Court Opinion

ID: 3064522
Source: CourtListenerOpinion
Date Created: 2015-10-14 22:25:17.660227+00
Date Added: 2024-06-11T11:49:40.369882
License: Public Domain

FOR PUBLICATION
 UNITED STATES COURT OF APPEALS
      FOR THE NINTH CIRCUIT

In the Matter of: JOHN HARVEY           
WARDROBE; THERESA ROSE
WARDROBE,
                          Debtors,
                                              No. 07-16635

SUSAN GRIFFIN,                                 BAP No.
                                            NV-06-01451-DES
                           Appellant,
                                               OPINION
                 v.
JOHN HARVEY WARDROBE; THERESA
ROSE WARDROBE
                     Appellees.
                                        
             Appeal from the Ninth Circuit
              Bankruptcy Appellate Panel
 Dunn, Efremsky and Smith, Bankruptcy Judges, Presiding

                  Argued and Submitted
       February 13, 2009—San Francisco, California

                      Filed March 16, 2009

    Before: Alfred T. Goodwin, Mary M. Schroeder and
          Michael Daly Hawkins, Circuit Judges.

                 Opinion by Judge Goodwin

                             3389
                 IN THE MATTER OF WARDROBE               3391

                        COUNSEL

John Bartlett, Carson City, Nevada, for the appellant.

J. Craig Demetras, Demetras & O’Neil, Reno, Nevada, for the
appellee.
3392              IN THE MATTER OF WARDROBE
                          OPINION

GOODWIN, Circuit Judge:

   Susan Griffin sued John Wardrobe, a building contractor,
and his bonding companies, for breach of contract after a dis-
appointing home repair job. Three days before the trial was to
begin in the Nevada state court, the contractor filed for Chap-
ter 13 bankruptcy, which was converted to Chapter 7, and
obtained the statutory automatic stay of the litigation pending
in state court.

   Griffin then filed a motion in the bankruptcy court for a
limited lifting of the stay to permit her to proceed against the
bonding companies, using the defendant contractor as a wit-
ness. She attached a copy of her state court complaint to her
motion. The complaint alleged only a damages claim for
breach of contract and costs and attorney fees. The motion
stated that Griffin would not attempt to recover on the judg-
ment (against Wardrobe) without further order of the bank-
ruptcy court.

   The bankruptcy court granted the motion in an order stating
that “the stay is lifted so that the Creditor may seek to compel
the debtor, John Wardrobe, to participate in this trial as a wit-
ness and obtain judgment. However, Creditor may not pro-
ceed to enforce that judgment against the Debtor, or property
of the estate without further order of this court.” Approxi-
mately a month later, Griffin filed an unopposed motion in the
bankruptcy court to extend the bar date to object to dischar-
geability of debt until “thirty days after there has been a
notice of entry of judgment in the state court civil suit which
is pending between the parties.” The motion stated “Ms. Grif-
fin believes her debt is non-dischargeable under 11 U.S.C.
§ 523(a)(2), (4) and (6).” The bankruptcy court granted the
motion.

   At that stage of the bankruptcy, a state-court judgment in
the pending case would have been dischargeable. Wardrobe
                  IN THE MATTER OF WARDROBE                3393
thereafter received a discharge in bankruptcy and then became
hard to find. Prior to the recommencement of the state court
action, the attorney who had represented Wardrobe in state
court applied for leave to withdraw as counsel. The motion
was granted. Griffin settled with the insurance companies and
dismissed her complaint as to them. The terms of that settle-
ment are not revealed in the record.

   The Nevada case proceeded to trial against Wardrobe, who,
if served, failed to appear, and Griffin amended her complaint
to allege intentional fraud. She obtained a default judgment
for $192,314.54 for fraudulent misrepresentation and conse-
quential damages, $24,377 for compensatory damages,
$50,000 for punitive damages, costs and attorney fees.

   Griffin then filed an adversary petition in the bankruptcy
court, objecting to the discharge of the Nevada judgment pur-
suant to 11 U.S.C. § 523(a)(2)(A). Wardrobe filed an answer,
and after a hearing on the matter, the bankruptcy judge deter-
mined that the state court judgment was entitled to preclusive
effect and “that the elements necessary to establish a cause of
action under 11 U.S.C. Section 523(a)(2)(A) have been estab-
lished in this matter.” The debt arising from the state court
judgment, with the exception of the $50,000 punitive damages
award, was found to be nondischargeable.

   Wardrobe appealed to the Bankruptcy Appellate Panel
(BAP), which reversed. The BAP held that the state court
judgment “lack[ed] preclusive effect to establish the elements
of a § 523(a)(2)(A) cause of action, with the possible excep-
tion of damages, because the bankruptcy court had lifted the
stay only to allow the state court to decide the breach of con-
tract claim in order, if appropriate, to enter an enforceable
judgment against the bond insurers.” The BAP reasoned that
the order granting relief from the stay had to be interpreted in
light of the relief Griffin requested in her relief from stay
motion, and that although the order stated “that the automatic
stay was lifted and that Griffin could proceed with her lawsuit
3394              IN THE MATTER OF WARDROBE
against Wardrobe and the bond insurers, the Relief from Stay
Motion requested that the stay be lifted in order to obtain an
enforceable judgment against the bond insurers only.” The
BAP cited Thornburg v. Lynch (In re Thornburg), 277 B.R.
719, 726-27 (Bankr. E.D. Tex. 2002) for the proposition that
“[t]he bankruptcy court could not, in the Relief from Stay
Order, grant relief greater than what Griffin requested in the
Relief from Stay Motion.” Because the state court allowed
Griffin to amend her complaint to include the claim for fraud-
ulent misrepresentation, “the state court impermissibly modi-
fied the stay as to Wardrobe,” resulting in a violation of the
stay and leaving the findings “void and without preclusive
effect.” The BAP remanded to the bankruptcy court “to hear
evidence and to make its own findings, as appropriate, on
Griffin’s § 523(a)(2)(A) cause of action against the debtors.”

                        DISCUSSION

   [1] When a debtor files a bankruptcy petition, 11 U.S.C.
§ 362(a) imposes an automatic stay on proceedings against
the debtor. We have explained that “[t]he automatic stay is
self-executing” and “sweeps broadly, enjoining the com-
mencement or continuation of any judicial, administrative, or
other proceedings against the debtor . . . .” Gruntz v. County
of Los Angeles (In re Gruntz), 202 F.3d 1074, 1081-82 (9th
Cir. 2000) (en banc). The stay “gives the bankruptcy court an
opportunity to harmonize the interests of both debtor and
creditors while preserving the debtor’s assets for repayment
and reorganization of his or her obligations.” MacDonald v.
MacDonald (In re MacDonald), 755 F.2d 715, 717 (9th Cir.
1985) (citation omitted). Further, “[b]y halting all collection
efforts, the stay affords the debtor time to propose a reorgani-
zation plan, or simply ‘to be relieved of the financial pres-
sures that drove him into bankruptcy.’ ” Gruntz, 202 F.3d at
1081 (quoting S. Rep. No. 95-989, at 54-55 (1978), reprinted
in 1978 U.S.C.C.A.N. 5787, 5840-41).

  [2] In light of this broad sweep, actions, including judicial
proceedings, “taken in violation of the automatic stay are
                  IN THE MATTER OF WARDROBE                  3395
void.” Id. at 1082 (citing Schwartz v. United States (In re Sch-
wartz), 954 F.2d 569, 571 (9th Cir. 1992); Phoenix Bond &
Indemnity Co. v. Shamblin (In re Shamblin), 890 F.2d 123,
125 (9th Cir. 1989)). Although 28 U.S.C. § 1738 typically
requires federal courts to give full faith and credit to state
judicial proceedings, “[b]ecause . . . judicial proceedings in
violation of the stay are void ab initio, the bankruptcy court
is not obligated to extend full faith and credit to such judg-
ments.” Id. at n.6.

   [3] A party may petition the bankruptcy court for relief
from the automatic stay. 11 U.S.C. § 362(d). However, “ ‘be-
cause only an order of the bankruptcy court can authorize any
further progress in the stayed proceedings, it follows that the
continuation of the [stayed] proceeding can derive legitimacy
only from the bankruptcy court order.’ ” Gruntz, 202 F.3d at
1082 (quoting Noli v. Comm’r of Internal Revenue, 860 F.2d
1521, 1525 (9th Cir. 1988)). Further, “the terms of an order
lifting the automatic stay are strictly construed.” Noli, 860
F.2d at 1525 (citing Casperone v. Landmark Oil & Gas Corp.,
819 F.2d 112, 114 (5th Cir. 1987)).

