Memorandum Decision re Order Dismissing Case and Reserving Jurisdiction to Determine Sanctions

Original filed June 16, 2000

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA


In re                                                               ) Bankruptcy Case                                                                        ) No. 00-30959DM CUNNINGHAM FAMILY TRUST,           )                                                                        ) Chapter 11                                                      Debtor.     ) ___________________________________)
ORDER DISMISSING CASE AND RESERVING
JURISDICTION TO DETERMINE SANCTIONS

For the reasons set forth below, this Court dismisses this case with prejudice, but retains jurisdiction to hear a motion for contempt and sanctions. The following shall constitute findings of fact and conclusions of law pursuant to Rule 7052, Federal Rules of Bankruptcy Procedure.

On May 15, 2000 secured creditor Bank of America (the "Bank") filed its motion for dismissal of this case with prejudice, or, in the alternative, termination of the automatic stay in rem against the real property located at 295 Pacific Way, Muir Beach, California (the "Property"). The United States Trustee filed its joinder in the motion to dismiss on May 24, 2000, and requested that this Court retain jurisdiction to hear a motion for contempt and sanctions. The Cunningham Family Trust (the "Trust") filed an opposition on May 25, 2000. The motion came on for hearing on May 25, 2000 at 9:30 a.m., Joan M. Grimes, Esq. appeared for the Bank, David L. Cunningham, Esq. ("Cunningham") appeared for the Trust, and Patricia A. Cutler, Esq. appeared for the Office of the United States Trustee.

As an initial matter, the Court notes that the Bank's motion was timely insofar as it requested relief from the automatic stay (B.L.R. 4001-1(c)), and that the Bank served all creditors included on the Trust's creditor matrix, but that the Bank did not provide the 20-day notice required by Rule 2002(a)(4). However, the Court notes that neither the Trust nor the U.S. Trustee nor any other party objected to the lack of 20-day notice, and the Court will use its discretion under Rule 9006(c) to reduce the required time nunc pro tunc.

In support of dismissal, the Bank argues that the Trust is not a "person" and is therefore ineligible to be a debtor under 11 U.S.C. § 109. The Trust responds, without citation, that under common law principles the trust is tantamount to a corporation, and is therefore a person entitled to relief under the Bankruptcy Code.

The court takes judicial notice that this same issue arose in connection with a prior Chapter 11 bankruptcy petition filed by the Trust on October 20, 1998 (Case No. 98-34723). In response to that earlier petition, this Court issued an Order to Show Cause, on October 26, 1998, directing the Trust to appear on November 10, 1998 to address this issue. On October 29, 1998 the U.S. Trustee filed a response which argued that the Trust's lack of business purpose was shown by the terms of the Trust's Memorialization of Irrevocable Trust Agreement, Cunningham Family Trust, dated October 4, 1990 (the "Trust Agreement"), which had been produced by Cunningham in an earlier, personal Chapter 11 case (Case No. 96-11164). The Trust Agreement defines the trust estate to include the Property and all household equipment and furnishings located therein. The U.S. Trustee quoted from the Trust Agreement as follows:

The spirit, direction and mandate of this Family Trust is to maintain and keep those special family keepsakes
in use and enjoyment by all members of the family for
the Duration of this Trust.

(Trust Agreement p. 3, attached as Exhibit B to Declaration of Stephen L. Johnson in Support of United States Trustee's Response to Order to Show Cause, filed October 29, 1998.)

The Trust did not file any response to the Order to Show Cause or the U.S. Trustee's response in this earlier case. However, Cunningham did appear at the hearing on November 10, 1998, at which time this Court ordered the Trust to file and serve on the U.S. Trustee a declaration relating to its alleged business activities, and continued the Order to Show Cause hearing to December 4, 1998. The Trust failed to file any such declaration. Cunningham appeared at the continued hearing and stated that, for financial reasons, the Trust had determined not to oppose the dismissal.

