In re Carvalho

In re SHARRA NEVES CARVALHO, Debtor.

Case No. 15-00646

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLUMBIA

Filed: October 1, 2018

September 30, 2018

(Chapter 7)

MEMORANDUM DECISION AND ORDER RE MOTION FOR SANCTIONS

Teodora Aureliana Simu is a creditor in this bankruptcy case. Simu, through her attorney, Matthew August LeFande, filed a Motion to Convert Chapter Seven to Chapter Eleven (Dkt. No. 151), renewing contentions that this court had already rejected in disposing of other litigation in this case. The debtor, Sharra Neves Carvalho, then filed a Motion for Sanctions (Dkt. No. 187) and an accompanying memorandum in support thereof (Dkt. No. 188). In her Motion for Sanctions, Carvalho requests the court to levy sanctions against Simu and LeFande pursuant to Fed. R. Bankr. P. 9011, 28 U.S.C. § 1927, and this court's inherent authority, for their filing and pursuit of Simu's Motion to Convert. For the following reasons, I will grant Carvalho's Motion for Sanctions as to LeFande but not as to Simu.

IFACTS

Prior to the commencement of this bankruptcy case, both Carvalho and Simu at one point had been in business together, jointly operating Elite Insurance & Consulting Services, LLC ("Elite"). Conflict between the two arose and Simu resigned her position at Elite and sued Carvalho in the Superior Court of the District of Columbia, asserting claims related to Carvalho's operation of Elite. Simu ultimately recovered a $90,250 monetary judgment against Carvalho.

Carvalho then filed her petition commencing this bankruptcy case under Chapter 7 of the Bankruptcy Code (11 U.S.C.) on December 15, 2015. On her bankruptcy schedules, Carvalho listed as debts Simu's claim pursuant to the $90,250 judgment and a disputed unsecured claim of $374,741.45 asserted by Simu for attorney's fees incurred for services that LeFande provided Simu in the Superior Court case. See Dkt. No. 1, at 22. As of the petition date, because Simu had left Elite and had not been replaced, Carvalho owned a 100% equity interest in Elite. When Carvalho filed her petition, that equity interest in Elite became property of the estate under 11 U.S.C. § 541(a)(1). The intense conflict that already existed between Carvalho and Simu prior to the commencement of the bankruptcy case almost immediatelypresented in litigation within the bankruptcy case and within the related adversary proceeding that Simu filed.

A. Simu's Unsuccessful Adversary Proceeding to Deny Carvalho a Discharge

On January 5, 2016, shortly after Carvalho filed her petition commencing this bankruptcy case, Simu commenced an adversary proceeding (Adv. Pro. No. 16-10001) against Carvalho. In the adversary proceeding, Simu requested the court to either deny Carvalho a discharge or, in the alternative, deem Carvalho's debt to Simu nondischargeable.

Among many claims raised by Simu in support of denial of discharge or a determination of nondischargeability were claims that Carvalho knowingly and fraudulently made false oaths and accounts in her petition and to the Chapter 7 trustee at the meeting of creditors; that she withheld from the Chapter 7 trustee information relating to her property or financial affairs; and that, since filing her petition, Carvalho had transferred money from Elite to herself without giving notice to or obtaining the consent of the Chapter 7 trustee and the court and had done so with the intent to hinder, delay, or defraud Simu, the Chapter 7 trustee, and the court.

After Simu presented her evidence at trial and before Carvalho presented her defense, upon Carvalho's motion for judgment, the court held that Simu had failed to demonstrate that Carvalho had made false oaths in her petition or at the meetingof creditors, or that Carvalho had withheld information from the court or from the Chapter 7 trustee. The only claim remaining when Carvalho began presenting evidence at trial was the claim for denial of discharge stemming from Carvalho's postpetition operation of Elite and withdrawals of money from that LLC.

In an oral decision issued at the conclusion of the trial on May 10, 2017, the court issued its findings of fact with great detail. The court found that, shortly after commencement of the bankruptcy case, Carvalho's counsel had received permission from Bryan Ross, the Chapter 7 trustee, for Carvalho to continue operating Elite and that Ross, in exercising his discretion to permit Carvalho to continue operating Elite, did not believe or intend that Carvalho would do so without compensation. The court found that Ross had never instructed Carvalho to stop operating the company or removing money from Elite; that Carvalho's attorney had advised Carvalho to continue withdrawing money from Elite in amounts that were reasonably consistent with the money she had removed from Elite as compensation for her operation of Elite in the past; and that, in continuing to operate Elite and withdraw money from Elite, Carvalho had followed the directions of the Chapter 7 trustee, as relayed to her by her counsel, and had not acted with intent to hinder, delay, or defraud any creditor. The court also addressed multiple provisions of the Bankruptcy Code that Simu had raised and relied upon inpresenting her arguments and explained their irrelevance to the case.

