In re O'Farrell

• Decision Date: 21 August 2013
• Docket Number: No. 12–12312–JKC–7A.,12–12312–JKC–7A.
• Citation: 498 B.R. 873
• Parties: In re Thomas B. O'FARRELL and Heather E. O'Farrell, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of Indiana

498 B.R. 873

In re Thomas B. O'FARRELL and Heather E. O'Farrell, Debtors.

No. 12–12312–JKC–7A.

United States Bankruptcy Court,

S.D. Indiana,

Indianapolis Division.

Aug. 21, 2013.

Alfred E. McClure, McClure & O'Farrell, Lafayette, IN, for Debtors.

Jeannette Eisan Hinshaw, Office of U.S. Trustee, Indianapolis, IN, for U.S. Trustee.

ORDER DENYING MOTION FOR THE HONORABLE JAMES K. COACHYS TO RECUSE FROM THIS CAUSE PURSUANT TO 28 U.S.C. § 455(a) and (b)(1)

JAMES K. COACHYS, Bankruptcy Judge.

This matter comes before the Court on Debtors Thomas B. O'Farrell and Heather E. O'Farrell's (together, “Debtors”) Motion for the Honorable James K. Coachys to Recuse From This Cause Pursuant to 28 U.S.C. § 455(a) and (b)(1) (the “Recusal Motion”). Following a hearing on July 31, 2013, the Court took the matter under advisement and now issues the following Order.

Procedural History

The Court begins by setting out the rather long and involved procedural history that precedes Debtors' Recusal Motion. On September 13, 2007, Mary and Scott Knighton (the “Knightons”) filed a voluntary Chapter 11 petition (the “Knighton 11”) under Case No. 07–08826–JKC–11. The Knightons were represented by Mr. O'Farrell and Alfred B. McClure, both of McClure & O'Farrell, P.C. (the “Firm”). On Schedule A of the petition, the Knightons listed their residence at 23998 Twilight Hills, Cicero, Indiana 46034 (the “Property”) as an asset of the estate and valued the property, per an appraisal, at $290,000.00. On December 12, 2007, CitiMortgage, Inc. (“Citi”) filed a secured claim with respect to the Property in the amount of $118,797.29. No objection to that claim was ever posed.

On November 7, 2008, the Knightons filed an Amended Application to Sell Property Free and Clear of Liens pursuant to 11 U.S.C. § 363(f)(3) (the “Amended Sale Motion”),¹ wherein they sought to sell the Property free and clear of liens and encumbrances for $150,000.00 to Phillip D. Roudebush and Sara S. Roudebush (the “Roudebushes”). The Amended Sale Motion also stated that the sale proceeds “shall be deposited in a segregated account, to which any and all valid liens will attach, subject to distribution upon further order of the Court.” Counsel for Citi was served with the Amended Sale Motion and did not object.

Following a hearing on November 20, 2008, at which counsel for the Knightons, Citi and the United States Trustee appeared, the Court issued an order granting the Amended Sale Motion (the “Sale Order”). Admittedly, the Sale Order, ² was not particularly well crafted in that it did not explicitly restate all of the terms of the Amended Sale Motion. Instead, it stated that the Amended Sale Motion was “granted” and further provided that the sale proceeds were to be placed in a “segregated account for distribution only pursuant to further order of the Court.” ³ While the Knightons never filed a formal report of sale, the Property was apparently sold to the Roudebushes for the sum of $147,831.68, with a check made payable to the Knightons and the Firm (the “Sale Proceeds”).

Following issuance of the Sale Order, very little additional activity transpired in the case-at least according to the Court's docket—until Citi filed a Motion for Relief from Stay and to Abandon Real Estate or in the Alternative Adequate Protection (the “Chapter 11 Stay Motion”) on February 27, 2009. In the Chapter 11 Stay Motion, Citi asserted that the Knightons had defaulted on their post-petition payments to Citi for the period October 1, 2007 through February 1, 2009. No mention was made in the Chapter 11 Stay Motion that the Property had been sold free and clear of Citi's mortgage. The Knightons objected, asserting that the Property had been sold and was no longer property of the estate. No mention was made in the objection that Citi had a lien on the Sale Proceeds or that there was any dispute between the parties as to Citi's entitlement to them.

The Court set the Chapter 11 Stay Motion and the objection thereto for hearing, but the hearing was continued multiple times at the Firm's request. Meanwhile, the United States Trustee moved for dismissal of the case on April 7, 2009, based on the Knightons' nonpayment of fees to be paid to the United States Trustee (the “Dismissal Motion”). The Court noticed the Dismissal Motion to all creditors and parties in interest and set the matter for hearing on April 30, 2009. The Chapter 11 Stay Motion was also reset to be heard that same day.

