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The Hearing - Updated 9Xs
Tuesday, November 06 2007 @ 10:17 AM EST

Just got first word. The hearing is about to begin. Michael Jacobs is there. Darl just arrived. We have three eyewitnesses there. No, wait, I am hearing now four. So stay tuned. There will be periodic reports.

First motion of the day is SCO's motion to "enforce" the automatic stay, to try to make it apply to the arbitration in Switzerland. SCO now has the floor. It's their motion, so of course, they speak first. Motions are always like symphonies, ABA format. Motion filer goes first, then the other side speaks, then the original motion filer replies.

If you want to imagine you can hear the symphony, like Beethoven, while we await word, here's SUSE's special opposition. And here is SCO's response to SUSE's opposition.

Update 1, 11:48 AM Eastern: The SUSE motion is almost done. They are on a break. The judge wanted to check some cases referenced.

Update 2, 12:06: The arbitration is stayed. The judge rules that it is offensive, therefore stayed. But it's all stayed, SCO's counterclaims too. The judge, according to one of our eyewitnesses, says the judge referenced a case, Maritime Electric Co. v. United Jersey Bank,, and while I haven't found a public version of it yet for you, here's a snip from another case that talks about what it stands for:

The automatic stay is primarily for the protection of the unsecured creditors as a group. The stay prevents (without need to ask a court for an injunction) a race by the creditors to seize the debtor's assets, a race that by thwarting the orderly liquidation of those assets would yield the creditors as a group less than if they are restrained. In re Rimsat, Ltd, 98 F.3d 956, 961 (7th Cir. 1996); Martin-Trigona v. Champion Federal Savings & Loan Ass'n, 892 F.2d 575, 577 (7th Cir. 1989); Maritime Electric Co. v. United Jersey Bank, supra, 959 F.2d at 1204. But it is also for the debtor's protection, id.; In re Hellums, 772 F.2d 379, 381 (7th Cir. 1985) (per curiam); In re Little Creek Development Co., 779 F.2d 1068, 1071 (5th Cir. 1986), most obviously in a case like the present one where the debtor is being asked to waive his right to a discharge of debts, the right that is at the heart of the "fresh start" rationale of bankruptcy. A debtor bludgeoned into waiving his right of discharge is denied the protection of bankruptcy law.

As you can see, the judge's job is to try to protect everybody, at least until the picture is very clear, so money doesn't disappear first, but the purpose of bankruptcy, Chapter 11, is to give the debtor a breathing spell, to be able to reorganize. Our eyewitness reports that SCO's attorney was John Eaton, and he says he spoke extremely well, so well that he'd have ruled in his favor. He's not a lawyer, though. But evidently, Mr. Eaton is skilled. Everyone says the same thing, that he and Jacobs were the stars of the day. I don't really see how SCO can sell assets now that SUSE is stayed, though, not even just the Linux assets, since that is the core of that dispute.

Next up: Novell's motion asking for its undisputed royalties immediately. But Novell's Michael Jacobs has told the court that as of today, SCO is up-to-date, so the judge rules that if SCO runs off the rails in the future on payments, Novell can submit an emergency motion, but for now, Novell's motion is denied. Arthur Spector argued for SCO, saying the motion was improper and they should go to lunch. But Novell won that anyway, when they discovered SCO has to pay monthly, not quarterly, I would think. But I am not yet clear that the judge even addressed that point.

Update 3, 12:30 PM Eastern: The motion on whether to retain Boies Schiller has been postponed until the next hearing on November 16. This was on the request of Laura Jones for SCO. The court is now taking an hour for lunch.

Update 4, 2:15 Eastern: Now comes Novell's motion regarding lifting the stay. Judge Gross wonders if this should be heard by Judge Kimball in Utah or by him, and how much further along Kimball is than Judge Gross is. [PJ: 32 million miles, since he's been doing it for 4 years and more if you count the IBM case too. Alternatively, Groklaw reader Wang-Lo suggests this reply, "Well, your honor, it has progressed to the point where SCO has filed for bankruptcy in this court to escape judgement in that one.] Lewis for Novell is explaining what Kimball has already done. Now Michael Jacobs speaks for Novell. Judge Gross wants to know how complicated the trial will be. Jacobs states that things are fairly simple. He speaks about the Sun and Microsoft agreements and how much should be apportioned to Novell. The trial should only take about 4 days to complete. He mentions about the "constructive trust" being heard by Gross's court and having Kimball determining apportionment. Mr. Spector for SCO claims Novell will not be harmed by waiting a few months.

[PJ: Well. They will be if SCO sells off all its assets and Novell's too, methinks.]

Mr. Spector says Kimball ruled against both Novell and SCO concerning the "constructive trust". [PJ: What? He did not. He said Novell deserved a constructive trust, but he just didn't know how much to put in it.] Spector admits that some of the Sun and Microsoft funds might be Novell's, but all that money is gone, he asserts, although some might still exist. Spector does seem nervous on this issue.

York Capital Management has a lawyer [PJ: surprised?] there and he reads from notes about the purchase. Lewis for Novell said he thinks "SCO feels that the Delaware court is more favorable to SCO".

Update 5, 2:42 PM: Ruling: Judge will take this Novell motion under advisement, but he will not take too long.

Court adjourned!

The feeling from our eyewitnesses is that Novell won this motion. One eyewitness says his impression was that the Judge was showing signs of getting tired of SCO's arguments at the end. He smiled at Novell when they spoke but basically frowned when SCO was speaking. He also was looking at the teams on both sides during the later part of the arguments. He got the impression the judge is finally starting to get the message about what was dumped onto his lap.

But we'll find out when we see the actual ruling. More details will follow, and I have that case for you. As soon as I can format, I'll add it here. This was fun, huh?

Update 6, 4:10 PM: I found the case that the judge found persuasive. I think you will find it so also. I do, assuming it's good law, which I haven't had time to verify. I would assume the judge did that, though. So we'll assume it is. I saw a few comments in the "how could he?" category, and this case will answer your questions. The thing about a rule of law, as opposed to mob rule, is that even when you lose a motion or whatever, you show respect. You can look for another case to trump this, or look for a mistake on the part of the judge in another way and then appeal. Mobs just want what they want, fair or not, based on who they like and who they don't. Courts look for what the law is. And even if a party you *don't* like finds a case that trumps the good guys, they have to win that point. All you can do is shake their hand and say, well done.

Here's what the case held, and I've highlighted in red the part where the decision discusses lifting an automatic stay -- that what matters isn't who began the overarching litigation; it's who is in a defensive posture in this aspect of it. SCO could be wiped out by an unfavorable decision in arbitration in Switzerland if damages were awarded, so it is true that it's SCO that is in that defensive posture. Here's the one paragraph that says it all:

All proceedings in a single case are not lumped together for purposes of automatic stay analysis. Even if the first claim filed in a case was originally brought against the debtor, section 362 does not necessarily stay all other claims in the case. Within a single case, some actions may be stayed, others not. Multiple claim and multiple party litigation must be disaggregated so that particular claims, counterclaims, crossclaims and third-party claims are treated independently when determining which of their respective proceedings are subject to the bankruptcy stay.

See the point? How could the judge rule otherwise? What matters, the case is saying, isn't that SCO first filed the lawsuit against Novell. What matters is that the estate is going to potentially be wiped out by a favorable decision, and it was SUSE that initiated the arbitration. Now, we haven't heard yet about what the arguments were in regard to jurisdiction. There could even be an appeal on that. I can't say. But I do think you have to acknowledge that Judge Gross had a case that supports his decision. And keep in mind too that the stay is not forever.

Update 7, 5:53 PM: Some detailed accounts are now starting to arrive. I'm putting this ahead of the case, because it makes sense to do it that way. So, whatever updates we have will go ahead of the ruling the judge found persuasive in the SUSE matter, so you know you can find it by looking for the row of stars at the very end of the eyewitness accounts. And now, our second eyewitness report:

Proceedings began at 10:00. There were four lawyers there for Novell and 12 people on SCO's side. Two of them were representing York. Two were in the audience.

Ms. Laura Davis Jones for SCO started out. A number of items from the agenda were quickly dispatched. Forgive me for not retyping the relevant sections. The numbers are from the agenda:

#4 Resolved with Trustee. Proposed order forthcoming.
#6 Being filed under seal
#8 Resolved. Proposed form of order given to judge.
#11 Not resolved Trustee gave SCO a proposed order. SCO wishes to review it further.
#12 Al Petrofsky was on the phone. The judge gave him time to speak. He spoke of lack of supplemental notices. Ms. Jones will get all further notices to him. Al spoke of the wording which could leave an open door to hire other professionals without creditors' objections. The judge denied Al's motion to limit hiring needed professionals in the normal course of business. Creditors will have the opportunity to object to such issues in the future if the need arises.

#7 Motion to lift stay for SUSE arbitration:

Mr. Eaton spoke for SCO. They first spoke of the allegedly defective service. Mr. Eaton spoke about many of the case rulings provided in SCO's motion.

Adam Lewis spoke for Novell. The Judge asked if this was a "defensive motion from SUSE". Mr. Lewis argued that it was defensive. Mr. Lewis spoke about the defective service.

The judge asked if the SUSE arbitration could have been handled in Utah.

The lawyers argued back and forth for a long time. The judge suggested a break to review his notes and the filings.

