Media Group, Inc.

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1The moving papers also include a request for the costs
incurred in prosecuting this motion. However, no such costs
were quantified in the reply. To permit these additional costs
to be quantified at a later date would simply perpetuate this
litigation at still more cost to the estate and would not be in
the estate’s best interests. However, if Shao’s future conduct
requires the Trustee to file a new request for sanctions, the
Court will consider the costs of prosecuting this motion at that
time.
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re No. 01-45924 TD
Chapter 7
MEDIA GROUP, INC.,
Debtor.
_____________________________/
MEMORANDUM OF DECISION RE MOTION FOR SANCTIONS
Lois I. Brady (the “Trustee”), the duly appointed chapter 7
trustee of the above-captioned estate, seeks civil contempt
sanctions against Linda Shao and the Law Office of Linda Shao
(“Shao”) in the amount of $29,062.50 pursuant to 11 U.S.C. §
105(a).1 For the reasons stated below, her motion will be granted.
Signed: October 12, 2005
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
October 12, 2005
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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2
BACKGROUND
Prior to the commencement of this bankruptcy case, Shao, an
attorney, represented the above-captioned debtor (the “Debtor”) in
certain state court matters. According to Shao, the Debtor owed
her attorneys’ fees for her legal services. One of the litigation
matters settled, and Shao received a settlement check made out
jointly to her and the Debtor (the “Check”). According to Shao,
the Debtor had previously agreed that any settlement payments
would be applied to her outstanding bill. Shao sent the Check to
the Debtor without endorsing it. She asked the principals of the
Debtor (the “Officers”) to endorse it and return it to her.
Instead, the Officers deposited it in the Debtor’s bank account.
Despite the lack of Shao’s endorsement, the bank (the “Bank”)
credited the Debtor’s account with the amount of the Check.
Shortly thereafter, on November 5, 2001, the Debtor filed a
chapter 11 bankruptcy petition. The automatic stay prevented Shao
from suing the Debtor in state court for the improper deposit of
the Check. However, Shao did file suit against the Officers and
the Bank (the “State Court Action”). As a result of being sued,
without obtaining relief from the automatic stay, the Bank debited
the Debtor’s bank account for the amount of the Check and
interpleaded the funds in the State Court Action.
The chapter 11 case was not successful and, after
approximately a year, the case was converted to chapter 7. The
Trustee was appointed and, with Court approval, hired Reidun
Stromsheim (“Stromsheim”) as her bankruptcy counsel. Shortly
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2The Trustee’s adversary proceeding against Shao also
sought an order directing turnover to her of the funds
interpleaded with the state court. This eventually occurred,
and the adversary proceeding was dismissed.
3
thereafter, Stromsheim filed a complaint against Shao, seeking,
among other things, damages for violation of the automatic stay.
The Court concluded that this claim violated Rule 9011 of the
Federal Rules of Bankruptcy Procedure and imposed sanctions
against Stromsheim in favor of Shao. This decision was upheld on
appeal to the Bankruptcy Appellate Panel.2
Shao settled her claims against the Bank, but the State Court
Action is apparently still pending against the Officers. On May
4, 2004, without seeking leave of the Court, Shao issued a
subpoena (the “Subpoena”) pursuant to the State Court Action,
directing Stromsheim (“Stromsheim”) to appear at a deposition on
May 19, 2004. The Subpoena directed her to produce ten
categories of documents as follows:
1. Any and all documents that may prove correspondences
between any member of your law firm (including yourself)
and Iling Chiang [one of the Debtor’s principals],
including but not limited to: phone logs, phone bills,
phone notes, letters (however sent) and e-mails.
2. All records pertaining to any investigation
involving Linda Shao made by or on behalf of your firm
or the trustee before filing the complaint against Linda
Shao in Adversary Proceeding # 02 7254 AT, of Bankruptcy
Court case # 024485, including but not limited to:
reports, phone logs, phone bills, phone notes, letters
(however sent) and e-mails.
