Court Opinion

ID: 9731710
Source: CourtListenerOpinion
Date Created: 2023-08-26 15:55:46.315218+00
Date Added: 2024-06-11T18:26:20.706193
License: Public Domain

CONCURRING AND DISSENTING OPINION BY
KLEIN, J.:
¶ 1 While I agree with certain aspects of the majority opinion, I disagree with the analysis and result regarding those issues dealing with the bankruptcy. I believe the majority is announcing too broad a rule that will likely lead to problems and mischief in future cases. Therefore, I must dissent on those points.
¶ 2 I begin by noting that the trial court based its decision, well intentioned though it was, on a central, faulty presumption. The trial court repeatedly stated that if the actions taken by Graziani were declared void, then Graziani would be unable to prosecute her claim due to the expiration of the statute of limitations. The trial court cites Daniels v. Yellow Cab, 10 Phila. Co. Rptr. 46 (1983), to support its belief that bankruptcy affords no relief from the statute of limitations. While Daniels was decided in 1983, its genesis was well before that date and, importantly, preceded the enactment of 42 Pa.C.S. § 5535, which specifically tolls the statute of limitations where a “civil action or proceeding has been stayed by a court or by statutory prohibition.” 42 Pa.C.S. § 5535(b). Thus Daniels, in addition to having- no prece-dential value as a Common Pleas Court decision, was overruled by statute. Simply put, there is no problem with the statute of limitations in this matter.
¶ 3 The belief that Graziani would be prevented from proceeding with her claim apparently tinted the trial court’s view on whether a bankruptcy renders collateral actions taken pending that bankruptcy void or merely voidable.
We conclude that to find void an action that has commenced while a bankruptcy order is in effect, particularly when the Plaintiff has no knowledge of the bankruptcy filing, would not be in the interests of justice and would prejudice the Plaintiff in the subsequent state action.
Trial Opinion, 5/19/03, at 5.
The Court: How could a plaintiff in Pennsylvania know that a bankruptcy petition was filed in some other state and then find out that their lawsuit is now void because of a stay order which they didn’t know about and also they were now barred by the statute of limitations? That doesn’t make any sense to me at all.
N.T. 5/5/03 at 11.
The Court: In this case it would [extinguish plaintiffs claim] because the statute has run. It ■ would be effectively extinguished because the statute of limitations has run, isn’t that right?
Id. at 12.
The Court: This [extinguishment of the claim] was confirmed by the Superior Court in an unpublished opinion, the case involved Yellow Cab Company. In that case the Plaintiff waited until after the bankruptcy petition, the stay was lifted, then filed their complaint and the judge in Philadelphia found that that did not toll the statute of limitations, they were barred because they knew about it, everybody knew about it in Philadelphia, I guess, and the Superior Court said in an unpublished opinion -
Ms. Roberts (Defense Counsel): Your honor, I’m not familiar with the case you are citing.
*1227The Court: You are now. It’s reported at 10 Philadelphia Reporter 46.
Id. at 13.
In an effort to protect Graziani’s claim, and preserve equity, the trial court determined that actions taken during bankruptcy were voidable. This decision is in opposition to the United States Court of Appeals for the Third Circuit approach, which declares such actions void. Raymark Industries v. Lai, 973 F.2d 1125 (3rd Cir.1992).
¶ 4 Interestingly, the Third Circuit has also determined that such actions are merely voidable. See In re: Siciliano, 13 F.3d 748 (3rd Cir.1994). If we examine the equitable situation in Siciliano, however, we realize that in declaring the action taken during the pendency of the bankruptcy — the sheriffs sale of Siciliano’s home, possibly voidable, the court was protecting the interest of the bankrupt party by refusing to allow an action to stand that might prejudice that party.1
¶ 5 If we apply the lessons of Siciliano to the matter before us, the equities would argue in favor of the debtor, in not allowing an action taken during the bankruptcy stay (the default, especially) that would prejudice the debtor to stand.
¶ 6 From a certain viewpoint, void or voidable is something of a moot question. Given the enactment of section 5535, the statute of limitations is tolled during the pendency of a stay. Thus, for practical purposes, there is little difference if a complaint, filed against a bankrupt defendant during the bankruptcy proceedings, is allowed to stand or is required to be re-filed. Unless a claimant is absolutely asleep at the wheel, there will be no problem in refiling a complaint. Thus, from the equitable viewpoint of Graziani, it does not particularly matter if the filing of the complaint is determined to be void or voidable.
¶7 That determination does not and cannot end the investigation. We must also look to the effect upon the debtor/defendant. All parties agree that the general rule is that actions taken during the pendency of a bankruptcy are void. It is also not in dispute that a bankruptcy stay not only affects the actions of a potential plaintiff, but also of the debtor/defendant. Thus, if a plaintiff, unknowingly or not, files an action against a bankrupt defendant, the defendant is not allowed to file a response. The bankrupt defendant should, beyond doubt, inform the plaintiff in a timely manner of the bankruptcy. But, the debtor/defendant should also be secure in the knowledge that if a matter slips through the cracks, the action taken is, per general rule, void. It follows from this that any default taken by the plaintiff would be similarly void. Not only because the original filing is a nullity, but because the debtor/defendant is not allowed to formally answer the petition for default judgment (in the same way it is not allowed to formally answer a complaint).
