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In re Young

United States Court of Appeals, Eighth Circuit

June 17, 2015

In re: Jonathan Michael Young, also known as Jon Young, Debtor; Jonathan Michael Young
v.
Kristalynn Young, Kathy A. Cruz, Appellant

Submitted, January 15, 2015

Page 873

Appeal from the United States Bankruptcy Appellate Panel for the Eighth Circuit.

Kathy A. Cruz, Appellant, Pro se, Hot Springs, AR.

For Kathy A. Cruz, Appellant: Jeffrey M. Rosenzweig, Little Rock, AR.

Before LOKEN, MELLOY, and GRUENDER, Circuit Judges.

OPINION

Page 874

MELLOY, Circuit Judge.

The bankruptcy court[1] sanctioned attorney Kathy Cruz under Rule 9011 of the Federal Rules of Bankruptcy Procedure during her representation of a client, Jonathan Young. Cruz appeals the imposition of sanctions. For the reasons stated below, we affirm.

I

A

This case has a complicated history. In order to put this appeal in context, a brief overview of how domestic support obligations are treated under the United States Bankruptcy Code (Code) is warranted.

Page 875

Simply put, the Code provides preferential treatment to domestic support obligations. For example, past-due alimony, owed on the date of filing bankruptcy, may be paid through monthly Chapter 13 payments. The past-due prepetition alimony is given priority status, meaning it is paid out of the monthly payments before payment is made to general unsecured creditors. Further, after a debtor files a petition, alimony that accrues postpetition must be paid by a debtor as an ongoing expense. In order to get a Chapter 13 plan confirmed, the debtor must show he or she has the financial ability to pay postpetition alimony and that it is, in fact, being paid. Failure of a debtor to pay postpetition alimony is a reason for dismissal.

Young filed for bankruptcy shortly after he and his wife, Kristalynn Young (now " Stephens" ), divorced. The divorce decree required Young to pay alimony. Young did not pay, and as a result, Stephens filed contempt proceedings against him in state court in arguable violation of a bankruptcy stay order.[2] Young responded by filing an adversary proceeding against Stephens in the bankruptcy court, alleging a violation of the stay.

In the Chapter 13 bankruptcy, including the adversary proceeding, attorney Cruz represented Young. During the course of this representation, she repeatedly mischaracterized past-due postpetition alimony obligations as past-due prepetition obligations. In addition, she falsely asserted Young was current on his alimony payments. Further, she represented to the bankruptcy court that Young would " continue" to make his alimony payments even though, up to that point, he had not been making any such payments. In reliance on these representations, the bankruptcy court confirmed a plan. After discovering Cruz's false statements and her inaccurate characterization of the alimony, the bankruptcy court entered a show-cause order and, eventually, sanctions against Cruz. Cruz appeals the sanctions.

B

On November 1, 2007, Young and Stephens finalized their divorce. The divorce decree required Young to pay $1,100 per month in alimony, $10,890 in attorney's fees, and $2,350 in restitution (mainly marital debts, including credit card debt). Shortly thereafter, a state court jailed Young for contempt, finding that he failed to pay his domestic support obligations. He was released from jail after his parents posted a $5,000 bond. Young appealed the divorce decree and the contempt ruling. On January 24, 2008, while his appeals were pending, Young filed a petition for relief under Chapter 7 of the Code. Young listed $13,240 in domestic support obligations owed as of the date of filing of the Chapter 7 petition. He also listed $1,100 in monthly alimony on Schedule J, which lists " Current Expenditures of Individual Debtor."

Proceedings not relevant to this appeal ensued in the Chapter 7 bankruptcy, mainly over the issues of dischargeability of debts owed to Stephens and relief from the stay order. Cruz then entered her appearance for Young and converted his bankruptcy case to Chapter 13.[3]

Page 876

The original Chapter 13 plan did not mention Stephens, even though Young's Schedule E listed prepetition obligations of $2,350 in restitution and $10,890 in attorney's fees and Young's Schedule J listed $1,100 per month in alimony as a postpetition obligation. Stephens objected to the original Chapter 13 plan because it did not address alimony, attorney's fees, or restitution and because it listed alimony as a Schedule J " expense" even though Young had not paid any alimony.

In September 2008, a state appellate court affirmed the divorce decree. Stephens then sent a letter to Young in October 2008. The October 2008 Letter detailed Young's alimony arrearages from October 2007 to October 2008 (most of which accrued after filing the Chapter 7 petition in January 2008). The October 2008 Letter stated that if Stephens did not receive assurances of payment, she would again file a petition for contempt against Young in state court.

In response to the October 2008 Letter, Cruz amended Young's Schedule E to include $9,300 in alimony as a § 507(a)(1) unsecured priority claim. Also, Cruz filed a " Modification of Chapter 13 Plan" (Modified Plan), which included the $9,300 in alimony as past-due priority debt. Cruz asserted that Young would " continue" to make his alimony payments to Stephens directly, even though Young had not made a single payment. The Modified Plan also noted that the restitution and attorney's fees from the divorce decree would be paid in full.

Because Stephens was dissatisfied with Young's response to her October 2008 Letter, she filed an objection to the Modified Plan in the bankruptcy court and a petition for contempt against Young in the state court. The state court held a contempt hearing in December 2008 and found Young in contempt for failure to pay alimony and attorney's fees.[4] The state court judge held the contempt order in abeyance, ...


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