In Re Chandler
Memorandum Opinion
Introduction
The Debtor’s estranged wife, Dolores Chandler (“Movant” or “Mrs. Chandler”) filed a Motion for Relief from the Automatic Stay (the “Motion”) requesting relief from the automatic stay to (1) proceed with a state court contempt proceeding against the Debtor, Michael Scott Chandler (the “Debtor” or “Mr. Chandler”); (2) complete the sale of certain real property; and (3) pursue all rights and claims she may have against the Debtor in equitable distribution and support in a divorce proceeding now pending in the Chester County Court of Common Pleas captioned
Dolores R. Chandler v. Michael S. Chandler,
Civil Action No. 04-06895 (the “Divorce Proceeding”). Mrs. Chandler contends that she is entitled to relief from the stay because the Debtor’s bankruptcy filing was made in “bad faith,” and the Debtor con
For the reasons discussed below, the Court will grant Mrs. Chandler’s request for relief from stay to pursue all rights and claims that she may have in equitable distribution and support in the Divorce Proceeding. However, the Court will deny her requests with regard to the sale of the real property and to the state court contempt proceeding against the Debtor.
Procedural History
The Debtor commenced a Chapter 7 bankruptcy case on July 23, 2010. Michael H. Kaliner was appointed Chapter 7 trustee (the “Trustee”). Mrs. Chandler filed the Motion approximately two weeks later on August 5, 2010. The Trustee filed a response opposing the Motion on August 20, 2010 [Docket No. 27] (the “Trustee’s Response”). Thereafter, Debtor filed an opposition to the Motion on August 23, 2010 [Docket No. 34] (the “Response”). 1 On that same day, the Debtor converted his bankruptcy case to Chapter 11. 2
On September 24, 2010, this Court held a hearing to address the matters raised by the Motion (the “Hearing”). Appearing at the Hearing were the Debtor, representatives of the Movant and Trilogy Investments, LLC (“Trilogy”) 3 , and the court-appointed conservator. In support of the Motion, the Movant, offered the testimony of her divorce attorney Dolores Troiani and submitted several documents into evidence including a copy of an Order dated March 23, 2009 issued by the Chester County Court of Common Pleas in the Divorce Proceeding, a copy of a transcript of the hearing dated March 13, 2009, and a copy of an Order dated May 12, 2010 issued by the Chester County Court of Common Pleas in the Divorce Proceeding. The Debtor testified in opposition to the Motion. In addition, Maria D. Feeney, the Debtor’s attorney in the Divorce Proceedings, testified regarding the circumstances involving the marketing of the Property and the formation of the agreement between the parties and Trilogy.
At the conclusion of the Hearing, this Court requested that the Debtor and Mov-ant submit post-trial memoranda to address two issues: (1) whether this Court lacks jurisdiction to stay the sale of the Property as authorized by the Order of Court dated March 23, 2009 and the Order of Court dated May 13, 2010 issued by the
Pursuant to this Court’s Order, the Movant was to file her post-trial memorandum on or before October 8, 2010, and the Debtor was to file his memorandum on or before October 18, 2010. The Movant managed to comply with this schedule. However, Debtor was a day late in filing his memorandum. After the Movant filed a motion to strike the Debtor’s late-filed memorandum, Debtor’s counsel submitted a response explaining that the failure to meet this Court’s deadline was the result of an administrative error caused by his office’s internal case management software. 4
In addition to the document filed October 19, 2010, the Debtor filed an Amended Reply Memorandum and a Second Amended Reply Memorandum [Docket Nos. 64 & 70]. Because Debtor did not seek leave from this Court to make his supplementary filings, this Court will not consider them.
