In re Benalcazar, 02 B 06685.
| Decision Date | 15 August 2002 |
| Docket Number | No. 02 B 06685.,02 B 06685. |
| Parties | In re Fernando A. BENALCAZAR, Debtor. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
Robert R. Benjamin, Benjamin, Berneman & Brom LLC, Chicago, IL, for debtor.
Daniel M. Feeney, Miller, Shakman & Hamilton, Chicago, IL, for creditor.
This Chapter 7 case is before the court on opposing motions, filed by the debtor and one of his creditors, dealing with the application of the automatic stay to state court contempt proceedings. As set forth below, (1) the Rooker-Feldman doctrine does not prevent this court from considering the merits of the parties' motions; (2) the automatic stay applies to civil contempt proceedings brought by an individual creditor; (3) the debtor has established that the creditor willfully violated the stay, requiring an award of actual damages, but punitive damages are not appropriate; and (4) the creditor has not established cause for relief from the stay.
One of the principal issues raised by the pending motions is whether this court has jurisdiction to rule on the applicability of the automatic stay to a state court proceeding, after a state court has considered the issue. Of course, this court does have jurisdiction to consider the extent of its jurisdiction, see In re Edwards, 962 F.2d 641, 645 (7th Cir.1992), and the issue is addressed in the Conclusions of Law below. Apart from the disputed jurisdictional question, this court has jurisdiction to determine the applicability and enforcement of the automatic stay because it is a core matter arising in a case under the Bankruptcy Code (Title 11, U.S.C.) that has been referred to this court by the district court. 28 U.S.C. § 1334(a) (); 28 U.S.C. § 157(a)-(b) (); Internal Operating Procedure 15(a) of the District Court for the Northern District of Illinois (effecting the reference); Skaggs v. Fifth Third Bank (In re Skaggs), 183 B.R. 129, 130 (Bankr.E.D.Ky.1995) ().
The facts relevant to the pending motion are not in dispute. Fernando Benalcazar, an individual doing business as Teddie Kossof Salons, Inc. ("Teddie Kossof"), commenced this bankruptcy case by filing a voluntary Chapter 7 petition on February 20, 2002. Prior to his bankruptcy filing, Benalcazar operated his business in space that was leased by a corporation, Teddie Kossof Salon & Spa, Inc. ("Salon & Spa"). Benalcazar guaranteed the lease; the lessor was Brookfield Retail Centers, Inc. ("Brookfield"). In April of 2001, ten months prior to the bankruptcy filing, Brookfield obtained a judgment in excess of $195,000 for breach of the lease against Salon & Spa and Benalcazar in the Circuit Court of Cook County, Illinois (the "state court").
In the months before the bankruptcy, Brookfield engaged in substantial efforts to collect its judgment against Salon & Spa and Benalcazar:
• In August of 2001, Brookfield served Benalcazar with a citation to discover assets, pursuant to 735 ILCS 5/2-1402(a), requiring him to appear before the state court to answer questions about assets that might be used to satisfy the judgment. The citation generally required production of Benalcazar's own papers and records (which would include any records of the business that he conducted as Teddie Kossof) and specifically commanded production of various business records of Salon & Spa.
• In October 2001, after Benalcazar failed to appear as directed in the citation, Brookfield presented a motion for a rule to show cause, which was granted, requiring Benalcazar to appear in state court to explain why he should not be held in contempt for his failure to appear at the citation proceeding.
• On November 20, after Benalcazar appeared for examination without producing documents, Brookfield obtained an order continuing the citation proceedings and directing Benalcazar to produce personal business documents that he had identified during the examination. The order did not require Benalcazar to produce any records of Salon & Spa, because he denied possessing any such records.
