United States District Court, D. New Jersey
MEMORANDUM AND ORDER
G. SHERIDAN, U.S.D.J.
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.
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).
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
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,
(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
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
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
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.
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).
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
(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