In Re Enyedi
ORDER ON CHAPTER 7 TRUSTEE’S MOTION FOR ORDER OP CONTEMPT
Dеbtors Zoltán Enyedi and Leona A Nelson (“Debtors”) filed for bankruptcy protection under Chapter 7 of the Title 11 of the United States Code (“Bankruptcy Code” or “Code”) on July 23, 2006. Pursuant to section 341 of the Code, a meeting of creditors was held on August 21, 2006. Eugene Crane was assigned as the Trustee in the Debtors’ case and presided at the meeting of creditors. On August 23, 2006, the Trustee filed a No Asset Report that stated, in part, that “after diligent inquiry into the property of the estate, believеs that there are no assets to be administered for the benefit of creditors.” See 06-bk-08771, Doc. 13. The Debtors obtained a discharge order on October 23, 2006 in accordance with section 727 of the Bankruptcy Code. See 06-bk-08771, Doc. 23. On October 26, 2006, their bankruptcy case was closed and the Trustee was discharged from the case. See 06-bk-08771, Doc. 25.
On May 23, 2007, Mr. Crane filed a motion to have himself re-appointed as the Trustee in the Debtors’ case.
See
06-bk-08771, Doc. 29. According to the attached service list, the Trustee provided notice of his motion to the Office of the United
Subsequent to his re-appointment, the Trustee moved to employ Attorney Spear-man and her law firm as special counsel to reрresent the bankruptcy estate’s interests in the Personal Injury Litigation. See 06-bk-08771, Doc. 31. The certificate of service attached to the motion indicates that neither the Defendants involved in the state court litigation nor their attorneys were served; however, the motion was served on Attorney Spearman on June 1, 2007. A hearing on the motion was held June 12, 2007. An order approving the motion was signed on June 12, 2007. See 06-bk-08771, Doc. 32.
While the Debtors’ bankruptcy case was being revived in the bankruptcy cоurt, the Defendants involved in the Personal Injury Litigation filed a motion on April 9, 2007 in state court seeking dismissal of the case because of Debtor Enyedi’s failure to properly list the lawsuit claim in his bankruptcy case. On June 20, 2007, the state court judge presiding over the matter entered an order dismissing the lawsuit with prejudice based on judicial estoppel due to the failure to list and schedule the lawsuit on the bankruptcy schedules. The Trustee alleges that neither he nor the bankruрtcy estate were provided with notice of the motion to dismiss. 5
The Trustee alleges that the Defendants involved in the state court litigation were aware of the Debtors’ bankruptcy and were, or should have been, aware of its reopening and his reappointment as trustee prior to the entry of the state court order of dismissal. He moves the court'to find that the state court order dismissing the personal injury litigation is void
ab initio
because it was entered in violatiоn of the automatic stay. The Trustee also moves the court to issue an order finding that the Defendants willfully violated the automatic stay. He seeks an award of compensatory and punitive damages and
A hearing on the motion was held in bankruptcy court on July 10, 2007. While the Trustee, acting as his own attorney, and attorneys representing the Defendants were present, Attorney Spearman did not appear in court. Neither did Attorney Doyle appear on thе Debtors’ behalf; Debtor Nelson instead appear pro se before the court. Although evidence was not offered in the form of oral testimony or documentation, Defendants’ attorneys maintained that they were not aware that the bankruptcy case had been re-opened and had they known, they would not have proceeded on their motion to dismiss. This court signed an order on July 10, 2007 ordering that (1) the state court order entered June 20, 2007 in Enyedi v. A-American Contractors & Suppliers, Inc., et al. (Law Division, Case No. 05 L 005008) was void ad initio and held for naught; (2) the Defendants are directed to immediately take all actions necessary to vacate the June 20, 2007 state court order of dismissal; and (3) that the hearing on the Trustee’s request for damages, attorney’s fees and costs based on Defendants’ allegedly willful violation of the automatic would be held on July 12, 2007. See 06-bk-08771; Doc. 37. The Defendants were also granted the opportunity to file any pleadings they deem pertinent for the hearing on July 12, 2007. See id. The Defendants filed a written response to the motion on July 11, 2007. See 06-bk-08771, Doc. 38. As stated during the hearing on July 10, 2007, this court’s ruling on the issues is explained in this order.
Property of the Estate & The Automatic Stay
Upon the commencement of a bankruptcy case under Title 11, an estate includes, in part, “all legal or equitable interests of the debtor in property.”
