Unpublished Disposition, 930 F.2d 26 (9th Cir. 1988)

MEMORANDUM^** 

This case arose from Robert A. Young's purchase of two hairdressing salons from Aviva Gelato, Inc. ("Gelato"), a corporation owned by David Earl Beugen and his wife. Disputes over the sale produced 18 separate lawsuits in federal court, California state court, and Nevada state court. Both Beugen and Gelato eventually filed for relief under Chapter 11 of the Bankruptcy Code.

Young appeals seven separate judgments, discussed more fully below. We affirm the lower courts' determinations in all the appeals.

FACTS AND PROCEEDINGS BELOW

David Earl Beugen and his wife Susan owned Gelato, an ice cream enterprise. They also owned two hairstyling salons in Reno, Nevada. On May 1, 1983, Robert A. Young, Hyon T. Mun, and Khang Un Mun, Inc. (collectively, "Young") purchased the two salons from Gelato. Soon after the sale was complete, Young became convinced that Beugen "intentionally misrepresented the business's income and intentionally concealed the existence of significant business debts." Young refused to pay the monthly installments and attempted to have the contract rescinded. Settlement negotiations were unsuccessful.

The parties commenced the following actions, among others:

(1) On June 27, 1983 Young commenced an action against Beugen in Nevada state court, seeking damages and rescission of the sale ("Beugen I ").

(2) On the following day Beugen filed suit against Young in the same Nevada state court for repossession of the business premises and for the balance due on the purchase price ("Beugen II ").

(3) On July 27, 1983 Beugen sued Young in California state court, again for the balance due on the purchase price ("Beugen III ").

(4) On June 18, 1984 Young commenced an action in California state court against Beugen, again for damages and rescission of the sale ("Beugen IV "). On Beugen's motion, the court entered an order staying this action pending the outcome of Beugen II.

In Beugen I, Beugen demanded that Young post a $1000 bond as security for costs pursuant to Nev.Rev.Stat. Sec. 18.130(1). When Young failed to post the required bond, Beugen moved to dismiss the action pursuant to Nev.Rev.Stat. Sec. 18.130(4). The court entered an order of dismissal on May 23, 1984. Young did not appeal.

After lengthy negotiations, a settlement agreement (the "Agreement") was drafted, which required Young and Beugen to dismiss most of their actions against each other. Beugen II, however, was permitted to survive and proceed.

On November 14, 1985, Young solicited and obtained a claim against Beugen owned by Louise Spottswood (the "Spottswood claim"). Ms. Spottswood had leased an apartment from Beugen and paid him a $1200 security deposit. Eventually, she vacated the premises and brought a small claims suit against Beugen to recover the security deposit. A judgment was rendered on May 10, 1983 and Ms. Spottswood was awarded $753.38. Although a balance of only $374.47 remained, Young paid $500 for the claim. "Thereafter, Young undertook numerous, extensive and extreme acts to enforce his claim.... Young currently asserts that the debtor owes him $1,100 on the Spottswood claim." Young v. Beugen (In re Beugen), 99 Bankr. 961, 964 (Bankr.9th Cir. 1989) ("Beugen ").

On March 12, 1986, both Beugen and Gelato filed petitions under Chapter 11 of the Bankruptcy Code, staying all matters pending between the parties. On May 21, 1986, Young was appointed to the Official Creditors' Committee in Beugen's individual bankruptcy case. Shortly thereafter, Young acquired a second claim, this one against both Beugen and Gelato, which originally belonged to Galen Leung (the "Leung claim"). Id. Beugen and Gelato had given Leung a note worth $5000, plus interest, on July 9, 1986. Id. Young solicited Leung and gave him $500 for the note.

Based on the Leung claim, Young was also appointed to the Official Creditors' Committee in the Gelato case, thus becoming the only common member of the two creditors' committees. Thereafter, upon Young's motion, the bankruptcy court entered an order transferring the Spottswood and Leung claims to Young in the Official Creditors' Register. Id. at 962.

