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v. Chatanika Gold Camp Properties (10/1/99) sp-5186
Compton v. Chatanika Gold Camp Properties (10/1/99) sp-5186
Notice: This opinion is subject to correction before publication in
the Pacific Reporter. Readers are requested to bring errors to the attention of
the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone
(907) 264-0608, fax (907) 264-0878.
THE SUPREME COURT OF THE STATE OF ALASKA
LARRY COMPTON, Trustee, )
) Supreme Court No. S-7792
Appellant, )
) Superior Court No.
v. ) 4FA-94-1081 CI
)
CHATANIKA GOLD CAMP PROPERTIES, ) O P I N I O N
an Alaska Partnership, ARTHUR LYLE )
ROBSON, and KENNETH RINGSTAD, ) [No. 5186 - October 1, 1999]
)
Appellees. )
___________________________________)
Appeal from the Superior Court of the State of
Alaska, Fourth Judicial District, Fairbanks,
Mary E. Greene, Judge.
Appearances: Cabot Christianson and Michelle
Boutin, Bundy & Christianson, Anchorage, for
Appellant. Kenneth P. Ringstad, Law Office of Kenneth P. Ringstad,
Fairbanks, for Appellee Chatanika Gold Camp Properties. John
Foster Wallace, Call, Barrett & Burbank, Fairbanks, for Appellee
Arthur Lyle Robson. Edward R. Niewohner, Niewohner & Wright, PC,
Fairbanks, for Appellee Kenneth Ringstad.
Before: Matthews, Chief Justice, Compton,
Eastaugh, Fabe, and Bryner, Justices.
EASTAUGH, Justice.
I. INTRODUCTION
A creditor purchased litigation claims from the debtors'
bankruptcy estate in 1993. The creditor then filed a superior
court malpractice suit against the debtors' attorney. In 1996 the
bankruptcy court set aside the order approving the sale of the
claims and declared that only the bankruptcy trustee was the real
party in interest on those claims. The existing superior court
parties then filed a stipulation dismissing the malpractice lawsuit
with prejudice, and the superior court ordered dismissal with
prejudice. The bankruptcy trustee unsuccessfully moved to set
aside the dismissal order and to be substituted as the real party
plaintiff in interest. Because the claims were assets of the
bankruptcy estate and because dismissal of the suit without the
trustee's permission violated the automatic stay imposed by 11
U.S.C. sec. 362(a)(3), we reverse.
II. FACTS AND PROCEEDINGS
Lorimer and Pamela McLaughlin purchased a historic gold
camp near Fairbanks from Chatanika Gold Camp Properties (CGCP) in
1982. When the McLaughlins defaulted on their obligation to CGCP,
it reacquired the gold camp in 1990 at a foreclosure sale. Arthur
Robson was the McLaughlins' attorney. The McLaughlins claimed that
the foreclosure sale was defective and refused to vacate the
property. CGCP sued in state court for repossession.
Following the foreclosure sale, but before CGCP's
repossession suit was resolved, Masayoshi Okumura contacted the
McLaughlins about building facilities on the property so tourists
could watch the Northern Lights. Allegedly acting on Robson's
advice, the McLaughlins did not advise Okumura of the foreclosure
sale. Okumura sent the McLaughlins $638,000 to build the
facilities, including an "Aurorium." Tourists were to view the
Aurora Borealis from the Aurorium. [Fn. 1]
In April 1991 CGCP prevailed in its repossession action
against the McLaughlins, who were to be evicted from the gold camp
premises. Okumura then sued the McLaughlins in state court for
equitable relief and damages with respect to construction of the
Aurorium. In May 1993 a state-court judgment of $878,000 for fraud
was entered in favor of Okumura against the McLaughlins. The
McLaughlins then filed for Chapter 7 bankruptcy. At the time, they
were preparing to appeal from the state repossession and fraud
judgments. Attorney Robson represented the debtors in the two
lawsuits and in their bankruptcy.
