Amayo v MJ Company [2007] FMSC 3; 14 FSM Intrm. 535 (Pon. 2007) (26 January 2007)

FEDERATED STATES OF MICRONESIA
SUPREME COURT TRIAL DIVISION
Cite as Amayo v. MJ Co., [2007] FMSC 3; 14 FSM Intrm. 535 (Pon. 2007)

ALFREDO AMAYO, and ELSA AMAYO, individually,

and as next friends of ALFIE AMAYO, APRIL

AMAYO, and JILLEEN AMAYO,
Plaintiffs,

vs.

MJ COMPANY, RON PANGELINAN, and IOANIS

PANUELO d/b/a IP ENTERPRISES,
Defendants.

CIVIL ACTION NO. 1999-091

MEMORANDUM AND ORDER CONCERNING
BANKRUPTCY APPLICATION’S EFFECT

Martin Yinug
Associate Justice

Decided: January 26, 2007

APPEARANCES:

For the Plaintiffs:
Daniel J. Berman, Esq.
P.O. Box 2069
Kolonia, Pohnpei FM 96941

For the Defendant (Panuelo):
Ron Moroni, Esq.
134 West Soledad Avenue, Suite 402
Hagatna, Guam 96910

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HEADNOTES

Bankruptcy - Automatic Stay
By operation of law, the moment a person files an application for relief under the Bankruptcy Act of 2004 (Title 31 of the FSM Code), all legal proceedings against that applicant-debtor are automatically stayed with the exception of criminal proceedings and proceedings by a governmental entity to enforce a police or regulatory power. No court order or notice is needed or issued for the stay to take effect. Amayo v. MJ Co., [2007] FMSC 3; 14 FSM Intrm. 535, 537 (Pon. 2007).

Bankruptcy
Exhibit A and Form 4 are official forms that are only to be filed by corporate debtors in chapter 3 reorganization cases, not by an individual applying for bankruptcy relief under chapter 2. Amayo v. MJ Co., [2007] FMSC 3; 14 FSM Intrm. 535, 537 (Pon. 2007).

Bankruptcy

[14 FSM Intrm. 534]

A bankruptcy application must be accompanied by the debtor’s statement of financial condition, as well as schedules of debts, assets and exemptions of the debtor. Amayo v. MJ Co., [2007] FMSC 3; 14 FSM Intrm. 535, 538 (Pon. 2007).

Bankruptcy
Under the Bankruptcy Rules, the debtor’s schedules and statements must, in a voluntary case, be filed with the application or if the application is accompanied by a list of all the debtor’s creditors and their addresses, within 15 days thereafter, except as otherwise provided. Amayo v. MJ Co., [2007] FMSC 3; 14 FSM Intrm. 535, 538 (Pon. 2007).

Bankruptcy
A "creditor" is someone who has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor and a "claim" is any right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. Amayo v. MJ Co., [2007] FMSC 3; 14 FSM Intrm. 535, 538 (Pon. 2007).

Bankruptcy; Bankruptcy - Automatic Stay
Persons with a claim to a disputed, unsecured, unliquidated debt owed by the debtor which arose before the debtor applied for bankruptcy relief are "interested parties" who may appear in the bankruptcy proceeding and who may (and must) pursue any sanctions of the debtor and relief from the automatic stay within the bankruptcy case. Amayo v. MJ Co., [2007] FMSC 3; 14 FSM Intrm. 535, 538 (Pon. 2007).

Bankruptcy - Automatic Stay
The Bankruptcy Act sets forth the proper procedure to be followed by anyone who desires relief from the automatic stay. Relief from the automatic stay may be sought by applying to the bankruptcy court, and if that court grants the relief from the stay and determines that the disputed claim against the debtor should be referred to and determined by the court in which the case was already filed, that court will proceed with trial of the claim against the debtor. Amayo v. MJ Co., [2007] FMSC 3; 14 FSM Intrm. 535, 538 (Pon. 2007).

Bankruptcy - Automatic Stay
Unless and until the bankruptcy court grants relief from the automatic stay and refers the matter to the court in which the claim was filed to determine the amount of the claim allowable, the court can take no further action on the claim against the debtor. A plaintiffs’ request to the court in that case cannot be considered a request for relief from the automatic stay since it bypasses the bankruptcy court, the only proper forum in which to seek such relief. Only the bankruptcy court can lift the automatic stay. Amayo v. MJ Co., [2007] FMSC 3; 14 FSM Intrm. 535, 538 (Pon. 2007).

