1

Appellee Larry Brown, the debtor, has not filed a brief or

anything else in response to appellant's brief on appeal.

IN THE UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION

IN RE: §

§

LARRY BROWN, §

§

Debtor. §

______________________________ §

§

INDUSTRIAL BANK N.A., §

§

Appellant, §

§

VS. § NO. 4:05-CV-035-A

§

LARRY BROWN, ET AL., §

§

Appellees. §

MEMORANDUM OPINION

and

ORDER

This action comes before the court as an appeal from an

order of the United States Bankruptcy Court for the Northern

District of Texas, Fort Worth Division, the Honorable Dennis

Michael Lynn presiding. The court, having considered the briefs

of appellant, Industrial Bank N.A., and appellee City Bank1, the

record on appeal, and applicable authorities, finds that the

bankruptcy court's order should be reversed for the reasons given

below.

I.

Jurisdiction

The appeal is from an order sustaining an objection to

appellant's secured claim and denying its alternative motion to

 

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annul automatic stays. The court is satisfied that the order is

final and appealable. See Sonnax Indus., Inc. v. Tri Component

Prods. Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280, 1284 (2d

Cir. 1990). This court's jurisdiction exists pursuant to 28

U.S.C. § 158.

II.

Underlying Proceedings

The description of pertinent facts given by the bankruptcy

court is sufficient for purposes of this opinion:

On August 5, 2002, Debtor [appellee Larry Brown]

filed a voluntary petition ("Case 1") under chapter 13

of the Bankruptcy Code. Case 1 was initially dismissed

on October 16, 2002; reinstated on November 19, 2002,

pursuant to a timely motion; and finally dismissed on

May 21, 2003. Although City Bank was not listed as a

creditor on Debtor's original schedules, City Bank

filed a Notice of Appearance and Request for Service of

Papers as "a creditor of, and a party in interest in

this [Case 1]" on December 11, 2002, and filed a proof

of claim on January 27, 2003. Industrial Bank was not

listed as a creditor of Debtor and did not receive

notice of Case 1. During the pendency of Case 1,

Industrial Bank sued Debtor on September 23, 2002;

obtained a default judgment (the "Judgment") on

February 10, 2003, and recorded the Judgment against

Debtor on March 28, 2003.

On June 3, 2003, thirteen days after dismissal of

Case 1, Debtor filed a voluntary petition ("Case 2")

under chapter 11 of the Code. Case 2 was dismissed on

January 7, 2004. City Bank was listed by Debtor on

Schedule D as a secured creditor and on Schedule F as

an unsecured nonpriority creditor. Industrial Bank was

not listed as a creditor of Debtor and did not receive

notice of Case 2. During the pendency of Case 2,

Industrial Bank obtained in connection with the

Judgment a writ of execution against Debtor on June 25,

2003, and gave Debtor notice of levy under the writ of

execution on August 28, 2003.

On February 27, 2004, fifty-one days after

dismissal of Case 2, Debtor filed the above-captioned

chapter 11 case ("Case 3"). City Bank was listed by

 

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Debtor on Schedule D as a secured creditor and on

Schedule F as an unsecured nonpriority creditor. 

Industrial Bank was not listed as a creditor of Debtor

and did not receive notice of Case 3. On March 19,

2004, during the pendency of Case 3, Industrial Bank

obtained in connection with the Judgment an order

granting post-judgment sanctions against Debtor.

On March 26, 2004, Industrial Bank received notice

of Case 3 and in April 2004 learned of Debtor's Case 1

and Case 2. On May 20, 2004, Industrial Bank filed in

Case 3 a secured creditor Proof of Claim based on the

Judgment.

Nov. 10, 2004, Mem. Op. & Order at 2-3 (footnote omitted). The

August 2003 levy under the writ of execution was on a deferred

compensation contract debtor had with the Oakland Raiders.

City Bank objected to appellant's claim, asserting that all

actions taken by appellant during the pendency of Cases 1 and 2

were in violation of the automatic stays. City Bank requested

the bankruptcy court to disallow appellant's claim as a secured

claim and, at best, to allow the claim as an unsecured claim. 

Appellant, on the other hand, filed an alternative motion to

annul the automatic stays as to Cases 1 and 2 retroactively so

that its claim would be secured. Also, appellant argues that

City Bank lacked standing to challenge appellant's claim. Three

days before the hearing, debtor, appellee Larry Brown, filed

documents by which he joined in City Bank's filings.

