In re: AZRA INVESTMENT CORP., Debtor.
A& E HOLDINGS, et al., Appellants,
v.
AZRA INVESTMENT CORP., Appellee
BAP No. NV-05-1275-SMaMo United States Bankruptcy Appellate Panel of the Ninth Circuit
June 7, 2006
NOT FOR PUBLICATION
Argued and Submitted at Las Vegas, Nevada: May 18, 2006
Appeal from the United States Bankruptcy Court for the District of Nevada. Bk. No. 02-18301-BAM, Ref. No. 05-18. Honorable Bruce A. Markell, Bankruptcy Judge, Presiding.
Before: SMITH, MARLAR, and MONTALI, Bankruptcy Judges.
MEMORANDUM
Appellants appeal two orders. The first order imposed sanctions against them and their attorney for civil contempt arising out of their failure to vacate a state court default judgment obtained in violation of the automatic stay. The second order denied reconsideration of the first order. A timely notice of appeal was filed on June 23, 2005. We AFFIRM.
Appellants are investors who invested funds with Debtor to develop property referred to as Azra Assisted Living Center (the " Azra Property") in Las Vegas, Nevada, and are comprised of the following: A& E Holdings; Everett B. Cook and Alice V. Cook, as Trustees for the Cook Family Trust dated 09/22/97; James Abbey; Coleen Abbey; Robert A. Anderson; John Carney; Curtis F. Clark; First Trust Company of Onaga c/f Curtis F. Clark dated 12/04/97; Anthony Della; Calvin Dull; Gregory Dull; Perlita Dull; Delores A. Flood; Richard L. Flood; Alan Frankel; Blaine W. Frew; Edmond Garfield; Gail Garfield; Gilfada, L.L.C.; Robert Leroy Gooch; Maude Gooch; Robert Leroy Gooch and Maude Margaret Gooch, as Trustees for the Gooch Living Trust dated 12/06/91; Janet Hagin; Dick Sander; Stanley S. Hall and Jeannine M. Hall, as Trustees of the Stanley S. and Jeannine M. Hall Living Trust dated 03/07/00; Darlene J. King; Brett Lauren; Scott Lauren; Marvin Lauren; Diane Lauren; Marvin Lauren and Diane Lauren, as Trustees of the Lauren Living Trust dated 04/25/90; Anthony Madonia; Jeannie Madonia; Anthony Madonia, Sr.; Lynn Madonia; Ray Millisor; Lonnie Moon; Yvonee Moon; Sol Munn and Evelyn Munn, as Trustees of the Munn Trust of 1975 dated 05/23/75; Lewis Panozzo; William Powers; Pearl Rosen; Geraldine Schoen; Donald Schoen; Betty Shields; George Swartz and Mildred Swartz, as Trustees of the MSG Trust dated 10/24/89; Elaine Taylor; Jan Uhlir; John Walters; Elaine Walters; Clifford Wiehe, Jr. and E. Jeanette Wiehe; Clifford Wiehe, Jr. and E. Jeanette Wiehe, as Trustees of the John and Lorraine Walters Trust dated 09/03/98; Mike Young; Linda Zieff; Paul Benedict; Phyllis Jacobson; Karen O'Connell; and DOES 1-50; and, ROES 1-50.
I. FACTS
On July 23, 2002, Azra Investment Corp. (" Debtor") commenced a chapter 11 case that was later converted to a chapter 7. On May 14, 2003, unaware of the pending bankruptcy and without first obtaining relief from the automatic stay, Appellants and their counsel, Mont E. Tanner (" Tanner"), filed a complaint in Nevada District Court alleging that Debtor engaged in acts of fraud, misrepresentation, and embezzlement with regard to a pre-petition promissory note that was signed between Debtor and Pacific West Mortgage on behalf of Appellants (the " state court action"). As a result of Debtor's failure to respond to the state court action (allegedly because it was not served with notice), a default judgment in the amount of $5.4 million was entered on February 9, 2004.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated prior to the effective date (October 17, 2005) of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, Apr. 20, 2005, 119 Stat. 23.
