United States Court of Appeals
For the First Circuit
No. 03-1315
IN RE: SPOOKYWORLD, INC.,
Debtor.
__________
SPOOKYWORLD, INC.,
Plaintiff, Appellant,
v.
TOWN OF BERLIN, ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Boudin, Chief Judge,
Baldock,* Senior Circuit Judge,
and Howard, Circuit Judge.
Stephen Gordon with whom Stephen Gordon & Associates was on
brief for appellant.
Peter J. Camp with whom Adam J. Brand and Brand & Associates
were on brief for appellees.
September 25, 2003
*
Of the Tenth Circuit, sitting by designation.
BOUDIN, Chief Judge. This appeal concerns efforts by the
Town of Berlin to bring certain attractions owned by appellant
Spookyworld, Inc. ("Spookyworld"), into compliance with the
Massachusetts Building Code. 780 C.M.R (passim) (6th ed. 1997).
Spookyworld was created in 1991 by sole shareholders David and
Linda Bertolino. The corporation built a horror theme park in
Berlin, Massachusetts, on land leased from a trust controlled by
the Bertolinos. The park celebrated Halloween, opening every year
only for the month of October.
From modest beginnings, Spookyworld's business grew
quickly: in 1997, it grossed $1,880,000, and by 1998, it was
employing approximately 500 people during its annual month of
operation. In 1998 the park contained three buildings housing a
total of five attractions: a barn, which included a haunted house
and a "celebrity area" on the main floor and a haunted "mine shaft"
in the basement; a "museum display"; and a metal building
containing a 3-D wax museum.
On September 30, 1998, the building inspector for the
Town of Berlin, Lawrence Brandt, issued three certificates of
inspection to Spookyworld, one for each building. Shortly
thereafter, on October 7, Brandt sent a letter to David Bertolino
rescinding the certificate covering the haunted house and the
haunted mine shaft. According to Brandt, recent amendments to the
Massachusetts Building Code required that these two attractions
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have sprinkler systems installed. 780 C.M.R. § 413.4 (6th ed.
1997).1
Because of Brandt's actions, Spookyworld faced the
prospect of having to close two of its principal draws for the
duration of the critical month of October. Spookyworld therefore
immediately appealed Brandt's decision to the building code appeals
board under Mass. Gen. Laws, ch. 143, § 100 (West 2002). Under
that provision, Spookyworld's appeal had the effect of staying all
enforcement proceedings against it, unless state or local officials
could present evidence that the stay would "involve imminent peril
of life or property." Id.; see also 780 C.M.R. § 122.3.3 (6th ed.
1997).
Spookyworld then began negotiations with town officials,
attempting to work out an interim solution whereby the haunted
house and the haunted mine shaft could continue to operate through
October without shutting down for sprinkler installation. Duncan
Baum, the town's assistant fire chief, and Gene Novak, a regional
building inspector, participated in the negotiations. Among the
options discussed was a "fire watch," which would have involved
1
Defendants say in their brief that there were multiple
problems with all three buildings and that Brandt withdrew the
certificates for all of them. Nevertheless, the principal dispute
between the parties relates to the haunted house and haunted mine
shaft and to the question whether these two attractions required
sprinkler systems.
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Spookyworld's paying the town to station fire personnel at the park
during its hours of operation.
The negotiations ultimately broke down, and on October
16, 1998, the town filed a complaint against Spookyworld in
Worcester Superior Court. The complaint sought a temporary
restraining order, shutting down the haunted house and the haunted
mine shaft until such time as sprinkler systems could be installed
in each; the complaint also sought a fine for each day of non-
compliance. The court issued the temporary restraining order later
that day.
One hour after the order issued, Spookyworld filed a
chapter 11 petition under the Bankruptcy Code and sought to
continue operating both attractions by virtue of the automatic stay
provided by the statute. 11 U.S.C. § 362(a) (2000). The very next
day, however, Spookyworld was forced to shut down the attractions
when town officials came to the park and threatened to arrest
Spookyworld employees for non-compliance with the court order.
In response, Spookyworld filed an adversary complaint in
bankruptcy court, seeking a preliminary injunction to halt the
state court proceedings and prevent any action on the part of the
town to close park facilities. At an emergency hearing held before
the bankruptcy court on October 20, 1998, counsel for the town
claimed that continued operation of the two facilities in question
posed an immediate danger to the safety of the park's customers.