3. Any and all invoices that were ever submitted to the
estate regarding your contacts with Iling Chiang.
4. Any and all documents that may prove correspondences
between any member of your law firm (including yourself)
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4
and Jeff Chiou [another of the Debtor’s principals],
including but not limited to: phone logs, phone bills,
phone notes, letters (however sent) and e-mails.
5. Any and all documents that may prove correspondences
between any member of your law firm (including yourself)
and Scott Goodsale [sic] and any attorneys at Scott
Goodsale’s law firm, including but not limited to: phone
logs, phone bills, phone notes, letters (however sent)
and e-mails.
6. All records regarding any investigation of payments
made by Media Group, Inc. Or the Media Group, Inc.
Estate, to Scott Goodsale.
7. Any and all documents that may prove correspondences
between any member of your law firm (including yourself)
and any employee, agent or former employee of Media
Group, Inc., including but not limited to: phone logs,
phone bills, phone notes, letters (however sent) and e-
mails.
8. Any and all correspondence between Lois Brady and
Iling Chiang or Iling Chiang’s attorney, including but
not limited to: phone logs, phone bills, phone notes,
letters (however sent) and e-mails.
9. Any and all correspondence between Lois Brady and
Jeff Chiou or his attorney, including but not limited
to: phone logs, phone bills, phone notes, letters
(however sent) and e-mails.
10. Any and all documents that may prove
correspondences between any member of your law firm
(including yourself) and Far East National Bank or any
of its attorneys or agents, including but not limited
to: phone logs, phone bills, phone notes, letter
(however sent) and e-mails.
The Court assumes that Iling Chiang and Jeff Chiou are the
Officers. Scott Goodsale refers to Scott Goodsell (“Goodsell”),
the attorney who represented the Debtor during the chapter 11
case.
Shao complains about the fact that Goodsell received a $40,000
pre–petition retainer from the Debtor and that the Trustee made no
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3Goodsell filed an application seeking allowance of his
attorneys’ fees in the amount of $174,476.50 and costs on June
29, 2004. The application has yet not been noticed for hearing
since there may be insufficient funds in the estate to pay
chapter 11 expense claims.
5
attempt to recover this amount from him despite Goodsell’s failure
to file a fee application.3 Shao also contends that the Trustee
and Stromsheim are percipient witnesses in connection with the
State Court Action despite the fact that they were not appointed
until well over a year after the Check was improperly deposited.
On May 7, 2004, Elizabeth Murphy (“Murphy”), Stromsheim’s
associate, wrote Shao, advising her that the Subpoena was
inappropriate and asking her to withdraw it. Murphy asserted that
a chapter 7 trustee and her counsel have quasi-judicial immunity
in the performance of their functions and that the bankruptcy
court that appointed them has the right to control the enforcement
of any process against them. Murphy also noted that, from the
list of documents requested in the Subpoena, it appeared that Shao
was attempting to use state court process to investigate the
Trustee’s administration of the estate. She asserted that this
was also improper.
Shao apparently refused to withdraw the Subpoena because, on
May 10, 2004, Murphy wrote to Shao a second time. This letter
gave Shao notice that the Trustee would be seeking an order from
the bankruptcy court restraining the deposition. A complaint and
application was filed later that day. The hearing on the
application took place three days later, on May 13, 2004. The
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4In the meantime, the Court ordered the Trustee to permit
Shao to review any documents pertaining to the administration of
the estate that were not privileged or work product. However,
the Court ordered Shao to reimburse the estate for any cost
incurred a result of the document review.
6
Court granted the restraining order and scheduled a hearing on the
Trustee’s application for a preliminary injunction for June 2,
2004.
