McCarthy Johnson & Miller v. North Bay Plumb., SIDD-CHAMPIO

Citation217 F.3d 1072
Decision Date06 July 2000
Docket NumberAPPELLEE,SIDD-CHAMPIO,99-15415,V,DEBTORS-APPELLANTS,No. 99-15413,99-15413
Parties(9th Cir. 2000) IN RE: ELMAR LEE PETTIT AND AUDREY JEAN PETTIT, DEBTORS. IN RE: NORTH BAY PLUMBING, INC., DEBTOR. MCCARTHY, JOHNSON & MILLER, A LAW FIRM; JOHN J. DAVIS; DIANENORTH BAY PLUMBING, INC.; ELMAR LEE PETTIT, A/K/A ELMAR LEE PETTIT; AUDREY JEAN PETTIT, IN RE: ELMAR LEE PETTIT AND AUDREY JEAN PETTIT, DEBTORS. IN RE: NORTH BAY PLUMBING, INC., DEBTOR. BAY AREA PIPE TRADES TRUST FUNDS, APPELLEES, V. NORTH BAY PLUMBING, INC.; ELMAR LEE PETTIT; A/K/A ELMAR LEE PETTIT; AUDREY JEAN PETTIT,
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

[Copyrighted Material Omitted] Todd M. Bailey, McDonough, Holland & Allen, Sacramento, California, for appellants North Bay.

Pamela C. Jackson, Pamela C. Jackson, Inc., Vacaville, California, for appellants Elmar Lee Pettit and Audrey Jean Pettit.

Theodore W. Phillips, Phillips, Greenberg, Strain & Hauser, San Francisco, California, for appellees McCarthy Johnson & Miller.

John J. Davis, Jr., McCarthy, Johnson & Miller, San Francisco, California, Steven A. Hirsch, Keker & Van Nest, L.L.P., San Francisco, California, for appellees Bay Area Pipe Trades Trust Funds.

Appeals from the United States District Court for the Eastern District of California Frank C. Damrell, Jr., District Judge, Presiding D.C. No. CV-98-00641-FCD; D.C. No. CV-98-01175-FCD

Before: Mary M. Schroeder, Robert R. Beezer, and Stephen S. Trott, Circuit Judges.

Trott, Circuit Judge

Appellants Elmar Lee Pettit, his spouse Audrey Jean Pettit, and North Bay Plumbing, a corporation wholly owned by the Pettits (collectively "Pettits" or "Appellants"), appeal from a decision of the district court. The court reversed the bankruptcy court's determination that appellees -- Bay Area Pipe Trades Health & Welfare Trust Fund, Bay Area Trades Pension Trust Fund, Northern California Pipe Trades Health & Welfare Trust Fund, Northern California Pipe Trades Pension Trust Fun, U.A. Local 343 Health & Welfare Trust Fund, and U.A. Local 343 Pension Trust Fund; and counsel for these funds, the law firm of McCarthy, Johnson & Miller ("McCarthy, Johnson"), and two of its individual attorneys, John Davis, Jr. and Diane Sidd-Champion (collectively "Trust Funds") -- violated the automatic stay provision of the Bankruptcy Code, 11 U.S.C. S 362(a), by obtaining and retaining registry funds held by the court in connection with a lawsuit filed by the Trust Funds against Appellants.

The district court concluded that, at the time the Pettits filed for bankruptcy, the registry funds were no longer property of their estate and, thus, were not subject to the automatic stay. On appeal, the Pettits argue that (1) the registry funds were property of the bankruptcy estate; and (2) even if the funds ultimately are found not to be property of the estate, where there is a bona fide dispute as to whether property is part of the bankruptcy estate, the burden should be on the creditor to seek a determination from the bankruptcy court as to whether the property is subject to the automatic stay. This court has jurisdiction pursuant to 28 U.S.C. S 158(d), and we AFFIRM the district court.

I.

The Pettits are debtors in a bankruptcy case pending before the United States Bankruptcy Court for the Eastern District of California. The Trust Funds, which are established under Section 302 of the Labor Management Relations Act, 29 U.S.C. S 186, manage the employee benefit contributions that Appellants were required to pay under a collective bargaining agreement.

In 1987, the Trust Funds sued the Pettits in the United States District Court for the Northern District of California for violations of federal labor law and, in 1992, obtained a $4.55 million award on summary judgment. The Pettits appealed, and execution of judgment was stayed pending appeal on condition that the Pettits deposit $700,000 into the district court's registry fund in lieu of a supersedeas bond. On appeal, this court reversed the district court's grant of summary judgment and remanded the matter for trial.