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The town's counsel also represented that the town's actions enjoyed
the support of the highest public safety officials of the state.
The bankruptcy court refused to grant Spookyworld's requested
injunction, citing the police power exception to the automatic
stay. 11 U.S.C. § 362(b)(4) (2000).
Shortly thereafter the Worcester Superior Court held a
hearing on the continuation of the town's temporary restraining
order. Counsel for the town made representations at this hearing
similar to the ones he had made before the bankruptcy court. After
the hearing, the court converted the temporary restraining order
into a preliminary injunction. The haunted house and the haunted
mine shaft remained closed for the rest of October 1998.
On February 9, 1999, Spookyworld filed an amended
adversary complaint in bankruptcy court. The amended complaint
alleged that the Town of Berlin and various of its officials had
willfully violated the automatic stay. The amended complaint also
contained a section 1983 claim, 42 U.S.C. § 1983 (2000), a section
1985 claim, id. § 1985, and several state law claims including
libel, slander, interference with contractual relationships, and
violations of Mass. Gen. Laws, ch. 12, § 11H-I (West 2002). In due
course, defendants moved for summary judgment on all claims.
On August 2, 2001, the bankruptcy court ruled that
Spookyworld's automatic stay claim was a core bankruptcy claim and
that all of Spookyworld's other claims were non-core claims. In re
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Spookyworld, 266 B.R. 1, 6-11 (Bankr. D. Mass. 2001). The
bankruptcy court granted defendants' motion for summary judgment
with respect to the automatic stay claim, 28 U.S.C. § 157(b)(1)
(2000); and, as to the rest of Spookyworld's claims, framed
proposed findings of fact and conclusions of law recommending the
grant of summary judgment in favor of defendants. 28 U.S.C. §
157(c)(1) (2000); Spookyworld, 266 B.R. at 11-20.
Spookyworld filed a timely appeal to the district court
challenging the bankruptcy court's grant of summary judgment on the
core automatic stay claim. Possibly the notice could be read also
to embrace a challenge to the bankruptcy court's proposed findings
of fact and conclusions of law with regard to the non-core claims.
If the latter was intended, use of an appeal was a procedural
misstep; the proposed findings and conclusions were not a judgment
subject to "appeal" but recommendations to the district court. The
correct, and required, course was to file "specific objections" to
those recommendations that were disputed by Spookyworld. 28 U.S.C.
§ 157(c)(1) (2000); Fed. R. Bank. P. 9033.
On December 19, 2001, no specific objections to the
recommendations having been filed within the time provided, the
district court adopted the bankruptcy court's proposed findings of
fact and conclusions of law; accordingly, the district court, by
order dated the same day, granted judgment to the defendants on the
non-core claims. Whether Spookyworld was immediately aware of the
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December 19 actions is unclear, but at no point did it seek to
reopen this judgment based on lack of notice.
The appeal as to the core claims was more protracted.
Over a year later and after briefing by both sides the district
court on January 23, 2003, issued a memorandum and order affirming
(on grounds described below) the bankruptcy court's grant of
summary judgment to defendants on Spookyworld's core automatic stay
claim. The district court then dismissed Spookyworld's appeal on
January 24, 2003. Spookyworld's district court brief also attacked
the recommendations on the non-core claims but the district court
noted that those had already been disposed of by the December 19,
2001, judgment. Spookyworld filed a notice of appeal to this court
on February 21, 2003.
In this court, Spookyworld contests both the district
court order of December 19, 2001, entering judgment for the
defendants on the non-core claims (the "non-core order") and the
memorandum and order of January 23, 2003, affirming the bankruptcy
court's disposition of the core automatic stay claim (the "core
order"). At the threshold, defendants say that Spookyworld's
notice of appeal does not encompass the non-core order, and that
therefore we lack power to consider it on the merits. Fed. R. App.
P. 3(c); Smith v. Barry, 502 U.S. 244, 248 (1992) ("Rule 3's
dictates are jurisdictional in nature . . . .").
