Court Opinion

ID: 4270946
Source: CourtListenerOpinion
Date Created: 2018-04-28 00:00:39.520591+00
Date Added: 2024-06-11T14:32:43.533467
License: Public Domain

FILED
                                                               APR 25 2018
 1                         NOT FOR PUBLICATION
 2                                                         SUSAN M. SPRAUL, CLERK
                                                             U.S. BKCY. APP. PANEL
                                                             OF THE NINTH CIRCUIT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
                              OF THE NINTH CIRCUIT
 4
 5   In re:                        )      BAP No.     CC-17-1151-TaFS
                                   )
 6   WILLIAM ROBERT NORRIE,        )      Bk. No.     2:13–bk-25751-BR
                                   )
 7                  Debtor.        )      Adv. No.    2:14-ap-01755-BR
     ______________________________)
 8                                 )
     MARK BLISS,                   )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )      MEMORANDUM*
11                                 )
     JOHN NORRIE, Trustee of The   )
12   561 Brooks Avenue Trust,      )
     Dated March 14, 2007;         )
13   MICHAEL D. KWASIGROCH,        )
                                   )
14                  Appellees.     )
     ______________________________)
15
              Submitted Without Oral Argument on February 22, 2018
16
                             Filed – April 25, 2018
17
                 Appeal from the United States Bankruptcy Court
18                   for the Central District of California
19            Honorable Barry Russell, Bankruptcy Judge, Presiding
20
     Appearances:     Appellant Mark Bliss, pro se, on brief; Michael
21                    D. Kwasigroch on brief pro se and for appellee
                      John Norrie.
22
23   Before:     TAYLOR, FARIS, and SPRAKER, 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(c)(2).
 1                               INTRODUCTION
 2        William Robert Norrie’s chapter 71 bankruptcy case has been
 3   contentious.    But this appeal does not directly involve him;
 4   instead, it derives from litigation between John Norrie
 5   (“John”)2 (William’s brother) and Mark Bliss (“Bliss”, the
 6   appellant).
 7        At a mid-point in the case, John sued Bliss.    Bliss
 8   responded with a Rule 9011 motion initially directed at John’s
 9   attorney, Michael Kwasigroch (collectively with John,
10   “Appellees”).    The bankruptcy court denied the Rule 9011 motion;
11   Bliss appealed.
12        While the appeal was pending, Bliss asked the bankruptcy
13   court to issue a Rule 8008 indicative ruling reconsidering
14   (under Civil Rule 60) its order denying the Rule 9011 motion and
15   adding John as an additional party subject to sanctions.      The
16   bankruptcy court deferred ruling on this request until the Panel
17   resolved the appeal.
18        Bliss was at least partially successful on appeal:      We
19   vacated the order denying the Rule 9011 motion (the bankruptcy
20   court did not provide us with complete findings, so we could not
21
22        1
             Unless otherwise indicated, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
23
     All “Rule” references are to the Federal Rules of Bankruptcy
24   Procedure. All “Civil Rule” references are to the Federal Rules
     of Civil Procedure. And all “LBR” or “local rules” references
25   are to the local rules for the United States Bankruptcy Court
     for the Central District of California.
26
          2
27           Because John and William share a last name, we refer to
     them in this memorandum by their first names. We intend no
28   disrespect.

                                      2
 1   determine if the bankruptcy court applied the correct legal
 2   rule) and remanded so the bankruptcy court could conduct further
 3   proceedings consistent with our decision.
 4        Bliss’s success was short-lived.   On remand, the bankruptcy
 5   court said it would prepare an order denying Bliss’s Rule 9011
 6   motion again; it did not.   It did, however, deny Bliss’s
 7   reconsideration motion, found that motion frivolous, and
 8   accordingly sanctioned Bliss and his attorney.
 9        Bliss again appeals; and again we are unable to rule.
10        The bankruptcy court has yet to comply with our
11   instructions on remand.   The bankruptcy court said that it would
12   prepare an order or further statement in response to the remand,
13   but it has not done so.   The bankruptcy court has neither
14   explained its reasoning in findings of fact and conclusions of
15   law nor re-entered an order, minute or otherwise, deciding the
16   Rule 9011 motion.   But based on the bankruptcy court’s oral
17   statements and its findings when denying the reconsideration
18   motion, we conclude that the bankruptcy court employed an
19   erroneous legal standard, such that denial of Bliss’s Rule 9011
20   motion on that basis would be an abuse of discretion.    And this
21   error makes it impossible for us to rule on the motion
22   requesting sanctions against Bliss which is grounded in the main
23   on the denial of the Rule 9011 motion and the reconsideration
24   motion.
25        Accordingly, we VACATE the order denying the
26   reconsideration motion and imposing sanctions on Bliss and
27   REMAND with instructions that the bankruptcy court comply with
28   the instructions of the previous Panel, apply the correct

