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In re Hall

September 18, 2002

IN RE: WILLIAM L. HALL, DEBTOR-APPELLEE.
APPEAL OF: ENODIS CORPORATION



Appeal from the United States District Court for the Northern District of Indiana, Hammond Division. No. 01 C 20--Allen Sharp, Judge.

Before Posner, Ripple, and Diane P. Wood, Circuit Judges.

The opinion of the court was delivered by: Diane P. Wood, Circuit Judge.

ARGUED JANUARY 14, 2002

Only four months after filing for relief under Chapter 11 of the Bankruptcy Code, William L. Hall filed a motion to dismiss his petition. One of his creditors, Enodis Corporation (to which we will refer by its former name, Welbilt) believed that Hall had abused the bankruptcy process and accordingly asked the bankruptcy court to take the extra steps of making the dismissal one with prejudice and awarding monetary sanctions against Hall. The bankruptcy court promptly granted the motion to dismiss, but it reserved the right to modify the dismissal in accordance with Welbilt's motion if the facts warranted such an action. After an evidentiary hearing, the bankruptcy court denied Welbilt's requests; the district court affirmed. Finding no abuse of discretion, we in turn affirm the decision of the district court.

I.

Consolidated Industries Corporation (Consolidated), a manufacturer and retailer of residential furnaces in Lafayette, Indiana, was once a subsidiary of Welbilt. Among the furnaces it designed and manufactured were two similar horizontal furnaces. In 1994, it became involved in costly and lengthy class action litigation over horizontal furnaces manufactured between 1982 and 1989. See Salah v. Consolidated Indus., Inc., CV 738376 (hereinafter the Salah action). By May 1995, Consolidated's furnace design was also under investigation by the Consumer Product Safety Commission.

Many people might not want to purchase a company embroiled in so much controversy, but Hall was not one of them. In 1998, after several years of negotiation, Hall purchased Consolidated from Welbilt, becoming its sole shareholder. As a part of this purchase, Consolidated took out a loan from FINOVA Capital Corporation (FINOVA), a commercial lender, for $7.5 million, and Hall personally guaranteed the debt. Under the terms of the sale, Consolidated assumed the ultimate risk of loss on all tort litigation, although Welbilt continued its existing insurance coverage.

Approximately four months after the purchase, on May 28, 1998, Consolidated filed a Chapter 11 petition. Consolidated claimed that it could not afford the time and litigation expense of the Salah action. Furthermore, Consolidated was also involved in a number of other lawsuits, including one that it had filed against some 24 insurance companies concerning coverage for the defective furnaces, and one against Welbilt and associated parties claiming that Welbilt was responsible for Consolidated's debts and that various frauds and breaches of fiduciary duty had occurred. Hall also had an individual action against the Welbilt parties. At the time of the bankruptcy filing, Consolidated's largest outstanding debt was the remaining $4.5 million due on the FINOVA note.

Before the Consolidated bankruptcy proceeding was completed, Hall filed a personal Chapter 11 petition in which he claimed that his outstanding debt was approximately $5.1 million. That number reflected Hall's direct debts as well as his exposure through his guarantee of Consolidated's debt. The petition automatically stayed all litigation against Hall (much of which had to do with Consolidated) and prevented any attempts to commence collection of debts from Hall. 11 U.S.C. § 362. The bankruptcy court scheduled a mediation designed to resolve all of the claims against Hall, but it was unsuccessful because Hall could not persuade the insurance companies to contribute to a comprehensive settlement (that also would have resolved Consolidated's bankruptcy). FINOVA then stated that it would not renew the Consolidated loan agreements, which naturally affected Consolidated's ability to secure additional loans. Without the co-operation of FINOVA and the insurance companies, Hall realized there could be no "global" reorganization of his personal assets. At that point, he filed the motion to dismiss the Chapter 11 action that led to the present dispute. Welbilt responded by filing a cross motion to dismiss with prejudice along with a request for costs and attorneys' fees. It argued that Hall had filed his bankruptcy petition in bad faith. According to Welbilt, the record showed that Hall's personal liabilities were actually zero at the time of his filing, and so there was no basis for claiming protection under the bankruptcy laws. Furthermore, Welbilt claimed, the fraud action that Hall had filed against Welbilt prior to the bankruptcy was meritless. Welbilt also argued that Hall had filed the bankruptcy petition for the impermissible purpose of slowing down the resolution of the fraud case.

