Opinion
Bap No. PR 01-035, Bankruptcy No. 00-12963-ESL
October 21, 2002
Before Feeney, Vaughn, and Kornreich, U.S. Bankruptcy Appellate Panel Judges.
Nelson Robles-Diaz, Esq. on brief for Appellant, Reliable Equipment Corp.
Carmen D. Conde Torres, Esq. on brief for Appellee, Turabo Motors Co.
Appeal from the United States Bankruptcy Court for the District of Puerto Rico (Hon. Enrique S. Lamoutte).
OPINION
INTRODUCTION
Reliable Equipment Corp. ("Reliable") appeals several orders of the United States Bankruptcy Court for the District of Puerto Rico ("Bankruptcy Court") relating to its post-petition retention of assets of the Appellee, Turabo Motors Co. ("Turabo"), seized pre-petition pursuant to a judgment by the Caguas Superior Court for the Commonwealth of Puerto Rico (the "Superior Court"). During ongoing bankruptcy and Superior Court litigation, Reliable sought to establish its right to retain the assets notwithstanding Turabo's assertion and the Bankruptcy Court's multiple orders that its retention of assets was a violation of the automatic stay. Reliable appeals the following orders of the Bankruptcy Court: (i) the March 1, 2001 order determining that Reliable violated the automatic stay, ordering Reliable to turn over the seized assets, and imposing attorneys' fees of $3,000; (ii) the April 30, 2001 order denying Reliable's motion for reconsideration of the March 1, 2001 decision; (iii) the April 30, 2001 order denying Reliable's request to disqualify the law firm of Carmen Conde Associates ("Law Firm") from representing Turabo in its corporate case; and (iv) the April 30, 2001 order denying Reliable's motion for stay of the March 16, 2001 order directing the immediate return of Turabo's assets. As more specifically set forth below, we conclude that the order denying Reliable's request to disqualify the Law Firm from representing Turabo is not a final order and that no exception to the final judgment rule confers appellate jurisdiction on this Panel. As to the other three orders, we find that we have appellate jurisdiction, and, for the reasons set forth below, we affirm the orders of the Bankruptcy Court.
In its Notice of Appeal, Reliable appeals from the "Final Order that denied Reliable's Urgent Motion in Aid of Jurisdiction Requesting Stay of Court's Order dated March 9, 2001." Although the referenced order was signed on March 9, 2001, it was entered on the docket on March 16, 2001. Therefore, we refer to said order as the "March 16, 2001 order."
BACKGROUND
A. Superior Court Proceedings.
The underlying facts of this case are not in dispute. Prior to the bankruptcy filing, Turabo purchased certain electric cars and distribution rights from Reliable. Turabo paid for the purchase with a check which was later returned by the bank for insufficient funds. As a result, Reliable commenced proceedings in the Superior Court for collection of the purchase price, and the Superior Court entered judgment against Turabo and in favor of Reliable in the amount of $425,000 on August 7, 2000. On October 4, 2000, the Superior Court authorized Reliable to execute on the judgment and authorized the appointment of Mr. Jorge del Valle as custodian of the seized property. On October 31, 2000 and November 1, 2000, Reliable executed on the judgment and seized certain inventory, vehicle parts and other assets from Turabo.
Two days later, on November 3, 2000, Carlos Torres Rodriguez and his wife, Migdalia Velazquez Lopez (collectively, the "Shareholders"), Turabo's sole shareholders, filed a Chapter 13 petition with the Bankruptcy Court. Less than two weeks later, on November 13, 2000, Turabo filed a voluntary Chapter 11 case with the Bankruptcy Court.
On February 27, 2001, Turabo filed a motion in the Superior Court requesting annulment of the attachment since the attached assets were in Reliable's possession rather than in the possession of the court-appointed custodian, Mr. del Valle. On March 2, 2001, the Superior Court set aside the attachment and ordered the custodian to return the assets to Turabo within five days (the "Turnover Order"). On March 9, 2001, Reliable filed a motion in the Superior Court alleging that the Superior Court lacked jurisdiction to enter the Turnover Order due to Turabo's bankruptcy filing, and that Turabo had violated the automatic stay by requesting that the Superior Court annul the attachment while its bankruptcy case was pending. On March 15, 2001, the Superior Court, acting upon Reliable's allegations of lack of jurisdiction, entered an order setting aside the Turnover Order. On May 16, 2001, Turabo filed a motion in the Superior Court requesting that the Superior Court sustain the Turnover Order, identifying an April 30, 2001 order of the Bankruptcy Court deferring jurisdiction to the Superior Court to determine the validity of the attachment, and finding that Turabo's request to annul the attachment was not a violation of 11 U.S.C. § 362. Thereafter, on May 22, 2001, the Superior Court entered an order reinstating the Turnover Order. On June 6, 2001, the Superior Court denied Reliable's subsequent motion for reconsideration, and on August 31, 2001, the Circuit Court of Appeals for the Commonwealth of Puerto Rico denied Reliable's request for certiorari on the grounds that the request was untimely, thus sustaining the Turnover Order.
The March 2, 2001 order provided, in pertinent part: "The stay of the proceedings of execution of judgment in this case is hereby ordered, and the order of attachment of assets is set aside. The depository shall return the attached assets to defendant in five (5) days." Appellee's Appendix at 4.
