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IN RE SARATOGA SPRINGS PLASTIC SURGERY

June 8, 2004.

In re SARATOGA SPRINGS PLASTIC SURGERY, PC, Debtor. ROBIN YARINSKY, Appellant,
v.
SARATOGA SPRINGS PLASTIC SURGERY, PC, Appellee.



The opinion of the court was delivered by: DAVID HURD, District Judge

MEMORANDUM-DECISION and ORDER

I. INTRODUCTION

  Robin Yarinsky ("Mrs. Yarinsky"), her attorney Wayne P. Smith, Esq. ("Attorney Smith"), and her former attorney Nancy Bunting, Esq. ("Attorney Bunting") appeal from orders of the United States Bankruptcy Court for the Northern District of New York denying them an extension of time to appeal that court's decision finding that they willfully violated the automatic stay and awarding debtor Saratoga Springs Plastic Surgery, P.C. ("SSPC" or "debtor") compensatory damages, and setting forth the amount of compensatory damages. The consolidated appeals were taken on submission without oral argument.

  II. BACKGROUND

  SSPC filed for voluntary Chapter 11 bankruptcy protection on January 28, 2002. SSPC's sole principal is Steven Yarinsky, M.D. ("Dr. Yarinsky"). At the time of the bankruptcy filing an acrimonious matrimonial action in state court had been pending for several years between Dr. Yarinsky and his estranged wife Robin Yarinsky ("Mrs. Yarinsky"), one of the appellants in this matter.

  A brief digression into some of the history of the matrimonial action sets the stage for the occurrences in the bankruptcy matter. On September 25, 2000, Honorable Jerry J. Scarano, New York State Supreme Court Justice, issued a finding that Dr. Yarinsky had the ability to pay previously court-ordered child support and spousal maintenance, and was in arrears in the sum of $34,100 to Mrs. Yarinsky, as well as in the sum of $4,500 to Attorney Bunting for court-ordered counsel fees. (Record on Appeal ("R.") at 169-73.) He therefore granted a judgment on their behalf for those sums, with interest. The court further awarded counsel fees to Attorney Bunting and Attorney Smith in the total amount of $12,500. Id. On October 16, 2000, Justice Scarano granted an additional judgment on behalf of Mrs. Yarinsky in the sum of $46,100 against Dr. Yarinsky and SSPC. Id. at 174-75. On December 22, 2000, Justice Scarano entered an order finding Dr. Yarinsky in contempt for non-payment of arrears and remitting him to the Saratoga County Jail for ninety days, pending payment of the sum of $68,600 to cure the contempt. Id. at 163-68. Dr. Yarinsky cured the contempt with his payment of the $68,600. Another order entered on December 22, 2000, further provided that all money judgments entered in the action were to be filed against Dr. Yarinsky personally and against SSPC.

  On December 17, 2002, Justice Scarano dismissed the matrimonial action for failure of both parties to comply with scheduling orders, continued current child support and spousal maintenance, and remanded the matter to Saratoga County Family Court for final determination of those matters. Id. at 29-30. However, he ordered a judgment in the amount of $20,000 in favor of Attorney Bunting (out of which Attorney Smith's fees were to be paid) and against Dr. Yarinsky and SSPC. Id. Justice Scarano further granted a judgment in favor or Mrs. Yarinsky for child support and maintenance arrearages against Dr. Yarinsky and SSPC in the amount of $151,691.58.*fn1 Id.

  This is where the matrimonial matter and the bankruptcy proceeding collide. Attorney Smith duly recorded the $151,691.58 judgment and caused restraining orders to be issued against the bank accounts of Dr. Yarinsky and SSPC, in apparent violation of the automatic stay protection afforded the debtor by virtue of the Chapter 11 proceeding. He also filed a claim against debtor's bankruptcy estate based upon the judgment (which apparently was construed as objections to the confirmation plan).

  Although Attorney Smith professed to believe that child support and spousal maintenance were exempt pursuant to § 362, "as a precaution," he moved the bankruptcy court for nunc pro tunc relief from the § 362 automatic stay, on February 7, 2003. On February 27, 2003, the Honorable Robert E. Littlefield, Jr., United States Bankruptcy Court Judge, denied the motion for relief from the stay, and a written order dated March 12, 2003, to that effect was entered on March 19, 2003.

  On March 7, 2003, Mrs. Yarinsky filed documents in the bankruptcy proceeding that were construed by the court as objections to the confirmation plan. The basis for the objections was that the plan called for Dr. Yarinsky to draw an annual salary of $150,000 from the debtor. Mrs. Yarinsky contended that prior to the formation of SSPC at the initiation of the matrimonial action Dr. Yarinsky had a gross revenue of about $1.6 million and a net income of just under $350,000. Her concern was that, while the gross revenues remained at over one million dollars, such a low salary draw would have a preclusive (and detrimental) effect in the setting of child support and spousal maintenance amounts in the matrimonial action.

  On March 12, 2003, SSPC moved pursuant to § 362(h) and F.R.Bankr.P. 9011 for a finding that the automatic stay was violated and for resultant compensatory damages. SSPC sought Rule 9011 sanctions contending that there was no basis upon which the spouse of debtor's principal could object to debtor's confirmation plan.

  At a confirmation hearing held on March 14, 2003, the bankruptcy court found that Mrs. Yarinsky had standing as a party in interest to object to debtor's confirmation plan under the theory that SSPC was a corporate shell unreasonably retaining earnings so as to protect debtor's principal, Dr. Yarinsky, from state court judgments. (See 3-14-03 Hearing Tr. at 12, 20.)

  Also during the March 14, 2003, hearing the bankruptcy court discussed with both counsel what the effect of confirmation would be. The bankruptcy court stated that confirmation would only constitute a finding that the $150,000 salary for Dr. Yarinsky was not unreasonable. Id. at 30-32. The bankruptcy court impressed upon Attorney Smith that if Mrs. Yarinsky pursued the objections, then a hearing would be required and she would have the burden of proving that the debtor was indeed a shell corporation formed to shield Dr. Yarinsky's income from the state court judgments. Attorney Smith asserted that experts were required to do that and the bankruptcy court responded that it had no authority to order debtor to pay expert fees, unlike in a matrimonial action. Id. at 28-29. The bankruptcy court then adjourned the matter so that Mrs. Yarinsky could consider whether to pursue or withdraw her objections to confirmation. Id. at 35. By letter dated March 26, 2003, Attorney Smith notified the bankruptcy court and the debtor that the objections to the plan would be withdrawn.

  On April 23, 2003, debtor made an additional motion to extinguish the judgment (income execution) pursuant to 11 U.S.C. § 105, 362, for ...


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