ORDER: (1) AFFIRMING IN PART AND VACATING IN PART THE BANKRUPTCY COURT'S ORDER GRANTING SANCTIONS AGAINST KONOP AND (2) REMANDING THIS MATTER TO THE BANKRUPTCY COURT
DAVID ALAN EZRA, District Judge.
Pursuant to Local Rule 7.2(d), the Court finds this matter suitable for disposition without a hearing. After reviewing Appellant Robert C. Konop's ("Konop") appeal and the supporting and opposing memoranda, the Court
BACKGROUND
I. Representations to the Bankruptcy Court
On March 21, 2003, Appellee Hawaiian Airlines, Inc. ("Hawaiian Airlines") filed a voluntary petition for bankruptcy under Chapter 11. (Bk. No. 03-00817, Doc. # 1.) Konop, Hawaiian Investment Partners Group LLC, and Hawaiian Reorganization Committee LLC (collectively, "Konop and the Co-Proponents") filed a plan of reorganization for Hawaiian Airlines and multiple disclosure statements describing, among other things, the details of that plan and the means for implementing it. Hawaiian Airlines alleges that beginning in September 2004, Konop signed and filed three separate disclosure statements and various supporting documents that he knew to contain material misstatements of fact regarding the existence of financing to support his plan of reorganization. (Doc. # 64 at 3.)
First, on September 9, 2004, Konop and the Co-Proponents filed a Third Amended Plan of Reorganization. (Bk. No. 03-00817, Doc. # 3249.) They filed a disclosure statement for the Third Amended Plan on September 20, 2004. (Bk. No. 03-00817, Doc. # 3306.) The September 2004 disclosure statement stated that the plan "recapitalizes the Debtor with an immediate equity infusion of $200 million in cash, with Plan associated financial resources of more than $300 million." (
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Second, on November 11, 2004, Konop and the Co-Proponents filed a Fourth Amended Plan of Reorganization and another disclosure statement. (Bk. No. 03-00817, Docs. ## 3713, 3714.) The November disclosure statement contained the same representations as the September disclosure statement regarding the availability of funding to the levels called for within the plan. (Bk. No. 03-00817, Doc. # 3714 at 50.) However, this time an affidavit from Mr. Paul Boghosian was attached as Exhibit H. (
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Third, on December 8, 2004, Konop and the Co-Proponents filed a Fifth Amended Plan of Reorganization and disclosure statement. (Bk. No. 03-00817, Docs. ## 3894, 3896.) The December disclosure statement contained the exact same representations about the availability of funds as the November 2004 statement and attached as Exhibit H the same affidavit from Boghosian. (Bk. No. 03-00817, Doc. # 3896 at 50;
On January 13, 2005, Konop and the Co-Proponents filed another exhibit to the December 2004 disclosure statement. (Bk. No. 03-00817, Doc. # 4150.) It contained an affidavit from Dr. William H. Spencer stating that "if funds are not otherwise available, E&M will utilize the $500,000,000 United States dollars as evidenced in the attached documentation to fund the above-referenced transactions with Hawaiian Airlines, Inc." (
On February 4, 2005, Konop and the Co-Proponents filed a declaration from Spencer further attesting to the availability of funds and commitment to finance Konop's reorganization plan. (Bk. No. 03-00817, Doc. # 4309.) Attached to that declaration was a letter from ABN-AMRO bank purporting to confirm the $500 million on deposit in the E&M Trust account. (
