United States Court of Appeals
For the First Circuit
No. 03-2444
IN RE JUDITH A. McMULLEN,
Debtor,
JUDITH A. McMULLEN,
Plaintiff, Appellant,
v.
LORI SEVIGNY, RICHARD F. SEVIGNY, JOHN WILLIAMS,
AND CURTIS PERRY,
Defendants, Appellees,
MICHAEL J. McGLONE,
Defendant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Reginald C. Lindsay, U.S. District Judge]
Before
Boudin, Chief Judge,
Cyr, Senior Circuit Judge,
and Howard, Circuit Judge.
Gordon N. Schultz, with whom Schultz & Company was on brief
for appellant.
Gary W. Cruickshank, for appellee Curtis Perry.
John Williams, on brief pro se.
Mary Alice McLaughlin, with whom Michael J. McGlone and Folan
& McGlone, P.C. were on brief for appellees Lori and Richard
Sevigny.
October 20, 2004
2
CYR, Senior Circuit Judge. Chapter 13 debtor Judith A.
McMullen challenges a bankruptcy court ruling that the postpetition
complaints lodged against McMullen, in the Massachusetts Superior
Court and with the Massachusetts Division of Registration for Real
Estate Agents, by the four defendants-appellees did not contravene
the automatic stay provisions of Bankruptcy Code § 362. Discerning
no error, we affirm.
I
BACKGROUND
The case stems from an acrimonious real estate
transaction which originated in 1997, when Lori Sevigny entered
into an agreement with Lester Pryor, a trustee employed by the
estate of one Mary Perry, to purchase a parcel of real estate
located in Rochester, Massachusetts. McMullen, a licensed real
estate agent, acted as the broker for the transaction, and accepted
a $10,200 deposit from Lori Sevigny and her husband Richard.
Subsequently, the sale fell through, and eventually the property
was purchased by a corporation controlled by McMullen’s father.
The deposit was never returned to the Sevignys, and McMullen
insists that she did not have possession of it.
In January 2000, McMullen initiated chapter 7
proceedings. Roger Stanford, Esq., the attorney for the Sevignys,
filed a nondischargeability complaint in the chapter 7 case,
alleging that McMullen fraudulently retained their $10,200 deposit.
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In her amended creditor matrix, McMullen listed the Sevignys as
creditors, but incorrectly listed their address as 723 Snipatuit
Road, rather than 732. On June 13, 2000, Stanford sent the
Sevignys a letter, explaining that McMullen had submitted an answer
to their nondischargeability complaint, but that her bankruptcy
case was being converted from chapter 7 to chapter 13. The
Sevignys mistakenly understood the letter to mean that McMullen was
withdrawing her chapter 7 petition, thus terminating her bankruptcy
case, but that she might commence a new chapter 13 proceeding in
the future. For the next six weeks the Sevignys repeatedly –
though unsuccessfully – attempted to contact Stanford to confirm
their understanding of the status of the McMullen bankruptcy
proceeding.
On July 10, 2000, a formal notice of the conversion of
the McMullen case was mailed to the Sevignys by the bankruptcy
court, and Stanford dismissed the nondischargeability complaint.
Thereafter, the Sevignys discharged Stanford as their attorney,
purportedly for failing to keep them informed about litigation
matters. Stanford nonetheless failed to withdraw from the
bankruptcy court proceeding. The Sevignys consulted briefly with
another bankruptcy lawyer, but did not retain an attorney.
Instead, on July 27, 2000, Lori Sevigny submitted a
complaint against McMullen before the Massachusetts Division of
Registration for Real Estate Agents, claiming that the $10,200
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deposit had been fraudulently retained by McMullen. Lori provided
the Board with a copy of the 1997 purchase and sales agreement
expressly designating McMullen as the custodian of the deposit, as
well as a copy of her canceled check for the deposit, which listed
an account number and had been endorsed by the seller, Lester
Pryor, but which was not endorsed by McMullen. Absent any evidence
that McMullen had ever had the deposit, the Division dismissed the
Sevigny complaint.
In September 2000, Curtis Perry (hereinafter: "Perry"),
Mary Perry's son and heir, who had held an interest in the
Rochester property, decided to assist the Sevignys in reclaiming
their deposit by procuring an affidavit from Lester Pryor,
supporting Perry’s suspicion that McMullen had (i) shortchanged his
mother’s estate by selling the property to McMullen's father’s
corporation for an amount less than the Sevignys’ offer, and (ii)
wrongfully retained the Sevignys’ $10,200 deposit. Perry, and his
friend and attorney John E. Williams, procured the Pryor affidavit,
which asserted that McMullen (and not Pryor) had received and
appropriated the deposit to her own use.
