In Re Lamar Crossing Apartments V. ( 2011 )


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  • By order of the Bankruptcy Appellate Panel, the precedential effect of this decision is limited to
    the case and parties pursuant to 6th Cir. BAP LBR 8013-1(b).
    See also 6th Cir. BAP LBR 8010-1(c).
    File Name: 11b0006n.06
    BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
    In re: LAMAR CROSSING APARTMENTS,                  )
    L.P.,                                              )
    )
    Debtor.                                )
    ______________________________________             )
    )
    PRESTON E. BYRD,                                   )
    )             No. 10-8071
    Appellant,                           )
    )
    v.                                   )
    )
    ARVEST BANK,                                       )
    )
    Appellee.                              )
    ______________________________________             )
    Appeal from the United States Bankruptcy Court
    for the Western District of Tennessee.
    Bankruptcy Case No. 09-30194.
    Decided and Filed: September 20, 2011
    Before: HARRIS, McIVOR, and RHODES, Bankruptcy Appellate Panel Judges.
    ____________________
    COUNSEL
    ON BRIEF: Paul A. Matthews, BOURLAND HEFLIN ALVAREZ MINOR & MATTHEWS,
    PLC, Memphis, Tennessee, for Appellee. Preston Byrd, Collierville, Tennessee, pro se.
    ____________________
    OPINION
    ____________________
    MARCI B. McIVOR, Bankruptcy Appellate Panel Judge. Preston E. Byrd (“Byrd”), pro se,
    appeals an order of the bankruptcy court granting a motion for sanctions against him pursuant to
    Federal Rule of Bankruptcy Procedure 9011. The order required Byrd to pay Arvest Bank’s attorney
    fees and expenses in the amount of $42,299.08. For the reasons that follow, we affirm the order of
    the bankruptcy court.
    ISSUE ON APPEAL
    The issue presented by this appeal is whether the bankruptcy court abused its discretion in
    ordering that Byrd pay Arvest Bank’s attorney fees and expenses as a sanction for filing a chapter
    11 bankruptcy petition without authority and in bad faith in violation of Federal Rule of Bankruptcy
    Procedure 9011.
    JURISDICTION AND STANDARD OF REVIEW
    The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal.
    The United States District Court for the Western District of Tennessee has authorized appeals to the
    Panel, and neither party has timely elected to have this appeal heard by the district court. 28 U.S.C.
    §§ 158(b)(6), (c)(1). A final order of the bankruptcy court may be appealed as of right pursuant to
    28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ends the litigation on the merits
    and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United
    States, 
    489 U.S. 794
    , 798, 
    109 S. Ct. 1494
    , 1497 (1989) (citations omitted). The bankruptcy court’s
    order imposing sanctions is a final, appealable order. See B-Line, LLC v. Wingerter (In re
    Wingerter), 
    594 F.3d 931
    , 936 (6th Cir. 2010).
    The bankruptcy court’s conclusions of law are reviewed de novo. Riverview Trenton R.R.
    Co. v. DSC, Ltd. (In re DSC, Ltd.), 
    486 F.3d 940
    (6th Cir. 2007). “Under a de novo standard of
    2
    review, the reviewing court decides an issue independently of, and without deference to, the trial
    court’s determination.” Menninger v. Accredited Home Lenders (In re Morgeson), 
    371 B.R. 798
    ,
    800 (B.A.P. 6th Cir. 2007). The court’s findings of fact are reviewed under the clearly erroneous
    standard. In re DSC, 
    Ltd., 486 F.3d at 944
    . “A finding of fact is clearly erroneous ‘when although
    there is evidence to support it, the reviewing court on the entire evidence is left with the definite and
    firm conviction that a mistake has been committed.’” 
    Id. (quoting Anderson
    v. City of Bessemer City,
    
