FILED
FEB 04 2016
1
SUSAN M. SPRAUL, CLERK
2 ORDERED PUBLISHED U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
3 UNITED STATES BANKRUPTCY APPELLATE PANEL
4 OF THE NINTH CIRCUIT
5 In re: ) BAP No. NC-15-1149-JuKuW
)
6 FAROUK E. NAKHUDA, ) Bk. No. 14-41156-RLE
)
7 Debtor. )
______________________________)
8 )
)
9 ANDREW W. SHALABY, )
)
10 Appellant, )
)
11 v. ) O P I N I O N
)
12 PAUL J. MANSDORF, Trustee, )
)
13 Appellee. )
______________________________)
14
15 Argued and Submitted on January 21, 2016
at San Francisco, California
16
Filed - February 4, 2016
17
Appeal from the United States Bankruptcy Court
18 for the Northern District of California
19 Honorable Roger L. Efremsky, Bankruptcy Judge, Presiding
_________________________
20
21 Appearances: Andrew W. Shalaby argued pro se; Dennis D. Davis
of Goldberg, Stinnett, Davis & Linchey, argued
22 for appellee Paul J. Mansdorf, chapter 7 trustee.
23 _________________________
24
25
26 Before: JURY, KURTZ, and WANSLEE,* Bankruptcy Judges.
27
28 *
Hon. Madeleine C. Wanslee, United States Bankruptcy Judge
for the District of Arizona, sitting by designation.
1 JURY, Bankruptcy Judge:
2
3 The bankruptcy court issued an Order to Show Cause (OSC)
4 directing Andrew W. Shalaby (Shalaby), the attorney for chapter
5 71 debtor Farouk E. Nakhuda, to show cause why he should not be
6 required to disgorge fees he had been paid and sanctioned for
7 violations of Rule 9011. After a hearing, the bankruptcy court
8 issued a Memorandum Decision finding that Shalaby asserted
9 numerous positions in filed documents without an adequate basis
10 in law or fact. As a result, the court imposed sanctions
11 consisting of: (1) non-compensatory monetary sanction for $8,000
12 payable to the bankruptcy court for violations of Rule 9011(b);
13 (2) disgorgement of $4,000 that was paid to Shalaby by debtor
14 under § 329; (3) suspension from the practice of law in the
15 bankruptcy courts for the Northern District of California until
16 he had completed 24 hours of continuing legal education in
17 bankruptcy law and 3 hours of continuing legal education in
18 ethics (except for those cases which he had already appeared);
19 and (4) suspension of his electronic case filing (ECF)
20 privileges until he had completed the ECF training provided by
21 the clerk’s office.2 The bankruptcy court entered an Order On
22 Memorandum Decision Re Order To Show Cause (Sanctions Order).
23
1
Unless otherwise indicated, all chapter and section
24
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
25 “Rule” references are to the Federal Rules of Bankruptcy
Procedure and “Civil Rule” references are to the Federal Rules of
26 Civil Procedure.
27 2
Subsequent to the filing of this appeal, Shalaby paid the
sanctions, was reinstated to practice before the bankruptcy court
28
in the Northern District, and had his e-filing privileges
restored.
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1 Thereafter, Shalaby moved to amend the Sanctions Order which the
2 bankruptcy court denied (Amendment Order). Shalaby appeals from
3 the Sanctions Order and the Amendment Order.
4 We AFFIRM in part and REVERSE in part. We AFFIRM the
5 court’s decision as to disgorgement under § 329 and suspension
6 of Shalaby’s ECF filing privileges. We REVERSE the bankruptcy
7 court’s decision finding that Shalaby’s conduct violated 9011(b)
8 and imposing sanctions of $8,000 payable to the clerk of the
9 bankruptcy court. When the court initiates sanctions under Rule
10 9011(c)(1)(B), the party ordered to show cause is afforded no
11 “safe harbor” opportunity to correct his or her conduct.
12 Because there is no “safe harbor,” the Ninth Circuit has
13 instructed courts to apply a higher “akin to contempt” standard
14 than in the case of party-initiated sanctions when applying Rule
15 9011(b). United Nat’l Ins. Co. v. R & D Latex Corp., 242 F.3d
16 1102, 1116 (9th Cir. 2001). Here, the bankruptcy court applied
17 a “reasonableness” standard to Shalaby’s conduct, which is the
18 appropriate standard for party-initiated sanctions, but not for
19 court-initiated sanctions. Moreover, the court’s factual
20 findings do not support the heightened “akin to contempt”
21 standard.
22 I. FACTS3
23 On March 16, 2014, Shalaby filed a skeletal chapter 7 case
24 for debtor. Paul Mansdorf was appointed the chapter 7 trustee
25 (Trustee).
26 At the time of his filing, debtor was operating five
27
3
The facts leading up the OSC are comprehensively set
28
forth in the bankruptcy court’s Memorandum Decision dated April
27, 2015.
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1 laundromats in the San Francisco and Vallejo area, either as
2 sole proprietorships or as partnerships. The petition listed no
3 trade names for debtor and indicated the debts were primarily
4 consumer debts rather than business debts. The Schedules listed
5 no executory leases, no interests in partnerships and no
6 payments to landlords.
7 On March 31, 2014, Shalaby filed the first version of the
8 Schedules and Statement of Financial Affairs (SOFA). Schedule A
9 listed a house valued at $433,000 and encumbered with secured
10 debt of approximately $380,000. Schedule B listed personal
11 property consisting of $600 in debtor’s wallet, $4,000 in a
12 checking account, and $211 in a Fidelity Investments account
13 (Fidelity Account). Schedule B did not list any accounts
14 receivable or interests in partnerships, but did list certain
15 office equipment valued at $900 and inventory of detergents and
16 sodas valued at $300. Schedule C claimed a homestead exemption
17 and an exemption in office equipment and inventory under
18 California Code of Civil Procedure (Cal. Civ. Proc.) § 704.760
19 (tools of the trade). Schedule I stated debtor was married with
20 two adult children and was self-employed with $4,359 monthly net
21 income from operating a business.
22 Question no. 18 in the SOFA listed five laundromat
23 businesses in San Francisco and Vallejo. Question no. 21
24 identified two of the laundromats as partnerships in which
25 debtor owned a 50% interest and two as sole proprietorships.4
26 On April 10, 2014, Shalaby filed the first amendments to
27 the Schedules. Schedule B listed the same cash and bank
28
4
The fifth laundromat was evidently closed.
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1 accounts and now listed a $15,000 account receivable. Amended
2 Schedule B also listed debtor as the 50% owner of the
3 partnership laundromats valued at $45,000 and added laundry
4 machines valued at $437,485, but did not list the sole
5 proprietorship laundromats. Schedule C listed the same
6 homestead exemption and the same exemptions in the office
7 equipment and inventory and added an exemption valued at $0 for
8 the partnership laundromats (erroneously referring to Cal. Civ.
9 Proc. § 704.010, the exemption for motor vehicles). Schedule D
10 added a secured creditor owed $437,485 with a lien on the
11 laundry machines.
12 Before the meeting of creditors took place, Shalaby and
13 Trustee exchanged emails. The April 7, 2014 email from Trustee
14 to Shalaby asked about the laundromats’ entity status and
15 requested Shalaby to confirm that any sole proprietorship
16 businesses were not operating and that no estate property was
17 being used. Shalaby replied that the sole proprietorship
18 laundromats were still in business. In response, Trustee
19 informed Shalaby that debtor could not operate a sole
20 proprietorship business while he was in chapter 7.
