Fred C. Arko

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
FRED C. ARKO, JR., No. 03-13010
Debtor(s).
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Memorandum on Order to Show Cause
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In 2004, the court ordered the proceeds of the sale of estate property sequestered as the cash
collateral of judgment lien creditor Robert Freeman. During these Chapter 11 proceedings the debtor in
possession, Fred Arko, improperly used some of the funds to cure a default on other estate property. At
the request of Freeman, the court issued an order to Arko to appear and show cause why he should not be
held in contempt for violation of the order.
At the initial hearing, Arko did not dispute the allegations against him. The court then appointed
a Chapter 11 trustee, it being apparent that Arko had forfeited his right to be a debtor in possession by
disobeying an order of the court.
The court deferred an award of further sanctions for further hearing. At that hearing, the court
was nonplused to learn that Freeman had commenced an action against Arko in state court based on
Arko’s use of the funds. The court was even more astounded when Freeman’s counsel attempted to
bargain with the court, offering to drop the state court action if this court’s remedies were deemed
sufficient by Freeman.
Entered on Docket
June 26, 2006
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 03-13010 Doc# 437 Filed: 06/26/06 Entered: 06/26/06 14:55:35 Page 1 of
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The court cannot see any role the state court has to play in this drama. Either a Chapter 11 plan
will be confirmed, or the case will be converted to Chapter 7, or the case will be dismissed. This latter
result is the least likely, as there has been considerable litigation and there are assets to be liquidated. If
a Chapter 11 plan is confirmed, Freeman will have a priority claim pursuant to § 507(a)(1) of the
Bankruptcy Code and will have to be made whole pursuant to § 1129(a)(9)(A). If the case is converted,
Freeman’s claim will be treated for all purposes as if it had arisen prepetition pursuant to
§ 348(d), so there will be no role for the state court to play. Only in the improbable event that this case
is dismissed would there be a basis for a state court ruling, and even then this court would almost
certainly retain jurisdiction to adjudicate the matter so that a state court does not have to learn about cash
collateral rights in bankruptcy and then enforce an order of a federal judge.
Thankfully, the supremacy provisions of the United States Constitution allow this court to decline
Freeman’s offer to drop the state court action if he deems this court’s remedy satisfactory. Whether by
removal or injunction, this court will see that the state court is not burdened by this dispute. Freeman’s
remedy will be decided by this court alone.
The court deems loss of debtor in possession status to be a sufficient punishment for Arko at this
time. Further relief will be denied without prejudice to further proceedings in this court and without
prejudice to the rights of the Chapter 11 trustee. Counsel for Arko shall submit an appropriate form of
order.
Dated: June 26, 2006
SAlan Jaroslovsky
U.S. Bankruptcy Judge
Case: 03-13010 Doc# 437 Filed: 06/26/06 Entered: 06/26/06 14:55:35 Page 2 of
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