    470 U.S. 564
    , 573, 
    105 S. Ct. 1504
    (1985)).
    A bankruptcy court’s imposition of sanctions is reviewed for an abuse of discretion. 
    Id. An abuse
    of discretion is established when the reviewing court is left with a “definite and firm
    conviction that the trial court committed a clear error of judgment.” Mich. Div.-Monument Builders
    of N. Am. v. Mich. Cemetery Ass’n, 
    524 F.3d 726
    , 739 (6th Cir. 2008) (citations omitted). “An abuse
    of discretion occurs only when the [trial] court relies upon clearly erroneous findings of fact or when
    it improperly applies the law or uses an erroneous legal standard.” Kaye v. Agripool, Inc. (In re
    Murray, Inc.), 
    392 B.R. 288
    , 296 (B.A.P. 6th Cir. 2008) (citations omitted). “‘The question is not
    how the reviewing court would have ruled, but rather whether a reasonable person could agree with
    the bankruptcy court’s decision; if reasonable persons could differ as to the issue, then there is no
    abuse of discretion.’” In re 
    Wingerter, 594 F.3d at 936
    (quoting Barlow v. M.J. Waterman &
    Assocs., Inc. (In re M.J. Waterman & Assocs., Inc.), 
    227 F.3d 604
    , 608 (6th Cir. 2000)).
    FACTS
    On June 14, 2007, Horizon Holding Company, LLC (“Horizon”) and Boston Capital
    Corporate Tax Credit Fund XXVI (“Boston Capital”) entered into a First Amended and Restated
    Agreement of Limited Partnership (“Partnership Agreement”) for the purpose of constructing a
    housing project in Germantown, Tennessee. Lamar Crossing Apartments, LP (“Debtor”), a
    Tennessee limited partnership, was the owner of this housing project under development. Originally,
    the general partner of the Debtor was Horizon. Preston E. Byrd (“Byrd”) is the Chief Manager of
    3
    Horizon. The special limited partner of the Debtor is BCCC, Inc. (“BCCC, Inc.”). The investment
    limited partner is Boston Capital.1
    Pursuant to the terms of the Partnership Agreement, the special limited partner has the right
    to:
    remove the General Partner and elect a new General Partner (A) on the basis of the
    performance and discharge of such General Partner’s obligations constituting fraud,
    bad faith, gross negligence, willful misconduct or breach of fiduciary duty, or
    (B) upon the occurrence of a Material Event.
    (Section 4.5(a)(iii), Partnership Agreement). On May 8, 2008, under the terms of the Partnership
    Agreement, Boston Capital, the investment limited partner, gave notice to Horizon of a material
    default.2 On November 10, 2008, after Horizon failed to cure the default, the special limited partner
    exercised its rights to remove Horizon as the general partner of the Debtor. On November 10, 2008,
    BCP-Michigan, LLC (“BCP”) was appointed as general partner, and the special limited partner gave
    notice to Byrd of Horizon’s removal as general partner. On November 12, 2008, BCCC, Inc. filed
    an Amendment to the Certificate of Limited Partnership with the Tennessee Secretary of State
    indicating that “Horizon Holding Company, LLC. has withdrawn as General Partner and replaced
    by BCP-Michigan, LLC as General Partner.”
    The construction of the housing project was the subject of a number of lawsuits filed in state
    court. On December 18, 2008, in a lawsuit in Chancery Court styled James Hutton and Orson Sykes,
    individually and derivatively on behalf of Horizon Holding Co., LLC v. Preston Byrd, et. seq., a
    consent order was entered appointing Lucian T. Pera (“Pera”) as Horizon’s receiver. Pera was
    charged to “take all actions necessary to preserve and safeguard the PILOT status [of the housing
    1
    The special limited partner and investment limited partner are affiliates of Boston Capital, which
    is in the business of syndicating tax credits and providing financing and investment for low and moderate
    income housing projects nationwide.
    2
    The notice of default indicates that Horizon, as general partner, was in default because it had
    “failed to pay various vendors and contractors . . . notwithstanding receipt of funds” of approximately $1
    million dollars.
    4
    project] and tax credits available to the real estate development known as the Lamar Crossings
    Project.” Pera was also empowered to determine whether “the withdrawal of Horizon Holding
    Company, LLC’s opposition to its removal as the General Partner on the Project is necessary to
    preserve and safeguard the PILOT status and the tax credits.” As receiver, Pera was given authority
    to bind Horizon. After conferring with all interested parties, including Byrd and all parties’ counsel,
    Pera determined that Horizon’s removal was necessary.
    On September 15, 2009, in another related proceeding in state court styled, Lamar Crossing
    Apartments, LP, and Horizon Holding Co., LLC v. Arvest Bank, an order was entered dissolving a
    previously entered temporary restraining order and authorizing Arvest Bank to “proceed with the
    foreclosure scheduled for September 16, 2009 at noon at the southwest corner of Shelby County
    Courthouse (Adams Avenue entrance), Memphis, Tennessee.” Arvest Bank is the holder of bonds
    secured by the first priority Deed of Trust on real estate owned by the Debtor. Bank of Oklahoma,
    N.A., is the Trustee under the applicable Trust Indenture to act on behalf of the holder of the bonds,
    Arvest Bank. The Debtor had defaulted under the Deed of Trust on the real estate, and under other
    loan documents. Horizon filed the Lamar Crossing litigation in an attempt to prevent Arvest Bank
    from foreclosing on the property.
    On September 16, 2009 at 9:37 a.m., Byrd caused a petition for relief under chapter 11 of the
    Bankruptcy Code to be filed for the Debtor. The petition was signed by Samuel Jones (“Jones”) as
    attorney for the Debtor, and by Byrd as “Chief Manager.” Arvest Bank and Bank of Oklahoma were
    unaware of the filing. Therefore, the foreclosure sale went forward as scheduled at noon that same
    day with Bank of Oklahoma, in its capacity as Trustee for Arvest Bank, as the successful bidder.
    On September 17, 2009, Arvest Bank and BCP, the general partner of the Debtor, filed a joint
    Expedited Motion to Dismiss Case, to Vacate Order for Relief, and/or to Determine that Automatic
    Stay Does Not Apply to Foreclosure Sale. The motion asserted that neither Jones nor Byrd was
    authorized to file or sign the petition for relief, and even if the filing were authorized, the petition
    was not filed in good faith.
    5
    On September 18, 2009, Arvest Bank and BCP filed a joint Motion for Sanctions Against
    Samuel Jones and Preston Byrd for Filing Bankruptcy Petition in Bad Faith and in Violation of Fed.
