§ 62.2     What Court?
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 62.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Stay violations become an issue in Chapter 13 cases when creditors take collection actions against debtors after the petition. When that action is in a state court, conventional wisdom was that debtors had a choice: the automatic stay could be raised as a defense in the state court; or the debtor could bring a separate action in the bankruptcy court against the creditor for violating the automatic stay. At least two courts of appeals have held that state courts have jurisdiction to determine whether the automatic stay applies.1

[2]

The downside for debtors to raising the automatic stay as a defense to collection action in state court was that once the state court determined whether the stay applied, the debtor was bound by that decision, and if the debtor didn’t like the state court decision, the debtor had to appeal through the state court system (and ultimately to the U.S. Supreme Court). If the state court ruled that the automatic stay did not apply or that an exception was available, the debtor could not collaterally attack that decision by later seeking declaratory relief or sanctions in the bankruptcy court.2

[3]

Then along came Gruntz v. County of Los Angeles (In re Gruntz),3 mentioned above4 for its discussion of the exception to the automatic stay for criminal actions. In Gruntz, the debtor filed a Chapter 13 case that included past-due child support. The case converted to Chapter 11, and during the Chapter 11 case, the district attorney prosecuted the debtor for criminal nonsupport. In the state court action, the debtor argued that the automatic stay prohibited the prosecution. The debtor claimed that the district attorney’s office “offered to agree to a suspended sentence” if he would plead guilty and pay the back support. A California state court concluded that the exception to the automatic stay for the continuation of criminal actions applied, and a jury found the debtor guilty of criminal nonsupport. The debtor was sentenced to 360 days in jail.

[4]

The debtor twice brought adversary proceedings in bankruptcy court to stop the state court prosecution. The bankruptcy court held that the state court determination that the criminal prosecution did not violate the automatic stay precluded the debtor’s subsequent adversary proceedings.

[5]

The Ninth Circuit disagreed. Citing “federal pre-emption over bankruptcy,” the Ninth Circuit panel found that the California state court did not have jurisdiction to finally decide the reach of the automatic stay. Citing Hucke v. Oregon,5 the Ninth Circuit noted that a criminal prosecution “is not automatically excluded from the reach of the automatic stay;” therefore, the bankruptcy court should have entertained the debtor’s adversary proceeding to, in effect, redetermine whether the state court was correct that the stay did not apply. The Ninth Circuit panel later modified its Gruntz opinion6 to note that it was only erroneous decisions by state courts with respect to the reach of the automatic stay that triggered concern for federal jurisdiction and the automatic stay—presumably a correct decision by a state court that the automatic stay did or did not apply would preclude a subsequent action in bankruptcy court raising the same issue.

[6]

Gruntz immediately sent shock waves through the bankruptcy bar nationwide. If only the bankruptcy courts have jurisdiction to determine with certainty whether the automatic stay applies, then is a creditor ever safe to proceed with an action in another court during a bankruptcy case without first seeking relief from the stay from the bankruptcy court? Does Gruntz mean that debtors always get two bites at the stay—a freebie in state court as a defense to whatever action is brought against the debtor and a second declaratory action or request for sanctions in the bankruptcy court if the debtor doesn’t like what the state court says?7

[7]

Gruntz highlights a difficult logic internal to the automatic stay and jurisdiction to determine whether the stay has been violated. In the Ninth Circuit and some other circuits actions in violation of the automatic stay are void.8 For example, a judgment taken in state court after the petition in a Chapter 13 case is void in the Ninth Circuit unless an exception to the stay applies. The original Gruntz panel explained that even if a state court erroneously determined that its judgment was excepted from the automatic stay, the judgment then entered in violation of the automatic stay would be void, and federal court jurisdiction to correct the error of the state court was necessary to preserve the integrity of the bankruptcy stay.

[8]

The Ninth Circuit agreed to hear Gruntz en banc, withdrawing the original panel decision as modified.9 On rehearing en banc, the Ninth Circuit affirmed but on different grounds.10 With respect to the authority of the bankruptcy court to determine whether the state court prosecution of the debtor violated the automatic stay, the Ninth Circuit broadly declared that state courts cannot bind bankruptcy courts with respect to the reach of the automatic stay:

