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In re Gilbert Hospital, LLC

United States District Court, D. Arizona

September 19, 2019

In re Gilbert Hospital, LLC Debtor.
v.
Michael W. Carmel Limited, et al. Appellees. Brinkman Portillo Ronk APC, Appellant,

          ORDER

          G. Murray Snow, Chief United States District Judge.

         Brinkman Portillo Ronk APC (“BPR” or alternatively “Appellant”) appeals a Sanctions Order entered on September 24, 2018 by the United States Bankruptcy Court of the District of Arizona (the “Bankruptcy Court”). The Order required BPR to pay $30,000 to the Creditor Trust for the benefit of beneficiaries, $5,000 to creditor Southwest Medical Services, and $5,000 to Michael W. Carmel, Ltd. The Order also revoked BPR’s pro hac vice status, effective October 1, 2018. For the reasons set forth below, that Order is vacated as to the monetary sanctions and affirmed as to the revocation of pro hac vice. The case is remanded to the Bankruptcy Court for further action consistent with this order.[1]

         BACKGROUND

         On March 6, 2013, Florence Hospital at Anthem, LLC (“FHA”) filed for Chapter 11 bankruptcy. On February 5, 2014, Gilbert Hospital, LLC (“GH”) also filed for Chapter 11 bankruptcy. The Bankruptcy Court subsequently determined that the FHA and GH cases would be jointly administered for the purpose of confirming a joint plan of reorganization and related proceedings. The final version of the “Second Amended and Restated Joint Plan of Reorganization for Gilbert Hospital LLC and Florence Hospital at Anthem, LLC Proposed by Gilbert Hospital, LLC and Bank SNB” (“Joint Plan”) was confirmed by the Bankruptcy Court on October 23, 2015. Thereafter, to resolve disputes and potential appeals, the parties negotiated a stipulated confirmation order, which was entered by the Bankruptcy Court on February 29, 2016 as a “Stipulated Order Amending Findings of Fact, Conclusions of Law and Order Confirming Second Amended Joint Plan of Reorganization and Declaring Effective Date” (“Stipulated Confirmation Order”). After the entry of the Stipulated Confirmation Order, the Creditor Trust Agreement (“Trust Agreement”) was executed. Pursuant to these agreements, the Gilbert Hospital Unsecured Creditor Trust (“Trust”) was formed as a mechanism for recovery for GH’s unsecured creditors. David Gottlieb was appointed as trustee (“Trustee”) and retained BPR as his counsel. GH and FHA were thereafter collectively managed by a newly formed entity, New Vision Health, LLC (“NVH”).

         On January 10, 2018, NVH filed a “Motion for Order Directing the Gilbert Hospital Unsecured Creditors Trust to Produce Information About Its Operations; and to Show Cause Why Its Trustee and Counsel Should Not be Replaced.” Although the Bankruptcy Court denied NVH’s request to immediately remove the Trustee and BPR, it entered an order directing the Trustee and BPR to produce a complete accounting through January 10, 2018, including detailed invoice and billing records to justify payments made to professionals; ledgers of payments made to the Trustee, BPR, and other professionals; ledgers showing reserves held for claimants and beneficiaries; and a claims register documenting allowed claims, disallowed claims, and disputed claims (“Accounting Order”). This accounting was to be filed with the Bankruptcy Court and distributed to NVH’s counsel by January 31, 2018.

         In response, the Trustee filed a Motion for Reconsideration of the Accounting Order (“Motion for Reconsideration”), arguing that the Bankruptcy Court did not have jurisdiction to enter the Accounting Order. On February 1, 2018, the Bankruptcy Court entered an order setting a hearing on the Motion to Reconsider for February 15, 2018 (“Reconsideration Hearing Order”). The Reconsideration Hearing Order addressed the Trustee’s arguments regarding the Bankruptcy Court’s jurisdiction and cited two provisions in the Trust Agreement as authority for the Court’s power to order an accounting. The Reconsideration Hearing Order further stated that seeking reconsideration did not toll the Accounting Order deadline of January 31, 2018, which had passed without the Trustee’s compliance. The Bankruptcy Court then set a new filing deadline of February 9, 2018 permitting the Trustee to file the requested documents under seal, with which the Trustee timely complied.

         On February 7, 2018, the Trustee filed a Rule 60(b) Motion seeking to vacate both the Accounting Order and the Reconsideration Hearing Order, arguing that the Bankruptcy Court lacked subject matter jurisdiction to order an accounting. The Trustee also filed a Motion for Stay requesting the Bankruptcy Court stay the Accounting and Reconsideration Hearing Orders pending resolution of the Rule 60(b) Motion, and a Motion to Withdraw the Reference. NVH responded to each of these motions. The February 15 hearing set in the Reconsideration Hearing Order was later continued by consent to February 28. Subsequently, NVH and the Trustee stipulated to withdraw the Motion for Reconsideration and the Motion to Withdraw the Reference. The Bankruptcy Court signed the Order approving the Stipulation on February 27, 2018. The Accounting Order and the Reconsideration Hearing Order were thus left as final orders with no pending requests for relief.

