                                                            FILED
                                                            MAR 29 2012
 1
                                                         SUSAN M SPRAUL, CLERK
                                                           U.S. BKCY. APP. PANEL
 2                                                         OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )       BAP Nos.   NC-11-1068-HDoD
                                   )                  NC-11-1069-HDoD
 6   AVON TOWNHOMES VENTURE,       )
                                   )       Bk. No.    11-41750
 7                  Debtor.        )
     ______________________________)
 8                                 )
     JOE GUERRA; RAYMUNDO LUJANO, )
 9                                 )
                    Appellants,    )
10                                 )
     v.                            )       M E M O R A N D U M1
11                                 )
     NANNETTE DUMAS, U.S. Trustee; )
12   ROBERT JARAMILLO; MOHAMED     )
     POONJA, Chapter 7 Trustee,    )
13                                 )
                    Appellees.     )
14   ______________________________)
15                  Argued and Submitted on January 20, 2012
                           at San Francisco, California
16
                             Filed - March 29, 2012
17
              Appeal from the United States Bankruptcy Court
18                for the Northern District of California
19       Honorable Roger L. Efremsky, Bankruptcy Judge, Presiding
20
     Appearances:     Appellant Joe Guerra argued pro se. Appellant
21                    Raymundo Lujano argued pro se. Scott Tate of
                      Schnader Harrison Segal & Lewis LLP argued for
22                    appellee, Mohamed Poonja, Chapter 7 Trustee.
23
     Before: HOLLOWELL, DONOVAN2 and DUNN, Bankruptcy Judges.
24
25
          1
26          This disposition is not appropriate for publication.
     Although it may be cited for whatever persuasive value it may
27   have (see Fed. R. App. P. 32.1), it has no precedential value.
28   See 9th Cir. BAP Rule 8013-1.
          2
            Hon. Thomas B. Donovan, United States Bankruptcy Judge for
     the Central District of California, sitting by designation.
 1        Joe Guerra (Guerra) and Raymundo Lujano (Lujano)
 2   (collectively, the Appellants) each appeal the order of the
 3   bankruptcy court that imposed over $200,000 in sanctions against
 4   them, jointly and severally, for concealing an insider connection
 5   between the debtor and the purchaser of the debtor’s main asset.3
 6   We AFFIRM.
 7                         I.   FACTUAL BACKGROUND
 8        In 2001, Luis Aguilar (Aguilar) purchased real property in
 9   Lathrop, California (the Property) with two single family
10   residences, which he rented out for income.     Aguilar’s ultimate
11   goal was to construct townhomes on the Property.    He sought a
12   partner to assist him in developing the Property.    Aguilar placed
13   an advertisement for a developer and met Guerra as a result.      He
14   later entered into an agreement with Guerra to move the project
15   forward.   To that end, Aguilar and Guerra formed Avon Townhomes
16   Venture (Avon).
17        Aguilar agreed to transfer the Property to Avon and to
18   continue to make mortgage payments; Guerra agreed to take sole
19   management control of Avon and was tasked with obtaining
20   financing for the project, preparing construction plans, and
21   obtaining building permits and approvals.   Aguilar and Guerra
22
23        3
            The bankruptcy court imposed sanctions on other
     individuals along with the Appellants. Indeed, there was an
24
     entire cast of characters, including the officers and agents of
25   the company Metricz, as well as the attorneys for Metricz and the
     debtor, which was subject to the bankruptcy court’s order to show
26   cause on whether sanctions were appropriate and its ultimate
27   order imposing sanctions for misconduct. However, this
     memorandum decision is limited to the Appellants’ conduct and
28   responses.

                                      -2-
 1   were the sole shareholders of Avon, but Aguilar’s interest in
 2   Avon was subordinated to the stock held by Guerra.
 3        When Guerra made little progress in developing the Property,
 4   the relationship between Aguilar and Guerra soured.   Aguilar had
 5   the rents from the residences paid to him directly and Guerra
 6   responded by “terminating” Aguilar’s interest in Avon.     Aguilar
 7   sued Guerra in October 2004, alleging damages for breach of
 8   contract and fraud.
 9        On May 26, 2005, Guerra filed a chapter 114 bankruptcy
10   petition for Avon.5   Postpetition, Avon continued to act as the
11   debtor-in-possession with Guerra serving as Avon’s responsible
12   individual.    On November 10, 2005, Avon filed a motion seeking
13   authority to sell the Property, as is, free and clear of
14   ownership interests, to an entity known as Metricz, Inc.
15   (Metricz) for $400,000 (Sale Motion).6
16        Lujano is Metricz’s Chief Financial Officer and sole
17   shareholder.   Robert Jaramillo (Jaramillo) is Metricz’s
18   President.    Jaramillo executed the proposed purchase contract for
19   the Property on behalf of Metricz.
20        In its Sale Motion, Avon stated that it and its equity
21
          4
22          Unless otherwise indicated, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
23   All Rule references are to the Federal Rules of Bankruptcy
24   Procedure, Rules 1001-9037.
          5
25          Guerra initially filed the petition pro se on behalf of
     Avon, but subsequently retained Stanley Zlotoff as Avon’s
26   counsel.
27        6
            Avon did not seek court approval to hire a real estate
28   broker to market the Property.