21 Despite this prior communication, when debtor appeared with
22 Shalaby at the § 341 meeting of creditors on April 16, 2014
23 (§ 341 meeting), he testified that he was still operating the
24 laundromats. Trustee’s counsel advised debtor that he could
25 not continue to use business income to pay rent to the landlords
26 and could not operate the businesses. Shalaby responded: “I am
27 not sure you are right about that . . . it is not so black and
28 white.” Shalaby requested Trustee to provide him with authority
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1 for this position and give him an opportunity to respond.
2 A. The Turnover Order
3 On April 17, 2014, Trustee filed an Ex Parte Application to
4 Cease Debtor’s Operations and Turnover Non–Exempt Funds and
5 Records. Attached to the application was the supporting
6 declaration of Trustee’s counsel describing debtor’s
7 post-petition use of estate assets and continued operation of
8 the sole proprietorship laundromats.
9 On the same date, the bankruptcy court signed an order
10 granting the application, which required debtor to (1) turnover
11 all of his bank account proceeds; (2) shut down the sole
12 proprietorship laundromats and give the keys to Trustee;
13 (3) stop using estate assets for the operation of any business;
14 and (4) provide Trustee with bank records for all post-petition
15 activity.
16 Instead of advising debtor to comply with the Turnover
17 Order, on April 17, 2014, Shalaby filed an Ex Parte Application
18 for Briefing and Hearing Schedule for Motion to Remove Trustee
19 and Motion to Set Aside Turn–Over Order or Direct Turn–Over to
20 New Trustee. The application sought to remove Trustee because
21 of the way he had conducted the § 341 meeting. Shalaby also
22 asserted that the Turnover Order suffered from a “due process
23 problem” as it had been granted without debtor being given an
24 opportunity to respond. Shalaby further argued: “The
25 [T]rustee’s proposal is simply to wipe out those businesses and
26 shut them down immediately, which will cause irreparable harm to
27 debtor as well as to potential creditors.” The bankruptcy court
28 denied the application on April 18, 2014.
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1 On April 21, 2014, Shalaby filed an Ex Parte Application to
2 Set Aside Turnover Order for Failure to Notice Hearing. The
3 application argued that the Turnover Order was issued in
4 violation of the Fifth and Fourteenth Amendments. Shalaby
5 further asserted that the “laundry machines that are not
6 exempted as tools of the trade are secured by liens and there is
7 no equity” and the “two businesses themselves are upside-down
8 with secured liens. It appears they are exempted.” This
9 application did not cite the Bankruptcy Code or any relevant
10 case law (although it did cite the Fourteenth Amendment and case
11 law regarding due process).
12 On April 22, 2014, Shalaby filed an amended application.
13 The amended application repeated his previous arguments and
14 proposed that the bankruptcy court amend its Bankruptcy Local
15 Rule (BLR) 9014–1 to provide for hearings on ex parte matters.
16 In Shalaby’s own words:
17 Even if laws do in fact exist that mandate the closure
of a business upon filing of a Chapter 7, there is a
18 fundamental due process violation insofar as there is
no notice given to the debtor of any such law in
19 existence. Even to the extent that if such a law
should exist, ignorance of the law is no excuse, the
20 debtor would still be entitled to challenge any such
law under the 5th Amendment or otherwise if he
21 believes it to be unconstitutional. The point is,
however, that the debtor has been entirely deprived of
22 any and all opportunity to respond to the [T]rustee’s
application.
23
24 In connection with this amended application, Shalaby filed
25 a Notice of Ex Parte Motion and Motion to Set Aside Turnover
26 Order for Failure to Notice Hearing which purported to give
27 notice that a hearing would be held two days later. The
28 bankruptcy court denied this application on April 22, 2014.
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1 On May 6, 2014, Shalaby filed a Motion for Return of
2 Exempted Property and Removal of Trustee which was set for
3 hearing on June 4, 2014. In the motion, Shalaby sought the
4 return of the sole proprietorship laundromats and the “working
5 capital and other exempted funds” held by Trustee. He also
6 sought removal of Trustee on the grounds “exempted property does
7 not belong to the Trustee.” Shalaby asserted that Trustee had
8 “taken control of two exempted assets, laundromats, and has
9 terminated and destroyed those businesses without any benefit to
10 the estate, maliciously, and in retaliation.” Trustee opposed
11 and, in an accompanying declaration, Trustee’s counsel detailed
12 numerous examples of Shalaby’s ignorance of fundamental chapter
13 7 practice and incompetent representation of debtor. He also
14 declared that “to date,” debtor has never turned over any funds
15 to Trustee despite the bankruptcy court’s order.
16 Shalaby responded by withdrawing as “moot” the part of the
17 motion requesting a return of the cash in the checking account
18 and the sole-proprietorship laundromats. However, Shalaby
19 withdrew this reply two days later and then filed another
20 document entitled Withdrawal of Moot Portions of Motion and
21 Reply to Opposition to Motion to Remove Trustee. Shalaby
22 withdrew this motion in its entirety one day before the June 4th
23 hearing “on grounds of obsolescence.”
24 B. Turnover Order Appeal
25 On April 24, 2014, Shalaby filed a Notice of Appeal to this
26 Panel, purporting to appeal the Turnover Order, the order
27 denying his request to stay the Turnover Order, and the order
28 denying his request to set aside the Turnover Order. On the
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1 same day that Shalaby filed his designation of the record on
2 appeal, he filed another document in the bankruptcy court
3 captioned Objection to Turnover Motion. This objection repeated
4 his prior arguments and again requested the bankruptcy court to
5 hold a hearing on the turnover issue.
6 On May 1, 2014, Shalaby filed a motion to have the appeal
7 decided by the Ninth Circuit on the basis that the question of
8 law presented (i.e., whether the bankruptcy court can issue a
9 turnover order on an ex parte basis) was “of national importance
10 with no other authority in existence in any jurisdiction.”
11 Following briefing, the Panel heard oral argument on
12 February 19, 2015. The day after oral argument, Shalaby filed a
13 motion to dismiss the Turnover Order appeal.
14 On March 3, 2015, the Panel issued its Memorandum and
15 Judgment affirming the Turnover Order and denying the late
16 motion to dismiss the appeal. In its decision, the Panel
17 confirmed the applicable provisions of the Bankruptcy Code which
18 provide that a chapter 7 debtor is required to cease operation
19 of a business upon filing for bankruptcy and which required
20 debtor to surrender the business assets to Trustee.
21 On March 9, 2015, Shalaby filed Debtor’s motion for
22 rehearing of the BAP ruling affirming the Turnover Order, which
23 the Panel denied on March 19, 2015. Shalaby then filed a notice
24 of appeal of the BAP ruling to the Ninth Circuit. That appeal
25 was subsequently dismissed on debtor’s request due to a
26 settlement with Trustee.
27 C. Contested Exemptions
28 Between April 10 and April 25, 2014, Shalaby filed several
-9-
1 amendments to the Schedules. On May 6, 2014, Shalaby filed
2 fourth amended Schedules B and C. This version of Schedule B
3 listed the same cash, bank accounts, account receivable, and the
4 partnership laundromats. This Schedule C claimed the same
5 exemptions in the office equipment and inventory, added an
6 exemption for $3,719 in the business checking account under Cal.
