954 F.2d 569 (9th Cir. 1992), 90-35830, In re Schwartz

Docket Nº:90-35830.
Citation:954 F.2d 569
Party Name:26 Collier Bankr.Cas.2d In re: Russell SCHWARTZ; Linda Schwartz, Debtors. Russell SCHWARTZ; Linda Schwartz, Appellants, v. UNITED STATES of America, Appellee.
Case Date:January 22, 1992
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit
 
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Page 569

954 F.2d 569 (9th Cir. 1992)

26 Collier Bankr.Cas.2d

In re: Russell SCHWARTZ; Linda Schwartz, Debtors.

Russell SCHWARTZ; Linda Schwartz, Appellants,

v.

UNITED STATES of America, Appellee.

No. 90-35830.

United States Court of Appeals, Ninth Circuit

January 22, 1992

Argued and Submitted July 31, 1991.

Page 570

Joseph L. Koplin, Moschetto and Koplin, Bellevue, Wash., for debtors-appellants.

Gary R. Allen, Tax Div., U.S. Dept. of Justice, Washington, D.C., for appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel.

Before WRIGHT, BEEZER and WIGGINS, Circuit Judges.

WIGGINS, Circuit Judge:

Debtors Russell and Linda Schwartz appeal from a Bankruptcy Appellate Panel (BAP) decision that an IRS tax penalty assessed in violation of the Bankruptcy Code's automatic stay provision is voidable but not void. We reverse the judgment of the BAP.

BACKGROUND

The essential facts of this case are not in dispute. On February 25, 1983, the Schwartzes and their corporation, R.H. Schwartz Construction Specialties, Inc., filed a Chapter 11 bankruptcy petition. On October 8, 1984, the IRS, apparently unaware of the bankruptcy filing, assessed a 100% tax penalty, totaling $65,819.25, against Russell Schwartz pursuant to 26 U.S.C. § 6672 (1988). The Schwartzes did not challenge the tax assessment within the Chapter 11 bankruptcy and stipulated to their dismissal from the Chapter 11 bankruptcy on March 27, 1985.

In August 1987, the IRS filed a Federal Tax Lien with the King County Auditor pursuant to the penalty assessment. The IRS claimed that the penalty had increased to $86,296.60. On October 8, 1987, the Schwartzes filed a Chapter 13 bankruptcy petition. The IRS filed a Proof of Claim in the Chapter 13 bankruptcy on February 19, 1988, alleging that the Schwartzes owed the IRS $90,787.67 for the 1984 tax assessment.

The Schwartzes objected to the IRS claim. They argued that the tax assessment, which originally occurred during their prior Chapter 11 bankruptcy, violated the automatic stay provision of the Bankruptcy Code and was therefore void. The bankruptcy court agreed and ruled that the IRS tax assessment was void and without effect. The government appealed to the BAP, which rejected the Schwartzes' argument and reversed the judgment of the bankruptcy court. In re Schwartz, 119 B.R. 207 (1990). The BAP held that acts in violation of the automatic stay are voidable, not void. Because the tax assessment was not affirmatively challenged by the Schwartzes in the original Chapter 11 bankruptcy, the BAP held that the assessment was valid and enforceable in the subsequent Chapter 13 bankruptcy. This appeal followed.

DISCUSSION

The sole issue before us is whether creditor violations of the Bankruptcy

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Code's automatic stay provision are void or simply voidable. If violations of the automatic stay are void, the IRS tax assessment made against the Schwartzes in the Chapter 11 bankruptcy is without effect. If, however, such violations are merely voidable, the assessment is valid because the Schwartzes made no attempt to have the assessment voided in the Chapter 11 bankruptcy. The issue in this appeal is one of law; we review the BAP's conclusions of law de novo. In re Taylor, 884 F.2d 478, 480 (9th Cir.1989); In re 268 Ltd., 877 F.2d 804, 805 (9th Cir.1989).

It is undisputed that the IRS tax assessment violated the Bankruptcy Code's automatic stay provision. 11 U.S.C. § 362(a)(4)-(6) (1988). 1 The Ninth Circuit has stated generally that violations of the automatic stay are "void". See, e.g., In re Shamblin, 890 F.2d 123, 125 (9th Cir.1989) ("Judicial proceedings in violation of [the] automatic stay are void."); In re Stringer, 847 F.2d 549, 551 (9th Cir.1988) ("Any proceedings in violation of the automatic stay in bankruptcy are void."). Although Shamblin and Stringer suggest that violations of the automatic stay are void and not merely voidable, the void/voidable distinction was not dispositive in those cases, and the Ninth Circuit has not directly addressed the precise issue presented in this appeal. See Shamblin, 890 F.2d at 124-26 (debtor affirmatively challenged and litigated potential automatic stay violation); Stringer, 847 F.2d at 550 (same).