Finally, Welbilt argued that Hall had engaged in other sanctionable conduct. For instance, it alleged that Hall provided FINOVA with a false affidavit to induce it to lend him the $7.5 million; Hall committed perjury in the Consolidated bankruptcy proceeding by lying about a prior bankruptcy in 1990; and Hall committed perjury by filing a complaint in his own bankruptcy proceeding, in which he claimed that Welbilt violated the automatic stay and a bankruptcy court order. Welbilt maintained that this conduct, individually and cumulatively, amounted to an abuse of the bankruptcy process and rendered appropriate both monetary sanctions and a dismissal with prejudice.

II.

No one is claiming that Hall's personal bankruptcy petition should not have been dismissed. The only question is whether there should have been punitive elements to that dismissal, by making it with prejudice and ordering sanctions. We review the bankruptcy court's finding that Hall did not act in bad faith for clear error, Covey v. Commercial Nat'l Bank of Peoria, 960 F.2d 657, 662 (7th Cir. 1992), and its dismissal of the bankruptcy petition for an abuse of discretion, In re Leavitt, 171 F.3d 1219, 1223 (9th Cir. 1999). Normally, a dismissal of a bankruptcy petition has no long-term consequences for the debtor's ability to re-file. Umbenhauer v. Wong, 969 F.2d 25, 30 (3d Cir. 1992). There is an exception, however, if the court "for cause" orders that the dismissal of the case is with prejudice. See 11 U.S.C. § 349(a). In that instance, the order may either bar the later dischargeability of debts that would have been dischargeable in the dismissed proceeding, or it may preclude the debtor from filing a subsequent petition related to those debts. Id. Dismissals with prejudice are therefore generally reserved for extreme situations, such as when a debtor conceals information from the court, violates injunctions, files unauthorized petitions, or acts in bad faith. Id.; In re Tomlin, 105 F.3d 933, 937 (4th Cir. 1997) (filing six bankruptcy petitions in seven years); In re Martin-Trigona, 35 B.R. 596, 601 (Bankr. S.D.N.Y. 1983).

Welbilt argues that Hall is exactly the kind of debtor that a dismissal with prejudice was designed for. According to Welbilt, Hall used the bankruptcy process to manipulate the course of the other lawsuits with which he and Consolidated were enmeshed, and that his bad faith was patent. Hall's sole motive for filing the Chapter 11 petition, in Welbilt's view, was to "slow down" meritless litigation in which he was a plaintiff. But there are some immediate problems with Welbilt's position. Much of that litigation involved Consolidated or Hall as a plaintiff, and the automatic stay of 11 U.S.C. § 362 does not apply to suits by the debtor. See Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir. 1991); Martin-Trigona v. Champion Fed. Sav. & Loan & Ass'n, 892 F.2d 575, 577 (7th Cir. 1989). On the other hand, "[a]ll proceedings in a single case are not lumped together for purposes of automatic stay analysis." Maritime Elec. Co., 959 F.2d at 1204. Thus, while the bankruptcy filing did not automatically stay Hall's own actions, nor did Hall's personal filing have any effect on Consolidated's suits, Welbilt's counterclaim against Hall (which it was admittedly aggressively pursuing) and the Salah action were automatically stayed. A greater problem with Welbilt's position here is that the bankruptcy court believed Hall's explanation for his course of action. Hall repeatedly testified that he filed the bankruptcy petition in an attempt to achieve a "global settlement." That is a common motive for debtors, not one that immediately raises concerns about bad faith.

Hall was attempting to gather before one court parties that represented both his and Consolidated's liabilities (as to which he definitely had a personal stake stemming from his guarantee) as well as their potential assets, permitting a discussion among parties whose claims were interrelated. The starkest example of the entanglement between Hall and Consolidated's financial success was that Consolidated's largest liability, the remaining $4.5 million debt to FINOVA, was personally guaranteed by Hall. While it is true that a debtor does not have to file bankruptcy to negotiate with creditors, as Hall explained at argument, the global settlement was merely the method he was trying to use to achieve a critical purpose--settling the FINOVA debt. Undoubtedly ...


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