In the March 9, 2001 motion, Reliable sought the following relief:
[W]e pray that this Honorable Court:
(1) Set aside its order of 2 March, 2001.
(2) Impose sanctions on Turabo Motors Corp. and its counsel for violating the federal stay of proceedings and for having induced this court to take action in this case without having jurisdiction to do so.
Appellee's Appendix at 9.
The March 15, 2001 order provided, in pertinent part: "The order entered on 2 March 2001 is set aside. Defendant is to answer within fifteen (15) days." Appellee's Appendix at 11.
The May 22, 2001 order provided, in pertinent part: "The order entered on 13 March 2001 is set aside, and consequently, the order entered on 2 March 2001 is upheld." Appellee's Appendix at 18.
B. Bankruptcy Court Proceedings.
1. Facts Relating To Appeals Of Stay Violation Order, Denial of Motion for Reconsideration and Denial of Motion for Stay.
On November 13, 2000, Turabo filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. Shortly after the bankruptcy filing, Turabo sent a letter to Reliable requesting the return of the seized property for use in its ongoing business. Reliable refused to return the seized assets unless Turabo recognized its secured status and provided adequate protection. Turabo refused the demand for adequate protection and Reliable refused to return the property to Turabo.
Unless otherwise indicated, all references to the "Bankruptcy Code" and all references to statutory sections are to the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. § 101, et seq.
On January 9, 2001, Turabo filed a Motion Requesting Order To Expeditiously Return Assets And To Show Cause For Violation Of Automatic Stay And Illegal Seizure (the "Stay Violation Motion"), arguing the seized property was essential to its reorganization and Reliable's refusal to return the seized assets constituted a willful violation of the automatic stay. Turabo further argued the pre-petition attachment was invalid since the assets were held by Reliable rather than the custodian. Reliable opposed the Stay Violation Motion, arguing that it became a secured creditor when it legally seized Turabo's assets, and, therefore, under the Supreme Court's holding in United States v. Whiting Pools, Inc., 462 U.S. 198 (1983), was entitled to adequate protection before returning the assets. In its reply, Turabo requested sanctions against Reliable for contempt under § 105 of the Bankruptcy Code due to Reliable's failure to return the seized assets. On February 22, 2001, Turabo filed a motion requesting annulment of the attachment due to the custodian's abandonment of the assets without the Bankruptcy Court's consent.
At a March 1, 2001 hearing, the Bankruptcy Court, among other things, granted Turabo's Stay Violation Motion. According to the Bankruptcy Court, Reliable's actions in refusing to return the seized assets constituted an exercise of control over property of the estate in violation of § 362(a)(3). The Bankruptcy Court noted that although Whiting Pools is a "very strong pronouncement on the adequate protection that must be given to secured creditors," it does not defeat the automatic stay provisions of § 362(a)(3). Transcript of March 1, 2001 Hearing, Appellant's Appendix at 237. The Bankruptcy Court reasoned that Reliable should have made a request for adequate protection pursuant to §§ 363 or 362 of the Bankruptcy Code rather than "trying to impose its own terms on what adequate protection should be without requesting the Court to make a determination on the same." Id. at 238. Moreover, the Bankruptcy Court, finding that Reliable had been "obstinate" in refusing to return the property, awarded Turabo attorneys' fees of $3,000. Id. During the hearing, Reliable requested reconsideration of the decision, which the Bankruptcy Court denied. The Bankruptcy Court noted, however, that its ruling was without prejudice to any future requests for adequate protection. Id. at 239.
The Bankruptcy Court issued no memorandum of decision but articulated its findings and rulings on the record at the hearing.
The Bankruptcy Court noted the following:
Since the filing of the petition to this date, March 1, Reliable has retained and exercised control over the attached property. Has not moved the Court to lift the stay, for adequate protection, and has not moved the Court under [§] 363 to obtain adequate protection for the lien it enjoys on the pre-petition attachment. And I think those for me are the relevant facts and they are not in controversy.
Transcript of March 1, 2001 Hearing, Appellant's Appendix at 237.
The next day, on March 2, 2001, Reliable filed an emergency motion requesting a determination of adequate protection before surrendering the seized property (the "Adequate Protection Motion"). Turabo opposed Reliable's Adequate Protection Motion, arguing that Reliable's efforts to condition the return of assets on a determination of adequate protection violated the March 1, 2001 order and the automatic stay.
On March 5, 2002, Turabo filed another emergency motion requesting the immediate return of assets in compliance with the March 1, 2001 order and requesting another order of contempt. On March 7, 2001, Reliable filed a timely motion for reconsideration of the March 1, 2001 decision (the "Motion for Reconsideration") which was scheduled for hearing on April 30, 2001. On March 16, 2001, notwithstanding Reliable's pending Motion for Reconsideration, the Bankruptcy Court again ordered Reliable to immediately return the seized assets in compliance with the March 1, 2001 order. On March 26, 2001, Reliable filed an emergency motion ("Motion for Stay") requesting that the March 1, 2001 order be vacated and that enforcement of the March 1, 2001 and March 16, 2001 orders be stayed until the April 30, 2001 hearing on the Motion for Reconsideration and Adequate Protection Motion. The Motion for Stay was scheduled for hearing on April 30, 2001.
