In re Cunningham, Civil Action No. 06-40008-FDS.

• Decision Date: 28 November 2006
• Docket Number: Civil Action No. 06-40008-FDS.
• Citation: 354 B.R. 547
• Parties: In re Maurice F. CUNNINGHAM, Debtor. William J. Pasquina, P.C., Plaintiff/Appellant, v. Maurice F. Cunningham, Defendant/Appellee.
• Court: U.S. District Court — District of Massachusetts

Page 547

354 B.R. 547

In re Maurice F. CUNNINGHAM, Debtor William J. Pasquina, P.C., Plaintiff/Appellant, v. Maurice F. Cunningham, Defendant/Appellee.

Civil Action No. 06-40008-FDS.

United States District Court, D. Massachusetts.

November 28, 2006.

John G. Neylon, Neylon & O'Brien, P.A., Boston, MA, for Plaintiff/Appellant.

George J. Nader, Riley & Dever PC, Lynn, MA, for Defendant/Appellee.

United States Bankruptcy Court, U.S. Bankruptcy Court, pro se.

MEMORANDUM AND ORDER ON APPEAL FROM BANKRUPTCY COURT

SAYLOR, District Judge.

This is an appeal from an order of the United States Bankruptcy Court confirming that proceeds from the sale of debtor's home are exempt from appellant's pre-petition debt.

Debtor Maurice F. Cunningham claimed a homestead exemption under Massachusetts law in his home in North Andover, Massachusetts. He then filed for bankruptcy. After the allowance of the homestead exemption by the Bankruptcy Court, he moved to a Florida vacation property that was held in the name of his wife, sold the Massachusetts property, and kept the proceeds. Plaintiff William J. Pasquina is owed a pre-petition, non-dischargeable debt by Cunningham, and seeks to satisfy it against the proceeds. Thus, the issue presented is whether proceeds realized by a debtor from the post-petition, voluntary sale of his home — in which he had an "estate of homestead" under state law, and for which he claimed and received an exemption in the bankruptcy proceedings — may be liable for a pre-petition, non-dischargeable debt. For the reasons set forth below, the answer to that question is in the negative. The order of the Bankruptcy Court will therefore be affirmed.

I. Background

William Pasquina and Maurice Cunningham were high school classmates who became attorneys. Pasquina practiced law through a professional corporation, of which he was the sole shareholder. He hired Cunningham as an associate attorney and trained him to handle worker's compensation and Social Security cases.

In February 1995, Pasquina was seriously injured in an automobile accident. He was out of the office for an extended period of time and, in fact, never returned to the full-time practice of law. After the accident, Cunningham managed the law office and handled the entire case load.

By November 1995, Pasquina had determined that he could not continue to practice law. He and Cunningham began to discuss the sale of the practice to Cunningham. At some point, Cunningham also began to negotiate with another law firm, Pierce & Associates, concerning the possibility of joining that firm. He apparently never reached final arrangements with either firm. Nonetheless, Pasquina and Pierce sent letters to Pasquina's clients and referral attorneys indicating that Cunningham would join Pierce and provide continuity in representation.

Instead, Cunningham secretly removed files from the Pasquina law office and opened his own firm servicing the former Pasquina clients. Cunningham never paid Pasquina his fair share of the fees earned as to those clients, nor did he reimburse Pasquina for expenses advanced.

In June 1997, Pasquina filed suit against Cunningham in the Essex Superior Court claiming, among other things, breach of the duty of loyalty. After a jury trial as to certain claims and counterclaims, the parties tried the duty of loyalty claim before the Superior Court (Kottmyer, J.). Judge Kottmyer issued her findings of fact and conclusions of law on March 22, 2001, and entered judgment against Cunningham on the duty of loyalty claim.¹

In October 2001, Cunningham filed a declaration of homestead as to his residence at 795 Johnson Street in North Andover, Massachusetts.² On December 12, 2002, Pasquina obtained a writ of attachment in the Superior Court against the Johnson Street property in the amount of $250,000.

On February 28, 2003, Cunningham filed a voluntary bankruptcy petition under Chapter 7 of the United States Bankruptcy Code. At that time, Cunningham and his wife resided at the Johnson Street property, which they jointly owned as tenants by the entirety. Cunningham listed the Johnson Street property as an asset on his bankruptcy schedules. He claimed that the outstanding mortgages on the property totaled $260,000 and that his equity interest was $212,000. He also claimed that the estate of homestead in the residence, to the extent of $300,000, was exempt from the bankruptcy estate pursuant to MASS. GEN. LAWS ch. 188, § 1. See 11 U.S.C. § 522(b). In addition, he disclosed the judgment obtained against him by Pasquina and the resulting $250,000 lien on the Johnson Street property.