7 Civ. Proc. § 704.060 (tools of the trade), and also claimed the
8 partnership laundromats exempt, valuing the exemption at $0
9 under Cal. Civ. Proc. § 704.010 (motor vehicles). It did not
10 exempt the $15,000 account receivable or the $600 cash in
11 debtor’s wallet.
12 On May 7, 2014, Trustee filed an objection to this version
13 of Schedule C on the grounds that (1) money in a checking
14 account does not qualify as a tool of the trade under Cal. Civ.
15 Proc. § 704.060; (2) the $0 exemption in the partnership
16 laundromats appeared to be an admission that there was no claim
17 of exemption in these; and (3) the entire Schedule C was
18 objectionable because it had not been signed by debtor.
19 Trustee also stated that his investigation concerning these
20 matters was continuing and that these objections would be set
21 for hearing when that investigation concluded.
22 On June 2, 2014, Shalaby filed fifth amended Schedules B
23 and C. This version of Schedule B listed the same cash,
24 checking account, and account receivable. It added the sole
25 proprietorship laundromats with an “unknown” value. This
26 Schedule C again exempted as tools of the trade (Cal. Civ. Proc.
27 § 704.060) the office equipment, inventory, the $3,719 in the
28 checking account, and — for the first time — the $600 cash in
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1 debtor’s wallet. It also added an exemption based on Cal. Civ.
2 Proc. § 706.050 (exempt earnings) for the account receivable,
3 now characterizing it as “income not yet paid.” The values in
4 this version of Schedule B and C were cut in half under the
5 theory that not all community property was property of the
6 estate. Thus, for example, the checking account balance became
7 $1,971 and the account receivable became $7,350.
8 On June 3, 2014, Trustee filed an Amended Objection to
9 Debtor’s Claim of Exemptions, incorporating his prior objection
10 to exemptions and objecting to the exemption in alleged earnings
11 due to debtor from a company named Borismetrics because they
12 were the same account receivable previously listed in Schedule
13 B. Trustee also objected to the 50% valuations of community
14 property assets as violating § 541(a)(2).
15 On June 12, 2014, Shalaby filed yet another version of
16 Schedules B and C, which increased the amount claimed in
17 connection with the account receivable from $7,350 to $8,930.56
18 as exemptible earnings.
19 On July 10, 2014, Trustee filed an Amended and Supplemental
20 Objections to Exemptions. It incorporated the prior objections
21 and said:
22 Debtor continues to claim a portion of his bank
account proceeds exempt under California Code of Civil
23 Procedure § 704.060 [sic] but has increased the amount
of exemption from $7,350 to $8,930.56. The Trustee
24 objects to said amended claim of exemption on the
ground that it has no factual or legal basis as a
25 claim of exemption in debtor’s bank account proceeds.
26 D. Exemption Disputes and Turnover Compliance
27 On July 22, 2014, the Trustee filed Memorandum of Points
28 and Authorities in Support of Notice of Status Conference
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1 Regarding Objections to Claims of Exemption and Request for
2 Turnover of Assets (July Motion), along with a Notice setting a
3 hearing for September 3, 2014. There was no motion accompanying
4 the pleadings. In the points and authorities, Trustee sought
5 turnover of cash which debtor had, on advice of Shalaby, refused
6 to turn over to Trustee (i.e., $600 cash, $3.12 in savings
7 account, $3,719 in checking account, $2,471 accounts receivable
8 collected post-petition, and $211 in the Fidelity Account, for a
9 total of $7,274.41). It also restated Trustee’s objections to
10 the claimed exemptions in the account receivable recharacterized
11 as exempt wages and the exemptions claimed in bank accounts as
12 tools of the trade. The July Motion was supported by Trustee’s
13 counsel’s declaration attaching excerpts from debtor’s
14 deposition at which debtor testified that he was not an employee
15 of Borismetrics, the entity owing the accounts receivable.
16 The day before the hearing on the July Motion, Shalaby
17 filed an Opposition and Objection to Procedurally Defective
18 Motion. This opposition described the July Motion as
19 procedurally defective because it was “not a status conference,”
20 but “facially a motion on a contested matter that is up on
21 appeal, fully briefed, and awaiting a ruling.” Shalaby further
22 contended that the “motion” was contested and thus it should be
23 denied for failure to comply with BLR 9013 or 9014. Because
24 the bankruptcy court wanted to afford the parties an opportunity
25 to address whether the pending appeal of the Turnover Order
26 precluded a ruling on all or part of the July Motion, the court
27 continued the hearing from September 3, 2014, to October 1,
28 2014, and set a briefing schedule regarding whether the pending
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1 appeal affected the court’s jurisdiction. The bankruptcy court
2 also allowed Shalaby an opportunity to file a brief regarding
3 the validity of his claimed exemptions.
4 On September 10, 2014, Shalaby filed his brief on the
5 merits of the exemption issues, supported by the declarations of
6 debtor and Shalaby. Shalaby claimed that Trustee’s objections
7 to the exemption in the wages paid by Borismetrics to debtor and
8 in the bank accounts was untimely. With respect to the bank
9 account exemption, Shalaby argued that Trustee failed to
10 identify any assets in dispute. He further asserted that it was
11 correct to cut the amount of the Borismetrics receivable to
12 $8,930 to reflect debtor’s non-filing spouse’s community
13 property share, citing Cal. Family Code § 760, but failed to
14 explain why § 541(a)(2) did not control. Shalaby also
15 maintained that the Borismetrics payment of $8,930 was exempt as
16 wages, but he failed to address debtor’s prior deposition
17 testimony that he was not an employee of Borismetrics.
18 In addition, Shalaby raised a new issue regarding debtor’s
19 unchallenged $100,000 homestead exemption. The bankruptcy court
20 had previously entered an order approving the estate’s
21 compromise with debtor through which debtor had paid $30,000 to
22 purchase the non-exempt equity in his house from the estate
23 (Sale Order). Shalaby now argued that the Sale Order should be
24 vacated “in the interest of justice” because — months after the
25 fact — he had obtained an appraisal from which he had concluded
26 that the house was worth less than Trustee’s broker had said it
27 was worth. He asked the bankruptcy court to enter an order
28 directing Trustee to return this $30,000 (plus a $600 appraisal
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1 fee) to debtor.
2 Trustee filed a supplemental brief on the merits of the
3 exemptions. Trustee largely repeated his prior arguments and
4 pointed out that debtor had agreed to the compromise embodied in
5 the Sale Order and this belated attack on it was procedurally
6 and substantively inappropriate. Trustee also maintained that
7 debtor had amended his Schedules a number of times and, each
8 time, Trustee filed a new set of objections to debtor’s claims
9 of exemption within thirty days of the amendments.
