In re: Kathleen Kellogg-Taxe, No. 2:2015cv00084 - Document 52 (C.D. Cal. 2015)

Court Description: ORDER DENYING APPEAL AND AFFIRMING BANKRUPTCY COURT' SANCTIONS 2 , 24 by Judge Dean D. Pregerson. For all the reasons discussed above, this Court DENIES Debtor Kathleen Kellogg-Taxe's appeal and AFFIRMS the award of sanctions. IT IS SO ORDERED. (Made JS-6. Case Terminated.) (lom) Modified on 12/8/2015 (lom).
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In re: Kathleen Kellogg-Taxe Doc. 52 1 2 O 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 12 IN RE DEBTOR: KATHLEEN KELLOGG-TAXE; KATHLEEN KELLOGG-TAXE; RONALD TAXE; JOHN SABA; GREGORY GRANTHAM, 13 Plaintiffs, 14 v. 15 16 CAROLYN A. DYE, CHAPTER 7 TRUSTEE, 17 Defendant. 18 19 ___________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No. CV 15-00084 DDP [2:12-bk-51208 RN] [2:13-ap-01781 RN] ORDER DENYING APPEAL AND AFFIRMING BANKRUPTCY COURT’S SANCTIONS [Dkt. Nos. 2, 24] 20 21 Presently before the Court is Debtor Kathleen Kellogg-Taxe’s 22 appeal from the Bankruptcy Court’s December 19, 2014, Order 23 Granting Chapter 7 Trustee’s Motion for Sanctions Pursuant to 11 24 U.S.C. § 105(a) (“Order”). 25 submissions, the Court adopts the following Order. Having considered the parties’ 26 27 cc: US Bankruptcy Court & US Trustee's Office 28 Dockets.Justia.com 1 I. 2 BACKGROUND The facts of this case are quite convoluted, as the parties 3 and the Bankruptcy Court have noted. (See Order at 3; Appellant’s 4 Opening Brief at 4-5; Appellee’s Reply Brief at 1-2.) 5 complexity is, however, driven primarily by what the Bankruptcy 6 Court termed a “family fraud.” 7 facts are only complex in so far as they tell the long and winding 8 story of the Taxe family’s fraudulent lien on their own property, 9 which was meant to shield the property from creditors. (Order at 14.) This factual That is to say, the (Id. at 3- 10 12; see also Appellant’s Opening Brief at 4-8 (statement of facts); 11 Appellee’s Reply Brief at 4-19 (same).) 12 the parties have explained the story in detail after many hearings 13 and much briefing, so the Court does not labor over the details 14 here. 15 The Bankruptcy Court and On appeal before this Court is the Bankruptcy Court’s Order 16 granting the Chapter 7 Trustee’s motion for $150,000 in sanctions 17 jointly and severally against the Debtor Kathleen Kellogg-Taxe, 18 Debtor’s brother-in-law Ronald Taxe, and attorneys for Kellspin, 19 Inc., Gregory Grantham and John Saba. 20 company of the Taxe family that was alleged to hold a senior lien 21 on real property owned by the Debtor at 10535 Vestone Way, Los 22 Angeles, California (“Vestone Property”). 23 Kellspin is a closely held (Order at 2.) The Trustee’s sanction motion arose out of litigation in the 24 Bankruptcy Court about the Vestone Property. 25 Schedules in her Chapter 7 bankruptcy (Debtor’s fifth bankruptcy) 26 that disclosed for the first time “an undisputed secured claim of 27 $1,465,815” for Kellspin as assignee of a judgment lien from the 28 Omni Group. (Id. at 9; Amended Schedules.) 2 Debtor filed Amended Debtor asserted in the 1 bankruptcy proceeding that the Vestone Property was subject to 2 Kellspin’s lien, and that the lien was senior to the liens recorded 3 by First Federal Bank, Countrywide Financial, and Astoria Federal 4 Savings on the same property. 5 Proof of Claim for Kellspin, which Kellspin later amended when it 6 filed its own Proof of Claim. 7 in any prior bankruptcy or in the applications for loans from First 8 Federal Bank, Countrywide Financial, and Astoria Federal Savings. 9 (Id. at 7-9.) (See Order at 9.) Debtor filed a The Kellspin lien was not disclosed 10 Investigation into the alleged Kellspin lien led to the 11 Trustee filing an adversary proceeding in the Bankruptcy Court to 12 quiet title to the Vestone Property. 13 claiming that Kellspin had a secured, first priority lien against 14 the Vestone Property. 