IN RE MAINS, (Bankr.E.D.Va. 1995)

Case No. 95-11072-AM, Contested Matter No. 95-964United States Bankruptcy Court, E.D. Virginia
October 2, 1995

MEMORANDUM OPINION AND ORDER
STEPHEN MITCHELL, Bankruptcy Judge

This matter, having been previously continued, was heard in open court on September 26, 1995, on the motion for relief from the automatic stay filed on August 8, 1995 by David L. Duff. After hearing the evidence of the parties and the argument of counsel, the court ruled from the bench that the stay would not be lifted. Counsel for Mr. Duff then orally moved for reconsideration and as a condition of relief offered to waive the secured claim Mr. Duff otherwise claimed arising from a pre-petition attachment. The court took the motion under advisement, and having reconsidered the matter in light of the movant’s offer, concludes that relief from the automatic stay should be granted with appropriate restrictions to protect the bankruptcy estate.

Facts

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The debtor, Diana E. Mains, filed a voluntary petition under chapter 11 of the Bankruptcy Code in this court on March 16, 1995. Prior to the filing, she had been represented for approximately eight years by David L. Duff, an attorney, in connection with what was apparently a difficult and contentious divorce. After the debtor discharged Duff as her attorney in April 1994, he brought an action against her for unpaid legal fees in the Circuit Court of Fairfax County, Virginia. The debtor filed a counter-claim for malpractice. In February 1995 a three-day jury trial was held that resulted in a verdict in Mr. Duff’s favor in the amount of $136,507.19 on his claim for legal fees[1] and also in his favor on the debtor’s counterclaim for malpractice. After the verdict, Duff sued out a pre-judgment attachment against a $25,000.00 payment that was due to the debtor from her former husband under a settlement agreement.[2] The debtor, who was represented in the state court action by a different attorney than the one who represents her in the

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chapter 11 case,[3] filed a motion to set aside the verdict. The day prior to the hearing on that motion, which was also the hearing at which an order was to be tendered entering judgment on the jury verdict, the debtor filed her chapter 11 petition.[4] Duff’s claim is listed in the debtor’s schedules as disputed. Duff has filed a timely proof of claim in the amount of $136,507.19, and the debtor has filed an objection to the claim. Duff now seeks relief from the automatic stay in order to have judgment entered on the two jury verdicts in his favor in order to liquidate his claim, and he agrees that there would be no execution on the judgment. As noted above, he is now also willing to release the attachment lien as a further condition of relief from the automatic stay.

Discussion
Under § 362(a)(1) of the Bankruptcy Code, the filing of a voluntary or involuntary bankruptcy petition operates as a stay, among other acts, of “the continuation, including the issuance or employment of process, of a judicial . . . action or proceeding against the debtor that was . . . commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title.” At the request of the party stayed, however, the bankruptcy court may grant relief from the stay

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such as by terminating, annulling, modifying, or conditioning such stay —

(1) for cause. . . .

§ 362(d), Bankruptcy Code. As the Fourth Circuit has explained,

The automatic stay gives the bankruptcy court an opportunity to harmonize the interest of both debtor and creditors while preserving the debtor’s assets for repayment and reorganization of his or her obligations. According to section 362(d), the bankruptcy court may lift the stay “for cause.” Because the Code provides no definition of what constitutes “cause,” courts must determine when discretionary relief is appropriate on a case-by-case basis.

Robbins v. Robbins (In re Robbins), 964 F.2d 342, 345 (4th Cir. 1992). In particular, when the relief requested is a modification of the stay to permit the trial of a claim in a forum other than the bankruptcy court, the factors that should be considered include

(1) whether the issues in the pending litigation involve only state law, so the expertise of the bankruptcy court is unnecessary; (2) whether modifying the stay will promote judicial economy and whether there would be greater interference with the bankruptcy case if the stay were not lifted because matters would have to be litigated in bankruptcy court; and (3) whether the estate can be protected properly by a requirement that creditors seek enforcement of any judgment through the bankruptcy court.

Id. Each of these factors will be considered in turn.

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A. The effect of the stay on the debtor’s counterclaim.