Significantly, Reliable did not file a response to Turabo's motion until March 16, 2001, the same day the Court entered an order granting the motion.
The Bankruptcy Court did not rule upon Turabo's request for additional sanctions, scheduling the issue for hearing on April 30, 2001. See Appellant's Appendix at 191.
In its Motion for Stay, Reliable argued that it "needs the aid of the jurisdiction of [the Bankruptcy Court] to stay the compliance of the Court Orders dated March 1, 2001 and March [16], 2001, because otherwise, Reliable's Reconsideration and Request for Adequate Protection, to be considered on April 30, 2001, will be moot." Appellant's Appendix at 427. Significantly, Reliable never appealed the March 16, 2001 order, nor did it request reconsideration of the March 16, 2001 order.
Multiple motions followed on the issue of Reliable's request for adequate protection, Turabo's request for return of assets in compliance with the Bankruptcy Court's orders, and Turabo's claims of annulment of the attachment.
On April 30, 2001, the Bankruptcy Court held a hearing to consider the various pending motions, including Reliable's Motion for Reconsideration and Motion for Stay of the March 16, 2001 order. At the hearing, the Bankruptcy Court denied Reliable's Motion for Reconsideration, concluding that the motion did not comply with the requirements for a motion to alter or amend judgment under Rule 59(e) since it raised new legal theories not previously argued. In addition, the Bankruptcy Court denied Reliable's Motion for Stay.
Unless otherwise indicated, all references in this opinion to "Rule 59(e)" and "Rule 60" refer to Fed.R.Civ.P. 59(e) (made applicable to bankruptcy proceedings by F.R.Bankr.P. 9023) and Fed.R.Civ.P. 60 (made applicable to bankruptcy proceedings by F.R.Bankr.P. 9024).
The Bankruptcy Court issued no memorandum of decision but articulated its findings and rulings on the record at the hearing.
2. Facts Relating To Appeal Of Disqualification Order.
On November 17, 2000, the Bankruptcy Court approved the Law Firm's application for employment as counsel for Turabo. The Shareholders were initially represented by separate legal counsel. Thereafter, on January 17, 2001, Turabo's Chapter 11 case and the Shareholders' Chapter 13 case were administratively consolidated. On March 12, 2001, upon conversion of the Shareholders' case to Chapter 11 and the withdrawal of their previous legal counsel, the Law Firm filed an application for employment as counsel for the Shareholders. The Bankruptcy Court approved the application on March 23, 2001.
On April 18, 2001, Reliable filed a motion (the "Disqualification Motion") requesting, among other things, the disqualification of the Law Firm from representing both Turabo and the Shareholders in their respective cases. At an April 30, 2001 hearing, the Bankruptcy Court found that there was a "potential conflict of interest of such an extent th[at] warrants the Court to disqualify the law firm of Carmen Conde Associates from representing the interest of the personal debtors, Carlos Torres Rodriguez and Migdalia Velazquez Torres [sic], not so in the case of Turabo Motors Corp." Appellant's Appendix at 763. During the hearing, Reliable requested reconsideration, arguing that the Law Firm had access to privileged information from the Shareholders' personal case, and, therefore, also should be disqualified from representing Turabo. The Bankruptcy Court denied the request for reconsideration, reasoning that since the Law Firm had limited involvement in the individual case, and since most of the litigation with Reliable took place in Turabo's corporate case, disqualification of the Law Firm in Turabo's corporate case was not warranted.
STANDARD OF REVIEW
Appellate courts reviewing an appeal from a bankruptcy court generally apply the clearly erroneous standard to findings of fact and de novo review to conclusions of law. See, e.g., Prebor v. Collins (In re I Don't Trust), 143 F.3d 1, 3 (1st Cir. 1998); Brandt v. Repco Printers Lithographics, Inc. (In re Healthco Int'l, Inc.), 132 F.3d 104, 107 (1st Cir. 1997); TI Fed. Credit Union v. DelBonis, 72 F.3d 921, 928 (1st Cir. 1995). The specific standards of review applicable to each order will be discussed below.
APPELLATE JURISDICTION
Before addressing the merits of this appeal, we must first determine the threshold issue of our appellate jurisdiction.
A. Final Order Analysis.
This Panel has jurisdiction to hear appeals from "final judgments, orders, and decrees" pursuant to 28 U.S.C. § 158(a)(1) or, "with leave of the court, from interlocutory orders and decrees" pursuant to 28 U.S.C. § 158(a)(3), unless one of the parties properly elects to have the district court hear the appeal. Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (B.A.P. 1st Cir. 1998). "A decision is final if it `ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'" Id. at 646 (citations omitted). An interlocutory order "`only decides some intervening matter pertaining to the cause, and which requires further steps to be taken in order to enable the court to adjudicate the cause on the merits.'" Id. (quoting In re American Colonial Broad. Corp., 758 F.2d 794, 801 (1st Cir. 1985)).
Although Reliable requested that these appeals be heard by the United States District Court for the District of Puerto Rico, the request was denied due to Reliable's failure to comply with the procedural requirements of 28 U.S.C. § 158(c)(1)(A) as implemented by F.R.Bankr.P. 8001(e) and 1st Cir. BAP R. 8001-1(d).
