James, In re
| Citation | 940 F.2d 46 |
| Decision Date | 07 August 1991 |
| Docket Number | No. 90-1884,90-1884 |
| Parties | , 25 Collier Bankr.Cas.2d 471, 21 Bankr.Ct.Dec. 1584, Bankr. L. Rep. P 74,125 In re Norma Y. JAMES, Debtor. Norma Y. JAMES v. Jacqueline DRAPER, et al., Jacqueline Draper, State of New Jersey, Department of Law and Public Safety, Division of Criminal Justice; Peter N. Perretti, Jr., Attorney General of State of New Jersey; and Robert T. Winter, State of New Jersey, Department of Law and Public Safety, Division of Criminal Justice, Appellants. |
| Court | United States Courts of Appeals. United States Court of Appeals (3rd Circuit) |
Berneter Mallory (argued), Mallory and Associates, Philadelphia, Pa., for appellee.
Robert J. Del Tufo, Michael R. Clancy, Paul Schneider (argued), Steve L. Scher, Office of Atty. Gen. of Jersey, Trenton, N.J., for appellants.
Before STAPLETON, SCIRICA and ALDISERT, Circuit Judges.
In this appeal by New Jersey state officials, we must decide whether a federal bankruptcy or district court had the power under the automatic stay provision in the Bankruptcy Code, 11 U.S.C. Sec. 362(a), to collaterally attack the merits of a facially valid judgment of a state court.
The State of New Jersey obtained a state court judgment in its favor in a civil forfeiture action against the property of appellee Norma Y. James ("Debtor"). The bankruptcy court vacated the state court judgment after determining that the Debtor's prior Chapter 7 bankruptcy filing had triggered the automatic stay under section 362(b), and that the state forfeiture proceedings did not fall within the "police power" exception to the automatic stay because the State had no legitimate interest in the funds seized. The district court affirmed for different reasons, ruling that although the "police power" exception ordinarily does apply to civil forfeiture proceedings, it did not apply to this particular forfeiture because the state court wrongly decided the case on the merits.
We hold that it was improper for the bankruptcy and district courts to collaterally examine the merits of the state court proceedings and, for the reasons that follow, will reverse the judgment of the district court 120 B.R. 802 that affirmed the bankruptcy court's order.
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. Sec. 1334(a). The district court had jurisdiction over the final order of the bankruptcy court based on 28 U.S.C. Sec. 158(a). We have jurisdiction on appeal based on 28 U.S.C. Sec. 158(d). The appeal was timely filed under Rule 4(a), F.R.A.P.
On March 2, 1988, New Jersey state troopers pulled over a car for speeding in that state. Owned by the Debtor, Norma James, the car was driven by Patrick Brown and was en route to New York City. Neither Brown nor the passenger had a valid driver's license, but they nonetheless consented to a search of the vehicle. During the search the officers discovered a duffle bag containing a yellow plastic bag which held eight bundles of currency totalling $7,990: $1,000 in each of seven bundles and $990 in the eighth. The troopers took Brown and his passenger to a local police station where a trained narcotics detection dog "alerted" to something in the currency, indicating that it possessed the odor of an unidentified, and possibly controlled, substance. However, a subsequent criminal investigation uncovered no other evidence of illegal drugs or of a drug transaction involving the money. No drug-related criminal charges were lodged against Brown, his passenger or the Debtor, and the car was returned to the Debtor.
Brown told different stories to the police. He initially said that he owned all the money but later stated that only $2500 was his and that he had borrowed $5500 from the Debtor. The police retained the seized currency because they suspected that it related to an illegal drug transaction, ostensibly based on the police dog's reaction to the money, the inconsistencies in Brown's statements and the manner in which the currency was hidden from view.
New Jersey (now appellants individually named in their official capacities) instituted a civil forfeiture action against the money on May 31, 1988, pursuant to N.J.Stat.Ann. 2C:64-1, which provides for civil forfeiture of proceeds of illegal activity. The State offered no independent evidence during the course of the forfeiture action to show that the money had been used in, or was received pursuant to, an illegal drug or other criminal transaction.