Bankruptcy - Automatic Stay
The trial court has no power to enter a default on the issue of the debtor’s liability or to try damages (damages would still need to be proven in an evidentiary proceeding) while the Bankruptcy Act’s automatic stay is in effect. Amayo v. MJ Co., [2007] FMSC 3; 14 FSM Intrm. 535, 538 (Pon. 2007).

Bankruptcy - Automatic Stay
When an automatic stay has taken effect because one defendant applied for bankruptcy relief, trial could sill proceed as scheduled on the plaintiffs’ claims against the other two defendants, but when the court considers that to be a needless waste of scarce judicial resources and an unnecessary financial burden on the plaintiffs to have to try the case first against those defendants, and then against the debtor, the court may continue the trial. Amayo v. MJ Co., [2007] FMSC 3; 14 FSM Intrm. 535, 539 (Pon. 2007).

[2007] FMSC 3; [14 FSM Intrm. 535]

Bankruptcy
The bankruptcy court may choose to try the plaintiffs’ previously-filed claim itself although the claim was previously filed in another case. Amayo v. MJ Co., [2007] FMSC 3; 14 FSM Intrm. 535, 539 (Pon. 2007).

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COURT’S OPINION

MARTIN G. YINUG, Associate Justice:

Trial in this matter was scheduled for January 30, 2007, to be preceded by a status conference set for the afternoon of January 29, 2007. On January 15, 2007, defendant Ioanis Panuelo filed an application for bankruptcy relief. Then, on January 18, 2007, Panuelo filed Official Bankruptcy Form 1 - Voluntary Application. The court asked the parties to submit by January 23, 2007, their views of the effect of Panuelo’s bankruptcy filing on this case, which the plaintiffs ("Amayos") and Panuelo both did.

I.

Panuelo asserts that the bankruptcy filing automatically stays any proceeding against him, but that trial could still proceed as scheduled against the other defendants since the automatic stay does not apply to them. The Amayos assert that Panuelo’s bankruptcy filing was defective because the proper forms were not used and the required schedules of assets and liabilities were not filed with Panuelo’s bankruptcy application and that therefore the court should strike Panuelo’s application as fatally defective, impose fees and costs for the Amayos’ expenses in trial preparation and for their response to the bankruptcy filing, and issue a notice that the court intends to enter a default judgment as to liability and damages after twenty days.

II.

By operation of law, the moment a person files an application for relief under the Bankruptcy Act of 2004 (Title 31 of the FSM Code), all legal proceedings against that applicant-debtor are automatically stayed, 31 F.S.M.C. 106(1), with the exception of criminal proceedings and "proceedings by a governmental entity to enforce a police or regulatory power," 31 F.S.M.C. 106(2). No court order or notice is needed or issued for the stay to take effect. Since this case is neither a criminal proceeding nor a proceeding by a governmental entity to enforce a police or regulatory power, the automatic stay applies.

The Amayos contend that since, in their view, Panuelo’s application is fatally defective, the court should strike that filing, impose sanctions on Panuelo for the expense that filing has cost the Amayos, and notice the court’s intent to enter a default judgment against him. The Amayos note the absence of Exhibit A and of Official Form 4, as well as the statutorily-required schedules of assets and liabilities. The Amayos also contend that the bankruptcy application was signed solely for the improper purpose to delay trial and that, pursuant to Bankruptcy Rule 9011, either Panuelo or his attorney (or both) should be ordered to show cause why they should not be sanctioned for filing the application for an improper purpose and the Amayos awarded their attorneys’ fees and expenses.

The court notes that on Form 1, Panuelo left blank the line on which he was required to estimate his assets. While, as the Amayos note, Exhibit A and Form 4 are both absent, those forms are only to be filed by corporate debtors in chapter 3 reorganization cases. Panuelo has applied, as an individual, for bankruptcy relief under chapter 2.