In advance of the hearing, and with no objection to the Dismissal Motion having been filed by the Knightons or any other party, Mr. McClure informed the Court by telephone that the case could be dismissed. Consistent with that, the Court vacated the April 30th hearing and immediately dismissed the case. Following dismissal, the Court was unaware of any further litigation between the Knightons, the Firm, Citi and/or the Roudebushes until December of 2012—as detailed below.

On June 18, 2012, the Knightons filed a voluntary Chapter 7 bankruptcy petition with the assistance of counsel, Tom Scott & Associates, under Case No. 12–07266–JKC–7 (the “Knighton Chapter 7”). On December 6, 2012, the Roudebushes filed a Motion to Clarify Court's Order (the “Clarification Motion”) that brought to this Court's attention some troubling developments that allegedly transpired after dismissal of the Knighton Chapter 11 case. The Court set a hearing on the Clarification Motion for December 13, 2012.⁴

In reviewing the Clarification and Stay Motions, the Court recognized that the Firm might have some information to share that could potentially help clarify what happened after dismissal of the Knighton Chapter 11. The Court, through staff counsel, contacted the Firm by telephoneand eventually talked to both Ms. O'Farrell and Mr. McClure in an effort to inform them of the hearing. Staff counsel also sent an email to Mr. O'Farrell on December 10, 2012, stating: ⁵

Thanks for calling me back. Unfortunately, no one is picking up your cell phone number, and it won't let me leave a voicemail. So, I thought I'd leave an email message on the matter for which I'm calling.

You and your firm handled the above-referenced Chapter 11 case back in 2007. In the course of that case, your clients sold their residence by way of Section 363(f), free and clear of CitiMortgage's and LaSalle Bank's mortgages on the property. The mortgages instead attached to the sale proceeds, which were sufficient to pay off both mortgages and which you agreed to hold in escrow pending their distribution.

The case was then involuntarily dismissed, with a motion for relief from stay from Citi pending at the time. Citi has since proceeded with a foreclosure action in state court, with the buyers of the property ultimately interpleading. Your debtors, the Knightons, have now filed a Chapter 7 case under Case No. 12–07266 to stop the foreclosure proceeding. Various questions have been raised in the new case as to what happened to the sale proceeds. Debtor indicated in their schedules that they did not receive any of them, and it would appear that neither did Cit[i] or LaSalle.

We have a hearing set this Thursday at 1:30 on a motion by the buyers of the real estate to clarify that the sale to them was, in fact, free and clear. The Court is not ordering you to appear at that hearing, but it would seem—based on what is before the Court already—that we will likely need to formally hear from you at some point as to the proceeds. So, if you can make the hearing, that might expedite resolution of the matter. We may have to reopen the 2007 case if [there] are funds that need to be administered or any other relief requested or ordered.

Please let me know how you with to proceed and/or if you have any questions.

Thank you.

Consistent with the email, the Court conducted a hearing on the Clarification Motion and Chapter 7 Stay Motions on December 13, 2012, at which counsel Tammy Lynn Ortman for the Roudebushes, David H. Yunghans for Citi, and Jeannette E. Hinshaw for the United States Trustee appeared, as did Deborah J. Caruso, the Chapter 7 Trustee in the Knighton Chapter 7. No one from the Firm was present. At the hearing, the Court first learned that Debtors had filed a Chapter 7 bankruptcy petition in this district on October 16, 2012, and that such petition was pending before the Honorable Robyn L. Moberly.

What further transpired at that hearing and immediately thereafter is largely the basis for the Recusal Motion. In the interest of providing an accurate and complete depiction of that hearing, nearly the entire transcript follows: ⁶

THE COURT: Well, can somebody enlighten me as to what the heck is going on?

MS. CARUSO: I would be happy to. Just for a little bit of background, Your Honor, and I'm sure you've read the pleadings that we filed here, but this case emanates from a case that was filed by the Knightons in 2007. It was a Chapter 11 case that was filed in this court. The court issued an order pursuant to motion to authorize the sale of the Knightons' house to the Roudebushes. The sale was for $150,000 and the motion requests that the sale be under 363, free and clear of all liens and encumbrances. That's the last the court knew of the case because it was dismissed for the debtors' failure to do a lot of things. Anyhow, fast forward to this year and the Knightons filed a Chapter 7 bankruptcy proceeding. I am the trustee. In connection with the administration of that estate, I learned that the $150,000, it was about 147 net, proceeds, was deposited into Mr. O'Farrell's account, trust account in 2007. It was never disbursed. So what happened after that was, CitiMortgage filed a foreclosure proceeding against the house that was sold to the Roudebushes who, by the way, paid cash at closing. And there was actually a judgment of foreclosure issued. The Roudebushes are now represented. That has been stayed in the Hamilton County Court and with much persistence, Mr. O'Farrell...