Graziani v. Randolph

887 A.2d 1244, 2005 Pa. Super. 378, 2005 Pa. Super. LEXIS 4008

• Court: Superior Court of Pennsylvania
• Decided: November 9, 2005
• Status: Published

Opinions

OPINION BY

JOHNSON, J.:

¶ 1 Eric L. Randolph and Burlington Motor Carriers, Inc., an Indiana Corporation (collectively, Burlington; individually, Randolph and BMC), appealed the trial court’s order dismissing their Motion to Strike Complaint and Strike or Open Default Judgment, their Motion for Demand for Jury Trial, and their Petition for Recu-sal or Hearing on Recusal. Relying largely on the Agreed Order Modifying the Automatic Stay between the parties approved by the United States Bankruptcy Court for the Southern District of Indiana (“Bankruptcy Court”), we found no merit in Burlington’s appeal and thus affirmed the trial court’s decision. This case is now before us on remand from our Supreme Court with instructions to reconsider our earlier decision in light of the Bankruptcy Court’s March 28, 2005 “Clarification Order of the United States Bankruptcy Court for the Southern District of Indiana, Indianapolis Division” (“2005 Clarification Order”).

¶ 2 For the sake of clarity, we restate the following relevant facts. On November 25, 2000, a commercial tractor-trailer owned by BMC and driven by Randolph allegedly struck Graziani’s car in Beaver County, Pennsylvania, causing Graziani severe and permanent injuries. On July 9, 2001, BMC filed a Bankruptcy Petition under Chapter 11 in United States Bankruptcy Court for the Southern District of Indiana, Indianapolis Division. Graziani received no notice of BMC’s bankruptcy filing.

¶ 3 On March 22, 2002, having no knowledge of BMC’s bankruptcy petition, Gra-ziani filed a complaint in the Court of Common Pleas of Beaver County, seeking relief against both BMC and Randolph. BMC and Randolph were served with copies of the complaint. On June 18, 2002, after Randolph and BMC failed to appear or otherwise acknowledge Graziani’s complaint, Graziani was awarded default judgments against both parties.

¶4 On November 1, 2002, Graziani moved the trial court to schedule a non-jury trial to liquidate the default judgments entered in June 2002. That motion was denied, however, when counsel entered an appearance for both BMC and Randolph and produced a stay order issued by the Bankruptcy Court in connection with BMC’s bankruptcy petition.

¶ 5 On January 23, 2003, Graziani secured the Agreed Order from the bankruptcy court modifying the automatic stay effective in connection with BMC’s bankruptcy petition. Due to its importance to this litigation, we include below all material portions of that order.

AGREED ORDER MODIFYING AUTOMATIC STAY

Robert S. Koor, Trustee herein (the “Trustee”), and Tina A. Graziani, (“Plaintiff’) herewith agree that the automatic stay in this bankruptcy case arising pursuant to Section 362 of the Bankruptcy Code be modified as specified below, ask the Court to enter this Agreed Order, and in support thereof state as follows:

1. The above-captioned Debtors filed their voluntary Petitions for Relief under Chapter 11 of the Bankruptcy Code on July 9, 2001 (the “Petition Date”), and operated their businesses as Debtors-in-Possession until subsequent conversion of their cases.

2. Each of the Debtors’ cases was converted to a case under Chapter 7 of the Bankruptcy Code by Order of this Court on May 17, 2002.

‡ ^ ‡ $

5. Plaintiff is an individual who has filed a currently pending suit against one or more of the Debtors in The Court of Common Pleas of Beaver County, Pennsylvania under Case No. 10501 of 2002 (the “Pending Action”).

6. The Plaintiffs claim in the Pending Action arises from events occurring prior to the Petition Date.

7. The Plaintiff wishes to continue litigation of the Pending Action.

8. The Trustee intends to exercise his discretion pursuant to F.R.P.B. 6009 not to appear or defend in the Pending Action.

9. The Trustee has no objection to the continued litigation of the Pending Action except to the extent that such continued litigation creates a financial burden upon the bankruptcy estates.

