In re Merrick
| Citation | 175 BR 333 |
| Decision Date | 08 December 1994 |
| Docket Number | BAP No. CC-93-2344-VJH. Bankruptcy No. SB92-14393 DN. Adv. No. SB92-1411. |
| Parties | In re Barbara Leslie MERRICK, Debtor. Errol J. GORDON, Appellant, v. Robert S. WHITMORE, Chapter 7 Trustee, Appellee. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Arnold M. Johnson, Los Angeles, CA, for appellant.
Michelle C. Araneta, San Bernardino, CA, for appellee.
Before VOLINN, JONES and HAGAN, Bankruptcy Judges.
A bankruptcy trustee sought sanctions against several state court defendants for willful violation of the automatic stay of 11 U.S.C. § 362(a) when the state court, after determining that defense issues were not affected by the automatic stay, granted the defendants' motion for a summary judgment, dismissed the lawsuit, and awarded them costs. The bankruptcy court ruled to the contrary, holding that the automatic stay was applicable. Because a defendant need not seek relief from the automatic stay in order to defend himself against a lawsuit commenced by the debtor, we reverse.
On March 5, 1990, prior to the bankruptcy case, the debtor, Barbara Leslie Merrick, and Joyce Marie Pentard1 sued appellant, Errol Jay Gordon, and several other defendants for $1,000,000.00 in state court based on fraud relating to the sale of a business. Some of the defendants raised counterclaims and cross-claims, but Gordon did not. In January 1992, the defendants filed motions for summary judgment to dismiss the lawsuit. A hearing was set for February 26, 1992. On February 6, the plaintiffs asked for an extension of time to file a response to the motions. The state court extended the deadline for filing opposition to the motions to April 2, 1992, and rescheduled the hearing for April 16, 1992. On March 30, 1992, prior to the state court hearing, and without responding to the summary judgment motions, both plaintiffs filed chapter 7 bankruptcy petitions. The debtors each listed the lawsuit as an asset of their respective estates.
On April 1, 1992, the debtors' state court counsel filed notice of the bankruptcies and the automatic stay in state court and moved to take the proceedings off calendar, alleging that the plaintiffs, as debtors, lacked standing to proceed pending an order of the bankruptcy court. In reliance on the automatic stay, the trustee did not respond to the summary judgment motions. The debtors' motion apparently was denied, and hearing on the summary judgment motions was held on April 16. Debtors' counsel appeared at the hearing. The trustee did not appear, nor did he move in bankruptcy court for a stay of the state court hearing.2
Gordon states without rebuttal that although other defendants appeared in state court on April 16, he did not appear, nor was he represented by counsel at the hearing. According to Gordon, the state court determined that the automatic stay did not affect its proceedings and ruled on the motions, dismissing the lawsuit. A minute order states summary judgments were granted, but does not mention the automatic stay. Judgment was entered on May 18, 1992. (No copy of the judgment appears in the record.) Some $12,000 in costs were assessed against the debtors. Merrick appealed this assessment to the California Court of Appeal and subsequently moved that court for an extension of time to file her brief.
On September 14, 1992, the trustee filed complaints in the bankruptcy court against the state court defendants for willful violation of the automatic stay. This complaint was premised on the defendants' postpetition pursuit of dismissal of the state court action and costs. The trustee then offered to enter into stipulations with the defendants to dismiss the complaint if they would agree to vacate the state court judgment and seek relief from the stay to re-file their summary judgment motions. Some of the defendants agreed to so stipulate. Gordon did not. On December 1, 1992, Gordon filed a "Remission of Costs" in state court, disclaiming any interest in the costs awarded to the prevailing defendants in that action. At this point, the state court appeal was mooted as to Gordon's position, which became defensive only. On April 2, 1993, the California Court of Appeal determined that Merrick's appeal was stayed by the automatic stay, because the cost assessment constituted an action against the debtor.
Subsequently, the trustee and the remaining defendants filed cross-motions for summary judgment on the trustee's complaint. On April 20, 1993, at the hearing on the cross-motions, the bankruptcy court offered to defer its ruling to allow the remaining defendants to join the stipulation. Although other of the remaining defendants agreed to stipulate, Gordon's counsel informed the court that his client was unavailable to authorize the stipulation.
