Kochhar v. Bansal

DEBORAH S. EYLER, J. In the United States Bankruptcy Court for the District of Maryland, Baljit Kochhar (“Baljit”) and her daughter Sonia Kochhar (“Sonia”) filed Chapter 13 bankruptcy petitions on October 2 and 5, 2012, respectively. Pursuant to 11 U.S.C. section 362 (a), each bankruptcy petition “operate[d] as a stay, applicable to all entities, of — (1) the commencement ... of a judicial ... action or proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy case].” The section 362(a) stay often is referred to as the automatic stay in bankruptcy. On October 9, 2012, Amar Nath Bansal; Bina Bansal, his wife; Deepak Bansal, their son; and Shashi Jain, Bina’s sister (collectively, “the Bansal family members”), filed in the Circuit Court for Montgomery County a “Complaint to Avoid and Recover Fraudulent Conveyances.” The Bansal family members alleged that each of them had extended a loan or loans to Baljit, that Baljit had defaulted on the loans, and that each of them then had obtained judgments against her. They further alleged that Baljit, with knowledge of the judgments against her in their favor and with the intent to avoid her obligations on those judgments, made three conveyances of residential real property to Sonia for no consideration.

The deeds evidencing these conveyances were attached to the complaint. ³⁵ The Bansal family members asked the court to set aside the three conveyances, permit the sheriff to levy on the properties to satisfy their judgments, order that the properties be retained to satisfy those debts, enter judgment against Baljit and Sonia for compensatory and punitive damages in an unspecified amount, and award attorneys’ fees. When they filed suit, the Bansal family members did not know that Baljit and Sonia had filed bankruptcy petitions. On October 25, 2012, Sonia and Baljit filed suggestions of bankruptcy giving the dates of their bankruptcy filings and the case numbers. From then until December 6, 2012, there was no activity in the circuit court case.

The Bansal family members did not serve Sonia or Baljit during this time period or take any other action in the case. Meanwhile, by order of the bankruptcy court entered on November 19, 2012, Sonia’s bankruptcy case was dismissed for “failure to complete required filings” and the automatic stay was terminated as to her case. One week later, on November 26, 2012, Baljit’s bankruptcy case was dismissed for the same reason and the automatic stay was terminated as to her case. On December 7, 2012, the Bansal family members filed in the circuit court a “Motion to Set Aside Bankruptcy Stay of Proceedings.” They attached copies of the two orders of the bankruptcy court dismissing the cases and terminating the automatic stay.

The circuit court granted the motion on December 19, 2012. 1 Baljit and Sonia were served on January 4, 2013. Sonia unsuccessfully moved to quash service. On May 1, 2013, Sonia filed a motion to dismiss, arguing that the circuit court case was a “nullity at the time of filing” because it was commenced in violation of the automatic stay, which had rendered the circuit court without “jurisdiction to ³⁶ hear matters involving Debtor or property of Debtor.” She acknowledged that her bankruptcy case had since been dismissed and the automatic stay had been terminated, but argued that that did not “cure the jurisdictional defect that existed at the time of [the] filing [of the circuit court case].” The Bansal family members filed an opposition to the motion to dismiss. They took the position that actions taken in violation of the automatic stay are voidable, not void.

They argued that under the facts of this case — where no action was taken in the circuit court until after the stay was terminated— there was no prejudice to Sonia (or Baljit) and dismissal was not required. On June 3, 2013, while Sonia’s motion to dismiss was pending, the court entered an order of default against Baljit. The circuit court held a hearing on Sonia’s motion to dismiss and on July 23, 2013, entered an order denying it. She noted an appeal from that order, which was dismissed for failure to file an information report, as required by Rule 8-205(g). 2 On March 14, 2014, the appellees moved for an order of default against Sonia.

An order of default was entered on March 20, 2014. Sonia did not move to vacate it. On April 21, 2014, the court held an ex parte hearing on damages. On April 23, 2014, the court entered an order finding that Baljit was indebted to each of the Bansal family members in the amount of their judgments; that Baljit had made the three conveyances of real property to Sonia, alleged in the complaint; that each conveyance was made for no consideration at a time when Baljit was aware of the judgments against her; and that all the conveyances were fraudulent as a result.

The court ordered the three conveyances “vacated and set aside,” entered judgment against Sonia and Baljit jointly and several ³⁷ ly for $335 in costs, and entered judgment against Sonia and Baljit jointly and severally for $15,362.50 in attorneys’ fees. Sonia noted a timely appeal from the judgment. She presents four questions, all of which amount to an attack on the circuit court’s subject matter jurisdiction. For the reasons to follow, we conclude that the circuit court lacked subject matter jurisdiction over this case.

