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MJS Las Croabas Props., Inc. v. Federal Deposit Insurance Corporation

United States Bankruptcy Appellate Panel, First Circuit

February 17, 2016

MJS LAS CROABAS PROPERTIES, INC., a/k/a Ocean Club at Seven Seas, Debtor. CASTELLANOS GROUP LAW FIRM, L.L.C., Appellant,
FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for Westernbank Puerto Rico, and WILFREDO SEGARRA MIRANDA, Chapter 7 Trustee, Appellees

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[Copyrighted Material Omitted]

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          Appeal from the United States Bankruptcy Court for the District of Puerto Rico. Bankruptcy Case No. 12-05710-ESL. (Hon. Enrique S. Lamoutte, U.S. Bankruptcy Judge).

         Alfredo A. Castellanos Bayouth, Esq., on brief for Appellant.

         Jeffrey A. Sandell, Esq., Manuel Fernández-Bared, Esq., and Brian M. Dick-Biascoechea, Esq., on brief for Appellee, Federal Deposit Insurance Corporation, as Receiver for Westernbank Puerto Rico.[1]

         Before Feeney, Deasy, and Cary, United States Bankruptcy Appellate Panel Judges.


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          Cary, U.S. Bankruptcy Appellate Panel Judge.

         Castellanos Group Law Firm, L.L.C. (the " Castellanos Firm" ) appeals from the following bankruptcy court orders: (1) the March 13, 2015 order imposing sanctions against the firm (the " March 2015 Order" ); [2] and (2) the May 27, 2015 order quantifying the amount of the sanctions (the " May 2015 Order" ) (collectively, " the Orders" ). For the reasons discussed below, we AFFIRM the Orders.


         MJS Las Croabas Properties, Inc. (the

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" Debtor" )[3] filed a voluntary chapter 11 petition on July 19, 2012. Thereafter, Quiñones-Rodriguez filed duplicate notices of appearance in the main case and an adversary proceeding on behalf of a creditor, indicating she was a lawyer " from the law firm of Castellanos & Gierbolini." [4] On September 12, 2013, the bankruptcy court converted the case to chapter 7; several days later, the Trustee was appointed.

         On August 14, 2014, Quiñones-Rodriguez filed a motion for relief from stay pursuant to § 362[5] (the " Relief Motion" ) on behalf of a different creditor, the Homeowners Association of the Development (the " HOA" ),[6] seeking authorization " to present a complaint before the Department of Consumer Affairs against the [D]ebtor for [ ] construction defects" relating to the Development. Her signature on the Relief Motion indicated that Quiñones-Rodriguez was a lawyer with the Castellanos Firm. On August 15, 2014, the bankruptcy court issued a summons, scheduling the Relief Motion for a hearing at 9:00 A.M. on September 9, 2014 (the " September 2014 Hearing" ).

         Thereafter, on August 19, 20, and 21, 2014, Manuel Fernández-Bared (" Fernández-Bared" ), a lawyer from the firm of Toro, Colón, Mullet, Rivera & Sifre, P.S.C. (" Toro Colón" ) serving as local counsel for the FDIC, telephoned Quiñones-Rodriguez to resolve the FDIC's concerns regarding the Relief Motion prior to the September 2014 Hearing.[7] In each instance, the person who answered the phone informed Fernández-Bared that Quiñones-Rodriguez was unavailable; each time, Fernández-Bared left a message,

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asking Quiñones-Rodriguez to return his call. His phone calls went unreturned and unacknowledged. In addition, the Trustee and Trigild telephoned Quiñones-Rodriguez several times, without success.

         Unable to reach Quiñones-Rodriguez by email or telephone, the FDIC filed a motion for extension of time on August 27, 2014, seeking seven additional days to communicate with the HOA and/or to respond to the Relief Motion. On August 28, 2014, Trigild also filed a motion for extension of time, similarly requesting a seven-day extension in order to make a final effort to speak with the HOA's counsel or, if necessary, to file a response to the Relief Motion. The following day, the Trustee likewise filed a motion, seeking nine additional days to file an opposition to the Relief Motion. In the absence of any objection or response from the HOA, the bankruptcy court granted the three motions, directing the FDIC and Trigild to respond to the Relief Motion by September 4, 2014, and the Trustee to respond by September 8, 2014.

