UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF ALASKA

Eklutna, Inc., Eklutna Utilities, Inc., and Sourdough Bowl, Ltd., (Eklutna) have moved for sanctions against the debtor. The debtor filed for Chapter 7 relief on December 15, 1995. The case was dismissed on November 29, 1996, and this court reserved jurisdiction for a Rule 9011 motion by Eklutna. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O). This court has jurisdiction in accordance with 28 U.S.C. § 1334(b) and the district court's order of reference.

Background

Eklutna, Inc., is a native corporation formed under the provisions of the Alaska Native Claims Settlement Act (ANCSA). Eklutna Utilities, Inc., and Sourdough Bowl, Ltd. are subsidiaries. The debtor, Alice D. Fullenwider (Debbie), is a shareholder and the former president of Eklutna, Inc. She is married to John Fullenwider (John), a retired Anchorage fireman. She works part-time for the Federal Emergency Management Agency (FEMA), and is a board member for Cook Inlet Region Inc. (CIRI), another ANCSA native corporation.

Debbie was involved in litigation during the mid 1980s. In January of 1985 she was named as a defendant in a state court lawsuit entitled 5 ABR 56      Daniel Alex, Plaintiff vs. Eklutna, Inc, Alice Debbie Fullenwider, vs. Barbara Hitchcock, Leo Stephan, and Mildred Alex, Case No. 3AN-85-439-CIV. The suit sought unspecified damages for wrongful acts of the defendants arising out of a "lock-out" of shareholders and a proxy contest. A second suit was filed in March of 1986, entitled Dan Alex and Dorothy Cook, Plaintiffs vs. Leo Stephan and Alice D. Fullenwider, Defendants, Case No. 3AN-86-2578-Civ. This action sought records of Eklutna, Inc. and judgment against the defendants for $75,000.00. When faced with these suits, Debbie initiated a series of real property transfers to her husband in 1987. She transferred real property located in Homer, Eklutna and Eagle River to John. After the suits were settled, John reconveyed the Eagle River and Eklutna properties to himself and the debtor. He retained the Homer property in his own name.

Debbie was discharged as president of Eklutna on February 26, 1993. While her termination was imminent, Debbie terminated nearly all employees of Eklutna. She gave severance pay to the discharged employees, which included her husband, son and daughter. She also increased her personal salary. Michael Curry was appointed as her successor. In a letter dated November 18, 1993, he suggested that she meet with him to settle the corporations' claims against her for excessive severance pay and salary payments to herself and several employees prior to her termination. Eklutna threatened litigation if no settlement was reached.

After the November 1993 letter, Debbie and John made a number of sales and conveyances. They owned improved property in Eklutna that Debbie had received as an inheritance, which they had leased in the name of D & J rentals. They refinanced the property in December of 1993 and obtained $68,500.00 in cash. They paid $42,297.00 of these funds to the 5 ABR 57      Internal Revenue Service, $14,000.00 went to remodeling and marketing costs, and $10,000.00 was given as a gift to their daughter, Heidi Ungaro, in January of 1994. The debtor also transferred a number of native artifacts to her other daughter, Kim, without consideration. In April of 1994 the Fullenwiders consummated a tax-free exchange of the Eklutna property for a home located in Menifee, California. The California residence is apparently held by the Fullenwiders jointly. According to her schedules, the home is worth about $120,000.00, and the Fullenwiders owe $120,000.00 against it. As part of the exchange, the Fullenwiders paid $37,000.00 cash along with the Eklutna property for the California home.

Eklutna sued Debbie in state superior court on May 11, 1994. Debbie counter-claimed against the corporation for defamation. After Eklutna's suit was filed, the debtor and her husband continued to transfer various assets. John sold the Homer real property and received the net sale proceeds of $10,230.71 on November 7, 1994. The couple sold their home in Eagle River for $195,000.00 and purchased a condominium on Cimarron Circle in Anchorage for $137,500.00. Both closings occurred in August of 1995. Sale proceeds from the Eagle River home were used to pay off a loan from National Bank of Alaska, the Fullenwider's Ford Explorer and Cadillac loans, and an American Express credit line. The Fullenwiders also had to pay for upgrading a well at their former residence. The condominium is held solely in John's name. The purchase was completely leveraged and required no down payment. Closing statements for the Eagle River and Anchorage transactions were not submitted into evidence. The disposition of the $195,000.00 in proceeds from the Eagle River home has never been adequately explained or documented by the Fullenwiders.

5 ABR 58      Debbie also transferred her interest in the two vehicles now owned free and clear to her husband. On October 16, 1995, she transferred her interest in the Ford Explorer to him. On October 17, 1995, she transferred the 1990 Cadillac to him.