See, e.g., In re Jungkurth,
Factual Background
The Debtor and the Movant are husband and wife who are currently in the midst of what appears to be an extremely acrimonious divorce. As of this date, no divorce decree has been issued. The Debtor does not contest that the property at issue which consists of 35.9 acres of real property located at 438 McFarlan Road in Ken-nett Township and identified as Tax Parcel ID Nos. 62^4-129.1., 129.3, 130, 131 and 132 (the “Property”) is marital property. Presently, the Property has two uses: a mushroom farm and a farmhouse. Parcels nos. 62-4-130, 131 and 132 of the Property comprise a total of 8.9 acres and are being used for the purpose of mushroom farming (the “Mushroom Farm”). The Mushroom Farm is titled to “Michael Chandler Mushrooms” in fee simple. Both the Movant and the Debtor concede that, despite the Mushroom Farm’s title, the title is effectively held by the Debtor. Parcel nos. 64-4-129.1 and 129.3 of the Property comprise a total of 26.9 acres and contain a farmhouse and wetlands (the “Farmhouse Property”). The Farmhouse Property is titled to the Debtor and the Movant as tenants by the entireties. Since the parties separated in 2004, the Debtor has maintained sole and exclusive possession of the Property. 6
At the Hearing, the Debtor testified that he has no education past high school and has been engaged in the mushroom business for more than 40 years. The Debtor relies on the Mushroom Farm as the primary source of his income. 7 The Debtor further testified that if the Mushroom Farm is sold he would be without a means to support himself or fund any obligations he may have to the Movant as a result of the Divorce Proceedings. The Debtor estimated that rental of the mushroom houses located on the Mushroom Farm generate approximately $120,000.00 per year. In addition to this sum, he generates another $25,000.00 from performing cleaning and filling services relating to the mushroom houses. 8 The Debtor’s estimation of the Property’s income producing capacity was corroborated by the testimony of Mov-ant’s counsel in the Divorce Proceedings. Movant’s counsel testified that in her estimation Debtor’s income exceeds $100,000.00 per year.
The primary thrust of the Motion deals with the efforts by the parties to sell the Property. From the record, it appears that the parties had entered into an agreement of sale to transfer the Property. The parties did not provide specific information with regard to the nature of this original agreement. However, that sale was not consummated. After this initial sale agreement failed, the parties received a letter of intent dated November 18, 2008 from George P. Beer to purchase the Property for the sum of $2,000,000.00 with settlement to occur within six months (the “Beer Offer”).
The record is less than clear as to why the Beer Offer was not accepted. The Movant avers that she desired to accept the offer. When it appeared that the Debtor would not accept the Beer Offer, the Movant apparently petitioned the Chester Country Court of Common Pleas to prevent the dissipation of the asset (the “Dissipation Petition”). In response to the Movant’s petition, the Debtor argued that rather than causing the dissipation of the
A hearing on the Dissipation Petition was scheduled for March 23, 2009. Rather than proceed with the hearing, the parties appear to have negotiated a settlement in which they agreed to the appointment of a conservator who would have the authority to convey the property. The parties’ agreement was disclosed to the Chester County Court of Common Pleas and memorialized in an order dated March 23, 2009 (the “Conservator Order”). The Debtor contends that the Conservator Order is not binding on him because his then-attorney lacked the authority to agree to such an arrangement. He further avers that upon learning of the effect of the Conservator Order, the Debtor terminated his counsel for malfeasance.
Pursuant to Conservator Order, the Chester County Court of Common Pleas appointed Wendy W. McLean as conservator of the Property (the “Conservator”). In relevant part, the Conservator Order reads:
“The Conservator shall have the authority to exercise general powers to effectuate sale of the property, including but not limited to: the ability to enter upon the property and permit others to do so; the execution and delivery of all documents, deeds, agreements, instruments, certificates and affidavits in connection with or in respect to the said sale and further to convey the property and all interest they may have therein, in the name, place and stead of the parties ... By way of example and not limitation, the Conservator shall have the following powers: to negotiate the sale of the property; to engage a realtor to sell the property; to engage a appraise to advise as to its value; to engage other professionals/consultants, including but not limited to engineers, land planners, environmental firms, to direct from the proceeds of the sales the payment of all costs and fees, including attorney’s fees and further to settle and/or discontinue any litigation involving the land ...”
Movant’s Exh. 1.
At some point, the Conservator identified Trilogy as a potential buyer of the Property. In response to the Conservator’s plan to sell the Property to Trilogy, the Debtor filed a petition in the Divorce Proceedings seeking to stay the sale of the Property to allow the Debtor time to obtain financing to buy out the Movant’s interest in the Property. After holding an evidentiary hearing addressing the Debt- or’s petition, the Chester County Court of Common Pleas denied the Debtor relief. By an order dated May 12, 2010 (the “Sale Order”), the Chester County Court of Common Pleas granted the Conservator “express authority to enter into an agreement of sale with Trilogy Investments (or its nominee) for the sale of the real estate.” Movant’s Exh. 4.
