Hendrix v. Page

640 N.E.2d 1081, 1994 Ind. App. LEXIS 1348, 1994 WL 533795

• Court: Indiana Court of Appeals
• Decided: October 4, 1994
• Docket: 72A01-9306-CV-213
• Status: Published

Opinions

ON PETITION FOR REHEARING

NAJAM, Judge.

We deny the Pages’ petition for rehearing but once again address the fundamental issue in this case. The Pages contend that their personal injury action against Hendrix in the Scott Circuit Court, filed while the automatic bankruptcy stay was in effect, did not violate the stay. The Pages argue that this court invaded the bankruptcy court’s jurisdiction when we “found” in our first opinion that their action violated the stay and held that their complaint was void ab initio. See Appellee’s Petition for Rehearing at 4; Hendrix v. Page (1993), Ind.App., 622 N.E.2d 564, 567.

Scope of the Automatic Stay

The automatic stay plays a vital and fundamental role in bankruptcy. Hillis Motors, Inc. v. Hawaii Automobile Dealers’ Association (9th Cir.1993), 997 F.2d 581, 585. The stay is broad in scope. Id; Maritime Electric Co. v. United Jersey Bank (3rd Cir. 1991), 959 F.2d 1194, 1203. The stay “is ‘automatic’ because it is triggered as against all entities upon the filing of a bankruptcy petition, irrespective of whether the parties to the proceedings stayed are aware that a petition has been filed.” Maritime Electric, 959 F.2d at 1204.

The automatic stay is applicable to all claims, even nondischargeable and priority claims, unless a claim falls within one of the exceptions to the stay listed under Section 362(b). In re Miller (N.D.Ga.1989), 98 B.R. 110, 113, The Section 362(b) exceptions to the automatic stay are narrowly construed. Hillis Motors, 997 F.2d at 590. Here, the Pages’ personal injury claim against Hendrix does not even remotely satisfy any of the exceptions to the stay found in Section 362(b).

Generally then, unless a creditor’s claim is excepted from the automatic stay by Section 362(b), that claim is subject to the stay until the bankruptcy court orders relief from the stay pursuant to Section 362(d). See David Epstein, et al., Bankruptcy § 3-3, at 87 (1992). The Pages never sought or obtained relief from the automatic stay while it was in effect. Instead, the Pages sought and obtained relief from the discharge injunction after Hendrix’s bankruptcy case was closed. See In Matter of Hendrix (7th Cir. 1993), 986 F.2d 195.

“Whether a specific judicial proceeding falls within the scope of the automatic stay must be determined by looking at the proceeding ‘at its inception.’ ” Maritime Electric, 959 F.2d at 1204 (quoting Association of St. Croix Condominium Owners v. St. Croix Hotel Corp. (3rd Cir.1982), 682 F.2d 446, 449). The dispositive question is whether the proceeding was originally brought against the debtor. Id. The Pages’ complaint named Hendrix, and only Hendrix, as the defendant in an action for personal injuries. Despite the Pages’ later claim that they sued Hendrix as a nominal defendant to recover proceeds from his insurance policy, their complaint at its inception was a proceeding brought against the debtor. Nothing on the face of the Pages’ complaint suggests that they were not seeking to recover a money judgment from Hendrix.

Thus, the only conclusion consistent with the foregoing authorities is that the Pages’ action against Hendrix in the Scott Circuit Court, filed after Hendrix’s bankruptcy petition, violated the automatic stay. Contrary to their assertion, we are not invading the jurisdiction of the bankruptcy court because we are not interpreting the scope of the automatic stay in Hendrix’s bankruptcy case. Rather, we are merely observing the clear mandate of the Bankruptcy Code which stays the commencement of a judicial proceeding against the debtor that could have been commenced before the bankruptcy case was filed. See 11 U.S.C. § 362(a)(1).

In its simplest terms, the Pages’ argument both in the Scott Circuit Court and in this court is tantamount to a request that Indiana state courts determine whether the automatic stay should have applied to their action against Hendrix and then to grant relief from the stay. However, it is not for state courts to determine piecemeal whether the bankruptcy stay should apply to a particular action. The Constitution of the United States vests jurisdiction over bankruptcy matters with the federal government, and the Bankruptcy Code preempts state law in its operation and effect. U.S. Const. Art. 1, § 8. Only the bankruptcy court with jurisdiction over the debtor’s case has authority to grant relief from the automatic stay. Maritime Electric, 959 F.2d at 1204. Administration of the bankruptcy rests with the bankruptcy court, not with Indiana courts.