On November 6, 2000, the Sevignys retained a new
attorney, Michael McGlone, Esq., who commenced suit against
McMullen in state superior court to recover the $10,200. Both
Perry and Williams were aware of McMullen’s pending chapter 13 case
and the resultant automatic stay, but neither informed Richard
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Sevigny or McGlone. Five weeks later, as soon as McMullen had
notified them of the automatic stay, the Sevignys promptly
dismissed the superior court complaint.
On December 1, 2000, McMullen commenced the instant
adversary proceeding, alleging that (i) the Sevignys violated the
automatic stay by submitting a complaint with the Division of
Registration for Real Estate Agents, and (ii) Perry and Williams
had aided and abetted the Sevignys, in filing the collection action
in the superior court notwithstanding the automatic stay.
Following trial, the bankruptcy court entered its unpublished
decision, granting judgment for the defendants on all counts. On
appeal, the district court affirmed the bankruptcy court, without
opinion, and McMullen now appeals.
II
DISCUSSION
A. The Complaint Submitted to
the Division of Registration
McMullen first contends that the bankruptcy court
misapplied Bankruptcy Code § 362(b)(4) in determining that the
complaint submitted by the Sevignys before a state regulatory
agency – viz., the Board of Registration – could never, as a matter
of law, constitute a violation of the automatic stay. She cites
authority which states that the bankruptcy court must assess each
state agency proceeding on a case-by-case basis in order to
determine, inter alia, (i) whether the state places such importance
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upon the particular regulatory scheme at issue as to outweigh the
public policy objectives sought to be served by the automatic stay,
and (ii) whether the creditor knew of the pending bankruptcy case,
yet either intentionally or in bad faith sought to employ the
regulatory proceeding as an end-run to collect its disputed claim
outside of bankruptcy. McMullen suggests that the bankruptcy court
in this case failed to undertake the requisite fact-specific
inquiry.
Following an intermediate appeal to the district court,
the findings of fact arrived at by the bankruptcy court are
independently reviewed by the court of appeals for clear error; its
conclusions of law de novo. See In re Charlie Auto Sales, Inc.,
336 F.3d 34, 37 (1st Cir. 2003).
Subsection 362(a) of the Bankruptcy Code ordains that a
bankruptcy petition shall operate as an automatic stay of "the
commencement or continuation, including the issuance or employment
of process, of a judicial, administrative, or other action or
proceeding against the debtor." Bankruptcy Code § 362(a)(1); 11
U.S.C. § 362(a)(1). By thus safeguarding the debtor estate from
piecemeal dissipation, the automatic stay efficiently ensures that
the assets remain within the exclusive jurisdiction of the
bankruptcy court pending their orderly and equitable distribution
among the creditors, better enabling the debtor's "fresh start."
See In re Jamo, 283 F.3d 392, 398 (1st Cir. 2002) ("The automatic
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stay is one of the fundamental protections that the Bankruptcy Code
affords to debtors.").
Nonetheless, although the Code accords broad scope to the
automatic stay, it expressly excepts certain postpetition
proceedings from the operation of the stay, including any action
brought before a governmental regulatory agency to enforce its
police or regulatory powers. See Bankruptcy Code § 362(b)(4), 11
U.S.C. § 362(b)(4). This exception discourages debtors from
submitting bankruptcy petitions either primarily or solely for the
purpose of evading impending governmental efforts to invoke the
governmental police powers to enjoin or deter ongoing debtor
conduct which would seriously threaten the public safety and
welfare (e.g., environmental and/or consumer protection
regulations). See In re First Alliance Mortgage Co., 263 B.R. 99,
107 (BAP 9th Cir. 2001) (noting that fundamental policy of §
362(b)(4) is to “prevent[] the bankruptcy court from becoming a
‘haven for wrongdoers’”) (citation omitted); see also H.R. Rep. No.
95-595, pt. 1, at 343 (1977); S. Rep. No. 95-989, pt. 2, at 51-52
(1977), reprinted in 1978 U.S.C.C.A.N. 5787, 5836, 5963, 6299.
Nevertheless, given the expansiveness of subsection 362(a), the
exception contained in subsection 362(b)(4) is to be narrowly
construed. See Corporacion de Servicios Medicos Hospitalarios de
Fajardo v. Mora (In re Corporacion de Servicios Medicos
Hospitalarios de Fajardo), 805 F.2d 440, 447 (1st Cir. 1986).