Eklutna filed a lengthy and comprehensive motion for summary judgment in the state superior court action. Debbie's response was due on December 15, 1995. She filed a Chapter 7 petition instead, and the state court proceedings were stayed.

Debbie's schedules reflected a half interest in the Menifee, California home as well as her "marital" interest in the Cimarron Circle condominium. Neither interest was scheduled as having any equity. Her scheduled personal property included a $50,000.00 claim against Eklutna and three vehicles, including the two which she had previously transferred to her husband. She listed her interest in the vehicles as having a value of $3.00.

Debbie listed very few creditors. Banc Boston Mortgage Group was listed as a secured creditor on her California residence. Her scheduled unsecured creditors included Preston, Gates and Ellis, her attorneys, for $4,018.45 and Nordstrom for $632.00. Eklutna, Inc., Eklutna Utilities, Inc. and Sourdough Bowl, Ltd. were listed as disputed unsecured claims.

Debbie listed her income from employment as $34,197.58 for 1995, $34,640.00 for 1994 and $53,873.00 for 1993. Eklutna disputes those amounts, claiming that she has substantially understated her income.

Eklutna filed an adversary complaint in this court seeking a determination of the dischargeability of its state court claims on May 9, 1996. It also sought relief from stay to pursue those claims in state court. I entered an order conditionally denying the motion for relief 5 ABR 59      from stay on June 7, 1996. At pages three and four of that order I stated:

Absent a disputed claim, continuation of the current state court proceeding will not resolve all the fundamental bankruptcy claims under § 523 or the § 727 objection to discharge. Recommencement of those proceedings will not aid the prompt determination of bankruptcy issues.

However, if the debtor actively disputes the proof of claim submitted by the Eklutna Entities, relief from stay would be appropriate. No such objections to claims have been filed to date. Unless the debtor or the trustee files an objection to the claim within the period set forth by this order, there is simply no point in going on with the state court litigation, except as to actions taken by the trustee regarding the debtor's counterclaims. I conclude that relief from stay is not appropriate. If the amount of the Eklutna proof of claim is placed at issue by the debtor or the trustee, a return to state court to determine the proper amount of the Eklutna Entities's claim would be appropriate. If the proof of claim is undisputed, return to the state court litigation imposes an unwarranted burden upon the debtor, contrary to the Code concepts underlying the automatic stay and the policy of a fresh start.

The order gave the debtor and the trustee until June 28, 1996, to indicate their intentions with regard to the debtor's state court counterclaim, and also gave the debtor until June 28, 1996, to object to allowance of the Eklutna claim. The trustee moved to abandon the debtor's counterclaims to the debtor. The debtor objected to the Eklutna claim. Relief from stay was granted on July 9, 1996. The bankruptcy case was dismissed on November 29, 1996, with the court reserving jurisdiction to determine the instant motion. The debtor agreed to pay $8,250.00 to the trustee and his attorney for their services in this case.

Analysis

Rule 9011(a), Fed. R. Bankr. P. provides:

5 ABR 60      Every petition, pleading, motion and other paper served or filed in a case under the Code on behalf of a party represented by an attorney, except a list, schedule, or statement, or amendments thereto, shall be signed by at least one attorney of record in the attorney's individual name, whose office address and telephone number shall be stated. A party who is not represented by an attorney shall sign all papers and state the party's address and telephone number. The signature of an attorney or a party constitutes a certificate that the attorney or party has read the document; that to the best of the attorney's or party's knowledge, information, and belief formed after reasonable inquiry it is well grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; and that it is not interposed for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation or administration of the case. If a document is not signed, it shall be stricken unless it is signed promptly after the omission is called to the attention of the person whose signature is required. If a document is signed in violation of this rule, the court on motion or on its own initiative, shall impose on the person who signed it, the represented party, or both, an appropriate sanction, which may include an order to pay to the other party or parties the amount of the reasonable expenses incurred because of the filing of the document, including a reasonable attorney's fee.

These differences between bankruptcy proceedings and ordinary civil litigation militate against wholesale adoption of Townsend's reasoning in interpreting Bankruptcy Rule 9011. Nonetheless, we accept Townsend's basic teaching, which is that frivolousness and improper purpose are not wholly independent considerations but "will often overlap." 929 F.2d at 1362. We thus adopt an interpretation of Bankruptcy Rule 9011 that differs somewhat from Townsend's interpretation of FRCP 11, but one we believe is more faithful to Rule 9011's language and more consistent with the realities of bankruptcy practice. We conclude that bankruptcy courts must consider both frivolousness and improper purpose on a sliding scale, where the more compelling the showing as to one element, the less decisive need be the showing as to the other. (footnote omitted)

Further, the debtor had the ability to repay these creditors. Her family household income was substantial. Although her income tax returns do not reflect CIRI dividend income, she has continued to earn substantial sums following her termination as president of Eklutna, reporting income of about $34,000.00 for both 1994 and 1995. As noted by Eklutna, her real income may be substantially higher. She receives FEMA income, rental income, CIRI director income and tax-free CIRI dividends. Her husband receives over $50,000.00 annually on his pension. In addition to their two residences, the couple owns three vehicles worth at least $30,000.00 free and clear of liens. The debtor also has other assets of value, including jewelry and furs.

