Court Opinion

ID: 9694418
Source: CourtListenerOpinion
Date Created: 2023-08-25 17:41:03.930228+00
Date Added: 2024-06-11T12:09:09.424423
License: Public Domain

CONCURRING OPINION BY
KLEIN, J.:
¶ 1 Because I believe that certain issues raised in the prior incarnation of this appeal remain unclear and because such issues may arise in other actions, I write separately. The issues are the confusion over whether certain actions taken during the bankruptcy are void or voidable and the need for specific proof of intent to ratify those actions.
Actions taken against a debtor during the pendency of bankruptcy are void.
¶ 2 Many courts, including our own, are uncertain as to whether actions taken against a debtor during the pendency of a bankruptcy are void or voidable. This confusion is, in no small part, self-imposed due to the non-traditional use of those terms.
¶ 3 The clarification order supplied by the U.S. Bankruptcy Court clearly states such actions are void. “The Pennsylvania State Courts have given legal effect to the otherwise void (and not voidable) acts of the filing of a complaint and obtaining a default judgment during the pendency of the bankruptcy without first obtaining relief from the automatic stay.” Clarification Order, 6/29/05 at 6.
¶ 4 This statement is not simply a case specific pronouncement from the bankruptcy judge in this matter. It is a requirement of the Bankruptcy Code at 11 U.S.C.A. § 362 and has been affirmed by the Third Circuit Court of Appeals in Raymark Industries v. Lai, 973 F.2d 1125 (3d Cir.1992). Thus the starting point for any analysis regarding relief from an automatic stay is that the actions taken during the pendency of the bankruptcy, without prior permission, are void.
¶ 5 The confusion ensues because of the standard uses of the terms void and voidable. An action that is void is often viewed as an action that cannot be saved. The action is viewed as a nullity, as if it never happened. That is clearly not the case here. While the Bankruptcy Code declares certain actions as void, it also allows *1252such actions to be ratified by the consent of the parties involved. See 11 U.S.C.A. § 862(d). The strict and traditional definition of void is inapplicable because the “void” action in this circumstance can be saved by ratification. See generally In re: Schwartz v. United States, 954 F.2d 569 (9th Cir.1992); Sikes v. Global Marine, Inc., 881 F.2d 176 (5th Cir.1989).
¶ 6 In lieu of the term “void,” the courts have, in some instances, taken to calling such actions “voidable.” This term, however, is also imprecise. A voidable action is, generally, seen to be an action that is otherwise valid, but upon a showing of certain proof, may be declared invalid. An example of this would be a contract with a minor. Although a minor is generally deemed incompetent to enter into a contract, such a contract is nonetheless enforceable unless the minor invalidates it. See generally Pankas v. Bell, 413 Pa. 494, 198 A.2d 312 (1964). The starting point of analysis in that instance is the contract is valid and proof must be shown to negate that presumption.
¶ 7 As noted above, the Bankruptcy Code makes it clear that actions taken during pendency of the bankruptcy are invalid. The term “voidable” as generally understood is also not quite correct. Thus we seem to be in a definitional haze, with neither term being precisely accurate. By our own choice of terms, “void” and “voidable,” we have engendered confusion.
¶ 8 We would be wise, or at least more prudent, to simply begin our analysis in matters such as this with the recognition that actions taken during the pendency of bankruptcy, without prior relief from the automatic stay, are invalid.
Specific proof of intent to ratify should be required.
¶ 9 Because actions taken during the pendency of bankruptcy are invalid, specific proof of intent to ratify an action should be required in all actions. Such proof is already required to ratify the filing of a complaint. See Sikes, supra. Specific proof should be required to ratify all actions.
¶ 10 In my original dissenting opinion in this matter, I voiced concern that no proof had ever been presented to our Court as to whether the Bankruptcy Court knew a default judgment had been taken when it issued its original order to modify the automatic stay. Absent that proof, we risked violating the due process rights of the debtor by denying the debtor the ability to defend itself against allegations of negligence. My concerns were validated when the Bankruptcy Court issued its clarification. “When Graziani did obtain such relief by agreement with the Trustee, the Agreed Order failed to recite that a default judgment had been taken against BMC; nor was this Court informed that a default judgment had been taken against BMC.” Clarification Order at 5.
¶ 11 My concerns on this point were buttressed by the notion a defendant in bankruptcy is not allowed to formally answer a complaint. This idea was taken from the Bankruptcy Code itself, 11 U.S.C.A. § 362, and the very definition of a stay, which is: a halt to a proceeding, or in specifically referencing the automatic stay of bankruptcy, a bar to all judicial and extrajudicial collection efforts. This proposition was also supported by the clarification order. “Graziani, unaware of the automatic stay, filed her complaint and obtained her default judgment before obtaining relief from the stay in this Court, despite the fact that BMC was stayed from even responding to the complaint or that BMC’s filing of a response could have been seen as a waiver of the stay. See, Matter of the United States Abatement Corp., 152 B.R. 78 (Bankr.E.D.La.1993).” Clarification Order at 5.