Appellants loaned a total of $5.9 million plus interest at the rate of 14% to Debtor that was secured by the Azra Property. Debtor defaulted on its obligations and the property was sold at a trustee's sale on October 23, 2002 for $2 million.
On March 17, 2004, a final decree in the bankruptcy was entered, the trustee was discharged, and the case was closed. Thereafter, on June 21, 2004, Debtor's then litigation counsel, Scott A. Meehan (" Meehan"), telephoned and faxed Tanner to notify him of the bankruptcy and to inform him that the state court action and the entry of default judgment occurred during the pendency of the bankruptcy in violation of the automatic stay. Meehan demanded that Appellants and Tanner dismiss the complaint and set aside or vacate the default judgment. Tanner did nothing. A week later, on June 28, 2004, Meehan made a second request for the default to be vacated. Again, Tanner took no action.
In December 2004, Debtor successfully moved the court to reopen the bankruptcy case. Debtor then filed a motion for an order to show cause why Tanner should not be held in contempt and sanctioned for willful violation of the automatic stay and why the default judgment should not be vacated (the " OSC").
The request for sanctions was directed solely against Tanner and not against Appellants.
Appellants opposed the OSC, arguing that at the time the complaint was filed and default judgment entered, they were not aware of the bankruptcy, hence, their conduct was not intentional nor willful to justify sanctions. Appellants further asserted that the filing of the OSC was merely an attempt to wrongfully avoid an otherwise nondischargeable debt (the state court having found Debtor engaged in fraudulent conduct), and that setting aside the default judgment would have the unfair effect of rewarding Debtor for its bad acts. In the alternative, Appellants requested that the bankruptcy court permit an adversary proceeding to be filed.
Tanner filed the opposition on behalf of Appellants only, and not on behalf of himself.
Apparently, Appellants' counsel was not aware that a chapter 7 corporate debtor is not entitled to a discharge under § 727.
The matter was heard on April 15, 2005, at which time the bankruptcy court reprimanded Tanner for his failure to voluntarily set aside or vacate the default judgment after becoming aware of the bankruptcy. Appellants, through Tanner, argued that they acted in good faith because they were under the belief that judgments based on fraud were automatically considered nondischargeable and not subject to the automatic stay. The bankruptcy court rejected the argument, and admonished Tanner further for his failure to adequately research applicable bankruptcy law:
The Court: I take as a given that the complaint and the filing of the complaint and the obtaining of the default judgment were done without the subjective knowledge of the filing of the bankruptcy.
Notwithstanding that, I find that subsequent to that at some point in time that has occurred within the last six months, it has come to the notice and attention of Mr. Tanner's clients and Mr. Tanner that, in fact, it was in violation of the stay.
At that point, any well-advised and competent attorney would have either moved to set aside actions that had been pointed out to be taken in violation of the automatic stay which operates without regard to notice and/or come back into this court and seek an order annulling the automatic stay.
Transcript of Proceedings, April 15, 2005, p. 15-16.
Appellants were ordered to dismiss the complaint and set aside or vacate the default judgment. In addition, Appellants and Tanner were found to be in civil contempt of the court and jointly and severally liable to Debtor for sanctions in the amount of $11, 025.44. On April 26, 2005, the parties executed a stipulation to set aside the default judgment.
Although the OSC was brought directly against Tanner, the bankruptcy court found both Appellants and Tanner jointly and severally liable. As Appellants never challenged the sufficiency of the notice of the OSC as to them, we presume without deciding that any issue regarding service was waived.
The stipulation was not filed with the Nevada District Court until May 10, 2005, over three weeks after the parties were ordered to do so by the bankruptcy court.
