United States Court of Appeals

Fifth Circuit



## FILED

August 19, 2005

Charles R. Fulbruge III

Clerk REVISED OCTOBER 17, 2005

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

__________________________

No. 04-10919

__________________________

In The Matter Of : VANCE COLE CHESNUT

Debtor.

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MARK T. BROWN; TEMPLETON MORTGAGE CORP.,

Appellees,

versus

VANCE COLE CHESNUT

Appellant.

___________________________________________________

Appeal from the United States District Court

For the Northern District of Texas

___________________________________________________

Before HIGGINBOTHAM, WIENER, and CLEMENT, Circuit Judges.

EDITH BROWN CLEMENT, Circuit Judge:

The Bankruptcy Code’s automatic stay is designed to ensure the orderly distribution of assets

by temporarily protecting the property of the debtor’s estate from the reach of creditors. A willful

violation of the stay occurs when a creditor, with knowledge of the stay, seizes the debtor’s property

without first ob t aining relief from the stay from the bankruptcy court. Here, we face the question1 None of the other forms related to the property sale included that language.

2 whether the creditor violates the stay if, without permission of the bankruptcy court, he forecloses

on an asset to which the debtor has only an arguable claim of right (hereafter, “arguable property ”).

We answer in the affirmative, reverse the district court, affirm the judgment of the bankruptcy court,

and remand to that court for further proceedings.

I.

This case arises out of the foreclosure of a 2.52-acre parcel of land in Eastland County, Texas

(the “Eastland property”). Jacqueline Chesnut (“Mrs. Chesnut”), who is named in the deed as the

sole purchaser of the Eastland property

, married the debtor, Va nce Chesnut (“Mr. Chesnut”), in

1996, approximately three years before she purchased th e Eastland property . The parti es di spute

whether the property was Mrs. Chesnut’s separate property or belonged to Mr. and Mrs. Chesnut

as their community property

. Mrs. Chesnut attended the closing without her husband and signed all

of the relevant legal documents alone, including the real estate lien note, the deed of trust, the title

policy and the warranty deed. Although the warrant y deed recites that the Eastland property was

acquired by “Jacqueline Chesnut, as her sole and separate propert y and estate,” 1 Mr. Chesnut

contended that the Eastland property was paid for with community funds, and Texas law provides

for a rebuttable presumption that property purchased during marriage is community property.

The original grantor of the deed, after having difficult y collecting t imely payments from Mrs.

Chesnut, sold the note to Templeton Mortgag e Co rporation and its sole shareholder, Mark

Templeton Brown. After acquiring the note, Brown corresponded with Mrs. Chesnut, telling her that

she was delinquent in her obligations. In early 2003, Brown informed Mrs. Chesnut that if she did

no t make her account current, he would foreclose on the Eastland property. After Mrs. Chesnut3

failed to make the necessary payments, Brown set a foreclosure sale for February 4, 2003.

However, on January 31 of 2003, Mr. Chesnut filed an individual Chapt er 13 petiti on f or

bankruptcy relief. A copy of the bankruptcy pe t it io n was faxed to Brown’s office that day and

reviewed by Brown’s attorney

. In his appellate brief, Brown acknowledges receipt of notification

from Mr. Chesnut of the filing of his Chapter 13 petition; in fact, Brown filed a copy of the notice as

an exhibit in this lawsuit. The petition put Brown on notice that Mr. Chesnut claimed that the

Eastland property was community property under the protection of the automatic stay. 11 U.S.C.

§ 362(a)(3) (establishing the aut o mat ic stay for property of the estate); § 541(a)(2) (including

community property in the debtor’s estate). Although Brown knew about the petition and Mr.

Chesnut’s claim that he held a community interest in the Eastland property, Brown proceeded with

the foreclosure sale. The Eastland property was sold on February 4, 2003, as planned.

Mr. Chesnut brought this action against Brown and Templeton Mortgage in August 2003,

asserting that Brown willf ully violated the automatic stay provisions of 11 U.S.C. § 362(h). The

bankruptcy court, without deciding whether the Eastland property was community property

, agreed.

The bankruptcy court found that Brown’s belief that the property was not part of the estate was not

sufficient to obviate compliance with the relief-of-stay procedures of 11 U.S.C. § 362(d). The court

assessed Brown a fine and attorney’s fees. The district court reversed the bankruptcy court, and held

that the Eastland property was Mrs. Chesnut’s separate property and that, regardless of when that

determination was made, there was no violation of the automatic stay because Mr. Chesnut had no

interest in the Eastland property. Mr. Chesnut appeals to this court.