Based on the foregoing record, this Court finds that the Trust has failed adequately to respond to the Bank's allegations that it is not a "person" qualified to be a debtor, and the Trust has failed to produce any evidence to rebut the evidence in the record that it not engaged in any business activity. Therefore, the Trust's bankruptcy case is hereby dismissed pursuant to 11 U.S.C. § 1112(b), 109(a) and (d), and § 101(41). See In re Hunt, 160 B.R. 131, 134-136 (9th Cir. BAP 1994).

The dismissal shall be with prejudice for the following reasons. First, the issue is not moot. Although the Trust might conceivably be eligible to file a bankruptcy petition, it has not yet carried its burden of proof. If facts exist now or in the future that would justify a filing, the Trust should first demonstrate its eligibility before burdening the court, the United States Trustee and other parties with a new petition.

Second, the Trust has evaded any judicial determination of its eligibility. The Trust had the opportunity to present evidence that it is engaged in business in its prior Chapter 11 case before this court. It was ordered to do so by November 10, 1998, and was then given additional time, until December 4, 1998. However, the Trust acquiesced in dismissal without presenting any evidence it was engaged in business. In the present case, the Trust failed to file a meaningful response to the Bank's and the U.S. Trustee's allegations that it was not engaged in business.

Third, the Trust has made false statements in papers filed with this Court. In its opposition to the Bank's motion, the Trust falsely claimed it "has not filed any petition for relief for bankruptcy protection" and "this is the first request for relief by the Trust." (Opp. pp. 2:2-3 and 3:6.) The Trust's statements are all the more surprising because it disclosed its prior filing in the petition it filed to commence this present case.

Fourth, the Trust did not dispute the Bank's evidence that no payments have been made since September 8, 1997 on a promissory note held by the Bank, in the original principal amount of $100,000, of which $96,207.26 remains unpaid (not including interest and other charges). Nor has the Trust disputed the Bank's evidence that no payments have been made since August 13, 1998 on a second promissory note held by the Bank, in the original principal amount of $149,000, of which $202,747.82 remains unpaid (not including interest and other charges).

For the foregoing reasons, dismissal with prejudice is appropriate. See, e.g., In re A-K Enterprises, Inc., 111 B.R. 149 (Bankr. N.D. Ohio 1990); Walker v. Stanley, 231 B.R. 343 (N.D. Cal. 1999). The Trust is hereby barred from filing any bankruptcy petition in any court, for a period of one year from the date hereof, except as follows. At any time after 10 days of the date hereof, the Trust may file a motion with this division of this Court for leave to file a bankruptcy petition in an appropriate division of this Court or any other bankruptcy court, on shortened time if necessary, provided that the Trust attaches to such motion a copy of this Order and provided further that such motion is accompanied by a declaration detailing the Trust's business activities, if any. Such motion shall be served on the Office of the United States Trustee and on any creditors by U.S. Mail and, if the Trust requests that the motion be heard on less than 5 days' notice, then service shall be by messenger or overnight delivery.

The Bank has presented evidence that the foregoing conduct may be part of a more substantial pattern of conduct by Cunningham related to the Property. The Bank refers to four previous personal bankruptcy petitions filed by Cunningham in Division 1 of this Court, before Judge Jaroslovsky - Case No.'s 96-11164, 97-14497, 98-11943 and 99-13602. This Court takes judicial notice that in the last of these cases, Judge Jaroslovsky entered an order on March 22, 2000 dismissing Cunningham's bankruptcy case and ordering:

Cunningham may not file any bankruptcy petition in any
court before March 10, 2001. In the event Cunningham
files any petition in violation of this order he may be
cited for contempt and any creditor may seek relief from
the automatic stay by ex parte application.

This Court also takes judicial notice that Cunningham is an attorney admitted to the State Bar of California (Bar No. 34583). According to the Bar's online records, Cunningham is an active member.

For the foregoing reasons, this Court retains jurisdiction over the Trust and Cunningham for the purpose of hearing any motion the U.S. Trustee or the Bank may choose to bring for contempt and sanctions. Such moiton may brought in either the San Francisco Division or the Santa Rosa Division.

SO ORDERED:

Dated: June __, 2000

                                                                                                         ______________________________                                                                                                                      Dennis Montali                                                                                                            United States Bankruptcy Judge

NOTE: File also available in pdf format Cunningham.pdf