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To that end, the courts have devised two interrelated,
fact-dominated inquiries – the so-called “public policy” and
“pecuniary purpose” tests – for assessing whether a particular
governmental proceeding comes within the subsection 362(b)(4)
exception. See In re Spookyworld, Inc., 346 F.3d 1, 9 (1st Cir.
2003); Corporacion de Servicios, 805 F.2d 440, 445 n.4; In re
Mohawk Greenfield Motel Corp., 239 B.R. 1, 6 (Bankr. D. Mass.
1999). These inquiries contemplate that the bankruptcy court,
after assessing the totality of the circumstances, determine
whether the particular regulatory proceeding at issue is designed
primarily to protect the public safety and welfare, or represents
a governmental attempt to recover from property of the debtor
estate, whether on its own claim, or on the nongovernmental debts
of private parties. See id.; In re Fitch, 123 B.R. 61, 63 (Bankr.
D. Idaho 1991).
Tested against these criteria, there can be little doubt
that the Board proceeding brought against McMullen in the instant
case is excepted from operation of the automatic stay by virtue of
Bankruptcy Code § 362(b)(4). The complaint alleged that McMullen,
acting as a licensed real estate broker, improperly retained the
cash deposit made by the Sevignys during the course of the aborted
real estate transaction. State law expressly empowers the Board to
suspend, revoke, or refuse to renew a real estate broker license
where the broker has "failed, within a reasonable time, to account
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for or remit any moneys belonging to others which have come into
his possession as a broker or salesman." Mass. Gen. Laws ch. 112,
§ 87AAA(d); see 254 C.M.R. § 3.00(10)(a) (“[A] broker shall be
responsible for such money until the transaction is either
consummated or terminated, at which time a proper account and
distribution of such money shall be made.").
Consequently, we next inquire whether subsection
362(b)(4) contemplates that the state power to regulate the
licensure of real estate brokers is designed to advance a
sufficiently important public policy so as to trump the competing
interests fostered by the automatic stay. The state power of
licensure, which safeguards the public from wrongful future conduct
of corrupt or incompetent professionals, falls squarely within the
purview of the subsection 362(b)(4) exception to the automatic
stay. See S. Rep. No. 95-989, at 52 (1978), reprinted in 1978
U.S.C.C.A.N. 5838 ("[Section 362(b)(4)] excepts . . . governmental
units . . . suing a debtor to prevent or stop violation of fraud,
environmental protection, [or] consumer protection.") (emphasis
added); see also, e.g., Thomassen v. Div. of Med. Quality Assurance
(In re Thomassen), 15 B.R. 907, 909 (BAP 9th Cir. 1981) (observing
that revocation of medical license for medical malpractice and
professional incompetence protects public); Shapiro v. Dep’tal
Disciplinary Comm. for the First Judicial Dep’t (In re Friedman &
Shapiro, P.C.), 185 B.R. 143, 145 (S.D.N.Y. 1995) (same, concerning
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revocation of license to practice law); Fitch, 123 B.R. at 63
(noting that insurance license revocation proceedings were
"designed to punish [the licensee] for his alleged fraudulent
conduct, and to deter others from engaging in such activities,
rather than to attempt to recover any alleged misappropriated funds
or to recompense any insurers"); Christmas v. Md. Racing Comm'n (In
re Christmas), 102 B.R. 447, 460-81 (Bankr. D. Md. 1989)
(concerning revocation of horse trainer's license); Beker Indus.
Corp. v. Fla. Land and Water Adjudicatory Comm'n (In re Beker
Indus. Corp.), 57 B.R. 611, 631 (Bankr. S.D.N.Y. 1986) (involving
revocation of license to transport phosphate rock). More
specifically, these same policy considerations are cited in
relation to the revocation or suspension of the licenses of real
estate brokers or salesmen. See, e.g., Sam Daily Realty, Inc. v.
Dep't. of Commerce and Consumer Affairs, State of Hawaii (In re Sam
Daily Realty, Inc.), 57 B.R. 83, 85-86 (Bankr. D. Haw. 1985)
(holding that state real estate commission's suspension of
realtor's license and imposition of $5,000 fine were exempt from
stay pursuant to § 362(b)(4), because the commission's "interest in
this matter is in punishing misconduct and preventing future acts
of the type [the licensee] has been accused"); cf. Granger v.