                                     3
 1   standard in doing so, decide the reconsideration motion as
 2   appropriate, and re-evaluate the request for sanctions against
 3   Bliss in light of these determinations.
 4                                    FACTS3
 5          Because little has changed in the intervening time, we
 6   borrow substantially from our earlier decision and “highlight in
 7   somewhat summary form the disputes and proceedings” involved
 8   here.      Bliss v. Norrie (In re Norrie), BAP No. CC-15-1125-DKiG,
 9   2016 WL 373868, at *1 (9th Cir. BAP Jan. 29, 2016).
10          The relevant dispute centers on William’s interest in a
11   Venice, California apartment complex (the “Property”).
12          The Property.    William purchased the Property in 2005.     In
13   2008, he transferred his interest in the Property to his newly-
14   formed, solely owned limited liability company (the “LLC”).        A
15   grant deed reflecting the transfer was recorded, and William
16   later confirmed to his lender that the LLC was “solely owned by
17   myself.”      The LLC provided no consideration for the transfer.
18          William filed a chapter 7 petition in 2013.    He did not
19   schedule or disclose any interest in either the Property or the
20   LLC.
21          Instead, Bliss, William’s former friend and business
22   associate, informed the chapter 7 trustee about these assets; he
23   also apparently helped the chapter 7 trustee prosecute a
24   fraudulent transfer action against William and the LLC.      The LLC
25
            3
             We exercise our discretion to take judicial notice of
26   documents electronically filed in the adversary proceeding and
27   in the underlying bankruptcy case. See Atwood v. Chase
     Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th
28   Cir. BAP 2003).

                                        4
 1   defaulted, but less than 24 hours before a default-related
 2   hearing, John sought to continue the hearing and to intervene.
 3   He asserted, as purported trustee, alleged rights of The 561
 4   Brooks Avenue Trust Dated March 14, 2007 (the “Brooks Trust”).
 5   According to John, the Brooks Trust was formed to hold title to
 6   the Property for the benefit of William’s sons.    Kwasigroch
 7   represented John, as trustee of the Brooks Trust.
 8        The bankruptcy court denied the motion to continue.     The
 9   chapter 7 trustee opposed the intervention motion and argued
10   that Bliss, not John, was the trustee.    John argued to the
11   contrary, but the bankruptcy court determined that John was not
12   the trustee and that the Brooks Trust had no interest in the
13   Property, denied the intervention motion, and entered a default
14   judgment against the LLC that recovered the Property for the
15   benefit of William’s bankruptcy estate.
16        The Brooks Trust litigation.     Undeterred by the default
17   judgment in the fraudulent conveyance action, John, again as
18   alleged trustee of the Brooks Trust, filed an adversary
19   proceeding against the chapter 7 trustee and Bliss, in his
20   capacity as alleged trustee of the Brooks Trust.    He sought:
21   (1) a declaration that John, not Bliss, was the trustee of the
22   Brooks Trust; and (2) imposition of a trust on the Property for
23   the benefit of the Brooks Trust.     Kwasigroch again represented
24   John, as alleged trustee of the Brooks Trust.
25        Bliss and the chapter 7 trustee filed motions to dismiss;
26   John amended the complaint.   Bliss then filed a motion to
27   dismiss the amended complaint.   Eventually, John filed a Rule
28   7041 notice of dismissal as to Bliss, and the bankruptcy court

                                      5
 1   finalized the matter by dismissing the amended complaint without
 2   leave to amend as to the chapter 7 trustee.
 3        The Rule 9011 motion.   Bliss then filed a motion seeking
 4   monetary sanctions against Kwasigroch under Rule 9011 (the “Rule
 5   9011 Motion”).   In relevant part, the Rule 9011 Motion argued:
 6   (1) the issues raised in the complaint had already been
 7   conclusively decided in the earlier litigation, so the claims
 8   were unwarranted, frivolous, and barred by res judicata; (2) the
 9   amended complaint alleged a new interest in the Property based
10   on a January 2008 promissory note from Joe Davis (William’s
11   father-in-law), but those allegations were false and lacked
12   evidentiary support, and Kwasigroch knew or should have known
13   that they were false; and (3) Kwasigroch’s conduct constituted a
14   continuing pattern of bad faith and improper litigation tactics.
15        Kwasigroch voluntarily dismissed Bliss before the Rule 9011
16   Motion was filed, but he did so after Bliss provided a safe
17   harbor notice and after the 21-day safe harbor period passed.
18   Thus, the dismissal did not protect Kwasigroh from Rule 9011
19   sanctions if otherwise appropriate.   Bliss sought $19,722.50 in
20   sanctions.
21        Kwasigroch opposed.   He emphasized that before he filed the
22   complaints he met with Joe Davis and got his declaration and
23   testimony in writing.   He also consulted about his theory of the
24   case with two experts, whose opinions concurred with his.   He
25   also argued that the documents allegedly undermining the Davis
26   promissory note were obtained by Bliss after the complaint was
27   filed and, in any event, simply showed that the evidence was in
28   conflict — which would not mean that the complaint was

