Mary Sarah Vernon

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UNITED STATES BANKRUPTCY COURT

Entered on Docket
March 13, 2006
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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San Jose, California
8 UNITED STATES BANKRUPTCY COURT
9 NORTHERN DISTRICT OF CALIFORNIA
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E 11] Inre Case No. 04-57874 JRG
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; 12 | MARY SARAH VERNON Chapter 13
So 8 13 Debtor(s).
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= 16 TENTATIVE
Z MEMORANDUM DECISION REGARDING RESOLUTION OF DISPUTED ISSUES
E 17
A 18] I. INTRODUCTION
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19 Mary Vernon filed a Chapter 7 petition on December 28, 2004. The Chapter 7 case was
20 || converted to a case under Chapter 13 on May 3, 2005.
21 During this bankruptcy case, James McBurney has initiated several proceedings against Vernon
22 || and others which remain pending in this court. In addition, there is litigation pending between Vernon
23 || and McBurney in the state court that preceded the filing of the bankruptcy. The various pending matters
24 | stem from a relationship that existed between Vernon and McBurney for approximately twenty years.
25 The pending proceedings present a number of issues that need to be resolved before the
26 || bankruptcy case can successfully proceed.
27 |) MH
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TENTATIVE MEMORANDUM DECISION REGARDING RESOLUTION OF DISPUTED ISSUES 1

INFORMATION

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UNITED STATES BANKRUPTCY COURT

For The Northern District Of California

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I. THE LITIGATION BETWEEN VERNON AND McBURNEY'

A. Litigation Commenced Prior to Bankruptcy.

1. The Temporary Restraining Order.

In or about July 2004, Vernon reported to the Police Department in Sunnyvale California that
she had been raped by McBurney on more than one occasion. Shortly thereafter, on or about July 15,
2004, Vernon obtained a Temporary Restraining Order against McBurney in Santa Cruz County Family
Law Case Number FL 019889.

Following the issuance of the Temporary Restraining Order an evidentiary hearing was scheduled
for September 9, 2004, before the Honorable Jeffrey Almquist. The result of this hearing is not totally
clear to this court. McBurney states that the Temporary Restraining Order was terminated following the
hearing.

2. The Mutual Restraining Order And Subsequent Appeal.

On or about February 14, 2005, Judge Almquist issued a Mutual Restraining Order in Superior
Court Case Number FL 019889. McBurney states that this was done on an ex parte basis.

McBurney subsequently appealed the Mutual Restraining Order. That appeal is pending before
the California Sixth District Court of Appeal.

3. The Slander Suit And Vernon’s Cross-Complaint.

On or about September 16, 2004, McBurney filed an action for slander, and other causes of
action in the Santa Cruz County Superior Court, Superior Court Case Number CV 149889. On
November 1, 2004, Vernon filed a cross-complaint in this action based on allegations of sexual assault
and defamation. McBurney states the action is presently set for a Case Management Conference on
May 1, 2006.

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! The facts set forth herein are not intended to constitute findings of fact with respect to specific pieces of litigation between
the parties. With respect to matters occurring or pending in the state court, this court does not have copies of the pleadings and has relied
on the representations of the parties as to the nature and status of such matters. As a result, the facts are only relevant to the court’s
analysis of the interrelationship between the various proceedings and the court’s determination of the manner in which they can be most
expeditiously be resolved.

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B. Proceedings Commenced Following Bankruptcy.
1. Vernon’s Chapter 7 Case.

On December 28, 2004, Vernon filed her Chapter 7 petition. On February 7, 2005, McBurney
filed Adversary Proceeding No. 05-05025. This proceeding seeks to deny Vernon’s discharge in total
under § 727 of the Bankruptcy Code and alternatively to deny the debt owed to McBurney under § 523
of the Code. In general, the complaint parallels McBurney’s slander action in the state court.