The deadline for objecting to Cunningham's claimed exemption in the residence was May 30, 2003. Pasquina did not object, and the exemption was allowed by the Bankruptcy Court.

On July 24, 2003, Pasquina initiated an adversary proceeding in the Bankruptcy Court, seeking an order that the debt was non-dischargeable pursuant to 11 U.S.C. §§ 523(a)(4) (debts for fraud while acting in a fiduciary capacity) and (a)(6) (debts for willful and malicious injury by the debtor).

On January 29, 2004, Cunningham moved pursuant to 11 § 522(f) for an order avoiding Pasquina's $250,000 writ of attachment.³ In that motion, Cunningham stated that the residence was appraised at $495,000 and subject to outstanding mortgages totaling $260,000. He argued that, absent the lien, his equity interest in the property at most would be $235,000. Therefore, he argued, the lien impaired his $300,000 homestead exemption and should be avoided.

On February 4, Pasquina filed an objection to the $300,000 homestead exemption and to the § 522(f) lien avoidance motion. On February 12, he moved for an attachment on the Johnson Street property in the amount of $350,000. On June 4, the Bankruptcy Court entered an order denying Pasquina's objections, denying his motion for an attachment, and avoiding the lien in its entirety. Among other things, the court found that the objection to the exemption was time-barred and that the lien avoidance issue was controlled by the First Circuit's decision in Patriot Portfolio, LLC v. Weinstein (In re Weinstein), 164 F.3d 677 (1st Cir.1999). The court also sanctioned Pasquina for filing the objections, which it determined were frivolous. Pasquina did not appeal that order.

In approximately December 2004, Cunningham closed down his law practice. He and his wife moved to a condominium in Bonita Springs, Florida, that was held in her name and that the couple had formerly used as a vacation and rental property. It is not clear when the condominium was purchased, although it apparently predated the filing of the bankruptcy petition.

On July 26, 2005, the Bankruptcy Court entered an order that Cunningham's debt to Pasquina was non-dischargeable under §§ 523(a)(4) and (a)(6). Shortly thereafter, on September 20, 2005, it closed the adversary proceeding.

In the meantime, Cunningham had apparently listed the Johnson Street property for sale. On August 18, 2005, Pasquina filed a motion in the Superior Court requesting that Cunningham and his wife be enjoined from disbursing or using proceeds from the sale.

On September 14, the Superior Court enjoined Cunningham and his wife from removing any share of the sale proceeds "remaining after satisfying existing mortgages and expenses related to the closing of the sale and which exceed the $300,000 homestead exemption." One week later, Pasquina filed an emergency motion in the Superior Court action arguing that the $300,000 homestead exemption had terminated, and that the sale proceeds should be available to satisfy the Pasquina debt, because (1) the exemption did not extend to the cash proceeds derived from the sale of exempt assets and (2) Cunningham allegedly vacated the property post-petition, thereby destroying the exemption. He also contended that Cunningham's wife was entitled to at least one-half of the sale proceeds and that her share was not protected by the $300,000 homestead exemption.

On November 3, Cunningham filed a "Motion for Order Confirming Sale Proceeds ... as Exempt" in the Bankruptcy Court seeking a determination that the proceeds realized from the post-petition sale of the Johnson Street property were exempt, and therefore protected from liability on the Pasquina debt, by virtue of § 522(c). The motion stated that Cunningham planned to sell the property so that he could "use the proceeds to pay for living expenses and downsize to a smaller home."

On November 21, the Cunninghams sold the Johnson Street property. The net sale proceeds, after satisfying the mortgages and other sale expenses, were $150,723.42. There is no evidence that Cunningham has reinvested, or intends to reinvest, any part of the proceeds into another residence; it appears, instead, that he has made the Florida condominium his primary residence for the indefinite future.

On December 7, the Bankruptcy Court entered an order that the proceeds from the sale of the Johnson Street property were exempt from liability for the Pasquina debt under 11 U.S.C. § 522(c). With regard to Pasquina's contention that the non-debtor spouse was entitled to one-half of the proceeds and that her share is not protected, the Bankruptcy Court stated that (1) it had no jurisdiction over the debtor's wife, and therefore could not adjudicate her rights in the proceeds, and (2) even if it did have jurisdiction, it would not exercise it, as this issue was the subject of a supplemental brief filed by Pasquina and pending in the state court.

On December 14, Pasquina filed a notice of appeal with respect to the December 7 order, and an election that the appeal be heard by this Court. He also filed a motion for preliminary injunction, asking that Cunningham be enjoined from spending more than $500 per month from the sale proceeds, as well as a request that this Court certify a question of law to the First Circuit and/or the Supreme Judicial Court.

II. Jurisdiction and...