Court Opinion

ID: 2757089
Source: CourtListenerOpinion
Date Created: 2014-12-03 19:08:29.199415+00
Date Added: 2024-06-11T10:22:02.691376
License: Public Domain

FILED
                                                             JUN 20 2012
                                                         SUSAN M SPRAUL, CLERK
                                                           U.S. BKCY. APP. PANEL
                                                           OF THE NINTH CIRCUIT
 1
 2
 3                   UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                             OF THE NINTH CIRCUIT
 5   In re:                           )      BAP No. NV-11-1628-DKiPa
                                      )
 6   RICHARD E. MARIS and             )      Bk. No. 09-12172-MKN
     DEBORAH HARRIS,                  )
 7                                    )
                          Debtors.    )
 8   ________________________________ )
                                      )
 9   BARRY LEVINSON, Esq.,            )
                                      )
10                        Appellant,  )
                                      )
11   v.                               )      M E M O R A N D U M1
                                      )
12   PENGILLY, ROBBINS, SLATER &      )
     BELL; JAMES F. LISOWSKI,         )
13   Chapter 7 Trustee; UNITED STATES )
     TRUSTEE,                         )
14                                    )
                          Appellees.  )
15   ________________________________ )
16                     Argued and Submitted on June 15, 2012
                                at Las Vegas, Nevada
17
                               Filed - June 20, 2012
18
                  Appeal from the United States Bankruptcy Court
19                          for the District of Nevada
20            Honorable Mike K. Nakagawa, Bankruptcy Judge, Presiding
21   Appearances:    Appellant, Barry Levinson, Esq., in pro per;
                     Robert T. Robbins, Esq. of Pengilly, Robbins, Slater &
22                   Bell, for the Appellee, Pengilly, Robbins, Slater &
                     Bell.
23
24
          1
25             This disposition is not appropriate for publication.
     Although it may be cited for whatever persuasive value it may have
26   (see Fed. R. App. P. 32.1), it has no precedential value. See 9th
     Cir. BAP Rule 8013-1.

                                         1
 1   Before:    DUNN, KIRSCHER, and PAPPAS, Bankruptcy Judges.
 2
 3             After his former employer, Western Pride Construction, LLC
 4   (“WPC”), obtained a state court judgment (“Judgment”) in excess of
 5   $1,000,000 against him, Richard Maris filed a chapter 72 bankruptcy
 6   petition (“Bankruptcy Case”) and stipulated that the Judgment was
 7   nondischargeable pursuant to § 523(a)(9).      Thereafter, the
 8   bankruptcy court approved the chapter 7 trustee’s (“Trustee”)
 9   application to employ WPC’s counsel, the law firm of Pengilly
10   Robbins Slater & Bell (“Pengilly”), pursuant to § 327(e), as special
11   counsel to file and prosecute a malpractice claim (“Malpractice
12   Claim”) against Barry Levinson, the attorney who had represented
13   Mr. Maris in the litigation which led to the entry of the Judgment.
14   On Mr. Levinson’s motion, the bankruptcy court vacated the order
15   authorizing the trustee’s employment of Pengilly under § 327(e),
16   with leave to reapply under § 327(c).       Because the bankruptcy court
17   denied Mr. Levinson’s additional request that it impose monetary
18   sanctions on Pengilly, Mr. Levinson appealed.
19            We AFFIRM.
20                                  I.   FACTS
21            Until 2005, Mr. Maris owned an electrical contracting
22   business, Regency Electric, Inc. (“Regency”).      On March 25, 2005,
23
          2
               Unless otherwise specified, all chapter and section
24
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
25   all “Rule” references are to the Federal Rules of Bankruptcy
     Procedure, Rules 1001-9037. The Federal Rules of Civil Procedure
26   are referred to as “Civil Rules.”

