United States Court of Appeals,
Fifth Circuit.
No. 93-9180.
Summary Calendar.
In the Matter of Gordon F. SADKIN, Debtor.
Perkins COIE, Appellant,
v.
Gordon F. SADKIN, Appellee.
Nov. 2, 1994.
Appeal from the United States District Court for the Northern
District of Texas.
Before KING, HIGGINBOTHAM and BARKSDALE, Circuit Judges.
PER CURIAM:
Appellant Perkins Coie ("Perkins"), a law firm headquartered
in California, appeals from the district court's affirmance of the
bankruptcy court's order that allowed Gordon F. Sadkin's claimed
exemption of his wrongful garnishment cause of action and denied
all relief requested by Perkins. We affirm the judgment of the
district court.
I. BACKGROUND
Prior to events giving rise to this bankruptcy, Perkins
represented the debtor Gordon F. Sadkin ("Sadkin") in various real
estate ventures, allegedly earning attorneys' fees of more than
$180,000. When a dispute over legal fees arose, Perkins filed a
pre-judgment garnishment suit in a Texas district court. The court
later granted Sadkin's Motion to Dissolve the Garnishment, ruling
that the debt was not liquidated. Following the dissolution order,
1
on March 21, 1991, Sadkin filed a petition for relief under Chapter
11 of the Bankruptcy Code. On February 14, 1992, the bankruptcy
court converted the case to a proceeding under Chapter 7 of the
Bankruptcy Code. On March 25, 1992, Sadkin filed amended Chapter
7 schedules, including a schedule of property claimed to be exempt
from distribution to creditors. Listed on that exemption schedule
was a "[p]otential cause of action against Perkins Coie for damages
for lost income due to wrongful garnishment." Although an initial
creditors' meeting on March 30, 1992 was postponed, Sadkin's
creditors, including a representative of Perkins, did meet on April
3, 1992.
On May 21, 1992, Perkins filed a late objection to Sadkin's
"wrongful garnishment" exemption,1 coupled with a motion for
sanctions. In essence, Perkins' objection alleged that Sadkin had
no legal basis for his claimed exemption of a potential wrongful
garnishment cause of action. As a consequence, Perkins requested
that the claimed exemption be stricken. Moreover, Perkins
maintained that sanctions were warranted because Sadkin's cause of
action was fraudulently and falsely designated as exempt property.
At a July 27, 1992 hearing, the bankruptcy court found no fraud in
Sadkin's actions. On August 14, 1992, the bankruptcy court issued
a written order allowing Sadkin's exemption for a wrongful
1
Bankruptcy Rule 4003(b) provides in relevant part that "The
trustee or any creditor may file objections to the list of
property claimed as exempt within 30 days after the conclusion of
the meeting of creditors held pursuant to Rule 2003(a) or the
filing of any amendment to the list or supplemental schedules
unless, within such period, further time is granted by the
court." Bankr.Rule 4003(b), 11 U.S.C.A. (emphasis added).
2
garnishment cause of action and denying all relief requested by
Perkins. Similarly, in both an August 31, 1993 order and a
November 22, 1993 order, the district court affirmed the decision
of the bankruptcy court. The district court noted that "[t]aken as
a whole, Sadkin's pleading is equivocal on the issue of whether
Sadkin filed a false claim of exemption and, therefore, does not
establish that sanctions are warranted."
II. STANDARD OF REVIEW
A bankruptcy court's findings of fact are subject to the
clearly erroneous standard of review. See Haber Oil Co. v.
Swinehart (In re Haber Oil Co.), 12 F.3d 426, 434 (5th Cir.1994).
When the district court has affirmed the bankruptcy court's
findings, this standard is strictly applied, and reversal is
appropriate only when there is a firm conviction that error has
been committed. See Chiasson v. Bingler (In re Oxford Management
Inc.), 4 F.3d 1329, 1333 (5th Cir.1993). Similarly, the imposition
of sanctions is a matter of discretion for the bankruptcy court;
thus, we review under an abuse of discretion standard. See Shipes
v. Trinity Indus., 987 F.2d 311, 323 (5th Cir.), cert. denied, ---
U.S. ----, 114 S.Ct. 548, 126 L.Ed.2d 450 (1993); Thomas v.
