Chugach Forest Products, Inc., In re

• Decision Date: 28 April 1994
• Docket Number: No. 92-36976,92-36976
• Citation: 23 F.3d 241
• Parties: , Bankr. L. Rep. P 75,865 In re CHUGACH FOREST PRODUCTS, INC.; Chugach Timber Corporation, Debtors. CHUGACH TIMBER CORPORATION; Chugach Forest Products, Inc., Appellants, v. NORTHERN STEVEDORING & HANDLING CORPORATION, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 241

23 F.3d 241

62 USLW 2754, Bankr. L. Rep. P 75,865

In re CHUGACH FOREST PRODUCTS, INC.; Chugach Timber

Corporation, Debtors.

CHUGACH TIMBER CORPORATION; Chugach Forest Products, Inc., Appellants, v. NORTHERN STEVEDORING & HANDLING CORPORATION, Appellee.

No. 92-36976.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 10, 1994.

Decided April 28, 1994.

Peter W. Giannini, Law Offices of Giannini & Associates, Anchorage, AK, for appellants.

James B. Nebel, Flynn, Delich & Wise, San Francisco, CA, for appellee.

Appeal from the United States District Court for the District of Alaska, James K. Singleton, District Judge, Presiding.

Before: HUG, HALL, and THOMPSON, Circuit Judges.

Opinion by Judge Hall.

CYNTHIA HOLCOMB HALL, Circuit Judge:

Chapter 11 debtors Chugach Timber Corporation and Chugach Forest Products, Inc. appeal a district court order affirming the bankruptcy court's determination that Northern Stevedoring & Handling Corporation did not violate the Bankruptcy Code's automatic stay by foreclosing a maritime lien on a vessel containing property of the debtors. We affirm.

I.

In February 1991, Chugach Timber Corporation hired Northern Stevedoring & Handling Corporation to load logs and lumber onto the M/V Hermes Island, a vessel under charter to Alaska Pacific Trading Company ("Alpac"). Upon completion of the job, Northern Stevedoring billed Chugach $101,488.94 and, pursuant to the Maritime Lien Act, acquired a lien on the Hermes Island for that amount. See 46 U.S.C. Sec. 31342. In March 1991, before paying the bill, Chugach and its parent entities (Chugach Alaska Corporation and Chugach Forest Products, Inc.) filed petitions under chapter 11 of the Bankruptcy Code.

Shortly thereafter, Chugach procured a bankruptcy court order allowing it to sell to Alpac a shipment of logs and lumber free and clear of liens. See 11 U.S.C. Sec. 363(f). Chugach again hired Northern Stevedoring to load the shipment onto the Hermes Island, which was due to return to port in mid-April 1991. On April 10, after receiving a $70,000 advance for this second job, Northern Stevedoring foreclosed the $101,488.94 lien by filing in district court an in rem complaint to arrest the Hermes Island. See Fed.R.Civ.P. Supp. C. A magistrate judge issued an arrest warrant after ex parte review of the complaint, which named only the vessel and made no mention of the Chugach bankruptcy proceedings.

The Hermes Island arrived in port on April 14 and, the following morning, Northern Stevedoring began to load Chugach's logs and lumber onto the vessel. At noon, when approximately fifty percent of the lumber and ten percent of the logs were on board, a federal marshal arrived and served the arrest warrant, halting all loading operations. Upon learning of the arrest, Chugach informed Northern Stevedoring that the logs and lumber on the Hermes Island were property of the bankruptcy estate, ¹ warned that the arrest violated the automatic stay, and demanded release of the cargo. Northern Stevedoring refused to do so and Chugach sought sanctions for a willful violation of the stay. ² The bankruptcy court denied Chugach's request and the district court affirmed with a one-paragraph order. Chugach filed a timely appeal.

II.

Section 362(a) of the Bankruptcy Code embodies the "automatic stay," one of the most important protections of bankruptcy law:

When a debtor files a bankruptcy petition, an automatic stay immediately arises. The scope of the stay is quite broad. It is designed to effect an immediate freeze of the status quo by precluding and nullifying post-petition actions, judicial or nonjudicial, in nonbankruptcy fora against the debtor or affecting the property of the estate. The automatic stay plays a vital and fundamental role in bankruptcy. The stay ensures that all claims against the debtor will be brought in a single forum, the bankruptcy court. The stay protects the debtor by allowing it breathing space and also protects creditors as a class from the possibility that one creditor will obtain payment on its claims to the detriment of all others.

Hillis Motors, Inc. v. Hawaii Auto. Dealers' Ass'n, 997 F.2d 581, 585 (9th Cir.1993) (citations omitted). See H.R.Rep. No. 595, 95th Cong., 1st Sess. 340 (1977) ["House Report"], reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6296-97. Of specific relevance to the present appeal, Sec. 362(a)(3) provides that a bankruptcy petition "operates as a stay, applicable to all entities, of ... any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." 11 U.S.C. Sec. 362(a)(3) (emphasis added).

