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#2208 signed 3-27-96





IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS







In re:

AMERICAN FREIGHT SYSTEM, INC.,

DEBTOR.

CASE NO. 88-41050-11

CHAPTER 11

AMERICAN FREIGHT SYSTEM, INC.,

PLAINTIFF,

v.

RONALD H. SCHNEIDER, P.A.,

MICHAEL C. ZENDER,

MARVIN HAUGE AND RUTH HAUGE,

DEFENDANTS

ADVERSARY NO. 95-7028

MEMORANDUM OF DECISION

This proceeding is before the Court on the defendants' motion to dismiss or for summary judgment. Defendants Ronald H. Schneider, P.A., Michael C. Zender, Marvin Hauge, and Ruth Hauge (the defendants) appear by counsel Michael C. Zender and Larry G. Karns. Plaintiff-debtor American Freight System, Inc. (AFS), appears by counsel Kurt Stohlgren and Joseph L. Steinfeld, Jr. The Court has reviewed the relevant materials and is now ready to rule.

FACTS

Although AFS filed a motion to strike the defendants' motion and supporting affidavit, it has also effectively conceded that most of the following facts are not controverted. The facts not actually conceded are drawn from the official court files for this proceeding and the main bankruptcy case, and so are established by judicial notice under Rule 201 of the Federal Rules of Evidence.

AFS filed a Chapter 11 bankruptcy case on August 16, 1988, at 2:47 p.m. (The time of day of the filing is shown by the stamp the court clerk placed on the original petition which AFS filed to commence its bankruptcy case). That same day, but at an undisclosed time, Ronald H. Schneider, P.A., and Michael C. Zender, as counsel for Marvin Hauge and Ruth Hauge, filed a personal injury action in the District Court of Kandiyohi County, Minnesota. (The parties have not informed the Court of the time of day when this lawsuit was filed, and that information is not contained in this Court's records). A summons was mailed to AFS that day. When AFS filed its chapter 11 petition, 11 U.S.C.A. §362(a) imposed a stay which prohibited the commencement or continuation of such a lawsuit against AFS.

AFS did not list the Hauges on its bankruptcy schedules as creditors. Sometime after August 16, 1988, presumably after receiving the mailed summons for the Minnesota lawsuit, AFS sent the defendants a letter advising them of the bankruptcy filing. The Minnesota action was stayed after the defendants received this informal notice.

Although, as shown by its letter, AFS was aware the defendants had attempted to assert the Hauges' claim against it, AFS never added the Hauges (or their counsel) to its list of creditors. Consequently, no notices of significant events in the bankruptcy case were ever sent to the defendants. The defendants therefore received no notice of AFS's proposed disclosure statement and plan of reorganization, or of the confirmation hearing. The plan was confirmed on June 10, 1991, but no notice of this fact was sent to the defendants.

At some point late in 1994, the defendants became aware that AFS had obtained confirmation of a plan of reorganization. In early 1995, they sought to proceed with their Minnesota lawsuit. AFS responded, and the parties litigated certain issues before the Minnesota court. Those issues included the effect on the Minnesota lawsuit of AFS's failure to give the defendants notice of important events in the bankruptcy case, the timeliness of service of process on AFS in the Minnesota lawsuit, and AFS's possible waiver of objections to service. Apparently on March 1, 1995, the Minnesota court found the Hauges were entitled to proceed with their suit and placed the case back on its active calendar. The materials the parties supplied to this Court indicate they told the Minnesota court the date AFS filed for bankruptcy but failed to disclose the time of day it filed, just as they have told this Court the date but not the time of day when the Minnesota lawsuit was filed.

On March 8, 1995, AFS filed this adversary proceeding, seeking an injunction against the continuation of the Minnesota suit by the Hauges and their counsel, a declaration that the Minnesota suit is void, and an award of actual and punitive damages. In their answer, the defendants asserted a counterclaim for damages, fees, and costs on the ground AFS improperly filed this proceeding after litigating the same issues in the Minnesota case. On March 10, in its main bankruptcy case, AFS filed a motion for a contempt citation against the defendants. At a hearing on March 29, this Court orally denied AFS's motion for contempt citation. The Court ruled the Minnesota court had correctly determined that the defendants were not bound by AFS's confirmed plan since they received no notice of the plan confirmation process; this result was mandated by the Tenth Circuit's decision in Reliable Electric Co. v. Olson Construction Co., 726 F.2d 620 (1984). Sometime later, the defendants filed the motion to dismiss or for summary judgment which this order will resolve.

DISCUSSION AND CONCLUSIONS

Although section 1141 of the Bankruptcy Code might appear to bind a creditor to a confirmed reorganization plan and discharge its claim against the debtor without regard to any lack of notice to the creditor, the Tenth Circuit has ruled that the due process clause of the Fifth Amendment prevents imposing such consequences on a creditor who is given no notice of the hearing on confirmation of the plan. Reliable Electric v. Olson Construction, 726 F.2d 620, 623; see also Dalton Development Project #1 v. Unsecured Creditors Committee (In re Unioil), 948 F.2d 678 (10th Cir. 1991) (more recent application of rule established in Reliable Electric). While the summons mailed to AFS on the day the Minnesota suit was filed could not have been delivered until at least the next day and so could not give effective service because of the automatic stay imposed by §362(a), it certainly gave AFS actual knowledge of the existence of the Hauges' claim. AFS acted on this knowledge when it informed the defendants of its bankruptcy filing. The Hauges were known creditors entitled to notice. Since AFS did not give them notice of the confirmation hearing, their claim is protected by Reliable Electric.

