BAYLSON, District Judge.
Presently before this Court is an appeal from an Order of the United States Bankruptcy Court for the Eastern District of Pennsylvania (Coleman, J.) granting a motion for a preliminary injunction filed by Plaintiff-Appellee Union Trust Philadelphia, LLC ("Union Trust"), enjoining state court proceedings brought by Defendant-Appellant Singer Equipment Company, Inc. ("Singer") against third-party non-debtors Joseph Grasso ("Grasso") and Garrett Miller ("Miller"). For the reasons that follow, the Bankruptcy Court is affirmed.
On March 31, 2011, Union Trust, the operator of a restaurant named Union Trust Steakhouse in Center City, Philadelphia, filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. However, Grasso and Miller, the sole members of Union Trust, did not. In April 2009, Singer commenced proceedings in Pennsylvania state court by filing suit against Grasso, Miller, and Chestnut Restaurant Ventures, LLC ("CRV"), among others, in an attempt to collect nearly $500,000 in payments that CRV allegedly owed Singer for purchases of restaurant equipment. Grasso and Miller, along with two other individuals not relevant to the instant dispute, are also members of CRV. On August 9, 2010, while the state court proceedings were pending, CRV transferred all of its assets, including its interest in the equipment, to Union Trust for one dollar. Union Trust continues to benefit from the use of the equipment. On or about April 4, 2011, the Court of Common Pleas of Philadelphia County entered a judgment enforcing a settlement among the parties to the state court proceedings. The judgment requires Grasso and Miller each to personally contribute $350,000. Grasso and Miller have appealed from the judgment.
On May 23, 2011, after Grasso and Miller filed their appeal in state court, Union Trust commenced the instant adversary
On July 7, 2011, Singer filed a motion to stay the effect of the order pending appeal with this Court. After holding an expedited hearing on the motion, this Court denied the relief sought on procedural grounds. In re Union Trust Philadelphia LLC, No. 11-mc-141, 2011 WL 3330797 (E.D.Pa. Aug. 2, 2011).
Even though the terms of the preliminary injunction expired on August 31, 2011, Singer made a request by letter, dated September 1, 2011, that this Court rule on the appeal. In the letter, Singer argued that the expiration of the preliminary injunction did not render the appeal moot because Union Trust could seek to renew the injunction for a limited duration at any time. This Court subsequently held a teleconference on the matter. Union Trust did not object to Singer's contention. Therefore, resolution of the appeal by this Court is appropriate.
In granting Union Trust's motion for a preliminary injunction, the Bankruptcy Court relied on the testimony of both Grasso and Miller at the hearing. In re Union Trust, 2011 WL 2604784, at *2. The court explained that the testimony by Grasso and Miller concerning their day-to-day involvement in Union Trust's operations, their involvement in the state court proceedings, and their efforts to secure a loan commitment on Union Trust's behalf to assist in its reorganization were of particular relevance to the issues raised by the motion. Id. The court also noted that Singer did not present any of its own witnesses in opposition to the motion, but did cross-examine Grasso and Miller. Id.
As an initial matter, the Bankruptcy Court first concluded that it had jurisdiction to consider the requested relief on the ground that an action for an injunction under § 105(a) is a "core" proceeding under the Bankruptcy Code. Id. at *3 n. 3. Moreover, the court determined that the Anti-Injunction Act, 28 U.S.C. § 2283, did not limit its jurisdiction and authority to enter such an injunction because § 105(a) is an "expressly authorized" exception to the Act. Id. at *3-*4.
Next, the Bankruptcy Court concluded that "unusual circumstances" existed to support extending the automatic stay under § 362(a) to Grasso and Miller. Specifically, the court determined that Union Trust's ability to reorganize would be substantially
Notably, in order to protect Singer's interests, the Bankruptcy Court required Grasso and Miller to provide Singer with sworn personal financial statements so that it could monitor their assets and protect against dissipation. Id. The court also made clear that it would revisit whether continuation of the injunction is warranted if it found that Union Trust had not acted expeditiously in formulating its plan of reorganization at the time of the injunction's expiration date. Id.
This Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158. Singer appeals a final order of the United States Bankruptcy Court for the Eastern District of Pennsylvania.
In an appeal from an order by a bankruptcy court, a district court sits as an appellate court. 28 U.S.C. § 158(a)(1). As a general matter, a district court reviews a bankruptcy court's legal conclusions de novo and its factual findings for clear error. In re Global Indus. Techs., Inc., 645 F.3d 201, 209 (3d Cir.2011).
A factual finding is clearly erroneous when "the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985) (quoting United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)). In particular, "due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Fed. R. Bankr.P. 8013.
Singer contends that the Bankruptcy Court should be reversed for several reasons. First, Singer argues the Anti-Injunction Act prohibits the Bankruptcy Court from enjoining the state court proceedings against Grasso and Miller. In addition, Singer argues that the Bankruptcy Court lacked jurisdiction over the state court proceedings. Further, Singer argues that the Bankruptcy Court improperly extended the automatic stay to Grasso and Miller. Finally, Singer argues the
In response, Union Trust contends that the Bankruptcy Court should be affirmed for substantially the same reasons outlined by the court in its opinion. Union Trust argues that the Anti-Injunction Act does not bar the Bankruptcy Court from enjoining the state court proceedings because § 105(a) creates an exception to the Act and the court had jurisdiction to grant such relief. Moreover, Union Trust contends that the record demonstrates that the Bankruptcy Court's extension of the automatic stay was not clearly erroneous and that the issuance of the injunction to effectuate the stay was not an abuse of discretion.
A three-step analysis is required to determine whether the Bankruptcy Court properly issued a preliminary injunction extending the § 362(a) automatic stay to the non-debtor third parties in this matter. In re Philadelphia Newspapers, LLC, 407 B.R. 606, 611 (E.D.Pa.2009). First, the Court must determine "whether the Bankruptcy Court had jurisdiction to issue the injunction." Id. Second, the Court must determine "whether the Bankruptcy Court properly extended the § 362(a) stay" to the non-debtor third parties. Id. And third, the Court will determine "whether the Bankruptcy Court properly exercised its discretion in issuing the injunction pursuant to section 105(a)." Id. "Although the facts necessary to support the Court's determination at each step of the analysis may overlap, each step of the inquiry is distinct, independently necessary, and implicates different interests." Id.; see also In re Combustion Eng'g, Inc., 391 F.3d 190, 224 (3d Cir.2004) ("While aspects of the § 105(a) analysis may be relevant to the [] jurisdiction inquiry, these inquiries are analytically distinct." (footnote omitted)). Unless all three steps of the analysis are satisfied, an injunction should not issue. Philadelphia Newspapers, 407 B.R. at 611.
Initially, the Court must consider whether the Bankruptcy Court had jurisdiction to issue an injunction pursuant to § 105(a) extending the § 362(a) automatic stay to the non-debtor third parties.
Section 105(a) permits bankruptcy courts to "issue any order, process or judgment that is necessary or appropriate to carry out the provisions" of the Bankruptcy Code. 11 U.S.C. § 105(a). But, as the Third Circuit has made clear, § 105(a) "does not provide an independent source of federal subject matter jurisdiction." Combustion Eng'g, 391 F.3d at 224-25. "Thus, before considering the merits of any § 105(a) injunction, a bankruptcy court must establish that it has subject matter jurisdiction to enter the injunction." In re W.R. Grace & Co., 591 F.3d 164, 170 (3d Cir.2009).
District courts "have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b).
In this case, the parties principally dispute whether the Bankruptcy Court had "related to" jurisdiction over the state court proceedings.
