Young v. Young (In re Young)

• Decision Date: 12 March 2014
• Docket Number: BAP No. 13–6054.
• Parties: In re Jonathan Michael YOUNG, also known as Jon Young, Debtor. Jonathan Michael Young, Plaintiff v. Kristalynn Young, Defendant.
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit

507 B.R. 286

In re Jonathan Michael YOUNG, also known as Jon Young, Debtor.

Jonathan Michael Young, Plaintiff

v.Kristalynn Young, Defendant.

BAP No. 13–6054.

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: Jan. 31, 2014.

Filed: March 12, 2014.

Jeffrey M. Rosenzweig, argued, Little Rock, AR, for appellant.

Before KRESSEL, SCHERMER and SHODEEN, Bankruptcy Judges.

SCHERMER, Bankruptcy Judge.

Kathy A. Cruz, appeals from the: (1) September 11, 2013 Order Imposing Sanctions and Judgment; and (2) October 1, 2013 Order Denying Motion to Vacate or to Alter or Amend Judgment. For the reasons that follow, we rule consistently with respect to the bankruptcy court's two decisions, affirming in part, and reversing and remanding in part.

ISSUES

The issues in this appeal are whether the bankruptcy court erred when it: (1) decided that Cruz violated Federal Rule of Bankruptcy Procedure 9011, and imposed sanctions, for her conduct throughout a debtor's case; (2) suspended Cruz from the practice of law in the Arkansas bankruptcy court for a period of time; and (3) imposed sanctions against Cruz under 11 U.S.C. § 105 and its inherent authority based on misrepresentations allegedly made by Cruz during a show cause hearing. The bankruptcy court acted within its discretion when it found a violation of Rule 9011 and imposed sanctions including suspending Cruz from the practice of law in Arkansas's bankruptcy court. However, the bankruptcy court's imposition of sanctions under § 105 and its inherent authority was improper because Cruz did not receive separate prior notice and an opportunity to be heard regarding such sanctions.

BACKGROUND

On January 24, 2008, Jonathan Michael Young (the “Debtor”), filed a petition for relief under Chapter 7 of Title 11 of the United States Code (the “Bankruptcy Code”). Prior to the petition date, the Debtor and his former wife, Kristalynn Young, who is now known as Kristalynn Stephens (“Stephens”), divorced. The state court entered a divorce decree on November 1, 2007, awarding Stephens alimony of $1,100 per month (subject to review after a year), attorney's fees of $10,890 and restitution in the amount of $2,350. The Debtor was put in jail in January 2008 (prepetition) for contempt due to his failure to pay alimony to Stephens. He was released when his parents posted a $5,000 bond. The Debtor's appeal of the divorce decree and the contempt ruling was pending on the petition date.

The Debtor's original Schedule E listed prepetition obligations to Stephens for attorney's fees in the amount of $10,890, and restitution in the amount of $2,350, but it did not include an obligation for prepetition alimony. Instead, the Debtor's Schedule J included $1,100 of alimony each month as a postpetition expense.

Stephens filed a motion in the Debtor's bankruptcy case for relief from the automatic stay with respect to the Debtor's state court appeal. The motion for relief from the stay ended in a June, 2008 agreed order granting relief from the stay. Shortly thereafter, on July 1, 2008, the Debtor's bankruptcy case was converted to one under Chapter 13. The original Chapter 13 plan, filed in July, 2008, did not mention Stephens.

Unfortunately, the parties did not agree on the interpretation of the June, 2008 stay relief order and whether Stephens was permitted to seek a ruling of contempt against the Debtor in state court. After the entry of the stay relief order and after the state appellate court affirmed the lower state court's decision, Stephens sent a letter to the Debtor dated October 6, 2008 (the “October Letter”). The October Letter set forth the arrearages in the Debtor's alimony payments for the period October, 2007 through October, 2008.

The bankruptcy court stated that, applying the bond that was posted earlier by the Debtor's parents to the amount of the alimony arrearages stated in the October Letter, resulted in a balance of $9,300, most (if not all) of which accrued postpetition, and that the October Letter stated that if Stephens did not receive assurances of payment from the Debtor by a date certain, she would file for contempt. Stephens filed a petition in state court and the state court held contempt hearings in December 2008 and March 2009, resulting in the Debtor being held in contempt and serving jail time.

It was Stephens's request for a ruling of contempt that led to the filing of an adversary proceeding by the Debtor against Stephens in December, 2010, alleging a stay violation. In his adversary proceeding, the Debtor referred to his alimony arrearages as “prepetition” alimony. In addition, in the complaint, the Debtor claimed that Stephens had not been paid because she continued to object to confirmation of the plan and she failed to file a proof of claim.

