ERIC L. FRANK, Bankruptcy Judge.
Before the commencement of this bankruptcy case, a group of creditors, Marybeth DeHanes, Jason DeHanes, Richard Fitzpatrick, and Barbara Fitzpatrick ("the Respondents"), filed a lawsuit against Carol Gronczewski ("the Debtor") and various other defendants in state court in New Jersey. In the lawsuit, the Respondents sought money damages from the defendants. After the Debtor commenced this bankruptcy case on September 15, 2009, the Respondents filed an amended complaint ("the Amended Complaint") in the New Jersey action. The Amended Complaint added additional defendants and asserted additional claims against parties other than the Debtor.
The Debtor contends that the filing of the Amended Complaint violated the automatic stay, 11 U.S.C. § 362(a).
On July 1, 2010, the Debtor filed a Motion to Enjoin Continuing Violation of the Automatic Stay and for Assessment of Fees and Damages ("the Motion") The Respondents filed a response to the Motion on July 15, 2010. A hearing was held on August 11, 2010.
For the reasons set forth below, the Motion will be denied.
The underlying facts are not in dispute.
On August 26, 2009, the Respondents filed a complaint ("the Original Complaint") in the Superior Court of New Jersey, Mercer County ("the State Court Action"), against the Debtor, Craig Gronczewski and Vanessa Gronczewski (the Debtor's son and daughter-in-law) and several entities allegedly owned or controlled by the Debtor. (Ex. R-1). The 76-paragraph Complaint asserted eight claims:
(Id.).
On September 15, 2009, a few weeks after the filing of the State Court Action, the Debtor filed this chapter 7 bankruptcy case. There is no dispute that, shortly thereafter, the Respondents received notice of the Debtor's bankruptcy filing.
On May 4, 2010, the Respondents filed the Amended Complaint in the State Court Action. (Ex. M-1). The Respondents did not serve the Debtor with the Amended Complaint.
The Amended Complaint includes the same eight claims asserted in the Original Complaint, but differs from the Original Complaint in two significant respects.
First, the Amended Complaint added four new defendants:
Second, the Amended Complaint added five new claims:
After efforts to convince the Respondents' state court counsel to withdraw the Amended Complaint were unsuccessful, the Debtor, through her counsel, filed the Motion in this court, asserting that the Respondents' filing of the Amended Complaint violated the automatic stay provision of the Bankruptcy Code, 11 U.S.C. § 362(a).
The Debtor requests the court enjoin the Respondents from further prosecuting the State Court Action "to the extent it is on account of an Amended Complaint filed . . . in violation of the automatic stay in this case." (Proposed Order, Doc. #93-3). The Debtor also seeks an award of counsel fees.
The Debtor's Motion is premised on two theories. First, the Debtor argues that the Respondents' filing of the Amended Complaint in the State Court Action violated the automatic stay under § 362(a)(1) because it constituted a continuation of a judicial action or proceeding against the Debtor. Second, the Debtor asserts that the filing of the Amended Complaint was a violation of § 362(a)(3) as an attempt to obtain or control estate property.
In support of her first legal theory, the Debtor cites to 11 U.S.C. § 362(a)(1), which provides that the commencement of a bankruptcy case operates as a stay of
11 U.S.C. § 362(a)(1) (emphasis added).
In the circumstances presented here, I conclude that the filing of the Amended Complaint was not a "continuation" of the Respondents' pre-petition lawsuit against the Debtor.
The foundation for my conclusion is the black letter bankruptcy principle that § 362(a) does
Thus, notwithstanding the commencement of the Debtor's bankruptcy case, the Respondents were within their rights to continue prosecuting their claims against the other, non-debtor defendants in the State Court Action and to assert claims against any additional defendants that they wished to join in the litigation. The only question is whether, by filing the Amended Complaint, the Respondents also took some further action (i.e., "continued" the lawsuit in some fashion) against the Debtor.
After comparing the Original Complaint and the Amended Complaint, I find no new claims or requests for relief directed against the Debtor. In the Amended Complaint, the Respondents added new claims, all but one of which were against new defendants. The one new claim raised against an existing defendant was not asserted against the Debtor. Thus, the Amended Complaint did not advance, in any way, the Respondents' claims against the Debtor.
