UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

A hearing was held on May 21, 1998 regarding the motions to dismiss and for sanctions submitted by creditors Conner, Fitzgerald, Fidler and Kracker, confirmation of the debtor's amended Chapter 13 plan, the debtor's objections to the claims of creditors Kracker, Fitzgerald, Conner and Fidler, and the debtor's motion for contempt against Michael Conner. Jeff Carney appeared for the debtor. Michael Conner and JoAnne Fitzgerald appeared on their own behalf. Erika Kracker appeared on behalf of James V. Kracker and Dale N. Fidler.

In addition to the evidence produced at the hearing, the court has taken judicial notice of the § 341 meetings in both this bankruptcy case and the related case of debtor, John Henry Dunham, Case No. A98-00018-DMD. The motion to dismiss will be granted. The motion for sanctions, the objections to claims and confirmation of the Chapter 13 plans will be denied. The motion for contempt will be granted.

Background

Debtors Craig Puddicombe and John Dunham are the owners of property located on the Knik River near Metal Creek and the Knik 5 ABR 431      glacier. They acquired the property, known as United States Survey 5265, in 1983. Conner and Fitzgerald staked mining claims in the Metal Creek area in 1978 and gained access to their property through the Puddicombe and Dunham property. Kracker and Fidler also traversed the Puddicombe and Dunham property for access to their mining claims. Puddicombe and Dunham filed suit in 1991 to quiet title to the property naming Conner, Fitzgerald, Kracker and Fidler as defendants. Kracker and Fidler settled before trial. Conner and Fitzgerald went to trial. After a bench trial, the superior court denied Conner's and Fitzgerald's claims to the property. Partial attorney's fees and costs of over $9,800.00 were awarded to Puddicombe and Dunham. Fitzgerald alone appealed. Puddicombe and Dunham executed against Fitzgerald's property during the appeal.

Fitzgerald prevailed on appeal. On April 26, 1996, the Alaska Supreme Court reversed the superior court judgment. It found that a public right-of-way existed on the property. The case was remanded to the superior court for a determination of the location and extent of the right-of-way. The superior court's award of attorney's fees was vacated. Fitzgerald v. Puddicombe, 918 P.2d 1017 (Alaska 1996).

On November 26, 1996, after remand, the superior court awarded $5,922.85 to Fitzgerald on November 26, 1996, as reimbursement for attorney's fees and costs recovered by Puddicombe and Dunham during the appeal. The superior court entered a second judgment on July 2, 1997. It found that a 100 right-of-way traversed the Puddicombe and Dunham property. It awarded $21,962.52 in public interest attorney's fees along with $1,146.24 5 ABR 432      in costs to Fitzgerald on October 14, 1997. When combined with the prior award, Fitzgerald's claim against Puddicombe and Dunham totaled over $29,758.00 as of November 17, 1997. Puddicombe and Dunham have appealed the superior court's new judgments.

Puddicombe and Dunham filed for chapter 13 relief on December 31, 1997. On February 24, 1998, they filed a motion for relief from automatic stay to continue their appeal before the Alaska Supreme Court. The motion was improperly noticed. It was denied on April 1, 1998.

Bad Faith Dismissal

Fitzgerald and other parties allege that Puddicombe's and Dunham's chapter 13 cases should be dismissed for cause as bad faith filings. A chapter 13 petition filed in bad faith may be dismissed "for cause" pursuant to 11 U.S.C. § 1307(c). Eisen v. Curry (In re Eisen), 14 F.3d 469, 470 (9th Cir. 1994). To determine bad faith a bankruptcy judge must review the totality of the circumstances. 550 W. Ina Rd. Trust v. Tucker (In re Tucker), 989 F.2d 328, 330 (9th Cir. 1993); Goeb v. Heid (In re Goeb), 675 F.2d 1386, 1391 (9th Cir. 1982). Bad faith may exist where the debtor only intended to defeat state court litigation. Chinichian v. Campolongo (In re Chinichian), 784 F.2d 1440, 1445 (9th Cir. 1986). This court has previously dismissed chapter 13 cases which have been filed for this purpose. In re Reisland, Case No. F96-00960-DMD, Memorandum dated March 12, 1997; aff'd., Reisland v. Nenana Heating Services, 5 A.B.R. 176 (D. Alaska 1998).