¶ 8 The main problem I find with the logic of the majority in this matter, is that it ignores the reality that Burlington was not allowed to formally answer the petition for default. The majority then reasons, circularly, that if the filing of the complaint is now deemed valid, then the default is also valid, because the original problem— no validity to the filing of the complaint— has been removed.
*1228¶ 9 That Burlington was not allowed to file an answer is clear. Federal law specifically forbids the continuation of an action such as this while the automatic stay issued by the Bankruptcy Court is in place.
Except as provided in subsection (b) of this section, a petition filed under section 301, 302 or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates to stay, applicable to all entities of:
(1) The commencement or continuation, including the issuance or employment of process, of a judicial, administrative or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title.
11 U.S.C.S. § 362(a)(1).
¶ 10 Further, the very definition of a “stay” tells us that no party may take any action in the proceeding that has been stayed.
Stay, n. 1. The postponement or halting of a proceeding, judgment or the like. Automatic stay. Bankruptcy. A bar to all judicial and extra judicial collection efforts against the debtor or the debtor’s property. The policy behind the automatic stay, which is effective upon the filing of the bankruptcy petition, is that all actions against the debtor should be halted pending the determination of creditors’ rights and the orderly administration of the debtor’s assets free from creditor interference.
Black’s Law Dictionary 1425 (7th Ed.1999).
¶ 11 In the same manner that the trial court sought to protect the equitable standing of the plaintiff — in effect, sought to prevent Burlington from improperly benefiting from the bankruptcy — we should be equally mindful to prevent the plaintiff from improperly benefiting from the bankruptcy.
¶ 12 The majority finds the intent of the parties was to ratify the filing of the complaint. This finding is based upon the language of the agreed order and Sikes v. Global Marine, Inc., 881 F.2d 176 (5th Cir.1989). If we accept the notion that the filing of the complaint, otherwise void, may be ratified through specific intent, then such a finding may be supported by the record here. The agreed order, what appears to be a form order, refers to this plaintiff, this particular case and the continuation of the pending litigation. What is not clear from the record is whether the Bankruptcy Trustee and the Bankruptcy Court were ever informed of the default judgment. Without specific proof of that, we risk the violation of the due process rights of Burlington to present a defense on both liability and damages.
¶ 13 In order to ratify the complaint, and thereby defeat the presumption of void actions, the courts require proof of intent to ratify the complaint. In this case, such proof included that the court was aware of the plaintiffs claim and aware of the pending court action. These proofs are found in the Agreed Order, recommended by the Trustee and so ordered by the Bankruptcy Court. Case law cited by the majority, the trial court and Graziani all deal with the ratification of a complaint, not with ratification of any subsequent actions. Thus, case law is not instructive as to what happens to a default judgment taken during the pendency of a bankruptcy stay. It seems clear to me that if the courts require specific proof of intent to ratify a complaint, no less specific proof should be required to strip a defendant of the right to defend. There is no specific proof offered in this case to show that the intent of the parties was to ratify the default judgment. There is no indica*1229tion the Trustee was informed of the default judgment and no indication the Bankruptcy Court intended to order the ratification of the default judgment.
¶ 14 This approach appears to be supported by the United States Code, as well.
On a request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying or conditioning such stay.
11 U.S.C.A. § 362(d). Relief from a bankruptcy stay can, under federal law, take the form of a modification, such as has happened here, or it may annul a stay.
Annulment, n. The act of nullifying or making void.
Black’s Law Dictionary 89 (7th Ed.1999).
It is clear that the parties in this matter sought to modify the automatic stay and there is no indication that the stay was annulled. The statute clearly contemplates the power to annul, as well as to modify, a stay. Because the order for modification does not address the issue of the default, the majority’s proposed solution resembles the aftermath of an annulment, not a modification.
¶ 15 Because Burlington was prevented by operation of the bankruptcy stay from answering the petition for default judgment, and because there is no proof of intent to ratify the taking of the default judgment, I believe it is error for our court to announce a rule that would automatically ratify subsequent actions taken during a stay, once the complaint has been deemed valid.