    R. Bankr. P. 9011. Initially, the motion to dismiss and motion for sanctions were set jointly for
    hearing on October 29, 2009. However, the bankruptcy court continued the hearing on the motion
    for sanctions until December 16, 2009.
    On October 28, 2009, an evidentiary hearing was held on the motion to dismiss only.
    Following the hearing on the motion to dismiss the case, Jones filed an amended petition, schedules
    and statement of financial affairs. The amended petition indicated that Byrd signed the petition as
    “Chief Manager of Horizon Holding Company, LLC, G.P. of Debtor.” Schedule B was amended
    to indicate that “Boston Capital Tax Credit Fund XXVI owes the Debtor as an equity contribution
    to the Debtor - $3,000,000.” Schedule F was amended to list additional unsecured creditors,
    including contractors on the project. The Statement of Financial Affairs was amended to list six
    lawsuits involving the Debtor which were pending at the time the petition was filed.
    On November 12, 2009, the bankruptcy court entered an order dismissing the chapter 11 case
    and annulling the automatic stay. In that order, the bankruptcy court held that the case should be
    dismissed because it was filed without authority. The bankruptcy court found: (1) that the special
    limited partner had taken all steps necessary to remove Horizon and substitute BCP as general
    partner of the Debtor, and (2) that because BCP was the general partner at the time the petition for
    relief was filed, Byrd was not authorized by the Partnership Agreement to hire counsel for, or sign
    the petition on behalf of, the Debtor. Further, the court found that the Partnership Agreement
    prohibits the general partner from filing a bankruptcy petition on behalf of the Debtor without the
    consent of the special limited partner, and no such consent was given by the special limited partner.
    The bankruptcy court also concluded that “cause” existed under 11 U.S.C. § 1112(b)(1) for
    dismissing the chapter 11 bankruptcy case because the petition was not filed in good faith. The
    bankruptcy court noted that the Debtor’s bankruptcy petition was filed on the day of foreclosure,
    without proper authorization as required under the Partnership Agreement, and immediately after
    6
    the stay of foreclosure had been dissolved by the Chancery Court. The court also found that the
    petition was not filed in good faith based on false statements and omissions contained in the filing,
    including: that Byrd is Debtor’s Chief Manager; that Horizon is the Debtor’s general partner; and
    that there were no lawsuits or administrative proceedings to which the Debtor was a party pending
    in the year proceeding the filing. Under the facts and circumstances of the case, the court held that
    the petition was filed in bad faith and should be dismissed. Byrd did not appeal the November 12,
    2009, bankruptcy court order dismissing the Debtor’s bankruptcy case.
    On March 3, 2010, the court held an evidentiary hearing on Arvest Bank’s motion for
    sanctions. At the evidentiary hearing, both Jones and Byrd appeared pro se and testified. Jones
    testified that at 9:00 a.m. on September 16, 2009, while he was with a client in his office preparing
    for a 10:00 a.m. hearing, Byrd and Byrd’s father came to his office without an appointment
    requesting that he file a chapter 11 petition for relief on Debtor’s behalf. Byrd represented to Jones
    that he had authority to file a petition on Debtor’s behalf because he was a manager of Horizon and
    Horizon was a partner of the Debtor. In an effort to confirm that representation, Jones did an online
    search of the Tennessee Secretary of State records which revealed that Horizon was the registered
    agent for service of process for the Debtor, and that Byrd was the registered agent for service of
    process for Horizon. The Partnership Agreement was not made available to Jones at that time. At
    that time, Byrd and Jones discussed the recent state court hearing which resulted in the order
    permitting the foreclosure sale to proceed, but apparently did not discuss any other ongoing litigation
    regarding the Debtor or Horizon.
    Jones agreed to file a chapter 11 petition for the Debtor at that time, and prepared a one page
    “Client Information Sheet and Agreement” under the name “Lamar Crossing Apartments, LP/Preston
    Byrd.” The agreement indicates that Jones will file a chapter 11 petition and be paid $150 per hour
    for all work related thereto. An upfront fee of $10,000 was required in order to take the case. The
    agreement further indicates that $500 was paid on the date the agreement was executed, with an
    additional $2,000 to be paid on September 18, 2009, and $7,500 on September 30, 2009. The
    agreement is signed by Byrd. Byrd’s father paid the $500 in cash. At the hearing, Jones identified
    7
    a check in the amount of $3,039 dated September 18, 2009, drawn on Horizon’s account which he
    later received, and which was negotiated on September 23, 2009.
    Jones further testified that with Byrd at his side he typed information into his computer to
    prepare the chapter 11 petition and file it electronically. The petition was electronically signed by
    Jones as attorney for the Debtor, and Byrd as “Chief Manager,” and filed at 9:37 a.m. on September
    16, 2009.
    At the hearing on March 3, 2010, Byrd testified that he received a copy of the report filed
    by Pera, the state court receiver for Horizon, withdrawing Horizon’s motion to stay its removal as
    general partner of the Debtor. Byrd further testified that he was present at the state court hearing at
    which the court ruled that the foreclosure on the Debtor’s property could go forward, and that he
    understood the ruling.
    In response to the court’s questions, Byrd explained that before approaching Jones about
    filing the chapter 11 petition, he discussed the possibility with Michael McCullar (“McCullar”), the
    attorney representing Horizon in state court. According to Byrd, McCullar told him that bankruptcy
    may be the “only alternative.” However, because McCullar does not practice bankruptcy law, he
    recommended two other attorneys with whom Byrd could speak. The first attorney Byrd approached
    advised that he had insufficient time to evaluate the case. The second attorney Byrd approached was
    Jones. Byrd testified that he discussed filing a bankruptcy petition with no one else.
    According to Byrd, he went to Jones’ office on the morning of September 16, 2009, without
    an appointment to “discuss bankruptcy to see if we could file it to protect the assets and the