  A.   Arguments on appeal

   Griffin argues that the plain language of the bankruptcy
court’s order granting relief from the automatic stay clearly
authorized her to proceed in the state court action to judgment
against all parties, including Wardrobe. She contends that nei-
ther the motion for relief from the stay nor the order granting
relief limited the claims available in the state court action, and
that the motion to extend the bar date to object to dischargea-
bility of debt placed Wardrobe on notice that she intended to
pursue a judgment in state court that would be non-
dischargeable in bankruptcy.

   Wardrobe argues that the fraud claim pursued in state court
was beyond the scope of both the order granting relief from
the automatic stay and the relief Griffin sought in the motion
3396              IN THE MATTER OF WARDROBE
for relief from the automatic stay, that the motion to extend
the bar date to object to dischargeability of debt did not put
Wardrobe on notice that Griffin would proceed with a fraud
claim in state court, and that because Griffin obtained the
fraud judgment in violation of the automatic stay, it is void
and not entitled to preclusive effect. The essence of Ward-
robe’s argument is that the bankruptcy court’s order, strictly
construed, could not have authorized Griffin to pursue a claim
against him in state court that was not alleged at the time she
requested relief from the stay to pursue her state court claims.

   [4] The parties have cited no case, and we have found none
in this Circuit, dealing with the narrow question whether a
limited relief from stay order can be expanded by a creditor
to obtain a non-dischargeable judgment when the motion for
the limited relief requested only permission to litigate the fac-
tual question of the damages caused by a breach of contract.

  B.   Orders Granting Relief From the Automatic Stay
       are Strictly Construed

   The BAP decision is consistent with Ninth Circuit case law
that orders granting relief from the automatic stay are to be
strictly construed. See Noli, 860 F.2d at 1525. The BAP deci-
sion also discourages creditors from misrepresenting the
actual or potential scope of the cause of action pending before
a state court and thereby tends to ensure that the bankruptcy
court is fully informed as to the potential effect of any order
granting relief from the automatic stay. In this way, it furthers
the purpose of the automatic stay.

   Griffin’s pursuit of her fraudulent misrepresentation claim
in the Nevada court was outside of the scope of the bank-
ruptcy court’s order. As the BAP noted, Griffin’s motion for
relief from the automatic stay expressly stated that lifting the
stay was necessary so that she could recover against Ward-
robe’s bonding companies and that “[t]he stay relief will only
allow her to go to state court and proceed against [the bonding
                  IN THE MATTER OF WARDROBE                   3397
companies].” In light of this statement in Griffin’s motion for
relief from stay, the BAP relied on Thornburg and held that
“[t]he bankruptcy court could not, in the Relief from Stay
Order, grant relief greater than what Griffin requested in the
Relief from Stay Motion.”

   Thornburg, however, is not a perfect fit. Unlike the instant
case, Thornburg involved the interpretation of an agreed order
that the parties submitted to the bankruptcy court in response
to a creditor’s motion for relief from the automatic stay.
Thornburg, 277 B.R. at 726. The motion for relief specifically
requested the stay to be lifted to allow the creditor “to have
a hearing in state court on her Motion for Enforcement.” Id.
The order granting relief “recite[d] simply that ‘the automatic
stay is lifted accordingly.’ ” Id. The bankruptcy court held
that because “[a]n Agreed Order is a contract and its interpre-
tation is governed by basic rules of contract construction . . . .
[t]his court must find that the order on the motion for relief
from the automatic stay granted the relief requested in the
motion, no more no less . . . .” Id. at 726-27.

    Furthermore, the BAP’s holding may be potentially in ten-
sion with 11 U.S.C. § 105(a) (“The court may issue any order
. . . that is necessary or appropriate to carry out the provisions
of this title. No provision of this title providing for the raising
of an issue by a party in interest shall be construed to preclude
the court from, sua sponte, taking any action or making any
determination necessary or appropriate to enforce or imple-
ment court orders or rules, or to prevent an abuse of pro-
cess.”). At least one bankruptcy court in this circuit has held
that § 105(a), “when applied to section 362(d), compels the
conclusion that a bankruptcy court can lift the automatic stay
sua sponte.” Swift v. Bellucci (In re Bellucci), 119 B.R. 763,
779 (Bankr. E.D. Cal. 1990). Thus, Thornburg arguably does
not fully support the BAP’s holding that the bankruptcy court
is limited to granting only the relief requested in the motion.
However, while a bankruptcy court has equitable judicial
3398              IN THE MATTER OF WARDROBE
power, its power is confined by ordinary standards of notice
and opportunity to be heard.