15 proceeding, Debtor fought the Trustee’s motions for access to the 16 property, to employ a broker to sell the property, and to sell the 17 property free and clear of liens. 18 actions could not be taken because of the Kellspin lien. (Id. at 9-10.) Kellspin filed an Answer Back in the bankruptcy Debtor alleged that these (Id.) 19 In the end, several courts — state and federal bankruptcy 20 courts — have found the Kellspin lien to be fraudulent and that the 21 actions taken by the Kellspin attorneys and the Taxe family in 22 defense of that lien have all been in the knowing service of that 23 fraud. 24 Debtor, Ronald Taxe, Gregory Grantham, and John Saba for their 25 conduct in relation to the lien. 26 Court granted the motion. 27 28 (Id. at 10-12, 14.) The Trustee sought sanctions against (Id. at 12.) The Bankruptcy All the sanctioned parties appealed the Order. (Dkt. No. 2.) This Order only reviews Debtor’s appeal, however, because John Saba 3 1 and Gregory Grantham never filed an appeal brief, and Ronald Taxe’s 2 late and oversized brief was struck from the docket pursuant to 3 Trustee’s unopposed motion. (See Dkt. No. 45.) 4 5 II. 6 LEGAL STANDARD The Bankruptcy Court’s findings of fact are reviewed under the 7 clearly erroneous standard and conclusions of law are reviewed de 8 novo. 9 also In re Lazar, 83 F.3d 306, 308 (9th Cir. 1996). In re Brown, 235 B.R. 644, 646 (Bankr. C.D. Cal. 1999); see 10 sanctions are reviewed for an abuse of discretion. 11 564 F.3d 1052, 1058 (9th Cir. 2009). 12 Awards of III. DISCUSSION 13 In re Lehtinen, The sole issue on appeal is the Bankruptcy Court’s imposition 14 of sanctions against Debtor. 15 appeal, but all six ask the question of whether the Bankruptcy 16 Court abused its discretion in sanctioning Debtor. 17 Opening Br. at 3.) 18 Debtor’s brief states six issues on (Appellant’s Debtor argues that she was not a party to the adversary 19 proceeding to quiet title to the Vestone Property and so she cannot 20 be sanctioned for actions taken in that suit. 21 also argues that the Bankruptcy Court’s award of sanctions under 11 22 U.S.C. § 105 was improper and excessive, and that any sanction 23 should have been under Federal Rule of Bankruptcy Procedure 9011, 24 which is equivalent to Federal Rule of Civil Procedure 11. 25 10-12, 22-26.) 26 erroneously based its ruling on a statutory section limiting a co- 27 creditor filing a proof of claim for another creditor, instead of a 28 debtor filing a proof of claim for a creditor. (Id. at 9-10.) She (Id. at Debtor further claims that the Bankruptcy Court 4 (Id. at 13-22.) 1 The Trustee responds that sanctions are available to the 2 Bankruptcy Court under both Rule 9011 and Section 105(a), and that 3 the use of Section 105(a) was proper here. 4 19-21.) 5 Debtor’s behavior in her bankruptcy proceeding as well as Ronald 6 Taxe’s and the Kellspin attorneys’ acts in the adversary 7 proceeding, thus it does not matter that Debtor was not a party to 8 the adversary proceeding. 9 claim, at no point, the Trustee says, did the Bankruptcy Court (Appellee Reply Br. at She argues that the sanctions were meant for both the (Id. at 21-22.) As for the proof of 10 state that Debtor could not file a proof of claim for a creditor — 11 it simply found that Debtor’s doing so was in bad faith. 12 22-23.) 13 the Bankruptcy Court’s finding of bad faith was clearly erroneous. 14 (Id. at 23.) 15 A. 16 A bankruptcy court has sanctioning power under both Section (Id. at Lastly, the Trustee argues that Debtor failed to show that Section 105 versus Rule 9011 17 105 and Rule 9011, but the two statutes entail different standards. 18 Rule 9011 is modeled after Federal Rule of Civil Procedure 11, 19 which means it is a limited sanctioning power for attorneys or 20 unrepresented parties that make misrepresentations to the court. 21 See Fed. R. Bankr. Pro. 9011; Fed. R. Civ. P. 11. 