In re Demeza

582 B.R. 868

IN RE: Donald Linwood DEMEZA, Debtor(s)

Case No.: 1–16–bk–02789 RNO

United States Bankruptcy Court, M.D. Pennsylvania.

Signed March 1, 2018

Kara Katherine Gendron, Dorothy L. Mott, Mott & Gendron Law, Harrisburg, PA, for Debtor.

Nature of Proceeding: Motion to Employ Counsel to Pursue Fraudulent Conveyance Action and Preference Action against Ashley Demeza

OPINION ¹

Robert N. Opel, II, Chief Bankruptcy Judge

A creditor in this Chapter 13 case moved to employ counsel and to be granted derivative standing to file an avoidance action. The Motion was opposed by the Chapter 13 Trustee and the Debtor. Additionally, the Debtor seeks sanctions against the creditor, including the award of attorney's fees. To the extent the Motion seeks to employ counsel, it is denied. To the extent the Motion seeks derivative standing it is denied. The Debtor's motion for the payment of attorney's fees by the creditor is also denied.

I. JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A).

II. FACTS AND PROCEDURAL HISTORY

Donald L. Demeza ("Demeza/Debtor") filed a voluntary Chapter 13 petition on July 5, 2016. The case was originally assigned to The Honorable Mary D. France. In light of Judge France's impending retirement, on February 26, 2017, the case was reassigned to me.

Pre-petition, Richard Hackerman ("Hackerman/Creditor") commenced two actions against Demeza/Debtor in the United States District Court for the Middle District of Pennsylvania. Those civil actions were filed to Case Nos. 1:13–cv–02883–SES and 1:16–cv–01154–YK–SES ("Pre–Petition Actions"). The dockets for each of the Pre–Petition Actions indicate the matters are stayed pending resolution of this bankruptcy proceeding.

Hackerman/Creditor has an unliquidated damage claim against Demeza/Debtor. Hackerman/Creditor has sought damages due to the death of his pregnant broodmare and her foal. The broodmare and the foal were in Demeza/Debtor's possession at the time the foal was delivered. Hackerman/Creditor alleges that Demeza/Debtor's negligence led to the euthanization of the broodmare and the foal.

Hackerman/Creditor filed a proof of claim in the amount of $500,000.00. Demeza/ Debtor objected to the proof of claim and that objection is pending. The objection to the proof of claim is only one of several contested matters, as well as a pending adversary proceeding, between the two parties. Previously, Judge France entered an order and opinion denying Hackerman/Creditor's motion to convert the case to a case under Chapter 7 of the Bankruptcy Code. The conversion opinion is reported as In re Demeza , 567 B.R. 473 (Bankr. M.D.Pa. 2017). Further, on February 23, 2017, Bankruptcy Judge France entered an amended order confirming the Chapter 13 plan, over the objections of Hackerman/Creditor.

Hackerman/Creditor timely appealed the denial of conversion to Chapter 7 and the entry of the order confirming the Chapter 13 plan. District Judge Caldwell affirmed the denial of the conversion motion, but reversed and remanded the confirmation order, directing the Bankruptcy Court to make additional findings concerning the "best interests of creditors test" codified in 11 U.S.C. § 1325(a)(4).² Judge Caldwell's opinion is reported as Hackerman v. Demeza , 576 B.R. 472 (M.D.Pa. 2017).

Hackerman/Creditor also commenced an adversary proceeding alleging that his claim against Demeza/Debtor should be determined to be non-dischargeable. The adversary proceeding is filed to Case No. 1:16–ap–00141 ("Non–Dischargeability Proceeding"). I wrote an opinion dismissing several of the counts in the Non–Dischargeability Proceeding. That opinion is reported as In re Demeza , 570 B.R. 33 (Bankr. M.D.Pa. 2017). A second amended complaint was filed, and answered in the Non–Dischargeability Proceeding. Trial is scheduled for May 25, 2018.

The Federal Rules of Evidence apply to bankruptcy proceedings before United States bankruptcy judges. In re Il Nam Chang , 539 B.R. 733, 736 (Bankr. M.D.Pa. 2015). Federal Rule of Evidence 201 provides that a Federal court can take judicial notice of facts that are not subject to reasonable dispute. A bankruptcy court may take judicial notice of the docket events in a case and the contents of the bankruptcy schedules to determine the timing and status of case events, as well as other facts not reasonably in dispute. In re Harmony Holdings, LLC , 393 B.R. 409, 412 (Bankr. D.S.C. 2008) ; In re Paolino , 1991 WL 284107, at *12 n.19 (Bankr. E.D.Pa. Jan. 11, 1991). I take judicial notice of the docket in this Chapter 13 case, as well as the docket in the Non–Dischargeability Proceeding, the dockets in the Pre–Petition Actions, and the District Court docket in the appeal from Judge France's order denying conversion and confirming the Chapter 13 plan. That appeal was assigned District Court Case No. 1:17–cv–00395–WWC. I specifically take judicial notice that Amended Schedule A/B Property lists Demeza/Debtor as the co-owner of real property known as 500 Ortanna Road, Ortanna, PA, 17353 ("Real Property").