10. The Trustee and the Plaintiff hereby agree:

a. that the automatic stay in these cases arising pursuant to Section 862 of the Bankruptcy Code should be modified to permit continued litigation of the Pending Action against the Debtors;

b. that the Plaintiff shall bear all costs and expenses of any discovery demands and of any other demands or requests addressed to the Trustee or the bankruptcy estates; and

c. that the Plaintiff shall pay all such costs and expenses in advance of their incurrence by the bankruptcy estates.

d. That, unless further ordered by this Court, the Plaintiff may enforce any judgment or settlement obtained in the Pending Action or otherwise only, but without further order of court, to the extent of either (a) the Debtors’ insurance coverage (including any deposits or bonds securing deductibles) or (b) assets of non-debtors.

Agreed Order Modifying Automatic Stay (hereinafter, “Agreed Order”), filed January 16, 2003, at 1-3. The Honorable Anthony J. Metz, United States Bankruptcy Court, approved the Agreed Order on January 23, 2003.

¶ 6 On February 19, 2003, Graziani again moved the trial court to schedule a non-jury trial to liquidate damages, this time affixing to her motion a copy of the Agreed Order. Burlington did not oppose the motion. The trial court granted Graziani’s request, scheduling the requested non-jury trial for May 5, 2003.

¶ 7 On May 1, 2003, Burlington filed a number of motions, including a Motion for Demand for Jury Trial, a Motion for Reconsideration, a Motion to Strike Complaint and to Strike and/or Open Default Judgments (hereinafter, “Motion to Strike or Open”), and a Petition for Recusal or Alternatively for Hearing on Recusal. By Opinion dated May 19, 2003, the trial court responded to Burlington’s petition and motions, granting in part Burlington’s Motion for Reconsideration, but denying the balance of Burlington’s motions and its petition concerning recusal. The trial court also found, where the language adopted by the bankruptcy court clearly identifies specific pending litigation, and uses language indicating an intent that the referenced litigation should proceed as originally filed, that Graziani need not file any new documents, but rather may stand on his or her previously filed complaint. Trial Court Opinion (T.C.O.), 5/19/03, at 5-8, 9.

¶ 8 Burlington appealed the trial court’s ruling, arguing that the trial court erred in declining to strike Graziani’s complaint and consequently in declining to strike or open the default judgments that were entered when Burlington failed to respond to that complaint. Burlington argued that the filing of Graziani’s complaint violated the automatic stay provision of 11 U.S.C. § 362(a), that this violation rendered the complaint void ab initio, and that the trial court improperly construed the Bankruptcy Court’s Agreed Order to apply retroactively, thus curing the putative violation of § 362(a). After a comprehensive review of relevant law, we declined the invitation to address the controversial question whether a complaint is void ab initio versus merely voidable, because a bankruptcy court has discretion to effectuate, for example, an agreed order permitting pending litigation to proceed notwithstanding § 362(a), where circumstances support that decision. See, e.g., E. Refractories Co. Inc. v. Forty Eight Insulations Inc., 157 F.3d 169, 172 (2d Cir.1998); Sikes v. Global Marine, Inc., 881 F.2d 176, 178-79 (5th Cir.1989).

¶ 9 With this analysis in hand, we next considered the adequacy of the Agreed Order in this case to provide retroactive relief to Graziani, thus preserving her complaint and the default judgment that followed. After a review of the Order, we found that the Agreed Order in this case was clear as to the Bankruptcy’s Court’s intent. We also found that the Agreed Order validated Graziani’s complaint and did not require that she file a new complaint to maintain her personal injury claim. Further, we found the Agreed Order identified Graziani as one “who has filed a currently pending suit against one or more of the Debtors in The Court of Common Pleas of Beaver County, Pennsylvania under Case No. 10501 of 2002,” and defined that suit as the “Pending Action.” Moreover, the Bankruptcy Court noted that Graziani’s claim in the Pending Action arises from events occurring prior to the Petition Date.

¶ 10 We considered whether, given the validity of the initial complaint, the trial court acted properly in denying Burlington’s Motions to Strike or Open the default judgment entered on that complaint. We relied upon the fact that there is substantial agreement among federal courts that a bankruptcy court may afford retroactive relief from the automatic stay even as to litigation initiated after the filing of a bankruptcy petition. See, e.g., In re Schwartz, 954 F.2d 569, 572-73 (9th Cir.1992). Therefore, we affirmed the trial court’s decision.

