McGahren v. Heck , 111 F.3d 1159 ( 1997 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In re: C. WALTER WEISS, d/b/a
W&M Investment, d/b/a Weiss
Development; In re: PAULETTE H.
WEISS, d/b/a Karmel Korn, d/b/a
Connectables, Incorporated,
Debtors.
JOHANNA F. MCGAHREN, as personal
representative for the Estate of
Francis J. McGahren,
No. 95-2564
Creditor-Appellant,
v.
FIRST CITIZENS BANK & TRUST
COMPANY; JAMES GARY ROWE,
Attorney for First Citizens Bank,
Creditors-Appellees,
and
BARBARA A. HECK, Trustee,
Trustee-Appellee.
In re: C. WALTER WEISS, d/b/a
Weiss Development, d/b/a W&M
Investment; In Re: PAULETTE H.
WEISS, d/b/a Karmel Korn, d/b/a
Connectables, Incorporated,
Debtors.
JOHANNA F. MCGAHREN, as personal
No. 95-2706
representative for the Estate of
Francis J. McGahren,
Creditor-Appellant,
v.
BARBARA A. HECK, Trustee for C.
Walter & Paulette Weiss,
Trustee-Appellee.
2
In Re: C. WALTER WEISS, d/b/a
W&M Investment, d/b/a Weiss
Development; In Re: PAULETTE H.
WEISS, d/b/a Connectables,
Incorporated, d/b/a Karmel Korn,
Debtors.
JOHANNA F. MCGAHREN, as personal
representative for the Estate of
Francis J. McGahren,
Creditor-Appellant,
No. 95-2707
v.
DAVID G. GRAY,
Creditor-Appellee,
and
BARBARA A. HECK, Trustee,
Trustee-Appellee,
and
FIRST CITIZENS BANK& TRUST
COMPANY; JAMES GARY ROWE,
Attorney for First Citizens Bank,
Creditors.
3
In Re: C. WALTER WEISS, d/b/a
W&M Investment; PAULETTE H.
WEISS, d/b/a Connectables,
Incorporated, d/b/a Karmel Korn,
Debtors.
No. 96-1879
ESTATE OF FRANCIS J. MCGAHREN,
Creditor-Appellant,
v.
BARBARA A. HECK, Trustee,
Trustee-Appellee.
Appeals from the United States District Court
for the Western District of North Carolina, at Asheville.
Richard L. Voorhees, Chief District Judge;
Lacy H. Thornburg, District Judge.
(CA-93-59-1, CA-94-60-1, CA-94-30-1,
CA-93-84-1, CA-95-242-1-T, BK-87-10330)
Argued: December 2, 1996
Decided: April 24, 1997
Before WIDENER and MURNAGHAN, Circuit Judges, and
PHILLIPS, Senior Circuit Judge.
_________________________________________________________________
Affirmed by published opinion. Judge Murnaghan wrote the opinion,
in which Judge Widener and Senior Judge Phillips joined.
_________________________________________________________________
COUNSEL
ARGUED: Matthew Francis McGahren, Norcross, Georgia, for
Appellants. David G. Gray, Jr., Asheville, North Carolina, for
Appel-
lees.
4
OPINION
MURNAGHAN, Circuit Judge:
In 1985, C. Walter Weiss and Appellant Francis J. McGahren dis-
solved their partnership, and their attorney executed a multiple-
property deed that transferred several properties from the
partnership
to McGahren. In 1989, McGahren attempted to sell one of the proper-
ties, but he discovered that he could not pass good title to the
property
because the partners' attorney had inadvertently left the property
out
of the multiple-property deed.
In the meantime, Weiss had filed for bankruptcy. Thus, when
McGahren discovered the defect in the deed, he turned the property
over to Weiss's bankruptcy trustee, Appellee Barbara Heck. The
bankruptcy court entered several orders adverse to McGahren, and
the
district court affirmed. For the reasons stated below, we also
affirm.
I.
Weiss and McGahren formed a partnership, the W&M Investment
Company ("W&M" or the "partnership"). In October 1984, W&M
acquired the property at issue in the instant case, described as
Lot 3,
Ridgedale Subdivision, Buncombe County, North Carolina ("Lot 3"
or the "property"), and it borrowed the purchase price from First
Fed-
eral Bank.1 In 1985, Weiss and McGahren dissolved their
partnership.
There is no evidence in the record, however, that Weiss or McGahren
wound up the partnership affairs.
As part of the dissolution, the partners decided that McGahren
would receive Lot 3 and other properties. The partners' attorney,
George Saenger, accordingly executed a multiple-property deed to
McGahren. The deed, however, erroneously failed to include Lot 3.
As a result, the property remained titled in the name of W&M. Weiss
and McGahren, however, were unaware of the title mistake, and they
proceeded as if McGahren alone owned the property. McGahren
_________________________________________________________________
1 First Citizens Bank & Trust Company ("First Citizens Bank") later
acquired First Federal Bank.
5
rented the property as a duplex, kept all of the rental proceeds,
and
paid all of the maintenance costs, insurance, and taxes on the
prop-
erty. In late 1989, however, McGahren realized the mistake when he
attempted to sell the property and discovered that he could not
pass
good title.
