Sharp v. Klein et al

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UNITED STATES BANKRUPTCY COURT
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES DIVISION
In re
ARNOLD KLEIN,
Debtor.
Case No.: 2:11-BK-12718RN
Chapter 11
BRADLEY D. SHARP,
Plaintiff,
v.
ARNOLD W. KLEIN, M.D., an
individual; BENJAMIN C. STULL
II, an individual; BENJAMIN
C. STULL, TRUSTEE OF THE
BENJAMIN C. STULL 2008
REVOCABLE TRUST, a California
Trust; SHAUN K. ANDERSON,
a/k/a SEAN K. ANDERSON, an
individual; PAUL CAMUSO, an
individual; IRON SINK MEDIA,
INC., a California
corporation; DANIEL GONZALEZ,
an individual; ELLEN BRUNN,
an individual; GEMMA
CUNNINGHAM, an individual;
WILLIAM “BILL” RIDLEY, an
individual; LAGUNA CLEANING
SERVICES, LLC, a Nevada
limited liability company;
LAGUNA WINDOW WASHING, a
California Corporation;
Adv. No.: 2:13-AP-01777RN
MEMORANDUM OF DECISION RE: DR.
ARNOLD KLEIN’S MOTION FOR THE
RECUSAL OF JUDGE NEITER;
DISQUALIFICATION OF ATTORNEYS;
DISQUALIFICATION OF LANDAU,
GOTTFRIED & BERGER LLP;
DISQUALIFICATION OF TRUSTEE AND
REVIEW DE NOVO, INJUNCTIVE
RELIEF
FILED & ENTERED
DEC 04 2013
CLERK U.S. BANKRUPTCY COURT
Central District of California
BY DEPUTY CLERK	llewis
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RONALD A. FLATE, an
individual; THOMAS SWIFT, an
individual; MINIMALLY
INVASIVE AESTHETICS, LLC, a
California limited liability
company,
Defendants.
DATE: December 4, 2013
TIME: 10:00 a.m.
PLACE: Courtroom 1645
INTRODUCTION
This memorandum of decision addresses the following issues that
have arisen out of the above-referenced adversary proceeding:
(i) whether this Court should recuse itself from adjudicating
this adversary proceeding and from presiding over the
Debtor/Defendant Arnold Klein’s (“Debtor”) individual
bankruptcy case;
(ii) whether the firm Landau, Gottfried & Berger LLP (“LGB”)
and its attorneys, specifically John Reitman
(“Reitman”), should be disqualified from representing
the chapter 11 trustee Bradley Sharp (“Trustee” or
“Sharp”);
(iii) whether Sharp should be disqualified as a chapter 11
trustee in this adversary proceeding;
(iv) whether grounds exist to disgorge fees of the Trustee and
his attorneys;
(v) whether grounds exist to unwind the transfers of property
of the estate to third parties;
(vi) whether de novo review of all orders in the bankruptcy
case is warranted; and
(vii) whether the Debtor is entitled to injunctive relief.
After careful consideration of the Debtor’s Motion For The Recusal
Of Judge Neiter; Disqualification Of Attorneys; Disqualification Of
Landau, Gottfried & Berger LLP; Disqualification Of Trustee And
Review De Novo, Injunctive Relief (“Motion”), the
Plaintiff/Trustee’s Opposition to Motion (“Opposition”), the
Debtor’s Reply, the declarations in support thereof, the factual
history of this bankruptcy case and the related adversary
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proceedings that have transpired and are known to this Court and to
the parties in the bankruptcy case and this adversary proceeding,
and all evidence submitted for consideration; finding that the
issues have been fully briefed by the parties without the need for
oral arguments and that oral arguments will not lend additional
clarification of the issues; the Court hereby renders its decision
based on the pleadings filed and the record of this case and of this
adversary proceeding, and DENIES the relief requested in the Motion.
STATEMENT OF RELEVANT FACTS
The facts, as known to this Court and as supported by the
evidence presented, are as follows. On January 20, 2011, the Debtor
sought bankruptcy protection under chapter 11 of the Bankruptcy Code
in his individual capacity.1 The Debtor served as Debtor in
Possession (“DIP”), with the same rights and powers of a trustee in
bankruptcy pursuant to 11 U.S.C. § 1107(a), for one year and three
months until a chapter 11 trustee was appointed for cause by order
of this Court on April 18, 2012. The Trustee was appointed after a
contested hearing on a motion to appoint a chapter 11 trustee filed
by one of the Debtor’s secured creditors, Allen V.C. Davis, Trustee
for Davis Trust No. 1 U/A/T November 7, 1961. Debtor was
represented at the hearing by counsel.2 In granting the motion, the
Court found that the appointment of a trustee was “in the best
interests of [Debtor’s] creditors and his estate” based on “his
1 The Court takes judicial notice of all documents filed in this case since its inception (Fed. R. Evid. 201), the contents of
which are subject to the applicable Rules of Evidence, Rules of Civil Procedure and Appeals, doctrines of estoppel, and
doctrines of finality. .
2 The Debtor was represented by Peter Lively, Esq. at the hearing on the motion to appoint a chapter 11 trustee in the case.
(Order Granting Motion For Appointment Of Chapter 11 Trustee, at 2.)
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gross mismanagement [of the bankruptcy estate] and his inability to
