Court Opinion

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Opinions of the United
2008 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

6-30-2008

In Re: Advanced Elec
Precedential or Non-Precedential: Non-Precedential

Docket No. 07-3020

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http://digitalcommons.law.villanova.edu/thirdcircuit_2008/954

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                                                             NOT PRECEDENTIAL

                     UNITED STATES COURT OF APPEALS
                          FOR THE THIRD CIRCUIT
                               ____________

                                     No. 07-3020
                                    ____________

                    IN RE: ADVANCED ELECTRONICS, INC.,

                                          Debtor

              JOHN H. DORAN, Trustee for Advanced Electronics, Inc.,

                                         Appellant

                                           v.

                          PHILIP ALAN COURTRIGHT;
                          PATRICIA S. COURTRIGHT;
                                 ____________

                   On Appeal from the United States District Court
                      for the Eastern District of Pennsylvania
                               (D.C. No. 06-cv-05323)
                     District Judge: Honorable Stewart Dalzell
                                   ____________

                            Argued June 4, 2008
        Before: FISHER, JORDAN and VAN ANTWERPEN, Circuit Judges.

                                 (Filed: June 30, 2008)

Robert C. Nowalis (Argued)
Doran, Nowalis & Doran
69 Public Square
700 Northeastern Bank Building
Wilkes-Barre, PA 18701
      Attorney for Appellant
Robert L. Knupp (Argued)
Knupp, Kodak & Imblum
407 North Front Street
P.O. Box 630
Harrisburg, PA 17108
       Attorney for Appellee, Philip Alan Courtright

Deborah A. Hughes (Argued)
2080 Linglestown Road, Suite 106
P.O. Box 961
Harrisburg, PA 17108
       Attorney for Appellee, Patricia S. Courtright

                                      ____________

                               OPINION OF THE COURT
                                    ____________

FISHER, Circuit Judge.

       The case before us has a long and convoluted history. The immediate subject of

this appeal is the motion of John Doran, bankruptcy trustee for Advanced Electronics,

Inc., to hold Philip and Patricia Courtright in contempt for violation of a consent order.

The Bankruptcy Court initially granted the Trustee’s motion for contempt, but upon the

Courtrights’ motion for reconsideration, the Bankruptcy Court vacated the contempt order

and denied the motion. The District Court affirmed the Bankruptcy Court’s denial. The

Trustee appeals. For the reasons that follow, we will vacate the District Court’s order and

remand.

                                              2
                                              I.

       We write exclusively for the parties, who are familiar with the factual context and

legal history of this case. Therefore, we will set forth only those facts necessary to our

analysis.

       In 1989, three creditors filed an involuntary bankruptcy petition against Advanced

Electronics, Inc. (“Advanced”). The appellant, John Doran, Esq. (“Trustee”), was

appointed Trustee of the bankruptcy estate. He commenced an adversary action on behalf

of Advanced against spouses Philip and Patricia Courtright (“the Courtrights”), officers

and directors of Advanced, alleging breach of fiduciary duty and conversion. On July 29,

1996, the Bankruptcy Court for the Middle District of Pennsylvania entered a judgment

against the Courtrights in the amount of over $1.4 million.

       The Courtrights appealed to the District Court. Additionally, they filed a motion in

the Bankruptcy Court for stay and supersedeas pending appeal. After a hearing, the

Trustee and the Courtrights worked out and entered into a Consent Order that the

Bankruptcy Court approved in October 1996 (“1996 Consent Order”).

       The 1996 Consent Order provided that because the Courtrights did not have the

money to post a supersedeas bond, they would deposit their shares of two companies,

Marvier Advertising Co. and 2595 Lycoming Creek, Inc., with the United States

                                              3
Marshal.1 The shares would be held in lieu of a supersedeas bond, and therefore, the

1996 Consent Order contained several provisions to safeguard the value of the shares.

The Courtrights were enjoined from transferring, conveying, or otherwise diminishing the

value of the shares or the corporate property. They were to notify the Trustee

immediately if any event occurred that diminished their value. The Courtrights were also

forbidden from making any expenditure over $1000 without giving notice to the Trustee.