                                      -3-
 1   owners were unrelated to Metricz.      Additionally, Guerra stated in
 2   his declaration in support of the Sale Motion that neither he,
 3   Aguilar, nor Avon had any relationship or connection with
 4   Metricz.
 5        Aguilar filed a limited objection to the Sale Motion.      He
 6   consented to the sale, but proposed a competing bid by Thomas
 7   Sayles (Sayles).   On December 7, 2005, the bankruptcy court
 8   conducted an auction for the Property, at which Metricz and
 9   Sayles participated (the Sale Hearing).7     Jaramillo made the bids
10   on behalf of Metricz.   Metricz was the highest bidder at
11   $610,000.   At the Sale Hearing, Sayles and the United States
12   Trustee (UST) expressed concerns that Guerra had some connection
13   with Metricz.   The bankruptcy court addressed the issue:
14        If there are any connections between anybody, then that
          becomes a concern. . . . From my perspective the
15        absolutely most important thing is that a sale is done
          fairly; it’s legitimate; everybody has a fair shot at
16        buying; that there’s no shenanigans; there’s no inside
          deals; there’s no undisclosed relationships; there’s
17        none of this stuff. . . . There’s an integrity of the
          process that to me is the most important. And I’d
18        rather lose a sale than have one – one tainted by some
          wrongdoings.
19
20   Hr’g Tr. (Dec. 5, 2005) at 27:20-28:17.
21        The bankruptcy court offered to continue the Sale Hearing;
22   however, after a recess, the parties decided to go forward with
23   the auction.    During the recess, Guerra represented to the UST
24   that there was no connection between Avon or Guerra and Metricz
25   or Metricz’s officers or agents, and that Metricz had been
26
27        7
            Judge Grube presided over the Sale Hearing.     The case was
28   transferred to Judge Efremsky on July 31, 2006.

                                      -4-
 1   located through a real estate broker named Jim McClenehan
 2   (McClenehan) of a firm called Eagle Home Loan.   The UST put that
 3   representation on the record.
 4        The bankruptcy court then approved the sale.   However, as a
 5   condition of the sale, it required Metricz to make two non-
 6   refundable deposits, $25,000 and $100,000, respectively, to
 7   Avon’s attorney to be held in his trust account in advance of the
 8   close of escrow, or risk forfeiting its funds and losing the
 9   Property to Sayles for a back-up bid of $550,000.   The final
10   order authorizing the sale free and clear of interests and
11   approving the sale to Metricz was entered on December 30, 2005.
12   The sale closed on February 3, 2006.
13        In June 2006, Metricz filed an adversary proceeding against
14   Avon, claiming Avon had represented that the Property had been
15   granted valuable sewer rights from the City of Lathrop (Adversary
16   Proceeding).   It turned out that prior to the sale, Aguilar had
17   the sewer rights terminated without Guerra’s knowledge.8    Metricz
18   alleged that without the sewer hook-ups it was deprived of the
19   opportunity to sell the Property for over $1 million.   Avon
20   sought a compromise of the Adversary Proceeding, which included
21
22
23        8
            Avon initially purchased the sewer hook-up rights with
     partial funds from a loan it obtained from a loan broker,
24
     Fernando Jimenez (Jimenez). The loan was secured by a second
25   deed of trust on the Property. When the loan became due in April
     2004, and was not paid by Avon, Aguilar obtained a personal loan
26   from his parents to pay off the loan. The City of Lathrop
27   refunded the $50,500 fee to Jimenez at Aguilar’s request and
     Jimenez paid that sum over to Aguilar. Aguilar and Jimenez were
28   defendants in the Adversary Proceeding.

                                     -5-
 1   paying the City of Lathrop $50,500 for reinstatement of the sewer
 2   hook-up rights.
 3        The UST objected to the compromise because she was concerned
 4   there was an undisclosed relationship between Avon or Guerra and
 5   Metricz and possible collusion or misconduct related to the sale
 6   of the Property.   Her concern was based on her discovery that
 7   incorporation documents showed that Metricz and Avon shared the
 8   same street address in San Jose, California, and the attorney
 9   representing Metricz, Samuel Goldstein (Goldstein), had
10   represented Guerra on prior (unrelated) matters.   Additionally,
11   the UST was concerned that under the compromise, the estate would
12   be required to pay for the sewer rights even though the Property
13   had been sold “as is.”
14        Thereafter, the UST sought conversion of Avon’s case to
15   chapter 7.    Rather than converting the case, on May 11, 2007, the
16   bankruptcy court appointed a trustee, Mohamed Poonja (the
17   Trustee), to investigate the facts surrounding Metricz’s purchase
18   of the Property.
19        As part of his investigation, the Trustee conducted Rule
20   2004 examinations of Guerra and Lujano, as well as Jaramillo and
21   McClenehan.   At those examinations, Guerra testified that he had
22   no communication or contact with anyone connected to Metricz
23   prior to the Sale Hearing.
24        On January 24, 2008, the Trustee filed a report summarizing
25   his investigation (Investigation Report).   The Investigation
26   Report concluded that Guerra had concealed a relationship with
27   Metricz that preceded the sale of the Property.    The Trustee
28

                                      -6-
 1   found that Guerra had, in fact, played a role in Metricz’s
 2   formation and directed the sale transaction to Metricz.
 3        In March 2008, the Trustee discovered that funds drawn on
 4   Guerra’s son’s bank account might have been used to pay the non-
 5   refundable deposits for the purchase price of the Property.    The
 6   Trustee conducted additional Rule 2004 examinations to determine
 7   if Guerra or Metricz was concealing Guerra’s involvement in the
 8   purchase of the Property.