¶ 11 Burlington then filed a petition for Allowance of Appeal with the Pennsylvania Supreme Court, which was denied. While that petition for appeal was pending, Burlington’s insurance company, OneBeacon Insurance Company (“OneBeacon”) filed a Motion for Emergency Order of Clarification of January 16, 2003 Agreed Order. The Bankruptcy Court, acting sua sponte, entered a Clarifying Order on March 28, 2005 (“2005 Clarification Order”). The relevant portions of the Order are set forth below.

Given certain motions that have been filed in this Court, it has come to the attention of this Court that its approval of the Agreed Order has been used by the State Trial Court and the Superior Court of Pennsylvania (collectively, the “Pennsylvania State Courts”) to give retroactive effect to not only the Grazia-ni’s filing of the State Court complaint but also to the default judgment entered against BMC on June 18, 2002. Based on the ambiguity that apparently exists in this Court’s January 16th Order, the Court sua sponte under § 105(a) of the Bankruptcy Code, hereby CLARIFIES that January 16th Order, approved January 23rd, for the reasons set forth below.

Thus this Court CLARIFIES its prior order of January 16, 2003 and finds that this Court’s Order modifying the stay should be treated as retroactive only to the extent that Graziani need not re-file her complaint. However, this Court’s Order Modifying the Automatic Stay should not be treated as retroactive between the date of the filing of Graziani’s complaint and the date of this Court’s Agreed Order Modifying the Automatic Stay. Thus, the Agreed Order Modifying the Automatic Stay is not retroactive with respect to any other acts taken in the Pending Action, including the filing of the motion for default judgment and the entry of the default judgment, thus rendering such acts VOID.

2005 Clarification Order at 4, 7 (footnotes omitted) (emphasis in original).

¶ 12 After the Bankruptcy Court issued the 2005 Clarification Order, Burlington filed an Application for Reconsideration of Denial of Allowance of Appeal. The Pennsylvania Supreme Court granted the Application for Reconsideration and ultimately remanded the matter to this Court, “for reconsideration in light of the Order dated March 28, 2005, entitled ‘Clarification Order of the United States Bankruptcy Court for the Southern District of Indiana, Indianapolis Division.’ ” Order, 6/8/2005.

¶ 13 Pursuant to our Supreme Court’s Order, we will reconsider our decision in light of the Bankruptcy Court’s March 28, 2005 Order. On remand, our review is limited to only those issues designated by our Supreme Court. See Basile v. H & R Block Inc., 777 A.2d 95, 100 (Pa.Super.2001); see also Scott v. Pennsylvania Board of Probation and Parole, 739 A.2d 1142, 1145 (Pa.Cmwlth.1999) (“The law is clear that we may only address what was remanded to us.”).

¶ 14 Preliminarily, we note that Graziani set forth a number of arguments regarding the propriety of the Bankruptcy Court’s action in issuing the 2005 Clarification Order. In her brief on remand, Graziani claims that OneBeacon’s effort to seek a clarification of the 2003 Agreed Order constitutes an unlawful collateral attack on a valid Pennsylvania state judgment. Brief for Appellee on Remand at 5. She also argues that OneBeaeon lacked standing to seek relief from the 2003 Agreed Order and that the Bankruptcy Court lacked jurisdiction to enter the 2005 Clarification Order. See id. at 9-10. We will briefly address these issues.

¶ 15 We acknowledge that the bankruptcy court has jurisdiction to determine the extent and terms of the automatic stay under 11 U.S.C. § 362. See Diaz v. State of Texas (In re Gandy), 327 B.R. 796, 801 (Bankr.S.D.Tex.2005) (noting that “state courts lack authority to terminate the stay when it in fact does apply. The bankruptcy court alone has authority to modify the automatic stay.”); Mirzai v. Kolbe Foods, Inc., 271 B.R. 647, 654 (C.D.Cal.2001) (“The longstanding rule is that a state court judgment entered in a case which falls within the federal courts’ exclusive jurisdiction is subject to collateral attack in federal courts”) (citation and quotations omitted); In re Raboin, 135 B.R. 682, 684 (Bankr.D.Kan.1991) (“[a bankruptcy court] has exclusive jurisdiction to determine the extent and effect of the stay, and the state court’s ruling to the contrary does not bar the debtor’s present motion.”). We find that it is well-established that a bankruptcy court has the right to modify or clarify its orders relating to the scope of a stay.