Harris (In re Harris), 85 B.R. 858, 863 (Bankr. D. Colo. 1988)
(same, distinguishing punitive fines against realtor from
compensatory awards). Further, the Board’s power to revoke or
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suspend realtor licenses plainly implements Commonwealth policy.
See Greater Boston Real Estate Bd. v. Bd. of Registration of Real
Estate Brokers & Salesmen, 540 N.E.2d 1313, 1315 n.7 (Mass. 1989)
("The conduct described in [Mass. Gen. Laws ch. 112, § 87AAA(d)]
clearly relates to discipline and to acts which are either criminal
or against public policy.") (emphasis added).
Although it is conceivable that a state might assert a
public-policy purpose in order to mask some improper pecuniary aim,
see In re North, 128 B.R. 592, 602 (Bankr. D. Vt. 1991), most
assuredly this case is not such an instance, since neither the
Commonwealth nor the Board could have any conceivable pecuniary
interest in property of the McMullen chapter 7 estate or chapter 13
estate. See Spookyworld, 346 F.3d at 9 (noting that government had
no pecuniary interest in enforcing building code). Although it is
alleged that the Sevignys harbored such a pecuniary interest in the
recovery of their deposit from McMullen's funds, the suspension,
revocation, or refusal to renew a real estate broker license are
the only enumerated powers accorded the Board. See Mass. Gen. Laws
ch. 121, § 87AAA(d).1 Hence, the Board was neither empowered to
1
McMullen cites cases which hold that a regulatory board or
commission may award civil monetary penalties against a debtor
without offending the automatic stay, provided the enabling statute
or regulation so ordains, see, e.g., Poule v. Registrar of
Contractors of State of Cal. (In re Poule), 91 B.R. 83, 87 (BAP 9th
Cir. 1988); In re Synergy Dev. Corp., 140 B.R. 958, 961 (Bankr.
S.D.N.Y. 1992), but otherwise a regulatory commission cannot order
restitution, see In re Dunbar, 235 B.R. 465, 473 (BAP 9th Cir.
1999). From these authorities, McMullen would have us infer that
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compel McMullen to repay the deposit to the Sevignys, nor to award
any other restitutionary remedy. See id. ("Any person whose
licensure is suspended or revoked shall also be liable to such
other punishment as may be provided by law.").2 Finally, even if
the Board were so empowered, it did not order such relief, but
instead ultimately dismissed the Sevigny complaint on the merits.
Cf. Bd. of Governors of the Fed. Reserve Syst. v. McCorp. Fin.,
Inc., 502 U.S. 32, 41 (1991) (noting that order for money judgment
may be entered in a proceeding, as long as it is not enforced, and
the mere "possibility" that proceedings ultimately have some effect
on the property of the bankrupt estate does not make subject to the
automatic stay a proceeding which is otherwise exempt from stay
under section 362(b)(4)). Thus, the disciplinary proceeding before
the Board was designed to serve – and did in fact principally serve
– to protect the public in the future, rather than to seek
recompense for the alleged financial losses sustained by the
the absence of such authority in subsection 87AAA(d) means that the
Sevignys’ complaint did violate the stay. As the Board's powers
extend neither to awards of monetary damages nor restitution, these
citations are inapposite.
2
The McMullen citation to In re Massenzio, 121 B.R. 688
(Bankr. N.D.N.Y. 1990), is inapposite, as the court there found
that the state insurance department had agreed not to revoke the
insurance license of the debtor's partner after he repaid premiums
to their customers, and thus concluded that the state had commenced
the revocation proceedings against the debtor and his partner in a
veiled attempt to protect their customers' pecuniary interests,
rather than to protect the public welfare. Thus, the proceedings
were not exempt from the subsection 362(b)(4) stay. Id. at 692.
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Sevignys.
Citing In re Byrd, 256 B.R. 246 (Bankr. E.D.N.C. 2000),
McMullen maintains that the above-cited cases are apposite only if
the proceedings are initiated by the government, whereas the Board
proceedings commenced with the Sevignys' postpetition filing of a
verified complaint. See Mass. Gen. Laws ch. 121, § 87AAA. In
Byrd, the court stated that a private third party may lodge a
prepetition criminal complaint against a debtor, and any post-
petition proceeding on that complaint would still be exempt from
the automatic stay under subsection 362(b)(4), even if the
proceeding were designed to recover a private debt. See Byrd, 256
B.R. at 251. On the other hand, the court opined that once the
bankruptcy petition has been filed the third party cannot approach
governmental authorities with a complaint, and any proceedings
based upon that postpetition complaint would be stayed. Id.