On March 28, 2005, the Bankruptcy Court entered an Order disapproving with prejudice Konop and the Co-Proponents' Fifth Amended Plan of Reorganization and the accompanying disclosure statement. (Bk. No. 03-00817, Doc. # 4671.) That Order states, in pertinent part, that "it appear[s] that the proponents of that proposed [Fifth Amended] Plan have no available financing to fund their Plan and have misrepresented the availability of such funding." (
II. The Sanctions Motion
On April 11, 2005, Joshua Gotbaum, the Chapter 11 Trustee of Hawaiian Airlines, Hawaiian Holdings, Inc., HHIC, Inc., and RC Aviation LLC (collectively, "HHI Parties") filed a motion requesting that the Bankruptcy Court hold Konop, Randal Yoshida ("Yoshida"), and Timothy Philipp ("Philipp")
In support of its Sanctions Motion, Hawaiian Airlines submitted substantial amounts of evidence, including an email sent from Konop to Boghosian on November 5, 2004. In that email, Konop tells Boghosian that "your document provides no nexus between your stated intent to provide funds and the funds." (
A. July 2005 Hearing
On July 29, 2005, the Bankruptcy Court held the first of several hearings on the Sanctions Motion. (Bk. No. 03-00817, Doc. # 5442.) At the conclusion of oral argument, the court determined that the record supported a finding that Konop made knowing misstatements of fact. (
First, the Bankruptcy Court explained that there was "that plain, bald, unconditional statement in the body of the disclosure statement that the money was there and that the truth now apparently is that there wasn't the money there." (
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Second, the court addressed the Boghosian affidavit and concluded that Konop himself did not believe Boghosian's statements regarding the availability of financing. The court stated as follows:
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Based on those factual findings, the Bankruptcy Court determined that Hawaiian Airlines had "made the case for sanctions against Captain Konop" and scheduled a conference for August 15, 2005 to address, among other things, the amount of sanctions to be imposed. (
B. August 2005 Conference
At the August 15, 2005 conference, Konop's counsel requested leave to conduct additional discovery and supplement the record on the issue of Konop's beliefs about the availability of funding at the time that the disclosure statements were filed. (Bk. No. 03-00817, Doc. # 5700 at 8-10.) The court granted this request in light of the "very serious collateral consequences" of the imposition of sanctions. (
On November 15, 2005, Hawaiian Airlines filed a Motion for Partial Summary Judgment against Konop on the ground that there was no triable issue of material fact as to whether Konop made knowing misrepresentations to the court. (Bk. No. 03-00817, Doc. # 5731.) Specifically, Hawaiian Airlines argued in its Motion that Konop's supplemental declaration and accompanying exhibits failed to provide any facts to explain away the specific evidence relied upon by the court at the July 29th hearing as the basis for imposing sanctions against Konop. (
On November 23, 2005, Konop filed an Opposition to that Motion, attaching another supplemental declaration and additional exhibits. (Bk. No. 03-00817, Docs. ## 5742-5744.) Hawaiian Airlines filed a Reply on December 2, 2005. (Bk. No. 03-00817, Doc. # 5752.)
C. December 2005 Hearing
At a hearing held on December 13, 2005, the Bankruptcy Court issued a tentative ruling granting Hawaiian Airlines' Motion for Partial Summary Judgment. (Bk. No. 03-00817, Doc. # 5885.) The court's ruling was based on a finding that Konop repeatedly made knowing misrepresentations to the court.