    property.” (Bankr. Ct. Docket # 83, p. 88, Transcript of Hearing held March 3, 2010). He explained
    that he “told [Jones] that this project had been surrounding several litigations that was going on. We
    just had a hearing a couple of days ago in Chancery Court and the judge lifted the stay to allow the
    plaintiffs to foreclose and that we needed to protect the asset.” 
    Id. at 97.
    In response to questions
    regarding the client agreement, between him and Jones, Byrd acknowledged his signature, in an
    8
    individual capacity, and that Horizon appears nowhere on the document. Byrd further explained that
    he went to Jones’ office unprepared to pay any fees. As a result, Byrd’s father, who he testified is
    not employed by Horizon, volunteered to pay and did pay the $500 fee in cash.
    During the March 3, 2010, hearing, the bankruptcy court pointedly asked Byrd: “Did you
    think it was reasonable to show up at an attorney’s office and have a Chapter 11 petition filed thirty
    minutes later?” Byrd responded:
    Having never gone through a bankruptcy process before, I mean, that would be the
    purpose for me to go to an attorney to figure out. I didn’t try to do it myself. I went
    to an attorney to advise the company on how to proceed with this process or even if
    we could proceed.
    (Bankr. Ct. Docket # 83, at 102-03, Transcript of Hearing held March 3, 2010). The court then
    inquired whether Byrd had ever personally filed bankruptcy or whether any other entity with which
    he has been involved has done so. Byrd responded in the negative. Later in the proceeding he
    “corrected” his answer to state that he had twice filed personally. Byrd testified that he spent
    approximately 30 minutes with his attorney answering questions, but that each case was dismissed
    at Byrd’s request.3
    The bankruptcy court also questioned Byrd regarding his educational and employment
    background. Byrd testified that in 2006 he formed Horizon Holding Company, LLC for the purpose
    of developing multi-family housing development complexes, such as the Lamar Crossing project.
    Byrd testified that Horizon “currently, for all intents and purposes, is defunct because of this Lamar
    Crossing project.” (Bankr. Ct. Docket # 83, at 101, Transcript of Hearing held March 3, 2010).
    In response to the court’s questions, Byrd explained that he has engaged a number of
    attorneys in the past in connection with his businesses. Byrd also works with a number of attorneys
    3
    The bankruptcy court checked the court records and determined that in fact Byrd filed two
    chapter 13 cases in 1996 both of which were dismissed. However, they were not dismissed at Byrd’s
    request. One was dismissed because Byrd did not attend the first meeting of creditors, and the other was
    dismissed because Byrd did not timely commence making payments.
    9
    in connection with Horizon’s business. According to the bankruptcy court, Byrd named a number
    of “leading Memphis law firms” with which he has worked.
    At the hearing on the motion for sanctions, Byrd introduced into evidence a copy of his
    employment agreement with Horizon, and the operating agreement of Horizon. Byrd asserted that
    the employment agreement was relevant because the motion for sanctions was against him
    individually, whereas, according to Byrd, in seeking to have the chapter 11 petition filed, Byrd was
    acting only in his capacity as Horizon’s chief manager. Byrd further asserted that because he is
    employed by Horizon, and was acting in his capacity as Horizon’s chief manager, he is entitled to
    indemnification from Horizon for any sanctions which may be levied against him. Byrd also asserted
    that the articles of indemnification contained in the Horizon operating agreement entitle him to
    indemnification. Byrd did not include the indemnification argument in his pleadings.
    Arvest Bank introduced into evidence monthly statements of attorney fees and expenses for
    legal services rendered in connection with the bankruptcy case from the time the petition was filed
    through December 28, 2009, in the amount of $42,299.08. Donald Bourland, an attorney for Arvest
    Bank, testified that Arvest Bank had incurred, and paid, the fees and costs listed in the statements.
    The bankruptcy court asked both Jones and Byrd to submit sworn written balance sheets and
    income statements within ten days of the hearing, in order to determine their ability to pay any
    sanctions which may be levied. Both Jones and Byrd submitted statements regarding their income
    and expenses, and Byrd also submitted a balance sheet. The information submitted showed that
    neither of them has significant income in excess of expenses.
    On August 30, 2010, the bankruptcy court issued a memorandum opinion and order
    granting Arvest Bank’s motion for sanctions against Byrd and Jones pursuant to Federal Rule of
    Bankruptcy Procedure 9011 for causing a chapter 11 petition for relief to be filed in bad faith and
    without authority. The court imposed sanctions against both Byrd and Jones.
    10
    Sanctions were imposed against attorney Jones for failure to make an objective inquiry
    pursuant to Rule 9011(b)(2). Jones was ordered to attend 24 hours of continuing legal education
    within 12 months of the entry of the order at issue, one-half concerning ethics and one-half related
    to chapter 11 bankruptcy. Jones did not appeal the order imposing sanctions against him.
    Sanctions were imposed against Byrd for causing the chapter 11 petition to be filed without
    authority to do so, and doing so in bad faith. Byrd was ordered to pay Arvest Bank its attorney fees
    and expenses incurred through December 28, 2009, in the amount of $42,299.08.4 In determining
    whether to impose sanctions against Byrd, the bankruptcy court analyzed whether he had a
    reasonable basis to believe that he had authority to cause the chapter 11 petition to be filed on
    Debtor’s behalf. The court determined that Byrd did not, because he is a sophisticated businessman
    who was fully aware that, at a minimum, there was a dispute as to whether Horizon continued to
    serve as Debtor’s general partner, and that as Horizon’s chief manager and signatory to the
    Partnership Agreement, Byrd was charged with the knowledge that the Partnership Agreement
    required the consent of the limited partner to file a petition for bankruptcy. Moreover, the court
    noted that for the purposes of this case, the court had determined in its earlier order that Horizon was
    removed as general partner before the filing, and the filing was not authorized.
    Byrd filed a timely appeal of the bankruptcy court’s order.
    DISCUSSION
