In re Johnston

• Decision Date: 08 August 2003
• Docket Number: Adversary No. 01-885.,Bankruptcy No. 01-06221-ECF-SSC.
• Citation: 308 B.R. 469
• Parties: In re JOHNSTON, Logan T., III, Debtor. Logan T. Johnston, III, Plaintiff, v. Paula Parker, et als., Defendants.
• Court: U.S. District Court — District of Arizona

308 B.R. 469

In re JOHNSTON, Logan T., III, Debtor Logan T. Johnston, III, Plaintiff, v. Paula Parker, et als., Defendants.

Bankruptcy No. 01-06221-ECF-SSC.

Adversary No. 01-885.

United States District Court, D. Arizona.

August 8, 2003.

COPYRIGHT MATERIAL OMITTED

Ronald J. Ellett, Ellett Law Offices, P.C., Logan T. Johnston, Johnston Law Offices PLC, Phoenix, AZ, for debtor.

Craig Bolton, Esq., Jennings, Haug & Cunningham, Larry O. Folks, Poll & Ball, PLC, Michael P. Lane, Adam B. Nach, Lane & Nach, P.C., Phoenix, AZ, Kathryn A. Neuheisel, Neuheisel Law Firm, P.C., Tempe, AZ, for creditors.

Paul A. Randolph, Office of the U.S. Trustee, Phoenix, AZ, for U.S. Trustee.

MEMORANDUM DECISION

SARAH SHARER CURLEY, Chief Judge.

I. Introduction

Logan T. Johnston III, the Plaintiff in this adversary, and the Debtor-in-Possession, commenced this proceeding against Paula Parker, his ex-spouse, and Melvin Sternberg, her divorce attorney, and another individual on July 23, 2001. After various pretrial matters were considered,¹ the Plaintiff presented his case to the Court over several days. When the Plaintiff rested, the Defendants Parker and Sternberg moved that the Complaint be dismissed because the Plaintiff had failed to show a violation of the stay by the remaining Defendants; or, in the alternative, if the stay violation had been shown, the remaining Defendants did not act willfully, and no damages had been proven by the Plaintiff.

In this Memorandum Decision, the Court has set forth its findings of fact and conclusions of law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure. The issues addressed herein constitute a core proceeding over which this Court has jurisdiction. 28 U.S.C. §§ 1334(b) and 157(b) (West 2003).²

II. FACTUAL BACKGROUND

On May 14, 2001, the Debtor filed his Chapter 11 petition for relief with the Court, and, as previously noted, filed this adversary proceeding on July 23, 2001. In the Complaint, the Debtor alleged that the Defendants proceeded with a series of State Court actions in violation of the automatic stay after they were aware that the Debtor had filed his bankruptcy petition.

With the filing of this adversary proceeding, the Debtor simultaneously filed an "Emergency Motion for Ruling That State Court's Minute Entry Violate[d] the Automatic Stay." An expedited hearing on the Emergency Motion was held in this Court on July 31, 2001. At the conclusion of the hearing, this Court vacated the Minute Entry Order of the Maricopa County Superior Court, dated June 26, 2001, but entered on the docket and sent to the Debtor and the Defendants on July 13, 2001. The Debtor's counsel also proceeded with this adversary, because he believed that Defendants Parker and Sternberg had willfully violated the stay and that compensatory and punitive damages should flow from their actions.

However, prior to the hearing in this Court on July 31, 2001, a number of proceedings had occurred in the Maricopa County Superior Court. A brief history of what has transpired between the parties is important in determining whether the automatic stay has been violated and by whom.

The Maricopa County Superior Court entered a Decree of Dissolution of Marriage on January 2, 1996, dissolving the marriage of the Debtor and Defendant Parker. As a part of the Decree, the Debtor was ordered to pay the sum of $366,948.45, as well as $2,000 per month in support obligations. On January 22, 2001, Defendants Parker and Sternberg filed, in the Superior Court, a request that the Debtor be held in contempt regarding the nonpayment of spousal maintenance or support. At all relevant times, Parker was represented in the Superior Court by Defendant Sternberg.

On May 17, 2001, the State Court held a hearing on the request that the Debtor be held in contempt. The parties have presented this Court with a transcript of those proceedings.³ The Debtor represented himself before the State Court.⁴ It was not until, perhaps, ten to fifteen minutes into the hearing that the Debtor advised the State Court Judge that he had just filed a Chapter 11 proceeding a few days earlier on May 14, 2001. Moreover, the Debtor's bankruptcy attorney did not file any notification of the commencement of the bankruptcy proceedings until May 17, the date of the hearing.⁵ Defendants Parker and Sternberg and the State Court did not have the benefit of the Notice of Chapter 11 Filing when the May 17 hearing commenced. It is clear from the transcript that the State Court Judge struggled with how and whether to proceed.