II.

A.4

We review a decis io n o f a district court, which sat as an appellate court in review of the

bankruptcy court, by applying “the same standards of review to the bankruptcy court’s findings of

fact and conclusions of law as applied by the district court.” I n re Gerhardt

, 348 F.3d 89, 91 (5th

Cir. 2003). Findings of fact are reviewed for clear error and the conclusions of law are reviewed d e

novo

. Id.

B.

The automatic stay is designed to protect creditors as well as debtors. Without t he stay,

creditors might scramble to obtain as much property of the debtor’s limited estate as possible. The

automatic stay prevents such a scramble by providing “breathing room ” for a debtor and the

bankruptcy court to institute an organized repayment plan. I n re Stembridge

, 394 F.3d 383, 387 (5th

Cir. 2004). It allows for the equitable disbursement of estate property among creditors. S ee Reliant

Energy Servs., Inc. v. Enron Can. Corp. , 349 F.3d 816, 825 (5th Cir. 2003) (“The purposes of the

bankruptcy stay under 11 U.S.C. § 362 . . . [include] ‘further[ing] equity of distribution among the

creditors by forestalling a race to the courthouse.’” (quoting GATX Aircraft Corp. v. M/V Courtney

Leigh , 768 F.2d 711, 716 (5th Cir. 1985)).

The development of this principle has progressed unevenly over the last one hundred and fift y

years. Its evolving nature is reflected in the Supreme Court’s and Congress’s incremental

modification of the stay in response to perceived defects in its scope. Although the Bankruptcy Act

of 1841 did not include an express stay provision, the Supreme Court recognized the need for

injunctive power as far back as 1845. In E x parte Christy

, the Court protected property in custodia

legis (literally, “in the custody of the law”; loosely, “in the care of the court”) under the rationale that

an injunction was necessary to enforce the Court’s jurisdiction over the equitable dispersal of property2 For a thorough recounting of the history of the automatic stay, see 3 C OLLIER ON

B ANKRUPTCY ¶ 362.LH[1] (15th ed. 2003).

5 to credi tors. 44 U.S. (3 How.) 292, 312 (1845) (“[T]he purposes so essential to the just operation

of the bankruptcy system, could scarcely be accomplished except by clothing the courts .

. . sitting

in bankruptcy with the most ample powers and jurisdiction to accomplish them.”). Ninety years later,

the Court extended the scope of the stay to protect property not in custodia legis

. Cont’l Bank v.

Rock Island Ry.

, 294 U.S. 648 (1935). Congress followed in 1938 by making the stay self-executing.

Chandler Act of 1938, 52 Stat. 840-940. Congress later amended the statute to move the initiation

date from confirmation of the plan back to the petition date. 2 In 1978, Congress enacted the current

version of the stay, 11 U.S.C. § 362. This section contains provisions that establish and enforce the

stay, e xcept part icular kinds of property from its reach, and provide procedure for parties to seek

relief from the stay. 11 U.S.C. § 362(a)–(h).

In § 362(h), Congress gave debtors the right to sue for violation of the stay, specifying that

“[a]n 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.” § 362(h). A willful violation

does not require a specific intent to vio late the autom ati c stay . Rather, the statute

provides for damages upon a finding that the defendant knew of the automatic stay

and that the defendant’s actions which violated the stay were intentional. Whether the

party believes in good faith that it had a right to t he property is not relevant to

whether the act was “willful” or whether compensation must be awarded.

In re Taylor

, 884 F.2d 478, 482 (9th Cir. 1989) (emphasis omitted) (quoting In re Bloom

, 875 F.2d

224, 227 (9th Cir. 1989); see also Fleet Mortgage Group, Inc. v. Kaneb

, 196 F.3d 265, 269 (1st Cir.6

1999). Thus, there are three elements to a claim under 362(h): (1) the defendant must have known

of the existence of the stay; (2) the defendant’s acts must have been intentional; and (3) these acts

must have violated the stay.

The first two elements are undeniably present here. The bankruptcy court found that Brown

knew of Mr. Chesnut’s bankruptcy filing, and that Brown intenti o nally continued with the

foreclosure. Brown contests none of these findings. This leaves the question whether Brown

violated the automatic stay when he foreclosed on the Eastland property without first seeking relief

from the bankruptcy court.

C.

Section 362(a)(3) bars any act to obtain possession of property of the estate and, by negative

implication, allows “any ac t to obtain possessi on” of property that i s n ot “property of the estate.”

