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In re Salem

United States District Court, N.D. Illinois, Eastern Division

December 14, 2017

IN RE MAURICE SALEM, Appellant.

         On appeal from the U.S. Bankruptcy Court for the Northern District of Illinois Bankr. Case No. 09-B-05868 Judge Jacqueline P. Cox

          MEMORANDUM OPINION AND ORDER

          Robert M. Dow, Jr. United States District Judge

         This case is on appeal from the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, Case No. 09-B-05868. Appellant Maurice Salem (“Salem”) is an attorney who represents Ragda Sharifeh (“Ragda”) and Haifa Sharifeh (“Haifa”) in the bankruptcy proceeding. Salem appeals from the Bankruptcy Court's February 16, 2017 order [6-1] sanctioning him and fining him $20, 000 for filing two motions in violation of Federal Rule of Bankruptcy Procedure 9011. Salem also has filed a motion for extension of time to pay the fine [7]. For the following reasons, the Court affirms the Bankruptcy Court's order. The Court also grants Salem's motion for extension of time [7] and gives him until January 16, 2018 to pay the fine imposed by the Bankruptcy Court.

         I. Background

         The underlying Bankruptcy Court proceeding (Case No. 09-B-05868) has been pending since 2009 before Bankruptcy Judge Cox. The case is a Chapter 7 bankruptcy initiated by Debtor Richard Sharif (“Debtor”), who is Ragda and Haifa's brother. Horace Fox, Jr. is the bankruptcy trustee (“Trustee”). Debtor filed the bankruptcy action shortly after a federal judge in Texas ordered him to pay more than $650, 000 as a sanction for failing to comply with discovery orders in a case that he filed in 2003 against Wellness International Network (“WIN”).See generally Sharif v. Wellness Int'l Network, Ltd., 273 Fed.Appx. 316 (5th Cir. Apr. 8, 2008); Sharif v. Wellness Int'l Network, Ltd., 2008 WL 2885186 (N.D. Tex. July 22, 2008). WIN also filed an adversary proceeding against Debtor in the bankruptcy case in this district.

         One of the major issues in the bankruptcy has been whether assets held in a trust that was allegedly established by Soad Wattar (“Wattar”) (the “Trust”) should be included in Debtor's bankruptcy estate. Wattar is Debtor, Ragda, and Haifa's mother. A related issue that arose later in the litigation is which trust agreement is the governing document? Debtor originally relied on a purported amended trust agreement signed on May 15, 1996 (the “1996 Trust Amendment”), which named Debtor as trustee, assigned and conveyed to the trustee all of Wattar's real and personal property, granted the trustee authorization to do all acts of an owner, and granted the trustee absolute discretion to litigate any claim in favor of or against Wattar's estate. (As discussed below, Debtor and his sisters subsequently asserted that 1996 Trust Amendment was superseded by later amendments.)

         Wattar died on March 17, 2010. In discovery, Debtor produced a copy of a will in which Wattar left all of her estate (“Estate”) to the trustee of the Trust acting at the time of her death (i.e., Debtor) (the “April 26, 2007 Will”). The April 26, 2007 Will named Debtor as executor and Ragda as successor executor of Wattar's Estate. (As discussed below, more than five years later Haifa sought to intervene, arguing that a different will, executed on April 28, 2007 and naming Haifa as executrix, should control.)

         On July 6, 2010, the Bankruptcy Court determined that Debtor had failed to comply with most of WIN's discovery requests-which sought among other things information concerning the funding of the Trust-and granted WIN's motion for sanctions. As a sanction, the Bankruptcy Court entered default judgment against Debtor and in favor of WIN in the adversary proceeding, holding that the Trust was the alter ego of Debtor because Debtor treated the Trust's assets as his own property and, therefore, it would be unjust to allow him to maintain that the Trust was a separate entity. On August 5, 2010, the Bankruptcy Court granted the Trustee's motion to turn certain assets of the Trust over to the Trustee.