After the break, Mr. Lewis stipulated to allow the defective service this time only. He also suggested Novell may waive damage claims in Switzerland if the arbitration was allowed to go through.

The Judge ruled that the SUSE action was assertive and not defensive. He ruled on the spot to stay any further arbitration action. The Judge mentioned 362(a)(1) of the Bankruptcy Code several times.

#10 Motion to submit SVRX royalties:

To make a long story short, the Judge asked if SCO was current in their payments of $41,000/mo. Novell said they were up-to-date.

The Judge denied Novell's motion therefore. If there are problems with future payments, Novell can file an emergency motion which will be heard by the court.

#11 Motion to hire Boies, Schiller:

Ms. Jones said that they had not reached agreement with the Trustee. This motion was deferred for another day.

#9 Motion to lift stay in Utah:

The Judge asked "how complicated are the remaining issues"?

Mr. Jacobs spoke for Novell. "The issues seem simple now. It took years to get there." There are two issues for trial:

1. What authority, if any, did SCO have to enter into agreements with Sun and Microsoft?

2. What portion of the money and code is Novell's? (apportionment)

He also spoke to a potential constructive trust. Novell spoke to the need to resolve the remaining issue in Utah. Indeed, how could SCO sell the company until the issues of who owns what is resolved?

Mr. Spector responded by asking how Novell is being hurt. "The money is already spent." Mr. Spector went on to say that they disagreed with Judge Kimball's ruling, and that if they win litigation, all creditors including shareholders would get paid. He also said people reading the contract would assume that SCO got the copyrights.

Mr. Spector spoke to how Judge Gross could handle the issues.

The Judge responded by pointing out that Novell would say that SCO is trying to sell Novell's property.

SCO introduced Scott McNutt for York. He said that York has been looking at SCO since 2005 and has done extensive due diligence. They are ready and able to take over the Unix business and run it.

Mr. Spector agreed that there needs to be resolution in Utah, but not now. He said Judge Gross could decide issues relating to a constructive trust. He accused Novell of forum shopping by trying to get back to Utah. Mr. Spector said: "Our litigation is a tremendous asset" and "Our litigation with IBM could bring in hundreds of millions of dollars." [PJ: Remember when I said I'd formed a positive impression of Mr. Spector? I take it back. *Novell* is forum shopping?]

Mr. Lewis pointed out that SCO was trying to get another bite at the apple by retrying items in Delaware that have been decided in Utah. He read from page 19 of SCO's motion where SCO asked the Delaware court to decide apportionment AND who owns the rights to the copyrights and code.

--- OK, are you sitting down for the finale? ---

Mr. Spector said that SCO never said that they would keep the Unix business forever. He believes the reorganization plan can go forward without deciding the SUSE issues or the issues in Utah. There are companies out there that would be willing to take a risk in buying the assets without resolution of these issues. Unix is a legacy system that someone else might find profitable. But Unix may not be part of SCO's plans going forward. [PJ: Dude, the mobile stuff is also Unix.]

The Judge took this issue under advisement and will publish his ruling in the near future.

Adjourned about 2:30 pm EST

I am sure I missed things. I have 12 pages of notes. There were 3 other Groklaw members there and one person who attended after following Groklaw for a little while.


Well. SCO never lacked spunk and daring. I confess this has me a bit speechless, as we are entering the gall zone. Running. Jumping.

Update 8, 8 PM: We have another report now, from a volunteer for whom this was his first foray into the belly of the beast. I mean his first time in a courtroom for Groklaw. And what a report! Lots of juicy details from Groklaw member UD:

I got to the courtroom about 20 minutes before 10am and found it pretty empty except for a few other Groklaw fans. Ted Normand was the first lawyer to arrive and when we told him we were Grokkers, he said he'd keep to his side of the gallery (in a kidding way). He's a lot younger and smaller than I had imagined and I would have liked to see him in action, but as it turns out he said nothing at these proceedings. He was even sitting in the gallery for the morning motions instead of at the SCO table (probably because 7 SCO lawyers and Darl McBride sitting there already and no chairs were left!). He made some small talk with Mike Jacobs before things got started and they both seemed pretty congenial with each other.

Mike is a bit taller and definitely looks (and talks) the confident litigator part. But for all the differences in physical appearance, they all still wear the mandatory dark suit -- even the women. And all their beige overcoats were hung in the coat rack in the hallway too.

So the herd of lawyers came pouring in right at 9:55 and lots of greetings and hand-shaking ensued until everyone got in their seats and waited for the judge who was just a couple of minutes late.

Stuart Singer started off by introducing Ms. Jones who went through some of the motions that were settled before the hearing. She was going pretty fast and not speaking very loudly, but here is what I got from it:

  • Motions 1-3 were continued to the 11/16 hearing.
  • Motion 4 was resolved with the trustee and they're working through it.
  • Motion 5 (the CFO thing?) has not been agreed upon yet and they seek to move that to 11/16 as well
  • Motion 6 (SUSE exhibits filed under seal?) -- they have no opposition. Judge said he will sign order.
  • Motion 8 (Mesirow) issues were resolved with the trustee
  • Motion 11 (BSF) McMahon made a proposal to SCO right before court and they needed more time to digest it.

Mr. Petrofsky was on the phone and I missed what he was talking about until they turned up the volume. It was something about people on the notification list possibly being the only ones who could object to issues in this case? Also something about a "backdoor" on paragraph 7 (of what document?) that could allow many more parties onboard. Sorry, my note taking was a little slow at the outset and I was trying to figure out what the conversation was even about...

SCO said it needs to retain counsel in Germany. The judge granted this and denied the objection, but said it was still subject to review by Mr. McMahon.

Mr. Spector then introduced John Eaton who presented SCO's arguments on the first motion being heard -- the motion to lift the automatic stay on the SUSE arbitration. He starts out saying that it is undisputed (then why are we here?) that SUSE initiated the proceedings. It's a simple issue. Says SUSE is wrong in stating that is defensive in its nature and that the law points to who initiated the actual proceedings, which was SUSE. He also discounts SUSE's other reasons listed in their filings. The arbitration is supposed to start Dec 3 and they don't have counsel now. The arbitration panel wants some input from both sides about what is at issue. He then starts listing the issues...

Mr. Eaton then addresses the service of notification issue. They sent notice to Germany (SUSE), their Swiss attorney, their attorney in San Francisco and counsel for Novell. That should suffice -- after all, everyone is here and knows about it. He said the Hague Convention doesn't apply when you serve the agent of the company. Plus SUSE was in the US until 2004. Novell's officers were in effect SUSE's CEO's. They also served Morrison & Foerster who had their power of attorney. Also, Rule 2004 4(f)3 (?) states that they can be served through an agent of the company.

Addressing the minimum contacts issue, he notes that they only need to show one contact. Since the litigation is bound to cause claims against its assets, then it will have an effect in the U.S. Also, the UnitedLinux agreements SUSE and Novell entered into were through a Delaware LLC. Morrison and Foerster are their lawyers and they're in the U.S. He says all of these establish jurisdiction in this court. I noted the judge was smiling and nodding his head a lot though this part of his presentation, especially when he brought up the Photochrome case that I guess Novell used in their briefs and said it doesn't apply. The Maritime Electric case did apply because the arbitration is offensive in nature.

Adam Lewis presented the case for Novell. The judge started off asking him to address the issue that Novell says the arbitration is defensive in nature. He says it is because SCO admittedly made claims against SUSE and those claims stood to harm SUSE's business if unchecked. In Utah, they are using Novell's license from SUSE as an affirmative defense. That same defense should also apply to the Swiss arbitration. SUSE was not going to wait to be sued by SCO and could not let the ongoing harm continue. Rule 362a talks about who started the *issue* and not necessarily the *case*. He says it's a simple issue (at least both lawyers agree there!). The judge really seemed more detached at this point -- not really engaging Mr. Lewis all that much or even looking at him. Mr. Lewis says that the Maritime case does not apply because in that case they were going after the debtor's assets, which is not the case here. He agrees that any damage claims would be stayed. As for the $100 million being talked about, the arbitration requires an injury amount to be stated -- not a damage claim, so damages would probably be lower. Novell is prepared to waive the damage claim in order to allow the arbitration to go forward. This is at a critical phase right now where the copyright issues need to be resolved, so these things need to go forward.

The judge asks about the state of the litigation in Utah and Mr. Lewis defers to Mike Jacobs who gives the judge a nice summary of the state of those proceedings. The judge jokingly thanks Mr. Lewis for such a thorough explanation. Chuckles all around (you'd better laugh at a judge's humor!).

Mr. Lewis continues with addressing the jurisdictional issues. He says SCO didn't follow the rules and now asks for the authority to serve as it wishes. He said SCO thinks it doesn't matter about the rules as long as the parties got the notice. SCO should have asked the court for permission to serve as they did. Judge asks wryly: what if SCO asked him now for permission to serve in the manner they did and he granted it? They'd be right back where we all all now. Mr. Lewis seems to drop the issue at this point.

