Memorandum of Decision Re: Rule 11 Sanctions

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re RICK and DEBORAH WILLHITE,                                       No. 1-87-00959      Debtors. __________________________/ SEARS, ROEBUCK & CO.,      Plaintiff,    v.                                                                                      A.P. No. 1-87-0168 RICK and DEBORAH WILLHITE,      Defendants. ____________________________/
Supplemental Memorandum of Decision
     On March 7, 1988, the Court issued its decision to render judgment in favor of the debtors because the undisputed facts showed that the debtors had committed no culpable act which might render the debt nondischargeable and because as a matter of law Sears was limited to in rem rights against its collateral. his supplemental memorandum concerns sanctions against Sears for commencing and prosecuting a meritless case.      The complaint filed by Sears in this matter prays that the debt owed to it by the debtors be declared nondischargeable. It was filed four days before the deadline for filing dischargeability actions pursuant to Bankruptcy Rule 4007(c). Despite these facts, Sears now takes the position that the action was not a dischargeability action brought pursuant to section 523(c) of the Bankruptcy Code and Rule 4007(c), but rather a replevin action which Sears says it was entitled to bring.      If the action is not a dischargeability action, then the acts of praying for such relief and filing the action during the brief time allowed for the commencement of nondischargeability actions are themselves sanctionable conduct. A dischargeability action is of much greater concern to a debtor than mere loss of a refrigerator, as a nondischargeable judgment lessens or perhaps entirely negates the benefits of the bankruptcy. It also requires a much more vigorous defense, thereby causing him to incur significant legal expenses at a time when he can least afford them. If Sears did not intend the action to be a dischargeability action, then it included the prayer regarding dischargeability merely to scare the debtors into quickly settling and surrendering their rights. Such a purpose is clearly improper and alone justifies the imposition of sanctions pursuant to Bankruptcy Rule 9011. Sears' argument that the dischargeabilty prayer was the unauthorized act of a maverick local counsel may have bearing on the amount of the sanctions, but Sears must stand responsible for the acts of its chosen counsel.      Assuming for the sake of argument that the action is, as Sears now asserts, a replevin action and not a dischargeability action (and setting aside the propriety of a replevin action after a Chapter 7 filing), Sears advances no reason why it should not be sanctioned pursuant to section 362(h) of the Code for violation of the automatic stay.      When questioned by the Court over a year ago in a prior case about the justification for bringing a replevin action against the debtors while the automatic stay was in effect, counsel for Sears responded with a letter stating that "Section 362(a) operates as a stay of all process against the debtor outside the bankruptcy court (emphasis added)." The parenthetical remark is Sears' counsel's, not the Court's. If the Code read this way, Sears would be entirely justified. However, the words "outside the bankruptcy court" are not in the law, nor should they be implied as Sears now argues.      As this Court has previously noted, the Bankruptcy Code is to be interpreted as a unified statute; it is not a violation of the automatic stay to bring an action authorized by the Code itself. 2 Collier on Bankruptcy(15th Ed.) sec. 362.02, p. 362-27; In re Hodges , 83 B.R. 25. However, this exception to the scope of the automatic stay is not to be interpreted broadly. The Court of Appeals has recently reiterated that exceptions to the automatic stay are to be interpreted narrowly in favor of the debtor in order to secure the broad relief granted to debtors by the Code. In re Stringer II (9th Cir.1988) -- F.2d --, 88 Daily Journal D.A.R. 6516, 6517. While this Court is willing to find an implied exception to the automatic stay for actions authorized by the Code, Stringer II does not allow an interpretation so broad as to permit any sort of action as long as it is filed in the bankruptcy court.      The purpose of the automatic stay was set forth clearly in Stringer II:
       The automatic stay is one of the fundamental debtor        protections provided in the bankruptcy laws. It        gives the debtor a breathing spell from his credi-        tors. It stops all collection efforts, all harass-        ment, and all foreclosure actions. It permits the        debtor to attempt a repayment or reorganization plan,        or simply to be relieved of the financial pressures        that drove him into bankruptcy.