In August 1993 CGCP sought to purchase the McLaughlins'
litigation claims and interests "stemming from and/or arising out
of"the state-court cases brought by CGCP and Okumura against the
McLaughlins. Kenneth Ringstad, CGCP's attorney, applied in the
bankruptcy court for an order allowing trustee Mitchel Friday to
sell those litigation claims and interests for $5,000. In
September 1993 the bankruptcy court granted the trustee permission
to sell assets. In October the trustee sold CGCP the debtors'
rights, claims, and interests arising out of or stemming from their
two state-court cases. Asserting that this sale encompassed claims
the McLaughlins had against the attorney who had represented them
in the two state cases, in April 1994 CGCP sued Robson for legal
malpractice. We refer to this case as CGCP v. Robson. Robson
answered and filed a third-party complaint against attorney
Ringstad. Robson's September 1994 answer asserted as a defense
that CGCP did not purchase a malpractice cause of action from the
trustee and was not the real party in interest.
In August 1994 the McLaughlins learned of CGCP's
malpractice suit against Robson. They filed motions asking the
bankruptcy court to clarify whether CGCP had actually purchased any
malpractice claims from the bankruptcy estate. They sought a
"specific determination"by the bankruptcy court that "either the
malpractice claims were not included in the sale, or, if they were
included, they were sold for such nominal consideration and under
such inequitable circumstances that the sale, insofar as it
included malpractice claims, should be set aside with respect to
such claims."
United States Bankruptcy Judge Donald MacDonald IV
treated the McLaughlins' motions for clarification as motions for
relief under Federal Rule of Civil Procedure 60(b). By memorandum
and order entered April 10, 1996, he granted Rule 60(b) relief and
vacated the September 1993 order "insofar as it purports to
transfer any malpractice claims or rights to [CGCP]." The order
granting relief stated:
2. Insofar as this court's order of sale of
September 21, 1993, Docket Entry 35, granting the trustee's
application to sell assets purports to sell malpractice claims
against Arthur Lyle Robson, it is vacated and found to be null and
void. No malpractice claims were sold or transferred as a result
of the order. However, the order remains valid and fully effective
as to other litigation rights and claims described in the trustee's
August 30, 1993, application to sell assets.
3. The claims asserted by CGCP in [CGCP v.
Robson], as well as any other claims of the [McLaughlins] against
Robson or [Robson's malpractice insurance carrier], are property of
the bankruptcy estate. All are subject to the turnover property of
the bankruptcy estate. All are subject to the turnover rights of
a Chapter 7 trustee and the trustee is the real party in interest.
(Emphasis added.)
On April 16, 1996, Larry Compton replaced Mitchel Friday
as the trustee in the McLaughlins' bankruptcy.
In early May 1996 the attorneys for Robson, CGCP, and
Ringstad signed and filed a stipulation for dismissal with
prejudice of CGCP v. Robson. They were the only parties to that
lawsuit. Their stipulation did not refer to the bankruptcy court's
April 10 order. On May 8 the superior court signed an order
dismissing CGCP v. Robson with prejudice.
On May 17 trustee Compton entered an appearance in CGCP
v. Robson; he moved to set aside the order approving the dismissal
of the case with prejudice and to be substituted as the real party
plaintiff in interest. Trustee Compton asserted that he first
learned of the dismissal of CGCP v. Robson after it had already
occurred.
The superior court heard the trustee's motions in July
1996. The court denied both motions, concluding that Alaska Civil
Rule 41(a)(1)[b] authorized all the parties to agree to voluntary
dismissal, "leaving the bankruptcy Trustee to go ahead and pursue
an action on its own."
The trustee appeals.