Byrd is readily distinguishable. First, the Byrd
complaint involved a criminal proceeding, which implicated unique
federal-court abstention issues. See id. at 250 ("We maintain the
'deep conviction that federal bankruptcy courts should not
invalidate the results of state criminal proceedings.' This rule
reflects a 'fundamental policy against federal interference with
state criminal prosecutions.'") (citations omitted).
Even more importantly, the second prong of the Byrd rule
– whether or not it offers a sound interpretation of subsection
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362(b)(4) – is mere dicta, since the complainants in Byrd had
lodged their complaint before the debtor filed for bankruptcy, and
the court held that the proceedings on the complaint were not
stayed. Id. at 256.3 Thus, Byrd does not support the McMullen
contention that postpetition proceedings initiated by a private
party are outside the subsection 362(b)(4) exception to the
automatic stay. See Municipality of San Juan v. Rullan, 318 F.3d
26, 28 n.3 (1st Cir. 2003) (“Dicta – as opposed to a court's
holdings – have no binding effect in subsequent proceedings in the
same (or any other) case.”).
The last statement in Byrd is not only dicta, but in our
view, overbroad. A private party’s reporting of wrongful conduct
to governmental regulatory authorities is neither the commencement
of a proceeding under subsection 362(a)(1), nor necessarily an “act
to collect” under subsection 362(a)(6). Although we broadly
construe the automatic stay in many contexts, the same sound public
policy reasons which undergird the subsection 362(b)(4) exception
counsel against any rule which might dissuade private parties from
providing governmental regulators with information which might
3
The McMullen citation to In re Pincombe, 256 B.R. 774 (Bankr.
N.D. Ill. 2000), is unavailing as well. There the court held that
a private party had not violated the automatic stay by filing an
employment discrimination complaint with the state anti-
discrimination commission five months before the debtor filed the
bankruptcy petition. Id. at 781. Although McMullen would have us
indulge the negative inference that a similar postpetition
complaint would violate the stay, the Pincombe court plainly and
simply had no occasion to determine that matter.
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require enforcement measures to protect the public from imminent
harm. McMullen surmises that the Sevignys’ Board complaint was
motivated by their desire to force McMullen into repaying the
alleged debt, but the Sevignys made no postpetition threat to file
a complaint which might constitute an “act to collect” under §
362(a)(6), cf. In re Diamond, 346 F.3d 224 (1st Cir. 2003),4 nor
was the continued prosecution of the Board proceeding made
contingent on whether McMullen repaid the deposit, cf. In re
Massenzio, 121 B.R. at 692; see supra note 2.
Additionally, McMullen argues that even if these sorts of
professional licensing proceedings normally are not stayed by
subsection 362(b)(4), the instant case differs in that the Sevignys
submitted their complaint in bad faith. Although we have yet to
decide this issue on its merits, we have noted in dicta the
tenuousness of the arguments for engrafting such a "bad faith"
exception onto subsection 362(b)(4), noting the emergent rule that
"bankruptcy courts should not inquire into the 'legitimacy' of
4
In re Diamond held that a creditor violated the automatic
stay by informing the debtor, during settlement negotiations in a
nondischargeability proceeding in the bankruptcy court, that the
creditor immediately would file a complaint with the state real
estate commission to revoke the debtor's real estate license unless
the debtor agreed to settle. Id. at 227 (finding that creditor's
threat constituted "impermissible 'coercion or harassment'" under
§ 362(a)(6)). The instant case is factually distinguishable, since
(1) the Sevignys never expressly conditioned their filing of a
Board complaint on McMullen's refusal to repay the deposit; and (2)
In re Diamond did not involve a creditor's action in commencing a
proceeding otherwise exempt from the automatic stay pursuant to
subsection 362(b)(4).
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ongoing administrative enforcement proceedings in determining
whether the police power exception applies to them." See
Spookyworld, 346 F.3d at 9-10 & n.5 (noting that plaintiff alleged
that government acted vindictively in closing down its park due to
fire code violations) (citing In re Javens, 107 F.3d 359, 365-67 &
n.6 (6th Cir. 1997)); see also Beker Indus. Corp., 57 B.R. at 631.
Whether or not bad faith is alleged on the part of the regulators
or of the complainants, such an exception would immerse the
bankruptcy courts in “‘mini-trials of purely state regulatory
issues,’” which are far better left to the state courts through
recourse to available state-law remedies. See Spookyworld, 346
F.3d at 9-10.