As I noted in Reisland, at pages 4 and 5:

Nenana's primary contention for a finding of bad faith is that Reisland is a solvent 5 ABR 433      debtor who has used Chapter 13 for an improper purpose: as a substitute for a supersedeas bond. A number of Chapter 11 cases have been dismissed on bad faith grounds under such circumstances. In re Marsch, 36 F.3d 825 (9th Cir. 1994); In re Nahas, 95 B.R. 387 (Bankr. W.D. Pa. 1989); In re Business Information Co., Inc., 81 B.R. 382 (Bankr. W.D. Pa. 1988); In re Karum Group, Inc., 66 B.R. 436 (Bankr. W.D. Wash. 1986); In re Smith, 58 B.R. 448 (Bankr. W.D. Ky. 1986); In re Wally Findlay Galleries (New York), Inc., 36 B.R. 849 (Bankr. S.D.N.Y. 1984). A number of courts have dismissed Chapter 13 petitions or granted relief from stay under similar circumstances. In re Chinichian, 784 F.2d 1440, 1445 (9th Cir. 1986); In re Maurice, 167 B.R. 114 (Bankr. N.D. Ill. 1994); In re Ramji, 166 B.R. 288 (Bankr. S.D. Tex. 1993); In re Roberts, 117 B.R. 677 (Bankr. N.D. Okla. 1990). Other courts have not dismissed Chapter 11 petitions which have been used as alternatives to a supersedeas bond. In re Nome Commercial Company, In re Brown, 4 A.B.R. 358 (Bankr. D. Alaska 1996); In re Askinuk Corporation, 3 A.B.R. 251 (Bankr. D. Alaska 1993); In re N.R. Guaranteed Retirement, Inc., 112 B.R. 263 (Bankr. N.D. Ill. 1990), aff'd, 119 B.R. 149 (N.D. Ill. 1990); In re Corey, 46 B.R. 31 (Bankr. D. Hawaii 1984); In re McLaury, 25 B.R. 30 (Bankr. N.D. Texas 1982); In re Alton Telegraph Printing Co., 14 B.R. 238 (Bankr. S.D. Ill. 1981). The primary rationale behind cases refusing to dismiss on bad faith grounds has been to protect the business of the debtor from liquidation.

In considering the totality of the circumstances, I will look to the factors noted by the Eighth Circuit in United States v. Estus (In re Estus), 695 F.2d 311, 317 (8th Cir. 1982), and approved by the Bankruptcy Appellate Panel in Fidelity & Casualty Co. of N.Y. v. Warren (In re Warren), 89 B.R. 87, 93 (B.A.P. 9th Cir. 1988). The first factor to consider is the amount of the proposed payments and the amount of the debtor's surplus. Puddicombe's plan proposes payments of $179.55 per month over a 5 ABR 434      five year term plus $15,000.00 from his claim against Matanuska Electric Association (MEA), committing a total of $25,773.00 to be paid into the plan. Given Puddicombe's meager retirement income of $2,362.54 a month, there would be no surplus income available for debt service under his plan.

Dunham works six months a year as a warehouseman for the MEA, and receives unemployment benefits in the off season. Last year he made $38,000.00 over the summer. His unemployment benefits are $992.00 per month in the off season. He also receives monthly pension benefits of $617.21 from the Teamsters. His proposed plan payments are $108.11 per month from November through May, increasing to $500.00 dollars per month from June through October of each year. He has also contributed a tax refund of $8,000.00 to the plan for this year. Total payments over five years would total $24,283.85. Dunham's schedules reveal a $50.00 surplus after plan payments in the winter, but fail to account for his increased summer income. Based on his 1997 compensation, Dunham should have surplus income of at least $3,000.00 to $3,500.00 per month for six months after payment of both income taxes and plan payments of $500.00 per month.