In July 1987, Weiss filed a Chapter 7 bankruptcy petition. Since
Weiss was unaware of the title mistake at that time, he did not
list Lot
3 as an asset of the bankruptcy estate. In late December 1989 or
early
January 1990, when McGahren discovered the error in the deed, he
contacted the bankruptcy trustee, Appellee Barbara Heck. McGahren
told Heck that Lot 3 belonged to him and that, but for a mistake in
title, W&M would have deeded the property to him in 1985. Heck
asked McGahren whether there was any equity in the property, and
McGahren told her that he had a proposed sale contract for $68,000
(the "1989 offer"), which exceeded the mortgage payoff and other
liens. According to McGahren, Heck then told him that he would
have to pay the bankruptcy estate from the proceeds of the sale.
In February 1990, when Weiss learned of the error in the original
deed, he executed a general warranty deed (the "February 1990
deed")
that granted McGahren title to Lot 3. McGahren recorded the deed in
March 1990. However, a question then arose as to whether the Febru-
ary 1990 deed was voidable because Weiss had already filed for
bankruptcy.
In September 1991, Heck wrote to McGahren and offered to aban-
don the property in order to help him clear the title. By that
time,
however, McGahren was having financial difficulties. He had stopped
making mortgage and insurance payments on the property, and First
Citizens Bank had begun foreclosure proceedings. Thus, when Heck
offered to abandon the property, McGahren abruptly changed his
position. He no longer claimed that he owned the property, but
instead claimed that the property belonged to the bankrupt estate.
In an effort to clarify the issues surrounding the property, Heck
brought a motion to abandon the property in December 1991. Based
upon realtor David Boyter's $55,000 appraisal of the property,2 the
_________________________________________________________________
2 Since the 1989 offer for $68,000, a fire had partially destroyed
the
house on Lot 3. Although McGahren had begun reconstruction, he had
not completed the repairs at the time that Heck moved to abandon
the
property.
6
motion asserted that no equity existed in the property. McGahren
objected to the abandonment. He claimed that instead of abandoning
the property, the trustee had a duty to sell the property, pay the
bank,
and distribute any remaining proceeds to the creditors. McGahren
claimed that a private sale would net a greater profit than
foreclosure
and thus would reduce the deficit that he owed the bank.
After a hearing in March 1992, the bankruptcy court issued an
order abandoning the property. McGahren appealed that order to the
District Court for the Western District of North Carolina. In
February
1993, the district court remanded the case to the bankruptcy court
for
additional proceedings to determine the value of the property. At
the
second abandonment hearing, First Citizens Bank presented detailed
appraisal and valuation testimony by its expert, Ted Vish,
regarding
the value of Lot 3. Like the realtor at the first abandonment
hearing,
Vish valued the property at $55,000. The bankruptcy court again
granted Heck's motion to abandon Lot 3, and the court lifted the
auto-
matic stay on the property. First Citizens Bank then scheduled the
property for foreclosure and sale.
McGahren appealed again and moved for an order staying the fore-
closure pending appeal. In July 1993, the district court denied the
motion and found that McGahren had not produced sufficient evi-
dence to prove that the foreclosure sale would realize a lower
profit
than a private sale. On June 30, 1995, the district court affirmed
the
bankruptcy court's order granting abandonment and relief from stay.
McGahren now appeals that ruling.
In March 1992, McGahren filed a separate suit against Heck for
negligence and intentional misconduct. He claimed that Heck should
have discovered the bankrupt estate's interest in Lot 3 before the
1989
offer fell through and that she should have consummated the sale of
the property. Heck answered the complaint and later moved for sum-
mary judgment. After a hearing, the bankruptcy court granted Heck's
motion and dismissed the action. McGahren appealed, and the
district
court affirmed on July 25, 1995. McGahren now appeals the district
court's order.
In July 1993, the bankruptcy court imposed sanctions on
McGahren pursuant to Federal Rule of Bankruptcy Procedure 9011
7
and the inherent powers of the court. McGahren appealed. On July
11,
1995, the district court affirmed the bankruptcy court's decision
to
impose sanctions on McGahren. However, the district court reversed
the bankruptcy court's order that McGahren pay the attorneys' fees
that the trustee and First Citizens Bank incurred after the
district
court's February 1993 remand of the bankruptcy court's abandonment
order. The district court remanded the sanctions order to the bank-
ruptcy court for further proceedings to determine the amount and
form of sanctions. McGahren now appeals the district court's order
affirming the sanctions.
Pursuant to the district court's remand of the sanctions order, the
bankruptcy court held a hearing on October 18, 1995. McGahren died
in August 1995, and his widow, Johanna McGahren, filed a brief on
his behalf. On November 2, 1995, the bankruptcy court reduced its
prior award of attorney's fees and also awarded additional
attorney's
fees to David Gray, Heck's attorney, for McGahren's subsequent con-
duct.
On November 10, 1995, Johanna McGahren filed a timely notice
of appeal of the second sanctions order. On March 1, 1996, the dis-
trict court clerk mailed a briefing letter to Mrs. McGahren that
advised her that the appeal had been docketed and that her brief
was
due within fifteen days of the date of the letter. On April 11,
1996,
Heck and Gray filed a motion to dismiss the appeal on the ground
that
Mrs. McGahren had failed to file an appeal brief. In her response
and
opposition to the motion, Mrs. McGahren claimed that she never
received the briefing letter. Despite Mrs. McGahren's claim,
however,
the district court dismissed the appeal on May 3, 1996 pursuant to
Federal Rules of Bankruptcy Procedure 8001(a) and 8009(a). Mrs.