In any event, even if we were to decide, as a matter of
law, that a "bad faith" exception is available, the record facts in
the instant case amply warrant the bankruptcy court finding of fact
that the Sevignys did not submit their Board complaint in bad
faith. Whether a party has acted in bad faith constitutes a
quintessential issue of fact, which must be determined by the
factfinder following an examination of the totality of the
circumstances. See Official Unsecured Creditors Comm. v. Stern (In
re SPM Mfg. Corp.), 984 F.2d 1305, 1316-17 (1st Cir. 1993) ("The
bankruptcy court, not the district court or court of appeals, is
the only tribunal equipped to make evidentiary findings on relevant
factual matters such as whether the parties acted in bad faith.");
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Palmacci v. Umpierrez, 121 F.3d 781, 788-89 (1st Cir. 1997); In re
Harris, 279 B.R. 254, 262 (BAP 9th Cir. 2002). The findings of
fact determined by the bankruptcy court are reviewed for clear
error only, with “‘due regard . . . to the opportunity of the
bankruptcy court to judge the credibility of witnesses,’” In re
Carp, 340 F.3d 15, 21-22 (1st Cir. 2003) (citation omitted). See,
e.g., N. Light Tech., Inc. v. N. Lights Club, 236 F.3d 57, 64 (1st
Cir. 2001) (undertaking "clear error" review of "bad faith"
finding). Accordingly, such findings of fact are not to be
disturbed if “supportable on any reasonable view of the record,"
viz., "'unless, on the whole of the record, we form a strong,
unyielding belief that a mistake has been made.'" Carp, 340 F.3d
at 22 (citations omitted).
McMullen points to the following record evidence, as
compelling a finding that the Sevignys acted in bad faith, inter
alia: the Sevignys (i) did not inform the Board regarding
McMullen's pending chapter 13 case; (ii) falsely alleged before the
Board that McMullen (rather than Lestor Pryor) had received and
held their deposit; and (iii) gave the Board only the 1997 purchase
and sales agreement, which named McMullen as the escrow agent, and
did not submit the 1998 superseding agreement, which named a
different agent. None of the record evidence cited by McMullen
even remotely suffices to establish clear error.
First, the bankruptcy court explicitly held that the
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Sevignys did not conceal the McMullen bankruptcy case from the
Board. The Sevignys testified at the bench trial that the reason
they did not inform the Board of the McMullen bankruptcy was that
they believed at the time they filed their Board complaint that the
McMullen bankruptcy proceedings were no longer active. The
Sevignys also testified that: (i) they did not understand how
their deposit, which McMullen simply held in escrow, could become
property of her bankrupt estate;5 (ii) they interpreted their
attorney's June 13, 2000 notification – that the McMullen chapter
7 case was being converted to chapter 13 – to mean that the
McMullen bankruptcy case was being withdrawn, viz., that it was
being terminated; (iii) they were unable to contact their attorney
after receiving his letter to ask him followup questions, and
eventually had to discharge him; (iv) they received no further
notices from the bankruptcy court, possibly because the creditor
matrix in the McMullen bankruptcy case did not list their correct
address; and (v) neither Richard not Lori Sevigny is an attorney,
nor are they otherwise knowledgeable about bankruptcy law or
terminology.
Second, the Sevignys testified that at the time they
5
In some circumstances, courts have held that a transgression
of the automatic stay, undertaken in the well-grounded and "good
faith" belief that the stay was inapplicable to the disputed
property, cannot support a claim for damages under Bankruptcy Code
§ 362(h). See, e.g., Univ. Med. Ctr. v. Sullivan (In re Univ. Med.
Ctr.), 973 F.2d 1065, 1071 (3d Cir. 1992); United States v. Inslaw,
932 F.2d 1467, 1472 (D.C. Cir. 1991).
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filed their complaint with the Board they did not know that Lester
Pryor had their deposit. The reverse side of the deposit check did
reflect that Pryor had endorsed the check, and listed an account
number, but the Sevignys had no way of knowing that the listed bank
account was that of Pryor, and they assumed that Pryor might have
endorsed the check and that McMullen had deposited it into the
escrow account without adding her own endorsement. Indeed, the
purchase and sales agreement designated McMullen as the custodian
of the deposit.
