Reinert & Duree v. David S. Sosne

United States Court of Appeals
FOR THE EIGHTH CIRCUIT

___________

No. 96-2078
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*
In Re: Just Brakes *
Corporate Systems, Inc., *
*
Debtor. *
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*
David A. Sosne, Trustee, *
* Appeal from the United States
Plaintiff - Appellee. * District Court for the
* Eastern District of Missouri.
v. *
*
Reinert & Duree, P.C.; Gary *
Robbins; Robbins & Associates, *
Inc.; Estes & Estes, Inc.; *
James C. Landes, *
*
Defendants - Appellants. *
___________

Submitted: December 11, 1996

Filed: March 13, 1997
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Before FAGG, FLOYD R. GIBSON, and LOKEN, Circuit Judges.
___________

LOKEN, Circuit Judge.

Appellants are judgment creditors of a Chapter 7 bankruptcy
debtor, Just Brakes Corporate Systems, Inc. ("Just Brakes" or
"debtor"). They appeal an order awarding Trustee David A. Sosne
$100,717 in damages for appellants' willful violation of the
automatic stay. See 11 U.S.C. § 362. We agree that appellants
violated the automatic stay but conclude that the damage award was
an improper remedy and therefore reverse.

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 I. Background.

In 1988, appellants obtained a state court judgment against
Just Brakes for $104,583.33. In January 1991, Just Brakes assigned
its only valuable asset, a registered trademark, to FGR Management,
Inc. ("FGR"). Appellants promptly attacked the transfer as a
fraudulent conveyance. The state court agreed, enjoined Just
Brakes and FGR from further transfers, and scheduled a foreclosure
sale of the trademark to satisfy appellants' judgment. Five
minutes before that sale, Just Brakes petitioned for Chapter 11
protection and asserted its own claim to recover the trademark.
The foreclosure sale was cancelled.

Appellants persuaded the bankruptcy court to dismiss the
Chapter 11 case as "essentially a single asset reorganization
case." In dismissing, the court observed that Just Brakes's claim
to avoid its pre-petition assignment of the trademark to FGR "is an
asset of the Bankruptcy estate," and that the rights of Just Brakes
and others asserting claims to the trademark could be adequately
protected at less cost in state court.

The parties then returned to state court, and the court
scheduled a foreclosure sale of the trademark at noon on October
15, 1991. That morning, Just Brakes filed this Chapter 7 petition.
Though notified of the filing, the state court allowed the sale to
proceed, ordering that its proceeds be held in escrow while the
parties "exhausted their legal remedies contesting the validity of

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the . . . sale, or until further order of court."1 Nine days
later, in the action here at issue, appellants applied to the state

1
No one challenged the state court's decision to complete the
foreclosure sale, doubtless because the sale proceeds exceeded the
value debtor placed on the trademark in its Chapter 7 schedules.

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court and were granted pay-out of the net sale proceeds, $100,717,
without obtaining relief from the Chapter 7 automatic stay.

One year later, the Trustee sued to recover the sale proceeds
for the bankruptcy estate, attacking debtor's January 1991
assignment of the trademark as a fraudulent conveyance, see 11
U.S.C. § 548, and seeking damages from appellants for willful
violation of the automatic stay. When appellants demanded a jury
trial of the avoidance issues, the Trustee dismissed that claim,
and the district court remanded the case to the bankruptcy court
for resolution of the "core" automatic stay issues.

The bankruptcy court granted summary judgment in favor of the
Trustee. It found a violation of the automatic stay because
appellants applied the trademark proceeds to their pre-petition
judgment, knowing that debtor had asserted a claim to recover that
asset. Turning to the question of remedy, the court concluded that
it may award "[c]ompensation and punishment" for willful violation
of the automatic stay in a contempt proceeding, and may also award
money damages under its broad § 105(a) power to issue "necessary or
appropriate" orders. It awarded as the "appropriate measure" of
damages the $100,717 appellants received from the foreclosure sale.
The district court affirmed. Appellants challenge the decision
that they violated the automatic stay and the damage award.

