Wiencko v. Erlich ( 2004 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: AKEMI TAKAYAMA WIENCKO, 
Debtor.
AKEMI TAKAYAMA WIENCKO,
Plaintiff-Appellant,
v.  No. 03-2128
DAVID EHRLICH,
Defendant-Appellee.
UNITED STATES TRUSTEE,
Trustee.

In Re: CLYDE T. SHAW; In Re: 
DORIS LEDERER,
Debtors.
CLYDE T. SHAW; DORIS LEDERER,
Plaintiffs-Appellants,
v.  No. 03-2129
DAVID EHRLICH,
Defendant-Appellee.
UNITED STATES TRUSTEE,
Trustee.

2 IN RE WIENCKO
Appeals from the United States District Court
for the Western District of Virginia, at Roanoke.
James C. Turk, Senior District Judge.
(CA-03-252-7; CA-03-254-7; BK-01-5219-7-RKR;
BK-01-5217-7-RKR)
Submitted: April 30, 2004
Decided: May 24, 2004
Before NIEMEYER, LUTTIG, and DUNCAN, Circuit Judges.
Affirmed by unpublished per curiam opinion.
COUNSEL
Howard J. Beck, Jr., Lori D. Thompson, GENTRY, LOCKE, RAKES
& MOORE, Roanoke, Virginia, for Appellants. Richard C. Maxwell,
B. Webb King, WOODS ROGERS, P.L.C., Roanoke, Virginia, for
Appellee.
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
OPINION
PER CURIAM:
In these consolidated appeals, Clyde Shaw, Doris Lederer, and
Akemi Takayama Wiencko (the Debtors) appeal from the district
court’s orders affirming, on alternate grounds, the bankruptcy court’s
rulings finding that a Pennsylvania state court order in favor of David
IN RE WIENCKO 3
Ehrlich was valid and did not violate the automatic stay in their bank-
ruptcy proceedings. We affirm.
All of the parties were, at one time, members of a classical string
quartet called the Audubon Quartet, a non-profit corporation orga-
nized in Pennsylvania and based in Blacksburg, Virginia. The Debtors
terminated Ehrlich in early 2000; Ehrlich then filed suit in Pennsylva-
nia state court. Judgment was entered in Ehrlich’s favor, finding that
the Debtors had breached their fiduciary duties to Ehrlich and award-
ing him $611,119.24.
On December 12, 2001, the Debtors filed petitions for relief under
Chapter 13 of the bankruptcy code in the bankruptcy court for the
Western District of Virginia. On December 20, 2001, the Pennsylva-
nia trial court issued its "Adjudication and Final Decree," denying
both parties’ post-judgment motions and confirming its award of
$611,119.24 to Ehrlich. On the same day, the notice of the pending
bankruptcy proceedings was filed in the Pennsylvania court.
The Debtors filed motions in the bankruptcy court seeking to have
the December 20, 2001, order of the Pennsylvania court declared null
and void because it was entered after the automatic stay in their bank-
ruptcy proceedings. Ehrlich, in turn, filed a motion to dismiss the
Chapter 13 petitions on the grounds that the debtors were not quali-
fied to proceed under Chapter 13 because their debt exceeded the
limit provided in 11 U.S.C. § 109(e) (2000). The bankruptcy court
granted Ehrlich’s motion, dismissed the Debtors’ Chapter 13 petition,
and denied as moot the Debtors’ motion seeking to have the Pennsyl-
vania court order declared void. On May 30, 2002, the bankruptcy
court granted the Debtors’ motions to convert the cases to Chapter 11
proceedings. The Debtors again moved to have the Pennsylvania
court’s order declared void. On October 31, 2002, the bankruptcy
court issued an order finding that the dismissal of the Debtors’ Chap-
ter 13 petition effected a dissolution of the automatic stay, notwith-
standing their later conversion to Chapter 11. The court further found
that the Pennsylvania court’s December 20, 2001, order was in viola-
tion of the automatic stay in effect at the time and was therefore void.
The court reversed itself a month later and held that no automatic
stay ever existed because the Debtors were ineligible for relief under
4 IN RE WIENCKO
Chapter 13 when they filed their petitions. Accordingly, the court
found, the Pennsylvania court’s order was valid.
The Debtors appealed to the district court. Disagreeing with the
bankruptcy court, the court held, first, that the automatic stay arises
immediately upon the filing of a petition in bankruptcy, even where
the debtor is ineligible for relief under the Chapter in which he or she
filed. The court nevertheless affirmed the bankruptcy’s ultimate deter-
mination that the Pennsylvania court order was valid because it could
have been rendered valid under 11 U.S.C. § 362(d) (2000), which
allows a court to retroactively lift the automatic stay. The Debtors
noted timely appeals.
