Memorandum of Decision Re: Bad Faith Filing

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re THE FITCH MOUNTAIN TRUST,                                       No. 93-11250      Debtor. ___________________________/
Memorandum of Decision
     On the eve of foreclosure, attorney Mark Swendsen and his wife transferred title to their real property to the Fitch Mountain Trust and filed a Chapter 11 petition for the trust in order to thwart the foreclosure. Swendsen was a trustee and beneficiary under the trust.      On motion of the U.S. Trustee, the court dismissed the petition as having been filed in bad faith. See In re Thirtieth Place, Inc., 30 B.R. 503 (9th Cir.BAP 1983). The court reserved the issue of any sanctions to be assessed against Swendsen.      The foreclosing deed of trust holder, Anne M. Vercelli, now seeks sanctions in the amount of $7,555.00, representing her attorneys' fees incurred in obtaining relief from the automatic stay. Swendsen raises the novel defense that state anitideficiency law bars the imposition of sanctions against him because she nonjudicially foreclosed. The court rejects this argument and awards sanctions.      The flaw in Swendsen's argument is that a request for sanctions is not an action on a debt. While the court may take the moving party's expenses into account in fixing an appropriate amount of sanctions, it is only one element in size of the award and not the basis for it. The primary purpose of sanctions is to deter conduct. When bad faith is found, FRBP 9011 mandates sanctions, irrespective of any debt which may or may not be owing; compensation for expenses is permissive, not an essential element of sanctions. See In re Eighty South Lake, Inc., 81 B.R. 580, 582 (9th Cir.BAP 1987).      It is no secret in this circuit that transferring real estate to a fictitious entity on the eve of foreclosure and then filing a bankruptcy petition for the entity in order to obtain the benefits of the automatic stay amounts to bad faith, and renders both the debtor and its attorney subject to sanctions. See In re Thirtieth Place and In re Eighty South Lake, Inc., supra; In re Villa Madrid, 110 B.R. 919 (9th Cir.BAP 1990). Sanctions are even more appropriate where the attorney is also the transferor and a principal of the fictitious entity.      As noted above, the purpose of sanctions is to deter bad faith conduct. While the court makes note of the $7,555.00 in attorneys' fees incurred by Vercelli, it declines to fix sanctions in this amount for numerous reasons, including the fact that these fees are somewhat excessive in relation to the value of the property, that she could have easily obtained relief from the automatic stay for much less than this amount, and that deterrent does not compel such a large sum. The court feels that sanctions in the amount of $5,000.00 are appropriate and accordingly awards this sum against the debtor and Swendsen.      Counsel for Vercelli shall submit an appropriate form of order forthwith.
Dated: September 27, 1993                                                                          _______________________                                                                                                                     Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy