Court Opinion

ID: 3023845
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:29:51.189553+00
Date Added: 2024-06-11T12:41:01.114740
License: Public Domain

United States Bankruptcy Appellate Panel
                               FOR THE EIGHTH CIRCUIT
                                     ____________

                                        99-6049MN
                                       ___________

In re: Kevin Lynn Vierkant;                   *
       Darlene Lisa Vierkant                  *
                                              *
       Debtors                                *
                                              *
Dale Alan LaBarge                             *
                                              *   Appeal from the United States
       Plaintiff - Appellee                   *   Bankruptcy Court for the
                                              *   District of Minnesota
              v.                              *
                                              *
Kevin Lynn Vierkant;                          *
Darlene Lisa Vierkant                         *
                                              *
       Defendants - Appellants                *

                                       ____________

                               Submitted: October 12, 1999
                                Filed: November 2, 1999
                                     ____________

Before KOGER, Chief Judge, WILLIAM A. HILL and SCHERMER, Bankruptcy Judges.
                                ____________

KOGER, Chief Judge.

                                     Background Facts

        On September 9, 1998, Kevin and Darlene Vierkant filed a voluntary petition for
relief under Chapter 7 of the Bankruptcy Code. At the time the Vierkants filed their
bankruptcy petition, a lawsuit filed by Dale LaBarge alleging retaliatory discharge for filing
a workers’ compensation claim was pending against them and their corporation, KLV,
Incorporated, in Minnesota state court. The Vierkants never filed an answer to LaBarge’s
state court complaint. However, the Vierkants did personally appear at a pretrial conference
held on July 24, 1998, to inform the state court that KLV, Incorporated had filed for
bankruptcy. On August 28, 1998, a hearing was held in the state court lawsuit on LaBarge’s
motion for the entry of a default judgment. The Vierkants failed to appear at this hearing.
On September 14, 1998, after the bankruptcy petition had been filed, the Minnesota state
court entered a default judgment against the Vierkants and in favor of LaBarge. The state
court expressly concluded that the legal basis for the underlying liability was retaliatory
discharge in violation of Minn. Stat. § 176.82 Subd. 1, and awarded damages in the total
amount of $62,217.82 to LaBarge.1

       LaBarge has never moved the bankruptcy court for retroactive relief from the
automatic stay in regards to the post-petition entry of the default judgment. The Vierkants
have never asserted that the post-petition entry of the default judgment violated the automatic
stay.

        LaBarge filed an adversary proceeding against the Vierkants contending that the
damage award was a nondischargeable debt under 11 U.S.C. § 523(a)(6), and that the default
judgment collaterally estopped the Vierkants from contesting the willful and malicious nature
of the debt. The bankruptcy court conducted a trial on the adversary complaint during which
the state court default judgment was admitted as evidence, and witnesses testified regarding
the underlying merits of the nondischargeability action. At the conclusion of trial, the
bankruptcy court ruled that the default judgment should be given collateral estoppel effect
in the adversary proceeding, and that on the basis of the state court’s findings of fact and
conclusions of law the debt was nondischargeable under section 523(a)(6). However, the
bankruptcy court further stated that no evidence had been introduced at trial to support
nondischargeability of the debt under section 523(a)(6), and that in the absence of the default
judgment the debt would have been dischargable. The bankruptcy court explained:

       1
         The Minnesota court awarded damages for lost wages in the amount of $10,000.00;
damages for emotional distress in the amount of $10,000.00; punitive damages in the amount of
$40,283.82; and costs and attorney’s fees in the amount of $1934.00.

