Raymark Industries, Inc. v. Lai

• Decision Date: 02 September 1992
• Docket Number: No. 91-2099,91-2099
• Citation: 973 F.2d 1125
• Parties: , Bankr. L. Rep. P 74,914 RAYMARK INDUSTRIES, INC., Debtor-Appellant, v. George Q. LAI.
• Court: U.S. Court of Appeals — Third Circuit

Page 1125

973 F.2d 1125

23 Bankr.Ct.Dec. 689, Bankr. L. Rep. P 74,914

RAYMARK INDUSTRIES, INC., Debtor-Appellant, v. George Q. LAI.

No. 91-2099.

United States Court of Appeals, Third Circuit.

Argued June 22, 1992.

Decided Sept. 2, 1992.

James D. Coleman, William A. Slaughter (argued), Janine M. Dlutowski, Ballard, Spahr, Andrews & Ingersoll, Philadelphia, Pa., for debtor-appellant.

Michael L. Goldberg (argued), Mandell, Lewis & Goldberg, McLean, Va., Aaron H. Simon, Kazan, McClain, Edises & Simon, Oakland, Cal., and Paul Reich, Clark, Ladner, Fortenbaugh & Young, Philadelphia, Pa., for appellee.

Present: BECKER, HUTCHINSON and ALITO, Circuit Judges.

OPINION OF THE COURT

HUTCHINSON, Circuit Judge.

Raymark Industries, Inc. (Raymark) appeals from an order of the district court that affirmed a bankruptcy court order denying Raymark's motion to enforce an automatic stay against California state court proceedings. Both the California appellate courts and the bankruptcy court held that the state court action was not stayed by Raymark's involuntary bankruptcy. The bankruptcy court relied on our decision in Mid-Jersey Nat'l Bank v. Fidelity Mortgage Investors, 518 F.2d 640 (3d Cir.1975). There, we held that the automatic stay of the Bankruptcy Act, since repealed and replaced by the Bankruptcy Code, did not apply to cases in which the bankrupt party, pre-petition, had posted a deposit to stay execution of a judgment pending appeal because the deposit so posted was not property of the bankrupt's estate.

Neither the California appellate courts nor the bankruptcy court had the benefit of our decision in Borman v. Raymark Industries, Inc., 946 F.2d 1031 (3d Cir.1991), which was filed while Raymark's appeal from the decision of the bankruptcy court was pending in the district court. In Borman we held that the automatic stay of section 362(a) of the Bankruptcy Code, 11 U.S.C.A. § 362(a) (West 1979 & Supp.1992), applies to a pre-petition state court action against a debtor who has posted a cash deposit to stay execution on a judgment pending appeal, regardless of whether the deposit was considered property of the debtor's estate. Id. at 1035-37. The district court concluded that Borman should not be applied retroactively to this case and instead followed Mid-Jersey.

We hold that the district court erred in failing to apply Borman to this case. Mid-Jersey did not address the automatic stay provision of section 362 of the Code but instead involved the automatic stay as it existed under the now-repealed Bankruptcy Act. As we stated in Borman, the automatic stay of section 362 applies to all actions brought against a debtor, either pre- or post-petition, regardless of whether the assets in question are considered property of the debtor's estate. We will therefore reverse the district court's order and remand with instructions to remand the case in turn to the bankruptcy court for entry of an order vacating the order of the state court dismissing Raymark's appeal.

I.

Appellee George Lai (Lai) was a plaintiff in a products liability action against Raymark in the California Superior Court for the County of Los Angeles (Superior Court). On December 28, 1987 a judgment was entered for him in the amount of $725,000.00 plus costs. Raymark appealed to the Court of Appeal of the State of California, Second Appellate District (California Court of Appeal). On March 21, 1988, Raymark posted a cash supersedeas bond in the amount of $1,087,500.00 with the Clerk of the Superior Court of Los Angeles County. This deposit stayed execution on Lai's judgment pending the California Court of Appeal's disposition of Raymark's appeal.

On February 10, 1989, Raymark was placed in involuntary bankruptcy when one of its creditors filed a petition against it in the United States Bankruptcy Court for the Eastern District of Pennsylvania (bankruptcy court). As of that date, Raymark had not yet secured those portions of the trial transcript that it needed to prosecute its appeal in the California Court of Appeal. On May 15, 1989, Raymark notified the California Court of Appeal and Lai's attorney that it had been placed in involuntary bankruptcy and that the automatic stay prevented it from taking any further action with respect to its appeal. Approximately one year later, on July 9, 1990 Lai filed a motion with the California Court of Appeal to dismiss Raymark's appeal from the Superior Court's judgment for failure to diligently prosecute. On August 2, 1990, the California Court of Appeal directed Raymark to proceed forthwith to secure the court reporter's transcript and to advise the Court by September 4, 1990 of the measures it had taken to do so. The Court deferred ruling on Lai's motion to dismiss until September 5, 1990.