First, the court identified five specific misrepresentations contained in the September 2004 disclosure statement, including the representation that there would be more than $200 million in available new cash. (
Second, the court observed that the November 2004 disclosure statement made many of the same misrepresentations as the September disclosure statement, the only significant difference being that Boghosian's affidavit was attached as Exhibit H to the November statement. (
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Third, the court observed that in the December 2004 disclosure statement, "the same representations are repeated and at that point there was, as far as the record shows, no more available money." (
After issuing its tentative ruling, the court heard oral argument from both sides. Thereafter, the court adopted its tentative ruling and granted the Motion for Partial Summary Judgment. (
Following the December 2005 hearing, the parties briefed the issue of the amount of sanctions that should be imposed against Konop. Hawaiian Airlines sought sanctions based on the amount of fees and expenses incurred in responding to each of the three false disclosure statements as well as fees incurred in preparing and prosecuting the Sanctions Motion. (Bk. No. 03-00817, Doc. # 5836.) In response, Konop argued that the sanctions should be limited to the fees and expenses incurred by Hawaiian Airlines in opposing the September 2004 disclosure statement. (Bk. No. 03-00817, Doc. # 5853.) Specifically, Konop objected to the inclusion of any fees incurred before September 20, 2004 and after October 6, 2004. (
D. March 2006 Hearing
On March 28, 2006, the court held a hearing to address the calculation of the sanctions award. (Bk. No. 03-00817, Doc. # 5859.) The court identified certain fees that would not be included, such as fees incurred before the filing of the September 2004 disclosure statement and fees related to Konop's appeal. (
III. The Instant Appeal
Following the Bankruptcy Court's December 13, 2005 bench ruling granting the Motion for Partial Summary Judgment against Konop as to Sanctions Motion (Bk. No. 03-00817, Doc. # 5769), Konop filed his initial Notice of Appeal on December 22, 2005 (Bk. No. 03-00817, Doc. # 5773). On May 15, 2006, Konop filed a Supplemental Notice of Appeal after the Bankruptcy Court issued its Order Granting Sanctions against Konop. (Bk. No. 03-00817, Doc. # 5881.) On August 25, 2008, Judge Faris approved the parties' Stipulation for Dismissal With Prejudice of the Motion for Contempt and Payment of Attorneys Fees as to Timothy Philipp. (Bk. No. 03-00817, Doc. # 6034.) Thereafter, on September 8, 2008, Konop filed his Second Supplemental Notice of Appeal. (Bk. No. 03-00817, Doc. # 6045.) On June 6, 2011, Konop filed his opening brief. (Doc. # 56.) On July 14, 2011, Appellee Hawaiian Airlines filed its Brief. (Doc. # 64.) On August 1, 2011, Konop filed his Reply. (Doc. # 66.)
STANDARD OF REVIEW
A district court applies the same standard of review applied by an appellate court in reviewing a bankruptcy appeal.
A bankruptcy court's award of sanctions is reviewed under the abuse of discretion standard.
DISCUSSION
In the instant appeal, Konop contends that: (1) the Bankruptcy Court improperly sanctioned him without a necessary conclusion of bad faith; (2) the Bankruptcy Court deprived him of due process by sanctioning him without providing adequate notice and an opportunity to be heard; (3) the Bankruptcy Court abused its discretion in determining the amount of sanctions awarded; (4) the Bankruptcy Court erred in granting Hawaiian Airlines' Motion for Partial Summary Judgment; and (5) Hawaiian Airlines had an improper purpose in bringing the Sanctions Motion.
I. The Bankruptcy Court's Inherent Authority to Sanction
The Ninth Circuit has held that Bankruptcy Courts possess the inherent power to sanction bad faith or willful misconduct even in the absence of express statutory authority to do so.
11 U.S.C. § 105(a). By granting Bankruptcy Courts authority to "issue orders necessary `to prevent an abuse of process,' Congress impliedly recognized that Bankruptcy Courts have the inherent power to sanction that . . . exists within Article III courts."
In order to impose sanctions under its inherent authority, a Bankruptcy Court "must make an explicit finding of bad faith or willful misconduct."
II. Bankruptcy Court's Finding of Bad Faith
Here, the Bankruptcy Court made clear that it was sanctioning Konop pursuant to its inherent powers. (Bk. No. 03-00817, Doc. # 5873.) In order to impose sanctions under its inherent authority, the Bankruptcy Court was required to make a finding of bad faith or willful misconduct.