Two days after the date of the October Letter, on October 8, 2008, Cruz: (1) amended the Debtor's Schedule E to include $9,300 in alimony (the exact balance determined by the bankruptcy court to be set forth in the October Letter after applying the bond posted by the Debtor's parents), as a § 507(a)(1) unsecured priority claim; and (2) filed a Modification of Chapter 13 Plan (the “Modified Plan”) that included a priority debt for $9,300 in “past due alimony,” to be paid in full under the plan, and stated that the Debtor would “continue” to make his $1,100 alimony payments to Stephens directly. The Modified Plan also provided for full payment of the restitution and attorney fee amounts set forth in the divorce decree.

Beginning in 2008 and ending in 2009, the Chapter 13 trustee filed objections to the Debtor's Chapter 13 plan on the basis that the Debtor did not provide proof of payment of postpetition domestic support obligations. The Debtor obtained several continuances of the confirmation hearing. And, although Stephens's last objection to plan confirmation was withdrawn early in 2009, the Debtor did not confirm a plan until April 6, 2011, because of the trustee's pending objections.

Following the October, 2008 Modified Plan, the Debtor modified his plan twice: (1) once in March, 2009 (making no changes to plan provisions), at the same time the Debtor filed an amended Schedule J showing an amended alimony expense of $800; and (2) the second time in March, 2011, when Crux filed a third modified plan (the “Third Modified Plan”). The Third Modified Plan included a statement “[t]hat the [D]ebtor believes he is current on all domestic support obligations that were due after the filing date of his chapter 13 plan.” Other than this statement, the terms of the plan did not change. In April, 2011, the bankruptcy court entered an order confirming the Debtor's Chapter 13 plan.

On March 10, 2009, after the time of the state court contempt hearing, Stephens filed a proof of claim in the Debtor's bankruptcy case, which characterized the claim as a prepetition priority domestic support claim under 11 U.S.C. § 507(a)(1), and attached the divorce decree. The Debtor objected to the proof of claim only on the basis of the amount of the claim, not based on the characterization of it as a prepetition priority claim. The bankruptcy court sustained the claim objection, and Stephens was permitted to, and did, file an amended unsecured, priority claim in a lesser amount (an amount that the bankruptcy court later construed to represent prepetition restitution and attorney's fees under the divorce decree, plus mostly postpetition alimony, under the divorce decree), but with the same classification.

The bankruptcy court found that the Debtor made his required plan payments, but, notwithstanding the fact that he listed an alimony expense on his Schedule J, he had never made his postpetition alimony payments to Stephens.

The bankruptcy court held a trial in the adversary proceeding and, in June, 2013, the court issued its decision in the adversary proceeding. In its Memorandum Opinion on the merits in the adversary proceeding, the court set forth the basis for its issuance of a separate show cause order. The court issued a separate Order to Appear and Show Cause (the “OSC”), which “direct[ed] the [D]ebtor to show cause why his case should not be dismissed for cause pursuant to 11 U.S.C. § 1307, ..., and direct[ed] the [D]ebtor's attorney, [Cruz], to show cause why she should not be sanctioned pursuant to Federal Rule of Bankruptcy Procedure 9011.” ¹ The OSC also stated that it “is issued pursuant to 11 U.S.C. § 105 and Federal Rule of Bankruptcy Procedure 9011(c)(1)(B).” That is the only reference in the OSC to § 105. The OSC set forth the possibly sanctionable conduct of Cruz under a heading titled “ Federal Rule of Bankruptcy Procedure 9011.” The OSC set forth four bases upon which the court was considering sanctions against Cruz, with specific information about the court's concerns. Thereafter, the court entered an order inviting written responses to the OSC.

Following a hearing on the OSC, the court issued its Order Imposing Sanctions and its separate Judgment. Referring to three of the four items set forth in its OSC, the court imposed sanctions against Cruz under Federal Rule of Bankruptcy Procedure 9011, suspending her from practice in the Arkansas bankruptcy court for six months, imposing a $1,000 fine, payable to the Clerk of the court, and requiring her, within six months, to attend twelve hours of continuing legal education on Chapter 13 bankruptcy. The court also sanctioned Cruz, under 11 U.S.C. § 105 and the court's inherent power, for alleged misrepresentations made by Cruz in her testimony to the court at the hearing on the OSC, imposing a concurrent six month suspension on her practice before the Arkansas bankruptcy court, and fining her an additional $1,000 payable to the Clerk of the court. In addition, the court referred and provided a copy of the sanctions order to the Office of the Committee on Professional Conduct. ²

Cruz then filed a Motion to Vacate or to Alter or Amend Judgment, which the...