Sanctions Over Mexican Villa Transfer Upheld

     PASADENA, Calif. (CN) – A couple must face sanctions for failing to cooperate with an order to turn over a Mexican coastal villa after a bankruptcy, the 9th Circuit ruled.
     Alejandro Diaz-Barba and Martha Margarita Barba De La Torre had paid $1.5 million for an interest in Villa Vista Hermosa in Jalisco, Mexico, after the previous owners filed for bankruptcy in December 2003.
     The bankruptcy trustee tried to overturn the Diazes’ acquisition as an unauthorized post-petition transfer, but the bankruptcy court agreed in November 2006 to let Kismet Acquisition buy the estate’s assets.
     After a bench trial in June 2008, the court ordered that the property be reconveyed to a fideicomiso trust, which is an “arrangement wherein a Mexican bank holds title to property and a foreign national is granted the right to its use.”
     Kismet was named the sole beneficiary, and the court gave until Sept. 13, 2008, to undo the avoided transfer.
     The Diazes nevertheless objected, claiming that Kismet’s power of attorney was in a conflict of interest, as the persons nominated to act on their behalf worked at the same law firm as Kismet’s counsel.
     Kismet suggested that, rather than execute a power of attorney, the Diazes should appear before a notary public in Mexico to execute the transfer documents. A few days later, Kismet sent the Diazes a document proposing that a Mexican company, Axolotl Immobiliaria S. de R.oL. CV, as its assignee, act as beneficiary of the fideicomiso.
     The Diazes rejected the document, however, claiming that it should have specified Kismet as the beneficiary of the fideicomiso for the benefit of the bankruptcy estate.
     In a new version of the transfer agreement, Kismet said that the bankruptcy court would continue to maintain jurisdiction.
     The Diazes again objected that the document named Axolotl as the beneficiary.
     After further delay, the court ordered the Diazes to show why they should not be held in contempt. The next day, the bankruptcy court ordered Diaz-Barba to document his attempts at compliance.
     Diaz-Barba claimed that his attorneys told him that signing the transfer documents would violate Mexican law, and that he sought to block the transfer of the villa through an amparo – a Mexican proceeding designed to ensure that an individual’s constitutional rights are not violated.
     Documents between the Diazes and their attorney then showed that the couple “sought to delay and obstruct” the implementation of the deal. Diaz-Barba told his attorney, “I will not sign anything that executes a trust agreement … I will not cooperate with these brigands, making a mockery of Mexican law and attempting to circumvent it,” according to court documents.
     His attorney responded: “I understand that but we don’t need to reveal it to [Kismet’s counsel] yet. Better let him think we are preparing to cooperate while we get our ducks in a row in Mexico. Therefore, [to] the extent [we] can point to defects, we can send back the draft document t and make them change it again causing delay.”
     The Diazes also allegedly tried to have Mexican officials intervene in the matter, and court documents show that Diaz-Barba asked his attorney to lobby Ambassador Joel Garcia to sign a document stating that compliance with the order would be impossible under Mexican law.
     Garcia did just that and Diaz-Alba then contacted the Ministry of Foreign Affairs to block issuance of the fideicomiso permit to Kismet, according to court documents. The Diazes next filed an amparo to block the transfer and their attorney then sent an email that said the plan was to keep the amparo a secret until it was recorded, and then present it “as an obstacle for transferring title,” according to the ruling.
     Since Kismet had not sought to have the transfer recognized in Mexico, however, there was no official Mexican action to block so the amparo was dismissed.
     Finally, the Diazes circulated a “narrative highly critical of the bankruptcy judge and orchestrated radio advertisement denouncing Kismet,” according to the 9th Circuit ruling.
     The bankruptcy court held the Diazes in contempt at a hearing in November 2008. It also ordered the Diazes to sign documents transferring the villa to Axolotl within the week, or face fines of $25,000 per day. The couple additionally faced a $4,150 per-day fine for lost rental value and $205 per day in lost use of property.
     As the deal was set to close, the notary public who had initially agreed to oversee the transaction suddenly withdrew. Kismet tried to get a different notary, but she withdrew as well.
     The notary then reported that she had been contacted by an agent whom Diazes attorneys hired to investigate the transaction. Every notary in the area was contacted that same day to ensure that no one would participate in the transaction, she said.
     The Diazes claimed that the notaries withdrew based on “legitimate objections to the transfer,” while Kizmet claimed that their withdrawal was ‘solely due to the Diazes’ intimidation.”
     The bankruptcy court then ordered that Kismet not inform the Diazes of the new notary’s name until the time of closing.
     Just before the scheduled closing date, a however, relative of the Diazes tried to identify and influence the notary. Diaz-Alba’s close friend Guillermo Rivera then rammed his truck through the villa’s gate and “took the property ‘hostage.'”
     With the Diazes refusing to leave, a federal judge in San Diego found no clear error in the bankruptcy court’s findings. The judge reversed the imposition of $225,000 in compulsory sanctions and compensatory sanctions for loss of use of the villa. It also vacated the court’s awards of attorneys’ fees and costs, then remanded the matter for recalculation of fees.
     The Diazes claimed that the bankruptcy court’s rulings lacked jurisdiction to substitute Axolotl as transferee, and that the courts violated their due process rights by imposing the sanctions.
     Kismet claimed in a cross-appeal that the District Court erred in vacating the compulsory sanctions.
     Writing for a three-judge panel of the 9th Circuit, Judge Jerome Farris said it was within the court’s jurisdiction to order transfer of the villa to Axolotl, which could receive the property without using a fideicomiso as a Mexican corporation.
     Farris also saw no issue with holding the Diazes in contempt solely based on affidavits.
     “Having failed to raise an issue of fact through documentary evidence or to seek to discharge their burden of production through live testimony, the Diazes cannot now argue that the bankruptcy court deprived them of due process,” he wrote.
     As for the Diazes argument that abiding by the court’s order to transfer the property violated Mexican law, “the Diazes have not shown that compliance with the ACJ would violate Mexican law,” the ruling states.
     “In short, even if ‘legal impossibility’ excuses noncompliance, the Diazes have not demonstrated that compliance with the ACJ was legally impossible,” Farris added.
     Despite the Diazes assertion that disclosure of their communications with their attorney violated attorney-client privileges, such privileges are waived when it is proven that they are conducted when “the client was engaged in or planning a criminal or fraudulent scheme,” the judge wrote.

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