                                     6
 1   frivolous.
 2        At the hearing, the bankruptcy court orally denied the Rule
 3   9011 Motion.   The bankruptcy court entered a separate order.
 4   Bliss appealed to the BAP.
 5        Bliss’s motion for a Rule 8008 indicative ruling on a Civil
 6   Rule 60(b) reconsideration motion.       Litigation and drama did not
 7   abate while the appeal was pending.       Bliss conducted discovery
 8   in the main bankruptcy case.   At some point, William fled the
 9   country.
10        Bliss then filed a motion for an indicative ruling under
11   Rule 8008 on a reconsideration motion under Civil Rule 60(b)
12   (the “Reconsideration Motion”).       Given allegedly newly
13   discovered evidence, Bliss asked the bankruptcy court to
14   reconsider the Rule 9011 Motion and also to allow him to add
15   John as a party subject to the sanctions motion.
16        In particular, he referred to the following: a letter and
17   emails from William’s former attorney to William; a new
18   declaration from Davis; and a part of William’s loan
19   modification application dated five days before his chapter 7
20   filing.    He asserted that this evidence was suppressed by John,
21   William, and Kwasigroch and argued that it showed that they knew
22   or should have known that the material factual allegations in
23   the adversary proceeding were false.       Despite this actual
24   knowledge, he urged, they continued to assert false allegations
25   before the Ninth Circuit Court of Appeals.       Bliss discovered the
26   documents, he said, through Rule 2004 subpoenas on third
27   parties; and he asserted that Civil Rule 60(b)(2) and
28   (3) applied.

                                       7
 1        The bankruptcy court exercised its discretion and deferred
 2   ruling on the Reconsideration Motion until after the BAP decided
 3   the appeal.   See Fed. R. Bankr. P. 8008(a)(1).
 4        Our decision.   In January 2016, we issued our decision.
 5   In re Norrie, 2016 WL 373868.    We vacated the judgment as
 6   lacking complete findings and remanded for the bankruptcy court
 7   to make the requisite findings.       In particular, we wrote:
 8        Under Ninth Circuit standards, a bankruptcy court
          “must consider both frivolousness and improper
 9        purpose” when ruling on a motion for sanctions under
          Rule 9011. Here, the bankruptcy court made no
10        findings as to whether the Amended Complaint was filed
          for an improper purpose. As to whether the Amended
11        Complaint was frivolous, the bankruptcy court stated
          only “everything in this case is not frivolous,” and
12        “Yes, I disagreed with the pleadings and I’ve ruled
          accordingly. But that doesn’t make it frivolous.”
13
14   Id. at *6.
15        Kwasigroch appealed to the Ninth Circuit, but the Ninth
16   Circuit dismissed the appeal for lack of jurisdiction because
17   our decision was not a final order.
18        Proceedings on remand.     Now that it had an appellate
19   decision, the bankruptcy court set a hearing on the status of
20   the remand and the Reconsideration Motion.
21        Appellees opposed the Reconsideration Motion.       They
22   repeated Kwasigroch’s argument that, even if there were evidence
23   that undermined the complaint’s material factual allegations,
24   that would not rise to the level of frivolous or unwarranted in
25   fact — for instance, although Davis later recanted his original
26   declaration in a new declaration, Kwasigroch met with him three
27   times and obtained his declaration before filing the complaint.
28   They also argued that the evidence was not “new.”

                                       8
 1         They also requested costs, attorney fees, and sanctions of
 2   $7,425 against Bliss and his attorney.   They argued that the
 3   bankruptcy court could sanction Bliss and his attorney under the
 4   local rules and its inherent authority and briefly asserted that
 5   the attempt to add John to the motion was particularly
 6   frivolous.
 7         In his reply, Bliss argued, among other things, that the
 8   sanction request was spurious because his motion had merit.
 9         The bankruptcy court heard the matter.   The bankruptcy
10   judge began by addressing the remand:
11         Okay. As far as the -- I will prepare an order, they
           just -- the one that was remanded from the BAP, they
12         just wanted me to talk about, I guess I was actually
           quite surprised, but I guess they wanted to make sure
13         I knew what the law was. So that I'm not going to –
           I'll just prepare a further statement as to that.
14         There's no need for either of you to say anything on
           that.
15
16   Hr’g Tr. (Mar. 28, 2017) 1:10-16.   Later, the bankruptcy judge
17   again addressed the remand:
18         Yeah, I thought I had made it quite clear when you
           deny a motion you normally don't say anything other
19         than anything that they haven't proven. And I thought
           that was sufficient. I've never seen that before. But
20         I, you know, I will -- I will respond. But it was my
           intention to say now that I've read all the cases. I
21         didn't think it was necessary, but I'll do it now
           since that's what they asked me to do. I'll just say
22         that, yes, I’m quite aware of the rulings.
23   Id. at 20:17-25.   At the end of the hearing, the bankruptcy
24   judge said that he “will issue a separate ruling explaining to
25   the BAP that I really meant what I said . . . .”    Id. at 29:23-
26   24.   So the bankruptcy judge reiterated his intent to deny
27   Bliss’s Rule 9011 Motion in a separate written decision.
28         As for the Reconsideration Motion, the bankruptcy judge