• On December 14, 2001, Brookfield filed a motion for a second rule to show cause and for sanctions against Benalcazar (the "December 14 motion"). This motion is particularly significant, since it gave rise to the state court proceedings central to the motions pending in this court. The December 14 motion was premised on the assertion that Benalcazar had "thwarted Brookfield's efforts ... to obtain the business records of defendants/judgment debtors, Teddie Kossof ... and ... Salon & Spa ... and other documents responsive to Brookfield's Citation." The motion reiterated that Brookfield's citation "required that Benalcazar produce not only personal records but also certain business records of each of [Teddie Kossof] and the Salon & Spa," and cited testimony of Benalcazar that although he was an officer and principal shareholder of Salon & Spa, he did not have possession of the business records of either his proprietorship [Teddie Kossof] or Salon & Spa. The precipitating event for the December 14 motion was asserted to be a conversation in which a former attorney for Benalcazar told counsel for Brookfield that he had delivered business records of Teddie Kossof and Salon & Spa to Benalcazar. Depending on the date of this delivery (which had not been ascertained at the time of the motion), it was possible that Benalcazar's reported citation testimony denying possession of the documents had been false. On this basis, the December 14 motion made three specific requests for relief: (1) for a court order (the "rule" of the title of the motion) directing Benalcazar to show cause why he should not be held in contempt for failing to produce documents responsive to the citation and for "apparently making misrepresentations" about the documents; (2) for a court order "[c]ompelling Benalcazar to produce ... all documents responsive to the Citation," specifically including documents of both Teddie Kossof and Salon & Spa; and (3) for an award of all of Brookfield's attorneys' fees and costs in seeking compliance with the citation, specifically including not only the December 14 motion itself but also "costs and fees incurred ... to appear in Court several times in connection with obtaining Benalcazar's compliance with the Citation."
• On January 7, 2001, Brookfield filed another motion against Benalcazar (the "January 7 motion") alleging other misrepresentations in connection with the citation proceedings. Both the December 14 motion and the January 7 motion, as well as the continued citation proceeding, were set to be heard on February 21, 2002.
At the hearing on February 21, the state court was informed of Benalcazar's February 20 bankruptcy filing, and accordingly entered an order (1) continuing the citation proceeding and the December 14 motion "pending the outcome" of the bankruptcy case, and (2) continuing the January 7 motion to March 14, 2002, for a hearing as to "whether this motion should be stayed pursuant to the bankruptcy filing" and, if not, for a hearing on the motion.
At the March 14 hearing, the state court determined that the January 7 motion for sanctions should not be stayed, held a hearing on that motion, and entered an order denying the motion on the merits. However, (despite the February 21 order staying the matter until the outcome of the bankruptcy case) the court also considered the merits of the December 14 motion for rule, and, at Brookfield's request, issued a rule against Benalcazar, requiring him to appear on April 18 to show cause why he should not be held in civil contempt for making false statements and failing to produce the requested records.
On the following day, March 15, 2002, Benalcazar filed his now pending motion, contending that Brookfield's actions in "proceed[ing] with post-judgment debt collection activity" in state court violated the automatic stay imposed by § 362(a) of the Bankruptcy Code. The motion seeks an award of damages, costs and attorneys' fees incurred as a result of the alleged violation.
Brookfield responded with its pending motion, seeking a declaration from this court that the automatic stay did not apply to its state court actions, or alternatively, seeking relief from the stay to continue the state court action.
At an initial hearing, this court determined that the motions raised the question of whether a ruling by the state court, holding the automatic stay inapplicable, deprived this court of jurisdiction to consider the question, under the Rooker-Feldman doctrine. The court allowed the parties an opportunity to brief this additional question.
On May 2, 2002, while the motion was under advisement, Brookfield filed a complaint in this court, objecting to Benalcazar's discharge in bankruptcy on the ground that he had made false statements under oath in the bankruptcy proceedings. On May 20, the deadline passed for filing complaints to determine the dischargeability of particular debts under § 523 of the Bankruptcy Code, without Brookfield filing a complaint to except from discharge any liability Benalcazar may have incurred for improper conduct in the citation proceedings.
The motions of Benalcazar and Brookfield raise four distinct legal questions:
(1) Did the state court make a ruling on the applicability of the automatic stay that precludes this court from enforcing the stay in connection with the state court contempt proceedings?
(2) If the question is open for decision, does the automatic stay apply to the contempt proceedings?
(3) If the automatic stay was applicable to the...
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