II. Violation of the Automatic Stay.

Appellants argue that they did not violate the automatic stay
when they collected the foreclosure sale proceeds because Just
Brakes transferred its entire interest in the trademark in January
1991, and state law does not allow the transferor to avoid a
fraudulent conveyance. Acknowledging that the Trustee asserts a

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claim to recover the trademark for the Chapter 7 estate, appellants
argue that claim is neither "property of the estate" nor "property
of the debtor" within the meaning of §§ 362(a)(2)-(5) until the

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Trustee has actually recovered the property. Thus, the Trustee's
only remedy is to enjoin appellants' collection efforts under
§ 105(a) of the Code, as was done in Celotex Corp. v. Edwards, 115
S. Ct. 1493, 1498-1500 (1995).

The nature of debtor's present interest in the trademark is an
interesting question2 but one that we need not resolve because, by
collecting the foreclosure sale proceeds, appellants violated
§ 362(a)(6), which provides:

[A] petition filed under . . . this title . . . operates as a
stay . . . of (6) any act to collect, assess, or recover a
claim against the debtor that arose before the commencement of
the case under this title.

Here, the trademark was sold to satisfy appellants' pre-petition
"claim against the debtor" -- their 1988 judgment. After the sale,
appellants applied to the state court and received the sale
proceeds out of escrow, clearly an "act to collect" on their
judgment. See Valley Transit Mix of Ruidoso, Inc. v. Miller, 928
F.2d 354, 356 (10th Cir. 1991). This act prejudiced the Trustee's
ability to litigate a competing avoidance claim on behalf of all
creditors and was therefore inconsistent with the basic purpose of
the automatic stay, "to prevent creditors from stealing a march on
each other." Brown v. Armstrong, 949 F.2d 1007, 1010 (8th Cir.

2
We note that property of the bankruptcy estate is broadly
defined in § 541(a)(1) of the Code. See United States v. Whiting
Pools, Inc., 462 U.S. 198, 204-05 & n.9 (1983). But the nature and
extent of the debtor's interest in property is governed by state
law. See Butner v. United States, 440 U.S. 48, 54-55 (1979).

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1991) (quotation omitted).3 The bankruptcy court correctly
concluded that appellants violated the automatic stay.

III. The Appropriate Remedy.

The Trustee urged the bankruptcy court to award money damages
under § 362(h), which provides that "[a]n individual injured by any
willful violation of [the automatic stay] shall recover actual
damages, including costs and attorneys' fees, and, in appropriate
circumstances, may recover punitive damages." The bankruptcy court
ruled that § 362(h) only applies to "individual" debtors, not to
corporate entities such as Just Brakes. We agree.4 As the Second
Circuit persuasively explained, this construction of § 362(h) is
required by the plain meaning of the word "individual," as used in
the Bankruptcy Code, supported by the fact that § 362(h) was added
to the Code as part of the "Consumer Credit Amendments" of 1984.
See In re Chateaugay Corp., 920 F.2d 183, 186-87 (2d Cir. 1990);
accord In re Goodman, 991 F.2d 613, 619 (9th Cir. 1993); In re
Calstar, Inc., 159 B.R. 247, 260 (Bankr. D. Minn. 1993). We reject
earlier, contrary circuit decisions that did not give adequate
weight to the statute's plain meaning. See In re Atl. Bus. &
Community Corp., 901 F.2d 325, 329 (3d Cir. 1990); Budget Serv. Co.
v. Better Homes of Va., Inc., 804 F.2d 289, 292 (4th Cir. 1986).

3
This factor distinguishes this case from cases holding that
§ 362(a)(6) does not automatically stay post-petition acts to
collect creditors' independent claims against debtors' guarantors.
See In re Alcom Corp., 154 B.R. 97, 115-16 (Bankr. D.D.C. 1993)
(subsequent history omitted); In re Advanced Ribbons & Office
Prods., Inc., 125 B.R. 259, 265 (B.A.P. 9th Cir. 1991).
4
This court has not previously addressed the issue. In Lovett
v. Honeywell, 930 F.2d 625 (8th Cir. 1991), we assumed that
§ 362(h) damages could be awarded to a corporate debtor and
affirmed the denial of damage relief.