After being advised of the positions of the parties, including the Debtor, the State Court Judge concluded that she should proceed with the hearing to determine whether the Debtor was in contempt of Court for failure to comply with the Divorce Decree or a State Court Order, but that there would be no execution on any judgment until the issue of whether the automatic stay applied to the collection of the unpaid support obligations could be clarified in the Bankruptcy Court.⁶ At the conclusion of the contempt proceedings, the State Court took the matter under advisement.

The May 17, 2001 Notice filed by the Debtor in the State Court proceedings stated as follows:

Please take notice that ... [the Debtor] 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). [The Debtor] will be proposing a plan under Chapter 11 to cure any arrears on pre-bankruptcy maintenance payments owed to Ms. Parker.⁷

This very notice may have created confusion. It left open the possibility that the State Court could proceed under one of the exceptions to the automatic stay.

In a Minute Entry dated June 22, 2001, and filed in the State Court on July 13, 2001 ("July 13, 2001 Minute Entry," "Minute Entry" or Minute Entry Order") the State Court found that the Debtor was in violation of the Divorce Decree. Specifically, the Debtor had made no support payments since October, 1998, leaving an arrearage in the amount of $87,525.60. The Minute Entry also stated that the Debtor was in contempt of court and ordered that he pay the full amount, of the then $87,515.60 Judgment, by August 1, 2001. If the Debtor 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."⁸

It may not be gainsaid that all parties to the State Court litigation were surprised by the Minute Entry Order. The evidence presented before this Court reflected that the Defendants had expected further proceedings before the Judge would order the Debtor to pay a sum certain or face any consequences. The Debtor, still representing himself in the State Court proceedings, filed a Motion for Stay and Telephonic Hearing in the State Court.⁹ However, the State Court Judge did not set a hearing until August 2, 2001, the day after he was to pay the amount of $87,525.60 or face incarceration. The Debtor's counsel meanwhile attempted to contact the State Court Judge (on July 16, 2001 by facsimile) and Defendant Sternberg and Defendant Parker's recently retained bankruptcy counsel on July 17, 2001.¹⁰

Because the Debtor wanted to proceed simultaneously in the State Court and the Bankruptcy Court, the Debtor immediately sought appellate review of the State Court's July 13, 2001 Minute Entry Order. However, the evidence reflects that Defendant Sternberg left town shortly after receipt of the July 13, 2001 Minute Entry Order, and that it was a partner at his firm who filed the responsive brief in the State appellate proceedings. In the State appellate proceedings, Defendant Sternberg's firm presented the position that the State Court had only proceeded within an exception to the automatic stay. This Court has reviewed the cases cited in the appellate brief, some of which will be discussed later in this Decision, and concludes that the brief was appropriately researched and the arguments presented were not frivolous.

By July 23, 2001, the Debtor and his bankruptcy counsel had filed the Complaint in this adversary, and their Emergency Motion to set aside the July 13, 2001 Minute Entry Order. On July 31, 2001, this Court conducted a hearing on the Debtor's Emergency Motion and concluded that the automatic stay had been violated and vacated the July 13, 2001 Minute Entry Order. At approximately the same time, the State Appellate Court issued a stay of the July 13, 2001 Minute Entry, awaiting this Court's determination of the matter. This Court must emphasize that although it vacated the State Court's Minute Entry Order, it left for future proceedings whether the Defendants had willfully violated the automatic stay and whether compensatory and punitive damages would flow from the violation.

The parties have subsequently debated at great length what this Court relied on at the July 31, 2001 hearing. Although the July 31 hearing consisted primarily of oral argument, the Debtor's Emergency Motion did contain Schedule I from the Debtor's Schedules, filed under penalty of perjury, and an Affidavit of Defendant Parker dated March 8, 2001, filed in the State Court proceedings.¹¹ The Debtor did not list his current spouse's income on the Schedule, but the law firm distribution to him was listed at $6,500 per month. The Schedule also reflected that within a year of filing his petition, the Debtor expected his compensation to increase to $16,000 per month.¹² Defendant Parker's Affidavit listed net monthly income of $2,369.82, $85,000 in a money market account, and $1,400,000 in "stocks, bonds, securities."¹³

At the July 31, 2001 hearing, Debtor's counsel argued that the Debtor's Schedules and Statement of Affairs reflected that he had no assets to pay the $87,525.60 obligation by August 1, 2001, that his compensation, the only potential property that he had that was not property of the...