In re Thorpe

• Decision Date: 17 February 2017
• Docket Number: Bky. No. 13–15267 ELF
• Citation: 563 B.R. 576
• Parties: IN RE: Renee M. THORPE, Debtor
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

563 B.R. 576

IN RE: Renee M. THORPE, Debtor

Bky. No. 13–15267 ELF

United States Bankruptcy Court, E.D. Pennsylvania.

Signed February 17, 2017

Roger V. Ashodian, William H. Hall, IV, Jennifer Song, Regional Bankruptcy Center of SE PA, Havertown, PA, for Debtor.

Morton R. Branzburg, Christopher John Leavell, Klehr Harrison Harvey Branzburg & Ellers, Philadelphia, PA, for Trustee.

Frederick L. Reigle, Reading, PA, pro se.

Frederic J. Baker, Sr. Assistant United States Trustee, Philadelphia, PA, for U.S. Trustee.

MEMORANDUM

ERIC L. FRANK, CHIEF U.S. BANKRUPTCY JUDGE

I. INTRODUCTION

Joseph G. Mirarchi Legal Services, P.C., a law firm in which Joseph G. Mirarchi ("Mr. Mirarchi") is the sole practitioner,¹ has filed a motion ("the Mirarchi Motion") seeking payment of $113,400.00 that has been placed in the bankruptcy court clerk's registry. The $113,400.00 constitutes thirty-five percent (35%) of the settlement proceeds of a lawsuit the chapter 12 debtor, Renee M. Thorpe ("the Debtor"), and her non-debtor husband, Dale Thorpe ("Mr. Thorpe"), filed against Nationwide Mutual Insurance Company ("Nationwide").

Mirarchi seeks the $113,400.00 fund based on a contingent fee legal services agreement entered into during the pendency of this chapter 12 bankruptcy case. The Debtor and Mr. Thorpe (collectively, "the Thorpes") object to the payment of any professional compensation to Mirarchi. The chapter 12 trustee ("the Trustee") also objects to the payment requested by Mirarchi.

As explained below, I have concluded that this is a non-core matter as to which the bankruptcy court lacks authority to enter a final judgment. See 28 U.S.C. § 157(c)(1). Mirarchi has not consented to the entry of a final order by the bankruptcy court. Accordingly, this Memorandum will serve as my proposed findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 9033.

Based on the proposed findings of fact and conclusions of law, I recommend that the district court enter an order denying the Mirarchi Motion in its entirety.

II. PROCEDURAL HISTORY

A. The Two (2) Confirmed Chapter 12 Plans

The procedural history of this case was set out in great detail in the district court's reported opinion, In re Thorpe, 540 B.R. 552 (E.D. Pa. 2015). I will truncate that history to highlight the events most relevant to the current matter.

On June 13, 2013, the Debtor filed a chapter 12 bankruptcy petition in this court. The bankruptcy filing stayed a sheriff's sale of the Debtor's farm property, 371 Stoney Brook Road, Newtown, PA ("the Farm") scheduled by Lititz Properties, Inc. ("Lititz"). At that time, Lititz held a mortgage on the Farm, as well as a mortgage on a second (residential) property owned by the Thorpes.

On January 13, 2014, this court confirmed the Debtor's Fourth Amended Plan ("the Initial Confirmed Plan"). The Initial Confirmed Plan provided for the modification and payment of Lititz's allowed secured claim. See 11 U.S.C. §§ 1222(b)(2), 1225(a)(5). To implement the Initial Confirmed Plan, the Debtor was obliged to sell one (1) parcel of the Farm, the proceeds of which would be applied to reduce the balance of Lititz's allowed secured claim. After that sale, the Initial Confirmed Plan contemplated that the Debtor would retain the balance of the property that comprised the Farm and satisfy the balance of Lititz's claim through periodic payments. It further provided that if the Debtor was unable to sell the parcel by a set deadline, the Trustee was authorized to market the parcel.

B. The Fifth Amended Plan and the Auction of the Farm Property

Ultimately, neither the Debtor nor the Trustee succeeded in selling the Farm parcel by the deadline set in the Initial Confirmed Plan. As a result, Lititz pressed for dismissal of the bankruptcy case.

After extensive negotiations among the parties and with their consent, on November 13, 2014, the court approved a post-confirmation modified plan, the Debtor's Fifth Amended Plan, as Amended ("the Modified Confirmed Plan"). Under the Modified Confirmed Plan, the Debtor was given a short period to market the parcel and, if no buyer were found, the Trustee would market the parcel for a fixed period of time. If the Trustee could not sell the parcel within the allotted time, an auction of the entire Farm would be held. Lititz retained the right to credit bid at the auction. The auction process was subject to the continuing right of the Debtor to pay Lititz a fixed sum ($1 million), which the Debtor could obtain by finding a buyer for the parcel or by any other means. If the Debtor made the $1 million payment, no auction would be held and the Debtor would be entitled to satisfy the balance of Lititz's allowed secured claim through periodic payments as set forth in the Modified Confirmed Plan.