The court also notes that Panuelo did not file the required schedules listing his assets and liabilities. The statute requires that a bankruptcy application be accompanied by "a statement of financial condition of the debtor, as well as schedules of debts, assets and exemptions of the debtor." 31 F.S.M.C. 104(3). These were not included in Panuelo’s filing. The court further notes that on Panuelo’s original application he did list those persons that he asserted are his creditors. Under the Bankruptcy Rules, the schedules and

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statements must, in a voluntary case, be filed with the application "or if the application is accompanied by a list of all the debtor’s creditors and their addresses, within 15 days thereafter, except as otherwise provided." FSM Bankr. R. 1007(c). Whether Rule 1007(c) applies and whether because of his original listing of creditors, Panuelo has fifteen days from his original application to file all of the statements and schedules and therefore has (or will) substantially complied with the required procedure, is a matter to be determined in the bankruptcy proceeding and not in this case. This is also true for the sanctions, including the Rule 9011(c) sanctions, that the Amayos seek.

The Amayos are persons who claim to be creditors with a disputed, unsecured, unliquidated debt owed by Panuelo - Panuelo’s liability, which he disputes, for the claimed debt to the Amayos has not been reduced to judgment and the amount (which may be zero if there is no liability) determined. The Amayos meet the definition as Panuelo’s creditors. A "creditor" is someone who "has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor." 31 F.S.M.C. 102(3). A "claim" is any right to payment, "whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 31 F.S.M.C. 102(2)(a). The Amayos’ claims, which is based on Alfredo Amayo’s injury on July 17, 1999, thus arose before Panuelo applied for bankruptcy relief. The Amayos are therefore "interested parties" who may appear in the bankruptcy proceeding. An "interested party" may be "any creditor of the debtor . . . and any othety that the cthe court supervising an application under [Title 31] may determine to have a right to be heard on issues pertaininthat cation." 31 F.S.M.C. 102(8).

As interested parties, the Amayos may (aay (and mund must) pursue the sanctions and the relief they seek within the bankruptcy case, not this case because that is the proper forum for action and because while the Section 106(1) stay is in effect, it bars the court in this case from taking any further action. The Bankruptcy Act sets forth the proper procedure to be followed by anyone who desires relief from the automatic stay. The Amayos may seek relief from the automatic stay by applying to the bankruptcy court. 31 F.S.M.C. 106(4). If that court grants the Amayos relief from the stay and determines that the Amayos’ disputed claim against Panuelo should be referred to and determined by the court in this case, 31 F.S.M.C. 107(3)(c), the court will proceed with trial of the Amayos’ claims against Panuelo. Unless and until the bankruptcy court grants such relief from the automatic stay and refers the matter to this court to determine the amount of the claim allowable, this court can take no further action on the Amayos’ claim against Panuelo. The Amayos’ request to the court in this case cannot be considered a request for relief from the automatic stay since it bypasses the bankruptcy court, the only proper forum in which to seek such relief. Only the bankruptcy court can lift the automatic stay.

This court has no power to enter a default on the issue of Panuelo’s liability or to try damages (damages would still need to be proven in an evidentiary proceeding) while the automatic stay is in effect. As the court has previously stated, "This court will not attempt to take shortcuts contrary to the appellate court’s direction." Amayo v. MJ Co., [2006] FMSC 48; 14 FSM Intrm. 355, 364 (Pon. 2006). Liability and damages must be tried and proven.

Panuelo is correct that trial could sill proceed as scheduled on the Amayos’ claims against the other two defendants, MJ Company and Ron Pangelinan. However, the court considers that to be a needless waste of scarce judicial resources and an unnecessary financial burden on the plaintiffs to have to try this case first against those defendants, and then against Panuelo, either in this case, or in the bankruptcy case if the bankruptcy court chooses to try the Amayos’ claim itself, which it may do, see 31 F.S.M.C. 107(3)(b).

III.

Accordingly, since the court was not informed by noon, Friday, January 26, 2007, that relief from the stay had been granted, the court will continue the scheduled January 29, 2007 status conference and the

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January 30, 2007 trial date. In the expectation that relief may be promptly sought and that the stay may be lifted in a timely fashion, the court will set the following schedule, which will be continued further if no relief from the automatic stay is obtained: A pretrial status conference with all parties present in person or through counsel, will be held Monday, February 19, 2007, at 3:30 p.m., in the FSM Supreme Court courtroom, Palikir, Pohnpei, and trial will start on Tuesday, February 20, 2007, at 9:30 a.m.

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