Any state court modification of the automatic stay would constitute an unauthorized infringement upon the bankruptcy court’s jurisdiction to enforce the stay. . . . Because of the bankruptcy court’s plenary power over core proceedings, the County’s argument that states have concurrent jurisdiction over the automatic stay under 28 U.S.C. § 1334(b) is unavailing. . . . In sum, by virtue of the power vested in them by Congress, the federal courts have the final authority to determine the scope and applicability of the automatic stay. . . . If state courts were empowered to issue binding judgments modifying the federal injunction created by the automatic stay, creditors would be free to rush into friendly courthouses around the nation to garner favorable relief. The bankruptcy court would then be stripped of its ability to distribute the debtor’s assets equitably, or to allow the debtor to reorganize financial affairs. . . . [M]odifying the automatic stay is not the act of a state court merely interpreting federal law; it is an intervention in the operation of an ongoing federal bankruptcy case, the administration of which is vested exclusively in the bankruptcy court.11
[9]

The en banc Ninth Circuit then reached the merits and concluded that the criminal prosecution of the debtor was excepted from the automatic stay by § 362(b)(1).

[10]

Gruntz is not the only authority in the Ninth Circuit for the proposition that state court jurisdiction is imperfect to determine whether the automatic stay has been violated.12 Until this issue is further clarified, creditors, in particular, must be cautious about jurisdiction to determine whether collection action violates the automatic stay. A state court order that the stay does not apply may not be quite the protection from sanctions that it was once thought to be.

[11]

At least in the Ninth Circuit, a creditor worried whether an action violates the stay is best advised to get declaratory relief or relief from the stay in the bankruptcy court. At the risk of being too cute, debtors may have the rare opportunity to litigate whether the stay has been violated in two courts—first as a defense in any state court action brought against the debtor and then in bankruptcy court if the answer from the state court is not to the debtor’s liking.

[12]

Outside the Ninth Circuit, debtors must remain focused that whichever court acts first will be binding with respect to whether the stay applies. If the debtor wants the bankruptcy court to make this determination in the first instance, then the debtor should not raise the stay as a defense in state court but instead seek declaratory relief or sanctions by separate action in the bankruptcy court. There is authority that the awarding of sanctions for violation of the stay under § 362(h)13 is exclusively within the jurisdiction of the bankruptcy court, thus even a final state court judgment refusing sanctions is not preclusive of the recovery of sanctions by the debtor.14 One district court has held that it is improper to remove a Chapter 13 debtor’s state court action alleging a violation of the automatic stay because only the bankruptcy court has jurisdiction to determine whether the stay was violated.15

[13]

Almost too obvious to need saying, because the automatic stay is a (statutory) injunction, the bankruptcy court in which the Chapter 13 case is pending is the court of first resort to modify or annul the stay or to determine whether the stay has been violated. For example, in Merrill Lynch Credit Corp. v. King,16 the U.S. District Court for the Virgin Islands did not have jurisdiction to modify or annul the automatic stay arising when the owner of property in the Virgin Islands filed a Chapter 13 petition in the state of Virginia. And in Canter v. Canter (In re Canter),17 the U.S. Court of Appeals for the Ninth Circuit issued mandamus to a district court for improperly withdrawing the reference of a Chapter 13 case after the bankruptcy court granted relief from the stay to a creditor. The Ninth Circuit explained that the stay relief issue began in the bankruptcy court and could properly progress to the district court only by appeal:

[T]he district court’s action created inefficiency, engendering a series of nonproductive motions and hearings. The district court’s action also negatively impacted bankruptcy administration by needlessly disrupting the bankruptcy court’s seamless processing of the case. The district court’s withdrawal of reference effectively “derailed the [bankruptcy] process provided by statute.” . . . The district court’s withdrawal also resulted in great delay and costs to the Appellants . . . . [T]he district court’s action encouraged forum shopping by essentially reversing the bankruptcy court’s prior determinations. . . . Despite repeated requests to reconsider its ill-advised sua sponte withdrawal, the district court perpetuated its excursion outside the confines of its lawful jurisdiction.18
[14]

Not to be forgotten in this discussion is the possibility that Eleventh Amendment immunity or sovereign immunity may affect whether the bankruptcy court has authority to determine a claim of stay violation. When the alleged violator is the state or an agency of the state, the Eleventh Amendment may preclude an action for sanctions in the bankruptcy court.19


 

1  See NLRB v. Edward Cooper Painting, Inc., 804 F.2d 934 (6th Cir. 1986); Erti v. Paine Webber Jackson & Curtis, Inc. (In re Baldwin-United Corp. Litig.), 765 F.3d 343 (2d Cir. 1985).

