In re Vierkant

• Citation: 240 BR 317
• Decision Date: 02 November 1999
• Docket Number: BAP No. 99-6049MN.
• Parties: In re Kevin Lynn VIERKANT; Darlene Lisa Vierkant, Debtors. Dale Alan LaBarge, Plaintiff-Appellee, v. Kevin Lynn Vierkant; Darlene Lisa Vierkant, Defendants-Appellants.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Eighth Circuit

240 B.R. 317 (1999)

In re Kevin Lynn VIERKANT; Darlene Lisa Vierkant, Debtors.

Dale Alan LaBarge, Plaintiff-Appellee, v. Kevin Lynn Vierkant; Darlene Lisa Vierkant, Defendants-Appellants.

BAP No. 99-6049MN.

United States Bankruptcy Appellate Panel for the Eighth Circuit.

Submitted October 12, 1999.

Decided November 2, 1999.

Before KOGER, Chief Judge, WILLIAM A. HILL and SCHERMER, Bankruptcy Judges.

Don B. Fuller, Minneapolis, MN, for appellant.

Arlo H. VandeVegte, Long Lake, MN, for appellee.

Background Facts

KOGER, Chief Judge.

On September 9, 1998, Kevin and Darlene Vierkant filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. At the time the Vierkants filed their bankruptcy petition, a lawsuit filed by Dale LaBarge alleging retaliatory discharge for filing a workers' compensation claim was pending against them and their corporation, KLV, Incorporated, in Minnesota state court. The Vierkants never filed an answer to LaBarge's state court complaint. However, the Vierkants did personally appear at a pretrial conference held on July 24, 1998, to inform the state court that KLV, Incorporated had filed for bankruptcy. On August 28, 1998, a hearing was held in the state court lawsuit on LaBarge's motion for the entry of a default judgment. The Vierkants failed to appear at this hearing. On September 14, 1998, after the bankruptcy petition had been filed, the Minnesota state court entered a default judgment against the Vierkants and in favor of LaBarge. The state court expressly concluded that the legal basis for the underlying liability was retaliatory discharge in violation of Minn.Stat. § 176.82 Subd. 1, and awarded damages in the total amount of $62,217.82 to LaBarge.¹

LaBarge has never moved the bankruptcy court for retroactive relief from the automatic stay in regards to the post-petition entry of the default judgment. The Vierkants have never asserted that the post-petition entry of the default judgment violated the automatic stay.

LaBarge filed an adversary proceeding against the Vierkants contending that the damage award was a nondischargeable debt under 11 U.S.C. § 523(a)(6), and that the default judgment collaterally estopped the Vierkants from contesting the willful and malicious nature of the debt. The bankruptcy court conducted a trial on the adversary complaint during which the state court default judgment was admitted as evidence, and witnesses testified regarding the underlying merits of the nondischargeability action. At the conclusion of trial, the bankruptcy court ruled that the default judgment should be given collateral estoppel effect in the adversary proceeding, and that on the basis of the state court's findings of fact and conclusions of law the debt was nondischargeable under section 523(a)(6). However, the bankruptcy court further stated that no evidence had been introduced at trial to support nondischargeability of the debt under section 523(a)(6), and that in the absence of the default judgment the debt would have been dischargeable. The bankruptcy court explained:

However, if I\'m wrong on giving collateral estoppel effect to the default judgment . . . then I am going to give you the findings that I would have come to had there been no prior state court judgment. I would have without a question determined that Darlene owes no debt to the plaintiff, Mr. LaBarge, and that if she did it would be a dischargeable debt. She — and this would be based on findings that while she was apparently a shareholder and the CEO of the company she had little or nothing to do with the company\'s activities. She — she was not — it\'s undisputed she was not informed of what might be going on. She hardly knew that Mr. LaBarge worked for the company and she simply had no facts upon which to act and she did not take any action against him.

And I would also find that the debt to — that Kevin\'s debt to Mr. LaBarge would be dischargeable because I believe his version which is much better documented than that given here by the plaintiff is the more likely scenario, that there was no retaliatory discharge of this debtor and no willful and malicious injury targeted against this debtor.

That being said, however, because of the findings I make and then I would not obviously be required to go into what the damages might be because I would have determined that whatever the amount of the debt was it was in fact dischargeable. That being said I am going to enter judgment in favor of the plaintiff and against the defendants based on the findings that I have just read into the record which will hold that the debt in the amount awarded in the state court is excepted from discharge under § 523(a)(6) because of a collateral estoppel effect of the state court judgment.