On September 27, 2004, the bankruptcy court held a hearing

to consider motions filed by appellant and City Bank. After

considering supplemental materials filed by the parties, on

November 10, 2004, the bankruptcy court issued its memorandum

opinion and order (a) sustaining the objection to appellant's

 

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secured claim, (b) denying appellant's motion to annul the

automatic stays, (c) denying as moot City Bank's alternative

motion for authority to avoid post-petition attachment of

appellant's security interest, and (d) allowing appellant's claim

as a general unsecured nonpriority claim. Appellant appeals from

that order.

III.

Issues on Appeal

Appellant sets forth six issues on appeal. They are:

(1) whether the bankruptcy court erred in sustaining City

Bank's objection to the secured status of appellant's claim;

(2) whether City Bank did not have the requisite legal

standing to object to appellant's claim; 

(3) whether the bankruptcy court erred in failing to find

that a challenge to the post-petition fixing of appellant's lien

was time-barred pursuant to 11 U.S.C. § 549 and In re Pointer,

952 F.2d 82 (5th Cir. 1992); 

(4) whether the bankruptcy court erred in failing to find

that the dismissal of debtor's previous bankruptcy cases voided

the automatic stays and validated any action taken by appellant

while the previous cases were pending;

(5) whether, in view of the undisputed evidence presented

by appellant, the bankruptcy court erred in failing to find cause

to annul the automatic stay and grant appellant's motion to annul

the automatic stay; and

 

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Because the court has upheld City Bank's right to object to

appellant's claim, the motion City Bank filed September 16, 2004,

titled "City Bank's Alternative Motion for Authority to Avoid PostPetition Attachment of Alleged Security Interest of Industrial Bank,

N.A.," continues to be moot.

5

(6) whether the bankruptcy court erred in determining that

the debtor's untimely joinder in City Bank's objection to

appellant's claim and alternative motion for authority to avoid

post-petition attachment of alleged security interest of

appellant rendered the issue of City Bank's standing moot.

IV.

Discussion

A. Whether Standing is an Issue.

Appellant contends City Bank lacks standing to contest

appellant's secured claim, relying on City of Farmers Branch v.

Pointer (In re Pointer), 952 F.2d 82 (5th Cir. 1992). Pointer,

however, is not in point as to City Bank's contest to appellant's

claim. There, the court focused its attention on standing under

11 U.S.C. § 549. Here, City Bank's standing is established

pursuant to 11 U.S.C. § 502(a), which authorizes "any party in

interest" to object to a claim.2 Moreover, debtor's joinder in

City Bank's objection to appellant's claim renders moot the issue

of City Bank's standing. The bankruptcy court did not err in

giving effect to debtor's joinder.

B. The Dismissals of Cases 1 and 2 Had the Effect of

Nullifying the Stay as to Actions Appellant Took During

Pendency of Those Cases.

Automatic stays pursuant to 11 U.S.C. § 362 were in effect

during the pendency of Cases 1 and 2. See Bustamante v. Cueva

 

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(In re Cueva), 371 F.3d 232, 236 (5th Cir. 2004). Actions taken

by appellant against debtor or his property while those stays

were in effect were subject to the stays even though appellant

had no knowledge that the cases had been filed. Id. Appellant's

actions, when they were taken, against debtor and his property

during the pendency of the cases were voidable. See Sikes v.

Global Marine, Inc., 881 F.2d 176, 178 (5th Cir. 1989) (saying

"[w]e are persuaded that the better reasoned rule characterizes

acts taken in violation of the automatic stay as voidable rather

than void"). See also Picco v. Global Marine Drilling Co., 900

F.2d 846, 850 (5th Cir. 1990). 

In a footnote in Jones v. Garcia (In re Jones), a panel of

the Fifth Circuit explained that the statements in Picco and

Sikes that actions taken in violation of the stay are voidable,

and not void, really mean that "[i]t is the effect of the stay

itself which is voidable, subject to the broad discretion

afforded a bankruptcy court under section 362." 63 F.3d 411, 413

n.3 (5th Cir. 1995). Regardless of the meaning the respective

panels of the Fifth Circuit had in mind when they made the

"voidable" statements in Picco and Sikes, the end result would be

the same--actions taken in violation of the stay are subject to

being cleansed of the effect of the stay by subsequent action of

the bankruptcy court. See Chapman v. Bituminous Ins. Co. (In re

Coho Res., Inc.), 345 F.3d 338, 344 (5th Cir. 2003) (expressing

the view of the Fifth Circuit in 2003 that "violations [of the

automatic stay] are merely 'voidable' and are subject to

 

