Bliss v. Norrie (In re Norrie)

In re: WILLIAM ROBERT NORRIE, Debtor.

MARK BLISS, Appellant, v. JOHN NORRIE, Trustee of The 561 Brooks Avenue Trust,Dated March 14, 2007; MICHAEL D. KWASIGROCH, Appellees.

BAP No. CC-17-1151-TaFS

Adv. No. 2:14-ap-01755-BR

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

Submitted: February 22, 2018

April 25, 2018

NOT FOR PUBLICATION

Bk. No. 2:13-bk-25751-BR

MEMORANDUM^*

Submitted Without Oral Argument on February 22, 2018

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

Honorable Barry Russell, Bankruptcy Judge, Presiding

Appearances: Appellant Mark Bliss, pro se, on brief; Michael D. Kwasigroch on brief pro se and for appellee John Norrie.

Before: TAYLOR, FARIS, and SPRAKER, Bankruptcy Judges.

INTRODUCTION

William Robert Norrie's chapter 7¹ bankruptcy case has been contentious. But this appeal does not directly involve him; instead, it derives from litigation between John Norrie ("John")² (William's brother) and Mark Bliss ("Bliss", the appellant).

At a mid-point in the case, John sued Bliss. Bliss responded with a Rule 9011 motion initially directed at John's attorney, Michael Kwasigroch (collectively with John, "Appellees"). The bankruptcy court denied the Rule 9011 motion; Bliss appealed.

While the appeal was pending, Bliss asked the bankruptcy court to issue a Rule 8008 indicative ruling reconsidering (under Civil Rule 60) its order denying the Rule 9011 motion and adding John as an additional party subject to sanctions. The bankruptcy court deferred ruling on this request until the Panel resolved the appeal.

Bliss was at least partially successful on appeal: We vacated the order denying the Rule 9011 motion (the bankruptcy court did not provide us with complete findings, so we could notdetermine if the bankruptcy court applied the correct legal rule) and remanded so the bankruptcy court could conduct further proceedings consistent with our decision.

Bliss's success was short-lived. On remand, the bankruptcy court said it would prepare an order denying Bliss's Rule 9011 motion again; it did not. It did, however, deny Bliss's reconsideration motion, found that motion frivolous, and accordingly sanctioned Bliss and his attorney.

Bliss again appeals; and again we are unable to rule.

The bankruptcy court has yet to comply with our instructions on remand. The bankruptcy court said that it would prepare an order or further statement in response to the remand, but it has not done so. The bankruptcy court has neither explained its reasoning in findings of fact and conclusions of law nor re-entered an order, minute or otherwise, deciding the Rule 9011 motion. But based on the bankruptcy court's oral statements and its findings when denying the reconsideration motion, we conclude that the bankruptcy court employed an erroneous legal standard, such that denial of Bliss's Rule 9011 motion on that basis would be an abuse of discretion. And this error makes it impossible for us to rule on the motion requesting sanctions against Bliss which is grounded in the main on the denial of the Rule 9011 motion and the reconsideration motion.

Accordingly, we VACATE the order denying the reconsideration motion and imposing sanctions on Bliss and REMAND with instructions that the bankruptcy court comply with the instructions of the previous Panel, apply the correctstandard in doing so, decide the reconsideration motion as appropriate, and re-evaluate the request for sanctions against Bliss in light of these determinations.

FACTS³

Because little has changed in the intervening time, we borrow substantially from our earlier decision and "highlight in somewhat summary form the disputes and proceedings" involved here. Bliss v. Norrie (In re Norrie), BAP No. CC-15-1125-DKiG, 2016 WL 373868, at *1 (9th Cir. BAP Jan. 29, 2016).

The relevant dispute centers on William's interest in a Venice, California apartment complex (the "Property").

The Property. William purchased the Property in 2005. In 2008, he transferred his interest in the Property to his newly-formed, solely owned limited liability company (the "LLC"). A grant deed reflecting the transfer was recorded, and William later confirmed to his lender that the LLC was "solely owned by myself." The LLC provided no consideration for the transfer.

William filed a chapter 7 petition in 2013. He did not schedule or disclose any interest in either the Property or the LLC.

Instead, Bliss, William's former friend and business associate, informed the chapter 7 trustee about these assets; he also apparently helped the chapter 7 trustee prosecute a fraudulent transfer action against William and the LLC. The LLCdefaulted, but less than 24 hours before a default-related hearing, John sought to continue the hearing and to intervene. He asserted, as purported trustee, alleged rights of The 561 Brooks Avenue Trust Dated March 14, 2007 (the "Brooks Trust"). According to John, the Brooks Trust was formed to hold title to the Property for the benefit of William's sons. Kwasigroch represented John, as trustee of the Brooks Trust.

