law-bankruptcy stay | bankruptcy and state court proceedings |

Tex. R. App. P. 8.2 ("
A bankruptcy suspends the appeal and all periods in these rules from
the date when the bankruptcy petition is filed until the appellate court reinstates or
severs the appeal in accordance with federal law.
").

BANKRUPTCY STAY CASE LAW FROM HOUSTON COURTS OF APPEALS

McCloskey v. McCloskey (Tex.App.- Houston [14th Dist.] Mar. 23, 2010)(Frost)
(
appeal from garnishment order, subsequent appeal, divorce and SAPCR case, characterization of
attorney's fees as child support in divorce case, bankruptcy stay)
In seven issues, Chris, the garnishment debtor, contends that (1) the trial court abused its discretion by not complying with
the mandate of the appellate court, (2) the garnishment action violated the automatic bankruptcy stay, (3) the garnishment
action is improper because it is the second action for the same fees, (4) the manner in which Chris’s assets were taken from
two separate-property accounts was improper, (5) this court should stay execution of judgment until this court “rules on the
characterization of attorney fees as child support,”(6) Chris was improperly divested of his assets, and (7) the judgment is
manifestly unjust.  We affirm.
Our record contains documents from Chris’s Chapter 7 bankruptcy case showing that, under section 554(a) of the Bankruptcy
Code, the bankruptcy trustee abandoned the property that is the subject of the trial court’s garnishment judgment.  See 11 U.S.
C. § 554(a).  This abandonment meant that this property was no longer “property of the estate.”  See Bamburg v. Townsend,
35 S.W.3d 85, 88–89 (Tex. App.—Texarkana 2000, no pet.).  The garnishment action resulted in the collection of attorney’s
fees as “additional child support” that were awarded in the trial court’s decree.  After the trial court rendered its garnishment
judgment, this court modified the decree so that the fees were not awarded as child support.  Nonetheless, this subsequent
modification of the decree does not retroactively operate to change the character of the garnishment action.  The fees
collected in the garnishment action were “alimony, maintenance, or support” within the meaning of former section 362(b)(2)(A)
(ii).  See Silansky v. Brodsky, Greenblatt & Renehan, 897 F.2d 743, 744  (4th Cir. 1990); Klass v. Klass, 831 A.2d 1067, 1075
(Md. 2003).  Because the garnishment action was an action for the “collection of alimony, maintenance, or support from
property that is not property of the estate” under former section 362(b)(2) of the Bankruptcy Code, it did not violate the
bankruptcy stay.  Accordingly, Chris’s second issue is overruled.
Chris argues, in part, under his fifth issue that the trial court lacked jurisdiction over the garnishment action because the
bankruptcy stay applied.  Because the stay did not apply, we also overrule this part of the fifth issue.
AFFIRMED: Opinion by Justice Frost        
Before Justices Brock Yates, Frost and Brown    
14-08-00365-CV Christopher J. McCloskey v. Anne Miriam McCloskey, Michael A. Craig, and Fidelity
Investments D/B/A National Financial Services, L.L.C.    
Appeal from 387th District Court of Fort Bend County
Trial Court Judge: Robert J. Kern    


The scope of the property included in the bankruptcy estate is broad. United States v. Whiting Pools, Inc.,
462 U.S. 198, 204-05, 103 S. Ct. 2309, 2313 (1983); Sigmar v. Anderson, 212 S.W.3d 789, 794 (Tex. App.--
Austin 2006, no pet.).; After a debtor files a bankruptcy proceeding, the determination of what constitutes
property of the estate is a core proceeding over which the bankruptcy court has exclusive jurisdiction. See In
re Duval Ocunty Ranch Co., 167 B.R. 848 (Bankr. S.D. Tex. 1994) (citing Slay Warehousing Co. v. Modern
Boats, Inc., 775 F.2d 619, 620 (5th Cir. 1985)).
Koval v. Kirkland Contractors, Inc. (Tex.App,- Houston [1st
Dist.] Feb. 15, 2008)(Davie Wilson) (res judicata based on bankruptcy proceeding, attorney's fees probate
code,
waiver of cross-appeal)
AFFIRM TC JUDGMENT: Opinion by
Senior Justice Davie Wilson
Before Judge Wilson, Justices Alcala and Hanks
01-06-00067-CV Linda Koval v. Henry Kirkland Contractors, Inc.
Appeal from
Probate Court No 3 of Harris County (Judge Hon. Rory R. Olsen)  