In June 1986, Young commenced an adversary proceeding pursuant to section¹  523(a) (2) to determine both the liability and dischargeability of the contingent and unliquidated fraud claims previously asserted in Beugen I, II, III, and IV ("Beugen V "). Young requested a jury trial on the issues of liability and damages. The request was denied on June 19, 1987. Further, the bankruptcy court determined that the dismissal of Beugen I for failure to post security for costs operated to bar maintenance of Beugen V. The trial continued on Beugen's three counterclaims. The court granted partial summary judgment for Young on two of the counterclaims, and Beugen moved for voluntary dismissal of his only remaining claim. The motion was granted, and Young appealed to the district court.

The district court found the dismissal of Beugen I was an adjudication on the merits under Nev.R.Civ.P. 41(b) and was entitled to preclusive effect. Further, the district court affirmed the bankruptcy court's denial of a jury trial and reversed the bankruptcy court's dismissal of the counterclaim without prejudice, holding the counterclaim should have been dismissed with prejudice. Both Young and Beugen appeal this ruling in Nos. 88-15314 and 88-15380.

Meanwhile, Beugen's counsel filed a motion for summary judgment in the stayed, but still pending, Beugen II. In response, Young filed an adversary proceeding seeking to enjoin Beugen from proceeding simultaneously with Beugen II and Beugen V because the entire dispute was already set for trial in Beugen V. The bankruptcy court permitted the simultaneous prosecution of the two actions. On June 10, 1987, Beugen II was removed to the bankruptcy court in Reno, Nevada. Young then successfully moved the bankruptcy court to transfer the matter to San Francisco. Eventually, the bankruptcy court dismissed Beugen II because all disputes were resolved by Beugen V.

Thereafter, Mun and Khang (but not Young) filed a motion to recover attorneys' fees as the prevailing party in Beugen V, as authorized under the contract for sale of the hair salons. The motion was denied. Young also moved the bankruptcy court for attorneys' fees and sanctions against Beugen and his counsel under Bankruptcy Rule 9011 and 28 U.S.C. § 1927. "This motion was based upon various violations and misrepresentations allegedly committed before bankruptcy courts in Reno and San Francisco pertaining to [Beugen II ]." The bankruptcy court denied the motion for attorneys' fees and the Bankruptcy Appellate Panel (the "BAP") affirmed. Young appeals this ruling in No. 89-15858. The BAP also imposed Rule 38 sanctions against Young in the amount of $3,703.60. Young appeals this order in No. 89-16416.

On April 13, 1987, Young filed motions pursuant to section 1112(b) to dismiss both the Beugen and Gelato bankruptcy petitions (1) for cause, (2) for bad faith in filing and maintaining the petitions, and (3) for debtor's misconduct. The bankruptcy court dismissed the Gelato case on June 24, 1987, and converted the Beugen case to Chapter 7 on December 4, 1987. On June 27, 1988 Young filed an adversary proceeding against Beugen in the Chapter 7 case (1) objecting to Beugen's discharge under virtually every subdivision of section 727(a), and (2) seeking to determine both the liability and dischargeability under section 523(a) (6) of an unliquidated, contingent state-law claim for malicious prosecution ("Beugen VI ").² 

On August 17, 1988, Beugen moved to dismiss the adversary proceeding based on "Young's lack of standing to sue, his bad faith in filing the complaint, and his failure to state a claim upon which relief could be granted." Beugen, 99 Bankr. at 963. On August 31, 1988 Young also filed a motion for sanctions under Bankruptcy Rule 9011. The bankruptcy court dismissed the adversary complaint with prejudice and denied Young's motion for sanctions. The BAP affirmed. Young appeals the dismissal in No. 89-16012. The BAP also imposed sanctions against Young in the amount of $17,863.62. Young appeals the Rule 38 award in No. 89-16412.

Finally, also in Beugen VI, Beugen filed a motion to require Young to post a bond for costs "as a condition of proceeding further with [Young's] appeal [89-16012], and for such other relief as seems just and proper." Young opposed the request, and made a counter-motion for sanctions against Beugen's counsel under Fed. R. Civ. P. 11 for filing and prosecuting a frivolous motion. The BAP denied the Rule 11 motion. Young appeals the denial in No. 90-15114.

