Appeal from the United States Bankruptcy Court for the Southern District of California. BK. No. 88-04238-B7, Adv. No. 91-90142-B7. Honorable Peter W. Bowie, Bankruptcy Judge, Presiding
Before: Russell, Ollason, and Jellen,*fn1 Bankruptcy Judges.
RUSSELL, Bankruptcy Judge:
The bankruptcy court awarded the trustee attorneys' fees and costs against the debtor's attorneys*fn2 pursuant to 11 U.S.C. § 362(h)*fn3 for violations of the automatic stay. The violations involved exercising dominion and control over property of the debtor's estate, including a state court malpractice lawsuit and the proceeds of the settlement of the lawsuit. The attorneys appeal. We AFFIRM.
The essential facts of the case are undisputed or uncontested. The debtor, Jeri L. Pace, presently known as Jeri LeMai ("LeMai"), and her former husband, H. Russell Pace ("Pace"), were the sole owners of two Alaska corporations known as The Pines Corporation and Pace Corporation (hereinafter collectively referred to as "the corporations").
In January 1985, the corporations sold their assets, including the Alcohol Beverage Dispensary Licenses (hereinafter collectively referred to as "the liquor licenses"), to The New Pines Corporation. LeMai and Pace retained legal counsel to assist them in the sale transaction to The New Pines Corporation.
In September 1986, Pace filed a Chapter 11 petition in the District of Alaska. In December 1986, the Pace bankruptcy case was converted to Chapter 7 and Kenneth Battley was appointed trustee.
In July 1987, LeMai and Pace discovered that their attorneys may have committed malpractice by failing to file a financing statement to perfect their security interest in the liquor licenses. In October 1987, LeMai and Pace filed a complaint in Alaska Superior Court against their former attorneys for malpractice for failing to perfect their security interest in the liquor licenses (hereinafter the "Alaska lawsuit").
In November 1987, the First Amended Complaint was filed in the Alaska lawsuit, removing LeMai as a plaintiff from lawsuit.
On May 26, 1988, LeMai filed her petition under Chapter 7 in the Southern District of California. LeMai did not list her claim for legal malpractice and her interest in the pending Alaska lawsuit on her Statement Of Financial Affairs and Schedules Of Assets And Liabilities filed with the bankruptcy court as part of her petition for bankruptcy. Consequently, the trustee believed LeMai's bankruptcy estate had no assets. On September 23, 1988, the order of discharge was entered in LeMai's bankruptcy and the case was ordered closed on February 21, 1989.
On July 26, 1989, shortly after her discharge, LeMai entered into an agreement with Pace to share any proceeds received from the pending Alaska lawsuit on a 50/50 basis. On July 31, 1989, LeMai hired Appellant, attorney John E. Havelock ("Havelock"), to prosecute the Alaska lawsuit. In the summer of 1989, Pace hired Appellant, attorney John R. Strachan ("Strachan"), to prosecute the lawsuit and informed Strachan of his bankruptcy. Despite having hired their attorneys, active prosecution of the Alaska lawsuit did not re-commence at this time. Pace had not been discharged and his bankruptcy case had not yet closed. It appears that the decision was made to wait until Pace was discharged before re-commencing prosecution of the Alaska lawsuit and was based upon the mistaken belief that the lawsuit would be deemed abandoned after the discharge.*fn4 Strachan admitted that he "suggested to (Pace) that there was little point in proceeding with a case if the only beneficiaries of the work involved were to be creditors."
In September 1989, Pace's bankruptcy case in the Alaska bankruptcy court was closed and Pace was discharged.*fn5 In November 1989, LeMai rejoined the Alaska lawsuit by filing the Second Amended Complaint which once again named Pace and LeMai as plaintiffs.
On April 2, 1990, LeMai disclosed to Appellants that she had filed a Chapter 7 case and provided a copy of her statements and schedules filed with her bankruptcy petition at her deposition in the Alaska lawsuit. Appellants admit that they were aware of LeMai's bankruptcy at this time, but that they ignored it because they believed this fact was not legally significant. As Strachan stated, "at the LeMai deposition, we first learned of her bankruptcy" but "I did not pursue it further; there was no need."
Shortly thereafter, the defendants in the Alaska lawsuit discovered that both LeMai and Pace had filed bankruptcy petitions and that both LeMai and Pace did not disclose the Alaska lawsuit to their respective trustees or to the bankruptcy court. The defendants in the Alaska lawsuit urged the Appellants to contact the trustees of the bankruptcy estates and inform them that the lawsuit was property of the respective bankruptcy estates. Despite the warning, Appellants did not contact the trustees. Consequently, in July 1990, the defendants in the Alaska lawsuit filed a motion with the Alaska Superior Court to substitute the trustees as the real parties in interest in the Alaska lawsuit.