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Fed. R. App. P. 3(c)(1)(B) states: "The notice of appeal
must designate the judgment, order, or part thereof being
appealed." The requirements of Rule 3 are liberally construed,
Barry, 502 U.S. at 248, and "[a] mistake in designating a judgment
. . . in the notice of appeal ordinarily will not result in loss of
the appeal as long as the intent to appeal a specific judgment can
be fairly inferred from the notice and appellee is not misled by
the mistake." Kelly v. United States, 789 F.2d 94, 96 n.3 (1st
Cir. 1986). But Rule 3 must still be satisfied, and "noncompliance
is fatal to an appeal." Barry, 502 U.S. at 248; Torres v. Oakland
Scavenger Co., 487 U.S. 312, 317 n.3 (1988).
Spookyworld's notice of appeal to this court says in its
entirety:
[Now comes] the Appellant Spookyworld, Inc.
and appeals the Order of Dismissal of the
District Court dated 1/23/03 affirming the
decision of the Bankruptcy Court which
allowed the Motion of Defendants, Town of
Berlin, et al for Summary Judgment.
This language refers only to the order resolving the core claim,2
and this is not sufficient to inform either defendants or the court
of Spookyworld's intent to appeal the non-core order. Barry, 502
U.S. at 248. Accordingly, we do not reach the questions whether
2
The district court's own core order does mention the non-core
order but only to say it previously resolved the non-core claims;
a "passing allusion" to a previous order in the order designated by
the notice of appeal is not enough to incorporate the previous
order into the notice. See Kotler v. Am. Tobacco Co., 981 F.2d 7,
12 (1st Cir. 1992).
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defendants were prejudiced or whether an appeal from the non-core
order issued over a year before the notice of appeal was filed
would have been timely. Fed. R. App. P. 6(a); Fed. R. App. P.
4(a)(1)(A).
Occasionally, an opening brief has been treated as a
notice of appeal, and Spookyworld's brief in this court does
contest the disposition of the non-core order. But Spookyworld's
opening brief was not filed until May 20, 2003, which is well after
the 30 days for filing a notice of appeal, Fed. R. App. P.
4(a)(1)(A), from the core order (issued on January 23, 2003), and
over a year after the non-core order (issued on December 19, 2001).
Barry, 502 U.S. at 249 (appellate court may treat a filing "styled
as a brief as a notice of appeal," but only "if the filing is
timely under Rule 4 and conveys the information required by Rule
3(c)").
This brings us to the bankruptcy court's grant of summary
judgment to defendants on Spookyworld's core automatic stay claim
which we review de novo, In re Varrasso, 37 F.3d 760, 762-63 (1st
Cir. 1994), construing the record in the light most favorable to
Spookyworld as the non-moving party. Triangle Trading Co. v.
Robroy Indus., 200 F.3d 1, 2 (1st Cir. 1999); Varrasso, 37 F.3d at
763. We must affirm if "no genuine issue of material fact exists,
and [defendants have] successfully demonstrated an entitlement to
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judgment as a matter of law." Fed. R. Civ. P. 56(c); Fed. R.
Bankr. P. 7056; Varrasso, 37 F.3d at 763.
Spookyworld argues that defendants' actions, including
the continued prosecution of the state court case after Spookyworld
filed its chapter 11 proceeding, constitute a willful violation of
the automatic stay, entitling it to damages under section 362(h).
The bankruptcy court ruled that these actions rested on the town's
police or regulatory power and so were exempt from the automatic
stay under section 362(b)(4). Spookyworld, 266 B.R. at 17-20. The
district court affirmed but on a different ground: it held that
corporations cannot take advantage of section 362(h)'s right of
action because the provision only authorizes suits brought by
"individual[s]."
In our view both courts were right. We conclude that
Spookyworld, because it is a corporation, cannot bring suit under
section 362(h), and that even if it could, defendants' actions are
within the police power exception to the automatic stay. We also
reject Spookyworld's alternative argument that the bankruptcy court
should have sanctioned defendants according to its contempt powers
under 11 U.S.C. § 105(a) (2000). These three issues are considered
in turn.
Section 362(a) of the Bankruptcy Code, imposing the
automatic stay, applies generally to proceedings against "the
debtor." By contrast, section 362(h) says: "An individual injured
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by any willful violation of a stay provided by this section shall
recover actual damages, including costs and attorneys' fees, and,
in appropriate circumstances, may recover punitive damages."