22 requires that a party to be sanctioned receive notice and a 23 reasonable opportunity to correct the misrepresentation before 24 sanctions are granted. 25 26 27 28 The Rule Fed. R. Bankr. Pro. 9011. By contrast, 11 U.S.C. § 105(a) contains a broad grant of inherent power: 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 5 1 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. 2 3 4 11 U.S.C. § 105(a). This broad grant of power includes the ability 5 to sanction bad faith conduct conducted in bankruptcy courts by a 6 party, a non-party, and attorneys. 7 Magazine, Inc., 77 F.3d 278, 284 (9th Cir. 1996) (“There can be 8 little doubt that bankruptcy courts have the inherent power to 9 sanction vexatious conduct presented before the court.” (citing 11 See, e.g., In re Rainbow 10 U.S.C. § 105(a))). 11 (9th Cir. 2003), the Ninth Circuit explained that there is a 12 difference between the civil contempt power of bankruptcy courts 13 under 11 U.S.C. § 105(a) and the inherent sanctioning power of 14 courts, and that earlier decisions of the Circuit had confused the 15 two. 16 conduct, which could be upheld under either the inherent 17 sanctioning power or 11 U.S.C. § 105(a), this Court will not focus 18 on this jurisprudential point of difference. However, in In re Dyer, 322 F.3d 1178, 1196 Since the issue in this case is about bad faith litigation 19 Here, the Trustee alleged, and the Bankruptcy Court found, bad 20 faith conduct by Debtor, Ronald Taxe, and the Kellspin attorneys in 21 the various proceedings that involved the Vestone Property and the 22 fraudulent lien. 23 use of Section 105 and/or the inherent sanctioning power instead of 24 Rule 9011 was appropriate in this case because Debtor was involved 25 in litigation concerning the fraudulent lien and took actions in 26 that litigation that the Trustee alleged were in bad faith. 27 /// 28 /// Therefore, contrary to Debtor’s assertions, the 6 1 B. Bad Faith 2 Debtor argues that her conduct in asserting the existence and 3 validity of the Kellspin lien was in good faith and thus not 4 sanctionable. 5 Appellant’s Reply Br. at 4-5.) 6 Bankruptcy Court considered Debtor’s argument that she filed the 7 proof of claim for Kellspin in good faith based on her title report 8 investigation and the Bankruptcy Court properly found this argument 9 unpersuasive. (Appellant’s Opening Br. at 13-17, 24-25; The Trustee argues that the (Appellee’s Reply Br. at 21-22.) The Trustee 10 details the entire course of conduct that the Bankruptcy Court 11 found as evidence of Debtor’s involvement in the fraudulent scheme 12 and of Debtor’s bad faith. 13 (Id. at 23-27.) “The inherent sanction authority allows a bankruptcy court to 14 deter and provide compensation for a broad range of improper 15 litigation tactics.” 16 2003). 17 faith or willful misconduct” in order to exercise its inherent 18 sanctioning power. 19 misconduct is “something more egregious than mere negligence or 20 recklessness.” 21 “improper purpose” or intent, and “even if the act consists of 22 making a truthful statement or a non-frivolous argument or 23 objection,” there can be sanctionable conduct based on the bad 24 faith. 25 In re Dyer, 322 F.3d 1178, 1196 (9th Cir. The bankruptcy court must “make an explicit finding of bad Id. Id. The standard for bad faith or willful For bad faith, there must be some kind of Fink v. Gomez, 239 F.3d 989, 992 (9th Cir. 2001). In this case, the Bankruptcy Court found Debtor engaged in bad 26 faith litigation conduct in her bankruptcy proceeding. 27 Bankruptcy Court found that Debtor applied for multiple loans 28 without disclosing the alleged Kellspin lien as encumbering the 7 The 1 Vestone Property. Order at 7-8. Further, Debtor filed four prior 2 Chapter 13 bankruptcy cases, none of which disclosed the Vestone 3 Property as being encumbered by the Kellspin lien. 4 The Kellspin lien was only disclosed in the current Chapter 7 5 bankruptcy proceeding, and only in Debtor’s amended schedules. 