Eduardo V. Rodriguez, United States Bankruptcy Judge
This Court reviews whether it is appropriate to extend the same protections afforded to a debtor under Title 11 of the United States Code (the "
On October 16, 2013, Frescos Tomver initiated a lawsuit against the Debtor and Marco Antonio Jimenez ("
The Motion filed by the Debtor seeks to have this Court extend the protections of 11 U.S.C. § 362 ("
Section 362(a)(1) provides for an automatic stay of any judicial "proceeding against the debtor." 11 U.S.C. § 362(a)(1). "Section 362(a)(3) provides that the filing of a petition `operates as a[n] [automatic stay] applicable to all entities, of ... any act to obtain possession of property of the estate or of property from the estate.'" See Matter of S.I. Acquisition, Inc., 817 F.2d 1142, 1148 (5th Cir.1987) (quoting 11 U.S.C. § 362(a)(3)). Ordinarily, the automatic stay under § 362 does not apply to actions against a non-debtor. See In re TXNB Internal Case, 483 F.3d 292, 301 (5th Cir.2007). Courts recognize that a § 362 stay may apply to an action against non-debtor defendants depending on their relationship to the debtor. See Reliant Energy Servs., Inc. v. Enron Can. Corp., 349 F.3d 816, 825 (5th Cir.2003) ("[A] bankruptcy court may invoke § 362 to stay proceedings against nonbankrupt codefendants where `there is such an identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.'" (quoting A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir.1986))). The party invoking the stay has the burden to show that it is applicable. See 2 WILLIAM L. NORTON, JR., NORTON BANKRUPTCY LAW AND PRACTICE § 43:4 (3d ed. Supp.2010) (noting that in bankruptcy court proceedings, "the party seeking to extend the stay will bear the burden to show that `unusual circumstances' exist warranting such an extension of the stay to a nondebtor"); see also Arnold v. Garlock, Inc., 278 F.3d 426, 436 (5th Cir.2001) (holding that the defendant had "no interest to establish such an identity [of interests] with [the] debtor"). This Court makes the following Findings of Fact and Conclusions of Law pursuant to Federal Rules of Bankruptcy Procedure 7052, which incorporates Fed.R.Civ.P. 52, and 9014. To the extent that any Finding of Fact constitutes a Conclusion of Law, it is adopted as such. To the extent that any Conclusion of Law constitutes a Finding of Fact, it is adopted as such.
1. Frescos Tomver filed suit against Debtor and Jimenez on October 16, 2013. The complaint alleged violations of PACA, breach of fiduciary duty, and breach of contract. [Case No. 7:13-cv-0577, ECF No. 1].
2. The Parties attempted to mediate the dispute with a scheduled mediation on June 4, 2014. [Case No. 7:13-cv-0577, ECF No. 35, ¶ 6]. The attorney for the Debtor and Jimenez failed to appear at the scheduled time for the mediation, but the attorney later arrived at approximately 10:30 A.M. [Case No. 7:13-cv-0577, ECF No. 35, ¶ 14]. However, Jimenez did not appear nor was his attorney able to contact him before noon that day. Id. On July 9, 2014, the District Court sanctioned the Defendants for failing to attend the court ordered mediation.
3. Jimenez filed a Motion to Dismiss Plaintiff's Complaint on July 21, 2014 pursuant to Fed.R.Civ.P. 12(b)(1). [Case No. 7:13-cv-0577, ECF No. 37].
4. Frescos Tomver filed a Motion for Summary Judgment on October 22, 2014. [Case No. 7:13-cv-0577, ECF No. 56].
5. The District Court considered the Defendant's Motion to Dismiss and the Plaintiff's Motion for Summary Judgment on November 17, 2014. The District Court heard oral arguments, denied the Motion to Dismiss, and granted Frescos Tomver's Motion for Summary Judgment.
6. The Debtor filed a Motion to Reconsider the District Court's grant of Frescos Tomver's Motion for Summary Judgment, [Case No. 7:13-cv-0577, ECF No. 68], which was considered at a status conference on February 4, 2015. The District Court denied Debtor's Motion To Reconsider the Court's granting of Frescos Tomver's Motion For Summary Judgment and noted that the liability for Jimenez was still at issue. [Case No. 7:13-cv-0577, ECF No. 77, 6:6-12].
7. Frescos Tomver filed a Motion for Final Summary Judgment on March 20, 2015, [Case No. 7:13-cv-0577, ECF No. 81], and on April 23, 2015, the Court granted the motion as to the Debtor, but not as to Jimenez.
8. The Debtor filed a voluntary petition for bankruptcy under Title 11, chapter 11 of the United States Code on August 5, 2015. [Case No. 15-70405, ECF No. 1].