On May 24, 2004, Shao filed a motion to disqualify the Trustee
in the adversary proceeding. On May 25, 2004, she filed a motion
for leave to take the Trustee’s deposition in the adversary
proceeding. At the June 2, 2004 hearing, the Court denied the
motion to disqualify the Trustee without prejudice to its being
refiled in the main case on notice to all creditors. The Court
continued the hearing on the motion for leave to take the
Trustee’s deposition to June 30, 2004 and granted a preliminary
injunction until that date.
On June 16, 2004, Shao filed a motion to dismiss the adversary
proceeding, scheduling it for hearing on July 29, 2004. On June
17, 2004, the Trustee filed a motion for summary judgment,
scheduling it for hearing on June 30, 2004. On June 30, 2004, the
Court continued the hearing on the Trustee’s motion for summary
judgment to July 29, 2004 and extended the preliminary injunction
through that date.4
The hearing on the various motions and applications was
continued several times thereafter at Shao’s request, with the
preliminary injunction remaining in effect. The hearing finally
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5Inexplicably, in her opposition, Shao complains about the
Trustee’s eight month delay in filing the motion for sanctions.
6Shao filed a request to take judicial notice on October 3,
2005. She filed an objection to the Trustee’s reply on October
4, 2005. These documents were filed out of time without leave
of Court. Similarly, at the hearing on the motion for
7
went forward on November 18, 2004. At that time, Shao argued that
the proceeding should be dismissed because she acknowledged that
she could not depose Stromsheim without leave of court. She
contended that the Court had denied her motion for leave. The
Trustee argued that her claim for damages for having to defend
against the Subpoena should be resolved before the adversary
proceeding was dismissed. She initially referred to this claim as
being based on 11 U.S.C. § 362. During the course of the hearing,
however, it was clarified that the claim was based on 11 U.S.C. §
105. The Court dismissed the adversary proceeding without
prejudice to the Trustee’s bringing her damage claim by motion in
the main case.
On December 14, 2004, Shao filed a notice in the main case
that she would be unavailable to appear in court or to respond to
any motions from December 13, 2004 to May 19, 2005.5 On July 21,
2005, the Trustee filed a motion for damages against Shao in the
main case. The motion was originally noticed for hearing on
August 18, 2005. At Shao’s request, the hearing was continued
October 6, 2005 to give Shao more time to file an opposition. Her
opposition was filed on September 22, 2005. The Trustee filed a
reply on September 29, 2005.6 Both parties appeared at the
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sanctions, Shao cited several cases not included in her
opposition brief. Neither the late filed documents nor the late
cited cases will be considered.
7The name of the doctrine comes from the United States
Supreme Court case establishing it: i.e., Barton v. Barbour, 104
U.S. 126 (1881)(improper to sue receiver without first obtaining
permission of appointing court).
8
hearing on October 6, 2005. At the conclusion of the hearing, the
Court took the motion under submission.
DISCUSSION
A. SUMMARY OF ARGUMENT
As noted above, the Trustee seeks civil contempt damages
against Shao for the costs incurred by the bankruptcy estate
defending against the Subpoena. These costs consist of
Stromsheim’s attorneys’ fees in the amount of $29,062.50. The
Trustee contends that, with limited exceptions, not applicable
here, a party may not sue or attempt to enforce process against a
bankruptcy trustee or her counsel in a forum other than the
bankruptcy court without first obtaining leave of the bankruptcy
court. She refers to this principle as the Barton Doctrine.7 In
support of this contention, she cites In re DeLorean Motor Co.,
991 F.2d 1236, 1240-41 (6th Cir. 1993) and In re Dyer, 322 F.3d
1178, 1191 (9th Cir. 2003).
The Trustee also contends that it was improper for Shao to
attempt to use the Subpoena to investigate the Trustee’s
administration of the bankruptcy estate. According to the
Trustee, the documents listed in the Subpoena clearly indicate
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8The Trustee’s motion is supported by the declarations of
Stromsheim and Murphy. Attached to the Murphy declaration are a
series of letters written by the Stromsheim Firm to Shao,
attempting to persuade her to withdraw the Subpoena. Also
attached is a detailed itemization of the work performed and
fees requested.
