Ralbert Rallington Brooks-Hamilton

OCR transcription for search; preserved printed pages are authoritative

pid ot

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Entered on Docket
July 19, 2005

GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

JUL 08 2005
NOT FOR PUBLICATION HAROLD § WARE URL ELERN

OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: } BAP No. NC-04-1452-PBS
) NC-04-1453-PBS
RALBERT RALLINGTON ) (related appeals)
BROOKS-HAMILTON, )
) Bk. No. 03-44829
Debtor. )
) Adv. No. 03-04837
)
DAVID A. SMYTH, )
)
Appellant, )
)
Vv. ) MEMORANDUM?
)
CITY OF OAKLAND, )
)
Appellee. )
)

Argued and Submitted on
May 19, 2005 at San Jose, California

Filed - July 8, 2005

Appeal from the United States Bankruptcy Court
for the Northern District of California

Honorable Leslie Tchaikovsky, Bankruptcy Judge, Presiding

Before: PERRIS, BRANDT, and SMITH, Bankruptcy Judges.

. This disposition is not appropriate for publication and
may not be cited to or by the courts of this circuit except when

relevant under the doctrines of law of the case, res judicata, or
collateral estoppel. See 9th Cir. BAP Rule 8013-1.

cs 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 1 of

39

10
11
12
13
14
15
- 16
17
18
19
20
21
22
23
24
25
26

Ca

In these two appeals, the lawyer for a bankruptcy debtor
appeals separate orders that imposed monetary sanctions on him for
violation of Fed. R. Bankr. P. 9011 and prohibited him from
practicing before the bankruptcy court in the Northern District of
California for six months. Because the facts underlying both orders
are the same, we will discuss both appeals in one Memorandum. For
the reasons set out below, we AFFIRM in both appeals.

FACTS

Between 1996 and 1998, debtor Ralbert Rallington Brooks-
Hamilton (debtor) borrowed a total of $500,000 from the City of
Oakland (the city) under a federal program relating to economic
enterprise zones, secured by some personal property and deeds of
trust on two parcels of debtor’s real property. Debtor defaulted on
the loans. In early 2001, the city brought an action against debtor
in state court seeking possession of certain personal property
collateral. It also began nonjudicial foreclosure proceedings
against debtor’s real property that secured the loans.

In July 2002, the city sought from the state court a writ of
possession of the personal property (the state court action). The
state court entered an order authorizing issuance of the writ, but
the city never enforced the writ by taking possession of the
personal property.

Debtor filed a cross-complaint in the state court action,
alleging, among other claims, a claim for breach of contract. The
cross-claims, including the claim for breach of contract, were

dismissed twice with leave to amend.

se: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 2 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

At this point, appellant David Smyth (Smyth) began representing
debtor. Smyth filed a second amended cross-complaint on debtor’s
behalf, alleging breach of contract and racial discrimination. In
May 2003, the state court dismissed the cross-complaint without
leave to amend. The state court complaint was dismissed on the
city’s motion on August 29, 2003.

In the meantime, in late 2001, debtor filed a complaint against
the city in federal district court, alleging various causes of
action relating to the loans (the federal district court action).
After debtor amended his complaint twice, the district court in May
2002 dismissed the action for lack of subject matter jurisdiction.

Debtor, represented by Smyth, filed this chapter 13? bankruptcy
case in August 2003. His schedules listed the city as an undisputed
secured creditor, holding a claim in an amount much less than what
the city claims is owed. Debtor’s chapter 13 plan provided that the
city’s claim would be paid by April 1, 2004, through a sale or
refinance of debtor’s real property. The city did not object to the
plan, which was confirmed.

Thereafter, Smyth filed on behalf of debtor a complaint against
the city, seeking a declaration that the city’s liens on debtor's
property are void and that debtor does not owe the city any money.

The city moved to dismiss the adversary complaint, arguing that

the claims were barred by res judicata and collateral estoppel.

2 Unless otherwise indicated, all chapter, section and rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1330, and to
the Federal Rules of Bankruptcy Procedure, Rules 1001-9036.

3

Cyse: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 3 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Because, by the time the motion to dismiss was heard, it was
apparent that debtor’s bankruptcy case was either going to be
dismissed or converted, the bankruptcy court declined to address the
preclusion arguments, instead dismissing the adversary proceeding
without prejudice.

In the meantime, the city filed a proof of claim in debtor’s
bankruptcy case, asserting a secured claim of $983,146.51. Smyth
filed an objection to the claim, asserting that the secured claim
could not be paid through the confirmed plan because the plan did
not provide for payment of any secured claims, and it could not be
paid as unsecured because the city had not filed an unsecured claim.

The court did not rule on the claim objection, concluding in
the adversary proceeding that it would abstain from deciding the
issues raised regarding the city’s claim.

Because of debtor’s counsel’s frivolous arguments in connection
with the city’s claim, the court issued an order to show cause in
the bankruptcy case why the case should not be dismissed and why
Smyth should not be sanctioned for violating Rule 9011. The city
filed a motion for sanctions under Rule 9011 against both debtor and
Smyth, as well as a motion to convert the case to chapter 7 rather
than have it dismissed.

The bankruptcy court ordered the case converted to chapter 7.
After a hearing on the city’s motion for sanctions and the court’s
order to show cause, the court issued thorough, well-reasoned
memoranda explaining its decision to grant both motions. On the

city’s motion, the court sanctioned Smyth $10,671 for violating Rule

Cape: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 4 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

C

9011 in the adversary proceeding, which represented the costs the
city incurred in connection with the adversary proceeding. The
court stayed the payment of the sanctions for one year, based on its
ruling on the show cause order that Smyth should be prohibited from
practicing law before the court for six months. The court denied
the motion for sanctions against debtor. Smyth’s appeal of that
order is BAP No. NC-04-1452.

On the order to show cause, the court found that Smyth had
violated Rule 9011 by making frivolous arguments in connection with
debtor’s objection to the city’s claim. The court ordered Smyth
suspended from practicing law before the bankruptcy court for the
Northern District of California for six months, except that Smyth
could continue to appear in cases in which he was already the
attorney of record. Smyth’s appeal of that order is BAP No. NC-04-
1453. The bankruptcy court stayed the order until this appeal is
decided.

ISSUES
APPEAL NO. 04-1452

Whether the bankruptcy court abused its discretion in imposing
monetary sanctions under Rule 9011.

APPEAL NO. 04-1453

Whether the bankruptcy court abused its discretion in
suspending Smyth from practicing law before the court for violation

of Rule 9011.

nSe: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 5 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Cc

STANDARD OF REVIEW
We review all aspects of a decision to impose Rule 9011

sanctions for abuse of discretion. In re Grantham Bros., 922 F.2d

1438, 1441 (9th Cir. 1991). A court abuses its discretion “if it
base[s] its ruling on an erroneous view of the law or on a clearly

erroneous assessment of the evidence.” Cooter & Gell v. Hartmarx

Corp., 496 U.S. 384, 405 (1990).
DISCUSSION
In both orders that are on appeal, the bankruptcy court imposed
sanctions under Rule 9011. Rule 9011 “imposes on attorneys, and
also on unrepresented parties, the obligation to insure that all
submissions to a bankruptcy court are truthful and for proper

litigation purposes.” In re DeVille, 361 F.3d 539, 543 (9th Cir.