                                     9
 1   found that the evidence was “not newly-discovered evidence.”
 2   Id. at 26:17.      And he also denied it on the merits because the
 3   newly-discovered evidence did not show that Kwasigroch actually
 4   knew, at the time he filed the complaint, that it was based on
 5   false factual allegations.
 6          Next, the bankruptcy judge explained his reasoning, granted
 7   Kwasigroch’s sanctions request against Bliss, and directed
 8   Appellees to submit proposed findings of fact and conclusions of
 9   law.
10          They did.    The bankruptcy court altered the proposed
11   findings of fact and conclusions of law by striking various
12   words and lines before entering them.     May 8, 2017 Findings of
13   Fact and Conclusions of Law (“Mem Dec.”).     On the merits of the
14   Reconsideration Motion, the bankruptcy court denied the motion
15   and found, in relevant part:
16   !      The motion “contained no new or recently discovered
17          evidence” because it was all either known by Bliss or
18          readily available through discovery processes.    Id. at 6.
19   !      “Neither in the moving or reply papers of Mr. Bliss, or at
20          oral argument . . ., was Mr. Bliss's attorney, John C.
21          Feely, able to articulate any evidence that Mr. Kwasigroch
22          knew of any of the alleged ‘new evidence’ and information
23          . . . .”    Id. at 7-8.
24   As for Kwasigroch’s sanctions request, the bankruptcy court
25   awarded them.      It found:
26   !      “Mr. Bliss is being driven by . . . improper motives
27          . . . .”    Id. at 6.
28   !      “[R]eferences . . . to the appeal before the Ninth Circuit

                                        10
 1        . . . is further evidence of Mr. Bliss’s use of the within
 2        proceedings to retaliate against Mr. Kwasigroch . . . .”
 3        Id. at 7.4
 4   !    “Mr. Bliss . . . has cited to numerous irrelevant matters
 5        . . . for the obvious attempt to disparage or otherwise
 6        simply demean Mr. Kwasigroch for no legitimate purpose
 7        . . . .”     Id.
 8   !    “Mr. Bliss is clearly driven by motives which are not
 9        proper in the within matter.”    Id.
10   !    “As a veiled motion for reconsideration, the
11        [Reconsideration Motion] . . . was unfounded in fact and
12        frivolous.”     Id. at 8.
13   !    “The request . . . to add John Norrie as a subject and
14        respondent to the motion for sanctions[] was separately and
15        distinctly unfounded and frivolous. This request . . . is
16        further evidence of the motive of Mark Bliss . . . to use
17        this motion for harassment . . . .”    Id.
18   !    “Under the totality of the facts presented . . ., the court
19        finds that the motion of Bliss herein is not only unfounded
20        and frivolous, but brought for the improper motives [sic]
21        to harass [] Mr. Kwasigroch.”    Id. at 9.
22        The bankruptcy court entered a separate order denying the
23   Reconsideration Motion and granting the sanctions request.
24   Feely and Bliss timely appealed.
25        After granting Feely’s motion to withdraw as counsel for
26
27        4
             Throughout the findings of fact and conclusions of law,
28   the bankruptcy court struck all other references to “retaliate.”

                                      11
 1   Bliss, we dismissed Feely from the appeal for lack of
 2   prosecution.
 3                               JURISDICTION
 4        The bankruptcy court had jurisdiction under 28 U.S.C.
 5   §§ 1334 and 157(b)(2)(B).   Subject to the discussion below in
 6   Section B, we have jurisdiction under 28 U.S.C. § 158.
 7                                   ISSUES
 8        Is the appeal moot?
 9        Did the bankruptcy court abuse its discretion when it
10   stated its intent to deny Bliss’s Rule 9011 Motion and denied
11   Bliss’s Reconsideration Motion?
12        Did the bankruptcy court abuse its discretion in
13   sanctioning Bliss?
14                         STANDARDS OF REVIEW
15        We review mootness de novo.       Wilson v. Lynch, 835 F.3d
16   1083, 1091 (9th Cir. 2016); Ellis v. Yu (In re Ellis), 523 B.R.
17   673, 677 (9th Cir. BAP 2014).
18        We review for an abuse of discretion a bankruptcy court’s
19   decision: to deny sanctions under Rule 9011, Classic Auto
20   Refinishing, Inc. v. Marino (In re Marino), 37 F.3d 1354, 1358
21   (9th Cir. 1994); to award sanctions, Price v. Lehtinen (In re
22   Lehtinen), 564 F.3d 1052, 1061 (9th Cir. 2009), abrogated on
23   other grounds by Gugliuzza v. FTC (In re Gugliuzza), 852 F.3d
24   884, 898 (9th Cir. 2017); and to deny a reconsideration motion,
25   Weiner v. Perry, Settles & Lawson, Inc. (In re Weiner), 161 F.3d
26   1216, 1217 (9th Cir. 1998).
27        A bankruptcy court abuses its discretion if it applies the
28   wrong legal standard, misapplies the correct legal standard, or

                                       12
 1   makes factual findings that are illogical, implausible, or
 2   without support in inferences that may be drawn from the facts
 3   in the record.   See TrafficSchool.com, Inc. v. Edriver Inc.,
 4   653 F.3d 820, 832 (9th Cir. 2011) (citing United States v.
 5   Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc)).
 6                               DISCUSSION
 7        This appeal ostensibly involves two sanctions decisions.
 8   First, Bliss appeals from the bankruptcy court’s stated denial
 9   of his Rule 9011 Motion and the order denying his
10   Reconsideration Motion.   Second, Bliss appeals from the
11   bankruptcy court’s grant of Appellees’ request for sanctions
12   against him.
13   A.   The appeal is not moot.
14        Appellees argue that the appeal is equitably moot because
15   the monetary award has been paid.    They explain that John Feely,
16   Bliss’s former counsel, did not file a brief on appeal, which
17   resulted “in his appeal being dismissed.”   They suggest that all
18   the BAP “can do if it finds in favor of Mr. Bliss is create an
19   indemnity cause of action for him against his former counsel.”
20        There are two mootness doctrines to consider.   First,
21   constitutional mootness asks “whether the appellate court can
22   give the appellant any effective relief in the event that it
23   decides the matter on the merits in [appellant’s] favor.”     Motor
24   Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe
25   Insulation Co.), 677 F.3d 869, 880 (9th Cir. 2012) (internal
26   quotation marks omitted).   Second, equitable mootness “occurs
27   when a comprehensive change of circumstances has occurred so as
28   to render it inequitable for this court to consider the merits