Generally, orders finding violation of the automatic stay and imposing sanctions are final appealable orders. See generally Washington Mutual v. Fritz (In re Fritz), 225 B.R. 218 (E.D.Wash. 1997); Zeoli v. RIHT Mortg. Corp., 148 B.R. 698 (D.N.H. 1993) (order finding violation of automatic stay and imposing attorneys' fees is final appealable order); Diviney v. NationsBank, N.A. (In re Diviney), 225 B.R. 762 (B.A.P. 10th Cir. 1998) (same). In addition, a bankruptcy court's denial of a Rule 59(e) motion is final and appealable. See Mariani-Giron v. Acevedo-Ruiz, 945 F.2d 1, 3 (1st Cir. 1991).
Denial of disqualification motions are, however, interlocutory, rather than final orders. See Continental Inv. Corp. v. Wallace, 637 F.2d 1 (1st Cir. 1980); see also In re Casco Bay Lines, Inc., 14 B.R. 846 (B.A.P. 1st Cir. 1981). Generally, interlocutory orders may be not be appealed unless they fall within the collateral order exception. The First Circuit's model for identifying collateral orders is four-pronged. To qualify as a reviewable collateral order, the order must be (1) essentially unrelated to the merits of the main dispute, (2) a complete resolution of the issue, (3) effectively unreviewable from a final judgment, and (4) involve an important and unsettled question of controlling law. Continental Inv. Corp., 637 F.2d at 4; see also Petralia v. ATT Global Info. Solutions Co., 114 F.3d 352, 354 (1st Cir. 1997). These factors have been summarized as "separability, finality, urgency and importance." Continental Inv. Corp., 637 F.2d at 5. Applying these requisites to an appeal of a denial of a disqualification motion in a reorganization proceeding, the First Circuit has held that although the separability and finality elements are clearly met, such appeals are not "urgent" for purposes of the collateral order doctrine, and seldom raise significant unsettled legal questions. Id. at 4. Therefore, such orders are not immediately reviewable. Id.; see also Casco Bay Lines, 14 B.R. at 847. Based on the foregoing, we find that we are precluded from reviewing the April 30, 2001 order denying Reliable's request to disqualify the Law Firm from representing Turabo in its corporate case.
B. Timeliness of Appeals.
Bankruptcy Rule 8002 establishes a ten-day period to appeal the judgments, orders or decrees of the bankruptcy court. Under Bankruptcy Rule 8002(b), a timely motion to alter or amend a judgment under Bankruptcy Rule 9023 (which incorporates Rule 59(e)) tolls the time for filing a notice of appeal, and the time for filing the appeal starts to run from the entry of the order denying said motion. The time limits established for filing a notice of appeal are "mandatory and jurisdictional." Yamaha Motor Corp. v. Perry Hollow Mgmt. Co., Inc. (In re Perry Hollow Mgmt. Co., Inc.), 297 F.3d 34, 38 (1st Cir. 2002) (citations omitted). If a notice of appeal is not timely filed, the bankruptcy appellate panel does not have jurisdiction over the appeal. See Colomba v. Solomon (In re Colomba), 257 B.R. 368, 369 (B.A.P. 1st Cir. 2001).
Unless otherwise indicated, all references to "Bankruptcy Rule" in this opinion refer to the Federal Rules of Bankruptcy Procedure.
Bankruptcy Rule 8002(b) provides, in pertinent part, as follows:
If any party makes a timely motion of a type specified immediately below, the time for appeal for all parties runs from the entry of the order disposing of the last such motion outstanding. This provision applies to a timely motion . . . . (2) to alter or amend the judgment under Rule 9023. . . .
Reliable filed its notice of appeal on May 10, 2001, within ten days of the Bankruptcy Court's April 30, 2001 orders denying the Motion for Reconsideration and denying Reliable's Motion for Stay of the March 16, 2001 order. Therefore, these appeals are timely and within our jurisdiction.
The more difficult question is whether Reliable timely appealed the March 1, 2001 order finding Reliable violated the automatic stay and imposing sanctions. Reliable asserts that the appeal of that order is timely because its Motion for Reconsideration extended the time period for filing a notice of appeal under Bankruptcy Rule 8002(b). Turabo argues that motion had no tolling effect because it was not considered to be a proper Rule 59(e) motion by the Bankruptcy Court.