2004). As relevant to these appeals, the rule provides:

(b) By presenting to the court .. . a petition,
pleading, written motion, or other paper, an attorney or
unrepresented party is certifying that to the best of the
person’s knowledge, information, and belief, formed after an
inquiry reasonable under the circumstances --

(1) it is not being presented for any improper
purpose, such as to harass or to cause unnecessary delay
or needless increase in the cost of litigation; [and]

(2) the claims, defenses, and other legal contentions
therein are warranted by existing law or by a nonfrivolous
argument for the extension, modification, or reversal of
existing law or the establishment of new law[.]

Wo

The standard against which an attorney’s conduct is measured “is a
competent attorney admitted to practice before the [pertinent]

court.” ‘Zaldivar v. City of Los Angeles, 780 F.2d 823, 830 (9th

Cir. 1986), overruled on other grounds by Cooter & Gell _v. Hartmarx

hSe: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 6 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Corp., 496 U.S. 384 (1990).

A motion for sanctions may be brought by a party or on the
court’s own motion. Rule 9011(c) (1) (A), (B).? If the court
determines after notice and a hearing that a person has violated
Rule 9011(b), it may impose sanctions, which “shall be limited to
what is sufficient to deter repetition of such conduct or comparable

conduct by others similarly situated.” Rule 9011 (c) (2).

BAP NO. NC-04-1452

Smyth argues that the court erred in awarding monetary
sanctions on the city’s motion in the adversary proceeding, which
was based on the court’s determination that the claims asserted in
the adversary complaint were frivolous as they were all barred by
collateral estoppel or res judicata, and that the one-action rule
claim was also substantively frivolous. The court further held that
the claims were filed for an improper purpose.

The bankruptcy court rejected Smyth’s four arguments: (1) that
the fact that the court had abstained from deciding the claims
asserted in the adversary proceeding, rather than deciding them on

the merits, precluded the court from awarding sanctions for a

3 The rule contains a safe harbor, so that a motion for
sanctions may not be filed unless, within 21 days of service of the
motion on the offending person, the challenged pleading or document
is not withdrawn or corrected. Rule 9011(c) (1) (A). The city served
Smyth with its motion for sanctions more than 21 days before it
filed the motion with the court, and Smyth failed to withdraw or
correct the complaint.

Case: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 7 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

C

frivolous complaint; (2) that the claims were not barred by
preclusion doctrines; (3) that the claims were not asserted for an
improper purpose; and (4) that the monetary sanction requested by
the city was excessive. Smyth raises numerous arguments on appeal,
which can be put into various categories.

1. Sanctions for filing pleading that was not dismissed on the

merits

Smyth argues that the court should not have sanctioned him for
filing the adversary complaint, because the court did not dismiss
that complaint on the merits, but instead abstained and dismissed it
without prejudice.

The bankruptcy court did dismiss the complaint without
prejudice, saying that the court would abstain from deciding issues
relating to debtor’s objections to the city’s claims. However, the
court then decided, on the city’s motion for sanctions, that the
claims asserted in the adversary proceeding were frivolous.

Rule 9011 prohibits an attorney from signing and filing
pleadings that are without legal support. Nothing in the rule
requires that the claims asserted in the pleading be dismissed on
the merits before sanctions can be imposed. Smyth does not provide
any authority for the proposition that a court cannot, in the
context of a motion for sanctions, decide whether a pleading

violates Rule 9011 because it is legally frivolous.‘ In fact,

4 The only case he cites in support of this argument is
Jureczki v. City of Seabrook, Tex., 668 F.2d 851 (5th Cir. 1982),
which says that a court does not reach the merits of the case when
it abstains. The case has nothing to do with a motion for
sanctions.

8
nse: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 8 of

39

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

fall

subsection (b) (2) of the rule requires just such a determination.
Therefore, the court could impose sanctions for violation of Rule
9011, even though it had dismissed the complaint without prejudice.
In his reply brief, Smyth argues for the first time that the
sanctions order was in effect an improper alteration of the original
abstention and dismissal without prejudice. We will not consider an

argument that was not raised in the bankruptcy court and not raised

on appeal until the reply brief. U.S. Vv. Bigman, 906 F.2d 392, 395
(9th Cir. 1990) (appellate court will not consider issue raised for

the first time on appeal); In re N. Cal. Homes and Gardens, Inc., 92

B.R. 410, 413-14 (9th Cir. BAP 1988) (same); In _re Baldwin, 70 B.R.

612, 617 (9th Cir. BAP 1987) (raising issues for first time in reply

brief disfavored).

2. Preclusive effect of prior actions

Debtor had filed two different actions making claims against
the city before Smyth filed this adversary proceeding on his behalf
in the bankruptcy case. We will consider the preclusive effect of

each prior action separately.

A. Federal district court action

The adversary complaint in this case alleges that the trust
deeds executed in connection with the loans made by the city to
debtor are illegal and void because, among other reasons, they
violated federal law (the regulations of Housing and Urban
Development (HUD), under which the loans were made). In the earlier
federal district court action, debtor had alleged various state law

claims, including a claim that the city had negligently administered

se: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 9 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

26

Ca

federal funds.® The district court dismissed the complaint, finding
that there is no private right of action arising out of alleged
violations of the HUD regulations, and thus no federal question
jurisdiction.

The bankruptcy court concluded that the dismissal of the
district court action for lack of jurisdiction precluded debtor from
seeking a determination in this adversary proceeding that the city
had violated the HUD rules with regard to its loans to debtor, based
on collateral estoppel or issue preclusion.

The bankruptcy court correctly explained that a federal court’s
dismissal of a complaint for lack of subject matter jurisdiction has
“collateral estoppel effect with respect to the issue upon which the

dismissal was based[,]” citing Qkoro v. Bohman, 164 F.3d 1059, 1062-

63 (7th Cir. 1999). Thus, because the district court had dismissed
debtor’s claims against the city on the ground that there was no
private right of action for violation of HUD regulations, debtor was
precluded from relitigating that issue in the adversary proceeding.
Memorandum of Decision re Motion for Rule 9011 Sanctions at 12-13.
The court rejected Smyth’s argument that the principle does not
apply when the second action is one for declaratory judgment.
According to Smyth, the adversary complaint is really a request for

declaratory relief.

° The district court complaint also alleged breach of
contract, intentional interference with prospective economic
advantage, negligent interference with prospective economic
advantage, intentional infliction of emotional distress, and fraud,
misrepresentation and deceit.

10

e: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 10 of
39

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

C

—_)

On appeal, Smyth raises a different argument, that there is no
bar to asserting violation of federal regulations as a basis for
invalidating the trust deeds under state law. Because he failed to
make that argument to the bankruptcy court, we will not consider it
on appeal.