                                     13
 1   of the appeal.”    Id. (internal quotation marks omitted).      And
 2   the “party moving for dismissal on mootness grounds bears a
 3   heavy burden.”    Id. (internal quotation marks omitted).
 4        We disagree with Appellees.      Appellees, who bear the
 5   burden, have not shown that Feely was the source of funds.        More
 6   to the point, Appellees’ argument gets things backwards.        If we
 7   reverse or vacate, we need not create an indemnity claim for
 8   Bliss and against Feely; instead, we would simply direct
 9   Appellees to return any funds that Bliss paid to Appellees.5
10   Nor have Appellees pointed to, much less argued about, a
11   comprehensive change of circumstances that would make it
12   inequitable for us to consider this appeal.6
13        The appeal is thus not moot.
14   B.   The scope of the appeal is limited.
15        As Bliss points out on appeal, the bankruptcy court has not
16   yet entered further findings of fact and conclusions of law on
17   remand, despite our clear direction to do so.     The order and
18
19        5
             The adversary proceeding’s docket includes the following
     entry: “Defendant Mark Bliss’s notice of payment of sanctions to
20
     Michael D. Kwasigroch under reservation of rights.” In it, John
21   Feely represents that Bliss paid the sanctions. It also
     includes a copy of Bliss’s personal check.
22
          6
             The Ninth Circuit has “set out four considerations to
23   help determine whether an appeal is equitably moot . . . .”
24   JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props.,
     Inc. (In re Transwest Resort Props., Inc), 801 F.3d 1161, 1167
25   (9th Cir. 2015). Appellees do not discuss any of them, even
     though Appellees are well aware of the relevant legal standard:
26   before Appellees filed their brief in this appeal, the Ninth
27   Circuit dismissed one of Norrie’s appeals as equitably moot and
     discussed the relevant standard. See Norrie v. Krasnoff (In re
28   Norrie), 690 F. App’x 495, 495 (9th Cir. 2017).

                                      14
 1   related findings of fact and conclusions of law that were
 2   entered are titled as if they address only the Reconsideration
 3   Motion and Appellees’ sanctions request.   This affects the scope
 4   of the appeal.
 5        We vacated the original Rule 9011 order and remanded for
 6   further findings of fact and conclusions of law.   But after the
 7   status conference on remand, the bankruptcy court neither
 8   entered an order denying the Rule 9011 Motion nor issued
 9   findings.   So there is no order to appeal directly resolving the
10   Rule 9011 Motion.
11        On the other hand, the bankruptcy judge made oral
12   statements that unambiguously indicated an intent to deny the
13   Rule 9011 Motion.   It is possible the bankruptcy judge intended
14   the Reconsideration Motion order to constitute a final order on
15   both motions.    And the denial of the Reconsideration Motion and
16   the related findings fully support this interpretation of the
17   bankruptcy judge’s intent.   But the title of the order and the
18   limited findings related to the Rule 9011 Motion suggest to the
19   contrary.   And if there is no order on the Rule 9011 Motion, the
20   order on the Reconsideration Motion is interlocutory and the
21   appeal would be premature.
22        In either event, however, the bankruptcy court entered an
23   order that: (1) sanctioned Bliss; and (2) denied the
24   Reconsideration Motion.   And although the bankruptcy judge
25   provided scant analysis of why he intended to deny the
26   underlying Rule 9011 Motion, the bankruptcy judge clearly
27   articulated why he was, in part, sanctioning Bliss: for bringing
28   a frivolous Reconsideration Motion.   He in turn clearly

                                      15
 1   explained why the Reconsideration Motion, in part, was
 2   frivolous: as a disguised Civil Rule 60(b) motion related to the
 3   original Rule 9011 Motion order, it did not provide any new
 4   evidence showing that Kwasigroch actually knew the allegations
 5   in the complaint were false.
 6        So all three matters are linked, as the bankruptcy judge
 7   expressed the standard that he applied and would apply.    That
 8   standard, as discussed below, was erroneous and not the standard
 9   that the original Panel directed the bankruptcy court to apply.
10   Thus, any order resolving the Rule 9011 Motion consistent with
11   the oral statements about it would be subject to reversal.
12        Given the state of the record and the absence of a crisp
13   order denying the Rule 9011 Motion, we treat the resolution of
14   the Reconsideration Motion as interlocutory.    Cf. Green v.
15   Waterfall Victoria Master Fund 2008-1 Grantor Tr. Series A
16   (In re Green), BAP No. CC-11-1374-MkHHa, 2012 WL 4857552, at
17   *5–*6 (9th Cir. BAP Oct. 15, 2012) (treating as interlocutory an
18   order denying a motion for reconsideration entered before the
19   order disposing of the underlying motion).   But we review it for
20   the limited purpose and to the extent it allows us to evaluate
21   the sanction award, which we cannot evaluate in isolation.
22        In short, as we explain in the following section, the
23   bankruptcy court articulated the wrong standard when it stated
24   that it would deny the Rule 9011 Motion.   It applied the same
25   wrong standard when it evaluated the Reconsideration Motion.
26   And until these motions are correctly addressed we cannot aptly
27   evaluate the sanctions imposed against Bliss.    Put bluntly, we
28   are confident, given the overlap in subject matter between the

