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In re Tarquinio

United States District Court, D. New Jersey

November 27, 2017

PIO TARQUINIO, et al. Appellee, CLAUDIO TARQUINIO, Appellant,


          PETER G. SHERIDAN, U.S.D.J.

         Debtor Claudio Tarquinio, appeals an order by Bankruptcy Court Judge Katheryn C. Ferguson. Judge Ferguson granted Appellees Pio Tarquinio (hereinafter, “Pio”) and Drinker Biddle & Reath's (hereinafter, “DBR”) motion to convert his Chapter 11 Bankruptcy to Chapter 7 and denied Debtor's claimed exemptions. Over the summer, the Debtor's attorney sought to be relieved as counsel. The Court granted his motion and provided time for Debtor to find new counsel, and for his former counsel to transfer Debtor's files to his new attorney (if any). Oral argument was scheduled for November 8, 2017 at 2:00 p.m. The Debtor did not appear, and no attorney entered an appearance on his behalf. The Court affirms the decision of the Bankruptcy Court for the reasons set forth herein.

         By way of background, in June 2012, Debtor retained DBR to represent him in an ongoing business dispute between him and Pio, his brother and former business partner. (Bankruptcy Appendix [“App.”] at 1045). Over the course of its representation, DBR incurred unpaid legal fees and expenses of $118, 865.07 and was fired by Debtor before the conclusion of the lawsuit. (Id. at 1045-56). Thereafter, in March 2013, Debtor and his wife initiated a lawsuit against DBR, alleging various theories of professional negligence. (Id. at 1060-80). However, on October 2015, a New Jersey Superior Court judge found in favor of DBR, concluding that Debtor and his wife's claims were frivolous and that they “manufactured this baseless lawsuit . . . by alleging a fictitious set of facts.” (Id. at 1076). As such, in an October 2015 order, the trial court imposed sanctions against Debtor and his wife, and awarded DBR a judgment against them in the amount of $196, 914.06. (Id. at 1058-59). When Debtor and his wife failed to pay the judgment, DBR obtained a court order authorizing the sale of Debtor's real property in Skillman, New Jersey, in satisfaction of the principal amount of $172, 747.55. (Id. at 1239-41). On October 5, 2016, a Somerset County Sheriff's Officer levied on the Skillman property. (Id. at 1235).

         During this same timeframe, Debtor remained embroiled in litigation against Pio, wherein Pio alleged claims of conversion, minority shareholder oppression, fraud, and breach of fiduciary duties. (Id. at 576). In a seventy-five page written decision, another New Jersey Superior Court judge held that Debtor was liable for, among other things, fraudulently and grossly mismanaging the brothers' business, and awarded Pio compensatory and punitive damages of $3, 205, 258.68 on September 27, 2016. (Id. at 544).

         Almost a month later, on October 26, 2016, Debtor filed for Chapter 11 Bankruptcy. (Id. at 1). As part of his bankruptcy petition, Debtor disclosed ownership of the following assets: (1) two pieces of real property jointly owned with his wife, valued at $1.2 million; (2) ownership interest in five companies, valued at over $7.6 million; (3) intellectual property with no value; and (4) potential claims against his brother, Pio, and his former counsel, DBR, totaling $925, 250.[1] (Id. at 323-28, 626-31). Debtor also sought to exempt from the bankruptcy proceeding real properties in Princeton, New Jersey and Skillman, New Jersey since they are owned by Debtor and his wife as tenants by the entirety. (Id. at 20). DBR and Pio thereafter filed objections to Debtor's property exemptions. (Id. at 337-445).

         On January 13, 2017, Pio filed a motion to appoint a Chapter 11 trustee or, alternatively, convert Debtor's case to Chapter 7. (Id. at 523-24). In support of his motion, Pio relied on his attorney's certification and the New Jersey Superior Court's underlying judgment, which demonstrated Debtor's prior misconduct at the state proceedings. Notably, in the underlying state proceeding, the trial court found that Debtor violated various discovery orders, held him in contempt, and struck his pleadings with prejudice. (Id. at 546). Therefore, Pio contended that cause existed to convert Debtor's Chapter 11 case to Chapter 7 based on: (1) Debtor's pre-petition conduct; and (2) Debtor's inability to confirm a plan of reorganization due to lack of income. (Id. at 539-42).