 9        On April 8, 2008, the Trustee filed a motion requesting that
10   the bankruptcy court issue show cause orders based on his
11   investigation, which “uncovered irrefutable evidence” confirming
12   that Guerra committed a fraud on the bankruptcy court when he
13   denied in his declaration supporting the Sale Motion, as well as
14   his statements at the Sale hearing, that he did not have any
15   connection to Metricz (the OSC Motion).   The Trustee asserted
16   that the Appellants were aware of the relationship between Guerra
17   and Metricz but conspired to give false testimony at their Rule
18   2004 examinations to conceal Guerra’s insider purchase of the
19   Property.   The Trustee requested the Appellants “show cause why
20   the [bankruptcy court] should not impose sanctions jointly and
21   severally against them in amounts sufficient to make the estate
22   whole for the costs of uncovering their fraudulent scheme.”9
23
24
25
          9
            The Trustee requested the bankruptcy court order Goldstein
26   to show cause why sanctions were not appropriate for his conduct
27   in concealing the relationship between Metricz and Guerra, and
     for possibly advising or participating in a scheme to manufacture
28   claims in the Adversary Proceeding.

                                     -7-
 1        On May 15, 2008, the bankruptcy court issued an Order to
 2   Show Cause (OSC).   It ordered Guerra, Metricz, and Metricz’s
 3   officers and agents, Lujano, Jaramillo, and McClenehan, to appear
 4   and show cause why they should not be sanctioned for misconduct.
 5   The OSC attached the OSC Motion and Investigation Report and
 6   required the parties to file memoranda, declarations and
 7   documentation addressing the Trustee’s allegations “that they
 8   committed fraud upon the Court by actively concealing and
 9   misrepresenting an insider connection between Metricz as the
10   purchaser of the [Property] and Avon and Guerra as Avon’s
11   responsible individual.”10   Finally, the bankruptcy court
12   specified that if sanctions were warranted, they would be imposed
13   under the bankruptcy court’s § 105 inherent sanction authority.
14        On July 11, 2008, Guerra filed a declaration in response to
15   the OSC stating that he had been unable to obtain legal counsel
16   and that he denied each and every accusation made by the Trustee
17   in his Investigation Report.11   Lujano did not file a response to
18   the OSC.
19
          10
            The OSC was later amended to include Stanley Zlotoff,
20
     counsel for Avon, as well as Guerra in his capacity as Avon’s
21   President.
          Additionally, the bankruptcy court issued a separate order
22   to show cause in the Adversary Proceeding, requiring Metricz,
23   Jaramillo, Lujano, McClenehan and Metricz’s counsel, Goldstein,
     to show cause why the imposition of sanctions was not warranted
24   in light of the Trustee’s allegation that they manufactured the
     claims and damages asserted in the Adversary Proceeding.
25
          11
26          We have taken judicial notice of the bankruptcy court
     docket and various documents filed through the electronic
27   docketing system. See O’Rourke v. Seaboard Sur. Co. (In re E.R.
     Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1988); Atwood v.
28   Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9
     (9th Cir. BAP 2003).

                                      -8-
 1        The bankruptcy court subsequently held nine days of
 2   evidentiary hearings on the OSC between July 25, 2008, and
 3   December 15, 2008 (the OSC Proceeding).12   The bankruptcy court
 4   invited the parties to file post-hearing briefs, but neither of
 5   the Appellants did so.    The bankruptcy court issued a memorandum
 6   decision (Memorandum Decision) on August 2, 2010, finding that
 7   the imposition of sanctions against the Appellants was
 8   appropriate because they lied under oath and committed a fraud on
 9   the court.   It found that “the parties held firm” throughout the
10   Trustee’s investigation
11        in perpetuating the fiction that Metricz had purchased
          the Property and that [Guerra] had no connection with
12        the sale or with Metricz. This led directly to the
          [Trustee’s] and his counsel’s expenditure of hours upon
13        hours of time and expense, in an attempt to figure out
          what really happened.
14
15   Memorandum Decision at 2.   Consequently, the bankruptcy court
16   determined that, pursuant to its inherent authority to sanction
17   bad faith conduct, sanctions were warranted in an amount
18   necessary to compensate the estate for the expenses incurred in
19   conducting the investigation, in uncovering the Appellants’ bad
20   faith conduct, and in participating in the OSC Proceeding.   The
21   bankruptcy court, therefore, directed the Trustee to file a fee
22   application setting forth those fees and costs.
23        The bankruptcy court also entered, pursuant to its
24   Memorandum Decision, an order holding the Appellants jointly and
25   severally liable for the fees and costs awarded to the Trustee
26
27        12
            The OSC Proceeding also encompassed the issues raised by
28   the order to show cause entered in the Adversary Proceeding.

                                      -9-
 1   and his counsel for the investigation into their conduct, the
 2   exact amount of which the bankruptcy court would determine
 3   following a hearing on the Trustee’s fee application.
 4        Thereafter, the Trustee filed his third fee application (Fee
 5   Application).   The Fee Application requested $64,794.50 in fees
 6   and $6,794.06 in costs, which represented the expenses incurred
 7   between September 1, 2008 through July 31, 2010, in conjunction
 8   with the investigation and OSC Proceeding.   Furthermore, it set
 9   out the amount of fees and costs previously approved by the
10   bankruptcy court that were attributable to the investigation into
11   the Appellants’ conduct with respect to the sale of the Property,
12   which amounted to $190,202.00 in fees and $21,726.30 in costs.
13        The Fee Application was noticed to all parties and stated
14   that a hearing would be held and the parties could file “any
15   objection to the necessity and/or reasonableness of the fees and
16   costs incurred . . . from the inception of the investigation and
17   OSC Proceeding, regardless of whether such fees and costs were
18   previously allowed and paid.”   The Appellants did not file an
19   objection to the Fee Application or appear at the hearing on the
20   Fee Application.   The bankruptcy court approved the Fee
21   Application on October 18, 2010.
22        On January 19, 2011, the bankruptcy court entered an order
23   imposing $208,678.30 in sanctions against the Appellants, jointly
24   and severally (the Sanctions Order).   The Appellants’ appealed.13
25
26        13
            The Appellants filed premature notices of appeal on
27   November 1, 2010, following the announcement of the bankruptcy
     court’s ruling in its Memorandum Decision and its companion order
28                                                      (continued...)