They were required to provide the Trustee with monthly statements of receipts and

disbursements.

       The 1996 Consent Order further provided that the Trustee was stayed from

executing upon the Courtrights’ property “pending the Appeal.” The stay was

“conditioned upon the Courtrights’ full compliance with the terms of [the] Consent

Order.” If the District Court affirmed or otherwise entered a money judgment against the

Courtrights, the Trustee would be entitled to satisfy the judgment by liquidating the shares

of Marvier and Lycoming Creek or the corporations’ property. If the District Court

reversed, the Marshal was to return the shares to the Courtrights.

       In October 1997, the District Court entered an order (“1997 Affirmance”) that

affirmed the Bankruptcy Court’s 1996 judgment against the Courtrights and the

       1
        Philip and Patricia jointly owned all of the outstanding shares of Marvier. As for
Lycoming Creek, Philip was the sole owner of 510 shares and Patricia was the sole owner
of 490 shares (there were no other outstanding shares). Each corporation owned one
parcel of commercial real estate in Williamstown, PA. Both of these commercial
properties were rented out, generating a combined monthly income of over $10,000.

                                             4
Courtrights subsequently appealed to this Court. They filed a motion in the District Court

for a stay and supersedeas pending appeal. In March 1998, the District Court entered an

order that granted the motion and directed that the terms and conditions of the original

1996 Consent Order would “continue in full force and effect during the pendency of the

appeal of this case before the Court of Appeals for the Third Circuit.”

       On June 29, 1999, we issued an opinion and judgment affirming the District Court.

The Courtrights then filed a petition for rehearing, which we denied. We issued our

mandate, thus concluding the appeal, on October 12, 1999. Meanwhile, during the

pendency of the appeal, Philip Courtright filed for personal bankruptcy on July 2, 1999.

       Because the appeals in the District Court and our Court affirmed the Bankruptcy

Court’s 1996 judgment against the Courtrights, the Marshal continued to hold the shares

of Marvier and Lycoming Creek, as directed by the 1996 Consent Order. The Trustee did

not liquidate the shares or the corporate property as contemplated in the 1996 Consent

Order. Instead, he filed several motions in Philip Courtright’s personal bankruptcy case

(motions to dismiss or convert the case, motions for relief from stay, and objections to

exemptions or discharge). After Patricia Courtright filed for bankruptcy in 2003, the

Trustee filed a motion for relief from stay in her case. All of these motions were filed

between 1999 and 2003.2

       2
       Patricia Courtright was discharged from bankruptcy in January 2008; she filed a
motion to reopen in February 2008, and her case remains open. Similarly, Philip
Courtright was discharged from bankruptcy in January 2008; he filed a motion to reopen

                                             5
         The impetus for the Trustee’s motion for contempt, which is the subject of this

appeal, is the disposition of the real estate owned by the Courtrights’ companies – the

same companies whose shares they had posted in lieu of a supersedeas bond. The real

estate transfers involved two companies that Philip Courtright’s father owned: Tri Co.

Realty, Inc. and TC Construction and Development Co. Tri Co. Realty obtained an

assignment of the mortgage on the Marvier property and later foreclosed. TC

Construction and Development bought the Lycoming Creek property at a tax sale after

Lycoming Creek stopped paying real estate taxes.3

         The Courtrights did not inform the Trustee or the Bankruptcy Court of these

proceedings. The Trustee claims that he did not learn of the sales until a creditors’

meeting in late 2003.

         In October 2005, approximately two years later, the Trustee filed a motion in the

Bankruptcy Court to hold the Courtrights in contempt for violation of the original 1996

Consent Order. After a hearing, Bankruptcy Judge Thomas M. Twardowski granted the

motion for contempt in January 2006. He concluded that after the Courtrights’ appeal

ended, the 1996 Consent Order survived and the parties continued to be bound by its

terms.

in February 2008, and his case also remains open.
         3
       At the tax sale, TC Construction and Development was represented by Phillip
Courtright, who was acting as the agent for his father’s company.

