Shalaby v. Mansdorf (In Re Nakhuda)
544 B.R. 886
9th Cir. BAP2016Background
- Debtor Farouk Nakhuda filed a skeletal Chapter 7 petition; Andrew Shalaby represented him and filed multiple amended schedules claiming various exemptions (including tools-of-trade and wages) and repeatedly amended values and exemptions.
- Trustee Paul Mansdorf discovered debtor continued operating sole-proprietorship laundromats post-petition; court issued an ex parte Turnover Order requiring cessation of operations and turnover of funds and records.
- Shalaby repeatedly opposed turnover and defended exemption claims through numerous filings (some lacking citations or factual support), appealed the Turnover Order to the BAP (which affirmed), and pursued collateral challenges that the bankruptcy court found procedurally and substantively weak.
- The bankruptcy court issued an Order to Show Cause (OSC) identifying seven representative frivolous positions and alleged failures (including lack of evidentiary support and failure to obtain debtor signatures for ECF filings).
- The court imposed sanctions: $8,000 to the court under Rule 9011, disgorgement of $4,000 paid by debtor under § 329, suspension from bankruptcy practice pending CLE, and suspension of ECF privileges until clerk training completed.
- On appeal the Panel affirmed disgorgement under § 329 and ECF-suspension, but reversed the Rule 9011 sanction because the court applied the party-initiated “reasonableness” standard rather than the heightened court-initiated "akin to contempt" standard required when issuing sua sponte sanctions under Rule 9011(c)(1)(B).
Issues
| Issue | Plaintiff's Argument (Shalaby) | Defendant's Argument (Trustee/Court) | Held |
|---|---|---|---|
| Whether court properly imposed sua sponte sanctions under Rule 9011 | Shalaby argued his positions were reasonable good-faith legal arguments and that the court should not sanction him for oversight or disagreement on law | Court/Trustee argued filings lacked legal or factual support and warranted sanctions for frivolous positions and burdening the estate | Reversed: court applied wrong standard; sua sponte Rule 9011 requires an "akin to contempt" (bad-faith/egregious) standard, and findings did not support that heightened standard |
| Whether disgorgement under § 329 was appropriate for fees paid by debtor | Shalaby contended § 329 could not apply or that fees were justified; argued against disgorgement (also objected to disgorging filing fee) | Trustee argued fees exceeded reasonable value given poor, unnecessary, or harmful work; court found services not beneficial and counsel lacked requisite skill | Affirmed: $4,000 disgorgement (including filing fee) was within court's § 329 authority; fee exceeded reasonable value |
| Whether suspension of ECF privileges was proper for failure to obtain/retain wet signatures | Shalaby said omission was oversight, remedied before OSC, and not sanctionable under Rule 9011 or § 105 | Court relied on local ECF procedures (BLR 5005-2(d), BLR 9011-1) requiring possession/retention of original signatures and empowered court to suspend ECF access | Affirmed: suspension until completion of clerk-provided ECF training was a permissible, nonmonetary sanction under local rules and court’s inherent authority |
| Whether request for judicial notice of trustee’s fee applications and judicial misconduct documents was proper on appeal | Shalaby sought judicial notice of these documents to support positions | Panel found documents irrelevant to disposition of appeal | Denied: request for judicial notice was improper as irrelevant |
Key Cases Cited
- Chambers v. NASCO, Inc., 501 U.S. 32 (1991) (recognizing federal courts’ inherent authority to sanction and regulate attorney conduct)
- United Nat’l Ins. Co. v. R & D Latex Corp., 242 F.3d 1102 (9th Cir. 2001) (court-initiated Rule 11 sanctions require heightened "akin to contempt" standard; no safe harbor)
- Barber v. Miller, 146 F.3d 707 (9th Cir. 1998) (distinguishes party-initiated sanctions with safe-harbor from court-initiated sanctions)
- Zaldivar v. City of Los Angeles, 780 F.2d 823 (9th Cir. 1986) (objective reasonableness standard for assessing frivolous filings under Rule 11/9011)
- Marsch v. Marsch (In re Marsch), 36 F.3d 825 (9th Cir. 1994) (applicability of Rule 11 jurisprudence to Rule 9011)
- In re Basham, 208 B.R. 926 (9th Cir. BAP 1997) (§ 329 disgorgement assessed under § 330 reasonableness factors)