¶ 16 Graziani’s arguments regarding On-eBeacon’s standing to bring the motion requesting clarification as well as its argument that the Bankruptcy Court lacked jurisdiction to enter the Order are arguments that Graziani made before the Bankruptcy Court. The Bankruptcy Court did not find these arguments persuasive. We will not decide whether the Bankruptcy Court erred when it issued the 2005 Clarification Order. We further assume that Graziani made these arguments in her appeal of the Bankruptcy Court’s decision to issue the 2005 Clarification Order, which is the proper forum to challenge the propriety of that Order.

¶ 17 We further note that the Bankruptcy Court specifically stated that it was acting sua sponte when it issued the 2005 Clarification Order. See 2005 Clarification Order at 4. As such, the argument relating to OneBeacon’s standing to move for clarification is irrelevant, as the Bankruptcy Court acted of its own accord. Further, to the extent that Graziani is arguing that OneBeacon’s motion constitutes an improper collateral attack, we find that argument irrelevant because the Bankruptcy Court did not grant OneBeacon’s motion, but rather acted sua sponte.

¶ 18 Regarding the substance of the 2005 Clarification Order, Graziani argues that the Order is contrary to the applicable law and contrary to the 2003 Order. Brief for Appellee on Remand at 5-6. She also argues that the default judgment against Randolph is not affected by the 2005 Clarification Order. Brief for Appellee on Remand at 8.

¶ 19 As with the arguments regarding standing and jurisdiction, the propriety of the Order is not something this Court will consider, as it is well established that a bankruptcy court has the power to modify a stay. See e.g., Eastern Refractories Co. Inc. v. Forty Eight Insulations Inc., 157 F.3d 169, 172 (2d Cir.1998) (“[Bankruptcy courts have the plastic powers to modify or condition an automatic stay so as to fashion the appropriate scope of relief’). Indeed, as Graziani recognized in her brief filed with this Court in 2004,

Because it is the bankruptcy judge who is the most knowledgeable about the debtor’s affairs, and about the effect that any judicial proceeding would have on the debtor’s reorganization, it is essential that the [bankruptcy judge] make the determination as to whether an action against the debtor may proceed or whether the stay against such actions should remain in effect.’ Schulz v. Holmes Transportation, Inc. 149 B.R. 251 (D.Mass.1993); citing, Association of St. Croix Condominium Owners[ v. St. Croix Hotel Corp.], 682 F.2d 446 (3rd Circuit.1982) [sic]. The fact that the bankruptcy court has the power to grant or refuse a relief from a stay is considered a “sufficient safeguard of the protections which the automatic stay is designed to give creditors.” Schulz, supra.

Brief for Appellee at 4-5.

¶ 20 We find, therefore, that the Bankruptcy Court’s 2005 Clarification Order is valid and we will now interpret and apply that order.

¶ 21 The only issue Graziani raises that relates to our application of the 2005 Clarification Order is whether the default judgment entered against Randolph, the individual that was driving the BMC vehicle that was involved in the accident with Gra-ziani, is affected by the Order. In her brief on remand, Graziani argues that the 2005 Clarification Order does not mention Randolph and that he receives no benefit from the stay provisions of the Bankruptcy Code. Brief for Appellee on Remand at 8. She further argues that there are no financial consequences to the debtor, “therefore the purpose behind the automatic stay provisions are not served or furthered in any respect by expanding stay protection to include Randolph.” Brief for Appellee on Remand at 8 Finally, she argues that even if she were to succeed in her claim against Randolph, pursuant to the terms of the 2003 Agreed Order, Burlington could not be affected by the claim because the 2003 Agreed Order expressly limits her recovery to insurance coverage funds and/or non-debtor assets. Brief for Appellee on Remand at 10.