Appellants timely moved the court to amend its order to vacate the award of sanctions, or in the alternative, to annul the automatic stay (the " motion to amend"). They sought amendment on the grounds that 1) Debtor lacked standing to bring the OSC because at the time it was filed, its corporate charter had been revoked; 2) Debtor suffered no actual damages as a result of the stay violation; and 3) Debtor brought the OSC for retaliatory purposes. Alternatively, Appellants claimed that though they did not expressly move for annulment of the automatic stay at the OSC hearing, the request was implicit from the facts, and the court should have granted annulment of the automatic stay because the equities justified such relief.
As evidence that Debtor's corporate charter was revoked, Appellants submitted a " screen shot" of Tanner's computer that reflected the Nevada Secretary of State website.
In opposition, Debtor countered that under Nevada state law, a revoked corporation can only act through its directors as trustee for the corporation and that it had acted properly through its director/trustee Salim Rana. More importantly, Debtor urged that the Appellants' request to retroactively lift the stay was not for the intended purpose of the law - to justify the continuation of the state court action - but instead was a tactic to set aside the award of sanctions.
The hearing on the motion to amend was held on June 8, 2005. The court determined
The Court: In my prior order based on the evidence and the facts that were presented before me, I ordered sanctions.
The motion that has been brought before me today with respect to amend the judgment or to go back is nothing more than an improper attempt to reconsider either the same arguments raised the last time with respect to the annulment of the stay or to introduce evidence that should have and could have been produced if it was relevant at the first time that this was considered.
Moreover, even if I go beyond that and look at it, there is absolutely no evidence presented by the moving parties here as to a disabling status of Azra Investments.
All they have presented is a screen shot from the Secretary of State's Web site that is insufficient, especially in light of the fact that I do have before me admissible evidence in the form of the declaration of Mr. Rana that he was a director at all relevant times; thus, I am denying the motion for reconsideration.
Transcript of Proceedings, June 8, 2005, p. 14-15.
Appellants appeal.
We assume that this appeal is brought by Tanner on behalf of himself as well as Appellants (as Debtor has not questioned Tanner's status as an appellant though the response to the OSC and the subsequent reconsideration motion were brought only by Appellants).
II. JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § 1334 and § § 157(b)(1) and (b)(2)(G). We have jurisdiction under 28 U.S.C. § § 158(b)(1) and (c)(1).
III. ISSUES
A. Whether the bankruptcy court abused its discretion in issuing sanctions based on a violation of the automatic stay.
B. Whether the bankruptcy court abused it discretion in denying annulment of the automatic stay.
IV. STANDARD OF REVIEW
A violation of the automatic stay provisions of § 362(a) is a question of law reviewed de novo. In re Eskanos & Adler, P.C., 309 F.3d 1210, 1213 (9th Cir. 2002); In re Del Mission, 98 F.3d 1147, 1150 (9th Cir. 1996). Whether a party has willfully violated the automatic stay is a question of fact reviewed for clear error. Fed.R.Bankr.P. 8013; In re Eskanos & Adler, P.C., 309 F.3d at 1213; In re McHenry, 179 B.R. 165, 167 (9th Cir. BAP 1995). It is clear error where there is a definite and firm conviction that a mistake has been committed. In re Roman, 283 B.R. 1, 7 (9th Cir. BAP 2002). The bankruptcy court's imposition of sanctions is reviewed for abuse of discretion. In re Fjeldsted, 293 B.R. 12, 19 (9th Cir. BAP 2003). A court's decision to deny retroactive annulment of the automatic stay is reviewed for an abuse of discretion. Id. at 18; In re Nat'l Envtl. Waste Corp., 129 F.3d 1052, 1055 (9th Cir. 1997). A denial of a motion for reconsideration is also reviewed under the abuse of discretion standard. In re Ankeny, 184 B.R. 64, 69 (9th Cir. BAP 1995).
V. DISCUSSION
Appellants contend that the bankruptcy court abused its discretion in awarding sanctions and not annulling the stay. They assert, for the first time on appeal, that an order vacating the automatic stay was entered prior to the filing of the state court complaint and the entry of the default judgment. As a result, Appellants maintain that the award of sanctions should be vacated and either the prior order granting relief from the automatic stay be applied to them as a safe harbor, or the bankruptcy court be directed to annul the automatic stay. We disagree.