Appellants opposed this motion and somehow convinced the Alaska Superior Court that the trustees had abandoned their interests in the Alaska lawsuit and were not the real parties in interest. Consequently, the Alaska Superior Court denied the motion to substitute the trustees as the real parties in interest in the Alaska lawsuit. Appellants continued to conceal the pending Alaska lawsuit from the trustees and the bankruptcy courts.
In December 1990, the defendants in the Alaska lawsuit informed the San Diego Office of the United States Trustee of the existence of the pending Alaska lawsuit. Harold S. Taxel ("trustee") was informed for the first time about the Alaska lawsuit by the United States Trustee's office by letter, dated January 16, 1991. On February 7, 1991, the bankruptcy court reopened this bankruptcy case and reappointed the trustee as trustee of the LeMai bankruptcy estate.
On February 8, 1991, the trustee informed Appellants, Strachan and Havelock, that this bankruptcy estate had been reopened and that LeMai's interests in the legal malpractice claim and the Alaska lawsuit were property of the bankruptcy estate. The trustee requested that Appellants cease prosecution of the Alaska lawsuit and informed them that any further prosecution of the Alaska lawsuit constituted a violation of the automatic stay under the Bankruptcy Code. At this time, Strachan and Havelock were clearly on notice that their actions were violative of the stay. In his letter addressed to both Havelock and Strachan, Richard C. Norton, of Estes & Hoyt P.C., (who represented the trustee, Harold S. Taxel), explained that LeMai had removed herself from the Alaska state court malpractice action; that she moved to San Diego, filed bankruptcy, and obtained a discharge; that she moved back to Alaska and amended back in as a plaintiff; and that it appeared that she intentionally left the cause of action off her schedules. In addition, the letter explained: (1) that the bankruptcy estate is comprised of all legal and equitable interests of the debtor, citing § 541; (2) that the lawsuit being asserted by Appellants was clearly included in property of the estate; (3) that any act to exercise control over this lawsuit is in violation of the automatic stay citing § 362(a)(3); and (4) that any further prosecution of the Alaska lawsuit would be a violation of the stay and could subject them to liability for damages. Nonetheless, Appellants denied that LeMai's interest in the pending Alaska lawsuit was property of the bankruptcy estate and continued to prosecute the lawsuit.
On February 13, 1991, a settlement conference was held before Judge Ripley of the Alaska Superior Court and the parties to the Alaska lawsuit reached a tentative agreement to settle the lawsuit for $300,000.00. In order to terminate their liability to the bankruptcy estates, defendants in the Alaska lawsuit would not agree to settle the lawsuit with LeMai and Pace without the trustees' approval of the settlement agreement. Consequently, Judge Ripley held a conference in his chambers with all parties to the Alaska lawsuit and their attorneys present. The attorneys for the LeMai and Pace trustees participated in this conference by telephone for purposes of approving the terms of the settlement agreement.
The trustees would not approve the settlement agreement unless the settlement proceeds were deposited into an escrow account which would not be disbursed until the LeMai and Pace trustees' claims to the proceeds were resolved. It was agreed that the trustees would have thirty (30) days to assert their claims to the settlement proceeds and that the proceeds would not be disbursed until the LeMai and Pace trustees' claims were resolved. The terms of the settlement, agreed upon by the parties to the Alaska lawsuit at the settlement conference, were announced on the record and approved by the trustees for the LeMai and Pace bankruptcy estates. The relevant terms of the settlement agreement were as follows:
1. The amount of the settlement was $300,000;
2. The $300,000 would be deposited into an interest bearing escrow account subject to the control of the Clerk of the Alaska Superior Court;
3. The trustees would have 30 days (on or before March 15, 1991) to assert a claim to the proceeds; and
4. The proceeds deposited into the escrow account would not be disbursed until the trustees' claims to the proceeds were resolved.
In accordance with the settlement agreement, on March 8, 1991, the LeMai trustee filed the instant adversary proceeding with the bankruptcy court asserting the estate's claims to the settlement proceeds. This adversary proceeding requested damages for violations of the automatic stay, and declaratory and injunctive relief with respect to the proceeds. It is this adversary proceeding that culminated in the order appealed herein.