10 At the hearing on October 1, 2014, the bankruptcy court
11 sustained Trustee’s objections to the claimed exemptions and
12 denied debtor’s belated attack on the Sale Order. The court
13 also indicated it intended to issue an OSC directed at Shalaby
14 for the positions he had taken during the case. The court then
15 issued an order sustaining Trustee’s objection to the
16 exemptions, denying debtor’s request for return of the $30,000
17 in connection with the Sale Order, and ordering debtor to turn
18 over (1) $600 in cash; (2) $2,741 account receivable collected
19 post-petition; and (3) $211.29 from the Fidelity Account to
20 Trustee within ten days of the order (October 2 Order).
21 The day after this hearing, Shalaby filed a request that
22 the court order a settlement conference. In the request,
23 Shalaby stated: “Unfortunately, I must agree with the court,
24 largely, that with a bit more effort and legal research, many of
25 the problems and matters disputed could have and would have been
26 avoided.” He then quoted Rule 9011(b) and said:
27 [W]hile a matter may explain the reason I admittedly
failed to diligently research some of my legal
28 contentions and presented incorrect interpretations of
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1 applicable law (e.g. community property interest being
irrelevant to exemptions, misapplication of 11 U.S.C.
2 § 542(a), and other matters), that matter is quite
personal and difficult to disclose on the record
3 and/or in pleadings on an OSC hearing.
4 It went on to state “I do in fact recognize my mistakes, and
5 appreciate the court’s frustration.” Shalaby suggested that the
6 “practical thing” to do was to try to “settle the OSC/sanction
7 by negotiating a reasonable payment to the trustee.” The
8 bankruptcy court declined to order a settlement conference.
9 E. The OSC
10 On November 4, 2014, the bankruptcy court issued the OSC.5
11 The OSC describes seven specific factual and legal positions
12 taken by Shalaby in connection with the issues that culminated
13 in the October 1 hearing: (1) he argued that Trustee’s
14 objections to exemptions were not timely when they were; (2) he
15 argued that the value of assets was reduced by 50% as non-estate
16 property ignoring § 541(a)(2); (3) he reclassified the
17 Borismetrics account receivable as exemptible wages without
18 factual or legal support (ignoring debtor’s deposition testimony
19
20 5
Creditor Mercy Commercial California (MCC) also responded
21 to the OSC. MCC received relief from stay on May 29, 2014, to
enforce the lease and recover the premises at 1305 Polk Street,
22 San Francisco, California and that order was final. Relying on
the order, counsel for MCC served a non-default notice of
23 termination of the occupancy on debtor and then filed and served
24 an unlawful detainer action in the San Francisco Superior Court.
MCC alleged that debtor, through Shalaby’s office, filed a Notice
25 of Stay of Proceedings, which blocked the state court action from
proceeding. This conduct, MCC asserted, was a misuse of the
26 bankruptcy process and falsely stated to the state court that
there was a stay when the opposite was true. As a result of this
27
tactic, MCC incurred additional legal fees and expenses and
28 delay. MCC urged the bankruptcy court to examine this particular
act of debtor and counsel.
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1 that he was not an employee); (4) he argued that Trustee’s
2 objections had not identified any assets in dispute; (5) he
3 argued that a bank account was exempt as a tool of the trade
4 with no supporting legal authority; (6) he attacked the Sale
5 Order which was a final order; and (7) he argued debtor had no
6 obligation to turn over assets based on his assertion that the
7 scheduled values were inconsequential.
8 The OSC directed Shalaby to appear and show cause why he
9 should not be required to disgorge the fees he had been paid or
10 should not be otherwise sanctioned for his conduct in the case.
11 Based on the seven illustrative factual and legal positions that
12 Shalaby had taken, the specific violations described in the OSC
13 were: (1) making arguments not warranted by existing law or
14 non-frivolous arguments for its extension, modification or
15 reversal; (2) failing to ensure that allegations and factual
16 contentions had evidentiary support; (3) his inability or
17 unwillingness to obtain the most basic knowledge of bankruptcy
18 law or engage in the legal analysis necessary to competently
19 represent debtor; (4) harming the estate by forcing Trustee to
20 use limited estate assets to respond to the frivolous arguments
21 and positions; and (5) failing to obtain original signatures on
22 documents filed with the court. The court identified its
23 authority for issuance of the OSC and possible sanctions as the
24 court’s inherent powers and § 105, § 329(b), Rule 9011(b) and
25 (c), and paragraphs 8 and 9 of the ECF Procedures for the
26
27
28
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1 bankruptcy court.6
2 Immediately after the OSC was issued, Shalaby filed an Ex
3 Parte Application to advance the December 4, 2014 hearing date
4 to November 20, 2014, due to a scheduling conflict. Shalaby
5 proposed that the OSC response deadline be advanced to November
6 14, 2014. The bankruptcy court granted his request and reset
7 the OSC hearing date and response deadline.
8 On November 6, 2014, Shalaby filed an Ex Parte Application
9 for Order Directing Disgorgement in Discharge of the OSC.
10 There, Shalaby moved the court for an order directing him to
11 disgorge $4,000 in discharge of the OSC. Shalaby further said:
12 “This counsel is very sorry that the bankruptcy has gone so
13 awry, and hopes that his offer of voluntarily disgorgement of
14 the fees will be to the Court’s satisfaction.” Trustee filed an
15 objection to the application asserting that the damages to the
16 estate were in excess of $30,000. The bankruptcy court
17 subsequently denied the application.
18 Shalaby then responded to the OSC on the merits supported
19 by his and debtor’s declarations. Shalaby asserted that
20 sanctions should not be imposed in the case because there was a
21 good faith disagreement as to the interpretation of law and that
22 imposing sanctions would chill his First Amendment rights. He
23 further argued that (1) there was improper notice of a hearing
24 for the July Motion; (2) Trustee’s exemption objections should
25
26 6
These paragraphs contain the requirements for signatures
27 on electronically filed documents and retention requirements.
Under BLR 5005-2(d), a debtor’s counsel must obtain and retain
28 wet signatures of debtor for ECF.
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1 have been overruled; (3) § 541(a)(2) did not prevent him from
2 taking the position that the non-filing spouse’s community
3 property share of non-exempt assets was not property of the
4 estate and that the bankruptcy court should have held a trial on
5 that issue; (4) the court should hold a trial on whether the
6 Borismetrics payment was exemptible wages; (5) Trustee had not
7 identified specific assets in dispute; (6) funds in a bankruptcy
8 account could be exempted as tools of the trade; (7) the Sale
9 Order could be challenged after the fact because a trustee
10 should not be allowed to collect money or property from a debtor
11 based on an artificially high valuation; and (8) his advice to
12 debtor that he did not need to turn over assets to Trustee was
13 justified because:
14 [A]s a matter of logic, a property that has very low
value, or a ‘negative’ value, is not an asset of the
15 estate due to the lack of a value. This belief is
based on an understanding of the trustee’s statutory
16 [duty] as specified in 11 U.S.C. § 704. Generally,
the trustee’s duty is to collect only assets of value
17 that exceed the exemptions and to distribute those
assets to the creditors.
18
19 Trustee responded to Shalaby with the declaration of his
20 counsel which attached multiple exhibits evidencing alleged
21 frivolous positions asserted by Shalaby. Shalaby objected to
22 the declaration arguing that every matter therein was a
23 privileged First Amendment communication pursuant to Cal. Civ.
24 Code § 47, and that the declaration was the “equivalent of a
25 SLAPP suit.” Shalaby also argued that the declaration was an
26 “undisguised attempt to circumvent the safe harbor provisions”
27 of Rule 9011(c)(1)(A).