9. On August 9, 2015, the Debtor filed a Motion to Use Cash Collateral, [ECF No. 6], and included with the motion a copy of the Debtor's "August-September Monthly Budget," [Case No. 15-70405, ECF No. 6-1], that provided a brief description of projected income and expenses.
10. The Debtor filed its Motion to Extend Automatic Stay As To The Non-Debtor Jimenez, which is the subject of this opinion, on August 13, 2015. [Case No. 15-70405, ECF No. 12].
11. After the partial grant of summary judgment, Frescos Tomver filed a Motion to Sever the Debtor on August 14, 2015. [Case No. 7:13-cv-0577, ECF No. 90].
12. The District Court granted Frescos Tomver's Motion to Sever on September 1, 2015, leaving only Jimenez as a party to the case. [Case No. 7:13-cv-0577, ECF No. 93].
13. The District Court is considering Frescos Tomver's Motion for Summary Judgment against Jimenez concurrent with this Court's consideration of the Debtor's Motion to Extend the Automatic Stay As To The non-debtor Jimenez. [Case No. 7:13-cv-0577, ECF No. 93].
14. At the September 15, 2015 hearing, the Debtor offered, and the Court admitted the following exhibits relating, among
15. Exhibits P-B: The documents presented were copies of Jimenez's alleged financial contributions to the Debtor.
16. Exhibits P-F: purported to be an explanation of the tomato farming operation by Jimenez in Mexico. However, the only information contained in the explanation was an unsubstantiated estimate for harvest yield, price per box, and total sales.
17. Exhibits P-G and P-H were merely copies of Frescos Tomver's Motion for Summary Judgment, [Case No. 7:13-cv-0577, ECF No. 56], styled No. 2 and No. 3, which were offered by the Debtor in support of its claim of immediacy of the need for relief from the threat presented by Frescos Tomver. Exhibit P-H corresponded with Fresco Tomver's Exhibit R-3.
18. Exhibit P-K included the Debtor's initial petition, [Case No. 15-70405, ECF No. 1], and the accompanying schedules.
19. Frescos Tomver offered and the Court admitted the following exhibits:
20. Notably, Jimenez did not appear to testify at the hearing. The Debtor's only live witness was Saul Zuniga. Mr. Zuniga testified to the following:
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(b)(1) & (2)(A) and 1334(b). See In re Southmark Corp., 163 F.3d 925, 930 (5th Cir. 1999) ("[A] proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.").
Venue is proper pursuant to 28 U.S.C. §§ 1408(2) and 1409.
This Court also has an independent duty to evaluate whether it has the constitutional authority to sign a final order in matters before it. Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). The Supreme Court held that a statute authorizing bankruptcy judges to issue final judgments violated Article III to the extent that it authorized such final judgments on certain matters. Stern, 131 S.Ct. at 2616. The Court found that the particular bankruptcy ruling in dispute did not stem from bankruptcy itself, nor would it necessarily be resolved in the claims allowance process, and it only rested in a state law counterclaim by the estate. Id. at 2618. The Court reasoned that bankruptcy judges are not protected by the lifetime tenure attribute of Article III judges, but they were performing Article III judgments by judging on "all matters of fact and law" with finality. Id. at 2618-19. Hence, the Court held that Article III imposes some restrictions against a bankruptcy judge's power to rule with finality. The Court found that a solely state law based counterclaim, while statutorily within the bankruptcy judge's purview, escaped a bankruptcy court's constitutional power. Id. at 2620. This Court reads Stern to authorize final judgments only where the issue is rooted in a right created by federal bankruptcy or the resolution of which relies on the claims allowance process. In other words, this Court may issue final judgments and orders where the issue "arises in" or "arises under" bankruptcy, but not where the issue is merely "related to" bankruptcy. See 28 U.S.C. § 157. However, even where the case does create a "Stern problem," Article III will be satisfied where the parties to the case knowingly and voluntarily consent to the bankruptcy court's power to issue final judgments. Wellness Int'l Network v. Sharif, ___ U.S. ___, 135 S.Ct. 1932, 1938-39, 191 L.Ed.2d 911 (2015).
The matter at bar arises from the Debtor's Motion to Extend The Automatic Stay to Jimenez, which is a matter that can only arise in bankruptcy. Thus, this Court finds that it has the constitutional authority to grant or deny the Motion pursuant to 28 U.S.C. §§ 157 and 1334(b).
There is no basis to extend the § 362 stay to the non-debtor defendant Jimenez. Other than the similarity between Frescos Tomver's claims against the Debtor and its claims against the individual defendant Jimenez and the potential application of collateral estoppel, the record provides no basis to conclude that a judgment against the individual defendant Jimenez would in effect be a judgment against the Debtor.
