Bankr. L. Rep. P 77,176,
In re DEL MISSION LIMITED, Debtor.
STATE OF CALIFORNIA EMPLOYMENT DEVELOPMENT DEPARTMENT;
Stаte of California State Board of Equalization, Appellants,
v.
Harold S. TAXEL, Trustee for Del Mission Limited, Appellee.
No. 95-55658.
United States Court of Appeals,
Ninth Circuit.
Argued and Submitted Aug. 9, 1996.
Decided Oct. 23, 1996.
Richard W. Bakke, Deputy Attorney General, Los Angeles, CA, for appellants.
Jeffry A. Davis, Gray, Cary, Ware & Freidenrich, San Diego, CA, for appellee.
Appeal from the Ninth Circuit Bankruptcy Appellate Panel, Jones, Hagan and. BAP No. SC-94-1191-JhR.
Before: FLETCHER and TASHIMA, Circuit Judges, and RESTANI, Court of International Trade Judge.*
TASHIMA, Circuit Judge:
This appeal presents two important issues. First, we consider whether failing to return bankruptcy estate property in a timely manner constitutes a viоlation of the automatic stay provision of 11 U.S.C. § 362(a)(3). We conclude that it does. Next, we resolve whether a bankruptcy court may award fees and costs incurred in prior appellate proceedings as a contempt sanction under 11 U.S.C. § 105(a). We conclude that it may not.
BACKGROUND
This is the second round of litigation between these parties. The first round arose when appellants California Employment Development Department and State Board of Equalization (collectively the "State") refused to approve the sale of Chapter 7 debtor Del Mission Limited's ("Del Mission") liquor license until it paid all outstanding taxes and interest accrued thereon. The trustee of Del Mission, appellee Harold S. Taxel ("Taxel"), paid the disputed taxes under protest, and then brought a proceeding in the bankruptcy court seeking repayment. The bankruptcy сourt found that the State's action violated the automatic stay provision of 11 U.S.C. § 362(a)(3), and ordered the State to pay Del Mission $15,604.1 Taxel v. California Employment Dev. Dep't (In re Del Mission Ltd.),
The failure of the State to repay the disputed taxes in a timely manner is the subject of this second round of litigation. In spite of the bankruptcy court's order, the State did not repay the disputed taxes while the underlying case was being аppealed. Following our decision in Del Mission III, Taxel filed a motion with the bankruptcy court seeking to hold the State in civil contempt of the automatic stay for failing to repay the disputed taxes in a timely manner.2 As sanctions, Taxel requested attorney's fees and costs incurred in enforcing the automatic stay on appeal in Del Mission II and Del Mission III. The bankruptcy court denied the motion, concluding that the automatiс stay violation merged into the previously awarded money judgment. As an alternative ground for its decision, the court also concluded that it had no legal authority to award fees incurred on prior appeals. The bankruptcy appellate panel ("BAP") reversed on both issues, and awarded Taxel the fees and costs he incurred in Del Mission II and Del Mission III, on the prior appeals.3
We have jurisdiction of this appeаl under 28 U.S.C. § 158(d), and we affirm in part and reverse in part.
DISCUSSION
I. Continuing Violation of the Automatic Stay
The first issue we must decide is whether the State's failure to repay Del Mission in a timely manner constituted a continuing violation of 11 U.S.C. § 362(a)(3). "Because we are in as good a position as the BAP to examine the decision of the bankruptcy court, we independently review the bankruptcy court's ruling." Havelock v. Taxel (In re Pace),
A. The Merger Doctrine
The doctrine of merger is a subset of res judicata and precludes a plaintiff from maintaining an action on the original claim after a final judgment has been entered. Restatement (Second) of Judgments § 18 (1980). The bankruptcy court reasoned that undеr this doctrine, the State's violation of the automatic stay ended with a final judgment in Taxel's favor. When judgment was entered, the violation of the stay ceased to exist and all remaining rights between the parties merged into the money judgment. It therefore rejected Taxel's motion for contempt, concluding that the State's retention of the disputed taxes could not, under the doctrine of merger, be a continuing violation of the automatic stay. We decline the State's invitation to adopt the reasoning of the bankruptcy court.
The bankruptcy court's analysis stretches the doctrine of merger beyond its intended limits. The doctrine of merger does not extinguish "advantages to which the plaintiff was entitled with respect to the original claim...." Id. at § 18, cmt. g. For example, "if a creditor has a lien upon property of the debtor and obtains a judgment against him, the creditor does not thereby lose the benefit of the lien." Id.
