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In re Dingley

United States Bankruptcy Appellate Panel of the Ninth Circuit

August 6, 2014

In re: MARK DINGLEY, Debtor. YELLOW EXPRESS, LLC; YELLOW LOGISTICS, LLC, Appellants,
v.
MARK DINGLEY, Appellee

Argued and Submitted, at Las Vegas, Nevada January 24, 2014

Appeal from the United States Bankruptcy Court for the District of Nevada. Bk. No. 3:13-bk-50648-BTB. Honorable Bruce T. Beesley, Bankruptcy Judge, Presiding.

Mark D. Wray, Esq., argued for appellants Yellow Express, LLC and Yellow Logistics, LLC.

Christopher P. Burke, Esq., argued for appellee Mark Dingley.

Before: KIRSCHER, JURY and TAYLOR, Bankruptcy Judges.

OPINION

Page 592

KIRSCHER, Bankruptcy Judge:

Yellow Express, LLC and Yellow Logistics, LLC (collectively, " appellants" ) appeal from the bankruptcy court's order sanctioning appellants $1,500 for violation of the automatic stay. Following precedent

Page 593

of the Ninth Circuit Court of Appeals (" Ninth Circuit" ), first decided under the Bankruptcy Act of 1898, establishing that a civil contempt proceeding is not subject to the automatic stay, we REVERSE.

I. FACTS[1]

A. Prepetition Facts

In 2009, appellants filed an action in the Second Judicial District Court in Washoe County, Nevada, Case No. CV09-02392 against Mark Dingley (" debtor" ) and two LLCs which he owned and controlled, M& M Tow & Transport, LLC and Superior Tow and Transport Service, LLC (collectively, " the LLCs" ). The operative first amended complaint (" state court action" ) alleged claims for claim and delivery, unjust enrichment, negligence, conversion and constructive fraud against debtor and the LLCs (collectively, " defendants" ), based on the tow, storage and disposition of a semi-truck and trailer which belonged to Yellow Express and was leased to Yellow Logistics. The state court action included no alter ego allegations.

Initially, defendants defaulted and, following a prove-up hearing, judgment was entered against them in the total sum of $300,000. Subsequently, defendants moved to set aside the default judgment, which was granted. The state court then ordered that a hearing be held on sanctions for their willful failure to appear for depositions. At the hearing on June 26, 2012, the state court ordered defendants to pay sanctions to appellants in a sum not to exceed $6000 for attorneys' fees and court reporter costs. Appellants subsequently filed an affidavit, which fixed the sanctions at $4078.35.

Defendants did not pay the sanctions. On March 25, 2013, appellants filed an application for an order to show cause regarding contempt for defendants' noncompliance with the June 26, 2012 order. On April 2, 2013, the state court judge issued the order to show cause (" OSC" ), ordering defendants to appear on April 25, 2013, to show cause why they should not be held in contempt for nonpayment.

B. Postpetition Facts

On April 8, 2013, debtor filed a Chapter 7[2] proceeding in the Nevada bankruptcy court. Although his membership interest in the LLCs was disclosed in debtor's schedules, the LLCs did not file independent cases. Debtor scheduled appellants as creditors, and the court mailed notice of the filing of the bankruptcy case to appellants' attorney Mark D. Wray (" Wray" ) on April 11, 2013. On April 24, 2013, debtor's state court counsel advised Wray of the bankruptcy filing and the automatic stay provided by § 362(a). On the following day, debtor's bankruptcy attorney also advised Wray of the stay. Wray, on April 24, 2013, wrote debtor's bankruptcy attorney acknowledging the notification of debtor's bankruptcy filing and inquiring why the OSC could not proceed given the law established by several noted cases. Despite the bankruptcy filing notices and given his response to opposing counsel, Wray declined to request the state court to vacate the OSC because: (1) the LLCs had not filed and did not receive the benefit of the stay; and (2) his preliminary research led him to believe that Ninth Circuit authority

Page 594

excepted a state court contempt proceeding from the automatic stay. In making this second assertion, he relied on David v. Hooker, Ltd., 560 F.2d 412 (9th Cir. 1977), and Dumas v. Atwood (In re Dumas), 19 B.R. 676 (9th Cir. BAP 1982).

Debtor's attorney responded that she did not have time to review his cases, but she continued to assert that the contempt hearing was a violation of the automatic stay and that the LLCs should get the benefit of debtor's stay because he listed his interest in them in his schedules. She then filed a Notice of Bankruptcy Filing in the state court on the same day. The state court responded to that Notice by vacating the hearing. On the following day, it issued an order requiring briefing from the parties on the applicability of the automatic stay to the contempt hearing. Appellants' brief was due ten days after the order and defendants' brief was due in another ten days.