The Automatic Stay provides protection to debtors when they file for bankruptcy. 11 U.S.C. § 362(a). The Automatic Stay applies in different circumstances, but is "applicable to all entities." Id.; Wedgeworth v. Fibreboard Corp., 706 F.2d 541, 544 (5th Cir.1983).
11 U.S.C. § 362(a)(1) (emphasis added); see also Arnold v. Garlock, Inc., 278 F.3d 426, 435-6 (5th Cir.2001) (stating that "[v]irtually any act attempting to enforce a judgment against or obtain property from the estate of the debtor is stayed once the title 11 proceedings are commenced"). The Automatic Stay also provides that "the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate." § 362(c)(1). The earliest that an entity may continue their action against the debtor is (1) "the time the case is closed;" (2) "the time the case is dismissed;" or (3) "the time a discharge is granted or denied." § 362(c)(2)(A-C). However, the protections of § 362 for debtors in a single or joint case is qualified. § 362(c)(3)
However, the protections of § 362's automatic stay are generally not extended beyond the debtor, because § 362 "is rarely... a valid basis on which to stay actions against non-debtors." Arnold, 278 F.3d at 436. The Fourth Circuit has recognized an exception to the debtor-only application of § 362 in the circumstances where non-debtors are co-defendants with the debtor and "there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor." A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir.1986). In order to find an identity of interest between bankrupts and nonbankrupts, the A.H. Robins Co. court reasoned that there must be both "unusual circumstances" and "something more than the mere fact that one of the parties to the lawsuit has filed [for bankruptcy] ..." Id. at 999. The A.H. Robins Co. court provided an example of the type of situation that would qualify as one where "a suit against a third-party who is entitled to absolute indemnity by the debtor on account of any judgment that might result against them in the case." Id. In the case at bar, Debtor provided no such evidence to support a claim that Jimenez would be entitled to absolute indemnity by the Debtor. The Fifth Circuit has recognized the A.H. Robins Co.'s exception to the general rule, but the application has been limited
In TXNB Internal, Edge Petroleum Operating Company, Inc. ("Edge") sued Duke Energy Trading and Marketing, LLC ("Duke") for payment of gas sold to a debtor's subsidiary, among others, who then delivered the gas to Duke to offset an overpayment. Id. at 296. The case was removed to the district court due to the bankruptcy filed by Aurion Technologies, LLC, the majority shareholder of Aurora Natural Gas, LLC ("Aurora"), which had purchased the gas from Edge. Id. However, the United States District Court for the Southern District of Texas ruled that the Duke matter was related to the bankruptcy
A sister court similarly applied the standards recited above when reviewing whether the automatic stay should be extended to a non-debtor co-defendant in a civil case. In re Xenon Anesthesia of Texas, PLLC, 510 B.R. 106, 111 (Bankr. S.D.Tex.2014).
In order to extend the Automatic Stay to a non-debtor, a court must find an identity of interest between the debtor and the non-debtor, and then evaluate whether the circumstances warrant exercising the "general discretionary power ... to stay proceedings in the interest of justice and in control of their dockets." Wedgeworth, 706 F.2d at 545; In re Atlantic Ambulance Associates, Inc., 166 B.R. 613 (Bankr. E.D.Va.1994). However, the proper use of this discretionary power requires "weigh[ing] competing interests and maintain[ing] an even balance." Id. (citing to Landis v. North American Co., 299 U.S. 248, 254-55, 57 S.Ct. 163, 81 L.Ed. 153 (1936)). The Supreme Court in Landis provided guidance for what is required in order to invoke the discretionary power of a court by placing the burden of justification on the movant. Landis v. North American Co., 299 U.S. 248, 255, 57 S.Ct. 163, 81 L.Ed. 153 (1936);
In considering the relationship between Jimenez and the Debtor, this Court, in addition to the scant evidence and testimony taken at the hearing, first looked to the Debtor's petition and schedules, but these documents do not include any hints of contributions from Jimenez, as they would be superfluous. Compare Ex. R-1 with ECF No. 12, ¶¶ 11 and 28. The Debtor's Statement of Financial Affairs, [ECF No. 21, p. 24-31], provides that the Debtor's current business is the leasing of cold storage space in the Warehouse to third party tenants, but noticeably fails to mention the sale or brokerage of produce in line with the testimony of Mr. Zuniga on the expected future operations. Additionally, although Mr. Zuniga testified that he was the Debtor's accountant, the Debtor's Statement of Financial Affairs indicates that the books and records are kept by a different