Before addressing whether the stay should be lifted to permit entry of judgment on the jury verdict on Duff’s contract claim against the debtor, consideration must be given to the question of the debtor’s counter-claim against Duff for legal malpractice. As noted above, the jury returned a verdict in his favor on the counter-claim as well as on his own claim. By its own plain language, § 362(a) stays only actions “against” the debtor or to recover a claim “against” the debtor. Accordingly, the automatic stay has no application to pending litigation by the debtor against another party, and such actions may continue to judgment notwithstanding the intervention of a bankruptcy petition by the plaintiff.[5] Martin-Trigona v. Champion Federal Savings and Loan Assn., 892 F.2d 575 (7th Cir. 1989); Carley Capital Group v. Fireman’s Fund Ins. Co., 889 F.2d 1126 (D.C. Cir. 1989). Thus, for example, the automatic stay does not prevent the defendant, in a pending action by the debtor-plaintiff, from moving to dismiss the litigation or otherwise to assert his defenses. Martin-Trigona, 892 F.2d at 578. The debtor’s counter-claim for malpractice, although asserted in the context of Duff s suit against her for legal fees, is conceptually and legally no different than an independent action by her against him. Accordingly, the automatic stay does not bar Duff from asking for, or the state court from entering, judgment in his favor on the counterclaim.

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B. Whether the issues in the pending litigation involve only statelaw.

Duffs suit against the debtor set forth two alternative claims for damages, one based on breach of an express contract and one based on quantum meruit. Both causes of action arise under state law and raise issues solely of state law. Certainly, it cannot be said that anything in what would otherwise be a run of the mill contract suit requires the “expertise” of the bankruptcy court. On the other hand, it is also true that, unlike the situation presented in the Robbins case, where the pending litigation involved issues of equitable distribution under state law (and a different state at that from the state in which the bankruptcy court was sitting), the litigation here does not raise issues with respect to which state courts have special expertise, as they do with respect to domestic relations matters. Both this court and the state court probably have equal expertise with respect to the subject matter of the controversy, and this factor therefore does not weigh heavily either way.

C. Whether modifying the stay will promote judicial economy.

The allowance or disallowance of claims against the estate is part of a bankruptcy court’s “core” jurisdiction. 28 U.S.C. § 157(b)(2)(B). Ordinarily, therefore, the trial of disputed claims against a bankruptcy debtor takes place in the bankruptcy court, whether or not suit in another forum was pending at the time the bankruptcy petition was filed. As noted in Robbins, however, sometimes a disputed or unliquidated claim may be more conveniently or speedily resolved in another court, particularly where the litigation has already been commenced and is ready for trial or where the other court has special expertise. As noted above, Duff’s claim has already been fully tried in the state court. All that remains is to consider the debtor’s motion to set aside the

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verdict and to enter judgment on the jury verdict. The trial of the action took three days. Even if much of that time was taken up with issues raised by the debtor’s counter-claim for malpractice, it is apparent that to retry Duff’s claim in this court would involve some significant expenditure of time.

The debtor asserts that the issues to be considered on her objection to Duffs claim for attorney fees are relatively simple and would not require extensive hearing. At the hearing on relief from stay, she asserted three grounds of objection to the claim, all of which relate only the prejudgment interest claimed by Duff and awarded by the jury. The amount of money involved is substantial: apparently, over $90,000.00 of Duff’s claim consists of interest charged by him on the unpaid balance of his fees at the rate of 1.5% per month, compounded monthly (an effective annual rate of 19.56%). The debtor asserts three defenses to the claim for interest: (1) that she was coerced, by an improper threat to withdraw from representation, into signing the 1991 agreement obligating herself to pay interest; (2) that the interest rate charged is usurious; and (3) that the charging of interest violates the Virginia Code of Professional Responsibility, which, it is asserted, limits the circumstances in which an attorney may ethically charge a client interest.

With respect to the issue of duress, it would appear, first, that all the evidence has already been heard by the state court jury and trial judge in the course of the three-day trial and that to relitigate the issue in this court would not only be wasteful of the judicial resources of this court but would involve unfair and unnecessary expense to the plaintiff, who has already been required to litigate the issue once and who would be required to incur additional expense to litigate it a second time in this court. As to that issue, it would clearly promote judicial economy to have the state court judge, who has already heard the evidence, determine whether to enter a judgment that

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includes prejudgment interest based on the 1991 agreement.