The second factor for consideration is the debtor's employment history, ability to earn and likelihood of future increases in income. Puddicombe is a journeyman electrician and a member of the International Brotherhood of Electrical Workers (I.B.E.W.), a powerful union. He worked for MEA as a lineman for 27 years, making substantial income and rising through the ranks to become a foreman. He would like to return to MEA at his previous status and is bargaining for a return through his union's grievance 5 ABR 435      procedures. Puddicombe has taken early retirement but could return to work as an electrician now. He has not taken any calls offered through the union, however, and appears intent on regaining his old position. If he returned to work, his income could approach or surpass his 1995 earnings of $91,000.00. Puddicombe has substantial untapped earning power.

Dunham's employment history and ability to earn have not been fully explored. He, too, is a member of the I.B.E.W. and makes a very substantial income during the summer. He appears tied to seasonal employment, however. The likelihood of his obtaining increases in income is unknown.

The probable or expected duration of the plan is the third factor to consider in evaluating a plan. Here, each plan is drawn out over a sixty month period.

The accuracy of the plan and schedules and whether any inaccuracies are attempts to mislead the court constitute the next criteria to consider in evaluating good faith. Puddicombe's and Dunham's first amended chapter 13 plans contain a number of errors. First, both fail to include a number of secured creditors. Puddicombe has omitted four secured creditors from his plan, whose claims are scheduled as being in excess of $50,000.00. Dunham has two, or possibly three, secured creditors who are omitted from his plan, with claims totaling $20,000.00 to $40,000.00. If the payments to these secured creditors are not modified, they should be listed in paragraph three of the plan. Neither of the debtors' amended plans makes any provision for these secured creditors. Each plan analysis is also in error. The individual plans do not provide for payment in full of all allowed unsecured claims. 5 ABR 436      Rather, each individual plan proposes to pay about 50% of the debtors' mutual disputed claims if those claims are upheld by the Alaska Supreme Court. Neither plan deals with the possibility of conversion or dismissal of the other debtor's case, and the impact such an action would have on these disputed claims.

Puddicombe's schedules are also in error in several major respects. First, they fail to include mining claims that he owns. Second, his statement of financial affairs fails to disclose over $86,000.00 in cash which he received on November 25, 1996, through his termination of a 401(k) plan with MEA. The schedules also fail to reveal the amount of funds held in his state court attorney's trust account. Puddicombe includes an alleged $1,000,000.00 claim against JoAnne Fitzgerald in his schedule of personal property. Given the history of the litigation to this point, there is no basis for the claim.

Dunham's schedules contain errors as well. They do not list his mining claims as assets, although they are listed in the schedule of exemptions. They fail to disclose his income from unemployment compensation and his Teamster's pension over the last two years. His schedules also fail to reveal the amount of funds held in trust by his state court attorneys.

Other factors this court is to consider include whether there is preferential treatment between classes of creditors, the extent to which secured claims are modified, whether the debtor seeks to discharge nondischargeable debt, and the existence of special circumstances. The debtors appear to seek to pay their secured creditors in full and their allowed unsecured creditors over time. Neither of the debtor's plans gives preferential 5 ABR 437      treatment to any class of creditors. Treatment of secured debt under their plans is unclear, however. It does not appear secured claims have been modified under the plans, but it is impossible to tell for certain because most of the secured claims have been ignored in the plans. Neither debtor has nondischargeable debt and there are no special circumstances, such as large medical debts, found in either case.

Puddicombe has not previously filed for bankruptcy. Dunham filed a Chapter 7 petition in 1990. Dunham quit-claimed his interest in United States Survey 5265 to Puddicombe prior to filing. After the bankruptcy was closed, Puddicombe returned the property to Dunham.