                                              2
               However, if I’m wrong on [giving collateral estoppel effect to the
       default judgment] . . . then I am going to give you the findings that I would
       have come to had there been no prior state court judgment. I would have
       without a question determined that Darlene owes no debt to the plaintiff, Mr.
       LaBarge, and that if she did it would be a dischargeable debt. She – and this
       would be based on findings that while she was apparently a shareholder and
       the CEO of the company she had little or nothing to do with the company’s
       activities. She – she was not – it’s undisputed she was not informed of what
       might be going on. She hardly knew that Mr. LaBarge worked for the
       company and she simply had no facts upon which to act and she did not take
       any action against him.
               And I would also find that the debt to – that Kevin’s debt to Mr.
       LaBarge would be dischargeable because I believe his version which is much
       better documented than that given here by the plaintiff is the more likely
       scenario, that there was no retaliatory discharge of this debtor and no willful
       and malicious injury targeted against this debtor.
               That being said, however, because of the findings I make and then I
       would not obviously be required to go into what the damages might be because
       I would have determined that whatever the amount of the debt was it was in
       fact dischargeable. That being said I am going to enter judgment in favor of
       the plaintiff and against the defendant[s] based on the findings that I have just
       read into the record which will hold that the debt in the amount awarded in the
       state court is excepted from discharge under 523(a)(6) because of a collateral
       estoppel effect of the state court judgment.

Appellants’ Appendix, Transcript of Trial at pages 48-49.

       The Vierkants timely appeal from the bankruptcy court’s order.

                                         Discussion

       The bankruptcy court’s decision to apply collateral estoppel is subject to de novo
review by the BAP. See Fischer v. Scarborough (In re Scarborough), 171 F.3d 638, 641 (8th
Cir. 1999), cert. denied, ___ S. Ct. ___, 1999 WL 700016 (Oct. 12, 1999). Further, the
applicability of the automatic stay to a pending matter is an issue of law within the
competence of an appellate court. See National Labor Relations Bd. v. Edward Cooper
Painting, Inc., 804 F.2d 934, 938 (6th Cir. 1986). Here, we determine that because the default
judgment was entered in violation of the automatic stay and, therefore, is void, the

                                              3
bankruptcy court erred as a matter of law by giving the default judgment collateral estoppel
effect in LaBarge’s adversary proceeding.

        In In re Ahlers, 794 F.2d 388, 394 n.3 (8th Cir. 1986)(citation omitted), the Eighth
Circuit opined:

       The automatic stay is one of the fundamental debtor protections provided by
       the bankruptcy laws. It gives the debtor a breathing spell from his [or her]
       creditors. It stops all collection efforts, all harassment, and all foreclosure
       actions. It permits the debtor to attempt a repayment or reorganization plan,
       or simply to be relieved of the financial pressures that drove him into
       bankruptcy.

       The Court continued:

       The automatic stay also provides creditor protection. Without it, certain
       creditors would be able to pursue their own remedies against the debtor’s
       property. Those who acted first would obtain payment of the claims in
       preference to and to the detriment of other creditors. Bankruptcy is designed
       to provide an orderly liquidation procedure under which all creditors are
       treated equally. A race of diligence by creditors for the debtor’s assets
       prevents that.

Id. at 394 n.4 (citation omitted).

       “The automatic stay is among the most basic of debtor protections under bankruptcy
law.” Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969, 975 (1st Cir. 1997). “It
is designed to protect debtors from all collection efforts while they attempt to regain their
financial footing.” Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571 (9th Cir.
1992). “The stay springs into being immediately upon the filing of a bankruptcy petition:
‘[b]ecause the automatic stay is exactly what the name implies – “automatic” – it operates
without the necessity for judicial intervention.’” Soares, 107 F.3d at 975 (citation omitted).
The automatic stay “is triggered upon the filing of a bankruptcy petition regardless of
whether the other parties to the stayed proceeding are aware that a petition has been filed.”
Constitution Bank v. Tubbs, 68 F.3d 685, 691 (3d Cir. 1995). “The automatic stay cannot
be waived. Relief from the stay can be granted only by the bankruptcy court having

                                              4
jurisdiction over a debtor’s case.” Id. “In order to secure the[] important protections [of the
stay], courts must display a certain rigor in reacting to violations of the automatic stay.”
Soares, 107 F.3d at 975-76.

        In Constitution Bank v. Tubbs, the Third Circuit opined:

               The automatic stay is of broad scope, directing that “[a]ll judicial
        actions against a debtor seeking recovery on a claim that were or could have
        been brought before commencement of a bankruptcy case, are automatically
        stayed.” . . . thus, “[o]nce triggered by a debtor’s bankruptcy petition, the
        automatic stay suspends any non-bankruptcy court’s authority to continue
        judicial proceedings then pending against the debtor.” . . . Unless relief from
        the stay is granted, the stay continues until the bankruptcy case is dismissed
        or closed, or discharge is granted or denied. . . . Once a stay is in effect,
        without relief from the bankruptcy court, “the parties themselves [can]not
        validly undertake any judicial action material to the . . . claim against” the
        debtor.