account for the proper use of all of the fire insurance proceeds he
received in the last few years and for such other reasons as recited
on the record.” (Order Granting Motion For Appointment Of Chapter
11 Trustee, ¶1.) At the time the Trustee was appointed, the DIP had
been represented by at least six attorneys.3
Since his appointment, the Trustee has sought authorization to
sell various assets of the chapter 11 estate, inter alia, real
properties and various art pieces owned by the estate. A chapter 11
trustee is charged with marshalling assets of a bankruptcy estate,
developing a chapter 11 plan of reorganization or liquidation,
generating cash for the estate’s creditors and obtaining fair value
for the assets of the estate. In many instances, the Debtor
vigorously challenged the sale motions and attempted, on numerous
occasions, to thwart the sale of these assets in court and through
unconventional methods outside court channels. These acts of
concealing assets, vandalism of estate property, and impeding the
marshalling of estate assets have been documented in various
pleadings filed in this case and have resulted in numerous court
orders to enforce this Court’s prior orders.4
3 Apparently, the number of attorneys who have so far represented the Debtor totals eighteen.
4 A non-exhaustive list of orders that have been entered in this case resulting from the Debtor’s failure to cooperate and
acts to hinder the administration of estate assets follows:
Contempt:
Order to show cause re Civil contempt against Arnold Klein (Doc # 447) (Entered: 07/12/2012)
Order Discharging in Part Order to Show Cause Re Civil Contempt Against Arnold Klein and Continuing Hearing (Doc # 570) (Entered:
09/25/2012)
Order Granting Application and Setting Hearing on Shortened Notice Re Chapter 11 Trustee's Motion for Issuance of Order to Show Cause Re:
Civil Contempt Against Arnold Klein (Entered: 01/09/2013) (Doc # 684)
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The times the Debtor challenged the Trustee’s administration of
the estate through proper court channels, the Debtor did so on three
major occasions. First, the Debtor, while represented by Mette
Kurth, Esq. and subsequently, Peter Lively, Esq., inquired of the
Trustee about the connections between the Trustee and other
individuals or entities associated with the bankruptcy case or
pending adversary proceedings. The result of such inquiries was a
“Statement of Chapter 11 Trustee in Response to Inquiries of Dr.
Arnold Klein” filed on October 3, 2102. (Docket No. 581.)5 In
response, the Debtor filed “Debtor’s Response to Statement of
Chapter 11 Trustee in Response to Inquiries of Dr. Arnold Klein and
Request for Hearing”. (Docket No. 617.) The Debtor’s response
Order to Show Cause RE Civil Contempt Against Arnold Klein and Setting Hearing on Continued Motion for Issuance of Further Writ of
Assistance (Doc # 702) (Entered: 01/17/2013)
Order Adjudging Arnold Klein to be in Civil Contempt of Court (Doc # 718) (Entered: 01/25/2013)
Order RE: Issuance of a Warrant for the Incarceration of Debtor Arnold Klein for Civil Contempt of Court (Doc # 765) (Entered: 02/21/2013)
Turnover:
Order Granting Order requiring turnover of property held by Debtor Arnold Klein and persons acting under his direction and control (Doc # 433)
(Entered: 06/20/2012)
Order Approving Stipulation of Debtor and the Chapter 11 Trustee to Consolidate Hearings on: (A) Debtor's Motion to Resolve Disagreement
Pursuant to Paragraph 17 of the Turnover Order; and (B) Debtor's Disagreement Arising Under Paragraph 17 of the Turnover Order Regarding the
Trustee's August 8, 2012 Intial List (Doc # 518) (Entered: 08/24/2012)
Order Denying Debtor's Motion to Resolve Disagreement Pursuant to Paragraph 17 of the Turnover Order (Doc # 563) (Entered: 09/13/2012)
Order Compelling immediate turnover by debtor Arnold Klein of untitled drawing by Roy Lichtenstein indentified as "Landscape - Red Sunset"
(Doc # 571) (Entered: 09/25/2012)
Order Approving Chapter 11 Trustee's application for Writ of Assistance Re: Laguna Beach Property, Palm Springs Property, and Beverly Hills
Office; turnover of Art and Ferrari Motor Vehicle (BNC-PDF) (Doc # 731) (Entered: 01/30/2013)
Amended order approving chapter 11 trustee's application for writ of assistance re Laguna Beach Property, Palm Springs Property, and Beverly
Hills Office; turnover of art and Ferrari motor vehicle. Signed on 1/30/2013 (Doc. #732) (Entered: 01/30/2013)
5 All docket references are to the main bankruptcy case’s docket unless otherwise specified.
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questioned the undisclosed connections between the Trustee and R.
Todd Neilson, the Chairman of the Private Bank of California
(“PBC”), which allegedly gave rise to a material conflict and
disqualification of the Trustee. See id. A reply from the Trustee
followed. (Docket No. 645.)
PBC is a third-party defendant in the adversary action entitled
Klein v. Khilji, et al. (2:11-ap-02407VZ) (“Khilji Action”) which
Debtor commenced while serving as debtor in possession. This Court
recused itself sua sponte from presiding over the Khilji Action
pursuant to 28 U.S.C. § 455(b)(4) based on its small number of
shares held in PBC at the time the action was commenced. (Docket
No. 48 in the Khilji Action.) Because the request for a hearing on
the disinterestedness of the Trustee implicated PBC, the Court
recused itself from ruling on the Trustee’s disinterestedness
pursuant to 28 U.S.C. § 455(b)(5)(iii). (Docket No. 767.)
A hearing was conducted before Judge Neil Bason, another
bankruptcy judge, where the Debtor was represented, on a limited
basis, by Jeremy Faith, Esq. The matter was taken under submission
by Judge Bason resulting in his “Memorandum of Decision re: Chapter
11 Trustee's (1) Disinterestedness and (2) Disclosures”
(“Disinterestedness Order”) entered on March 29, 2013 in favor of
the Trustee. (Docket No. 819.)
Second, the Debtor filed on June 28, 2013 in the adversary case
entitled Bradley Sharp v. Arnold Klein and Helene Schley (2:13-ap-
01442RN) a “Motion for Suspension of Proceedings Preliminary
Injunction and Request for Hearing” (“Suspension Motion”). The
motion requested a preliminary injunction to prevent the Trustee
from “selling, hypothecating, settling, occupying, conveying” the
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real property located at 553 S. Windsor Boulevard in Los Angeles
(“Windsor Property”) until the Khilji Action and the dispute with
the Debtor’s insurance provider are adjudicated. The motion was
based partly on the Trustee’s failure to disclose his association
with PBC and its CEO. The Trustee opposed the motion raising, among
other things, procedural issues and arguing that the motion was a
collateral attack on the Court’s prior orders. A reply from the
Debtor followed. Issuing a lengthy and detailed ruling, this Court
denied the Debtor’s request to suspend the proceedings of this case
finding that the Debtor failed to satisfy 11 U.S.C. § 305(a) and the
motion was an improper collateral attack on this Court’s prior
orders. (Docket No. 31 in Adversary Proceeding No. 2:13-ap-
01442RN.)
