In re Dahlgren

Citation:
No. 11-2794 (3d Cir. Aug. 23, 2012) (NOT PRECEDENTIAL)
Tag(s):
Ruling:
AFFIRMING the District Court, the Third Circuit held that Debtor's plan, as submitted by his counsel, would have voided the state court's sale order issued prior to the bankruptcy filing. Without deciding whether the Rooker-Feldman doctrine actually applied, Debtor's attempt to confirm a plan that contemplated a forced sale from Palone to Debtor was improper. The Bankruptcy Court issued a decision making clear that a plan that included a forced sale to Debtor could not be approved. And yet Shaver submitted a revised plan that once again contemplated a forced sale from Palone to Debtor. While the initial submission of the plan could be "warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law," Fed. R. Bankr. P. 9011(b)(2), pursuing a revised plan that included the sale-to-debtor provision was frivolous in light of the Bankruptcy Court's initial opinion declaring such a provision "patently unconfirmable." By resubmitting a plan that the Bankruptcy Court had unambiguously rejected, Debtor's counsel's conduct was not reasonable under the circumstances. Following the Bankruptcy Court's opinion, Shaver could not have had an objective knowledge or belief that the claim was well-grounded in law and fact. The Bankruptcy Court imposed sanctions that were reasonable: only half of Palone's attorneys' fees. On these facts, the Bankruptcy Court did not abuse its discretion.
Procedural context:
The Bankruptcy Court refused to confirm a chapter 13 plan because it was "patently unconfirmable." Debtor's former lover, who had a co-owner interest in a farm treated under the plan, filed a motion for sanctions because she believed the plan violated Fed. R. Bankr. P. 9011(b). Because Debtor filed a second plan that was substantially similar to the prior one, the Bankruptcy Court sanctioned Debtor's bankruptcy counsel, imposing $400 in costs and $12,500 in fees. The District Court affirmed the Bankruptcy Court, finding that the sanctions were appropriate in light of Debtor's attorney's resubmission of a plan that was substantially similar to the one that the Bankruptcy Court had found to be "patently unconfirmable." The District Court also found that both plans violated the Rooker-Feldman doctrine.
Facts:
Debtor and Regina Palone ("Palone") purchased a farm together. The relationship ended a few years later. Due to missed mortgage payments, the first mortgagee filed a foreclosure action. Palone instituted a partition action in state court. Since Debtor did not appear at the hearing and his attorney did not timely file an answer, the court entered a default against him, and eventually ordered that the property be listed for sale. Debtor filed a chapter 13 bankruptcy case on the day scheduled to allocate the proceeds from the sale. In his bankruptcy case, Debtor proposed a plan that would divest Palone of her interest in the farm, treating her instead as a creditor. In response to this characterization, Palone's counsel sent David E. Shaver, Debtor's bankruptcy attorney ("Shaver"), a safe-harbor letter under Fed. R. Bankr. P. 9011(c)(1)(A), informing Shaver that he believed that the proposed plan violated Fed. R. Bankr. P. 9011(b). Fifty days later, Palone filed for sanctions and a motion to dismiss. The Bankruptcy Court did not approve the original plan, but denied Palone's motion to dismiss. The Bankruptcy Court held that the plan was not filed or prosecuted in bad faith. Notwithstanding, the Bankruptcy Court ruled that the plan was "patently unconfirmable" because of Debtor's treatment of Palone's interest in the farm. Shaver contacted Palone's counsel to ask for a withdrawal of the sanctions motion in light of the Bankruptcy Court's determination that the plan was not filed in bad faith. Palone's counsel refused. Soon thereafter, Debtor filed an amended plan. The only alterations therein were to authorize the sale of the farm to a third party if Debtor defaulted and to fix the price of Palone's interest in the farm. As such, the Bankruptcy Court granted Palone's sanctions motion, imposing $400 in costs and $12,500 in fees. (The Bankruptcy Court ordered the sanctions in open court and did not memorialize its reasoning in a written opinion.) The District Court affirmed the Bankruptcy Court, finding that the Bankruptcy Court imposed sanctions because of Shaver's submission of a plan that was similar to a plan that the Bankruptcy Court had not confirmed. The District Court also found that both plans violated the Rooker-Feldman doctrine. Shaver and his law firm appealed.
Judge(s):
SMITH and FISHER, Circuit Judges RAKOFF, District Judge (S.D.N.Y.), sitting by designation

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