Notwithstanding the failure of Reliable to denominate any particular rule as the basis of its Motion for Reconsideration, we will follow the well settled policy of this Circuit that a motion which asked the trial court to modify its earlier disposition of a case because of an allegedly erroneous legal result will be deemed a motion to alter or amend under Rule 59(e). See Appeal of Sun Pipe Line Co., 831 F.2d 22, 24 (1st Cir. 1987), cert. denied, 486 U.S. 1055 (1988). See also Aybar v. Crispin-Reyes, 118 F.3d 10, 14 n. 3 (1st Cir. 1997), cert. denied, 522 U.S. 1078 (1998) (regardless of how it is characterized, a post-judgment motion made within ten days of entry of judgment that questions correctness of judgment is properly construed as a Rule 59(e) motion); Feinstein v. Moses, 951 F.2d 16, 19 n. 3 (1st Cir. 1991) (although motion did not specifically invoke Rule 59(e), it was properly considered as such since it sought to set aside judgment as legally erroneous); Lopez v. Corporacion Azucarera de Puerto Rico, 938 F.2d 1510, 1513-14 (1st Cir. 1991) (motion, although characterized as one under Rule 60(b), which was served within ten days of entry of judgment and questioned correctness of judgment was considered functional Rule 59(e) motion and postponed time to appeal). See also Jimenez v. Rodriguez (In re Rodriguez), 233 B.R. 212, 218-19 (Bankr.D.P.R. 1999), aff'd, Lopez v. Lee, 2001 U.S. App. LEXIS 19034 (1st Cir. 2001) (citations omitted). We therefore can conclude that the Motion for Reconsideration was a motion under Rule 59(e) for the purpose of tolling the appeal period under Bankruptcy Rule 8002(b).
We reject Turabo's argument that the Motion for Reconsideration did not extend the appeal period because the Bankruptcy Court declined to treat it as a proper motion for two reasons. First, it is factually incorrect. It is true that the bankruptcy judge initially stated that he would not consider the motion because it was not "pled with sufficient specificity." See Appellant's Appendix at 817. But he ultimately considered and denied the motion because it presented "new legal theories" which had not been raised in the original proceedings. See Appellant's Appendix at 817-19. Second, it is not necessary that a trial court actually engage in reconsideration of a prior order for a motion for reconsideration to be considered as a Rule 59(e) motion for the purpose of tolling the appeal period. If the motion is filed within the ten-day period, it will have a tolling effect without regard to its disposition by the trial court. See Tintillo Franchise Assocs., Inc. v. Amaris Corp. (In re Amaris Corp.), 88 B.R. 13, 13-14 (D.P.R. 1988) ("[T]he filing of a motion for reconsideration interrupts the time for appealing, regardless of whether it is entertained by the court. A contrary result would leave litigants with no choice but to file within the ten-day period both a motion for reconsideration and an appeal, so that if their motion is not entertained by the court, their appeal would still be timely.").
We will therefore review both the Motion for Reconsideration and the underlying March 1, 2001 order determining that Reliable violated the automatic stay.
DISCUSSION
Motion for Reconsideration.
The Bankruptcy Court denied the Motion for Reconsideration "because it presented new legal theories" which had not been raised in the original proceeding. See Appellant's Appendix at 819. We review the April 30, 2001 order denying the Motion for Reconsideration for manifest abuse of discretion. See Sun Pipe Line Co., 831 F.2d at 25; Salem Five Cents Sav. Bank v. Tardugno (In re Tardugno), 241 B.R. 777, 779 (B.A.P. 1st Cir. 1999); Neal Mitchell Assocs. v. Braunstein (In re Lambeth Corp.), 227 B.R. 1, 7 (B.A.P. 1st Cir. 1998). Based on our review, we affirm the decisions of the Bankruptcy Court.
To meet the threshold requirements of a successful Rule 59(e) motion, the motion "must demonstrate the reason why the court should reconsider its prior decision and must set forth facts or law of a strongly convincing nature to induce the court to reverse its earlier decision." Rodriguez, 233 B.R. at 219. In order to be successful on a Rule 59(e) motion, the moving party must establish a manifest error of law or fact or must present newly discovered evidence. Id.; see also Landrau-Romero v. Banco Popular de Puerto Rico, 212 F.3d 607, 612 (1st Cir. 2000). The moving party cannot use a Rule 59(e) motion to cure its procedural defects or to offer new evidence or raise arguments that could and should have been presented originally to the court. Rodriguez, 233 B.R. at 219. Rule 59(e) motions are generally denied because of the narrow purpose for which they are intended. Id. at 220.
In its Motion for Reconsideration, Reliable sought to raise new legal theories and to rehash some of the same theories argued in the initial proceeding. Specifically, Reliable argued that the custodian of the assets was not a party to the March 1, 2001 proceedings and, therefore, should be added as an indispensable party. In a related argument, Reliable alleged it never obtained control over the assets which remained in the custodian's possession, and, therefore, could not have violated the automatic stay. Reliable also sought to revisit issues previously raised, again arguing that it was entitled to adequate protection, that its secured rights would be waived if it was forced to return the property, that Turabo lacked property rights in the assets, and that the sanctions were unreasonable.
It is clear from the record that the issues of the custodian as an indispensable party and his exclusive possession of and control over the assets were never raised in the initial proceeding. The fact that they could have been raised earlier, but were not, is also clear. There is nothing in the record indicating a change in fact or law which might have compelled the Bankruptcy Court to take another look when Reliable belatedly shifted gears to raise this defense. Inclusion of the custodian would not have changed the result. Turnover by a custodian is governed by § 543. That provision is not conditioned upon adequate protection and does not afford a mere custodian independent rights in property under his control.
Reliable has failed to show that the Bankruptcy Court misapprehended the law in denying the Motion for Reconsideration or that it improperly failed to consider the issue of the custodian. Thus, there was no manifest abuse of discretion and we deny the appeal of the April 30, 2001 order denying the Motion for Reconsideration.