Raymark filed a response stating that it had asked the court reporter for an estimate of the cost of completing the trial transcript two years earlier, and that it had only recently renewed that request. Raymark also filed a motion in which it again advised the California Court of Appeal of the pending involuntary bankruptcy proceeding and asked the state court to stay the case pursuant to the automatic stay provision of the Bankruptcy Code, 11 U.S.C.A. § 362(a). Further, Raymark advised the court that it had communicated to Lai's counsel that it would not oppose any motion by Lai in the bankruptcy court to lift the stay so that the appeal could proceed. On September 4, 1990 the California Court of Appeal dismissed Raymark's appeal for lack of diligent prosecution and in the same order dismissed as moot Raymark's motion to stay the appeal pursuant to section 362's automatic stay.

Raymark then sought enforcement of the automatic stay in the bankruptcy court through a motion for an injunction restraining Lai from executing on the bond. Raymark also sought a declaration that the California Court of Appeal's dismissal of the appeal was null and void along with sanctions against Lai and his attorneys for violating section 362's automatic stay. Lai in turn moved to dismiss Raymark's motion to enforce the automatic stay. He argued that the California Court of Appeal's judgment collaterally estopped Raymark from raising the automatic stay issue in the bankruptcy court.

On October 2, 1990 the bankruptcy court denied Raymark's motion and held that Raymark's state court appeal was not subject to the automatic stay of section 362(a) because the pre-petition cash supersedeas bond was not property of Raymark's bankruptcy estate. In doing so, the bankruptcy court relied on this Court's decision in Mid-Jersey. Raymark appealed to the United States District Court for the Eastern District of Pennsylvania.

While Raymark's motion was pending in the bankruptcy court, it also filed a petition for rehearing in the California Court of Appeal on that court's order dismissing its motion to stay the state proceedings pursuant to section 362. The California Court of Appeal denied Raymark's petition for rehearing on September 25, 1990, and Raymark's subsequently filed Petition for Review was denied by the Supreme Court of California on November 14, 1990. On December 12, 1990, the Clerk of the California Court of Appeal issued a Remittitur Notice stating that the September 4, 1990 judgment of the Superior Court was now final. On April 9, 1991, the Superior Court ordered its Department of Finance to disburse funds in the amount of $960,625.00 from the cash bond posted by Raymark to Lai and his attorneys and to return all remaining funds to Raymark. Lai executed upon the judgment and received the funds on April 17, 1991.

With his state court judgment satisfied, Lai filed a motion in the district court to dismiss Raymark's appeal of the bankruptcy court's order as moot. On October 21, 1991, while Raymark's appeal was pending before the district court, this Court held in Borman that the automatic stay provision of section 362(a) applied to bonded appeals by a bankrupt debtor. See Borman, 946 F.2d at 1036-37. Raymark promptly brought the Borman case to the district court's attention.

On December 23, 1991 the district court denied Lai's motion to dismiss on mootness grounds and affirmed the bankruptcy court's order denying Raymark's motion to enforce the automatic stay. The district court agreed with the bankruptcy court that under controlling Third Circuit precedent in force at the time the California courts entered their orders, the cash posted by Raymark in lieu of the supersedeas bond was not property of the estate and was thus exempt from the automatic stay. The district court therefore believed that the state court orders were not void ab initio and that it did not have authority to vacate the state court rulings under federal principles of comity. The district court also stated that even if Borman applied and the state courts had acted in violation of the automatic stay, Raymark's recourse would have been to file a petition for certiorari with the Supreme Court of the United States after the Supreme Court of California denied review. In support, the district court cited our decision in In re James, 940 F.2d 46, 51 (3d Cir.1991). Raymark filed a timely notice of appeal from the district court's order on December 27, 1991.

II.

The bankruptcy court had subject matter jurisdiction over this matter under 28 U.S.C.A. § 1334(b) (West Supp.1992) and 28 U.S.C.A. § 157 (West Supp.1992). The district court had jurisdiction over the appeal from the bankruptcy court's order pursuant to 28 U.S.C.A. § 158(a) (West Supp.1992). We have appellate jurisdiction over the final order of the district court pursuant to 28 U.S.C.A. § 158(d) (West Supp.1992).

On February 7, 1992, Lai filed a motion to dismiss this appeal on grounds of mootness. That motion was referred to this panel. It must be considered before we can reach the merits of the case. Lai argues that Raymark's appeal is moot because the money Raymark posted with the Clerk of the Superior Court in lieu...