 

2  See, e.g., Singleton v. Fifth Third Bank of W. Ohio (In re Singleton), 230 B.R. 533 (B.A.P. 6th Cir. 1999) (Rooker-Feldman doctrine divests bankruptcy court of subject-matter jurisdiction to determine whether foreclosure sale of property owned by Chapter 13 debtor’s corporation violated stay because state court in which the foreclosure was pending decided that stay did not apply. Debtor’s remedy was to appeal the state court decision, not to collaterally attack that decision in the bankruptcy court. State courts have jurisdiction to determine the reach of the automatic stay in the Sixth Circuit under NLRB v. Edward Cooper Painting, Inc., 804 F.2d 934 (6th Cir. 1986). BAP declines to follow Gruntz v. County of Los Angeles (In re Gruntz), 166 F.3d 1020 (9th Cir.), as modified, 177 F.3d 728, 736 (9th Cir.), withdrawn and reh’g granted, 177 F.3d 729 (9th Cir. 1999), after reh’g, 202 F.3d 1074 (9th Cir. 2000); In re Glass, 240 B.R. 782 (Bankr. M.D. Fla. 1999) (Because state court determined that the debtor’s ex-spouse’s petition for contempt was excepted from the automatic stay by § 362(b)(2)(A)(ii), the Rooker-Feldman doctrine precluded jurisdiction in the bankruptcy court to determine whether the petition for contempt violated the automatic stay. Court aligns itself with Erti v. Paine Webber Jackson & Curtis, Inc. (In re Baldwin-United Corp. Litigation), 765 F.2d 343 (2d Cir. 1985), and NLRB v. Edward Cooper Painting, Inc., 804 F.2d 934 (6th Cir. 1986), and rejects the contrary conclusion of the Ninth Circuit in Gruntz v. County of Los Angeles (In re Gruntz), 166 F.3d 1020, 1023–27 (9th Cir.), as amended, 177 F.3d 728 (9th Cir.), withdrawn and reh’g granted, 177 F.3d 729 (9th Cir. 1999), after reh’g, 202 F.3d 1074 (9th Cir. 2000).); Wisconsin v. Weller (In re Weller), 189 B.R. 467 (Bankr. E.D. Wis. 1995) (Wisconsin lawsuit for unfair rental practices did not violate stay because it was a police or regulatory proceeding excepted from the stay by § 362(b)(4). State court determination that its action did not violate the stay precludes the debtor from arguing stay violation to the bankruptcy court.).

 

3  166 F.3d 1020 (9th Cir.), amended by 177 F.3d 728 (9th Cir.), withdrawn and reh’g granted, 177 F.3d 729 (9th Cir. 1999), after reh’g, 202 F.3d 1074 (9th Cir. 2000).

 

4  See § 70.1 [ Criminal Action or Proceeding Exception ] § 58.7  Criminal Action or Proceeding Exception.

 

5  992 F.2d 950 (9th Cir. 1993). See § 70.1 [ Criminal Action or Proceeding Exception ] § 58.7  Criminal Action or Proceeding Exception.

 

6  177 F.3d 728 (9th Cir. 1999).

 

7  See Randolph J. Haines, Ninth Circuit Divests State Courts of Jurisdiction to Construe and Apply the Automatic Stay, 4 Norton Bankr. L. Adviser 1 (1999); Randolph J. Haines, More Gruntz, 8 Norton Bankr. L. Adviser 6 (1999).

 

8  See § 78.1 [ Remedies for Violation of Stay ] § 62.5  Remedies for Violation of Stay.

 

9  177 F.3d 729 (9th Cir. 1999).

 

10  202 F.3d 1074 (9th Cir. 2000).

 

11  202 F.3d at 1082–84.

 

12  See Contractors’ State License Bd. of Cal. v. Dunbar (In re Dunbar), 245 F.3d 1058, 1062–63 (9th Cir. 2001), aff’g In re Dunbar, 235 B.R. 465 (B.A.P. 9th Cir. 1999) (Bankruptcy court was not required to give full faith and credit to decision by administrative law judge and state contractors’ licensing board that action against Chapter 13 debtor for improperly installing concrete was excepted from the automatic stay by § 362(b)(4). “The broad rule espoused in [Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074 (9th Cir. 2000) (en banc)], and the similarity of the issues in that case to the immediate case compel us to rule, as did the Gruntz en banc panel, that ‘Rooker-Feldman does not nullify federal courts’ authority to enforce the automatic stay, nor does it strip us of jurisdiction to entertain this appeal.’ . . . If the bankruptcy court had independently considered the question, it may have concluded that the administrative proceedings violated the automatic stay. ‘Because [actions] in violation of the stay are void ab initio . . . the bankruptcy court is not obligated to extend full faith and credit to’ them.”).

