Illinois Bankruptcy Court Addresses Circuits' Split Regarding a State Court's Jurisdiction Over the Automatic Stay's Applicability and a Debtor's Right to Unilaterally Waive the Automatic Stay's Protections

Another solid opinion from the Bankruptcy Court for the Northern District of Illinois, this time in In re Mid-City Parking, Inc., 2005 WL 2857728 (Bankr.N.D.Ill, 10/31/05). In this case, Mid-City (the debtor in possession or "DIP") filed a petition for relief under chapter 11. Subsequent to the filing, the DIP appealed a judgment that had been entered against it prepetition in favor of Clark Polk Land, LLC ("Clark Polk"). Notably, the DIP did not seek to modify the stay under section 362(d) in advance. Clark Polk shrewdly filed a motion in the state court to dismiss debtor's appeal, arguing that the appeal violated the automatic stay. The Illinois Appellate Court granted Clark Polk's motion. Not satisfied leaving well enough alone, Clark Polk then filed a motion in the DIP's bankruptcy case seeking costs and attorneys' fees related to the effort to seek dismissal of the appeal. The Bankruptcy Court undertook an extensive analysis of two central unsettled questions which have generated significant splits among the circuits:

1. Does a bankruptcy court have exclusive jurisdiction over whether a state court proceeding is subject to the automatic stay?


2. Can the trustee or debtor in possession unilaterally waive the protections of the automatic stay "with acts of estate administration that would otherwise violate 11 U.S.C. § 362(a) if performed by anyone else"?

After an extensive review of applicable law, Judge Jacqueline Cox answers the first question by choosing the first of three distinct approaches taken by various courts (including an earlier case from the same district that had selected the second of the three alternative approaches):

(A) the bankruptcy and state courts have concurrent jurisdiction to determine jurisdiction, with the bankruptcy court having the final say;


(B) the bankruptcy court has exclusive jurisdiction (and thus the state court ruling has no legal effect);

(C) the bankruptcy and state courts have concurrent jurisdiction to determine jurisdiction, but a prior state court ruling strips the bankruptcy courts of jurisdiction under the Rooker-Feldman doctrine. [Ed. Note: Though the Bankruptcy Court did not raise this, consider whether another ground for rejecting this third approach is the US Supreme Court's unanimous ruling last term in Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 125 S.Ct. 1517 (2005), which held that the Rooker-Feldman doctrine could not be invoked in cases involving concurrent or parallel state and federal court proceedings.]

The Court answered the second question in the affirmative, stating:

A Chapter 11 debtor-in-possession or case trustee may waive the protections afforded by § 362(a) when the actions that would otherwise violate the stay are in furtherance of his statutory duties of administering the bankruptcy estate, including appealing judgments against the debtor's estate in nonbankruptcy forums. In so holding, this Court approves the result reached by the U.S. Court of Appeals for the Tenth Circuit and the Indiana Supreme Court rather than that reached by the First Circuit and the Ninth Circuit. Until a debtor-in-possession or trustee takes affirmative action showing an intent to prosecute the appeal of a judgment claim, however, an appeal from a judgment against the debtor's estate is stayed pursuant to § 362(a)(1).

In support of this conclusion, the Court provides a thoroughly researched analysis, much of which follows:

Here, because Clark Polk initially filed a complaint against Mid-City in the Circuit Court of Cook County, the suit was an "action or proceeding against the debtor" within the meaning of § 362(a)(1), and all stages of the controversy were automatically stayed, at least initially, when Mid-City filed the present Chapter 11 bankruptcy case. 11 U.S.C. § 362(a)(1). This is well-settled law that does not depend on which party had most recently prevailed, the ultimate disposition of the claim, the current stage of the litigation, or the existence of any pending appeal from a final judgment.... The opinion on which Clark Polk primarily relies, In re Capgro Leasing Assocs., 169 B.R. 305, 310-11 (Bankr. E.D.N.Y. 1994), places great weight on this substantial legal history, and as a general proposition its conclusion is correct.


Nevertheless, an additional legal issue remains in Chapter 11 cases in which the debtor-in-possession acts in the capacity of a trustee under § 1107(a), having not been replaced with a case trustee under § 1104(a) of the Code. The issue in these cases is whether the debtor-in-possession must always seek modification of the stay to proceed with actions that are otherwise stayed automatically or, alternatively, whether the debtor-in-possession (acting as a trustee) may proceed without a court order by simply waiving the protections of the automatic stay and taking action on behalf of the estate. It is important to note that if scrutinized properly, the long line of case law that some courts, including Capgro Leasing, cite as the so-called "majority" position does not actually address this issue; it merely stands for the much broader proposition that a debtor and a creditor are enjoined from continuing any particular lawsuit that is in essence an "action or proceeding against the debtor."