III. DISCUSSION

A. Motion to Employ Counsel

Hackerman/Creditor filed a Motion to Employ Counsel to Pursue Fraudulent Conveyance Action and Preference Action against Ashley Demeza ("Derivative Standing Motion"). ECF No. 123. In part, the Derivative Standing Motion seeks the employment of Hackerman/Creditor and requests that he be "reimbursed his expenses and paid professional fees pursuant to Section 503 of the Bankruptcy Code." Mot. to Employ Counsel to Pursue Fraudulent Conveyance Action and Preference Action against Ashley Demeza 10, ECF No. 123. The Court accepts Hackerman/Creditor's representations that he is a practicing attorney and maintains a law office in Baltimore, Maryland.

Unlike other chapters of the Bankruptcy Code, there is no statutory provision for the employment of professionals in a Chapter 13 case. Section 327 of the Bankruptcy Code addresses the employment of professional persons. Section 327(b) provides:

(b) If the trustee is authorized to operate the business of the debtor under section 721, 1202, or 1108 of this title, and if the debtor has regularly employed attorneys, accountants, or other professional persons on salary, the trustee may retain or replace such professional persons if necessary in the operation of such business.

Conspicuously absent from this provision is a provision authorizing employment of professional persons in a Chapter 13 proceeding. In re Olick , 565 B.R. 767, 789 (Bankr. E.D.Pa. 2017) ("Indeed, in every-day practice in the bankruptcy courts, no one expects chapter 13 debtors to request court appointment of their bankruptcy counsel and debtors never do so.").

I take judicial notice that, in this case, neither counsel for Demeza/Debtor nor counsel for the Chapter 13 Trustee moved for the approval of her or his employment. A starting point in determining Congressional intent in a statute is an examination of the existing statutory text. Lamie v. U.S. Trustee , 540 U.S. 526, 124 S.Ct. 1023, 1030, 157 L.Ed.2d 1024 (2004). Further, when a statute's language is plain, the function of a court—at least where the disposition required by the text is not absurd—is to enforce the statute according to its terms. Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A. , 530 U.S. 1, 120 S.Ct. 1942, 1947, 147 L.Ed.2d 1 (2000).

A learned commentator discussing § 327 noted, "[t]hus, a debtor in a case under chapter 7 or chapter 13 does not need court approval before retaining counsel." 3 Collier on Bankruptcy ¶ 327.01 at 327–5 (16th ed. 2017) (emphasis added). A number of reported cases have found that there is no requirement for the employment of a debtor's attorney in a Chapter 13 case. In re Jones , 505 B.R. 229, 233 (Bankr. E.D.Wisc. 2014) (no requirement for employment of special counsel by Chapter 13 debtor); In re Gutierrez , 309 B.R. 488, 501 (Bankr. W.D.Tex. 2004) ; In re Young , 285 B.R. 168, 170 (Bankr. D.Md. 2002).

My colleague, Judge John Thomas, recently considered a Chapter 13 debtor's application to employ a real estate agent. He denied the subject application to employ finding that he lacked the authority to grant such an application under § 327. He further found that an order employing such a professional would merely be an advisory opinion; which a Federal court has no authority to issue. In re Roggio , 577 B.R. 457, 458 (Bankr. M.D.Pa. 2017).

Hackerman/Creditor offers no statutory authority for his employment as a self-represented, unsecured creditor. I recognize there is authority in the Bankruptcy Code for a Chapter 11 creditors' committee to employ legal counsel. 11 U.S.C. § 1103(a) ; In re Buran , 363 B.R. 358, 359 (Bankr. W.D.N.Y. 2007). However, § 1103 applies only to Chapter 11 reorganization cases. This is because § 103(g) provides that Chapter 11 provisions only apply to cases under such chapter. In re Liberty Fibers Corp. , 2007 WL 2471446, at *3 (Bankr. E.D.Tenn. Aug. 27, 2007). Clearly, § 1103 does not apply to this Chapter 13 case.

Based upon the above considerations, I will deny the Derivative Standing Motion to the extent it requests that the Court approve the employment of Hackerman/Creditor.

B. Standards for Derivative Standing to Utilize Avoiding Powers

The principal issue in this case is whether Hackerman/Creditor should be granted authority to utilize the Chapter 13 Trustee's avoiding powers. Such permissive authority from the court is referred to as derivative standing.

The archetypal case on derivative standing in the Third Circuit is Official Committee of Unsecured Creditors of Cybergenics Corp., ex rel. Cybergenics Corp. v. Chinery , 330 F.3d 548 (3d Cir. 2003). In this en banc decision, the Third Circuit considered an appeal from the district court's dismissal of the creditors' committee's complaint which sought to avoid an alleged fraudulent transfer. Cybergenics , unlike the case at bar, was decided under ...