In accordance with the Sale Order, the Conservator entered into an Agreement of
To stop the Debtor from resorting to self-help measures, the Movant filed a petition dated June 9, 2010 in the Divorce Proceedings requesting that the Chester County Court of Common Pleas hold the Debtor in contempt for violation of the Sale Order (the “Contempt Petition”). In response, the Chester County Court of Common Pleas scheduled a hearing to be held on July 30, 2010. The hearing on the Contempt Petition was stayed by the filing of the Debtor’s bankruptcy petition.
The Debtor admitted that he filed for bankruptcy protection in order to prevent the sale to Trilogy and thereby preserve the Property because it is his principal source of income. He believes the proposed sale would leave him with insufficient assets to fund the claims of his creditors, including those owed to the Movant. He proposes in the alternative to conduct a sale in connection with this bankruptcy case with the goal of obtaining a price closer to his estimation of the Property’s true value.
Discussion
I. The Court’s Jurisdiction
At the close of the Hearing, this Court specifically requested that the parties address its jurisdiction in light of the State Court’s orders authorizing the sale of the Property to Trilogy.
See, e.g., In re Conference of African Union First Colored Methodist Protestant Church,
As recently addressed by the Third Circuit, the
Rooker-Feldman
doctrine bars the losing party in a previous state court action from seeking “appellate review of the state-court judgment, a task entrusted by statute solely to the Supreme Court.”
Great Western Mining & Mineral Co., Inc. v. Fox Rothschild LLP,
Courts have recognized an exception to the
Rooker-Feldman
doctrine where a bankruptcy court’s jurisdiction is necessary to protect a debtor’s rights that arise under the Bankruptcy Code.
See In
This exception is consistent with this Court’s mandatory abstention obligations under 28 U.S.C. § 1334(c)(2). Section 1334(c)(2) provides:
Upon timely motion of a party in a proceeding based upon a State law claim or State law cause of action, related to a case under title 11 but not arising under title 11 or arising in a case under title 11, with respect to which an action could not have been commenced in a court of the United States absent jurisdiction under this section, the district court shall abstain from hearing such proceeding if an action is commenced, and can be timely adjudicated, in a State forum of appropriate jurisdiction.
28 U.S.C. § 1334(c)(2). For mandatory abstention to apply, a proceeding must not implicate a debtor’s rights that arise under the Bankruptcy Code. In other words, mandatory abstention is not appropriate in core proceedings.
Although a debtor’s interests in property is generally determined by state law, the Code provides a debtor certain rights that if exercised have the power to augment a debtor’s interests. The Debtor has indicated that he filed bankruptcy with the intent to conduct what amounts to a § 363(h) sale.
See
11 U.S.C. § 1107(a) (giving the debtor-in-possession all the rights and duties of a trustee);
see also In re Brown,
II. Scope of the Automatic Stay
A. Property of the Debtor’s Estate
As indicated at the Hearing, this Court must as an initial matter determine whether any of the actions undertaken in the Divorce Proceedings had the effect of divesting the Debtor of his interest in the Property so as to remove it from the scope of the automatic stay. The filing of a
B. The Trilogy Sale Agreement
The existence of the Sale Agreement does not change this analysis. By operation of the “strong-arm powers” provided by 11 U.S.C. § 544(a)(3), a trustee or debtor-in-possession has the rights of a bona fide purchaser of real property (a “BFP”) that is perfected as of the commencement of a bankruptcy case. In the capacity as a BFP, a debtor-in-possession may avoid unrecorded interests incurred by the Debtor. Neither the Movant or the Debtor contend that any action has been taken to record the transfer of the Property to Trilogy pursuant to Pennsylvania’s recording statute, 21 P.S. § 402, or the
lis pendens
statute, 42 Pa.C.S. § 4302. Significantly, the Conservator Order did not divest the Debtor of possession of the Property.
See, e.g., In re Stewart,
For these reasons, this Court finds that the Debtor’s interest in the Property is sufficient to render it an asset of his bankruptcy estate protected by the automatic stay and divest the Divorce Proceeding of jurisdiction over its disposition.
See, e.g., In re Wilson,
III. The Debtor’s Case Is Not A “Bad Faith Filing”
Movant has requested relief from the automatic stay pursuant to 11 U.S.C. § 362(d)(1). Section 362(d)(1) enables a bankruptcy court to grant a credi
The Movant contends that cause exists for relief from the automatic stay due to the Debtor’s filing of his bankruptcy petition in bad faith. The mere fact that the Debtor filed for bankruptcy relief during the pendency of the Divorce Proceeding is insufficient to support an inference of bad faith.