Again, neither the Trustee nor the Debtor was able to sell the parcel. Nor was the Debtor able to raise the $1 million necessary to forestall the auction. As a result, the entire Farm was sold to a third party at an auction held on September 16, 2015. Prior to the auction, Lititz's proof of claim, to which the Debtor had filed an objection, was temporarily allowed for purposes of credit bidding in the amount of $2,358,354.32. (Doc. # 463).

At the auction, Lititz did not invoke its credit bid to make the highest bid. Instead, the winning bid, made by a third party, was $1.75 million.

This court confirmed the auction sale by order dated September 18, 2015. (Doc. # 476).

The Debtor appealed the order confirming the sale. The district court affirmed the order by opinion and order dated October 9, 2015. See Thorpe, 540 B.R. at 565–68. On October 16, 2015, the Trustee closed with the buyer and transferred the Farm to him. (See Trustee's Report ¶ 7) (Doc. # 495).²

C. The Mediation

The Farm having been auctioned, this court held a status hearing in the case on November 24, 2015.

At the status hearing, the Debtor and Lititz discussed certain issues that remained unresolved. Lititz's claim was secured not only by the Farm, but also by the Debtor's second (residential) property. With the loss of the Farm, the Debtor expressed her intent to move with her family into that second property in the near future. From Lititz's perspective, the auction price for the Farm ($1.75 million) was significantly less than the outstanding debt (in excess of $2.3 million), leaving Lititz with a substantial deficiency claim, secured by that second property. The Debtor asserted that her then-pending objection to Lititz's claim would either eliminate or greatly reduce Lititz's deficiency claim, allowing her to propose a second, post-confirmation modified plan. Lititz disputed the validity of the Debtor's claim objection and did not concede that the Debtor had any further right to modify her chapter 12 plan.

Rather than resume litigation of the claim objection and commence litigation regarding the merits of another post-confirmation modification to the Debtor's plan, the Thorpes and Lititz agreed to mediation. Following the status hearing on November 24, 2015, Judge Ashely M. Chan of this court agreed to serve as mediator and was so appointed.

Judge Chan successfully mediated the disputes between the Thorpes and Lititz. However, the mediation also brought to light the dispute that is now before the court.

D. The Mediated Lititz Settlement and the Mirarchi Dispute

At the same time as the unsuccessful marketing process of the Farm parcel that eventually led to the auction of the Farm was taking place in September 2015, the Debtor was pressing an insurance claim against Nationwide in state court. The insurance claim was based on several fire and storm events that damaged the Farm and its structures.

Three (3) salient events occurred in connection with this insurance litigation:

(1) Nationwide offered to settle the matter for approximately $324,000.00;

(2) The Thorpes retained Mr. Mirarchi under a 35% contingency fee agreement and later terminated him as their counsel; and

(3) The Thorpes discharged Mr. Mirarchi as counsel before any settlement was reached and disputed his entitlement to any counsel fee.

The Nationwide insurance matter figured prominently in the mediated settlement ("the Lititz Settlement") between the Debtor and Lititz, as the availability of the settlement proceeds was material in inducing Lititz to compromise its claim against the Thorpes. The question that came up was whether the full $324,000.00 was available to fund the settlement or whether that fund would be diminished by the Mirarchi 35% contingent fee.

By the conclusion of the mediation, the Thorpes and Lititz reached an agreement, but no global settlement was reached that would resolve the Mirarchi fee dispute. As a result, the essential terms of the Lititz Settlement were:

• the Debtor and her husband would promptly accept Nationwide's offer to settle the pending action for $324,000.00;

• the Debtor and her husband would pay Lititz $210,600.00, representing the undisputed 65% of the insurance settlement proceeds;

• the dispute regarding the remaining 35% of the proceeds, (i.e., Mirarchi's claimed contingent fee of $113,400.00), would be resolved at a later date;

• to the extent that Mirarchi received less than his 35% contingent fee, Lititz would receive an additional payment, up to a maximum of $9,400.00

• Lititz would accept the payments provided in the Settlement Agreement in full satisfaction of its claim against the Debtor and her husband and release its mortgage against the Debtor's remaining (residential) real property.³

On April 19, 2016, Lititz filed a motion to approve the Lititz Settlement ("the Lititz Settlement Motion"). (Doc. # 547). Mirarchi, the Trustee and the Thorpes all filed responses to the Lititz Settlement Motion. (Doc. #'s 550, 553, 559).

Mirarchi's primary concern was to ensure that approval of the Lititz Settlement would not prejudice his claim for his contingent fee. (See Doc. #'s 545, 550). On behalf of the bankruptcy estate, the Trustee did not object to the Lititz Settlement "per se," but...