The motivation and sincerity of the debtors in seeking chapter 13 relief are very suspect. Puddicombe has engaged in a series of fraudulent transfers to avoid execution by Fitzgerald. He sold a Corvette for $10,000.00 in the summer of 1996, after the state court judgment had been reversed and the case remanded to superior court. He withdrew his entire MEA 401(k) plan proceeds, netting $86,000.00, on November 25, 1996. Fitzgerald's first judgment against Puddicombe and Dunham, totaling nearly $6,000.00, was rendered the next day and remains unpaid. Puddicombe took out "loans" that encumbered his other assets, making execution difficult for Fitzgerald. He allegedly borrowed $15,000.00 cash from Iowa friend Terry J. Bair in October of 1997 to pay legal fees and bills. Bair encumbered Puddicombe's two five-acre parcels. Similarly, another encumbrance was granted to Robert Bush for $8,000.00 on one of the parcels in November of 1997. Puddicombe "sold" his airboat in October of 1997 for $3,000.00 cash but has 5 ABR 438      retained possession of it. He encumbered his pick-up for over $16,000.00 to National Bank of Alaska just fifteen days before filing for bankruptcy. The loan proceeds allegedly went to Puddicombe's son. None of Puddicombe's dispersals can be documented because he deals strictly in cash. All of the cash has been spent without any records documenting expenditures. Puddicombe's vague explanations of his cash expenditures and transactions are incredible and unbelievable.

Dunham has played the same game. He over-withheld taxes to avoid Fitzgerald's executions in 1997, resulting in an $8,000.00 tax refund in 1998. He participated in a loan further encumbering United States Survey No. 5265 for $8,000.00 in November of 1997.

Neither of the debtors has an active business to protect from liquidation. The Knik Glacier Lodge, scheduled by Puddicombe, has never been a functioning entity. If Mr. Dunham has an active business, he has failed to schedule it and it deserves no protection.

The debtors' plans are not confirmable. While neither plan would be difficult for the trustee to administer if they both performed, each plan fails to deal with the impact that conversion or dismissal of one of their Chapter 13 petitions would have on the other's plan and the disputed unsecured creditors. The plans do not satisfy the requirements of the best interests of creditors test, 11 U.S.C. § 1325(a)(4), because they do not provide for payment of interest to unsecured creditors, who would receive 100% in a chapter 7 liquidation in any event. The plans fail to deal with most of Puddicombe's and Dunham's secured creditors.

Puddicombe and Dunham are solvent and have large earning 5 ABR 439      capacities. They have already contributed over $20,000.00 in plan payments to the trustee, consisting of $12,000.00 of Puddicombe's wage claims against MEA and Dunham's $8,000.00 income tax refund. Despite his pre-filing manipulations, Puddicombe retains a home free and clear of liens in Palmer as well as an unencumbered airplane. Dunham has over $21,000.00 in an I.B.E.W. pension plan that he could withdraw immediately. These debtors have the present ability to post any required bonds needed in the state court proceedings with their disclosed assets, which appear to be understated. There is no reason for them to be before this court. They are attempting to use Chapter 13 as a litigation device to defeat state court litigation and as an improper substitute for a supersedeas bond.

The debtors have abused the spirit and purpose of Chapter 13. Confirmation of their plans will be denied and their petitions will be dismissed. The court will retain jurisdiction, however, for entry of sanctions.

Miscellaneous

Conner and Fitzgerald have moved for entry of sanctions against Puddicombe and Dunham. Under Fed. R. Bankr. P. 9011(c)(1)(A), a motion for sanctions must be made separately from other motions. Here, Conner and Fitzgerald have combined their motions for sanctions with their motions to dismiss. If they desire sanctions, they must file separate motions no later than July 6, 1998. Their current motions for sanctions will be denied without prejudice.