III. DISCUSSION
A. Standard of Review
This appeal turns on the application of federal
bankruptcy law and raises legal questions which we decide
exercising our independent judgment. [Fn. 2] To the extent this
appeal raises questions about the interpretation of our civil
rules, we exercise our independent judgment. [Fn. 3] "On questions
of law, our duty is to adopt the rule of law which is most
persuasive in light of precedent, reason, and policy."[Fn. 4] "We
decline to review claims not raised below except to the extent that
they may constitute plain error."[Fn. 5] "Plain error exists
where an obvious mistake has been made which creates a high
likelihood that injustice has resulted."[Fn. 6]
"Whether or not a party should be substituted for another
rests in the sound discretion of the trial court."[Fn. 7]
B. Was It Error to Deny the Trustee's Motions?
The trustee argues that it was error to deny his motions
to substitute himself as the real party in interest and to set
aside the order approving the stipulation to dismiss CGCP v. Robson
with prejudice. He contends that, as Bankruptcy Judge MacDonald's
April 10 order determined, the trustee was the real party in
interest in the dismissed case. He argues that dismissing CGCP v.
Robson violated Alaska Civil Rule 17(a), worked a forfeiture of the
estate's malpractice claims, and deprived the estate of its rights
because the statute of limitations may bar the estate from
commencing a new action against Robson. He also argues that
dismissal violated the automatic stay imposed by 11 U.S.C. sec.
362(a)(3).
CGCP, Robson, and Ringstad argue that the superior court
appropriately dismissed CGCP v. Robson after the parties filed
their signed stipulation under Rule 41(a)(1)[b] and that the
stipulation, signed by all parties to the suit, was effective upon
filing without entry of an order of dismissal. Robson further
argues that the trustee failed to take timely action to protect the
interests of the bankruptcy estate, and that the trustee's remedy
is to institute another malpractice action against Robson, rather
than be substituted into an action that Robson claims was lawfully
dismissed. Robson also contends that CGCP did not forfeit the
trustee's claims or fail to turn the malpractice claims over to the
bankruptcy estate, because Judge MacDonald's order established that
CGCP never owned the malpractice claims in the first place, and
therefore had nothing to turn over.
1. Dismissal violated the automatic stay.
We conclude that dismissing the case after April 10
without the trustee's permission violated the automatic bankruptcy
stay imposed by federal law. [Fn. 8] In summary, we reason as
follows: the malpractice claims being asserted in state court were
property of the estate; after April 10, 1996, only the trustee
could prosecute or impair the value of the claims; any action
impairing the value of estate property without the trustee's
permission violated the automatic stay; and the dismissal violated
the stay.
a. The claims were "property of the estate."
It is undisputed that any malpractice claims the
McLaughlins potentially had against Robson became the property of
the McLaughlins' bankruptcy estate when they filed for bankruptcy
in June 1993. Because Robson's alleged malpractice predated the
bankruptcy, any claim the McLaughlins potentially had against
Robson existed when they filed for bankruptcy. According to
section 541 of the Bankruptcy Code, "all legal and equitable
interests of the debtor in property"become property of the estate
when the debtor files for bankruptcy. [Fn. 9] Any malpractice
claims against Robson were therefore the estate's.
The estate sold its litigation claims and interests in
the state-court cases to CGCP in October 1993. The sale agreement
referred to all the McLaughlins' "rights, claims and interest in,
to, [a]rising out of and/or stemming from"the two state court
actions. CGCP then sued Robson.
When the scope of the sale was litigated in federal
court, Judge MacDonald found that "the price paid for the claims
was not fair and reasonable. In fact, the price paid was so
unreasonable it shocks the conscience of the court." For $5,000
CGCP had bought claims the judge thought were potentially worth
millions. For this and other notice-related and equitable reasons,
Judge MacDonald decided to "set aside"the sale of malpractice
claims. [Fn. 10] Judge MacDonald stated in his April 10 order that
"[i]nsofar as this court's order of sale . . . purports to sell
malpractice claims against Arthur Lyle Robson, it is vacated
. . . ."
b. After April 10, 1996, it was clear that only
the trustee could pursue the claims.
Judge MacDonald's April 10, 1996, order declared that the
legal right CGCP sought to enforce did not belong to CGCP. The
order stated that "[n]o malpractice claims were sold or transferred
as a result of the [September 1993] order." The April 10 order
also held that the malpractice claims against Robson "are property
of the bankruptcy estate. All are subject to the turnover property
of the bankruptcy estate. All are subject to the turnover rights
of a Chapter 7 trustee and the trustee is the real party in
interest."