BANKRUPTCY STAY

In Re Small, NO. 14-08-01075-CV (Tex.App.- Houston [14th Dist.] May 7, 2009)(Anderson) (civil contempt is
void in violation of the bankruptcy stay)the bankruptcy court entered an order granting partial relief from
the bankruptcy stay.  See 11 U.S.C.A. §362(a)(1) (West 2004) (filing of bankruptcy petition stays
commencement or continuation of judicial proceeding against debtor).  The bankruptcy court
modified the stay to allow the trial court to (1) enter judgment from the October 2007 trial ”consistent
with the evidence and the jury verdict,” (2) enter a divorce between relator and McMaster, (3)
determine the amount of any future support owed by relator to McMaster so long as such support is
paid from relator’s future earnings and not from property of the bankruptcy estate, (4) determine the
amount of any monetary damages claim held by McMaster against relator, (5) enter any other order
against any non-debtor parties, and (6) allocate the community estate between relator and
McMaster.  The order also allows any party to the underlying proceeding to “prosecute any appeal
of the orders and/or judgments” of the trial court.  

In his motion for rehearing, relator argues, for the first time, the October 31, 2008 contempt order is
void because it violates the automatic bankruptcy stay.[2]  "Because in Texas we recognize that a
judgment entered in violation of the bankruptcy stay is void for lack of jurisdiction, this is a
fundamental error that can be recognized by the appellate court, sua sponte, or raised for the first
time on appeal by a party.”  Houston Pipeline Co. LP v. Bank of Am., N.A., 213 S.W.3d 418, 429
(Tex. App.-Houston [1st Dist.] 2006, no pet.).  Therefore, we will address this issue.  Bankruptcy
courts take two approaches to determining whether a civil contempt proceeding is subject to the
automatic bankruptcy stay.  Some courts hold, because civil contempt is not among the exceptions
found in section 362(b), such actions are considered private collection devices and come within the
scope of the automatic stay.  In re Wiley, 315 B.R. 682, 687 (E.D. La. 2004) (quoting In re Newman,
196 B.R. 700, 704 (S.D. N.Y. 1996)); In re Lincoln, 264 B.R. 370, 373-74 (E.D. Pa. 2001).[5]  Other
courts do not look to the civil or criminal nature of the state court proceedings, but look at the
circumstances surrounding the issuance of the order of contempt to determine whether the intent of
the court was (1) to enforce compliance with a court order, i.e., satisfy a judgment, or (2) to uphold
the dignity of the court or simply to punish.  In re Wiley, 315 B.R. at 687; In re Lincoln, 264 B.R. at
373-74.  Where the contempt citation is designed to uphold an order of the court and not calculated
to enforce a money judgment, i.e., pursue a “collection motive,” enforcement of that order does not
violate the bankruptcy stay.  In re Rook, 102 B.R. 490, 493 (E.D. Va. 1989).  

We need not decide which approach to follow because, under either, the October 31, 2008
contempt order violates the bankruptcy stay.  Under the first approach, the civil contempt order is
subject to the bankruptcy stay because civil contempt is not one of the enumerated exceptions
found in the bankruptcy code.  The contempt order also violates the bankruptcy stay under the
second approach because it is designed to coerce relator’s compliance with the November 1,
2005 order awarding the temporary spousal support.  