A. The Failure to Discontinue the State Court Action Was a Wilful Violation of the Automatic Stay Pursuant to § 362(a)
Section 362(a)(1) automatically stays
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.
11 U.S.C. § 362(a).
The statute is clear. The plain language of § 362(a)(1) prohibits the commencement and maintenance of judicial actions. See In re Eskanos & Adler, P.C, 309 F.3d at 1214. In Eskanos & Adler, P.C., the Ninth Circuit held
The maintenance of an active collection action alone adequately satisfies the statutory prohibition against " continuation" of judicial actions. Consistent with the plain and unambiguous meaning of the statute, and consonant with Congressional intent, we hold that
§ 362(a)(1) imposes an affirmative duty to discontinue post-petition collections actions.
Id. at 1215 (emphasis added).
Notwithstanding Appellants' ignorance of Debtor's pending bankruptcy, the court determined that they violated the stay when they failed to promptly dismiss the state court action or set aside the default judgment upon becoming aware of the bankruptcy. Though Appellants now acknowledge that they had an affirmative duty to discontinue prosecution of the state court action, which led to the default judgment, they implore the panel to consider that their conduct was neither willful nor in bad faith.
As noted in the quoted excerpt of the transcript of April 25, 2005, supra, the bankruptcy court concluded without inquiry that Appellants did not have subjective knowledge of the bankruptcy at the time the state court action was filed and the default judgment was entered.
Appellants argue that their motives for filing the state court action and obtaining entry of a default judgment was based on a mistaken understanding of the application of the automatic stay. They believed that because Debtor was found in the state court action to have acted fraudulently, the subsequent default judgment was not subject to the automatic stay. As they proceeded in a honest, but mistaken manner, their actions should not be considered willful.
A willful action is deemed to have occurred when a party knows about the automatic stay and acts intentionally. Id.; In re Pinkstaff, 974 F.2d 113, 115 (9th Cir. 1992). A good faith mistake of law or a legitimate dispute as to legal rights does not relieve a willful violator of the consequences of his act. In re Ramirez, 183 B.R. 583, 589 (9th Cir. BAP 1995); In re Johnston, 321 B.R. 262, 281 (Bankr. D. Ariz. 2005). This includes a failure to undo an act after the violation has been committed. In re Eskanos & Adler, P.C., 309 F.3d at 1215.
As Appellants refused to dismiss the complaint or vacate the default judgment after becoming aware of the bankruptcy, their conduct, as the bankruptcy court correctly found, was in violation of the automatic stay. Their mistaken understanding of the application of the automatic stay did not justify their actions. Consequently, we find that the bankruptcy court did not err in determining that Appellants wilfully violated the automatic stay.
B. The Bankruptcy Court Did Not Abuse Its Discretion in Awarding Sanctions
Section 105(a) provides
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
11 U.S.C. § 105(a).
An injured corporation may recover damages caused by willful violation of the automatic stay under the theory of ordinary civil contempt. In re Goodman, 991 F.2d 613, 620 (9th Cir. 1993); In re Chugach Forest Prods., Inc., 23 F.3d 241, 244 (9th Cir. 1994); In re Roman, 283 B.R. 1, 14 (9th Cir. BAP)(" Since the enactment of § 362(h), damages for a violation of the automatic stay are ordinarily recovered under § 362(h), but if that statute is inapplicable, for example because the debtor is a corporation and not an individual, then § 105(a) provides relief to injured parties."). As Appellants wilfully violated the automatic stay, we find the award of sanctions to be appropriate.