This court reviews the judgment of a district court sitting in review
of a bankruptcy court de novo, applying the same standards of review
that were applied in the district court. Three Sisters Partners, L.L.C.
v. Harden (In re Shangra-La, Inc.), 167 F.3d 843, 847 (4th Cir. 1999).
Specifically, the bankruptcy court’s factual findings are reviewed for
clear error, and legal determinations are reviewed de novo. Loudoun
Leasing Dev. Co. v. Ford Motor Credit Co. (In re K & L Lakeland,
Inc.), 128 F.3d 203, 206 (4th Cir. 1997).
We conclude that the bankruptcy court erred in finding that the
automatic stay never arose in the Debtors’ Chapter 13 proceeding
because they were ineligible for relief under that Chapter. Section 362
"imposes an automatic stay on all proceedings merely upon the filing
of a bankruptcy petition." Gilchrist v. General Elec. Capital Corp.,
262 F.3d 295, 303 (4th Cir. 2001). The bankruptcy court’s construc-
tion of § 362 creates an unwarranted exception to the automatic stay
and, therefore, we find that the stay was in effect at the time the Penn-
sylvania court entered the December 20, 2001, order.
Nevertheless, we conclude, as did the district court, that the bank-
ruptcy court’s ultimate determination that the state court order is valid
may be affirmed on alternate grounds supported by the record. See
Helvering v. Gowran, 302 U.S. 238, 245 (1937).
Under § 362(d), bankruptcy courts have the discretion to annul the
automatic stay retroactively for cause in order to rehabilitate stay vio-
lations. See Mataya v. Kissinger (In re Kissinger), 72 F.3d 107, 108-
IN RE WIENCKO 5
09 (9th Cir. 1995). Three factors are considered in determining
whether "cause" exists for lifting a stay under § 362(d):
(1) whether the issues in the case 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 require-
ment that creditors seek enforcement of any judgment
through the bankruptcy court.
In re Robbins, 964 F.2d 342, 346 (4th Cir. 1992). We find that all
three factors weigh in favor of annulling the stay under § 362(d).
First, the issues involved in the underlying litigation clearly involve
only state law. The suit involved the rights and duties of fiduciaries
of a closely-held corporation under Pennsylvania law. Further, the
December 20, 2001, order was only a formality because both liability
and amount of damages had been determined in the court’s October
12, 2001, Decree Nisi.
Second, as the district court noted, "principles of judicial economy
and comity weigh heavily in favor of annulling the automatic stay"
where the order at issue was entered after eighteen months of costly
litigation and where the final order of judgment was "only a formal-
ity." Finally, there will be little if any harm to the Debtors’ estate as
the automatic stay from the Debtors’ subsequent Chapter 11 proceed-
ing is currently in place to prevent any collection efforts by Ehrlich.
Therefore, the stay associated with the Chapter 13 proceedings could
have been annulled retroactively under § 362(d).
The Debtors argue that the district court’s application of § 362(d)
was improper because the court: (1) exceeded its jurisdiction where
a motion to annul the stay was pending in the bankruptcy court; (2)
exceeded the scope of its appellate review when it ruled on a matter
outside the scope of the issues raised on appeal; (3) denied them due
process because they were not afforded notice and a hearing as
required under § 362(d); and (4) reached its decision on the issue of
6 IN RE WIENCKO
annulment without a record to support it. These arguments were
addressed by the district court in denying the Debtors’ motion for
reconsideration. As the district court properly noted, the motion to
annul was mooted when the bankruptcy court issued its November 22,
2002, and January 7, 2003, orders holding that no automatic stay
arose when the Debtors filed for bankruptcy. Next, an appellate court
may affirm on alternate grounds—including grounds not raised by the
parties—where a sufficient basis appears on the record. Here, a suffi-
cient basis appears in the record to support application of § 362(d). In
applying § 362(d), the district court considered the history of the
Pennsylvania state court litigation, all of which is included in the
record and discussed in detail in the bankruptcy court’s rulings.
Finally, although § 362(d) does state that the court must provide
notice and a hearing, the Debtors cannot show that they were preju-
diced by the failure of the district court to do so.
Accordingly, we affirm the district court’s order affirming on alter-
nate grounds the bankruptcy court’s rulings determining that the
Pennsylvania state court order entered on December 20, 2001, did not
violate the automatic stay and is, therefore, valid. We dispense with
oral argument because the facts and legal contentions are adequately
presented in the materials before the court and argument would not
aid the decisional process.
AFFIRMED