The so-called majority position does not even begin to address what happens when the Code bestows upon a debtor all of the rights, power, functions, and duties of a trustee. It is particularly telling that of the so-called majority position cases, five make no reference whatsoever to the chapter of Title 11 under which the bankruptcy was filed. [Citations omitted]. Only eight are actually Chapter 11 cases involving a § 1107 debtor-in-possession. [Citations omitted]. Even in these eight Chapter 11 opinions, the language does not make any mention of a debtor-in-possession's special rights, powers, and duties under § 1107(a) and Bankruptcy Rule 6009, nor does it even indicate generally that a debtor in a Chapter 11 case is any different from a debtor in any other type of case.

Consequently, many of the so-called majority-position cases do not discuss whether an estate representative even asserted that the appeal from the creditor's judgment should proceed without modification of the stay. [Citations omitted]. In these cases it was entirely possible that the debtor-in-possession or trustee viewed the appeal as burdensome to the estate, in which case the issue of whether an estate representative may continue litigation without a court order by simply foregoing the protections of the automatic stay and proceeding would not have arisen. In other cases the issue does not materialize because the debtor-in-possession or trustee clearly wants the appellate forum to enforce the automatic stay of the appeal from the judgment against the debtor's estate. [Citations omitted].

When the issue in the instant case is properly understood more specifically as the interplay between a trustee's role and § 362(a), the case law is much more evenly divided. Parker v. Bain (In re Parker), 68 F.3d 1131, 1135-38 (9th Cir. 1995); Simon v. Navon, 116 F.3d 1, 3-4 (1st Cir. 1997); In re Capgro Leasing Assocs., 169 B.R. 305, 312-13 (Bankr. E.D.N.Y. 1994); and Way Architects, P.C. v. Rockrimmon Elderly Hous. L.P., 2005 Colo. App. LEXIS 940, at 4-5, 8 (Colo. Ct. App. 2005), indicate that, specifically, a Chapter 11 debtor-in-possession must obtain a bankruptcy court order modifying the stay in order to proceed with an appeal from a judgment claim against the bankruptcy estate; a trustee or debtor-in-possession may not unilaterally waive the stay and proceed with an appeal (the "Capgro Leasing" line).

On the other hand, Chaussee v. Lyngholm (In re Lyngholm), 24 F.3d 89, 91-92 (10th Cir. 1994); Autoskill v. Nat'l Educ. Support Sys., 994 F.2d 1476, 1486 (10th Cir. 1993); In re Cobb, 88 B.R. 119, 120-21 (Bankr. W.D. Tex. 1988); In re Townview Nursing Home, 28 B.R. 431, 436, 447-48 (Bankr. S.D.N.Y. 1983); and Carpenter v. Farm Credit Servs., 654 N.E.2d 1125, 1127-28 (Ind. 1995), indicate that the debtor-in-possession may simply proceed as any trustee would in otherwise administering the estate: by waiving the protections § 362(a) affords and continuing with the desired action, including the defense of litigation against the debtor's estate. The other opinions supposedly constituting the "majority" position do not even purport to address whether the entity acting as estate representative must seek stay relief. But see Way Architects, P.C., 2005 Colo. App. LEXIS 940, at 3-4 & 7 (mistakenly referencing "majority" cases that do not address the specific issue); 10 Collier On Bankruptcy � 6009.04 & n. 3, at 6009-7 to -8 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2005) (same).

Of particular significance is the fact that Capgro Leasing's reasoning explicitly applies to trustees in addition to debtors-in-possession, see Capgro Leasing, 169 B.R. at 313, while the other so-called "majority" cases discuss § 362(a)'s effect on debtors without addressing the special rights, duties, and powers of any type of estate representative. The analysis of Capgro Leasing begins without giving sufficient consideration to the text of § 1107(a), and occasionally it uses the words "debtor" and "trustee" as if they are legally interchangeable, see, e.g., Capgro Leasing, 169 B.R. at 311-12 (implying that waiver by a debtor and by a trustee are the same); Simon, 116 F.3d at 3-4 & n. 2 (using "debtor" and "debtor in possession" interchangeably). When the Code allows the Chapter 11 debtor to remain a debtor-in-possession, the "debtor in possession shall have all the rights, other than the right to compensation under section 330 of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter." 11 U.S.C. § 1107(a) (emphasis added). Thus, the debtor-in-possession has "all" the rights, powers, functions and duties of a trustee....

The problem is that a Chapter 11 debtor is not just "a debtor" when granted the powers and responsibilities of a trustee under § 323; he is a fiduciary for all creditors. Thus, the question is really whether a trustee or debtor-in-possession may "unilaterally waive" or "limit the scope of the automatic stay...."

