In re Johnston

Citation321 B.R. 262
Decision Date11 February 2005
Docket NumberAdversary No. 01-00885-SSC.,Bankruptcy No. 01-06221-SSC.
PartiesIn the Matter of Logan T. JOHNSTON, Debtor. Logan T. Johnston III, Appellant, v. Paula Parker, et al., Appellees.
CourtU.S. District Court — District of Arizona
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Ronald Jeffrey Ellett, Ellett Law Offices PC, Phoenix, AZ, for appellant.

Craig J. Bolton, Jennings Haug & Cunningham LLP, Adam Bennett Nach, Lane & Nach PC, Michael W. Carmel, Michael W. Carmel Ltd., Daniel Hunt Bergin, Thomas I. McClory, Office of Attorney General, Civil Division, Phoenix, AZ, for appellees.

AMENDED ORDER

BROOMFIELD, District Judge.

This Amended Order corrects typographical errors in the Court's previous Order entered on September 30, 2004. Appellant Logan T. Johnston III, a Chapter 11 debtor, filed an adversary proceeding pursuant to 11 U.S.C. § 362(h) against his former wife and her lawyer alleging that they had prosecuted contempt proceedings in state court in willful violation of the Bankruptcy Code's automatic stay. After Johnston presented his case at trial, the Appellees made an oral motion for a directed verdict. The bankruptcy court granted the motion in a written decision, finding no liability on the part of the Appellees as a matter of law. The Court affirms in part, reverses in part, and remands for proceedings consistent with this opinion.1

BACKGROUND

In 1993, Appellant Logan T. Johnston III ("Johnston") filed for divorce from Appellee Paula Parker ("Parker") in Superior Court in Maricopa County. (See Divorce Decree, Appellant Johnston's Excerpts of Record ("JER") 13.) Johnston, a lawyer, represented himself in the divorce proceedings. The Superior Court entered its findings of facts and conclusions of law on July 19, 1995. (Id.) The court awarded the couple's ownership interest in Johnston's law firm, Johnston Maynard Grant & Parker ("JMGP"), to Johnston and assigned a value of $1.18 million to this community asset. (Id) To equalize its award, the court awarded Parker much of the couple's remaining property and a judgment in the amount of $332,078.00, with interest at 10% per annum. (Id.) It also awarded spousal maintenance to Parker in the amount of $4,000.00 per month for 24 months and $2,000.00 per month thereafter. (Id.)

On January 22, 2001, Parker and her lawyer, Appellee Melvin Sternberg ("Sternberg") filed a motion in the Superior Court to hold Johnson in contempt for nonpayment of spousal support. (Pet. for Order to Show Cause Re: Contempt, attached as Exh. A. to Def. Sternberg's Mot. to Dismiss, Bankr.Docket Entry ("BDE") 14.) Parker alleged that Johnston had not made any spousal maintenance payments to her since October 1998 and that his arrearage as of January 1, 2001 was $79,422.88. (Id.) She asked that "the Court enter an Order that Johnston be incarcerated; that his professional law license be suspended; and his drivers' sic license be revoked or suspended until Johnston purges himself of contempt by immediately paying ALL sums found to be due and owing to her." (Id. (emphasis in original); see also Joint Pretrial Statement ¶ 34, JER 22.)

On February 20, 2001, Johnston filed a response to Parker's motion for contempt and also moved to modify the Superior Court's divorce decree.2 (Def. Parker's Mot. to Dismiss Compl. at 2, BDE 17.) The parties appeared before Superior Court Judge Karen O'Connor on February 22, 2001 for a fifteen-minute review hearing. (Id.) Judge O'Connor set an evidentiary hearing for April 6, 2001. (Id.) The parties appeared on that date, but the court ran out of time and continued the hearing to May 17, 2001. (Id.)

The Superior Court denied Johnston's motion to modify on May 7, 2001. (Def. Parker's Mot. to Dismiss Compl. at 2, BDE 17.) Shortly thereafter, on May 14, 2001, Johnston filed a Chapter 11 petition with the United States Bankruptcy Court for the District of Arizona. (Chapter 11 Petition, JER 14.) Johnston's schedules showed total liabilities of $960,961.00, total assets of $359,595.00, and a gross annual income of $96,000.00 (Id.) Among Johnston's liabilities were $270,000.00 in mortgage loans on a home valued at $300,000.00, $110,185.00 in tax liabilities owed to the IRS, and $428,000.00 owed to Parker pursuant to the divorce decree. (Id.) Johnston's assets mainly consisted of his $300,000.00 home, his $25,000.00 partnership interest in his new law firm, a $15,000.00 interest in two timeshares, an $8,000.00 car, and $11,000.00 in household furniture, collectibles, and other items. (Id.)