Third, this Motion was filed initially in the adversary
proceeding entitled Bradley Sharp v. Arnold Klein (2:13-ap-01654RN)
in error. (Docket No. 24 in Adversary Proceeding No. 2:13-ap-
01654RN.) The erroneously filed motion has not been withdrawn in
the aforementioned adversary proceeding, but an identical Motion was
filed in this adversary proceeding on November 4, 2013. The Motion
argues that: (i) this Court should recuse itself from presiding over
the entire bankruptcy case pursuant to 28 U.S.C. § 455 due to his
ownership of some stock in PBC; (ii) Reitman engaged in attorney
misconduct by breaching his obligation of confidentiality; (iii)
Trustee failed to disclose his relationship with PBC and its CEO and
Judge Bason’s ruling has no bearing on the Trustee’s
disqualification; and (iv) that fraud upon the Court has been
committed. Thus, while the Debtor filed the Motion in this
adversary proceeding, the substance of the Motion seeks to
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disqualify this Court, the Trustee and his counsel not only from
this proceeding but from the entire bankruptcy case.
The Trustee opposed the Motion on grounds that (i) Debtor
presented no evidence to support this Court’s recusal in the
bankruptcy case or this adversary proceeding under 28 U.S.C. § 455;
(ii) the Motion relitigates the issue of the Trustee’s
disqualification previously ruled upon by the court and therefore, a
collateral attack on prior court orders; (iii) the request for a de
novo review of the whole bankruptcy case by a neutral jurist is not
based on evidence or any legal authority; (iv) the Trustee inherited
the DIP’s attorney-client privilege relating to matters involving
the administration of the estate thereby preserving confidentiality
with Reitman; and (v) LGB has no conflict of interest based on a
purported relationship with R. Todd Neilson.
The Debtor’s Reply focused on the purported relationship
between Neilson and Reitman and Reitman’s failure to disclose such a
relationship warranting disqualification.
Trustee filed a surreply reiterating that Khilji and PBC are
not involved in this adversary proceeding.
DISCUSSION
Section 455 of Title 28 governs the determination of whether
this Court should recuse itself from presiding over this adversary
proceeding and the entire bankruptcy case. Section 455(a) imposes
upon the judge, who is the subject of a recusal motion, the burden
of deciding its own recusal. The statute mandates "any justice,
judge, or magistrate judge of the United States shall disqualify
himself in any proceeding in which his impartiality might reasonably
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be questioned." 28 U.S.C. § 455(a) (emphasis added). The Ninth
Circuit and the Fifth Circuit have recognized the propriety of the
judge against whom recusal is sought to decide the issue. United
States v. Azhocar, 581 F.2d 735, 738 (9th Cir. 1978); In re
Corrugated Container Antitrust Litigation, 614 F.2d 958, 963 n.9
(5th Cir. 1980). As the Ninth Circuit explained “only the
individual judge knows fully his own thoughts and feelings and the
complete context of facts alleged." Azhocar, 581 F.2d at 738
(citations omitted). The Fifth Circuit opined that "(i)t is for the
judge who is the object of the affidavit (of bias) to pass on its
sufficiency." 614 F.2d at 963 (citations omitted). Similarly, the
Eleventh Circuit explained that “judges routinely preside over
motions for their own recusal. For example, Justice Scalia presided
over a motion to recuse him in a case before the United States
Supreme Court.” Ginsberg v. Evergreen Sec., Ltd. (In re Evergreen
Sec., Ltd.), 570 F.3d 1257, 1278 (11th Cir. 2009) citing Cheney v.
United States Dist. Court, 541 U.S. 913, 124 S. Ct. 1391, 158 L. Ed.
2d 225 (2004).
Accordingly, this Court finds it is incumbent upon this court
to rule on the recusal motion in the first instance pursuant to
statutory and case law. The statute, as the Debtor stated, is self-
executing, thereby placing the obligation to identify the existence
of disqualifying grounds upon the judge himself. See Taylor v.
O'Grady, 888 F.2d 1189, 1200-1201 (7th Cir. 1989). The Court is
most knowledgeable of the convoluted facts and protracted history of
this case, the decisions that have been made, and the reasoning
behind such decisions. It is, therefore, the proper court to
address the Debtor’s grievance with respect to this Court’s
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impartiality and disqualification of the Trustee and his
professionals.
A. Debtor’s grounds for this Court’s recusal are unsupported by
evidence and do not warrant this Court’s disqualification
from this case.
Recusal is warranted if the judge has a personal bias or
prejudice concerning a party or personal knowledge of disputed
evidentiary facts concerning the proceeding. The oft-cited case
from the U.S. Supreme Court Liteky v. United States, 510 U.S. 540,
114 S. Ct. 1147 (1994), held two principles governing recusal.
First, judicial rulings alone almost never constitute a valid basis
for a bias or partiality motion as they are proper grounds for
appeal, not recusal. Liteky, 510 U.S. at 555. Second, “opinions
formed by the judge on the basis of facts introduced or events
occurring in the course of the current proceedings . . . do not
constitute bias . . . unless they display a deep-seated favoritism
or antagonism that would make fair judgment impossible” such that,
even remarks that are critical or disapproving to counsel or to the
parties ordinarily do not support bias or partiality. Id.
Here, not only did the Debtor fail to synthesize the
application of § 455 and case law to the facts of this case, he
failed to demonstrate any evidence of this Court’s alleged
partiality or bias against the Debtor. The Debtor’s reliance on the
Court’s ties with PBC as the main reason for disqualification is
misplaced.
First, with respect to this adversary proceeding, PBC is not
a named defendant in the action nor was it mentioned in the
complaint in any of its factual recitations. Based on Debtor’s
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statements in various pleadings and by his representatives in Court,
Mohammed Khilji unilaterally dissolved the originally formed
Minimally Invasive Aesthetics LLC (“MIA 2000”) in which the Debtor
had an interest. Motion at 3; see also Ex. 8 to Declaration of
Peter Gurfein in Support of Opposition (“Gurfein Decl.”). The
Motion further states Khilji created a second MIA6 (“MIA 2007”)
changing ownership of MIA 2007 under his name. Motion at 3; see
also Gurfein Decl., Ex. 8. The Motion further explained that with
the exception of stocks in SkinMedica, Inc., Khilji transferred the
assets of MIA 2000 to MIA 2007 because SkinMedica’s stocks at the
time were “nontrading stocks” which made them worthless to Khilji.
Motion at 4. The Debtor asserts Khilji’s actions result in a direct
relationship between this adversary proceeding and the Khilji
action. Thus, the Motion concludes, the adversaries are “virtually
inseparable and the Judge’s failure to disqualify himself from the
entire case has resulted in a gross denial of Dr. Klein’s due
process rights.” Motion at 9.
