Pace, In re, 93-56685

• Decision Date: 08 June 1995
• Docket Number: No. 93-56685,93-56685
• Citation: 56 F.3d 1170
• Parties: , Bankr. L. Rep. P 76,513 In re Jeri L. PACE, Debtor. John E. HAVELOCK; John R. Strachan, Appellants, v. Harold S. TAXEL, Trustee, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1170

56 F.3d 1170

64 USLW 2015, Bankr. L. Rep. P 76,513

In re Jeri L. PACE, Debtor John E. HAVELOCK; John R. Strachan, Appellants, v. Harold S. TAXEL, Trustee, Appellee.

No. 93-56685.

United States Court of Appeals Ninth Circuit.

Argued and Submitted May 11, 1995.

Decided June 8, 1995.

Thomas J. Yerbich, Yerbich & Associates, Anchorage, AK, for appellants.

Richard C. Norton, Estes & Hoyt, San Diego, CA, for appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel.

Before: HALL and LEAVY, Circuit Judges, and HOGAN, ^* District Judge.

LEAVY, Circuit Judge:

Debtor's counsel appeal from an affirmance of the bankruptcy court's award of costs and attorney's fees to the trustee, arguing that the trustee is not entitled to recover his fees under either sections 105(a) or 362(h) of the Bankruptcy Code. We uphold the decision in favor of the trustee but remand for a determination of the amount of damages to be awarded under section 105(a).

FACTS AND PRIOR PROCEEDINGS ¹

Jeri LeMai ("LeMai") and her former husband, H. Russell Pace ("Pace"), were joint shareholders in and sole owners of two Alaska corporations, The Pines Corporation and Pace Corporation (jointly, "the Corporations"). The Corporations' principal assets consisted of an Alaska nightclub and two liquor licenses. In May of 1984, LeMai and Pace retained the services of a local law firm to help them sell their interest in the Corporations. In January of 1985, the Corporations sold their assets, including the liquor licenses, to two individuals and a newly formed corporation, The New Pines Corporation ("NPC").

NPC issued a promissory note ("the Note") for a portion of the purchase price, and secured the Note with the two liquor licenses. LeMai and Pace later divorced, and LeMai received a sixty percent interest in the Note as a portion of her divorce settlement. Unfortunately, NPC did poorly and filed a Chapter 11 petition in bankruptcy in March of 1986. Three months later, the case was converted to a Chapter 7 liquidation. Pace then filed his own Chapter 11 petition in bankruptcy in September of 1986, which the bankruptcy court converted to Chapter 7 in December of the same year. Pace listed his security interest in the two liquor licenses as an exempt asset of his estate.

In May of 1987, the trustee in the NPC bankruptcy sold the two liquor licenses. Shortly thereafter, LeMai and Pace learned that, as the result of their attorneys' failure to include the two licenses in the UCC filings at the time NPC acquired the Corporations' assets, LeMai and Pace's purported security interest in the licenses was invalid. As a result, LeMai and Pace filed a malpractice action against their former lawyers in Alaska In May of 1988, LeMai filed her own Chapter 7 petition in bankruptcy in California, where she had moved following her divorce. LeMai failed to include her Alaska state claim for legal malpractice as an asset on her schedule of assets and liabilities. ³ Believing LeMai's estate to be devoid of assets, the trustee allowed an order of discharge to be entered in September of that year. Five months later, the California bankruptcy court closed LeMai's case.

                state court in October of 1987. 2  Pace did not amend his bankruptcy schedules of assets and liabilities to include the law suit
                

Following her discharge in bankruptcy, LeMai entered into an agreement with Pace in July of 1989 to share any proceeds received from the Alaska malpractice action. LeMai then retained John E. Havelock ("Havelock") to prosecute the Alaska law suit, and Pace hired John R. Strachan ("Strachan") to do the same. ⁴ When Pace informed Strachan of his pending bankruptcy, Strachan decided not to proceed with the malpractice action until after Pace had been discharged and his bankruptcy case closed, because "there was little point in proceeding with a case if the only beneficiaries of the work involved were to be creditors." Havelock v. Taxel (In re Pace), 159 B.R. 890, 893 (9th Cir. BAP 1993) (quoting Strachan). Following Pace's discharge in bankruptcy in September of 1989, Havelock and Strachan ("the Appellants") filed a second amended complaint in the malpractice action, listing both LeMai and Pace as plaintiffs.