28 On November 20, 2014, the bankruptcy court held a hearing
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1 on the OSC. At the conclusion of the hearing, the court
2 requested a supplemental declaration from Trustee’s counsel
3 regarding attorney’s fees incurred for the matters identified in
4 the OSC. Trustee’s counsel subsequently filed a declaration
5 showing total fees and expenses of $58,679.89 through December
6 8, 2014, of which $14,231 were attributable to dealing with the
7 issues outlined in the OSC.
8 Shortly after, Shalaby filed a motion to recuse Judge
9 Efremsky based on alleged impartiality due to the fact Shalaby
10 indicated an intent to file a lawsuit against Trustee. In the
11 motion, Shalaby discussed numerous incidents where, in his
12 opinion, the bankruptcy judge showed bias and prejudice against
13 debtor and his counsel. In reaching his opinion, Shalaby
14 stated:
15 [H]e has now spoken with several attorneys and non-
attorneys after they had listened to the audio of the
16 OSC hearing and that every one expressed an
unequivocal belief and conclusion that Judge Efremsky
17 appears very biased and prejudiced in favor of the
trustee and against the debtor and his counsel.
18
19 The bankruptcy court denied the recusal motion.
20 On April 27, 2015, the bankruptcy court issued its
21 Memorandum Decision finding that Shalaby asserted numerous
22 positions during debtor’s case without an adequate basis in law
23 or fact in violation of Rule 9011. Accordingly, the court
24 imposed sanctions consisting of: (1) non-compensatory monetary
25 sanction for $8,000 payable to the bankruptcy court;
26 (2) disgorgement of $4,000 that was paid to him by debtor;
27 (3) suspension from the practice of law in the bankruptcy courts
28 for the Northern District of California until he had completed
-19-
1 24 hours of continuing legal education in bankruptcy law and 3
2 hours of continuing legal education in ethics (except for those
3 cases which he had already appeared); and (4) suspension of his
4 e-filing privileges until he had completed the ECF training
5 provided by the clerk’s office. On the same day, the court
6 entered the Sanctions Order.
7 On April 30, 2015, Shalaby filed an application to amend
8 the Memorandum Decision and Sanctions Order. The bankruptcy
9 court denied that application.
10 Shalaby filed a timely appeal from the Sanctions Order and
11 Amendment Order.7
12 II. JURISDICTION
13 The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
14 §§ 1334 and 157(b)(2)(A). See In re Nguyen, 447 B.R. 268, 275
15 (9th Cir. BAP 2011)(en banc) (citing In re Brooks–Hamilton, 400
16 B.R. 238, 244 (9th Cir. BAP 2009) (acts leading to suspension
17 occurred in matter central to administration of bankruptcy
18 case). We have jurisdiction under 28 U.S.C. § 158.
19
20
21
22 7
Shalaby’s notice of appeal (NOA) states that he also
appeals from the Memorandum Decision. The Memorandum Decision
23
does not contain a judgment, order or decree. See Rule 8001(a).
24 The NOA also does not mention the bankruptcy court’s order
denying Shalaby’s motion for recusal. As a result, the recusal
25 order is not before us in this appeal. In addition, as Shalaby
has not asserted any arguments on appeal that relate to the
26 bankruptcy court’s denial of his application to amend, those
arguments are waived. Smith v. Marsh, 194 F.3d 1045, 1052 (9th
27
Cir. 1999).
28
-20-
1 III. ISSUES8
2 Did the bankruptcy court abuse its discretion in imposing
3 sanctions against Shalaby under Rule 9011?
4 Did the bankruptcy court abuse its discretion in ordering
5 disgorgement under § 329 of all fees and costs paid by debtor to
6 Shalaby?
7 Did the bankruptcy court abuse its discretion by suspending
8 Shalaby’s e-filing privileges until he participated in the
9 training provided by the clerk’s office?
10 IV. STANDARDS OF REVIEW
11 All aspects of an award of sanctions are reviewed for an
12 abuse of discretion. Orion v. Haffman (In re Kayne), 453 B.R.
13 372, 380 (9th Cir. BAP 2011); In re Nguyen, 447 B.R. at 276.
14 We review the bankruptcy court’s decision regarding the
15 proper amount of legal fees to be awarded to the debtor’s
16 attorney for an abuse of discretion. Hale v. U.S. Trustee, 509
17 F.3d 1139, 1146 (9th Cir. 2007).
18 We also review the bankruptcy court’s interpretation and
19 application of a local rule for an abuse of discretion. Price
20 v. Lehtinen (In re Lehtinen), 564 F.3d 1052, 1058 (9th Cir.
21 2009).
22 Review for abuse of discretion has two parts. First, we
23 “determine de novo whether the bankruptcy court identified the
24 correct legal rule to apply to the relief requested.” U.S. v.
25
26
8
Shalaby has framed the issues differently and asserts
27 that all the issues he has raised on appeal are questions of law
subject to de novo review. We disagree with this contention.
28
Upon our review of his brief and the record, we reorganized and
rephrased the issues.
-21-
1 Hinkson, 585 F.3d 1247, 1261–62 (9th Cir. 2009) (en banc). If
2 so, we then determine under the clearly erroneous standard
3 whether the bankruptcy court’s factual findings and its
4 application of the facts to the relevant law were
5 “(1) ‘illogical,’ (2) ‘implausible,’ or (3) ‘without support in
6 inferences that may be drawn from the facts in the record.’”
7 Id. at 1262. Findings of fact are given great deference in this
8 context. DeLuca v. Seare (In re Seare), 515 B.R. 599, 614 (9th
9 Cir. BAP 2014).
10 We may affirm on any ground supported by the record.
11 Shanks v. Dressel, 540 F.3d 1082, 1086 (9th Cir. 2008).
12 V. DISCUSSION
13 A. The Bankruptcy Court’s Authority To Issue Sanctions
14 A bankruptcy court has the inherent authority to regulate
15 the practice of attorneys who appear before them. Chambers v.
16 NASCO, Inc., 501 U.S. 32, 43 (1991); Caldwell v. Unified Capital
17 Corp. (In re Rainbow Magazine, Inc.), 77 F.3d 278, 284-85 (9th
18 Cir. 1996). “Inherent powers are the exception, not the rule,”
19 and, therefore, “must be exercised with great caut2/4/16ion.”
20 Chambers, 501 U.S. at 64. “A specific finding of bad faith
21 . . . must ‘precede any sanction under the court’s inherent
22 powers.’” United States v. Stoneberger, 805 F.2d 1391, 1393
23 (9th Cir. 1986). The bankruptcy court also has express power to
24 impose sanctions pursuant to Rule 9011 and its local rules. See
25 In re Nguyen, 447 B.R. 380-81. A bankruptcy court may suspend
26 an attorney from the practice of law for violations of Rule
27 9011. In re Brooks-Hamilton, 400 B.R. at 249.
28
-22-
1 B. Rule 9011
2 The initial basis for imposing sanctions on Shalaby is Rule
3 9011, the bankruptcy counterpart to Civil Rule 11. Case law
4 interpreting Rule 11 is applicable to Rule 9011. Marsch v.
5 Marsch (In re Marsch), 36 F.3d 825, 829 (9th Cir. 1994).
6 Rule 9011(b) requires parties and their attorneys to ensure
7 papers filed before a bankruptcy court are “warranted by
8 existing law or by a nonfrivolous argument for the extension,
9 modification, or reversal of existing law or the establishment
10 of new law” and that “allegations and other factual contentions
11 have evidentiary support . . . .” Rule 9011(b)(2) and (3).