         On August 29, 2014, the FDIC, through another of its local attorneys, Brian M. Dick-Biascoechea (" Dick-Biascoechea" ), attempted to communicate with Quiñones-Rodriguez via telephone, in yet another effort to discuss the Relief Motion prior to the September 2014 Hearing. Quiñones-Rodriguez was " unavailable" to take the call. Dick-Biascoechea immediately followed up the call with an email to Quiñones-Rodriquez, stating:

My name is Brian Dick[-]Biascoechea, I represent the FDIC as receiver for Westernbank in the bankruptcy case of MJS Las Croabas, developer of [the Development]. I would like to speak with you as soon as possible concerning your client's request for relief from stay. I called your office today but was not able to reach you. Brother counsel Manuel Fernández[-]Bared has also tried contacting you on several occasions since you filed the motion for stay relief, to no avail.
Undeniably, all parties, as well as the Court, will benefit from a discussion of your client's objectives and your understanding of the law in this matter. It is in all our interests to dissipate any disagreements regarding your request before the FDIC, Trigild and the Trustee contest your motion next week. Per our motion for extension of time filed on August 27, 2014, the Court is already aware that we are trying to contact you for these purposes.
Let us know what time you can speak, or, simply give me a call using the contact information below.

         Dick-Biascoechea did not receive any form of response to his email.

         Subsequently, on September 3, 2014, Trigild's attorney emailed Quiñones-Rodriguez, stating:

We are writing on behalf of Trigild, Inc. We have tried to reach you at your office several times, however we have not received any response. Trigild has some concerns with the HOA's Motion for Relief from Automatic Stay that we would like to discuss without having to object to the HOA's motion. Trigild has until tomorrow to file its opposition to HOA's motion, therefore we hope to receive a response from you before then.

         That email produced no response.

         Unable to resolve its concerns regarding the Relief Motion by telephone, the FDIC filed a twelve-page opposition to the Relief Motion (the " FDIC's Opposition" ) by the September 4, 2014 deadline, five days before the September 2014 Hearing.[8] It argued:

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Over the past three weeks, the FDIC-R has repeatedly called and e-mailed the HOA's counsel in a genuine, honest, and good faith effort to resolve various defects inflicting [sic] the HOA's Motion for Relief. The HOA's counsel, however, has refused to respond to a single message or otherwise speak with undersigned counsel. Accordingly, in order to protect its interests, which arise, in part, from its timely-filed proofs of claim totaling more than $54 million, the FDIC-R has no choice but to file this objection and point out that the Motion for Relief is improper, fatally flawed for numerous independent reasons, and must be denied.

(footnote omitted). Trigild immediately joined the FDIC's Opposition, stating, in relevant part:

Trigild has tried to contact HOA's counsel several times, has left several messages, additionally we sent an email to HOA's counsel informing her that we wanted to discuss some of Trigild's concerns. However we haven't received any response.

         Several days passed, and the HOA's counsel continued to ignore the communications from the FDIC, the Trustee, and Trigild. However, on September 8, 2014, at 4:51 P.M., while Sandell was traveling by plane from Dallas, Texas to San Juan, Puerto Rico to attend the September 2014 Hearing, Quiñones-Rodriguez unexpectedly filed a terse motion to withdraw the Relief Motion and " vacate" [sic] the hearing (the " Withdrawal Motion" ), offering no explanation for this change of course.

