In re Confidential Investigative Consultants, Inc.
| Decision Date | 10 February 1995 |
| Docket Number | Bankruptcy No. 91 B 08172. |
| Citation | 178 BR 739 |
| Parties | In re CONFIDENTIAL INVESTIGATIVE CONSULTANTS, INC., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Timothy Huizenga, Jennifer J. Payne, David S. Yen, Legal Assistance Foundation, and Joseph E. Cohen, Cohen & Krol, Chicago, IL, for debtor.
Mitchell H. Frazen, Burditt & Radzius, Chicago, IL, for CIC.
Confidential Investigative Consultants, Inc. ("CIC" or "Debtor") filed this bankruptcy case on April 16, 1991, under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. CIC's Reorganization Plan was confirmed on March 19, 1992, but the Plan has not yet been consummated and a final decree has not been entered. This Court reserved jurisdiction to enforce the Plan.
Following Plan confirmation, Kenneth Jones ("Jones"), an unsecured creditor and former employee of Debtor, moved to annul the automatic stay. He thereby seeks to modify the stay with retroactive effect to validate a suit he filed and prosecuted for some time without notice of the bankruptcy.
On March 4, 1992, Jones filed suit in United States District Court for the Northern District of Illinois, alleging that CIC fired him in September, 1990, in violation of the Employee Polygraph Protection Act, 29 U.S.C. § 2001, et seq., ("EPPA"). Although that suit was filed while the bankruptcy automatic stay was still in effect, Jones and his counsel were not informed of CIC's bankruptcy filing until after the confirmation order (but prior to trial), and CIC never asserted the automatic stay under 11 U.S.C. § 362(a)(1) against the lawsuit prior to trial. The parties consented to be tried by jury before a Magistrate Judge without either side informing that judge about CIC's bankruptcy filing prior to suit. On October 6, 1993, the jury returned a verdict in favor of Jones in the amount of $90,000.00. Judgment was thereupon entered on the jury verdict and CIC immediately appealed the judgment.
CIC then filed a motion before the Magistrate Judge to vacate the judgment, for the first time informing her of its bankruptcy filing prior to the filing of suit. That motion was based on an asserted violation of the automatic stay by Jones in filing of his suit while the stay was in effect. The Magistrate Judge ruled that the suit filing was nullified by the stay and stated that she was prepared to vacate the judgment upon remand of the appeal. The substantive appeal has been stayed pending action here, as Jones moved that this Court annul CIC's now-expired automatic stay retroactively, so as to validate the original filing of suit and judgment therein. He also refiled his suit in an effort to save the cause of action from limitations if his first lawsuit is found to be a nullity.
For reasons stated herein, an evidentiary hearing will be set on that motion along with a hearing on other issues defined below.
Kenneth Jones was fired from his position as security guard with Confidential Investigative Consultants, Inc. on September 21, 1990, after submitting to a lie detector test at CIC's request. Seven months later, on April 16, 1991, CIC filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. At the time, CIC did not schedule Jones as a creditor in its bankruptcy schedules. Jones maintains that prior to October of 1992, he received no notice—formal or otherwise—of CIC's bankruptcy filing.
On April 23, 1991, seven days after CIC filed in bankruptcy, Jones's attorney sent a letter to Mr. Jim Bienge of CIC, declaring his intention to file suit on Jones's behalf for alleged violations of the Employee Polygraph Protection Act of 1988 ("EPPA"), and asking CIC to consider settlement options. CIC failed to respond to that letter. Nine months later, on December 9, 1991, Jones's attorney sent a second, nearly identical letter to Bienge, again encouraging CIC to enter into settlement negotiations. Ms. Marian Collum, Personnel Director, finally responded on behalf of CIC by letter dated December 18, 1991. Collum asserted that CIC had not violated the EPPA and that Jones had been "laid-off due to lack of work, not terminated due to failure of test." CIC did not, however, inform Jones about the pending bankruptcy filing and did not then amend its bankruptcy schedules to list Jones as a creditor as required under the Bankruptcy Code. 11 U.S.C. § 521(1); Fed.R.Bankr.P. 1007. Why it did not do so is not yet known to the Court.2
On March 3, 1992, Jones filed suit against CIC in the Northern District of Illinois. Jones v. Confidential Investigative Consultants, Inc. (92 C 1566) ("Jones v. CIC"). Sixteen days later, on March 19, 1992, this Court confirmed CIC's Third Amended Plan of Reorganization. The Plan provides that unsecured creditors are to receive 20% of their allowed claims in installment payments over a four-year period following confirmation.3 Upon confirmation, the automatic stay terminated as a matter of law under 11 U.S.C. § 362(c).
