UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
September 26, 2011
IN RE: KEITH GRADY SPEIR AND RHONDA LYNN SPEIR, DEBTORS. KEITH GRADY SPEIR; RHONDA LYNN SPEIR, APPELLANTS,
LAWRENCE COLEMAN NOBLE, APPELLEE.
Appeal from the United States Bankruptcy Court for the Central District of California Honorable Robin L. Riblet, Bankruptcy Judge, Presiding Bk. No. 09-14394-RR
SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
Argued and Submitted on May 13, 2011, at Pasadena, California
Filed - September 26, 2011
Before: KIRSCHER, SARGIS*fn2 and PAPPAS, Bankruptcy Judges.
Appellants, chapter 7*fn3 debtors Keith and Rhonda Speir ("Speirs"), appeal an order from the bankruptcy court denying their disgorgement motion against their former bankruptcy attorney, appellee, Lawrence Noble, Esq. ("Noble"). We VACATE the bankruptcy court's order and REMAND this matter with instructions that the bankruptcy court conduct an evidentiary hearing concerning the motion.
I. FACTUAL AND PROCEDURAL BACKGROUND
A. Prepetition Events.
In August 2006, Speirs filed a complaint in state court against Steve and Leana Smith ("Smiths") for damages and rescission of a real estate contract. The matter was tried before an arbitrator in January 2009. An interim award in favor of Smiths was issued on March 19, 2009. In April 2009, Smiths moved for attorney's fees and costs from Speirs. Speirs opposed the motion. In July 2009, the arbitrator issued a revised award determining Smiths to be the prevailing party and awarding them a total of $203,412.57 for attorney's fees, costs, and interest.
Smiths subsequently learned that shortly after the interim award was issued on March 19, Speirs had engaged in what Smiths thought were fraudulent transfers of real property. On July 31, 2009, Smiths sued Speirs in state court to set the transfers aside.
On August 24, 2009, Smiths's revised award of $203,412.57 for
attorney's fees and costs against Speirs became a judgment
$206,327.57, plus interest. In September 2009, Smiths
to conduct judgment debtor examinations of Speirs in aid
enforcement of the state court judgment. Ms. Speir
allegedly evaded service of the examination order. On October 21, 2009,
day before Mr. Speir's scheduled debtor's examination,
filed a chapter 7 bankruptcy petition, thereby staying
fraudulent transfer action.
B. Post-petition Events.
1. Events leading up to Smiths's Rule 2004 motion.
On February 2, 2010, Smiths moved for an order directing 11 Speirs to submit to a Rule 2004 examination due to their inability to get Speirs to submit to one voluntarily. To support their 13 motion, Smiths submitted various letter and email correspondence 14 between their counsel, Matt Guasco ("Guasco"), and Noble. For the 15 greater part of December 2009 and early January 2010, the parties 16 argued over whether Speirs could appear by stipulation and notice 17 rather than court order, whether Speirs had to produce documents 18 going back one year or two years, and whether Speirs had to 19 disclose their tax returns.
On January 6, 2010, Noble sent Guasco a letter again 21 asserting that Speirs would not appear pursuant to a court order, 22 but that his clients wished to "get on with the Rule 2004 23 examinations." On January 8, 2010, Smiths agreed that Speirs 24 could appear at their examinations and produce documents without a 25 court order, provided that objections to production of documents 26 were made in writing before the examinations. Noble was receptive 27 to the arrangement. Accordingly, Guasco mailed Noble a revised, 28 proposed stipulation for Noble's review.
On January 12, 2010, Guasco forwarded Noble a draft Rule 2004 2 notice of examination and production of documents for Noble's 3 review, which proposed examination dates of January 21 and 29, 4 2010. Noble responded by letter dated January 14, 2010, stating 5 that the proposed dates were "impracticable," and that Speirs 6 refused to provide Smiths with copies of tax returns because their 7 request was untimely. However, that same day, Noble told Guasco 8 in a telephone conversation that the draft stipulation was 9 acceptable, so Guasco emailed Noble a final version for Noble's 10 signature.