The Debtor may be suggesting that the Respondents took action to "continue" the pending litigation because the Amended Complaint restated the existing claims
The purpose of § 362(a)(1) is to "preserv[e] the status quo" in any pending litigation against a debtor. Taylor v. Slick, 178 F.3d 698, 702 (3d Cir.1999). As described above, the Respondents' actions were directed entirely against parties other than the Debtor. The filing or content of the Amended Complaint neither "prejudiced [the debtor] or otherwise altered [the debtor's] position" in the litigation. Id; accord In re Christakis, 291 B.R. 9, 17-18 (Bankr.D.Mass.2003) (giving debtor notice of post-petition addition of new party or substitution of new party for debtor does not violate automatic stay).
In the Motion, the Debtor also states that the filing of the Amended Complaint "prompted the filing of at least one crossclaim" against her. (Motion ¶ 10). That may be. And, it may also true, as the Debtor appears to assume, that the filing of the crossclaim violated the automatic stay. However, the Respondents did not file the crossclaim. The Debtor's point suggests only that some party other than the Respondents may have violated the automatic stay and the Debtor has not presented any reason why the Respondents are legally culpable for the conduct of one of the Debtor's codefendants in the State Court Action.
For these reasons, I conclude that the Respondents took no action against the Debtor in the State Court Action and did not "continue" a proceeding against the Debtor in violation of § 362(a)(1).
Section 362(a)(3) provides that the filing of a bankruptcy petition stays "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." The Debtor's second legal theory is that the Respondents' post-petition institution of a lawsuit against a non-debtor, to recover property that the Debtor allegedly fraudulently transferred, constituted an attempt to obtain possession or control of property of the estate in violation of 11 U.S.C. § 362(a)(3).
There is some legal authority that supports the proposition that a creditor's institution or continuation of an action outside the bankruptcy court to set aside a debtor's pre-petition transfer of property violates 11 U.S.C. § 362(a)(3).
Section 362(a)(3) is, by its own terms, designed to protect the integrity of the bankruptcy estate pending "either a financial reorganization of the debtor or an orderly liquidation of the assets of the bankruptcy estate." In re Allentown Ambassadors, Inc., 361 B.R. 422, 435-36 (Bankr.E.D.Pa.2007). As one court observed "property of the estate is itself protected by the Bankruptcy Code apart from the protections the Code affords to individual debtors" and "[i]t is a rare case where actions taken against property of the estate affect an individual Chapter 7 debtor personally." In re Copley, 2008 WL 2795139, at *4 (Bankr.S.D.W.Va. June 27, 2008).
Significantly, in the chapter 7 context, the sole legal representative of the bankruptcy estate is the chapter 7 trustee. As a result, many courts have held that "the only party with standing to raise a violation of § 362(a)(3) is the trustee." In re Laux, 181 B.R. 60, 61 (Bankr.S.D.Ill.1995); accord Wells Fargo Bank, N.A. v. Jimenez, 406 B.R. 935, 941-42 (D.N.M.2008); In re Young, 439 B.R. 211, 217-18 (Bankr. M.D.Fla.2010); In re Bucchino, 439 B.R. 761, 774 (Bankr.D.N.M.2010); In re Cook, 2008 WL 5157847, at *2-3 (Bankr.D.N.M. Sept.15, 2008); Copley, 2008 WL 2795139, at *4; In re Calvin, 329 B.R. 589, 601 (Bankr.S.D.Tex.2005).
To resolve this matter, I need not hold broadly that a chapter 7 debtor never has standing to prosecute a § 362(a)(3) stay violation. However, in the circumstances presented here, I conclude that the Debtor has not established her standing to raise a § 362(a)(3) claim.
As of the commencement of the bankruptcy case, the Debtor did not possess or own any of the property or properties that are the subject of the fraudulent transfer claims raised in the State Court Action. Nor has the Debtor claimed an exemption in any of the property that she allegedly transferred pre-petition.