In the case at bench, the automatic stay, "an advantage[ ] to which the plaintiff was entitled with respect to the original claim," id., remains effective until the bankruptcy estate terminates. See 11 U.S.C. § 362(c). Accordingly, until such time as the Del Mission estate terminates, the State is obligated to abide by the automatic stay. Thus, the doctrine of merger does not immunize the State from future violations of the stay, even though it has been found liable for past violations of the stay. Cf., Harkins Amusement Enter. Inc. v. Harry Nace Co.,
B. Retention of the Disputed Taxes
Given the cоntinuing viability of the automatic stay, we must next consider whether the State did, in fact, violate the automatic stay by retaining the disputed taxes. 11 U.S.C. § 362(a)(3) specifically enjoins "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate...." In Del Mission III, we concluded that the State's efforts to collect the disputed taxes in the first instance did constitute a violation of the stay under subsection (3).
The "exercise control" clause of § 362(a)(3) was added by the Bankruptcy Amendments and Federal Judgeshiр Act of 1984. Pub.L. No. 98-353, 1984 U.S.C.C.A.N. (98 Stat.) 371. Congress did not provide an explanation of that amendment. In re Young,
11 U.S.C. § 542(a) provides that an entity in possession of estate property "shall" deliver such property to the trustee. This is a mandatory duty arising upon the filing of the bankruptcy petition. Knaus v. Concordia Lumber Co. (In re Knaus),
Thеse cases emphasize the underlying purpose of the automatic stay, which is to alleviate the financial strains on the debtor. See, e.g., Knaus,
[I]f persons who could make no substantial adverse claim to a debtor's property in their possession could, without cost to themselves, compel the debtor or his trustee to bring suit as a prerequisite to returning the property, the powers of a bankruptcy court and its officers to collect the estate for the benefit of creditors would be vastly reduced.
Knaus,
Under this line of authority, we conclude that the State's knowing retention of the disputed taxes violated the automatic stay. As this case shows, the potential for multiple actions to obtain what is rightfully due to a bankruptcy estate is a very real concern. The State contends that it did not repay Del Mission in a timely manner because Taxel did not make any specific demand on it. As noted by the BAP, "[t]his argument is frivolous." BAP Dec. at 7. In Del Mission I, the bankruptcy court specifically held that Del Mission was entitled to a refund of the disputed taxes.
In summary, both the case law and policy considerations compel the conclusion that the State violated the automatic stay by knowingly retaining the disputed taxes, following the bankruptcy court's order to repay Del Mission.
II. The Scope of a Bankruptcy Court's Contempt Power under 11 U.S.C. § 105(a)5
Although the Statе violated the automatic stay, whether that violation authorized the BAP to award Taxel previously incurred appellate fees presents another question entirely. A bankruptcy court's award of attorney's fees is reviewed for an abuse of discretion or an erroneous application of the law. Feder v. Lazar (In re Lazar),
Typically, damages for a violation of the automatic stay are recovered under 11 U.S.C. § 362(h). This section mandates the award of actual damages to "[a]n individual injured by any willful violation of a stay provided by this sectiоn." Id. (emphasis added). A trustee, as the representative of a legal entity (the bankruptcy estate), is not an "individual" within the meaning of § 362(h), and therefore cannot recover under this statute. Pace,
Notwithstanding § 362(h)'s inapplicability, a bankruptcy court may award damages to a trustee for a violation of the automatic stay under its contempt power pursuant to 11 U.S.C. § 105(a). Pace,
The bankruptcy court concluded that it could not award fees for appellate representation under Vasseli v. Wells Fargo Bank (In re Vasseli),
In Vasseli, Chapter 7 debtors successfully defended a motion brought by a creditor under 11 U.S.C. § 523(a), to determine the dischargeability of a consumer debt.
Relying on Fed.R.App.P. 38, we held that a bankruptcy court does not have the authority to award attorney's fees incurrеd in response to a frivolous appeal under § 523(d). Id. Vasseli further held that Rule 38 is the only authority for awarding appellate fees incurred as a result of a frivolous appeal. Id. We agreed with the BAP's holding that "Rule 38 empowers only appellate courts, not bankruptcy courts to award damages, attorney's fees, and other expenses incurred by an appellee in response to a frivolous appeal." Id. (еmphasis added). Moreover, Vasseli held that an appellate court does not have the authority to delegate this power to a bankruptcy court. Id. Thus, Vasseli concluded that the debtors "should have applied to the district court, not the bankruptcy court, for costs incurred on their appeal pursuant to Rule 38." Id. at 354.
In the instant case, the BAP distinguished Vasseli by concluding that the plain language of § 523(d) precludes an awаrd of appellate fees. § 523(d) provides:
[i]f a creditor requests a determination of dischargeability of a consumer debt ..., and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney's fee for, the proceeding if the court finds that the position of the creditor was not substantially justified....
11 U.S.C. § 523(d) (emphasis added). The BAP found the emphasized phrase to be "limiting language" preсluding an award of appellate fees. BAP Dec. at 11. The BAP then noted that it was not constrained by such limiting language under the stay violation provisions, and therefore was not precluded from awarding previously incurred appellate fees.