                                         2
 1   Mr. Maris entered into a purchase agreement and employment agreement
 2   (“Employment Agreement”) with WPC, pursuant to which WPC purchased
 3   Regency from Mr. Maris and hired Mr. Maris as the Vice President of
 4   WPC’s electrical division for an initial period of three years.
 5   Under the Employment Agreement, Mr. Maris was provided a vehicle
 6   (“Vehicle”) for use in performing his services for WPC.   The
 7   Employment Agreement authorized WPC to terminate Mr. Maris’
 8   employment during the first year of employment without full
 9   severance pay for the remaining term “only in the event of a serious
10   moral, ethical, criminal or libelous act.”
11         Mr. Maris’ employment with WPC commenced on April 4, 2005.
12   On July 8, 2005, while driving WPC’s Vehicle, Mr. Maris was involved
13   in an automobile accident (“Collision”) which resulted in the death
14   of Monica Meily, the driver of the vehicle with which he collided.
15   At the time of the Collision, which occurred at 11:40 p.m.,
16   Mr. Maris was intoxicated, having just left a bar where he had been
17   drinking.
18         On September 5, 2005, Mr. Maris was charged with Involuntary
19   Manslaughter in connection with Ms. Meily’s death in the Collision.
20   Mr. Maris signed an “Agreement to Appear in Court and to Waive
21   Extradition After Admission to Bail” in the criminal matter on
22   September 10, 2005.   Mr. Maris pled guilty to the Involuntary
23   Manslaughter charge on April 11, 2007.
24         When he returned to work at WPC after the Collision,
25   Mr. Maris reported to WPC that he was not at fault for the
26   Collision.   At no time did Mr. Maris inform WPC of the true facts of

                                       3
 1   the Collision.
 2         Following the Collision, Mr. Maris’ job performance declined.
 3   In an effort to get pending electrical contracts “back on track,”
 4   WPC required Mr. Maris to supervise from the field rather than from
 5   his desk.
 6         On September 12, 2005, Mr. Maris requested a meeting
 7   (“September 12 Meeting”) with Romy Pantea, the Managing Member of
 8   WPC, to discuss the Employment Agreement.   In the week prior to the
 9   request, Mr. Maris had consulted with Mr. Levinson for advice on
10   enforcing the Employment Agreement.   At the September 12 Meeting,
11   Mr. Maris told Mr. Pantea he no longer would supervise the pending
12   electrical jobs except from his desk.   Because WPC refused to
13   authorize Mr. Maris to perform his supervisory role other than in
14   the field, Mr. Maris resigned.   On September 22, 2005, Mr. Maris
15   sued WPC in state court (“State Court Litigation”) for breach of the
16   Employment Agreement.   Mr. Levinson represented Mr. Maris in the
17   State Court Litigation.
18         WPC, represented by Pengilly, filed counterclaims against
19   Mr. Maris in the State Court Litigation for implied and equitable
20   indemnity with respect to its potential liability to Ms. Meily’s
21   estate, and for other damages it incurred as a result of the
22   Collision.   WPC had been notified on July 26, 2005, that Ms. Meily’s
23   heirs intended to bring legal action against WPC and its principals,
24   based upon their alleged liability with respect to the Collision.
25   WPC settled the threatened litigation in August of 2006, by paying,
26   with funds provided by its insurance carrier, $1 million to

                                       4
 1   Ms. Meily’s estate and her heirs.       In addition, after the Vehicle
 2   was determined to be a total loss and not reparable as a result of
 3   the Collision, WPC also paid $25,394.03 to satisfy the secured
 4   obligation on the Vehicle.
 5         A nonjury trial was held in the State Court Litigation on
 6   February 8, 2008, following which the state court, on April 8, 2008,
 7   issued its findings of fact and conclusions of law, as part of the
 8   Judgment.   The state court found that Mr. Maris, not WPC, had
 9   breached the Employment Agreement, (1) when he took the Vehicle,
10   “went drinking at a bar,” and thereafter drove the Vehicle and
11   caused the Collision that resulted in Ms. Meily’s death; and
12   (2) when he became incapable of performing his job duties because he
13   entered a state of depression following the Collision.
14         The state court also determined that WPC had an absolute
15   right to indemnity from Mr. Maris as a result of his tortious
16   conduct in relation to the Collision, and entered the Judgment in
17   favor of WPC in the amount of $1,034,738.30, which represented the
18   $1 million WPC paid (through its insurer) to Ms. Meily’s heirs,
19   $25,394.03 to pay off the Vehicle Mr. Maris had wrongfully converted
20   to his own use, and $9,344.27 to reimburse WPC for attorneys fees
21   incurred to the law firm that had defended WPC against the claims of
22   Ms. Meily’s heirs.
23         On behalf of Mr. Maris, Mr. Levinson filed an appeal (“State
24   Court Appeal”) from the Judgment on May 7, 2008.      However, after
25   Mr. Maris filed his Bankruptcy Case on February 19, 2009,
26   Mr. Levinson withdrew from his representation of Mr. Maris in the