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 Having denied the Trustee § 362(h) damages, the bankruptcy
court went on to conclude that it may compensate and punish for a
willful violation of the automatic stay under its inherent contempt
powers, or its broad § 105(a) power to "issue any order, process,
or judgment that is necessary or appropriate to carry out the
provisions of this title." But the power to punish for a statutory
violation is a criminal law power. It must be expressly conferred
by Congress, and its exercise is often subject to the procedural
safeguards that protect the criminally accused. Even the judicial
power to punish for criminal contempt of a court order is carefully
distinguished from the power to remedy a violation of that order
through civil contempt. See, e.g., Shillitani v. United States,
384 U.S. 364, 368-72 (1966); Combs v. Ryan's Coal Co., 785 F.2d
970, 981 (11th Cir.), cert. denied, 479 U.S. 853 (1986). We
conclude that Congress has conferred no power to punish for a
violation of § 362(a), other than the punitive damage authority in
§ 362(h).

On the other hand, we agree that bankruptcy courts have broad
equitable powers to remedy violations of the automatic stay that
injure a corporate debtor's estate. Many courts have said that
those who violate the automatic stay "may be held in contempt." In
re Computer Commun., Inc., 824 F.2d 725, 731 (9th Cir. 1987).
Calling this remedial power contempt overlooks a serious question
whether bankruptcy courts have contempt powers after the 1984
Amendments. Compare In re Sequoia Auto Brokers, Ltd., 827 F.2d
1281, 1290 (9th Cir. 1987), with In re Skinner, 917 F.2d 444, 448-
50 (10th Cir. 1990). More narrowly, it overlooks the fact that
contempt is a remedy for violating court orders, not statutes. See
In re Calstar, 159 B.R. at 257-58. Finally, even if a civil
contempt power exists, we see little if any need to resort to it in
this context because § 362(a), buttressed by § 105(a), confers

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broad equitable power to remedy adverse effects of automatic stay
violations. See Celotex, 115 S. Ct. at 1498-99 & n.6; In re Taco
Ed's, Inc., 63 B.R. 913, 931-32 (Bankr. N.D. Ohio 1986).

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 Having limited the scope of the bankruptcy court's remedial
powers, we encounter a problem with the remedy awarded in this
case, for neither the bankruptcy court nor the district court
clarified whether the damages awarded5 were compensatory or
punitive. Thus, we must examine whether the bankruptcy court's
award -- the "value of the voidable transfer that resulted from the
violation of the automatic stay" -- was properly compensatory.

The bankruptcy court relied upon In re Calstar in awarding the
Trustee the value of the trademark as determined by the foreclosure
sale. But in Calstar, the bankruptcy court held that the assets in
question were part of the debtor's estate before ruling that their
value was the appropriate remedy for violation of the stay. See
159 B.R. at 252-53. Here, by contrast, the Trustee has never
established his right to avoid debtor's pre-petition transfer and
recover the trademark or its value for the estate. Indeed, the
Trustee dismissed his adversary avoidance claims so that he could
pursue this § 362 claim in the bankruptcy court. Thus, the value
of the trademark is not an appropriate compensatory remedy. At
this stage of the proceedings, the Trustee's rights are preserved
if appellants are ordered to pay the foreclosure sale proceeds
(including interest on the proceeds from October 24, 1991) into
escrow pending determination of whether those proceeds now belong
to appellants, or to debtor's estate.

In making its damage award, the bankruptcy court observed that
appellants' violation of the automatic stay "required the Trustee
to incur the additional expense of litigating these actions." But
the court made no effort to quantify this expense. In vacating the

5
Damages are not an equitable remedy. Because Congress in
§ 362(h) did not grant authority to award damages to corporate
debtors, only compensatory equitable remedies are appropriate.

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$100,717 award and substituting an order to pay the proceeds into
escrow, we do not foreclose the bankruptcy court from returning to

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the question of remedy after the avoidance issues are finally
resolved. For example, if the Trustee proves that the trademark
proceeds belong in the debtor's estate, then appellants' violation
of the automatic stay has needlessly cost the estate delay and
litigation expense. On the other hand, if the Trustee fails to
prove his avoidance claim, then the Trustee has pursued a lost
cause, and the expense he incurred is a self-inflicted wound.

For the foregoing reasons, the district court's March 29,
1996, order is reversed and the case is remanded for further
proceedings consistent with this opinion.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.

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