However, the Debtor overlooks the crucial fact that the
adversary proceeding at issue involves a third MIA formed in 2012
(“MIA 2012”) and not MIA 2000 or MIA 2007. Gurfein Decl., Ex. 8.
Paragraph 17 of the Complaint states,
“Trustee is informed and believes, and based
thereon alleges, that defendant Minimally
Invasive Aesthetics, LLC is a California limited
liability company formed on or about November 30,
2012 (“New MIA”) which at all relevant times has
had a principal place of business in the County
6 Officially named Minimally Invasive Aesthetics 2007, Inc. under the California Secretary of State registry. Gurfein
Decl., Ex. 8.
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of Los Angeles, State of California.” Compl. ¶
17.
The Motion erroneously recites the averment in the complaint as
implicating MIA 2007. See Motion at 5. Indeed, this pending
adversary proceeding involves the transfer of the proceeds from the
sale of SkinMedica’s stock (which was not one of the assets
allegedly defalcated by Khilji) to MIA 2012 and from there, as a
conduit, distributed to various individual defendants named in the
complaint including the Debtor but not PBC. Because the SkinMedica
stocks were not misappropriated by Khilji and remained an asset of
MIA 2000 and did not involve PBC in any way, the Court finds no
direct correlation between the Khilji Action and this § 549
avoidance action contrary to the Debtor’s assertion. Neither Khilji
nor MIA 2007 were mentioned in the complaint. Indeed, a separate
action against PBC concerning PBC’s involvement in Khilji’s
embezzlement of the assets of MIA 2007 is pending before another
judge.7 Consequently, nothing in the complaint and the averments
therein implicate this Court’s ties with PBC warranting recusal from
this adversary proceeding.
Second, with respect to Debtor’s entire bankruptcy case, the
Trustee correctly argued that PBC is not a creditor of the estate.
Debtor’s bankruptcy schedules do not show that PBC is a creditor.
Debtor’s Reply concurs. See Docket No. 12, Schedules D and F; Reply
at 6. PBC is a third-party defendant that is alleged to have served
as a conduit for Khilji’s wrongful conduct. A decision from this
Court concerning the numerous other matters regarding the
administration of this case will not affect, adversely or favorably,
7 The action is entitled Minimally Invasive Aesthetics, LLC aka Minimally Invasive Aesthetics 2007, LLC v. The Private
Bank of California is pending before the Hon. Vincent Zurzolo (2:13-ap-01473VZ).
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PBC as all pending litigation involving PBC is before a different
court.
More importantly, the Motion, which contained no evidence,
failed to demonstrate satisfaction of § 455(a). As Liteky
instructs, judicial rulings that may be adverse or remarks that may
be critical of a party do not support a finding of bias. 510 U.S.
at 555. The test is an objective one—“whether a reasonable person
with knowledge of all the facts would conclude that the judge’s
impartiality might be reasonably questioned.” In re Goodwin, 194
B.R. 214, 222 (9th Cir. BAP 1996). At the same time, factual
allegations made do no have to be taken as true. Id. at 222 citing
In re Am. Ready Mix, Inc., 14 F.3d 1497, 1501 (10th Cir. 1994). The
Tenth Circuit further instructs, “a judge should not recuse [itself]
on unsupported, irrational, or highly tenuous speculation.” Am.
Ready Mix, 14 F.3d at 1501.
Here, no facts have been presented to demonstrate that this
Court’s impartiality can be reasonably questioned. The Court has
taken steps to recuse itself sua sponte when the obligation to do so
was present. Debtor recognized (and indeed, commended) this Court’s
adherence to its duty of impartiality in his Suspension Motion. See
Docket No. 22 (2:13-ap-01442RN) at 2-3 (“Honorable Richard M.
Neiter, according to the highest standard of Judicial Conduct, sua
sponte, recused himself from the Adversary Proceedings based on
stock ownership in one of the 12 defendants in the Adversary
Proceeding.”).
However, there is no ground to recuse the Court from
presiding over the bankruptcy case that does not involve PBC.
Debtor’s dissatisfaction of this Court’s decisions in his bankruptcy
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case does not support recusal. Furthermore, Debtor’s allegation
that he has been grossly denied his due process rights is unfounded
by evidence. Procedural due process requires that a party be
provided notice and an opportunity to respond. In re Goodwin, 194
B.R. at 222. The Motion failed to identify situations where Debtor
and/or his counsel at the time were not served with notices of
motions, hearings and orders relating thereto since the appointment
of the Trustee concerning the administration of the bankruptcy
estate. Debtor opposed such motions when he saw fit. Conversely,
this Court has given the Debtor or any of his numerous counsel the
opportunity, whenever necessary, to be heard including permitting
the Debtor on occasion to speak in court notwithstanding his
representation by counsel. The fact that this court ruled adversely
against the Debtor based on the merits does not constitute cause for
recusal. Likewise, no evidence that this Court holds any personal
bias or prejudice toward Dr. Klein has ever been demonstrated.
Moreover, none of Debtor’s allegations that this Court’s
stock holdings in PBC results in a conflict or commits “fraud upon
the court” are supported by any evidence. Specific instances of
fraud upon the court were not identified and to the extent that
conclusory accusations of fraud upon the court were made, they are
erroneous. As explained earlier, PBC is not a creditor of the
estate. It is solely a third-party defendant alleged to have been
the depository of funds generated by Khilji’s misconduct. The
Honorable Vincent P. Zurzolo, a different bankruptcy judge, will
decide the fate of PBC in the adversary proceedings involving the
bank. This Court believes it has recused itself promptly and
properly when required by § 455 and it refuses to recuse itself when
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it is obligated to remain as the judicial officer in charge of a
difficult case when the parties repeatedly disagree with one
another.
Instead, Debtor appears to suggest that because the liens
against his properties may be fraudulent, the properties cannot be
sold and efforts to sell such properties are inappropriate and that
these are grounds for this Court’s recusal. Case law that discusses
§ 455 does not support such a conclusion. If the Debtor believes
the Court’s decisions to sell estate properties were in error, error
is the basis for appeal and not recusal. See Liteky, 510 U.S. at
555. Instead, the record shows no appeal or objection to the form
of order has been taken of the numerous orders this Court has
rendered since the Trustee took over the case. Gurfein Decl., Ex.
