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A federal judge in Pennsylvania has ruled that the filing of a personal bankruptcy petition just one day before a state court judge was scheduled to announce his ruling in a fraud trial qualified as a “bad faith” filing that was properly dismissed by the bankruptcy court. In her 20-page opinion in In re Myers, U.S. District Judge Anita B. Brody found that the dismissal of Margaret Myers’ bankruptcy was proper despite two “serious violations” of the bankruptcy court’s automatic stay by the state court. Brody concluded that Bankruptcy Judge Bruce I. Fox did not abuse his discretion when he ruled that Myers was not entitled to a remedy for these violations because she filed for bankruptcy in bad faith. At the time of Myers’ bankruptcy filing, she and her husband — along with several corporations they control — were embroiled in litigation in the Bucks County Court of Common Pleas. The Bucks County suit was filed by Southern Medical Supply Co., which had obtained a judgment in a Georgia court of more than $739,000 against Paul F. Myers and two corporations owned by him — Alpha Technology and Micro Design. SMS had transferred the Georgia judgment to Bucks County and filed a suit that said the Myerses had fraudulently conveyed the assets of Alpha Technology and Micro Design to Alpha Watch Inc. — a corporation solely controlled by Margaret Myers — for the sole purpose of putting the funds beyond SMS’ reach. According to court papers, all three companies are in the business of selling “wander-control” and patient-monitoring systems to nursing homes. On Aug. 9, 2004, a nonjury trial began before Bucks County Judge Robert J. Mellon on SMS’ fraudulent conveyance claim. On the third day of the trial, Mellon announced he would issue his ruling in open court Aug. 13. But on Aug. 12, Margaret Myers filed a Chapter 13 bankruptcy petition and her lawyers informed SMS and Mellon that the state court litigation was automatically stayed. Earlier that same week, SMS had filed a second suit in Bucks County that named Paul and Margaret Myers as defendants, along with Stroll Control Inc., a corporation formed and owned by Paul Myers. That suit sought an injunction barring the Myerses from transferring any assets from AWI to SCI. Mellon had scheduled a preliminary injunction hearing for the same day that he was scheduled to announce his ruling in the fraudulent conveyance case. Despite being informed of the bankruptcy court’s automatic stay, Mellon went ahead with the Aug. 13 proceedings and issued his rulings in both suits. Mellon said he was aware of the bankruptcy filing, but he believed the bankruptcy stay only applied to matters against Margaret Myers in her individual capacity, not in her capacity as president of AWI. Ruling in favor of SMS, Mellon found that the Myerses had transferred all of the assets of Alpha Technology and Micro Design to AWI with the intent to defraud SMS. He also found that because AWI operated from the same location as the other two corporations, in the same business, with the same telephone numbers and involving the same customers, it was appropriate to pierce the corporate veil of AWI and hold Margaret Myers personally liable for the fraudulent conveyance. Mellon entered a judgment in favor of SMS for nearly $1.2 million — the amount of the original Georgia state court judgment, plus interest. He said the judgment was entered against AWI and Margaret Myers in her “corporate capacity,” and when the bankruptcy stay was lifted, he would enter the same judgment against Margaret Myers in his individual capacity. In the same hearing, Mellon also froze all of the assets of AWI and said he intended to appoint a receiver for the corporation. After finding the Myerses had engaged in conduct that was “solely for the purpose of defrauding creditors” and “designed to obstruct justice,” Mellon sanctioned them by awarding more than $55,000 in attorney fees to SMS. Mellon also issued an injunction that prohibited the Myerses from owning, operating, investing in or working for any entity involved in the business of patient monitoring or wander control. And because the Myerses had failed to appear in court on the day of his ruling, Mellon also scheduled a contempt hearing for the following Monday. Just one day later, Paul Myers ignored Mellon’s freeze order by withdrawing $6,000 from AWI’s bank account and more than $1,100 from SCI’s account to pay attorney fees. On Aug. 15, both SCI and AWI filed voluntary corporate bankruptcy petitions. SMS responded by asking the bankruptcy court to dismiss Margaret Myers’ petition as made in bad faith. But SMS lost the first round of bankruptcy litigation when Fox issued a restraining order that barred SMS from enforcing Mellon’s Aug. 13 orders. Just one month later, SMS emerged victorious when Fox dismissed the petition on bad faith grounds and ruled that Myers therefore had no remedy for the state court’s violations of the automatic stay. Margaret Myers’ bankruptcy lawyer, David A. Scholl of Newtown Square, Pa., filed an appeal to U.S. District Court and urged Brody to reverse Fox’s decision. Now Brody has upheld Fox’s rulings, finding that none of his reasons for dismissing the petition on bad faith grounds could be deemed erroneous. “Bad faith is a fact-intensive inquiry committed to the sound discretion of the bankruptcy court,” Brody wrote. In dismissing the petition, Brody noted, Fox found there was strong evidence that it had been filed in bad faith, including the decision to time the petition “after the state court announced its intention to rule, but just before it did so.” Fox concluded that Myers’ sole purpose for filing for bankruptcy when she did was “to frustrate the impending state court judgment.” Brody found that Fox’s decisions were sound. “The question of bad faith is a fact-intensive inquiry and I have found no factual finding on which the bankruptcy court relied to be clearly erroneous. Nor were any of the bankruptcy court’s legal conclusions in error,” Brody wrote. But Brody was also critical of SMS’ litigation tactics, saying the company and its lawyers had failed to respect the automatic stay by allowing Mellon to issue rulings against Margaret Myers immediately after the petition was filed. “Although I cannot condone SMS’ violations of the automatic stay, the bankruptcy court did not abuse its discretion in deciding that [Myers] was not entitled to a remedy for these violations because she filed for bankruptcy in bad faith,” Brody wrote. Brody found there were “at least two serious violations of the automatic stay during the course of the bankruptcy.” The first was Mellon’s entry of orders against Myers in her “corporate” capacity on the day after she had filed for bankruptcy. The second was Mellon’s order holding Myers in contempt of court and incarcerating her until she could pay more than $5,000 to counsel. “I acknowledge that it was the state court, and not SMS, that ultimately took these actions in violation of the stay. … However, the state court’s complicity in the stay violations does not excuse SMS’ role in them,” Brody wrote. “Courts have held that where a creditor has set in motion an action against the debtor prior to the bankruptcy filing, once the bankruptcy is filed and the automatic stay takes effect, the creditor has an affirmative duty to notify the court in which the action is pending and take any other action necessary to assure that the action does not continue,” Brody wrote. Even though Myers’ bankruptcy petition was later found to have been in bad faith, Brody found that “SMS’ proper remedy was to seek emergency relief from the automatic stay in the bankruptcy court — not to take the law into its own hands by seeking to have the state court violate the automatic stay.” But Brody also found that a bad faith filing is “grounds for granting a creditor relief from the automatic stay,” and that courts have “exonerated violations of the stay where a debtor has filed for bankruptcy in bad faith, reasoning that to do otherwise would reward the bad-faith filing.” Scholl, in an interview, said he intends to appeal Brody’s ruling and will be arguing to the 3rd U.S. Circuit Court of Appeals that SMS is effectively being allowed to do “an end-run around the automatic stay.” Myers’ petition, Scholl said, should never have been dismissed, but instead should have been converted to a Chapter 7 liquidation.

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