¶ 22 In response, Burlington argues that the interests of Randolph and BMC are so intertwined that BMC is the real party in interest and the stay should remain. Appellants Reply to Appellee’s Brief on Remand at 5. Specifically, Burlington argues that because Randolph was acting within the scope of his duty as an employee for BMC, and because “it is well established that the actions of an agent of a corporation are imputed to the corporation when the agent’s conduct was in the course of his employment and for the benefit of the corporation,” a judgment against Randolph would be imputed to BMC. Appellants Reply to Appellee’s Brief on Remand at 5-7. Burlington further argues that under the doctrine of respondeat superior, any liability imposed on Randolph will be imputed to BMC and, therefore, potentially diminish the bankruptcy estate. Appellants Reply to Appellee’s Brief on Remand at 7.

¶ 23 It is well established that the automatic stay under the Bankruptcy Code applies to debtors. 11 U.S.C. § 362(a)(1) states that,

Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of—

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title...

It is less clear, however, when a court may extend the stay to also encompass actions brought against non-debtors. A number of courts have found that a stay may be extended to non-debtors under “unusual circumstances.” See e.g., A.H. Robins v. Piccinin, 788 F.2d 994, 999 (4th Cir.1986) (concluding that stay should be extended where “there is such identity between the debtor and the third-party defendant that debtor may be said to be the real party defendant and a judgment against the third-party defendant will in effect be a judgment or finding against the debtor”); see also, McCartney v. Integra National Bank North, 106 F.3d 506, 510 (3d Cir.1997) (same). Stated differently, the issue is whether the debtor’s interests will be protected, and the “pivotal question is whether the debtor will suffer irreparable harm if the proceedings against the non-debtor go forward.” State of Oklahoma v. Medical Management Group, Inc., (In re Medical Management Group, Inc.) 302 B.R. 112, 2003 WL 21487310, at *6 (B.A.P. 10th Cir.2003) (table) (analyzing and extending the stay to nondebtor parties under § 105 of the Bankruptcy Code).

¶ 24 At least one court has addressed this issue in a similar context. In Turman v. Ameritruck Refrigerated Transport, Inc., No. 99-2325-JWL, 2001 WL 135843, 45 Collier Bankr.Cas.2d 964 (D.Kan. Feb.6, 2001), the court looked at whether the bankruptcy court had jurisdiction to enter a stay which prohibited prosecution of a non-debtor employee involved in a truck accident which occurred while the employee was driving a truck for Ameritruck, the debtor corporation. Turman, 2001 WL 135843, at *1. In finding that a stay was proper, the court found,

In this case there is no dispute that Ameritruck is liable for the actions of [the non-debtor employee] taken in the course of his employment under the doctrine of respondeat superior. Thus, the bankruptcy court was confronted with an ‘unusual situation’ in which a judgment against [the non-debtor employee] would, for all practical purposes, be a judgment against Ameritruck, the debt- or.

Turman, 2001 WL 135843, at *2.

¶ 25 We find the analysis in Turman is applicable here, although not controlling. Graziani has not alleged that Randolph was acting outside the scope of his employment with BMC. As with Turman, any liability imposed upon Randolph would likely be imputed to BMC under the doctrine of respondeat superior and such a finding would impact the assets of the debtor’s estate and at the very least would constitute a finding of liability on the part of BMC.

¶26 As Graziani noted, and Burlington concedes, neither of the Bankruptcy Court’s Orders discusses whether the stay applies to Randolph. However, we do not find this to be dispositive of whether we should find the stay applicable to Randolph. Based upon the language in the 2005 Clarification Order, it is clear that the Bankruptcy Court is concerned with preserving BMC’s due process rights. See 2005 Clarification Order at 6 (“Using this Court’s approval to validate the entry of default judgment where BMC was under no legal obligation to respond due to the fact that a stay was in effect with respect to all litigation only serves to deny BMC due process of law in being allowed to defend itself in the Pending Action.”) To allow Graziani to proceed against Randolph, when any judgment against him would likely be imputed to BMC, and at the very least would be binding on BMC, would also constitute an impermissible violation of BMC’s right to due process. Therefore, we find that the 2005 Clarification Order requires a finding that the trial court erred when it. refused to strike the default judgment against Randolph as well as BMC.

¶27 After a careful review of the 2005 Clarification Order, we find that the default judgment entered against Burlington should be stricken. The trial court erred when it denied Burlington’s motion to strike the default judgment.

¶ 28 Order of May 19, 2003, VACATED. Default Judgment of June 18, 2002 STRICKEN.

¶ 29 KLEIN, J., files a Concurring Opinion.