The bankruptcy court denied the motion to continue. The chapter 7 trustee opposed the intervention motion and argued that Bliss, not John, was the trustee. John argued to the contrary, but the bankruptcy court determined that John was not the trustee and that the Brooks Trust had no interest in the Property, denied the intervention motion, and entered a default judgment against the LLC that recovered the Property for the benefit of William's bankruptcy estate.

The Brooks Trust litigation. Undeterred by the default judgment in the fraudulent conveyance action, John, again as alleged trustee of the Brooks Trust, filed an adversary proceeding against the chapter 7 trustee and Bliss, in his capacity as alleged trustee of the Brooks Trust. He sought: (1) a declaration that John, not Bliss, was the trustee of the Brooks Trust; and (2) imposition of a trust on the Property for the benefit of the Brooks Trust. Kwasigroch again represented John, as alleged trustee of the Brooks Trust.

Bliss and the chapter 7 trustee filed motions to dismiss; John amended the complaint. Bliss then filed a motion to dismiss the amended complaint. Eventually, John filed a Rule 7041 notice of dismissal as to Bliss, and the bankruptcy courtfinalized the matter by dismissing the amended complaint without leave to amend as to the chapter 7 trustee.

The Rule 9011 motion. Bliss then filed a motion seeking monetary sanctions against Kwasigroch under Rule 9011 (the "Rule 9011 Motion"). In relevant part, the Rule 9011 Motion argued: (1) the issues raised in the complaint had already been conclusively decided in the earlier litigation, so the claims were unwarranted, frivolous, and barred by res judicata; (2) the amended complaint alleged a new interest in the Property based on a January 2008 promissory note from Joe Davis (William's father-in-law), but those allegations were false and lacked evidentiary support, and Kwasigroch knew or should have known that they were false; and (3) Kwasigroch's conduct constituted a continuing pattern of bad faith and improper litigation tactics.

Kwasigroch voluntarily dismissed Bliss before the Rule 9011 Motion was filed, but he did so after Bliss provided a safe harbor notice and after the 21-day safe harbor period passed. Thus, the dismissal did not protect Kwasigroh from Rule 9011 sanctions if otherwise appropriate. Bliss sought $19,722.50 in sanctions.

Kwasigroch opposed. He emphasized that before he filed the complaints he met with Joe Davis and got his declaration and testimony in writing. He also consulted about his theory of the case with two experts, whose opinions concurred with his. He also argued that the documents allegedly undermining the Davis promissory note were obtained by Bliss after the complaint was filed and, in any event, simply showed that the evidence was in conflict — which would not mean that the complaint wasfrivolous.

At the hearing, the bankruptcy court orally denied the Rule 9011 Motion. The bankruptcy court entered a separate order. Bliss appealed to the BAP.

Bliss's motion for a Rule 8008 indicative ruling on a Civil Rule 60(b) reconsideration motion. Litigation and drama did not abate while the appeal was pending. Bliss conducted discovery in the main bankruptcy case. At some point, William fled the country.

Bliss then filed a motion for an indicative ruling under Rule 8008 on a reconsideration motion under Civil Rule 60(b) (the "Reconsideration Motion"). Given allegedly newly discovered evidence, Bliss asked the bankruptcy court to reconsider the Rule 9011 Motion and also to allow him to add John as a party subject to the sanctions motion.

In particular, he referred to the following: a letter and emails from William's former attorney to William; a new declaration from Davis; and a part of William's loan modification application dated five days before his chapter 7 filing. He asserted that this evidence was suppressed by John, William, and Kwasigroch and argued that it showed that they knew or should have known that the material factual allegations in the adversary proceeding were false. Despite this actual knowledge, he urged, they continued to assert false allegations before the Ninth Circuit Court of Appeals. Bliss discovered the documents, he said, through Rule 2004 subpoenas on third parties; and he asserted that Civil Rule 60(b)(2) and (3) applied.

The bankruptcy court exercised its discretion and deferred ruling on the Reconsideration Motion until after the BAP decided the appeal. See Fed. R. Bankr. P. 8008(a)(1).

Our decision. In January 2016, we issued our decision. In re Norrie, 2016 WL 373868. We vacated the judgment as lacking complete findings and remanded for the bankruptcy court to make the requisite findings. In particular, we wrote:

Under Ninth Circuit standards, a bankruptcy court "must consider both frivolousness and improper purpose" when ruling on a motion for sanctions under Rule 9011. Her

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