In re Sechuan City, Inc.
| Decision Date | 06 February 1989 |
| Docket Number | Bankruptcy No. 88-12967F,Adv. No. 88-2065F. |
| Citation | 96 BR 37 |
| Parties | In re SECHUAN CITY, INC. d/b/a Sechuan Garden Restaurant, Debtor. SECHUAN CITY, INC. d/b/a Sechuan Garden Restaurant, Plaintiff, v. NORTH AMERICAN MOTOR INNS, INC., Jose Garcia and Richard Melius, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Jerome R. Balka, Philadelphia, Pa., for plaintiff, Sechuan City, Inc. d/b/a Sechuan Garden Restaurant.
Athena M. Dooley, Dessen, Moses & Sheinoff, Philadelphia, Pa., for defendants, North American Motor Inns, Inc., Jose Garcia and Richard Milles.
Anthony R. Barone, Philadelphia, Pa., Trustee.
The debtor has initiated an adversary proceeding against North American Motor Inns, Inc. (Hotel), its principal (Mr. Richard Melius)1 and an employee (Jose Garcia) alleging that defendants violated the automatic stay by attempting to collect a prepetition debt. Defendants allege that their activities did not violate any provision of § 362(a) and, alternatively, that their conduct was protected by the First Amendment. The Hotel also seeks a set-off for unpaid postpetition rent.
After hearing the testimony and reviewing the documentary evidence and pleadings, which were also offered into evidence to the extent they contain admissions, I make the following factual findings pursuant to Bankr.R. 7052.
1. On April 18, 1984, North American Motor Inns, Inc. entered into a leasehold agreement with Messrs. Fu G. Chu, Kosit Lore and Kwong Y. Ng, which allowed them to lease space inside the lessor Hotel and operate a restaurant. During the period in question the monthly rental was $5,000.00 plus utilities.
2. Subsequent to April 18, 1984, this lease was assigned to the plaintiff corporation; Messrs. Ng and Chu were principals in the debtor corporation.2
3. In July 1988 a dispute arose between lessor and lessee as to rental payments, particularly the utility components. In August 1988, the debtor made no rental payments whatsoever.
4. On August 24, 1988, the debtor filed a voluntary petition in bankruptcy under chapter 11. A copy of the filed petition was hand-delivered to the lessor and a letter was sent that same day to defendant Garcia, manager of the defendant Hotel, also informing him of the bankruptcy filing and of the automatic stay. (Exhibit P-5.)
5. The debtor operated a Chinese restaurant called the Sechuan Garden inside the hotel known as the North American Motor Inn. Access to the restaurant was through the hotel lobby. This lobby also contained the defendant hotel's registration desk and bar. A prepetition arrangement existed between the hotel and the debtor whereby any patron of the debtor who ordered an alcoholic drink was served, at his or her restaurant table, a drink prepared by the hotel bar.
6. On August 26 or 27, 1988 when defendant Garcia, the hotel manager, learned of the debtor's bankruptcy filing he telephoned his employer, defendant Melius (the owner of the Hotel), with that information.
7. Mr. Melius instructed Mr. Garcia that various signs should be posted immediately at all hotel entrances, in the hotel lobby, and immediately outside the restaurant doors located in the lobby.
8. The following four signs were immediately posted at these locations:
9. The language of each sign was discussed, in advance, between Mr. Garcia and Mr. Melius as was the use of colored paper as the background for the copies of the posted bankruptcy petition.
10. The debtor, through one of its principals, immediately requested that defendants remove the signs. Defendants refused. Some signs were subsequently torn down by the debtor's principals and were replaced by defendants.
11. In removing certain signs, Mr. Chu revealed a weapon to a hotel employee. The employee then called police who, upon arrival at the hotel, took no action as Mr. Chu had a license for the weapon.
12. On or about September 15, 1988 all signs were removed by defendants from every location.
13. The debtor testified that it suffered a loss of business due to the defendants' signs. Such testimony was credible. Customers were seen leaving the hotel lobby after noticing the signs. Gross weekly revenues fell markedly between July 1988 and September 1988. After considering the evidence presented, I conclude that plaintiff has demonstrated damages of $1,000.00 per week for the three weeks during which the signs remained posted.