C. The Bankruptcy Court Did Not Abuse Its Discretion In Denying Annulment of the Automatic Stay
Appellants argue that although they made no express request to annul the automatic stay in connection with the hearing on the OSC, because such a request was " implicit" in their opposition papers, and because the equities weighed in favor of granting annulment, the court abused its discretion when it did not do so sua sponte. As such, Appellants request that the panel direct the bankruptcy court to annul the automatic stay.
The purpose of Appellants' request to annul the automatic stay is not to retroactively validate the prosecution of the state court action and subsequent entry of default judgment, but to vitiate the basis for the award of sanctions entered against them.
Though the bankruptcy court observed at the OSC hearing that Appellants could have promptly sought annulment of the stay, thereby possibly avoiding the consequences of violating the stay, they did not do so. The bankruptcy court was certainly under no duty, statutorily or otherwise, to annul the stay on its own.
Apparently emboldened by the court's comments at the OSC hearing, Appellants formally requested annulment of the stay for the first time as part of their motion for reconsideration of the sanctions award. The request was not, however, presented for the purpose of validating the state court judgment but, rather, as a defense to the award of sanctions.
Pursuant to Fed.R.Bankr.P. 9023, which incorporates Fed.R.Civ.P. 59, the grounds for granting a motion for reconsideration include where there exists a manifest error of law or fact, or where evidence is newly discovered. Fed.R.Bankr.P. 9023; In re Ankeny, 184 B.R. 64, 73 (9th Cir. BAP 1995). As the bankruptcy court correctly determined, Appellants failed to satisfy either of these requirements. They could and should have raised all defenses to the stay violation at the hearing on the OSC. Because they failed to do so, the court properly determined that the annulment " defense" could not be raised for the first time in a motion for reconsideration.
D. The Order Vacating the Automatic Stay Obtained by Former Counsel Did Not Provide Relief For Appellants' Actions
In their reply brief on appeal, Appellants allege for the first time that an order granting relief from stay was entered prior to the state court action and the entry of default judgment. They advise that subsequent to the entry of the order granting relief, they hired new counsel (Tanner), who was not informed of the bankruptcy filing nor the stay order. Moreover, as the order was entered by former bankruptcy Judge Robert Clive Jones, who had left the bankruptcy bench prior to the filing of the OSC, the court itself was not aware that relief from stay had already been granted. As such, Appellants now maintain that there was no violation of the automatic stay and that the award of sanctions based on an " erroneous" assumption should be vacated.
Judge Jones was appointed to the United States District Court, District of Nevada, on December 1, 2003.
The bankruptcy court docket reflects that an order granting relief from the automatic stay with regard to the Azra Property was entered on November 7, 2002.
This argument is eviscerated by the plain language of the stay order itself:
IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the Automatic Stay in the above-entitled bankruptcy proceeding vacates and extinguishes on October 21, 2002 for all purposes
as to Secured Creditor MARCH 27, 2000 $5, 930.000 [sic] SECURED PROMISSORY NOTE, its assignees and/or successors in interest, and Secured Creditor may proceed with a foreclosure of and hold a Trustee's Sale of the subject property scheduled on October 22, 2002 at 10:00 a.m, [sic] upon property referred to as the AZRA ASSISTED LIVING CENTER in Las Vegas, Nevada, pursuant to applicable State Laws, and thereafter commence any action necessary to obtain complete possession of the subject Property.
During oral argument, Appellants asserted that the stay order covered the state court action focusing on the phrase " for all purposes." However, it is clear from a review of the order in its entirety that the relief granted was limited to conducting a foreclosure sale of the Azra Property.
Order Vacating Automatic Stay, October 22, 2002, p. 1 (emphasis added).
In accordance with the order, Appellants foreclosed and sold the Azra Property at a trustee's sale on October 23, 2002. However, Appellants never sought, and the stay order does not provide for, relief from the stay to prosecute a state court action for money damages based in tort (misrepresentation and fraud). That being the case, the Appellants' continued prosecution of the state court action was neither protected nor authorized by the stay order.
VI. CONCLUSION
For the foregoing reasons, we AFFIRM the bankruptcy court's award of sanctions.