The Bankruptcy Court's Order Granting Sanctions states that Konop is held in contempt and ordered to pay sanctions based, in part, on the reasons stated orally on the record at the hearings held on July 29, 2005, December 13, 2005, and March 28, 2006. (Bk. No. 03-00817, Doc. # 5873.) At the hearing held on July 29, 2005, the court stated the following with respect to the grounds for imposing sanctions against Konop:
(Bk. No. 03-00817, Doc. # 5873 at 29). At the hearing held on March 28, 2006, the Bankruptcy Court reiterated its conclusion regarding Konop's knowing misrepresentations as follows:
Therefore, although the Court did not explicitly state that Konop acted in bad faith, it impliedly did so by finding that Konop engaged in conduct amounting to bad faith, i.e., knowingly making misrepresentations to the Court.
Moreover, the court's finding that Konop made knowing misrepresentations to the court was not clearly erroneous. The record contained more than sufficient evidence to support a finding that Konop knew that the factual representations made in the disclosure statements were false at the time that those documents were filed. That evidence included Konop's deposition testimony, wherein he acknowledges that he did not have funding by the time that he filed the September 2004 disclosure statement, as well as Konop's emails to Boghosian demonstrating that he had clear misgivings about the availability of funding prior to the filing of the November and December disclosure statements. (Bk. No. 03-00817, Doc. # 4569 Ex. D at 150, Doc. # 5298 Exs. D, E.) Further, after the Bankruptcy Court gave Konop an opportunity to pursue additional discovery and supplement the record regarding his alleged knowing misrepresentations, Konop failed to come forward with evidence of financing commitments sufficient to support the representations made in the various disclosure statements. To be sure, the statements in his declaration regarding his reliance on funding from USA Capital Bank is controverted by his own prior deposition testimony. (Bk. No. 03-00817, Doc. # 4569 Ex. D. at 75-76;
III. Due Process
Notice and opportunity to be heard are indispensable prerequisites for monetary sanctions imposed pursuant to the court's inherent powers.
Konop argues that the Bankruptcy Court did not provide him adequate notice of "the allegations asserted to support its grant of sanctions." (Doc. # 56 at 19.) Konop also claims that there was "neither a fair hearing, nor a reasonable opportunity to be heard." (Doc. # 66 at 13.) The record belies this argument.
First, the Sanctions Motion put Konop on notice that Hawaiian Airlines was seeking sanctions for the "pattern of misrepresentations [that] began in September 2004 with the deceptive disclosure statement filed by Konop and others, and continued for a period of six months." (Bk. No. 03-00817, Doc. # 4739 at 2.) The Motion identified with specificity the various alleged misrepresentations made by Konop and set forth evidence supporting those allegations. (
Next, at the July 29, 2005 hearing on the Sanctions Motion, Konop's attorney, David Gierlach, Esq., was given an opportunity to present oral argument to the Court. Following oral argument, the Bankruptcy Court issued a bench ruling that detailed the sanctionable conduct committed by Konop. (Bk. No. 03-00817, Doc. # 5442.) Specifically, the Bankruptcy Court pointed to the misrepresentations made in the September 2004 disclosure statement and the continued misrepresentations made to the court following Konop's emails to Boghosian. (
At the status conference held a couple weeks later, pursuant to Mr. Gierlach's request, the Bankruptcy Court granted Konop the opportunity to conduct additional discovery and present evidence to show that he had a good faith belief that committed financing existed. (Bk. No. 03-00817, Doc. # 5700 at 8-10, 20.) In other words, Konop was given yet another chance to explain himself after the Sanctions Motion was fully briefed, hearing was held on that Motion, and the Court issued a bench ruling on that Motion. Konop took full advantage of this opportunity by filing a detailed supplemental declaration containing 545 paragraphs to which he attached 74 exhibits. (Bk. No. 03-00817, Docs. # 5492.)
After Konop submitted this additional evidence, Hawaiian Airlines filed its Motion for Partial Summary Judgment, which set forth all the conduct for which Hawaiian was seeking sanctions based upon the record that had been developed. (Bk. No. 03-00817, Doc. # 5731.) Konop was then given an opportunity to respond and submit yet another declaration to show that he did not act in bad faith.
