JAMES K. COACHYS, Bankruptcy Judge.
This matter comes before the Court on Defendant Trustees of Indiana University's ("Defendant") Motion for Summary Judgment on Plaintiff/Debtor Scott Ian Richardson's ("Debtor") First Amended Complaint for Willful Violation of Stay (the "Amended Complaint"). Having reviewed the parties' respective briefs and submissions, the Court hereby holds that Debtor is barred by the doctrine of judicial estoppel from asserting a claim for damages under 11 U.S.C. § 362(k)(1). However, the Court also holds that the underlying state court judgment at issue in this proceeding is invalid as having been issued in violation of the automatic stay.
1. Debtor incurred a debt, in the nature of a student loan, to Defendant in 1988 (the "Debt").
2. In May of 1998, Defendant filed a complaint in Monroe Circuit Court, Cause No. 53C04-9805-CP-733, against Debtor regarding the Debt (the "State Action").
3. The Monroe Circuit Court scheduled the complaint for a bench trial on September 7, 2000.
4. Debtor filed a voluntary petition for bankruptcy under Chapter 7 on September 1, 2000. Defendant was listed as a creditor in the bankruptcy and received notice of the bankruptcy sometime on or after September 9, 2000, the date on which this Court issued notice of the first meeting of creditors.
5. Defendant appeared at the bench trial on September 7, 2000; Debtor did not.
6. On September 12, 2000, the Monroe Circuit Court entered a judgment in favor of Defendant and against Debtor (the "Judgment") in the amount of $1,071.46, plus attorney fees of $502.72 and costs.
7. After entry of the Judgment, Debtor's bankruptcy counsel sent a letter to Defendant seeking to settle the Judgment for a lump sum. The letter referenced that the Judgment was entered despite the automatic stay but did not indicate that Debtor intended to have the Judgment set
8. Debtor received a discharge on May 3, 2001. The bankruptcy case was closed on February 26, 2002.
9. On June 24, 2001, Defendant filed a Verified Motion in Proceedings Supplemental in the State Action in an attempt to collect the Judgment. Debtor eventually moved to have the Judgment set aside (the "Motion to Set Aside"), arguing that the Judgment had been entered in violation of the stay. Debtor claims, and Defendant does not dispute, that he did not receive notice of the hearing for the Motion to Set Aside and that he, therefore, did not appear. He also claims, and Defendant does not dispute, that he did not receive notice of the order issued by the state court denying his requested relief.
10. Notwithstanding the fact that he did not receive the order on his Motion to Set Aside, Debtor assumed that the motion had been granted given the nature of, and reason for, the relief requested therein.
11. Debtor filed a Chapter 13 bankruptcy petition on January 29, 2002. At the time he initiated the case, he was still under the belief that the Judgment had been set aside. He, therefore, did not schedule or disclose any claim against Defendant, e.g., for violation of the automatic stay, as an asset of his bankruptcy estate.
12. Defendant filed a proof of claim on February 8, 2002. The proof of claim reflects that Defendant obtained the Judgment on September 12, 2000, and a copy of the Judgment is attached to the proof of claim.
13. Debtor received a Chapter 13 discharge on April 10, 2007. The case was closed on October 4, 2007.
14. On April 20, 2007, and May 1, 2007, Defendant filed a motion for proceedings supplemental and a motion for writ of attachment in the State Action. On October 23, 2007, Debtor sent a letter to Defendant insisting that the Judgment was taken in violation of the stay and requesting that Defendant set aside the Judgment. Debtor indicated that he intended to "file a claim for damages, based on [Defendant's] actions of violating the Federal Bankruptcy Stay." On December 6, 2007, Debtor moved to vacate the writ of attachment issued in the State Action and, at a March 13, 2007 hearing, indicated that he intended to file a motion to set aside the Judgment. He did not file such motion, nor did he appear at any subsequent hearings.