                                     -10-
 1        In their Reply brief on appeal, the Appellants raise the
 2   argument that the entire OSC Proceeding was tainted by an alleged
 3   ex parte communication between the Trustee and the bankruptcy
 4   court.
 5                                   II.   ISSUES
 6        Did the bankruptcy court abuse its discretion in entering
 7   the Sanctions Order?
 8        Did the bankruptcy court fail to provide the Appellants due
 9   process protections?
10        Was there an ex parte communication between the Trustee and
11   the bankruptcy court that tainted the OSC Proceeding?
12                                III.   JURISDICTION
13        The bankruptcy court had jurisdiction under 28 U.S.C.
14   § 157(b)(2)(A), (N) and (O).        We have jurisdiction under
15   28 U.S.C. § 158.
16                          IV.    STANDARDS OF REVIEW
17        We review all aspects of an award of sanctions for an abuse
18   of discretion.   Chambers v. NASCO, Inc., 501 U.S. 32, 55 (1991);
19   F.J. Hanshaw Enter., Inc. v. Emerald River Dev., Inc., 244 F.3d
20   1128, 1135 (9th Cir. 2001); Price v. Lehtinen (In re Lehtinen),
21   332 B.R. 405, 411 (9th Cir. BAP 2005), aff’d 564 F.3d 1052 (9th
22   Cir. 2009).   The bankruptcy court’s choice of sanction is also
23   reviewed for abuse of discretion.        U.S. Dist. Ct. for E.D. Wash.
24   v. Sandlin, 12 F.3d 861, 865 (9th Cir. 1993).
25
          13
           (...continued)
26
     that approved the Fee Application setting the amount of
27   sanctions, but before the Sanctions Order was entered.
     Nevertheless, the notices of appeal are considered timely under
28   Rule 8002(a).
                                    -11-
 1         A bankruptcy court abuses its discretion if it bases a
 2   decision on an incorrect legal rule, or if its application of the
 3   law was illogical, implausible, or without support in inferences
 4   that may be drawn from the facts in the record.    United States v.
 5   Hinkson, 585 F.3d 1247, 1261–63 (9th Cir. 2009) (en banc);
 6   Ellsworth v. Lifescape Med. Assocs. (In re Ellsworth), 455 B.R.
 7   904, 914 (9th Cir. BAP 2011).
 8         With respect to sanctions, a bankruptcy court’s factual
 9   findings are reviewed for clear error and given great deference.
10   F.J. Hanshaw, 244 F.3d at 1135.     A factual finding is clearly
11   erroneous if it is “illogical, implausible, or without support in
12   the record.”   Retz v. Samson (In re Retz), 606 F.3d 1189, 1196
13   (9th Cir. 2010).   Moreover, when factual findings are based on
14   determinations regarding the credibility of witnesses, we give
15   great deference to the bankruptcy court’s findings because the
16   bankruptcy court, as the trier of fact, had the opportunity to
17   note “variations in demeanor and tone of voice that bear so
18   heavily on the listener’s understanding of and belief in what is
19   said.”   Anderson v. City of Bessemer City, N.C., 470 U.S. 564,
20   575 (1985); see also Rule 8013.
21         Whether the Appellants’ due process rights were violated is
22   a question of law that we review de novo.    Miller v. Cardinale
23   (In re DeVille), 280 B.R. 483, 492 (9th Cir. BAP 2002), aff’d,
24   361 F.3d 539 (9th Cir. 2004).
25   ///
26   ///
27   ///
28   ///
                                       -12-
 1                              V.   DISCUSSION
 2   A.   The Bankruptcy Court’s Finding Of Bad Faith Conduct Was
          Supported By The Evidence.
 3
          Bankruptcy courts have the inherent power to sanction
 4
     parties and their counsel for a broad range of misconduct,
 5
     including “willfully abus[ing] judicial processes” or committing
 6
     fraud on the court.14   Roadway Express, Inc. v. Piper, 447 U.S.
 7
     752, 766 (1980); Chambers, 501 U.S. at 45-46 (If a court finds
 8
     “that fraud has been practiced upon it, or that the very temple
 9
     of justice has been defiled,” it may assess sanctions against the
10
     responsible party.).    However, under its inherent authority, a
11
     bankruptcy court may only impose sanctions for bad faith conduct
12
     or conduct tantamount to bad faith.    Fink, 239 F.3d at 994.
13
     Sanctions are available “for a variety of types of willful
14
15
          14
16          Implicit in § 105(a) is the recognition that, like other
     federal courts, the bankruptcy court has the inherent authority
17   to sanction a party for bad faith conduct that is not adequately
     sanctionable under the Rules or any other provision of law:
18
          No provision of [the Bankruptcy Code] providing for the
19        raising of an issue by a party in interest shall be
          construed to preclude the court from, sua sponte,
20        taking any action or making any determination necessary
21        or appropriate to enforce or implement court orders or
          rules, or to prevent an abuse of process.
22   11 U.S.C. § 105(a); Caldwell v. Unified Capital Corp. (In re
     Rainbow Magazine, Inc.), 77 F.3d 278, 284 (9th Cir. 1996).
23        A bankruptcy court’s statutory civil contempt authority,
24   also contained in § 105(a), is not the same as its inherent
     sanctions authority. In re Lehtinen, 564 F.3d at 1058; Knupfer
25   v. Lindblade (In re Dyer), 322 F.3d 1179, 1196 (9th Cir. 2003).