Mr. Lewis repeats that the arbitration is defensive in nature and would never have been brought without provocation. Also SCO presents no real, hard evidence about SUSE having US contacts. Novell is not the alter-ego of SUSE. The judge asks if SUSE did have a US presence. SUSE no longer has a US presence, but they once did. Regarding the role of the Delaware LLC (the UnitedLinux contracts), it was just a conduit for licensing issues and not actively involved as a corporation making decisions. It doesn't matter that they are referred to 73 times in the filings; what matters is the role and it was too limited to make them a valid contact. He sums up that the issues need to be resolved and that is why the arbitration needs to go forward.

The judge has a few questions for Mr. Eaton about the arbitration being defensive in nature. Mr. Eaton says that law states that is is about who brought the action and SUSE brought the action. Staying the damages for now still leaves the possibility of damages being awarded in the future and that is bad for the estate. Their Swiss counsel has resigned so they are now totally unprepared for arbitration, so going forward with it would be unduly burdensome. They are not making the argument that Novell is SUSE's alter-ego, but they are their agent. Lastly the Delaware LLC is part of a corporate agreement between the companies.

Mr. Lewis states that SCO has affirmative counterclaims in the Swiss arbitration and those must go forward (subject to the tribunal's decision). He finds it puzzling that SCO's Swiss counsel resigned at the last minute. He restates that the claims need to be decided because they will determine the assets that are at issue in the bankruptcy case. Right now nobody can state exactly what they are. He says again that the LLC was a conduit -- a mere bystander.

Mr. Eaton states that SCO is willing to stay its counterclaims in the Swiss arbitration. The judge asks Stuart Singer if they can just tell the tribunal that they don't want to proceed with their counterclaims? Mr. Singer says thay have no indication from the panel that they won't allow them to stop pursuing their claims. He says that SUSE's affirmative defense in the arbitration has a much broader scope than the Utah litigation since it is looking for a worldwide injunction against SCO. He says that the issue of deciding the IP has already been decided (wrongly) by Judge Kimball. He says that issue will truly be decided on appeal.

Mr. Lewis takes the podium again to state that SCO does not have free reign to interfere in SUSE's business just because they are in bankruptcy. Novell should be allowed to defend itself against this ongoing threat to their business.

Mr. Jacobs states that "SCO is in a pickle" because they really want to be able to appeal the Utah decision. He says that the arbitration needs to go forward before the appeal can happen because it resolves IP issues. He goes on the record that Novell will not oppose SCO's counterclaims going forward. He wants his day in court. He says it is up to the tribunal to decide if the counterclaims go forward and not SCO. He asks the judge if he would like a copy of Judge Kimball's order staying the copyright issues until the arbitration is decided and gives a copy to the judge and SCO.

The court takes a short recess so he can prepare to make his ruling.

Before the judge rules, Novell's Mr. Lewis states to the court that they consent that SCO's method of service was proper and that they also formally waive any claim of damages in the arbitration.

The judge thanks him for making that concession because it will drastically reduce the length of his ruling. He starts a suspenseful preamble with the "on one side you've got this" and "on the other side...". Then he says the arbitration proceeding at inception was brought by SUSE. Therefore he is enforcing the automatic stay. Novell's argument that it was defensive is not persuasive because most litigation is defensive in one way or another. SUSE is enjoined from pursuing the arbitration in its entirety - including the counterclaims.

Because it is getting close to lunch time, the court asks that they handle a shorter matter now if possible, so they take care of the motion to compel immediate payment. Mr. Lewis states that it is our money that SCO is receiving. We're worried they are using it. The judge asks if SCO is current it its payments. Mr. Lewis replies that they are, but Novell needs additional protection. Because SCO is resisting so forcefully Novell's attempt to get them to pay immediately, that makes him even more worried that they should get it right away. He says SCO can't take their money, spend it and replace it with more incoming funds. The money has to remain separate and not commingled funds.

Mr. Spector replies for SCO. He says Novell isn't playing by the rules. They should just stick to the agreement as it is now. SCO shouldn't have to "jump through hoops" just because Novell wants them to. Mr. Spector is acting like he is just really disgusted at this whole issue and shows a bit of disdain towards Novell. He says this type of injunctive relief must be brought in an adversarial proceeding and not in this court.

There is a little back and forth between the two counsels before the judge rules. For now, the motion is denied. If in the future, Novell can show dire circumstances they can file an emergency appeal with this court for relief.

The issue of retaining BSF as counsel is asked to be moved to the 11/16 hearing. I can see that hearing starting a LOT earlier than 4pm because a lot of rather weighty issues being moved there. I wouldn't doubt issues being moved from that date to a later hearing, but I believe they do want to resolve them asap (at least Novell does).

At 12:30 we break an hour for lunch in beautiful downtown Wilmington.

The next motion up was Novell's motion to lift the automatic stay in Utah. Mr. Lewis pleads for Novell. He states that the Utah case is very far advanced. Both parties are ready to proceed and in fact were in Utah ready for trial when they filed for bankruptcy. He says the case needs to be decided so it can be determined what the debtors' estate really is.

He also has issues with what SCO wants to sell off and that they might be selling something they can't show they own. The judge asks how far along Judge Kimball has gone in the Utah trial (it's a little distressing to me at this point that this judge seems to have so little background in this saga, but I guess he has lots of cases, and this is just another one). Mr. Lewis explains about the four years of this and that and all the judgements that have already been made. The judge wonders if he should allow things to proceed in Utah or whether those issues should instead be tried before him here in Delaware. Mr. Lewis explains how much effort has been expended in Utah and how wasteful it would be to redo all that effort here in Delaware. He says that Kimball has found evidence sufficient to order a constructive trust and just the amount of the trust is in question. This court should not be second-guessing all his work. Redoing the case would be giving SCO a second bite at the apple. The case so far has taken four years and would take a long time -- but not as long a time -- to do again. After it's decided, SCO can appeal, but the bankruptcy should not decide the case. Also, if SCO is trying to sell its assets, how can its assets be determined without the Utah trial? How can their fair value be set?

The judge asks Mr. Jacobs how complicated the remaining issues are to be resolved in the case. Mr. Jacobs replies that the case has been simplified. Numerous motions have been decided. The judge wonders if it is simple enough to move the case here before him if he can just take up where it left off in Utah instead of redoing the whole case. (Eeek!) Mr. Jacobs responds that there are still two big issues to be decided. One is if SCO had the authority to enter into the Sun and MS agreements and the other is how much of that license revenue should be apportioned to Novell by means of the constructive trust. He makes the point about how much expertise and effort Judge Kimball has put into this case, and how qualified he is to make those determinations. He also states that the stay could be lifted for the apportionment issue and once that is decided, come back to Delaware for the constructive trust issue.

Mr. Spector responds for SCO. He says that Novell hasn't shown they'd be harmed by waiting until after bankruptcy is over. They should be treated just like any other creditor. He says that the big question was copyright ownership and that was decided, but wrongly so, he opines. Then he says Judge Kimball had denied the request for the constructive trust to be set up anyway. The question is about what portion of the licensing revenue was due to each of the parties' IP. But all that licensing revenue has been spent already -- it's gone.

In Utah, Novell said that the money tracing would be a separate issue they would take up after the apportionment issue, but he thinks that this court can simply decide how much should be set aside for the trust after the amount was decided in Utah. (My impression was that Mr. Spector was definitely playing to this judge to get him to take control of the case.)

Mr. Spector then mentions that the counsel for York Capital was here and wanted to say a few words. Mr. Scott McNutt gives some background info on the company and says they have expended a considerable sum on working with SCO about purchasing their assets. They've worked a lot with management and believe they would be prepared to take over and run the Unix business if it goes through. (Yeah, right.) [PJ: Excuse me, but was the asset sale on the agenda today? No.]

The judge asks Mr. Spector if they can sell something that isn't theirs, and he says he should let the market determine that. People are selling bad debts all the time because some people are willing to roll the dice on making money from them. So sure, they can sell this off even if they don't own it as long as someone is willing to give them money for it. He says they do want/need some resolution on the ownership issue, but now is not the time. He says this court can decide both the apportionment and money tracing issues if it wants. Novell is just trying to confuse the court by saying that deciding these issues is in the public interest. Also, the issues left pending in the IBM case could prospectively bring $100's of millions of dollars SCO's way and that would be greatly beneficial to SCO's creditors and stockholders (hello, and lawyers maybe?). Novell and IBM are in collusion to try to run SCO out of business before it can collect its windfall.

Mr. Lewis for Novell counters that the IBM/Novell conspiracy is just a fantasy for SCO. He says this court would have a great deal of catching up to do if the case were to be moved and decided here. Why waste all that has been done so far? SCO just wants this court to decide the case because it is likely to be more favorable to SCO. SCO is afraid of Judge Kimball. But in the meantime, money is disappearing while this is being dragged out. The issues need to be decided now. If SCO is allowed to sell off the Unix assets the company wouldn't be viable coming out of bankruptcy.

They don't even have an APA for York drafted for inspection yet.

SCO responds that Novell can't jump in front of the line for its assets by using the constructive trust. Also, its proposed sale of assets is just a part of normal business procedures.

The judge said he is going to take this all under advisement but would try to rule on it shortly because he recognizes time is precious.

I had an impression that at one point the judge was leaning Novell's way on this issue, but I didn't like his reaction to the proposition that he might "take over" the Utah litigation. In the end I am holding my breath along with the rest of you.

Sorry if some of this rambles on or if I'm interjecting too much of my own commentary, but this is my first shot at reporting...