Capital Sec. Servs., Inc., 836 F.2d 866, 872-73 (5th Cir.1988) (en
banc). Finally, conclusions of law are reviewed de novo. See
Chiasson, 4 F.3d at 1333.
III. ANALYSIS AND DISCUSSION
A. Due Process
Perkins initially argues that the bankruptcy court's refusal
3
to consider its belated objection to the potential cause of action
exemption denied its right to due process. Perkins' argument
hinges on an interpretation of Bankruptcy Rule 1009(a), which
states in the following relevant part:
[a] voluntary petition, list, schedule, or statement may be
amended by the debtor as a matter of course at any time before
the case is closed. The debtor shall give notice of the
amendment to the trustee and to any entity affected thereby.
Bankr.Rule 1009(a), 11 U.S.C.A. (emphasis added). Perkins alleges
that Sadkin failed to provide notice of the amended list of
exemptions, and as a consequence, Perkins claims that it did not
learn of the disputed exemption until after the time for filing
objections had passed. See Bankr.Rule 4003(b), 11 U.S.C.A.
(providing a thirty-day time period for objecting to claimed
exemptions).
We reject Perkins' contentions. Rule 1009(a) does not require
any particular type of notice. Even though Sadkin's amended
schedules were not served on Perkins, the bankruptcy court
implicitly found that Perkins had actual notice of Sadkin's claimed
exemption. Such notice is adequate to satisfy Rule 1009(a) and to
meet due process concerns. See First Nat'l Bank v. Peterson (In re
Peterson), 929 F.2d 385, 386-88 (8th Cir.1991) (finding that a
creditor's receipt of a trustee's objection to amended exemptions
provided actual notice of the claimed exemptions to satisfy Rule
1009(a)); In re Cooke, 84 B.R. 67, 68-69 (Bankr.N.D.Tex.1988)
(concluding that a debtor's announcement of a homestead claim at a
meeting of creditors provided actual notice of the claimed
exemption to satisfy Rule 1009(a)). It is undisputed that on March
4
25, 1992, Sadkin filed amended schedules, including the contested
exemption. Perkins had knowledge that these amended schedules had
been filed, and therefore, Perkins knew that changes had been made.
In addition, at an April 3, 1992 creditors' meeting attended by a
representative of Perkins, Sadkin discussed and answered questions
about his purported claim of wrongful garnishment against Perkins.
In fact, the record states that the trustee questioned Sadkin at
that meeting about his purported claim of wrongful garnishment.
The record further notes that the trustee, after questioning
Sadkin, determined that the claim was of de minimis value to the
estate and decided to abandon it.2 Nevertheless, despite the
discussions about the claim, Perkins did not object until May 21,
1992—well after the thirty-day deadline of Rule 4003(b).
The bankruptcy court allowed the exemption and denied all
relief, implicitly finding that the discussions involving the
potential wrongful garnishment cause of action provided actual
notice that the claim had been designated as exempt. Cf. Norman v.
Apache Corp., 19 F.3d 1017, 1021 (5th Cir.1994) ("The denial of a
motion by the district court, although not formally expressed, may
be implied by the entry of a final judgment or of an order
inconsistent with the granting of the relief sought by the
motion."). No evidence in the record indicates that this finding
2
The Ninth Circuit has noted that "[w]hen there is an
independent trustee, most creditors, particularly smaller ones,
are likely to rely on the trustee to smoke out any assets
properly belonging to the estate. The debtor's responsibility to
serve creditors is therefore narrower." Fireman's Fund Ins. Co.
v. Woodson (In re Woodson), 839 F.2d 610, 615 n. 6 (9th
Cir.1988).
