Young v. Young (In re Young)

• Decision Date: 17 June 2015
• Docket Number: No. 14–1665.,14–1665.
• Citation: 789 F.3d 872
• Parties: In re Jonathan Michael YOUNG, also known as Jon Young, Debtor. Jonathan Michael Young v. Kristalynn Young. Kathy A. Cruz, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

789 F.3d 872

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

v. Kristalynn Young.Kathy A. Cruz, Appellant.

No. 14–1665.

United States Court of Appeals, Eighth Circuit.

Submitted: Jan. 15, 2015.

Filed: June 17, 2015.

Rehearing and Rehearing En Banc Denied July 20, 2015.

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

Before LOKEN, MELLOY, and GRUENDER, Circuit Judges.

Opinion

MELLOY, Circuit Judge.

The bankruptcy court¹ sanctioned attorney Kathy Cruz under Rule 9011 of the Federal Rules of Bankruptcy Procedure during her representation of a client, Jonathan Young. Cruz appeals the imposition of sanctions. For the reasons stated below, we affirm.

I

A

This case has a complicated history. In order to put this appeal in context, a brief overview of how domestic support obligations are treated under the United States Bankruptcy Code (Code) is warranted.

Simply put, the Code provides preferential treatment to domestic support obligations. For example, past-due alimony, owed on the date of filing bankruptcy, may be paid through monthly Chapter 13 payments. The past-due prepetition alimony is given priority status, meaning it is paid out of the monthly payments before payment is made to general unsecured creditors. Further, after a debtor files a petition, alimony that accrues postpetition must be paid by a debtor as an ongoing expense. In order to get a Chapter 13 plan confirmed, the debtor must show he or she has the financial ability to pay postpetition alimony and that it is, in fact, being paid. Failure of a debtor to pay postpetition alimony is a reason for dismissal.

Young filed for bankruptcy shortly after he and his wife, Kristalynn Young (now “Stephens”), divorced. The divorce decree required Young to pay alimony. Young did not pay, and as a result, Stephens filed contempt proceedings against him in state court in arguable violation of a bankruptcy stay order.² Young responded by filing an adversary proceeding against Stephens in the bankruptcy court, alleging a violation of the stay.

In the Chapter 13 bankruptcy, including the adversary proceeding, attorney Cruz represented Young. During the course of this representation, she repeatedly mischaracterized past-due postpetition alimony obligations as past-due prepetition obligations. In addition, she falsely asserted Young was current on his alimony payments. Further, she represented to the bankruptcy court that Young would “continue” to make his alimony payments even though, up to that point, he had not been making any such payments. In reliance on these representations, the bankruptcy court confirmed a plan. After discovering Cruz's false statements and her inaccurate characterization of the alimony, the bankruptcy court entered a show-cause order and, eventually, sanctions against Cruz. Cruz appeals the sanctions.

B

On November 1, 2007, Young and Stephens finalized their divorce. The divorce decree required Young to pay $1,100 per month in alimony, $10,890 in attorney's fees, and $2,350 in restitution (mainly marital debts, including credit card debt). Shortly thereafter, a state court jailed Young for contempt, finding that he failed to pay his domestic support obligations. He was released from jail after his parents posted a $5,000 bond. Young appealed the divorce decree and the contempt ruling. On January 24, 2008, while his appeals were pending, Young filed a petition for relief under Chapter 7 of the Code. Young listed $13,240 in domestic support obligations owed as of the date of filing of the Chapter 7 petition. He also listed $1,100 in monthly alimony on Schedule J, which lists “Current Expenditures of Individual Debtor.”

Proceedings not relevant to this appeal ensued in the Chapter 7 bankruptcy, mainly over the issues of dischargeability of debts owed to Stephens and relief from the stay order. Cruz then entered her appearance for Young and converted his bankruptcy case to Chapter 13.³

The original Chapter 13 plan did not mention Stephens, even though Young's Schedule E listed prepetition obligations of $2,350 in restitution and $10,890 in attorney's fees and Young's Schedule J listed $1,100 per month in alimony as a postpetition obligation. Stephens objected to the original Chapter 13 plan because it did not address alimony, attorney's fees, or restitution and because it listed alimony as a Schedule J “expense” even though Young had not paid any alimony.

In September 2008, a state appellate court affirmed the divorce decree. Stephens then sent a letter to Young in October 2008. The October 2008 Letter detailed Young's alimony arrearages from October 2007 to October 2008 (most of which accrued after filing the Chapter 7 petition in January 2008). The October 2008 Letter stated that if Stephens did not receive assurances of payment, she would again file a petition for contempt against Young in state court.

