Tuesday, January 23, 2007

Halkas v. Grigsby (Maryland U.S.D.C.)(not approved for publication)

Decided January 22, 2007--Memorandum Opinion by Judge Deborah K. Chasanow (not approved for publication)

Debtor initially filed Chapter 7 bankruptcy petition in 2001 which was ultimately converted to Chapter 13 in 2002. At the time the Chapter 13 plan was confirmed, Debtor owned two residential properties. The plan called for Debtor to retain both properties while making payments to her creditors; however, in 2003, Debtor consented to sell one of the properties, the proceeds of which would be partially retained by Debtor, partially paid to Trustee for the benefit of the creditors, and partially remitted to Debtor’s former spouse who had been co-owner before the sale. In August 2005, a motion to dismiss by Trustee was pending because Debtor did not stay current on payments agreed to in a modified plan from 2004 reducing her monthly payment. Debtor moved to sell the second residential property and in October 2005 the bankruptcy court ordered that all net sale proceeds be paid directly to Trustee and disbursed to pay creditors, up to the amount required to pay all claims against Debtor’s bankruptcy estate.

After completion of sale and Trustee’s distribution of proceeds, Debtor filed a motion contesting whether Trustee had the right to retain all proceeds of the sale. The bankruptcy court denied this motion in September 2006. Debtor filed a notice of appeal and filed an emergency motion in the bankruptcy court to stay the disbursement of the sale proceeds, which motion was denied September 29, 2006. On or about September 30, 2006, Trustee disbursed all remaining funds in the bankruptcy estate pursuant to the bankruptcy court’s Orders. Trustee filed a notice of plan completion in the bankruptcy court on October 5, 2006, and the bankruptcy court granted Debtor a discharge the next day.

On Debtor’s appeal, Trustee argued for dismissal pursuant to the doctrine of equitable mootness, definining mootness as when the issues presented are no longer ‘live’ or the parties lack a legally cognizable interest in the outcome. To survive an assertion that a claim is moot, a party must have suffered an actual injury that can be redressed by favorable judicial decision. Even the availability of a partial remedy is sufficient to prevent a case from being moot. Since Trustee paid out all the proceeds of the sale pursuant to the bankruptcy court’s Orders, and no creditors were parties to the appeal, it would be impossible to fashion any relief for Debtor even if she prevailed in the appeal because the nonparty creditors could not be ordered to return funds they had received. Consequently, the action was moot.

Debtor argued that the case was not moot because if she were to prevail on appeal, she could attempt to enforce a money judgment against Trustee for the distributed funds. The Court found that Debtor could not recover funds from Trustee personally because Trustee never held the proceeds from the sale for her own use and Trustee indicated that the funds were distributed pursuant to the bankruptcy court’s Orders.

Debtor relied on an unpublished opinion, Walker v. Grigsby, No. AW-06-62, slip op. at 4 (D.Md. April 11, 2006), in which the court concluded that an appeal by a debtor’s attorney contesting an order granting him only part of his requested fee was not constitutionally moot. Because the Debtor and Trustee remained parties to the case and at least one creditor continued to be subject to the bankruptcy court’s jurisdiction, the court reasoned that the attorney might have the ability to seek payment, if he succeeded on appeal, from the Debtor, the Trustee, or other creditors. The instant case, however, differs in that the Trustee alleged she had paid out all available funds to nonparty creditors pursuant to the bankruptcy court’s Orders.

The full opinion is available in PDF

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