B. State court action

The city argues that the claims in this adversary proceeding,
which arise out of the same transactions as the cross-claims that
were dismissed without leave to amend in the state court action,
were frivolous, because they are barred by doctrine of res judicata.
The bankruptcy court agreed.

The preclusive effect of a state court judgment in a subsequent
federal action is determined by the law of the state in which the

judgment was entered. In re Nourbakhsh, 67 F.3d 798, 800 (9th Cir.

1995). Under California law, res judicata bars relitigation not
only of issues that were determined, but also of issues that could

have been determined in the prior action. See Lunsford v. Kosanke,

295 P.2d 432, 435 (Cal. Ct. App. 1956). Res judicata applies when:

(1) A claim or issue raised in the present action is identical
to a claim or issue litigated in a prior proceeding; (2) the
prior proceeding resulted in a final judgment on the merits;
and (3) the party against whom the doctrine is being asserted
was a party or in privity with a party to the prior proceeding.

Brinton v. Bankers Pension Serv., Inc., 90 Cal. Rptr. 2d 469, 472

(Cal. Ct. App. 1999).
Smyth raises various arguments challenging the bankruptcy
court’s conclusion that the claims asserted in the adversary

complaint are barred by res judicata, based on the dismissal of

il

Se: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 11 of

39

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

debtor’s cross-claims in state court.

(i) Final judgment

First, Smyth argues that the state court’s dismissal of the
cross-complaint without leave to amend was not a final judgment,
because it did not dispose of the claims asserted in the city’s

complaint against debtor. Relying on Lemaire v. All City Employees

Ass’n, 110 Cal. Rptr. 507 (Cal. Ct. App. 1973), he asserts that,
because the claims of the city against debtor and the claims of
debtor against the city concerned the same financial transactions,
dismissal of the cross-claims was not a final judgment.

Smyth did not raise this precise argument to the bankruptcy

court. Nonetheless, Smyth is incorrect. As the bankruptcy court

noted,

[u]nder California law, an order sustaining a demurrer without
leave to amend is considered a judgment on the merits, with res
judicata effect, as long as the order was based on the merits
(or lack thereof) of the claims asserted and not on some formal
defect. See Goddard v. Security Ins. And Guar. Co., 14 Cal. 2d
47, 52 (1939); Pollock v. University of Southern California,
112 Cal. App. 4th 1416 (2003).

Memorandum of Decision re Motion for Rule 9011 Sanctions at 15:16-
22.

In Lemaire, the defendants filed cross-claims against
plaintiffs, based on the same transactions that formed the basis for
the plaintiffs’ complaint. The court sustained a demurrer to the
defendants’ cross-claims, and defendants appealed. The court held
that the order sustaining the demurrer to the cross-complaint was
not a final, appealable order, because the complaint was still

pending and had not been adjudicated. Under California’s one-

12

Cape: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 12 of

39

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

26

fab!

judgment rule, dismissal of the cross-claims was interlocutory
pending the entry of judgment on the complaint.

That case is distinguishable from this one. Here, the state
court action is no longer pending, having been dismissed at the
city’s request. That dismissal, which was not appealed, leaves
nothing pending in the court. Therefore, the state court action has
been finally concluded, rendering the dismissal of the cross-

complaint final.

(ii) Same cause of action

Next, Smyth argues that he could not have raised the one-action
rule sanction claim in the second amended cross-complaint in state
court, because the sanction argument did not exist at the time of
the state court lawsuit.

California’s one-action rule “requires a secured creditor to
proceed against its security before enforcing the underlying debt.”

In re Prestige Ltd. P’ship-Concord, 205 B.R. 427, 434 (Bankr. N.D.

Cal. 1997), aff’d, 164 F.3d 1214 (9th Cir. 1999). The rule may be
raised as a defense to an action on the obligation, to force the
creditor to exhaust the security before obtaining a money judgment,
or it may be asserted later as a sanction of waiver of the security.

Walker v. Cmty. Bank, 518 P.2d 329, 332 (Cal. 1974).

Whether or not Smyth is correct that a debtor may wait to raise
the sanction aspect of the one-action rule until after the creditor
obtains a money judgment against the debtor, the factual basis for
the one-action rule in this case shows that the city never obtained

a judgment against debtor. The adversary complaint alleges that the

13

Se: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 13 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Cap

city lost its liens on debtor’s real property “because on July 22,
2002 the City of Oakland obtained an Order for writ of Possession in
the Superior Court of the State of California, . . . for the
personal property, secured by the 6/26/97 Deed of Trust “
Complaint to Determine the Validity, Priority of Liens at 7 11. {It
was the order, issued on July 22, 2002, that was alleged to trigger
application of the one-action rule. Debtor filed his second amended
cross-complaint on January 17, 2003, well after the state court
order for the writ of possession was entered. Thus, the basis for
the alleged one-action rule violation existed at the time of the
second amended cross-complaint in the state court action and could
have been raised at that time. It is therefore barred from being

raised in the adversary complaint.

(iii) Claims as offsets

Smyth next argues that, even if the state court dismissal of
the cross-claims was final for purposes of res judicata, the claims
may have been dismissed based on statute of limitations rather than
for failure to state a claim, and therefore are not barred from
being asserted as offsets to the city’s claims.

The bankruptcy court disagreed with Smyth’s view of the basis
for dismissal of the state court action, finding that the state
court had sustained the demurrer to debtor’s second amended cross-—
complaint because it failed to state a claim. Memorandum of
Decision re Motion for Rule 9011 Sanctions at 16:3-7.

The bankruptcy court was correct that the state court sustained

the demurrer without leave to amend “for failure to state a claim.”

14

e: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 14 of
39

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Order Sustaining Demurrer. However, the city’s demurrer to the
second amended cross-complaint sought dismissal for failure to state
a claim based not only on the substance of the allegations, but also
on the statute of limitations. Under California law, “[w]here a
complaint shows on its face that the action is barred by the statute
of limitations, a general demurrer for failure to state a cause of

action will lie.” Kendrick v. City of Eureka, 98 Cal. Rptr. 2d 153,

155 (Cal. Ct. App. 2000). Thus, Smyth is correct that the court may
have sustained the demurrer on statute of limitations grounds.

Even so, that does not assist Smyth. He argues that claims
that are barred by the statute of limitations may nonetheless be
used as offsets against a claim made by the same party. See Styne

v. Stevens, 109 Cal. Rptr. 2d 14 (Cal. 2001) (defenses not barred by

statute of limitations, even though claims asserted on same basis
would be barred). Whether or not debtor can raise time-barred
claims as offsets to any claims the city may bring, that is not what
happened here. The adversary complaint Smyth filed in bankruptcy
court asserted claims in support of his theory that the lien of the
city is void. The claims were not asserted in defense to the city’s
claim.

