M. Frenville Co., Inc., Matter of

Decision Date04 January 1985
Docket NumberNo. 83-5789,83-5789
Parties11 Collier Bankr.Cas.2d 491, 12 Bankr.Ct.Dec. 396, Bankr. L. Rep. P 70,024 In the Matter of M. FRENVILLE CO., INC., Rudolph F. Frenville, Jr. and Rudolph F. Frenville, Sr. AVELLINO & BIENES, A Partnership, Appellant, v. M. FRENVILLE CO., INC. and Rudolph F. Frenville, Sr., and Charles Stanziale, Esq., Interim Trustee.
CourtU.S. Court of Appeals — Third Circuit

McDonough, Murray & Korn, Westfield, N.J., for appellant; Jay Scott MacNeill (argued), Westfield, N.J., on the brief.

Steven Z. Jurista (argued), Lehman & Wasserman, Millburn, N.J., for M. Frenville Co., Inc. and Rudolph F. Frenville, Sr.

Ben H. Becker, Schwartz, Steinberg & Stanziale, East Orange, N.J., for interim trustee.

Before SEITZ, Chief Judge, STEWART, Associate Justice (Retired) *, and ADAMS, Circuit Judge.

OPINION OF THE COURT

ADAMS, Circuit Judge.

This is an appeal by Avellino & Bienes (A & B) from a ruling by the district court, affirming the judgment of the bankruptcy court, that A & B's action against M. Frenville Co., Inc. and Rudolf Frenville, Sr. was barred by the automatic stay provision of the Bankruptcy Reform Act of 1978 (the Code), 11 U.S.C. Sec. 362(a)(1) (1982). The critical issue is whether the automatic stay provision applies to situations in which the acts of the debtor occurred before the filing of the bankruptcy petition yet the cause of action stemming from those acts arose post-petition. For the reasons set forth, we reverse the district court's judgment.

I.

The facts of this case are undisputed. A & B is a certified public accounting firm located in New York City. From 1977 to 1979 A & B was engaged by M. Frenville Co., Inc. as an independent auditor and accountant. As part of its duties, A & B prepared certified financial statements of the company for fiscal years 1978 and 1979.

In July 1980, creditors of Frenville filed an involuntary petition for bankruptcy against the company under chapter 7 of the Bankruptcy Reform Act of 1978, 11 U.S.C. Secs. 701 et seq. (1982). In January 1981, creditors also filed involuntary petitions under chapter 7 of the Code against two principals of the company: Rudolph Frenville, Sr. and Rudolph Frenville, Jr. 1

The Chase Manhattan Bank, N.A., the Fidelity Bank, Fidelity International Bank and Girard International Bank (the banks) filed suit in the Supreme Court of New York on November 16, 1981, against A & B. The complaint alleged that A & B negligently and recklessly prepared the Frenville financial statements, that the statements were false, and that because of their reliance on the statements, the banks had collectively suffered losses in excess of five million dollars.

As a result of the suit by the banks, A & B filed a complaint on January 10, 1983, in the Bankruptcy Court for the District of New Jersey, which was administering the Frenvilles' chapter 7 proceedings. In the bankruptcy court, A & B sought relief from the automatic stay provision of Sec. 362(a) in order to include the Frenvilles as third-party defendants in the New York state proceeding. The purpose of the third-party complaint was to obtain indemnification or contribution from the Frenvilles for any loss suffered by A & B as a result of the suit by the banks.

The bankruptcy judge held the automatic stay provision of Sec. 362(a) was applicable to A & B's suit because the Frenvilles' liability, if any, resulted from their pre-petition acts. Moreover, the bankruptcy judge refused to grant relief from the automatic stay as provided in Sec. 362(d) of the Code. 2 The district court affirmed the bankruptcy judge's order that the automatic stay barred A & B's action for indemnification or contribution.

II.

We must decide today whether the automatic stay of Sec. 362(a) of the Code is applicable when the debtor's acts which form the basis of a suit occurred pre-petition but the actual cause of action which is being instituted did not arise until after the filing of a bankruptcy petition. The automatic stay provision provides that

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title ... operates as a stay, applicable to all entities, of--

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

11 U.S.C. Sec. 362(a)(1) (emphasis added).

The automatic stay provision of Sec. 362(a) is one of the fundamental protections provided to a debtor by the Code. Congress' intent in enacting Sec. 362(a) is clear--it wanted to stop collection efforts for all antecedent debts. Congress intended that the debtor obtain a fresh start, free from the immediate financial pressures that caused the debtor to go into bankruptcy. See H.R.Rep. No. 595, 95th Cong., 1st Sess. 340-42 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 49-51 (1978), U.S.Code Cong. & Admin.News 1978, p. 5787; see also Turner Broadcasting System, Inc. v. Sanyo Electric Inc., 33 B.R. 996, 999-1000 (N.D.Ga.1983); 1 W. Norton, Jr., Norton Bankruptcy Law and Practice Sec. 20.04 (1981).