While the BAP's construction of § 523(d)'s "limiting language" may be correct--that is, the language itself may preclude an award of appellate fees--that was not the basis relied upon by Vasseli tо conclude that a bankruptcy court lacked the authority to award appellate fees. As mentioned above, Vasseli relied entirely upon Rule 38, and construed Rule 38 as the only authority that provides for appellate fees for frivolous appeals. See Vasseli,
We thus conclude that Vasseli is indistinguishable in principle from the instant case, and controls its outcome. Vasseli rejected the idea that a court's express discretionary authority to award fees at the trial level implied an authority to award fees at the appellate level. See Vasseli,
Moreover, because an award under § 105(a) is discretionary, its use as a device to award previously incurred appellate fees would overlap with Rule 38. Under eithеr authority, a court would be required to consider the merits of the arguments advanced and the manner in which the parties acted in determining whether to award fees. Given that Rule 38 already provides for a discretionary award of fees in frivolous appeals, it would be superfluous to treat § 105(a) as another vehicle to award appellate fees. In accord with Vasseli, we therefore hold that the only authority for awarding discretionary appellate fees in bankruptcy appeals is Rule 38.7 Accordingly, the bankruptcy court did not err in refusing to award Taxel previously incurred appellate fees.8
We therefore reverse the BAP's award to Taxel of previously incurred appellate fees.9
III. Attorney's Fees for this Appeal
In his responding brief, Taxel includes a motion for attorney's fees incurred while defending this current appeal, under both § 105(a) and Rule 38. As we have concluded § 105(a) does not authorize appellate fees, we consider only the request made under Rule 38.
The 1994 Amendment to Rule 38 permits an award of fees only "after a separately filed motion or notice from the court and reasonable opportunity to respond[.]" Fed.R.App.P. 38 (1994). Taxel has not filed such a separate motion. A request made in an appellate brief does not satisfy Rule 38. See Gabor v. Frаzer,
In this case, we do not deem it appropriate to deny the motion without prejudice and allow Taxel to file a separate motion. Given that the BAP's fee award was erroneous, the State's appeal was clearly not frivolous. Accordingly, because any separately-filed Rule 38 motion would be denied, permitting Taxel to file such a motion would be futile.
CONCLUSION
The BAP correctly concluded that the State's retention of the disputed taxes violated the automatic stay provisions of 11 U.S.C. § 362(a)(3). However, it erred in concluding that 11 U.S.C. § 105(a) authorizes an award of previously incurred appellate fees. The BAP's award of such fees to Taxel is therefore reversed.
AFFIRMED in part and REVERSED in part. Each party shall bear its or his own costs on appeal. Taxel's motion for fees on appeal is denied.
Notes
The Honorable Jane A. Restani, Judge of the United States Court of International Trade, sitting by designation
In a separate order, the bankruptcy court also awarded sanctions against the State equal to the amount of Del Mission's attorney's fees incurred in the bankruptcy court. That order is not at issue in this appeal
Soon after Taxel filed the motion for contempt, the State repaid the disputed taxes
Hereinafter these fees and costs shall be referred to as "previously incurred appellate fees."
Del Mission III also held that the State's actions violated subsection 6 of § 362(a).
Although the BAP did not сite to § 105(a), it is the authority that authorizes a bankruptcy court to award sanctions for ordinary civil contempt. Pace,
Sanctions cannot be issued against the State unless it has waived sovereign immunity. At the time the State filed a claim for the underlying disputed taxes, a governmental unit waived its sovereign immunity by filing a proof of claim against the bankruptcy estate. 11 U.S.C. § 106(a) (1993). This waiver is effective for claims arising out of the same transaction or occurrence brought in response to the claims filed by the government. Id. Accordingly, the state has waived its sovereign immunity in the instant case
We note that the 1994 Amendments to 11 U.S.C. § 106(a) specifically abrogate sovereign immunity for cases arising under §§ 105 and 362. See Bankruptcy Reform Act of 1994, Pub.L. No. 103-394, § 113, 1994 U.S.C.C.A.N. (108 Stat.) 4106, 4117-18. We further note that there are potential constitutional problems with these amendments. See Ohio Agric. Commodity Depositors Fund v. Mahern, --- U.S. ----,
Our holding is limited to awards of discretionary appellate fees in bankruptcy proceedings. We do not consider whether some bankruptcy statutes, such as § 362(h), may prоvide for a mandatory award of appellate fees
Moreover, we note that even if § 105(a) did authorize an award of previously incurred appellate fees, we would still be compelled to vacate the BAP's award. Because awarding sanctions under § 105(a) is a discretionary function of the bankruptcy court, an appellate court may not impose contempt sanctions under § 105(a) based on its assumption of what a bankruptcy court would do on remand. See Pace,
Because the award must be vacated, it is unnecessary for us to address the State's argument that the amount of the award was excessive