                                    16
 1   three issues, that this error permeated the bankruptcy court’s
 2   entire reasoning.
 3   C.   The bankruptcy court based its decision on an erroneous
          legal standard.
 4
 5        On appeal, Bliss argues that the bankruptcy court applied
 6   the wrong legal standard in connection with the Rule 9011 Motion
 7   and Reconsideration Motion by holding Kwasigroch to an “actual
 8   knowledge” standard instead of a “reasonable competent inquiry”
 9   standard.7   We agree.   A bankruptcy court “abuses its discretion
10   if the court rests its decision on an erroneous legal standard.”
11   Pom Wonderful LLC v. Hubbard, 775 F.3d 1118, 1123 (9th Cir.
12   2014).
13        At the hearing, the bankruptcy court repeatedly referred to
14   the relevant inquiry as whether Kwasigroch actually knew about
15   the information:
16   !    “And secondly, even if it is newly-discovered evidence,
17        . . . . I see nothing in your papers to show me that he
18        knew any of that.”    Hr’g Tr. 8:7–14.
19   !    “I see nothing in here to show me that he actually knew of
20        any of this.”   Id. at 8:20–21.
21   !    “But how can you with a straight face say that [what
22        Kwasigroch did before the Ninth Circuit] has anything to do
23        with your motion to give me new evidence of what he knew at
24        the time that he filed the complaint?”    Id. at 9:18–20.
25   The bankruptcy court further reified this “actual knowledge”
26
          7
27           Bliss proceeded pro se on appeal, so we liberally
     construe his brief. See Cruz v. Stein Strauss Trust # 1361
28   (In re Cruz), 516 B.R. 594, 604 (9th Cir. BAP 2014).

                                      17
 1   standard in its findings of fact and conclusions of law:
 2   !    “Neither in the moving or reply papers of Mr. Bliss, or at
 3        oral argument . . ., was Mr. Bliss's attorney, John C.
 4        Feely, able to articulate any evidence that Mr. Kwasigroch
 5        knew of any of the alleged ‘new evidence’ and information
 6        . . . .”   Mem. Dec. at 7-8.
 7   But “actual knowledge” is the wrong standard.8   Attorney conduct
 8   is measured objectively against a reasonableness standard.9
 9
          8
10           Now, Bliss is not entirely innocent, here. He argued in
     his Reconsideration Motion that his new evidence showed that
11   Kwasigroch actually knew about the relevant facts. And Bliss’s
12   attorney, at oral argument before the bankruptcy court,
     emphasized that point. But neither Bliss nor his attorney
13   confined their argument to actual knowledge; they insisted that
     even if Kwasigroch did not actually know, he should have known
14   or was under a duty to investigate. E.g., Hr’g Tr. 10:16-17
15   (“And a reasonable inquiry into the facts would have
     been . . . .”); id. at 15:2-3 (“Because he had –- he had a duty
16   to make a reasonable inquiry into the facts.”); id. at 17:23-24
     (“And opposing counsel had a duty to investigate and a duty to
17   make a reasonable inquiry.”). And this makes sense: if
18   Kwasigroch actually knew that the complaint was based on false
     factual allegations, then the Rule 9011 inquiry would stop there
19   – Bliss would not also need to show that a reasonable inquiry
     would reveal that the factual allegations were false.
20
          9
21           In addition, the bankruptcy court’s exclusive focus on
     Kwasigroch’s actual knowledge when he filed the complaint misses
22   the point of Rule 9011’s separate motion and safe harbor
     provisions. As the advisory committee notes for Civil Rule 11
23   explain:
24
          If, during this [21-day] period, the alleged violation
25        is corrected, as by withdrawing (whether formally or
          informally) some allegation or contention, the motion
26        should not be filed with the court. These provisions
27        are intended to provide a type of “safe harbor”
          against motions under Rule 11 in that a party will not
28                                                     (continued...)