Void Not Voidable

We agree with the dissent’s contention that the bankruptcy court has exclusive jurisdiction to interpret the stay, including the exclusive power to grant relief from the stay. However, we cannot agree with the dissent’s conclusion that the Pages’ complaint was not void ab initio but merely voidable because the bankruptcy court subsequently “ratified the validity of the [Pages’] complaint” by modifying the discharge injunction to exclude the Pages’ claim from its terms.¹

First, there is a fundamental difference between the broad initial reach of the automatic stay and the more narrow scope of the discharge injunction. The automatic stay applies to the commencement or continuation of any judicial proceeding against the debtor that was or could have been commenced before the bankruptcy case was filed. The discharge injunction, however, applies only to the collection of debts which are a “personal liability of the debtor” and to those debts which are not exempt from discharge. See 11 U.S.C. §§ 523, 524(a).

This fundamental difference in scope is illustrated by the fact that the automatic stay applies even to claims which are ultimately exempt from discharge. See Bronson v. United, States (Ct.Cl.1993), 28 Fed.Cl. 756, 760. For example, while the Bankruptcy Code excepts “any debt for a tax” from discharge, an Internal Revenue Service tax assessment made during the pendency of a Chapter 7 bankruptcy case violates the Section 362 automatic stay. See 11 U.S.C. § 523(a)(1)(A); Anglemyer v. United States (D.Md.1990), 115 B.R. 510, 512. Thus, even a nondischargable tax liability does not exempt the IRS from compliance with the automatic stay. See Bronson, 28 Fed.Cl. at 760; Anglemyer, 115 B.R. at 512.

Second, a modification of the discharge injunction cannot alter the basic principle of bankruptcy law that an act which violates the automatic stay always violates the stay. For this reason, the dissent’s argument that the Seventh Circuit’s opinion in Matter of Hendrix rendered the Pages’ action voidable and not void is erroneous. Unless and until the bankruptcy court grants relief from the stay or until the case is closed, dismissed or a discharge is granted, the stay remains in effect. In re Miller (N.D.Ga.1989), 98 B.R. 110, 113. Absent relief from the stay, judicial actions and proceedings brought against the debtor while the stay is in effect are a nullity and are void ab initio. See id. at 113-14; Maritime Electric, 959 F.2d at 1206.

Even those courts which have held that actions taken in violation of the stay are voidable consider such actions void absent limited equitable circumstances. See, e.g., Easley v. Pettibone Michigan Corp. (6th Cir. 1993), 990 F.2d 905, 911 (action in violation of stay is voidable rather than void only where debtor unreasonably withholds notice of stay and creditor would be prejudiced if debtor is able to raise stay as defense, or where debtor attempts to use stay unfairly as shield to avoid an unfavorable result). The dissent makes much of one “equitable consideration,” namely that Hendrix participated in discovery in the Pages’ state court action both before and after his discharge in bankruptcy. This conduct by Hendrix is not the sort of intentional concealment of a bankruptcy filing by the debtor which is required for equitable relief from the operation and effect of the automatic stay.² See Hendrix v. Page, 622 N.E.2d at 568 n. 4.

Even if the facts suggest that Hendrix concealed his bankruptcy for a time, the Pages were not prejudiced. The Pages had formal notice of Hendrix’s bankruptcy on July 13,1990, the date when Hendrix amended his schedule of creditors and added the Pages’ personal injury claim. Thus, the Pages had either (1) approximately 20 months to refile their action if they had moved, as was their right, to lift the stay to proceed against Hendrix or (2) more than 18 months to refile after Hendrix’s discharge. See Hendrix v. Page, 622 N.E.2d at 568 n. 3.

Relief from Stay and the Statute of Limitations

Any subsequent attempts by the Pages to obtain relief from the stay, and thus from the statute of limitations, by having the stay lifted retroactively are unavailing. Actions taken in violation of the stay are void; lifting the stay does not change the character of that action. Ellis v. Consolidated Diesel Electric Corp. (10th Cir.1990), 894 F.2d 371, 373. The lifting of the stay validates only later judicial proceedings, not prior ones. Id. After the bankruptcy case is closed, the bankruptcy court has the equitable discretion to lift the automatic stay retroactively. See 11 U.S.C. § 105. However, such action by the bankruptcy court does not determine the effect of the automatic stay on a complaint filed in state court while the stay was pending.³ See Pettibone Corp. v. Easley (7th Cir.1991), 935 F.2d 120, 123-24.

The facts and analysis in Anglemyer v. United States (D.Md.1990), 115 B.R. 510, apply with particular force to the Pages’ dilemma in this case. There, the IRS did not have actual notice of the taxpayers’ filing of their bankruptcy petition until after it had made an assessment while the automatic stay was in effect for unpaid tax liability incurred in 1980. Id. The statute of limitations for the IRS’s assessment action was tolled while the bankruptcy case was pending and for six months thereafter, a period of almost 28 months. Thus, the IRS had until August of 1986 to make a proper assessment before the statute of limitations would expire. Id. The IRS, however, attempted to collect on its assessment in 1987, nearly four years after the taxpayers’ April 22, 1983, discharge in bankruptcy. Id.