12 Rule 9011(b) incorporates a reasonableness standard which
13 focuses on whether a competent attorney admitted to practice
14 before the involved court could believe in like circumstances
15 that his actions were legally and factually justified. See
16 Zaldivar v. City of Los Angeles, 780 F.2d 823, 830-31 (9th Cir.
17 1986).
18 When assessing sanctions sua sponte under Rule
19 9011(c)(1)(B) and under the law of this Circuit, the bankruptcy
20 court is required to issue an order to show cause to provide
21 notice and an opportunity to be heard and to apply a higher
22 standard “akin to contempt” than in the case of party-initiated
23 sanctions. R&D Latex Corp., 242 F.3d at 1115-16. The reason
24 behind the heightened standard is because, unlike party-
25 initiated motions, court-initiated sanctions under Rule
26 9011(c)(1)(B) do not involve the 21-day safe harbor provision
27 for the offending party to correct or withdraw the challenged
28 submission. Id. at 1116 (citing Barber v. Miller, 146 F.3d 707,
-23-
1 711 (9th Cir. 1998)).
2 In Barber v. Miller, the Ninth Circuit emphasized the
3 distinctions between a party-initiated motion for sanctions
4 under Civil Rule 11 and sanctions imposed upon the court’s own
5 initiative, finding they were not the equivalent. There, the
6 district court granted the defendant’s motion to dismiss the
7 plaintiff’s complaint with prejudice. The order granting the
8 motion indicated that the district court would retain
9 jurisdiction to consider sanctions. After dismissal, the
10 defendant notified the attorney for the plaintiff by letter that
11 it would be seeking sanctions and then it filed the motion. The
12 district court granted the motion, awarding the defendant $2,500
13 in sanctions against the attorney. The attorney appealed and
14 the defendant cross-appealed on the amount. The Ninth Circuit
15 reversed the award of sanctions because the motion for sanctions
16 did not comply with the safe harbor provision under Civil Rule
17 11.
18 The court then considered whether the district court’s
19 retention of jurisdiction for purposes of a sanctions motion
20 could be equated to an election by the court to impose sanctions
21 on its own motion. The Ninth Circuit concluded that it was not
22 the equivalent, noting the distinction between a party-initiated
23 motion for sanctions and sanctions awarded on the court’s own
24 initiative. The Ninth Circuit observed that the district court
25 awarded sanctions to a party under circumstances which did not
26 meet the standard for court-initiated sanctions. The court also
27 noted that “the fact the district court exercised its discretion
28 to award sanctions on motion of a party does not necessarily
-24-
1 mean that the court would exercise its discretion to impose
2 sanctions on its own motion for the same conduct” since show
3 cause orders “will ordinarily be issued only in situations that
4 are akin to a contempt of court. . . .” 146 F.3d at 711 (citing
5 Civil Rule 11, Adv. Comm. Notes to 1993 Amend.).9
6 Here, the bankruptcy court expressly applied the objective
7 reasonableness standard to Shalaby’s numerous violations of Rule
8 9011. The court dismissed Shalaby’s contentions that his “good
9 faith belief” or “opinion” supported his positions on the basis
10 that his subjective intent was irrelevant since his conduct is
11 measured against a reasonableness standard which consists of a
12 competent attorney admitted to practice law before the court.
13 With respect to each violation of Rule 9011(b) set forth in the
14 OSC, the bankruptcy court expressly applied this standard to
15 each of its factual findings.
16 The evidence in the record supports the bankruptcy court’s
17
18 9
Civil Rule 11, Adv. Comm. Notes to 1993 Amend., states
19 in relevant part:
20 The power of the court to act on its own initiative is
retained, but with the condition that this be done
21 through a show cause order. . . . Since show cause
orders will ordinarily be issued only in situations
22
that are akin to a contempt of court, the rule does not
23 provide a ‘safe harbor’ to a litigant for withdrawing a
claim, defense, etc., after a show cause order has been
24 issued on the court’s own initiative.
25 Rule 9011, Adv. Comm. Notes to 1997 Amend. states:
26
This rule is amended to conform to the 1993 changes to
27 [Civil Rule] 11. For an explanation of these
amendments, see the advisory committee note to the 1993
28 amendments to [Civil Rule] 11.
-25-
1 ruling; it certainly shows that Shalaby’s legal positions and
2 arguments were objectively frivolous under the reasonableness
3 standard. In fact, Shalaby admitted as much when he requested
4 the court to order a settlement conference. There, he
5 acknowledged that with a bit more effort and legal research,
6 many of the problems and matters disputed could have and would
7 have been avoided. He further stated that there was a “personal
8 matter” which may explain why he admittedly failed to diligently
9 research some of his legal contentions and presented incorrect
10 interpretations of applicable law (e.g. community property
11 interest being irrelevant to exemptions, misapplication of
12 § 542(a), and other matters), but the record does not show what
13 that “personal matter” was or whether it was a legitimate excuse
14 for Shalaby’s admitted digressions. Finally, Shalaby went on to
15 say that he recognized his mistakes, and appreciated the
16 “court’s frustration.” Therefore, at least then, Shalaby seemed
17 to acknowledge that he had a duty to conduct a reasonable
18 inquiry into the law and underlying facts before filing the
19 documents, and that had he done so, many of the problems could
20 have been avoided.10
21 But even if Shalaby’s positions were frivolous under the
22 reasonableness standard, the standard for court-initiated
23 sanctions in the Ninth Circuit is “akin to contempt.” Although
24 we considered remand so that the bankruptcy court could apply
25
10
26 In his brief, Shalaby has not directed us to any clearly
erroneous facts which would warrant disturbing the bankruptcy
27 court’s decision based on its application of the reasonableness
standard. Instead, he continues to assert that his positions
28 were correct under the guise of zealously representing his
client.
-26-
1 the proper legal standard, we ultimately conclude that certain
2 factual findings made by the bankruptcy court foreclose that
3 consideration.
4 Admittedly, the “akin to contempt” standard is neither
5 well-developed nor consistently applied. However, case law
6 makes it clear the alleged transgressions must exceed those for
7 party-initiated sanctions. In United National Insurance Company
8 v. R & D Latex Corporation, 242 F.3d 1102, the Ninth Circuit
9 reversed the district court’s imposition of sua sponte sanctions
10 after examining the sanctioned attorneys’ statements made in a
11 Notice of Related Cases (Notice) they filed in connection with a
12 removed action. Looking at all the circumstances, the court
13 found the attorneys’ actions “not so egregious as to merit sua
14 sponte sanctions,” and concluded that the “Notice was in neither
15 purpose nor substance ‘akin to contempt.’” Id. at 1116, 1118.
