Sierra Switchboard Co. v. Westinghouse Elec. Corp.

Decision Date07 May 1986
Docket NumberI-40,Nos. 84-2840,84-2857,s. 84-2840
Citation789 F.2d 705
Parties, 14 Collier Bankr.Cas.2d 1064, 14 Bankr.Ct.Dec. 709, Bankr. L. Rep. P 71,145 SIERRA SWITCHBOARD CO., and Ella Fehl, Plaintiffs-Appellants, Cross-Appellees, v. WESTINGHOUSE ELECTRIC CORPORATION; Thomas R. Domeno; Dardanella Electric Corp., and DoesInclusive, Defendants-Appellees, Cross-Appellants.
CourtU.S. Court of Appeals — Ninth Circuit

P> John W. Clark, Michael J. Korda, Clark & Korda, San Jose, Cal., for plaintiffs-appellants, cross-appellees.

Mike C. Buckley, Crosby, Heafey, Roach & May, Oakland, Cal., for defendants-appellees, cross-appellants.

Appeal from the United States District Court for the Northern District of California.

Before SKOPIL, FLETCHER, and WIGGINS, Circuit Judges.

FLETCHER, Circuit Judge:

Ella Fehl ("Fehl") appeals the district court's judgment affirming the bankruptcy court's dismissal of her emotional distress claim against defendants Westinghouse and Thomas Domeno ("Westinghouse"). Westinghouse cross-appeals for dismissal, asserting that the district court should have dismissed Fehl's appeal for failure to designate timely a record and issues on appeal.

We affirm the district court's decision dismissing Fehl's appeal on the ground that Fehl's emotional distress claim belonged to the bankruptcy estate.

I. FACTS

Fehl was a co-owner and manager of Sierra Switchboard Company. Sierra designed and manufactured electrical equipment, and had an ongoing commercial relationship with Westinghouse. Thomas Domeno was a managerial employee of Westinghouse.

In a 1981 state court action arising out of commercial transactions between Sierra and Westinghouse, Fehl cross-complained against Westinghouse for emotional distress. Fehl alleged she suffered emotional distress because Westinghouse, inter alia, conspired to interfere with Sierra's contractual and business relationships, breached a security agreement under which Fehl had personally guaranteed Sierra's debts, and breached a credit agreement.

In October 1981, Fehl and Sierra Switchboard filed for bankruptcy. The entire state court action was removed to bankruptcy court. Westinghouse, Fehl, the trustee for Fehl's estate and others signed a stipulation dismissing the removed state court action without prejudice, with a proviso that any party could refile the action within one year. Within one year, Fehl refiled in bankruptcy court. The bankruptcy court dismissed Fehl's claim without making any findings or conclusions.

Although Fehl's notice of appeal to the district court was timely, Fehl did not comply with Bankruptcy Rule 8006 that requires designation of a record and issues on appeal within ten days after filing the notice of appeal.

The district court permitted Fehl to appeal even though the designation of record was untimely. After briefing, the district court remanded the action to bankruptcy court for written findings and conclusions. The bankruptcy court concluded that because the claim was the property of the bankruptcy estate and had not been abandoned by the trustee, Fehl lacked capacity to sue. Fehl objected.

The district court affirmed the bankruptcy court decision on the ground that the emotional distress claim was the property of the estate. Fehl timely appeals to this court.

II. DISCUSSION
A. Failure to Designate a Record and Issues on Appeal

Bankruptcy Rule 8006 requires an appellant to file a designation of items to be included in the record and a statement of issues within 10 days after filing a notice of appeal. Bankruptcy Rule 9006(b)(1) states in part:

[W]hen an act is required or allowed to be done at or within a specified period by these rules ... the court for cause shown may at any time in its discretion ... on motion made after the expiration of the specified period permit the act to be done where the failure to act was the result of excusable neglect.

Bankruptcy Rule 8001(a) provides in part:

Failure of an appellant to take any step other than the timely filing of a notice of appeal does not affect the validity of the appeal, but is ground only for such action as the district court or bankruptcy appellate panel deems appropriate, which may include dismissal of the appeal.

We review for an abuse of discretion a district court's decision regarding the imposition of sanctions for non-compliance with non-jurisdictional bankruptcy procedural requirements. We find no abuse. See In re Hill, 775 F.2d 1385, 1386-87 (9th Cir.1985).