Constitution Bank v. Tubbs, 68 F.3d at 691-92 (citations omitted).

        Section 362(a)(1) provides in relevant part that a bankruptcy petition “operates as a
stay, applicable to all entities, of the commencement or continuation . . . of a judicial . . .
action or proceeding against the debtor.” 11 U.S.C. § 362(a)(1). Here, the post-petition
entry of the default judgment was a continuation of a judicial proceeding within the meaning
of section 362(a)(1),2 and constituted a violation of the automatic stay.

        2
           The post-petition entry of the default judgment was not a ministerial act exempted from the
application of the automatic stay. See Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969,
973-75 (1st Cir. 1997)(The First Circuit stated that “it is readily apparent that the state court’s actions
in ordering a default and directing the entry of a judgment [post-petition] possess[ed] a distinctly
judicial, rather than a ministerial, character,” and, consequently, such action violated the automatic
stay.). Compare Heikkila v. Carver (In re Carver), 828 F.2d 463, 464 (8th Cir. 1987)(The Eighth
Circuit held that the post-petition “ministerial” and “routine” entry of a certification of noncompliance
by the court clerk after the expiration of a judicially decreed redemption period in a strict foreclosure
action brought against the debtor who had defaulted on a contract for deed did not violate the
automatic stay.).

                                                    5
       The courts are split on whether actions taken in derogation of the automatic stay are
void ab initio or merely voidable. See, e.g., Carpio v. Smith (In re Carpio), 213 B.R. 744,
748, 749 (Bankr. W.D. Mo. 1997)(collecting bankruptcy court and district court cases within
the Eighth Circuit that have addressed this issue, along with circuit court cases and one
United States Supreme Court case).

       In Kalb v. Feuerstein, 308 U.S. 433, 60 S. Ct. 343, 84 L. Ed. 370 (1940), the United
States Supreme Court, in the context of the Bankruptcy Act of 1898, held that actions taken
in violation of the automatic stay are void. The Supreme Court opined:

               It is generally true that a judgment by a court of competent jurisdiction
       bears a presumption of regularity and is not thereafter subject to collateral
       attack. But Congress, because its power over the subject of bankruptcy is
       plenary, may by specific bankruptcy legislation create an exception to that
       principle and render judicial acts taken with respect to the person or property
       of a debtor whom the bankruptcy law protects nullities and vulnerable
       collaterally. Although the Walworth County Court had general jurisdiction
       over foreclosures under the law of Wisconsin, a peremptory prohibition by
       Congress in the exercise of its supreme power over bankruptcy that no State
       court have jurisdiction over a petitioning farmer-debtor or his property, would
       have rendered the confirmation of sale and its enforcement beyond the County
       Court’s power and nullities subject to collateral attack. The States cannot, in
       the exercise of control over local laws and practice, vest State courts with
       power to violate the supreme law of the land. The Constitution grants
       Congress exclusive power to regulate bankruptcy and under this power
       Congress can limit that jurisdiction which courts, State or Federal, can
       exercise over the person and property of a debtor who duly invokes the
       bankruptcy law. If Congress has vested in the bankruptcy courts exclusive
       jurisdiction over farmer-debtors and their property, and has by its Act
       withdrawn from all other courts all power under any circumstances to maintain
       and enforce foreclosure proceedings against them, its Act is the supreme law
       of the land which all courts – State and Federal – must observe. The wisdom
       and desirability of an automatic statutory ouster of jurisdiction of all except
       bankruptcy courts over farmer-debtors and their property were considerations
       for Congress alone.
               We think the language and broad policy of the Frazier-Lemke Act
       conclusively demonstrate that Congress intended to, and did deprive the
       Wisconsin County Court of the power and jurisdiction to continue or maintain

                                              6
       in any manner the foreclosure proceedings against appellants without consent
       after hearing of the bankruptcy court in which the farmer’s petition was then
       pending.
                     ....
              The mortgagees who sought to enforce the mortgage after the petition
       was duly filed in the bankruptcy court, the Walworth County Court that
       attempted to grant the mortgagees relief, and the sheriff who enforced the
       court’s judgment, were all acting in violation of the controlling Act of
       Congress. Because that State court had been deprived of all jurisdiction or
       power to proceed with the foreclosure, the confirmation of the sale, the
       execution of the sherif’s deed, the writ of assistance, and the ejection of
       appellants from their property – to the extent based upon the court’s actions
       – were all without authority of law.