Answering in the negative creates several situations that are odd in terms of bankruptcy policy. The automatic stay is intended to benefit creditors collectively by preventing individual creditors from acting unilaterally to the detriment of other creditors. This benefit can be fully realized only if a single entity proceeds to administer the bankruptcy estate by objecting to and/or appealing improper claims and distributing estate property in accordance with the law. Staying anyone and everyone who could conceivably fall within § 101(15)'s definition of "entity" does not get the job done.

Section 362(a) exists to enable the trustee or debtor-inpossession to perform the above estate-administration duties--not to restrain, hinder, or inconvenience him in those duties. It exists so that a single voice may proceed to represent a diverse body of interests that have otherwise been enjoined from racing to pursue their own interests in scattered forums. The legislative history for § 362 indicates that the stay's purpose is to aid the trustee by allowing him more time to "inventory the debtor's position" and to "familiarize himself with the various rights and interests involved." H.R.Rep. No. 95-595, at 341 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6297-98. The automatic stay, however, becomes a burden if the trustee or debtor-in-possession must file motions for stay relief under § 362(d), even if the same are routinely granted. The "shield" aspect of the stay is intended to protect both the debtor and the estate, as mentioned, but not necessarily to protect individual creditor-appellees with interests adverse to the estate and its representative....

The stay does not exist to protect individual creditor-appellees such as Clark Polk from appeals of bankruptcy claims that could inure to the benefit of the bankruptcy estate; it exists to protect the bankruptcy estate from appeals the trustee deems not worthy of estate resources. Furthermore, it is questionable whether individual creditors have statutory standing to assert the automatic stay against a bankruptcy trustee or debtor-in-possession. Here, Clark Polk requests that Mid-City's estate be required to pay as damages its attorneys' fees incurred to persuade the Appellate Court of Illinois to dismiss the appeal as a stay violation. Because the automatic stay exists to protect the bankruptcy estate, it would seem odd that the estate must pay for its own alleged stay violation if and when such violation does not harm the estate.

In any bankruptcy case, the creditors have an aggregate interest in reducing claims against the bankruptcy estate as a way to increase their chances of receiving greater dividends on their claims. In order to accomplish this, the trustee must object to claims unenforceable under nonbankruptcy law and, in the situations specified above, must appeal those adverse judgments in the proper appellate forum rather than relitigating them in bankruptcy court. It would therefore be anomalous for the bankruptcy estate to be required to pay the attorneys' fees for the dismissal of an appeal that may have been in the estate's best interests, especially under a law designed to protect the estate as a whole from individual creditor-appellees rather than vice versa. As the Indiana Supreme Court stated, "Dismissing [the] appeal does nothing to further 'the policy behind the [Bankruptcy Code], which is to protect the bankrupt's estate from being eaten away by creditor's lawsuits and seizures of property before the trustee has had a chance to marshal the estate's assets and distribute them equitably among the creditors.'" Carpenter, 654 N.E.2d at 1128 (quoting Martin-Trigona, 892 F.2d at 577). Rather, dismissing the appeal because of § 362(a)(1) may result in the estate being eaten away by a judgment that should have been vacated on appeal, and this being so after the estate representative has actually had time to evaluate the merits of the particular creditor's lawsuit.

All of these policy problems are related to a much larger practical dilemma created by the Capgro Leasing interpretation. The Capgro Leasing line does not fully consider what applying the automatic stay to trustees would really entail; it does not carry its reasoning to its logical conclusion. The language of the eight subsections of § 362(a) describing different categories of automatically stayed activities contains no basis for concluding that trustees are subject to some of the subsections but not others. Under the Capgro Leasing interpretation, trustees and debtors-in-possession would be subject to all eight forms of the stay, not just the one in § 362(a)(1)....

We should avoid applying the various subsections of § 362(a) to trustees and debtors-in-possession in a random manner. The better interpretation holds that an automatically stayed "trust" or "estate" under § 101(15) includes neither the bankruptcy estate itself nor the trustee who administers it in that particular case....

As another alternative, the same result may be obtained here by holding that individual creditors of a bankruptcy estate do not have statutory, prudential standing to assert the stay against the entity acting as the trustee (and thereby representing creditors generally) in the same bankruptcy case. That is, when Congress created a "zone of interests" by writing § 362 of the Code, it did not intend that individual creditors could use the automatic stay as a sword against the estate's fiduciary. [Citations omitted].

Under any of these theories, Clark Polk may not recover attorneys' fees against the debtor-in-possession because Mid-City did not violate § 362(a) in the first instance; the debtor-in-possession had the authority to unilaterally proceed with estate administration by filing the notice of appeal in the Appellate Court of Illinois notwithstanding the automatic stay....


Steve Jakubowski

Hat tip to Ryan Zeller.

© Steve Jakubowski 2005

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