(iv) Dismissal for inept pleadings

Smyth next argues that the dismissal of the state court cross-
claims are not preclusive, because the city failed to present
sufficient portions of the state court’s record to show that the
cross-claims were not dismissed based solely on technical or formal

defects. He cites Goddard v. Sec. Title Ins. and Guar. Co., 92 P.2d

15

Cape: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 15 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

804, 806 (Cal. 1939), which says that “a judgment based upon the
sustaining of a special demurrer for technical or formal defects is
clearly not on the merits and is not a bar to the filing of a new
action.”

This argument fails. In California, a general demurrer is one
that challenges the pleading for failure to “state facts sufficient
to constitute a cause of action.” Cal. Code Civ. Pro. § 430.10(e);
Hon. EBileen C. Moore and Michael Paul Thomas, California Civil
Practice § 9:4 (2004) (general demurrer is one based on ground set
out in Cal. Code Civ. Pro. § 430.10(e), including statute of
limitations; demurrer based on any other grounds set out in § 430.10
is special demurrer). The city’s demurrer to the second amended
cross-complaint in state court was based on failure to state a
claim, and therefore was a general demurrer. The court’s dismissal
of the cross-complaint thus was not based on a special demurrer for
technical or formal defects.

(v) Declaratory judgment

Finally, with regard to the preclusive effect of the state
court dismissal, Smyth argues that this adversary proceeding is not
barred by the dismissal of the earlier action, because it is a
request for declaratory judgment, not an action for damages. He
asserts that, because the status of the loans has never been
determined, the adversary complaint was not barred.

First, the adversary complaint in this case is not a
declaratory judgment complaint; it seeks a determination that debtor

owes no money to the city and that the city has no valid liens on

16

se: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 16 of

=—_f)),

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

any of debtor’s property. This is a request for affirmative relief,
avoiding the liens and extinguishing the debt.

Even if this were a declaratory judgment action, Smyth’s
argument fails. Although a judgment on a declaratory judgment
action is “binding as to matters declared,” but not as to matters
that were not presented for decision, 40 Cal. Jur. 3d Judgments
§ 125 (2004), the earlier state court action was not an action for
declaratory judgment; it was a claim for damages based on the same
conduct that Smyth alleged in this adversary complaint. Thus, the
concept that a prior declaratory judgment does not bar a later
action on claims arising out of the same facts does not apply here,
where the prior cross-complaint was not one for declaratory
judgment.

3. Validity of four interim liens

Smyth argues that the adversary complaint was not frivolous,
because the status of four interim liens asserted by the city has
never been, and still needs to be, determined. He does not explain,
however, why the bankruptcy court was wrong in concluding that his
claims for invalidating those liens are barred by claim preclusion
because they are part of the same cause of action as the claims
relating to the other three liens. The mere fact that he still
wants a determination with regard to those interim liens does not
provide a basis for ignoring the doctrine of claim preclusion.

Smyth quotes the bankruptcy court’s statement in the Memorandum
of Decision that “if the amounts secured by the Interim Loan Liens

have been repaid and the city is unwilling to release them

17

Case: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 17 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

voluntarily, the debtor may seek judicial assistance to compel their
releases.” Appellant’s Opening Brief at 20 (quoting Memorandum of
Decision re Motion for Rule 9011 Sanctions at 22:11 n.10). He then
argues that he was simply seeking through the adversary proceeding
to obtain such a determination.

This is a complete distortion of the adversary complaint. That
complaint sought a determination that the liens were invalid as a
result of violations of federal law, breaches of contract, and the
one action rule. The interim liens arose out of the same
transaction as the other liens at issue in the adversary proceeding.
There was no allegation in the complaint that the interim loans had
been repaid or that the city was unwilling to release the liens
voluntarily; the claims were based solely on the city’s alleged
misconduct, the same alleged misconduct that debtor asserted
invalidated the city’s other liens. The bankruptcy court did not
err in concluding that the claims asserted regarding the four
interim liens were barred by claim preclusion for the same reasons
that the claims regarding the other three liens were barred.°®

Smyth also challenges the bankruptcy court’s determination that
the one-action rule claim was substantively frivolous. Because we

conclude that the one-action rule claim was barred by claim

6 The parties dispute whether the bankruptcy court found
that the arguments relating to the four interim loans were
frivolous. The court found that it should have been obvious to
Smyth that the claims were barred by claim preclusion. It was for
that reason that the court concluded that the claims relating to the
interim liens were frivolous. Memorandum of Decision re Rule 9011
Sanctions at 17:17-23. It did not address whether the claims were
frivolous for any other reason.

18

Cpse: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 18 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Ca

preclusion and that this should have been obvious to a competent
attorney, we will not address whether the claim was also
substantively frivolous.

4, Imposition of sanctions

A. Scintilla of support

Smyth argues that a court should not impose sanctions under
Rule 9011 if there is even a scintilla of support for the pleading.
The cases he cites for that proposition are irrelevant to the
bankruptcy court’s order in this case, which was based on the lack

of legal support for the claims. In In re Coastal Group, Inc., 100

B.R. 177, 179 (Bankr. D. Del. 1989), the court concluded that there

“

was no willful violation of the automatic stay where there was “a
scintilla of a suggestion” in the case law that the action taken by
the party did not violate the stay. This statement has nothing to
do with Rule 9011 or Fed. R. Civ. P. 11, on which it Rule 9011 is
based.

Smyth also cites Q’Brien v. Alexander, 101 F.3d 1479 (2d Cir.

1996). In that case, the circuit court noted that sanctions under
Fed. R. Civ. P. 11 “may not be imposed unless a particular
allegation is utterly lacking in support.” Id. at 1489. The court
there was dealing with factual allegations, not legal arguments.
Therefore, the case is inapposite.

In this circuit, the rule is that sanctions may be imposed
under Fed. R. Civ. P. 11, and therefore by extension under Rule
9011, for the filing of a frivolous claim, even if other claims

asserted in the pleading are not frivolous. Townsend v. Holman

19

e: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 19 of
39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

QQ)

Consulting Corp., 929 F.2d 1358, 1363 (9th Cir. 1991). Thus, the

bankruptcy court did not err in awarding sanctions if one of the
claims presented by Smyth was without arguable merit.

In considering sanctions under Rule 9011, the court measures
the attorney’s conduct “objectively against a reasonableness
standard, which consists of a competent attorney admitted to

practice before the involved court.” In re Grantham Bros., 922 F.2d

1438, 1441 (9th Cir. 1991). Reasonable inquiry “requires a party to

au

consider ‘whether any obvious affirmative defenses bar the case.

F.D.I.C. v. Calhoun, 34 F.3d 1291, 1299 (5th Cir. 1994) (quoting

White v. Gen’l Motors Corp., 908 F.2d 675, 682 (10th Cir.

1990)) (emphasis supplied by Fifth Circuit). Under that standard,
the question is not whether there was a scintilla of support for the
pleading, but whether it was objectively reasonable for Smyth to
assert the legal position, particularly in light of the two earlier
cases between these two parties concerning the same loans.
Therefore, even if there was a scintilla of support for the
adversary complaint, that does not make the argument objectively
reasonable, and the bankruptcy court did not err in awarding

sanctions in this case.

