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In re Spenlinhauer

United States District Court, D. Massachusetts

November 2, 2018




         In this consolidated bankruptcy appeal, Robert J. Spenlinhauer ("Debtor") challenges several orders from the United States Bankruptcy Court for the District of Massachusetts. The parties submitted briefs in Civil Action No. 18-10495-RWZ and, on October 23, 2018, presented oral arguments regarding Civil Action Nos. 18-10495-RWZ, 18-11498-RWZ, and 18-12101-RWZ.

         I. Factual Background

         Following are those aspects of the extensive proceeding in the bankruptcy court that are relevant to these appeals.

         On December 16, 2013, the Debtor- in his individual capacity and as trustee and beneficiary of RJS Realty Trust, C.C. Canal Realty Trust, and Classic Auto Realty Trust - filed a voluntary Chapter 11 petition. 11 U.S.C. § 101 et sea.

         On December 16, 2015, after becoming aware of actions by the Debtor inimical to the proceedings, the bankruptcy court appointed Lynne F. Riley ("Trustee") as the Chapter 11 trustee.[1] See In re Spenlinhauer, No. 13-19191-JNF, 2016 WL 1452346 (D. Mass. Apr. 13, 2016) (affirming Chapter 11 trustee appointment). The Trustee shortly thereafter uncovered the Debtor's alleged tax liabilities, which prompted the Internal Revenue Service ("IRS")[2] and the Massachusetts Department of Revenue ("DOR") to become involved in the proceedings.

         A. The Vehicle Collection

         On January 2, 2018, the Trustee filed an expedited motion to secure several of the Debtor's vehicles being stored at a foreclosed property in Osterville, Massachusetts, from which the Debtor would soon be evicted. To avoid potential loss to the estate, the Trustee proposed that a licensed and bonded auctioneer collect the vehicles and keep them in a secure facility in Holbrook, Massachusetts. The Debtor responded by informiing the court that some of the vehicles had been transferred to Parsonsfield, Maine, and proposed that the remaining vehicles also be transported to the same location prior to his likely eviction from the Osterville property.

         After a hearing on January 24, 2018, the court granted the Trustee's motion because her proposal presented "less risk of loss to the estate" when compared to the Debtor's suggestion to transport the vehicles "approximately 180 miles to Parsonsfield, Maine and store them in an uninsured 'barn.'" Docket #1312 ("Turnover Order").[3] The court noted that the Debtor failed to "provide any details on how the vehicles were going to be transported to Maine" nor did he present "a proposal for returning the vehicles to Massachusetts in the event the Trustee were to be authorized to take possession of [them]." ]Id. The Debtor's subsequent motion to vacate the order was denied. Docket #1319.

         B. Case Dismissed and Reinstated

         On March 6, 2018, the Trustee informed the court that the Debtor had not turned over any vehicle keys or otherwise permitted the Trustee and auctioneer to implement the court-ordered plan and that the vehicles were dispersed among eight different locations - including the barn in Parsonsfield, Maine. The court thereupon ordered the Debtor to:

show cause, in writing, on or before March 9, 2018 at noon why he should not be held in contempt for failure to obey a lawful order of the Court and why his Chapter 11 case should not be converted to a case under Chapter 7 or dismissed under 11 U.S.C. [§] 1112(b). Any party in interest may file a response to the order to show cause or motion or request for relief relative to the Trustee's Status Report by March 9, 2018 at noon. The Debtor shall appear at a hearing on March 12, 2018 at 10:00 am to respond to the order to show cause and other requests for relief.

Docket # 1323 ("Show Cause Order").

         The Debtor responded that "[a]ll vehicles are safe," argued against conversion to a Chapter 7 case, and "consented] to the dismissal of [the] case." Docket # 1332. The IRS supported the proposed conversion to Chapter 7 and explained various tax-related estate liabilities that would be jeopardized if the case were to be dismissed. The Trustee, however, did not respond.

         On March 9, 2018, the court dismissed the Debtor's case entirely, explaining that its decision was based on the IRS's response, the Debtor's submission, and the absence of further responses or requests for relief. The Trustee, in an Emergency Motion for Reconsideration, argued that dismissal was not in the best interests of the creditors and explained that she understood the court's order to be "directed to the Debtor" and not to require her response. Shortly thereafter, the court stayed the dismissal, reviewed additional briefing, held a hearing, and ultimately vacated its Dismissal Order and reinstated the case.

         C. Conversion to Chapter 7 and Contempt Issues

         Following reinstatement, the Debtor continued to violate the court's orders and deadlines. On June 5, 2018, the Trustee filed a Motion for Contempt and Related Sanctions, based on her largely unsuccessful attempts to secure the vehicles pursuant to the court's January 24, 2018 Turnover Order. The Trustee also filed a Motion to Convert the case to a Chapter 7 proceeding. See 11 U.S.C. § 1112(b). After hearing both matters, the court granted the Trustee's Motion to Convert. It also issued an "interim order" on the Motion for Contempt and Related Sanctions, which (i) required the Debtor to provide the Trustee with the locations of all of the vehicles, as well as all keys, registrations, titles, and other documents relating to ownership; (ii) authorized the Trustee to "take all necessary action to safeguard and obtain possession of the vehicles;" and (iii) scheduled an evidentiary hearing on the Motion for Contempt and Related Sanctions on July 10, 2018. Docket #1510.

         On August 10, 2018, the bankruptcy judge issued her decision that the testimony "unequivocally established" that the Debtor had not complied with the court's June 25, 2018 order and that, while testifying, he expressly admitted violating the January 24, 2018 Turnover Order. She set yet another deadline for compliance, which the Debtor failed to meet.[4]

         After another evidentiary hearing on September 17, 2018, the bankruptcy judge found that the Debtor "continue[d] to flagrantly disobey" court orders "without cause or justification" and therefore imposed monetary sanctions. Docket #1612. In the event of further noncompliance, the judge stated that she would ...

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