*1253¶ 12 That there are great differences between the filing of a complaint and the taking of a default judgment is obvious. There are dangers in presuming the ratification of a complaint ratifies any and every action taken after the complaint. All reported case law involves merely the ratification of the filing of a complaint. Once again, the clarification order is in accord: “Although this Court is aware of the cases where the automatic stay has been modified or annulled retroactively, neither the Pennsylvania State Court decisions nor Graziani point to any case where a default judgment taken in violation of the stay was later given retroactive effect.” Id. at 6.
¶ 18 Although I can find no case law that has given retroactive effect to a default judgment, I can imagine a circumstance where it might. Where a defendant is in a position to admit full liability for an accident and where the insurance carrier has been fully apprised of the facts and agrees that no defense to. fault can be credibly mounted, leaving damages as the only point in contention, parties might well agree to accept and ratify a default judgment. However, such a circumstance cannot be presumed. Rather, the parties should need to make specific reference to these facts when seeking relief from the automatic stay. If such a factual scenario is clearly laid out in the order granting relief from the automatic stay, then a trial court might be comfortable in allowing the case to proceed directly to a trial on damages.
¶ 14 But again I emphasize, specific proof of such a circumstance needs to be present before we can presume to ratify a default judgment. Otherwise, we are denying a party the right to mount a defense and violating that party’s right to due process. We must be cognizant of the fact that while the automatic stay is in place and no relief from the stay has been granted, the debtor is not allowed to respond to the legal action taken against it.1 Just as there must be specific proof of intent to ratify the filing of a complaint, there should also be a requirement of specific proof to ratify any other action taken in violation of the automatic stay.
¶ 15 Another problem that may arise if ratification of a default judgment is granted without specific proof is the possibility of the affected insurance carrier disclaiming coverage. In virtually every circumstance where relief for the automatic stay is granted, the relief is contingent upon insurance coverage. That is, the claimant may proceed with the tort claim but agrees to limit any recovery to the maximum amount of applicable insurance coverage. In this way the claimant still has an avenue of redress for the alleged tort and the assets of the debtor are protected from the claim and remain available to pay other debtors.
¶ 16 If a default judgment is ratified without the consent and/or knowledge of the insurance carrier then the carrier may have the right to disclaim coverage on the basis that the insured improperly limited the carrier’s ability to defend the action. “By virtue of a cooperation clause, an insured binds itself to assist the insurer fully in its handling of the claim and agrees to take no action which would vitiate a valid defense.” Forest City Grant Liberty Assoc. v. Genro II, Inc., 438 Pa.Super. 553, 652 A.2d 948, 951 (1995) If the carrier *1254disclaims coverage, then the only assets available to pay the tort claim are those of the debtor. This would bring the tort action back under the authority of the bankruptcy court and stay the action. Not only would the action be stayed, preventing a timely resolution, but it would greatly increase the probability that the claimant would be inadequately compensated for any injury caused by the defendant/debtor’s negligence. This cannot be a resolution favored by any court.
¶ 17 Thus, in addition to the due process concerns for the debtor, a requirement of specific proof of intent to ratify also protects the claimant/plaintiff. This appears to be a solution that benefits all parties concerned.
¶ 18 Putting these concerns together, I believe the following procedure should govern cases such as this. The beginning point for any analysis is that any action taken against a debtor during the pen-dency of a bankruptcy and that has been taken without formal relief from the protection of the automatic stay is invalid (void). Such invalid actions may be ratified, but only to the extent that specific proof of intent to ratify each action is supplied to the bankruptcy court and documented by the order granting relief from the automatic stay. In this way, all parties’ rights will be properly protected.

. As noted by the majority in this Court’s prior opinion, the automatic stay did not prevent the debtor from showing the simple courtesy to both Graziani and the trial court of sending a suggestion of bankruptcy along with a letter informing the court and the plaintiff of the automatic stay and the requirement to seek relief from that stay. However, this courtesy is not a requirement of the law.