5. The argument, moreover, illustrates a lack of understanding of
11 U.S.C. § 363(f)(4) which confers upon a trustee the right and
power to sell estate property notwithstanding disputed liens on the
property.
On its surface, the allegations made in the Debtor’s Motion
appear to be serious challenges to the involved parties and this
Court’s integrity and impartiality. However, the baseless
allegations in the Motion coupled with the timing of seeking a
suspension of the entire bankruptcy case until a new judge and
trustee are appointed almost three years after the Court was
assigned the case, are indicative of the Debtor’s repeated efforts
throughout this case to delay its administration and to further
obfuscate the facts. The untimeliness of the Motion further
militates against recusal. See United States v. Conforte, 624 F.2d
869, 880 (9th Cir. 1980).
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B. This Motion is an improper collateral attack on prior court
orders.
Although the Debtor insists the Motion is not a collateral
attack on prior orders of this case, the evidence proves that the
Motion is nothing but an impermissible collateral attack on this
Court’s prior orders. One of the reliefs requested in the Motion
seeks to disqualify the Trustee based on his connections with R.
Todd Neilson (“Neilson”), the CEO of PBC. The alleged connection
pertains to Neilson and the Trustee’s work in the bankruptcy case of
Namco Capital Group, Inc. and Ezri Namvar. Motion at 13-14. The
Motion then points to Trustee’s disclosure that he has hired
Neilson’s accounting firm in past bankruptcy cases that are
unrelated to the Debtor’s. Id. Particularly, Debtor contends
Trustee and Neilson both employed Pachulski Stang Ziehl & Jones LLP
(“PSZJ”) as special counsel in the related Namco/Namvar case and
that a partner of PSZJ is a shareholder and director of PBC. Id.
This precise issue of the Trustee’s disqualification on the
aforementioned facts has been adjudicated by Judge Neil Bason
pursuant to his order entered on March 29, 2013. See
Disinterestedness Order, Docket No. 819. Judge Bason ruled that
based on the Debtor’s contentions, Trustee is disinterested and that
the connection with Neilson and PBC are too remote and attenuated to
require disclosure. Disinterestedness Order at 4-6. Debtor
dismisses as immaterial Judge Bason’s decision as not being that of
Judge Neiter’s or Judge Zurzolo’s. Motion at 14. The argument is
meritless and indeed, counterintuitive to the Debtor’s request that
a new neutral judge decide the issues in this case.
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Similarly, this Court must reject Debtor’s assertion that he
was not represented by counsel when the issue of the Trustee’s
disinterestedness was adjudicated. See Motion at 14. First, the
record shows Jeremy Faith, Esq. represented the Debtor, albeit on a
limited basis, at the initial hearing before Judge Bason. Gurfein
Decl., Ex. 4. Second, Peter Lively, Esq. wrote the “Debtor’s
Response to Statement of Chapter 11 Trustee in Response to Inquiries
of Dr. Arnold Klein and Request for Hearing” that served as the
foundation for Judge Bason’s Disinterestedness Order. (Docket No.
617.) The assertions made in the Debtor’s response are almost
verbatim to the assertions made in the instant Motion. As described
in the Disinterestedness Order, the Debtor asserted:
“Mr. Sharp is not a disinterested person because
Mr. Sharp has a working relationship with R. Todd
Neilson, the Chairman of the Board of Private
Bank. The debtor argues that because Mr. Sharp and
Mr. Neilson work as court-appointed chapter 11
trustees in two related bankruptcy cases (In re
Namco Capital Group, Inc., 2:08-bk-32333-BR
(“Namco”), and In re Ezri Namvar, 2:08-bk-32349-
BR, respectively) and because Mr. Sharp hired Mr.
Neilson’s accounting firm in Namco, Mr. Sharp
cannot be disinterested. Similarly, the debtor
argues that in Namco, Mr. Sharp hired the law firm
Pachulski Stang Ziehl & Jones LLP (“PSZ&J”) as
special counsel and that the first named partner
at PSZ&J is a shareholder and director of Private
Bank. For these and comparable reasons the debtor
argues that Mr. Sharp has both professional and
“pecuniary” relationships with Mr. Neilson and Mr.
Pachulski and that it is “certainly plausible”
that those “relationships” are “enough to
constitute a material conflict,” or alternatively
that there is an “appearance” of impropriety and a
perception of bias. See, e.g., Debtor Response
(dkt. 617) at 9:12-14.”
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Disinterestedness Order at 3. Judge Bason found the Debtor’s
position unpersuasive and the connection with PBC too attenuated to
warrant disqualification. Id. at 4-6. Debtor did not appeal the
Disinterestedness Order.
This Court finds that the Disinterestedness Order is binding
on this Court, the Debtor, the Trustee and LGB. The principles of
preclusion further prevent relitigation of the same issue involving
the same parties under the same facts adjudicated on the merits by
Judge Bason. For this Court to reconsider the issue based on the
same facts is an improper collateral attack on Judge Bason’s order.
This is not the first time that the Debtor has sought
disqualification of the Trustee on identical facts. In his
Suspension Motion, the Debtor recited verbatim, including the
emphasis made, the allegations concerning the Trustee’s connection
with PBC and Neilson. (Docket No. 22 in Adversary Proceeding No.
2:13-ap-01442RN at 3.) This Court previously found this contention
to be a collateral attack on Judge Bason’s ruling and denied the
Suspension Motion. (Docket No. 31 in Adversary Proceeding No. 2:13-
ap-01442RN.) The Debtor did not appeal this Court’s order denying
his Suspension Motion. Consequently, this is the Debtor’s third
attempt to disqualify the Trustee on the same factual grounds
through three different motions.
Similarly, the Debtor’s attempt to disqualify the Trustee’s
counsel and request to disgorge fees are an impermissible collateral
attack on this Court’s order approving LGB’s employment entered on
June 14, 2012 and orders approving LGB fees—none of which the Debtor
appealed. See Celotex Corp. v. Edwards, 514 U.S. 300, 306 (1995)
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(collateral attacks on bankruptcy court orders are not permitted;
the proper remedy is to appeal).
Lastly, the Debtor’s request for an injunction rehashes the
arguments that this Court rejected in two prior motions. First, the
Debtor sought to suspend all proceedings in this bankruptcy case in
his Suspension Motion. (Docket No. 22 in Adversary Proceeding No.