                                         5
 1   State Court Appeal.   The State Court Appeal thereafter was
 2   dismissed, without prejudice, on May 20, 2009.
 3         On May 21, 2009, Pengilly filed a complaint in the Bankruptcy
 4   Case (“Adversary Proceeding”) seeking a determination that
 5   Mr. Maris' debt to WPC represented by the Judgment was
 6   nondischargeable pursuant to § 523(a)(9) and/or § 523(a)(6).    The
 7   Adversary Proceeding was dismissed February 10, 2010, on the
 8   stipulation of WPC and Mr. Maris ("Stipulation").
 9         In the course of negotiating the Stipulation, Mr. Maris
10   became aware for the first time that he held the Malpractice Claim
11   against Mr. Levinson in connection with the Judgment.    On
12   December 10, 2009, Mr. Maris filed an amended Schedule B to include
13   the Malpractice Claim, with an unknown value, as an asset of his
14   bankruptcy estate.    The Stipulation provided that Mr. Maris' debt to
15   WPC was nondischargeable pursuant to § 523(a)(9), but that WPC
16   agreed to dismiss the Adversary Proceeding with prejudice based upon
17   "a settlement agreement heretofore reached between the parties"
18   ("Settlement Agreement").
19         The Settlement Agreement was not attached to the Stipulation,
20   nor was it ever filed in the Adversary Proceeding.   In fact, the
21   Settlement Agreement never was reduced to writing:
22       [Mr. Maris] agreed that if the [Malpractice Claim]
         reverted to him, he would pursue it and pay an unspecified
23       portion of any proceeds to [WPC]. [Mr. Maris] also agreed
         that he would consider employing [Pengilly] to pursue the
24       [Malpractice Claim]. However, this agreement was never
         memorialized in writing. In the [Stipulation],
25       [Mr. Maris] stipulated that the debt was nondischargeable.
         The [adversary proceeding] was dismissed with prejudice
26       and no judgment of nondischargeability was entered.

                                        6
 1   Pengilly Opposition to the Levinson Motion at 4:4-9.
 2            On March 24, 2010, Pengilly filed a motion to compel the
 3   Trustee to abandon the Malpractice Claim (“Abandonment Motion”),
 4   which the Trustee opposed.    The bankruptcy court denied the
 5   Abandonment Motion by its order entered on April 12, 2010; however,
 6   that order permitted the Trustee to file an application to employ
 7   Pengilly to pursue the Malpractice Claim.
 8            On behalf of Mr. Maris and the Trustee, Pengilly commenced
 9   litigation against Mr. Levinson on the Malpractice Claim on April 7,
10   2010, immediately prior to the expiration of the limitations period,
11   without having obtained the approval of the bankruptcy court for its
12   employment.    On September 18, 2010, the Trustee filed, pursuant to
13   § 327(e), his ex parte application to employ (“Employment
14   Application”) Pengilly as special counsel, nunc pro tunc as of
15   April 6, 2010.    No disclosure was made in the Employment Application
16   that the litigation on the Malpractice Claim had been commenced.      On
17   September 22, 2010, the bankruptcy court authorized the employment
18   of Pengilly as requested (“Employment Order”).    Under the fee
19   agreement approved in the Employment Order, any recovery in the
20   litigation on the Malpractice Claim was to be divided: 3% to the
21   Trustee, 33-40% to Pengilly, and the balance to WPC on account of
22   its nondischargeable unsecured claim.3
23            On April 20, 2011, Mr. Levinson filed a motion ("Levinson
24
25        3
               WPC’s Judgment represents approximately 89% of the
26   unsecured claims Mr. Maris scheduled in the Bankruptcy Case.