AFS has failed to demonstrate to either this Court or the Minnesota court that the automatic stay was in effect before the defendants filed their state-court lawsuit. The Court infers from AFS's failure to present evidence of the time of day when the Minnesota suit was filed that the suit was filed earlier in the day than AFS's bankruptcy petition. The attempted service would not have reached AFS before its bankruptcy filing, but the Court agrees with the Minnesota court that the filing of the Minnesota suit was not voided by the subsequent imposition of the automatic stay. As a result, AFS is not entitled to either a declaratory judgment that the suit is void or an injunction preventing its continuation. This means it cannot recover any damages from the defendants, either.

The conclusion that the Minnesota suit is not void does leave the question whether the Hauges' claim is barred under the Minnesota statute of limitations and suspension statute. At a hearing in October 1995, the Court asked the parties to address the question of the tolling of the statute of limitations while the automatic stay was in effect. Although the parties mention 11 U.S.C.A. §108(c) in their briefs on that question, both sides indicate Minnesota law will almost completely control it. The Court believes §§362(c) and 1141(d) of the Bankruptcy Code also have some impact on the resolution of the question, but agrees with the parties that Minnesota law will largely determine it. Consequently, the Court will exercise its discretion to abstain under 28 U.S.C.A. §1334(c)(1) and leave that state law issue for the Minnesota court to resolve. See Siragusa v. Siragusa (In re Siragusa), 27 F.3d 406, 408 (9th Cir. 1994) (listing some factors that affect decision under §1334(c)(1)).

The defendants contend the Court should sanction AFS for commencing this proceeding after the Minnesota court had ruled against it on the issues raised, and continuing to prosecute the proceeding after this Court had denied its request for a contempt citation. They ask for their costs and attorney fees. The general rule is that a concurrent action pending in state court does not bar a federal court having jurisdiction from hearing the same matter. Tucker v. First Maryland Savings & Loan, 942 F.2d 1401, 1407 (9th Cir. 1991). In fact, before the Supreme Court declared in 1976 that it could be done, there had been some doubt whether a federal court with jurisdiction had the power to abstain from hearing a matter solely because a similar action was already pending in a state court in which the parties' dispute could be resolved. 17A Wright, Miller & Cooper, Fed. Prac. & Pro. Jurisdiction, §4247 (1988). Ordinarily, a federal court is obliged to exercise its jurisdiction despite a concurrent state proceeding. Id., §4247 at 151-54. Of course, in the bankruptcy context, Congress has made abstention more readily available by expressly providing for it in 28 U.S.C.A. §1334(c). Both courts in which the concurrent proceedings are pending are free to go forward until one renders a judgment that can be asserted as res judicata in the other. 17A Wright, Miller & Cooper, §4247 at 124. Consequently, AFS was free to bring this adversary proceeding before this Court unless the Minnesota court's decision to return the defendants' lawsuit to its active calendar constituted res judicata on the claims AFS asserted here.

Similar to Federal Rule of Civil Procedure 54(b), Minnesota Rule of Civil Procedure 54.02 provides:

When multiple claims for relief or multiple parties are involved in an action, the court may direct the entry of a final judgment as to one or more but fewer than all of the claims or parties only upon an express determination that there is no just reason for delay and upon an express direction for the entry of judgment. In the absence of such determination and direction, any order or other form of decision, however designated, which adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties shall not terminate the action as to any of the claims or parties, and the order or other form of decision is subject to revision at any time before the entry of judgment adjudicating all the claims and the rights and liabilities of all the parties.

See also Krmpotich v. City of Duluth, 449 N.W.2d 507, 509 (Minn.App. 1989) (judgment on less than all claims is not appealable unless it states that there is no just reason for delay and directs entry of final judgment). Nothing presented to the Court indicates the Minnesota court entered such a judgment resolving the claims AFS has asserted here. The case the defendants cite is distinguishable because the state court had entered such a partial but final judgment. In re Moon, 116 B.R. 75, 76-79 (Bankr.E.D.Mich. 1990). The Court concludes res judicata did not bar the relief AFS sought in this proceeding.

Unaware of any law which precluded AFS from bringing this proceeding, the Court must conclude AFS cannot be sanctioned for doing so. Although AFS has not asked for summary judgment, the conceded facts show the defendants are not entitled to recover sanctions. The defendants request for damages, fees, and costs must be denied.

The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A judgment based on this ruling will be entered on a separate document as required by FRBP 9021 and FRCP 58.

Dated at Topeka, Kansas, this ____ day of March, 1996.













_________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE





IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS









In re: )

)

AMERICAN FREIGHT SYSTEM, ) CASE NO. 88-41050-11

INC., ) CHAPTER 11

)

DEBTOR. )

)

AMERICAN FREIGHT SYSTEM, )

INC., )

)

PLAINTIFF, )

v. ) ADVERSARY NO. 95-7028

)

RONALD H. SCHNEIDER, P.A., )

MICHAEL C. ZENDER, MARVIN )

HAUGE AND RUTH HAUGE, )

)

DEFENDANTS. )



JUDGMENT ON DECISION

This proceeding was before the Court on the defendants' motion to dismiss or for summary judgment. Defendants Ronald H. Schneider, P.A., Michael C. Zender, Marvin Hauge, and Ruth Hauge (the defendants) appeared by counsel Michael C. Zender and Larry G. Karns. Plaintiff-debtor American Freight System, Inc. (AFS), appeared by counsel Kurt Stohlgren and Joseph L. Steinfeld, Jr. The Court reviewed the relevant materials and issued its Memorandum of Decision resolving their disputes.

For the reasons stated in the Memorandum of Decision, judgment is hereby entered denying all the relief AFS sought in its complaint, and denying the relief the defendants sought in their counterclaim. The Court hereby abstains from deciding whether the Hauges' claim against AFS is barred by the Minnesota statute of limitations.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of March, 1996.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

 

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