The State served the Debtor with notice of the forfeiture action, but she failed to respond within the requisite time period. She subsequently obtained counsel, who reached an agreement with the State's attorney to continue the matter. Through her attorney, the Debtor claimed full ownership of the funds, which she allegedly placed in Brown's possession so that he could transport them to her business partner in New York. Brown made no claims to the money in the forfeiture proceeding. The Debtor's counsel, however, failed to file the agreed upon continuation. There is some indication that counsel failed to do so because the Debtor failed to pay a fee. The State then filed a motion for a default judgment based on the pleadings.
On July 18, 1989, the Debtor received notice that a default judgment hearing would be held on July 21. She did not appear at the state court hearing, but instead she filed for bankruptcy on July 19, the next day, and contends that she informed the State attorney of this filing on that same day. The court entered default judgment on July 21, 1989. The State attorney claims that the State had no knowledge of the bankruptcy filing until after the default judgment was entered.
On September 21, 1989, the Debtor filed a complaint in bankruptcy court alleging that the State had violated 11 U.S.C. Sec. 362, the automatic stay provision of the Bankruptcy Code. She sought an order under 11 U.S.C. Sec. 542, the Act's turnover provision, directing the State to turn the disputed $7,990 over to her Trustee. The State filed an answer, raising various affirmative defenses, including that the Trustee was a necessary party/plaintiff and had not been joined and that the bankruptcy court lacked jurisdiction over the forfeiture action. The State also filed a motion to dismiss on jurisdictional grounds.
On March 13, 1990, the bankruptcy court determined that it had jurisdiction over the proceeding, denied the State's motion to dismiss, vacated the New Jersey state court default judgment, directed the Debtor to join the Trustee as a necessary plaintiff and scheduled a supplemental hearing for April 5, 1990, at which time the ultimate disposition of the case would be determined. The court also determined that the forfeiture action was a core proceeding. See Opinion of Bankruptcy Court at 9-12; J.A. at 18-21. On March 23, 1990, the State filed an interlocutory appeal to the district court. Ruling that the State had proffered no evidence of an illegal drug or other criminal transaction, the court dismissed the appeal without prejudice on April 11, 1990.
After the supplemental hearing on April 26, at which only the Debtor testified, the bankruptcy court proceeded into an evaluation of the merits of the state forfeiture proceedings. It determined that the State produced no evidence that the seized funds were received by the Debtor pursuant to criminal activity. The only putative evidence of criminality was the police dog's reaction to the seized currency. Neither the Debtor nor any of those in the Debtor's car had been charged with any criminal offense related to the seized funds.
The bankruptcy court made three significant findings: First, it held that the "governmental unit" exception of section 362(b)(4) to the automatic stay provision of section 362(a) did not apply; second, that the State had no basis for forfeiture and that the New Jersey state court default judgment was therefore a nullity; and third, that the matter before it was a "core proceeding." On May 1, 1990, the bankruptcy court entered a final order in favor of the Debtor on her section 362 and section 542 claims and ordered the State to turn over the seized funds to the Debtor's Trustee. The court ordered the parties to agree upon reasonable attorney's fees and costs to be awarded the Debtor pursuant to 11 U.S.C. Sec. 362(h).
The State defendants appealed to the district court, which, except for the attorney's fees award, affirmed the bankruptcy court's order for different reasons. The district court disagreed with the bankruptcy court and concluded that this State forfeiture action was excepted from the automatic stay by section 362(b)(4) because they are "not out to collect monetary debts but to advance public policy in the area of law enforcement." Memorandum Opinion at 27; J.A. at 249. However, the court determined that section 362(b)(4), which excepts state police power actions from the automatic stay, only applies if the bankruptcy court first determines that the relevant state action was properly decided. Id. at 25-29; J.A. at 247-251. Like the bankruptcy court, the district court, too, proceeded into an evaluation of the merits of the state case and concluded that the State had not presented to the bankruptcy court a reasonable factual basis for prevailing in the forfeiture proceeding. The court therefore held that the exception of section 362(b)(4) applied legally but not factually to the scenario and affirmed the order of the bankruptcy court.
Because these issues require the interpretation and application of legal precepts, the standard of review is plenary. Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98 (3d Cir.1981).
Section 362(a) of the Bankruptcy Code provides in part:
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title ... operates as a stay, applicable to all entities, of--
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