16 Accordingly, at bottom, the “akin to contempt” standard
17 seems to require conduct that is particularly egregious and
18 similar to conduct that would be sanctionable under the
19 standards for contempt. See MyMedicalRecords, Inc. v. Jardogs,
20 LLC, 2015 WL 5445987, at *2 (C.D. Cal. 2015) (finding that bad
21 faith analysis applied to court-initiated sanctions under Civil
22 Rule 11); Brown v. Royal Power Mgt., Inc., 2012 WL 298315, at *4
23 (N.D. Cal. Feb. 1, 2012) (finding that assertion of a position
24 knowing that it is baseless “constituted bad faith and lacked
25 forthrightness with the court” and thus was “akin to
26 contempt.”); Stone v. Wolff Properties LLC, 135 Fed.Appx. 56,
27 2005 WL 1389893, at *2 (9th Cir. June 13, 2005) (reversing
28 district court’s imposition of sua sponte sanctions, finding
-27-
1 that appellant’s “conduct, though perhaps not laudable, was not
2 so ‘egregious’ as to be considered ‘beyond the pale.’”) (citing
3 R & D Latex Corp., 242 F.3d at 1116-18); Sanai v. Sanai, 408
4 Fed.Appx. 1, 2010 WL 2782636, at *3 (9th Cir. July 12, 2010)
5 (affirming sua sponte sanction award by district court which
6 issued OSC, gave appellants an opportunity to be heard, and
7 expressly found they acted in bad faith); Lynch v. Cal. Ct. of
8 Appeal, Third Dist., 2008 WL 2811197, at *7 (July 14, 2008)
9 (noting that prior to a sua sponte imposition of sanctions under
10 Civil Rule 11, the court must find that counsel’s conduct was
11 particularly egregious, i.e., “akin to a contempt of court”);
12 compare Darulis v. Iaria, 2008 WL 5101932, at *4 (S.D. Cal. Dec.
13 1, 2008) (finding conduct was not of the nature of a violation
14 of a court order and therefore could not be punished sua sponte
15 under Civil Rule 11).
16 Here, the bankruptcy court’s findings do not support the
17 heightened standard. First, the court found that nothing in the
18 record suggested that Shalaby had an improper purpose under Rule
19 9011(b)(1). Next, in considering the sanctions to impose, the
20 bankruptcy court cited the ABA standards which include an
21 inquiry into whether the attorney acted intentionally, knowingly
22 or negligently. The bankruptcy court did not find Shalaby acted
23 knowingly or intentionally, but that at a minimum, his conduct
24 was negligent. The heightened standard of “akin to contempt”
25 requires more than ignorance or negligence on the part of
26 Shalaby. See Barber, 146 F.3d at 711 (noting that bad faith in
27 an analogous context requires more than mere negligence). While
28 we do not condone Shalaby’s conduct, these factual findings
-28-
1 demonstrate that his conduct was neither in purpose nor
2 substance “akin to contempt.”
3 In sum, the bankruptcy court erred in sanctioning Shalaby
4 for his conduct under Rule 9011 because it applied the wrong
5 legal standard for sua sponte sanctions and its factual findings
6 do not support — and in fact foreclose — the heightened standard
7 of “akin to contempt.” Accordingly, the court abused its
8 discretion in issuing sanctions under Rule 9011.
9 C. Section 329
10 Section 329(a) requires an attorney representing a debtor
11 in a bankruptcy case to file a statement regarding the
12 compensation agreed to be paid for services in the case and the
13 source of the compensation. Section 329(b) provides in relevant
14 part: “If such compensation exceeds the reasonable value of any
15 such service, the court may cancel any such agreement, or order
16 the return of any such payment. . . . .” (Emphasis added.)
17 Bankruptcy Code § 329 is implemented by Rules 2016 and 2017.
18 Rule 2016(b) provides that every attorney for a debtor, whether
19 or not the attorney applies for compensation, shall file the
20 statement required by § 329 of the Code. Rule 2017(a) provides
21 that on the court’s own initiative, the court may determine
22 whether any payment by the debtor, made directly or indirectly
23 and in contemplation of the filing of a petition, to an attorney
24 for services rendered or to be rendered, is excessive.
25 The standard applied under § 329(b) to determine the
26 reasonable value of fees is set forth in § 330. Hale v. U.S.
27 Trustee (In re Basham), 208 B.R. 926, 931 (9th Cir. BAP 1997).
28 “The burden is upon the applicant to demonstrate that the fees
-29-
1 are reasonable.” Id. at 931-32. Section 330(a)(3) states that
2 in determining the amount of reasonable compensation, the court
3 should consider the nature, extent, and value of the services
4 rendered, taking into account all relevant factors, including
5 (A) the time spent on the services; (B) the rates charged for
6 the services; (C) whether the services were necessary or
7 beneficial at the time the services were rendered; (D) whether
8 the services were performed within a reasonable amount of time
9 commensurate with the complexity, importance, and nature of the
10 problem, issue, or task addressed; (E) whether the person
11 demonstrated skill and experience in the bankruptcy field;
12 (F) whether the compensation is reasonable based on the
13 customary compensation charged by comparably skilled
14 practitioners in cases other than bankruptcy cases.
15 The reasonable value of services rendered by a debtor’s
16 attorney “is a question of fact to be determined by the
17 particular circumstances of each case. The requested
18 compensation may be reduced if the court finds that the work
19 done was excessive or of poor quality.” In re Spickelmier, 469
20 B.R. 903, 914 (Bankr. D. Nev. 2012); see also In re Basham, 208
21 B.R. at 933 (disgorgement upheld for incomplete and inaccurate
22 schedules, improperly claimed exemptions, improperly noticed
23 plan confirmation hearing).
24 The bankruptcy court’s OSC put Shalaby on notice of a
25 potential disgorgement under this section. On appeal, Shalaby
26 contends § 329 “could not, as a matter of law, apply in this
27 case.” Shalaby does not fully explain his position on this
28 point, but presumably he contends that § 329 does not apply
-30-
1 since $4,000 was disproportionate to the services rendered.
2 Shalaby is mistaken. As noted by the bankruptcy court, the
3 question is not how much time Shalaby spent on the case and what
4 he believes his theoretical unpaid bill might be. Rather, the
5 question is whether the $4,000 he was paid was excessive for
6 what he accomplished for debtor in this case.
7 The bankruptcy court properly considered the value of
8 Shalaby’s services under § 330(a)(3). Specifically, the court
9 found factors (C) whether the services were necessary or
10 beneficial and (E) skill and experience in the bankruptcy field
11 “particularly important here.” Applying those factors, the
12 court found:
13 First, as the issues listed in the OSC and the above
discussion show, his services were not necessary or
14 beneficial to the debtor and they were costly and
detrimental for the estate. Second, it is apparent
15 that Mr. Shalaby lacked skill and experience in this
field; he lacked competence in the relevant
16 substantive and procedural areas required to handle
this case.
17
His handling of this case showed he did not understand
18 the implications of filing a chapter 7 case and did
not understand the basic concepts, including the
19 debtor’s duties, the Trustee’s duties, the nature of a
bankruptcy estate, the duty to turn over assets, the
20 rules regarding abandonment, the concept of rejection
of an executory lease, or the importance of
21 administrative rent. If he were competent, multiple
amendments to the schedules would not have been
22 necessary and he would have known he had to have the
debtor sign them, as the applicable ECF rules require.
23
24 The record supports these findings and thus they are not clearly
25 erroneous.
26 Shalaby also complains that of the $4,000, $306 was for the
27 filing fee. According to Shalaby, § 329 cannot be used to
28 direct a debtor’s counsel to “disgorge” filing fees as this
-31-
1 would be a Fifth Amendment takings violation. Shalaby provides
2 no analysis to support his conclusory statement nor does he
3 bother to provide authority. The takings clause provides that
4 “private property [shall not] be taken for public use without
5 just compensation.” U.S. CONST. amend. V. Suffice to say that
6 a debtor’s attorney does not have a property interest in his or
7 her compensation that is protected under the Takings Clause of
8 the Fifth Amendment.