B. Consideration of prior conduct in imposing sanction

Smyth argues that the court erred in considering prior
misconduct in imposing the sanction in this case. He relies on

Christian v. Mattel, Inc., 286 F.3d 1118 (9th Cir. 2002). In that

case, the circuit court reversed a district court’s imposition of

20

Se: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 20 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

C

sanctions under Fed. R. Civ. P. 11, where the court had imposed
sanctions not only for signing and filing frivolous pleadings, but
also because of counsel’s conduct in the case and in related
litigation. Because sanctionable behavior under Fed. R. Civ. P. il
relates to papers signed in violation of the rule, the district
court had erred in considering other behavior in deciding whether to

sanction counsel.

The bankruptcy court in this case did not decide to award
sanctions based on counsel’s conduct in prior cases. The decision
regarding whether to award sanctions was based solely on the
pleadings signed and filed by counsel in this case. Thus, Christian

is not applicable here.

The bankruptcy court did take into consideration counsel’s
prior conduct in other cases in determining what sanction would be
appropriate to deter him from further frivolous pleadings. The

court said:

This is not the first time Smyth has been sanctioned. As
he conceded in his papers, many years ago, he was the object of
a malpractice judgment. Thereafter, over ten years ago, the
three bankruptcy judges in the Oakland division, based on their
observations of his incompetence and unprofessional conduct,
advised Smyth that he would not be appointed to represent
chapter 11 debtors.

Still more recently, in In re Kellander, Case No. 99-
17645, Smyth was sanctioned $6,000 for filing a frivolous
motion to avoid a judgment lien for child support despite the
statutory exclusion of such liens from avoidance. The sanction
was imposed by the Honorable James Grube of the San Jose
division, after the judge assigned to the case, the Honorable
Randall Newsome, recused himself. Judge Grube also required
Smyth to complete 40 hours of continuing legal education in the
field of consumer bankruptcy law and legal ethics.

Clearly, Judge Grube’s sanction was insufficient to deter
Smyth’s continued unprofessional conduct. Thus, it is not

21

po 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 21 of
39

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

fab}

excessive to impose a monetary sanction of $10,671 for his
conduct in connection with the Adversary Proceeding. While
Rule 9011(b) is not intended as a justification for “wholesale
fee shifting,” requiring the offending attorney to pay the
attorneys’ fees of the party harmed is permissible under
appropriate circumstances. The Court finds the circumstances
here to be appropriate and that this amount is the least that
would serve the deterrence purpose of the rule. See Zambrano
v. City of Tustin, 885 F.2d 1473, 1480 (9th Cir. 1989).

Memorandum of Decision re Motion for Rule 9011 Sanctions at 23:24 -
25:2.
The bankruptcy court has broad discretion in deciding what

sanction to impose for violation of Rule 9011. In re DeVille, 361

F.3d 539, 553 (9th Cir. 2004). The principal goal of Rule 9011 “is

to deter baseless filings . .. .” See Cooter & Gell v. Hartmarx

Corp., 496 U.S. 384, 393 (1990) (discussing Fed. R. Civ. P. 11).

Rule 9011 was amended in 1997 to conform to the 1993 changes to Fed.
R. Civ. P. 11, and interpretations of Fed. R. Civ. P. 11 are helpful
to interpretation of Rule 9011. DeVille, 361 F.3d at 552. The
Advisory Committee Note to Rule 11 clearly supports the court’s
consideration of Smyth’s earlier conduct in determining what
sanction was appropriate to deter him from further frivolous
filings: it lists consideration of “whether the person has engaged
in similar conduct in other litigation” as relevant to what sanction

is appropriate. Advisory Committee Note to Rule 11.’

7 The Note provides:

Whether the improper conduct was willful, or negligent; whether
it was part of a pattern of activity, or an isolated event;
whether it infected the entire pleading, or only one particular
count or defense; whether the person has engaged in similar
conduct in other litigation; whether it was intended to injure;
(continued...)

22

Se: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 22 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

C

Thus, the bankruptcy court did not err in considering Smyth’s
prior conduct in other cases in determining what sanction was needed
to deter further violations of Rule 9011.°

Cc. Reasonableness of sanction awarded

Finally, Smyth argues that the sanction awarded was too harsh,
because it was based on purely legal errors in an area of law that
is complex.?

The court has wide discretion in determining what sanction to
impose for the filing of a complaint that violates Rule 9011. In re

Giordano, 212 B.R. 617, 622 (9th Cir. BAP 1997), aff'd in part,

rev’d in part on other grounds, 202 F.3d 277 (9th Cir. 1999) (table).

Smyth does not explain why the sanctions imposed are too harsh,
other than to argue that the preclusion and one action rule issues
in this case are complex.

The bankruptcy court concluded, and we agree, that the lack of
legal support for the claims asserted in the adversary complaint
should have been obvious to a competent attorney. The court further

concluded, after reviewing the impact of prior sanctions on Smyth’s

™(,..continued)

what effect it had on the litigation process in time or
expense; whether the responsible person is trained in the law;
what amount, given the financial resources of the responsible
person, is needed to deter similar activity by other litigants:
all of these may in a particular case be proper considerations.

Advisory Committee Notes to Rule 11, Subdiv. (b) and (c).

8 Smyth does not argue that the court failed to consider
other factors, such as his ability to pay.

9 He does not argue that the fees are unreasonable, if
sanctions were warranted in this case.

23

se: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 23 of
39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Ca

conduct, that a compensatory sanction (in conjunction with the
suspension discussed below) was appropriate. Smyth has not
demonstrated that the bankruptcy court abused its discretion in
imposing the sanction that it did.
CONCLUSION

All of the claims Smyth alleged in the adversary complaint were
barred by claim preclusion, a proposition that should have been
obvious to a competent attorney. The bankruptcy court did not abuse
its discretion in awarding monetary sanctions. Therefore, we AFFIRM

in BAP No. NC-04-1452.

BAP NO. NC-04-1453

In this appeal, Smyth seeks review of the bankruptcy court’s
order that suspended him from practice before the bankruptcy courts
of the Northern District of California for six months.

DISCUSSION
Smyth makes numerous arguments, which can be divided into three

categories.’

10 After oral argument, counsel for Smyth filed with the
panel a letter addressing three questions that we had asked at
argument. We did not ask for further briefing of this appeal, and
counsel did not seek permission to file a post-argument brief.
Nonetheless, we have reviewed the letter and the legal arguments it
contains, and conclude that it does not add anything to the
arguments made in the brief or at oral argument.

24

e: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 24 of
39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
295
26

1. Procedural

Smyth argues that the court erred by failing to refer this
matter to the Standing Committee on Professional Conduct, which he
claims is required by the local court rules. Although he is correct

that a court must follow its own rules, see Standing Comm. on

Discipline of the U.S. Dist. Court v. Yagman, 55 F.3d 1430, 1435 n.8

(9th Cir. 1995), he has not demonstrated that the rules on which he
relies apply or, if they do, that they require reference to the
Standing Committee.