In response, Union Trust argues that the Bankruptcy Court did have "related to" jurisdiction because the state court proceedings triggered certain contractual indemnification provisions requiring Union Trust to indemnify Grasso and Miller. In addition, Union Trust argues that the Bankruptcy Court had "related to" jurisdiction because the outcome of the state court proceedings would impact Union Trust's reorganization efforts and the value of its assets. The Court will consider each of these contentions in turn.
A bankruptcy court lacks "related to" jurisdiction over a third-party action "if the only way in which that third-party action could have an impact on the debtor's estate is through the intervention of yet another lawsuit." Grace, 591 F.3d at 173; accord In re Federal-Mogul Global, Inc., 300 F.3d 368, 382 (3d Cir.2002). Thus, a mere claim of common law indemnity against the Debtor is not, in and of itself, enough to establish "related to" jurisdiction. Id.; Combustion Eng'g, 391 F.3d at 190; Federal-Mogul, 300 F.3d at 382; Pacor, 743 F.2d at 994. Some courts, however, have suggested that a contractual right to indemnity, as opposed to a claim of common law indemnity, is sufficient to establish "related to" jurisdiction. See, e.g., A.H. Robins Co. v. Piccinin, 788 F.2d 994, 1001 (4th Cir.1986); Philadelphia Newspapers, 407 B.R. at 612. But, as the Third Circuit has recognized, while a contractual right to indemnity may present "a more direct threat" to reorganization, such a right is not, in all cases, sufficient to establish "related-to" jurisdiction. Grace, 591 F.3d at 174 & n. 9. "What will or will not be sufficiently related to a bankruptcy to warrant the exercise of subject matter jurisdiction is a matter that must be developed on a fact-specific, case-by-case basis." Id. at 174 n. 9.
Union Trust contends that it has a contractual obligation to indemnify Grasso and Miller for legal costs and expenses incurred in the state court proceedings under the terms of the Operating Agreement for Union Trust Philadelphia LLC (the "Operating Agreement"). Singer, on the other hand, contends that Union Trust has no such obligation because the claims raised in state court did not arise from Grasso's and Miller's performance of any duties for Union Trust. Moreover, Singer contends that even if Union Trust is contractually obligated to indemnify Grasso and Miller, that obligation does not affect the administration of the bankruptcy estate because any legal costs that resulted from the state court proceedings were incurred prior to the bankruptcy filing.
Section 3.3 of the Operating Agreement, entitled "Indemnity," provides in pertinent part:
(June 1, 2011, Hr'g Tr., Exh. 2, at 3.) The Operating Agreement further specifies that Grasso and Miller are the sole "Members" and "Managing Members" of Union Trust, as those terms are used in the Operating Agreement. (Id. at 11.)
Based on the terms of the indemnification provision and the record before this Court, it is arguable that Union Trust is contractually obligated to indemnify Grasso and Miller under the Operating Agreement. Indeed, Miller and Grasso both testified at the hearing below that the indemnification provision requires Union Trust to indemnify them in connection with the state court proceedings. (June 1, 2011, Hr'g Tr. 31:23-32:5, 86:8-18.)
Given the limited record concerning indemnity before the Bankruptcy Court, the Court is unable to determine whether the claims raised against Grasso and Miller in the state court proceedings come within the scope of the provision. See Philadelphia Newspapers, 407 B.R. at 614 (refusing to construe indemnification provision due to "the limited testimony and airing of the issues at the hearing below"). While Miller did testify that Union Trust was paying both his and Grasso's legal fees in connection with the state court proceedings prior to the bankruptcy filing (June 1, 2011, Hr'g Tr. 32:6-9, 52:2-9), it is unclear from the record whether Union Trust was making these payments pursuant to an obligation under the Operating Agreement, or as a matter of practice, or for some other reason. Therefore, whether Union Trust is required to indemnify Grasso and Miller in connection with the state court proceedings is an open question. In these circumstances, Grasso's and Miller's potential contractual right to indemnification from Union Trust is insufficient, on its own, to establish "related to" jurisdiction over the state court proceedings.