Following the Ninth Circuit's ruling, and pending trial, the Pettits moved to release the $700,000 in security held in the court's registry. This motion was denied. At the same time, the Trust Funds applied for a prejudgment writ of attachment, attempting to attach "virtually all of [the Pettits'] business assets." Before the district court formally ruled on this motion, however, the Pettits, the Trust Funds, and the district court reached an agreement, whereby the Trust Funds' motion for prejudgment attachment would be denied on condition that the $700,000 would remain in the court's registry as judgment security for the upcoming trial on the merits and would not be released "pending further order of the court."

The trial resulted in a $1.8 million jury verdict in favor of the Trust Funds and judgment was entered on April 15, 1996. The award also entitled the Trust Funds to attorneys' fees, for which they claimed an excess of $1.2 million. The Pettits appealed the judgment, which this court recently affirmed in a published opinion. See Local 159 v. Nor-Cal Plumbing, 185 F.3d 978 (9th Cir. 1999).

Following the trial, the Pettits moved for (1) judgment as a matter of law; (2) a new trial; (3) a stay of execution pending appeal to the Ninth Circuit; and (4) a reduction or waiver of the funds in the court's registry serving as judgment security which, because the district court permitted the Pettits to make two withdrawals for legal fees before trial, totaled approximately $523,000 at the time of the verdict. On May 21, 1996, the district court denied all of the Pettits' motions and ordered the balance of the registry funds to be released to the Trust Funds. In discussing a possible stay of execution, Judge Illston stated:

Well, my concern is, I want the stay to be lifted in this court before the bankruptcy court asserts jurisdiction over any of the assets in this court.... If there's a bankruptcy filing that intervenes, I think that does make things very much more complicated than they should be. I do not think that should happen before this court has an opportunity to release the funds if there is no stay.

Moreover, when asked if the court intended to release the funds that day, Judge Illston responded:

I was going to sign [the Order Directing Clerk's Release of Funds] today because I didn't want the bankruptcy filing to interfere with that process. But if I get a stipulation from defendants that they won't file the bankruptcy until the issue of the stay in the Ninth Circuit is resolved, and these funds can be released if it's denied, then I won't sign it today.

After consulting with his clients, the Pettits' counsel withdrew the request for a stay pending appeal. Accordingly, Judge Illston immediately signed the order releasing the funds in the court registry to the Trust Funds. The "Order Directing Clerk's Release of Funds," executed and filed on May 21, 1996, provided that:

A judgment having been entered on the jury's verdict herein, the Clerk of the court is hereby directed to release all funds being held on deposit in this action and to disburse said funds, including accrued interest, to the law firm of McCarthy, Johnson & Miller as attorneys for the plaintiffs herein.

Because no one was available in the clerk's office after the hearing, counsel for the Trust Funds could not get a check for the registry funds issued that evening.

Hours after Judge Illston signed the order directing the clerk to release the funds, the Pettits filed bankruptcy petitions in the Eastern District of California under Chapter 11 of the Bankruptcy Code. Specifically, the Chapter 11 petition for Elmar and Audrey Pettit was filed at 8:49 p.m. on May 21, 1996, and the petition for their corporation, North Bay Plumbing, was filed earlier in the day at 4:56 p.m. After filing the petitions, counsel for the Pettits notified the Trust Funds' counsel that the Pettits and North Bay had filed bankruptcy petitions, and that "any action taken by you or your clients to enforce any judgment would be in violation of the automatic stay provisions of 11 U.S.C. S 362(a)."

The following morning, May 22, 1996, John J. Davis, Jr., an attorney with McCarthy, Johnson, counsel for the Trust Funds, went to the clerk's office at the United States District Court for the Northern District of California and obtained a check for $523,117.69 drawn on the court's registry account, pursuant to the "Release of Funds" order signed the day before by Judge Illston. Before the check was actually issued, Mr. Davis and the courtroom deputy clerk passed by the court clerk's office where an attorney employed by the Pettits' law firm was waiting for the public counter to open so that he could deliver a letter informing the district court about the bankruptcy petitions. When the public counter opened, the Pettits' attorney delivered the letter about the bankruptcy petitions and explained its urgency. However, the clerk told the attorney that the check had already been issued.

With check in hand, Mr. Davis proceeded directly from the courthouse to the Bank of America branch where McCarthy, Johnson maintained its firm trust account and deposited the $523,117.69 into the account. Subsequently, counsel for the Pettits sent McCarthy, Johnson three letters notifying the Trust Funds that they had violated the automatic stay in bankruptcy and demanding that they return the funds to the Pettits. The Trust Funds refused to return the funds.

Faced with this refusal, on July 10, 1997, more than a year after filing their bankruptcy petitions, the Pettits moved the bankruptcy court to hold the Trust Funds in contempt for willful violation of the automatic stay provisions under 11 U.S.C. S 362(a) ("section 362") and for an order compelling the return of estate assets seized in...

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