Local Bankruptcy Rule 1001-2(a) (32) and (33) provide that Civil
Local Rules 11-6 and 11-7 apply in all bankruptcy cases. The

Northern District of California’s Civil Local Rule 11-6, labeled

“Discipline,” provides, as relevant:

(a) General. In the event that a Judge has cause to believe
that an attorney has engaged in unprofessional conduct, the
Judge may do any or all of the following:

(1) Initiate proceedings for civil or criminal contempt

,

(2) Impose other appropriate sanctions;

(3) Refer the matter to the appropriate disciplinary
authority of the state or jurisdiction in which the
attorney is licensed to practice;

(4) Refer the matter to the Court’s Standing Committee on
Professional Conduct; or

(5) Refer the matter to the Chief Judge for her or him to
consider whether to issue an order to show cause under
Civ. L.R. 11-7.

Here, the court imposed sanctions for violation of Rule 9011,

not for “unprofessional conduct,” which is covered by the local

rules. Smyth does not point to any authority requiring application

25

Cape: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 25 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

of the local rule to Rule 9011 sanctions.

Even assuming that the rule does apply to the imposition of
sanctions under Rule 9011, the rule is discretionary. It provides
that the judge “may” act, not that the judge must act. Further, if
the judge does act, the rule does not mandate that disciplinary
proceedings be conducted by the court’s Standing Committee on
Professional Conduct. The rule gives the judge five options for
dealing with counsel’s unprofessional conduct, only one of which is
referral to the Standing Committee. Assuming that this rule
applies, the bankruptcy court chose to “impose other appropriate
sanctions,” which is specifically authorized by the rule. See
Northern District of California’s Civil Local Rule 11-6(a) (2).

Smyth argues that, because suspension is considered discipline
under Civil Local Rule 11-7(c) (3), the court was required to refer
the matter to the Standing Committee. Civil Local Rule 11-7(c)
describes the procedure the Standing Committee must follow when it
receives a referral from a judge that an attorney admitted to
practice before the court has engaged in unprofessional conduct.
Subsection (3) sets out the procedure for determining what action
the committee will take. Nothing in the rule requires that alleged

violations of Rule 9011 be referred to the Standing Committee.}!

11 Smyth argues that the Ninth Circuit requires that
disciplinary matters be heard by the Standing Committee, citing
Standing Comm. on Discipline of the U.S. Dist. Court v. Yagman, 55
F.3d 1430, 1435 n.8 (9th Cir. 1995). The case says nothing of the
sort. It merely explains that a local rule of the Central District
allows attorney misconduct to be referred to the Standing Committee.
Id. at 1435. The case does not even address the local rule on which

(continued...)

26

Cape: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 26 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Ca

2. Findings
Smyth argues that suspension is a quasi-criminal sanction, and
therefore the court was required, but erroneously failed to make a
finding of bad faith before suspending him. Smyth is wrong.
Sanctions may be imposed under various authority including,
among others, Rule 9011 and the court’s inherent power. See

Chambers v. NASCO, Inc., 501 U.S. 32 (1991) (discussing different

bases for imposing sanctions on attorneys). Where a court imposes a
sanction under its inherent power, it must make a finding of bad

faith. E.g., In re Dyer, 322 F.3d 1178, 1196 (9th Cir. 2003); In re

Ejieldsted, 293 B.R. 12, 26 (9th Cir. BAP 2003). Where, however, it
imposes sanctions under Rule 9011, or its counterpart Fed. R. Civ.
P. 11, no finding of bad faith is required; the rule sets out an
objective standard for an attorney’s conduct. Chambers, 501 U.S. at

47; In re Grantham Bros., 922 F.2d 1438, 1441 (9th Cir. 1991).

There is no doubt that suspension of an attorney from the
practice of law is a serious sanction. It is, however, a sanction
that is available for violations of Rule 9011, which does not
require a finding that the attorney acted in bad faith. See, €.g.,
Weissman v. Quail Lodge, Inc., 179 F.3d 1194, 1197 (9th Cir. 1999)

(noting that temporary suspension of counsel is a permissible

sanction); American Bar Assoc., Standards and Guidelines for

11(...continued)
Smyth relies here, which is a rule of the Northern District.
Further, footnote 8, on which Smyth relies, deals with discovery in
a matter that had been referred to the Standing Committee, not with
whether referral to the committee is required in the first place.

27

e: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 27 of
39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

fall

Practice under Rule 11 of the Federal Rules of Civil Procedure, 121

F.R.D. 101, 124 (1988).
In Fieldsted, we said:

Rule 9011(c) (2) provides that the court may impose a “penalty”
that is “limited to what is sufficient to deter repetition of
such conduct or comparable conduct by others similarly

situated.” Fed. R. Bankr. P. 9011 (c)(2). Civil in nature, the
Rule 9011(c) (2) penalty parallels civil contempt and inherent
sanctions. It also has the same dual aspects of (1) due

process and (2) the imposition of a sanction amount appropriate

to the purpose. We hold, therefore, that under Rule 9011 (c) (2)

a court may not impose a deterrence penalty that is a “serious

penalty” in the nature of criminal contempt; only an amount

necessary to deter the misconduct may be awarded.
293 B.R. at 28 (footnote omitted). The difference between civil and
criminal sanctions is that “[c]ivil penalties must either be
compensatory or designed to coerce compliance.” Dyer, 322 F.3d at
1192. Where, however, the sanction is designed to coerce
compliance, or in the terms of Rule 9011, “to deter repetition of
such conduct,” the sanction is civil.

As we will discuss in more detail below, the bankruptcy court
determined that a temporary suspension from the practice of law
before the bankruptcy courts for the district was required to deter
repetition of Smyth’s conduct. Thus, the sanction was designed to
obtain compliance, not to punish, and was authorized under Rule
9011.

Smyth also argues that the two legal arguments he made in
support of debtor’s objection to the city’s proof of claim were not
frivolous, and therefore not sanctionable.

The court first found that there was no support for the

contention that, because debtor’s confirmed chapter 13 plan did not

28

Se: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 28 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

specifically refer to the city’s claim as secured, it could not be
paid as a secured claim. Specifically, the objection says:

(1) The City of Oakland’s claim is secured. [?*] The
debtor’s confirmed Chapter 13 Plan does not provide for the
payment of any secured claims. Accordingly, this claim cannot
be paid as secured. In re Avery, 272 Bankr. 718, 724 (Ftnt)
(Bk. E.D. CA 2002).

Debtor’s Objection to Claim No. 1 Filed by the City of Oakland.
Debtor’s confirmed chapter 13 plan provided that debtor would “pay
off all debts to the City of Oakland by 4/1/04, through sale or
refinance of his real property.” Order Confirming Plan.
The bankruptcy court did not abuse its discretion in rejecting
Smyth’s legal argument and concluding that it was frivolous:
However, there is no requirement that a plan specifically refer
to a claim as secured for the claim to be paid through the plan
as a secured claim. Only two things are required. The
creditor must file a timely proof of claim asserting secured
status, and the plan must provide for its payment. See 11
U.S.C. § 1327 (c). Here, both requirements were satisfied.