2:13-ap-01442RN at 3.) The Suspension Motion requested the Court to
“issue a preliminary injunction temporarily preventing the Trustee
from selling, hypothecating, settling, occupying, conveying either
directly or through agents, the real property located at 553 S.
Windsor Boulevard in Los Angeles . . . and for the suspension of all
proceedings in this case” until the Khilji Action and the dispute
with the Debtor’s insurance company are adjudicated. Docket No. 22
in Adversary Proceeding No. 2:13-ap-01442RN at 7-8.) This Court
denied the Suspension Motion on August 30, 2013. The Debtor did not
appeal the order. Similarly, the Debtor’s opposition to the sale
motion relating to the Windsor Property was based on the Debtor’s
position that the Khilji Action must first be resolved. Docket No.
1071 at 5. The Court approved the sale and rejected the Debtor’s
opposition.
The instant Motion requests the Court to “issue a preliminary
injunction temporarily preventing the chapter 11 trustee for the
bankruptcy estate from selling, hypothecating, settling, occupying
conveying either directly or through agents, the real property
located at 553 S. Windsor Boulevard in Los Angeles” this time,
pending re-assignment and review of all matters in this case by an
impartial judge and a neutral trustee. Motion at 17. While the
current Motion seeks an injunction until the case is reassigned to a
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new judge, the basis for the injunction remains the same—that the
pending actions concerning the fraudulent liens on the property
warrant enjoining the administration of the case, particularly the
sales of estate properties. This Court has considered Debtor’s
position originally raised in the Suspension Motion and, based on
the merits, denied the relief to enjoin the administration of the
estate. Delays have been very costly in this case, e.g., with the
estate having to incur thousands of dollars in administrative fees
resulting from the Debtors noncooperation and the estate’s need to
take action in response to the Debtor’s obstructive behavior through
the course of this case. With this Motion, the Debtor seeks an
impermissible collateral attack of this Court’s orders by seeking
the same relief on the same grounds as were previously considered.
In an attempt to recharacterize the Motion so as to fall
outside the purview of a collateral attack, the Reply contends that
new evidence of the Trustee’s carelessness and allegations that
Reitman and Neilson made monetary contributions to the same
political action committee warrant finding that the Motion is not a
collateral attack on prior orders. Reply at 10. The general rule
that is well-established in this circuit prohibits parties from
raising a new issue for the first time in their reply briefs. See
e.g., Northwest Acceptance Corp. v. Lynnwood Equipment, Inc., 841
F.2d 918, 924 (9th Cir. 1988); United States v. Birtle, 792 F.2d
846, 848 (9th Cir. 1986); Eberle v. Anaheim, 901 F.2d 814, 818 (9th
Cir. 1990). As such, the Court cannot consider the Reply’s new
issue for disqualifying the Trustee based on “carelessness” in
handling the sale of certain estate assets due to its untimeliness.
Similarly, raising disqualification of Reitman based on political
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contributions in the Reply when the information seems readily
available at the time the Motion was filed cannot be considered at
this stage of the briefing. Besides the argument being ludicrous
and devoid of any rationale or cohesiveness, the principle ensures
that the opposing party’s right to respond to the new argument or
object to the newly presented evidence is preserved. Because such
arguments will not be considered, the Trustee’s surreply is not
considered as well.
Alternatively, even if considered, the Court finds that the
evidence of carelessness from Debtor’s counsel’s declaration is
inadmissible hearsay and lacks foundation and personal knowledge.
The Declaration of Steffanie Stelnick does not state that she has
personal knowledge of the statements in her declaration. See
generally, Declaration of Steffanie Stelnick (“Stelnick Decl.”).
Furthermore, the declaration attempts to offer testimony of an
unknown declarant other than Stelnick as evidence to prove as true
that the unknown declarant purchased a computer from the sale of the
Debtor’s properties that contained personal photographs of the
Debtor. Stelnick Decl. ¶¶3-6. This is classic inadmissible
hearsay. Fed. R. Evid. 802; see Bellard v. Gautreaux, 675 F.3d 454,
461 (5th Cir. 2012) (it is not error for the court to exclude sua
sponte hearsay evidence). Moreover, attaching a photograph of an
address book is inadmissible without proper authentication and
identification as a condition precedent to admissibility pursuant to
Fed. R. Evid. 901. See Reply at 10, Ex. B. The lack of foundation
as to the printout of the photograph, the purported website where
the photograph can be found, the individual who found the photograph
and the circumstances that would authenticate Exhibit B were all
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missing. In addition, since the Reply purports to place at issue
the contents of the address book, Fed. R. Evid. 1002 applies. The
lack of the original writing makes the evidence inadmissible.
Likewise, the Reply did not include admissible evidence of the
purported political contribution and merely refers to a website.
Reply at 5. Accordingly, the Court must reject the Debtor’s
assertion on procedural and evidentiary grounds without ruling on
the merits of the argument relating to the connection between
Reitman and PBC.
Because rules of evidence and case law prohibit introduction
of the foregoing new factual issues, the Court must find the Motion,
as filed, a collateral attack on its prior orders.
C. The request for a de novo review of the whole bankruptcy case
by a neutral jurist is unsupported in fact and law.
The Motion, while it seeks de novo review of the entire
bankruptcy case by a neutral jurist, failed to show legal authority
for such relief outside of the appellate process. Indeed, de novo
review is not the only standard for appeals. See e.g., In re
Miller, 262 B.R. 499, 503 (B.A.P. 9th Cir. 2001) (A bankruptcy
court's findings of fact are reviewed for clear error and its
conclusions of law are reviewed de novo) citing Smith v. Kennedy (In
re Smith), 235 F.3d 472, 475 (9th Cir. 2000); Diamond v. City of
Taft, 215 F.3d 1052, 1055 (9th Cir. 2000) (Mixed questions of law
and fact are generally reviewed de novo). As stated earlier, the
Debtor has elected not to appeal numerous orders of this Court
relating to the case. Gurfein Decl., Ex. 5. Consequently, such
orders are final and binding on all parties affected by such orders.
More importantly, the Debtor does not advance any legal authority
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that he can circumvent the appellate process and seek de novo review
of the entire case. Accordingly, the Court must deny the Debtor’s
request.