Accordingly, the Court will consider Union Trust's alternative argument for "related to" jurisdiction—that the outcome of the state court proceedings would impact Union Trust's reorganization efforts.
Union Trust contends that the outcome of the state court proceedings would impact its reorganization efforts for several reasons. First, Union Trust argues that Grasso and Miller have guaranteed and provided financial assurances in support of a loan commitment that will be used to help fund the Union Trust's reorganization. Moreover, according to Union
After careful review, the Court finds that Union Trust's contentions are amply supported by the record. For starters, the record reveals that both Grasso and Miller are crucial to Union Trust's reorganization efforts. To be sure, both are actively involved in obtaining financing for the reorganization and have guaranteed a loan commitment in the amount of $6,063,000 to help fund the reorganization. (June 1, 2011 Hr'g Exh. 4; June 1, 2011 Hr'g Tr. 33:2-17; 36:9-11.) In addition, Grasso and Miller testified that they are prepared to contribute their personal assets to help fund the plan of reorganization and ensure that the loan is obtained. (June 1, 2011 Hr'g Tr. 37:8-13; 85:11-86:7; 95:24-96:2). Significantly, Grasso further testified that he has made substantial payments—totaling approximately $125,000 to $150,000—on behalf of Union Trust since the bankruptcy filing to pay back taxes, litigation expenses, and an electricity deposit for the restaurant. (Id. at 84:5-16.) According to Grasso, allowing the state court proceedings to continue makes him "personally weaker to be able to help Union Trust." (Id. at 100:20-21.)
Moreover, the record reveals that both Grasso and Miller participate extensively in the operations of Union Trust. Indeed, both Grasso and Miller testified that they are actively involved in the daily operations of Union Trust and participate in daily business decisions concerning Union Trust. (Id. at 23:20-22, 67:1-10; 84:24-85:2; 110:6-8.)
The record further demonstrates that the continuation of the state court proceedings would require the involvement of both Grasso and Miller and would, thus, adversely impact Union Trust's reorganization efforts. Grasso testified that he has had to "[m]eet with attorneys, review documents, spend money, [and deal with] mental aggravation" as a result of the state court proceedings. (Id. at 104:6-11.) In addition, Grasso testified that he has had to devote time to defend against Singer's collection efforts, including an attempt by Singer to have a sheriff enter his home in order to effectuate a writ of execution and levy on personal assets in his residence. (Id. at 104:19-23.) Likewise, Miller testified that he has participated in discussions relating to attempts to resolve
According to both Grasso and Miller, the state court proceedings significantly interfere with their role in Union Trust's reorganization efforts. (Id. at 36:15-22; 89:5-11.) Therefore, "[u]nder these circumstances, diverting the time and energy of key personnel from the reorganization effort at a critical time in the formulation of a plan would adversely impact the [] ability to promptly and effectively reorganize." Philadelphia Newspapers, 407 B.R. at 614.
If the state court proceedings are allowed to proceed, Union Trust's reorganization efforts could also be impacted in another substantive way. Notably, Union Trust is in privity with Grasso and Miller. Therefore, in subsequent suits, Union Trust could be bound to critical factual and legal issues determined in those proceedings by operation of collateral estoppel.
Union Trust's potential indemnification obligations and the impact on Union Trust's reorganization efforts, taken together, provide an adequate basis for the Court to find that the state court proceedings are sufficiently "related to" the underlying bankruptcy. Therefore, the Bankruptcy Court had jurisdiction to issue the injunction in the instant action.