The linchpin of standing, in the constitutional sense, is that the party seeking relief "demonstrate exposure to some actual or threatened injury." In re Athos Steel and Aluminum, Inc., 69 B.R. 515, 519 (Bankr.E.D.Pa.1987) (citing Frissell v. Rizzo, 597 F.2d 840, 844 (3d Cir.1979), cert. denied, 444 U.S. 841, 100 S.Ct. 82, 62 L.Ed.2d 54 (1979)). As no actual or threatened injury is present, the Debtor lacks standing to prosecute the claim for the asserted violation of § 362(a)(3).
To avoid any misunderstanding and unnecessary future litigation, I write further, briefly, to clarify the reach and consequence of this decision denying the Debtor's Motion.
The Debtor has not established that the Respondents violated either 11 U.S.C. § 362(a)(1) or (a)(3).
While various rationales have been offered by different courts, there is a judicial consensus that the Bankruptcy Code provides that after the commencement of a bankruptcy case, only the bankruptcy trustee may bring an action to avoid a preference or to set aside a pre-petition fraudulent transfer made by the bankruptcy debtor. "[T]he commencement of bankruptcy gives the trustee the right to pursue fraudulently conveyed assets to the exclusion of all creditors." Klingman v. Levinson, 158 B.R. 109, 113 (N.D.Ill.1993); accord Constitution Bank v. DiMarco, 155 B.R. 913, 917-18 (E.D.Pa. 1993); In re Ryan, 2008 WL 4829947, at *3 (Bankr.N.D.Cal. Oct.29, 2008); In re Integrated Agri, Inc., 313 B.R. 419, 427 (Bankr.C.D.Ill.2004); Matter of Daniele Laundries, Inc., 40 B.R. 404, 407-08 (Bankr.S.D.N.Y.1984).
In short, the Respondents' fraudulent transfer claims may not have not been stayed automatically, but they are subject to being stayed by the court through an appropriate proceeding initiated by a party with standing. Here, the Respondents' right to prosecute the fraudulent transfer claims raised in the State Court Action ultimately depends on whether the chapter 7 Trustee has any interest in pursuing those claims and the decisions she makes within the next few months. See Klingman, 158 B.R. at 113 (trustee's exclusive right to maintain fraudulent transfer action is not in perpetuity and individual creditor may resume prosecution of actions "when the trustee no longer has a viable cause of action").
For the reasons set forth above, the Debtor's Motion will be denied. An appropriate order will be entered.
(Debtor's Memorandum of Law at 3 n.5) (Doc. # 99).
Because, the Debtor is proceeding under the statutory cause of action for damages found in 11 U.S.C. § 362(k) and seeks an injunction, rather than invoking the remedy of contempt, arguably, the Debtor should have commenced an adversary proceeding. See Fed. R. Bankr.P. 7001(1), (7). The Respondents have not objected to the Motion on procedural grounds and I perceive no prejudice to the Respondents in having this dispute litigated as a contested matter rather than as an adversary proceeding and. Therefore, I consider any procedural irregularity waived. See, e.g., In re Zolner, 249 B.R. 287, 292 (N.D.Ill.2000); In re Granoff, 2006 WL 1997408, at *3-4 (Bankr.E.D.Pa.2006).
There is, however, a contrary line of cases, described by one court as the "majority view," In re Midland Euro Exchange, Inc., 347 B.R. 708, 717 (Bankr.C.D.Cal.2006), that has rejected the holding in MortgageAmerica, concluding instead (based primarily on the plain language of the Bankruptcy Code) that property transferred by the debtor pre-petition becomes estate property only after it has been recovered by the bankruptcy trustee. See In re Colonial Realty Co., 980 F.2d 125, 131 (2d Cir.1992); In re Fehrs, 391 B.R. 53, 71-72 (Bankr.D.Idaho 2008); In re Feringa, 376 B.R. 614, 625 n. 10 (Bankr.W.D.Mich.2007); In re Murray, 214 B.R. 271, 278-79 (Bankr. D.Mass.1997); In re Saunders, 101 B.R. 303 (Bankr.N.D.Fla.1989). If the second line of cases is correct, a creditor's commencement or continuation of a fraudulent transfer action against a non-debtor does not violate the automatic stay violation, 11 U.S.C. § 362(a)(3).
40 B.R. at 407-08.