Memorandum of Decision Re: Claim Objection After Confirmation

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Judge's Decisions
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re MICHAEL DANELEN,                                                                              No. 96-10521        Debtor(s). ______________________________________/
Memorandum of Decision
     Prior to and during the early stages of his Chapter 11 filing, debtor Michael Danelen was represented by attorney Lynn Young, doing business as the Napa Legal Clinic. Ms. Young engaged in unethical conduct, and was removed from the case. Danelen proceeded to plan confirmation with other counsel. Young has since filed her own bankruptcy case.      Creditor Kelly Ternullo was Lynn Young's employee. She worked as a paralegal while she went to law school. She became a lawyer on December 7, 1995 and continued to work either for or with Young.      Ternullo filed a proof of claim in this case for legal services, alleging that she had a direct attorney-client relationship with Danelen. Danelen objects, arguing that at all times Ternullo was Young's employee. The issue is crucial, as Danelen has considerable claims against Young which can offset the claim at issue if it is deemed to be Young's claim. Ternullo's motion for summary judgment is now before the court.      At best, Ternullo has raised a triable issue of fact as to whether her fees were incurred independently or as an employee of Young. The purported contract between Ternullo and Danelen was not signed, the bills to Danelen were on the letterhead of the Napa Legal Clinic, which was a fictitious name of Young alone, and the bills included time during which Ternullo was not a licensed attorney and therefore could not have billed directly for her services. All of these matters undercut Ternullo's claim. However, the court will need to listen to the testimony of several witnesses before making a final adjudication.      Citing Kelly v. South Bay Bank, 199 B.R. 698 (9th Cir.BAP 1996), Ternullo argues that she is entitled to allowance of her claim as a matter of law, regardless of its merits, because Denelen did not object to it prior to confirmation. However, that case is not controlling because the plan specifically reserves Denelen's right to continue or instigate litigation against Young. The central factual issue in this case is whether the billings which are the subject of the claims are Ternullo's or Young's. To the extent they belong to Young, confirmation of the plan clearly does not bar the present claim objection.      Moreover, Kelly is easily distinguished. For one thing, the plan in that case made no clear reservation of rights. For another, the creditor in that case had actively opposed confirmation. In this case, the invoices which form the basis for Ternullo's claim bear the name of Lynn Young, against whom there was a clear reservation of rights. Neither Young nor Ternullo was actively involved in confirmation. The court is not compelled to blindly allow Ternullo's claim, regardless of its merits, merely because the plan did not reserve rights against her as well as Young.      The court also notes that ordinary rules of res judicata do not apply to claims objections. Section 502(j) of the Bankruptcy Code specifically provides that a claim that has been allowed or disallowed may be reconsidered for cause according to the equities of the case. See also FRBP 3008. While the equities of the Kelly case may have dictated that the creditor's claim not be revisited, the equities of this case are quite different. Young's engaged in highly unethical conduct in her representation of Danelen. Before the court allows Ternullo anything, equity demands that the court be certain that the claim belongs to her alone and that she in no way participated in Young's wrongdoing.      For the foregoing reasons, Ternullo's motion for summary judgment will be denied. Counsel for Danelen shall submit an appropriate form of order.
Dated: December 26, 1998                                                                          ____________________________                                                                                                                      Alan Jaroslovsky                                                                                                                      United States Bankruptcy