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In Re: John Dahlgren v. Regina Palone

December 16, 2010


The opinion of the court was delivered by: Wolfson, United States District Judge:


Chapter 13


Presently before the Court is the appeal of John Dahlgren ("Dahlgren" or the "Debtor") from an order from Bankruptcy Judge Raymond T. Lyons of the United States Bankruptcy Court for the District of New Jersey ("Bankruptcy Court") imposing sanctions against his counsel. For the following reasons, the Debtor's appeal is denied and the order of the Bankruptcy Court is affirmed.

I. Background and Procedural History

Except as otherwise stated, neither Dahlgren nor Defendant-Appellee Regina Palone ("Palone") contest the facts set out in the Bankruptcy Court's opinion below ("Bankruptcy Opinion").*fn1 Since the Court only writes for the benefit of the parties, the Court provides a brief summary of the relevant facts.

Dahlgren and Palone have known each other for many years, and they began a romantic relationship in the mid-1990s. Although the couple never married, over the course of their relationship they purchased several properties together. On August 3, 2001, Dahlgren and Palone purchased the property at issue in this motion, a residential/farm property in Monmouth County, New Jersey (the "Property"). The couple financed the purchase of the Property with a cash contribution by Dahlgren and with two separate mortgages. The first mortgage names both Dahlgren and Palone as the mortgagors, and the second names only Palone. The deed to the Property lists both parties together, with no indication of ownership percentage.

The couple resided on the Property for some years, with Dahlgren primarily maintaining and managing the Property by contributing capital and making improvements to it. In 2005, the relationship between the couple soured. Palone left the Property and acquired her own separate residence. Three years of dispute ensued, and in 2008, Palone filed a partition action in the New Jersey Superior Court ("State Court").

After Dahlgren failed to oppose Palone's action,*fn2 on October 14, 2008, the State Court approved Palone's request for a partition of the Property ("Sale Order"). Subsequently, on March 13, 2009, the State Court issued an order that Dahlgren show cause as to why the Sale Order should not be enforced. Dahlgren's Counsel, but not Dahlgren, appeared at the cause hearing, and on March 24 2009, the State Court issued an order reaffirming the Sale Order. Through the Sale Order, the State Court directed the sale of the Property, with the proceeds placed into a trust account until the appropriate allocation of the proceeds between Dahlgren and Palone could be determined at a later hearing. Pursuant to the Sale Order, Palone sought and obtained an offer on the Property, but had not yet executed the sale when Dahlgren filed for bankruptcy.

While this opinion predates the Bankruptcy Court's sanctions ruling, it sets forth the factual and legal predicate for the Bankruptcy Court's subsequent sanctions ruling.

On April 9, 2009, Dahlgren filed a petition in the instant chapter 13 bankruptcy, automatically staying all other legal proceedings involving Dahlgren, including the State Court proceedings of the Sale Order and the scheduled allocation hearing. Dahlgren's petition treated Palone as a creditor as opposed to co-owner of the Property. In response to Dahlgren's bankruptcy petition, Palone filed a proof of claim of her co-ownership interest in the Property with the Bankruptcy Court, as well as a motion to dismiss the petition as a bad faith filing.

Palone's counsel sent Debtor's counsel a safe harbor letter on May 6, 2009. That letter indicated that "[t]he filing of the petition and proposed plan, in light of my client's opposition, is not warranted by existing law and non-frivolous argument for the extension of the law. The filing is an attempt to end run around the res judicata and collateral estoppels effect . . . of the State Court Orders." The letter further indicated that "[t]he Bankruptcy Court also has no jurisdiction over the controversy by reason of the Rooker-Feldman doctrine."*fn3

On November 9, 2009, the Bankruptcy Court issued the Bankruptcy Opinion, denying both Palone's motion to dismiss, and Dahlgren's proposed chapter 13 reorganization plan. In its Opinion, the Bankruptcy Court acknowledged that "the timing of the Debtor's bankruptcy petition and apparent forum shopping [were] suspicious," but nonetheless held that the filing "did not rise to the level of bad faith as construed by the Third Circuit." Bankruptcy Opinion at 8. In addition, the Bankruptcy Court reasoned, dismissal at that stage was not in the interest of Dahlgren's other creditors.

Importantly, the Bankruptcy Court further held that Dahlgren's plan proposed to treat Palone's interest in the Property as that of a creditor in bankruptcy, rather than that as a co-tenant owner, rendering the plan "patently unconfirmable." Id. at 16. The Bankruptcy Court reasoned that it "would not be justified in confirming a plan that abrogates the [State Court Sale Order]." Id. at 14. In the Bankruptcy Court's view, "[n]either the Bankruptcy Code nor existing state law authorize[d] the remedy proposed in Debtor's plan, i.e., the forced sale to him of [Palone's] interest in the farm. The Debtor missed his opportunity to ask the state court to fashion such a remedy and the state court has already ordered the sale of the farm." Id. at 15-16. The Bankruptcy Court did not dismiss Dahlgren's case at ...

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