IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
RICK and DEBORAH WILLHITE, No. 1-87-00959
SEARS, ROEBUCK & CO.,
v. A.P. No. 1-87-0168
RICK and DEBORAH WILLHITE,
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
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
(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
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.
, 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
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
, 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 ______________________
U.S. Bankruptcy Judge
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
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