Violation of the Automatic Stay.
The next issue we must decide is whether the Bankruptcy Court erred in finding that Reliable's failure to return Turabo's property in a timely manner violated the automatic stay under § 362(a)(3). A bankruptcy court's determination that the automatic stay has been violated involves a question of law that is subject to de novo review. Varela v. Quinones Ocasio (In re Quinones Ocasio), 272 B.R. 815, 822 (B.A.P. 1st Cir. 2002); see also Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969, 973 (1st Cir. 1997).
Section 362(a)(1) provides that the filing of a bankruptcy petition automatically stays all post-petition acts against a debtor and property of the debtor's estate, subject to limited exceptions. The automatic stay provides a debtor with one of the fundamental protections under federal bankruptcy law — it gives debtors "breathing room" from the pressures of their creditors. See Soares, 107 F.3d at 975. Courts "must display a certain rigor in reacting to violations of the automatic stay." Id. at 975-76.
Section 362(a)(3) expressly prohibits any post-petition actions by creditors "to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." 11 U.S.C. § 362(a)(3). Courts are divided on whether a party's knowing post-petition retention of estate property which was lawfully seized pre-petition constitutes a violation of the automatic stay. Compare STMIMA v. Carrigg (In re Carrigg), 216 B.R. 303, (B.A.P. 1st Cir. 1998), with In re U.S. Physicians, Inc., 235 B.R. 367 (Bankr.E.D.Pa. 1999). Reliable relies on one line of cases which hold that "exercising control" for purposes of § 362(a)(3) requires a more affirmative act than passively retaining possession of estate property. See, e.g., U.S. Physicians, Inc., 235 B.R. at 375-76; In re Young, 193 B.R. 620, 623-29 (Bankr.D.D.C. 1996); In re Richardson, 135 B.R. 256, 258-59 (Bankr.E.D.Tex. 1992). These courts have reasoned that since the main purpose of the automatic stay is to maintain the status quo, creditors are prohibited from disturbing the status quo, but are not required to take affirmative actions. See, e.g., Young, 193 B.R. at 624-25. According to this line of cases, the burden is on a debtor to request the return of estate property pursuant to the Bankruptcy Code's turnover provisions (such as § 542), and the creditor is justified in retaining possession until the issue of adequate protection is resolved. See id.
Other courts, including this Panel, have held that a creditor's post-petition retention of estate property constitutes "exercising control" for purposes of § 362(a)(3), regardless of whether the original seizure was lawful. See, e.g., California Employment Dev. Dep't v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147, 1152-53 (9th Cir. 1996); Knaus v. Concordia Lumber Co., Inc. (In re Knaus), 889 F.2d 773, 774-75 (8th Cir. 1989); TranSouth Fin. Corp. v. Sharon (In re Sharon), 234 B.R. 676, 682 (B.A.P. 6th Cir. 1999); In re Carrigg, 216 B.R. at 304-05. According to this line of cases, the fundamental protection provided by the automatic stay would be defeated if the burden was on the debtor to pursue the creditor which withholds estate property. See A J Auto Sales, Inc. v. United States (In re A J Auto Sales, Inc.), 223 B.R. 839, 842 (D.N.H. 1998). Thus, the duty to return property of the estate under § 542 arises upon filing of the bankruptcy petition and the failure to do so violates the automatic stay. Id.
This Panel followed the latter line of cases in In re Carrigg, supra, and we see no reason not to follow suit. By withholding possession of the assets until Turabo agreed to tender adequate protection, Reliable exercised control over Turabo's assets and over Turabo's right to possess those assets. This exercise of control violated § 362(a)(3). Therefore, the Bankruptcy Court acted well within its discretion in finding that Reliable had violated the automatic stay.
Moreover, affirmative action on Reliable's part is evidenced by its attempts to demand and negotiate terms relating to adequate protection while holding Turabo's assets hostage.
Nonetheless, Reliable wishes another chance to argue that it is a secured creditor and that, as such, it is entitled to seek adequate protection before turning over possession of the seized property. Relying on United States v. Whiting Pools, Inc., 462 U.S. 198 (1983), Reliable again defends its decision to withhold possession of Turabo's assets by arguing that a secured creditor's right to "adequate protection" includes a right to retain estate property until adequate protection is provided by the debtor. We agree with the Bankruptcy Court that Reliable's reliance on Whiting Pools is misplaced. Although Whiting Pools supports a secured creditor's right to adequate protection, it does not entitle a secured creditor to make unilateral demands for adequate protection (without requesting a determination by the court) while withholding estate property.
There is an ongoing dispute about whether Reliable is, in fact, a secured creditor. Turabo argues that the Superior Court's May 22, 2001 order renders the attachment null and void and, therefore, Reliable is unsecured. Reliable argues, however, that there was no order explicitly stating that the attachment was null and void. We do not find it necessary to address this issue here. At a hearing held on May 15, 2001, the Bankruptcy Court specifically deferred on comity principles to the Superior Court to adjudicate the validity of the attachment made by Reliable, and, as a result, held in abeyance all matters relating to Reliable's request for adequate protection and Turabo's request for annulment of the attachment until the Superior Court makes a decision on the validity of the attachment. No party has appealed this ruling.
