In re Kestner

In re: Julie Lee Kestner and Melvin Dean Kestner Debtors

Case No. 12-32831-RAG

Case No. 12-32832-NVA

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MARYLAND at Baltimore

April 20, 2015

(jointly administered)

Chapter 11

MEMORANDUM OPINION IN SUPPORT OF ORDER DENYING MOTION FOR RECONSIDERATION AND GRANTING IN PART DEBTORS' COUNSEL'S INTERIM APPLICATION FOR COMPENSATION

I. Preliminary Statement

Before the Court is the Corrected First Amended Interim Application for Compensation for Counsel for the Debtor and Debtor in Possession and for Reimbursement of Expenses (12/27/12-08/31/13) (Fee Application) (Dkt. No. 169) and the Debtors' Motion for Revisory Relief Pursuant to Fed. R. Civ. P. 59(e) and Fed. R. Bankr. P. 9023 (Motion for Reconsideration) (Dkt. No. 128), both related to the compensation of Debtors' Counsel, John Burns, Esquire and The Burns Law Firm, LLC (Counsel). These papers are naturally intertwined with disputes that stretch back to the early days of these consolidated cases. Counsel's reconsideration arguments challenge the authority of the bankruptcy court to regulate and review the award of attorneys'fees in addition to the process employed. While, in the end, Counsel's entirely warranted decision to dramatically slash his requested fee largely addresses concerns regarding the value and appropriateness of his services, the questions raised by Counsel necessitate the issuance of something beyond a simple order of approval.

II. Procedural and Factual Background

In order to accurately determine the value of an attorney's services, it is essential to look at the history of the case. The case of Julie Kestner (Lead Case) (Case No. 12-32831) and the separate case of her husband Melvin Kestner (Case No. 12-32832) were filed simultaneously on December 27, 2012 under Chapter 13 of the Bankruptcy Code. When the cases were converted to Chapter 11 less than five months later on May 9, 2013, there were already over 100 docket entries in the Lead Case. That reflects an extraordinary amount of activity for a Chapter 13 and most of it was borne of the, at best, misguided, and, at worst, frivolous strategy of Counsel.

A. Pre-Petition State Court Litigation

The filing of these cases was precipitated by a tort suit brought by Ms. Kestner's ex-husband, James Nicholson, against the Kestners and Rebecca Forbes in the Circuit Court for Anne Arundel County (State Court Case). At the conclusion of the jury trial, two (apparently separate) $350,000 judgments were entered against Mr. and Ms. Kestner on October 17, 2012 (Judgment).¹ The Kestners and their co-defendant filed a motion for a new trial and motion for remittitur on October 26, 2012 (Dkt. No. 45-2).² When Mr. Nicholson moved to enforce theJudgment, and before the state court ruled on the Kestners' post-judgment motions, these bankruptcy cases were filed.

B. Motions to Dismiss

The verve of the state court dispute quickly tumbled into this forum. On February 15, 2013, Mr. Nicholson filed a Motion to Dismiss Chapter 13 Case (Nicholson MTD) (Dkt. No. 24). The Nicholson MTD requested dismissal on two grounds: (1) that Ms. Kestner did not qualify as a Chapter 13 debtor under Section 109(e) and (2) bad faith. The Chapter 13 Trustee (Trustee) also filed a Motion to Dismiss Case Because of Failure to Qualify for Relief Under Chapter 13 (Trustee MTD) (Dkt. No. 42) on March 7, 2013. While the Trustee and Mr. Nicholson's arguments differed regarding the treatment of certain claims, the underlying basis of both was that Ms. Kestner's noncontingent, liquidated, unsecured debts exceeded the then applicable Chapter 13 debtor cap of $360,475 set by 11 U.S.C. § 109(e).³ Similar motions to dismiss were filed in Mr. Kestner's case (Case No. 12-32832, Dkt. Nos. 27 & 47).

At the time the motions to dismiss were filed, Ms. Kestner's schedules and filed claims reflected the following relevant debts:

• $204,216.15 owed to Bank of America, secured by real property known as 350 Earls Road in Baltimore County (BoA Claim);

• $350,000 owed to Mr. Nicholson as a result of the Judgment;

• $194,328.79 in "secured" claims held by BB&T which Ms. Kestner had guaranteed on behalf of her business (BB&T Claims);

• $69,797.59 in "secured" claims held by M&T which Ms. Kestner had guaranteed on behalf of her business (M&T Claims); and

• $19,191.17 in general unsecured claims.

Both of the Motions to Dismiss pointed out that the Earls Road property, which secured the BoA Claim, had been transferred to J&M Property Company, LLC and was no longer owed by Ms. or Mr. Kestner individually. Therefore, for the purposes of the Kestners' bankruptcies, the BoA Claim was unsecured. Ms. Kestner conceded this point and amended her schedules appropriately (Dkt. No. 47). As a result, it was undisputed that Ms. Kestner had at least $223,407.32 in liquidated, noncontingent unsecured debt at the time the case was filed.