Thus, seizing a debtor’s bank account would violate the stay, while foreclosing on the home of some

unrelated individual’s property

, to which the debtor neither had nor asserted a claim of interest, would

not. Neither of these examples disposes of the instant case, however, because the classification of

the Eastland property as separate or community property was subject to a non-frivolous dispute at

the time of Brown’s foreclosure.

Brown argues that the district court’s post-seizure determination that the Eastland property

was Mrs. Chesnut’s separate property and thus not a part of Mr. Chesnut’s estate must mean that the

automatic stay did not bar the foreclosure under the provisions of § 362(a)(3). The analysis is not

so straightforward, however. In barring foreclosure, § 362(a)(3) implies that the stay bars “act[s] to

obtain possession” only of those assets that are “property of the estate” at the time the foreclosure

action takes place. Section 362(a)(3) is silent, however, on when that determination of the asset’s7

status is to be made. In other words, § 362(a)(3) says nothing about the automatic stay’s effect on

any act to obtain possession of what is later determined to be property of the estate. Therefore, the

section does not make clear whether its protection extends to property with uncertain status at the

time of the act of possession.

The Eastland property was not clearly part of Mr. Chesnut’s bankruptcy estate at the time of

the foreclosure, but neither was it clearly not part of his estate. Whether an asset is property of the

estate is a legal determination which frequently entails complex analyses invo lving a number of legal

elements and a variety of facts. Here, the status of the Eastland property hinged on the application

of Texas’s legal presumptions regarding separate and community property as well as an examination

of the factual bases underlying the transaction, including the text of the title documents, the source

of purchasing funds, and even the possible existence of fraud. T E X

. F AM

. C ODE A NN

. § 3.003; Bahr

v. Kohr

, 980 S.W.2d 723, 726 (Tex. App. Ct. 1998) (citing Massey v. Massey

, 807 S.W.2d 391, 405

(Tex. App. Ct. 1991)). These questions concerning the characterization of the Eastland property as

separate or community property can only be answered with finalit y through the judicial proc e ss,

which was not initiated here until after the foreclosure of the East l and property

. Regardless of

whether the Eastland property is ultimately held to have been Mrs. Chesnut’s separate property or

the Chesnuts’ community property

, at the time that Brown foreclosed on the Eastland property

, it

was uncertain whether it was property of Mr. Chesnut’s estate and, therefore, was arguable property

.

We must determine how bankruptcy law treats t he unilateral seizure of arguable property.

The policy and structure of the Bankruptcy Code suggest that the stay covers at least some arguable

pro perty. First, the automatic stay has broad application. S ee, e.g.

, In re Krystal Cadilla c

Oldsmobile GMC Truck, Inc.

, 142 F.3d 631, 637 (3d Cir. 1998); s ee also 3 C OLLIER ON8

B ANKRUPTCY ¶ 362.03 (15th ed. 2003) (noting the stay’s “extremely broad” scope). This breadth

suggests Congressional intent that, in the face of uncertainty or ambiguity, co urt s should presume

protection of arguable property.

Second, by providing bankruptcy courts broad discretion to lift stays, In re Cueva

, 371 F.3d

232, 236 (5th Cir. 2004), Congress has evinced an intent to constitute the bankruptcy courts as the

proper forum for the vindication of creditor rights. Sections 362(d) and (e) provide the mechanism

for seeking relief from the automatic stay. § 362(d), (e). Section 362(d) states:

On request of a party in interest and after notice and a hearing, the court shall grant

relief from the stay provided under subsecti o n (a) o f this section, such as by

terminating, annulling, modifying, or conditioning such stay—

(1) for cause, including the lack of adequate protection of an interest in property of

such party in interest;

(2) with respect to a stay of an act against property under subsecti on (a) of thi s

section, if—

(A) the debtor does not have an equity in such property . . . .

§ 362(d). This provision gives bankruptcy courts flexibility to address specific exigencies on a caseby-case basis. S ee C OLLIER

, supra

, at ¶ 362.07[1]; In re Cordry

, 149 B.R. 970, 974 (D. Kan. 1993).