         Accordingly, at 6:52 A.M. on the morning of the September 2014 Hearing, the FDIC filed a response to the Withdrawal Motion (the " FDIC's Response to the Withdrawal Motion" ), wherein it: (1) requested the entry of an order pursuant to the bankruptcy court's inherent authority, directing both the HOA and the [Castellanos Firm] to pay the FDIC's expenses and costs incurred in connection with the filing of the FDIC's Opposition and travelling to the hearing (the " FDIC's Sanctions Request" ); (2) urged the court to proceed with the hearing; and (3) requested five additional days to prepare a bill of costs, itemizing the expenses and costs it incurred as a result of " the misconduct of [the] HOA and [the Castellanos Firm]." The FDIC maintained that Sandell " had no choice but to prepare and file [an] extensive response . . . and fly from Dallas, Texas to San Juan, Puerto Rico" to attend the September 2014 Hearing because the [Castellanos Firm] " categorically refused to respond to any communications concerning the [Relief Motion]."

         At the hearing which ensued shortly thereafter, the HOA, the Trustee, and the FDIC appeared by counsel.[9] At the outset of the hearing, the court acknowledged the withdrawal of the Relief Motion, observed that there would have been grounds to deny the motion, and ruled that the FDIC's request to proceed with the hearing was moot. Then, in support of the FDIC's Sanctions Request, Sandell argued that the HOA refused to respond to " dozens of voice messages" and " several e-mails" from Trigild and the FDIC. On behalf of the HOA, Quiñones-Rodriguez

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countered: " [W]e are in the process of moving our offices, so our communications are interrupted right now. All the files are packed, . . . we have an answering service, but we don't have an office per se, so that might account for our lack of communication."

         The court explicitly granted both the Castellanos Firm and Quiñones-Rodriguez additional time to respond to the FDIC's Sanctions Request and indicated it was inclined to view the allegations of the FDIC and Trigild favorably:

So when you answer the motion by the FDIC and if there are any allegations to be made by counsel or by the persons involved in this matter, that they be under sworn statements under penalty of perjury, in opposition to the motion.
Depending on what the response is, I may or may not schedule a hearing and I will determine if the matter should be decided on the pleadings. But definitely, prima facie, after I read the -- I can advance to you that after I read the oppositions both by the FDIC and Trigild, as a matter of law, I thought that they proceeded.
Second, if that -- if failure to answer calls prompted the respondents to incur expenses, they should be compensated.
I am advancing that that's how I see it, but I will not make any final determination until I hear your written response, because as a matter of due process, I think you should be given time to respond to the allegations which, in my opinion, are serious allegations.

         On September 19, 2014, the Trustee filed a motion, " joining" the FDIC's Response to the Withdrawal Motion (the " Trustee's Sanctions Request" ) and representing that he had attempted to contact Quiñones-Rodriguez on at least three occasions, to no avail. The Trustee further asserted that the conduct of both the HOA and its counsel demonstrated " bad faith" and " unnecessarily increased administrative expenses of the estate." Maintaining that Rule 11,[10] § 1927,[11] and the court's inherent power permitted the court " to correct and to discipline conduct by counsel and parties," the Trustee sought: (1) the imposition of sanctions against the HOA and its counsel, jointly and severally; (2) a determination that the withdrawal of the Relief Motion was " with prejudice" ; and (3) a five-day period (from the entry of the order) to submit evidence in support of his fee application.

         On October 2, 2014, absent objection, the bankruptcy court entered two orders--one granting the FDIC's Sanctions Request, and the other granting the Trustee's Sanctions Request (collectively, the " October 2014 Sanctions Orders" ). The same day, the HOA immediately filed an emergency motion to vacate the October 2014 Sanctions Orders, on the grounds that they were entered prematurely.[12] Later on October 2, 2014, the HOA filed an amended motion to vacate (the " Amended Motion to Vacate" ),[13] reiterating the allegations of

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the original motion, and adding several attachments, including its Motion in Opposition to Request for Sanctions (the " HOA's Opposition to Sanctions" ) and unsworn statements of Quiñones-Rodriguez, Alfredo Castellanos Bayouth (" Castellanos" ), and Elga Albino Acosta (" Albino Acosta" ). The Amended Motion to Vacate was filed on behalf of the HOA by Quiñones-Rodriguez, whose signature line indicated that she was a lawyer with the " Castellanos & Gierbolini Law Firm."