On March 7, 1991, the escrow account was opened and settlement proceeds were deposited. On March 8, 1991, just one day after the settlement proceeds were deposited into the escrow account, Appellants filed a motion with the Alaska Superior Court to have all settlement proceeds released and disbursed to Appellants by March 15, 1991. The trustee for the Pace estate, Kenneth Battley, was never served with this motion and did not initiate further action; the trustee for the LeMai estate received this motion in San Diego on March 14, 1991, just one day before the proposed disbursement.
The LeMai trustee*fn6 immediately demanded that Appellants withdraw their request for disbursement of the settlement proceeds and informed Appellants that their request was a violation of the automatic stay and the settlement agreement. Appellants refused to withdraw the motion, describing the trustee's claims as "phony," and threatened that the trustee's counsel was increasing his "exposure" by asserting the trustee's claims to the proceeds.
Appellants' motion for disbursement of the settlement proceeds was opposed by both trustees, as well as one of the defendants in the Alaska lawsuit, as being contrary to the terms of the settlement agreement. On March 28, 1991, the bankruptcy court issued a preliminary injunction enjoining the Appellants from receiving or disbursing the settlement proceeds deposited into the escrow account during the pendency of the adversary proceeding. Consequently, the Alaska Superior Court did not grant Appellants' motion requesting disbursement of the settlement proceeds.
The Appellants filed a motion to dismiss the trustee's complaint initiating the instant adversary proceeding and to close the debtor's bankruptcy estate. The bankruptcy court never reviewed this motion because it was defective in that no hearing was requested or scheduled.
In that motion to dismiss Appellants stated the following:
There is a serious question of whether a reopened [case] carries with it an automatic stay of a claim against the debtor. There is no question that ongoing litigation on behalf of the debtor is not affected by an automatic stay. The Anchorage Superior Court did not have much trouble with the merits of that claim . . . .
Ironically, in that same motion, Appellants accused the LeMai trustee's counsel of making misrepresentations to the court and made the following threats:
In some states where an attorney misrepresents facts known to be untrue for the purpose of instigating litigation or extort a settlement is grounds for disbarment. In this case the only reason we can discern for plaintiff's counsel taking such actions is an attempt to extort a settlement, perhaps to the extent of attempting to deprive defendants Havelock and Strachan of the earned fee and expenses incurred in the Pace litigation. The undersigned believes that it is appropriate that the proceedings in this case be referred to the California Bar Association to take appropriate action.
Further, in his affidavit in support of this motion, Strachan stated: "It was my job to point out the fallacy of the argument and the trustee's misrepresentation of the statute to the court and have personal knowledge that no stay was entered."
On March 14, 1991, the trustee's counsel called Appellant, Strachan, regarding Appellants' request for release of the settlement proceeds. During this telephone conversation, Strachan threatened that if the trustee's counsel continued to prosecute the bankruptcy estate's claim to the settlement proceeds and seek damages for violation of the automatic stay, then counsel would be exposing himself to personal liability. In his letter, dated March 14, 1991, confirming his conversation with the counsel, Strachan repeated his threats.*fn7
In another letter, dated March 15, 1991, Appellants conveyed further threats and insults to the trustee's counsel.*fn8
The Appellants did not cease in their efforts to seize the settlement proceeds from the trustees before the bankruptcy court could determine the ownership of the settlement proceeds. Appellants attempted yet another method to gain control of the proceeds. On December 6, 1991, Appellants filed a Motion to Allocate Recovery with the Alaska Superior Court requesting that court to: (1) allocate the settlement proceeds between post-petition and pre-petition damages; (2) order the case reopened for purposes of determining allocation by jury; or (3) dissolve the settlement agreement. The trustees opposed Appellants' motion which the Alaska Superior Court denied.
On June 9, 1992, the bankruptcy court granted summary judgment in favor of the LeMai trustee on his complaint for attorneys' fees, costs and for declaratory and injunctive relief. The order held that the proceeds of a state court malpractice action were indeed property of the estate, and that Appellants did violate the automatic stay by their actions in prosecuting the actions and attempting to exercise control over the proceeds. The court awarded damages in the form of costs and attorneys' fees for these violations of the automatic stay against the debtor and Appellants. We AFFIRM.
1. Whether the Alaska malpractice cause of action was property of the debtor's estate protected by the automatic stay after the close of the case.
2. Whether the acts committed by the debtor's attorneys including prosecution of the underlying claims, attempting to take control of the proceeds, and other acts to obtain, were violative of the stay.
3. Whether the award of attorneys' fees and costs is appropriate.
4. Whether the trustee is an "individual" entitled to recover damages, attorneys' fees and costs for a willful ...