         Debtor opposed Pio's motion, contending that Pio failed to meet his burden under 11 U.S.C. § 1104(a) or § 1112(b), since cause did not exist to convert his case to Chapter 7. (Id. at 1257-82). Specifically, Debtor claimed he was receiving regular income through gifts from family and was “actively seeking employment in his field that would pay as much as $100, 000 per year.” (Id. at 1279). As such, Debtor contended he had “a host of assets that could be utilized to fund a plan of reorganization, ” which negated a finding of cause to convert his Chapter 11 case to Chapter 7. (Id.). Debtor also raised a procedural argument, contending that the attachment of the attorney certification to Pio's motion was improper.

         The following month, February 23, 2017, Debtor filed a proposed plan of reorganization which he planned to fund through: (1) future earnings; (2) contribution from an unknown source of no more than “$50, 000”; (3) “disposition or refinancing of Assets”; and (4) “proceeds from causes of actions.” (Id. at 1294-95). However, Debtor provided no additional information to support his claims for future earnings or the source of new contributions. The plan of reorganization also included a “Classification of Claims and Interests, ” which revealed that DBR had a “Class 2” Secured Claim against debtor. (Id. at 1290). The plan described a “Secured Claim” as, “a Claim secured by a lien on any Asset, which lien is valid, perfected and enforceable and is not subject to avoidance under the Bankruptcy Code or other applicable non-bankruptcy law, but only to the extent that such Claim does not exceed the value of the Asset securing such Claim.” (Id. at 1289). The plan also noted that Pio had a “class 4 unsecured claim” of $3, 205, 258.68 and that he has not obtained a judgment lien against any property. (Id. at 1293).

         Oral argument on the motions was heard on March 7, 2017. (Id. at 1570-1625). Both Pio and DBR argued that Debtor's lack of good faith, as demonstrated by Debtor's pre-petition conduct and his failure to comply with discovery requests, warranted Chapter 7 conversion immediately. (Id. at 1573, 1590-91). Moreover, DBR questioned the legitimacy of Debtor's reorganization plan, characterizing it as a “cookie cutter boilerplate plan” designed to stall the bankruptcy proceedings. (Id. at 1574). Debtor's counsel responded that Debtor's past conduct should not be considered by the court. (Id. at 1582). Regarding his reorganization plan, Debtor's counsel contended that it was “confirmable on its face.” (Id. at 1585). He also argued that converting this case to Chapter 7 would not be in the creditor's interest since Debtor would not be able to maintain going concern values of his assets and estate. (Id. at 1588).

         After hearing oral argument, the bankruptcy court rendered its decision on the record. The court was unpersuaded by Debtor's procedural argument, concluding that the certification was acceptable and the attorney had personal knowledge of the facts presented, since he was Pio's attorney in the State court action. (Id. at 1596). The court then found there was independent unrefuted facts supporting the appointment of a Chapter 11 trustee or conversion to Chapter 7:

[T]he fact that the State Court first struck [Debtor's] answer without prejudice and then later made it with prejudice speaks volumes. The certification also establishes that [Debtor] was held in contempt for failing to abide by a temporary restraining order. Those facts satisfy the movant's burden. The burden then shifts to the debtor to refute the showing of cause. In defense of this motion, the debtor did not submit a certification refuting those facts. On those unrebutted facts alone the Court has ample room to find that cause exists to appoint a trustee or to convert the case.

(Id. at 1598). The court then addressed Debtor's reorganization plan, finding it without merit:

My concern is not that the plan is a cookie cutter plan. The plan that [Debtor] filed is so devoid of specifics both regarding the treatment of creditors and the funding of the plan that it's a non-starter. The plan will allegedly be funded by future earnings of the debtor. At this point it is pure speculation that he will have any income whatsoever, a new valuation - - a new value contribution of $50, 000, there's no indication of when that money will be made or where the money will come from, and the sale or refinance of assets. But no information about which assets or when they will be sold or refinanced.
One of the duties of [a debtor-in-possession] is to conserve property in its possession for the benefit of creditors. . . . At this point the Court has no confidence that the debtor can perform this function. This is a plan that does not have a ...

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