         In the HOA's Opposition to Sanctions, it argued: (1) law firms are not responsible for the signatures of their attorneys; (2) the imposition of sanctions under § 1927 requires a finding of bad faith and vexatious conduct; (3) counsel for the FDIC could have appeared telephonically to avoid travel costs; (4) neither the FDIC nor the Trustee " exhausted" their remedies by sending a letter to opposing counsel, " explaining what they consider[ed] frivolous" ; and (5) " defending or prosecuting a lawsuit" was a " valid exercise of its First Amendment rights." Accordingly, the HOA asked the court to vacate the October 2014 Sanctions Orders.

         In her unsworn statement, Quiñones-Rodriguez indicated, inter alia, that: (1) she was an " independent contractor" and counsel for the HOA; (2) she had rendered professional legal services on behalf of " Alfred Castellanos, [d/b/a] Castellanos & Castellanos Law Firm, Castellanos & Gierbolini Law Firm and . . . now Castellanos Group Law Firm, L.L.C.," for nearly four years; (3) the Relief Motion was filed " after careful consideration . . . and after multiple communications with the HOA" ; (4) beyond the request for a certain expert's report, she knew of only one other communication from the moving parties relating to the Relief Motion; (5) she was unaware that the FDIC's attorney was traveling from Dallas for the September 2014 Hearing when she filed the Withdrawal Motion; (6) the HOA instructed her to file the Withdrawal Motion; and (7) she was surprised to learn that the September 2014 Hearing was going forward.

         In his unsworn statement, Castellanos represented: (1) he was the " owner and founding member" of the Castellanos Firm; (2) he was not the attorney of record for the HOA; (3) he " never received any communication from any of the attorneys that represent the FDIC or the Trustee regarding this case" ; (4) it was not his " practice to be unavailable to communicate with opposing counsel" ; (5) sanctions, if any, should be imposed upon the FDIC and the Trustee for making " heinous accusations" ; (6) the court should warn the FDIC against submitting " future filings . . . intended to deprive parties and litigants of their First Amendment rights" ; and (7) the court should strike the FDIC's Response to the Withdrawal Motion from the docket.

         Albino Acosta asserted in her unsworn statement that: (1) she had been the administrative assistant for " Alfredo Castellanos, [d/b/a] Castellanos & Castellanos Law Firm, Castellanos & Gierbolini Law Firm and . . . now Castellanos Group Law Firm, L.L.C." for nearly four years; (2) she was responsible for answering " most if not all" of the firm's incoming phone calls and " channeling . . . all written notifications" ; (3) as of October 2, 2014, she had not received any phone call, email, letter, or fax from any of the attorneys for the FDIC or from the office of the Trustee; and (4) the allegations contained in the FDIC's Response to the Withdrawal Motion and the Trustee's Sanctions Request were untrue.[14]

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          The HOA simultaneously filed a Motion Requesting Leave to File Documents, explaining that it filed the HOA's Opposition to Sanctions as an exhibit to the Amended Motion to Vacate because the " CM/ECF system did not allow [it] to file the opposition separately." Accordingly, the HOA requested leave to " file the Opposition to Motion for Sanctions separately with the accompanying exhibits."

         On October 7, 2014, the court granted the HOA's request to file an opposition to the pending sanctions requests, but instructed it to comply with P.R. LBR 9013-1(c).[15] Accordingly, on October 8, 2014, Quiñones-Rodriguez re-filed the HOA's Opposition to Sanctions as a separate document, this time indicating that she was from the " Castellanos Group Law Firm."

         On October 10, 2014, Quiñones-Rodriguez filed on behalf of the HOA a motion for clarification relating to the October 7, 2014 order, again indicating her affiliation with the " Castellanos Group Law Firm." She argued:

It is the HOA's understanding by what is stated in the Generic Order issued on October 7, 2014 that our Amended Motion to Vacate Order was implicitly granted by allowing the ...

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