2. Vernon’s Chapter 13 Case.
a. McBurney’s Objection To Confirmation.

On June 20, 2005, McBurney filed his objection the confirmation of Vernon’s Chapter 13 Plan.
McBurney’s objection centers around the debtor’s bad faith in filing her bankruptcy and plan. Central
to the objection are the allegations that Vernon has misstated her income in that she has not disclosed
that she was receiving money for sex, has failed to disclose various other assets and that she has tried
to manipulate the bankruptcy law in such a way as to forum shop for a resolution of the sex-related
disputes originally initiated in the state court.

b. McBurney’s Proof Of Claim.
On June 17, 2005, McBurney filed a Proof of Claim in the amount of $100,000. The claim

parallels his slander action pending in the state court.

c. McBurney v. Vernon, Gromeeko and Worldwide Professional Yacht
Services.
On October 28,2005, McBurney filed Adversary Proceeding No. 05-05554. The main thrust of
the proceeding is the determination of the slander allegations set forth in the action pending in the state
court as well as included in the Proof of Claim.

d. McBurney v. Newport Yacht Management, Tom Rowe, Patty Martin

and Owner Of The Yacht Massimo.

On November, 11, 2005, McBurney filed Adversary Proceeding No. 05-05585. This action
involves the nature of Vernon’s employment as a first mate on a yacht berthed in Miami, Florida.
I. THE INTERRELATIONSHIP OF THE PROCEEDINGS

The court has examined the overall situation from the perspective of the debtor’s attempt to

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confirm a Chapter 13 plan. McBurney’s objection to the Chapter 13 plan is the first issue that must be
resolved if the Chapter 13 case is to move forward. Vernon believes a hearing on the objection should
take two days. On the other hand, McBurney believes twenty days is required for the hearing. Even if
the time for the hearing on McBurney’s objections can be reduced substantially, conducting that hearing
will not resolve the situation.

In order to move the debtor’s plan forward, Vernon’s cross complaint in the state court action
must also be valued. It is an asset of the estate and, if it has value, will impact the dividend to creditors.
The debtor’s present plan offers a six cent on the dollar dividend to creditors. If the cross complaint has
substantial value then the dividend would likely increase. Vernon must believe that the cross complaint
has value because if it had no value, McBurney’s allegations would presumably be true.

There is a further problem that stems from McBurney’s $100,000 Proof of Claim. The claim
is based on the slander complaint pending in the state court. So far, the debtor has filed no objection to
the claim. That may be because the present plan provides only a six cent dividend. However, were the
dividend to increase an objection might become necessary. It seems unlikely this issue can be resolved
at present. To litigate the claim would simply duplicate what would ordinarily be tried in the state court.
If Vernon were to simply stipulate to allow the claim, it would undermine her position and leave her with
a determination of debt that would likely survive the dismissal of the bankruptcy.

It is clear that trying the objection to confirmation in some limited fashion does not resolve the
possible problems facing the debtor in the Chapter 13 case. It would also run the risk of multiple trials
of the same or similar issues and the possibility of res judicata or collateral estoppel principles affecting
future litigation should such become necessary. It is also clear that a limited hearing on the objection
to confirmation fails to resolve the serious issues existing between Vernon and McBurney regarding their
twenty year relationship.

IV. THE COURT’S RESOLUTION

In examining all the pending issues it becomes clear that the resolution of the issues stemming
from the twenty year relationship between Vernon and McBurney is central to the case moving forward
to conclusion. The court has given great thought to the best means by which this can be accomplished

and researched its authority to implement its proposal.

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A. Court’s Proposal.

The court proposes to lift the automatic stay to permit the state court to resolve McBurney’s
slander suit and Vernon’s cross-complaint and also permit the state court to resolve the mutual
restraining order, including the appeal, and any issues involving the temporary restraining order, if any
remain. While the state court is resolving to judgment the above actions, this court would stay
McBurney’s three adversary proceedings as well as McBurmey’s objection to confirmation proceeding
and any litigation regarding McBurney’s proof of claim. After the state court proceedings are finally
determined, the parties could return to the bankruptcy court and at that point the bankruptcy court would
determine what, if any, issues remain to be resolved.