     The civil contempt authority allows a court to remedy a violation
26
     of a specific order, while the inherent sanction authority allows
27   a bankruptcy court to deter and provide compensation for a broad
     range of misconduct. Fink v. Gomez, 239 F.3d 989, 992-93 (9th
28   Cir. 2001).
                                    -13-
 1   actions, including recklessness when combined with an additional
 2   factor such as frivolousness, harassment, or an improper
 3   purpose.”   Id.    Therefore, even if a party does not act in bad
 4   faith but only recklessly, when the reckless conduct is coupled
 5   with an improper purpose, such as an attempt to influence or
 6   manipulate proceedings to gain an advantage, it is sanctionable
 7   under a court’s inherent power.    Id.
 8        The Appellants argue that there was “no evidence whatsoever”
 9   that Guerra directed his son to provide the non-refundable
10   deposits for the purchase of the Property.    However, the
11   bankruptcy court’s finding that the deposits were made by
12   Guerra’s son was only one of its many findings that led to its
13   conclusion that Guerra concealed a relationship with Metricz and
14   that the Appellants acted in bad faith with respect to the sale
15   of the Property.
16        A review of the record demonstrates that the bankruptcy
17   court had sufficient evidence to support its finding that the
18   Appellants acted in bad faith.15    The bulk of the evidence relied
19
20        15
            The Appellants argue that the standard for establishing
21   bad faith is by clear and convincing evidence. That is true in a
     civil contempt proceeding where “the moving party has the burden
22   of showing by clear and convincing evidence that the contemnors
     violated a specific and definite order of the court.” In re
23   Dyer, 322 F.3d at 1191, quoting Renwick v. Bennett (In re
24   Bennett), 298 F.3d 1059, 1069 (9th Cir. 2002). However, the
     clear and convincing evidence standard has not been identified by
25   the Ninth Circuit as being the applicable burden of proof for
     establishing bad faith before a court may impose sanctions under
26
     its inherent authority. Id. at 1196; In re Lehtinen,564 F.3d at
27   1061 n.4. Because the record demonstrates that the bankruptcy
     court had sufficient evidence to support its finding of bad faith
28                                                      (continued...)
                                    -14-
 1   on by the bankruptcy court was witness testimony.16   Although it
 2   found that there were “conflicting and ever-changing stories,”
 3   the bankruptcy court concluded that Guerra acted in bad faith
 4   because he concealed that he “was intimately involved with
 5   Metricz and that he orchestrated the sale to, and purchase by,
 6   Metricz.”   Memorandum Decision at 47.
 7        The testimonial evidence submitted at the OSC Proceeding
 8   revealed that Guerra chose McClenehan, with whom he (and his
 9   family members) had done business for over 20 years, to market
10   the Property on behalf of Avon.   However, Guerra did not seek
11   approval to employ McClenehan as Avon’s real estate broker, did
12   not provide McClenehan details of the Property or its value, did
13   not follow up with McClenehan, or ensure that the Property was
14   listed or being marketed appropriately.   The evidence indicated
15   that Lujano was fortuitously introduced to McClenehan soon after
16   Guerra sought McClenehan’s assistance.
17        Hernandez, who incorporated Metricz, had a role in
18   facilitating Lujano’s purchase of Metricz and introducing Lujano
19
20
21        15
           (...continued)
22   under either a clear and convincing standard or a lesser
     standard, we need not decide here which standard applies.
23
          16
24          In many instances, the Appellants did not provide
     testimony but asserted their Fifth Amendment right against self-
25   incrimination. The Appellants’ assertion of their Fifth
     Amendment rights, however, does not prevent the bankruptcy court
26
     from drawing adverse inferences from that assertion. Baxter v.
27   Palmigiano, 425 U.S. 308, 318 (1976) (court may make adverse
     inferences against parties in civil actions who refuse to testify
28   in response to probative evidence offered against them).
                                    -15-
 1   to McClellan.17   Hernandez and Guerra were long-time friends.
 2   Moreover, Guerra knew Jaramillo, Metricz’s President.   Jaramillo
 3   worked for an attorney named Tom Salciccia (Salciccia).
 4   Salciccia had represented Guerra in prior matters and was the
 5   corporate service agent for both Metricz and Avon.   In fact,
 6   Metricz’s mail was delivered to Salciccia’s office and left by
 7   Jaramillo for Guerra to pick up.
 8        The connections between Guerra and Metricz do not end there.
 9   The non-refundable deposit money for the Property was paid by
10   Guerra’s son, Curtis.   Curtis delivered a $25,000 check to
11   McClenehan made payable to McClenehan’s business.    McClenehan
12   then issued a check in the same amount to Guerra, who in turn
13   purchased a cashiers’ check for delivery to Avon’s attorney.      A
14   similar scenario took place with respect to the second non-
15   refundable deposit.   Although Guerra contended that Curtis was
16   investing in McClenehan’s business, McClenehan denied that
17   contention.
18        Thus, the evidence clearly demonstrated that Guerra had a
19   prior relationship to Metricz and its officers and agents, which
20   he concealed.
21        The bankruptcy court found that Lujano acted in bad faith
22   because he refused to admit that he was a “willing pawn in
23   Mr. Guerra’s scheme to purchase the Property from the estate,”
24   that “[h]is fabrications wasted judicial time and resources,
25
          17
            Lujano could not remember if it was Hernandez or someone
26
     named Carlos de la Torre (Torre) who advised him on Metricz. He
27   testified that he did not know anything about corporations and
     relied on the advice of others who told him having a corporation
28   would facilitate buying the Property.