See In re Myers,
The Movant argues that Debt- or did not file his bankruptcy for a legitimate bankruptcy purpose, but solely for the purpose of frustrating the sale to Trilogy as authorized by both the Conservator Order and the Sale Order. Admittedly, the Debtor stated in his testimony that he filed to prevent the sale. However, his resort to this forum cannot be dismissed as a mere litigation tactic. He contemplated that if the sale was completed, he would be rendered insolvent. Neither party disputes this proposition. This motive constitutes a legitimate bankruptcy purpose. This finding is buttressed by the fact that the purpose of the Debtor’s filing appears to be that he perceived bankruptcy as the only means available to him to preserve his ability to repay his debts. “It is quite common and not inappropriate for a debtor to use chapter 11 to obtain a respite from a creditor or creditors aggressively seeking to collect on a debt, even when execution is imminent, provided that financial rehabilitation is possible.”
In re McStay,
The Movant also argues that the Debtor’s filing was made in bad faith because the bankruptcy proceeding is fundamentally a two-party dispute between divorcing spouses. This Court recognizes that this proceeding does have many of the indicia of a two-party dispute that would give rise to an inference of bad faith. However, the impending Sheriff Sale negates this inference. The Debtor was caught between the proverbial rock and a hard place. On the one hand, he was faced with the sale to Trilogy that would have effectively rendered him insolvent. On the other, he was faced with the impending Sheriff Sale that would have had the same effect. The purpose of bankruptcy is to provide debtors a breathing spell during which they are permitted to marshal assets and otherwise get their financial affairs in order.
See, e.g., In re
Finally, the Movant argues that bad faith may be inferred from the fact that the Debtor holds bare legal title to the Property and therefore he has no chance of reorganization. This argument fails for two reasons. One, the Debtor holds more than bare legal title to the Property. He is the title owner of the Mushroom Farm and a tenant by the entireties of the Farmhouse Property. Second, as previously discussed, for bankruptcy purposes, the Debtor has interest in the Property equivalent to that of a BFP and therefore would be able to avoid the Sale Agreement pursuant to his § 544 rights.
See, e.g., McCannon v. Marston,
For these reasons, this Court finds that the Movant has failed to establish that the Debtor acted in bad faith and the stay may not be modified on this basis.
IV. Modification of The Automatic Stay for The Divorce Proceeding
The Movant has requested relief from the stay to pursue certain actions in and connected with the Divorce Proceeding. First, the Movant requests relief to allow her to proceed with the Contempt Petition. Second, the Movant requests relief to proceed with the sale of the Property. Third, the Movant requests relief to pursue her rights against the Debtor in equitable distribution and otherwise continue the Divorce Proceeding. Relief from stay is not an all or nothing endeavor. Cause must exist for each action for which relief is sought. As such, this Court must determine whether grounds exist for granting relief to the Movant on each of her requests.
A. Equitable Distribution
Domestic relations law is an area of law with particular importance to state interests.
See, e.g., Solomon v. Solomon,
B. The Sale of the Property to Trilogy
As to the conveyance of the Property to Trilogy, the Movant has not dem
Support for this outcome is found in
In re Johnson,
What was not clear to the court was the extent of the debtor’s interest in the property. On this basis, the court modified the automatic stay to permit the parties to proceed with equitable distribution in the pending state court divorce proceeding. “Until the instant debtor’s interest in the property is determined, we will be unable to establish if he has met the elements of § 363(h).”
In re Johnson,
The same dynamic exists here. The Debtor has indicated that he filed bankruptcy with the intent to conduct a sale of the Property. Although the Debtor has not specifically identified the precise section of the Code that entitles him to this relief, he is in effect attempting to invoke his rights under § 363(h). Pursuant to § 363(h), a debtor in possession has the right to sell the estate’s interest together with the interest of a co-owner, including a spouse, provided the benefit to the estate exceeds the detriment to the non-debtor co-owner.
