In re No. 97-70679 TC

Chapter 7

JAMES DOUKAS, R.S. 98-1478



Debtor.

___________________________/

The debtor in the above-captioned chapter 7 case (the “Debtor”) seeks approval of a stipulation with the chapter 7 trustee (the “Trustee”) relating to certain state court litigation (the “state court action”) commenced against the Debtor before the bankruptcy case was filed. The San Francisco Community College (“District”), the other party to the state court action, objects to the stipulation. For the reasons stated below, the Court will approve only a portion of the stipulation.

The following facts are undisputed:

Prior to the commencement of this bankruptcy case, the Debtor was employed by the District as a tenured instructor. In 1994, the District initiated administrative proceedings to terminate the Debtor’s employment. At the conclusion of those proceedings, the arbitrator ruled that, rather than being terminated, the Debtor’s employment should simply be suspended for six months.

Unhappy with this decision, the District filed a petition for a writ of mandamus and for review of the arbitrator’s decision in the San Francisco Superior Court. The Superior Court granted the petition and entered judgment in favor of the District, ordering that the Debtor’s employment be terminated. This order was entered on October 15, 1997 (the “Superior Court order”). As the nonprevailing party, the Debtor was ordered to pay the District’s costs.

On October 29, 1997, the Debtor filed this chapter 7 bankruptcy case, and the Trustee was appointed. Thereafter, the Debtor filed a timely notice of appeal from the Superior Court order. There is a minor factual dispute concerning whether the Debtor discussed his intention to file the notice of appeal with the Trustee before filing it or just afterward. In the appeal, the Debtor seeks reinstatement of his employment (the “Job Status Claim”) and back pay (the “Back Pay Claim”). In addition, if the Debtor prevails in the appeal, the appellate court may require the District to pay the Debtor’s costs on appeal, at the trial court, and perhaps even in the arbitration (the “Costs Claim”).

The District has filed a motion to dismiss the appeal in the state appellate court. In its brief, the District raises two distinct contentions: (1) that the notice of appeal was filed in violation of the automatic stay and is thus void and (2) that the claims asserted in the state court action are property of the estate which the Debtor has no standing to assert. Although the Debtor disputes both contentions in his opposition to the motion, by seeking approval of the stipulation, the Debtor seeks to viscerate each of these arguments. The stipulation proposes that the Court annul the automatic stay. If the Court approves this portion of the stipulation, the filing of the notice of appeal will no longer be void. The stipulation also proposes that the claims asserted in the state court action be abandoned to the Debtor. If this portion of the stipulation is approved, the Debtor wil have standing to assert all claims represented by the state court action.

A. ANNULMENT OF THE AUTOMATIC STAY

The Court agrees with the District’s contention that the Debtor’s filing of the notice of appeal violated the automatic stay. The continued prosecution of any action against the Debtor that was filed before the bankruptcy case violates the automatic stay. 11 U.S.C. § 362(a)(1). There are exceptions to this general rule but none of them is applicable here. 11 U.S.C. § 362(b). When the underlying action is against the debtor, the fact that an appeal has been initiated by the debtor does not change the nature of the action. Finally, actions taken in violation of the automatic stay are void. In re Schwartz, 954 F.2d 569 (9th Cir. 1992).

However, the Court has the power to annul the automatic stay for cause. 11 U.S.C. § 362(d)(1). There is cause to annul the stay under these circumstances. As discussed below, annulment of the stay will permit the Debtor to prosecute claims of great value to him and of no value to his pre-petition creditors. It would promote one of bankruptcy’s fundamental policies--i.e., to give the Debtor a “fresh start.” It does not appear that the Debtor acted in bad faith by failing to obtain relief from the automatic stay before filing the notice of appeal. The District cites no prejudice as a result of his failure to do so. To the contrary, the District appears to be seeking a procedural windfall in opposing the annulment.

As a result of the Court’s annulment of the stay, the Debtor is free to prosecute the appeal as it relates to those claims that belong to him rather than to the bankruptcy estate. The Court disagrees with the District’s contention that the entirety of the claims asserted in the state court action belong to the estate. Section 541(a) defines property of the estate as all of the Debtor’s interests in property as of the petition date. The Back Pay Claim and Costs Claim do not constitute interests of the Debtor as of the petition date to the extent they relate to periods occurring and expenses incurred after the bankruptcy case was filed. The Job Status Claim does not constitute an interest of the Debtor in property within the meaning of section 541(a). To the extent the Debtor has a right of reinstatement, that right cannot be transferred or sold so as to generate value of creditors.

B. ABANDONMENT

However, annulment of the automatic stay does not cure the Debtor’s standing problem to those portions of the Back Pay Claim and Costs Claim relating to the pre-bankruptcy period. To solve that problem, the stipulation proposes that the estate’s interests in the state court action be abandoned to the Debtor. Section 554(a) of the Bankruptcy Code provides that, after notice and hearing, the trustee may abandon any property of the estate that is burdensome or of inconsequential value or benefit to the estate. Abandoned property revests in the Debtor. There are several problems with this portion of the stipulation.

First, the requirement of notice and hearing has not been satisfied. Initially, approval of the stipulation was sought without notice to anyone. Learning that the District wished to file an opposition, the Court required that notice be given to the District. The District filed an opposition, and a hearing was conducted. However, other creditors have not received notice and an opportunity to be heard.

Second, the Trustee has not explained why the property to be abandoned is burdensome or of inconsequential value to the estate. The District notes that the Debtor has not received a salary from the District since 1994. If the Debtor is successful in the appeal, the estate’s interest in the Back Pay Claim may have substantial value. The pre-petition portion of the Costs Claim may also have value.

Third, and most important, the Court believes that the proposed abandonment, under these circumstances, would be contrary to the provisions of the Bankruptcy Code. Section 108(c)(2) of the Bankruptcy Code provides that any deadline established under nonbankruptcy law in an action subject to the automatic stay is extended until 30 days after the expiration of the automatic stay. The deadline for filing a notice of appeal from the Superior Court order had not expired when the bankruptcy case was filed. The state court action was stayed by the automatic stay. That stay expired when the Debtor was granted his discharge on February 7, 1998. The Trustee had until March 9, 1998 to file her notice of appeal. She failed to do so and thus lost the right to prosecute the appeal. To permit this default to be sidestepped by permitting the Trustee to abandon the estate’s claims to the Debtor would render section 108(c) meaningless and would be unfair to the District. As a result, the Court will not approve this portion of the stipulation.

Based on the foregoing, it is hereby

ORDERED that:

1. The stipulation between the Trustee and the Debtor is approved in part and approval is denied in part.

2. The automatic stay is annulled retroactively to validate the filing of the notice of appeal in the state court action.

3. The estate’s interests in the state court action--i.e., in those portions of the Back Pay Claim and Costs Claim relating to the pre-bankruptcy time period--are not abandoned to the Debtor.

Dated: July 30, 1998

_______________________________

United States Bankruptcy Judge













CANB DocumentsNorthern District of California