                                    -16-
 1   forced the Trustee to conduct extensive investigation and incur
 2   significant expense, and violated the integrity of the bankruptcy
 3   system as a whole.”    Memorandum Decision at 66.    The bankruptcy
 4   court’s finding was based on testimonial evidence that
 5   demonstrated Lujano was not actively involved in selecting the
 6   Property and knew little about it.      Lujano admitted he relied on
 7   Jaramillo or McClenehan to help him make decisions regarding
 8   Metricz, to facilitate all paperwork and to collect the rents
 9   from the Property.    Lujano also testified that McClenehan managed
10   the payments that Lujano personally owed on two mortgage loans
11   that he had obtained in order to purchase the Property for
12   Metricz.    On the financing applications for those loans Lujano
13   listed bank accounts belonging to Guerra’s son, Joe, as among his
14   financial resources.
15        Lujano was unable to produce documentation concerning
16   Metricz’s payment of the non-refundable deposits for the
17   Property.    Lujano contended that he had personally raised
18   $150,000 from his church and gave the money to McClenehan.
19   However, Lujano could not provide any documentation that the
20   money had been raised, had been deposited into a bank account, or
21   had been delivered to McClenehan.       Moreover, McClenehan testified
22   that he did not receive any cash (or money whatsoever) from
23   Lujano or anyone else on behalf of Metricz.      Finally, Goldstein
24   admitted that he delivered documents intended for Lujano or
25   Jaramillo to Guerra and that Guerra returned such documents to
26   Goldstein.
27        In short, there was ample evidence to support the bankruptcy
28   court’s finding that the Appellants had made misrepresentations
                                      -17-
 1   to the bankruptcy court when they repeatedly denied a
 2   relationship between Guerra and Metricz and its principals, as
 3   well as subsequently concealed the relationship during the
 4   pendency of the bankruptcy case, the initiation of the Adversary
 5   Proceeding, and the Trustee’s investigation.        As a result, the
 6   bankruptcy court’s finding that the Appellants’ conduct was
 7   tantamount to bad faith and “wasted judicial time and resources
 8   and defiled the integrity of the bankruptcy system” was not
 9   clearly erroneous.
10   B.   The Appellants Were Afforded Due Process Protections.
11        The Appellants argue that their due process rights were
12   violated because the bankruptcy court (1) imposed criminal
13   sanctions; (2) violated Lujano’s Fifth Amendment rights; and
14   (3) failed to assess the Appellants’ culpable conduct, ability to
15   pay sanctions, or whether their wrongdoing prejudiced anyone.          We
16   address these concerns in turn.
17        In order to protect against abuse and to ensure parties
18   receive due process, individuals subject to sanctions are
19   afforded procedural protections.         F.J. Hanshaw, 244 F.3d at 1137.
20   When an individual is subject to sanctions, he or she has a right
21   to receive notice of the particular alleged misconduct and of the
22   disciplinary authority under which the court is planning to
23   proceed, along with an opportunity to respond.        In re Ruffalo,
24   390 U.S. 544, 551-52 (1968); In re Lehtinen, 564 F.3d at 1060.
25   “[W]hen using the inherent sanction power, due process is
26   accorded as long as the sanctionee is ‘provided with sufficient,
27   advance notice of exactly which conduct was alleged to be
28   sanctionable, and [was] furthermore aware that [he] stood accused
                                       -18-
 1   of having acted in bad faith.’”     Id. (citing In re DeVille,
 2   361 F.3d at 548).
 3        Here, the OSC notified the Appellants that the bankruptcy
 4   court was considering imposing sanctions pursuant to its inherent
 5   authority.   The OSC apprised the Appellants of the specific
 6   conduct at issue (concealing and misrepresenting an insider
 7   connection between Guerra and Metricz in the purchase of the
 8   Property), and also alerted the Appellants to the compensatory
 9   nature of the proposed sanctions by its reference to the OSC
10   Motion.
11        Additionally, the Appellants were provided the opportunity
12   to respond to the OSC.    The bankruptcy court held no less than
13   nine days of evidentiary hearings to solicit evidence and
14   testimony from all parties concerned in order to understand the
15   facts surrounding the sale of the Property.     Guerra attended and
16   participated in the OSC Proceeding.      Lujano also attended part of
17   the OSC Proceeding and provided testimony.     Additionally, the
18   bankruptcy court afforded the Appellants the opportunity to
19   present post-hearing briefs and to object to the fees and costs
20   submitted by the Trustee (even those that had previously been
21   approved), on which the sanction award was based.
22        On the first day of the OSC Proceeding, the bankruptcy court
23   made clear to the parties that the scope and nature of the
24   potential sanctions could be comprised of reimbursement to the
25   estate for the fees and costs associated with the Trustee’s
26   investigation.   The bankruptcy court notified the parties that
27   the expenses were at least $150,000 given the amount of fees and
28   costs already approved.   The bankruptcy court stated that even
                                       -19-
 1   though the amount of money at issue was significant, the
 2   sanctions were civil, not criminal, and that the OSC Proceeding
 3   was purely a civil proceeding to determine whether bad faith
 4   conduct existed to justify sanctions.      See Hr’g Tr. (July 25,
 5   2008) at 10-23.
 6         As a result, the Appellants’s assertion that their due
 7   process rights were violated because they did not “know from
 8   reading the OSC the extent of the sanctions that could be awarded
 9   in order to decide whether to default or vigorously contest the
10   allegations” is meritless.      See Reply at 7.    The bankruptcy court
11   provided the Appellants proper due process protections before it
12   imposed sanctions.