I know. Unbelievable.

Update 9, 10:46 PM: Our first eyewitness adds an interesting detail: when Arthur Spector was speaking about SCO's wonderful prospects of collecting hundreds of millions in the IBM litigation in an alternate universe, Darl was following along:

Arthur Spector was the workhorse of the afternoon, neither glorious nor subpar. He at least made of appearance of confidence in the righteousness of SCO's position. He did elicit the only visible emotion I discerned in Darl McBride's demeanor all day; Darl notably nodding his head in agreement when Mr. Spector was speaking of how SCO wants UNIX to continue, and York is the solution to heeping the business alive

He adds a bit to the cast of characters and the color of the day:

On stage right, my left, around the table: Michael Nestor, Michael Jacobs, Julie Dyas, Adam Lewis and Joseph McMahon. There were also two others, a man and woman separately seated in the audience, who casually joined them in front of the bar when court was not in session.

On stage left, on my right, around the table was Laura Jones, Stuart Singer, John Eaton, Arthur Spector. Behind them with their back to the bar, starting on right was Darl McBride, [someone I unfortunately did not get the name of], Rachell Werkheiser, and representing York, Fred Rosner [PJ: we're going by the sign in sheet, but it's handwritten, so we believe this is correct, and if so, the affiliation is Duane Morris] and Scott McNutt. (I believe that I recognized Fred Rosner as being at the First Day hearing, which coupled with their statements, leads me, anyway, to suspect that perhaps the proposed sell-off has been planned for a while.) There were also two other gentlemen behind me in the audience, Tom Allison and Tim Fazel I believe, that came forward and hung out with the rest of the SCO contingent during off times.

Both sets of lawyers were rather congenial with each other after the hearing. In fact, I observed Adam Lewis and John Eaton joking quite freely with each other. Practioners of their trade when court was in session; but just because their clients are at odds with each other, that did not flow through to them being adversaries when off-stage.

It was MikeD, "RFD" Rick, "RSI" Rick, UD, and myself from before. And one other spectator, who asked me if "that was Darryl". I made sure he correctly understood his name was Darl and pointed him out. It looked like he had a few questions to ask and they talked for a minute.

Darl smiled and said hello when he recognized me from the last meeting, and I observed the same when he saw Mike. He gave me a friendly goodbye on the way out, with a something about going forward "one step at a time."

And lastly I'll add, I observed a lawyer joining us after lunch, who later told me he was representing Sun. We chatted briefly about how he expected that more was to have happened in the afternoon. I filled him in on which agenda items were continued to 11/16, or settled in advance of today. He seemed interested, but not terribly urgent to keep abreast of the matters.

I asked another witness at the first hearing if he recalled seeing the York attorney, and he doesn't, so if any of the other witnesses have a view, let us know.

And, with that, here's the entire ruling that the judge referenced in his ruling on the SUSE matter. It recalls to my mind the other reason I never wanted to be a bankruptcy paralegal in addition to all the boring form filling -- you find some really awful people there. This case will turn your stomach, I think. It's a father from hell, in my view, and it's interesting how the court found a way to make it come out as right as possible anyhow in the end, despite all the machinations. You'll also get a glimpse into just how complicated a bankruptcy can be if even one side is ... well... disfunctional? Mean as a snake? What can I say? Read it for yourself, and you can come to your own conclusions.




UNITED JERSEY BANK, A New Jersey Banking Corporation;


MICHAEL GILL, Third-Party Plaintiff



THOMAS GILL, Individually and in his Capacity as President of Maritime Electric Company, Inc., (N.Y.), Third Party Defendants; Maritime Electric Co., Inc., (plaintiff and third-party defendant) and Thomas Gill (third-party defendant), Appellants

No. 90-6057


959 F.2d 1194; 1991 U.S. App. LEXIS 28157; Bankr. L. Rep. (CCH) P74,353

June 12, 1991, Argued
December 2, 1991, Filed

COUNSEL: SAMUEL FELDMAN, ESQUIRE (Argued), Orloff, Lowenbach, Stifelman & Siegel, Roseland, New Jersey, Attorney for Appellants.

ALEXANDER W. BOOTH, JR., ESQ. (Argued), Brownstein & Booth, Union City, New Jersey, Attorney for Appellee, Michael Gill.

JUDGES: Nygaard and Alito, Circuit Judges, and Honorable John P. Fullam, Senior United States District Judge for the Eastern District of Pennsylvania, sitting by designation.



In this appeal arising from litigation between a father and son and their respective corporations, we address the scope and effect of the Bankruptcy Code's automatic stay provision, 11 U.S.C. 362(a)(1), on the district court's judgment entered after the son filed a Chapter 13 petition in bankruptcy. We hold that any district court proceedings against the debtor-son that occurred during the son's bankruptcy are void ab initio; that the district court's July 16, 1990 judgment must be vacated accordingly; and, given the lack of a final order respecting appellant Maritime Electric Co.'s conversion claim against Michael Gill, we must dismiss for lack of appellate jurisdiction.

The district court had jurisdiction under 28 U.S.C. 1332(a). We have inherent power and a continuing obligation to determine our own jurisdiction. See Shendock v. Director, OWCP, 893 F.2d 1458, 1461 (3d Cir.), cert. denied, 112 L. Ed. 2d 53, U.S., 111 S. Ct. 81 (1990); Thermice Corp. v. Vistron Corp., 832 F.2d 248, 251 (3d Cir. 1987).


A. Facts

At various times during the period 1975-1986, Thomas Gill ("Father") and Maritime Electric Co., Inc. ("MNY"), Father's New York corporation, employed Michael Gill ("Son"). Father was MNY's President. MNY was in the business of selling electrical equipment and parts to the marine industry. Albert Bishow was MNY's treasurer during the events described below.

At first, MNY employed Son as an outside salesman. Son was paid a weekly salary plus selling expenses. Then, pursuant to an oral agreement between Father and Son effective beginning May 1, 1979, Son was employed on a commission and monthly draw basis: he was entitled to commissions equal to 25% of MNY's gross profit margin on his sales, and to regular monthly draws against those commissions.

From 1979 until August 1984, Son's sales performance for MNY increased steadily. During this period, Son made repeated requests for an accounting and payment of all the commissions he earned, but Father made excuses and refused to comply. By and large, MNY paid Son monthly draws only which fell far short of the total commissions Son earned.

In 1979, when Son's sales for MNY were over $800,000, he received monthly draws of $2000 and one additional $2000 payment against the commissions outstanding. In 1980, when Son's sales were more than $ 1,000,000, Son received only monthly draws. Towards the end of 1980, Son's monthly draw was increased to $ 4000, but as the district court found "his requests for payment of accrued commissions were still being 'sandbagged' and he was told to wait".

Son's sales for MNY increased to approximately $1,500,000 in 1981, and to approximately $1,800,000 in 1982 -- but for each of these years Son received only $48,000 in monthly draws instead of his earned commissions which were $131,250 and $157,500, respectively. At the end of 1982, Father again refused Son's request for a comprehensive accounting and payment of all past due commissions. Nevertheless, Son continued to work for MNY.

In February 1984, when Son's sales for MNY had increased to approximately $2,200,000 out of the company's total sales of $2,831,000, Father told Son that the commission arrangement would be terminated and Son would be compensated on a salary plus expenses basis beginning March 1, 1984. Indeed, on that date the commission arrangement ended and Son began to receive a salary, but it amounted to $ 8000 less per year than the draws he had most recently been receiving. Furthermore, Son's past due commissions remained unpaid. When Son repeated his request for an accounting of the unpaid commissions, Father made assurances and referred vaguely to "corporate problems".

In May 1984, Son yet again requested an accounting, but this time Father said to forget the unpaid commissions. Son responded by suggesting that they agree to settle their commission dispute on some figure -- $50,000, $20,000, or even $10,000 -- but Father refused saying, "You got f----d. But at least you got f----d by someone you know. Don't let it happen down the road." Needless to say, the father-son relationship had wholly deteriorated.

In August 1984, Son filed a complaint against MNY in the Supreme Court of the State of New York, County of New York, seeking to recover the unpaid commissions. In response to Son's suit, Father terminated Son's employment with MNY.

In the spring of 1985, before discovery commenced in the New York litigation, Father asked Son to come back to work at MNY. Still refusing to pay the past due commissions, Father promised that if Son dropped the pending state court action: Son could come back as General Manager of MNY with authority over all of its business but not its general ledger; and, at the end of 1985, Father and Bishow would retire, Son would become President of MNY and he could buy Father's stake in the company. Father insisted, however, that no attorneys were to be involved in this proposed settlement.

Father reiterated the details of his proposal at a subsequent meeting with Son. But Father became indignant and emotional when Son asked that the proposed settlement be put in writing. Father said, "I promise you on the grave of my father who started the business. . . . [that I will keep my settlement promises]". The proposed settlement terms were confirmed at yet another meeting. Son finally accepted the settlement and agreed that it not be in writing.

When, as per their agreement, Son returned to work at MNY, he was introduced by his Father to the company's staff as "General Manager", "their boss". The following day, Son signed a Stipulation of Discontinuance of his New York suit with prejudice. Son also signed a general release in favor of MNY.