Defendants argue that the term "individual" means that corporations
are not authorized to collect damages under section 362.
There is currently a circuit split. Two circuits hold
that the term "individual" includes corporations, and four circuits
hold that it does not.3 Every district court in this circuit to
consider the issue has endorsed the majority view, as has the
circuit's Bankruptcy Appellate Panel.4 Analysis starts, as usual,
with the statutory language, United States v. Ron Pair Enters., 489
U.S. 235, 241-42 (1989), although bare words would not license a
result "demonstrably at odds" with legislative intent. Id. at 242
(quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571
(1982)).
The Bankruptcy Code does not define "individual," but
several provisions indicate that the term was not meant to include
3
Compare In re Atlantic Bus. and Cmty. Corp., 901 F.2d 325,
328-29 (3d Cir. 1990), and Budget Serv. Co. v. Better Homes of Va.,
Inc., 804 F.2d 289, 292 (4th Cir. 1986), with In re Just Brakes
Corp. Sys., 108 F.3d 881, 884-85 (8th Cir. 1997), In re Jove Eng'g,
Inc. 92 F.3d 1539, 1549-53 (11th Cir. 1996), Goodman v. Knight, 991
F.2d 613, 618-20 (9th Cir. 1993), and In re Chateaugay Corp., 920
F.2d 183, 184-87 (2d Cir. 1990).
4
See In re American Chem. Works Co., 235 B.R. 216, 220-21
(D.R.I. 1999); In re A & J Auto Sales, Inc., 223 B.R. 839, 844-45
(D.N.H. 1998); In re Shape, Inc., 135 B.R. 707, 708 (D. Me. 1992);
In re Turabo Motors Co., BAP No. PR 01-035, 2002 Bankr. Lexis 1278,
*32-*34 (B.A.P. 1st Cir. Oct. 21, 2002).
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corporations. For example, the code defines "person" to include
"individual[s], partnership[s], and corporation[s]." 11 U.S.C. §
101(41) (2000) (emphasis added). In addition, "corporation" is
defined to include an "association having a power or privilege that
a private corporation, but not an individual or a partnership
possesses." Id. § 101(9)(A)(i) (emphasis added). See also In re
Jove Eng'g, Inc. 92 F.3d 1539, 1551 & n.11 (11th Cir. 1996) (citing
additional examples); In re Chateaugay Corp., 920 F.2d 183, 185-86
(2d Cir. 1990) (same).
It may at first be surprising that Congress would want to
withhold the benefits of 362(h) from corporations, but this
decision is not "demonstrably at odds" with legislative intent.
Section 362(h) was enacted as part of the "'Consumer Credit
Amendments,' which contain[ed] numerous additions to the code
relating only to 'individuals.'" Chateaugay, 920 F.2d at 186
(citing Bankruptcy Amendments and Federal Judgship Act of 1984,
Pub. L. No. 98-353, Title III--Amendments to Title 11 of the United
States Code, Subtitle A--Consumer Credit Amendments, § 304, 98
Stat. 333, 352 (1984)).
Corporations are not wholly without remedy for violations
of the automatic stay: under 11 U.S.C. § 105(a) (2000), "[t]he
court may issue any order, process, or judgment that is necessary
or appropriate to carry out the provisions of this title." Prior
to the enactment of section 362(h) in 1984, contempt orders issued
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under section 105(a), including awards of damages, were routinely
used to punish violations of the automatic stay. See In re
Crysen/Montenay Energy Co., 902 F.2d 1098, 1104 (2d Cir. 1990); In
re A & J Auto Sales, Inc., 223 B.R. 839, 844-45 (D.N.H. 1998).
After enactment of section 362(h), corporations (and
other non-"individual[s]") remain free to petition bankruptcy
courts to award damages for automatic stay violations pursuant to
their section 105(a) power. See, e.g., Chateaugay, 920 F.2d at
186-87. A discretionary remedy is not as good as one that is
assured, see Goodman v. Knight, 991 F.2d 613, 620-21 (9th Cir.