Memorandum of Decision re Order to Show Cause re Rule 9011 Sanctions

at 6:14-19. That reasoning is correct.)

12 This statement is indicative of the shifting positions
Smyth took throughout this dispute with the city. He argued in
connection with the conversion of the bankruptcy case to chapter 7
that the city’s claim was not secured, having been extinguished by
confirmation of the plan.

13 Smyth complains that the court’s citation of § 1327(c)
must be a mis-cite, as it does not support the proposition for which
it is cited. From this, he contends that the court’s finding that
his argument is frivolous is erroneous.

The citation appears to be a typographical error. Section
1327(c) deals with the effect of confirmation on property that
revests in the debtor. Presumably, the court intended to cite

(continued...)

29

Case: 03-44829 Doc# 172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 29 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

fal!

The authority Smyth cites does not undermine the bankruptcy
court’s reasoning. In Avery, which he cited in the objection to the
claim as well as on appeal, the court noted that a claim must be
filed before it may be paid through a confirmed chapter 13 plan, and
that, if a “plan fails to provide for a secured or priority claim,
the claim will not be paid even if the creditor files a proof of
claim.” 272 B.R. at 724 n.5. Here, the plan did provide for
payment of the city’s claim, albeit without referring to the claim
as secured. The fact that the plan does not refer to the claim as

secured does not prevent payment as provided in the plan.

On appeal, Smyth also cites In re Fiore, 290 B.R. 138 (Bankr.
E.D. Mo. 2003). In that case, a creditor properly filed a proof of
claim asserting priority status. The debtor’s confirmed chapter 13
plan provided for payment of specific priority claims, which did not
include this creditor. The court held that the claim could not be
paid as a priority claim, because it was not listed among the
priority claims to be paid. Nor would it be paid as a general
unsecured claim, because it was in fact a priority claim. The court
concluded, therefore, that the claim was not provided for in the
plan and would survive the discharge.

That is not the situation here. Debtor’s plan specifically
provided for payment of the city’s claim, without designating it as

secured or unsecured. Therefore, when the city filed its secured

13(...continued)
§ 1326(c), which provides that, “[e]xcept as otherwise provided in
the plan or in the order confirming the plan, the trustee shall make
payments to creditors under the plan.”

30

se: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 30 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

y

claim, that claim could be paid in accordance with the plan. In
other words, it was to be paid through the sale or refinance of
debtor’s property. There is no legal authority to support Smyth's
contention that the claim could not be paid through the confirmed
plan.

The bankruptcy court also did not err in concluding that
Smyth’s second objection to the city’s claim was frivolous. Smyth
argued that the city could not be paid as unsecured, because it had
not filed an unsecured claim. We agree with and adopt the
bankruptcy court’s reasoning:

Smyth’s second contention is even more clearly frivolous.

In the Claim Objection, Smyth cited a case purportedly in

support of his contention: In re Avery, 272 B.R. 718 (Bankr.

E.D. Cal. 2002). However, the only relevant statement made in

that case is that a creditor may not be paid through a chapter
13 plan unless it files a proof of claim. Avery, 272 B.R. at

723, n.5. In papers filed in connection with the order to show
cause, Smyth admitted that he had no authority for his second
contention.

While an attorney may not be sanctioned for making a
creative argument, the argument must be plausible. Smyth’s
contention is ridiculous. A creditor must be able to rely ona
proof a claim asserting secured status to preserve its
underlying monetary claim in the event its security interest is
avoided. Otherwise, it would have to file multiple claims or
plead in the alternative in every case on the chance that a
debtor might challenge its lien.

Memorandum of Decision at 8:6-20. A claim asserting secured status
may be objected to on the basis that it is in fact unsecured, and
the court may sustain the objection and allow the claim as an
unsecured claim.

Smyth’s entire argument for why this contention was not

frivolous is:

31

se: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 31 of
39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

Cal

If for any reason a secured creditor wants to be paid as
unsecured, he must file an (amended) unsecured claim. See In
re Padgett, 119 B.R. 793, 795 and In re Delmonte, 237 B.R.

[132*4].

Appellant’s Brief at 22 (emphasis in original). Those cases do not

support his argument.

In In re Padget, 119 B.R. 793 (Bankr. D. Colo. 1990), the

creditor had filed a secured claim in the debtor’s chapter 7 case.
The trustee issued his final report, showing that he was treating
the claim as secured, and proposed paying dividends to unsecured
creditors. After the final report was approved and the dividends
issued, the creditor sought reconsideration, arguing that it should
be treated as an unsecured creditor and therefore share in the
distribution, because its collateral had turned out to be worthless.

Not surprisingly, the trustee opposed such treatment, and the
court agreed. Because a proof of claim must be filed for a creditor
to receive a distribution in a chapter 7 case, Rule 3002, and filed
Claims are deemed allowed unless objected to, §& 502(a), the
creditor’s claim was deemed allowed as secured. It could not change
the status of its claim after allowance, unless it filed a timely
amendment or supplemental claim. The creditor had not done that,
despite having had more than one year during which it could have
done so. Therefore, the court held that the trustee was not
required to pay the creditor as unsecured.

In this case, Smyth filed an objection to the city’s claim,

arguing that it was not secured. Thus, the claim was not deemed

14 Smyth's citation to this case was incorrect in the brief.

32

e: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 32 of
39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

26

allowed. Had he prevailed on the objection, the claim could have
been allowed as an unsecured claim, or the city would have had an
opportunity to file an amended claim asserting unsecured status.

The objection that the claim was not properly categorized as secured
did not preclude the court from allowing it as unsecured (if the
objection had been well-taken) or from allowing the city to file an
amended claim. Padget is not on point.

Even less on point is In re Delmonte, 237 B.R. 132 (Bankr. E.D.

Tex. 1999). In that case, the creditor filed a proof of claim for a
secured debt. The debtor’s confirmed chapter 13 plan provided that
the creditor would have relief from the automatic stay to pursue its
collateral, and that any unsecured portion of the creditor’s debt
would be treated the same as other unsecured claims. After the
creditor repossessed and sold its collateral, it filed an amended
proof of claim, reducing the amount to reflect the deficiency and
changing the claim from secured to unsecured.

The court held that the amended proof of claim qualified as an
amended claim that was timely filed, and that the plan provided for
payment of the claim as unsecured.

Again, this case is not pertinent to the factual situation
presented here. The fact that a creditor may need to file an
amended proof of claim to assert the deficiency after sale of the
collateral does not mean that a debtor’s objection to a proof of
claim as secured automatically eliminates any possible unsecured
claim the creditor may have.

The bankruptcy court did not abuse its discretion in concluding

33

Cape: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 33 of

39

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

26

that Smyth’s arguments on the objection to the city’s claim violated
Rule 9011.