McGahren now appeals the dismissal order. We consolidated all four
appeals for oral argument.
II.
When Weiss filed his Chapter 7 bankruptcy petition in 1987, title
to Lot 3 remained with W&M. An issue therefore arose in the bank-
ruptcy court regarding whether Weiss's bankrupt estate had an
inter-
est in Lot 3. The district court concluded that Lot 3 itself never
became property of the bankrupt estate because it remained titled
to
8
W&M. The court held, however, that the bankrupt estate did have an
interest in Lot 3 because the partners had not completely wound up
their partnership affairs at the time that Weiss filed his
bankruptcy
petition. The court concluded that the bankruptcy estate included
Weiss's entitlement as a partner to a distribution upon the winding
up
of the partnership affairs. However, since the facts proven at the
sec-
ond abandonment hearing established that Lot 3 had little, if any,
equity, the district court affirmed the bankruptcy court's order
aban-
doning the bankrupt estate's interest in the property.
We review the district court's decision de novo . See Travelers
Ins.
Co. v. Bryson Properties, XVIII (In re Bryson Properties), 961 F.2d
496, 499 (4th Cir. 1992). We review the bankruptcy court's findings
of fact only for clear error. Id. Findings of fact are 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." Green v. Staples (In re Green), 934
F.2d 568, 570 (4th Cir. 1991). The Supreme Court has explained:
If the [lower] court's account of the evidence is plausible in
light of the record viewed in its entirety, the court of
appeals
may not reverse it even though convinced that had it been
sitting as the trier of fact, it would have weighed the evi-
dence differently. Where there are two permissible views of
the evidence, the factfinder's choice between them cannot
be clearly erroneous.
Anderson v. Bessemer City, 470 U.S. 564, 573-74 (1985). We review
the bankruptcy court's conclusions of law de novo. See In re Bryson
Properties, 961 F.2d at 499.
A.
North Carolina law provides that a partnership does not terminate
upon dissolution. The partnership continues until the partners com-
plete the "winding up" of partnership affairs. See N.C. Gen. Stat.
§ 59-60 (1989). The North Carolina Court of Appeals has stated:
[D]issolution of itself has no effect on existing liabilities
of
the partnership. If it did, partners could escape their
obliga-
9
tions by dissolving. [The statute] provides that upon dissolu-
tion, the partnership is not terminated, but continues until
the winding up of partnership affairs is completed. In other
words, dissolution designates the point in time when the
partners cease to carry on the business together; termination
is the point in time when all the partnership affairs are
wound up, winding up [meaning] the process of settling
partnership affairs after dissolution.
Baker v. Rushing, 409 S.E.2d 108, 113 (N.C. Ct. App. 1991)
(internal
quotation marks and citations omitted). Moreover, the parties must
present evidence regarding when the partners wound up the partner-
ship affairs. Id. at 250. In the instant case, the parties failed
to present
any evidence that Weiss and McGahren wound up the partnership
affairs of W&M. Thus, at the time of Weiss's bankruptcy, the
partner-
ship continued to own Lot 3.
The federal bankruptcy statute provides that a bankrupt estate "is
comprised of . . . all legal or equitable interests of the debtor
in prop-
erty as of the commencement of the case." 11 U.S.C.A. § 541(a)(1)
(West 1993). Courts broadly define "property" that enters a Chapter
7 estate under § 541 to include all types of property, including
"legal
or equitable interests, tangible or intangible property, choses in
action,
and beneficial rights and interests that the Debtor has in the
property
of another." In re Lima Days Inn, Ltd., 10 B.R. 173, 174 (Bankr.
N.D.
Ohio 1981). However, courts consistently have held that partnership
property itself does not become property of an individual partner's
bankruptcy estate. See In re Signal Hill-Liberia Ave. Ltd.
Partnership,
189 B.R. 648, 652 (Bankr. E.D. Va. 1995); Magers v. Thomas (In re
Vannoy), 176 B.R. 758, 770 (Bankr. M.D.N.C. 1994). The courts base
their reasoning on the fact that individual partners only have an
indi-
rect ownership interest in partnership property. 3 Thus, the
district
court correctly concluded that Lot 3 itself never became property
of
Weiss's bankrupt estate.
In the district court, McGahren vehemently argued that the bank-
rupt estate did include Lot 3. On appeal, however, McGahren claims
_________________________________________________________________
3 Under North Carolina law, each partner owns partnership property
as
a tenant in partnership. See N.C. Stat.§ 59-55(a) (1989).
10
that the district court correctly concluded that the bankrupt
estate did
not include Lot 3. He now argues that since the property did not
enter
the bankrupt estate, the bankruptcy court had no jurisdiction to
aban-
don it.
The federal statute regarding abandonment provides that "[a]fter
notice and a hearing, the trustee may abandon any property of the
estate that is burdensome to the estate or that is of
inconsequential
value and benefit to the estate." 11 U.S.C.A.§ 554(a) (West 1993)
(emphasis added). The issue thus becomes whether Weiss possessed
a beneficial right or interest in Lot 3 that constituted "property
of the
estate." McGahren argues that since Lot 3 itself was not "property
of
the estate," the bankruptcy court had no jurisdiction to grant the
trust-
ee's motion to abandon it.