¶ 16 Bad facts make for bad law. Burlington was certainly slipshod in failing to inform Graziani of the bankruptcy in a timely manner.2 But that failure should not be the basis for a general rule that allows a default judgment taken during a bankruptcy stay to remain in place absent specific proof of intent. I believe the rule as announced can lead to serious abuse by unscrupulous parties and will require the courts to engage in guessing games as to the intent of the parties.3
¶ 17 The majority also appears to believe that Burlington should have filed a suggestion of bankruptcy with the court, and thereby implies that Burlington’s failure to do so allows for the sanction imposed. The majority cites to Com., Dep’t of Env. Res. v. Ingram, 658 A.2d 435 (Pa. Cmwlth.1995), in referencing the suggestion of bankruptcy. The Commonwealth Court in that case simply treated the suggestion of bankruptcy as a motion for stay. Technically, federal law has already done that through 11 U.S.C.A. § 362. Whether the trial court is aware of the bankruptcy or not is not at issue under the federal code. The automatic stay provisions of federal bankruptcy law divest the state courts of the ability to take any action in *1230derogation of the bankruptcy stay.4 Thus, a suggestion of bankruptcy is more of courtesy. The majority would elevate the filing of a suggestion to a requirement. I can find no support for this notion. While this appeal would never have arisen if Burlington had just operated with a little common sense, that lack of common sense without the violation of any rule does not necessitate the formation of a new procedural requirement.
¶ 18 The problem in assuming intent can be seen by what might happen in this case. The modification of the bankruptcy stay in this case, and in many others, allows the injured party to proceed against the bankrupt defendant only to the extent of insurance coverage. It is well settled in Pennsylvania law that an insurer may disclaim coverage where the insured has taken steps that prejudice the rights of the insurer.5 It is equally clear that allowing the entry of a default judgment is such an action. Hargrove v. CNA Insurance Group, 228 Pa.Super. 336, 323 A.2d 785 (1974). Thus, by ratifying the default judgment, the majority has provided the insurer with an avenue to disclaim coverage, where otherwise it could not. It must be remembered that the modification of the stay was negotiated between the trustee, Burlington, and the plaintiff. There is no indication that Burlington’s insurer had any input at all into the modification. Without insurance coverage, the plaintiff may only collect against Burlington. The problem with this is obvious. Perhaps the plaintiff will, collect nothing, since the agreement limits recovery to what might be non-existent insurance coverage. Perhaps the plaintiff has recourse directly against Burlington, but then the automatic stay goes back into effect.
¶ 19 This possibility also supports my belief that the parties and the Bankruptcy Court had no intention of ratifying the default judgment when entering the order modifying the stay. It is difficult to argue the intent of the order was to ratify the default knowing that a disclaimer of coverage was a possibility.6
¶20 We, as an appellate court, do not and cannot know if the insurer in this case will disclaim. It appears that the insurer would be within its rights to at least attempt disclaimer.7 Whatever happens, either specifically in this case or in future cases, there seems little reason to provide a rule that conjures up such a nightmare.
*1231¶ 21 As a result of the above, I believe there are two alternate solutions to this matter. First, one may adopt the general rule that actions taken during the pen-dency of a bankruptcy stay are void, but may be ratified by specific agreement between the parties. The ratification would apply only to the commencement of an action and would not apply to subsequent actions such as default judgments. This recognizes the fact that a bankruptcy stay applies whether a particular party or court has specific knowledge of the bankruptcy or not. It also recognizes the fact that a default judgment taken during a stay is taken without jurisdiction. “Whether it knows of the bankruptcy or not, a trial court cannot enter a default judgment during a bankruptcy stay because it simply does not have jurisdiction at that time.
¶22 The second approach, and the approach I favor, is simply to follow the Third Circuit’s reasoning in Raymark and declare all actions taken during the pen-dency of the stay void. This has the advantage of unifying the Third Circuit and Pennsylvania law, making the practice more seamless. Given the existence of 42 Pa.C.S. § 5535, it also presents no disadvantage to a prospective plaintiff, allowing a case to be filed past an otherwise expired statute of limitations.8 This prevents a bankrupt party from taking advantage of its bankruptcy to defeat an otherwise viable claim. This approach also has the virtue of absolute simplicity. It places the parties back at the starting line and allows the action to proceed just as it would have absent the bankruptcy. There is no need to investigate the intent of the parties.
¶ 23 Either solution, however, would prevent the possibility of a party unscrupulously taking advantage of a debtor/defendant’s inability to answer a default petition, or as in the case before us, from an inadvertent advantage being taken. Either solution would also prevent a situation that might allow an insurer to disclaim coverage.