Next, the Court must determine whether the Bankruptcy Court properly extended the automatic stay under § 362(a) to Grasso and Miller. Section 362(a) "operates as a stay, applicable to all entities, of the commencement or continuation. . . 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). By its terms, § 362(a) stays actions only against the "debtor." McCartney v. Integra Nat'l Bank North, 106 F.3d 506, 509 (3d Cir. 1997). It typically does not extend to protect "sureties, guarantors, co-obligors, or others with a similar legal or factual nexus to the . . . debtor." Id. at 509-10 (quoting Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1205 (3d Cir.1991)).
However, where "unusual circumstances" exist, the § 362(a) automatic stay may be extended to non-debtor third parties. Id. at 510 (quoting A.H. Robins, 788 F.2d at 999). The Third Circuit has recognized that unusual circumstances
In this case, at a minimum, the second situation is present. Indeed, the Bankruptcy Court made numerous factual findings in support of its conclusion that extending the automatic stay to Grasso and Miller was essential to Union Trust's reorganization efforts. In re Union Trust, 2011 WL 2604784, at *6-*7. The court determined that Grasso and Miller devote a "substantial amount of their time" to the day-to-day operations of Union Trust. Id. at *6. In addition, the court found that Grasso and Miller are actively involved in Union Trust's reorganization. Specifically, Grasso and Miller have personally guaranteed a loan commitment on behalf of Union Trust and provided additional financial assurances in support of that commitment to help fund Union Trust's plan of reorganization. Id. at *6-*7. Moreover, Grasso has personally funded tax payments to the Internal Revenue Service on behalf of Union Trust. Id. According to the court, Union Trust's "ability to reorganize is clearly diminished and the [] estate risks substantial harm if it is deprived of Mr. Grasso and Mr. Miller's assistance in reorganizing." Id.
As discussed above, the testimony provided by Grasso and Miller at the hearing clearly supports the Bankruptcy Court's findings. Based on this record, the Court cannot say that the Bankruptcy Court's determination that unusual circumstances exist was clearly erroneous.
Last, the Court must determine whether the Bankruptcy Court properly exercised its discretion in granting a preliminary injunction pursuant to § 105(a) to enjoin the state court proceedings. Section § 105(a) gives courts the authority to issue injunctions to effectuate the purposes of the automatic stay under § 362(a). Philadelphia Newspapers, 407 B.R. at 616; Monroe Well, 67 B.R. at 751. However, initially, the Court addresses Singer's argument
The Anti-Injunction Act provides: "A court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments." 28 U.S.C. § 2283. As the Third Circuit has recognized, "[a]lthough the Anti-Injunction Act. . . generally prevents a federal court from enjoining state court proceedings, section 105(a) of the Bankruptcy Code creates an exception to this general statutory rule by authorizing a bankruptcy court to issue any order necessary or appropriate to carry out the provisions of the Act." In re James, 940 F.2d 46, 51 (3d Cir.1991); see also Matter of Davis, 691 F.2d 176, 177-78 (3d Cir.1982) ("The Bankruptcy Code . . . is an `expressly authorized' exception to the statute." (citing 11 U.S.C. § 105(a))). Therefore, "a bankruptcy court generally is considered to possess the power to enjoin a pending state action that violates the automatic stay." James, 940 F.2d at 51.
This authorization is not without limits, however. While a bankruptcy court has the power to stay proceedings in state court, it does not possess any power to vacate a judgment of the state court. Id. (citing Hill v. Harding, 107 U.S. 631, 633, 2 S.Ct. 404, 27 L.Ed. 493 (1883)). Therefore, so long as a bankruptcy court does not seek to vacate a state court judgment, the Anti-Injunction Act does not bar the court from using its § 105(a) power to suspend state court proceedings. Id.
Here, the Bankruptcy Court did not so much as attempt to review the merits of the underlying state court judgment. In re Union Trust, 2011 WL 2604784, at *3. To the contrary, the court simply issued a preliminary injunction to suspend the state court proceedings against Grasso and Miller. Id. Upon expiration of the injunction, Singer is free to resume its efforts to enforce the judgment rendered by the state court.
