Unpublished Disposition, 885 F.2d 875 (9th Cir. 1987)

MEMORANDUM^* 

Section 303(i) (2) of Title 11 allows a bankruptcy court to sanction creditors for the bad-faith filing of an involuntary bankruptcy petition. This appeal involves the award of $25,287.50 in damages and $10,000 in punitive damages in favor of Johnston Hawks Limited and Jack J. McGarrity ("debtors") against Chicago Credit Services (Chicago Credit), Champion Mortgage Company (Champion) and MPI Consultants (MPI) (collectively referred to as "the creditors"). In this appeal, we determine whether the bankruptcy court abused its discretion in refusing to allow testimony by the creditors' attorney to resolve the question of bad faith.

FACTUAL AND PROCEDURAL BACKGROUND

Johnston Hawks, the debtor, is a Hawaii corporation whose principal business is the development of an Oregon time-share resort known as "Shadow Hawk." The creditors filed a joint involuntary Chapter 7 petition on February 5, 1985 against Johnston Hawks and its owner Jack J. McGarrity, claiming money owed for the financing of Shadow Hawk.

On March 27, 1985, the petition was dismissed with respect to McGarrity because he was improperly joined. On May 23, 1985, the petition was dismissed with respect to Johnston Hawks on the ground that Chicago Credit was not qualified to petition as a Johnston Hawks' creditor because its claim was subject to "a bona fide dispute". The dismissals were not appealed.

On August 16, 1985, Johnston Hawks and McGarrity moved, pursuant to 11 U.S.C. § 303(i), for the imposition of costs, attorney's fees, damages and punitive damages. Section 303(i) provides:

If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment--

(1) against the petitioners and in favor of the debtor for--

(A) costs; or

(B) a reasonable attorney's fee; or

(2) against any petitioner that filed the petition in bad faith, for--

(A) any damages proximately caused by such filing; or

(B) punitive damages.

Between October 30, 1985 and December 3, 1986 four hearings were held to determine relief. At the November 18, 1986 hearing, William Lawson, Champion's local counsel, called to the stand Burton R. Berman, a San Diego attorney who had filed the petition for all three creditors. Berman was called, according to Lawson, to counter McGarrity's earlier testimony that the creditors filed the bankruptcy petition to run the debtors out of business.

The debtors objected to Berman's testifying on the ground that he had a conflict of interest since he had never withdrawn as counsel of record after filing the petition for the three creditors. The bankruptcy court sustained the objection and noted that Berman remained as counsel of record for the creditors even though they had retained local Hawaii attorneys.¹  It stated:

[t]he Court has ruled that because Mr. Berman is of record--counsel of record for the other petitioning creditors, [MPI and Chicago Credit] the Court will not let Mr. Berman testify.

At the December 3, 1986 hearing, Champion orally sought reconsideration of the court's exclusion of Berman's testimony. Lawson, Champion's attorney, indicated that he had received letters from MPI and Chicago Credit releasing Berman from representation of their interests but did not indicate that they had hired substitute counsel. Since Berman was not present at the hearing, Lawson also orally conveyed Berman's request to withdraw as counsel.

The court denied Champion's motion for reconsideration. It based its ruling on the fact that Berman had never withdrawn from his representation of the three creditors, including Champion, and also on the fact that Champion had failed to give notice of its motion. The court stated at the hearing:

Because of the suit brought by the original defendants, ... Mr. Ito [who had been retained by MCI and Chicago Credit] did find possible conflicts and did withdraw. Mr. Berman was aware of Mr. Ito's position. Mr. Berman was in the same position as Mr. Ito, if not in a deeper position. Yet he chose to remain as counsel of record for the three petitioning creditors.

Even though on November this Court had cautioned Mr. Berman that he would not be allowed to testify so long as he was counsel of record for the three petitioning creditors, he has not yet withdrawn from the three petitioning creditors, and the Court is denying the motion for reconsideration.

Not only that. The motion for reconsideration was brought up this morning, after Mr. Lawson's own three witnesses had completed their testimony and the motion was a surprise not only to the Court but also to opposing counsel. So the motion is denied.

On April 28, 1987, the bankruptcy court entered an order imposing joint and several liability on the three creditors to pay the debtors $25,287.50 in damages, $10,000 in punitive damages, $29,087.30 in attorneys' fees and $3,020.19 in costs for a total of $67,394.99. The court concluded that the creditors filed the involuntary petition in bad faith because they acted with ill-will, malice and intent to harass, and used the Bankruptcy Code as a substitute for customary collection procedures by: (1) failing to follow the Bankruptcy Code in naming and serving the Debtors, (2) failing to review the claim of Chicago Credit to see if it was subject to a bona fide dispute, (3) forcing a bonding company to release funds from an escrow account to pay some of their claims and (4) filing their petition with the knowledge that a contract action was a more appropriate resolution of their dispute.