We shall reverse the judgment. DISCUSSION There is no dispute in this case that the automatic stay was in effect before suit was filed and that the action was filed in violation of the automatic stay. There also is no dispute that, when the Bansal family members filed suit, they did not know that Baljit and Sonia had filed bankruptcy petitions. The issue in this appeal is what is the consequence, if any, of the instant action having been commenced when the automatic stay was in effect.

Sonia, the appellant, contends the filing of a bankruptcy petition “serves to deprive a state court of jurisdiction over matters that are then stayed.” She maintains that, because the circuit court action was filed when the automatic stay was in effect, it was void ab initio and had to be dismissed for lack of subject matter jurisdiction upon the termination of the stay. The Bansal family members, the appellees, respond that there is a split of authority as to whether suits commenced in violation of the automatic stay are void or merely voidable. They urge that, under the circumstances of this case, where there is no allegation that the appellees willfully violated the stay by commencing the circuit court case and where no action was taken in the circuit court once the existence of the bankruptcy petitions became known and until the bankruptcy stay was terminated, equitable considerations support the circuit court’s decision to deny the motion to dismiss. Because the Constitution vests exclusive control over the regulation of bankruptcy in Congress, Congress has the power to “oust the jurisdiction of state courts over bankruptcy ³⁸ matters by vesting exclusive jurisdiction in the federal courts.” In re Bulldog Trucking, Inc., 147 F.3d 347, 353 (4th Cir.1998) (citing Kalb v. Feuerstein, 308 U.S. 433, 438-39 , 60 S.Ct. 343 , 84 L.Ed. 370 (1940)).

As the United States Supreme Court has explained, Congress, because its power over the subject of bankruptcy is plenary, may by specific bankruptcy legislation ... render judicial acts taken with respect to the person or property of a debtor whom the bankruptcy law protects nullities and vulnerable collaterally---- The States cannot, in the exercise of control over local laws and practice, vest State courts with power to violate the supreme law of the land. Kalb, 308 U.S. at 438-39 , 60 S.Ct. 343 . Within the exercise of this authority, Congress enacted section 362(a), which, as stated above, causes an automatic stay, binding on all people and entities, to take effect immediately upon the filing of a bankruptcy petition. Gilchrist v. General Elec.

Capital Corp., 262 F.3d 295 , 303 (4th Cir.2001). The automatic stay is “a bedrock policy upon which the [Bankruptcy] Code is built and a fundamental debtor protection of the bankruptcy law.” In re Lampkin, 116 B.R. 450, 453 (Bankr.D.Md.1990). As the Court of Appeals has explained, the automatic stay is broad in scope and is intended to give the debtor a ‘breathing spell’ from his/her creditors, to allow time to formulate a repayment or reorganization plan, and to prevent a chaotic and uncontrolled scramble for the debtor’s assets in a multitude of uncoordinated proceedings in different courts, by ensuring that all claims against the debtor, other than those exempted from the stay, will be brought in a single forum. Klass v. Klass, 377 Md. 13, 22 , 831 A.2d 1067 (2003); see also Williford v. Armstrong World Indus., 715 F.2d 124 , 127 (4th Cir.1983) (the automatic stay “ ‘gives the debtor a breathing spell from its creditors.

It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be ³⁹ relieved of the financial pressures that drove him into bankruptcy.’ ” (quoting S.Rep. No. 95-989, 95th Cong., 2d Sess. 54-55 (1978))). The prevailing view among the federal courts of appeal is that actions taken in violation of the automatic stay are void ab initio.

See In re Smith Corset Shops, Inc., 696 F.2d 971 (1st Cir.1982); In re 48th Street Steakhouse, Inc., 835 F.2d 427 (2d Cir.1987), cert. denied 485 U.S. 1035 , 108 S.Ct. 1596 , 99 L.Ed.2d 910 (1988); In re Ward, 837 F.2d 124 (3d Cir.1988); Smith v. First America Bank, N.A., 876 F.2d 524 (6th Cir. 1989); In re Taylor, 884 F.2d 478 (9th Cir.1989). The Fourth Circuit has not spoken on this issue. In a series of cases, the United States Bankruptcy Court for the District of Maryland has hewn to the majority view. See In re Miller, 10 B.R. 778, 780 (Bankr.D.Md.1981) (“An action taken in violation of the stay is void ab initio whether it is taken with knowledge of the stay or without.”); Anglemyer v. United States, 115 B.R. 510 (D.Md.1990) (IRS assessment for unpaid taxes made during the automatic stay was “null and