5
is clearly erroneous. Thus, Perkins' actual notice of the
exemption satisfied both the notice requirement of Rule 1009(a) and
fundamental due process concerns. Indeed, with knowledge that
amended schedules had been filed, Perkins could have sought a time
extension under Rule 4003(b) to insure that it had fully informed
itself of the schedule changes. Moreover, considering that the
amended schedules were filed with the bankruptcy clerk on March 25,
1992, Perkins could have examined the schedules within the
thirty-day period for objections, and Perkins certainly could have
examined them before the May 21, 1992 filing date of its objection.
As the bankruptcy court noted in In re Cooke :
[A] procedural rule containing a time bar that requires a
party to monitor a court record for a filing does not
necessarily impose an unreasonable burden on that party.
Analogously, the federal rules of appellate procedure require
a litigant who receives an unfavorable court ruling to
vigilantly monitor the case for entry of a final judgment or
order if that litigant wants to preserve the right to appeal.
84 B.R. at 68. Requiring Perkins to act on its actual notice of
the potential cause of action exemption does not unreasonably
frustrate the creditor's right to object to an exemption, nor does
it undermine the creditor's due process protections. Cf. Sequa
Corp. v. Christopher (In re Christopher), 28 F.3d 512, 519 (5th
Cir.1994) ("[D]ue process requires only notice that is both
adequate to apprise a party of the pendency of an action affecting
its rights and timely enough to allow the party to present its
objections.").
B. Sanctions for Fraud
Pervading Perkins' brief, and especially its second, third,
6
and fourth arguments, are assertions that Sadkin "fraudulently" and
"falsely" designated the potential wrongful garnishment claim as
exempt property, and Perkins' request for the court to sanction
Sadkin by striking the "meritless exemption claim" under Bankruptcy
Rule 9011.3 Perkins offers no evidence of this misconduct except
for highlighting various paragraphs which were admitted by Sadkin
in his response to Perkins' "Objection to False Designation of
Exempt Property" ("Objection").4 The bankruptcy court denied all
relief requested by Perkins in its Objection, as the court did not
find any fraud on the part of the debtor. The district court
affirmed, noting that "[t]aken as a whole, Sadkin's pleading is
equivocal on the issue of whether Sadkin filed a false claim of
3
Bankruptcy Rule 9011, which is substantially similar to
Federal Rule of Civil Procedure ("FRCP") 11, provides in relevant
part:
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
reasonable inquiry it is well grounded in fact and is
warranted by existing law or a good faith argument for
the extension ... of existing law; and that it is not
interposed for any improper purpose.... If a document
is signed in violation of this rule, the court on
motion or on its own initiative, shall impose ... an
appropriate sanction.
Bankr.Rule 9011(a), 11 U.S.C.A. Perkins also claims that
the Court has the authority to sanction Sadkin under FRCP
11.
4
The complete title of Perkins' initial objection to the
exemption is "Objection to False Designation of Exempt Property,
Motion to Extend Time to Object to Debtor's Claimed Exemptions,
Motion for Sanctions and to Strike Debtor's Fraudulently Claimed
Exemptions, and Motion for Relief Under Rule 60(b) and Bankruptcy
Rules 9024 and 1007."
7
exemption, and, therefore, does not establish that sanctions are
warranted under Rule 9011."
We find nothing in the record to indicate that the bankruptcy
court abused its discretion in denying sanctions. The bankruptcy
court implied that Sadkin's exemption was a theory based on a loss
of future earning capacity that, regardless of its validity, did
not warrant a Rule 9011 sanction. In addition, although Perkins
emphasizes Sadkin's admissions, there are relevant denials that
undermine the allegations of fraud and counsel against reversal of
the bankruptcy court's findings. For example, Sadkin's denials of
paragraphs 2, 7, and 9 of Perkins' Objection rebut the allegations
of fraud, intent to mislead, and willful abuse of the bankruptcy
process. By itself, Sadkin's response is not enough to compel this
Court to reverse the denial of sanctions, and with no other
evidence of fraud presented by Perkins, sanctions are not
warranted.