15. On March 29, 2011, Defendant filed a Verified Motion for Proceedings Supplemental in the State Action.
16. On May 11, 2012, Debtor moved to reopen his Chapter 7 case. Such request was granted on May 15, 2012. Debtor then filed a complaint and, eventually, an amended complaint (the "Amended Complaint") against Defendant seeking damages under 11 U.S.C. § 362(k)(1)
17. On July 23, 2012, Defendant moved for dismissal of the Amended Complaint under Federal Rule of Bankruptcy Procedure 7012 and Federal Rule of Civil Procedure 12(b)(6), arguing that Debtor had failed to state a cause of action upon which
18. On December 1, 2012, Debtor filed a Verified Emergency Motion for Order Declaring Judgment Obtained in Violation of the Automatic Stay Void. The Court denied the motion, finding that the request was inextricably entwined in Debtor's Amended Complaint and would be addressed as such. The Court also ordered the parties to mediate their dispute. Per a mediator's report filed in February of 2012, the mediation did not lead to a resolution of the parties' dispute.
19. Defendant then moved for summary judgment, arguing that (1) Debtor's stay violation claim is barred by laches and/or judicial estoppel; and (2) that because the Judgment is merely voidable, not void, Debtor cannot as a matter of law establish a "willful" violation of the stay.
20. Defendant has never asked for, nor obtained, retroactive relief from, or annulment of, the stay pursuant to Code § 362(d).
1. The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). The parties have consented to this Court's entry of a final judgment.
2. As set forth above, Defendant argues on summary judgment that because the Judgment is merely voidable, Debtor cannot as a matter of law establish a "willful" violation of the stay. That argument encompasses the penultimate issue the Court must decide in this proceeding, i.e., whether the Judgment is void or merely voidable.
3. Section 362(a)(1) provides in relevant part that a bankruptcy petition "operates as a stay, applicable to all entities, of the commencement or continuation of a judicial ... action or proceeding against the debtor." Here, the trial that took place in the Monroe Circuit Court on Defendant's action against Debtor and the resulting Judgment were a continuation of a judicial proceeding against Debtor and, as such, constitutes a violation of the automatic stay. The fact that Defendant did not learn of the bankruptcy case until after entry of the Judgment does not alter that result.
4. The circuit courts are split as to whether actions taken in derogation of
5. The Seventh Circuit has said that actions taken in violation of the stay are generally void, see Matthews v. Rosene, 739 F.2d 249, 251 (7th Cir.1984) (interpreting statutory predecessor of § 362). However, in recognizing the void-versus-voidable split among the circuits, it has declined opportunities to formally and conclusively decide the issue. See Middle Tenn. News Co., Inc. v. Charnel of Cincinnati, Inc., 250 F.3d 1077, 1082 n. 6 (7th Cir.2001). Thus, in the absence of a clear directive from the Seventh Circuit, this Court must look outside the circuit to determine the legal effect of the Judgment.
6. In reviewing the numerous opinions on the issue, the Court finds the Ninth Circuit's reasoning and conclusion, as expressed in Schwartz v. United States (In re Schwartz), 954 F.2d 569 (9th Cir.1992) to be particularly compelling. As support for its holding that actions taken in violation of the stay are void, not voidable, Schwartz enunciated the following rationale:
In re Schwartz, 954 F.2d 569, 571-72 (9th Cir.1992).
7. Schwartz further observed that "[t]he courts that have found the automatic stay voidable rather than void have relied primarily on §§ 362(d) and 549 of the Code, reasoning that a court's power to annul the automatic stay and the trustee's duty under § 549 to void an unauthorized post-petition transfer are inconsistent with violations of the stay being void." Id. at 572 (citing Sikes v. Global Marine, Inc., 881 F.2d 176, 178-79 (5th Cir.1989) and In re Oliver, 38 B.R. 245, 248 (Bankr.D.Minn. 1984)). In finding such reasoning "erroneous," the Schwartz court explained:
Id. at 572-574. On this logic, Schwartz concluded that actions taken in violation of the stay are void, not voidable. See also LaBarge v. Vierkant (In re Vierkant), 240 B.R. 317 (8th Cir. BAP 1999) (quoting extensively from Schwartz in reaching same conclusion).
8. Of course, the Schwartz court is not without its detractors. In holding that actions taken in violation of the stay are merely "voidable," the Sixth Circuit in Easley v. Pettibone Michigan Corp., 990 F.2d 905 (6th Cir.1993), took issue with Schwartz's statement that the burden should not be on debtors to invalidate actions taken in violation of the stay, stating:
Id. at 910.