Finally, Richard Sevigny testified that he submitted the
original purchase and sales agreement to the Board in the belief
that it contained the same terms as the superseding purchase and
sales agreement, that he had not realized that the superseding
agreement contained the new term which designated a "United Realty"
as the escrow agent, and hence that he had not acted with any
intent to conceal that provision from the Board.
As each of these findings turns primarily upon the
factfinder's assessment of the credibility of the Sevignys’
plausible explanations, we can discern no clear error on the
present record. See Carp, 340 F.3d at 21-22. Thus, even if we
were to assume that subsection 362(b)(4) might allow for a "bad
faith" exception, the McMullen claim must fail.
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B. The Superior Court Action
1. Willfulness of the Sevignys’ Violation
McMullen next contends that the bankruptcy court erred in
holding that the Sevignys’ state superior court complaint against
McMullen was merely a technical violation of the automatic stay,
rather than a willful violation compensable under Bankruptcy Code
§ 362(h). Once again we must disagree.
Under Bankruptcy Code § 362(h), a violation of the
automatic stay must be “willful” or the violator cannot be held
liable for damages. Bankruptcy Code § 362(h); 11 U.S.C. § 362(h).
Generally speaking, a violation will be found “willful” if the
creditor’s conduct was intentional (as distinguished from
inadvertent), and committed with knowledge of the pendency of the
bankruptcy case. See Fleet Mortgage Group, Inc. v. Kaneb, 196 F.3d
265, 268-69 (1st Cir. 1999). Absent such knowledge on the part of
a creditor, however, the violation is merely “technical,” and no
damages are to be awarded. See In re Will, 303 B.R. 357, 364
(Bankr. N.D. Ill. 2003) (noting that no damages could be awarded
under subsection 362(h) where creditor had not been listed, and
hence had received no notice of the bankruptcy case and resultant
automatic stay); Shadduck v. Rodolakis, 221 B.R. 573, 585 (Bankr.
D. Mass. 1998) (noting that no damages are allowable for technical
violation, even where debtor nonetheless incurred attorney fees as
result of violation). Normally, however, a creditor that commits
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a technical violation of the automatic stay, due to lack of notice,
has an affirmative duty to remedy the violation as soon as
practicable after acquiring actual notice of the stay. See Will,
303 B.R. at 364.
The determination as to whether a violation of the
automatic stay was “willful,” as defined in subsection 362(h),
poses a factual issue, which we review only for clear error. See
In re Campion, 294 B.R. 313, 315 (BAP 9th Cir. 2003). As
previously stated, in relation to the McMullen allegation of “bad
faith” under subsection 362(b)(4), see supra Section II.A, the
bankruptcy court credited the Sevignys’ testimony that they did not
have notice that the McMullen bankruptcy proceeding remained
pending at the time their superior court action to recover their
deposit was filed. As soon as McMullen informed them of the
automatic stay, the Sevignys promptly dismissed their superior
court action. At most, McMullen catalogs tidbits of record
evidence which might have persuaded the factfinder to reach a
contrary conclusion,6 but in no event could such evidence compel a
finding in McMullen’s favor. Thus, the bankruptcy court finding
that the Sevignys’ violation of the automatic stay was not willful
is amply supported by the record, hence cannot constitute clear
6
As but one instance, McMullen notes that the bankruptcy court
mailed notices to the Sevignys, yet does not dispute the evidence
that the Sevignys’ listed address was incorrect, and that the
Sevignys asserted that they did not receive the notices.
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error. See Campion, 294 B.R. at 315.
2. The "Aiding and Abetting" Claims
As her final claim on appeal, McMullen contends that the
bankruptcy court erred in concluding that subsection 362(h) did not
permit the McMullen claims for damages against Perry and Williams,
wherein she alleged that Perry and Williams knowingly aided and
abetted the Sevignys in filing their superior court complaint. As
the instant claim involves an issue of statutory interpretation, we
review the bankruptcy court decision de novo. See Charlie Auto
Sales, 336 F.3d at 37. We discern no error of law.
The bankruptcy court correctly noted that McMullen failed
to cite any case authority which specifically supported her
contention that subsection 362(h) permits the imposition of damages
against a person who aids and abets another in violating the
automatic stay. None of the McMullen citations even mentions the
phrase “aiding and abetting,” nor sets forth or analyzes the
elements of such a derivative claim under subsection 362(h).7
Moreover, none of the McMullen citations deals with the
pertinent question on appeal: can a defendant be found liable in
7
To the extent that it is not an expression of federal
bankruptcy law on this issue, the McMullen citation to
Massachusetts “aiding and abetting” law is unhelpful. See Matter
of Flynn, 169 B.R. 1007, 1022-23 (Bankr. S.D. Ga. 1994) (“[S]ection
362(h) creates an independent federal bankruptcy cause of action
which is based exclusively upon a violation of the automatic stay
rather than any duty created under state law. The Supreme Court has
made clear that ‘state law does not operate of its own force’ when
dealing with a federal cause of action.”) (citation omitted).