D. The Debtor’s request for injunctive relief fails.
Debtor improperly requests enjoining the entire bankruptcy
case from moving forward, particularly, the sale of estate property,
by seeking the relief in this avoidance action wherein the Debtor is
a defendant. A separate adversary proceeding against the Trustee
for an injunction of the sale of estate properties has not been
commenced. Notwithstanding the apparent procedural defect of the
motion for a preliminary injunction, the Court finds that the Debtor
failed to demonstrate entitlement to the relief.
For a preliminary injunction to issue, a movant seeking a
preliminary injunction must establish (1) that he is likely to
succeed on the merits, (2) that he is likely to suffer irreparable
harm in the absence of preliminary relief, (3) that the balance of
equities tips in his favor, and (4) that an injunction is in the
public interest. Winter v. NRDC, Inc., 555 U.S. 7, 20, 129 S. Ct.
365, 172 L. Ed. 2d 249 (2008) (citations omitted); see also
Neighborhood Assistance Corp. of Am. v. First One Lending Corp.,
2012 U.S. Dist. LEXIS 67950, 36-41, 2012 WL 1698368 (C.D. Cal. May
15, 2012). Alternatively, when a plaintiff demonstrates a strong
likelihood of prevailing on the merits, a preliminary injunction may
be entered based on a likelihood of irreparable harm. Winter, 555
U.S. at 21. In applying this sliding scale, the Supreme Court
rejected the Ninth Circuit’s use of “possibility” of irreparable
harm for the more stringent requirement of “likelihood” of
irreparable harm explaining that the former is too lenient and is
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inconsistent with the Court’s characterization that injunctive
relief is an extraordinary remedy that is never awarded as of
right.8 Id. at 22 citing Munaf v. Geren, 553 U.S. 674, 689-690, 128
S. Ct. 2207, 171 L. Ed. 2d 1 (2008). The Motion is wanting of even
an attempt to mention the standards for preliminary injunction and
apply the elements to this case. The movant’s disregard of his
burden to prove entitlement to injunctive relief warrants denial of
the request.
E. Duty of confidentiality has not been breached and therefore,
no conflict of interest exists to disqualify LGB and Reitman.
The Motion to disqualify Reitman and his firm is based on two
separate grounds. Debtor argues (i) Reitman breached the duty of
confidentiality when he initially met with the Debtor concerning
potential representation of the Debtor in his bankruptcy case and
thereafter, represented the Trustee; and (ii) Reitman failed to
disclose to the Court that he has represented Neilson, the CEO of
PBC, in the past in several bankruptcy cases. Motion at 10-13, 15-
16. The Reply expounds on Reitman and his firm’s failure to
disclose his relationship with PBC’s CEO. Reply 2-9.
To the extent that disqualification of Trustee’s counsel is
sought based on the purported strong relationship between PBC’s CEO
and members of the LGB firm, the Court will recuse itself from
deciding the issue the same way that it recused itself from deciding
the Trustee’s disinterestedness as it pertained to PBC.
8 The Ninth Circuit test requires clear showing of either (1) a combination of probable success on the merits and
possibility of irreparable harm, or (2) that serious questions are raised and the balance of hardships tips sharply in the
moving party’s favor must be present. See Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115, 1119 (9th Cir.
1999). The test is a sliding scale—as the hardship increases for the moving party, less probability of success must be
shown. Nat’l. Ctr. For Immigrants Rights, Inc. v. Immigration and Naturalization Serv., 743 F.2d 1365, 1369 (9th Cir.
1984).
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The Court will rule, however, on whether a breach of
confidentiality exists in this case that warrants disqualification
and/or disgorgement of fees.
Much has been said by both sides about what transpired at the
meeting between Reitman and the Debtor on or about February 12, 2012
while the Debtor was still acting as debtor-in-possession in the
bankruptcy case and the decision not to represent the Debtor in his
bankruptcy case including conflicting testimony on whether Reitman
took confidential documents from the meeting. Declaration of Paul
Camuso (“Camuso Decl.”) in support of the Motion ¶¶2-4; Declaration
of Michael Gottfried (“Gottfried Decl.”) in support of the Opp’n.
¶¶3-6; Declaration of John Reitman (“Reitman Decl.”) in support of
the Opp’n. ¶¶4-8), Declaration of Shaun Anderson (“Anderson Decl.”)
in support of the Reply ¶¶2-6; Declaration of Arnold Klein (“Klein
Decl.”) in support of the Reply ¶¶3-12. The Court also recognizes
the Debtor “feels Mr. Reitman has a conflict of interest now working
with the Trustee against [him] especially given the amount of
personal and private information on my case he was made privy to in
[their] meeting. . . .” Klein Decl. ¶14. However, Debtor’s feeling
is not tantamount to evidence of breach of confidentiality.
Debtor, as the holder of the confidential information, has the
burden of demonstrating that the information exchanged was
confidential. See Elec. Frontier Found. v. CIA, 2013 U.S. Dist.
LEXIS 142146, *56 (N.D. Cal. Sept. 30, 2013). Here, the Debtor
failed to identify which information shared was confidential and not
already available to the public through the allegation made in the
Khilji Action.
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Where counsel represents a debtor-in-possession, the duty to
protect a client’s confidences is clear. However, in this case,
Reitman, his firm, and the Debtor did not agree to the
representation at all. Their communication is based on a
consultation with a prospective client. The test is “whether and to
what extent the attorney acquired confidential information.” In re
Tevis, 347 B.R. 679, 692 (B.A.P. 9th Cir. 2006) (citation omitted).
Based on Camuso’s declaration, the Debtor went into detail
with Reitman about an alleged embezzlement, including allegations of
fraudulent or defective mortgages and the issues concerning PBC and
Chartis and other bankruptcy issues including fees. Camuso Decl.
¶2. He further states that Reitman left with printouts that the
Debtor provided him during the meeting. Id. ¶3. The Debtor
testifies that he provided detailed information about his situation,
various litigations that were pending or that Debtor wished to
pursue, evidence of embezzlement, information about his assets, and
fees. Klein Decl. ¶8. However, Reitman’s recollection of what
occurred differs from Camuso’s and the Debtor’s testimony. First,
Reitman testifies he did not take any materials from the meeting
that he had not brought. Reitman Decl. ¶6. He further testifies
that fees arrangements were not discussed. Id. He recalls the
majority of his discussions were with Camuso and not the Debtor.
