In re Myers

• Citation: 491 F.3d 120
• Decision Date: 21 June 2007
• Docket Number: No. 05-4882.,05-4882.
• Parties: In re Margaret J. MYERS, Debtor. Margaret J. Myers, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

491 F.3d 120

In re Margaret J. MYERS, Debtor.

Margaret J. Myers, Appellant.

No. 05-4882.

United States Court of Appeals, Third Circuit.

Submitted Pursuant to Third Circuit L.A.R. 34.1(a) June 4, 2007.

Filed: June 21, 2007.

David A. Scholl, Newtown Square, PA, for Appellant.

Francis J. Sullivan, Hill Wallack, Langhorne, PA, for Appellee.

Before: SMITH, COWEN, and SILER, Circuit Judges.^*

OPINION OF THE COURT

SMITH, Circuit Judge.

Every now and then, we encounter an appeal where just about everyone appears to have behaved badly. Unfortunately, this is such a case.

In June 1999, Appellee-creditor Southern Medical Supply Co. ("SMS") obtained a $739,044.32 judgment in Georgia state court against Margaret Myers and her husband, Paul Myers, and two corporations owned by him, Alpha Technology and Micro Design. SMS then transferred the Georgia judgment to Bucks County, Pennsylvania, where Mr. and Mrs. Myers reside.

SMS also filed a lawsuit in the Bucks County Court of Common Pleas ("the CP Court") against Mr. Myers, Mrs. Myers, and Alpha Watch, Inc. ("AWI"), a corporation of which Mrs. Myers was the president and sole shareholder. All corporations owned by Mr. and Mrs. Myers sold "wander-control" patient-monitoring systems to nursing homes. The couple was involved in the operations of AWI and earned income from it. The CP Court suit alleged that the Myerses had fraudulently conveyed the assets of Mr. Myers's corporations, Alpha Technology and Micro Design, to AWI. On January 15, 2003, Mr. Myers filed a voluntary Chapter 7 bankruptcy petition and received a bankruptcy discharge.

On August 9, 2004, a bench trial began in the CP Court suit to decide SMS's fraudulent conveyance claim. Mrs. Myers and AWI were the only remaining defendants. On Wednesday, August 11, 2004, the trial judge in the CP Court suit stated that he would issue his judgment in open court on Friday, August 13. Mrs. Myers was not present in court for this announcement. However, the Bankruptcy Court concluded that Mr. Myers and his attorney, who were both present, believed that the CP Court intended to enter judgments against both AWI and Mrs. Myers and advised Mrs. Myers to therefore file for bankruptcy.

On Thursday, August 12, 2004, the day before the state court was to render its judgment, Mrs. Myers filed a bankruptcy petition under Chapter 13. Her counsel immediately informed SMS and the CP Court of the bankruptcy filing. Earlier that week, SMS had commenced an additional lawsuit in the CP Court against the Myerses and Stroll Control, Inc. ("SCI"), another corporation formed and owned by Mr. Myers. SMS sought to enjoin defendants from transferring any assets from AWI to SCI. A preliminary injunction hearing before the same state court was scheduled for August 13, 2004.

On Friday, August 13, 2004, the CP Court issued rulings in both suits against the Myerses and SCI. The Myerses did not attend the August 13 hearing, but their attorney was present and asserted that Mrs. Myers's bankruptcy filing the day before and Mr. Myers's prior bankruptcy filing prevented any judgment in the two lawsuits. The state court stated that it was aware of Mrs. Myers's bankruptcy filing, but that the bankruptcy stay only applied to matters against her in her individual capacity, not in her capacity as president of AWI. The CP Court ruled that Mr. and Mrs. Myers had transferred all of the assets of Alpha Technology and Micro Design to AWI with the intent to defraud SMS. Furthermore, the CP Court found that because AWI operated from the same location as the other two corporations, in the same business, with the same telephone numbers, and involving the same customers, it was appropriate to pierce the corporate veil of AWI and hold Mrs. Myers personally liable for the fraudulent conveyance. The CP Court entered judgments against AWI and Mrs. Myers in the amount of the original Georgia state court judgment, plus interest, totaling $1,198,778.19. The CP Court decreed that judgment was entered against Mrs. Myers "in her corporate capacity, and will be [entered against her] in her individual capacity when the stay is lifted, in the similar amounts."

The CP Court also froze all of the assets of AWI and announced its intention to appoint a receiver for the corporation. The CP Court sanctioned the Myerses by awarding attorney's fees to SMS and referring the case for possible criminal sanctions. The CP Court entered nine orders. It (1) entered judgment against Mrs. Myers and AWI in the amount of $1,198,778.19; (2) placed Mrs. Myers's stock in AWI in a constructive trust in favor of SMS with the stock to be held by the state court; (3) froze the assets of AWI and enjoined defendants from transferring, selling or otherwise disposing of AWI's assets; (4) appointed a receiver for AWI; (5) assessed sanctions against defendants in the amount of $55,284.37; (6) directed Appellant-debtor to appear for a contempt hearing on August 16 due to her failure to appear in court on August 13; (7) enjoined SCI, as well as Mr. and Mrs. Myers, from transferring any assets already delivered from AWI to SCI; (8) appointed a receiver for SCI; and (9) enjoined Mr. and Mrs. Myers from owning, operating, investing in, or working for any entity involved in the business of patient monitoring.

