Timberon Water and Sanitation District

1
UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	TIMBERON WATER AND SANITATION DISTRICT, 	No. 9-07-12142 ML
Debtor.
ORDER DENYING GENERAL OBJECTORS’ REQUEST FOR ATTORNEYS’ FEES
THIS MATTER is before the Court on the request of Arlin Gamble, Lyndal Wilcox,
Dwayne Beagles and Virgil Beagles (together, General Objectors), by and through their counsel
of record, J. Robert Beauvais, for an order awarding General Objectors their attorney’s fees and
costs incurred in contesting the Chapter 9 bankruptcy petition filed by Timberon Water and
Sanitation District (“TWSD”). General Objectors assert that the Court should exercise its
authority under 11 U.S.C. § 105 to award attorney’s fees and costs to General Objectors as a
sanction against TWSD for its alleged bad faith filing of the Chapter 9 proceeding. 	After
consideration of the briefs filed by General Objectors and TWSD, and after review of the record
of this proceeding, the Court finds that a sanction against TWSD is not warranted. 	Accordingly,
the Court declines to award General Objectors its attorney’s fees and costs.
BACKGROUND AND PROCEDURAL HISTORY
TWSD filed a voluntary petition under Chapter 9 of the Bankruptcy Code on August 30,
2007. 	General Objectors filed an objection to the voluntary petition, alleging that TWSD did
not meet the requirements for protection under Chapter 9 of the Bankruptcy Code and had filed
its petition in bad faith. 	See Docket No. 9. 	The Court held a two-day hearing on General
Objectors’ objection to the filing of the voluntary petition, at which General Objectors presented
evidence in support of their allegations that TWSD was not insolvent and failed to negotiate in
good faith with its creditors prior to the filing of the petition, two requisites to proceeding under
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1Those subsections provide, in relevant part:
An entity may be a debtor under chapter 9 of this title if and only if such entity –
(3) is insolvent;
5)(B) has negotiated in good faith with creditors and has failed to obtain
the agreement of creditors holding at least a majority in amount of
the claims of each class that such entity intends to impair under a
plan in a case under such chapter[.]
11 U.S.C. § 109(c)(3) and (5)(B).
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Chapter 9. See 11 U.S.C. § 109(c)(3) and (5).1 General Objectors also asserted that TWSD
filed its petition in bad faith. 	Though raised by General Objectors in their Memorandum Brief
in Support of Objection to Chapter 9 Bankruptcy Timberon Water and Sanitation District
Petition (See Docket No. 9), neither party asserted at trial that TWSD was not eligible for relief
under Chapter 9 of the Bankruptcy Code because it was not authorized by state law to file a
petition under Chapter 9.
At a status conference following the trial, the Court raised this threshold issue of whether
TWSD was eligible for relief under Chapter 9 of the Bankruptcy Code under 11 U.S.C. §
109(c)(2), and requested that the parties brief this issue. In their brief regarding TWSD’s
eligibility, General Objectors acknowledged that the focus of their argument had been the
eligibility requirements found under 11 U.S.C. § 109(c)(3) and (5), rather than 11 U.S.C. §
109(c)(2). 	General Objectors also requested the Court to consider further argument regarding
costs and attorney’s fees under 11 U.S.C. § 105, as a sanction against TWSD. See Response to
Debtor TWSD’s Memorandum Regarding Eligibility to File for Bankruptcy Protection (“General
Objectors’ Brief”), Docket No. 54.
The Court determined that TWSD is not specifically authorized under New Mexico law
to be a debtor under Chapter 9 of the Bankruptcy Code, and, therefore, failed to meet the
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eligibility requirements of 11 U.S.C. § 109(c)(2). See Memorandum Opinion, Docket No. 55.
Consequently, the Court dismissed TWSD’s Chapter 9 bankruptcy case on June 18, 2008. See
Order Dismissing Bankruptcy Case, Docket No. 56. 	The case was closed on July 2, 2008.
On October 10, 2008, General Objectors filed a motion to reopen the bankruptcy case for
the limited purpose of considering their claim to attorney’s fees and costs as a sanction against
TWSD. 	The Court granted the motion and reopened the case on February 2, 2009. See Order
Granting Motion to Reopen and Setting Preliminary Hearing on Objectors’ Request for Award of
Attorney’s Fees and Costs, Docket No. 64. 	The Court directed the parties to submit briefs on
the issue of whether an award of attorney’s fees and costs should be entered against TWSD. The
Court further authorized the parties to submit proposed findings and conclusions, and allowed
General Objectors to submit the deposition transcript of Ms. Olivia Padilla-Jackson, which the
Court had previously authorized General Objectors to submit following the close of evidence on
their motion to dismiss.
DISCUSSION
General Objectors request the Court to exercise its inherent authority under 11 U.S.C. §
105 and award General Objectors its attorney’s fees and costs incurred in connection with this
bankruptcy case as a sanction against TWSD for its alleged bad faith filing of its voluntary
petition under Chapter 9 of the Bankruptcy Code. 	That section provides:
The court may issue any order, process, or judgment that is necessary or appropriate to
carry out the provisions of this title. No provision of this title providing for the raising of
an issue by a party in interest shall be construed to preclude the court from, sua sponte,
taking any action or making any determination necessary or appropriate to enforce or
implement court orders or rules, or to prevent an abuse of process.
