McDermott v. Junk (In re Junk)

Citation: 533 B.R. 639Docket: Case No. 13-55139; Adv. Pro. No. 15-2064

Court: United States Bankruptcy Court, S.D. Ohio; July 15, 2015; Us Bankruptcy; United States Bankruptcy Court

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The Court denied the defendants’ joint motion for a stay of proceedings and extension of time to answer the complaint filed by Daniel L. Junk and Christine H. Junk. The Junks had previously filed for Chapter 11 bankruptcy on June 27, 2013, contesting CitiMortgage, Inc.'s right to enforce a $1.2 million note and mortgage on their South Carolina property. CitiMortgage sought relief from the automatic stay to continue foreclosure proceedings, which the Court granted, while abstaining from issues meant for South Carolina state courts. The Junks subsequently appealed this order to the United States District Court for the Southern District of Ohio. CitiMortgage later filed a motion to dismiss or convert the Junks’ case to Chapter 7, prompting the Court to issue a show cause order regarding a potential trustee appointment or case conversion. Following a hearing, the Court converted the case to Chapter 7 on January 13, 2015, citing ongoing losses, lack of rehabilitation prospects, failure to pay insurance and taxes, unauthorized sales and loans, and lack of candor in disclosures. The Junks' operating reports were found to contain significant misrepresentations. The Junks also appealed the Conversion Order to the District Court.

On February 25, 2015, the UST initiated an adversary proceeding against the Junks by filing a complaint under 11 U.S.C. § 727(a)(4)(A), which allows for the denial of a bankruptcy discharge if a debtor knowingly makes a false oath. The Junks were served with the complaint and summons on the same day, with a response deadline set for March 27, 2015. This deadline was extended to April 26, 2015, by mutual agreement, but the Junks failed to respond by that date. Instead, they filed a Motion on April 27, 2015, requesting both a stay of the proceeding and an extension to answer the complaint until 30 days after the District Court ruled on an appeal regarding the Conversion Order. 

The Junks based their extension request on Bankruptcy Rule 9006, which allows for late responses only if the failure to act resulted from excusable neglect; however, they did not provide an explanation for their delay. Consequently, the request for an extension was denied. Furthermore, in seeking a stay under Bankruptcy Rules 8007(a)(1)(D) and 8007(e), the Junks were required to first seek relief from the bankruptcy court. The court evaluates stay requests using four interrelated factors: likelihood of success on appeal, potential for irreparable harm, harm to others, and public interest. 

After analyzing these factors, the court denied the Junks' motion for a stay, concluding they failed to demonstrate a likelihood of success in reversing the Conversion Order based on the arguments presented.

The Junks contend that the Court's denial of their counsel's appearance hindered their right to be heard during the sua sponte Show Cause Hearing. However, the Court provided them ample opportunity to secure new representation. During a status conference on October 20, 2014, Susan Rhiel, their then-counsel, indicated that she had not been paid for some time and believed she could not continue representing them due to professional conduct rules. Despite this, special counsel Jennifer Brunner asserted that the only reason for Ms. Rhiel’s withdrawal was nonpayment. The Junks chose not to waive attorney-client privilege, preventing further clarification. The Court authorized Ms. Rhiel's withdrawal and noted the Junks' failure to insure their Oldfield property and pay real estate taxes. Consequently, the Court indicated it would issue a show cause order regarding the appointment of a Chapter 11 trustee or the potential conversion of their case to Chapter 7. The Show Cause Order was issued on October 23, 2014, and served on October 25, requiring the Junks to appear by January 9, 2015, giving them 78 days to secure new counsel. However, they failed to do so. Mr. Junk sent an email on December 29, 2014, requesting a continuance for the January 9 hearing, citing a new job that required travel and the ongoing search for counsel.

CitiMortgage’s counsel has been copied on a request for a continuance of a scheduled hearing but has not been consulted regarding their position due to the representation status of the requesting party, who is currently unrepresented in the main case but represented in an adversary case. The counsel indicated they cannot communicate directly with the party based on the Ohio Code of Ethics. The party inquired whether they needed to file a motion or if the Court would grant their request to reschedule the hearing due to travel obligations related to a new job, allowing time to obtain new representation in the main case.

The Court responded, clarifying that it does not consider email requests for continuances unless all parties agree. The request was denied since the party had not conferred with CitiMortgage or the Office of the United States Trustee regarding the continuance. The Court noted that the Show Cause Order had been issued over two months prior, providing sufficient time to secure counsel. Furthermore, new attorneys filed notices of appearance just before the hearing, but because the Junks remained debtors in possession, the Court did not approve their employment as counsel in that capacity.