In In re Hill, the bankruptcy trustee timely appealed the bankruptcy judge's adverse decision to the district court, but failed to file a brief within the time frame specified under the bankruptcy rules. The trustee failed to seek the district court's permission to file a late brief and did not satisfactorily explain his failure to file a brief. A week after the time period for filing a brief had elapsed, appellees in the action filed a motion to dismiss the appeal. On the following day, the trustee filed his brief with the district court clerk. The district court later granted appellees' motion to dismiss. The trustee then filed a motion to reconsider the order to dismiss and permit late filing of the brief, which the district court denied.

We held that the district court's action constituted an abuse of discretion. We explained:

[T]he default was the fault of the attorneys and not the litigant. Yet the impact of the sanction imposed is primarily against the client. We have no intent to disavow the established principle that the faults and defaults of the attorney may be imputed to, and their consequences visited upon, his client. We do, however, believe that when any court is considering the imposition of sanctions for non-jurisdictional, procedural defaults and deficiencies in the management of litigation, the selection of the sanction to be imposed must take into consideration the impact of the sanction and the alternatives available to achieve assessment of the penalties in conformity with fault. Absent such consideration, there is an abuse of discretion.

Id. at 1387.

Similarly, in this case failure to designate a record and issues on appeal and failure to move for enlargement of time was the fault of the attorney and not Fehl. The primary impact of dismissal of the appeal would have been against Fehl. Having considered these factors, the district court was well within its discretion to permit Fehl's appeal to go forward. Accord In re Bienert, 48 B.R. 326, 327 (N.D.Iowa 1985) (where debtors and their attorney showed no bad faith with reference to their untimely designation of record and issues on appeal, action should not be dismissed. "[J]ustice is better served when controversies are decided on their merits rather than procedural technicalities.").

B. The Emotional Distress Claim as Property of the Bankruptcy Estate

The district court held that Fehl's emotional distress claim was the property of the bankruptcy estate under 11 U.S.C. Sec. 541(a)(1). Questions of statutory interpretation are reviewed de novo. Powell v. Tucson Air Museum Foundation of Pima County, 771 F.2d 1309, 1311 (9th Cir.1985).

11 U.S.C. Sec. 541(a)(1) (1982) defines property of the bankruptcy estate to include "all legal or equitable interests of the debtor in property as of the commencement of the case." The scope of section 541 is broad, and includes causes of action. United States v. Whiting Pools, Inc., 462 U.S. 198, 205 & n. 9, 103 S.Ct. 2309, 2313 & n. 9, 76 L.Ed.2d 515 (1983). Section 70a(5) of the Bankruptcy Act, former 11 U.S.C. Sec. 110(a)(5)(1976), the predecessor statute to section 541, defined property to include:

[r]ights of action, which prior to the filing of the petition [the bankrupt] could by any means have transferred or which might have been levied upon and sold under judicial process against him, or otherwise seized, impounded, or sequestered: Provided, That rights of action ... for injuries to the person of the bankrupt ... shall not vest in the trustee unless by the law of the State such rights of action are subject to attachment, execution, garnishment, sequestration, or other judicial process....

The issue before us is whether the Bankruptcy Reform Act of 1978 broadened the definition of "property" to include a cause of action for emotional distress where such a cause of action could not be reached by creditors under state law. 1 See Purdy v. Pacific Automobile Insurance Co., 157 Cal.App.3d 59, 79-80, 203 Cal.Rptr. 524, 536 (1984). This is an issue of first impression in this circuit. The Fourth and Sixth Circuits, having analyzed the scope of section 541, reached conflicting results.

In Tignor v. Parkinson, 729 F.2d 977 (4th Cir.1984) the Fourth Circuit broadly construed section 541 and held that an unliquidated personal injury claim was property of the bankruptcy estate. The court, recognizing that such claims would have been excluded under former section 70a as a non-transferable interest, unreachable by creditors, reasoned:

The Bankruptcy Reform Act which repealed the old Bankruptcy Act is a significant change in the law applicable to the property of the bankrupt estate. Under the old Act only non-exempt property was included as part of the bankrupt estate.... Under the Reform Act, however, all property of the debtor is included in the bankrupt estate, including exempt property. "After the property comes into the estate, then the debtor is permitted to exempt it under proposed 11 U.S.C. Sec. 522, and the court will have jurisdiction to determine what property may be exempted ..." Legislative History, 1978 U.S.Code Cong. & Ad.News at 5787, 5868, 6324 ... The legislative history of this statute is explicit ...: "The scope of this paragraph is broad. It includes all kinds of property, including tangible or intangible property, causes of action...."

The fact that the schedule of...

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