In re North Coast Village, Ltd.
| Decision Date | 22 January 1992 |
| Docket Number | BAP No. SC-91-1199-PRO,Bankruptcy No. 90-04997-LM11,Adv. No. 90-90406-LM11. |
| Parties | In re NORTH COAST VILLAGE, LTD., a California limited partnership, Debtor. John R. PREWITT, Appellant, v. NORTH COAST VILLAGE, LTD., a California limited partnership, Appellee. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Roger A. Ferree, Los Angeles, Cal., for appellant.
Ole B. Oleson, San Diego, Cal., for debtor, appellee.
Before PERRIS, RUSSELL, and OLLASON, Bankruptcy Judges.
The appellant, John R. Prewitt ("Prewitt"), brought an adversary proceeding in the bankruptcy court where the bankruptcy case was pending against the debtor, North Coast Village, Ltd., for specific performance and declaratory relief. The debtor moved to dismiss the proceeding on the grounds that the adversary proceeding violated the automatic stay and sought sanctions pursuant to 11 U.S.C. § 362(h).1 Prewitt appeals from the bankruptcy court's order dismissing the proceeding and imposing sanctions. We REVERSE.
The complaint at issue asserts causes of action against the debtor arising from disputes between Prewitt and A. Thomas Murphy, the principal of Century Southwest Corporation, the debtor's general partner. The parties resolved the dispute, in part, through two settlement agreements executed in 1983 and 1986 ("the agreements"). Prewitt asserts that the agreements required, inter alia, the debtor to convey to him certain property and to deliver a "Modified Land Note." Prewitt further contends that certain escrows were opened pursuant to the agreements, that the debtor was required to deliver the note and other documents into the escrows and that the debtor failed or refused to deliver the Modified Land Note, as was required.
In January of 1987, Prewitt, the debtor and others were named as defendants in a state court action relating to the escrows. Subsequently, Prewitt filed a cross-complaint against the debtor and others based upon the alleged breach of the agreements. In the cross-complaint, Prewitt alleged, inter alia, a cause of action for specific performance,2 seeking an order requiring the debtor, Murphy and Century Southwest to deliver into escrow the Modified Land Note or, if the note no longer existed, an order requiring the debtor to execute and deliver a new Modified Land Note.
The debtor filed its Chapter 11 petition on June 15, 1990, thereby staying further proceedings on the cross-complaint in state court.3 In August of 1990, Prewitt commenced an adversary proceeding against the debtor by filing a complaint for specific performance, damages and declaratory relief, asserting causes of action the same as those asserted against the debtor in the state court cross-complaint. In October of 1990, Prewitt filed an amended complaint in the adversary proceeding. Similar to the cross-complaint in state court, the amended complaint alleged a cause of action for specific performance and sought an order requiring the debtor to execute, if necessary, and deliver into escrow the modified land note. The amended complaint also sought a declaration, in order to preserve any rights against real property collateral under California's single action rule, that the specific performance requested is not a form of action for the recovery of the debt, the enforcement of the trust or a judgement directing the sale of encumbered property. Prewitt did not seek or obtain relief from the automatic stay before filing and serving either the original complaint or the amended complaint in the adversary proceeding.
The debtor moved to dismiss the amended complaint as being in violation of the automatic stay and sought to recover damages under section 362(h). The bankruptcy court determined that the commencement of the adversary proceeding violated the automatic stay and that the debtor could recover damages under section 362(h). Prewitt filed this timely appeal from the bankruptcy court's order dismissing the amended complaint and awarding monetary sanctions to the debtor.
The dispositive issue in this appeal is whether the automatic stay precluded Prewitt from filing an adversary proceeding in the bankruptcy court where the bankruptcy case was pending seeking specific performance and declaratory relief. This issue presents a question of law that we review de novo. See e.g., In re Orvco, Inc., 95 B.R. 724, 726 (9th Cir. BAP 1989).
The automatic stay of section 362(a)(1) generally stays proceedings to recover prepetition claims against the debtor.4 Although the plain language of this section appears to apply the stay to all proceedings, in the context of proceedings in bankruptcy court, courts have generally limited the application of the stay. In In re Teerlink Ranch Ltd., 886 F.2d 1233, 1237 (9th Cir.1989), the Ninth Circuit stated without analysis or citation to authority, that "the stay does not operate against the court with jurisdiction over the bankrupt." In re American Spinning Mills, Inc., 43 B.R. 365, 367 (Bankr.E.D.Pa.1984), and similar cases hold that the automatic stay implicitly does not bar a party from commencing a proceeding against the debtor in the court where the bankruptcy petition is pending. See In re Atreus Enterprises, Ltd., 120 B.R. 341, 346 (Bankr.S.D.N.Y.1990); In re Washington Manufacturing Co., 118 B.R. 555, 561 (Bankr.M.D.Tenn.1990); In re American Sports Innovations, 105 B.R. 614, 617 (Bankr.W.D.Wash.1989).
We agree that the stay does not apply to proceedings commenced against the debtor in the bankruptcy court where the debtor's bankruptcy is pending. Although the statutory language does not differentiate between proceedings in bankruptcy courts and proceedings in other courts, the application of the stay to proceedings against the debtor in the home bankruptcy court would be illogical and would not serve the purposes underlying the automatic stay.
It is beyond serious dispute that the application of the stay to certain proceedings in the bankruptcy court would lead to absurd results. For example, if the automatic stay were construed to apply to all proceedings in bankruptcy, a creditor would need relief from the stay to file a proof of claim or even a motion for relief from the stay. As a further example, application of the stay to bar the commencement of proceedings to determine the dischargeability of a debt in the absence of relief from the stay would be unworkable in light of the short time limits within which such proceedings must be commenced. See Fed. R.Bankr.P. 4007(c).
The application of the stay to proceedings in the home bankruptcy court does not serve the purposes underlying the stay. The automatic stay is designed (1) to provide the debtor a breathing spell from his or her creditors by stopping all collection efforts, (2) to protect creditors from each other by stopping the race for the debtor's assets and preserving the assets for the benefit of all creditors and (3) to provide for an orderly liquidation or administration of the estate. See House Report ...
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