However, Weiss's estate did include an interest in the specific
part-
nership property insofar as he was entitled, as a partner, to a
distribu-
tion upon the winding up of the partnership affairs. Courts have
held
that such an interest constitutes "property of the estate." For
example,
the Bankruptcy Court of the District of Maryland noted that an
indi-
vidual debtor's estate includes the debtor's interest in specific
partner-
ship property. See In re Korangy, [1989-1990 Transfer Binder]
Bankr.
L. Rep. (CCH) ¶ 72,867, at 95,007 (Bankr. D. Md. Mar. 30, 1989),
aff'd, 927 F.2d 596 (4th Cir. 1991). The court stated that because
the
partnership in question continued to own the property, "the
debtor's
estate included an interest in specific partnership property, but
the
property itself did not become part of the debtor's estate. Rather
debt-
or's estate included the debtor's entitlement to the distribution
as a
partner upon the winding up of partnership affairs." Id. See also
In re
Antonelli, 148 B.R. 443, 446 (D. Md. 1992) (holding that a partner-
ship interest constitutes "property of the estate"), aff'd, 4 F.3d
984
(4th Cir. 1993); In re Signal Hill-Liberia Ave. Ltd. Partnership,
189
at 652 (holding that an individual debtor's partnership interest is
prop-
erty of the debtor's estate); In re Vannoy, 176 B.R. at 770 (same).
Thus, since Lot 3 remained titled in W&M and Weiss and
McGahren had not wound up the partnership at the time that Weiss
filed his bankruptcy petition, the bankrupt estate included Weiss's
partnership interest in Lot 3. We hold that such an interest
constitutes
11
"property of the estate" and that the bankruptcy court had
jurisdiction
to abandon it.
B.
The bankruptcy court found, as a matter of fact, that the liens on
Lot 3 exceeded its value and that the property therefore had
little, if
any, equity. Accordingly, the court granted the trustee's motion to
abandon Weiss's interest in the property. McGahren argues that even
if the bankruptcy court did have jurisdiction over the matter, it
should
not have abandoned Weiss's interest in Lot 3 because the property
was worth a substantial amount of money.
Before a bankruptcy court may abandon property of the estate, "the
trustee must ascertain the property's fair market value and the
amount
and validity of the outstanding liens against the property." New
Jersey
Dep't of Envtl. Protection v. National Smelting of N.J., Inc. (In
re
National Smelting of N.J., Inc.), 49 B.R. 1012, 1014 (D. Colo.
1985).
At the abandonment hearing, First Citizens Bank presented testimony
and evidence regarding the outstanding indebtedness on the
mortgage.
The evidence revealed that the amount owed on the mortgage totaled
$52,557.83. The evidence also established that McGahren owed
$1,016.75 in real estate taxes. Moreover, the bank had incurred
almost
$5,000 in attorneys' fees and costs in its attempts to collect on
the
mortgage. Thus, the record supports the bankruptcy court's finding
that the liens against the property amounted to over $58,000.
The parties presented conflicting evidence at the hearing regarding
Lot 3's fair market value. First Citizens Bank's expert, Ted Vish,
appraised the property at $55,000. The house on Lot 3 had sustained
substantial fire and water damage that required extensive
reconstruc-
tion. At the time that Vish appraised the property, McGahren had
not
completed the repairs. After McGahren received a copy of Vish's
appraisal, however, he began to complete the repairs in what the
dis-
trict court described as a "rather slipshod manner." McGahren then
hired an architect and a real estate salesman to appraise Lot 3.
They
testified that Lot 3 was worth between $68,000 and $75,000.
The bankruptcy court credited Vish's opinion. The court found that
McGahren's architect had not yet been licensed as an appraiser. In
12
addition, McGahren's appraisers based their estimates on incomplete
and incorrect information. For example, McGahren failed to inform
them that he had recently modified Lot 3's property restrictions,
that
many other property restrictions existed, and that Lot 3 had a
history
of water seepage.
Furthermore, McGahren's position that Lot 3 is worth between
$68,000 and $75,000 does not make sense. The district court rightly
pointed out that if the property was worth that much, McGahren's
"dogged determination" to include Lot 3 in the bankruptcy estate
would be "incomprehensible" since that would mean that McGahren
would receive only one-half of the property's equity, as opposed to
all of the equity if the bankruptcy court abandoned the property.
The
district court noted that McGahren's property values were "less
than
credible" and that his efforts to include Lot 3 in the bankrupt
estate
probably resulted from his desire to avoid the financial
difficulties
that would result from a foreclosure action against him.
Thus, we find that the bankruptcy court did not clearly err when it
credited First Citizens Bank's expert over McGahren's experts. The
facts established at the abandonment hearing support the bankruptcy
court's conclusion. Moreover, since Vish appraised Lot 3 at only
$55,000, the bankruptcy court correctly concluded that the
property's
liens exceeded its value and that the property therefore was of
incon-
sequential value to the estate. Thus, we hold that the district
court
properly affirmed the bankruptcy court's order abandoning the bank-
rupt estate's interest in Lot 3 and granting relief from the
automatic
stay on the property.
III.