9 In sum, the bankruptcy court applied the correct legal rule
10 and its finding that the $4,000 paid to Shalaby by debtor
11 exceeded the reasonable value of his services was not illogical,
12 implausible, or without support in the record. Therefore, the
13 bankruptcy court did not abuse its discretion when it ordered
14 disgorgement of all fees, including the filing fee within the
15 total amount to be disgorged. See DeLuca v. Seare (In re
16 Seare), 515 B.R. 599, 621 (9th Cir. BAP 2014) (finding court did
17 not abuse its discretion in including filing and credit report
18 fees within the total amount to be disgorged).
19 D. Suspension of ECF filing privileges
20 The bankruptcy court stated in the OSC that it was
21 considering sanctions based on Shalaby’s admitted failure to
22 obtain debtor’s signature on documents filed with the court
23 through ECF. The court further observed that Shalaby had
24 admitted that it was his practice to not have his debtor clients
25 sign any of the papers filed on their behalf. In response to
26 the OSC, Shalaby maintained that he could not locate the ECF
27 procedures on the bankruptcy court’s website. The bankruptcy
28 court noted that the procedures were readily available on the
-32-
1 website and that Shalaby was required to know the rules and
2 abide by them if he was going to practice in that bankruptcy
3 court. Accordingly, the bankruptcy court determined that the
4 remedy for Shalaby’s “flagrant violation” was to suspend his e-
5 filing privileges until he participated in the training provided
6 by the clerk’s office.
7 On appeal, Shalaby acknowledges his oversight regarding the
8 requirements for wet signatures. He asserts, however, that such
9 oversight is not sanctionable under any provision of Rule 9011
10 nor § 105, especially since he rectified the error before the
11 OSC hearing. He further argues that the bankruptcy court erred
12 by not considering nonmonetary measures. We are not persuaded.
13 As noted by the bankruptcy court, Shalaby was a registered
14 user of the bankruptcy court’s CM/ECF system and thus bound by
15 the procedures and rules governing electronic filings. The
16 court’s ECF Administrative Procedures ¶¶ 8 and 9 state in
17 relevant part:
18 A Registered Participant who electronically files a
document . . . shall be deemed to have certified under
19 penalty of perjury that he or she has personally
reviewed the document.
20
Pleadings . . . that are required to be verified . . .
21 and all affidavits or other pleadings in which a person
verifies, certifies, affirms or swears under oath or
22 penalty of perjury concerning the truth of matters set
forth in that pleading or document (‘Verified
23 Pleading’) may be filed electronically . . . .
The electronic filing of a Verified Pleading
24 constitutes a representation by the Registered
Participant . . . that the Registered Participant has
25 in his or her possession at the time of filing the
fully executed original, signed pleading/document.
26
BLR 5005-2(d) provides:
27 In the case of a Signatory who is not a Registered
Participant, as in the case of documents requiring
28
-33-
1 multiple signatures or documents signed by a third
party such as a debtor, the filing of the document
2 constitutes the filer’s attestation that the filer has
possession of (i) an original ink signature, (ii) a
3 copy of the original ink signature that has been
electronically scanned, or (iii) a copy of the
4 original ink signature transmitted by facsimile. The
filer shall maintain records to support this
5 attestation for subsequent production to the Court, if
so ordered, or for inspection upon request by a party,
6 until five years after the case or adversary
proceeding in which the document was filed is closed.
7
8 Shalaby violated the ECF Administrative Procedures and BLR
9 5005-2(d) — he admitted he did not have debtor’s original
10 signatures on the documents he filed.
11 The bankruptcy court possesses the inherent authority to
12 manage attorney practices before it and to impose sanctions for
13 violation of its local rules. See Singh v. Singh (In re Singh),
14 2014 WL 842102, at *8 (9th Cir. BAP March 4, 2011). BLR 9011-1
15 states:
16 Any petition, schedule, statement, declaration, claim
or other document filed and signed or subscribed under
17 any method (digital, electronic, scanned) adopted
under the rules of this Court shall be treated for all
18 purposes (both civil and criminal, including penalties
for perjury) in the same manner as though manually
19 signed or subscribed.
20 Failure of counsel or of a party to comply with any
provision of these rules or the Bankruptcy Rules shall
21 be grounds for imposition by the Court of appropriate
sanctions.
22
23 We can affirm the bankruptcy court’s imposition of
24 sanctions against Shalaby under this rule.
25 BLR 9011-1 authorized the bankruptcy court to use its
26 authority to suspend Shalaby’s e-filing privileges until he took
27 further training. Moreover, contrary to Shalaby’s contention,
28 this remedy for the violation was a nonmonetary remedy and
-34-
1 Shalaby has already complied.11 Finally, unlike the court in In
2 re Singh, nowhere did the bankruptcy court purport to rely on
3 § 105 for its sanctioning power in connection with Shalaby’s
4 violations of the ECF procedures. Thus, the issue of Shalaby’s
5 “bad faith” was irrelevant. In sum, the bankruptcy court did
6 not abuse its discretion when it sanctioned Shalaby by
7 suspending his e-filing privileges until he participated in the
8 training session offered by the clerk’s office.
9 E. Request for Judicial Notice
10 On August 30, 2015, Shalaby filed a request for judicial
11 notice of the several documents pursuant to Fed. R. Evid. 201:
12 A cover email from Attorney Dennis Davis, received by
Appellant on August 19, 2015, advising that the
13 Chapter 7 trustee collected $76,176.73 in funds in
this bankruptcy case. Attached to the email is Mr.
14 Davis’ “First and Final Application” for compensation,
document number 285, which sets forth the amount of
15 fees he has claimed at $62,627.50, and costs of
$2,983.00.
16
Judge Efremsky’s order awarding fees of $62,627.50 and
17 costs of $2,983.99 to Attorney Dennis Davis.
18 A letter dated December 12, 2014 acknowledging receipt
of Appellant’s complaint of judicial misconduct no.
19 14-90182 pertaining to Judge Roger L. Efremsky.
20 These documents are not relevant to the disposition of this
21
22 11
Shalaby suggests that since he complied with the
Sanctions Order by taking the ECF class, this portion of his
23 appeal may be moot. We do not think Shalaby’s compliance with
24 the Sanctions Order renders this portion of his appeal moot as we
have jurisdiction to consider the legal question of whether
25 Shalaby’s conduct was sanctionable. See Fleming & Assocs. v.
Newby & Tittle, 529 F.3d 631, 640 (5th Cir. 2008) (“Any
26 non-monetary portion of the sanctions not rendered moot by
settlement is appealable for its residual reputational effects on
27
the attorney.”); Dailey v. Vought Aircraft Co., 141 F.3d 224, 226
28 (5th Cir. 1998) (“This appeal is not moot because the [temporary]
disbarment on the attorney’s record may affect her status as a
member of the bar and have other collateral consequences.”).
-35-
1 appeal. As judicial notice is inappropriate where the facts to
2 be noticed are irrelevant, see Ruiz v. City of Santa Maria, 160
3 F.3d 543, 548 n. 13 (9th Cir. 1998), we deny the request for
4 judicial notice.
5 VI. CONCLUSION
6 For the reasons stated, we AFFIRM in part and REVERSE in
7 part.
8
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26
27
28
-36-