Chugach argues that the bankruptcy court erred by concluding that Northern Stevedoring did not violate the stay. Specifically, Chugach asserts that Northern Stevedoring exercised control over property of the estate (the logs and lumber on board the Hermes Island at the time of the arrest) by foreclosing its lien on the vessel, that Northern Stevedoring's subsequent refusal to release the property independently violated the stay, and that, in any event, "unusual circumstances" enlarge the stay to encompass Alpac and the Hermes Island. Chugach therefore contends that Northern Stevedoring willfully violated the stay ³ and requests that we remand in order for the bankruptcy court to exercise its discretion to award damages. ⁴

We conduct de novo review, see Hillis Motors, 997 F.2d at 585, and conclude Northern Stevedoring did not violate the stay.

A.

The bankruptcy court was troubled by the events of this case. Because Northern Stevedoring was a member of Chugach's creditors' committee and should have known that property of the estate might be on the Hermes Island at the time of the arrest, the court believed "that there was something that was less than fair, maybe not in the legally wrong sense but sort of in the moral sense," about the stevedore's conduct. Nevertheless, the court concluded that, because Northern Stevedoring filed the foreclosure action only against the Hermes Island and not against Chugach or its property, the stay did not apply:

[T]he intent was always to try to effect a right against the vessel. And although I know some of the circumstances are suspicious, I think that the intent in arresting the vessel was really to get to the vessel and effect a right against that.... The fact that the debtor's cargo was in the vessel, I guess, is almost a fortuitous circumstance, depending on when the Marshal got down there [to the dock]....

[W]hatever problem there is with [the foreclosure], or if there's any rights that the debtor has because of that, are not because of a violation of the automatic stay. [There was] a possible breach of a covenant of good faith and fair dealing to be dealing on the stevedoring contract on one hand while knowing you're going to take the vessel and hold it up on the other. But unfortunately for the debtor, I think that's not enough, in the Ninth Circuit, to create a violation of the automatic stay.

We agree.

On its face, Sec. 362(a)(3) appears broad enough to encompass Northern Stevedoring's conduct. In a sense, the stevedore exercised control over Chugach's property by loading logs and lumber onto the Hermes Island with knowledge that an arrest, which it had arranged, was imminent. Closer scrutiny reveals, however, that the statute does not apply to such an indirect exercise of control.

Northern Stevedoring automatically acquired its maritime lien by supplying stevedoring services to the Hermes Island. See 46 U.S.C. Sec. 31342; Farwest Steel Corp. v Barge Sea-Span 241, 769 F.2d 620, 623 (9th Cir.1985). The stevedore therefore had the right to proceed in rem directly against the vessel. See All Pacific Trading, Inc. v. Vessel M/V Hanjin Yosu, 7 F.3d 1427, 1431 (9th Cir.1993) ("Generally, a vessel is viewed as a juristic person, responsible in rem for the acts and omissions of her personnel, separate and distinct from her owner.... [In an in rem action,] [t]he owner of a vessel is an interested party, but not a necessary one."), cert. denied, --- U.S. ----, 114 S.Ct. 1301, 127 L.Ed.2d 653 (1994); Alyeska Pipeline Serv. Corp. v. Vessel Bay Ridge, 703 F.2d 381, 384 (9th Cir.1983) ("In an in rem admiralty action brought to enforce a maritime lien pursuant to Rule C, a vessel or other property against which the lien is asserted becomes the res or subject matter of the action."), cert. dismissed, 467 U.S. 1247, 104 S.Ct. 3526, 82 L.Ed.2d 852 (1984). Thus, absent the presence of Chugach's logs and lumber, Northern Stevedoring's action against the Hermes Island was proper.

The automatic stay arising from Chugach's bankruptcy case does not change that result. Congress intended Sec. 362(a)(3) "to prevent dismemberment of the estate" and to enable an "orderly" distribution of the debtor's assets. House Report, supra page 243, at 341. See Hillis Motors, 997 F.2d at 586 ("A principal purpose of [Sec. 362(a)(3) ] is to preserve property for use in the reorganization of the debtor and to prevent the dismemberment of the estate."). Northern Stevedoring's arrest of the Hermes Island, a vessel that was not Chugach's property, did not threaten to dismember the bankruptcy estate or impede the reorganization proceedings. Because the magistrate eventually released the vessel, the foreclosure merely delayed Chugach's expected receipt of cash from the sale of its logs and lumber. Such incidental effect is insufficient to trigger the stay:

Although ... the scope of subsection 362(a)(3) is [not] precisely limited to instances where a creditor is taking direct action against a res in the hands of the debtor, there is no reason to adopt a strained interpretation which ignores legislative purpose.... Thus, while seemingly broad in scope, the automatic stay provisions should be construed no more expansively than is necessary to effectuate legislative purpose.

Continental Air Lines, Inc....