11 U.S.C. § 105(a).
Bankruptcy courts have relied upon 11 U.S.C. § 105(a) to impose an award of attorney’s fees
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2See also, In re Courtesy Inns, Ltd., Inc. 40 F.3d 1084, 1089 (10 th Cir. 1994)(stating that a
bankruptcy court has inherent authority under 11 U.S.C. § 105 “to maintain order and confine
improper behavior in its own proceedings” and holding that the bankruptcy court had inherent
authority to impose sanctions against company president in connection with dismissal of petition
based upon bad faith filing); Providian Nat’l Bank v. Vitt (In re Vitt), 250 B.R. 711, 723
(Bankr.D.Colo. 2000), aff’d on other grounds, 269 B.R. 232 (D.Colo. 2001)(stating that “Section
105(a) is intended to empower bankruptcy courts with the inherent powers imbued in the federal
district court to sanction conduct abusive of judicial process.”)(citing Courtesy Inns, 40 F.3d at
1089 and In re Skinner, 917 F.2d 444, 447 (10 th Cir. 1990)).
3See Vitt, 250 B.R. at 723, n.17 (“where the bankruptcy court sanctions parties pursuant
to its inherent authority, its decision is reviewed for an abuse of discretion and its factual
findings subject to the clearly erroneous standard.”)(citing In re Aspen Limousine Service, Inc.,
198 B.R. 341, 344 (D.Colo. 1996)).
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and costs against a party as a sanction for bad faith conduct. See, e.g., In re U.S. Voting Mach,
Inc., 224 B.R. 165, 169 (Bankr.D.Colo. 1998)(stating that “[c]ourts still retain the inherent
power to impose monetary sanctions for conduct determined by the court to be abusive,
unwarranted or in bad faith.”); In re Deville, 280 B.R. 483, 495 (9th Cir. BAP 2002), aff’d, 361
F.2d 539 (9th Cir. 2004) (“Sanctions under a court’s inherent power [under § 105] are justified
against a party who willfully disobeys a court order or acts in bad faith, ‘which includes a broad
range of willful improper conduct.’”)(quoting Fink v. Gomez, 239 F.3d 989, 991-92 (9th Cir.
2001)).2 Whether to impose sanctions under the court’s inherent power as a punishment for
willful or bad faith conduct lies within the court’s discretion. 3 But in order to impose sanctions
under its inherent power, “a court must find that a party acted ‘in bad faith, vexatiously,
wantonly, or for oppressive reasons.’” Deville, 280 B.R. at 495 (quoting Chambers v. NASCO,
Inc., 501 U.S. 32, 44, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991)). 	In addition, the bankruptcy court
may not use 11 U.S.C. § 105(a) to contravene the Bankruptcy Code; the court’s inherent power
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4In re Enloe, 373 B.R. 123, 135 (Bankr.D.Colo. 2007)(citing Marrama v. Citizens Bank
of Massachusetts, 549 U.S. 365, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007)).
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under 11 U.S.C. § 105(a) can only be used in furtherance of the Bankruptcy Code.4
The Court dismissed TWSD’s case on grounds other than those relied upon by General
Objectors in pursuing their motion to dismiss. 	At the time, there was no precedent in this
district as to whether a water and sanitation district is eligible for relief under Chapter 9 of the
Bankruptcy Code. 	The Court is not inclined to impose sanctions when it dismissed the
bankruptcy proceeding based upon a matter of first impression in this district. The facts upon
which General Objectors now rely in their request for an award of attorney’s fees, though alleged
by General Objectors in their motion to dismiss TWSD’s Chapter 9 petition, were not relied
upon by the Court in reaching its determination to dismiss the Chapter 9 case. The testimony
offered at the trial on the General Objectors’ motion to dismiss as well as the deposition
transcript of Ms. Padilla-Jackson indicate that there was likely a breakdown in communications,
but the evidence regarding TWSD’s insolvency offered at trial was not conclusive. 	Moreover,
as stated above, the Court did not make a determination as to TWSD’s good faith nor as to
insolvency in disposing of General Objectors’ motion to dismiss. Thus, even though it is evident
that the parties hotly contested the filing of TWSD’s chapter 9 proceeding, the Court cannot say
that the filing of TWSD’s chapter 9 proceeding was improperly vexatious, unnecessary, or
abusive.
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WHEREFORE, IT IS HEREBY ORDERED that General Objectors’ request for
attorneys’ fees and costs as a sanction against the Debtor is DENIED.
__________________________________________
MARK B. McFEELEY
United States Bankruptcy Judge
Date entered on docket: June 12, 2009
COPY TO:
J. Robert Beauvais 	Daniel J. Behles
Attorney for General Objectors 	Attorney for Debtor
PO Box 2408 	770 Jefferson NE, Suite 305
Ruidoso, NM 88345 	Albuquerque, NM 87109
J:\Orders\TimburonAttorneyFEesOrder.wpd
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