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Title 11 U.S.C. § 349(b) reads:

(b) Unless the court, for cause, orders otherwise, a

dismissal of a case other than under section 742 of this

title--

(1) reinstates--

(A) any proceeding or custodianship

superseded under section 543 of this title;

(B) any transfer avoided under section

522, 544, 545, 547, 548, 549, or 724(a) of this

title, or preserved under section 510(c)(2),

522(i)(2), or 551 of this title; and

(C) any lien voided under section 506(d)

of this title;

(2) vacates any order, judgment, or transfer

ordered, under section 522(i)(1), 542, 550, or 553 of

this title; and

(3) revests the property of the estate in the

entity in which such property was vested immediately

before the commencement of the case under this title.

7

discretionary 'cure'"). Such a view is consistent with the

primary function of a § 362 stay, for, as one court explained:

The primary function of the § 362 stay is to protect

the assets of the estate for the benefit of creditors,

so that an equitable distribution according to the

statutory scheme can be effected. Upon dismissal, the

need for this protection is eliminated. [Title 11

U.S.C. §] 349(b) recognizes this fact in its

"reinstatement" of all transfers avoided during the

pendency of the proceeding.

In re Linton, 33 B.R. 695, 697 (Bankr. D. Idaho 1983). 

In Linton, the court relied on 11 U.S.C. § 349(b) when

recognizing as valid voidable action taken against the debtor's

property during existence of the automatic stay, explaining that

the court found "no policy of the Code thwarted by this

recognition . . . ." Id.3

 

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The court has concluded that 11 U.S.C. § 349(b) caused the

dismissals of Cases 1 and 2 to have the effect of validating

actions taken by appellant during the pendency of those cases. 

In other words, the orders of dismissal of Cases 1 and 2, when

considered with § 349(b), were orders of the bankruptcy court

that annulled whatever effect the automatic stays resulting from

those cases otherwise had on actions taken by appellant. As the

court deciding Shell Oil Co. v. Capital Financial Services

explained:

Liens that violate the automatic stay are voidable

at the trustee's discretion, but they are not

automatically void. When a bankruptcy is dismissed,

the property of the estate revests in the entity that

held the property immediately before the case began. 

11 U.S.C. § 349(b)(3). The dismissal also ends the

automatic stay and it acts, in effect, as a grant of

relief from any automatic stay . . . . 

If the automatic stay was in effect when the IRS

filed its lien against Gibson, the dismissal of the

bankruptcy case terminated the stay and vested the

interpleaded funds in Gibson. Since the trustee of

Gibson's bankruptcy estate never avoided the IRS lien,

the dismissal, essentially, acts as a grant of relief

from the stay. Rather than void the lien, the

dismissal voids the stay, and voids it from its

inception. . . .

170 B.R. 903, 906 (S.D. Tex. 1994) (citations and internal

quotation marks omitted). See also Norton v. Hoxie State Bank,

61 B.R. 258, 260 (D. Kan. 1986) (recognizing that "[a] dismissal

of a bankruptcy case acts, in effect, as a grant of relief from

any automatic stay previously in effect").

 

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The effect of § 349(b), which is subject to interpretation,

was clarified by the following legislative history:

The basic purpose of [§ 349(b)] is to undo the

bankruptcy case, as far as practicable, and to restore

all property rights to the position in which they were

found at the commencement of the case.

S. REP. NO. 95-989, at 49 (1978), reprinted in 1978 U.S.C.C.A.N.

5787, 5835. For Cases 1 and 2 to be undone as to appellant, the

effect of the stays on actions taken by appellant during the

pendency of those cases would have to be negated. And, for

appellant's rights to be restored to the positions they enjoyed

at the commencement of Cases 1 and 2, appellant would have to be

given the benefit of actions appellant took in the exercise of

those rights during the pendency of those cases.

The court recognizes that there is case authority that

supports City Bank's argument that dismissal of a bankruptcy case

does not validate action taken in violation of the automatic

stay. See Elbar Inv., Inc. v. Pierce (In re Pierce), 272 B.R.

198, 211 (Bankr. S.D. Tex. 2001); In re Prine, 222 B.R. 610, 613

(Bankr. N.D. Iowa 1997); In re Lampkin, 116 B.R. 450, 453 (Bankr.