The bankruptcy court then ruled for the trustee. The court characterized the state court lawsuit as property of the estate — a chose in action — and determined that the state court proceeding dismissing the debtors' cause of action violated the automatic stay. The bankruptcy court entered an order granting summary judgment for the trustee and denying defendants' cross-motions. The order held the state court judgment null and void and reserved jurisdiction over Gordon and another non-stipulating defendant to assess non-punitive sanctions.3 The other remaining defendant subsequently joined the stipulation. On October 14, 1993, one of the stipulating defendants re-filed its summary judgment motion in the state court and was granted dismissal of the debtors' action.
On November 2, 1993, at the hearing to determine the trustee's damages, the bankruptcy court offered Gordon a last opportunity to join the stipulation to vacate the state court summary judgment. Gordon refused, and the court sanctioned Gordon alone $21,244.84 for the trustee's attorney's fees and costs. This figure included time spent drafting the trustee's attorney's employment application, an application for special counsel to proceed in the state court, and negotiations with counsel for other defendants.
Whether defensive action taken by a defendant in a state court lawsuit commenced by a debtor violates the automatic stay.
Questions of law and statutory interpretation are reviewed de novo. In re Price, 871 F.2d 97, 98 (9th Cir.1989).
The essential issue is whether a defendant violates the automatic stay of § 362 by defending claims brought by a plaintiff debtor. This issue is distinct from whether the bankruptcy court can stay state court proceedings in its discretion. See 11 U.S.C. § 105(a); 28 U.S.C. § 2283. Neither the trustee nor the debtor moved for such relief.
The trustee's argument, with which the court agreed, starts with the proposition that a debtor's lawsuit constitutes a chose in action that is property of the estate under § 541. This premise in the abstract is correct. "This paragraph will include choses in action and claims by the debtor against others. . . ." Notes of Committee on the Judiciary, S.Rep. No. 989, 95th Cong., 2d Sess., 82-83 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5868. The trustee extrapolates from the foregoing that the defendants' motion to dismiss the lawsuit constituted a prohibited "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. § 362(a)(3).
The automatic stay is a means of preserving the status quo for the trustee or the debtor.4 However, this primary objective is inapplicable to the trustee's offensive action, which need not be attended by a stay.
This distinction is the basis for language in the various subsections of § 362(a), where the statute uses the language "against the debtor," § 362(a)(1); "against property of the estate," § 362(a)(2); or "to exercise control over property of the estate," § 362(a)(3). It is most unlikely that a contention by a defendant that the trustee's claim is unfounded can be equated with exercising dominion or control over property of the estate. The only place where the language permits a broader view is § 362(a)(8), where the automatic stay applies to the "commencement or continuation of a proceeding before the United States Tax Court concerning the debtor." (emphasis added). Thus, the operative subsections in the case at hand, (a)(1) and (a)(3), contemplate actions "against" the debtor and not "concerning" the debtor, which is much broader.5
The automatic stay gives the debtor a breathing spell from his creditors and allows the trustee to marshall assets of the estate for the benefit of creditors. While restraint of a defendant in a suit subject to prosecution by the estate arguably could contribute to an orderly processing of estate assets, we could find no case that supports the proposition that the automatic stay prevents a defendant from continuing to defend against a pre-bankruptcy lawsuit. To the contrary, there is substantial authority that the stay is inapplicable to postpetition defensive action in a prepetition suit brought by the debtor. The following portion of an opinion authored by Judge Posner is pertinent:
For in any event the automatic stay is inapplicable to suits by the bankrupt ("debtor," as he is now called). This appears from the statutory language, which refers to actions "against the debtor," 11 U.S.C. § 362(a)(1), and to acts to obtain possession of or to exercise control over "property of the estate," § 362(a)(3), and from the policy behind the statute, which is to protect the bankrupt\'s estate from being eaten away by creditors\' lawsuits and seizures of property before the trustee has had a chance to marshal the estate\'s assets and distribute them equitably among the creditors. H.R.Rep. No. 595, 95th Cong. & Admin.News 1978, p. 5787. The fundamental purpose of bankruptcy,...
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The Education Resources Institute, Inc. v. Concannon
...40 F3d 567 [2d Cir 1994]), the automatic stay does not preclude defendant from presenting a defense to the action (see In re Merrick, 175 BR 333 [BAP 9th Cir 1994]; Martin-Trigona v Champion Fed. Sav. & Loan Assn., 892 F2d 575 [7th Cir 1989]). In contrast, counterclaims seeking affirmative ......