"It frequently is observed that a preliminary injunction is an extraordinary and drastic remedy, one that should
Applying these factors to the case at hand, the Bankruptcy Court determined that a preliminary injunction was warranted to extend the protections of the automatic stay to Grasso and Miller. As to the likelihood of successful reorganization, the Bankruptcy Court observed that Union Trust has "negotiated cash collateral agreements with . . . its acknowledged secured lender," "is paying adequate protection payments to . . . its disputed secured lender," and "continues to operate its restaurant." In re Union Trust, 2011 WL 2604784, at *6. Therefore, the court concluded that "at this early stage in the proceedings [Union Trust's] prospects for a successful reorganization remain viable and is entitled to additional time to formulate its plan of reorganization." Id.
The Bankruptcy Court also concluded that Union Trust would suffer irreparable harm if the state court proceedings are allowed to proceed. The court explained that "[b]oth Mr. Grasso and Mr. Miller testified that a substantial amount of their time is devoted to the day-to-day operation of [Union Trust]" and "that they are actively involved in [Union Trust's] attempts to secure post-petition financing" and are "arranging for funding on behalf of [Union Trust] to fund its plan of reorganization." Id. Additionally, the court recognized that "[t]here is evidence that Mr. Grasso has already provided post-petition funding to [Union Trust]." Id. Thus, according to the court, "[w]ithout their unfettered assistance, [Union Trust's] ability to reorganize is clearly diminished and [its] estate risks substantial harm if it is deprived of Mr. Grasso and Mr. Miller's assistance in reorganizing." Id.
Moreover, balancing the hardships among the parties, the Bankruptcy Court recognized that Singer has "failed to identify any harm that [it] would suffer" if the state court proceedings are stayed. Id. at *7. Therefore, according to the court, while Singer has "expended considerable time, effort and resources to secure judgments against [Grasso and Miller], . . . the fact that efforts to collect on the judgments may be delayed for short period in and of itself is not sufficient to outweigh the potential harm to [Union Trust's] estate if [it] is deprived of the full assistance of [Grasso and Miller]." Id. Significantly, "to minimize any harm" to Singer, the court required Grasso and Miller to provide sworn
Finally, the Bankruptcy Court determined that the issuance of an injunction would further the public interest by "foster[ing]. . . reorganization and protect[ing] the integrity of the claims resolution process." Id. These interests are well-established in the bankruptcy context, as they are the very interests underlying the § 362(a) automatic stay. See McCartney, 106 F.3d at 512 (explaining that the centralization of all prebankruptcy civil claims in the bankruptcy court provides the debtor "a `breathing spell' during which he is relieved of the financial pressures that drove him to bankruptcy" and "permits the assets of the debtor's estate to be marshaled for distribution to creditors in an orderly and equitable fashion" (quoting Maritime, 959 F.2d at 1204)). In this case, these interests have special significance because Union Trust continues to operate its steakhouse, the success of which could be hampered if the state court proceedings are not enjoined.
On this record, the Court cannot conclude that the Bankruptcy Court's factual findings were clearly erroneous. Therefore, the court did not abuse its discretion in issuing an injunction pursuant to § 105(a) to extend the automatic stay to Grasso and Miller.
For the reasons set forth above, the decision of the Bankruptcy Court issuing an injunction enjoining the state court proceedings is AFFIRMED.
An appropriate order follows.
AND NOW, on this 3rd day of November, 2011, for the reasons in the accompanying Memorandum re: Appeal of Bankruptcy Court Order, it is hereby ORDERED that the decision of the Bankruptcy Court to extend the protections of the 11 U.S.C. § 362(a) automatic stay to third-party non-debtors Joseph Grasso ("Grasso") and Garrett Miller ("Miller"), and to issue a preliminary injunction, pursuant to 11 U.S.C. § 105(a), enjoining state proceedings against Grasso and Miller, is AFFIRMED.