Moreover, we further conclude the bankruptcy court’s February 15, 2008 order for partial relief from
the bankruptcy stay does not allow the trial court to enter a civil contempt order.  Although McMaster
may have a “monetary damages claim” against relator with regard to her claim for temporary
support, the February 15, 2008 order only permits the trial court to determine the amount of such
claim.  The February 15, 2008 order also only allows the trial court to determine the amount of any
future support owed by relator to McMaster so long as support is paid from relator’s future earnings
and not from property of the bankruptcy estate.  McMaster sought payment for past support.  

Patton v. Patton (Tex.App.- Houston [14th Dist.] July 30, 2009)(per curiam dismissal of appeal after
conclusion of bankruptcy and notice to parties; stay was in effect)
DISMISSED: Per Curiam  
Before Justices Anderson, Guzman and Boyce  
14-05-00803-CV  Laura A. Patton v. Jimmy R. Patton   
Appeal from
246th District Court of Harris County

Houston Pipe Line Company, LP v. Bank of America, NA (Tex.App.- Houston [1st Dist.] Aug 24, 2006, no pet.)
(violation of bankruptcy stay, void order)
VACATE TC JUDGMENT AND DISMISS CASE: Opinion by Justice Alcala  
Before Justices Jennings, Alcala and Hanks
01-03-01263-CV  Houston Pipeline Company, LP v. Bank of America, N.A., As Administrative Agent, and as
Representative of the Wilmington Trust Company, Trustee of the Bammel Gas Trust--Appeal from 280th
District Court of Harris County
Trial Court Judge:   
The Honorable Tony Lindsay
Appellant, Houston Pipeline Company LP (Houston Pipeline), appeals from a declaratory judgment entered
by the trial court declaring relative rights in natural gas between Houston Pipeline and appellee, Bank of
America, N.A. (the Bank). In five issues, Houston Pipeline contends the following: (1) the declaratory
judgment violated the automatic bankruptcy stay of the Enron Company's (Enron) and related entities'
bankruptcies; (2) the declaratory judgment violated the declaratory judgments act by affecting interests of
absent parties and by not resolving the controversy; (3) the declaratory judgment was not entered in support
of a ripe and justiciable controversy; (4) unresolved questions of material fact precluded entry of summary
judgment on three of the four declarations; and (5) the trial court erred by summarily rejecting Houston
Pipeline's counterclaim. We conclude that the trial court's entry of the declaratory judgment violated the
automatic bankruptcy stay, thus rendering the judgment void. Accordingly, we vacate the trial court's
judgment and dismiss the case.

The Automatic Bankruptcy Stay

In its first issue, Houston Pipeline contends that the trial court's entry of summary judgment and the
Declarations violated the automatic bankruptcy stay, thus rendering the judgment void. The Bank contends
that the stay was not violated because only Enron had standing to assert the stay, the judgment did not
affect the Enron bankruptcy estate, and the stay was subsequently lifted, rendering any violation of the stay
complaint moot.

The filing of a bankruptcy petition operates as an automatic stay of the following acts, among others: "any
act to obtain possession of property of the estate or of property from the estate or to exercise control over
property of the estate," or "any act to create, perfect, or enforce any lien against property of the estate." 11
U.S.C.S. § 362(a)(3), (4) (LexisNexis 1995). The Bankruptcy Code defines property of the estate broadly to
include "all legal or equitable interests of the debtor in property as of the commencement of the [bankruptcy]
case." 11 U.S.C.S. § 541(a)(1) (LexisNexis 1995); see United States v. Whiting Pools, Inc., 462 U.S. 198,
204-05, 103 S. Ct. 2309, 2312 (1983).

The automatic stay encompasses a "wide swath of legal actions, including litigation, lien enforcement, and
administrative proceedings, that could affect or interfere with the property of the bankrupt's estate."
Checkers Drive-In Rests., Inc. v. Comm'r of Patents & Trademarks, 51 F.3d 1078, 1080 (D.C. Cir. 1995)
(emphasis added). The automatic stay offers important protection for debtors and creditors alike. Id. at 1081-
82.