Guasco sent emails to Noble on January 15, 18, and 19, 2010, 12 because he had not yet received Noble's signature on the 13 stipulation. Finally, on January 20, Noble called Guasco and 14 stated, for the first time, that he had "several problems with the 15 stipulation," that he needed "instructions" from Speirs, and that 16 he would "get back" to Guasco. Guasco emailed Noble on 17 January 21, asking Noble if he was going to sign the stipulation 18 that day, to which Noble replied that he would not be hearing from 19 his clients until the following day, January 22, and, in any 20 event, the stipulation contained "many objectionable items."
21 Guasco responded by email that same day demanding that Noble stop 22 engaging in "purposeful delay" and sign the stipulation he had 23 previously approved.
24 On January 22, 2010, Noble advised Guasco that he would not 25 be representing Speirs at their Rule 2004 examinations, and that 26 Guasco could now deal directly with Speirs in that regard.
27 Smiths's Rule 2004 motion immediately followed. The bankruptcy 28 court entered an order granting Smiths's Rule 2004 motion on February 12, 2010.
2. Speirs's motion to disgorge Noble's fee.
On March 17, 2010, Speirs, with new bankruptcy counsel Janet Lawson, Esq. ("Lawson"), filed a motion seeking to disgorge monies paid to Noble post-petition ("Disgorgement Motion"). According to the motion and a declaration from Ms. Speir, Speirs had paid Noble $4,201 prepetition to represent them in their chapter 7 case, for which Noble had filed a Rule 2016(b) statement. After the filing, Speirs paid Noble an additional $5,500 for which they alleged he provided no services and for which they received no bill. Speirs argued that they should not be billed for Noble delaying the Rule 2004 examinations as they "were always ready, able, and willing to attend the exam and produce the requested documents." Speirs further alleged that any amended schedules were filed only because of Noble's mistakes. Therefore, they demanded a refund of the allegedly unearned $5,500 fee.
Noble opposed the Disgorgement Motion. He explained that Speirs sought out his legal advice in response to Smiths's impending Rule 2004 examination, and that he provided post-petition services of at least $13,381 while advising Speirs about their disclosure obligations in the examination. Noble alleged that Speirs had made partial post-petition payments*fn4 to induce him to continue representing them while they considered their response to the Rule 2004 examination. According to Noble, Speirs's "obstinacy" caused him to spend an inordinate amount of time 2 advising them to disclose information, to produce documents for 3 the exam, and to get them to deliver rental income payments to the 4 trustee. Noble further asserted that it was Speirs, not he, who 5 insisted on appearing at the Rule 2004 examination only by 6 stipulation and not a court order, which resulted in time 7 consuming and costly negotiations with Guasco. Apparently, Speirs 8 were concerned about being found in contempt of a court order if 9 they provided unsatisfactory or incredible answers to Smiths's 10 questions, thus providing Smiths a greater basis for potential 11 litigation against them. Noble denied that amended schedules had 12 to be filed because of his mistakes; he alleged any mistakes made 13 were the fault of Speirs.
14 Attached to Noble's opposition was his declaration and three 15 exhibits. Exhibit C was an email dated January 21, 2010, from 16 Noble to Speirs, which Noble reluctantly submitted due to its 17 privileged content. This was Noble's last contact with Speirs 18 before they terminated him. In the email, Noble expressed his 19 concern about Speirs's "contentious" behavior with him and that it 20 appeared his advice was being "undermined" by Ms. Speirs's father, 21 Rich Coleman. Noble also expressed his concern about the 22 trustee's skeptical attitude regarding Speirs's conduct and her 23 questioning of the "dubious 'legal' documents and explanations" 24 Speirs had provided. Finally, Noble stated that the best way to 25 discourage Smiths from litigation was by making a good showing at 26 their Rule 2004 examinations, which would require an extensive 27 document production and preparation for questioning.