As noted by the Bankruptcy Appellate Panel for the Sixth Circuit, there is simply no "exception" to § 362(a)(3) that excuses a creditor's refusal to deliver possession of estate property based on the creditor's subjective opinion of adequate protection. TranSouth Fin. Corp., 234 B.R. at 683. To the contrary, "§§ 541 and 542 of the Code work together to draw back into the estate a right of possession that is claimed by a lien creditor pursuant to a pre-petition seizure; the Code then substitutes `adequate protection' for possession as one of the lien creditor's rights in the bankruptcy case." Id. (citing Whiting Pools, 462 U.S. at 211-12). Therefore, if a debtor has requested the return of estate property and a secured creditor believes it is entitled to adequate protection of its pre-petition lien, the creditor must first return the property and then request the court to determine if it is entitled to adequate protection. A secured creditor's right to adequate protection simply cannot and does not trump the debtor's right to possess property of the estate. Id.
We conclude that the Bankruptcy Court did not err in finding that Reliable's retention of the seized assets constituted an exercise of control over property of the estate in violation of § 362(a)(3).
Sanctions.
Next, we must decide whether the Bankruptcy Court abused its discretion in imposing attorneys' fees of $3,000 against Reliable for violating the automatic stay. A bankruptcy court's assessment of damages for violation of the automatic stay is upheld unless it amounts to an abuse of discretion or an erroneous application of the law. Quinones Ocasio, 272 B.R. at 822; see also In re Gonic Realty Trust, 909 F.2d 624, 626 (1st Cir. 1990).
1. Section 362(h).
The Bankruptcy Code provides a debtor with remedies for violations of the automatic stay. Pursuant to § 362(h) of the Bankruptcy Code, an individual injured by any willful violation of the automatic stay is entitled to recover "actual damages, including costs and attorneys' fees, and, in appropriate circumstances, . . . punitive damages." 11 U.S.C. § 362(h). The language of § 362(h) specifically refers to "individuals" and does not, by its express terms, apply to corporate debtors. Some courts, including courts within this circuit, have upheld a strict reading of the statute. See, e.g., Maritime Asbestosis Legal Clinic v. LTV Steel Co. (In re Chateaugay Corp.), 920 F.2d 183, 184-85 (2d Cir. 1990) (plain meaning and statutory scheme of § 362(h) compel conclusion that corporations cannot evoke § 362(h)); A J Auto Sales, 223 B.R. at 844 (finding that corporations are prohibited from recovering under § 362(h)); Bankvest Capital Corp. v. Fleet Boston (In re Bankvest Capital Corp.), 276 B.R. 12, 28 (Bankr.D.Mass. 2002) ("Section 362(h) is explicit; it applies only to individuals"); American Chem. Works Co. v. International Nickel, Inc. (In re American Chem. Works Co.), 235 B.R. 216 (Bankr.D.R.I. 1999) (finding that corporate debtors are ineligible for relief under § 362(h)). Other courts, however, have found that § 362(h) applies to corporate entities as well as natural persons. See, e.g., Cuffee v. Atlantic Bus. Community Dev. Corp. (In re Atlantic Bus. Community Dev. Corp.), 901 F.2d 325, 329 (3d Cir. 1990); Pardo v. Pacificare of Texas, Inc. (In re APF Co.), 264 B.R. 344 (Bankr.D.Del. 2001). The United States Court of Appeals for the First Circuit has not addressed this issue. However, this Panel agrees with the majority view that the plain meaning and statutory scheme of § 362(h) compel the conclusion that § 362(h) was intended to afford a remedy for willful violations of the automatic stay only to individual debtors and not corporations.
2. Section 105(a)
Many courts have held that, notwithstanding § 362(h)'s applicability, § 105(a) provides bankruptcy courts with broad discretionary power to provide relief to those entities that are injured by willful violations of the automatic stay, but cannot recover under § 362(h). See, e.g., In re Del Mission Ltd., 98 F.3d at 1152; In re Chateaugay, 920 F.2d at 186-87; American Chem. Works, 235 B.R. at 220; A J Auto Sales, Inc., 223 B.R. at 844; see also Havelock v. Taxel (In re Pace), 67 F.3d 187, 193 (9th Cir. 1995); Little Pat, Inc. v. Conter (In re Soll), 181 B.R. 433, 445-46 (Bankr.D.Ariz. 1995) (citing cases). According to these courts, the automatic stay functions essentially like an injunction, and courts must have the power to sanction violations of the automatic stay under their § 105(a) contempt powers. A J Auto Sales, Inc., 223 B.R. at 844.
Section 105(a) provides that a court "may issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105(a).
Although the United States Court of Appeals for the First Circuit has not specifically addressed the bankruptcy courts' contempt powers in this context, it has acknowledged their power to sanction, stating as follows:
It is well-settled law that bankruptcy courts are vested with contempt power. . . . Bankruptcy Rule 9020(b) specifically provides that a bankruptcy court may issue an order of contempt if proper notice of the procedures are given. . . . Sanctions in a civil contempt proceeding are employed to coerce the defendant into compliance with the court's order or, where appropriate, to compensate the harmed party for losses sustained. . . . These sanctions are not punitive, but purely remedial.