     That purpose is not served by allowing any sort of action to be brought against a debtor so long as it is commenced in the bankruptcy court. How can the automatic stay be said to stop all foreclosure actions if, as Sears interprets the law, a foreclosure action can be commenced as long as it is filed in bankruptcy court? The "breathing spell" lasts a scant 90 days or so, from the filing of the petition to the entry of discharge pursuant to section 362(c)(2)(C). The Court declines to gut this brief protection by agreeing to Sears' interpretation of the law, especially where leave is readily obtained in meritorious cases by the filing of a simple motion for relief from the stay.      The bringing of a motion for relief from the automatic stay is not a meaningless or minesterial act which can be dispensed with merely by suing the debtor in bankruptcy court. The motion is an acknowledgement that the debtor has a statutory breathing spell, and that only the bankruptcy court, for cause, can shorten the grace period before the debtor must again confront legal problems. It is the bankruptcy court alone which decides what actions a debtor will have to answer to before his respite is over. By suing the debtors here without bankruptcy court permission, Sears has unlawfully usurped the bankruptcy court's power. It is no defense to say that the act is excepted because the debtors were sued in bankruptcy court; they were still forced to hire an attorney and defend an action brought without court permission.      This is hardly the first time Sears has been questioned by the Court about its policies. As early as January of 1987, the Court declined to issue a default judgment on an identical complaint and stated its reasons for its refusal. When Sears persisted in filing the same actions in numerous cases, the Court prepared a written opinion in In re Penney, 76 B.R. 160, decided July 27, 1987. In that case, the Court assessed attorneys' fees of about $1,000.00 as sanctions against Sears.      After Penney, Sears continued to file the same complaints. When the Court asked Sears' counsel at the first status conference in this matter why Sears did not appeal the Penney decision, he answered that Sears did not think the matter was worth appealing. Sears now denies that this was the true reason for not appealing, and instead says that it did not appeal because it did not receive timely notice of the entry of judgment. However, this argument is far from convincing. While it is true that the clerk of the court did not give notice as he should have, the debtor's counsel gave notice 17 days after entry. Thus, Sears still had 13 days to seek an extension of the time to appeal pursuant to Bankruptcy Rule 8002(c). Sears had received both the memorandum of decision and the proposed form of judgment weeks before; if it had intended to appeal, it could have been fully prepared. The Court received no such request for an extension of time, which it would have granted, and there is no evidence that Sears prepared in any way to appeal. Sears' lack of pursuit of its appeal rights after Penney makes it difficult for the Court to find that subsequent identical suits were brought in good faith.      While it is not strictly necessary to a determination in this case to discuss the propriety of a replevin action against the debtor after discharge, the Court will once more outline what it perceives as the problems with such an action.      Section 524(a)(2) of the Code enjoins any act to collect a discharged debt as a personal liability of the debtor. As discussed in the Court's prior memorandum in this case, this leaves Sears only with an in rem action to recover its collateral. For Sears to recover a personal judgment against the debtor, it must show some postfiling act of the debtor to damage or convert its 1collateral. Sears cannot file its replevin action in good faith because it does not allege such postpetition conduct, but only that the collateral was not returned to Sears. There are many innocent reasons why collateral may not be returnable, but even intentional destruction does not justify a replevin action if the destruction occurred prepetition and Sears did not bring a timely action to determine the dischargeability of the debt.      Based on the foregoing, the Court will find Sears subject to sanction pursuant to both section 362(h) of the Bankruptcy Code and 2Bankruptcy Rule 9011. The Court believes Sears' assertions that the acts taken by its counsel in this district were not authorized by the Sears home office, and will accordingly not base the sanctions on Sears' income. However, since no attempt was made to appeal Penney, the Court feels that it must up the ante in order to encourage Sears to either modify its practices or obtain judicial approval of its conduct. Accordingly, the Court will order Sears      Counsel for the debtors shall submit an appropriate form of judgment.
Dated: June 28, 1988                                                                              ______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy Judge
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     1. Since the debtor's obligations under the contract are discharged, such an action would have to sound only in tort. Hence, attorneys' fees would not be awardable based on the contract. Nor can Sears in good faith bring a replevin action without knowing the reason for nonreturn of its collateral and expect to obtain a valid personal judgment against the debtor. Any judgment, whether rendered before or after discharge, is void pursuant to section 524(a)(1) if it is based on a discharged debt. The debtor may safely ignore the lawsuit and seek sanctions if an attempt is made to enforce any resulting judgment. 3 Collier on Bankruptcy (15th Ed.), sec. 524.01, p. 524-9. Sears can easily determine what happened to its collateral by examining the debtor pursuant to Rule 2004, and therefore cannot escape sanction by assuming that postpetition wrongdoing is involved every time it does not receive its collateral or a reaffirmation of the debt.
      2. Sears argues that the holding in In re Sequoia Auto Brokers Ltd., Inc. (9th Cir.1987) 827 F.2d 1281, denies this court the power to assess sanctions. However, that case only held that the bankruptcy court has no inherent contempt power. The Court here awards sanctions based on the express powers given to it by section 362(h) of the Code and Bankruptcy Rule 9011. to pay the debtors the sum of $10,000.00, plus their reasonable attorneys' fees and costs