On May 11, 2017, pursuant to the oral decision issued at the conclusion of the adversary proceeding trial on May 10, 2017, the court issued a Judgment (Adv. Proc. No. 16-10001, Dkt. No. 171) in favor of Carvalho. The Judgment directed that Carvalho was entitled to have a discharge issued in the bankruptcy case, and decreed that the debts owed to Simu were not excepted from the forthcoming discharge.

B. Simu's Related Efforts in the Bankruptcy Case, a Story of Three Motions Focusing Largely on Carvalho's Continued Operation of Elite

On April 14, 2017, about one month prior to the commencement of the trial in the adversary proceeding on May 8, 2017, Simu filed in Carvalho's bankruptcy case three motions:

• a Motion to Remove Estate Trustee (Dkt. No. 111) seeking to remove Ross as the trustee;

• a Motion for Leave to Sue Estate Trustee (Dkt. No. 112), seeking leave to sue Ross; and

• a Motion to Dismiss Case for Bad Faith (Dkt. No. 113).

After the motions were fully briefed, in response to an instruction from the court at a hearing, Simu filed a Unified Motion to Dismiss Bankruptcy Case for Bad Faith Motion to Remove Estate Trustee Motion for Leave to Sue the Estate Trustee (Dkt. No. 131) ("Unified Motion") incorporating all three motions, withthe Unified Motion serving also as a motion for summary judgment on all three motions. Simu filed that Unified Motion on July 28, 2017, more than two months after the court issued its Judgment in the adversary proceeding on May 11, 2017. In response, Carvalho filed a cross-motion for summary judgment (Dkt. No. 134).

Simu's Unified Motion contained 51 pages of "material facts not in dispute" (focusing largely on alleged acts of Carvalho that had been the subject of the adversary proceeding) and argued for summary judgment on the motions in an additional 47 pages. In comparison, Carvalho filed an opposition to the Unified Motion that contained 40 pages responding to Simu's account of the "material facts not in dispute" and only 18 pages of argument. Bryan Ross, the chapter 7 trustee assigned to Carvalho's case, filed an opposition consisting of a five-page statement of facts and 23 pages of argument.

1. Denial of the Motion to Dismiss Case for Bad Faith

In regards to the Motion to Dismiss Case for Bad Faith incorporated in the Unified Motion, Simu emphasized that Carvalho had filed the case in response to Simu's Superior Court judgment against her and Simu's motion for a charging order on that judgment; that Carvalho had filed the case primarily to avoid a large, single debt; and that, while Carvalho was not making any attempt to pay off her outstanding debts to creditors, she nevertheless was continuing to pay her attorneys. Simu claimedthat Carvalho acted illegally in continuing, postpetition, to operate Elite and withdraw money from Elite. Specifically, Simu claimed: "It is the profound fraud perpetrated on this Court from the onset of this bankruptcy proceeding, the undervaluation, maintenance and exploitation of Elite Insurance & Consulting Services, LLC as an unliquidated cash cow solely for the ongoing benefit of the Debtor that now demands dismissal." Dkt. No. 131-4, at 6.

In concluding the portion of the Unified Motion regarding the Motion to Dismiss Case for Bad Faith, Simu argued that Carvalho "has illegally transferred assets to herself on an ongoing basis, and failed to make any semblance of a candid and full disclosure of her affairs to Simu or the Court" and noted: "This case is rife with procedural "gymnastics" intended to defeat any semblance of compliance with Bankruptcy Code for the benefit of Carvalho's creditors. All of the facts and circumstances of this case now dictate dismissal of this case for cause under 11 U.S.C. § 707(a)." Dkt. No. 131-4, at 16.

On October 5, 2017, the court held a hearing on the Unified Motion, and by way of an oral decision, the court granted Carvalho's cross-motion for summary judgment and ruled that Simu's Motion to Dismiss Case for Bad Faith had to be denied. At the hearing of October 5, 2017, Carvalho, the Chapter 7 trustee, and the court addressed Simu's counsel's repetition of argumentsthat not only were premised on misunderstandings of the Bankruptcy Code but also had already been dismissed by the court. In denying Simu's Motion to Dismiss Case for Bad Faith, the court repeated rulings it made after the adversary proceeding trial and explained the flaws in Simu's arguments. The court explained that:

• Simu either failed to understand or acknowledge that the chapter 7 trustee lacked the legal authority to seize Elite's assets by virtue of Elite's status as a limited liability company (LLC);

• Simu had repeated allegations of Carvalho's

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