    The bankruptcy court order of dismissal entered on November 12, 2009, finding that the
    petition was filed without authority and in bad faith, was not appealed by Byrd and is therefore not
    properly before the Panel. (Bankr. Ct. Docket # 60, pp. 6, 8, Order dismissing case dated Nov. 12,
    2009). The November 12, 2009, order of dismissal was a final, appealable order. See DB Capital
    4
    The court refused, however, to also order as a sanction against Byrd payment of $51,390.08 in
    insurance premiums and security costs incurred by Arvest Bank in connection with maintenance of the
    Lamar Crossing’s apartment complex as a result of the bankruptcy filing as prayed for by Arvest Bank
    because the costs were incurred well in advance of the filing.
    11
    Holdings, LLC v. Aspen HH Ventures, LLC (In re DB Capital Holdings, LLC), Nos. CO-10-046,10-
    23242, 
    2010 WL 4925811
    (B.A.P. 10th Cir. 2010). Since Byrd did not file an appeal of the
    dismissal order, Byrd has waived his right to challenge any of the findings made by the bankruptcy
    court in dismissing the Debtor’s chapter 11 bankruptcy case and annulling the automatic stay.
    Byrd only appealed the bankruptcy court order entered on August 30, 2010. In the August
    30, 2010, order the court granted Arvest Bank’s motion for sanctions pursuant to Federal Rule of
    Bankruptcy Procedure 9011, requiring Byrd to pay Arvest Bank’s attorney fees and expenses in the
    amount of $42,299.08. Therefore, the only issue on appeal is whether the bankruptcy court abused
    its discretion in ordering Byrd to pay Arvest Bank’s attorney fees and expenses as a sanction for
    filing a chapter 11 bankruptcy petition without authority and in bad faith, in violation of Rule 9011.
    Federal Rule of Bankruptcy Procedure 9011
    Federal Rule of Bankruptcy Procedure 9011 provides in relevant part:
    (b) REPRESENTATIONS TO THE COURT. By presenting to the court (whether
    by signing, filing, submitting, or later advocating) a petition, pleading, written
    motion, or other paper, an attorney or unrepresented party is certifying that to the best
    of the person's knowledge, information, and belief, formed after an inquiry
    reasonable under the circumstances, --
    (1) it is not being presented for any improper purpose, such as to
    harass or to cause unnecessary delay or needless increase in the cost
    of litigation;
    (2) the claims, defenses, and other legal contentions therein are
    warranted by existing law or by a nonfrivolous argument for the
    extension, modification, or reversal of existing law or the
    establishment of new law;
    (3) the allegations and other factual contentions have evidentiary
    support or, if specifically so identified, are likely to have evidentiary
    support after a reasonable opportunity for further investigation or
    discovery; and
    12
    (4) the denials of factual contentions are warranted on the evidence
    or, if specifically so identified, are reasonably based on a lack of
    information or belief.
    (c) SANCTIONS. If, after notice and a reasonable opportunity to respond, the court
    determines that subdivision (b) has been violated, the court may, subject to the
    conditions stated below, impose an appropriate sanction upon the attorneys, law
    firms, or parties that have violated subdivision (b) or are responsible for the violation.
    (1) How Initiated.
    (A) By Motion. A motion for sanctions under this rule shall be made
    separately from other motions or requests and shall describe the
    specific conduct alleged to violate subdivision (b). . . . If warranted,
    the court may award to the party prevailing on the motion the
    reasonable expenses and attorney's fees incurred in presenting or
    opposing the motion. Absent exceptional circumstances, a law firm
    shall be held jointly responsible for violations committed by its
    partners, associates, and employees.
    ....
    (2) Nature of Sanction; Limitations. A sanction imposed for violation
    of this rule shall be limited to what is sufficient to deter repetition of
    such conduct or comparable conduct by others similarly situated.
    Subject to the limitations in subparagraphs (A) and (B), the sanction
    may consist of, or include, directives of a nonmonetary nature, an
    order to pay a penalty into court, or, if imposed on motion and
    warranted for effective deterrence, an order directing payment to the
    movant of some or all of the reasonable attorneys' fees and other
    expenses incurred as a direct result of the violation.
    Fed. R. Bankr. P. 9011.
    The test for imposing Rule 9011 sanctions is whether the individual's conduct at issue was
    “reasonable under the circumstances” at the time the filing was submitted. B-Line, LLC v. Wingerter
    (In re Wingerter), 
    594 F.3d 931
    , 941 (6th Cir. 2010). “Rule 9011 . . . is designed to encourage
    counsel (and parties) to avoid groundless filings or pleadings filed for improper purposes, largely
    through the imposition of sanctions.” In re Deville, 
    280 B.R. 483
    , 492 (B.A.P. 9th Cir. 2002); see
    13
    also Heavrin v. Schilling (In re Triple S Restaurants, Inc.), 
    342 B.R. 508
    , 513 (Bankr. W.D. Ky.
    2006) (“The purpose of Rule 9011 is to impose sanctions in order to deter baseless filings and thus
    avoid the expenditure of unnecessary resources.”). The filing of a petition for relief under the
    Bankruptcy Code on behalf of a corporate entity without authority has been found to be a violation
    of Rule 9011. See In re MPX Tech., Inc., 
    310 B.R. 453
    (Bankr. M.D. Fla. 2004) (finding party who
    was removed as president of corporation by shareholders and nevertheless caused chapter 11 petition
    to be filed violated Rule 9011 and warranted award of sanctions); Manfredi III v. D & V Constr., Inc.
    (In re D & V Constr., Inc.), 
    150 B.R. 362
    (Bankr. W.D. Penn. 1993) (imposing Rule 9011 sanctions
    against 50% shareholder in debtor who caused petition for relief to be filed without proper
    authority); In re AT Engineering, Inc., 
    142 B.R. 990
    (Bankr. M.D. Fla. 1992) (imposed Rule 9011
    sanctions against attorney who caused chapter 7 petition to be filed on behalf of corporate debtor by
    president who had no authority to place corporation into bankruptcy).
    After a bankruptcy court determines that Rule 9011 has been violated by a party, it has wide
    discretion in selecting the appropriate sanction. Jackson v. The Law Firm of O’Hara, Ruberg,
    Osborne, & Taylor, 
    875 F.2d 1224
    , 1229 (6th Cir. 1989). The two goals of the rule are deterrence
    and compensation, with deterrence being the primary goal. Orlett v . Cincinnati Microwave, Inc.,
    