McGahren also sued Heck in a separate adversary proceeding for
negligence and intentional misconduct. McGahren claimed that since
Lot 3 itself was part of the bankrupt estate, Heck should have sold
the
property pursuant to the $68,000 offer that McGahren received in
1989 before the fire partially destroyed the property. The
bankruptcy
court granted summary judgment to Heck, and the district court
affirmed. In light of its finding that Lot 3 itself never became
property
of the bankrupt estate, the district court held that Heck had no
duty
to collect and sell it.
13
We review the district court's grant of summary judgment de novo.
See M & M Medical Supplies and Serv., Inc. v. Pleasant Valley
Hosp.,
Inc., 981 F.2d 160, 163 (4th Cir. 1992). In order to prevail on a
motion for summary judgment, the moving party must establish that
no genuine issues of material fact exist and that it is entitled to
judg-
ment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S.
317,
322-23 (1986). If the moving party carries its burden, the
nonmoving
party may not rest on the allegations in its complaint, but must
pro-
duce sufficient evidence that demonstrates that a genuine issue
exists
for trial. Id. at 324. We view the facts in the light most
favorable to
the nonmoving party. See Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 255 (1986).
We have previously outlined the nature and scope of a bankruptcy
trustee's liability. In Yadkin Valley Bank & Trust Co. v. McGee,
819
F.2d 74, 76 (4th Cir. 1987), we held that a bankruptcy trustee may
be
held liable in his or her official capacity as a trustee for acts
of negli-
gence. However, a trustee may be held personally liable only for
will-
ful or intentional misconduct. Id.
McGahren first contends that Heck should be held liable in her
official capacity. However, Heck did not act negligently when she
failed to collect and sell Lot 3 pursuant to the 1989 offer. As
stated
above, Lot 3 itself never became property of Weiss's bankrupt
estate
because it remained titled to W&M. See In re Signal Hill-Liberia
Ave.
Ltd. Partnership, 189 B.R. 648, 652 (Bankr. E.D. Va. 1995) (holding
that partnership property itself does not become property of an
indi-
vidual partner's bankrupt estate). Since Lot 3 itself never entered
the
bankrupt estate, the district court correctly concluded that Heck
had
no duty to sell Lot 3. Although the bankruptcy estate did include
Weiss's partnership interest in Lot 3, we held above that Weiss's
interest was of inconsequential value to the estate given the
substan-
tial liens on the property. Thus, contrary to McGahren's assertion,
Heck would have breached her duty to the estate if she had
collected
Weiss's interest and incurred the significant costs entailed in
selling
it.
McGahren next contends that even if Heck had no duty to collect
and sell Lot 3, she acted outside the scope of her duties and
should
be held personally liable. When McGahren first discovered the title
14
problem in late December 1989 or early January 1990, he contacted
Heck. He claims that Heck told him at that time that he would have
to pay the bankrupt estate out of the proceeds of any sale of the
prop-
erty. McGahren contends that Heck's statement prevented him from
selling Lot 3 and caused the 1989 offer to fall through.
As stated above, however, we may hold bankruptcy trustees per-
sonally liable only for willful or intentional misconduct. See
Yadkin
Valley Bank & Trust, 819 F.2d at 76. McGahren fails to demonstrate
that Heck engaged in any willful or deliberate misconduct. The
record
reveals that Heck, the bankruptcy court, and First Citizens Bank
all
tried to help McGahren clear the title to Lot 3. In September 1991,
Heck offered to abandon the property. In October 1991, a
representa-
tive of First Citizens Bank wrote to McGahren and advised him of
three different methods to clear the title, including abandonment
of
the property by the trustee. In March 1992, Heck moved to abandon
the property, and the bankruptcy court granted her motion. The
court
advised McGahren that if the abandonment did not clear his title,
he
should proceed to do so in state court. In August 1992, another
bank
representative advised McGahren that the bank would help him clear
the title if he brought the mortgage current.
The undisputed facts in the record demonstrate that when
McGahren first learned of the title error, he adamantly insisted
that
he owned the property exclusively and that the bankrupt estate had
no
interest. He did not change his position until after the fire
damaged
the property. At that point, McGahren unrelentingly tried to have
the
property included in the bankrupt estate. As the bankruptcy court
stated:
it would be absolutely impossible for the trustee, as it has
been impossible for the Court or anybody else to satisfy Mr.
McGahren. In fact, the case started out by the trustee offer-
ing to do exactly what Mr. McGahren had moved the Court
to order the trustee to do and Mr. McGahren immediately
changed his position.
Thus, McGahren clearly failed to establish that Heck engaged in
any intentional misconduct. The record reveals instead that Heck
acted only to help McGahren. We therefore hold that the district
court
15
properly affirmed the bankruptcy court's order granting summary
judgment to Heck.
IV.
The bankruptcy court imposed sanctions on McGahren pursuant to
Federal Rule of Bankruptcy Procedure 9011 and the inherent power
of the court for his conduct in opposing Heck's motion for abandon-
ment and First Citizens Bank's motion to lift the stay. McGahren
appealed, and the district court affirmed the bankruptcy court's
deci-
sion to impose sanctions. We review the bankruptcy court's order
for
abuse of discretion. See Cooter & Gell v. Hartmarx Corp., 496 U.S.
384, 405 (1990).
A.