Together with Rule 4001 o f the Federal Bankruptcy Rules, § 362(e) provides the procedure for

having the stay lifted. § 362(e); F E D

. R. B ANK

. P. 4001(a). Generally, these provisions indicate that

one must file a motion, R. 4001, and unless a hearing is conducted within thirty days after the party

moves for relief, the stay is automatically lifted. § 362(e). For the assertion of creditors’ rights, these

provisions suggest a preference for adjudication rather than seizure. If a creditor wishes t o seize

property for lack of adequate protecti on, § 362(d)(1), or for lack of equity, § 362(d)(2), he cannot

do so first and thereby force the debtor to vindicate his rights after the seizure. Instead, he must first3 This analysis accords with other cases where a creditor who wanted to seize arguable

property of the estate went to the bankruptcy court and sought relief under § 362(d)(1) and (e).

In re CyberMedica, Inc. , 280 B.R. 12, 15 (D. Mass. 2002); see also In re Masterw orks, Inc. , 94

B.R. 262, 268 (D. Conn. 1988); In re Purity Ice Cream Co., Inc. , 90 B.R. 183, 189 (D.S.C.

1988).

9 seek relief from the bankruptcy court. Where seized property is arguable property, it is no answer

for the creditor to defend the foreclosure by claiming that the property was not properly covered by

the stay. We discern no principle, and Brown offers none, for why the “for cause” clause in §

362(d)(1) should be treated differently from the other § 362 grounds for relief. 3

Finally, a retroactive classification o f t he property to shape the scope of the stay would

encourage creditor abuse. Knowing a debtor is in a difficult pecuniary condition and may not be able

to vindicate his rights in a later adversary proceeding, a creditor could simply seize arguable property

without fear of later judicial retribution. Or the credi tor coul d gam

bl e that a court would accept

potential legal arguments long after foreclosure (as did the district court here), when the harm may

be more difficult to remedy. Given that in some instances arguable property is, in fact, the debtor’s

property

, these outcom es increase the probability that the debtor will be permanently deprived of his

wrongfully seized assets.

III.

Our conclusion that bankruptcy law demands some process prior to the seizure of arguable

property is buttressed and informed by the Supreme Co urt ’s analysis in analogous contexts. In

Sniadoch v. Family Financial Corp. of Bay View

, 395 U.S. 337 (1969), the Court ruled that a postseizure determination vindicating a creditor’s property righ t s was not sufficient to ameliorate the

insufficient process attendant to a pre-vindication seizure of the property

. At issue was a Wisconsin

statute that allowed the garnishment of the debtor’s wages by a potential creditor before a judgment10

had been obtained against the debtor. In striking down the statute, the Court noted that although “it

is true” that the frozen assets may “be unfrozen if the trial of the main suit is ever had and the wage

earner wins on the merits . . . in the interim the wage earner is deprived of his enjoyment of earned

wages without any opportunity to be heard and to tender any defense he may have.” Id. at 339.

I n F uentes v. Shevin

, 407 U.S. 67 (1972), the Court held that Florida and Pennsylvania

replevin statutes were unconstitutional because they failed to meet the b asic requirements of due

process. The defendants in F uentes seized a stove in the plaint iff’s possession on the power of a writ

of replevin issued by Florida to the store. To obtain the writ, the latter simply averred that the stove

was “wrongfully detained.” I d. at 70. The statute authorizing the writ did not require a pre-seizure

hearing to determine whether the goods were, in fact, wrongfully detained; rather, it allowed the

store’s “bare assertion” of that fact to suffice. I d. at 73–74. Just as it showed hostility t o postseizure determinations of property rights in Sniadoch

, the Court also expressed skepticism of relying

on the store’s opinion that it had a legal claim to justify its seizure:

The Florida and Pennsylvania prejudgment replevin statutes fly in the face of this [due

process] principle. To be sure, the requirements that a party seeking a writ must first

post a bond, allege conclusorily that he is entitled to specific goods, and open himself

to possible liabilit

y in dam ages if he is wrong, serve to deter wholly unfounded

applications for a writ. But those requirements are hardly a substitute for a prior

h earing, for they test no more than the strength of the applicant’s own beli ef in his

rights. S in ce his private gain is at stake, the danger is all too great that his

confidence in his cause w ill be misplaced.

Id. at 83 (emphasis added).

In Connecticut v. Doehr

, 501 U.S. 1 (1991), the Court invalidated a Connecticut statute that

allowed plaint iffs to attach their potential judgments against the defendant’s property

. The plaintiff

had attached a $75,000 lien on the defendant’s home in connection with the plaintiff’s civil suit for

assault and battery. The state statute authorizing the attachment required only that the plaintiff aver11

that the facts in support of his civil claim were true. Here, the Court noted that the “risk of erroneous

deprivation” was “substantial” because it hinged on “one ultimate factual contingency—the award

of damages to the plaintiff which the defendant may not be able to satisfy.” Id. at 12.