In response to the October 2008 Letter, Cruz amended Young's Schedule E to include $9,300 in alimony as a § 507(a)(1) unsecured priority claim. Also, Cruz filed a “Modification of Chapter 13 Plan” (Modified Plan), which included the $9,300 in alimony as past-due priority debt. Cruz asserted that Young would “continue” to make his alimony payments to Stephens directly, even though Young had not made a single payment. The Modified Plan also noted that the restitution and attorney's fees from the divorce decree would be paid in full.

Because Stephens was dissatisfied with Young's response to her October 2008 Letter, she filed an objection to the Modified Plan in the bankruptcy court and a petition for contempt against Young in the state court. The state court held a contempt hearing in December 2008 and found Young in contempt for failure to pay alimony and attorney's fees.⁴ The state court judge held the contempt order in abeyance, however, to allow Young to determine the effect of the bankruptcy court's stay order on the contempt proceedings.

The state court judge held another contempt hearing in March 2009. Young stated that he was making his disposable income payments to the trustee in the bankruptcy case and that Stephens would receive those funds once she filed a notice of claim. The state court judge sent Young to jail at the conclusion of the proceeding for failing to pay past-due alimony and attorney's fees. Although Young made monthly disposable income payments to the trustee, Young made no alimony payments (even though they were included in his Schedule J as a monthly expense).⁵

Stephens withdrew her objection to the Modified Plan in January 2009. The Chapter 13 trustee, however, filed objections to Young's plan in 2008 and 2009. The trustee stated Young “did not provide proof that [he] has paid all amounts required to be paid under a domestic support obligation.” Because of the trustee's pending objections, the bankruptcy court did not confirm Young's plan.

After Cruz filed the Modified Plan in October 2008, she modified Young's plan two more times. In March 2009, Cruz filed a second modification (Second Modified Plan), which essentially made no changes to the plan. Cruz, however, filed an amended Schedule J, listing an $800 alimony expense. The Chapter 13 trustee renewed the previous objection that Young did not provide proof that he was paying his domestic support obligations and was current on his alimony. In March 2011, after receiving seventeen continuances, Cruz filed a third modification (Third Modified Plan). The Third Modified Plan did not change the payment terms but stated that Young “believes he is current on all domestic support obligations that were due after the filing of his chapter 13 plan.” The statement satisfied the trustee, and the bankruptcy court entered an order confirming Young's plan in April 2011.

In December 2010, during a delay pending confirmation of the plan, Cruz filed an adversary proceeding on behalf of Young against Stephens, alleging that Stephens violated the bankruptcy's stay order by filing the petition for contempt in the state court. In the complaint, Cruz asserted that Stephens had not been paid because Stephens continued to object to confirmation of the plan and failed to file a proof of claim.

After the bankruptcy court held a trial in the adversary proceeding, it issued a decision on the merits and also set forth its basis for a separate Order to Appear and Show Cause (OSC). The OSC was directed at Young and Cruz.⁶

The bankruptcy court's OSC asked Cruz to address four areas of concern: first, why Cruz characterized the $9,300 of past-due postpetition alimony as “prepetition” in the Modified Plan; second, why Cruz amended Young's Schedule E to include past-due postpetition alimony and Young's Schedule J to include a monthly alimony expense of $1,100 (even though Young was not paying alimony); third, why Cruz stated that Young would “continue” to make alimony payments; and fourth, why Cruz filed the Third Modified Plan asserting that Young believed he was current on all postpetition domestic support obligations due after the Chapter 13 petition.

After the bankruptcy court held a hearing on the OSC, it issued an order imposing sanctions against Cruz for three of the four items listed in the OSC.⁷ First, the order imposing sanctions devoted substantial discussion to Cruz's characterization of postpetition alimony as prepetition in the Modified Plan. As the court noted, a debtor must continue to pay his or her postpetition alimony as an ongoing expense under the Code. “[F]ailure of the debtor to pay any domestic support obligation that first becomes payable after the date of the filing of the petition” is a basis for conversion or dismissal of the bankruptcy case. 11 U.S.C. § 1307(c)(11). Further, a debtor must certify that he has paid all of his postpetition alimony as a condition for discharge. 11 U.S.C. § 1328(a). The bankruptcy court concluded that Cruz characterized the postpetition alimony as prepetition in order to avoid a dismissal of the bankruptcy proceeding....