 

13  See § 77.1 [ Sanctions or Contempt? ] § 62.3  Sanctions or Contempt?.

 

14  See Halas v. Platek, 239 B.R. 784, 791–92 (N.D. Ill. 1999) (State court denial of sanctions under § 362(h) was not res judicata subsequent § 362(h) motion to bankruptcy court because state court lacked jurisdiction to award sanctions under § 362(h). Debtor was sued for battery in state court and filed Chapter 13 case before plaintiff obtained default judgment. Plaintiff began wage deductions. Debtor moved state court to vacate the judgment as void in violation of stay and asked state court to order return of wage deductions. State court vacated default judgment, but denied further relief. Debtor then moved for § 362(h) sanctions in the bankruptcy court. “Though it is a close question and there is a dearth of authority on the issue, this court concludes that a § 362(h) request for sanctions is within the exclusive jurisdiction of the bankruptcy court under § 1334(a). . . . [A]llowing state courts to impose § 362(h) sanctions, a penalty so closely intertwined with the bankruptcy case itself, would undermine Congress’ intent to have one uniform bankruptcy system. . . . Because the state court did not have jurisdiction, Halas could not have sought § 362(h) in that forum. Accordingly, res judicata did not bar Halas’ motion for § 362(h) sanctions before the Bankruptcy Court.”).

 

15  See Couloute v. Hunt, Leibert, Chester & Jacobson, LLC, 295 B.R. 689, 691–92 & n.1 (D. Conn. 2003) (Because only bankruptcy court has jurisdiction to determine whether stay was violated, removal to district court of Chapter 13 debtor’s state court action for slander of title and unfair trade practices was improper. “Plaintiff’s well-pleaded complaint raises issues of state tort law for slander of title and unfair trade practices. Plaintiff, however, also implicates federal bankruptcy law as the complaint alleges a violation of the automatic stay statute, 11 U.S.C. § 362(h), as a basis for her state causes of action. . . . [I]ssues of bankruptcy law that require adjudication, even when state tort claims are pled, must first be presented to the bankruptcy court. . . . [T]hat the claims are couched as state tort claims rather than as a violation of the automatic stay does not require a different conclusion as the tort claims necessarily require a finding as to whether the automatic stay was violated. As only the bankruptcy court has the authority to make such a finding, the case is properly adjudicated in bankruptcy court.” In a note: “Due to jurisdictional issues this court cannot dismiss Plaintiff’s case, nor can the court transfer the action to bankruptcy court. As this court is not the proper venue to hear Plaintiff’s claims, it therefore remands the case to state court.”).

 

16  255 B.R. 388 (D.V.I. 2000), on reconsideration, No. Civ. 1995-053, 2001 WL 179900 (D.V.I. Jan. 25, 2001), aff’d, 281 F.3d 222 (3d Cir. 2001) (Table decision), cert. denied, 123 S. Ct. 91 (Oct. 7, 2002).

 

17  299 F.3d 1150 (9th Cir. 2002).

 

18  299 F.3d at 1154–55.

 