                                        7
 1   Motion") to disqualify Pengilly as special counsel on the basis that
 2   Pengilly was not eligible for employment pursuant to § 327(e) as
 3   provided in the Employment Order, because Pengilly never had
 4   represented Mr. Maris as is required by the express terms of
 5   § 327(e).   In the Levinson Motion, Mr. Levinson also preemptively
 6   asserted there was no basis upon which the bankruptcy court could
 7   approve the employment of Pengilly as special counsel under either
 8   § 327(a) or § 327(c).   Finally, the Levinson Motion requested that
 9   the bankruptcy court impose monetary sanctions pursuant to Rule 9011
10   against Pengilly and the Trustee based upon their alleged bad faith
11   in connection with the Employment Application, and on the basis that
12   Pengilly had violated several ethical rules, including those
13   relating to honesty and as to conflicts of interest, in connection
14   with the request for entry of the Employment Order.
15         Following extensive briefing by the partes, the Levinson
16   Motion was heard on July 20, 2011.    On October 25, 2011, the
17   bankruptcy court entered its order ("October 25 Order") vacating the
18   Employment Order.   However, the October 25 Order authorized the
19   Trustee to seek approval of the employment of Pengilly, nunc pro
20   tunc as of April 6, 2010, as special counsel pursuant to § 327(c).
21   Finally, the October 25 Order provided that no sanctions against
22   Pengilly or the Trustee were awarded to Mr. Levinson.   In support of
23   its determination to deny a sanctions award to Mr. Levinson, the
24   bankruptcy court stated that “sanctions against Pengilly or the
25   Trustee are not appropriate as the record does not sufficiently
26   establish that their prior efforts to employ Pengilly was [sic] in

                                       8
 1   bad faith.”
 2            Mr. Levinson timely filed his Notice of Appeal on
 3   November 4, 2011.
 4                                 II.    JURISDICTION
 5            The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
 6   and 157(b)(2)(A).    We have jurisdiction under 28 U.S.C. § 158.
 7                                       III.   ISSUE
 8            Whether the bankruptcy court abused its discretion when it
 9   denied Mr. Levinson’s motion for the imposition of monetary
10   sanctions against Pengilly.4
11                           IV.    STANDARDS OF REVIEW
12            We review the bankruptcy court's refusal to impose sanctions
13
          4
               In his Opening Brief on Appeal, Mr. Levinson asserted
14
     seven issues on appeal. The first six issues relate to the alleged
15   error or abuse of discretion by the bankruptcy court in allowing the
     Trustee to continue to seek to employ Pengilly, rather than
16   disqualifying Pengilly as ineligible for employment outright. As
     contemplated by the October 25 Order, the Trustee filed an
17   application for the nunc pro tunc employment of Pengilly pursuant to
18   § 327(c). On January 30, 2012 (“January 30 Order”), the bankruptcy
     court denied the Trustee’s subsequent application to employ Pengilly
19   and directed the Trustee to hire alternate counsel. Thereafter, on
     April 3, 2012, our motions panel entered an order which provided
20   that any issue relating to further efforts to employ Pengilly was
21   moot, and limiting the issue on appeal to the denial of
     Mr. Levinson’s request for sanctions only.
22        In his Reply Brief on Appeal, Mr. Levinson concedes that the
     only remaining issue on appeal is “Whether the Bankruptcy Court
23   committed an error of law or an abuse of discretion in not awarding
     sanctions against [Pengilly] for entering into an obviously
24
     conflicted and unethical relationship.” It thus appears that
25   Mr. Levinson is not appealing the bankruptcy court’s failure to
     enter a sanctions award against the Trustee, as requested in the
26   Levinson Motion.

