Farley v. Henson

• Decision Date: 06 August 1993
• Docket Number: Nos. 91-1620,91-1621,s. 91-1620
• Citation: 2 F.3d 273
• Parties: , 29 Collier Bankr.Cas.2d 702, 24 Bankr.Ct.Dec. 905, Bankr. L. Rep. P 75,389 Don FARLEY; Robert Mendenhall, Appellees, v. William R. HENSON, Jr.; Paul M. Henson; Bowes Lyon Resources Ltd.; National Transport Services, Inc., Defendants, Westark Specialties, Inc., Appellant. Don FARLEY; Robert Mendenhall, Appellees, v. William R. HENSON, Jr., Defendant, Paul M. HENSON, Appellant, Bowes Lyon Resources Ltd.; National Transport Services, Inc.; Westark Specialties, Inc., Defendants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 273

2 F.3d 273

62 USLW 2167, 29 Collier Bankr.Cas.2d 702,

24 Bankr.Ct.Dec. 905,

Bankr. L. Rep. P 75,389

Don FARLEY; Robert Mendenhall, Appellees, v. William R. HENSON, Jr.; Paul M. Henson; Bowes Lyon

Resources Ltd.; National Transport Services,

Inc., Defendants,

Westark Specialties, Inc., Appellant.

Don FARLEY; Robert Mendenhall, Appellees, v. William R. HENSON, Jr., Defendant, Paul M. HENSON, Appellant,

Bowes Lyon Resources Ltd.; National Transport Services,

Inc.; Westark Specialties, Inc., Defendants.

Nos. 91-1620, 91-1621.

United States Court of Appeals,

Eighth Circuit.

Submitted Nov. 15, 1991.

Decided Aug. 6, 1993.

W. Asa Hutchinson, Fort Smith, AR, argued (Gregory T. Karber and John D. Alford, on the brief), for Westark Specialties, Inc. in No. 91-1620.

Gary Alfred Love, Ozark, MO, argued (Gary A. Love, on the brief), for Paul Henson in No. 91-1620.

Laurence L. Pinkerton, Tulsa, OK, argued, for Don Farley and Robert Mendenhall.

Before BOWMAN, Circuit Judge, HENLEY, Senior Circuit Judge, and BEAM, Circuit Judge.

BOWMAN, Circuit Judge.

Westark Specialties, Inc., ("Westark") and Paul Henson appeal from a judgment entered in the District Court ¹ awarding Don Farley $3,246,000.00 and Robert Mendenhall $351,110.00 in damages on their common law fraud and federal securities law claims against Westark and Henson. During the pendency of these appeals, both Westark and Henson have filed bankruptcy petitions. ² Farley suggests that the appeals are stayed as a result of appellants' bankruptcy filings. Westark and Henson counter that, because they brought these appeals, the appeals are not proceedings against the debtor, and therefore are not subject to the automatic stay of 11 U.S.C. Sec. 362 (1988 & Supp. IV 1992). Although other courts have addressed the issue of whether an appeal brought by a debtor from a judgment obtained against it as a defendant is stayed by the debtor's bankruptcy, the issue is one of first impression for our Court. We conclude that such an appeal is stayed.

Section 362 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 action or 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). The purpose of the automatic stay is to give the debtor "a breathing spell from his creditors" in which he may "attempt a repayment or reorganization plan." H.R.Rep. No. 595, 95th Cong., 1st Sess. 340 (1977), reprinted in 1978 U.S.C.C.A.N. 5787, 5963, 6296-97. The automatic stay also protects creditors by averting a scramble for the debtor's assets and promoting instead "an orderly liquidation procedure under which all creditors are treated equally." Id. at 340, reprinted in 1978 U.S.C.C.A.N. at 6297.

Because the automatic stay applies to "the commencement or continuation ... of a judicial ... proceeding against the debtor," 11 U.S.C. Sec. 362(a)(1), it is well established that it does not apply to a proceeding brought by the debtor that inures to the benefit of the debtor's estate. Merchants & Farmers Bank of Dumas, Ark. v. Hill, 122 B.R. 539, 541 (E.D.Ark.1990), and cases cited therein. The question then arises whether an appeal brought by a debtor from a judgment obtained against it as a defendant is a "continuation" of a "proceeding against the debtor," and therefore subject to the automatic stay, or whether it may be viewed as an independent proceeding brought by the debtor. There is some state court authority for the proposition that such an appeal is not a proceeding against the debtor and therefore is not subject to the automatic stay. For example, in Southern Bank & Trust Co. v. Harley, 295 S.C. 423, 368 S.E.2d 908, 909 (1988), the South Carolina Supreme Court held that, since the debtors' appeals could not "result in a dimunition [sic] of the estates," the automatic stay did not apply.

At least six federal circuits, however, have held that an appeal by a debtor in a case in which the debtor originally was the defendant is a "continuation" of a "proceeding against the debtor" and thus is subject to the automatic stay. Ingersoll-Rand Fin. Corp. v. Miller Mining Co., 817 F.2d 1424, 1426 (9th Cir.1987); Teachers Ins. & Annuity Ass'n of Am. v. Butler, 803 F.2d 61, 65 (2d Cir.1986); Marcus, Stowell & Beye Gov't Sec., Inc. v. Jefferson Inv. Corp., 797 F.2d 227, 230 n. 4 (5th Cir.1986); Cathey v. Johns-Manville Sales Corp., 711 F.2d 60 (6th Cir.1983); Association of St. Croix Condominium Owners v. St. Croix Hotel Corp., 682 F.2d 446 (3d Cir.1982); Sheldon v. Munford, Inc., 902 F.2d 7 (7th Cir.1990) (holding that, even though the bankrupt has filed a supersedeas bond, his creditors have a stake in the outcome of the appeal and the appeal therefore is stayed). Under these decisions, whether a case is subject to the automatic stay is determined "from an examination of the debtor's status at the initial proceeding." Cathey, 711 F.2d at 62. We believe that these decisions are correct and join our sister circuits in holding that an appeal brought by a debtor from a judgment obtained against it as a defendant is subject to the automatic stay.

Several factors support our decision. First, the plain language of Sec. 362(a)(1) appears to compel this result. It would strain the language of the statute...