19  See § 78.1 [ Remedies for Violation of Stay ] § 62.5  Remedies for Violation of Stay. See, e.g., Straight v. Wyoming Dep’t of Trans. (In re Straight), 248 B.R. 403 (B.A.P. 10th Cir. 2000) (Eleventh amendment immunity bars adversary proceeding for damages for violation of § 362 and § 525 when Wyoming Department of Transportation revoked debtor’s Disadvantaged Business Enterprise certification after filing of Chapter 13 case. Debtor converted to Chapter 7, damages action did not become property of the Chapter 7 estate and § 106(b) waiver was not available.); Alabama Dep’t Human Resources v. Lewis, 279 B.R. 308 (S.D. Ala. 2002) (Although Alabama Department of Human Resources may have violated automatic stay when it garnished debtor’s wages during Chapter 13 case, Eleventh Amendment immunity prohibits bankruptcy court action for contempt and sanctions.); In re Raphael, 238 B.R. 69, 77–83 (D.N.J. 1999) (Bankruptcy court is without statutory authority to order municipal court to direct the New Jersey Division of Motor Vehicles to restore a Chapter 13 debtor’s driver’s license that was suspended prepetition based on traffic violations and parking fines; if bankruptcy court does have statutory authority to order license reinstatement, Eleventh amendment immunity prohibits the exercise of that authority. “[A] bankruptcy court does not have the power to relieve a party of all of the burdens that were created by nonpayment of debt. . . . This Court finds no authority in the Bankruptcy Code that indicates that the creation or approval of a payment plan may operate to lift the suspension of a license that was revoked pre-petition. . . . [T]he approval of a Chapter 13 plan does not carry with it the authority to restore a Debtor’s drivers license when such license was suspended pre-petition and the state has taken no action post-bankruptcy to compel payment. . . . This Court notes that a different result might arise if the suspension occurred after the bankruptcy petition was filed. Without reaching a determination on this issue, a post-petition revocation, particularly if done in connection with an effort to collect outstanding fines, would raise issues as to whether the State’s conduct violated the provisions of the automatic stay. . . . [T]his Court finds that a New Jersey Municipal Court is the State for purposes of sovereign immunity pursuant to the Eleventh Amendment. . . . [T]he bankruptcy judge lacked jurisdiction to order the municipal court to restore Rafael’s drivers license because a municipal court is entitled to Eleventh Amendment immunity and therefore is not subject to suit in federal court. Although this Court need not reach this issue, this Court notes that the Eleventh Amendment further bars the bankruptcy judge’s November 30, 1998, Order, because such order compels retroactive injunctive relief. . . . [A]n order to compel a municipal court to restore a Debtor’s drivers license mandates retrospective and not prospective relief . . . . Finally, this Court finds that even if the bankruptcy court’s November 30, 1998, Order is not prohibited by the Eleventh Amendment, such order violates the provisions of the Anti-Injunction Act, 28 U.S.C. § 2283. The Bankruptcy Court lacked the power to examine the state court proceeding, when the magistrate judge had entered a valid judgment on the merits.”); Peterson v. Florida (In re Peterson), 254 B.R. 740 (Bankr. N.D. Ill. 2000) (Chapter 13 debtor’s adversary proceeding against Florida Department of Revenue for turnover and damages with respect to a tax refund withheld postpetition is barred by Eleventh Amendment immunity and does not fall within the doctrine of Ex parte Young, 209 U.S. 123, 28 S. Ct. 441, 52 L. Ed. 714 (1908).); Womack v. Mays (In re Mays), 253 B.R. 241, 243–44 (Bankr. E.D. Ark. 2000) (Pro se debtor’s adversary proceeding against state court, state prosecutor and Office of Child Support Enforcement for violation of the automatic stay fails for lack of jurisdiction and under Eleventh Amendment analysis: “[T]he courts have consistently applied [Seminole Tribe of Florida v. Florida, 517 U.S. 44, 116 S. Ct. 1114, 134 L. Ed. 2d 252 (1996),] to preclude suits in the bankruptcy context against state agencies which have not waived sovereign immunity in the bankruptcy case. . . . The Eleventh Amendment, therefore, would appear to preclude the debtor from suing an agency of the State of Arkansas, absent its consent or effective waiver.”). But see In re Brown, 244 B.R. 62, 65–70 (Bankr. D.N.J. 2000) (Disagreeing with In re Raphael, 238 B.R. 69 (D.N.J. 1999), bankruptcy court has authority under §§ 105(a) and 525(a) to order municipal court to reinstate a debtor’s driving privileges when traffic fines are to be paid in full through the confirmed plan; municipal court is not entitled to Eleventh Amendment immunity, and Anti-Injunction Act does not preclude relief. Confirmed plan provided full payment for traffic fines owed to the Buena Vista Municipal Court. After confirmation, debtor moved to compel the municipal court to direct the Division of Motor Vehicles to rescind the suspension of the debtor’s driving privileges that was based on the nonpayment of traffic fines. “I respectfully disagree with the Raphael conclusion. The authority to direct the municipal court to rescind a driver license suspension based on failure to pay a fine, which fine is proposed to be paid through a debtor’s Chapter 13 plan, is found in 11 U.S.C. § 525(a). . . . [W]here, as here, a Chapter 13 debtor is paying an otherwise dischargeable debt through a Chapter 13 plan, section 525 of the Bankruptcy Code prohibits a municipal court from refusing to renew the debtor’s license, and authorizes the bankruptcy court to direct the municipal court to rescind its suspension of the debtor’s driving privileges.” Applying Fitchik v. New Jersey Transit Rail Operations, Inc., 873 F.2d 655 (3d Cir.), cert. denied, 493 U.S. 850, 110 S. Ct. 148, 107 L. Ed. 2d 107 (1989), Eleventh Amendment did not apply because municipal courts were funded by municipalities, not by the state. With respect to the Anti-Injunction Act, 28 U.S.C. § 2283, “[a] bankruptcy court order directing a municipal court to rescind a debtor’s license suspension is not a vacation of a state court judgment. Nor is such an order a collateral examination of ‘the merits of the state court decision’ . . . . Rather, the order simply represents the enforcement, under 11 U.S.C. § 105(a), of the provisions of the Bankruptcy Code that a governmental unit may not refuse to renew a debtor’s license, even before a discharge is issued, if the license suspension is based on a dischargeable debt.”).