The court makes this proposal based on the following considerations. First, if McBurney’s
objection to confirmation is litigated prior to resolving the state court litigation, determining the
objection to confirmation will create a risk of multiple trials and possible res judicata and collateral
estoppel issues, since the objection to confirmation contains aspects of the overall actions in state court,
but does not need to address all issues in that litigation. Thus, large portions if not the entire matter
would likely need to be retried in the state court. On the other hand, resolution of the state court
litigation will likely make a final determination of the nature of the relationship between Vernon and
McBurney as well as any rights and liabilities between the parties. Those determinations will likely have
preclusive effect in this court and will streamline the litigation in this court. Second, McBurney’s proof
of claim and his non-dischargeability action against Vernon all involve the same facts and circumstances
as the state court litigation. Thus, a final resolution of that litigation by the state court will substantially
reduce the litigation needed in this court. Finally, the adversary proceeding regarding the debtor’s
employment as a first mate in Florida ties in with the objection to confirmation, and can be stayed until
the state court litigation is resolved and then a determination can be made as to what, if any action will
need to be taken with respect to that litigation.

B. Legal Authority.

The decision whether to abstain in a certain matter is in the sound discretion of the bankruptcy
judge and can be raised by the court on its own motion. In re Costa, 172 B.R. 954, 962-63 (Bankr. E.D.
Cal. 1994).

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“[BJankruptcy court rulings should impinge on state domestic relations issues ‘in the most
limited manner possible.’” In re Siragusa, 27 F.3d 406, 408 (9th Cir. 1994) (quoting In re Harrell, 754
F.2d 902, 907 (11th Cir. 1985)).

Where a threshold question of state law is required to be determined before consideration of
exclusively bankruptcy questions and there is pending state court litigation on that question, it is

appropriate for the bankruptcy court to abstain. In re Owen-Johnson, 115 B.R. 254, 257-58 (Bankr. S.D.

Cal. 1990) (where the bankruptcy court abstained from determining a motion to reject an executory
contract when the threshold question of the existence of the contract was the subject of a pre-petition
state court complaint).

The court may exercise its discretion to abstain from hearing a proceeding where
“judicial economy and the interest of this court in timely and economical adjudication
dictate that the cause of action only be heard once”. In re World Financial Services
Center, Inc., 81 B.R. 33, 39 (Bankr. S.D. Cal. 1987). Other factors to be considered in
the decision to abstain are whether the resolution of the case involves interpretation of
state law, and whether interests of justice and comity prevail. Id. at 39.

Owen-Johnson, 115 B.R. at 257.

V. OPPORTUNITY FOR COMMENT FROM THE PARTIES

The court will hold a hearing on this tentative memorandum decision and the proposed order
embodying the court’s proposal on March 30, 2006 at 11:00 a.m. The proposed order is attached to this
tentative memorandum as Exhibit A. Any party may file papers regarding that party’s position with
respect to the court’s proposal on or before March 24, 2006.

Any proceedings currently scheduled for hearing before this court between now and March 30,
including the hearings scheduled on March 15, March 22, and March 29, 2006, are stayed and will not

be heard on the scheduled dates.