Without [the automatic stay], certain creditors would be able to pursue their own remedies against the
debtor's property. Those who acted first would obtain payment of the claims in preference to and to the
detriment of other creditors. Bankruptcy is designed to provide an orderly liquidation procedure under which
all creditors are treated equally. A race of diligence by creditors for the debtor's assets prevents that.

Id. at 1082 (quoting S. Rep. No. 989 at 49, 95th Cong., 2d Sess. 54 (1978), reprinted in 1978 U.S.C.C.A.N.
5787, 5835, H.R. Rep. No. 595, 95th Cong., 2d Sess. 340 (1977), reprinted in 1978 U.S.C.C.A.N. 5963,
6297); see also Mann v. Chase Manhattan Mortgage Corp., 316 F.3d 1, 3 (5th Cir. 2003) (stating,
"automatic stay . . . serves the salutory purpose of deterring creditors from jockeying for advantage" and is
thus "designed to forfend against the disorderly, piecemeal dismemberment of the debtor's estate outside
the bankruptcy proceedings"). "To effectuate these congressional purposes, section 362(a) generally must
be construed broadly" but "no more expansively than . . . necessary to effectuate [its] legislative purpose."
Checkers Drive-In Rests., 51 F.3d at 1082. Specifically, "[t]he stay [must insure] that the debtor's affairs will
be centralized, initially, in a single forum in order to prevent conflicting judgments from different courts and in
order to harmonize all of the creditors' interests with one another." A.H. Robins Co. v. Piccinin, 788 F.2d 994,
998 (4th Cir. 1986) (quoting Fidelity Mortgage Investors v. Camelia Builders, Inc., 550 F.2d 47, 55 (2d Cir.
1976)) (emphasis added).

The automatic stay generally does not extend to protect nondebtor parties. (4) Darr v. Altman, 20 S.W.3d
802, 807 (Tex. App.--Houston [14th Dist.] 2000, no pet.). An exception applies, however, "when the claims
against the debtor and nondebtor parties are 'inextricably intertwined.'" Id. (citing Carway v. Progressive
County Mut. Ins. Co., 183 B.R. 769, 775 (S.D. Tex. 1995); Federal Life Ins. Co. (Mut.) v. First Fin. of Tex.,
Inc., 3 B.R. 375, 376-77 (S.D. Tex. 1980)). The automatic stay applies to nondebtors when "the allegations
against [the debtors and nondebtors] arise from the same factual and legal basis." Federal Life Ins., 3 B.R.
at 377.

A. Property of the Estate

Before determining whether the trial court's judgment violated the automatic stay, we must first determine
whether the Storage Gas is property of the Enron bankruptcy estate and thereby whether the Declarations
affect or interfere with property of the Enron bankruptcy estate. Houston Pipeline contends that the Storage
Gas is property of the bankruptcy estate that was protected by the automatic stay. Although the Bank
contends that "this case does not involve property of the bankruptcy estate," it conceded during oral
argument that LeaseCo has an interest in the Storage Gas.