         After the closure of GH’s businesses, the United States Trustee moved to dismiss both bankruptcy cases. On August 1, 2018, the Bankruptcy Court held a hearing on the Motion to Dismiss. The Bankruptcy Court expressed its intent to require the Trustee to disclose the accounting information filed in February to Trust beneficiaries and other interested parties. The Bankruptcy Court also noted its power to order an accounting and its continuing post-confirmation jurisdiction over the Trustee and the Trust. Finally, the Bankruptcy Court permitted the Trustee to file additional briefing concerning the accounting. This information was subsequently documented in a Minute Entry. On August 13, 2018, the Trustee appealed the August 1 Minute Entry to the extent that it addressed the Bankruptcy Court’s power to order an accounting and continuing post-confirmation jurisdiction over the Trustee and the Trust. In addition, on August 14, 2018, the Trustee filed a motion for limited stay of the Minute Order as it related to jurisdiction of the Bankruptcy Court over the Creditor Trust and a motion to expedite the hearing on the Minute Order Stay Motion.

         On August 16, 2018, the Bankruptcy Court granted the Trustee’s motion to expedite and set the Minute Order Stay Motion for hearing August 30, 2018. After reviewing the Trustee’s amended brief and the accounting filed under seal on February 9, 2018, the Bankruptcy Court also ordered the Trustee to file the accounting publicly by August 23, 2018, including a summary sheet setting forth the amount of fees and costs accrued by and paid to each professional assisting him in the bankruptcy through January 10, 2018 (“Second Accounting Order”). The public accounting was to be redacted only as necessary to protect attorney-client privilege or strategy. On August 23, 2018, the Trustee partially complied with the Second Accounting Order; however, the Trustee’s filing omitted BPR’s detailed invoice and billing records. The Trustee then filed a Notice of Appeal regarding the Accounting Order on August 24, 2018, taking issue with the portion of the Second Accounting Order requiring the Trustee to file BPR’s privileged billing records.

         On August 30, 2018, the parties appeared on the Minute Order Stay Motion. The Bankruptcy Court stated that it could not conclude that a stay pending appeal was appropriate, but it granted a temporary stay of fifteen days to allow the Trustee to seek a stay from the District Court. The Bankruptcy Court also discussed the partial accounting filed by the Trustee and the fact that BPR’s bills were not filed. Noting that the Trustee had failed to follow a specific order, the Bankruptcy Court entered an Order to Show Cause (“OSC”) as to why the Trustee and/or BPR should not be held in contempt for violating the Court’s orders requiring disclosure. Therefore, as of August 30, 2018, BPR was on notice that it could be subject to contempt. A hearing on the OSC was scheduled for September 17, 2018. On September 5, 2018, the Trustee resigned his position and was replaced by Peter Kravitz (“Subsequent Trustee”). On September 6, 2018, the Subsequent Trustee filed most of BPR’s redacted bills for the required time period. On September 12, 2018, the Subsequent Trustee filed the remaining bills, completing the ordered accounting.[2]

         At the hearing on September 17, 2018, the Bankruptcy Court reviewed the history of the case and discussed its concerns as to the violation of the Second Accounting Order. The Bankruptcy Court found that the violation was not merely technical nor inadvertent and that it was akin to contempt. Citing Rule 9011(c)(1), Section 105(a), and its inherent powers, the Bankruptcy Court then assessed sanctions against BPR (but neither the original nor the Subsequent Trustee). The Bankruptcy Court ordered BPR to pay $30,000 to the Creditor Trust for the benefit of beneficiaries, $5,000 to creditor Southwest Medical Services, and $5,000 to Michael Carmel “in order to deter future similar conduct.” (Doc. 7-5 at 19.) The Court also revoked BPR’s pro hac vice status in the bankruptcy case, effective October 1, 2018. Finally, the Court ordered BPR to file an updated accounting to include information from January 10, 2018 through the end of August, with an unredacted version filed under seal by September 26, 2018 and a redacted version filed publicly no later than October 9, 2018.

         On September 25, 2018, BPR filed a Notice of Appeal of the Sanctions Order to the Bankruptcy Appellate Panel of the Ninth Circuit. On October 12, 2018, Appellee filed an election to proceed in District Court, transferring the appeal to this Court.

         DISCUSSION

         I. ...


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