ Sanctions Defense Is Not Sanctionable Under
 9        Bankruptcy Court's Inherent Power
10        The bankruptcy court ruled that the entirety of Resnik’s
11   sanctions defense was independently sanctionable under the
12   bankruptcy court’s inherent power.   The court found that all of
13   his efforts undertaken on and after May 3, 2016, were part of an
14   improper scheme to force defendants to incur additional
15   unnecessary attorney fees.   The court did not make a similar
16   express finding for the period before May 3, 2016, but such a
17   finding is implicit in the court’s ultimate determination that
18   the entirety of the plaintiffs’ litigation of the sanctions issue
19   “was itself brought in bad faith, vexatiously, wantonly, or for
20   oppressive reasons.”   Memorandum Decision Awarding Additional
21   Attorney Fees (October 13, 2016) at 2:20-21 (citations and
22   internal quotation marks omitted).
23        There are a number of considerations that undermine the
24   bankruptcy court’s conclusion that Resnik’s sanctions defense was
25   sanctionable under the bankruptcy court’s inherent power.    As a
26   threshold matter, we are troubled that a sanctions defense
27   necessitated by the bankruptcy court’s legally erroneous use of
28   its inherent power ultimately lead to a large attorney fee award

                                     20
 1   against the adverse party.   While the arguments Resnik focused on
 2   in his sanctions defense are not the ones leading us to reverse,
 3   his underlying position – that his and his client’s conduct did
 4   not justify inherent power sanctions – was meritorious, as
 5   explained above.
 6        In addition, Resnik’s filings before May 3, 2016, were duly
 7   filed in December 2015 in accordance with the briefing schedule
 8   the bankruptcy court set, so that plaintiffs and Resnik would
 9   have an opportunity to tell their side of the story and explain
10   their litigation conduct to the best of their ability, by way of
11   declarations and exhibits.   These filings primarily focused on
12   why, in plaintiffs’ view, plaintiffs’ and Resnik’s conduct was
13   not sanctionable as a factual matter.   They also challenged as
14   unreasonable the defendants’ request to recover $140,000 in
15   attorney fees.   Under these circumstances, we do not understand
16   how the bankruptcy court could have determined that Resnik filed
17   all of these papers solely for the purpose of increasing
18   defendants’ litigation expenses.
19        Similarly, many of the papers Resnik filed after May 3, 2016
20   were filed in accordance with and pursuant to the bankruptcy
21   court’s specific questions, concerns and directives regarding
22   litigation of the sanctions issue.   With the exception of
23   Resnik’s reconsideration motion papers, the bankruptcy court
24   encouraged and/or ordered these filings – as well as a second
25   round of mediation.
26        To permit blanket inherent power sanctions for the entirety
27   of a sanctions defense on a procedural history like this would
28   unduly interfere with (or chill) the litigants’ right to respond

                                     21
 1   to allegations of sanctionable conduct.      See generally Cole v.
 2   U.S. Dist. Court, 366 F.3d 813, 821 (9th Cir. 2004) (explaining
 3   importance of litigants’ due process rights to notice and an
 4   opportunity to be heard before sanctions can be imposed).
 5        The bankruptcy court arguably was justified in its
 6   assessment of the efficacy and quality of Resnik’s sanctions
 7   litigation defense.   As the bankruptcy court noted, Resnik’s
 8   efforts in response to the court’s questions, concerns and
 9   directives were lacking in a number of respects.      Nonetheless,
10   there is a critical disconnect between the litigants’ lackluster
11   litigation efforts and the bankruptcy court’s conclusion that the
12   filings the court directed Resnik to file were filed for an
13   improper purpose.   Something more than poor quality, invective
14   and repetitive arguments is required before inherent power
15   sanctions can or should be awarded.      See Rodriguez, 542 F.3d at
16   709 (citing Fink, 239 F.3d at 993-94).      A higher standard is
17   essential to ensure that inherent power sanctions are imposed
18   only with caution and restraint.       See Chambers, 501 U.S. at 50;
19   In re Snowden, 769 F.3d at 660.
20        To hold otherwise would not give enough weight to the dire
21   consequences significant inherent power sanctions potentially can
22   have on litigants and their counsel.      As the Ninth Circuit has
23   explained, “‘[s]anctions not only may have a severe effect on the
24   individual attorney sanctioned,’ potentially damaging the
25   attorney’s career, reputation and livelihood, but they ‘also may
26   deter future parties from pursuing colorable claims.’”      Mendez,
27 540 F.3d at 1133 (quoting Primus Auto. Fin. Servs., 115 F.3d at
28   650).

                                       22
 1        At bottom, the bankruptcy court’s determination that
 2   Resnik’s sanctions defense was sanctionable largely hinged on
 3   Resnik’s repetition of his Rule 9011 arguments – repetition which
 4   occurred after the court, multiple times, told Resnik that
 5   Rule 9011 sanctions were not being considered.    We understand
 6   that the bankruptcy court was very frustrated with Resnik based
 7   on his repeated attempts to present the same arguments for
 8   consideration.    Yet there was nothing so egregious about them (or
 9   their repetition) that justified the court’s imposition of
10   inherent power sanctions.
11        Indeed, Resnik has contended that, by analogy, the standards
12   applied to Rule 9011 sanctions issues should be applied to the
13   court’s imposition of inherent power sanctions.    While we
14   disagree with Resnik’s contention, there is nothing that far-
15   fetched, or frivoulous, in making it under the facts of this
16   case.    The contention is particularly apropos when, as here, the
17   defendants persuaded the bankruptcy court to sanction litigation
18   conduct under its inherent authority that more naturally fits the
19   rubric for Rule 9011 sanctions.    We are not saying that
20   defendants were obliged to exhaust their Rule 9011 remedies first
21   before seeking inherent power sanctions;7 we are saying that
22   their failure to avail themselves of Rule 9011 sanctions led the
23   bankruptcy court to make a legally erroneous decision regarding
24   the scope of inherent power sanctions and the applicability of
25
          7
26         See In re DeVille, 361 F.3d at 545 (“The Chambers Court was
     at pains to point out that the fact that certain statutes and
27   rules of procedure authorize the imposition of sanctions does not
     foreclose a court's invocation of its inherent sanctioning
28   authority when that appears to be the better instrument”).

                                       23
 1   its inherent power to address the alleged litigation misconduct
 2   of the plaintiffs and Resnik.
 3        In sum, the first instance of so-called litigation
 4   misconduct – the delay in requesting voluntary dismissal of the
 5   adversary proceeding – was not as a matter of law sanctionable
 6   under the bankruptcy court’s inherent power.   And the second
 7   instance of alleged litigation misconduct – Resnik’s entire
 8   sanctions defense – did not justify inherent power sanctions
 9   either.   Accordingly, we will REVERSE the bankruptcy court’s
10   sanctions judgment.
11                               CONCLUSION
12        For the reasons set forth above, the bankruptcy court’s
13   judgment awarding inherent power attorney fee sanctions to the
14   defendants is REVERSED.
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