Moreover, the Nicholson MTD argued that the M&T and BB&T Claims (Guarantee Claims) were also unsecured. Ms. Kestner likewise conceded that the Guarantee Claims were unsecured and her schedules were also amended for that reason. Id. But the Nicholson MTD further argued that Middle River Sweeping, LLC and J&M Sweeping, LLC the primary obligors on the M&T and BB&T claims, were in default on their obligations and therefore he Guarantee Claims were no longer contingent (or unliquidated) and their $264,126.38 balance should be added to Ms. Kestner's other qualifying liquidated, noncontingent, unsecured debt to put her well over the Section 109(e) limit. Finally, the Nicholson MTD alleged bad faith in the filing, relying upon the allegations that (a) the case was a "two-party dispute," filed mainly to protect the Kestners from enforcement of the Judgment without the necessity of a bond and (b) the Kestners had sold or transferred several automobiles to family members just prior to filing and had not disclosed those transfers.⁴

The Trustee MTD took another angle to attack the quality of Ms. Kestner's debt totals. The Trustee averred that it was Ms. Kestner's position that the Judgment was only against her personally and was not a joint judgment as to her and Mr. Kestner. As such, the Judgment wouldnot attach to property held as tenants by the entireties, such as the Kestners' primary residence. Because Ms. Kestner did not individually own any real property, the Judgment would therefore have to be unsecured. The Trustee also asserted that because the claim was reduced to judgment, the debt was no longer contingent or unliquidated. If the $350,000 judgment was included, Ms. Kestner would be well above the $360,475 limit.⁵

The hearing on the Nicholson MTD was scheduled for March 12, 2013, which was also the last day to file responses to the same. As the Trustee's MTD had been filed only five days earlier, it had not been set for hearing that day. On the morning of the hearing, Ms. Kestner timely filed her Memorandum in Response to Motion to Dismiss filed by James Nicholson and Motion to Dismiss filed by Chapter 13 Trustee, Ellen Cosby (MTD Response) (Dkt. No. 45). Because that left insufficient time to digest the MTD Response, or for the parties to respond to it, the hearing was continued to April 12, 2013.

The MTD Response argued that the Judgment was contingent and unliquidated as, under Maryland law, the post-trial motions in the state court undercut its finality. The Debtors further argued that the fact that the Kestners' principal residence was held as tenants by the entireties did not prevent a judgment lien from attaching in the first instance. It merely meant that the Debtors might, at their option, exempt the property from execution.⁶ Debtors also argued that the Guarantee Claims remained contingent as the holders of the claims had made no demand upon Ms. Kestner for payment. Unfortunately, the allegedly favorable letters submitted with the MTD Response did not support that notion. The letter from BB&T was dated February 26, 2012 (and therefore practically irrelevant to the question) and the letter from M&T Bank seemed to indicatean expectation that M&T would be repaid through Ms. Kestner's Chapter 13 Plan which of course is evidence that M&T considered the debt to be in default and fully due and payable. Finally the MTD Response stated that the failure to include the transfer of several vehicles in the Statement of Financial Affairs (SOFA) was merely an oversight and that Ms. Kestner had amended her SOFA after being instructed to do so.

The Trustee and Mr. Nicholson each filed a reply to the MTD Response (Dkt. Nos. 63 & 66, respectively). The Trustee relied upon significant precedent in support of the proposition that judgment finality was not required in order for a court to find that a tort claim was liquidated and noncontingent. The Trustee also averred that it was well-settled in Maryland that a judgment against only one spouse does not attach to property held as tenants by the entirety. Mr. Nicholson's Reply to Memorandum in Response to Motion to Dismiss likewise argued that the Judgment was liquidated and noncontingent.

C. Motion for Relief from Stay and Motion to Stay

While the motions to dismiss were pending, on February 28, 2013, the Debtors filed a Motion for Relief from the Automatic Stay to Permit Further Proceedings in Domestic Relations Matter Pursuant to 11 U.S.C. §§ 105 and 362(a), (d) (Motion for Relief) (Dkt. No. 32) in each case requesting that the Court lift the stay to allow the Debtors to prosecute their post-judgment motions in the State Court Case. On March 18, 2013, Mr. Nicholson filed a response (Dkt. No. 59) contesting whether the stay needed to be lifted in light of the posture of the State Court Case. Although both parties appeared to agree that they wanted the State Court Case to go forward (and indeed as a practical matter, it had to go forward lest these bankruptcy cases remain in limbo forever), on March 20, 2013 Debtor filed a Reply (Dkt. No. 60) and argued that the staywas in...