On April 29, 1987 the creditors appealed the bankruptcy court's judgment to the district court. The district court upheld the award of sanctions and fees. It pointed out that: (1) Champion failed to give notice of the oral motion for reconsideration, (2) Berman was not available to testify at the December 3, 1986 hearing and (3) Berman never withdrew as counsel for Chicago Credit and MPI.

STANDARD OF REVIEW

Because the Court of Appeals is in as favorable a position as the district court to review the findings of the bankruptcy court, the district court's decision is reviewed de novo. In re Woodson Co., 813 F.2d 266, 270 (9th Cir. 1987). The regulation of attorneys appearing before a trial court in ethical matters will be disturbed only when, on review of the record, it could be said that the court abused its permissible discretion. Gas-A-Tron of Arizona v. Union Oil Co. of California, 534 F.2d 1322, 1325 (9th Cir. 1976). A trial court is charged with the supervision of conduct of the members of its bar in order to maintain public confidence in the legal profession. Id. at 1324.

DISCUSSION

The bankruptcy court ruled that Burton R. Berman could not testify at the Section 303 hearing because Berman continued to represent all three creditors. We find that the court's ruling may be justified by concerns dealing with Berman's professional responsibility.

The most serious concern is that Berman offered to testify on behalf of Champion while continuing as Champion's attorney. We consider this to be an ethical violation. The governing code of ethics for attorneys practicing in Hawaii requires withdrawal from representation if attorneys learn or it is obvious that they "ought" to be called as a witness on behalf of their client. ABA Code of Professional Responsibility DR 5-102(A).² 

The policy rationale for prohibiting representation is to avoid placing the advocate in the "unseemly and ineffective position" of arguing his own credibility. Model Code EC 5-9; Mannhalt v. Reed, 847 F.2d 576, 581 (9th Cir.), cert. denied, 109 S. Ct. 260 (1988). "The roles of an advocate and of a witness are inconsistent; the function of an advocate is to advance or argue the cause of another, while that of a witness is to state facts objectively". Model Code EC 5-9. Such inconsistency could not only confuse proceedings but also lead to embitterment between counsel because there would likely be attempts to impeach attorneys in their capacity as witnesses. See General Mill Supply Co. v. SCA Services, Inc., 697 F.2d 704, 712 (6th Cir. 1982).

The creditors argue that Berman "ought" to have testified because his testimony would have shown that they did not file their petition in bad faith. Assuming the relevance of Berman's testimony, DR 5-102(A) requires his withdrawal from representation of Champion.

None of the exceptions to the attorney-witness rule excuse Berman from the requirement to withdraw. An attorney/witness is only allowed to continue representation if: (1) the testimony related to an uncontested matter, (2) the testimony related to a matter of formality and there is no reason to believe that there would be any opposition to it, (3) the testimony related to the nature and value of legal services rendered by the lawyer or (4) the refusal would have worked a "substantial hardship" on the client because of the distinctive value of the lawyer in the case. DR 5-101(B).

The first three exceptions, concerning uncontested testimony, formalities and legal fees clearly were not applicable. The fourth exception which authorizes continued representation if an attorney's withdrawal worked "substantial hardship" on the client also does not apply here. This would have been a relatively simple matter since the bankruptcy petition had already been dismissed and Champion had local counsel to handle the case. See Groper v. Taff, 717 F.2d 1415, 1418-9 (D.C. Cir. 1983) (retention of local counsel indicating lack of hardship).

In the instant case, Berman remained attorney of record for Champion when his testimony was offered. Berman's dual role as advocate and witness caused a conflict under DR 5-102(A), which justified the bankruptcy court's refusal to allow Berman to testify.

Section 1912 of Title 28 provides that where a judgment is affirmed by a court of appeals, the court in its discretion may award just damages to the prevailing party for the delay in resolving the appeal and costs. Under this section, costs and attorney's fees may be imposed as a sanction against a frivolous appeal. De Witt v. Western Pacific R. Co., 719 F.2d 1448, 1451 (9th Cir. 1983). "An appeal is frivolous if the result is obvious, or the arguments of error are wholly without merit". Id.

We do not find appellants' arguments to be wholly without merit. Thus, we conclude that sanctions under 28 U.S.C. § 1912 and Circuit Rule 39-1.6 shall not be imposed.

The rulings of the bankruptcy and district court are

AFFIRMED.