McDermott v. Junk (In re Junk), 533 B.R. 639

Background

Daniel and Christine Junk filed Chapter 11 on June 27, 2013; CitiMortgage sought relief from stay to foreclose on the Oldfield property and the bankruptcy court abstained on issues for state court to decide. The Junks appealed that abstention/stay-relief order to district court.
CitiMortgage moved to dismiss or convert the Chapter 11; the court issued a show-cause order and, after a hearing, converted the case to Chapter 7 (Conversion Order). The Junks appealed the Conversion Order to the district court.
The U.S. Trustee (UST) filed an adversary complaint under § 727(a)(4)(A) (denial of discharge for false oaths) on Feb 25, 2015; the Junks’ deadline to answer was extended from Mar 27 to Apr 26, 2015 but they did not answer by the deadline.
On Apr 27, 2015 the Junks filed a motion asking the bankruptcy court to (1) stay the adversary proceeding pending the district-court appeals and (2) extend their time to answer until 30 days after resolution of the Conversion Order appeal.
The bankruptcy court denied the requested extension because the Junks filed after the deadline and made no showing of excusable neglect under Fed. R. Bankr. P. 9006(b)(1). The court also denied the requested stay after balancing the four Griepentrog preliminary-injunction factors.
The court rejected the Junks’ arguments that (a) they were deprived of counsel at the show-cause hearing and (b) sequestration of a spouse during testimony denied them cross-examination and due process — finding the record showed ample notice/opportunity to retain counsel and no prejudice from sequestration.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the Junks are entitled to an extension of time to answer the UST’s complaint under Fed. R. Bankr. P. 9006(b)(1)	Extension denied absent timely motion and no showing of excusable neglect	Junks sought enlargement after time expired, relying on Rule 9006	Denied: late request with no excusable-neglect showing; Rule 9006(b)(1) not satisfied
Whether the adversary proceeding should be stayed pending appeals (Bankr. R. 8007/Griepentrog factors)	UST opposed stay to proceed with adversary; harm to creditors and public interest favor denial	Junks argued likely reversal of Conversion Order, irreparable harm, public interest and prejudice if not stayed	Denied: Junks failed to show likelihood of success or serious questions on the merits; remaining factors do not favor stay
Whether denial of counsel at the show-cause hearing deprived the Junks of due process	UST argued Junks had adequate notice and opportunity to retain counsel	Junks contended they were deprived of meaningful counsel and thus of the right to be heard	Denied: court provided ample time/notice to retain counsel; appointment/employment of counsel rules were applied properly
Whether sequestration of one spouse during the other’s testimony violated Rule 615/Fifth Amendment due process by preventing cross-examination	UST argued any exclusion caused no prejudice and testimony/supporting evidence would remain available	Junks claimed sequestration barred cross-examination and made evidence inadmissible under Fed. R. Evid. 615	Denied: exclusion was not objected to, record shows no prejudice; key facts were admitted by Junks and would not alter outcome

Key Cases Cited

Mich. Coalition of Radioactive Material Users, Inc. v. Griepentrog, 945 F.2d 150 (6th Cir. 1991) (sets the four-factor test applied to stays pending appeal)
Rosson v. Fitzgerald (In re Rosson), 545 F.3d 764 (9th Cir. 2008) (no prejudice from procedural deficiency where outcome would not differ)
Esso Standard Oil Co. v. Monroig-Zayas, 445 F.3d 13 (1st Cir. 2006) (if movant cannot show likelihood of success, remaining stay factors are largely irrelevant)
United States v. Seschillie, 310 F.3d 1208 (9th Cir. 2002) (sequestration error does not require reversal absent prejudice)
In re Brutsche, 476 B.R. 298 (Bankr. D.N.M. 2012) (reasons a trustee may be in the best interest of creditors)