                                              6
       The Courtrights moved for reconsideration. In September 2006, Judge Richard E.

Fehling, successor to Judge Twardowski (who had retired), entered an order that granted

the motion for reconsideration. On reconsideration, Judge Fehling vacated Judge

Twardowski’s contempt order and denied the Trustee’s motion for contempt. Judge

Fehling concluded, contrary to Judge Twardowski’s reasoning, that the 1996 Consent

Order remained in effect only through the pendency of the appeal. The Trustee moved

for reconsideration, and, in an order entered on October 31, 2006 (“2006 Order”), Judge

Fehling denied that motion. The Trustee then appealed to the District Court for the

Eastern District of Pennsylvania.

       The District Court, in a May 2, 2007 ruling (“2007 Ruling”) issued by Judge

Stewart Dalzell, affirmed the Bankruptcy Court’s 2006 Order denying the Trustee’s

motion for reconsideration. The 2007 Ruling was in the form of an order that contained

extensive discussion of the reasons behind the District Court’s decision to affirm the

Bankruptcy Court. In particular, the Court articulated the following reasons:

       First, it stated that when the Courtrights’ appeal to this Court ended, the 1996

Consent Order expired and the Bankruptcy Court no longer had jurisdiction to take action

in the case. Thus, the Bankruptcy Court had no power to enter its January 2006 order

holding the Courtrights in contempt of the expired Consent Order.

                                             7
       Second, the District Court stated that under the ordinary rules of contract

interpretation, the Consent Order was meant to remain in effect only until the completion

of the appeals.

       Third, the District Court stated that the Consent Order was created in lieu of a

supersedeas bond. Because a supersedeas bond is meant to protect the appellee’s interests

during the pendency of an appeal, the Court concluded that the Consent Order should

likewise be in effect only during the pendency of the Courtrights’ appeal.

       Finally, the District Court noted that after the conclusion of the Courtrights’

appeal, the Trustee never executed upon the shares of Marvier and Lycoming Creek or

took any action to enforce the Consent Order until he filed the motion for contempt.

Responding to the Trustee’s argument that he could not execute upon the shares due to

the automatic stay in Philip Courtright’s personal bankruptcy, the Court stated that the

U.S. Marshal was holding the shares in custodia legis, and therefore they were not part of

the bankruptcy estate and were not subject to the stay.

       The Trustee filed a motion for reconsideration, and the District Court denied the

motion on June 7, 2007. The District Court clarified that whether the automatic stay was

in effect was immaterial to its resolution of the appeal because the “lower courts” did not

have the jurisdictional authority to enter orders while the case was on appeal. The Court

concluded that the Trustee had not shown any reason why it should grant a motion for

reconsideration, so it denied the motion. The Trustee filed this timely appeal.

                                              8
                                             II.

       We have jurisdiction under 28 U.S.C. § 1291. The facts are not in dispute, and so

we exercise plenary review over the various legal issues presented in this appeal. Harris

v. City of Phila., 137 F.3d 209, 212 (3d Cir. 1998) (exercising plenary review over trial

court’s construction of a consent order); Wujick v. Dale & Dale, Inc., 43 F.3d 790, 792

(3d Cir. 1994) (exercising plenary review over the question of lower courts’ jurisdiction);

Washington v. Heckler, 756 F.2d 959, 962 (3d Cir. 1985) (As a “basic proposition[], . . .

the [trial] judge’s conclusions on questions of law are subject to plenary review.”).

                                            III.

                                             A.

       The District Court’s 2007 Ruling explicitly stated that it was affirming the

Bankruptcy Court’s 2006 Order. As noted, the District Court’s Ruling contained an

extensive discussion of its reasons. The District Court stated that the Bankruptcy Court

lacked the power to rule on the Trustee’s 2006 contempt motion because it had lost

jurisdiction to enforce the original 1996 Consent Order when the Courtrights’ appeal was

decided by the District Court in 1997. According to the District Court, “at the time the

lower courts issued and later continued the Consent Order, they could only offer relief

that protected [the Trustee’s] interests pending the appeal.” See App. at 20. When the

Bankruptcy Court’s 1996 judgment against the Courtrights was being appealed, the

Bankruptcy Court only had the power to order a stay or an injunction pending that appeal.