As noted above, Young successfully moved to dismiss the Gelato bankruptcy. Shortly thereafter, Young moved for taxing costs of $963.65. The bankruptcy court denied the motion, and the BAP affirmed. Young v. Aviva Gelato (In re Aviva Gelato), 94 Bankr. 622 (Bankr. 9th Cir. 1988) ("Gelato "). Young appeals the denial of taxing costs in No. 89-15426.

DISCUSSION

A. Preclusive Effect of Dismissal for Failure to Post a Bond

We agree with the bankruptcy court that the dismissal of Beugen I for failure to post a security bond constitutes an adjudication on the merits within the meaning of Rule 41(b). According to Nev.Rev.Stat. Sec. 18.130(1),

[w]hen a plaintiff in an action resides out of the state ..., security for the costs and charges which may be awarded against such plaintiff may be required by the defendant, by the filing and service on plaintiff of a written demand therefor within the time limited for answering the complaint.

Beugen made such a demand in Beugen I. When Young failed to post the bond within the statutory period, Beugen I was dismissed.³  The Nevada court did not specify whether the dismissal was with or without prejudice. The bankruptcy court found the dismissal of Beugen I was an "adjudication on the merits," and dismissed Beugen V, holding that the action was "barred by principles of collateral estoppel." The district court affirmed.

We review de novo a determination of res judicata. Lea v. Republic Airlines, 903 F.2d 624, 634 (9th Cir. 1990); State of Nevada Employees Assoc. v. Keating, 903 F.2d 1223, 1225 (9th Cir.), cert. denied, --- U.S. ----, 111 S. Ct. 558 (1990) ("We review district court claim preclusion determinations de novo."). Whether dismissal for failure to post a security bond constitutes an adjudication on the merits under Rule 41(b) is a question of statutory interpretation we review de novo. Valley Bank of Nevada v. Plus System, 914 F.2d 1186, 1189 (9th Cir. 1990).

Nev.R.Civ.P. 41(b) provides, in relevant part:

Unless the court in its order for dismissal otherwise specifies, a dismissal under this subdivision and any dismissal not provided for in this rule, other than a dismissal for lack of jurisdiction, for improper venue, or for failure to join a party under rule 19, operates as an adjudication upon the merits.

(emphasis added). Young argues the dismissal of Beugen I was "jurisdictional and thus not on the merits within the meaning of Rule 41(b)...." Relying on the reasoning of Costello v. United States, 365 U.S. 265 (1961), Young contends dismissal for failure to post a bond as security for costs is analogous to dismissal for failure to file an affidavit of good cause, which the Costello court found to be jurisdictional within the meaning of Fed. R. Civ. P. 41(b). We are not persuaded by this argument.

Rule 41(b)'s jurisdictional exception is not broad enough to embrace failure to post a security bond. We agree with the district court's reasoning:

The filing of a cost bond is not a jurisdictional prerequisite. The Nevada statute authorizing the cost bond, see Nev.Rev.Stat.Ann. Sec. 18.130(4), by its terms operates only after proceedings have been initiated and the court has assumed jurisdiction. The bond need not be sought; it may be waived; or the court may relieve a plaintiff of the obligation to post the bond. By contrast, the affidavit requirement in Costello was a nonwaivable prerequisite to the initiation of the action.

See Dubin v. Harrell, 79 Nev. 467, 386 P.2d 729, 731 (1963); Borders Electronic Co. v. Quirk, 97 Nev. 205, 626 P.2d 266, 267 (1981); Brion v. Union Plaza Corp., 104 Nev. 553, 763 P.2d 64, 65 (1988); Carter v. McGowan, 524 F. Supp. 1119, 1121 (D. Nev. 1981). Based on the reasoning of these cases, we affirm the district court's determination.

Because we affirm the dismissal on res judicata grounds, we need not reach this issue.

C. Dismissal of Counterclaim: Cross-Appeal No. 88-15380

The bankruptcy court dismissed Beugen's counterclaim without prejudice. On appeal, the district court reversed and dismissed the counterclaim with prejudice. We agree that the bankruptcy court abused its discretion. We therefore affirm the district court.