9. The Court disagrees with Easley in this regard. Placing the burden on the debtor to take some affirmative action to void or invalidate a stay violation flies in the face of the primary purpose of the automatic stay. For some debtors, taking any action — no matter how seemingly routine — is burdensome, financially and emotionally. In this Court's opinion, it is much more equitable, and in keeping with
10. The Court also disagrees with Easley to the extent the court seemingly ignored the impact of its holding on other creditors. The automatic stay serves to protect not just debtors, but creditors as well. See Martin-Trigona v. Champion Federal Sav. and Loan Ass'n, 892 F.2d 575, 577 (7th Cir.1989) ("The fundamental purpose of bankruptcy, from the creditors' standpoint, is to prevent creditors from trying to steal a march on each other ... and the automatic stay is essential to accomplishing this purpose.") (citations omitted). That purpose is not served particularly well in those jurisdictions that burden the debtor with invalidating stay violations or, as Easley suggests, by seeking invalidation outside of the bankruptcy court. What if a debtor lacks the resources or inclination to invalidate a judgment taken in violation of the stay? What if the debtor fails to convince a state court to invalidate an action taken in violation of the stay? In such instances, the debtor's remaining creditors are likely given no notice that the stay was violated and are given no opportunity to be heard on the matter in the event the stay violation helped the offending creditor improve its position at the expense of other creditors.
11. In this Court's opinion, it is far preferable for such matters to be adjudicated before the bankruptcy court, and the best way to guarantee that is to hold that actions taken in violation of the stay have no legal effect unless and until a creditor seeks retroactive relief from the bankruptcy court pursuant to Code § 362(d) to validate the otherwise invalid act.
12. The Court does agree with Easley in its opposition to use of the word "void" to describe the legal effect of actions taken in violation of the stay. The court explained:
Easley, 990 F.2d at 909. Like Easley, this Court prefers the word "invalid" over
13. Even though the Court concludes that the Judgment is invalid, it does not necessarily follow that Debtor is entitled to damages pursuant to 11 U.S.C. § 362(k)(1). Defendant argues on summary judgment that Debtor's stay violation claims are barred by the doctrines of laches and judicial estoppel. As explained below, the Court disagrees with Defendant's laches defense but agrees that Debtor is judicially estopped from asserting his claims under § 362(k)(1).
14. In order for laches to apply in a case, the party asserting the defense must establish two elements: (1) an unreasonable lack of diligence by the party against whom the defense is asserted; and (2) prejudice arising from the delay. Smith v. Caterpillar, Inc., 338 F.3d 730, 733 (7th Cir.2003); Morlan v. Universal Guar. Life Ins. Co., 298 F.3d 609, 620 (7th Cir.2002); Hot Wax, Inc. v. Turtle Wax, Inc., 191 F.3d 813, 820 (7th Cir.1999). A defendant is prejudiced from delay in asserting a claim where the defendant has changed its position in a way that would not have occurred if the plaintiff had not delayed. Hot Wax, 191 F.3d at 824.
15. In response to Defendant's argument, Debtor insists that Defendant cannot invoke laches because of Defendant's hands are "unclean."
16. It is true that a party's unclean hands may stand as an obstacle to the application of the doctrine of laches in certain circumstances. The notion of unclean hands working as a bar to the application of laches stems from the belief that an equitable defense, such as laches, cannot be used to reward a party's inequities or to defeat justice. See Precision Inst. Mfg. Co. v. Automotive Maintenance Mach. Co., 324 U.S. 806, 814, 65 S.Ct. 993, 89 L.Ed. 1381 (1945) (unclean hands "closes the doors of a court of equity to one tainted with inequitableness or bad faith relative to the matter in which he seeks relief"). However, the Court need not reach that issue. In the Court's view, Defendant was not prejudiced by Debtor's delay in asserting a claim for violation of the stay. It is true that because the Court has deemed the Judgment invalid, Defendant will have to return to state court to further pursue its claims against Debtor for breach of their lending agreement. In that sense, Defendant will be inconvenienced, if not prejudiced.
17. Defendant, however, is solely responsible for such prejudice. Defendant — seemingly aware of the conflicting case law on the validity of actions taken in violation of the stay — decided to rest on its Judgment for all these years. Defendant
18. Based on the foregoing, the Court is unwilling to apply the equitable doctrine of laches in Defendant's favor.
19. While Defendant's laches argument is unavailing, the Court agrees that Debtor is judicially estopped from asserting his claims under Code § 362(k)(1) because he did not disclose the them in his 2002 Chapter 13 bankruptcy case.