    954 F.2d 414
    , 419 (6th Cir. 1992). As such, the “court should impose the least severe sanction that
    is likely to deter.” 
    Jackson, 875 F.2d at 1229
    ; 
    Orlett, 954 F.2d at 419
    ; see also In re Triple S
    Restaurants, 
    Inc., 342 B.R. at 513
    (sanction imposed is limited to “what is sufficient to deter
    repetition of such conduct or comparable conduct by others similarly situated.”). One type of
    sanction which may be imposed is “reasonable attorney fees.” 
    Orlett, 954 F.2d at 419
    . Reasonable
    attorney fees does not necessarily mean actual legal expenses incurred. In determining the amount
    of attorney fees to impose as a sanction, the court must consider the party’s ability to pay. 
    Jackson, 875 F.2d at 1230
    .
    Byrd argues in this appeal that the bankruptcy court abused its discretion in imposing
    sanctions against him, individually, because he asserts that the petition for relief was filed by
    Horizon on Debtor’s behalf, and not by him individually. As such, Byrd argues that pursuant to the
    14
    Uniform Limited Liability Act, he cannot be held personally liable for the filing, and that he is
    entitled to indemnification pursuant to Tennessee law and his employment agreement. Byrd
    contends that any sanctions levied should be levied against Horizon or the Debtor, the parties Byrd
    asserts were Jones’ clients. However, because Arvest Bank did not move for sanctions against
    Horizon or the Debtor, Byrd argues the order imposing sanctions should simply be reversed.
    Byrd also argues that the bankruptcy court abused its discretion in ordering him to pay the
    full attorney fees and costs incurred by Arvest Bank as a sanction because: (1) Arvest Bank did not
    submit proper documentation of the fees and costs; and (2) Byrd demonstrated to the court that he
    has no ability to pay the sanctions.
    1.      Byrd Acted in his individual capacity in filing the bankruptcy petition.
    In his brief, Byrd argues that in causing the petition for relief to be filed in this case, he was
    acting on Horizon’s behalf, not individually. Therefore, Byrd contends, that he “is protected under
    the Uniform Limited Liability Act for any liabilities that may arise from his actions on behalf of
    [Horizon]” and that he “was acting as an officer of [Horizon] and not in his individual capacity,” and
    therefore, “cannot be held personally liable to Arvest according to the Uniform Limited Liability
    Act.”
    Contrary to Byrd’s assertions, however, the bankruptcy court found that he acted individually
    in causing the petition to be filed, not on Horizon’s behalf. Upon a review of the evidence and Byrd
    and Jones’ testimony, the Panel finds that the bankruptcy court performed an adequate inquiry into
    the facts presented during the evidentiary hearing and applied the correct legal standard. In doing
    so, the court determined that Byrd “acted on his own behalf and had no objectively reasonable basis
    for believing that the filing of the bankruptcy petition was authorized.” (Bankr. Ct. Docket # 131,
    p. 25, Memorandum Opinion dated Aug. 30, 2010). As 
    stated supra
    , the special limited partner had
    taken all steps necessary to remove Horizon and substitute BCP as general partner of the Debtor, and
    since BCP was the general partner at the time the bankruptcy petition was filed, Byrd was not
    authorized by the Partnership Agreement to hire counsel for, or sign the petition on behalf of, the
    15
    Debtor. Further, the court found that the Partnership Agreement prohibits the general partner from
    filing a bankruptcy petition on behalf of the Debtor without the consent of the special limited partner,
    and no such consent was given by the special limited partner. The bankruptcy court did not abuse
    its discretion in finding that Byrd acted in his individual capacity in filing the chapter 11 petition.
    2.     Byrd is not entitled to indemnification.
    Byrd next contends that pursuant to his employment agreement with Horizon he is entitled
    to indemnification for his actions taken in his capacity as Chief Manager of Horizon. The
    bankruptcy court’s memorandum opinion specifically states that it “formed no opinion about whether
    Mr. Byrd is entitled to indemnification from Horizon or any other entity for his actions in connection
    with this case as that issue was not presented by the pleadings.” (Bankr. Ct. Docket # 131, at 11, n.1)
    Although Byrd raised the issue of indemnification during his testimony, because Byrd did not raise
    this issue in his pleadings before the bankruptcy court, it is waived. Overstreet v. Lexington-Fayette
    Urban County Gov’t, 
    305 F.3d 566
    , 578 (6th Cir. 2002) (quoting Bailey v. Floyd County Bd. of
    Educ., 
    106 F.3d 135
    , 143 (6th Cir. 1997)) (“‘It is well-settled that this court will not consider
    arguments raised for the first time on appeal unless our failure to consider the issue will result in a
    plain miscarriage of justice.’”); In re Perrin, 
    361 B.R. 853
    , 857 (B.A.P. 6th Cir. 2007).
    3.     Byrd has an ability to pay sanctions.
    Byrd also argues that the bankruptcy court abused its discretion in not considering his ability,
    or inability, to pay any financial sanctions. Byrd notes that in the bankruptcy court’s memorandum
    opinion, the bankruptcy court stated that “neither of them has significant income in excess of
    expenses.” Byrd argues that he “did not have the ability to pay financial sanctions at the time of the
    court’s order nor does he have the ability to pay any today.”
    In response to Byrd’s arguments, Arvest Bank reiterates the reasons it cited before the
    bankruptcy court for giving little or no weight to the financial information Byrd submitted. Arvest
    Bank submitted various public records to show: (1) that Byrd and his wife engaged in questionable
    financial transactions related to their residence over a period of years leading to foreclosure upon the
    16
    residence by Deutsche Bank and then transfer by the bank to Horizon; (2) that Byrd and Horizon
    engaged in questionable transactions related to transfer of a luxury automobile worth approximately
    $70,000 to Byrd’s wife; and (3) that Byrd’s wife also owns another luxury vehicle, a 2008 Mercedes
    S55 sedan. Arvest Bank argued to the bankruptcy court that Byrd was not credible about his own
    financial condition because Byrd had been previously convicted of federal wire fraud in 2003, made
    numerous false statements on the chapter 11 petition and schedules, withheld “crucial information”
    from Jones, and falsely testified at the March 3, 2010, hearing regarding the reason his prior two
    personal bankruptcy cases were dismissed. Arvest Bank also notes that the bankruptcy court gave
    Byrd an opportunity to respond to the information submitted by Arvest; however, Byrd did not file
    any responsive pleading.
    While failure of the court to inquire into a sanctioned party’s ability to pay is an abuse of
    discretion, the Sixth Circuit has also explained:
    [W]hen courts evaluate a [sanctioned party’s] ability to pay, the
    burden of proof is on the sanctioned party to provide evidence of
    financial status. An unsupported claim regarding financial status is
    clearly insufficient. Even in the case of a proven total inability to
    pay, a court may still impose modest sanctions, because the purpose
    is to deter future misconduct in litigation.
    ...
    [E]ven if [the sanctioned party] had met [its] burden of demonstrating
    financial status, it was still within the court’s discretion to impose the
    sanction it felt it necessary to serve the cause of deterrence.
    Legair v. Circuit City Stores, Inc., 213 Fed. App’x 436, 440 (6th Cir. 2007) (unpub.) (internal
    citations omitted); see also White v. General Motors Corp., Inc., 
    908 F.2d 675
    , 685 (10th Cir. 1990)
    (“We also hold that even if plaintiffs prove that they are totally impecunious the court may impose
    modest sanctions to deter future baseless filings.”). Moreover, in addition to considering the party’s
    ability to pay, the court may consider other factors such as the “offending party’s history, experience,
    and ability, the severity of the violation, the degree to which malice or bad faith contributed to the
    violation, the risk of chilling the type of litigation involved, and other factors deemed appropriate
    17
    in individual circumstances.” 
    White, 908 F.2d at 685
    ; Robeson Def. Comm. v. Britt (In re Kunstler),
    