The Court declined to approve the Junks' employment under 11 U.S.C. § 327, having provided them ample opportunity to secure counsel as required by the Bankruptcy Code, directing the Debtor to obtain legal representation on four occasions. The Junks argued that the Conversion Order should be reversed due to the Court's sequestration of parties during testimony and denial of cross-examination opportunities, claiming this rendered the evidence inadmissible under Fed. R. Evid. 615. However, this argument was not presented during the Hearing but only in their appeal statement.

The Court clarified that Mrs. Junk left voluntarily during Mr. Junk's testimony, without objection. Mr. Junk stayed for Mrs. Junk's testimony but did not request to cross-examine her. Both parties declined rebuttal opportunities. The Junks cited Rule 615(a), which allows the exclusion of witnesses but not parties, arguing that any error in exclusion warranted reversal. However, the Court noted that no prejudice occurred from Mrs. Junk's absence, as Mr. Junk admitted to several key failures, including not making property insurance payments and selling personal property without Court approval.

Mr. Junk's testimony regarding the Junks' financial mismanagement was not challenged by Mrs. Junk, who provided consistent testimony despite not hearing his statements. The Junks did not argue that Mr. Junk would have misled the court if Mrs. Junk had been present. Their claims of prejudice due to her absence were insufficient to reverse the Conversion Order, which was supported by clear evidence of their failure to pay required fees and taxes. Testimony from a bankruptcy analyst confirmed the Junks' non-payment of quarterly fees, and their own reports indicated unauthorized sales of estate property. Additionally, Mr. Junk had previously admitted to failing to pay insurance and taxes on their property.

The court had ample grounds for conversion to Chapter 7, including the Junks' admission of negative net income and their acknowledgment of inaccuracies in their monthly operating reports. Mr. Junk admitted to mischaracterizing loans, gifts, and property sale proceeds as income, while Mrs. Junk maintained that their reporting was accurate but acknowledged potential mischaracterization. This explanation did not mitigate the reasons for conversion; rather, it suggested an attempt to mislead the court about their financial status, contradicting the court's prior warnings against sustaining their Chapter 11 status with excessive expenses.

The Court rejected the Junks’ attempts to portray their misrepresentations in monthly operating reports favorably, concluding that they were indeed attempting to mislead the Court. Both Mr. and Mrs. Junk conceded to the existence of these misrepresentations during their testimonies, which contributed to the decision to convert their case. The Court determined that the outcome would not have changed regardless of Mrs. Junk's presence in the courtroom or their representation during the hearing. The Junks failed to demonstrate any prejudice that would affect the outcome, as they did not present evidence that could alter the Court's findings of bad faith. The Court upheld its decision to convert the Junks’ Chapter 11 case to Chapter 7, emphasizing that the Junks did not raise serious questions regarding the merits of the Conversion Order, nor did they contest the existence of cause for conversion. The Court indicated that converting the case or appointing a Chapter 11 trustee would be in the best interest of creditors and the estate, as a trustee could ensure efficient repayment to creditors.

A trustee may investigate the Junks' postpetition sale of jewelry, fulfilling duties under Bankruptcy Code sections 704 or 1106. The Junks do not contest the appropriateness of converting their case to Chapter 7 or its benefits for creditors and the estate. Consequently, they have not raised substantial questions regarding the merits of the Conversion Order. According to Esso Standard Oil Co. v. Monroig-Zayas, the failure to show a likelihood of success on the merits renders other arguments less significant. The Junks' claims regarding irreparable harm and public interest in a stay are legally inconsequential and reveal a troubling lack of candor. They misrepresent facts about their alleged rescission of the Note and Mortgage, falsely asserting that CitiMortgage's secured status is directly affected by the ongoing litigation. The Court clarified that while the Junks sent a notice to rescind, it did not find that they successfully exercised their TILA rescission rights. A South Carolina state court had previously dismissed their TILA claim as time-barred and lacking merit, noting their failure to plead the ability to tender loan proceeds and that they did not timely exercise their rescission right.