                                     18
 1        Even when confronted with an accurate recitation of the
 2   legal standard of a reasonable inquiry, the bankruptcy court
 3   persisted in applying the actual knowledge standard:
 4        MR. FEELY:      Because -– because he could have -–
                          because he could have done a reasonable
 5                        inquiry into the facts of the case.
          THE COURT:      He could have done a lot of things. The
 6                        question is what did he actually know.
 7   Hr’g Tr. at 15:21-25.
 8        In short, the bankruptcy court stated the wrong legal
 9   standard in connection with Bliss’s request for Rule 9011
10   sanctions.   And the bankruptcy court’s conclusion that the
11   Reconsideration Motion was frivolous also relied on this
12   erroneous legal standard.   Hr’g Tr. at 27:9-18 (“This whole
13   thing, it's clear to me that it was frivolous from day one. That
14   is, the evidence does not . . . change in any way the
15   information. . . .   And it's clear, I'm focusing just on what
16   [Kwasigroch] knew and when he knew it, there's nothing in those
17
          9
18         (...continued)
          be subject to sanctions on the basis of another
19        party’s motion unless, after receiving the motion, it
          refuses to withdraw that position or to acknowledge
20        candidly that it does not currently have evidence to
21        support a specified allegation. Under the former
          rule, parties were sometimes reluctant to abandon a
22        questionable contention lest that be viewed as
          evidence of a violation of Rule 11; under the
23        revision, the timely withdrawal of a contention will
24        protect a party against a motion for sanctions.

25   Fed. R. Civ. P. 11 advisory committee’s notes to 1993 amendment.
     In short, the “purpose of the safe harbor . . . is to give the
26   offending party the opportunity, within 21 days after service of
27   the motion for sanctions, to withdraw the offending pleading and
     thereby escape sanctions.” Barber v. Miller, 146 F.3d 707, 710
28   (9th Cir. 1998).

                                     19
 1   papers.”).
 2        This is enough to vacate the award of sanctions.
 3        In addition, if or when the bankruptcy court considers
 4   whether to reimpose a sanction on Bliss, the bankruptcy court
 5   must apply the same standard to both parties: in stating that it
 6   would deny Bliss’s request to sanction Kwasigroch, the
 7   bankruptcy court considered what Kwasigroch actually knew when
 8   he filed the complaint; in sanctioning Bliss for bringing the
 9   Reconsideration Motion, the bankruptcy court concluded Bliss
10   should have or could have discovered the documents that
11   allegedly show what Kwasigroch actually knew.
12        D.     The sanctions award contains other errors.
13        When we examine the individual legal bases for the
14   sanction, we find additional shortcomings in the bankruptcy
15   court’s findings.    The bankruptcy court sanctioned Bliss under
16   its inherent power and for his violation of the Local Bankruptcy
17   Rules.
18        Inherent authority.    Bankruptcy courts have inherent
19   authority to sanction bad faith or willful misconduct.    In re
20   Lehtinen, 564 F.3d at 1061; Knupfer v. Lindblade (In re Dyer),
21   322 F.3d 1178, 1196 (9th Cir. 2003); Caldwell v. Unified Capital
22   Corp. (In re Rainbow Magazine, Inc.), 77 F.3d 278, 284 (9th Cir.
23   1996).    See Goodyear Tire & Rubber Co. v. Haeger, 137 S. Ct.
24   1178, 1186 (2017) (“Federal courts possess certain ‘inherent
25   powers,’ not conferred by rule or statute, to manage their own
26   affairs so as to achieve the orderly and expeditious disposition
27   of cases.    That authority includes the ability to fashion an
28   appropriate sanction for conduct which abuses the judicial

                                      20
 1   process.” (internal quotation marks and citations omitted)).
 2        Before the bankruptcy court imposes sanctions under its
 3   inherent authority, it must find either bad faith, conduct
 4   tantamount to bad faith, or recklessness with an “additional
 5   factor such as frivolousness, harassment, or an improper
 6   purpose.”   Fink v. Gomez, 239 F.3d 989, 994 (9th Cir. 2001).
 7   The bankruptcy court “must make an explicit finding . . . .”
 8   Primus Auto. Fin. Servs., Inc. v. Batarse, 115 F.3d 644, 648
 9   (9th Cir. 1997).   The explicit finding is “especially critical
10   when the court uses its inherent powers to engage in
11   fee-shifting,” as here.   Id.
12        To support an inherent authority sanction, the bankruptcy
13   court must find bad faith by Bliss.   And the bankruptcy court
14   made several such findings about Bliss’s bad faith in bringing
15   the motion.   But the bankruptcy court’s opinion of Bliss’s
16   motion was colored by an improper view of the relevant legal
17   standard.   So on remand, the bankruptcy court must re-evaluate
18   Bliss’s state of mind in bringing the motion.
19        We acknowledge that there is one finding of improper
20   purpose that does not necessarily relate to the bankruptcy
21   court’s erroneous legal standard: the bankruptcy court found
22   that Bliss’s request to add John to the sanction request “was
23   separately and distinctly unfounded and frivolous[]” and more
24   evidence of Bliss’s use of the motion for harassment.   Mem. Dec.
25   at 8.   But based on the record on appeal, we cannot tell if this
26   finding, standing alone, was sufficient to warrant either the
27   entire amount of sanction or any sanction at all.   Goodyear Tire
28   & Rubber Co., 137 S. Ct. at 1186-88 (holding that the quantum of

