Moody v. State ex rel. DeBellis

• Decision Date: 31 March 1986
• Citation: 487 So.2d 852
• Parties: Shearn MOODY, Jr. and W. Steve Smith, as trustee in bankruptcy for Shearn Moody, Jr. v. STATE of Alabama, ex rel. Michael DeBELLIS, Commissioner of Insurance of the State of Alabama, as receiver of Empire Life Insurance Company of America; and Protective Life Insurance Company. 84-1335.
• Court: Alabama Supreme Court

Page 852

487 So.2d 852

Shearn MOODY, Jr. and W. Steve Smith, as trustee in bankruptcy for Shearn Moody, Jr. v.STATE of Alabama, ex rel. Michael DeBELLIS, Commissioner of Insurance of the State of Alabama, as receiver of Empire Life Insurance Company of America; and Protective Life Insurance Company.

84-1335.

Supreme Court of Alabama.

Decision Announced March 31, 1986.

Opinion Released April 4, 1986.

Michol O'Connor, of Haight, Gardner, Poor & Havens, Kenneth T. Fibich, of Bonham, Carrington & Fox, Houston, Tex., and William Mills and Stephen W. Shaw, of Redden, Mills & Clark, Birmingham, for appellants.

William A. Robinson, of Cabaniss, Johnston, Gardner, Dumas & O'Neal, Birmingham, for appelleeProtective Life Ins. Co.

James W. Webb, of Webb, Crumpton, McGregor, Schmaeling & Wilson, Montgomery, for Receiver of Empire Life Ins. Co. of America.

PER CURIAM.

The appellants, Shearn Moody, Jr., and W. Steve Smith, as Moody's trustee in bankruptcy, appeal from a judgment rendered in Jefferson County Circuit Court in the receivership action of Empire Life Insurance Company("Empire").The judgment was rendered in response to a counterclaim filed by the appellants, and it orders certain distributions of Empire's funds to approved creditors.We affirm.

In 1972, Empire was found to be in a very poor financial position, and consequently was forced into receivership in Jefferson County by the state insurance commissioner for the purpose of liquidation.Moody, who had been the president of Empire and was the principal shareholder, intervened as a defendant in that action in 1973.Because of the receivership action, Protective Life Insurance Company agreed to reinsure the Empire policyholders under a "reinsurance treaty."This treaty was approved by this Court in 1977.Moody v. State ex rel. Payne, 344 So.2d 160(Ala.), cert. denied, 434 U.S. 996, 98 S.Ct. 634, 54 L.Ed.2d 490(1977), reh'g denied, 434 U.S. 1089, 98 S.Ct. 1288, 55 L.Ed.2d 796(1978).

In 1974, the receiver for Empire began a fraud action in federal court against Moody, and in 1979 obtained a judgment for $6.3 million.Meyers v. Moody, 475 F.Supp. 232(N.D.Tex.1979), aff'd, 693 F.2d 1196(5th Cir.1982), reh'g denied, 701 F.2d 173(5th Cir.1983), cert. denied, 464 U.S. 920, 104 S.Ct. 287, 78 L.Ed.2d 264(1983).In 1983, Moody filed for bankruptcy in North Carolina, and that action was transferred to Texas in 1985.Smith is the trustee for Moody in the bankruptcy action.For a more complete statement of the facts surrounding the misfortunes of Empire, seeMeyers v. Moody, 693 F.2d at 1201-05.

Since 1972, a substantial amount of litigation has arisen out of these events, resulting in at least seven reported decisions by this Court and nineteen reported decisions overall, as well as several unreported decisions.Much of the litigation has arisen because of Moody's continuous attempts "to prevent and harass the receivership action."Moody v. State ex rel. Payne, 355 So.2d 1116, 1118(Ala.), cert. denied, 439 U.S. 910, 99 S.Ct. 279, 58 L.Ed.2d 256(1978).

The present action involves a petition filed by the receiver asking for a judgment ordering partial distribution of Empire's funds to approved creditors.The appellants challenged the petition by filing a "Motion to Dismiss or to Stay Proceedings" based on the ground that a restraining order, issued in Moody's bankruptcy action, pursuant to 11 U.S.C. § 105, prohibited a hearing on the petition.The appellants also filed an answer to the petition, and they filed a counterclaim, which was primarily a counter-proposal for the distribution of Empire's funds.A hearing was set for April 23, 1985, on the petition, the counterclaim, and the motion.However, the hearing was continued until June 12, 1985, at which time counsel for Moody presented a "Motion to Cancel" the hearing based on the § 105 restraining order.

At the June 12, 1985, hearing, the motions filed by the appellants to halt the hearing were argued and were overruled.Thereafter, the trial judge proceeded to hear evidence on the appellants' counterclaim, the attorneys for petitioner having stipulated that the petition could be set aside temporarily and the counterclaim argued.However, counsel for the appellants stated that they were not prepared to proceed on the counterclaim because they had relied upon the § 105 restraining order, and they thereafter refused to participate in the hearing.Nevertheless, counsel for the receiver and counsel for Protective Life Insurance Company proceeded with the hearing.