9Shao also complains that she has never been served with a
summons in the adversary proceeding. Since Shao appeared at the
hearing on the application and since the adversary proceeding
has since been dismissed, this issue is moot.
9
that this was Shao’s intent. The Trustee asserts that Shao’s
actions constituted harassment and that the bankruptcy estate and
its creditors should not have to bear the costs of the harassment.8
In response, Shao contends that the Trustee’s motion was filed
in retaliation for the Rule 9011 sanctions that she obtained
against Stromsheim. She asserts that the Trustee has neglected
her duty to preserve assets of the estate and has harassed and
damaged Shao. She argues that she served the Subpoena on
Stromsheim as a percipient witness, not in order to investigate
the Trustee’s administration of the estate. She complains that
she was not given adequate notice that the Trustee intended to
seek a temporary restraining order. She contends that there was
no urgency in the Trustee’s filing the application.9
Shao asserts that it is questionable whether leave of the
appointing bankruptcy court is required before suing or deposing
a bankruptcy trustee’s attorney. However, she claims that she
agreed to file a motion for leave to depose Stromsheim before the
adversary proceeding was filed. Therefore, it was unnecessary for
the Trustee to file the adversary proceeding, and no fees for
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10The Trustee notes that she has only requested damages for
costs incurred defending against the Subpoena and prosecuting
the complaint for injunctive relief. She has eliminated any
charges for defending against Shao’s motion for leave to take
Stromsheim’s deposition.
10
filing it are justified. At a minimum, she asserts, no fees are
justified to the extent they were incurred after she filed her
motion for leave to depose Stromsheim. She compares the Trustee’s
insistence on proceeding with the adversary proceeding seeking an
injunction as similar to her insistence on proceeding with the
adversary proceeding seeking damages for stay violation, which
ultimately led to Stromsheim being sanctioned.
Finally, Shao contends that no sanctions can be imposed on her
without clear and convincing evidence that she acted with malice.
She asserts that no such evidence can be presented, particularly
given the lack of any clear law as to whether the Barton Doctrine
extends to a bankruptcy trustee’s attorney.
In her reply, the Trustee disagrees that the fees and costs
incurred after Shao filed her motion for leave to depose
Stromsheim were unnecessary.10 The Trustee notes that Shao never
withdrew the Subpoena. She consistently maintained that she was
entitled to take Stromsheim’s deposition in the State Court Action
without leave of the bankruptcy court. Moreover, the deposition
was set for May 19, 2004. The Trustee did not act precipitously
in seeking a temporary restraining order on May 10, 2004 given
Shao’s refusal to withdraw the Subpoena.
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The Trustee also contends that Shao is mistaken that the Court
denied her motion for leave to depose Stromsheim on June 30, 2004.
Rather, on that date, the hearing was continued due tp Shao’s
complaint that she had not been timely served with the motion.
The Court did not rule on the motion until November 18, 2004.
Even then, the denial was without prejudice to its being refiled
in the main case. In fact, there has never been a final ruling on
the motion since Shao never refiled the motion in the main case.
The permanent injunction sought by the Trustee in the adversary
proceeding did not become moot until November 18, 2004 at which
time the Trustee consented to the dismissal of the adversary
proceeding. Thus, Shao is mistaken in asserting that the Trustee
persisted in prosecuting a moot action.
Finally, the Trustee reiterates that she is clearly entitled
to damages against Shao pursuant to 11 U.S.C. § 105(a). She
contends that the facts set forth in In re DeLorean Motor Co., 991
F.2d 1236, 1241-42 (6th Cir. 1993), in which sanctions were granted
on the basis of this statute, are strikingly similar to the facts
in the instant case. In DeLorean, she notes, a chapter 7 trustee
sought damages for having to file a complaint seeking injunctive
relief for a violation of the Barton Doctrine by attempting to sue
both a trustee and the trustee’s counsel. The Sixth Circuit
affirmed the bankruptcy court’s order granting the trustee’s
request for compensatory sanctions. Id.