The Anglemyer court held that the IRS assessment made while the bankruptcy case was pending constituted a direct violation of the automatic stay and rendered that assessment null and void ab initio. Id. at 514. While acknowledging that the IRS “needfed] to have the September 14, 1981, assessment held valid in order to meet the statute of limitations,” the court rejected the IRS’ argument that their improper assessment should be found voidable instead of void. Id. at 513-14. Because the 1987 collection action was based upon a void assessment and was later commenced after the statute of limitations had run, the IRS’s claim for the tax debt was barred by the statute of limitations. See id. at 514.

Like the IRS in Anglemyer, the Pages had ample time after the bankruptcy ease was closed to refile their personal injury action against Hendrix.⁴ However, they never refiled but instead tried to breathe life into their complaint, a nullity which had been filed while the automatic stay was in effect. After the statute of limitations had expired, all subsequent attempts by the Pages to reinstate their action in either the Scott Circuit Court or the bankruptcy court were ineffective.

Objectives of the Automatic Stay

In discussing the purpose of the automatic stay in bankruptcy, Congress stated:

“The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.”

H.R.Rep. No. 595, 95th Cong., 1st Sess. 340 (1978), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5963, 6296-97. The stay ensures that all claims against the debtor will be brought in a single forum, the bankruptcy court. Pettibone Corp., 935 F.2d at 123. Given these policy considerations, “Congress intended violations of the automatic stay to be void rather than voidable.” In re Schwartz (9th Cir.1992), 954 F.2d 569, 571; see Bronson v. United States (Ct.C1.1993), 28 Fed.Cl. 756, 760 (“both legislative history and ease law support the conclusion that acts in violation of the stay should' be held void”).

Here, the bankruptcy court’s subsequent modification of the discharge injunction could not and did not effect relief from the automatic stay. The fact that the Pages’ were seeking Hendrix’s insurance proceeds cannot override the debtor protections implemented by Congress pursuant to its constitutional authority to establish uniform laws on bankruptcy. Therefore, the Pages’ violated the automatic stay and their action was void ab initio, not voidable and subject to subsequent validation.

The petition for rehearing is hereby denied.

STATON, J., concurs. BAKER, J., dissents with opinion.

1 . By the same token, the Pages’ reliance on In Matter of Shondel (7th Cir.1991), 950 F.2d 1301, and In re Femstrom Storage & Van Co. (7th Cir.1991), 938 F.2d 731, is misplaced. Shondel involved relief from the discharge injunction and is inapposite. Femstrom Storage affirmed the bankruptcy court’s grant of relief from the automatic stay without deciding that an action against the debtor to obtain the debtor's insurance proceeds does not initially violate the stay.

2 . In any event, the great weight of authority in the federal courts holds that actions taken in violation of the automatic stay are void rather than voidable. See In re Schwartz (9th Cir. 1992), 954 F.2d 569, 572 (citing cases); Maritime Electric Co. v. United States lersey Bank (3rd Cir. 1991), 959 F.2d 1194, 1206 and 1206 n. 10 (same). Otherwise, creditors would be encouraged to violate the stay. In re Schwartz, 954 F.2d at 572.

3 . We have been informed by the Pages during our consideration of their petition for rehearing that the bankruptcy court has retroactively lifted the automatic stay "nunc pro tunc from the date it arose on the filing of this bankruptcy on June 5, 1990 so that the Pages may proceed with their action in state court, but only against the insurance proceeds of the Debtor.” We have been further advised that the bankruptcy court has also denied Hendrix's motion to alter or amend its order. The Pages brought these developments to our attention by simply mailing uncertified copies of the court's orders to the Clerk of our court. The Pages did not properly supplement the record in this case. See Ind. Appellate Rule 7.2(C).

Nevertheless, the bankruptcy court’s action does not affect our resolution of this appeal. As shown above, lifting the automatic stay retroactively does not validate a claim which was filed while the stay was in effect but has been barred by the state statute of limitations. See Pettibone Corp., 935 F.2d at 124. Further, our statutes of limitation promote a legitimate state interest in preventing stale claims. See Matter of M.D.H. (1982), Ind.App., 437 N.E.2d 119, 128, trans. denied. Therefore, while we must generally defer to the bankruptcy court on matters of bankruptcy law, we cannot sanction action by the bankruptcy court which effectively vitiates our statute of limitation for tort actions and revives dead claims, such as the Pages', for which the statute has long since expired.

4 . If, as it appears, Hendrix was only a nominal defendant in the Pages’ action to recover proceeds from his insurance policy, then the Pages could have easily obtained timely relief from the stay to file a new action in state court, but only against the Hendrix's insurance proceeds. The Seventh Circuit’s decision in In re Fernstrom Storage & Van Co. (7th Cir.1991), 938 F.2d 731, 736, recognized that such a procedure is proper.