See
11 U.S.C. § 541(a). A cause of action held by a debtor on the petition date is “ ‘property’ of the debtor and hence of the debt- or’s estate in bankruptcy.”
In re Polis,
In addition to creating a bankruptcy estate, the filing of a bankruptcy petition operates to stay all actions, whether judicial or private, that seek to obtain possession of property of the estate or of property from the estatе or to exercise control over property of the estate. See 11 U.S.C. § 362(a)(3). Unless relief from the automatic stay is granted earlier, section 362(c) outlines when it terminates:
(c) Except as provided in subsections (d), (e), (f), and (h) of this section—
(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate;
(2) the stay of any other act under subsection (a) of this seсtion continues until the earliest of—
(A) the time the case is closed;
(B) the time the case is dismissed; or
(C)if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied;
11 U.S.C. § 362(c)(1) & (2). The Trustee argues that regardless of the fact that the Debtors obtained a discharge and their case was closed, the automatic stay remained in effect with respect to the Personal Injury Litigation because it was never abandoned and thus remained as property of the estate. The Trustee’s argument is correct.
Section 554 of the Bankruptcy Code states that “[a]fter notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate.” 11 U.S.C. § 554(a). However absent a trustee taking this affirmative step, “any property scheduled under section 521(1) of this title not otherwise administered at the time оf the closing of a case is abandoned to the debtor....”
See
11 U.S.C. § 554(c). Of the debtor’s duties enumerated in section 521(a)(1) of the bankruptcy Code, it includes the duty to “file ... a schedule of assets and liabilities” unless the court has order otherwise.
See
11 U.S.C. § 521(1)(B)(I). An unscheduled asset is not abandoned by a trustee to a debtor when the case is closed.
See Morlan,
It is well established in case law that acts taken in violation of the automatic stay impоsed under section 362(a) of the Bankruptcy Code are deemed void
ab ini-tio
and lack effect.
See Middle Tenn. News Co., Inc. v. Charnel of Cincinnati, Inc.,
The June 20, 2007 state court order dismissing the Personal Injury Litigation with prejudice is void ab initio. By statute, the Personal Injury Litigation is still property of the Debtors’ bankruptcy estate and is subject to the protections afforded by the automatic stay. The Defendants’ action violated section 362(a)(3) of the Bаnkruptcy Code.
Contempt
The Trustee requests a finding from the court that the Defendants willfully violated section 362(a)(3) of the Code and should be held in contempt. While the Trustee additionally cites Rules 9014 and 9020 of the Federal Rules of Bankruptcy Procedure for support, he stopped short of relying on section 362(k) of the Code.
7
Rule 9020,
Although not cited by the Trustee, a trustee may be entitled to recover for an automatic stay violation under section 105(a).
See Knupfer v. Lindblade (In re Dyer),
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).
The law in this circuit is clear that a debtor is judicially estopped from
personally
pursuing an undisclosed cause of action.
See e.g., Biesek v. Soo Line R.R. Co.,
This is highlighted by the fact that although the Defendants may have known on October 23, 2006 that Debtor Enyedi had filed a bankruptcy case and that the Trustee had filed a No Asset Report on October 26, 2006, the fact remains that neither the Debtors, the Dеbtors’ bankruptcy counsel nor the Trustee provided either the Defendants or their counsel with notice that the bankruptcy case was being re-opened for the purpose of listing and administering the Personal Injury cause of action. Additionally, Attorney Spearman, the Debtor’s state court attorney, was hired by the Trustee as special counsel to represent the estate’s interest in the litigation as of June 12, 2007 — eight days before the state court order of dismissal was entered. As counsel for both the Debtor, and later the bankruptcy estate, it seems likely that Attorney Spearman would have had some knowledge that there was a motion to dismiss pending in state court
before
the state court order dismissing the case was entered. If so, Defendants should not be penalized for a lack of communication between an Attorney and her client, which in this instance is the Trustee.
See e.g., Pioneer Inv. Serv. Co. v. Brunswick Assoc. Ltd. P’ship,
Notes
. While it has not been clarified by the Parties, the Workers Compensation action is separate from the Personal Injury action. Unlike the Workers Compensation action, the Personal Injury action was filed in state court. The Illinois Industrial Commission presides over wоrkers compensation actions. The Parties have not addressed whether the estate has an interest in the Workers Compensation action. To date, the Debtors have not asserted an exemption in the Workers Compensation action; the Debtors have not filed the necessary documentation in this bankruptcy proceeding to assert exemptions claims in either the Workers Compensation action or the Personal Injury action. The Dеbtors also have not filed the necessary schedule to list these assets in their bankruptcy.