   This court has employed in a limited relief from stay set-
ting, an unpublished, but appropriate, rationale in Nugent v.
Am. Broad. Sys., 1 Fed. Appx. 633 (9th Cir. 2001). In Nugent,
the creditors obtained a stay modification order that allowed
their “district court litigation to ‘proceed to final liquida-
tion.’ ” Nugent, 1 Fed. Appx. at 635. When the bankruptcy
court issued the order, the creditors’ complaint pending in the
district court sought only damages and an accounting of stock.
Id. After the bankruptcy court granted the order, the creditors
amended the complaint to include a constructive trust claim.
Id. The court upheld “the bankruptcy court’s conclusion that
the automatic stay was modified only as to the claims that
were actually pending in the district court litigation as of the
date of the order modifying the stay.” Id. The court noted that
the creditors had “fail[ed] to explain how the bankruptcy
court could lift the automatic stay as to the constructive trust
claim when, at the time of its order, the bankruptcy court had
no idea that the claim existed.” Id. at 635-36. The rationale is
substantially the same as the BAP’s in our case, but does not
purport to limit the discretion that 11 U.S.C. § 105(a) gives to
the bankruptcy court to issue orders sua sponte.

   [5] Adopting Nugent’s rationale here furthers the purpose
underlying the automatic stay while providing sufficient pro-
tection to creditors. As noted, the stay protects both a debtor
and his or her creditors by protecting the debtor’s assets from
collection efforts so that a repayment or reorganization plan
can be developed. See MacDonald, 755 F.2d at 717. Allowing
one creditor to amend a pending complaint after a relief from
stay order has been issued undermines this protection and
could threaten the debtor’s reorganization or repayment plan.
Limiting the relief available to a creditor to that which was
currently alleged in a pending complaint or specifically
requested in the motion for relief forces creditors to disclose
the causes of action they intend to pursue and ensures that the
                  IN THE MATTER OF WARDROBE                   3399
bankruptcy court is fully apprised of the nature of the lawsuit
so that the court can determine whether cause exists to grant
relief from the stay. See 11 U.S.C. § 362(d)(1) (providing that
“the court shall grant relief from the stay . . . for cause”). This
protects the debtor, and other creditors, from unforseen causes
of action that could result in non-dischargeable judgments and
furthers the purpose of the automatic stay.

   Furthermore, in the event that a previously unforeseen
cause of action becomes apparent during a trial proceeding
pursuant to an order granting relief from the automatic stay,
numerous avenues of relief are available to a creditor to
ensure that any resulting judgment does not violate the scope
of the order. A creditor could petition the bankruptcy court for
relief that is broad enough to encompass the cause of action;
could seek an order from the bankruptcy court clarifying the
relief from stay order, see Alonso v. Summerville (In re Sum-
merville), 361 B.R. 133, 144 (9th Cir. B.A.P. 2007) (stating
“[t]he bankruptcy court had jurisdiction to clarify its [relief
from stay] order”); or, if a judgment has been entered on a
cause of action that was not pending at the time the relief was
granted, could seek retroactive relief from the stay that is
broad enough to encompass the judgment, see, e.g., Mataya
v. Kissinger (In re Kissinger), 72 F.3d 107, 109 (9th Cir.
1995); Schwartz v. United States (In re Schwartz), 954 F.2d
569, 572 (9th Cir. 1992) (stating “section 362 gives the bank-
ruptcy court wide latitude in crafting relief from the automatic
stay, including the power to grant retroactive relief from the
stay” (citation omitted)).

   [6] Thus, because the reasoning of Nugent both furthers the
purpose of the automatic stay and leaves creditors with suffi-
cient procedural safeguards to ensure that any judgment that
is rendered is either within the intended scope of the order
granting relief from the stay or ratified by an order granting
retroactive relief, we adopt it and hold that an order granting
limited relief from an automatic stay to allow a creditor to
proceed to judgment in a pending state court action is effec-
3400              IN THE MATTER OF WARDROBE
tive only as to those claims actually pending in the state court
at the time the order modifying the stay issues, or that were
expressly brought to the attention of the bankruptcy court dur-
ing the relief from stay proceedings.

                       CONCLUSION

  For the foregoing reasons, we AFFIRM the BAP judgment.