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damages under subsection 362(h) for aiding and abetting a
codefendant’s mere technical violation of the automatic stay?
Instead, the cases she cites involved groups of persons who jointly
partook in willful and often egregious violations of the automatic
stay, thereby rendering them directly liable – rather than
derivatively liable as aiders and abettors – for the resulting
subsection 362(h) damages. See Tsafaroff v. Taylor (In re Taylor),
884 F.2d 478, 483 & n.6 (9th Cir. 1989) (rejecting defense that
creditors did not violate automatic stay, given that they relied on
advice of their counsel, but reserving question as to whether
counsel also would be liable for damages); In re Zick, 123 B.R.
825, 828 (E.D. Wisc. 1990) (noting that both wife and attorney
violated stay); In re McGinty, 119 B.R. 290, 295-96 (M.D. Fla.
1990) (finding that wife, attorney, and paralegal all engaged in
“clear[]” violations of stay); In re Lickman, 297 B.R. 162, 195,
198 (Bankr. M.D. Fla. 2003) (holding that in violating the stay,
all defendants acted egregiously and “in concert”); In re Timbs,
178 B.R. 989, 995 (Bankr. E.D. Tenn. 1994) (noting that attorneys
who “aided” clients in violating the stay may be subject to
subsection 362(h) damages, but observing that their liability is
coextensive with the liability of the “person whose actions
violated the stay,” viz., the clients).
By contrast, the bankruptcy court noted that the Sevignys
engaged in a technical violation of the automatic stay and that,
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“[a]bsent such a [willful and compensable] violation [by the
Sevignys], the alleged derivative liability of Williams and Perry,
if it exists, is lacking a necessary condition precedent.”
McMullen has elected not to address this particular matter on
appeal, choosing instead to focus exclusively upon whether Perry
and Williams had the requisite knowledge of the automatic stay and
substantially assisted the Sevignys by arranging to procure the
affidavit of Lester Pryor.
A plaintiff normally establishes a defendant’s liability
as an aider and abettor by demonstrating three elements: (1) the
primary actor committed a wrongful act that causes injury; (2) the
aider and abettor was aware of his role in the overall wrongful
activity when he provided the assistance; and (3) the aider and
abettor knowingly and substantially assisted the primary actor’s
wrongful act. See Temporomandibular Joint Implants Recipients v.
Dow Chem. Co. (In re Temporomandibular Joint Implants Prods. Liab.
Litig.), 113 F.3d 1484, 1495 (8th Cir. 1997); Colonia Ins. Co. v.
City Nat’l Bank, 13 F. Supp. 2d 891, 897 (W.D. Ark. 1998); In re
Northgate Computer Systs., Inc., 240 B.R. 328, 359 (Bankr. D. Minn.
1999); see generally Restatement (Second) of Torts § 876(b).
Assuming arguendo that McMullen adduced enough competent evidence
on the latter two elements, the bankruptcy court held that the
Sevignys had not committed a wrongful act which caused injury, but
simply a technical violation of the automatic stay, which they
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promptly cured as soon as McMullen notified them of the automatic
stay. As "aiding and abetting" liability is derivative in nature,
cf. United States v. Loe, 248 F.3d 449, 458 (5th Cir. 2001) (“An
aider-abettor is guilty in a derivative sense; his guilt is
contingent on the acts of another.”), and the factfinder already
had found that the primary actors (viz., the Sevignys) had
committed no violation either cognizable or compensable under
subsection 362(h), the bankruptcy court correctly found in favor of
Perry and Williams as well.8
We need not and do not determine whether an "aiding and
abetting" claim is cognizable under subsection 362(h). We simply
hold that, even if such a claim were cognizable, McMullen utterly
failed to demonstrate her entitlement to relief on the record.
Affirmed.
8
Without citation to authority, McMullen nonetheless implies
that Perry and Williams had an affirmative duty to inform the
Sevignys of the automatic stay. Moreover, McMullen has not
suggested that Perry and Williams had any form of fiduciary
relationship with the Sevignys which would have given rise to such
an obligation. Nor have we found case support for this
proposition.
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