Kalb v. Feuerstein, 308 U.S. at 438-40, 443, 60 S. Ct. at 346, 348 (footnotes omitted).

       In Potts v. Potts (In re Potts), 142 F.2d 883 (6th Cir. 1944), cert. denied, 324 U.S. 868,
65 S. Ct. 910, 89 L. Ed. 1423 (1945), also a Bankruptcy Act case, the Sixth Circuit, relying
on Kalb v. Feuerstein, held that actions in violation of the automatic stay are void. The Sixth
Circuit stated:

               Upon filing a petition under Chapter XII, all of the property of the
       debtor is brought within the jurisdiction of the Bankruptcy Court which
       jurisdiction is paramount and exclusive and thereafter no action taken in any
       other court can affect the proceedings in the Bankruptcy Court. Since the
       judgment of the state court of July 26, 1943, is the sole foundation for
       claimant Potts’ second claim, the judgment being void, the claim is void, and
       likewise, the whole decree of the state court.

Potts, 142 F.2d at 888 (citing Kalb v. Feuerstein, 308 U.S. 433, 443, 60 S. Ct. 343, 84 L. Ed.
370 (1940)).

       The circuit courts that have addressed the issue of void ab initio versus merely
voidable in the context of the Bankruptcy Code are split. The Fifth Circuit and the Federal
Circuit have taken the minority position that an act in violation of the automatic stay is
merely voidable. See Bronson v. United States, 46 F.3d 1573 (Fed. Cir. 1995)(2 to 1
decision); Picco v. Global Marine Drilling Co., 900 F.2d 846 (5th Cir. 1990).

                                               7
       The overwhelming majority of the circuits hold that an action in violation of the
automatic stay is void ab initio. See Soares v. Brockton Credit Union (In re Soares), 107
F.3d 969 (1st Cir. 1997); Constitution Bank v. Tubbs, 68 F.3d 685 (3d Cir. 1995); Parker v.
Bain, 68 F.3d 1131 (9th Cir. 1995); Franklin Sav. Ass’n v. Office of Thrift Supervision, 31
F.3d 1020 (10th Cir. 1994); Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522 (2d Cir.
1994); Albany Partners, Ltd. v. Westbrook (In re Albany Partners, Ltd.), 749 F.2d 670 (11th
Cir. 1984); Matthews v. Rosene, 739 F.2d 249 (7th Cir. 1984).

       In the Sixth Circuit two panels have held that actions in violation of the automatic stay
are void, Smith v. First America Bank, N.A. (In re Smith), 876 F.2d 524 (6th Cir. 1989);
National Labor Relations Bd. v. Edward Cooper Painting, Inc., 804 F.2d 934 (6th Cir. 1986);
while one panel has held that acts violating the automatic stay are invalid and voidable,
Easley v. Pettibone Michigan Corp., 990 F.2d 905 (6th Cir. 1993).

       The Eighth Circuit has not addressed this issue, and in a 1997 opinion expressly
declined to do so. See Riley v. United States, 118 F.3d 1220, 1222 n.1 (8th Cir. 1997), cert.
denied, 118 S. Ct. 1299, 140 L. Ed. 2d 466 (1998).

      The Ninth Circuit Court of Appeals enunciated the following rationale to support its
holding that violations of the automatic stay are void:

              In light of the automatic stay’s purpose, the issue before us requires
       some analysis of the relevant policy considerations. Either the debtor must
       affirmatively challenge creditor violations of the stay, or the violations are
       void without the need for direct challenge. If violations of the stay are merely
       voidable, debtors must spend a considerable amount of time and money
       policing and litigating creditor actions. If violations are void, however,
       debtors are afforded better protection and can focus their attention on
       reorganization [or relief].
              Given the important and fundamental purpose of the automatic stay and
       the broad debtor protections of the Bankruptcy Code, we find that Congress
       intended violations of the automatic stay to be void rather than voidable.
       Nothing in the Code or the legislative history suggests that Congress intended
       to burden a bankruptcy debtor with an obligation to fight off unlawful claims.