         While Debtor was appealing the Bankruptcy Court's alter ego ruling, his sisters Ragda and Haifa filed suit in Cook County Circuit Court seeking to compel Wells Fargo to transfer $700, 000 in Trust assets to Ragda. Ragda alleged that she became the successor trustee of the Trust at the time of her mother's death on March 17, 2010, pursuant to an amendment made to the Trust on October 8, 2007 (the “2007 Trust Amendment”). The Circuit Court dismissed the lawsuit on the basis that it was subject to the jurisdiction of the Bankruptcy Court.

         Ragda, purportedly acting as trustee of her mother's trust, also sought to intervene in the bankruptcy proceeding and to have the August 5, 2010 turnover order vacated. Ragda's motion to intervene and motion to vacate were denied on the basis that Ragda failed to timely intervene before the turnover order was entered and failed to provide any support for her contention that she was the successor trustee.

         Ragda then filed an adversary proceeding in the bankruptcy case (No. 10-A-02239) against the Trustee and Debtor for wrongful conversion, allegedly in her capacity as the trustee of Wattar's Trust. The Bankruptcy Court granted the Trustee's motion to dismiss the adversary proceeding and issued a detailed opinion discussing the complaint's deficiencies. Among other things, the Bankruptcy Court rejected Ragda's position that she was entitled to bring suit on behalf of the Trust, explaining that by the time Ragda allegedly became successor trustee (July 6, 2010), assets held in Wattar's Trust had already become the property of the bankruptcy estate.

         After protracted appeals that went all the way to the Supreme Court, the Bankruptcy Court's finding that the Trust was Debtor's alter ego ultimately was upheld. See Wellness Int'l Network, Ltd. v. Sharif, 135 S.Ct. 1932 (2015). While the case was on remand to the Seventh Circuit, Debtor wrote the Seventh Circuit a letter asserting that “[o]ne piece of evidence [that his attorney] failed to provide or disclose was that I was no longer the trustee [of the Trust] after 2007, revoked by my mother, Soad Wattar and her attorney.” Case No. 15-cv-10694, Docket Entry 15-25 at 1. Debtor attached a copy of a document titled “Revocation of Trustee to Soad Wattar Revocable Living Trust of 1992” (the “Revocation of Trustee”). The Revocation of Trustee purported to show that on November 1, 2007, Debtor resigned as trustee and Ragda took over as successor trustee. Debtor's allegations directly contradicted his earlier representations that he was the trustee of the Trust at the time he filed for bankruptcy and that he resigned as trustee in 2010. The Seventh Circuit, apparently unpersuaded by Debtor's letter, affirmed the Bankruptcy Court's July 6, 2010 decision that the Soad Wattar Trust was the alter ego of Debtor. See Wellness Int'l Network, Ltd. v. Sharif, 617 Fed.Appx. 589, 591 (7th Cir. 2015).

         Soon after Debtor's appeal of the alter ego ruling was concluded, Salem entered an appearance in the bankruptcy case as counsel for Haifa. Haifa, purportedly acting as executrix of Wattar's Estate, filed a motion to vacate the Bankruptcy Court's August 5, 2010 turnover order pursuant to Rule 60(b)(4) of the Federal Rules of Civil Procedure. Haifa argued that the Estate was never served with process and therefore (1) the Bankruptcy Court did not have personal jurisdiction over the Estate and (2) the Bankruptcy Court's August 5, 2010 order requiring the turnover of property held in the Trust was void. In her reply brief, Haifa attached a document that she claimed was the most recent version of Wattar's will, dated April 28, 2007 (the “April 28, 2007 Will”). The April 28, 2007 Will named Haifa executor of her mother's estate. Haifa also alleged that Ragda had been the trustee of the Trust since 2007, pursuant to the Trust Revocation. The Bankruptcy Court denied Haifa's motion, and Haifa appealed to this Court. See generally Case No. 15-cv-10694. On reconsideration, this Court determined that the appeal of the denial of the Rule 60(b)(4) motion should be remanded to the Bankruptcy Court for further proceedings. See Case No. 15-cv-10694, Docket Entry 58.