II. Attorneys' Fees and Sanctions: No. 89-15858

After the bankruptcy court determined that the result in Beugen V precluded the claims asserted in Beugen II (now removed and transferred to the San Francisco bankruptcy court), Young moved the bankruptcy court for attorneys' fees and sanctions against Beugen and his counsel under Bankruptcy Rule 9011 and 28 U.S.C. § 1927. The bankruptcy court denied the request. Young appealed to the BAP, and the appeal was consolidated with Mun's appeal from the denial of attorneys' fees in Beugen V. The BAP affirmed both denials. Mun and Young now appeal.

A. Mun's Request for Attorneys' Fees in Beugen V

When Young, Mun and Khang purchased the hair salons, the parties entered into a sale agreement that provided:

In the event either party finds it necessary to retain an attorney in connection with a default by any party of any of the agreements or covenants contained in this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and costs.

Mun claims Beugen's counterclaim in Beugen V was an "action on the agreement" within the meaning of the contract and, because the counterclaim was dismissed, Mun was the prevailing party and is now entitled to attorneys' fees.

Parties are not entitled to attorneys' fees unless they are provided for by statute or contract. Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 257 (1975); Perry v. O'Donnell, 759 F.2d 702, 704 (9th Cir. 1985). Even when a contract provides for attorneys' fees, the court may decline to award attorneys' fees when it believes such an award would be inequitable or unreasonable. See United States ex rel. A.V. DeBlasio Constr. v. Mountain States Constr. Co., 588 F.2d 259, 263 (9th Cir. 1978). A trial court's denial of a motion for attorneys' fees will not be overturned on appeal unless the court abused its discretion. Lads Trucking Co. v. Board of Trustees, 777 F.2d 1371, 1373 (9th Cir. 1985).

Here, the bankruptcy court had before it the vast record of Beugen V, as well as that of other related proceedings, and concluded that all parties should pay their own fees and costs. Reviewing for abuse of discretion, the district court agreed. Id. We hold the bankruptcy court did not abuse its discretion, and we affirm the district court.

B. Young's Request for Attorneys' Fees and Sanctions in Beugen II

The primary legal basis for a bankruptcy court's imposition of sanctions is Bankruptcy Rule 9011(a).

The language of Rule 9011(a) is virtually identical to that of Fed. R. Civ. P. 11, and courts imposing sanctions under Rule 9011(a) generally rely on case law interpreting Rule 11. Mortgage Mart v. Rechnitzer (In re Chisum), 847 F.2d 597, 599 (Bankr. 9th Cir.), cert. denied, 488 U.S. 892 (1988). We therefore review the decision not to impose sanctions under Bankruptcy Rule 9011(a) for an abuse of discretion. Cooter & Gell v. Hartmarx Corp., --- U.S. ----, 110 S. Ct. 2447, 2461 (1990); see also Westlake North Property Owners Ass'n v. City of Thousand Oaks, 915 F.2d 1301, 1305 (9th Cir. 1990); Townsend v. Holman Consulting Corp., 914 F.2d 1136, 1143 (9th Cir. 1990).

Young sets forth eight examples of what he alleges to be frivolous and bad faith conduct by Beugen and his counsel. Young's basic claim, however, is that it was frivolous for Beugen to pursue Beugen II while the same claims were being resolved in Beugen V. The bankruptcy court considered all of Young's arguments and found no misconduct by Beugen or his counsel. The BAP agreed, noting:

The litigation history between these parties indicates that Young instigated most of the eighteen or so lawsuits. In recognizing this fact, the bankruptcy court, in an unrelated proceeding between Mr. Young and the debtor, stated that "it appears that Mr. Young is attempting to use the court as a whipping post to inflict punishment on [Mr. Beugen], and that Mr. Young has reached the point of becoming a vexatious litigant."

We affirm the BAP because Beugen's pursuit of the Nevada action was not frivolous or in bad faith. See Golden Eagle Distrib. Corp. v. Burroughs Corp., 801 F.2d 1531, 1536-38 (9th Cir. 1986); Zaldivar v. City of Los Angeles, 780 F.2d 823, 831 (9th Cir. 1986).