After April 10 the malpractice claims were without doubt
exclusively the property of the estate. Under the Bankruptcy Code,
the trustee has the power to "collect and reduce to money the
property of the estate,"[Fn. 11] and also the "capacity to sue and
be sued."[Fn. 12] As we have noted, only the trustee has standing
to pursue causes of action that belong to the bankruptcy estate.
[Fn. 13]
c. Any action impairing estate property violated
the automatic stay.
Section 362(a)(3) of the Bankruptcy Code imposes a stay
on "any act to obtain possession of property of the estate or . . .
to exercise control over property of the estate."[Fn. 14] The
malpractice suit sought damages that Robson allegedly owed the
estate. Therefore, prosecuting or prejudicing the malpractice suit
without the trustee's permission would violate the automatic stay.
Robson argues that CGCP never possessed the right to
assert malpractice claims against him, because the sale was void
when it took place. Robson therefore concludes that dismissal did
not violate the stay because dismissal did not impair estate
assets.
Robson's argument ignores both the effect of the April 10
order and the potential effect of the dismissal. As we have seen,
the claims were exclusively estate property as of April 10. And
insofar as the dismissal was with prejudice, it potentially
impaired the value of an estate asset.
For example, the trustee suggests that if he is required
to commence a new action against Robson, Robson will raise a
statute of limitations defense that potentially would defeat the
trustee's claim. Robson has not disavowed that potential defense.
Therefore dismissal with prejudice potentially impaired the value
of an estate asset and prejudiced creditors. After April 10
dismissing the lawsuit without the trustee's permission violated
subsection 362(a)(3).
Some language in the April 10 memorandum and order
suggests, as Robson argues, that the bankruptcy court considered
the sale of malpractice claims to be void ab initio. Other
language suggests that the court considered the sale of the
malpractice claims to be voidable, not void. For example, the
April 10 order states that the "[September 1993 sale] order remains
valid and fully effective as to other litigation rights and claims
described in the trustee's August 30, 1993, application to sell
assets." And the court's accompanying memorandum states that the
court was vacating the sale only "insofar as it purports to
transfer any malpractice claims or rights to CGCP."
Federal policy, generally reflected in the stay statute
and the bankruptcy code, favors the preservation of assets for the
benefit of creditors. [Fn. 15] We are unwilling to read the orders
of the United States Bankruptcy Court in a manner that would defeat
that policy and impair an estate asset.
Moreover, there is no need to decide now whether the sale
was void or what rights CGCP acquired in 1993. Assuming the sale
was void from the beginning, the state court parties, absent the
trustee's permission, still had no authority to prosecute or
dismiss claims that on their face belonged to the trustee. And the
same order that vacated the sale also precluded the state court
parties from dismissing the claims.
d. The dismissal violated the automatic stay.
Accordingly, dismissing the malpractice claim without the
trustee's permission, whether by stipulation effective upon filing
or by superior court order, violated the automatic stay. We
accordingly reverse the dismissal and remand for further
proceedings.
Robson argues that setting aside the dismissal is an
inappropriate remedy for violating the automatic stay. We
disagree. As the Ninth Circuit Court of Appeals has held more than
once, judicial proceedings in violation of an automatic stay are
"void, not voidable."[Fn. 16]
2. Other issues
The trustee alternatively argues that federal supremacy,
res judicata, and collateral estoppel support a reversal of the
denial of his motions. Because we reverse for the reasons
discussed above, it is unnecessary to address these alternative
arguments.
It is necessary to address briefly the denial of the
trustee's substitution motion. Given the rulings of the bankruptcy
court, there is no possible basis for denying that motion.
IV. CONCLUSION
Because dismissing the malpractice action violated the
automatic stay, we VACATE the order dismissing the case with
prejudice, REVERSE the order denying the motion to substitute and
to set aside the order of dismissal, and REMAND for entry of an
order substituting the trustee as the real party plaintiff in
interest and for further proceedings.