1993), but Congress could easily have thought that corporations
needed less protection. As the Second Circuit explains:
After Congress in 1978 passed the automatic
stay provisions of § 362 along with the rest
of the code, including § 105(a) . . ., it is
entirely possible that Congress then chose to
expand the remedies for violations one step at
a time. Congress may well have thought that
individual debtors were particularly
vulnerable to violations of the stay by debt-
collection agencies and others who may be
tempted to believe that individuals are less
likely than corporations to be aware of their
rights under the automatic stay.
Chateaugay, 920 F.2d at 186.
In sum, we agree with the Second, Eighth, Ninth, and
Eleventh Circuits, and with the district courts and the BAP in this
circuit, and hold that corporations cannot sue under section 362(h)
to obtain damages for violation of the automatic stay. Statutory
language so suggests and neither legislative history nor policy
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concerns point the other way. It is well to have this issue
settled in this circuit at least until the Supreme Court addresses
the matter--which might take some time if other circuits follow the
plurality view.
Spookyworld argues that, so construed, section 362(h)
denies equal protection under the Fifth Amendment to closely held
corporations, like itself, that have only a few shareholders. But
when drawing distinctions that do not involve fundamental rights or
suspect classes, Congress need only have a rational basis for its
decisions, United States R.R. Ret. Bd. v. Fritz, 449 U.S. 166, 175-
76 (1980). There is nothing irrational in drawing economic-
regulation lines between individuals and corporations, closely held
or otherwise; indeed, the Internal Revenue Code is rife with such
distinctions.
Even if corporations could sue, we would still affirm the
bankruptcy court's grant of summary judgment on the merits.
Ordinarily, bankruptcy automatically stays lawsuits in other courts
against the debtor, see, e.g., ICC v. Holmes Transp., Inc., 931
F.2d 984, 987-88 (1st Cir. 1991), but this is subject to the so-
called police power exception. Section 362(b)(4) says:
The filing of a [chapter 11] petition . . .
does not operate as a stay . . . of the
commencement or continuation of an action or
proceeding by a governmental unit . . . to
enforce such governmental unit's . . . police
or regulatory power.
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11 U.S.C. § 362(b)(4) (2000). The town is a "governmental unit"
within the meaning of 362(b)(4). Cournoyer v. Town of Lincoln, 790
F.2d 971, 975 (1st Cir. 1986).
Spookyworld says that this section does not apply because
the defendants' actions were undertaken in bad faith. According to
Spookyworld, the defendants in securing the temporary restraining
order from the Worcester Superior Court deliberately exaggerated
the dangers of operating the haunted house and the haunted mine
shaft without sprinklers, the severity of any alleged building code
violations, and the degree to which state public safety officials
supported their decision to take legal action.
Spookyworld also says that when it sought protection
under chapter 11, the town similarly misled the bankruptcy court
in convincing it not to enjoin the state court action. It claims
that the defendants again misrepresented the situation when they
convinced the Worcester Superior Court, post-petition, to convert
its temporary restraining order into a preliminary injunction. It
says that the record demonstrates these false statements or, at the
very least, that their falsity involves factual issues barring the
district court's grant of summary judgment.
For clarity's sake, Spookyworld's argument should be
distinguished from a related, but here inapplicable, limitation on
the use of the police power exception to the automatic stay. Under
the case law, the exception does not apply if the government takes
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legal action to advance its own "pecuniary" interest (or perhaps
the pecuniary interest of others); but it does apply if the
government acts in the interest of "public safety and welfare."
E.g., In re Universal Life Church, 128 F.3d 1294, 1297-98 (9th Cir.
1997); see also Chao v. Hosp. Staffing Servs., Inc., 270 F.3d 374,
385-89 (6th Cir. 2001).
The Massachusetts Building Code is plainly aimed at
protecting the public, and Spookyworld does not say otherwise. In
adopting the police power exception to the automatic stay, Congress
explained that "where a governmental unit is suing a debtor to
prevent or stop violation of fraud, environmental protection,
consumer protection, safety, or similar police or regulatory laws
. . . the action or proceeding is not stayed under the automatic
stay." S. Rep. No. 95-989, at 52 (1978). Accord, Cournoyer, 790
F.2d at 975-77 (enforcement of zoning regulation within police
power exception).