                                             9
The Trustee nevertheless argues that the Bankruptcy Court had the power to hold the

Courtrights in contempt because after we issued our mandate ending their appeal in 1999,

jurisdiction returned “to the forum whence it came.”

         The District Court was correct when it stated that the Bankruptcy Court lacked

jurisdiction to rule on the Trustee’s motion to hold the Courtrights in contempt of the

1996 Consent Order. However, our reasoning is somewhat different than that of the

District Court. In Venen v. Sweet, 758 F.3d 117 (3d Cir. 1985), we explained the shifting

of jurisdiction between trial and appellate courts:

         [T]he timely filing of a notice of appeal is an event of jurisdictional
         significance, immediately conferring jurisdiction on a Court of Appeals and
         divesting a district court of its control over those aspects of the case
         involved in the appeal. Griggs v. Provident Consumer Disc. Co., 459 U.S.
56, 58 (1982); United States v. Leppo, 634 F.2d 101, 104 (3d Cir.1980).
         “Divest” means what it says-the power to act, in all but a limited number of
         circumstances, has been taken away and placed elsewhere.

Id. at 120-21 (parallel citations omitted). We also enumerated some of the “limited

number of circumstances” in which a district court has the power to act after an appeal is

filed:

         A district court, during the pendency of an appeal is not divested of
         jurisdiction to determine an application for attorney’s fees. Neither is it
         without jurisdiction to issue orders regarding the filing of bonds or
         supersedeas bonds, or to modify, restore, or grant injunctions. See F ED. R.
         A PP. P. 7 and 8 . . . . Although we do not suggest that these are the only
         circumstances in which a district court retains power to act, we reiterate that
         the instances in which such power is retained are limited.

                                               10
Id. at 121 n.2 (citations omitted). These jurisdictional principles are prudential rules that

prevent “the confusion and inefficiency which would . . . result were two courts to be

considering the same issue . . . simultaneously.” Id. at 121.

       Applying these principles to this case, we conclude that once the Courtrights

appealed the 1996 judgment to this Court in 1998, the Bankruptcy Court was clearly

divested of its jurisdiction over the terms of the 1996 Consent Order. This is because the

matter was on appeal to us from the District Court, and because the District Court in 1998

entered its own order adopting and continuing the terms of the 1996 Consent Order

(“1998 Continuation Order”). Accordingly, once the appeal to this Court was over, only

the District Court, and not the Bankruptcy Court, would have had the power to enter a

contempt order or enforce the terms of its 1998 Continuation Order.

       Furthermore, that power was limited to the approval of a supersedeas bond or entry

of a stay or injunction pending appeal to this Court. To retrace the history of the Consent

Order, the 1996 Consent Order provided for the disposition of the Courtrights’ shares of

stock “in the event that a valid, final order is entered by the United States District Court.”

When the District Court issued its 1997 Affirmance upholding the Bankruptcy Court’s

determination that the Courtrights were liable to the Advanced bankruptcy estate, the

Bankruptcy Court’s 1996 Consent Order had fully performed its supersedeas function.

       The Courtrights appealed to our Court and filed a motion for stay and supersedeas

in the District Court. The District Court granted their motion with its March 10, 1998

                                              11
Continuation Order. The 1998 Continuation Order directed that “[t]he terms and

conditions of the [1996] consent order shall continue in full force and effect during the

pendency of the appeal . . . before the Court of Appeals for the Third Circuit.” Although

the District Court order adopted the terms and conditions of the 1996 Consent Order, the

District Court’s 1998 Continuation Order superseded, replaced, and adopted the terms of

the1996 Consent Order. If there was power to enforce the terms of the 1996 Consent

Order, it was with the District Court, not the Bankruptcy Court.