. It must be noted that the Third Circuit did not absolutely rule that the actions taken by the mortgagor were either void or voidable, but rather remanded the case for further evidence. The Third Circuit noted that the record indicated that Siciliano actually had no equity in the home sold at sheriff's sale and so would have suffered no prejudice. The Third Circuit also implied that Siciliano was a serial bankruptcy filer, which might indicate an attempt to improperly take advantage of creditors.

. There may be support for the notion that Burlington ratified the default by failing to promptly seeking to strike that default once the stay was lifted. This determination would require a separate analysis of the ability of a defendant to waive the jurisdictional requirements otherwise at issue in a petition to strike. Further, the majority’s reliance on Burlington's silence is more of an issue to be contemplated when examining a petition to open or strike in the traditional manner, and does not seem particularly appropriate in examining whether the default is void.

. This case exemplifies the problem. An affidavit from the Trustee indicating there was no intent for retroactive application of the modification of the stay was submitted in the reproduced record, but was not included in the official record. Because it was not officially submitted for our review, the majority rightly does not take it into consideration. One is nonetheless left to wonder if the result in this matter would have been the same if the document had been properly introduced. I mention the statement’s existence only to show how difficult it can be to deduce intent.

. "Also, the Pennsylvania Supreme Court’s grant of reargument was rendered in violation of the automatic stay because, once the petition for bankruptcy was filed, the state court was deprived of the power and jurisdiction to continue with the appellate proceedings.” In re Highway Truck Drivers & Helpers Local Union # 107, 888 F.2d 293, n. 9 (3rd Cir.1989). (emphasis added)

. Obviously, simply allowing a suit to proceed against an insured, but bankrupt defendant, subject to limits of insurance coverage does not represent prejudice, in the legal sense, to the insurer. The insurer is exposed to the possible payment of that which it has contracted for, and that would have been at risk in any event. This differs significantly from being prevented from presenting a defense that might limit liability.

. This possibility also raises the ironic situation where coverage might be denied and the plaintiff left unable to collect on a possible award when the initial ruling was so clearly aimed at protecting the plaintiff's rights to proceed with the lawsuit. This would prove to be a pyrrhic victory.

. While the insurer may well have been aware of the personal injury action and been a part of the “silence " referenced by the majority, it may well be argued that the subsequent ratification of the default, an action otherwise void under federal law, is an independent act that serves to prejudice the insurer. This argument may or may not be successful, but once again, why even unlock that door, much less open it?

. It should also provide no disadvantage to a plaintiff regarding filing fees. Because the first filing is, in effect void, a plaintiff should be entitled to a refund of the initial filing fee. The payment of the initial filing fee could simply be applied to the subsequent filing.