    914 F.2d 505
    , 524-25 (4th Cir. 1990) (applying same factors).
    Based upon a review of the entire record in this case, Byrd has not shown that the bankruptcy
    court abused its discretion in awarding sanctions against him in the amount of Arvest Bank’s
    attorney fees and expenses of $42,299.08. The bankruptcy court considered Byrd’s ability, or
    professed inability, to pay sanctions. Based upon the evidence and testimony at the hearing on this
    matter, the court did not find Byrd’s unsupported claims regarding his financial situation to be
    credible. The court also considered other permissible factors, including: Byrd’s experience and
    abilities – finding that Byrd had proven himself “extremely sophisticated and resourceful” and “very
    capable of reading and understanding complex legal documents”; the severity of his violation –
    finding he “withheld crucial information” from counsel and caused a “great deal of harm” to parties
    including Arvest Bank, Jones, and the court itself; and the degree of bad faith on Byrd’s part, such
    as his continued attempts to place all blame with Jones and counsel for Arvest Bank. (Bankr. Ct.
    Docket # 131, pp. 23-25, Memorandum Opinion dated Aug. 30, 2010). Finally, and importantly, the
    bankruptcy court considered what it determined would be sufficient to deter Byrd from “acting in
    a similar fashion in the future.” 
    Id. at 25.
    The primary goal of Rule 11 sanctions is deterrence, with
    compensation being the secondary goal. 
    Orlett, 954 F.2d at 419
    . The Panel finds the bankruptcy
    court did not abuse its discretion in determining that Byrd had an ability to pay sanctions in the
    amount of $42,299.08.
    4.     Arvest Bank submitted proper documentation of its attorney fees and costs.
    Finally, Byrd asserts that the bankruptcy court abused its discretion in ordering him to pay
    Arvest Bank’s full attorney fees and costs because he contends Arvest Bank did not submit proper
    documentation of the fees and costs. Arvest Bank provided the bankruptcy court with monthly
    statements of attorney fees and expenses containing time entries described and recorded in
    increments of one-tenth of an hour by attorneys and paralegals working for Arvest Bank. These
    statements were authenticated by the testimony of Arvest Bank’s counsel at the hearing on March
    18
    3, 2010. The Panel finds that the bankruptcy court did not abuse its discretion in ordering Byrd to
    pay Arvest Bank’s attorney fees and costs in full.
    CONCLUSION
    For the reasons stated, the Panel affirms the bankruptcy court’s order awarding sanctions
    against Appellant Preston E. Byrd in the amount of $42,299.08.
    19
    