Appellants filed their state court brief timely on May 1, 2013, repeating the arguments they made to debtor's counsel that the automatic stay did not apply to nondebtor co-defendants and that the contempt proceeding was excepted from the stay under Hooker and Dumas. Debtor did not file a brief in state court. Instead, on May 3, 2013, he filed a Motion to Enforce Stay and For Award of Mandatory Sanctions Pursuant to 11 U.S.C. § 362(k) in the bankruptcy court. Simultaneously, debtor filed an Ex Parte Application for Order Shortening Time, requesting an expedited hearing on the motion since his brief in state court was due. On May 6, 2013, the bankruptcy court granted the application for shortened time and set the hearing for May 10, 2013, with opposition papers due no later than noon, May 9, 2013.

In his Motion to Enforce Stay, debtor asserted that the prosecution of the contempt proceeding against him was a violation of § 362(a) and that the bankruptcy court filing divested the state court of jurisdiction to rule on the effect of the automatic stay on its proceedings, relying on Gruntz v. Cnty. of Los Angeles (In re Gruntz), 202 F.3d 1074, 1080 (9th Cir. 2000) (en banc). Debtor's motion further sought an order halting the state court action and an award of attorney's fees and punitive damages based on appellants' willful violation of the stay. Appellants timely[3] filed their Opposition to Motion to Enforce Stay, asserting the same arguments which they had previously made to debtor's counsel. Relying on pre-Gruntz non-binding authority, they contended that the state court had concurrent jurisdiction to determine whether the automatic stay applied to its proceedings. Next, pointing out that the LLCs were separate legal entities from debtor and that the contempt proceeding was against those entities, not his membership interest, appellants argued the automatic stay did not apply to the LLCs and the contempt proceeding should continue against them. As authority, they cited Groner v. Miller (In re Miller), 262 B.R. 499, 503 (9th Cir. BAP 2001), which in turn relied on Advanced Ribbons & Office Prods., Inc. v. U.S. Interstate Distrib., Inc. (In re Advanced Ribbons & Office Prods., Inc.), 125 B.R. 259, 263 (9th Cir. BAP 1991), and Marcus, Stowell & Beye Gov't Sec., Inc. v. Jefferson Inv. Corp., 797 F.2d 227, 230 n.4 (5th Cir. 1986) (" The well established rule is that an automatic stay of judicial proceedings against one defendant

Page 595

does not apply to proceedings against co-defendants." ).

Appellants also contended that state court contempt proceedings were exempted from the automatic stay, citing again Hooker and Dumas and emphasizing to the bankruptcy court that debtor's papers did not address the holding of these cases. Finally, appellants noted that the only action they had taken which allegedly violated the stay was filing the brief in the state court pursuant to that court's request.

At the hearing in the bankruptcy court, debtor's counsel, contrary to the position she had initially taken with appellants' counsel, conceded that the stay did not apply to the LLCs. However, she argued that it did apply to debtor and that appellants had violated that stay by filing their brief in state court, which urged that court to proceed against debtor. She attempted to distinguish the Ninth Circuit authority excepting contempt proceedings from the stay by arguing they involved bad behavior and " criminal contempt." Despite arguments to the contrary from Wray, the bankruptcy court announced categorically that appellants could not proceed against debtor and that it was prepared to issue an order staying the state court action against him with no other relief granted.

Debtor's counsel then asserted that her client was broke and that she had incurred $1500 in attorney's fees to stop the affirmative action against him. After reading the brief which appellants had filed in state court,[4] the court announced:

" The automatic stay in bankruptcy court does not shield Mr. Dingley from his willful disobedience of the Court's lawful order." [5] I find that you're in contempt of court for urging the district court to extract from Mr. Dingley money for an order that was entered prebankruptcy which is certainly dischargeable. He can certainly be hauled into court for postbankruptcy conduct, but you cannot use the district court to try and recover money for contempt or otherwise that has occurred prior to the bankruptcy. I am awarding $1500 in sanctions against you.

Hr'g Tr. (May 10, 2014) 16:11-22. On May 17, 2013, the bankruptcy court entered the Order on Debtor's Motion to Enforce Automatic Stay and For Award of Mandatory Sanctions Pursuant to 11 U.S.C. § 362(k). Appellants paid the sanction and timely appealed.

II. JURISDICTION

The bankruptcy court had jurisdiction over this proceeding under 28 U.S.C. § § 1334 and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.

III. ISSUES

A. Whether the bankruptcy court erred in ruling that appellants violated the automatic stay; and

B. Whether the bankruptcy court erred in awarding sanctions of $1500.

IV. STANDARDS OF REVIEW

A bankruptcy court's determination that the automatic stay was violated is a question of law subject to de novo review. Cal. Emp. Dev. Dep't v. Taxel (In re Del ...


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