13         1.    Civil Sanctions
14         Because of “their very potency, inherent powers must be
15   exercised with restraint and discretion.”      Chambers, 501 U.S at
16   44.   However, “[a] primary aspect of that discretion is the
17   ability to fashion an appropriate sanction” for bad faith
18   conduct.    Id. at 44-45.     Nevertheless, a court’s inherent
19   sanction authority “does not authorize significant punitive
20   damages.”   In re Lehtinen, 564 F.3d at 1059 (quoting In re Dyer,
21   322 F.3d at 1197).   Bankruptcy courts cannot authorize
22   significant punitive damages because they cannot provide full due
23   process protections, such as a jury trial.        F.J. Hanshaw, 244
24   F.3d at 1139.
25         The Appellants contend that the bankruptcy court imposed
26   criminal sanctions because the sanction award “did not compensate
27   anyone” but rather “punished the [A]ppellants in an effort to
28   vindicate the trial Court’s process.”      Appellants’ Opening Br.
                                         -20-
 1   at 5.    However, the sanction amount was commensurate with the
 2   expense to the estate of investigating and uncovering the
 3   Appellants’ bad faith conduct.      Such compensatory sanctions are
 4   within the court’s inherent authority.       In re DeVille, 361 F.3d
 5   at 546.      Furthermore, compensatory sanctions are not considered
 6   criminal penalties: “Civil penalties must either be compensatory
 7   or designed to coerce compliance.”        F.J. Hanshaw, 244 F.3d at
 8   1137-38; Lasar v. Ford Motor Co., 399 F.3d 1103, 1110 (9th Cir.
 9   2005) (sanctions that compensate for any harm caused are civil);
10   see also In re Dyer, 322 F.3d at 1197.
11           The bankruptcy court’s choice of sanction is within its
12   sound discretion.     Sandlin, 12 F.3d at 865.     Here, the bankruptcy
13   court imposed compensatory sanctions because it found that the
14   continued concealment by the Appellants of the connection between
15   Guerra and Metricz harmed the bankruptcy estate “by virtue of the
16   fact that the Trustee and his counsel were required to spend
17   large amounts of time and money in attempting to figure out
18   exactly what happened.     This is money that could have and should
19   have gone to creditors.”     Memorandum Decision at 36.    We perceive
20   no abuse of discretion in the bankruptcy court’s decision to
21   issue sanctions in an amount commensurate with the loss of money
22   to the estate.
23           2.    Fifth Amendment Rights
24           The Appellants contend that Lujano’s Fifth Amendment rights
25   were violated when the bankruptcy court required him to testify
26   about Metricz’s role in the purchase of the Property or risk a
27   contempt fine.     The Fifth Amendment protects individuals from
28   being forced to incriminate themselves during a legal proceeding.
                                        -21-
 1   U.S. Const. amend. V.
 2        In requiring Lujano’s testimony, the bankruptcy court
 3   clarified that it was seeking testimony or other documentary
 4   evidence from Metricz that demonstrated its purchase of the
 5   Property was an arms-length transaction.    Because the bankruptcy
 6   court requested the information from Lujano as the representative
 7   of the corporate entity, Metricz – not as an individual officer
 8   or director of Metricz – it determined that the Fifth Amendment
 9   right against self-incrimination was inapplicable.    See Braswell
10   v. United States, 487 U.S. 99, 105 (1988) (privilege against self
11   incrimination protects only natural persons, not artificial
12   entities such as corporations).     A corporate custodian is denied
13   Fifth Amendment protection for acts done in a representative
14   capacity.   “Because an artificial entity can only act through its
15   agents, a custodian of such an entity’s documents may not invoke
16   [his] personal privilege to resist producing documents . . . even
17   if the documents may also incriminate the custodian.”    Baltimore
18   City Dept. of Soc. Servs. v. Bouknight, 493 U.S. 549, 567 (1990)
19   (citing United States v. White, 322 U.S. 694, 699 (1944)).
20        To the extent Lujano’s testimony was taken as an individual,
21   not a custodian of Metricz, we note that the Fifth Amendment’s
22   protection against self-incrimination “may only be invoked when
23   the threat of future criminal prosecution is reasonably
24   particular and apparent.”   U.S. v. Antelope, 395 F.3d 1128, 1134
25   (9th Cir. 2005).   “If the threat is remote, unlikely, or
26   speculative, the privilege does not apply.”    Id. (internal
27   citations omitted).   Here, there was no likely threat of criminal
28   prosecution.   The bankruptcy court repeatedly reminded the

                                       -22-
 1   parties that the OSC Proceeding was purely civil in nature.
 2   There was no criminal proceeding pending (or threatened) against
 3   any of the parties, and neither the Trustee nor the UST ever
 4   indicated that the matter would be further investigated or
 5   prosecuted beyond the OSC Proceeding.
 6        Furthermore, even if Lujano’s testimony and statements were
 7   obtained in violation of his Fifth Amendment rights, the result
 8   would not mandate vacating the Sanctions Order, as argued by the
 9   Appellants.   Instead, Lujano would be entitled to a hearing prior
10   to a subsequent criminal proceeding to demonstrate that any
11   evidence the government intended to introduce was free from the
12   taint of compelled statements and based on independent sources.
13   United States v. Anderson, 79 F.3d 1522, 1526 (9th Cir. 1996);
14   United States v. Koon, 34 F.3d 1416, 1431 (9th Cir. 1994), cert.
15   granted in part on other grounds, 515 U.S. 1190 (1995).
16        3.   Assessment Of Various Other Factors
17        The Appellants argue that the bankruptcy court erred by
18   failing to assess: (1) their culpable conduct; (2) whether there
19   was a pattern of wrongdoing; (3) whether the Appellants could pay
20   sanctions; or, (4) whether their wrongdoing prejudiced anyone.