The Supreme Court’s hostility to the inherent dangers of e x parte or unilateral seizures of

arguable property is seen in other contexts as well. Federal Rule o f Civil Procedure 65(c), for

example, establishes a bond requirement by providing that “[n]o restraining order or preliminary

injunction shall issue except upon the giving of security by the applicant

. . . for the payment of such

costs and damages as may be incurred or suffered by any party who is found to have w rongfully

enjoined or restrained .” F ED

. R. C IV

. P. 65(c) (emphasis added). This requirement, which is the usual

prerequisite for attachments and writs of replevin, is designed to provide the person whose property

is t o be seized with some protection against the improvident authorization of the seizure of his

property

.

Although Brown’s seizure does not implicate due process protec t io ns because it does not

involve state action, Barrera v. Sec. Bldg. & Inv. Corp. , 519 F.2d 1166, 1172–73 (5th

Cir. 1975), these authorities highlight the risk attendant in, and the law’s general antipathy towards,

unilateral seizure of arguable property without process. The risks were particularly acute in this case.

First, there was a substantial risk of error in Brown’s decision to foreclose. Connecticut , 501 U.S.

at 11 (listing the first prong of the Mathew s v. Eldridge test, “the risk of er r oneous deprivation”

(citing 424 U.S. 319, 335 (1976))). At the time of the seizure, Texas law contained a presumption

that the Eastland property was community in character because it was purchased during marriage by

one spouse. T EX

. F A M

. C ODE A NN

. § 3.003. The existence of a presumption that the Eastland

property was community property and therefore part of the estate increased the likelihood that the4 The existence of the presumption of community property, although not strictly necessary

to the outcome, serves to distinguish this case from instances where other relatives—brothers or

aunts, for example—make claims on property.

5 The district court expressed concern that following the bankruptcy court’s rule would

destroy any reliance on the warranty deed. That concern is unfounded. Here, Brown was told of

Mr. Chesnut’s bankruptcy and specifically informed of Mr. Chesnut’s claim, based on a

presumption in Texas law, to the Eastland property.

12 unilaterally foreclosed upon asset would ultimately be determined to be prope rty of the estate.

Moreover, as already noted, such intricate legal analyses do not easily lend themselves to a unilateral

determination of the merits by the seizing party and, therefore, enhance the already-present possibility

that property of the estate would be improperly seized. In such situations, unilateral foreclosures are

particularly offensive. 4

Second, the potential effect on Mr. Chesnut and on other creditors was subst ant ial.

Connecticut , 501 U.S. at 11 (l i sti ng the second prong of the M athews test, “consideration of the

private interest that will be affected by the prejudgment measure”). If the Eastland property is indeed

property of the estate, it would constitute one of Mr. Chesnut’s most substantial assets. By seizing

it, Brown would seriously harm Mr. Chesnut’s estate, as well as hinder the abilit y of other creditors

to obtain equitable distributions of the estate’s resources. 5

Third, the burden and cost of abeyance for Brown was slight. I d. (listing the last prong in the

Mathew s test, “attention to the interest of the party seeking the prejudgment remedy”). As Brown

conceded at the hearing, “[i]t’s very common in the course of my business to see bankruptcy filings.”

As he further stated, he “absolutely” has stopped foreclosures in such instances. Suspending planned

foreclosure actions in the face of a bankruptcy petition was a matter of course for Brown and not

obviously acutely harmful to his business. Moreover, as opposed to more moveable collateral, real13

property cannot be physically moved or hidden, and there is no allegation that Mr. Chesnut was going

to de st ro y or otherwise damage the value of the Eastland property. Furthermore, the procedural

burden on Brown to petition for relief from the stay was not onerous. Rule 4001(a) only requires a

motion for relief, and under § 362(e) the stay is automatically lifted as to the challenged property if

the motion is not acted on within 30 days. R. 4001; § 362(e). Finally, if Brown’s inability to

foreclose on the Eastland property was particularly harmful to his business, he could have sought

immediate , ex parte relief under § 362(f).

IV.

Not every bankruptcy petition, with an attendant claim of a right in property

, will transform

what is obviously

not property of the estate into arguable property that is subject to process

requirements. Nevertheless, given the considerations above, we are convinced that this is one such

instance. The district court erred in absolving Brown’s willful violation of the automatic stay with

a post-seizure determination of the property’s characterization.

The judgment of the district court is REVERSED and the judgment of the bankruptcy court

is AFFIRMED.