Moreover, assuming, without deciding, that Sadkin's claimed
exemption of a potential wrongful garnishment cause of action is
without a colorable basis, striking Sadkin's exemption claim would
still not be warranted because of Perkins' belated objection to the
exemption. As the Supreme Court noted in Taylor v. Freeland &
Kronz, --- U.S. ----, 112 S.Ct. 1644, 118 L.Ed.2d 280 (1992), the
Bankruptcy Code describes the following procedure for claiming and
objecting to exemptions:
The debtor shall file a list of property that the debtor
claims as exempt under subsection (b) of this section....
Unless a party in interest objects, the property claimed as
exempt on such list is exempt.
8
Id. at ----, 112 S.Ct. at 1647 (quoting 11 U.S.C. § 522(l ) (1988))
(emphasis added). The Supreme Court continued by noting that
although Section 522(l ) does not specify the time for objecting to
a claimed exemption, Bankruptcy Rule 4003(b) provides a thirty-day
deadline. See id. In Taylor, the appellant filed a late objection
to the debtor's claimed exemption, but nevertheless argued that
late objections should be allowed under Section 522(l ) and
Bankruptcy Rule 4003(b) if a debtor does not have "a good-faith or
reasonably disputable basis" for claiming the exemption. Taylor,
--- U.S. at ---- - ----, 112 S.Ct. at 1647-48. The appellant
justified this interpretation by asserting that "requiring debtors
to file claims in good faith will discourage them from claiming
meritless exemptions merely in hopes that no one will object." Id.
at ----, 112 S.Ct. at 1648.
The Supreme Court squarely rejected this argument. Writing
for the Court, Justice Thomas adopted a literal approach to the
interpretation of Section 522(l ) and Bankruptcy Rule 4003(b). As
Justice Thomas explained:
Rule 4003(b) gives the trustee and creditors 30 days from the
initial creditors' meeting to object. By negative
implication, the Rule indicates that creditors may not object
after 30 days "unless, within such period, further time is
granted by the court." The Bankruptcy Court did not extend
the 30-day period. Section 522(l ) therefore has made the
property exempt. [A trustee] cannot contest the exemption at
this time whether or not [the debtor] had a colorable
statutory basis for claiming it.
Id. (quoting Bankr.Rule 4003(b), 11 U.S.C.A.) (emphasis added).
After observing that "[d]eadlines may lead to unwelcome results,
but they prompt parties to act and they produce finality," the
9
Court concluded, "[w]e have no authority to limit the application
of § 522(l ) to exemptions claimed in good faith." Id. at --- - --
--, 112 S.Ct. at 1648-49.
In the instant case, Sadkin's creditors, including a
representative of Perkins, met on April 3, 1992. Perkins'
Objection to the claimed exemption was filed on May 21, 1992—well
past the thirty-day deadline of Rule 4003(b). Even if the disputed
exemption is wholly without merit and devoid of a statutory basis,
Taylor still holds that the claim is exempt under Section 522(l )
because of the late objection. Thus, we find no basis for striking
the exemption.
C. Equitable Relief
In its fifth argument, Perkins asserts that the bankruptcy
court abused its discretion in not using the equitable powers
granted by Section 105(a) of the Bankruptcy Code5 or Federal Rule
of Civil Procedure 60(b)6 to sustain Perkins' late objection. We
5
Section 105(a) of the Bankruptcy Code provides the
following:
The court may issue any order, process, or judgment
that is necessary or appropriate to carry out the
provisions of this title. No provision of this title
providing for the raising of an issue by a party in
interest shall be construed to preclude the court from,
sua sponte, taking any action or making any
determination necessary or appropriate to enforce or
implement court orders or rules, or to prevent an abuse
of process.
11 U.S.C. § 105 (1988).
6
The relevant portions of Federal Rule of Civil Procedure
60(b) provide the following:
On motion and upon such terms as are just, the court
10
decline the invitation to grant relief under these provisions.
First, "Section 105(a) permits courts to enforce the rules in
order to prevent an abuse of process." As noted, however, the
bankruptcy court found no fraud on the part of the debtor and no
additional evidence in the record suffices to undermine this
finding. Thus, we find no "abuse of process" that calls for
invocation of Section 105(a).