The BAP also awarded Rule 38 sanctions against Young in the form of attorneys' fees and double costs:

Federal Rule of Appellate Procedure 38 authorizes this Panel to award damages and single or double costs to the appellee if we determine that an appeal is frivolous. In re Wood, 1988 Bankr. LEXIS 2406, 11; In re Burkhart, 84 B.R. 658, 661 (9th Cir. BAP 1988). A frivolous appeal is one where the result is obvious or the arguments are wholly without merit. In re Peoro, 793 F.2d 1048, 1052 (9th Cir. 1986); In re Burkhart, 84 B.R. at 661.

We hold the Young parties' appeal of the bankruptcy court's denial of their motion for sanctions and attorneys' fees to be frivolous and without merit. The record clearly indicates that the court properly found no misconduct by Williams and thus no basis for sanctions.

Again, we review the imposition of sanctions for an abuse of discretion. Cooter & Gell, 110 S. Ct. at 2461; Townsend, 914 F.2d at 1143.

We affirm the BAP's award of Rule 38 sanctions in the amount of $3,703.60. Young's arguments to the BAP were frivolous, and the BAP did not abuse its discretion with regard to the amount of the award.

A. Young's Standing to Object to Beugen's Discharge: No. 89-16012

The BAP affirmed the bankruptcy court's dismissal of Beugen VI because Young was not a "creditor" entitled to object to Beugen's discharge. Beugen, 99 Bankr. at 961. He was not a creditor, the court held, because he was not the original holder of the Spottswood and Leung claims. Id. We agree.

Pursuant to section 727(c) (1), only a "creditor" may "object to the granting of a discharge under subsection (a) of this section." In the present action, the BAP resolved the question whether "a party who was not the original holder of claims is nevertheless a 'creditor,' within the meaning of the Code, who is entitled to object to a debtor's discharge." Beugen, 99 Bankr. at 963 (emphasis in original). Quoting the bankruptcy court, the BAP held:

Therefore, we hold that " [t]he right to object to a debtor's discharge is not a marketable commodity which may be purchased by one party from another in order to inflict further punishment and discomfort upon the debtor."

Id. at 965. We affirm. As a general matter, it is perfectly legitimate to buy and sell claims against a bankrupt estate. This, however, is an outrageous and atypical case. Young's continued and relentless harassment of Beugen, for the sole purpose of inflicting "punishment and discomfort," is not, by any means, a legitimate use of the judicial process.

The BAP also concluded:

[T]his appeal is part of a continued harassment by Young against the debtor. Therefore, we award sanctions in the form of attorney's fees and double costs.

Beugen, 99 Bankr. at 966. In light of the record below and the BAP's findings, we affirm the BAP's imposition of Rule 38 sanctions. See discussion in section I, subsection C, supra.

IV. The Cost Bond and Rule 11 Sanctions: No. 90-15114

While the above appeals were pending, Beugen's counsel filed a motion with the BAP to require Young to post a bond for costs. Young opposed the motion and filed a counter-motion for Rule 11 sanctions. The BAP denied Beugen's request for a cost bond, and denied the Rule 11 motion. Young now appeals the order, claiming that Beugen's motion for a cost bond was frivolous. This claim is wholly without merit, and we affirm the BAP.

In the Gelato bankruptcy, Young moved for "taxing costs" of $963.65 after filing a motion to dismiss the underlying Chapter 11 petition. The bankruptcy court denied the motion for costs, and the BAP affirmed. Gelato, 94 Bankr. at 622. The BAP found Young had not established that the requested costs were "necessary as required by 28 U.S.C. § 1920(2)." Id. at 625.

Young appeals, claiming the bankruptcy court abused its discretion in denying costs to Young as the "prevailing party." He argues further that the bankruptcy court considered matters not properly before it, and the BAP erroneously relied on the bankruptcy court's mischaracterization of the case. Again, these arguments are without merit, and we affirm the BAP.

THE MANDATE SHALL ISSUE FORTHWITH.

AFFIRMED.