                                                9
 1   for an abuse of discretion.      See Classic Auto Refinishing v. Marino
 2   (In re Marino), 37 F.3d 1354, 1358 (9th Cir. 1994)(reviewing denial
 3   of sanctions under Rule 9011).       We apply a two-part test to
 4   determine whether the bankruptcy court abused its discretion.
 5   United States v. Hinkson, 585 F.3d 1247, 1261-62 (9th Cir. 2009)
 6   (en banc).    First, we consider de novo whether the bankruptcy court
 7   applied the correct legal standard to the relief requested.        Id.
 8   Then, we review the bankruptcy court’s fact findings for clear
 9   error.    Id. at 1262 & n.20.    We must affirm the bankruptcy court’s
10   fact findings unless we conclude that they are “(1) ‘illogical,’
11   (2) ‘implausible,’ or (3) without ‘support in inferences that may be
12   drawn from the facts in the record.’”       Id. at 1262.   The bankruptcy
13   court has “broad fact-finding powers with respect to sanctions, and
14   its findings warrant great deference . . . .”      Primus Auto. Fin.
15   Serv., Inc. v. Batarse, 115 F.3d 644, 649 (9th Cir. 1997)(quoting
16   Townsend v. Holman Consulting Corp., 929 F.2d 1358, 1366 (9th Cir.
17   1990)(en banc))(internal quotation marks omitted).
18            We review for clear error the bankruptcy court’s fact
19   findings related to the existence of bad faith.      Leavitt v. Soto
20   (In re Leavitt), 171 F.3d 1219, 1223 (9th Cir. 1999).
21                                   V.   DISCUSSION
22            In the Levinson Motion, Mr. Levinson requested that the
23   bankruptcy court impose monetary sanctions against Pengilly, either
24   pursuant to Rule 9011 (the Civil Rule 11 analog applicable in
25   bankruptcy contested matters), or pursuant to the bankruptcy court’s
26   equitable powers under § 105(a).

                                            10
 1   A.    Mr. Levinson is not entitled to an award of sanctions under
           Rule 9011.
 2
 3         Rule 9011(b) provides:
 4        By presenting to the court (whether by signing, filing,
          submitting, or later advocating) a . . . pleading, written
 5        motion, or other paper, an attorney . . . is certifying
          that to the best of the person’s knowledge, information,
 6        and belief, formed after an inquiry reasonable under the
          circumstances, --
 7
          (1) it is not being presented for any improper purpose,
 8        such as to harass or to cause unnecessary delay or
          needless increase in the cost of litigation;
 9
          (2) the claims, defenses, and other legal contentions
10        therein are warranted by existing law or by a nonfrivolous
          argument for the extension, modification, or reversal of
11        existing law or the establishment of new law;
12        (3) the allegations and other factual contentions have
          evidentiary support or, if specifically so identified, are
13        likely to have evidentiary support after a reasonable
          opportunity for further investigation or discovery; and
14
          (4) the denials of factual contentions are warranted on
15        the evidence or, if specifically so identified, are
          reasonably based on a lack of information or belief.
16
17         On the record before us, we are unable to conclude that the
18   bankruptcy court erred when it did not find a basis to impose
19   sanctions under Rule 9011(b).   First, nothing in the record reflects
20   that the Employment Application was presented for an “improper
21   purpose.”   The Trustee merely was seeking to hire counsel to
22   prosecute the Malpractice Claim.   Second, the bankruptcy court
23   approved the Employment Application in the first instance, arguably
24   precluding a determination that the legal contention presented in
25   the Employment Application, i.e., that Pengilly met the requirements
26   for employment pursuant to § 327(e), was not warranted by existing

                                        11
 1   law or by a non-frivolous extension of existing law.    The simple
 2   reality is that the Trustee, Pengilly, and the bankruptcy court each
 3   omitted from their reading of § 327(e) the requirement that the
 4   proposed special counsel previously must have represented Mr. Maris.
 5   Third, the Declaration of Robert T. Robbins, a Pengilly partner,
 6   filed in support of the Employment Application, (1) disclosed
 7   Pengilly’s prior representation of WPC both in the State Court
 8   Litigation and in the Adversary Proceeding; (2) disclosed that
 9   Pengilly “appears on Schedule F as a representative of [WPC] holding
10   a claim totaling $1,037,738.30”; (3) affirmatively acknowledged that
11   Pengilly represented an interest adverse to Mr. Maris in the State
12   Court Litigation; and (4) stated the belief that in the proposed
13   representation, Pengilly did not hold an interest adverse to
14   Mr. Maris or the bankruptcy estate “with respect to the matter on
15   which [Pengilly] is to be employed.”    Thus, Pengilly’s connection
16   with WPC was substantially disclosed to the bankruptcy court.
17            The bankruptcy court acknowledged in the October 25 Order
18   that the Employment Order had been entered in error and vacated that
19   order.    The bankruptcy court, right or wrong, made a further finding
20   that Pengilly’s concurrent representation of WPC did not appear to
21   create an actual conflict of interest with the bankruptcy estate,
22   and further determined, that “Pengilly’s employment as special
23   counsel to represent the bankruptcy estate for the limited purpose
24   of prosecuting the [Malpractice Claim] likely would be permitted by
25   Section 327(c).”    Ultimately, however, after this appeal was filed,
26   the bankruptcy court denied the employment of Pengilly altogether

