Opinion ID: 653339
Heading Depth: 4
Heading Rank: 1

Heading: The Finding The Chapter 11 Petition Was Frivolous.

Text: 13 Each of the findings supporting the conclusion of frivolousness was properly reached. 14 (1.) Thomason's Lack of Intent to Reorganize Pioneer. 15 Thomason maintains that, contrary to the lower courts' findings, his intent in filing the Chapter 11 Petition was to properly effectuate the reorganization of Pioneer. He argues that his strategy was to spread out Pioneer's ten existing lawsuits and generate cash flow from one of those suits to fund the others. He erroneously thinks this position is supported by In re King, 83 B.R. 843 (Bankr.M.D.Ga.1988) and In re Trina Assoc., 128 B.R. 858 (Bankr.E.D.N.Y.1991)). These cases are clear that any such strategy must be part of a bonafide attempt to reorganize. As noted in In re King, [i]t is sound bankruptcy law that a Debtor may file a Chapter 11 petition in an attempt to delay creditors, without subjecting himself to Rule 11-type sanctions, as long as the Debtor also intends to make a legitimate effort at reorganization. In re King, 83 B.R. at 847 (emphasis added). Additionally, In re Trina Assoc. emphasized that seeking the protection of an automatic stay for the purpose of derailing other proceedings is inappropriate. See In re Trina Assoc., 128 B.R. at 872. 16 Thomason has not suggested any alternative purpose for filing the Chapter 11 Petition other than to freeze Pioneer's pending litigation. Conclusory protestations aside, the record lacks any evidence suggesting Thomason intended to effectuate a legitimate financial reorganization of Pioneer. 17 (2.) Debtor's Activity After the Lift-Stay Proceeding. 18 After reviewing the Record, both the bankruptcy and district courts concluded that the absence of activity by the Debtor after the stay was formally lifted in July 1990 implied that Thomason's bankruptcy filing was baseless. 19 Once the order lifting the stay was formally entered, the Debtor took no action to reorganize. Instead, when the bankruptcy court informed Debtor that the case would be dismissed if Debtor did not seek new counsel, the Debtor willingly agreed to dismiss the case. It was no abuse of discretion to infer this supported a finding of frivolousness. 20 (3.) Thomason's Failure to Secure Substitute Counsel. 21 Thomason argues his May 1990 withdrawal relieved him of any responsibility to find new counsel, and it would be grossly unfair to hold him accountable for finding new counsel after the bankruptcy court permitted him to withdraw. 22 However, the Record reflects that Thomason continued as counsel for Pioneer in the Federal Action until the court granted his motion to withdraw in August 1990. He also represented himself as Special Counsel for Pioneer in the bankruptcy proceedings even after his dismissal. Special Counsel Thomason's decision not to find substitute general counsel properly contributes to the conclusion Thomason filed the bankruptcy Petition for reasons other than to seek Pioneer's reorganization. 23 (4.) Thomason's Lack of Pre-filing Inquiry. 24 The lower courts found Thomason failed to conduct an adequate inquiry of Pioneer's financial position before filing the bankruptcy Petition, thereby reinforcing the suggestion that Thomason had no intent to effectuate a proper reorganization. Thomason argues the Record is to the contrary. 25 Thomason claims that before he filed the Petition, he met both with a bankruptcy expert to discuss whether Pioneer's filing for bankruptcy was appropriate, as well as with Pioneer's President and Secretary-Treasurer to discuss Pioneer's financial position. He states he represented Pioneer in a number of legal actions for the prior year and was thoroughly knowledgeable of Pioneer's financial situation. 26 Thomason's position is contradicted, however, by other evidence. For example, Thomason's original bankruptcy Petition stated the debtor's assets were $200,000 and liabilities were $150,000. Just one month after filing the Petition, Thomason submitted a Statement of Financial Affairs estimating assets of $2,496,881 and liabilities of $586,916--a significant departure. In an effort to explain the discrepancy, Thomason stated in an affidavit that he was faced with the necessity to file the petition to stop the commencement of the [State Action] in Hilo, and that he did not have time to thoroughly examine Debtor's records prior to the filing. This statement, however, is contrary to Thomason's present representation that, based on his experience in representing Pioneer, he was well aware of the Debtor's financial condition and what was necessary to effectuate reorganization. 27 In addition, Thomason's stated plan of reorganization was to schedule out litigation whereby claims would be liquidated to finance further lawsuits. Yet, when Thomason filed the Petition, he stated that he placed no known value on such litigation. 28 The lower courts did not abuse their discretion in determining that Thomason failed to conduct a sufficient pre-filing inquiry of Pioneer's finances. 29