ERIC L. FRANK, U.S. BANKRUPTCY JUDGE.
James E. Mager ("the Debtor") commenced this chapter 13 bankruptcy case on June 24, 2019. On October 25, 2019 Fresh Look Flooring LLC, d/b/a Olden Carpet and Flooring ("Fresh Floor") filed a motion
The Debtor previously owned a membership interest in and worked for Fresh Floor, but their business relationship soured and Fresh Floor terminated Debtor's employment. Each now asserts the other committed various business torts in the course of their dealings.
The Motion involves the relatively rare situation in which an unsecured creditor holding a disputed claim in a chapter 13 bankruptcy case seeks leave to resolve the dispute and liquidate its claim in another forum — in this case state court (the Court of Common Pleas, Bucks County) — rather than through the bankruptcy claims allowance process.
As explained below, after engaging in a holistic analysis of this chapter 13 case, I have concluded that cause exists to grant Fresh Look relief from the automatic stay.
It is helpful to begin by examining the parties' past relationship and the status of their prepetition state court litigation.
Beginning in 2008, the Debtor purchased a 45% membership interest in Fresh Look. Fresh Look operates a business that sells and services floor installations and paint, trading under the name "Olden Carpet and Flooring."
The Debtor also worked as a Fresh Look employee. Fresh Look terminated his employment in 2017. His termination initially triggered two (2) pieces of litigation in the Court of Common Pleas, Bucks County:
The parties resolved the Replevin Action in June 2018, following a conference with a state court judge. The same judge engaged the parties in a series of settlement conferences in an effort to reach a global settlement of all their disputes. The parties exchanged some discovery during the settlement negotiations, Despite the state court's efforts, the parties did not reach a global settlement.
As a result, in 2019, Fresh Look and its principal commenced another lawsuit in state court against the Debtor. In the Fresh Look Action Complaint, Fresh Look asserted,
As far as the Debtor's 2017 Action is concerned,
The Debtor filed his bankruptcy petition on June 24, 2019. The petition was accompanied by his bankruptcy schedules.
The Debtor's schedules and the proofs of claim filed in this case reveal the following relevant aspects regarding the Debtor's financial condition:
Moreover, and significantly, the equity in the Debtor's Residence (approximately $140,000, based on schedules A/B, C, and D) far exceeds the Debtor's allowable exemption in residential property ($25,150.00). Thus, in order to be confirmed, the Debtor's plan will have to provide for a substantial payment on account of allowed unsecured claims.
The proposed plan filed by the Debtor on July 22, 2019 ("the Plan") (Doc. # 15) provides for payments to the chapter 13 trustee ("the Trustee") totaling $102,000.00, as follows:
And yet, the Debtor disclosed monthly, after-tax income of $3,432.41 (which includes a "family contribution" of $600/ month) and monthly expenses of $6,489.12,
The Debtor's counsel acknowledged at the hearing on the Motion that the Plan was dependent on the successful outcome of the Debtor's litigation against Fresh Look. (
Fresh Look seeks relief from the automatic stay pursuant to 11 U.S.C. § 362(d), which provides, in pertinent part:
(emphasis added).
The term "cause," which is not defined in the Bankruptcy Code, "is an intentionally broad and flexible concept which must be determined on a case-by-case basis."
I previously articulated the principles governing the determination whether "cause" exists to grant relief from the automatic stay to an unsecured creditor as follows:
At the same time, however, the phrase "extraordinary circumstances" may overstate the stay relief movant's burden:
The bankruptcy court possesses broad discretion in determining whether cause exists, based on consideration of the various competing interests.
Fresh Look contends that cause exists to grant it relief from the automatic stay to proceed with the 2019 Fresh Look Action because "the disputes between Movant and Debtor would be resolved more economically and conveniently in a non-bankruptcy forum." (Motion ¶ 25). According to Fresh Look, the parties agreed to consolidate the litigation into a single track to be heard before the state court judge who had conducted a number of conferences with the parties and who "has an in-depth knowledge of the relationship and issues." (Motion ¶ 15). Indeed, Fresh Look's request for relief from the automatic stay is based largely on the state court's familiarity with the parties' dispute.