Puddicombe and Dunham have filed objections to the claims 5 ABR 440      of James V. Kracker, Dale Fidler, Michael Conner and JoAnne Fitzgerald. Their objections were filed May 15, 1998. The objections were not noticed for hearing in accordance with Fed. R. Bankr. P. 3007, which requires 30 days notice. Moreover, even if the objections were timely, this court would abstain from hearing these disputes given the seven years of state court litigation and the current appeals pending before the Alaska Supreme Court. 28 U.S.C. § 1334(c)(1). The claims objections will be dismissed without prejudice.

Finally, Puddicombe and Dunham allege that Conner violated the automatic stay by making post-petition filings with the Alaska Supreme Court. Conner participated in the state court trial but did not participate in the appeal. Following remand, he sought to recover compensation for his fees and expenses incurred in the initial trial. His request was summarily denied by the superior court and he appealed the decision. Conner was given notice of both Puddicombe's and Dunham's Chapter 13 filings. He also appeared at the January 28, 1998, first meeting of creditors for Puddicombe. Conner then filed a motion for posting of cash bond, an affidavit and a further notice of appeal with the Alaska Supreme Court.

Conner contends that he did not violate the stay because the debtors initiated the original quiet title suit as Plaintiffs. He alleges that his post-petition actions were simply "defensive actions" taken by a defendant in a state court lawsuit originally commenced by the debtors and allowable under Gordon v. Whitmore (In re Merrick), 175 B.R. 333 (B.A.P. 9th Cir. 1994). I disagree with Conner. His post-petition filings in the state court proceedings 5 ABR 441      were not simply defensive actions. Conner had dropped out of the litigation and was not a party to the original appeal of the adverse superior court judgment. Only after remand did he assert a claim for "compensation" or "legal costs" of over $27,000.00 against the debtors. While this new claim arose out of the prior litigation, it was not a defensive action by any means. After remand, his superior court pleadings were in the nature of a counter-claim for litigation expenses. These pleadings must be "disaggregated" from the various issues on appeal when determining which proceedings are subject to the automatic stay. Parker v. Bain, 68 F.3d 1131, 1137 (9th Cir. 1995), citing Maritime Elec. Co. V. United Jersey Bank, 959 F.2d 1194, 1204-1206 (3d Cir. 1992). Through his post-petition filings with the Alaska Supreme Court, Conner sought to recover on a claim against the debtors arising before commencement of the case.

While Conner may have had a good faith belief that his post-petition conduct did not violate the stay, this will not protect him from being liable for a willful violation of the stay. To find a "willful violation" of the automatic stay under 11 U.S.C. § 362(h), all that is required is that the creditor knew of the stay and that the actions which violated the stay were intentional. Pinkstaff v. United States (In re Pinkstaff), 974 F.2d 113, 115 (9th Cir. 1992). The creditor's good faith belief that his conduct was justified is irrelevant to the determination of a stay violation under § 362(h). Id.

Connor was aware that both Puddicombe and Dunham had filed bankruptcy. In spite of this knowledge, he intentionally filed pleadings in the state court proceedings. Conner has 5 ABR 442      willfully violated the stay. The debtors have been injured by his willful violation of the stay. They are entitled to recover costs and attorneys fees directly related to their motion for contempt and Conner's post-petition motions under § 362(h). Jeff Carney shall file and serve an affidavit detailing such fees and costs no later than July 6, 1998. The debtors are not entitled to punitive damages. Any damages awarded as sanctions against Conner will be offset by the amount of sanctions awarded to Conner for the debtors' bad faith filings.

Conclusion

Confirmation of the debtors' Chapter 13 plans will be denied and their bad faith petitions will be dismissed. Jurisdiction will be retained to determine appropriate sanctions against Puddicombe, Dunham and Conner. Conner's and Fitzgerald's initial motions for sanctions will be denied without prejudice and the debtors' objections to claims will be denied without prejudice.

DATED: June 18, 1998.

BY THE COURT

DONALD MacDONALD IV
United States Bankruptcy Judge