As set forth above, property of the estate is defined broadly to include "all legal or equitable interests of the
debtor in property" when the bankruptcy is filed. 11 U.S.C.S. § 541(a)(1) (emphasis added); see Whiting
Pools, 462 U.S. at 204-05, 103 S. Ct. at 2312. This encompasses "all kinds of property including tangible or
intangible property, causes of action, and all other forms of property currently specified in section 70a of the
Bankruptcy Act." (5) Whiting Pools, 462 U.S. at 205 n.9, 103 S. Ct. at 2313 n.9. A debtor's possessory and
ownership interests in property constitute property of the estate. See BKS Props. v. Shumate, 271 B.R. 794,
799 (N.D. Tex. 2002) (holding that ownership interest in corporation or partnership constituted property of
estate); MCZ, Inc. v. Andrus Res., Inc. (In re MCZ , Inc.), 82 B.R. 40, 42 (Bankr. S.D. Tex. 1987) (holding that
debtor's possessory interest in funds on deposit constituted property of estate). Furthermore, it is well
settled that a leasehold interest is property of the bankruptcy estate. In re Lucre, Inc., 339 B.R. 648, 653
(Bankr. W.D. Mich. 2006); In re Drexel Burnham Lambert Group, Inc., 138 B.R. 687, 702 (Bankr. S.D.N.Y.
1992); In re Alert Holdings, Inc., 148 B.R. 194, 203 (Bankr. S.D.N.Y. 1992). Likewise, as a general rule, a
debtor's interest as beneficiary of a trust is property of the estate. (6) See In re Young, 297 B.R. 492, 498 (E.
D. Tex. 2003) (citing In re Shurley, 115 F.3d 333 (5th Cir. 1997) (holding that property contributed by debtor
as beneficiary of family trust was property of estate)); Ohanian v. Irwin (In re Irwin), 338 B.R. 839, 852 (E.D.
Cal. 2006) (holding that debtor's interest as beneficiary of living trust was property of estate).

LeaseCo, a subsidiary of Enron, is one of the debtors in the Enron bankruptcy. As discussed above, it is
undisputed by the parties that LeaseCo has an interest in the Storage Gas. Moreover, the record shows the
following ownership and possessory interests in the Storage Gas belonging to LeaseCo:

* •The Amended Pressurization Agreement reflects that LeaseCo was leasing the Storage Gas held in trust
by Bammel Trust; (7)

* •The Right to Use Agreement states that LeaseCo will have "sufficient rights" in the Storage Gas "to enable
it to make and that it will cause and allow [the Storage Gas] to be available to [Houston Pipeline]"; and

* •The Amended and Restated Declaration of Trust states that "[f]or purposes of federal, state and local
income and franchise taxes and any other tax imposed on or measured by income . . . the Trust Estate is an
asset of LeaseCo." (8)

Because the record clearly shows that LeaseCo has possessory and ownership interests in the Storage
Gas, we thus conclude that the Storage Gas is property of the LeaseCo bankruptcy estate, subject to the
automatic stay. See 11 U.S.C.S. § 362(a)(3), (4).

B. Stay Violations under Section 362(a)(3) and (4)

Section 362(a)(3) stays "any act to obtain possession of . . . or to exercise control over property of the
estate." 11 U.S.C.S. § 362(a)(3) (emphasis added). The stay under subsection (a)(3) applies to "any action,
whether against the debtor or third-parties, to obtain possession or to exercise control over property of the
debtor." A.H. Robins, 788 F.2d at 1001 (emphasis in original); see also Marroquin v. D & N Funding, Inc.,
943 S.W.2d 112, 115 (Tex. App.--Corpus Christi 1997, no pet.) (holding stay was intact against nondebtor
third party for action that sought to evict debtor and nondebtor from property of the estate); Audio Data
Corp. v. Monus, 789 S.W.2d 281, 286 (Tex. App.--Dallas 1990, no writ) (holding that stay under 362(a)(3) is
applicable to all entities of "any act to obtain possession of . . . or to exercise control over property of the
estate") (quoting 11 U.S.C.S. § 362(a)(3)).

Further, "[a] declaratory judgment action against a debtor is an 'act to . . . exercise control over property of
the estate', 11 U.S.C.S. § 362(a)(3), insofar as it seeks to affect . . . estate property." Harbison-Walker
Refractories Co. v. Ace Prop. & Casualty Ins. Co. (In re Global Indus. Techs., Inc.), 303 B.R. 753, 760
(Bankr. W.D. Penn. 2004), vacated in part & modified on other grounds, 2004 WL 555418 (Feb. 3, 2004).
Thus, "[a]ny action in which the judgment may diminish" an asset of the bankruptcy estate "is unquestionably
subject to a stay under this subsection." A.H. Robins, 788 F.2d at 1001 (citing In re Johns Manville Corp., 33
B.R. 254, 261 (Bankr. S.D.N.Y. 1983)). We apply section 362(a)(3) in light of the "Bankruptcy Code's
general policies of securing and preserving the debtor's property and of ensuring equal distribution of the
debtor's assets to similarly situated creditors." Audio Data, 789 S.W.2d 281 at 286.