28 Noble's Exhibit B was an email exchange between Lawson and 1 Noble dated March 30, 2010. This exchange was Lawson's response 2 to Noble's prior email (see Exhibit A) to her about obtaining a 3 protective order. Shortly after Speirs filed the Disgorgement 4 Motion, Noble asked Lawson to enter into a protective order so 5 that his opposition (which would include privileged emails and a 6 detailed fee statement) would not aid creditors or the trustee in 7 collecting assets from Speirs. Lawson rejected Noble's request, 8 stating that Speirs needed no "protection" from him; they had 9 disclosed all of their assets and had nothing to hide.
Lawson 10 alleged that it was Noble, not Speirs, that "made a mess of this" 11 case; there were "no legitimate grounds to oppose the Rule 2004 12 examination."
13 Noble did not attach his fee statement to his opposition, 14 which he contended contained information that could undermine 15 Speirs's ability to obtain a discharge. However, Noble proposed 16 producing it in camera at the hearing.
17 In their reply, Speirs contended that despite their requests 18 for a copy of the fee statement, Noble had not yet provided one.
19 Speirs objected to Noble's offer to produce it for the first time 20 at the hearing because: (1) it would prevent them from having any 21 meaningful opportunity to refute it; and (2) it violated the 22 court's order setting hearing which stated that "no late filed 23 pleadings will be considered."
24 In her second declaration, Ms. Speir complained
25 of Noble's incompetence. Particularly, she stated that
26 ignorance of bankruptcy law and his need to "research"
27 unnecessarily prolonged the Rule 2004 examination process, not
28 Speirs's alleged "resistence." She further stated that Noble
"pressured and scared" Speirs into filing bankruptcy in order
2 avoid Smiths's judgment debtor exams. However,
3 accomplished the exact same thing with the Rule 2004
4 which Ms. Speir described as "no big deal." Finally, Ms.
5 alleged that prior to the second section 341 meeting of
6 Noble had told Speirs to not tell the trustee about monies
7 had paid him post-petition. Lawson also filed a declaration.
8 stated that she had no problems with Speirs, and that
9 produced all documents at the Rule 2004 examinations
11 Despite his proposal to only submit the fee statement in 12 camera, on June 2, 2010, the day before the Disgorgement Motion 13 hearing, Noble filed his fee statement. It reflected that between 14 December 16, 2009, and March 23, 2010, Noble had spent 38.9 hours 15 in Speirs's case, including 3.2 hours on the disgorgement matter, 16 for a total of $13,381 in fees. Noble did not serve Speirs with 17 the fee statement.
18 The bankruptcy court held a hearing on the Disgorgement 19 Motion on June 3, 2010. Noble finally provided Lawson with a copy 20 of the fee statement just moments before the hearing. After Noble 21 argued about his relationship with Speirs and the circumstances 22 surrounding the Rule 2004 examinations which led to the January 21 23 email, the following colloquy ensued between Lawson and the court:
LAWSON: If you look at the e-mail he's referring to,
it says nothing about refusing to turn over
documents. It's a demand for more money in the third paragraph.
Things that don't make
sense. There's nothing in here asking Speirs to turn over
documents. Nothing he's attached supports what he's saying here
1 COURT: But I don't have any evidence to the contrary do I, Ms. Lawson?
LAWSON: Because this is the first point of
it. His January 21 letter does not
COURT: You have a witness. Are you not going to put your witness on?
LAWSON: I wasn't aware this was an
hearing, your Honor.
7 COURT: I don't see a room full of lawyers waiting their chance to have a hearing.
LAWSON: I wasn't aware this was an
hearing, your Honor.
Hr'g Tr. (June 3, 2010) at 15:1-13. The court then proceeded
issue its oral ruling in favor of Noble, but limiting the
fees to the $5,500 he had already received.
The bankruptcy court entered an order denying the
Disgorgement Motion on September 28, 2010. This appeal
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 17 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.