Yet despite the broad reach of the automatic stay, it is not all encompassing. Section 362(b), for example, provides exemptions from the automatic stay. 3 As a further restriction, the Code requires that the proceeding stayed "was or could have been commenced" before filing or that the proceeding was based on a claim that arose pre-petition. Sec. 362(a)(1); see In re York, 13 B.R. 757, 758 (Bankr.D.Me.1981). Proceedings or claims arising post-petition are not subject to the automatic stay. See, e.g., Turner Broadcasting System, Inc. v. Sanyo Electric, Inc., 33 B.R. 996, 999-1000 (N.D.Ga.1983); In re Powell, 27 B.R. 146, 147 (Bankr.W.D.Mo.1983); In re Anderson, 23 B.R. 174, 175 (Bankr.N.D.Ill.1982); In re York, 13 B.R. 757, 758-59 (Bankr.D.Me.1981). In Anderson, for example, the debtor signed a contract for shipping services with several shipping companies on August 1, 1981. On November 12, 1981, the debtor filed a petition for relief under chapter 13 of the Code. Three months after the petition was filed the shipping companies commenced suit, alleging that the debtor had submitted fraudulent shipping charges. The court held that the automatic stay did not apply. Although the parties had signed the contract pre-petition, the alleged fraud did not begin until December 24, 1981, a month after the petition was filed. Since the shipping companies' claim arose post-petition, the bankruptcy court declared that Sec. 362(a) was inapplicable.

Only proceedings that could have been commenced or claims that arose before the filing of the bankruptcy petitions are automatically stayed. It is undisputed that the Frenvilles' acts which ultimately led to A & B's suit for indemnification or contribution occurred in 1978 or 1979, well before the chapter 7 petitions were filed. Section 362(a)(1), however, refers to "proceedings" and "claims" against, not acts done by, the debtor. Pre-petition acts by a debtor, by themselves, are not sufficient to cause the automatic stay to apply. In most cases, the claim or cause of action will arise simultaneously with the underlying act. But to the extent that the harm is separated from the underlying conduct, at least for purposes of Sec. 362(a), Congress has focused on the harm, rather than the act. Cf. Anderson, 23 B.R. at 175 ("The fact that a contract was executed among the parties [pre-petition] is not sufficient basis to hold that the claim arose prior to filing."); In re THC Financial Corp., 686 F.2d 799, 804 (9th Cir.1982) (although express indemnity agreement arose pre-petition, the related unjust enrichment claim arose post-petition). Thus, unless A & B could have proceeded with its suit before the bankruptcy petitions were filed in July 1980, 4 or had a claim against the Frenvilles which arose before that date, the automatic stay is inapplicable.

The proceeding which A & B sought to institute was an action for indemnity or contribution in New York state court. According to New York law, a third-party complaint for contribution or indemnity may be commenced at the time the defendant (in the present case A & B) serves his answer in the suit brought by the plaintiff (here, the banks), but not before. N.Y.Civ.Prac.Law Sec. 1007 (McKinney 1976); 5 see also Blum v. Good Humor Corp., 57 A.D.2d 911, 394 N.Y.S.2d 894 (N.Y.App.Div.1977); Taca International Airlines, S.A. v. Rolls Royce of England, Ltd., 47 Misc.2d 771, 263 N.Y.S.2d 269, 272 (N.Y.Sup.Ct.1965) (indemnification suit "could not be commenced by defendants until after service of their answer"); Musco v. Conte, 22 A.D.2d 121, 254 N.Y.S.2d 589, 595 (N.Y.App.Div.1964). In the present situation, A & B could not bring a proceeding for indemnification or contribution until it filed its answer in the suit instituted by the banks on November 16, 1981, some fourteen months after the filing of the bankruptcy petitions. Consequently, A & B's suit cannot be stayed by the "proceeding" language of Sec. 362(a)(1).

The applicability of the automatic stay, therefore, depends on whether A & B's claim arose pre-petition. The Code defines a "claim" as a

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, dispute, undisputed, legal, equitable, secured, or unsecured; or

(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured;

11 U.S.C. Sec....

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