In April of 1990, LeMai disclosed to Havelock that she, too, had been in bankruptcy and that she had also received a discharge without ever having listed the malpractice action as an asset of her estate. Neither Havelock nor Strachan considered this information to be significant; however, when the defendant attorneys in the state court action ("the Defendants") learned of LeMai and Pace's nondisclosures, they urged the Appellants to inform the trustees in the two closed bankruptcies that the malpractice action constituted an asset of their respective bankruptcy estates. The Appellants refused the request, whereupon the Defendants filed a motion in Alaska state court, asking that the trustees be substituted as the real parties in interest. The Appellants opposed the motion and managed to convince the Alaska state court that the trustees had abandoned their interests in the malpractice action and were not the real parties in interest. The Alaska state court denied the motion to substitute, and the Appellants continued to conceal the malpractice action from the trustees.

In December of 1990, the Defendants informed the United States Trustee in San Diego of the pending Alaska law suit. The U.S. Trustee in turn notified Harold S. Taxel ("Taxel"), former trustee in the LeMai bankruptcy. Taxel successfully petitioned the California bankruptcy court to reopen LeMai's case, and on February 7, 1991, the bankruptcy court reappointed Taxel as trustee. Taxel immediately informed the Appellants that LeMai's bankruptcy estate had been reopened, explained that her interest in the legal malpractice action constituted property of the bankruptcy estate, and warned that any further prosecution of the Alaska law suit would constitute a violation of the Bankruptcy Code's automatic stay provision. ⁵

The Appellants ignored the warning and continued to prosecute the Alaska case.

On February 13, 1991, a settlement conference was held in the Alaska state court proceedings. LeMai and Pace offered to dismiss their claims against the Defendants for $300,000; the Defendants agreed on the condition that the trustees ⁶ would approve of the settlement. Upon learning of the proposed settlement, the two bankruptcy trustees refused to agree thereto unless the proceeds were deposited into an escrow account not subject to disbursement until after the trustees' claims to the proceeds had been resolved. The parties agreed, and the funds were deposited into the escrow account on March 7, 1991.

The very next day, the Appellants filed a motion with the Alaska state court, asking that all of the settlement proceeds be disbursed to them within seven days. The Appellants failed to serve their motion on the trustee in Pace's reopened bankruptcy case, and Taxel only learned of the motion on March 14, 1991, one day before the funds were due to be disbursed. Upon learning of the Appellants' March 8 motion, Taxel promptly demanded that they withdraw their request for disbursement and warned them that the motion was a violation not only of the automatic stay, but of the settlement agreement as well. The Appellants refused to withdraw the motion. Both trustees and one of the Defendants opposed the motion, which was eventually denied by the Alaska state court.

Meanwhile, Taxel had filed an adversary proceeding in the California bankruptcy court against the Appellants, asserting a claim for the settlement proceeds, requesting damages for violations of the automatic stay, and seeking both declaratory and injunctive relief. On March 28, 1991, the bankruptcy court issued a preliminary injunction, enjoining the Appellants from receiving or disbursing the settlement proceeds during the pendency of the adversary proceeding.

The Appellants did not give up. When they failed in their attempts to have the bankruptcy court dismiss the adversary proceeding, they filed a motion in the Alaska state court on December 6, 1991, asking that court either to allocate the settlement proceeds, permit allocation by jury, or dissolve the settlement agreement. The Alaska state court denied the motion.

On June 9, 1992, the bankruptcy court entered summary judgment in favor of Taxel, holding that (1) the proceeds of the state court malpractice action were property of LeMai's bankruptcy estate, (2) the Appellants had willfully violated the automatic stay, and (3) Taxel was entitled to recover his costs from the Appellants, including attorney's fees, incurred in fighting the Appellants' various attempts to get their hands on the settlement proceeds. The Appellants challenged each of these rulings before the Bankruptcy Appellate Panel ("BAP"). The BAP affirmed the bankruptcy court, and the Appellants have timely appealed to this court.

ANALYSIS

Standard of Review

Because we are in as good a position as the BAP to examine the decision of the bankruptcy court, we independently review the bankruptcy court's rulings. See Dominguez v. Miller (In re Dominguez), 51 F.3d 1502, 1505-06 (9th Cir.1995) (quoting Allred v. Kennerley (In re Kennerley), 995 F.2d 145, 146 (9th Cir.1993)). We examine de novo the bankruptcy court's conclusions of law, while reviewing for clear error its factual findings. See id.

Discussion

I. Attorney's Fees under 11 U.S.C. Sec. 362(h)

A. Willful Violation of Stay

The Appellants first contend that they should not be required to pay any, or at "An individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorney's fees, and, in appropriate circumstances, may recover punitive damages." 11 U.S.C. Sec. 362(h).

                least, not all of the attorney's fees imposed by the bankruptcy court, because they did not willfully violate the automatic stay, and

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