                                     21
 1   a fee award must have a causal, but-for, relationship to the
 2   misconduct).   Only one paragraph in the 17-page opposition
 3   discusses this point, and the summary evidence of fees and costs
 4   related to the opposition to the Reconsideration Motion does not
 5   support that all or any portion of the sanction relates to this
 6   argument.   Thus, we cannot rely on this point for a
 7   determination that other error in relation to the sanctions
 8   award is harmless.
 9        Local rule violation.     A bankruptcy court has the power to
10   sanction for violations of local rules.    Miranda v. S. Pac.
11   Transp. Co., 710 F.2d 516, 519 (9th Cir. 1983).    This power
12   derives from two sources: first, the court’s inherent power,
13   Zambrano v. City of Tustin, 885 F.2d 1473, 1478 (9th Cir. 1989);
14   and, second, Congress’s statutory delegation “to the Supreme
15   Court [of] the power to make and enforce general bankruptcy
16   rules[,]” Pham v. Golden (In re Pham), 536 B.R. 424, 432 (9th
17   Cir. BAP 2015); see Zambrano, 885 F.2d at 1478-79.
18        The “Supreme Court promulgated Rule 9029, which authorizes
19   district courts, or bankruptcy courts with authority from the
20   district courts, to adopt their own local bankruptcy rules.”
21   Pham, 536 B.R. at 432 (footnote omitted).    But “this power is
22   strictly limited.”    Id.   A “local rule of bankruptcy procedure
23   cannot be applied in a manner that conflicts with the federal
24   rules.”   Anwar v. Johnson, 720 F.3d 1183, 1189 (9th Cir. 2013).
25   Nor can a local bankruptcy rule “enlarge, abridge, or modify any
26   substantive right.”    Id. (quoting Sunahara v. Burchard (In re
27   Sunahara), 326 B.R. 768, 782 (9th Cir. BAP 2005)).     We review
28   the validity of a local rule de novo.    Pham, 536 B.R. at 430.

                                       22
 1        The bankruptcy court concluded that the Reconsideration
 2   Motion was “unfounded, frivolous, and an ‘Unwarranted Motion’ as
 3   defined under Local Bankruptcy Rule 9013-4(b)(3)(A)-(E), And
 4   9011-3(c).”   Mem. Dec. at 10.   But the Local Bankruptcy Rules do
 5   not support the awarded sanctions.
 6        Local Bankruptcy Rule 9013-4(b)(3) discusses the procedure
 7   for bringing a reconsideration motion, but it does not
 8   separately define what is an unfounded, frivolous, or
 9   unwarranted motion.   For that, we look to Local Bankruptcy Rule
10   9011-3.   Local Bankruptcy Rule 9011-3(a) states:
11        The violation of, or failure to conform to, the FRBP
          or these rules may subject the offending party or
12        counsel to penalties, including monetary sanctions,
          the imposition of costs and attorneys’ fees payable to
13        opposing counsel, and/or dismissal of the case or
          proceeding.
14
15   LBR 9011-3(a).   And Local Bankruptcy Rule 9011-3(c)10 addresses
16   “penalties for unnecessary or unwarranted motion or opposition.”
17   LBR 9011-3(c).   It states:
18        The presentation to the court of an unnecessary motion
          . . ., which unduly delays the course of an action or
19        proceeding, or failure to comply fully with these
          rules, subjects the offender and attorney at the
20        discretion of the court to appropriate discipline,
          including the imposition of costs and the award of
21        attorneys’ fees to opposing counsel . . . and such
          other sanctions . . . as may appear proper to the
22        court under the circumstances.
23   LBR 9011-3(c).
24        Local Bankruptcy Rule 9011-3(c) thus aligns most closely
25   with the bankruptcy court’s sanction.   But Local Bankruptcy Rule
26
27        10
             Local Bankruptcy Rule 9011-3(b), which deals with a
28   party’s failure to appear or prepare, is not applicable.

                                      23
 1   9011-3(c) requires that the unnecessary motion “unduly delays
 2   the course of an action or proceeding.”    Id.   The bankruptcy
 3   court made no such finding.    Nor are we persuaded on this record
 4   that the Reconsideration Motion unduly delayed the action: the
 5   bankruptcy court had to address the matter on remand and the
 6   parties had to show up for the hearing.    So to the extent the
 7   bankruptcy court sanctioned Bliss for violating Local Bankruptcy
 8   Rule 9011-3(c), on this record we must conclude that it
 9   misapplied that rule.
10        As for Local Bankruptcy Rule 9011-3(a), to the extent the
11   bankruptcy court concluded that Bliss violated Rule 9011 by
12   filing a “frivolous” motion, the sanctions must be consistent
13   with Rule 9011.   Pham, 536 B.R. at 432 (“To the extent LBR 9011-
14   3 conflicts with Rule 9011 in authorizing sanctions for
15   discovery violations, it is invalid.”).    Because Local
16   Bankruptcy Rule 9011-3 cannot obviate either the separate motion
17   or safe harbor requirements of Rule 9011(c)(1)(A) or the
18   separate order to show cause requirement of Rule 9011(c)(1)(B),
19   we assume the bankruptcy court did not sanction Bliss under it;
20   to the extent it did, the bankruptcy court misapplied the rule.
21   Here, the record does not indicate that Bliss received the
22   required safe harbor notice, and it is clear that John and his
23   attorney did not file a separate motion seeking sanctions.
24                                 CONCLUSION
25        Based on the foregoing, we VACATE the order and REMAND for
26   further proceedings consistent with this decision.
27
28

                                       24