Federal Rule of Bankruptcy Procedure 9011 provides in pertinent
part:
Every petition, pleading, motion and other paper served or
filed in a case . . . on behalf of a party represented by an
attorney . . . shall be signed by at least one attorney of
record. . . . A party who is not represented by an attorney
shall sign all papers . . . . The signature of an attorney or
a
party constitutes a certificate that the attorney or party has
read the document; that to the best of the attorney's or
party's knowledge, information, and belief formed after rea-
sonable inquiry it is well grounded in fact and is warranted
by existing law or a good faith argument for the extension,
modification, or reversal of existing law; and that it is not
interposed for any improper purpose, such as to harass or to
cause unnecessary delay or needless increase in the cost of
litigation or administration of the case. . . . If a document
is
signed in violation of this rule, the court on motion or on
its
own initiative, shall impose on the person who signed it . .
.
an appropriate sanction, which may include an order to pay
to the other party or parties the amount of the reasonable
expenses incurred because of the filing of the document,
including a reasonable attorney's fee.
16
Fed.R.Bankr.P. 9011(a). The bankruptcy court concluded that
McGahren violated all three prongs of Rule 9011. The court found
that McGahren maintained frivolous factual and legal positions and
that he maintained those positions for the improper purpose of
delay-
ing Lot 3's ultimate foreclosure.
In deciding cases based on violations of Rule 9011, courts may
look to cases that interpret Federal Rule of Civil Procedure 11.
See
Valley Nat'l Bank of Ariz. v. Needler (In re Grantham Bros.) , 922
F.2d 1438, 1441 (9th Cir. 1991). In determining whether a signatory
violated Rule 11, the court must apply an objective standard of
rea-
sonableness. See Robeson Defense Comm. v. Britt (In re Kunstler) ,
914 F.2d 505, 514 (4th Cir. 1990). The fact that McGahren repre-
sented himself pro se in the proceedings below does not change our
analysis. Rule 9011 does not exempt pro se litigants from its
opera-
tion; a pro se litigant has the same duties under Rule 9011 as an
attor-
ney. See Upadhyay v. Burse (In re Burse), 120 B.R. 833, 837 (Bankr.
E.D. Va. 1990); In re 1801 Restaurant, Inc. , 40 B.R. 455, 457-58
(Bankr. D. Md. 1984).
The bankruptcy court based sanctions in part on a violation of the
first prong of Rule 9011; the court found that McGahren's documents
were not well grounded in fact. The court correctly noted numerous
misstatements of fact. The record reveals that McGahren initially
stated in his documents that he owned Lot 3 exclusively. He also
took
the inconsistent position that Heck should have sold the property
pur-
suant to the 1989 offer and that Heck's failure to do so caused him
to lose the offer. However, the record reveals that the buyers
with-
drew their offer not because of title problems, but because the
house
had serious structural problems and the buyer lost her job.
Moreover, McGahren employed false and deceptive methods to
prove Lot 3's fair market value. McGahren stated in various signed
documents that State Farm had insured Lot 3 for $75,000. However,
the record reveals that although State Farm issued a temporary
binder
while it appraised the property, it ultimately declined to insure
the
property for any value and denied McGahren's application. As the
district court found, "[t]his is a prime example of McGahren's use
of
half-truths to attempt to prove his case." In addition, McGahren's
experts based their appraisals on incorrect information; McGahren
17
failed to tell them about property restrictions and water problems.
Thus, the property values that McGahren asserted in his documents
were deceptive. We therefore hold that the bankruptcy court did not
abuse its discretion in concluding that McGahren's signed documents
were not well grounded in fact.
The district court also found that McGahren's documents were not
well grounded in law. We agree. McGahren's contention throughout
the abandonment proceedings that the bankrupt estate included Lot
3
was not warranted by existing law. As stated above, courts consis-
tently have held that partnership property itself does not become
prop-
erty of an individual partner's bankruptcy estate. See, e.g., In re
Signal Hill-Liberia Ave. Ltd. Partnership, 189 B.R. 648, 652
(Bankr.
E.D. Va. 1995); Magers v. Thomas (In re Vannoy) , 176 B.R. 758, 770
(Bankr. M.D.N.C. 1994). McGahren failed to make a good-faith argu-
ment, or any argument at all, for the reversal of such well
established
law.
As one district court noted:
To prevail on an appeal from the imposition of . . . sanc-
tions, appellant[ ] must show that the Bankruptcy Court
abused its discretion in finding that [his] conduct was not
reasonable. . . . Because a determination of whether a legal
position is "substantially justified" depends greatly on fac-
tual determinations, [the bankruptcy judge] was better posi-
tioned to make such factual determinations.
In re Studio Camera Supply, Inc. , 116 B.R. 70, 73-74 (E.D. Mich.
1990). We hold that the bankruptcy court in the instant case did
not
abuse its discretion in finding that McGahren's signed documents
were not well grounded in law.
The bankruptcy court could have imposed sanctions for the viola-
tions already discussed, see In re Kunstler, 914 F.2d at 518, but
the
bankruptcy court also based its award of sanctions on McGahren's
improper purpose in filing his documents. Rule 9011 provides that
"improper purposes" include purposes "to harass or to cause
unneces-
sary delay or needless increase in the cost of litigation."
Fed.R.Bankr.P. 9011. The purposes that Rule 9011 lists are not
exclu-
18
sive. See In re Kunstler, 914 F.2d at 518. We agree with the
district
court that documents filed for the central purpose of delaying or
avoiding a collateral state foreclosure constitute documents filed
for
an "improper purpose."