Jones was never served with notice of the proposed Plan, disclosure statement, confirmation procedures, ballot to permit voting, or the deadline for unsecured creditors to file claims, as required under the Bankruptcy Code. 11 U.S.C. §§ 342, 1125(b), 1128(a); Fed.R.Bankr.P. 2002, 2015(a), 3004, 3013, 3017. Once again, the Court does not know why Jones was treated thusly, given the written demands by his lawyer made many months prior to confirmation. While suit was filed before confirmation, it is not known when summons was served.
The District Court suit in Jones v. CIC proceeded through pretrial preparations for seven months after plan confirmation herein, without any notice to Jones during that period about CIC's bankruptcy proceeding. Finally, on October 13, 1992, Mr. Zane Smith, of Smith, Rubin & Assoc., Ltd., as counsel for CIC, sent a letter to counsel for Jones (at the Legal Assistance Foundation of Chicago), complying in part with a discovery request and indicating, almost as an aside: The record here does not permit a finding as to whether Jones's attorney had any notice of CIC's bankruptcy filing prior to that letter. However, it presently appears that Jones first received notice of CIC's bankruptcy through that letter dated October 13, 1992, seven months after the confirmation order.
At that point, although the automatic stay had ended as a matter of law, the confirmation order had the effect of a statutory injunction, barring efforts to collect any debt not provided in the Plan. 11 U.S.C. § 524. Since Jones never filed a claim, he is not presently entitled to plan benefits but is presently barred by § 524 from seeking any recovery on his pre-bankruptcy claim. However, counsel for CIC failed to assert before the Magistrate Judge prior to trial either that Jones had violated the automatic stay by his suit filing or that the confirmation injunction barred continuation of the suit. We do not know whether counsel for Jones checked the bankruptcy court file after receiving the October 13 letter to ascertain the period in which the automatic stay pended, but they could have done so before trial after they received that letter. Jones's counsel took no action with respect to the stay either before the Magistrate Judge or this Court when the letter was received.
The District Court suit went to trial a year later. During the months before the trial was held, the non-bankruptcy limitations period for any refiling of Jones's suit may have expired on September 21, 1993, as more fully discussed below. On October 6, 1993, after several days of testimony and argument, the jury in Jones v. CIC returned a $90,000.00 verdict in Jones's favor. Presiding Magistrate Judge Bucklo entered judgment on the verdict that same day.
Only after they lost the jury verdict did CIC counsel act on the fact that a bankruptcy filing had been pending when suit was filed. They waited until the judgment was entered against CIC to bring this bankruptcy into the lawsuit picture.
On December 10, 1993, attorney Joseph Cohen, of Cohen & Krol, wrote to Jones's attorneys, informing them that he had served as counsel in CIC's bankruptcy proceeding. In this letter, Cohen stated he had been informed that Jones's attorney was aware of the bankruptcy, and that Jones v. CIC never should have gone to trial because of the automatic stay. Cohen further informed Jones's counsel that an amendment to CIC's Schedule F had been filed, listing Jones and his attorneys as creditors of the estate. (Such amendment was in fact filed in this bankruptcy proceeding on November 16, 1993, but at this point it is not known whether leave of the bankruptcy court was obtained or prior notice was served on Jones and his counsel.)
On January 18, 1994, CIC filed notice of appeal from the judgment based on litigation issues. Two days later, CIC filed a motion before the trial judge to vacate the judgment under Fed.R.Civ.P. 60(b)(4), asserting that judgment was void because the lawsuit was originally filed in violation of the automatic stay. On February 1, 1994, District Judge John A. Nordberg ordered that proceedings in the appeal be stayed pending ruling by the Magistrate Judge on the Rule 60 motion.
On April 11, 1994, Magistrate Judge Bucklo issued a memorandum opinion concluding that, because of the violation of the automatic stay by the suit filing, the October 6 judgment was void and that, if the appellate court remanded the case, she would vacate the judgment. However, she never entered an order vacating the judgment.
As discussed more fully below, there are differing authorities on the issue of whether acts in innocent violation of the...
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