6 at 9. 7 settlement or action taken by the Chapter 7 Trustee that would 8 dispose of the Vestone Property because Debtor claimed this lien 9 was undisputed and senior to all the other liens on the home. Id. at 8-9. Id. Debtor used this lien to object to any proposed creditor Id. 10 As the Bankruptcy Court noted, Debtor filed a proof of claim for 11 Kellspin in order to thwart the Trustee’s attempt to sell the 12 Vestone Property clear of any liens. 13 filed a separate adversary proceeding in the Bankruptcy Court to 14 quiet title to the Vestone Property against Kellspin with evidence 15 that the lien was fraudulent, Debtor continued to use the Kellspin 16 lien to fight against any action taken by the Trustee to sell the 17 home. 18 Id. Even after the Trustee Id. at 10. Based on these facts, and others as described in the Order, 19 the Bankruptcy Court found “that Richard Taxe, Debtor, and Ronald 20 Taxe participated in perpetuating a scheme that has been found to 21 be fraudulent by several state court rulings since 1994, when the 22 state court in the Fernandez v. Ronald Taxe, et al. case found the 23 Omni Group Judgment was part of a fraudulent scheme and therefore 24 void.” 25 engaged in bad faith by filing several documents “including at 26 least four oppositions/objections” that relied on the fraudulent 27 lien even though “a review of state court records would [have] 28 reveal[ed] that the judgment ha[d] been extinguished.” Order at 14. The Bankruptcy Court found Debtor knowingly 8 Id. at 14. 1 Most revealingly, the court found that Debtor’s filing of a proof 2 of claim on Kellspin’s behalf asserting the lien despite Debtor 3 hiding such a lien in prior bankruptcies was in bad faith, and was 4 unnecessary as “Debtor d[id] not personally appear to be liable for 5 the underlying judgment” for the Kellspin lien. 6 Thus, there was no benefit to the bankruptcy estate in disclosing 7 the lien or in filing a proof of claim, other than to attempt to 8 thwart the sale of the Vestone Property in settling other debts 9 that the Debtor was most certainly personally liable for. 10 11 12 13 14 15 16 17 Id. at 14-15. See id. at 15-16. The Bankruptcy Court expressly held that Debtor’s conduct as alleged was in bad faith: Because the Debtor failed to initially disclose the existence of Kellspin’s lien in her schedules; because she filed a very detailed but false proof of claim; and because she blindly condoned and/or participated in the fraudulent attempts to advance the validity of the lien during the course of this case after it had been declared invalid by several courts; this Court finds that the Debtor’s actions were done in bad faith with the intent to perpetuate a fraudulent scheme to the creditors of this estate and to this Court. 18 Id. at 16. Thus, based on this finding of fact and application of 19 the law to these facts, the Bankruptcy Court granted the Trustee’s 20 motion for sanctions against the Debtor. 21 Debtor’s argument that she was not a party to the adversary 22 proceeding where the legitimacy of the Kellspin lien was determined 23 and thus should not be sanctioned fails because as described above, 24 the conduct sanctioned relates to Debtor’s conduct in her 25 bankruptcy proceeding. (See Appellant’s Opening Br. at 9-10.) 26 most importantly, Debtor’s argument that she filed the proof of 27 claim for Kellspin “in good faith and after a reasonable 28 9 And 1 investigation and review of the title records” was properly found 2 by the Bankruptcy Court to not be true. 3 the Bankruptcy Court are not clearly erroneous based on the record 4 developed. The factual findings of 5 Debtor attempts to use Bankruptcy Code Section 501(c) to 6 demonstrate that she legally could make a proof of claim on behalf 7 of a creditor. 