At the hearing on the Partial Summary Judgment motion, the Court issued a lengthy tentative ruling that identified numerous knowing misrepresentations made by Konop, including five specific misrepresentations in the September 2004 disclosure statement, the same misrepresentations repeated in the November 2004 and December 2004 disclosure statements, and the false and misleading statements in the Boghosian affidavit and the Spencer declaration. (Bk. No. 03-00817, Doc. # 5885 at 4-10.) The Court observes that these are the very same misrepresentations set forth in the Supplemental Memorandum that was incorporated by reference into Hawaiian Airlines' original Sanctions Motion. After issuing its tentative ruling, the Court gave both sides another opportunity to be heard with respect to Konop's knowing misrepresentations. Thereafter, the court adopted its tentative ruling and granted the Motion for Partial Summary Judgment.
In sum, the record clearly demonstrates that Konop received more than adequate notice of exactly which conduct was alleged to be sanctionable and was furthermore aware that he stood accused of having acted in bad faith. The record further demonstrates that Konop was provided ample opportunity to be heard with respect to those issues. Accordingly, the Court concludes that Konop's procedural due process rights were not violated in connection with the imposition of sanctions.
IV. Calculation of Sanctions
The Bankruptcy Court issued an Order Granting Sanctions Against Konop in the amount of $379,340.11, less any amounts paid by Randal Yoshida and Timothy Philipp. (Bk. No. 03-00817, Doc. # 5873.) This amount reflects the costs incurred in investigating and opposing the September, November, and December 2004 disclosure statements as well as the costs of bringing and prosecuting the Sanctions Motion. Konop contends that the Bankruptcy Court abused its discretion in determining the amount of sanctions awarded against him. Specifically, he asserts that the sanctions award should have been limited to the costs incurred by Hawaiian Airlines in responding to the September 2004 disclosure statement and that any sanctions beyond that amount are punitive and exceed the Bankruptcy Court's inherent authority.
A reviewing court will not disturb the Bankruptcy Court's entry of sanctions unless the Bankruptcy Court abused its discretion.
As applied here, the Bankruptcy Court properly held Konop liable for the attorneys' fees and expenses incurred by Hawaiian Airlines in investigating and opposing the three misleading disclosure statements since those constitute the "costs of opposing the offending pleading or motion."
The Bankruptcy Court erred, however, by holding Konop liable for the fees and expenses incurred by Hawaiian Airlines in preparing and prosecuting the Sanctions Motion, as those are not costs directly incurred by Hawaiian in opposing the misleading disclosure statements.
V. Motion for Partial Summary Judgment
Konop argues that the Bankruptcy Court erred in granting Hawaiian Airlines' Motion for Partial Summary Judgment against Konop. Specifically, Konop contends that there were genuine issues of material fact as to whether Konop made knowing misrepresentations to the court.
A district court reviews
Here, the Court concludes that there were no genuine issues of material fact as to whether Konop made knowing misrepresentations to the Bankruptcy Court. As set forth above, Hawaiian Airlines presented overwhelming evidence demonstrating that at the time that each of the three misleading disclosure statements were filed, Konop did not believe that financing existed to support his Reorganization Plan. Meanwhile, after being given several opportunities to supplement the record with respect to his argument that the representations were made in good faith, Konop failed to proffer competent, affirmative evidence showing that he believed such financing existed. To be sure, Konop's declaration and exhibit addendum did not raise a genuine issue of fact as to whether Konop believed that the specific representations he made in his disclosure statements were true.
VI. Improper Purpose
Lastly, Konop asserts that the Sanctions Motion should be dismissed because of Hawaiian Airlines' allegedly "unclean hands." (Doc. # 56 at 29.) According to Konop, Hawaiian Airlines had unclean hands because it brought the Sanctions Motion for the improper purpose of "counter[ing] Konop's lawful efforts to promote a Reorganization Plan." (
CONCLUSION
For the reasons stated above, the Court
IT IS SO ORDERED.
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