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punitive damage award. Id. at 1192-94.
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B. DECISION
The Court has authority pursuant to 11 U.S.C. § 105(a) to
impose compensatory sanctions against a party for willful
misconduct causing damages to the bankruptcy estate. See In re
Dyer, 322 F.3d 1178, 1189 (9th Cir. 2003). In Dyer, a creditor
violated the automatic stay by recording a deed of trust
postpetition. The bankruptcy court imposed sanctions. The
district court reversed the order. The Court of Appeals reversed
the district court, upholding the compensatory portion of the
bankruptcy court’s sanction award.11
The Dyer court reaffirmed the principle established in In re
Rainbow Magazine, Inc., 77 F.3d 278, 284 (9th Cir. 1996), that a
bankruptcy court has both the power to impose civil contempt
sanctions and the inherent power to sanction bad faith litigation
under 11 U.S.C. § 105(a). It distinguished between this inherent
authority and civil contempt authority as follows:
Civil contempt authority allows a court to
remedy a violation of a specific order
(including “automatic” orders, such as the
automatic stay or discharge injunction). The
inherent sanction authority allows a
bankruptcy court to deter and provide
compensation for a broad range of improper
litigation tactics. Fink v. Gomez, 239 F.3d
989, 992-93.
The inherent sanction authority differs from
the civil contempt authority in an additional
respect as well. Before imposing sanctions
under its inherent sanctioning authority, a
court must make an explicit finding of bad
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faith or willful misconduct. Id. In this
context, “willful misconduct” carries a
different meaning than the meaning employed in
the context of determining whether an
individual is entitled to damages under §
362(h) or a contempt judgment under § 105(a)
for an automatic stay violation. With regard
to the inherent sanction authority, bad faith
or willful misconduct consists of something
more egregious than mere negligence or
recklessness. Id. at 993-94. Although
“specific intent...” may not be required in
the contempt context, Pace, 67 F.3d at 191,
such specific intent or other conduct in “bad
faith or conduct tantamount to bad faith,”
Fink, 239 F.3d at 994, is necessary to impose
sanctions under the bankruptcy court’s
inherent power.
Id. at 1196.
The Court finds that Shao engaged in improper litigation
tactics in issuing and refusing to withdraw the Subpoena.
Moreover, based on the facts and circumstances presented here, the
Court finds that Shao acted in bad faith in engaging in these
tactics. For that reason, the Court concludes that the Trustee’s
motion for compensatory sanctions should be granted.
The Court bases its finding that issuing the Subpoena was an
improper litigation tactic on two independent grounds. First, as
the Trustee advised Shao, the law is clear that it is improper to
sue a bankruptcy trustee or her counsel without first obtaining
leave of the appointing bankruptcy court. See In re Crown
Vantage, Inc., 421 F.3d 963, 970 (9th Cir. 2005)(applying doctrine
to liquidating trustee appointed under chapter 11 plan). The
Crown Vantage court stated as follows:
We join our sister circuits in holding that a
party must first obtain leave of the
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bankruptcy court before it initiates an action
in another forum against a bankruptcy trustee
or other officer appointed by the bankruptcy
court for acts done in the officer’s official
capacity. See Muratore v. Darr, 375 F.3d 140,
147 (1st Cir. 2004); Carter v. Rodgers, 220
F.3d 1249, 1252 (11th Cir. 276 (2d Cir. 1996);
Allard v. Weitzman (In re DeLorean Motor Co.),
991 F.2d 1236, 1240 (6th Cir. 1993). In our
circuit, the doctrine was recognized by our
Bankruptcy Appellate Panel in Kashani v.