                                               8
      The position championed by the IRS in this case would impose severe
      hardships on debtors trying to regain their financial footing.
              The district court in In re Garcia, 109 B.R. 335 (N.D. Ill. 1989),
      explained that if violations of the automatic stay were merely voidable,
      creditors would be encouraged to violate the stay:
              [T]he fundamental importance of the automatic stay to the
              purposes sought to be accomplished by the Bankruptcy Code
              requires that acts in violation of the automatic stay be void,
              rather than voidable. Concluding that acts in violation of the
              automatic stay were merely voidable would have the effect of
              encouraging disrespect for the stay by increasing the possibility
              that violators of the automatic stay may profit from their
              disregard for the law, provided it goes undiscovered for a
              sufficient period of time. This may be an acceptable risk to
              some creditors when measured against a delayed prorata
              distribution.
      Id. at 340 (footnote omitted). Like the court in Garcia, we will not reward
      those who violate the automatic stay. The Bankruptcy Code does not burden
      the debtor with a duty to take additional steps to secure the benefit of the
      automatic stay. Those taking post-petition collection actions have the burden
      of obtaining relief from the automatic stay. See In re Williams, 124 B.R.
      [311,] 317-18 [(Bankr. C.D. Cal. 1991)].

Schwartz v. United States, 954 F.2d 569, 571-72 (9th Cir. 1992). The Schwartz court
continued:

             The courts which have found the automatic stay voidable rather than
      void have relied primarily on sections 362(d) and 549 of the Bankruptcy Code
      to support their conclusion. . . . These courts have reasoned that (1) the court’s
      power under section 362(d) to annul an automatic stay and (2) the trustee’s
      duty under section 549 to bring an action to void an unauthorized transfer are
      inconsistent with violations of the stay being void and thus demonstrate that
      violations of the automatic stay are merely voidable. We find this reasoning
      erroneous.
                     ....
      [S]ection 362[(d)] gives the bankruptcy court wide latitude in crafting relief
      from the automatic stay, including the power to grant retroactive relief from
      the stay. 2 Collier on Bankruptcy § 362.07 (15th ed. 1984). . . .
      [S]ection 362(d) is not inconsistent with the conclusion that any action in
      violation of the automatic stay is void and of no effect. Section 362(d)

                                              9
outlines the bankruptcy court’s authority to make exceptions to the general
operation of the stay. If a creditor obtains retroactive relief under section
362(d), there is no violation of the automatic stay, and whether violations of
the stay are void or voidable is not at issue.
               ....
The power to grant relief, even retroactively, simply does not mean that
violations of the stay must be merely voidable rather than void. As was
explained by the court in In re Garcia, 109 B.R. at 339, “that Congress saw fit
to include specific exceptions to the automatic stay does not require the
conclusion that actions in violation of the automatic stay are merely voidable.”
It is entirely consistent to reason that, absent affirmative relief from the
bankruptcy court, violations of the stay are void.
        Statements from leading authorities on bankruptcy generally support
this conclusion: “The use of the word ‘annulling’ [in § 362(d)] permits the
[court’s] order to operate retroactively, thus validating actions taken by a party
at a time when he was unaware of the stay. Such actions would otherwise be
void.” 2 Collier on Bankruptcy § 362.07 (emphasis added). With that
understanding, section 362(d) gives the court the power to ratify retroactively
any violation of the automatic stay which would otherwise be void. Simply
put, there is nothing remarkable or inconsistent about the normal operation of
the automatic stay being subject to a specific statutory exception such as that
found in section 362(d). . . .
               ....
        The supposed conflict between section 549 and section 362 can be
explained by the following reasoning. First, the expansive definition of
“transfer” means that sections 362 and 549, at times, cover the same
transactions. Second, section 549 implies that some of these overlapping
transactions will be valid unless affirmatively challenged by the trustee.
Therefore, some argue that section 362 cannot be interpreted to void these
overlapping transactions, for doing so would render section 549 moot. . . .
[A] straightforward analysis of section 549 reveals that it is not intended to
cover the same type of actions prohibited by the automatic stay nor rendered
moot by section 362's voiding of all automatic stay violations. Section 549
applies to unauthorized transfers of estate property which are not otherwise
prohibited by the Code. . . . In most circumstances, section 549 applies to
transfers in which the debtor is a willing participant. . . . For example, in a
transfer unrelated to any antecedent debt, the debtor may sell a portion of the
estate’s property to a third person. The trustee has the power to avoid such a
transfer under section 549.
        Section 362's automatic stay does not apply to sales or transfers of
property initiated by the debtor. Thus, section 549 has a purpose in