Later, in early December 1985, Father told Son he was no longer General Manager of MNY, he was demoted to MNY office manager, Father and Bishop were not retiring as promised, and "there's nothing -- no presidency, no nothing." Despite Father's breach of the settlement agreement, Son continued to work for MNY.

In February 1986, Son set up a New Jersey corporation named "Maritime Electric Company, Inc." ("MNJ"). He opened a bank account in New Jersey in the new corporation's name, which was identical to MNY's trade name.

Between July and November of 1986, while employed by MNY, Son took thirty-seven checks made payable to MNY and deposited them into his new corporation's account. He later withdrew the funds for his personal use. Thus, Son converted MNY funds totalling $111,725.09 because he felt he was entitled to them on account of the commissions still unpaid by MNY. Son's employment at MNY came to an end.

B. The federal litigation.

In June 1987, MNY filed a complaint in district court against Son and MNJ, alleging conversion, unjust enrichment, and fraudulent contraction of debt under N.J.S.A. 2A:26-2(a). MNY sought compensatory and punitive damages, interest, costs and, as provided by the New Jersey statute, prejudgment interest, attorneys' fees and a writ of attachment against Son's and MNJ's assets in New Jersey.

Son and MNJ answered MNY's complaint with several affirmative defenses and a jury trial demand. Additionally, Son asserted a counterclaim against MNY and a third-party complaint against Father, individually and in his capacity as President of MNY. The counterclaim and third-party action alleged inter alia that MNY and Father had breached Son's employment contract, and had fraudulently induced Son into settling his New York state suit against MNY. Son sought compensatory and punitive damages, interest and costs.

In July 1988, MNY moved for summary judgment on its conversion claims against Son and MNJ. On September 16, 1988, the district court ordered partial summary judgment in favor of MNY: a judgment against Son and MNJ, jointly and severally, awarding MNY $111,725 in compensatory damages together with prejudgment interest in the amount of $10,509.78, and imposing an equitable lien (for the same amounts) in favor of MNY on Son's real estate in Broward County, Florida. Nonetheless, the district court did not grant summary judgment on MNY's claim for punitive damages. See Partial Summary Judgment Opinion and Order of August 8, 1988; Final Partial Summary Judgment Order of September 16, 1988. 1

On March 2, 1989, the parties entered into a Pretrial Stipulation and Order. They stipulated that Son's and MNJ's liability to MNY for conversion was not disputed because MNY had already established on its motion for summary judgment facts enough to support the conversion claim. However, the pretrial order provided inter alia that, for purposes of MNY's claim for punitive damages, a determination of law was required: "Whether Michael Gill's conduct in converting the 37 Maritime New York checks is so egregious and wanton that punitive damages should be assessed against him, and if so, the amount of such damages." The pretrial order provided too that, for purposes of determining whether punitive damages should be awarded, MNY would prove inter alia the following: "the alleged commissions which were the basis of the New York action and the supposed justification for Michael Gill's conversion of Maritime NY checks did not exist"; "Thomas Gill did not promise Michael Gill that he and Albert Bishow would retire at the end of 1985 and sell Michael Gill their stock at the end of 1986"; and "Michael Gill's claim that he was entitled to the checks that he took from Maritime NY is merely [**10] after-the-fact justification for his illegal acts."

For purposes of Son's counterclaim and third-party action against MNY and Father, the pretrial order provided that MNY and Father would prove, inter alia, with regard to damages and liability that:

Throughout his employment by Maritime NY, Michael Gill repeatedly and regularly complained about his compensation and demanded that Thomas Gill turn over his stock to Michael Gill as the latter was better qualified to run the corporation. . . . There was no commission agreement that could be enforced in the New York Action. . . . The New York action was settled because Thomas Gill offered to give Michael Gill his old job, which Michael Gill accepted. . . . Although Thomas Gill hoped that his son would ultimately take over Maritime NY, Thomas Gill did not promise Michael Gill that he and Albert Bishow would retire at the end of 1985 or that he would sell his stock in Maritime NY at the end of 1986. . . . In October 1986, Thomas Gill, although under no obligation to do so, discussed with Michael Gill the possibility of Michael Gill becoming the president of Maritime NY. Thomas Gill did not proceed further with this offer because he discovered that Michael Gill had stolen over $100,000 from the corporation and had no desire to reward a thief, even if that thief was his son.

Thus, the pretrial order indicates that many of the proofs left for trial in MNY's conversion claim against Son and MNJ were the same factual issues to be tried in Son's counterclaim and third-party action against MNY and Father. 2

On May 18, 1990, Son filed an individual voluntary Chapter 13 petition for bankruptcy relief in the United States Bankruptcy Court for the Southern District of Florida. Bankruptcy relief was ordered upon the filing. Until Son's bankruptcy case was dismissed with prejudice on September 25, 1990, MNY never sought relief from the automatic stay which was triggered by Son's bankruptcy filing.3

On the morning of trial, July 2, 1990, the parties waived their rights to trial by jury. Then, over July 2 and 3, the district court tried MNY's claim for punitive damages against Son and MNJ, and also Son's counterclaim against MNY and his third-party claim against Father. 4

On July 16, 1990, the district court rendered judgment for Son and against MNY and Father on Son's counterclaim and third-party claim for unpaid commissions; and against MNY on its claims for punitive damages against Son and MNJ. The court's net judgment for Son in the amount of $321,849 reflected the total commissions earned by Son during the period 1979-1984, less amounts actually paid to Son and the funds he wrongfully converted. The district court reasoned that Son's Stipulation of Discontinuance and the Release of MNY in connection with the prior New York state court suit for unpaid commissions was fraudulently induced by Father; therefore, even if the Discontinuance and Release were judgments of the New York state court, they were not entitled to have a res judicata effect on Son's counterclaim and third-party complaint in this case; and, accordingly, Son was entitled to a judgment of damages for MNY's and Father's failure to pay the commissions earned between May 1, 1979 and March 1, 1984. The district court held also that MNY was not entitled to punitive damages for conversion.

On July 25, 1990, Son made two post-trial motions. First, he moved to vacate the September 16, 1988 partial summary judgment awarding compensatory damages to MNY. Second, Son moved to amend the July 16, 1990 trial judgment in his favor to add prejudgment interest on the amount of commissions past due.

On July 30, 1990, MNY and Father also made several post-trial motions. First, under Fed. R. Civ. P. 52(b), they sought to amend the district court's July 16, 1990 finding on MNY's gross profit margin: MNY and Father claimed that trial testimony showed MNY's gross profit margin was, on average, 23.6% rather than the 35% found by the district court. Thus, Father's and MNY's Rule 52(b) motion would reduce the amount of unpaid commissions earned by Son. Second, under Rule 59(e), MNY and Father sought to amend the July 16, 1990 judgment so as to reduce Son's award by the amount of 1984 commissions past due, on the grounds that Son did not maintain his claim for 1984 commissions in the pre-trial order. Third, and alternatively, MNY and Father moved under Rule 59(a) for a new trial on the issue of damages due Son on his counterclaim and third-party complaint.

On August 17, 1990, while the above-described post-trial motions were pending, MNY and Father gave notice of additional motions under Rule 60(b)(3), (4) and (6). MNY and Father sought to vacate the July 16, 1990 judgment; to award Father and MNY expenses including attorneys fees; and to stay enforcement of the district court's judgment pending appeal. In support of these motions, MNY and Father argued inter alia that the July 16, 1990 judgment against them was void by operation of the automatic stay triggered by Son's May 18, 1990 Chapter 13 bankruptcy petition; and because Son failed to advise MNY and Father of that petition.

Next, on August 28, 1990, MNY alone moved to amend the July 16, 1990 judgment for Son, so that the net amount awarded to Son would be reduced to reflect accrual of post-judgment interest on the September 16, 1988 partial summary judgment award of compensatory damages to MNY (which already included pre-judgment interest). A month later, on September 25, 1990, the Florida bankruptcy court dismissed Son's pending Chapter 13 case with prejudice.

On September 28, 1990, MNY and Father moved together again, this time under Rule 60(b)(3) and (6). They sought to vacate the July 16 judgment; to reinstate their demand for a jury trial which they had waived just before the bench trial; and to transfer the case to another district court judge. MNY and Father also sought an award of expenses and attorneys fees pursuant to 28 U.S.C. 1927. 5 MNY and Father argued that their motions should be granted because of Son's misconduct communicating ex parte with the trial judge,6 and because the trial judge was disqualified under 28 U.S.C. 455(a)7 for failing to recuse herself after not disclosing Son's ex parte communications with the court to MNY and Father before they waived their jury trial demand. Father and MNY contended that it was reasonable to think the trial judge's impartiality in the case might have been influenced by the court's knowledge of Son's bankruptcy.

In an opinion filed October 4, 1990, the district court decided the numerous motions made on July 25, July 30, August 17 and August 28, 1990, as follows. The court decided: to grant Son's July 25 motion to add prejudgment interest to the July 16, 1990 award of commissions past due, but to deny Son's concurrent motion to vacate the 1988 partial summary judgment awarding compensatory damages to MNY; to grant MNY's August 28 motion to amend the July 16, 1990 judgment so it would reflect accrual of post-judgment interest on the compensatory damages awarded MNY by the partial summary judgment; to grant MNY's and Father's July 30 Rule 59(e) motion to reduce the July 16, 1990 judgment by an amount equivalent to the commissions earned by Son during 1984, because Son never requested those commissions in the pretrial order; and, to deny the balance of MNY's and Father's motions.