Smyth also argues that his “back-up” argument, that the
confirmed plan extinguished the city’s lien, was not frivolous and
that, even if it were, sanctions could not be awarded because his
other arguments were not frivolous.

We have already explained that the two original legal arguments
Smyth made in support of his objection to the claim were frivolous,
and therefore the court was justified in imposing sanctions.
Accordingly, we need not consider whether the “back-up” argument was
frivolous. We note, however, that we rejected Smyth’s “back-up”
argument in an earlier appeal, BAP No. NC-04~-1257-PMas, decided on
December 13, 2004.

3. Sanction

Finally, Smyth makes two arguments about the sanction imposed.
First, he asserts that the court committed reversible error in
basing his sanction even in part on charges of prior misconduct,

citing Christian v. Mattel, Inc., 286 F.3d 1118 (9th Cir. 2002). As

with the monetary sanction awarded in the adversary proceeding and
reviewed in related BAP No. NC-04-1452, the bankruptcy court
considered Smyth’s prior conduct in other cases in determining the
least severe sanction that it could impose that would accomplish the
purpose of deterrence. Memorandum of Decision re Order to Show
Cause re Rule 9011 Sanctions at 9:7-12. As we explained in the
discussion of the related appeal, the bankruptcy court did not abuse

its discretion in considering the prior conduct in determining the

34

Cape: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 34 of

39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

“t

appropriate sanction, because such consideration was necessary to
determine what sanction would accomplish the purpose of deterrence.

Second, and in a similar vein, Smyth argues that the six-month
suspension is too harsh a penalty, even if the objection lacked any
legal merit, because his errors were legal rather than factual, and
had at least a “scintilla” of support. The arguments Smyth made
with regard to the objection to claim had no more support than did
his arguments that were sanctioned in the adversary proceeding. As
we explained in the related appeal from the adversary proceeding
sanctions order, Rule 9011 provides for sanctions for ungrounded
legal contentions, and sanctions may be imposed for frivolous
arguments even if some other arguments are not frivolous.

Neither of the arguments Smyth made in connection with the
objection to the city’s claim was supported by the law. Therefore,
the court was justified in imposing sanctions.

With regard to the severity of the sanction, there is no
question that a six-month suspension from practice before the
district’s bankruptcy courts is a serious sanction. However, the
question a court must answer in deciding what sanction to impose is
what is the least severe sanction that will likely accomplish the
purpose of deterrence. See Rule 9011(c) (2) (sanction to be “limited
to what is sufficient to deter repetition of such conduct .. .”).
Smyth does not argue that a lesser sanction would have a deterrent
effect. His arguments in this appeal in fact reflect that he still
does not accept that his arguments were completely without support.

Smyth has not demonstrated that a lesser sanction would have

35

se: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 35 of
39

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26

C

accomplished the purpose of deterrence. In view of the court’s
careful consideration of the inefficacy of prior sanctions in
changing Smyth’s performance, we cannot find an abuse of discretion
in choosing the sanction that it did.
CONCLUSION

The bankruptcy court did not abuse its discretion in finding
that Smyth had violated Rule 9011 in filing the objection to the
city’s claim, or in imposing a sanction of a six-month suspension
from practice before the bankruptcy courts of the district.

Therefore, we AFFIRM in BAP No. NC-04-1453.

36

ASe: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 36 of

39

U.S. Bankruptcy Appellate Panel
of the Ninth Circuit
125 South Grand Avenue, Pasadena, California 91105
Appeals from Central California (626) 229-7220
Appeals from all other Districts (626) 229-7225

NOTICE OF ENTRY OF JUDGMENT

BAP No. NC-04-1452-PBS

RE: RALBERT RALLINGTON BROOKS-HAMILTON

A separate Judgment was entered in this case on 7/8/05

BILL OF COSTS:

Bankruptcy Rule 8014 provides that costs on appeal shall be taxed by the
Clerk of the Bankruptcy Court. Cost bills should be filed with the Clerk
of the Bankruptcy Court from which the appeal was taken.

9th Cir. BAP Rule 8014-1

ISSUANCE OF THE MANDATE:

The mandate, a certified copy of the judgment sent to the Clerk of
the Bankruptcy Court from which the appeal was taken, will be issued
7 days after the expiration of the time for filing a petition for
rehearing unless such a petition is filed or the time is shortened or
enlarged by order. See Federal Rule of Appellate Procedure 41.

APPEAL TO COURT OF APPEALS:

An appeal to the Ninth Circuit Court of Appeals is initiated by

filing a notice of appeal with the Clerk of this Panel. The Notice

of Appeal should be accompanied by payment of the $255 filing fee
(effective November 1, 2003) and a copy of the order or decision on
appeal. Checks may be made payable to the U.S. Court of Appeals for

the Ninth Circuit. See Federal Rules of Appellate Procedure 6 and the
corresponding Rules of the United States Court of Appeals for the Ninth
Circuit for specific time requirements.

Case: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 37 of
39

U.S. Bankruptcy Appellate Panel
of the Ninth Circuit
125 South Grand Avenue, Pasadena, California 91105
Appeals from Central California (626) 229-7220
Appeals from all other Districts (626) 229-7225

NOTICE OF ENTRY OF JUDGMENT

BAP No. NC-04-1453-PBS

RE: RALBERT RALLINGTON BROOKS-HAMILTON

A separate Judgment was entered in this case on 7/8/05

BILL OF COSTS:

Bankruptcy Rule 8014 provides that costs on appeal shall be taxed by the
Clerk of the Bankruptcy Court. Cost bills should be filed with the Clerk
of the Bankruptcy Court from which the appeal was taken.

9th Cir. BAP Rule 8014-1

ISSUANCE OF THE MANDATE:

The mandate, a certified copy of the judgment sent to the Clerk of
the Bankruptcy Court from which the appeal was taken, will be issued
7 days after the expiration of the time for filing a petition for
rehearing unless such a petition is filed or the time is shortened or
enlarged by order. See Federal Rule of Appellate Procedure 41.

APPEAL TO COURT OF APPEALS:

An appeal to the Ninth Circuit Court of Appeals is initiated by

filing a notice of appeal with the Clerk of this Panel. The Notice

of Appeal should be accompanied by payment of the $255 filing fee
(effective November 1, 2003) and a copy of the order or decision on
appeal. Checks may be made payable to the U.S. Court of Appeals for

the Ninth Circuit. See Federal Rules of Appellate Procedure 6 and the
corresponding Rules of the United States Court of Appeals for the Ninth
Circuit for specific time requirements.

Case: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 38 of
39

CERTIFICATE OF MAILING

The undersigned, deputy clerk of the U.S. Bankruptcy
Appellate Panel of the Ninth Circuit, hereby certifies that a copy
of the document on which this certificate appears was mailed this date
to all parties of record to this appeal.

By: Edwina Clay

Deputy Clerk: July 8, 2005

Case: 03-44829 Doc#172 Filed: 07/08/05 Entered: 07/19/05 14:06:34 Page 39 of
39