                                       10
      bankruptcy beyond the potential overlap with section 362. In other words, the
      automatic stay can void any violation and still leave section 549 with a valid
      and important role in bankruptcy. Section 549 exists as a protection for
      creditors against unauthorized debtor transfers of estate property. Although
      there are circumstances where section 362 overlaps section 549 and renders
      it unnecessary, this overlap falls far short of rendering section 549
      meaningless.
              Similarly, subsection 549(c)’s protection of good faith purchasers
      carves out an extremely specific and narrow exception to the automatic stay
      when section 362 overlaps subsection 549(c). There is no reason to infer from
      this narrow exception that violations of the automatic stay are not void. . . . It
      is disingenuous to argue that the general rule must be invalid simply because
      there is a narrow exception to the rule. If violations of the automatic stay are
      not void because there is a narrow exception under subsection 549(c), then by
      the same reasoning the rest of section 549 would be invalid because subsection
      549(c) creates an exception to the trustee’s power to avoid postpetition
      transfers.
              Indeed, subsection 549(c) sheds no light on the void/voidable
      distinction. Subsection 549(c) is an exception to section 362 regardless of
      whether violations of the automatic stay are void or merely voidable.
      Congress did not draft subsection 549(c) to demonstrate that violations of the
      automatic stay are merely voidable; Congress drafted subsection 549(c) to
      protect good faith purchasers where the sale would otherwise be subject to
      avoidance under section 549 or void under section 362.

Schwartz, 954 F.2d at 572-74 (some citations omitted).

      In Soares v. Brockton Credit Union (In re Soares), the First Circuit explained:

      [T]he characterization of an infringing action as “void” or “voidable”
      influences the burden of going forward. Treating an action taken in
      contravention of the automatic stay as void places the burden of validating the
      action after the fact squarely on the shoulders of the offending creditor. In
      contrast, treating an action taken in contravention of the automatic stay as
      voidable places the burden of challenging the action on the offended debtor.
      We think that the former paradigm, rather than the latter, best harmonizes with
      the nature of the automatic stay and the important purposes that it serves.

                                             11
Soares, 107 F.3d at 976. The First Circuit further opined that in an appropriate case, a
bankruptcy court may grant retroactive relief from the automatic stay under section 362(d).
Id. at 976-77. However, retroactive relief should be granted “only sparingly and in
compelling circumstances.” Id. at 978.

       We are persuaded by the rationales offered by the Schwartz and Soares courts, and
align ourselves with the majority position. We hold that an action taken in violation of the
automatic stay is void ab initio.

       Here, LaBarge never sought retroactive relief from the automatic stay in the
bankruptcy court in an effort to validate the void default judgment. We rule that as a matter
of law, a void default judgment cannot be given collateral estoppel effect in an adversary
proceeding seeking the nondischargeability of a debt based upon that default judgment.
Accordingly, the bankruptcy court erred by giving the void default judgment collateral
estoppel effect in this section 523(a)(6) adversary proceeding.

        We reverse and remand to the bankruptcy court for the entry of an order discharging
the debt based upon the bankruptcy court’s express findings on the record that but for the
collateral estoppel effect of the default judgment the debt would be dischargeable.

       A true copy.

              Attest:

                        CLERK, U.S. BANKRUPTCY APPELLATE PANEL, EIGHTH
                        CIRCUIT

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