On November 2, 1990, the district court denied MNY's and Father's Rule 60(b)(3) and (6) motions made on September 28, 1990. Then, by an order filed November 30, 1990, and as per the court's prior October 4, 1990 opinion, the district court finally disposed of the parties' motions of July 25 and 30, and August 17 and 28, 1991. Thus, the district court increased the net judgment in favor of Son to $450,217, so it would reflect the total of unpaid commissions claimed in the pre-trial order plus pre-judgment interest, less the amount (together with pre- and post-judgment interest) of MNY funds converted by Son.

Following this last district court order, Father and MNY filed a timely notice of appeal. They appeal "from the Order entering Final Judgment filed in this action on July 16, 1990, from the Order inter alia, amending the Final Judgment entered in this action on December 7, 1990 and from the Order entered on November 5, 1990."

The issues raised by appellants are these: (1) the effect of the automatic stay triggered by Son's bankruptcy on the district court's judgments; (2) whether the district court's finding of fraudulent inducement is clearly erroneous; (3) whether the district court's finding on damages is clearly erroneous; and (4) whether the district court abused its discretion when it failed to order a new trial on the issue of damages. Since our analysis of the automatic stay issue leads us to conclude that the last order entered by the district court in this case did not finally decide all claims of all the parties, we must dismiss without reaching the merits of other issues raised on appeal.


Scope and Effect of the Automatic Stay on District Court Proceedings

Appellants MNY and Father contend that the district court's July 16, 1990 trial judgment is void. They argue that bankruptcy's automatic stay, 11 U.S.C. Section 362(a), was triggered by Son's May 18, 1990 bankruptcy petition and, therefore, the district court's July 16, 1990 judgment is void ab initio. This issue requires us to interpret and apply the legal precepts underlying section 362. Accordingly, standard of review is plenary. Universal Minerals, Inc. v. C. A. Hughes & Co., 669 F.2d 98 (3d Cir. 1981).

For the reasons below, we agree with appellants, but only in part. The automatic stay rendered the district court's judgment on MNY's claim for punitive damages against Son void ab initio, but it did not void the July 16, 1990 judgment with respect to MNY's claim for punitive damages against MNJ, or Son's claims against MNY and Father.

A. Scope of the Automatic Stay

Section 362 of the Bankruptcy Act provides in part:

Automatic stay.

(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title . . . operates as a stay, applicable to all entities, of --

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title. . . .

11 U.S.C. 362(a)(1) (1991) (emphasis added).

Subsection (a) defines the scope of the automatic stay by listing acts that are stayed by the commencement of a bankruptcy case. All judicial actions against a debtor seeking recovery on a claim that were or could have been brought before commencement of a bankruptcy case, are automatically stayed. Subsection (b) of the statute enumerates specific exceptions to the automatic stay rule. See 11 U.S.C. 362(b). None of the exceptions apply here.

The scope of the automatic stay is broad. Assoc. of St. Croix Condominium Owners v. St. Croix Hotel Corp., 682 F.2d 446, 448 (3d Cir. 1982). "All proceedings are stayed, including . . . judicial proceedings. Proceeding in this sense encompasses civil actions. . . ." Id.

The automatic stay serves several purposes. First, it gives a bankrupt a breathing spell from creditors by stopping all collection efforts, all harassment, and all foreclosure actions. Id. The stay permits a bankrupt to attempt a repayment or reorganization plan or simply to be relieved of the financial pressures that drove him into bankruptcy. Second, the stay protects creditors by preventing particular creditors from acting unilaterally in self-interest to obtain payment from a debtor to the detriment of other creditors. Id. In other words, the stay "protects the bankrupt's estate from being eaten away by creditors' lawsuits and seizures of property before the trustee has had a chance to marshal the estate's assets and distribute them equitably among the creditors." Martin-Trigona v. Champion Fed. Sav. & Loan Assoc., 892 F.2d 575, 577 (7th Cir. 1989).

The stay of Section 362 is "automatic" because it is triggered as against all entities upon the filing of a bankruptcy petition, irrespective of whether the parties to the proceedings stayed are aware that a petition has been filed. See NLT Computer Services v. Capital Computer Systems, 755 F.2d 1253, 1258 (6th Cir. 1985); In re Koresko, 91 Bankr. 689, 701 (Bankr. E.D. Pa. 1988); In re Boston Business Machines, 87 Bankr. 867, 870 (Bankr. E.D. Pa. 1988). Because the automatic stay serves the interests of both debtors and creditors, it may not be waived and its scope may not be limited by a debtor. Commerzanstalt v. Telewide Systems, Inc., 790 F.2d 206, 207 (2d Cir. 1986).

Only the bankruptcy court with jurisdiction over a debtor's case has the authority to grant relief from the stay of judicial proceedings against the debtor. Cathey v. Johns-Manville Sales Corp., 711 F.2d 60, 62-3 (6th Cir. 1983), cert. denied, 478 U.S. (1986). The bankruptcy court may provide relief upon request of "a party in interest" and after notice and a hearing. See 11 U.S.C. 362(d). The court grants relief "by terminating, annulling, modifying, or conditioning the stay." Id.8 If relief from the stay is granted, judicial proceedings against the debtor may then continue. In re Highway Truck Drivers & Helpers Local 107, 888 F.2d 293, 298 (3d Cir. 1989).

Although the scope of the automatic stay is broad, the clear language of section 362(a) indicates that it stays only proceedings against a "debtor" -- the term used by the statute itself. St. Croix, 682 F.2d at 448. "The statute does not address actions brought by the debtor which would inure to the benefit of the bankruptcy estate." Id. See also In re Berry Estates, 812 F.2d 67, 71 (2d Cir.), cert. denied, 485 U.S. 759, 108 S. Ct. 1537, 99 L. Ed. 2d 839 (1987); Martin-Trigona, 892 F.2d at 577.

Whether a specific judicial proceeding falls within the scope of the automatic stay must be determined by looking at the proceeding "at its inception." St. Croix, 682 F.2d at 449. "That determination should not change depending on the particular stage of the litigation at which the filing of the petition in bankruptcy occurs." Id. Thus, the dispositive question is whether a proceeding was "originally brought against the debtor." Id. See also Teachers Ins. & Annuity Ass'n of America v. Butler, 803 F.2d 61, 64-5 (2d Cir. 1986).

All proceedings in a single case are not lumped together for purposes of automatic stay analysis. Even if the first claim filed in a case was originally brought against the debtor, section 362 does not necessarily stay all other claims in the case. Within a single case, some actions may be stayed, others not. Multiple claim and multiple party litigation must be disaggregated so that particular claims, counterclaims, crossclaims and third-party claims are treated independently when determining which of their respective proceedings are subject to the bankruptcy stay.

Thus, within one case, actions against a debtor will be suspended even though closely related claims asserted by the debtor may continue. Judicial proceedings resting on counterclaims and third-party claims asserted by a defendant-debtor are not stayed, while same-case proceedings arising out claims asserted by the plaintiff are stayed. See First Wisconsin National Bank v. Grandlich Development Corp., 565 F.2d 879, 880 (5th Cir. 1978) (automatic stay did not bar district court's dismissal of debtor's counterclaim in action originally brought against debtors, "because the counterclaim was not a proceeding against the debtors"); Jefferson Ward Stores, Inc. v. Doody Co., 48 Bankr. 276, 278-79 (E.D. Pa. 1985) (automatic stay does not bar district court's denial of debtor's Rule 54(b) motion made in connection with third-party claim brought by debtor); Boone v. Beacon Bldg. Corp., 613 F. Supp. 1151, 1155 (D. N.J. 1985) (stay only operates as against actions in which bankruptcy petitioner is in defensive posture; thus bankrupt's crossclaim against codefendant for contribution is not stayed); Trans Caribbean Lines v. Tracor Marine, Inc., 49 Bankr. 360, 362 (S.D. Fla. 1985) (since prosecution of counterclaims and crossclaims by debtor is not stayed by 362, court's dismissal of debtor's counterclaims or cross claims is not barred by 362); In re Regal Construction Co., 28 Bankr. 413, 416 (Bankr. D. Md. 1983) (automatic stay did not preclude debtor from proceeding on counterclaim which it had brought).