Second, Section 105(a) authorizes a bankruptcy court "to
fashion such orders as are necessary to further the substantive
provisions of the Bankruptcy Code." Chiasson v. Bingler (In re
Oxford Management Inc.), 4 F.3d 1329, 1333 (5th Cir.1993).
Nevertheless, "the powers granted by that statute must be exercised
in a manner that is consistent with the Bankruptcy Code." Id. at
1334. The statute " "does not authorize the bankruptcy courts to
create substantive rights that are otherwise unavailable under
applicable law, or constitute a roving commission to do equity.' "
Id. (quoting United States v. Sutton, 786 F.2d 1305, 1308 (5th
Cir.1986)).
In the instant case, the use of equitable powers to sustain
Perkins' belated Objection would be inconsistent with the operation
of Section 522(l ), Bankruptcy Rule 4003(b), and the Supreme
Court's interpretation of these provisions in Taylor. Simply put,
may relieve a party or a party's legal representative
from a final judgment, order, or proceeding for the
following reasons: (1) mistake, inadvertence,
surprise, or excusable neglect ... (3) fraud[,] ...
misrepresentation, or other misconduct of an adverse
party ... or (6) any other reason justifying relief
from the operation of the judgment.
11
Perkins missed the explicit thirty-day deadline for filing
objections, and Section 105(a) "does not allow the bankruptcy court
to override explicit mandates of other sections of the Bankruptcy
Code." 2 Collier on Bankruptcy ¶ 105.01[3] (Lawrence P. King et
al. eds., 15th ed. 1994). The bankruptcy court and the district
court saw no reason to excuse Perkins' delay, and given the Supreme
Court's holding in Taylor, the Bankruptcy Rules were properly
enforced as written.7
Finally, Section 105(a) provides equitable powers for the
bankruptcy court to use at its discretion. See In re Danielson,
981 F.2d 296, 298-99 (7th Cir.1992) ("Whatever power § 105(a)
creates, it reposes in bankruptcy judges rather than appellate
courts and does not upset the norm of timeliness."). The
bankruptcy court found no fraud on the part of Sadkin and allowed
the exemption to stand. We find nothing in the record to indicate
that the bankruptcy court abused its equitable discretion in
reaching these conclusions.
Similarly, the bankruptcy court did not abuse its discretion
in refusing to grant relief under FRCP 60(b)(1), (3), and (6). The
court implicitly found that Perkins had actual notice of the
disputed exemption; therefore, there is no justifiable mistake,
inadvertence, or other ground that warrants relief under Rule
60(b)(1). The court found no fraud on the part of Sadkin;
7
As Judge Easterbrook noted while denying equitable relief
under Section 105(a), "[e]nforcing the Bankruptcy Rules according
to their terms cannot be an abuse of discretion." In re
Danielson, 981 F.2d 296, 299 (7th Cir.1992).
12
therefore, no relief is warranted under Rule 60(b)(3). In
addition, as we have already noted, the record does not indicate
that these findings are clearly erroneous or an abuse of
discretion. Finally, with no further evidence of misconduct or
justifiable error in the record, relief under the "catch-all" Rule
60(b)(6) is also not warranted.8
IV. CONCLUSION
For the foregoing reasons, the judgment of the district court
affirming the bankruptcy court's denial of all relief requested by
Perkins is AFFIRMED.
8
We also find that the district court did not abuse its
discretion in refusing to allow Perkins to supplement the record
on appeal. Even if the record should have been supplemented with
the transcript of the July 27, 1992 hearing before the bankruptcy
court, the district court's refusal would present only harmless
error, as the transcript is not helpful to Perkins' position.
See Fed.R.Civ.P. 61. Sadkin himself cites numerous portions of
the transcript in his brief that do not support Perkins'
arguments. Moreover, the bankruptcy court made specific findings
in the transcript that undermine Perkins' contentions. As the
bankruptcy court noted, "I don't know that there's any great
particular harm here, and I would have trouble seeing fraud." In
short, the transcript does not aid Perkins' efforts.
13