Eck v. Dodge Chem. Co. (In re Power Recovery Sys., Inc.), 950 F.2d 798, 802 (1st Cir. 1991) (emphasis added).
Section 105(a) empowers the bankruptcy court to exercise its equitable powers — where `necessary' or `appropriate' — to facilitate the implementation of other Bankruptcy Code provisions. . . . While it is true that the considerable discretion conferred on courts sitting in bankruptcy by § 105 is not unlimited, in that it is not `a roving commission to do equity,' a court is well within its authority if it exercises its equitable powers to enforce a specific code provision. Thus, § 105 does not itself create a private right of action, but a court may invoke § 105(a) `if the equitable remedy utilized is demonstrably necessary to preserve a right elsewhere provided in the Code,' . . . It follows, therefore, . . . that § 105 provides a bankruptcy court with statutory contempt powers, in addition to whatever inherent contempt powers the court may have. Those contempt powers inherently include the ability to sanction a party.
Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 444-45 (1st Cir. 2000) (citations omitted), cert. denied, Textron Funding Corp. v. Bessette, 532 U.S. 1048 (2001).
Therefore, since § 362 of the Bankruptcy Code protects debtors by imposing an automatic stay of certain post-petition actions by creditors, it follows that § 105(a) allows the Bankruptcy Court to impose monetary sanctions in order to enforce this provision of the Bankruptcy Code.
Moreover, it is undeniable that Reliable's stay violations were "willful" under our circuit's precedent. See Fleet Mortgage Group, Inc. v. Kaneb, 196 F.3d 265, 268-69 (1st Cir. 1999); In re Carrigg, 216 B.R. at 304-05 (creditor's refusal to voluntarily turn over estate property to the debtor after it had notice of bankruptcy constitutes a willful violation of the stay).
A good faith belief in a right to property is not relevant to a determination of whether the violation was willful. A willful violation does not require a specific intent to violate the automatic stay. The standard for a willful violation of the automatic stay under § 362(h) is met if there is knowledge of the stay and the defendant intended the actions which constituted the violation. In cases where a creditor received actual notice of the automatic stay, courts must presume that the violation was deliberate.
Fleet Mortgage Group, Inc. v. Kaneb, 196 F.3d at 268-69.
As the facts demonstrate, Reliable had knowledge of the bankruptcy and it intentionally refused to return the assets to Turabo after the Bankruptcy Court ordered return of the assets. Based on the violation of the stay and court order, the Bankruptcy Court acted well within its discretion under § 105(a) in awarding attorney's fees of $3,000 to Turabo. The Bankruptcy Court's factual findings are supported by the record and do not engender a "definite and firm conviction that a mistake has been made." Quinones Ocasio, 272 B.R. at 824. Therefore, we affirm the Bankruptcy Court's award of sanctions for violation of the automatic stay and deny the appeal.
Order Denying Reliable's Motion for Stay of March 16, 2001 Turnover Order.
As set forth above, on March 5, 2001, Turabo filed an emergency motion requesting the immediate return of assets in compliance with the March 1, 2001 order. On March 9, 2001, the Bankruptcy Court signed an order granting the motion. Reliable filed an opposition to the motion on March 16, 2001, and, on the same day, the order granting the motion was docketed (the "March 16, 2001 order"). Reliable did not timely appeal or specifically request reconsideration of the March 16, 2001 order. Instead, on March 26, 2001, Reliable filed its Motion for Stay seeking to vacate the March 1, 2001 order and to forestall compliance with that order and the March 16, 2001 order. As grounds Reliable stated that the Motion for Reconsideration and Adequate Protection Motion would be deemed moot once the assets had been returned. At the April 30, 2001 hearing, the Bankruptcy Court denied Reliable's Motion for Stay without discussion. We affirm.
Generally, an order is enforceable from the moment it is entered unless it is stayed pending appeal pursuant to Bankruptcy Rule 8005. Hospital Univ. Prop. Damage Claimants v. Johns-Manville Corp. (In re Johns-Manville Corp.), 7 F.3d 32, 35 (2d Cir. 1993). To have properly taken or preserved an appeal of the March 16, 2001 order, Reliable could have filed, within ten days of the entry of that order, either a notice of appeal under Bankruptcy Rule 8002(a), a motion for relief under Bankruptcy Rule 8002(b), or a request to extend the appeal period under Bankruptcy Rule 8002(c)(2). Reliable did none of these things and, therefore, exhausted its procedural remedies for seeking appellate review of the March 16, 2001 order.
There was no abuse of discretion in the denial of the Motion for Stay for all of the reasons set forth in Section II above.
CONCLUSION
Accordingly, we AFFIRM the following orders: (1) the March 1, 2001 order determining that Reliable violated the automatic stay; (2) the April 30, 2001 order denying Reliable's Motion for Reconsideration of the March 1, 2001 decision; and (3) the April 30, 2001 order denying Reliable's Motion for Stay of the March 16, 2001 order granting Turabo's request for the immediate return of assets.
The order of April 30, 2001 denying Reliable's request to disqualify the law firm of Carmen Conde Associates is interlocutory, is not now subject to review, and that portion of the appeal is dismissed.