Furthermore, the automatic stay is not available to non-bankrupt co-defendants of a debtor even if they are in a similar legal or factual nexus with the debtor. 9 Lynch v. Johns-Manville Sales Corp., 710 F.2d 1194, 1196-97 (6th Cir. 1983) ("it is universally acknowledged that an automatic stay of proceedings accorded by 362 may not be invoked by entities such as sureties, guarantors, co-obligors, or others with a similar legal or factual nexus to the . . . debtor"). See also Austin v. Unarco Industries, Inc., 705 F.2d 1, 4-5 (1st Cir.), cert. dismissed, 463 U.S. 1247 (1983); Teachers Ins. & Annuity Ass'n. v. Butler, 803 F.2d at 65; Williford v. Armstrong World Indus., Inc., 715 F.2d 124, 126-27 (4th Cir. 1983); Wedgeworth v. Fibreboard Corp., 706 F.2d 541, 544 (5th Cir. 1983); Clay v. Johns-Manville Sales Corp., 722 F.2d 1289, 1290-91 (6th Cir. 1983), cert. denied, 467 U.S. 1253, 104 S. Ct. 3537, 82 L. Ed. 2d 842 (1984); Pitts v. Unarco Industries, Inc., 698 F.2d 313, 314 (7th Cir.), cert. denied, 464 U.S. 1003, 104 S. Ct. 509, 78 L. Ed. 2d 698 (1983); Fortier v. Dona Anna Plaza Partners, 747 F.2d 1324, 1330 (10th Cir. 1984); In re Lessig Const., Inc., 67 Bankr. 436 (Bankr. E.D. Pa. 1986) (in adversarial action brought by debtor in bankruptcy court, defendant must obtain relief from automatic stay before asserting any counterclaim against debtor); Action Drug Co., Inc. v. Overnite Transp. Co., 724 F. Supp. 269 (D. Del. 1989) (where plaintiff-debtor enters bankruptcy, defendant may not assert counterclaim against bankrupt plaintiff), aff'd without op., 902 F.2d 1558 (3d Cir. 1990). But see A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 999 (4th Cir.) (automatic stay may be extended to non-bankrupt codefendants in unusual circumstances), cert. denied, 479 U.S. 876, 93 L. Ed. 2d 177, 107 S. Ct. 251 (1986).

In this regard, formal distinctions between debtor-affiliated entities are maintained when applying the stay. A proceeding against a non-bankrupt corporation is not automatically stayed by the bankruptcy of its principal, Marcus, Stowell & Beye v. Jefferson Investment. Corp., 797 F.2d 227, 230 n.4 (5th Cir. 1986); Personal Designs, Inc. v. Guymar, Inc., 80 Bankr. 29, 30 (E.D. Pa. 1987); and, section 362 does not bar an action against the principal of a debtor-corporation. In re Philadelphia Gold Corp., 56 Bankr. 87, 90 (Bankr. E.D. Pa. 1985).

Applying these principles here, we hold that section 362 stayed only MNY's conversion claim against Son, but not MNY's conversion claim against MNJ or Son's claims against MNY and Father. Only MNY's conversion claim against Son is an action against a "debtor", and so only proceedings arising out of that claim were stayed automatically by the filing of Son's May 18, 1990 bankruptcy petition.

B. Effect of Automatic Stay

Once triggered by a debtor's bankruptcy petition, the automatic stay suspends any non-bankruptcy court's authority to continue judicial proceedings then pending against the debtor. This is so because 362's stay is mandatory and "applicable to all entities", including state and federal courts. 11 U.S.C. 362(a). See Boynton v. Ball, 121 U.S. 457, 466-67, 7 S. Ct. 981, 984, 30 L. Ed. 985 (1887) ("where the bankruptcy proceedings are brought to the attention of the court in which a suit is being prosecuted against a bankrupt, that court shall not proceed to final judgment until the question of his discharge shall have been determined"); In re Highway Truck Drivers & Helpers Local 107, 888 F.2d at 299 n.8 (if state court proceeds in violation of stay, "such proceedings would have been in excess of the state court's authority and subject to collateral attack"); Ellis v. Consolidated Electric Corp., 894 F.2d 371, 373 (10th Cir. 1990) (district court "lacked power" to enter order in violation of automatic stay); Cathey v. Johns-Manville Sales Corp., 711 F.2d 60, 61 (6th Cir. 1983) ("the automatic stay of proceeding is applicable at both the trial and appellate levels"), cert. denied, 478 U.S. 1021, 92 L. Ed. 2d 740, 106 S. Ct. 3335 (1986); Kommanditselskab Supertrans v. O.C.C. Shipping, Inc., 79 Bankr. 534, 540 (S.D.N.Y. 1987) (if stay applies, "the district court's power to adjudicate the case is suspended pending the outcome of the bankruptcy proceedings").

The automatic stay's effect on judicial proceedings against the debtor does not depend upon whether the court finds for or against the debtor. Ellis, 894 F.2d at 373. Once triggered, the automatic stay of an action pending against the debtor in district court "continues until the bankruptcy case is closed, dismissed, or discharge is granted or denied, or until the bankruptcy court grants some relief from the stay. 11 U.S.C. 362(a), (c)(2), (d), (e), (f)." Pope, 778 F.2d at 239. See also In re De Jesus Saez, 721 F.2d 848, 851-2 (1st Cir. 1983) (stay terminates when Chapter 13 petition is dismissed). Absent relief from the stay, judicial actions and proceedings against the debtor are void ab initio. Kalb v. Feuerstein, 308 U.S. 433, 438-40, 60 S. Ct. 343, 346, 84 L. Ed. 370 ("the action of the. . .Court was not merely erroneous but was beyond its power, void, and subject to collateral attack"). See also In re Ward, 837 F.2d 124, 126 (3d Cir. 1988) (sheriff's sale conducted in violation of the stay is "void and without effect", citing Kalb). 10 But see Picco v. Global Marine Drilling Co., 900 F.2d 846, 850 (5th Cir. 1990) (district court dismissal of action in violation of stay voidable, not void), citing Sikes v. Global Marine, Inc., 881 F.2d 176, 178 (5th Cir. 1989) (filing of complaint against the debtor in unknowing violation of the stay is voidable rather than void); In re Schwartz, 119 Bankr. 207, 208-11 (9th Cir. Bankr. 1990) (tax assessment in violation of stay voidable, not void). 11 Cf. In re Norma James, 940 F.2d 46. (3d Cir. 1991, as amended August 7, 1991) (if state court judgment is not void ab initio because it falls within exception to automatic stay, lower federal court may not vacate judgment).

Holding that judicial acts and proceedings in violation of the automatic stay are void ab initio is consistent with the stay's function of "enabling the bankruptcy court to decide whether it will exercise its power under section 502(b) of the Bankruptcy Code to establish the validity and amount of claims against the debtor or allow another court to do so, thereby preventing a 'chaotic and uncontrolled scramble for the debtor's assets in a variety of uncoordinated proceedings in different courts.'" Hunt v. Bankers Trust Co., 799 F.2d 1060, 1069 (5th Cir. 1986), quoting In re Holtkamp, 669 F.2d 505 (7th Cir. 1982). Consolidating all pre-petition claims against the debtor in one collective proceeding before a bankruptcy court is the essence of bankruptcy. 12 SeeThomas H. Jackson, The Logic and Limits of Bankruptcy Law 7-19 passim (1986).

Also, by treating judicial acts and proceedings in violation of the stay as void acts, we deter non-bankruptcy courts from continuing proceedings against a debtor who has sought federal bankruptcy protection. The result is to conserve debtor assets which should be marshalled to satisfy creditor claims instead of expended as legal costs in defending against suits in violation of the stay.

Since the bankruptcy court with jurisdiction over Son's Chapter 13 case never granted relief from the automatic stay triggered on May 18, 1988, we hold that the district court had no authority to continue the proceedings in MNY's conversion action against Son after he filed his bankruptcy petition, and therefore, the district court's actions in violation of the stay are void ab initio. The district court must vacate its orders to the extent they have adjudicated MNY's conversion claim against Son during the pendency of Son's bankruptcy.

During Son's bankruptcy proceeding, May 18 - September 25, 1990, the district court could not try MNY's claim for punitive damages and could not render any judgment on that claim. It follows that the district court could not properly decide any post-trial motions pertaining to the conversion claim. Indeed, during Son's bankruptcy proceeding, the parties themselves could not validly undertake any judicial action material to the conversion claim against Son.

Thus, the district court's July 16, 1990 judgment rejecting MNY's claim for punitive damages against Son must be vacated. So too, the district court's post-trial orders must be vacated and amended to the extent they dispose of motions arising out of MNY's conversion claim against Son. 13

For the same reasons, MNY's July 2, 1990 waiver of its right to jury trial is a nullity, but only to the extent the waiver goes to trial of MNY's conversion claim against Son. Lacking power to act in any proceeding against Son qua debtor, the district court could not give its imprimatur of approval to such a waiver. Theoretically at least, MNY is now free to seek a jury trial of its claim for punitive damages against Son.

We hasten to add, however, that despite the bankruptcy stay's effect on MNY's conversion claim against Son, the bankruptcy stay did not affect the district court proceedings and judgments arising out of other claims in this case. 14 See Ellis, 894 F.2d at 373 n.4. Therefore, the prospect of a jury trial de novo on MNY's punitive damages claim against Son is, perhaps, remote. Since the district court did have power to make findings of fact and render judgment on MNY's conversion claim against MNJ, the district court might properly determine with issue preclusion analysis on remand that MNY is bound by facts found in the trial of MNY's conversion claim against MNJ. It might conclude that no jury trial of any fact is required to enter a final judgment on MNY's conversion claim against Son. But, we leave this analysis for the district court in the first instance.


Effect of Stay on Appellate Jurisdiction

Since we hold that the district court's judgment rejecting MNY's claim for punitive damages against Son was void ab initio, the district court has not yet entered a valid order finally adjudicating MNY's conversion action against Son. It follows that we are without jurisdiction to consider the merits of other issues raised by the parties on appeal. "Although not briefed by either party, we cannot ignore matters that bring into question the existence of federal jurisdiction." Thermice Corp., 832 F.2d at 251.