Admittedly, there is some authority for the proposition
that government actions undertaken in bad faith are not exempt from
the automatic stay. See In re Nat'l Hosp. and Institutional
Builders Co., 658 F.2d 39, 43-44 (2d Cir. 1981) (under the old
Bankruptcy Act which had no built-in police power exception); In re
Beker Indus. Corp., 57 B.R. 611, 627 (Bankr. S.D.N.Y. 1986).
However, National Hospital was arguably undermined, if not
overruled, by Board of Governors v. MCorp Financial, Inc., 502 U.S.
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32, 40 (1991), which held that bankruptcy courts should not inquire
into the "legitimacy" of ongoing administrative enforcement
proceedings in determining whether the police power exception
applies to them.5
We are doubtful whether a bad faith exception should be
read into section 362(b)(4) where the state directive being
enforced is directed at ordinary public purposes. There is much
force to the dissent of Judge Mansfield in National Hospital:
[A bad faith] exception would result in
Bankruptcy Court mini-trials of purely state
regulatory issues whenever, as might be
expected to happen frequently, the debtor
sought by claiming 'bad faith' to have those
issues tried in a Bankruptcy Court, which
would be sympathetic toward any resolution
that would improve the estate, rather than
before state tribunals. The proper remedy is
to seek redress in the state courts which may
be expected not to tolerate bad faith conduct
. . . .
National Hospital, 658 F.2d at 46. By contrast, the pecuniary
purpose exception need present no such dangers. Cf. Safety-Kleen,
Inc. v. Wyche, 274 F.3d 846, 865 (4th Cir. 2001) (pecuniary purpose
test looks only to the objective purpose of the underlying law
sought to be enforced).
5
See In re Javens, 107 F.3d 359, 365-67 & n. 6 (6th Cir. 1997)
(finding that National Hospital's analysis did not survive MCorp).
After MCorp, the Sixth Circuit concluded that bankruptcy courts
retain the power to enjoin bad faith exercises of police or
regulatory power (presumably under section 105(a)), but this was
not a claim that the automatic stay operated in such a case. Id.
at 366-67 & n. 7.
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Of course, one can imagine some fairly appealing cases
for a bad faith exception; suppose that incontrovertible proof was
available that the town's lawyer had brought a wholly baseless
injunction action against Spookyworld motivated by personal malice.
Yet such an injunction could easily be overturned by offering the
same evidence to the state court; and state remedies exist for
malicious prosecution. Thus, the case for a bad faith exception
seems thin; but, even if such an exception existed--which we need
not definitively decide--it would not extend to this case.
On summary judgment we are bound to assume that
Spookyworld could prove that defendants exaggerated the seriousness
of the building code violations, but this is a far cry from showing
that the defendants brought the state action for ulterior motives
or that they did not believe in the basic genuineness of their
case. Lawyers constantly overstate their claims. In a robust
adversary system, courts offer lawyers a measure of latitude.
If misstatements and exaggeration in the state court were
enough to defeat the automatic stay, the bankruptcy courts would be
relitigating state enforcement actions every day. The game is not
worth the candle. It is well to remember that section 362(b)(4)
embodies a fundamental judgment of Congress: that protecting the
public welfare and safety trumps the concerns that underlie the
automatic stay, a provision whose main purpose is to prevent some
private creditors from gaining priority on other creditors. See,
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e.g., Mann v. Chase Manhattan Mortgage Corp., 316 F.3d 1, 3 (1st
Cir. 2003).
There are penalties enough, formal as well as informal,
for lawyers and other officials who make false factual statements
to courts. Indeed, Spookyworld itself argues in the alternative
that the bankruptcy court should have awarded it damages under
section 105(a). As noted earlier, bankruptcy courts do possess the
discretionary authority to award damages for automatic stay
violations as part of their power to "issue any order . . . that is
necessary or appropriate to carry out the provisions of this
title." 11 U.S.C. § 105(a) (2000); Chateaugay, 920 F.2d at 186-87.
This alternative claim for damages is waived because
Spookyworld did not make it before the district court. See Daigle
v. Me. Med. Ctr., Inc., 14 F.3d 684, 687 (1st Cir. 1994). In any
event, the decision whether to award such damages is discretionary.
Goodman, 991 F.2d at 620. On this record, there is nothing that
would make it an abuse of discretion to refuse to award damages
under the contempt power.
Affirmed.
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