FOOTNOTES
Footnote 1:
Oh, it was wild and weird and wan,
and ever in camp o' nights
We would watch and watch the silver dance
of the mystic Northern Lights.
And soft they danced from the Polar sky
and swept in primrose haze;
And swift they pranced with their silver feet,
and pierced with a blinding blaze.
They danced a cotillion in the sky;
they were rose and silver shod;
It was not good for the eyes of man --
'twas a sight for the eyes of God.
It made us mad and strange and sad,
and the god whereof we dreamed
Was all forgot, and our only thought
was of the lights that gleamed.
Robert W. Service, The Ballad of the Northern Lights in Best Tales
of the Yukon, 40 (Running Press ed. 1983).
Footnote 2:
See State, Dep't of Health & Soc. Servs. v. Alaska State Hosp.
& Nursing Home Ass'n, 856 P.2d 755, 760 (Alaska 1993).
Footnote 3:
See Airoulofski v. State, 922 P.2d 889, 892 (Alaska 1996).
Footnote 4:
Grove v. Alaska Constr. & Erectors, 948 P.2d 454, 456 (Alaska
1997) (citing Guin v. Ha, 591 P.2d 1281, 1284 n.6 (Alaska 1979)).
Footnote 5:
Miller v. Sears, 636 P.2d 1183, 1189 (Alaska 1981).
Footnote 6:
Murray v. Feight, 741 P.2d 1148, 1156-57 (Alaska 1987).
Footnote 7:
State v. 18,018 Square Feet, More or Less, 621 P.2d 887, 889
(Alaska 1980) (citing 3B J. Moore, Federal Practice sec. 25.08, at
25-85 (1980)).
Footnote 8:
See 11 U.S.C. sec. 362(a)(3) (1994).
Footnote 9:
11 U.S.C. sec. 541(a)(1) (1994). See also In re M & L Bus.
Mach.
Co., Inc., 136 B.R. 271, 275 (Bankr. D. Colo. 1992) (defining legal
interests to include causes of action); Besing v. Seeligson,
Douglass, Falconer & Vanden Eykel, 822 S.W.2d 107, 109 (Tex. App.
1991) (declaring legal malpractice action to be property of
estate).
Footnote 10:
Insufficient consideration is grounds for voiding a contract
in Alaska. See Blumenstein v. Phillips Ins. Ctr., Inc., 490 P.2d
1213, 1222-23 n.8 (Alaska 1971).
Footnote 11:
11 U.S.C. sec. 704(1) (1994).
Footnote 12:
11 U.S.C. sec. 323(a) (1994).
Footnote 13:
See Briggs v. Newton, __ P.2d __, Op. No. 5154 at 6 (Alaska,
August 13, 1999); Bohna v. Hughes, Thorsness, Gantz, Powell &
Brundin, 828 P.2d 745, 754 (Alaska 1992).
Footnote 14:
11 U.S.C. sec. 362(a)(3) (1994). While the trustee raises the
automatic stay issue on appeal, he did not do so in the superior
court. The court's error in this case, however, was plain. See
Miller v. Sears, 636 P.2d 1183, 1189 (Alaska 1981).
Footnote 15:
See In re Hot Springs Broadcasting, Inc., 207 F. Supp. 303,
312 (W.D. Ark. 1962) ("[T]he very foundation of the Bankruptcy Act
is bottomed upon the necessity of preservation of the assets of the
bankrupt estate for the benefit of creditors; and this
consideration overrides any consideration of subsidiary
interests.").
Footnote 16:
In re Schwartz, 954 F.2d 569, 571 (9th Cir. 1992); see also In
re Shamblin, 890 F.2d 123, 125 (9th Cir. 1989). We read the
damages, costs, and fees remedies set out in 11 U.S.C. sec. 362(h)
as
being available to an injured party over and above the invalidation
of any action that violates a stay.