In order to determine whether a particular signatory acted with an
improper purpose, a district court must judge the signatory's
conduct
under an objective standard of reasonableness. In re Kunstler, 914
F.2d at 518. In other words, it is not enough that the injured
party sub-
jectively believes that the signatory filed a document to harass
him.
Id. Instead, the court must derive the signer's purposes from
objective
evidence of the signer's motive in filing the document. Id. at
518-19.
The court may consider circumstantial facts that surround the
filing
as evidence of the signer's purpose. Id. at 519. Baseless
allegations
also indicate an improper purpose. Id.
The bankruptcy court in the instant case did not abuse its
discretion
in finding that the evidence objectively demonstrated that McGahren
objected to Heck's motion to abandon for the improper purpose of
delaying foreclosure. McGahren openly admitted several times during
the course of the abandonment hearings that his efforts to include
Lot
3 in the bankrupt estate resulted from his desire to avoid the
financial
difficulties that would result from a foreclosure action against
him. In
addition, the fact that McGahren's allegations and asserted
property
values lacked a factual or legal basis strongly indicates that he
filed
his documents for an improper purpose. Thus, we affirm the bank-
ruptcy court's finding that McGahren also violated the improper
pur-
pose prong of Rule 9011.
Accordingly, we hold that the bankruptcy court did not abuse its
discretion in finding that McGahren violated all three prongs of
Rule
9011. McGahren filed questionable documents with inadequate legal
foundations that caused the trustee and the bank to incur
significant
legal expenses in defense.
B.
A federal court also possesses the inherent power to regulate liti-
gants' behavior and to sanction a litigant for bad-faith conduct.
See
Chambers v. NASCO, Inc., 501 U.S. 32, 43-44 (1991). A court may
19
invoke its inherent power in conjunction with, or instead of, other
sanctioning provisions such as Rule 9011. Id. at 46-50. See also
In re
Heck's Properties, Inc., 151 B.R. 739, 765 (S.D. W.Va. 1992) ("It
is
well-recognized, however, quite apart from Rule 9011, that courts
have the inherent authority to impose sanctions upon[litigants] who
[are] found to have acted in bad faith, vexatiously, wantonly or
for
oppressive reasons.").
The bankruptcy court sanctioned McGahren pursuant to its inherent
powers as well as Rule 9011. McGahren claims that he did not act in
bad faith and that the bankruptcy court improperly invoked its
inher-
ent powers. McGahren's behavior in the bankruptcy proceedings,
however, clearly constitutes bad-faith conduct. For example, in
July
1992, McGahren appeared before the bankruptcy court at the aban-
donment hearing and asked the court for a quitclaim deed from Heck.
Heck tendered a deed the next day, but McGahren refused to accept
it. McGahren also attacked witnesses who testified for Heck. He
filed
complaints with the North Carolina Real Estate Commission against
appraisers that Heck and the bank employed. He sued Heck and the
attorney who represented the original buyers of the property in
state
court. He also sued First Citizens Bank, its officers, and
attorneys in
state and federal court. In addition, McGahren repeatedly
interrupted
witnesses during their testimony in order to cut off unfavorable
answers. At times, he became so upset that the bankruptcy court had
to warn him of the presence of federal officers. He also repeatedly
ignored the bankruptcy court's warnings to move the hearings
expedi-
tiously.
The conduct described above does not technically fall under the
auspices of Rule 9011 since it occurred during hearings rather than
in
the context of signed pleadings. However, it clearly fits within
the
inherent power of the court to sanction. Much of McGahren's conduct
involved deceptions, half-truths, and misrepresentations presented
to
the bankruptcy court itself. As the Supreme Court found in a
similar
case, "his entire course of conduct throughout the [proceedings]
evi-
denced bad faith and an attempt to perpetrate a fraud on the court,
and
the conduct sanctionable under the Rules was intertwined within
con-
duct that only the inherent power could address." Chambers, 501
U.S.
at 51. Thus, we hold that the bankruptcy court did not abuse its
dis-
cretion in imposing sanctions pursuant to its inherent powers.
20
V.
Although the district court affirmed the bankruptcy court's
decision
to impose sanctions, the district court reversed the bankruptcy
court's
order that McGahren pay the attorneys' fees that Heck and First
Citi-
zens Bank incurred after the district court's February 1993 remand
of
the bankruptcy court's abandonment order. The district court
remanded the sanctions order to the bankruptcy court for further
pro-
ceedings to determine the proper amount of sanctions. Pursuant to
the
district court's remand, the bankruptcy court held a hearing on
Octo-
ber 18, 1995. On November 2, 1995, the bankruptcy court reduced its
prior award of attorney's fees and also awarded additional
attorney's
fees to Heck's attorney, David Gray, for McGahren's subsequent con-
duct.
On November 10, 1995, Johanna McGahren, the personal represen-
tative of McGahren's estate, filed a notice of appeal. On March 1,
1996, the district court clerk mailed a briefing letter to Mrs.
McGahren that stated that the appeal had been docketed and that her
brief was due within fifteen days of the letter's date. The clerk
attached a mailing certificate to the letter that indicates that
the clerk
did indeed mail the letter to Mrs. McGahren's address on March 1,
1996. On April 11, 1996, Heck and Gray filed a motion to dismiss
the
appeal on the ground that Mrs. McGahren had not filed a brief
within
the time limit. In her response and opposition to the motion, Mrs.