D. Md. 1990). The court respectfully disagrees with the

conclusions reached in those cases on the subject under

discussion. Of possible significance, the In re Prine and In re

Lampkin courts thought it important to their decisions to

ascertain whether the actions taken in violation of a stay were

void or voidable, and each court ruled as it did because its

circuit had held that actions taken in violation of a stay are

void. The In re Lampkin court mentioned that "[t]he Fifth

 

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The court is unable to find anything in the record showing that

treating appellant's claim as a secured claim would cause City Bank

or any other creditor in Case 3 to suffer any detriment because

debtor failed to give notice to appellant of his filings of Cases 1

and 2. There is nothing in the record to reflect that appellant

gained an unfair advantage because it did not have notice of the

automatic stays--there is nothing in the record to show that City

Bank or any other creditor would have done anything to improve their

respective positions as creditors if they had not known of the

automatic stays or if Cases 1 and 2 had not been filed.

10

Circuit believes that violations of the stay are voidable,"

citing Sikes. 116 B.R. at 451. The holding in In re Pierce

seems to have been influenced by a principle of Texas real

property law "that a judicial sale in violation of Bankruptcy

Code section 362 has no effect, even if the parties did not have

notice of the stay, unless a bankruptcy judge grants retroactive

relief from the stay." 272 B.R. at 210.

The bankruptcy court agreed with appellant that debtor

should not be allowed to benefit from the protections of the

automatic stays applicable to Cases 1 and 2, but concluded that

City Bank and other creditors in Case 3 "should not suffer a

detriment because Debtor failed to give notice of its bankruptcy

filings to [appellant]."4 Mini-Record, Vol. 1 at 9. In the

course of concluding that appellant's claim should not be allowed

as a secured claim, the bankruptcy court explained:

Because allowance of the Judgment as a secured claim

(1) would improve Industrial Bank's creditor status to

the prejudice of City Bank and those other creditors

obedient to the mandates of the automatic stay and (2)

would not further the purposes of the Code and the

equitable distribution of Debtor's assets among

creditors, the court is convinced that the Judgment

 

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should not be allowed as a secured claim with a

perfected lien against the deferred contract proceeds. 

Id. Those comments of the bankruptcy court would appear to be

appropriate to a discussion of appellant's alternative motion to

annul the automatic stay, the resolution of which could take into

account equitable considerations. However, there is no hint in

the language of § 349 or its legislative history that the

cleansing effect of the dismissal of a case under Title 11 is

dependent on factors such as those to which the bankruptcy court

directed its attention. As introductory language of § 349(b)

suggests, the effect of the statute can be modified on a case-bycase basis "for cause," but that modification would have to be

made at the time and as a part of the dismissal of the case.

City Bank focuses in its brief on what it characterizes as

appellant's "wrongful conduct" and "improper head start,"

Appellee's Br. at 16, implying that appellant engaged in improper

conduct when it took the actions about which debtor and City Bank

complain. But, there is no evidence that appellant had knowledge

of the stays when it took those actions; and, the findings of the

bankruptcy court on that subject, which are not challenged, are

that appellant did not have knowledge of the stays. Supra at 2-

3. Moreover, the court is of the belief that knowledge of the

stays, vel non, is not relevant to the issue under discussion. 

But, the court is not expressing an opinion as to what

appellant's rights would be if it had knowingly violated the

stays.

 

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The court does note, however, that the bankruptcy court appears

to have been incorrect in its statement that appellant's allegations

relative to its expenditures are unsubstantiated. See Mini-Record,

Vol. 1 at 11. There was testimony that appellant incurred legal fees

in excess of $80,000.00 in connection with its collection actions. 

R. at 328. 

12

For the reasons given above, the court concludes that the

actions taken by appellant during the stays related to Cases 1

and 2 should be given effect, and that the bankruptcy court erred

in failing to do so. Because the court's ruling is based on the

effect of § 349(b), the court is not required to reach issues

related to appellant's alternative motion to annul automatic

stays as to Cases 1 and 2, and declines to do so.5

V.

Order

For the reasons discussed herein,

The court ORDERS that the order of the bankruptcy court

sustaining the objection to appellant's secured claim be, and is

hereby, reversed.

The court further ORDERS that the bankruptcy court treat

appellant's claim as a secured claim by giving appellant the

benefit of actions appellant took during the pendency of Cases 1

and 2, including, but not limited to, the obtaining of a default

judgment on February 10, 2003, recording that judgment on March

28, 2003, obtaining a writ of execution against debtor on June

 

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25, 2003, and giving debtor and the Oakland Raiders notice of

levy under the writ of execution on August 28, 2003.

SIGNED June 21 , 2005.

 /s/ John McBryde 

JOHN McBRYDE

United States District Judge

 

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