The Master-in-Equity dismissed the Junks' counterclaims against CitiMortgage, determining they failed to make a timely rescission demand. The Junks misrepresented their situation by claiming irreparable harm due to a liability of at least $843,750 to an unknown creditor while failing to mention they had listed this debt as “disputed” in their Amended Schedule F. The court found these claims did not substantiate the assertion of irreparable harm. Additionally, the interests of creditors and the public did not support granting a stay of the adversary proceeding. The court expressed no objection to a stipulation between the UST and the Junks to hold the Complaint in abeyance during the appeal of the Conversion Order, but emphasized that granting a motion with significant misrepresentations would contradict public interest. Consequently, the Motion was denied. References to documents in the Junks' bankruptcy case will be marked as "Doc" and those related to the adversary proceeding as "Adv. Doc." Notably, although the Motion was dated April 26, 2015, it was filed on April 27, 2015, with both the Junks and UST signing a stipulation to this effect. The District Court has recognized the appeals related to the Stay Relief and Abstention Order and the Conversion Order as related cases. Furthermore, the Junks raised issues regarding their right to counsel during a sua sponte order to show cause hearing, alleging violations of their due process rights due to the inability to cross-examine witnesses. Lastly, they implied that the UST would dismiss the Complaint if he could not use evidence presented during the Hearing, but such a limitation would not prevent the UST from seeking evidence in future proceedings related to allegations of false oaths made by the Junks in their bankruptcy filings.

The Court permits the UST and the Junks to hold the Complaint in abeyance during the appeal of the Conversion Order, but does not find sufficient legal or factual support for granting a motion based on the proposed stipulation, which contains false and misleading statements. The Court previously denied the Junks' motion to vacate the Stay Relief and Abstention Order, which included a finding that the Defendants exercised their right of rescission under the Truth in Lending Act (TILA), thus voiding any security interest held by CitiMortgage. The Junks have previously misrepresented Court orders, and their actions have been deemed sufficient grounds for dismissing or converting their case. The Court believes that converting the Junks' case to Chapter 7 or appointing a Chapter 11 trustee would serve the best interests of creditors and the estate. A trustee could efficiently manage the repayment to creditors and investigate postpetition transfers made by the Junks without notice. The Junks have not contested the existence of cause for conversion or its benefits to creditors. Their failure to demonstrate a likelihood of success on the merits of their appeal leads to the conclusion that their additional arguments regarding irreparable harm and public interest are largely insignificant. Furthermore, the Junks' claims of potential harm are undermined by their misrepresentations concerning their rescission of the Note and Mortgage.

Defendants are compelled to pursue a final judgment regarding CitiMortgage’s status as a secured creditor, despite prior judicial findings in the Stay Relief and Abstention Order that the Defendants exercised their right under the Truth in Lending Act (TILA) to rescind the transaction related to the Note and Mortgage. Key issues include that CitiMortgage's secured status relies on the enforceability of the Note and Mortgage, which are currently under litigation in South Carolina state courts as mandated by the aforementioned order. Even if that order were reversed, the enforceability of the Note and Mortgage would still be litigated elsewhere. Additionally, the assertion that the Court previously found the Junks exercised their TILA rescission right is incorrect; the Court only noted an attempted rescission notice but highlighted that a South Carolina judge had dismissed the Junks’ TILA claim with prejudice due to statute of limitations issues, lack of a viable claim, and untimeliness of rescission demand. 

The Junks also misrepresented their claim of irreparable harm, stating they remain liable for a disputed loan amount of $843,750. They did not clarify why this debt was listed as disputed if they indeed remain liable. The Court concludes that the Junks’ statements in their Motion do not substantiate their claim of irreparable harm and contain significant inaccuracies. Furthermore, the interests of creditors and the public do not support granting a stay of the adversary proceeding. The Court denies the Motion due to its lack of merit and misleading content. The order concludes with a directive for future document references in the Junks’ bankruptcy case and this adversary proceeding.

The Junks dated their Motion as April 26, 2015, but it was not filed until April 27, 2015, as confirmed by a stipulation signed by the Junks and the UST. The District Court has recognized two related cases stemming from appeals of the Stay Relief and Abstention Order and the Conversion Order, which will be presided over by the same judge. During a hearing, attorneys Fisher and Coutinho represented the Junks, although the Court noted this for completeness rather than reliance. One key issue on appeal is the Bankruptcy Court's denial of the Joint Appellants' right to counsel during a sua sponte order hearing, which they argue violated their due process rights. The Junks believe that if the UST could not present evidence from the hearing, he would dismiss the Complaint; however, the UST could still gather evidence for future proceedings regarding allegations of fraudulent oaths made in Chapter 11 Monthly Operating Reports. The Court expressed no objection to the UST and the Junks holding the Complaint in abeyance during the appeal of the Conversion Order, but found no grounds to support a motion lacking legal or factual basis. The Court previously denied the Junks' motion to vacate the Stay Relief and Abstention Order, which they misrepresented as containing a finding regarding their rescission rights under TILA. The Junks have a history of mischaracterizing court orders, which the Court noted as grounds for possible case dismissal or conversion.