Court Opinion

ID: 9618008
Source: CourtListenerOpinion
Date Created: 2023-08-22 05:05:15.32051+00
Date Added: 2024-06-11T18:04:22.161501
License: Public Domain

TOCI, Judge,
dissenting.
I respectfully dissent. When the Stallings filed their personal injury action, their attorney did not know that Spring Meadows had filed a Chapter 11 bankruptcy petition. After learning about the bankruptcy, the Stallings’ attorney requested that the stay be lifted to allow the Stallings to proceed with their personal injury action. The bankruptcy court entered an order lifting the stay to the limited extent of allowing the case to proceed to judgment, with collection limited to the debtor’s insurance coverage. In other words, .the bankrupt’s estate was not and could not be affected by the outcome of the Stallings’ lawsuit.
Nevertheless, under the majority’s reasoning, the order lifting the stay was not sufficient. The majority adopts the law announced by the Ninth Circuit and concludes that because the filing of the lawsuit was in violation of the stay, it was therefore void. The majority also concludes that the Stallings were required to do more than to simply have the stay lifted—they were also required to ask for retroactive relief or that the stay be annulled. The net result reached by the majority is that because the Stallings’ complaint was filed when the stay was in effect, the complaint, being void, did not toll the statute of limitations. Thus, the Stallings’ claim against Spring Meadows has been extinguished on a technicality, one not necessary to protect Spring Meadows bankruptcy estate.
I would reject the rule announced by the Ninth Circuit in In re Schwartz, 954 F.2d 569 (9th Cir.1992), for several reasons. First, the rationale for the rule that acts taken in violation of a stay are void applies to grant the debtor relief from creditors and from collection efforts so that the debtor may prepare a plan of reorganization. Id. at 571 (citing H.R.Rep. No. 595, 95th Cong., 1st Sess. 340 (1978)). That rationale is not present here—this case does not involve any effort to hinder or impede the debtor’s reorganization plan. The Stallings are entitled to recover a judgment only from the liability insurance proceeds. The payment of insurance proceeds will not affect the debtor or any of its creditors one way or the other. Thus, the rationale for the Schwartz rule does not exist here.
Second, the weight of authority referred to by the majority simply does not apply in this situation. The cases cited by the majority are cases in which some effort was made to proceed with collection efforts against the debtor personally after a stay was entered. See Kalb v. Feuerstein, 308 U.S. 433, 438, 60 S.Ct. 343, 345-46, 84 L.Ed. 370 (1940); In re Schwartz, 954 F.2d at 572; Ellis v. Consolidated Diesel Elec. Corp., 894 F.2d 371 (10th Cir.1990); In re 48th St. Steakhouse, Inc., 835 F.2d 427,431 (2nd Cir.1987), cert. denied, 485 U.S. 1035,108 S.Ct. 1596, 99 L.Ed.2d 910 (1988); Borg-Wamer Acceptance Corp. v. *625Hall, 685 F.2d 1306, 1308 (11th Cir.1982). And, although the majority cites Miller v. National Franchise Services, Inc., 167 Ariz. 403, 407, 807 P.2d 1139, 1143 (App.1991), for the proposition that actions which violate the stay are void, this court has also held to the contrary in Flexmaster Aluminum Awning Co. v. Hirschberg, 173 Ariz. 83, 839 P.2d 1128 (App.1992). Consequently, in these circumstances, no reason exists to blindly follow the Ninth Circuit.
Third, most courts hold that a discharge in bankruptcy does not preclude an action against a discharged debtor as the nominal defendant where he is insured against liability for negligence. See, e.g., In re Edgeworth, 993 F.2d 51 (5th Cir.1993); First Fidelity Bank v. McAteer, 985 F.2d 114 (3rd Cir. 1993); Green v. Welsh, 956 F.2d 30, 35 (2nd Cir.1992); In re Femstrom Storage and Van Co., 938 F.2d 731, 733-34 (7th Cir.1991); In re Jet Florida Sys., Inc., 883 F.2d 970, 976 (11th Cir.1989); In re Beeney, 142 B.R. 360, 362-63 (Bankr. 9th Cir.1992); In re Greenway, 126 B.R. 253, 255 (Bankr.E.D.Tex.1991); In re Peterson, 118 B.R. 801, 804 (Bankr.D.N.M.1990); In re Traylor, 94 B.R. 292, 293 (Bankr.E.D.N.Y.1989); In re Lembke, 93 B.R. 701, 702-03 (Bankr.D.N.D.1988); In re White, 73 B.R. 983 (Bankr.D.D.C.1987); In re Mann, 58 B.R. 953, 958 (Bankr.W.D.Va. 1986). A discharge in bankruptcy does not extinguish the debt itself; it merely releases the debtor from personal liability for the debt. Edgeworth, 993 F.2d at 53. Section 524(e)10 of the Bankruptcy Code specifies that the debt still exists and can be collected from any other entity that may be liable. Edgeworth, 993 F.2d at 53. Thus, courts have held that the scope of a section 524 injunction does not prevent a proceeding against the discharged debtor to establish a claim against the debtor’s liability insurer. Id. at 54.
The foundation of this reading of § 524(a)(2) is that it makes no sense to allow an insurer to escape coverage for injuries caused by its insured merely because the insured receives a bankruptcy discharge. “The ‘fresh-start’ policy is not intended to provide a method by which an insurer can escape its obligations based simply on the financial misfortunes of the insured.”
Id. at 54 (quoting In re Jet Florida, 883 F.2d at 975). The same rationale should apply here.
The conclusion that the Stallings’ complaint is void because the bankruptcy court did not specifically annul the stay or grant retroactive relief is hypertechnical and unnecessary to protect the debtor or its estate. It does no violence to the Bankruptcy Code to hold that, where the debtor has liability insurance coverage, the order lifting the stay returns the parties to the status of the legal relationship that existed before the stay was entered. First Nat’l Bank of Minneapolis v. Kehn Ranch, Inc., 394 N.W.2d 709, 715 (S.D. 1986). In other words, the filing of a complaint in violation of the stay is, under these particular circumstances, voidable rather than void. To hold otherwise exalts form over substance and leads to injustice in this case.

. 11 U.S.C. § 524(e) (1988) states: "Except as provided in subsection (a)(3) of this section, discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.” (Emphasis added.)