       The Trustee argues that after we issued our mandate in 1999 ending the

Courtrights’ appeal, jurisdiction returned to the Bankruptcy Court. However, the Trustee

overlooks the fact that this case came to us on appeal from the District Court and not from

the Bankruptcy Court, and the record does not show any remand from the District Court

to the Bankruptcy Court. He provides no explanation of how our 1999 affirmance could

have resuscitated the Bankruptcy Court’s original 1996 Consent Order, which only

pertained to the appeal to the District Court. The Trustee analogizes the 1996 Consent

Order in this case to a consent order that settles an antitrust case and requires the parties

to conform their conduct indefinitely to some standard. However, his analogy is inapt

because both the 1996 Consent Order and the 1998 Continuation Order in this case were

meant to function in lieu of a supersedeas bond, which has a clear end point: the end of

the appeal process.

                                              12
       Thus, for the reasons stated, we agree with the District Court that in 2006 the

Bankruptcy Court did not have the power to rule on the Trustee’s motion to hold the

Courtrights in contempt of the terms of the 1996 Consent Order.4 The Bankruptcy Court

lacked jurisdiction, so Judge Fehling should have dismissed the Trustee’s motion.

Therefore, we will vacate the District Court’s ruling affirming the Bankruptcy Court’s

decision to deny the motion. As explained, we do so because the Bankruptcy Court

lacked jurisdiction to act and the matter was never remanded to it after the prior appeal.

                                             B.

       Despite our agreement in part with the District Court’s 2007 ruling, we disagree

with its statement that the Trustee could have executed against the stock at any time after

the Courtrights’ appeal ended in 1999. Because this issue will arise if the Trustee refiles

his contempt motion in the proper court, and because the District Court and both parties

failed to analyze the question properly, we provide the following guidance.

       The automatic stay provisions of 11 U.S.C. § 362 are part of the Bankruptcy Code

of 1978, which replaced the Bankruptcy Act of 1898. Borman v. Raymark Indus., Inc.,

946 F.2d 1031, 1032 (3d Cir. 1991). The Bankruptcy Act’s automatic stay provisions,

       4
       In this appeal to our Court, Philip and Patricia filed a joint brief that consisted of
arguments common to both of them. At oral argument, however, Patricia raised
arguments applicable only to her; she claimed that she could not be held in contempt
because she was not liable for her spouse’s actions. This argument was not raised in her
opening brief and is therefore waived. F.D.I.C. v. Deglau, 207 F.3d 153, 169-70 (3d Cir.
2000).

                                             13
which were in effect until 1978, only applied in proceedings involving property of the

estate. Id. at 1036. Like the Bankruptcy Act, the Bankruptcy Code provides for an

automatic stay of proceedings involving estate property. 11 U.S.C. § 362(a)(3) (A

bankruptcy petition “operates as a stay, applicable to all entities, of . . . any act to obtain

possession of property of the estate.”). In addition, the Bankruptcy Code created a

broader type of stay that applies to actions brought against the debtor, regardless of

whether those actions involve property of the estate. Id. § 362(a)(1) (A bankruptcy

petition “operates as a stay, applicable to all entities, of . . . the commencement or

continuation, including the issuance or employment of process, of a judicial,

administrative, or other action or proceeding against the debtor.”); Borman, 946 F.2d at

1036.

        In Borman, we applied 11 U.S.C. § 362(a)(1) and determined that an appeal should

be stayed, despite the fact that the judgment debtor had posted a supersedeas bond prior to

filing for bankruptcy. Id. at 1037. We explained that § 362(a)(1) is broader than the stay

provisions it replaced:

        [While the former stay provisions] were directed solely at protecting
        property of the estate, the current provisions provide a “breathing spell” for
        the debtor which stops all collection efforts. This breathing spell
        encompasses a stay of an action brought directly against the debtor, even
        when the funds to satisfy a judgment may ultimately come from another
        source. The automatic stay was designed to prevent certain creditors from
        gaining a preference for their claims against the debtor; to forestall the
        depletion of the debtor’s assets due to legal costs in defending proceedings
        against it; and, in general, to avoid interference with the orderly liquidation
        or rehabilitation of the debtor. These concerns are implicated whenever an

                                               14
       action is instituted directly against the debtor, although they arguably have
       more force when an action directly implicates property of the estate. The
       policy behind the automatic stay is applicable even when it is clear that
       another party will ultimately be responsible for payment as the result of a
       supersedeas bond.