. While the motion alleges that the Debtors’ purpose in reopening their bankruptcy case is to amend Schedules B & C to include these causes of action and assert certain exemption claims, the amended schedules have not been filed. Neither has the required filing fee been paid to the Clerk of the Court. See Local Rule 1006-3 ("Except as otherwise provided by these Rules, any document submitted for filing must be accompanied by the appropriate fee.”) Attaching the amended schedules as exhibits to a motion to reopen does not comply with a debtor’s duty under section 521(a)(1) to "file ... a schedule of assets and liabilities." See also Fed. R. Bankr.Pro. 1009. According to the "Disclosure of Compensation of Attorney for Debtor(s)" form filed with the Debtors’ petitions and schedules by Attorney Doyle, he "agreed to render legal serviсe for all aspects of the bankruptcy case, including ... [preparation and filing of any petition, schedules, statement of affairs and plan that may be required” in exchange for the $750 he received from the Debtors. It appears that the only services not included are the "[rjepresentation of the debtors in any dischargeability actions, judicial lien avoid-ances, relief from stay actions or any other adversary proceeding.” Based on his disclosure to the court, Attorney Doyle clearly has a contractual obligation to the Debtors to prepare and file the amended schedules at issue, in addition to rendering legal services to the Debtors "for all aspects of the bankruptcy case.”
.Upon further inspection of the combined Notice of Motion and Certification that Attorney Doyle filed with the motion to reopen, it remains unclear whether counsel served the motion on the Debtors’ creditors. See 06-bk08771, Doc. 26. Although the pages that follow the combined Notice of Motion and Certification list the namеs and addresses of creditors listed on the Debtor’s schedules, Attorney Doyle's Certification states that the "motion and notice of motion were served on the person to whom notice is given by causing the same to be delivered by hand to the client and via electronic notice to the Chapter 13 Trustee before the hour of 5:30 p.m., on April 21, 2007.” Nothing in this statement certifies that the Debtors’ creditors were given notice that the case was being reopened. And while Mr. Crane оbtained electronic notice of this motion automatically via CM/ECF, counsel’s certification indicates that notice was given to "the Chapter 13 Trustee.”
. Although the Trustee served the Debtors’ attorneys, he did not separately serve the Debtors. See Fed. R. Bankr.Pro. 9013, 9014(a) & (b), 7004(b)(9).
. If the court were to assume that this allegation is true, the Parties have failed to address the fact that as of June 12, 2007, counsel who had previously represented Debtor Enyedi in the state court litigation was now representing the Trustee — more specifically, the bankruptcy estate — in the Personal Injury Litigation. This was 8 days before the state court judge ruled on the motion to dismiss. More specifically, the Trustee certified in the certificate of service accompanying his motion to employ special counsel that he served the motion on Attorney Spearman. See 06-bk-08771, Doc. 31. Unless the Defendants were requesting ex parte relief in their dismissal motion and such relief was entertained and granted by the state court judge, Attorney Spearman should have received notice of the Defendants’ motion to dismiss regardless of whether she represented Debtor Enyedi or the Trustee. No one has bothered to address: (1) Was Attorney Spearman served or aware that the motion to dismiss had been filed?; (2) If so, did she inform her client, the Trustee?; and (3) Was Attorney Spearman present at the hearing in state court on the motion to dismiss? The Trustee is quick to point out that he was not provided with notice of the motion to dismiss, however he stops short of noting any role that may have been played by special counsel or his identical failure to, as a courtesy, provide notice of his bankruptcy motions to the Defendants or their counsel.
. 11 U.S.C. § 521(a)(4);
(a) The debtor shall—
(4) if a trustee is serving in the case or an auditor serving under section 586(f) of title 28, surrender to the trustee all property of the estate and any recorded information, including books, documents, records, and papers, relating to prоperty of the estate, whether or not immunity is granted under section 344 of this title;
. Section 362(k) states:
(k)(l) Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages. (2) If such violation is based on an action taken by an entity in the good faith belief that subsection (h) applies to the debtor, the recovery under paragraph (1) of this subsection against such entity shall be limited to actual damages.
11 U.S.C. § 362(k) (emphasis added). The threshold for relief under section 362(k) for any willful violation of the stay is that the injured party is an "individual.” There is a split in authority over whether a trustee is an individual for purposes of section 362(k).
Compare Sosne v. Reinert & Duree, P.C. (Just Brakes Corporate Systems, Inc.),