The debtor's counsel argues that the bankruptcy filing was necessary to avoid the high defense costs associated with the state court litigation. Eklutna aggressively pursued the debtor in state court, and defense of that action had already resulted in at least a $4,000.00 bill for attorney's fees. More fees were certainly on the way. While these fees could easily have escalated out of control, there was no assurance that bankruptcy litigation wouldn't result in similar fees. Indeed, by switching forums in the middle of the dispute, and continuing to actively litigate the claim, increased litigation costs were unavoidable. While the debtor's petition was not wholly frivolous, it was of questionable merit under the circumstances presented here.

Was the petition filed for an improper purpose? I think it was. 5 ABR 62      The debtor's actions following her termination by Eklutna indicate bankruptcy "estate planning" of the highest order. First, the debtor engaged in a series of real property transfers to her husband when she was a defendant in unrelated litigation during the mid-1980s. Her actions here indicate a similar modus operandi with regard to Eklutna.

The most blatant example lies with the vehicles. Just two months prior to filing Debbie transferred the unencumbered 1990 Cadillac and the 1994 Ford Explorer to John. Debbie attempts to justify these fraudulent acts by repeatedly citing a lien avoidance case, Fincher v. Evans (In re Fincher), 3 A.B.R. 526 (Bankr. D. Alaska 1994). According to the debtor, her transfer of the vehicles was meaningless as her interest in the vehicles was exempt anyway. I disagree.

In Fincher, the debtors sought to avoid the execution lien of Robert and Mildred Evans. The Evans had obtained a judgment of $3,458.00 solely against Aron Fincher and executed against a 1986 Nissan Maxima owned by Aron Fincher and Susan E. Fincher as tenants by the entirety. The Finchers filed for Chapter 7 relief, claimed the Maxima as exempt and sued to avoid the Evans lien in accordance with 11 U.S.C. § 522(f). The Evans contended that the lien attached to the full value of the vehicle, which was $5,700.00. I found for the Finchers. Because of the limitations of a tenancy by the entirety, I found Aron Fincher's interest in the vehicle to be worth less than $3,458.00 and avoided the execution lien under § 522(f). In reaching my conclusion, I noted the difficulty of partitioning an automobile and the costs and expenses involved. Because of those factors, I concluded Aron Fincher's interest in the automobile was nominal.

Here, the situation is entirely different. First of all, the value 5 ABR 63      of the vehicles is much more substantial: At least $30,000.00 for two vehicles versus $5,700.00 for one. The attorney's fees and costs for partitioning, if necessary, would be much less of a concern because the value of the vehicles is so much higher. Secondly, the Cadillac was held in joint tenancy and not tenancy by the entirety. Third, the trustee has the right to recover fraudulently transferred property and to sell the property, including an undivided interest of a tenant by the entirety or a joint tenant, when partition of the property is impractical and the other requirements of 11 U.S.C. § 363(h) are met. Even if Debbie had not transferred the vehicles, her non-exempt interest could have been sold by the trustee under § 363(h). The trustee does not have to partition the property under state law. Debbie's interest in the vehicles was substantial and for the most part non-exempt. Fincher is inapplicable here and does not justify Debbie's actions.

Additionally, I don't believe her gift of $10,000.00 to her daughter, the tax-free exchange of Eklutna property for a home in Menifee, California, the sale of her Eagle River home, and the transfers of vehicles to her husband were simply a series of random acts or mere coincidence. Rather, these transfers, coupled with her bankruptcy filing, indicate that the debtor's purpose was not just to avoid defense costs, but to hinder and delay any adjudication or possible payment of Eklutna's claim in any forum. I conclude that the filing was made for an improper purpose.

In my view, the debtor's petition had marginal legal basis and was filed for an improper purpose. Under the sliding scale of Marsh, the imposition of sanctions is appropriate.

5 ABR 64      Conclusion

Eklutna is entitled to reasonable attorney's fees against the debtor under Rule 9011(a). The amount of those fees will be determined following submission of an itemized statement in accordance with an interlocutory order issued concurrently with this decision.

DATED:   September 3, 1997.

BY THE COURT

DONALD MacDONALD IV
United States Bankruptcy Judge