Our decision today clarifies this area of the law by making clear that violations of the automatic stay are void, not voidable. See In re Williams, 124 B.R. 311, 316-18 (Bankr.C.D.Cal.1991) (recognizing that the Ninth Circuit adheres to the rule that violations of the automatic stay are void and criticizing the BAP decision in this case).

Before addressing the interplay between various Code sections, we must emphasize that the automatic stay plays a vital role in bankruptcy. It is designed to protect debtors from all collection efforts while they attempt to regain their financial footing. As Congress stated:

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his [or her] creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.

H.R.Rep. No. 595, 95th Cong., 1st Sess. 340 (1978), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5963, 6296-97 (emphasis added).

In light of the automatic stay's purpose, the issue before us requires some analysis of the relevant policy considerations. Either the debtor must affirmatively challenge creditor violations of the stay, or the violations are void without the need for direct challenge. If violations of the stay are merely voidable, debtors must spend a considerable amount of time and money policing and litigating creditor actions. If violations are void, however, debtors are afforded better protection and can focus their attention on reorganization.

Given the important and fundamental purpose of the automatic stay and the broad debtor protections of the Bankruptcy Code, we find that Congress intended violations of the automatic stay to be void rather than voidable. Nothing in the Code or the legislative history suggests that Congress intended to burden a bankruptcy debtor with an obligation to fight off unlawful

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claims. The position championed by the IRS in this case would impose severe hardships on debtors trying to regain their financial footing.

The district court in In re Garcia, 109 B.R. 335 (N.D.Ill.1989), explained that if violations of the automatic stay were merely voidable, creditors would be encouraged to violate the stay:

[T]he fundamental importance of the automatic stay to the purposes sought to be accomplished by the Bankruptcy Code requires that acts in violation of the automatic stay be void, rather than voidable. Concluding that acts in violation of the automatic stay were merely voidable would have the effect of encouraging disrespect for the stay by increasing the possibility that violators of the automatic stay may profit from their disregard for the law, provided it goes undiscovered for a sufficient period of time. This may be an acceptable risk to some creditors when measured against a delayed prorata distribution.

Id. at 340 (footnote omitted). Like the court in Garcia, we will not reward those who violate the automatic stay. The Bankruptcy Code does not burden the debtor with a duty to take additional steps to secure the benefit of the automatic stay. Those taking post-petition collection actions have the burden of obtaining relief from the automatic stay. See In re Williams, 124 B.R. at 317-18.

Our conclusion is supported by the great weight of authority. The majority of courts have long stated that violations of the automatic stay are void and of no effect. See, e.g., Kalb v. Feuerstein, 308 U.S. 433, 438, 60 S.Ct. 343, 345-46, 84 L.Ed. 370 (1940); Ellis v. Consolidated Diesel Elec. Corp., 894 F.2d 371, 372-73 (10th Cir.1990); In re 48th St. Steakhouse, 835 F.2d 427, 431 (2d Cir.1987), cert. denied, 485 U.S. 1035, 108 S.Ct. 1596, 99 L.Ed.2d 910 (1988); Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306, 1308 (11th Cir.1982). Indeed, many courts have specifically held that violations of the automatic stay are void and not merely voidable. In re Advent Corp., 24 B.R. 612, 614 (Bankr. 1st Cir.1982); Richard v. Chicago, 80 B.R. 451, 453 (N.D.Ill.1987); In re Coleman Am. Cos., 26 B.R. 825, 831 (D.Kan.1983); In re Pettibone Corp., 110 B.R. 848, 853 (Bankr.N.D.Ill.1990), aff'd sub nom. Pettibone Corp. v. Baker, 119 B.R. 603 (N.D.Ill.), vacated on other grounds sub nom. Pettibone Corp. v. Easley, 935 F.2d 120 (7th Cir.1991); In re Miller, 10 B.R. 778, 780 (Bankr.D.Md.1981), aff'd, 22 B.R. 479 (D.Md.1982).

The courts which have found the automatic stay voidable rather than void...

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