Section 362(a)(4) stays "any act to create, perfect, or enforce any lien against property of the estate." 11 U.
S.C.S. § 362(a)(4) (emphasis added). A lien "is enforced by affirmative action such as filing lawsuits,
foreclosing, and filing a notice of lis pendens." Kocurek v. Arnold (In re Thurman), 163 B.R. 95, 100 (Bankr.
W.D. Tex. 1994). These types of enforcement actions "would clearly be stayed by § 362(a)(4)." Id.

We analyze each Declaration under subsections 362(a)(3) and (4) to determine whether the Declarations as
a whole violated the automatic stay. The trial court made the following three interrelated declarations,
referenced above: "[Houston Pipeline] is estopped to deny that the Trustee is the owner of the Storage
Gas"; "[The Bank] . . . holds a security interest that is, as against [Houston Pipeline], a valid and first-priority
security interest in the Storage Gas"; and "Any rights of [Houston Pipeline] to use the Storage Gas . . . are
subject to the Trustee's ownership rights in and to the Storage Gas and [the Bank's] security interest in the
Storage Gas." We conclude that these Declarations affect estate property as an act to control estate
property because they influence the disposition of the Storage Gas by preventing Houston Pipeline from
asserting an interest in the Storage Gas in bankruptcy court. See A.H. Robins, 788 F.2d at 1001; Harbison-
Walker, 303 B.R. at 760. Thus, by excluding an interested third party, Houston Pipeline, we construe these
Declarations as an act to exercise control over the Storage Gas.

We further conclude that these Declarations constitute an act to enforce the Bank's security interest
because as part of the Bank's enforcement action against Enron, the Bank needed to determine whether its
security interest was superior to Houston Pipeline's interest in the Storage Gas. See Kocurek, 163 B.R. at
100. Thus, a determination of what party holds a superior interest in the Storage Gas was a necessary
prerequisite to the Bank entering a settlement agreement with Enron in bankruptcy court to enforce its
security interest. We therefore conclude that these Declarations are an act to control estate property in
violation of section 362(a)(3) of the bankruptcy stay and an act to enforce a lien in violation of section 362(a)
(4) of the bankruptcy stay.

The trial court also declared, "As a result of Bankruptcy Events involving Enron Corp. and [LeaseCo], Events
of Default and Guaranty Defaults have occurred under the Participation Agreement, the Guaranty, and the
Security Agreement." By asserting that an "Event of Default" has occurred, this Declaration directly affects
estate property because an Event of Default triggers the Bammel Trust trustee's right to enforce its rights
and remedies under the Guaranty, including any "rights and remedies available at law, in equity, by statute,
by agreement, or otherwise" against LeaseCo and in pursuit of the Storage Gas. Thus, we conclude that this
Declaration affects estate property as an act to exercise control over the disposition of the Storage Gas and
enforce rights and remedies against the debtor LeaseCo. See A.H. Robins, 788 F.2d at 1001; Global Indus.,
303 B.R. at 760.

Moreover, because the trial court's entry of the Declarations affects estate property, we further conclude
that the declaratory judgment action itself was an act by the Bank to control property of the estate in
violation of the automatic stay. See Global Indus., 303 B.R. at 760, 764. The trial court's entry of judgment,
therefore, violated the automatic bankruptcy stay. Furthermore, this declaratory judgment action would have
been more properly handled by the bankruptcy court to insure that Enron's "affairs [would have been]
centralized, initially, in a single forum in order to prevent conflicting judgments," A.H. Robins, 788 F.2d at
998, and because the "the allegations against [Enron and Houston Pipeline arose] from the same factual
and legal basis." Federal Life Ins., 3 B.R. at 377.



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