                                        12
 1   and directed the Trustee to find other counsel to prosecute the
 2   Malpractice Claim.    Under these facts, where the bankruptcy court,
 3   once explicitly and once implicitly, determined that it had erred in
 4   its interpretation of § 327, we cannot see a basis under
 5   Rule 9011(b) to impose sanctions against Pengilly.
 6            In addition, in the Rule 9011 context, precise procedures
 7   must be followed.    Polo Bldg. Grp., Inc. v. Rakita (In re Shubov),
 8   253 B.R. 540, 545 (9th Cir. BAP 2000).    Specifically and primarily
 9   relevant in this appeal, the “safe harbor” provision of
10   Rule 9011(c)(1)(A) required Mr. Levinson to provide Pengilly with an
11   opportunity to withdraw or correct the alleged improper Employment
12   Application before submitting his motion for sanctions to the
13   bankruptcy court.    Nothing in the record reflects that Mr. Levinson
14   complied with Rule 9011(c)(1)(A) prior to filing the Levinson
15   Motion.
16   B.       Mr. Levinson is not entitled to an award of sanctions under
              § 105(a).
17
18            The bankruptcy court had the inherent authority, implicitly
19   recognized in § 105(a),5 to impose sanctions for any bad faith
20
21        5
                 Section 105(a) provides:
22
          The court may issue any order, process, or judgment that
23        is necessary or appropriate to carry out the provisions of
          this title. No provision of this title providing for the
24
          raising of an issue by a party in interest shall be
25        construed to preclude the court from, sua sponte, taking
          any action or making any determination necessary or
26        appropriate to enforce or implement court orders or rules,
          or to prevent an abuse of process.

                                        13
 1   conduct engaged in by Pengilly.   Caldwell v. Unified Capital Corp.
 2   (In re Rainbow Magazine, Inc.), 77 F.3d 278, 284 (9th Cir. 1996).
 3   In order to do so, however, the bankruptcy court was required to
 4   make an explicit finding that Pengilly had engaged in conduct
 5   tantamount to bad faith.   Knupfer v. Lindblade (In re Dyer),
 6   332 F.3d 1178, 1196 (9th Cir. 2003).    Bad faith includes a broad
 7   range of willful, improper conduct, but requires something more
 8   egregious than mere negligence or recklessness.   Fink v. Gomez,
 9   239 F.3d 989, 992-94 (9th Cir. 2001).
10         It is clear that the bankruptcy court understood and applied
11   the correct legal standard in ruling on Mr. Levinson’s request that
12   monetary sanctions be imposed against Pengilly.   As we noted
13   previously, the bankruptcy court made an express finding that the
14   record did not sufficiently establish that Pengilly’s prior efforts
15   to obtain the Employment Order were in bad faith.   Where the
16   bankruptcy court has applied the correct legal standard, we must
17   affirm the bankruptcy court’s finding with respect to the bad faith
18   issue unless we conclude that finding is “(1) ‘illogical,’
19   (2) ‘implausible,’ or (3) without ‘support in inferences that may be
20   drawn from the facts in the record.’”    United States v. Hinkson,
21   585 at 1262.   For the reasons set forth above in our discussion of
22   sanctions under Rule 9011(b), we conclude that the bankruptcy court
23   did not clearly err when it found that Pengilly did not act in bad
24   faith in seeking court-authorized employment to prosecute the
25   Malpractice Claim.
26

                                       14
 1                              VI.   CONCLUSION
 2         The bankruptcy court did not abuse its discretion when it
 3   denied Mr. Levinson’s request that monetary sanctions be awarded
 4   against Pengilly.   We AFFIRM.
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