Fulton (In re Kashani), 190 B.R. 875, 883-85
(9th Cir. BAP 1995).
Id. at 970 [emphasis added]. See also In re General Carrier
Corp., 258 B.R. 181, 187 (Bankr. 9th Cir. 2001).
A chapter 7 trustee must obtain court approval to employ
counsel. Thus, the attorney for the trustee is an officer of the
court and is also protected by the Barton Doctrine. See In re
Balboa Improvements, Ltd., 99 B.R. 966, 970 (Bankr. 9th Cir. 1989),
cited in DeLorean Motor, 991 F.2d at 1241. This is not a new
rule. As early as 1989, the Balboa court stated: “It is well
settled that [a debtor’s attorney] cannot be sued in state court
without leave of the bankruptcy court for acts done in his
official capacity and within his authority as an officer of the
court.”), citing In re Campbell, 13 B.R. 974, 976 (Bankr. D. Idaho
1981). While there are no reported cases dealing with subpoenas
rather than suits, the principle is the same. The bankruptcy
court has the right to control an attempt to exercise legal
process against its officers.
Second, even without regard to this rule of bankruptcy law,
the issuance of the Subpoena was clearly improper. As noted
above, the events upon which the State Court Action is based
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happened over one year before the Trustee was appointed and
Stromsheim was employed. There was no rational ground for
deposing Stromsheim in connection with that action. Moreover, the
documents requested by the Subpoena make it clear that Shao was
attempting to use the Subpoena to investigate the Trustee’s
administration of the bankruptcy estate. This was an abusive use
of the state court process.
Shao’s bad faith in engaging in these improper litigation
tactics was demonstrated in several other ways as well. First,
she attempted to defend against her conduct by contending that it
was uncertain whether the Barton Doctrine applied to a trustee’s
counsel. However, if Shao was uncertain, she acted in bad faith by
not first asking for guidance from the bankruptcy court. Second,
Shao engaged in delaying tactics in connection with the Trustee’s
motion. She repeatedly asked for (and obtained) continuances of
the hearings, including the October 6, 2005 hearing. She filed a
notice of unavailability for an extended period of time. Finally,
as noted above, she filed further opposition to the motion after
the briefing schedule was closed and cited new cases at oral
argument, offering no justification for doing so.
Finally, Shao contends that, even if sanctions are granted,
they should not be granted for any services performed after she
filed her motion for leave to depose Stromsheim on May 25, 2004.
The Court disagrees. As the Trustee points out, Shao refused to
withdraw the Subpoena and continued to argue throughout the
proceeding that she was entitled to depose Stromsheim as a
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percipient witness to the State Court Action. Based on the
foregoing, the Court will grant an order for sanctions against
Shao in the full amount requested. Even so, as noted above, this
will not fully compensate the estate for the expense caused by
Shao’s improper conduct.
CONCLUSION
The Court will grant the Trustee’s motion for an award of
compensatory sanctions against Shao in the amount of $29,062.50
pursuant to its inherent authority under 11 U.S.C. § 105(a). For
the reasons stated above, the Court finds and concludes that Shao
engaged in improper litigation conduct in bad faith, thereby
damaging the bankruptcy estate in an amount in excess of the
award. Counsel for the Trustee is directed to submit a proposed
form of order in accordance with this decision.
END OF DOCUMENT
Case: 01-45924 Doc# 393 Filed: 10/12/05 Entered: 10/12/05 14:48:42 Page 16 of
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COURT SERVICE LIST
Reidun Stromsheim
Stromsheim & Associates
353 Sacramento St., Ste. 860
San Francisco, CA 94111
Linda Shao
Law Offices of Linda Shao
20380 Town Center Lane, Ste. 218
Cupertino, CA 95014
Case: 01-45924 Doc# 393 Filed: 10/12/05 Entered: 10/12/05 14:48:42 Page 17 of
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