Matthews v. Rosene
| Citation | 739 F.2d 249 |
| Decision Date | 29 June 1984 |
| Docket Number | No. 83-2938,83-2938 |
| Parties | Bankr. L. Rep. P 69,953 In the Matter of: Arthur R. MATTHEWS, Jr., Debtor-Appellant, v. Martin J. ROSENE and John K. Kneafsey, Respondents-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Michael J. McArdle, Chicago, Ill., for debtor-appellant.
John K. Kneafsey, Chicago, Ill., for respondents-appellees.
Before PELL, BAUER, and POSNER, Circuit Judges.
We are presented with the issue whether the bankruptcy court properly held that the doctrine of laches barred a debtor's attempt to nullify a nearly three-year-old state court judgment in favor of a creditor who had counterclaimed in the state court suit instituted by the debtor. The district court affirmed the bankruptcy court's determination. We affirm.
In December 1967, Martin Rosene contracted with Arthur Matthews to sell to Matthews certain residential real estate. Matthews made a small down payment and agreed to subsequent monthly payments. The agreement provided that Matthews would have no rights or interests in the property until delivery of a deed or when he made full payment of the purchase price of the land.
In 1973, Matthews filed for bankruptcy under Chapter 13 and listed Rosene as a creditor. Rosene filed a contract claim for approximately $18,000. In 1977, Matthews sued Rosene in the Circuit Court of Cook County seeking a declaratory judgment on the validity of the land sale contract. Rosene answered and filed a counterclaim. At the time the suit was filed, the bankruptcy court had made no determination regarding Rosene's claim against the debtor's estate. After trial in November 1978, the circuit court granted Rosene's motion for a directed verdict. The court awarded Rosene more than $20,000 on his counterclaim, and held that Matthews forfeited his interests in the contract. In March 1979, the court awarded Rosene $2,500 attorney's fees.
In April 1981, Rosene obtained a wage deduction summons against Matthews' employer. The employer began garnishing Matthews' wages. Matthews soon thereafter filed in the bankruptcy court a petition for a Rule to Show Cause why Rosene and his lawyer should not be held in contempt for violating the automatic stay provisions of the Bankruptcy Act. Matthews sought also a ruling that the circuit court order was void.
The bankruptcy court dismissed Matthews' petition and ruled that the doctrine of laches prevented it from nullifying a three-year-old state court order. The court stated that Matthews' petition was far too late to challenge the state court's jurisdiction, and the petition, if granted, would seriously prejudice Rosene's rights. The court also noted that Matthews accepted the risk of facing a counterclaim when he instituted his action in the state circuit court. The district court affirmed the bankruptcy court decision, ruling that it was not an abuse of discretion to apply laches to bar Matthews' contempt petition.
Orders issued in violation of the automatic stay provisions of the bankruptcy code, see 11 U.S.C. Sec. 362 (1978), ordinarily are void. (This case arose under Section 714, the precursor to Section 362.) A bankruptcy court, as a court of equity, nevertheless must be guided by equitable principles in exercising its jurisdiction. E.g., Stuhley v. Hyatt, 667 F.2d 807 (9th Cir.1982); In re Amador, 596 F.2d 428 (10th Cir.1979).
The First Circuit has applied equitable principles to protect creditors from unwarranted liability arising from application of Section 362. In In re Smith Corset Shops, Inc., 696 F.2d 971 (1st Cir.1982), the creditors brought an action against the shop owner for trespass and ejectment in state court when the shop owner defaulted on lease payments. The state court ruled for the creditors, allowing them to move the shop owner's goods out of the store and into a warehouse. Unknown to anyone involved in the state court action, the shop owner four days earlier had filed for Chapter 11 reorganization. The bankruptcy court ruled that the creditors had not tortiously converted the shop owner's property notwithstanding the automatic stay provisions of Section 362. A bankruptcy appellate panel reversed. The First Circuit, however, reinstated the bankruptcy court's ruling in favor of the creditors. The court ruled in part that Section 362 is subject to equitable considerations. The court accepted the bankruptcy judge's determination that Section 362 did not render the creditor's actions illegal because the creditors acted in good faith in ignorance of the pending bankruptcy petition and because the bankrupt's unreasonable behavior contributed to the creditor's plight.
The equitable doctrine of laches can apply in a similar manner in ...
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