14. Both Mr. Garcia and another employee, Mr. Joshua Kunkel, testified that the defendants' intent in posting these signs was to inform the public about the debtor's bankruptcy filing and to "shame" and "embarrass" the debtor into paying its bills. As there was no postpetition rent yet due when the signs were first posted, the bills for which defendants sought payment were prepetition debts.3 I find, then, that any desire on the part of defendants to inform the public of the debtor's bankruptcy filing was connected to their desire to pressure the debtor into making payment on its prepetition rent owing to the lessor.
15. The testimony of Mr. Garcia, that defendants never sought to harm the debtor's business, is contradicted by the sign requesting that the public not patronize the restaurant.
16. After the debtor's bankruptcy filing, the debtor failed to make postpetition rental payments for September, October, and November, 1988. The defendant lessor was granted relief from the automatic stay in order to pursue a state court eviction action.
17. This chapter 11 bankruptcy case was converted to chapter 7 on motion of the U.S. Trustee on December 8, 1988 and the U.S. Trustee subsequently appointed Mr. Anthony Barone as interim chapter 7 trustee.
18. Defendant Garcia acted at the express direction of defendant Melius.
Based upon these factual findings, I reach the following legal conclusions:
1. The conduct of defendants was designed to coerce payment of the lessor's prepetition claim from the debtor and so violated 11 U.S.C. § 362(a)(6).
2. This conduct was not protected by the First Amendment.
3. No punitive damages are warranted.
4. An award of damages pursuant to 11 U.S.C. § 362(a) is warranted.
5. The award of damages shall be in favor of the interim chapter 7 trustee.
6. Defendant Garcia is not personally liable for the actions taken by defendants.
The first question which must be addressed is whether the conduct of the defendants in posting the various signs throughout the hotel lobby, coupled with the hotel's decision not to allow alcoholic drinks to be served, violated the automatic stay established by 11 U.S.C. § 362(a). If not, there is no need to address the constitutional issue raised by defendants. See DeBartolo Corp. v. Florida Gulf Court Bldg. & Constr. Trades Council, 485 U.S. 568, 108 S.Ct. 1392, 1397, 99 L.Ed.2d 645 (1988). The debtor argues that the conduct of defendants violated 11 U.S.C. § 362(a)(3), (6).
In general, § 362(a) represents an expansion and codification of the concept that the filing of bankruptcy should create "a stay against creditors from collecting their claims against the debtor and his property from and after the filing of a bankruptcy petition. . . ." Kennedy, Automatic Stays Under the New Bankruptcy Law, 12 Univ. Mich.J. of Law Reform 3 (1978). The need for a stay has long been recognized. See, e.g., Kalb v. Feuerstein, 308 U.S. 433, 60 S.Ct. 343, 84 L.Ed. 370 (1940); Mueller v. Nugent, 184 U.S. 1, 22 S.Ct. 269, 46 L.Ed. 405 (1902).
The dual purpose of the stay was well expressed by the legislative history surrounding the passage of § 362(a):
H.R.Rep. No. 95-595, 95th Cong. 1st Sess. 340 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787 (emphasis added). Accord, e.g., H & H Beverage Distributors, Inc. v. Department of Revenue, 850 F.2d 165, 166 (3d Cir.1988), cert. denied, ___ U.S. ___, 109 S.Ct. 560, 102 L.Ed.2d 586 (1988); Association of St. Croix Condominium Owners v. St. Croix Hotel Corp., 682 F.2d 446, 448 (3d Cir.1982).
11 U.S.C. § 362(a)(6) specifically enjoins:
any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;. . . .
The language of this subsection is "very broad," Morgan Guaranty Trust Co. v. American Sav. & Loan Assoc., 804 F.2d 1487, 1491 (9th Cir.1986), cert. denied, 482 U.S. 929, 107 S.Ct. 3214, 96 L.Ed.2d 701 (1987), and is designed to prevent creditor coercion and harassment of the debtor. Id. See also 2 Collier on Bankruptcy, ¶ 362.056 at 362-41 (15th ed. 1988) (footnote omitted):
Paragraph 6 is intended to prevent creditor harassment of the debtor in attempting to collect pre-petition...
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