IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
FOODSOURCE, INC., No. 1-84-00703
_________________________/ R.S. #88-7
FOODSOURCE SALES CORPORATION, No. 1-84-00869
Memorandum of Decision
Before their bankruptcies, the debtors manufactured long-distance shipping containers and marketed
them to investors. Containers were sold either as a whole or fractionally to various investors at a price
of $260,000.00 per container. The terms were generally ten to twenty percent down in cash, and the
balance in the form of a long-term promissory note secured by the container. The debtors were to manage
the container and apply the income derived to the note.
Although the purchase price greatly exceeded the value of the containers, the debtors represented to
the investors that significant tax benefits would result from their purchase. At least some of these benefits
have apparently been disallowed by the Internal Revenue Service.
Moving parties have filed two adversary proceedings in the Bankruptcy Court. In those adversary
proceedings, movants seek to resolve disputes as to their rights in the containers or the proceeds of their
sale, their liability on the notes, and whether they are entitled to damages due to the debtors' alleged fraud.
Movants conceded at oral argument that as to the damages claim they only seek a determination of their
unsecured claims, and do not actually seek a money judgment against the estate.
The Trustee has taken the position that the automatic stay prohibits prosecution of the two actions,
even in Bankruptcy Court. The moving parties argue that the stay does not apply, but that if the Court
finds otherwise that the stay should be modified so as to permit them to proceed with the adversary
proceedings. This is the sole issue now before the Court.
Although there is little authority to support the point, it seems logical and consistent with the literal
wording of section 362(a) that the automatic stay does prohibit certain kinds of actions from being
commenced or prosecuted even in the bankruptcy court itself. For instance, a creditor ought not be able
to use the bankruptcy court to sue the debtor for money owed on a dischargeable prepetition debt. See,
e.g., In re Penney
(Bkrtcy. N.D.Cal.1987) 76 B.R. 160, 161.
A different situation arises when a party seeks a declaration of his rights against the estate. Numerous
provisions of the Bankruptcy Code deal with ownership of property or the validity of a lien or interest in
estate property. See, e.g., section 506(a), 542, 543, and 725. Nothing in the wording of section 362(a)
appears to bar declaratory type actions under these sections. As long as such an action is not against the
debtor personally, and does not seek to obtain estate property or create, perfect or enforce a lien on estate
property, but rather only seeks a determination as to whether
the property belongs to the estate or to what
the claimant has an interest in such property, the automatic stay does not apply.
The only part of section 362 which supports the Trustee's position at all is subsection (a)(4), which
prohibits an act to obtain property from the estate. If it were proper to read this statute in a vacuum, the
Court might be justified in ruling in favor of the Trustee. However, the Bankruptcy Code is to be read
as an integrated statute; the consideration of related statutory provisions is important to an understanding
of the Code's treatment of stays of creditor action. 2 Collier on Bankruptcy
(15th Ed.) sec. 362.02, p.
362-27. Read in conjunction with the other sections of the Bankruptcy Code, it is clear that section
362(a) is designed to prevent piecemeal and inequitable dissipation of the debtor's estate and actions
having the effect of thwarting the debtor's ability to reorganize. Where an action commenced in
bankruptcy court is consistent with other sections of the Bankruptcy Code and does not seek relief
inconsistent with the rights of other parties under the Code, section 362(a) should not be read as staying it.
Applying the above principles, section 362(a) does bar actions by creditors seeking to liquidate claims.
It is clearly inconsistent with the scheme of bankruptcy procedure set down by Congress to allow a
creditor to bring a lawsuit to fix the amount of his claim. Section 501(a) of the Code establishes that a
claim against the estate is made out by the filing of a proof of claim. Section 502(a) provides that such
a claim is deemed allowed unless there is an objection. The reason for this procedure is obvious; there
should be no expenses incurred in litigating the allowability of a claim before it is known if there are funds
available to pay at least part of the claim if it is allowed.
For the foregoing reasons, the Court determines that the automatic stay does not prohibit movants
from bringing an action in bankruptcy court seeking possession of a container or the proceeds of its sale
on the grounds that it is not an asset of the estate. Whether the Court can for good cause suspend such
an action pursuant to the Code, 28 U.S.C. section 1334, or the Bankruptcy Rules is not before the Court.
Regardless of the extent to which the automatic stay applies, movants will not be permitted to raise
or litigate the allowability of their unsecured claims or the extent of their liability on the notes unless such
issues are raised by the Trustee by way of counterclaim or affirmative defense. Even then, such issues may
not be litigated beyond the extent necessary to determine who owns the containers or proceeds of their
Counsel for movants shall prepare and submit a form of order consistent with this decision, which
counsel for the Trustee shall approve as to form.
Dated: February 15, 1988 ___________________________