DATED: 24 yo. O ROX

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JAMES R.GRUBE

vA UNITED STATES BANKRUPTCY JUDGE
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EXHIBIT A

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA

In re Case No. 04-57874 JIRG
MARY SARAH VERNON Chapter 13
Debtor(s).
/
[PROPOSED]

ORDER PROVIDING FOR ABSTENTION OF CERTAIN
NON-BANKRUPTCY ISSUES; MODIFYING THE AUTOMATIC
STAY TO PERMIT RESOLUTION IN STATE COURT; AND
STAYING CERTAIN PROCEEDINGS IN THE BANKRUPTCY COURT

For the reasons stated in the Memorandum Decision Regarding Resolution of Disputed Issues
filed concurrently herewith, IT IS HEREBY ORDERED:

1. The bankruptcy court abstains in favor of the state court resolving:

(a) Santa Cruz County Superior Court Case Number CV 149889;

(b) Santa Cruz County Superior Court Case Number FL 019889, including the appeal and any
issues involving the temporary restraining order, if any remain; and

(c) any other issues that need to be determined to resolve the relationship between Mary Sarah
Vernon and James McBurney, and any liability either party has to the other.

2. The automatic stay of 11U.S.C. § 362(a) is modified to permit the state court to resolve

the matters listed in paragraph 1 above. However, should McBurney obtain any relief against Vernon,

ORDER PROVIDING FOR ABSTENTION ETC. 1

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the automatic stay shall continue in effect and McBurney shall not be permitted to enforce such relief
without further order from the bankruptcy court.

3. The following proceedings pending in the bankruptcy court are hereby stayed until further
order of the court:

(a) McBurney’s objection the confirmation of Vernon’s Chapter 13 Plan;
(b) McBumey’s Proof of Claim;

(c) Adversary Proceeding No. 05—-05025;

(d) Adversary Proceeding No. 05-05554; and

(e) Adversary Proceeding No. 05-05585.

4. Vernon shall, and McBurney may at his own option, serve on the Chapter 13 trustee a
brief quarterly update of the status of the pending state court litigation. The quarterly report shall be
served on or before March 31, June 30, September 30 and December 31 until the litigation is finally
determined. The first update is due on June 30, 2006.

5. After the state court proceedings listed in paragraph 1 above are finally determined,
Vernon shall file and serve on the Chapter 13 trustee a notice of completion of state court litigation and

Vernon and the Chapter 13 trustee shall restore this proceeding to the court’s calendar.

DATED:

JAMES R. GRUBE
UNITED STATES BANKRUPTCY JUDGE

ORDER PROVIDING FOR ABSTENTION ETC. 2

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Case No. 04-57874 JRG

UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
CERTIFICATE OF MAILING

I, the undersigned, a regularly appointed and qualified Judicial Assistant in the office of the
Bankruptcy Judges of the United States Bankruptcy Court for the Northern District of California, San
Jose, California hereby certify:

That I, in the performance of my duties as such Judicial Assistant, served a copy of the Court's
TENTATIVE MEMORANDUM DECISION REGARDING RESOLUTION OF DISPUTED
ISSUES, and EXHIBIT A, ORDER PROVIDING FOR ABSTENTION, ETC. by depositing it in
the United States Mail, First Class, postage prepaid, at San Jose, California on the date shown below.
in a sealed envelope addressed as listed below.

I declare under penalty of perjury under the laws of the United States of America that the
foregoing is true and correct.

Executed on _WAp * » eG, at San Jose, California.

Aor Sh

LISA OLSEN

Office of the U.S. Trustee
U.S. Courthouse/Federal Bldg.
280 S. First St., Rm. 268 Mary Sarah Vernon
San Jose, CA 95113 421 36" Avenue

Santa Cruz, CA 95062

San Jose, CA 95113

Devin Derham-Burk, Esq.

Chapter 13 Trustee James McBurney

P.O. Box 50013 890 South Wolf Road
San Jose, CA 95150-0013 Sunnyvale, CA 94086

Brian M. Kandel, Esq. Andrew Gromeeko

LAW OFFICES OF BOOK & BOOK World Wide Professional Yacht Services
1414 Soquel Avenue, Suite 203 421 36" Avenue

Santa Cruz, CA 95062 Santa Cruz, CA 95062

James A. Whitten, Esq.
Office of The District Counsel

INTERNAL REVENUE SERVICE
55 South Market Street, Suite 505

CERTIFICATE OF SERVICE

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