On May 17, 2001, the Superior Court proceeded as scheduled with its hearing on Parker's request that Johnston be held in contempt for nonpayment of spousal maintenance. (See May 17, 2001 Hr'g Tr., JER 15.) Earlier in the day, Johnston's bankruptcy attorney, Ronald J. Ellett ("Ellett"), had filed a Notice of Filing of Chapter 11 Bankruptcy in the state court. (See Notice of Filing, JER 17.) The Notice stated:

Please take notice that Petitioner Logan T. Johnston has filed a Chapter 11 Bankruptcy Petition with the U.S. Bankruptcy Court on May 14, 2001. Accordingly, this action is stayed except those portions that relate to § 362(b). Mr. Johnston will be purposing sic a plan under Chapter 11 to cure any arrears on pre-petition bankruptcy maintenance payments owed to Ms. Parker.

(Id.) The bankruptcy court found that neither the state court, Parker, nor Sternberg were aware of the Notice of Chapter 11 Filing when the May 17 hearing began. Johnston v. Parker (In re Johnston), 308 B.R. 469, 472 (Bankr.D.Ariz.2003).

The parties presented the bankruptcy court with a transcript of the May 17 hearing at trial, and the transcript was admitted in evidence by stipulation. (March 26, 2003 Trial Tr. at 48, JER 10.). Johnston acted as his own lawyer at the hearing. The transcript shows that after roughly fifteen minutes of argument on discovery issues, Johnston informed the court that he had recently filed for bankruptcy, stating: "Your Honor, could I bring one thing to the Court's attention now? Simply not to appear to be blindsiding anybody, I filed for personal bankruptcy on Monday, and to the extent that that sic has any effect on what we do here, I would like you to know that now." (May 17, 2001 Hr'g Tr. at 23.)

Appellee Sternberg responded: "Your Honor, we—once more I was handed a copy of his filing of bankruptcy. I am no bankruptcy expert by any means. I don't know if it stays the proceedings or not. I have no idea." (Id. at 23.) He continued: "This is a spousal maintenance proceeding, and I know spousal maintenance and attorney's fees in connection with these proceedings, I believe, are not exempt from bankruptcy. Whether or not we need to lift the stay or not is another matter." (Id. at 23-24.) Johnston responded that he was not a bankruptcy expert either and that "what his bankruptcy attorney told him was that the effect of the bankruptcy is to stay anything regarding the property settlement ...." (Id.) "With respect to the spousal maintenance," Johnston said, "we are going to be putting together a Chapter 11 plan that will pay all the arrearages, and it's unclear to me, you know, whether that stays anything that we would be doing today or not." (Id.)

Sternberg then suggested going forward with "the action," but limiting it to a determination of the arrears on spousal maintenance and attorney's fees. (Id. at 23.) He remarked: "Then, perhaps, we can get another hearing at some future date for the remainder of these things." (Id. at 24.) Johnston apologized for "not knowing exactly what's going on here" and responded: "I object in the abstract to anything that would contravene the bankruptcy laws, but since I don't know what those are, I can't tell you what I'm objecting to." (Id.) He then stated: "I don't think there's much dispute about whether I am in arrears on these matters. There may be some dispute about the numbers. I don't object to those numbers being established if we can do that today." (Id)

As the bankruptcy court noted, "it is clear from the transcript of the hearing that the state court judge struggled with how and whether to proceed." Johnston, 308 B.R. at 472. Ultimately, the judge concluded that she should proceed with the hearing to determine whether Johnston was in contempt of court for failure to comply with the divorce decree, but that she would "take up the issue of sanctions at a later time when counsel has researched whether or not this court has jurisdiction to issue sanctions when a bankruptcy proceeding is pending." (May 17, 2001 Hr'g Tr. at 24.) At the conclusion of the hearing, the judge took the motion for contempt under advisement. (Id.)

In a minute entry dated June 22, 2001 and filed on July 13, 2001 (the "Minute Entry Order" or "Order"), the Superior Court judge found that Johnston was ordered to pay spousal maintenance in the amount of $2,000.00 per month pursuant to the divorce decree; that he had knowledge of the order; that he had the ability to comply with the order; and that he was in arrears in the amount of $87,525.60 through April 1, 2001. (Minute Entry Order, JER 15; Joint Pretrial Statement ¶ 4, JER 22.) The judge granted judgment in favor of Parker for $87,525.60, found Johnston in contempt, and—though she had indicated that she would not proceed further—ordered Johnston to pay the judgment by August 1, 2001. (Minute Entry Order, JER 15.) Significantly, she ordered that if Johnston failed to pay the judgment by that date, he would be "incarcerated in the Maricopa County Jail for an indefinite period of time until the full amount of arrearages was paid in full." Id.

The bankruptcy court found that "all parties to the State Court litigation were surprised by the Minute Entry Order." Johnston, 308 B.R. at 473. It observed that "the evidence ... reflected that the Defendants had expected...

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