In response, the Debtor argues that the state court litigation is easily adjudicated as part of the claims allowance process. The Debtor submits that the bankruptcy court should follow the conventional approach of resolving disputed claims in the bankruptcy court, particularly because the adjudication of the parties' completing claims is essential to determining the confirmability of the Plan.
As stated in Part III,
First, the Debtor's Plan and rehabilitation strategy are problematic. Confirmation and completion of the Plan are dependent on a substantially successful outcome in the Fresh Look litigation, which is hotly contested, subject to counterclaims and thus, likely to be drawn out and expensive. Many courts have questioned whether a chapter 13 plan dependent
Given this heightened standard for confirmation of the Plan and the Plan's explicit dependence on a successful prosecution of the Debtor's disputed claims against Fresh Look, one would have expected the Debtor to take steps as quickly as possible to pursue his claims against Fresh Look in the forum of his choice, presumably the bankruptcy court. Instead, that more than seven (7) months into this bankruptcy case, the Debtor has not initiated any action in the bankruptcy court to press his affirmative claims against Fresh Look or object to Fresh Look's proof of claim. Nor has he taken any action to prosecute the 2017 Action he commenced in state court, which has seen not progressed beyond service of the writ of summons.
Further, when questioned at the hearing on the Motion, the Debtor's bankruptcy counsel acknowledged that prosecution of the Debtor's claims against Fresh Look (and the Debtor's defense against Fresh Look's claims) likely would require a substantial expenditure of resources. The Debtor's bankruptcy counsel did not volunteer to undertake that litigation and could not articulate how the Debtor will be able to obtain or fund special counsel to do so.
This ongoing delay and the uncertainty in how the Debtor will obtain the resources to pursue the (allegedly beneficial) litigation against Fresh Look, combined with the imbalance in the Debtor's disclosed personal economy (his monthly expenses far exceeding his monthly income) lead me to question the Debtor's good faith in this bankruptcy case.
My concern about the Debtor's good faith and the viability of this bankruptcy case, while significantly contributing to my decision, is not, by itself, determinative. Fresh Look and the Debtor are locked in a bitter "business divorce" that will have to be adjudicated. But the present issue here
Here, given the time that has passed since the commencement of this bankruptcy case, my perception is that the most efficient way to "move the litigation" is to allow the parties to proceed in state court, where actions have already been commenced in state court and where the Debtor will be able to assert his claims against Fresh Look — rather than continuing to await the initiation of new proceedings in this court.
This outcome is equitable because it will not unduly interfere with the Debtor's chapter 13 strategy and proposed plan.
Whether the litigation is conducted in state court or the bankruptcy court, the Debtor cannot expect confirmation of his plan to await its outcome, which could take years. Thus, a confirmation hearing will be held before the conclusion of the litigation between the Debtor and Fresh Look.
At the confirmation hearing, the Debtor will have the burden of establishing the plan's feasibility.
Ultimately, the Debtor must satisfy a heavy burden in establishing the feasibility of his plan, when it is dependent the successful litigation of his claims against Fresh Look. If he cannot meet this burden, confirmation of his plan should be denied as infeasible.
The important point for present purposes is that, regardless whether the litigation between the Debtor and Fresh Look takes place in the bankruptcy court or state court, the Debtor will have the same obligation and opportunity to prove feasibility at the confirmation hearing and therefore, he is not unduly prejudiced by the grant of the relief requested by Fresh Look. If anything, the Debtor's ability to obtain timely discovery may be enhanced by proceeding in the pending state court actions, as opposed to bankruptcy proceedings that have not yet even been commenced.
For the reasons set forth above, the Motion will be granted. An order consistent with this Memorandum will be entered.