21   As a result, they assert they should have been accorded a hearing
22   to assess these factors.18   This argument was not made in the
23
          18
24          The Appellants rely on Republic of Philipines v.
     Westinghouse Elec. Corp., 43 F.3d 65 (3rd Cir. 1994) for their
25   contention that the bankruptcy court was required to address
     certain factors before imposing sanctions. There, the Third
26
     Circuit held that a court must “ensure that there is an adequate
27   factual predicate for flexing its substantial muscle under its
     inherent powers, and must also ensure that the sanction is
28                                                      (continued...)
                                    -23-
 1   bankruptcy court.
 2        We have discretion to review newly presented issues on
 3   appeal if (1) there are “exceptional circumstances” why the issue
 4   was not raised in the trial court, (2) the new issue arises while
 5   the appeal is pending because of a change in the law, or (3) the
 6   issue presented is purely one of law and the opposing party will
 7   suffer no prejudice as a result of the failure to raise the issue
 8   in the trial court.    Rhoades v. Henry, 598 F.3d 495, 501 n.7 (9th
 9   Cir. 2010).   The Appellants have not argued, and we do not
10   determine, that any of the exceptions to the rule apply.
11        The bankruptcy court provided the Appellants with the
12   opportunity to object to the Trustee’s fees and costs before it
13   entered the Sanctions Order.   The Appellants did not file any
14   post-hearing briefs.   They did not contest or file any response
15   to the Fee Application.   Thus, it is unclear what exceptional
16   circumstance would allow them to pursue those arguments now.
17   Furthermore, there has been no intervening change in the law.
18   Finally, allowing consideration of the Appellants’ new arguments
19   would prejudice the Trustee because their arguments are not legal
20   questions subject to de novo review.   Accordingly, we decline to
21
22
          18
           (...continued)
23   tailored to address the harm identified.” Id. at 74. It ruled
24   that courts should be guided by the same considerations as
     required by the Federal Rules of Civil Procedure when imposing
25   sanctions under their inherent authority: a court issuing
     sanctions “must consider the conduct at issue and explain why the
26
     conduct warrants sanction” and “must specifically consider the
27   range of permissible sanctions and explain why less severe
     alternatives to the sanction imposed are inadequate or
28   inappropriate.” Id. at 74.
                                    -24-
 1   address the Appellants’ argument that the bankruptcy court should
 2   have addressed various factors, such as the Appellants’ ability
 3   to pay, or whether there was a pattern of wrongdoing, before
 4   deciding the amount of sanctions to impose.
 5   C.   The Alleged Ex Parte Communication Between The Trustee And
          The Bankruptcy Court Did Not Taint The Propriety Of The
 6        Sanctions Proceeding.
 7        The Appellants, in their Reply brief, assert that they have
 8   obtained new evidence that indicates the OSC Proceeding was
 9   unfair.   The Appellants allege that the Trustee’s counsel engaged
10   in an impermissible ex parte communication with the bankruptcy
11   court.    In support of their allegation, the Appellants submitted
12   a copy of what appears to be a draft summary of the Trustee’s
13   Investigation Report (Draft Report) and a copy of a delivery air
14   bill receipt indicating that the Draft Report was mailed to
15   chambers approximately one month before the final Investigation
16   Report was filed.   The Appellants contend that we should stay the
17   proceedings “while a trial court considers what to do . . . and
18   consider whether the ex parte communication so tainted the
19   proceedings below that the trial court’s ruling should be
20   vacated.”   Reply at 20.
21        The Appellants have not taken any action in the bankruptcy
22   court based on this new evidence.       As noted above, we generally
23   do not consider issues raised for the first time on appeal.
24   However, since the Appellants have asserted that the Draft Report
25   was newly obtained evidence, which negatively affected the OSC
26   Proceedings, we exercise our discretion and address the issue.
27        Generally, ex parte communications between a trustee and the
28   bankruptcy court that affect a particular case or proceeding are
                                      -25-
 1   prohibited by Rule 9003(b).    The party seeking revocation of a
 2   bankruptcy order due to an ex parte communication must
 3   demonstrate that he was prejudiced by the communication or that
 4   the bankruptcy court judge was biased against him.    Shop
 5   Television Network, Inc. v. Chodos (In re Shop Television
 6   Network, Inc.), 170 B.R. 413, 418 (C.D. Cal. 1994).    The issue is
 7   whether the information that the judge received was information
 8   that could, or did, affect the bankruptcy court’s ruling.      See
 9   Metcalf v. Golden (In re Adbox, Inc.), 234 Fed. Appx. 420, 421
10   (9th Cir. 2007); United States v. Madrid, 842 F.2d 1090, 1094
11   (9th Cir. 1988); In re Allen, 2009 WL 856985 *9 (Bankr. D. Idaho
12   2009).
13        The Appellants have not demonstrated that the bankruptcy
14   judge actually received or read the Draft Report, only that a
15   copy was delivered to the bankruptcy judge’s chambers.   However,
16   many judges’ chambers have procedures for destroying or docketing
17   ex parte communications prior to the bankruptcy court judge ever
18   seeing the documents.   More importantly, the Appellants have not
19   articulated how the Draft Report could have prejudiced them in
20   the OSC Proceeding.   Indeed, they asserted merely that “the Judge
21   may have been influenced” or that “bias could have been the
22   effect” of the Draft Report.   Reply at 16-17.
23        The Appellants cannot establish that the Draft Report
24   amounted to an actual communication between the Trustee and the
25   bankruptcy judge, or that the alleged communication resulted in
26   prejudice or bias.    Consequently, we conclude that the OSC
27   Proceeding was not tainted or unfair.
28

                                      -26-
 1                              VI.   CONCLUSION
 2        For reasons set forth above, we AFFIRM the bankruptcy
 3   court’s Sanctions Order.
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