See Schlossberg v. Barney,
As in Johnson, until the completion of equitable distribution in the Divorce Proceeding, this Court is unable to discern the extent of the Debtor’s interest in the Property and whether such interest is sufficient to allow him to invoke his rights under § 363(h). Accordingly, this Court will modify the automatic stay to permit equitable distribution to proceed. However, as in Johnson, this Court will retain jurisdiction over the Property to ensure that the Property, to the extent it is determined the Debtor has an interest in it, remains available to fund the Debtor’s reorganization. To do otherwise, this Court would deprive the Debtor of his § 363(h) right. For both reasons, this Court finds that cause does not exist to modify the automatic stay to permit the sale of the Property. Once equitable distribution is completed, the parties may return to this forum to adjudicate the Debtor’s § 363(h) rights.
C. The Contempt Proceedings
The automatic stay has been held to apply to civil contempt proceedings brought against a debtor.
See In re Leonard,
Summary
The Motion is granted in part and denied in part. The Movant is granted relief from the automatic stay under 11 U.S.C. § 362(d)(1) to pursue all rights and claims she has against the Debtor in equitable distribution and support in the Divorce Proceeding. On the other hand, the Mov-ant is denied relief from the automatic stay under 11 U.S.C. § 362(d)(1) to proceed with the sale of the Property or the Contempt Petition filed in the Divorce Proceeding.
An order consistent with this Opinion will be entered.
ORDER
For the reasons stated in the accompanying Memorandum of Opinion issued by this Court, It is hereby ORDERED that:
1. The Motion is GRANTED IN PART and DENIED IN PART.
2. The movant, Dolores Chandler (“Movant”) is GRANTED relief from the automatic stay under 11 U.S.C. § 362(d)(1) to pursue all rights and claims she has against the Debtor in equitable distribution and support in the divorce proceeding pending in the Chester County Court of Common Pleas (the “Divorce Proceeding”) captioned Dolores R. Chandler v. Michael S. Chandler, Civil Action No. 04-06895.
3. The Movant is DENIED relief from the automatic stay under 11 U.S.C. § 362(d)(1) to proceed with the sale of the Property.
4. The Movant is DENIED relief from the automatic stay under 11 U.S.C.
Notes
. In the Debtor’s Response, the Debtor embedded a motion for sanctions. However, because the embedded motion was not properly noticed as required by L.R.B.P. 9014-3(c), this Court advised the Debtor at the Hearing that it would not consider the motion.
. Since conversion of this case to chapter 11, the Trustee has ceased his participation in this case.
. On November 12, 2010, almost two months after the conclusion of the Hearing, Trilogy filed a document styled “Joinder of Trilogy Investments, LLC to Motion of Dolores Chandler for Relief From the Automatic Stay Pursuant to Bankruptcy Code Section 362” [Docket No. 73] (the “Joinder Motion”). In the Joinder Motion, Trilogy claims to join the Movant's Motion. Despite being in attendance at the Hearing, Trilogy's representatives made no request to present arguments or evidence to this Court. Because the Debtor has not been afforded the opportunity to address the merits of Trilogy’s late-filed Joinder Motion, this Court will not consider it or the exhibits it seeks to rely upon as evidence.
See, e.g., Mannarino v. Morgan Tp.,
. The Movant did not notice its Motion to Strike consistent with L.R.B.P. 9014-3(c). As a result, no hearing has been scheduled on this matter. The Movant has identified no prejudice that she suffered as a consequence of the Debtor’s late-filed memorandum. Therefore, this Court finds that late filing constitutes excusable neglect and will permit it.
See. e.g., Pioneer Investment Services Co. v. Brunswick Associates Limited Partnership, 507
U.S. 380,
. This Court notes that by consenting to the post-hearing briefing schedule, the parties are deemed to have consented to a tolling of the 60-day period provided by § 362(e)(2).
See In re Aulicino,
.In addition to the Property, the Debtor is the owner of a property located at 661 Rose-dale Road, Kennett Square, Pennsylvania and identified as tax parcel number 62-4-118.1 (the "Residence”). The Debtor claims that the Residence is worth $345,000.00. Despite this valuation, the Residence is encumbered by a mortgage held by a first mortgage in the amount of $459,951.00 held by CitiMortgage and a second mortgage in the amount of $25,000.00 held by CitiBank. The Motion
. He claims that he also receives $800.00 per month from his children.
. In addition to the evidence presented at the Hearing, this Court has taken judicial notice of the Debtor's schedules and statement of financial affairs.
See, e.g., In re Jabarin,
. The Debtor disclosed the existence of the lawsuit in his Statement of Financial Affairs.