Appellants' Appendix, Transcript of Trial at pages 48-49.

The Vierkants timely appeal from the bankruptcy court's order.

Discussion

The bankruptcy court's decision to apply collateral estoppel is subject to de novo review by the BAP. See Fischer v. Scarborough (In re Scarborough), 171 F.3d 638, 641 (8th Cir.1999), cert. denied, ___ U.S. ___, 120 S.Ct. 330, ___ L.Ed.2d ___ (1999). Further, the applicability of the automatic stay to a pending matter is an issue of law within the competence of an appellate court. See National Labor Relations Bd. v. Edward Cooper Painting, Inc., 804 F.2d 934, 938 (6th Cir. 1986). Here, we determine that because the default judgment was entered in violation of the automatic stay and, therefore, is void, the bankruptcy court erred as a matter of law by giving the default judgment collateral estoppel effect in LaBarge's adversary proceeding.

In In re Ahlers, 794 F.2d 388, 394 n. 3 (8th Cir.1986) (citation omitted), the Eighth Circuit opined:

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his or her creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.

The Court continued:

The automatic stay also provides creditor protection. Without it, certain creditors would be able to pursue their own remedies against the debtor\'s property. Those who acted first would obtain payment of the claims in preference to and to the detriment of other creditors. Bankruptcy is designed to provide an orderly liquidation procedure under which all creditors are treated equally. A race of diligence by creditors for the debtor\'s assets prevents that.

Id. at 394 n. 4 (citation omitted).

"The automatic stay is among the most basic of debtor protections under bankruptcy law." Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969, 975 (1st Cir.1997). "It is designed to protect debtors from all collection efforts while they attempt to regain their financial footing." Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571 (9th Cir. 1992). "The stay springs into being immediately upon the filing of a bankruptcy petition: `because the automatic stay is exactly what the name implies — "automatic" — it operates without the necessity for judicial intervention.'" Soares, 107 F.3d at 975 (citation omitted). The automatic stay "is triggered upon the filing of a bankruptcy petition regardless of whether the other parties to the stayed proceeding are aware that a petition has been filed." Constitution Bank v. Tubbs, 68 F.3d 685, 691 (3d Cir.1995). "The automatic stay cannot be waived. Relief from the stay can be granted only by the bankruptcy court having jurisdiction over a debtor's case." Id. "In order to secure the important protections of the stay, courts must display a certain rigor in reacting to violations of the automatic stay." Soares, 107 F.3d at 975-76.

In Constitution Bank v. Tubbs, the Third Circuit opined:

The automatic stay is of broad scope, directing that "all judicial actions against a debtor seeking recovery on a claim that were or could have been brought before commencement of a bankruptcy case, are automatically stayed." . . . thus, "once triggered by a debtor\'s bankruptcy petition, the automatic stay suspends any non-bankruptcy court\'s authority to continue judicial proceedings then pending against the debtor." . . . Unless relief from the stay is granted, the stay continues until the bankruptcy case is dismissed or closed, or discharge is granted or denied. . . . Once a stay is in effect, without relief from the bankruptcy court, "the parties themselves cannot validly undertake any judicial action material to the . . . claim against" the debtor.

Constitution Bank v. Tubbs, 68 F.3d at 691-92 (citations omitted).

Section 362(a)(1) provides in relevant part that a bankruptcy petition "operates as a stay, applicable to all entities, of the commencement or continuation . . . of a judicial . . . action or proceeding against the debtor." 11 U.S.C. § 362(a)(1). Here, the post-petition entry of the default judgment was a continuation of a judicial proceeding within the meaning of section 362(a)(1),² and constituted a violation of the automatic stay.

The courts are split on whether actions taken in derogation of the automatic stay are void ab initio or merely voidable. See, e.g., Carpio v. Smith (In re Carpio), 213 B.R. 744, 748, 749 (Bankr.W.D.Mo.1997)(collecting bankruptcy court and district court cases within the Eighth Circuit that have addressed this issue, along with circuit court cases and one United States Supreme Court case).

In Kalb v. Feuerstein, 308 U.S. 433, 60 S.Ct. 343, 84 L.Ed. 370 (1940), the United States Supreme Court, in the context of the Bankruptcy Act of 1898, held that actions taken in violation of the automatic stay are void. The Supreme Court opined:

It is generally true that a judgment by a court of competent jurisdiction bears a presumption of regularity and is not thereafter subject to

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