Id. at 1036.5

       In Borman, we had not yet disposed of the appeal when Raymark filed for

bankruptcy. Id. at 1032. This case is different, because by the time Philip filed for

bankruptcy, we had issued our opinion and judgment (although the mandate did not issue

for three more months). But the fact that the appeal had progressed further in this case

does not affect the applicability of the Borman rule. When Philip filed for bankruptcy on

July 2, the mandate had not yet issued, and the parties’ obligations were therefore not yet

fixed. Finberg v. Sullivan, 658 F.2d 93, 97 n.5 (3d Cir. 1981). Any action by the Trustee

at that point to execute against the shares would have been premature.

       In light of our Borman opinion, the District Court erred when it concluded that the

Trustee could have proceeded against the shares upon the termination of the appeal. The

Trustee could not have executed against the shares due to the § 362(a)(1) automatic stay.6

       5
        In Borman, we did not decide whether a supersedeas bond is property of the
bankruptcy estate. Borman v. Raymark Indus., Inc., 946 F.2d 1031, 1035 (3d Cir. 1991).
We were not required to reach that question because we concluded that “§ 362(a)(1) stays
pending proceedings brought against the debtor, regardless of whether they involve
property of the estate.” Id. Once again, as in Borman, we are not required to reach the
question, because our disposition of this case rests on our conclusion that the Bankruptcy
Court lacked jurisdiction to entertain the Trustee’s contempt motion.
       6
        By ruling that the § 362 stay applied, we do not mean to endorse the Trustee’s
dilatory conduct in this case. To cite only one example, roughly two years elapsed

                                             15
                                             C.

       For the most part, the District Court correctly construed the 1996 Consent Order.

The terms of the Order were meant to last during the pendency of the appeal because:

(1) the District Court’s 1998 Continuation Order granting the Courtrights’ motion for stay

and supersedeas extended the 1996 Consent Order’s terms to the appeal to our Court;

(2) the original Consent Order’s terms show that it was meant to apply to the appeal, Fox

v. U.S. Dep’t of Hous. & Urban Dev., 680 F.2d 315, 319 (3d Cir. 1982) (consent orders

are “construed according to traditional precepts of contract construction”); and (3) the

Order functioned in lieu of a supersedeas bond, Poplar Grove Planting & Ref. Co. v.

Bache Halsey Stuart, Inc., 600 F.2d 1189, 1190-91 (5th Cir. 1979) (“The purpose of a

supersedeas bond is to preserve the status quo . . . pending appeal.”). Accordingly, the

supersedeas only pertained to and existed during the appeal.

       Nevertheless, as previously noted, certain provisions of the 1996 Consent Order

expressly provided for the Trustee to satisfy the judgment against the Courtrights by

liquidating the shares of Marvier and Lycoming Creek or the corporations’ property. If

Philip had not filed for personal bankruptcy, thus triggering the § 362 automatic stay, the

terms of the 1996 Consent Order, as continued by the 1998 Continuation Order, would

between his discovery of the sale of the corporate properties and his filing of the
contempt motion in Bankruptcy Court. We express no opinion as to whether his conduct
would have any bearing on the District Court’s decision to grant a contempt motion he
might file in that court.

                                            16
have come to an end when our appeal ended, and the Trustee could have proceeded to

liquidate the shares. Because he did file for bankruptcy, the Trustee’s execution against

the shares was stayed, and the 1998 Continuation Order can fairly be read to allow for its

continued effect in order to protect the value of the shares, by virtue of the stay. When

the bankruptcies ultimately end, the Trustee will be free to satisfy the judgment.7

                                            IV.

       For the foregoing reasons, we will vacate the District Court’s order affirming the

Bankruptcy Court’s judgment and remand for further proceedings in accordance with this

opinion.

       7
        Upon remand, the District Court will have to determine whether the intervening
judicial and tax sales were ineffective because of the bankruptcy stays. We express no
opinion on this subject.

                                             17