On July 1, 1985, the trial judge issued a "Judgment and Decree" setting forth a distribution schedule for Empire's funds.Moody and Smith are dissatisfied with the distribution schedule, and they appeal from the judgment.

I.

The appellants argue that the trial court erred by hearing evidence and rendering a judgment concerning the receivership because, they argue, these proceedings were prohibited by a bankruptcy court's restraining order filed in the bankruptcy case of Shearn Moody, debtor.The restraining order was issued pursuant to 11 U.S.C. § 105(a), and was signed by the bankruptcy judge on November 17, 1983.A similar automatic stay was also issued pursuant to § 362 of the Bankruptcy Code, but this second stay expired by operation of law.See, 11 U.S.C. § 362(e).

The restraining order purported to enjoin and restrain all persons from "instituting, commencing, continuing or taking any further steps in proceedings or suits against the aforesaid Debtor, or the property of said Debtor until further order of the Court."It also restrained all creditors "from commencing or continuing any civil action or attempting in any manner whatsoever to collect all or any part of a debt with the Debtor as endorser, guarantor or co-maker."The appellants interpret this order as preventing any action in the Empire receivership proceeding because claims by the debtor, Shearn Moody, would be affected.We disagree with this interpretation.

The receivership proceeding is an in rem or quasi in rem proceeding.Moody v. State ex rel. Payne, 295 Ala. 299, 307, 329 So.2d 73, 80(1976).This proceeding was initiated in an Alabama state court in 1972, while the bankruptcy proceeding began in a North Carolina federal court in 1983.The question that arises is whether the federal bankruptcy court has effectively prohibited the state receivership action by issuing an 11 U.S.C. § 105 restraining order.

Because a receivership action is an in rem or quasi in rem action, the receivership court has exclusive jurisdiction to deal with the property of the insolvent corporation.In Moody v. State ex rel. Payne, supra, this Court quoted the following passage from Donovan v. City of Dallas, 377 U.S. 408, 84 S.Ct. 1579, 12 L.Ed.2d 409(1964):

" 'Early in the history of our country a general rule was established that state and federal courts would not interfere with or try to restrain each other's proceedings.That rule has continued substantially unchanged to this time.An exception has been made in cases where a court has custody of property, that is, proceedings in rem or quasi in rem.In such casesthis Court had said that the state or federal court having custody of such property has exclusive jurisdiction to proceed.Princess Lida v. Thompson, 305 U.S. 456, 465-468, 59 S.Ct. 275, 280, 281, 83 L.Ed. 285 .' "(Emphasis added.)

295 Ala. at 307, 329 So.2d at 79-80.See also, Turton v. Turton, 644 F.2d 344, 348(5th Cir.1981).

Also in Moody v. State ex rel. Payne, supra, we stated with approval the following statement by Judge Robert Varner in a related unreported opinion:

"It appears to be the settled rule with respect to suits in equity for the control by receivership of the assets of an insolvent corporation that the Court first assuming jurisdiction may maintain and continue to exercise that jurisdiction to the exclusion of any other court."

295 Ala. at 307, 329 So.2d at 80.

The exclusive jurisdiction exercised by the receivership court was recognized in related litigation by U.S. District JudgeJ. Foy Guin, Jr., who, in an order of January 23, 1984, stated: "This Court determines as a matter of law that the Empire receivership case is not subject to bankruptcy proceedings of any type."Judge Guin, in an order of February 17, 1984, also stated: "The Empire receivership proceedings ... are not, as a matter of law, subject to the jurisdiction of federal bankruptcy courts."

Furthermore, the § 105 restraining order does not apply in this case because bankruptcy courts have held that a § 105 restraining order cannot be used to extend the bankruptcy "automatic stay" provision of 11 U.S.C. § 362 once the § 362 stay has expired.In the case of In re Wood, 33 B.R. 320, 322-23(Bankr.D.Idaho1983), the plaintiff attempted to avoid the thirty-day automatic termination provision of § 362(e) by filing a motion for a restraining order pursuant to § 105.The court held that § 105 could not nullify the operation and the termination provision of § 362, because Congress has expressly limited the length of such a stay.The court concluded that it could not "vary the operation of the Code through recourse to § 105(a)."This reasoning has been followed in In re Pirsig Farms, Inc., 46 B.R. 237(Bankr.D.Minn.1985), andIn re Willbet Enterprises, Inc., 43 B.R. 90(Bankr.E.D.Pa.1984).

Therefore, on the basis of our opinion in Moody v. State ex rel. Payne, supra, which followed the holdings of Donovan, supra, Princess Lida, cited in the excerpt from Donovan, and Kline v. Burke Construction Co., 260 U.S. 226, 43 S.Ct. 79, 67 L.Ed. 226(1922), as well as the bankruptcy decisions cited above, we...