Document Info

Docket Number: 10-8071

Filed Date: 9/20/2011

Precedential Status: Non-Precedential

Modified Date: 4/18/2021

Authorities (20)

Menninger v. Accredited Home Lenders (In Re Morgeson) , 371 B.R. 798 ( 2007 )

In Re Perrin , 361 B.R. 853 ( 2007 )

Miller v. Cardinale (In Re Deville) , 280 B.R. 483 ( 2002 )

Frederick Lawrence White, Jr. Benjamin L. Staponski, Jr., ... , 908 F.2d 675 ( 1990 )

Kaye v. Agripool, SRL (In Re Murray Inc.) , 392 B.R. 288 ( 2008 )

in-re-william-m-kunstler-in-re-barry-nakell-in-re-lewis-pitts-robeson , 914 F.2d 505 ( 1990 )

In Re: M.J. Waterman & Associates, Inc., Debtor. Duane H. ... , 227 F.3d 604 ( 2000 )

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Robert G. Jackson, Robert P. Gettys, Attorney-Appellant v. ... , 875 F.2d 1224 ( 1989 )

B-Line, LLC v. Wingerter (In Re Wingerter) , 594 F.3d 931 ( 2010 )

Edward Orlett v. Cincinnati Microwave, Inc., James L. Jaeger , 954 F.2d 414 ( 1992 )

Philip D. Overstreet v. Lexington-Fayette Urban County ... , 305 F.3d 566 ( 2002 )

sidney-jane-bailey-v-floyd-county-board-of-education-by-and-through-its , 106 F.3d 135 ( 1997 )

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Anderson v. City of Bessemer City , 105 S. Ct. 1504 ( 1985 )

Midland Asphalt Corp. v. United States , 109 S. Ct. 1494 ( 1989 )

In Re Triple S Restaurants, Inc. , 342 B.R. 508 ( 2006 )

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