         While the appeal in Case No. 15-cv-10694 was pending, Salem entered an appearance on behalf of Ragda in the Bankruptcy Court. Haifa and Ragda filed a motion for leave to sue the Trustee, Hartford, and Wells Fargo. Their motion did not explain why they should be granted leave to sue; instead it “trail[ed] off midsentence” and did not address why Intervenors had a prima facie case to sue the Trustee individually. See Case No. 16-cv-4699, docket entry 26-7 at 16. The attached proposed complaint shows that Haifa and Ragda sought to sue Hartford and Wells Fargo for breach of contract, breach of fiduciary duty, and negligence for turning over Trust assets to the Trustee. The proposed complaint also alleged a Bivens claim against the Trustee for using his alleged authority as a federal agent to take property that belonged to Wattar's Estate-namely, the proceeds of a Hartford insurance policy and the assets of the Estate held by Wells Fargo-without notice or hearing. The proposed complaint alleged that this violated the Estate's procedural and substantive due process rights. The proposed complaint further asserted that the proceeds from the Hartford insurance policy were exempt from the bankruptcy proceeding pursuant to Illinois law.

         In addition, Ragda filed a motion in the Bankruptcy Court seeking reimbursement of more than $900, 000 for (1) funds she allegedly spent paying the mortgage and taxes on one of Trust's assets, a house located at 36 Revere Drive, South Barrington, Illinois (the “Barrington house”) while the appeal to the Supreme Court was pending; and (2) the proceeds of the Hartford insurance policy, of which Ragda claimed to be the beneficiary.

         The Bankruptcy Court entered orders denying both Ragda and Haifa's motion for leave to sue the Trustee and Ragda's motion for reimbursement (these two motions are referred to collectively as the “Motions”). Ragda and Haifa appealed to this Court. See Case No. 16-cv-4699.

         While that appeal was pending, the Bankruptcy Court ordered Salem, Ragda, and Haifa to show cause why they should not be sanctioned for violating Federal Rule of Bankruptcy Procedure 9011(b)(1-3) by filing the Motions. All three appeared at a show-cause hearing on June 21, 2016 and filed written responses.

         After considering the parties' arguments, the Bankruptcy Court concluded that the Motions were filed in violation of Rule 9011 because they were based on insufficient legal grounds, were not warranted by existing law, and had no evidentiary support. The Bankruptcy Court discussed in great detail why the Motions were deficient. [6-1] at 54-67. The Bankruptcy Court also noted that the “parties continuously misstate the law and the facts, ” for instance by repeatedly asserting that the Trustee was a U.S. Trustee in order to establish a Bivens claim. Id. at 70-71. The Bankruptcy Court also provided an exhaustive discussion of the many times over the past eight years that it had ruled that the Trust assets were part of the bankruptcy estate because the trust was Debtor's alter-ego, and how this ruling had been affirmed. See [6-1] at 23-56, 69-71.

         The Bankruptcy Court concluded that the Motions were filed “to harass the bankruptcy Trustee, cause unnecessary delay and . . . increase the cost of litigation” and that Appellant's actions “unnecessarily increased the bankruptcy estate's litigation expenses.” [6-1] at 2.

         Specifically, the Bankruptcy Court found that the Trustee's fee request included attorneys' fees incurred on the appeal from the Bankruptcy Court order denying the Motions. Before deciding on the appropriate sanctions, the Bankruptcy Court explained that Salem had been involved in a number of other cases in which he had faced “allegations of misconduct” and provided details on those cases. Id. at 72-74. The Bankruptcy Court determined that it was appropriate to sanction Salem “by barring him from ever filing any pleadings in this bankruptcy case or any related adversary proceeding without prior leave of Court” and requiring him to pay a $20, 000 fine. Id. at 74-75.

         On March 10, 2017, this Court entered an order affirming the Bankruptcy Court's denial of the Motions. See Case No. 16-cv-4699, Docket Entry 53. Ragda and Haifa have appealed that order to the Seventh Circuit. See Case No. 16-cv-4699, Docket Entry 55.

         Currently before the Court is Salem's appeal of the Bankruptcy Court's sanctions order. Salem raises five issues, which the Court considers in turn below. Salem also has filed a motion for extension of time to pay the $20, 000 fine, which is discussed at the end of this opinion.

         II. Legal Standards

         Rule 9011(b) provides that, by presenting an “petition, pleading, written motion, or other paper” to the Bankruptcy Court, “an attorney . . . is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,

(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law; [and]
(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity ...

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