8 claims, the Bankruptcy Court made an error of law because it found 9 that her filing a proof of claim was part of her bad faith conduct 10 11 (Appellant’s Opening Br. at 17-19.) Thus, she but it was expressly allowed under the Bankruptcy Code. Section 501(c) does allow a debtor to file a proof of claim 12 for a creditor. 11 U.S.C. § 501(c). However, as the Bankruptcy 13 Court in this case noted, Kellspin was not a creditor of the 14 Debtor, so under Sections 501 and 502, there were no grounds for 15 the Debtor to file that proof of claim. 16 Debtor’s point that the Bankruptcy Court was focused on the section 17 relating to another creditor filing a proof of claim on behalf of a 18 creditor who failed to do so is inapposite. 19 to Kellspin, and the Kellspin lien was not a personal obligation to 20 be discharged in bankruptcy. See id. §§ 501, 502. Debtor was not in debt 21 Lastly, Debtor’s further arguments that she made “an 22 objectively reasonable inquiry” into the Kellspin lien fail to 23 engage with the abuse of discretion and clearly erroneous standards 24 of review that control this appellate review. 25 Opening Br. at 14-15.) 26 her family were using the Kellspin lien in furtherance of a fraud, 27 that Debtor knowingly filed a proof of claim that was false and 28 unsupported by the state court record, and that this conduct (See Appellant’s The Bankruptcy Court found that Debtor and 10 1 amounted to bad faith. This Court can review the Bankruptcy 2 Court’s findings only under the abuse of discretion and clearly 3 erroneous standards, and based on the facts found and the reasoning 4 of the Bankruptcy Court, this Court cannot find that Debtor’s 5 arguments overcome this high standard. 6 C. Amount of Damages 7 Debtor argues that the amount of sanctions imposed are 8 disconnected from any compensatory or deterrence justification and 9 are instead motivated by an attempt to get attorneys’ fees where 10 none are warranted and to coerce settlement. 11 Br. at 22-26; Appellant’s Reply Br. at 9-10.) 12 that the Bankruptcy Court was presented with evidence regarding the 13 fees Trustee’s attorneys incurred based on the litigation 14 surrounding the fraudulent Kellspin lien. 15 28-29.) 16 based on compensatory damages as well as deterring future bad 17 conduct. 18 (Appellant’s Opening The Trustee responds (Appellee’s Reply Br. at Thus, the Trustee argues, the amount of the sanctions was (Id.) The amount of damages imposed in an inherent sanction 19 authority or Section 105 case is limited to compensatory damages — 20 the Ninth Circuit has found Bankruptcy Courts and the procedures 21 they follow do not provide sufficient procedural safeguards for 22 imposing punitive damage awards. In re Dyer, 322 F.3d at 1197. 23 Here, the Bankruptcy Court awarded $150,000 jointly and 24 severally in sanctions against Debtor, Ronald Taxe, John Saba, and 25 Gregory Gantham. 26 $10,000 out of his own funds to be released from the remainder of 27 the sanction award. 28 justified by the purpose of compensating the Court and the Trustee John Saba, however, had the option of paying Order at 19 n.9. 11 This amount must be 1 for the bad faith conduct of these parties. 2 evidence to the Bankruptcy Court that “the fees of her attorneys in 3 the effort to combat the fraudulent Kellspin claim were in the sum 4 of $361,595.” 5 limited to solely the adversary proceeding, but also included fees 6 from the bankruptcy proceeding itself. 7 awarded in sanctions is not an abuse of discretion considering the 8 amount of time and work required by the Trustee to fight the 9 fraudulent lien and the conduct committed by the parties. 10 IV. (Appellant’s Br. at 29.) The Trustee presented These fees were not (Id.) Thus, the amount CONCLUSION 11 For all the reasons discussed above, this Court DENIES Debtor 12 Kathleen Kellogg-Taxe’s appeal and AFFIRMS the award of sanctions. 13 14 IT IS SO ORDERED. 15 16 17 Dated: December 7, 2015 DEAN D. PREGERSON United States District Judge 18 19 20 21 22 23 24 25 26 27 28 12