Mr. and Mrs. Myers were not present in court to witness these events. The Bankruptcy Court concluded that their attorney probably informed them of the state court's rulings, because on Saturday, August 14, 2004, Mr. Myers withdrew $6,000 from AWI's bank account and $1,184.10 (the entire balance) from SCI's account, in violation of the CP Court's orders. The Bankruptcy Court found that Mrs. Myers knew of these actions. The Bankruptcy Court also found that she appointed her husband vice-president of AWI, and that together they approved corporate bankruptcy filings of AWI and SCI. Mr and Mrs. Myers used the $6,000 withdrawn from the AWI account to pay state court counsel for AWI and Mrs. Myers, bankruptcy counsel for Mrs. Myers, and bankruptcy counsel for AWI and SCI.

SMS filed a motion to dismiss Mrs. Myers's bankruptcy case as filed in bad faith. Mrs. Myers sought to void the CP Court orders against her as violations of the automatic bankruptcy stay. Mrs. Myers also requested a temporary restraining order ("TRO") and preliminary injunction ("PI") enjoining SMS from enforcing the orders. The Bankruptcy Court issued a TRO preventing SMS from enforcing certain provisions of the CP Court's orders. SMS moved for relief from the automatic stay. The Bankruptcy Court consolidated SMS's motions to dismiss and for relief from the stay with Mrs Myers's motion for a PI.

Mrs. Myers duly filed her bankruptcy schedules and proposed Chapter 13 plan. She identified SMS as an unsecured creditor holding a contingent, unliquidated, and disputed claim for $740,000. She stated that she and her husband had no income and proposed payments to the Chapter 13 trustee of $10 per month for three months. Mrs. Myers was current on all of her debts other than her obligations to SMS.

The CP Court scheduled a hearing to hold Mrs. Myers and her husband in civil contempt for violating its orders. Mrs. Myers filed a second motion for a TRO, asking the Bankruptcy Court to enjoin the CP Court contempt hearing as a violation of the automatic stay. Mrs. Myers and her husband were incarcerated for civil contempt by the CP Court until they could each pay $5,196 to counsel, at which point Mrs. Myers filed an addendum asking the Bankruptcy Court to order her release from custody.

The Bankruptcy Court did not address this motion or SMS's motion for relief from the automatic stay directly. On September 21, 2004, the Bankruptcy Court dismissed Mrs. Myers's case under 11 U.S.C. § 1307(c) as having been filed in bad faith. This dismissal effectively granted SMS relief from the automatic stay. Mrs. Myers filed a motion for reconsideration and to convert her case to Chapter 7, which the Bankruptcy Court denied.

Mrs. Myers timely appealed to the United States District Court for the Eastern District of Pennsylvania. The District Court affirmed both the dismissal of Mrs. Myers's bankruptcy case and the Bankruptcy Court's refusal to convert the case to Chapter 7. The District Court, unlike the Bankruptcy Court, noted that the CP Court had violated the automatic stay by entering orders against Mrs. Myers, holding her in contempt, and incarcerating her. However, the District Court also held that these violations had been retroactively ratified by the annulment of the automatic stay. This appeal followed.

We have jurisdiction over this matter pursuant to 18 U.S.C. § 158(d) and 28 U.S.C. § 1291. "Because the district court acted as an appellate court in reviewing the final order of the bankruptcy court, our review of its determination is plenary. In reviewing the decision of the bankruptcy court, we exercise the same standard of review as the district court. Legal determinations are reviewed de novo. Factual determinations are reviewed under the clearly erroneous standard." Sovereign Bank v. Schwab, 414 F.3d 450, 452 n. 3 (3d Cir.2005) (citations omitted).

In support of reversing the Bankruptcy and District Courts, Mrs. Myers contends: (1) that the Bankruptcy Court abused its discretion by dismissing Mrs. Myers's bankruptcy case and refusing to convert it from Chapter 13 to Chapter 7; (2) that actions taken in violation of the automatic stay are void ab initio and must be set aside; and (3) that the Bankruptcy Court abused its discretion by retroactively annulling the automatic stay. We conclude that these arguments are without merit and will affirm the District Court.

(1) The Bankruptcy Court did not abuse its discretion by dismissing Mrs. Myers's bankruptcy case and refusing to convert it from Chapter 13 to Chapter 7

We review the Bankruptcy Court's decision to dismiss the bankruptcy case as a bad faith filing for abuse of discretion. See In re SGL...