McGahren claimed that she never received the clerk's briefing
letter.
The district court, however, dismissed the appeal pursuant to
Federal
Rules of Bankruptcy Procedure 8001(a) and 8009(a). Mrs. McGahren
now appeals the district court's dismissal order. We review the
order
for abuse of discretion. See Resolution Trust Corp. v. SPR Corp.
(In
re SPR Corp.), 45 F.3d 70, 74-75 (4th Cir. 1995).
Rule 8009(a)(1) provides that bankruptcy appellants must file their
briefs within fifteen days after entry of the appeal on the docket.
Fed.R.Bankr.P. 8009(a)(1). The notice that the court clerk sends to
the appellant triggers the time period. Jewelcor Inc. v. Asia
Commer-
cial Co., 11 F.3d 394, 397-98 (3d Cir. 1993). Thus, the notice that
the
district court clerk mailed on March 1, 1996 initiated the
fifteen-day
period. Mrs. McGahren therefore had to file her brief by March 16,
1996.
21
Mrs. McGahren claims that she never received the clerk's letter.
However, we have clearly held that "`[a] letter properly addressed,
stamped and mailed is presumed to have been duly delivered to the
addressee.'" Federal Deposit Ins. Corp. v. Schaffer, 731 F.2d 1134,
1137 n.6 (4th Cir. 1984) (quoting C. McCormick, McCormick's
Handbook of the Law of Evidence § 343 (1972)). Mrs. McGahren's
response to the Appellees' motion to dismiss reveals that her
mailing
address is identical to the address on the clerk's letter, and the
mailing
certificate reveals that the clerk did indeed mail the letter to
that
address. Mrs. McGahren failed to rebut the presumption that she
received the briefing letter, and we therefore presume that she
received it. Thus, since she failed to file her brief within the
specified
time, the district court correctly found that she violated Rule
8009(a).
If an appellant violates one of the rules of bankruptcy procedure,
the district court may dismiss the appeal. Federal Rule of
Bankruptcy
Procedure 8001(a) provides that an appellant's failure "to take any
step other than the timely filing of a notice of appeal does not
affect
the validity of the appeal, but is ground only for such action as
the
district court . . . deems appropriate, which may include dismissal
of
the appeal." Fed.R.Bankr.P. 8001(a).
We have previously addressed the propriety of a district court's
decision to dismiss an appeal pursuant to Rule 8001(a) for
violations
of the rules of bankruptcy procedure. In Serra Builders, Inc. v.
John
Hanson Sav. Bank FSB (In re Serra Builders, Inc.) , 970 F.2d 1309
(4th Cir. 1992), we held that the district court properly dismissed
an
appeal pursuant to Rule 8001(a) after the appellant filed its
designa-
tion of items to be included in the record fifteen days late.4 We
held
that before a district court may dismiss an appeal pursuant to Rule
8001(a), it must take at least one of the following steps: 1)make
a
finding of bad faith or negligence; 2)give the appellant notice and
an
opportunity to explain the delay; 3)consider whether the delay had
any possible prejudicial effect on the other parties; or 4)indicate
that
_________________________________________________________________
4 Federal Rule of Bankruptcy Procedure 8006 requires a bankruptcy
appellant to file a designation of the items to be included in the
record
and a statement of the issues to be presented on appeal within ten
days
after filing a notice of appeal. Fed.R.Bankr.P. 8006.
22
it considered the impact of the sanction and available
alternatives. Id.
at 1311.
In Resolution Trust Corp. v. SPR Corp. (In re SPR Corp.) , 45 F.3d
70 (4th Cir. 1995), we reexamined the test for dismissal under Rule
8001(a). We noted that although the Serra Builders test literally
only
required the district court to take one of the four steps, "a
proper
application of its test will normally require a district court to
consider
and balance all relevant factors." Id. at 74. We also specifically
held
that the second step, giving the appellant notice and an
opportunity
to explain the delay, does not by itself suffice to dismiss an
appeal.
Id.
The district court in the instant case attempted to address all
four
of the Serra Builders factors. Applying those factors, the district
court: 1)found that Mrs. McGahren filed the appeal in bad faith;
2)gave Mrs. McGahren notice and an opportunity to explain her
delay in filing a brief; 3)found that the delay prejudiced the
debtors
and creditors of the bankrupt estate; and 4)indicated that it had
con-
sidered possible alternatives. Mrs. McGahren, however, argues that
the district court abused its discretion in making those findings.
However, we do not conclude there was such abuse. Bad faith was
inferable from the overall behavior of the McGahrens throughout the
procedure. Mrs. McGahren's failure to explain satisfactorily her
non-
filing of a brief after the district court gave her an opportunity
to do
so satisfied the second Serra Builders factor. Prejudice suffered
by
the bankruptcy trustee was also felt by the creditors she
represented.
Finally, the district court's conclusion that less severe sanctions
would prove futile was supported by the record.
VI.
Accordingly, we affirm the district court's orders regarding the
abandonment of Lot 3, summary judgment in favor of Heck, and the
imposition of sanctions on McGahren. We also affirm the district
court's dismissal of Mrs. McGahren's appeal from the bankruptcy
court's second sanctions order.
23
The judgment is, accordingly,
AFFIRMED.
24