Did the bankruptcy court abuse its discretion by
the late-filed fee statement into evidence?
IV. STANDARDS OF REVIEW
22 A court's interpretation and application of a local rule
23 reviewed for abuse of discretion. United States v.
24 551 F.3d 1108, 1111 (9th Cir. 2009). To determine whether
25 bankruptcy court abused its discretion, we conduct a
26 inquiry: (1) we review de novo whether the bankruptcy
27 "identified the correct legal rule to apply to the
28 requested" and (2) if it did, whether the bankruptcy
application of the legal standard was illogical, implausible
"without support in inferences that may be drawn from the facts
in the record." United States v. Hinkson, 585 F.3d 1247,
(9th Cir. 2009)(en banc).
6 The bankruptcy court abused its discretion by accepting the late-filed fee statement into evidence without giving Speirs 7 a reasonable opportunity to refute it.
8 Speirs argue that accepting Noble's late-filed fee statement 9 into evidence was prejudicial, a fundamental violation of due 10 process, and it violated several local rules and the court's 11 order. Speirs contend that had they been given an opportunity to 12 review the fee statement prior to the hearing, they could have 13 impeached Noble's statements that they were the cause of all of 14 Noble's extra work, and they could have challenged many of Noble's 15 time entries. Noble did not address this issue on appeal. We 16 agree with Speirs.
17 Under the Central District's Local Bankruptcy Rule ("LBR") 18 9013-1(f)(1), opposition to a motion should contain "a complete 19 written statement of all reasons in opposition thereto," and any 20 "documentary evidence on which the responding party intends to 21 rely." Any opposition papers must be filed and served on the 22 moving party no later than 14 days prior to the hearing.
23 LBR 9013-1(f)(1). A proof of service must also accompany every 24 paper filed. LBR 9013-1(e).
25 Clearly, Noble did not comply with any of these local rules.
26 Despite his reluctancy to file the fee statement and his offer to 27 provide it in camera, Noble filed the fee statement just one day 28 prior to the hearing on the Disgorgement Motion, and he did not serve it on Speirs or file a proof of service.*fn5 Noble finally provided Lawson a copy of it just moments before the hearing. Speirs never had an opportunity to review the fee statement as they did not attend the hearing. The bankruptcy court said nothing about Noble's untimeliness or its order prohibiting any late-filed pleadings and proceeded to consider the fee statement, despite Speirs's objection to do so in their reply. Although Lawson did not expressly object at the hearing when the court accepted the fee statement into evidence, she did respond, twice, that she was unaware the court was conducting an evidentiary hearing.*fn6
1 The bankruptcy court has broad discretion to overlook 2 transgressions of its local rules (Nunez v. Nunez (In re Nunez), 3 196 B.R. 150, 157 (9th Cir. BAP 1996)), as long as a departure 4 from the local rules does not affect substantial rights. Prof'l 5 Programs Group v. Dep't of Commerce, 29 F.3d 1349, 1353 (9th Cir. 6 1994). The bankruptcy court also has the power to vacate or 7 modify its orders, as long as it is equitable to do so. In re 8 Marcus Hook Dev. Park, Inc., 943 F.2d 261, 265 (3d. Cir. 1991).
In this case, the bankruptcy court's departure from the local 10 rules and its last-minute decision to essentially vacate its 11 original order prohibiting late-filed pleadings unduly prejudiced 12 Speirs by depriving them of any reasonable opportunity to review 13 the fee statement, which was material to their Disgorgement 14 Motion, and refute it.
15 Accordingly, we believe the bankruptcy court abused its 16 discretion by accepting the late-filed fee statement into evidence 17 over Speirs's objection.
For the reasons stated above, we VACATE the bankruptcy 20 court's order denying the Disgorgement Motion and REMAND the 21 matter to the bankruptcy court with instructions that it conduct 22 an evidentiary hearing concerning the motion.