Id. ¶5. While discussions about an alleged fraudulent promissory
note took place, Reitman testified that the discussions were general
in nature and were known to him to be based on the filed pleadings
that he had read about the case in preparation for his meeting with
the Debtor. Id.
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Missing from the Motion is Debtor’s showing that despite
having third parties present, namely Camuso and Anderson, the
attorney-client privilege and that of confidentiality remain
applicable. See United States v. Simpson, 475 F.2d 934, 936 (D.C.
Cir. 1973) (third party present in a conference between client and
attorney precludes application of the rule protecting
confidentiality).
Even if confidential information was exchanged, the Bankruptcy
Code compels the Debtor to “. . . surrender to the trustee all
property of the estate and any recorded information, including
books, documents, records, and papers, relating to property of the
estate, whether or not immunity is granted under section 344 of this
title.” 11 U.S.C. § 521(a)(4). Debtor, therefore, has an
obligation to disclose all information concerning the properties of
the estate that may or may not be confidential in nature.
More importantly, the Court finds persuasive the holding in In
re Bame, 251 B.R. 367, 374 (Bankr. D. Minn. 2000), where the
bankruptcy court, following the Supreme Court’s analysis in
Commodity Futures Trading Com v. Weintraub, 471 U.S. 343, 105 S. Ct.
1986 (1985), found that the trustee for the bankruptcy estate,
succeeded to the individual debtor-in-possession’s power to assert
or waive the attorney-client privilege with respect to matters
involving the administration of the estate. Bame explains that as a
debtor-in-possession, the estate holds the privilege and it is the
only party that can waive the privilege. Id. At the time of the
meeting in February 2012, the Debtor was serving as debtor-in-
possession and there is no evidence to the contrary. Because the
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Trustee succeeded as the representative of the estate, he holds the
privilege that may have existed between Reitman and the estate.
This Court finds that the Trustee steps into the shoes of a
debtor-in-possession conferring all legal and equitable rights that
the Debtor may have upon the Trustee. Indeed, the Trustee’s rights
are limited by the Debtor’s rights under state law and the rights
conferred by the Bankruptcy Code. Consequently, the Debtor’s right
to confidentiality (that arguably may have existed at the meeting
between Debtor and Reitman) is conferred upon the Trustee and would
be preserved for the estate in the same manner.
Lastly, LGB properly disclosed in its application for
employment the meeting that occurred in February 2012 and its belief
that no confidential information from the Debtor or any other person
was obtained. (Docket No. 339 at 5:15-19.) Debtor did not
challenge the assertion before the period for opposition expired.
Accordingly, the Court finds no attorney misconduct with respect to
disclosures concerning the firm connection with the Debtor.
CONCLUSION
For the reasons stated herein, the Court denies the Debtor's
Motion.
Date: December 4, 2013
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NOTICE OF ENTERED ORDER AND SERVICE LIST
Notice is given by the court that a judgment or order entitled (specify) MEMORANDUM OF DECISION RE:
DR. ARNOLD KLEIN’S MOTION FOR THE RECUSAL OF JUDGE NEITER; DISQUALIFICATION OF
ATTORNEYS; DISQUALIFICATION OF LANDAU, GOTTFRIED & BERGER LLP; DISQUALIFICATION OF
TRUSTEE AND REVIEW DE NOVO, INJUNCTIVE RELIEF was entered on the date indicated as AEntered@
on the first page of this judgment or order and will be served in the manner indicated below:
I. SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (“NEF”): Pursuant to controlling
General Order(s) and Local Bankruptcy Rule(s), the foregoing document was served on the following person(s)
by the court via NEF and hyperlink to the judgment or order. As of December 4, 2013, the following person(s)
are currently on the Electronic Mail Notice List for this bankruptcy case or adversary proceeding to receive NEF
transmission at the email address(es) indicated below.
US Trustee’s Office (Los Angeles): ustpregion16.la.ecf@usdoj.gov
Plaintiff’s Counsel Peter Gurfein: pgurfien@lgbfirm.com; John Reitman: jreitman@lgbfirm.com
Counsel for Defendants William Ridley and Laguna Window Washing, Jesse Finlayson: jfinlayson@fwtrl.com
Counsel for Defendant Arnold Klein, Steffanie Stelnick: steffanie.stelnick@gmail.com
Defendant Tom Swift: swiftlaw@gmail.com
Service information continued on attached page
II. SERVED BY THE COURT VIA U.S. MAIL: A copy of this notice and a true copy of this judgment or order
was sent by United States Mail, first class, postage prepaid, to the following person(s) and/or entity(ies) at the
address(es) indicated below:
Defendant/Debtor’s Counsel:
Steffanie D Stelnick
Law Offices of Steffanie Stelnick
15821 Ventura Blvd., Ste 275
Encino, CA 91436
Debtor
Arnold Klein
1401 North Via Monte Vista
Palm Springs, CA 92262
Defendants:
Benjamin C. Stull II., an individual and
Trustee of the Benjamin C. Stull 2008
Revocable Trust, a California Trust;
550 S Indian Trail
Shaun K. Anderson
1176 El Rancho Blvd
Pocatello, ID 83201
Palm Springs, CA 92264
Iron Sink Media Inc.
c/o Paul Camuso
3940 Pacheco Dr.
Sherman Oaks, CA 91403
Daniel Gonzalez
1401 North Via Monte Vista
Palm Springs, CA 92262
Daniel Gonzalez
1401 North Via Monte Vista
Palm Springs, CA 92262
Ronald A. Flate, Esq.
9595 Wilshire Blvd., Suite 900
Beverly Hills, CA 90212
Tom Swift, Esq.
Law Offices of Thomas Swift
747 North LaSalle Street, Suite 500B
Chicago, IL 60654
Minimally Invasive Aesthetics, LLC
c/o Jeffrey Krinsk
501 W Broadway Ste 1250
San Diego, CA 92101
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Service information continued on attached page
III. TO BE SERVED BY THE LODGING PARTY: Within 72 hours after receipt of a copy of this judgment or
order which bears an AEntered@ stamp, the party lodging the judgment or order will serve a complete copy
bearing an AEntered@ stamp by U.S. Mail, overnight mail, facsimile transmission or email and file a proof of
service of the entered order on the following person(s) and/or entity(ies) at the address(es), facsimile
transmission number(s), and/or email address(es) indicated below:
Service information continued on attached page
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