A judgment is final and appealable under 28 U.S.C. 1291 if it "'ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.'" Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 275, 99 L. Ed. 2d 296, 108 S. Ct. 1133 (1988) (quoting Catlin v. United States, 324 U.S. 229, 233, 89 L. Ed. 911, 65 S. Ct. 631 (1945)). See also Sussex Drug Products v. Kanasco, Ltd., 920 F.2d 1150, 1153 (3d Cir. 1990). Nevertheless, Fed. R. Civ. P. 54(b) provides for special express certifications of finality which permit "entry of a final judgment as to one or more but fewer than all of the claims or parties". But "absent special certification, a judgment is final only if it disposes of all of the claims of all of the parties. Matter of Vitreous Steel Products Co., 911 F.2d 1223, 1230 n.3 (7th Cir. 1990). 15

Since the district court has yet to enter an order finally deciding the merits of all components of MNY's conversion claim against Son, and because there is no proper Rule 54(b) certification in this case, 16 the district court has not rendered a final, appealable order. Accordingly, we will dismiss for lack of appellate jurisdiction. See similarly Ellis, 894 F.2d at 373.



We will dismiss this appeal for lack of appellate jurisdiction, and remand to the district court for further proceedings in accordance with this opinion.

1 More particularly, the record shows that the district court filed both its partial summary judgment opinion and a preliminary partial summary judgment order on August 8, 1988; and then later, on September 16, 1988, filed a final partial summary judgment order. The last order (as contrasted with the preliminary order) purportedly certified the court's partial summary judgment as a final, appealable order, because Son and MNJ were unable to post bond covering the judgment for MNY. As discussed below, see note 16, the district court's purported certification of finality was flawed.

2This overlap of issues may determine whether any further trial is needed on remand. See discussion below, typescript at 29.

3 We take judicial notice of the docket entries in the bankruptcy court's file on Son's case. From these entries we know the actual dates of Son's bankruptcy proceedings. These dates are important to our analysis of the scope and effect of the automatic stay which was triggered by Son's Chapter 13 petition.

4 Contrary to MNY's and Father's assertion on appeal, Son did not abandon his contractual claims during trial. Although Son's attorney told the district court that Son was not seeking to enforce the terms of the oral settlement agreement fraudulently induced by Father, nothing in the record leads us to conclude that Son waived his contractual claim alleging that MNY and Father breached Son's employment agreement with MNY. Thus, the district court could have properly tried Son's claim for unpaid commissions as a contractual claim because it alleged MNY and Father (in his capacity as MNY's President) breached the commission agreement covering Son's work for MNY between May 1, 1979 and March 1, 1984.

Nonetheless, the record on appeal does not indicate clearly what legal theory underpins the district court's award of damages to Son. Indeed, the district court's pronouncements on this point are ambiguous. In its Findings of Fact and Conclusions of Law filed July 16, 1990, the court said, "what was before the court for trial were Maritime N.Y.'s claim for punitive damages on the conversion claim . . . and Michael Gill's counterclaim for earned commissions against Maritime N.Y. and Thomas Gill". [App. 125] Thus, the district court implies especially at note 2 of its opinion that Son's recovery was based on a contractual theory. Later, however, when adding prejudgment interest to the award of commissions past due, the district court says differently that Son's recovery was based on his " fraud claim, the sole claim tried, a claim which accrued in April 1985." [App. 257] (emphasis added).

We think that, on remand, the district court should clarify its findings of fact and conclusions of law. Clarification will facilitate appellate review if and when the parties reassert appeals later.

5Section 1927 (1991) provides:

Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.

6Son submitted three letters to the district court without copying counsel for Father and MNY. The first letter of one page requested "that a motion be filed" to terminate Son's relationship with his attorney. The district court responded, advising Son that no motion or hearing was necessary to accomplish that, but instead Son should supply the name and address of any new attorney to the court.

The second letter sent to the district court, handwritten and seventeen pages long, recounted many extra-judicial events about the case. This letter was not read by the trial judge, although she did subsequently advise Son not to make any submissions to the court without copying all parties to the case. Nevertheless, probably before Son received the court's advice, he mailed another one-page letter to the district court indicating that he had filed a voluntary petition for bankruptcy on May 18, 1990. Father and MNY complained about these last two letters in their Rule 60(b)(3) and (6) motions. See generally App. 261-267.

7Section 455(a) (1991) provides:

Any justice, judge, or magistrate of the United States shall disqualify himself in any proceeding in which his impartiality might be reasonably be questioned.

8 Section 362(d), 11 U.S.C., provides more fully, in part:

"On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay --

"(1) for cause. . . ."

9Chapter 13 of the Bankruptcy Code does contain provision for a stay of proceedings against non-debtors who are jointly liable with a debtor on a consumer debt, or secured a debtor's consumer debt. However, that provision does not apply in this case. See 11 U.S.C. 1301 (1991).

10 Other cases among the many holding that judicial acts in violation of the automatic stay are void, are these: In re Advent Corp., 24 Bankr. 612 (1st Cir. Bankr. 1982); In re 48th Street Steakhouse, Inc., 835 F.2d 427, 431 (2d Cir.), cert. denied, 485 U.S. 1035, 99 L. Ed. 2d 910, 108 S. Ct. 1596 (1987); In re Smith, 876 F.2d 524, 526 (6th Cir. 1989); In re Shamblin, 890 F.2d 123, 125 (9th Cir. 1989); Ellis, 894 F.2d at 372; In re Albany Partners, Ltd., 749 F.2d 670, 675 (11th Cir. 1984); In re Joyce Purnell, 92 Bankr. 625 (Bankr. E.D. Pa. 1988); In re Clark In re A.I.A. Industries, Inc., 75 Bankr. 1013, 1021 n.5 (Bankr. E.D. Pa. 1987); In re Fasgo, Inc., 58 Bankr. 99, 100 (Bankr. E.D. Pa. 1986); In re Marta Group, Inc., 33 Bankr. 634, 639 (Bankr. E.D. Pa. 1983).

11 The courts concluding that acts violating the stay are voidable rather than void rely on section 362(d) of the Bankruptcy Code which permits retroactive annulment of the stay,see Picco, 900 F.2d at 850, and on other provisions of the Code which have been used to cure acts purportedly void under the automatic stay. See generally In re Schwartz, 119 Bankr. at 209 . These courts maintain that a violation of the stay "can be declared invalid in an appropriate proceeding but are capable of being cured by confirmation or ratification or if no proceeding is brought to avoid the voidable act." Id. at 209.

We need not decide here whether a bankruptcy court may exercise its equitable powers to retroactively rehabilitate judicial acts and proceedings which would otherwise be void ab initio as violations of the automatic stay. Here, the bankruptcy court never granted prospective or retroactive relief from the automatic stay.

12 A suit for damages pending against a debtor in a non-bankruptcy court when the debtor files his petition, becomes a "claim" for bankruptcy purposes and may be liquidated by the bankruptcy court in a core proceeding without any final determination of the action by the non-bankruptcy court. See In re Meyertech Corp., 831 F.2d 410, 417-18 (3d Cir. 1987).

13 All of MNY's post-judgment motions made during the pendency of Son's bankruptcy with respect to its conversion claim against Son are void. For example, MNY's August 28, 1990 motion to amend the July 16, 1990 judgment to reflect accrual of post-judgment interest on the September 16, 1988 partial summary judgment award of actual conversion damages to MNY is void. So too is the district court's November 30, 1990 order granting that particular motion, and therefore that order must be vacated.

Similarly, Son's own July 25, 1990 motion made during the pendency of his bankruptcy is void to the extent it sought to vacate the 1988 summary judgment on MNY's conversion claim against Son. The district court's November 30 denial of that aspect of Son's July 25 motion must be vacated.

To the extent MNY's and Father's Rule 60 motions of August 17 and September 28, 1990 were void ab initio and must be reconsidered, the district court should take action consistent with this opinion on remand.

14 Despite Son's bankruptcy, the district court was authorized to decided the following motions: Son's July 25, 1990 motion to amend the July 16 judgment to add prejudgment interest to the award on Son's claims against MNY and Father; and also, MNY's and Father's July 30, 1990 Rule 52(b) and Rule 59(a) & (e) motions, which all focused only on the quantum of damages awarded on Son's counterclaim and third-party claim.

15 Fed. R. Civ. P. 54(b) states, in part,

In the absence of [a valid Rule 54(b) certification], 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.

16 The district court attempted Rule 54(b) certification of its partial summary judgment on MNY's claim for compensatory damages against Son and MNJ. See Order of Partial Summary Judgment. [App. 62-64] However, the purported certification is defective for two reasons.

First, the district court's order omitted to make "an express determination that there is not just reason for delay" and "an express direction for the entry of judgment". See Rule 54(b). Second, even if the district court had made the express statements required by the Rule, certification of the partial summary judgment on MNY's conversion claim would remain improper because that judgment only decided the issue of compensatory damages.

As we have said elsewhere, "the partial adjudication of a single claim is not appealable, despite a rule 54(b) certification." Sussex Drug Products, 920 F.2d at 1154. Applicable here is our holding there: "when liability rests on the same transaction or series of transactions, a count for punitive damages, although of a different order than compensatory damages, does not constitute a separate claim under Rule 54(b)." Id. at 1155.

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