The other two contentions are somewhat more problematic. The usury argument is largely, if not entirely, legal in nature and does not require elaborate fact-finding. Indeed, it is asserted that admissions made by Duff in the state court action conclusively establish that the contract between him and the debtor did not fall within any of the several exceptions to Virginia’s usury statute limiting the lawful rate of interest that may be charged to 12%.[6] Likewise the issue of whether the Virginia Code of Professional Responsibility bars Duff from charging interest in the circumstances of this case is largely legal, although, since in Virginia an attorney may ethically charge his or her client interest in certain circumstances,[7] some fact-finding would be required,

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which would in turn would necessitate the taking of evidence.

On balance, given that two of the objections urged by the debtor to entry of judgment on the jury verdict require consideration of the factual circumstances, which the state trial court judge has already heard, and on which this court would otherwise have to take evidence, judicial economy weighs heavily in favor of having such objections ruled upon in the first instance by the state court.[8]

D. Whether the estate can be protected if the stay is modified.

In his motion for relief, Duff agreed that no execution would issue on any judgment entered by the state court, and that entry of the judgment would be solely for the purpose of liquidating what is currently a disputed claim. In addition, he now offers, if relief is granted, to relinquish his attachment lien. The pendency of the attachment gave the court considerable concern, since under Virginia law the lien of a prejudgment attachment, although effective as of the date of the levy, becomes enforceable only after judgment is obtained on the underlying claim. Dorrier v. Masters, 83 Va. 459, 2 S.E. 927 (1887) Ross v. Peck Iron Metal Co., 264 F.2d 262 (4th Cir. 1959). That concern, of course, is mooted if Duff waives the attachment lien. The interests of the bankruptcy estate, if relief is granted, can be fully protected by appropriate conditions in the order granting relief that prevent the judgment from becoming a lien against the debtor’s real estate and which prohibit any execution on the judgment.

The debtor has raised an additional issue. The attorney who represented her in the state

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court action is a creditor in this case with respect to his own unpaid legal fees. In order for him to be compensated for any post-petition representation of the debtor in possession, his employment must be approved by this court under § 327 of the Bankruptcy Code. His status as a creditor would not necessarily bar him from representing the debtor as special counsel, since special counsel, unlike general counsel to the debtor in possession, is not required to be “disinterested.”[9] Nevertheless, counsel for the debtor in possession asserts that the United States Trustee commonly objects to attorneys serving even as special counsel to a debtor in possession if they hold a claim against the estate, and that as a practical matter motions to approve such employment have to be set for hearing and noticed to creditors. Duff advises the court that if relief from stay is granted, he intends to move for entry of judgment on the jury verdicts at the first available Friday motions day in the Fairfax County Circuit Court, which the debtor in possession complains would not be sufficient time for her to obtain approval of the employment of special counsel.

The debtor’s concern is valid but may be readily accommodated. The court will require that any hearing in the state court for the entry of judgment on the jury verdict be held not sooner than 25 days from entry of the order modifying the stay, and the court will shorten to 10 days the period of notice on any motion the debtor in possession may file for employment of special counsel.

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ORDER
For the foregoing reasons, which constitute the court’s findings of fact and conclusions of law as required by F.R.Bankr.P. 7052, it is

ORDERED:

1. The automatic stay arising under § 362 of the Bankruptcy Code does not apply to, and does not stay, the debtor’s counter-claim against David L. Duff in that certain action pending in the Circuit Court of Fairfax County, Virginia, and argument may be heard, orders and judgment entered, and appeals taken and defended therefrom, notwithstanding the chapter 11 petition filed by the counter-claim plaintiff, Diana E. Mains.
2. The automatic stay arising under § 362 of the Bankruptcy Code is modified so as to permit David L. Duff to prosecute to judgment that certain action pending in the Circuit Court of Fairfax County, Virginia, between him and Diana E. Mains, including the taking or defending of any appeals therefrom, upon the following conditions:
a. David L. Duff will dismiss his petition attaching the $25,000.00 payment due to Diana E. Mains from Thomas P. Mains.
b. Any judgment order shall provide that the judgment shall not be or become a lien against real estate belonging to Diana E. Mains unless her bankruptcy case is dismissed, or except upon further order of this court.
c. No execution shall issue on any judgment unless the debtor’s bankruptcy case is dismissed, or except upon further order of this court.
d. No hearing will be held on entry of judgment sooner than 25 days from

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the entry of this order.
3. The clerk shall mail copies of this order to counsel for the debtor, counsel for David L. Duff, and the United States Trustee.