20. In Cannon-Stokes v. Potter, 453 F.3d 446, 448 (7th Cir.2006), the Seventh Circuit held that a Chapter 7 debtor was judicially estopped from pursuing a claim that she waited to file until after her debts were discharged and the bankruptcy was over. The court agreed with a number of other circuits that "a debtor in bankruptcy who denies owning an asset, including a chose in action or other legal claim, cannot realize on that concealed asset after the bankruptcy ends." Id.; Biesek v. Soo Line R.R. Co., 440 F.3d 410, 412 (7th Cir.2006) ("Plenty of authority supports the district judge's conclusion that a debtor in bankruptcy who receives a discharge (and thus a personal financial benefit) by representing that he has no valuable choses in action cannot turn around after the bankruptcy ends and recover on a supposedly nonexistent claim."). Thus, in the bankruptcy context, judicial estoppel precludes a party from representing in bankruptcy that it has no outstanding claims, and then — after the bankruptcy is discharged or dismissed asserting the undisclosed claims for the party's own benefit.
21. Subjective intent is relevant to the question of judicial estoppel. See New Hampshire v. Maine, 532 U.S. 742, 750, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001) (noting that it may be "appropriate to resist application of judicial estoppel when a party's prior position was based on inadvertence or mistake"); In re Cassidy, 892 F.2d 637, 642 (7th Cir.1990) ("[Judicial estoppel] should not be used where it would work an injustice, such as where the former position was the product of inadvertence or mistake."); but see Becker v. Verizon North, Inc., 2007 WL 1224039, at *1 ("Becker intimates that her failure to disclose this lawsuit in her sworn financial statement was unintentional, but her subjective intent does not matter.").
22. In defense of Defendant's judicial estoppel argument, Debtor maintains that he did not list any cause of action against Defendant in his Chapter 13 bankruptcy because he assumed that the Judgment had been set aside upon his motion to the state court. As previously indicated, Debtor insists that he did not receive notice of the hearing on the Motion to Set Aside or on the court's eventual ruling.
23. While those facts are seemingly not in dispute, the Court cannot conclude that Debtor's failure to disclose a claim against Defendant in his Chapter 13 bankruptcy was borne out of "inadvertence" or "mistake." In the Court's opinion, Debtor — a practicing attorney at all times relevant to this proceeding — should have taken steps to verify the disposition of his Motion to Set Aside, and his assumption that it was
24. It is also significant that Defendant filed a proof of claim in Debtor's Chapter 13 case that not only referenced the Judgment, but also included it as an attachment. That should have sufficiently alerted Debtor to the fact that Defendant, in the very least, was still pursuing, not just the underlying debt, but the Judgment as well. Debtor could have, at that point in time, amended his schedules to include a claim for stay violation against Defendant.
25. The Court also disagrees with Debtor's insistence that Defendant's "unclean hands" prevent the application of judicial estoppel. Courts have uniformly recognized that the purpose of judicial estoppel is to protect the integrity of the judicial process by prohibiting parties from deliberately changing positions according to the exigencies of the moment. Even when one party's hands are unclean, another party's inconsistent positions may threaten judicial integrity. See Intamin, Ltd. v. Magnetar Technologies Corp., 623 F.Supp.2d 1055, 1074 (C.D.Cal.2009) (citations omitted); see also Milton H. Greene Archives, Inc. v. Marilyn Monroe, LLC, 692 F.3d 983, 996 (9th Cir.2012) (explaining that "judicial estoppel is intended to protect the courts").
26. Based on the undisputed facts, the Court holds that Debtor is barred, as a matter of law, from pursuing his claim for violation of the automatic stay by virtue of judicial estoppel.
Based on the foregoing, the Court holds that Defendant is entitled to summary judgment on judicial estoppel grounds and that Debtor is, therefore, barred from asserted a claim for damages pursuant to 11 U.S.C. § 362(k)(1). However, the Court further holds that the Judgment is invalid and has no legal effect.
27. The Court will issue a judgment consistent with the above Findings of Fact and Conclusions of Law contemporaneously herewith.
Order Denying Defendant's Motion to Dismiss at *6.
Id. at 325 (quoting Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969, 976 (1st Cir.1997)).