firm altogether. [ECF No. 21, p. 19]. The testimony provided by the Debtor's "representative," Mr. Zuniga, did not shed much certainty on Jimenez's potential contributions to effectuate the Debtor's reorganization aside from what Mr. Zuniga had heard from Jimenez, but did not have any personal knowledge of, regarding operations in Mexico. Supra Part IV.5. Moreover, the Debtor's records of Jimenez's historical contributions were mired by the disheveled state of the Mexican accounting records. Exhibit P-B. The Debtor's Mexican accounting records provide an incomplete picture of Jimenez's prior activities regarding operations in Mexico that bore some relationship to the Debtor, albeit more closely resembling that of a broker relationship, where Jimenez, according to Mr. Zuniga, had invested in operations where his return would be in produce rather than currency. The testimony by Mr. Zuniga did demonstrate that Jimenez uses the Debtor as a conduit for his operations, including the payment of certain personal expenses that the Debtor failed to disclose in its Statement of Financial Affairs as a withdrawal, transfer, or distribution to an insider within the prior year. Ex. P-K, p. 26 and 30. The way in which Jimenez used the Debtor for his operations seems contrary to what the Texas legislature intended to qualify as contributions, as the benefit derived from Jimenez's deals did not inure to the Debtor, but rather flowed through to Jimenez. Compare Exhibit P-B and Findings of Fact 21.g with Tex. Bus. Orgs.Code Ann. § 1.002(9) (West 2015);
In total, Mr. Zuniga's testimony gave a glimpse of the disarray present in the Debtor's financial condition, such that this Court could hardly distinguish the efforts of Jimenez on his own accord from those on behalf of the Debtor. Ex. P-B. The circumstances presented could hardly be a more ripe ground to pierce the corporate veil of the Debtor to Jimenez, but not the inverse, as the operations of the Debtor appear to have been unhampered by the lack of activity by Jimenez in recent years, contrary to the Debtor's argument of Jimenez's necessitude to the Debtor to remain a going concern. See generally Part IV; ECF No. 21, p. 24 (providing income for 2013 to present). Surely, the facts present in the instant case are not what the A.H. Robins Co. court and this Court would consider "unusual circumstances," consistent with the Fifth Circuit's treatment of the matter, presenting such an identity of interest between the debtor and non-debtor as to warrant exercising the extraordinary powers of 11 U.S.C. § 105 for extending the automatic stay to a non-debtor. Reliant Energy Servs., Inc., 349 F.3d at 825; see also Arnold, 278 F.3d at 435-36, 439-40; In re Zale Corp., 62 F.3d at 761-62; Edwards, 6 F.3d at 316-17; In re S.I. Acquisition, 817 F.2d at 1147-48; In re Xenon Anesthesia of Texas, PLLC, 510 B.R. at 110.
The Debtor attempts to further support its position in the Motion by claiming that the "Movant Debtor is responsible for all acts of its operating member under the principle of Respondeat Superior." [ECF No. 12, ¶ 22]. However, the Debtor did not offer any evidence as to how Jimenez has bound the Debtor under the principle of Respondeat Superior
Accordingly, given the foregoing reasons, this Court finds that the Debtor has not provided evidence of either element of the A.H. Robins Co. test for establishing cause to extend the protections of § 362 to a non-debtor party, as the Debtor has not demonstrated "unusual circumstances" or "something more than the mere fact that one of the parties to a lawsuit has filed a Chapter 11 bankruptcy ..." Thus, absent the justification under the A.H. Robins Co.'s test, as discussed and adopted by the Fifth Circuit, this Court cannot stay proceedings
Frescos Tomver's Response included a request for the recovery of attorneys' fees and costs based on the belief that the Motion filed by Debtor was frivolous. [Case No. 15-70405, ECF No. 23, ¶ 40]. The Supreme Court recently discussed the issue of the recovery of fees and costs by parties, in an application of the "American Rule"
Furthermore, Frescos Tomver's request does not comport with the requirements of Fed. R. Bankr.P. 9011. Rule 9011 provides the framework for the consideration of sanctions on the basis of, among other items, a frivolous filing by a party. Fed. R. Bankr.P. 9011(b)(2).
The Debtor moved for this Court to provide extraordinary relief, so that Debtor's reorganization would not be allegedly impeded by Frescos Tomver's lawsuit being permitted to proceed against Jimenez individually. [ECF No. 12]. The rationale offered by the Debtor was that the Automatic Stay was necessary so that Jimenez could contribute to the Debtor's reorganization efforts, but the Debtor's evidence, or lack thereof, testimony of its sole witness, and its own petition and schedules do not support this concept. Compare Ex. P-K and Ex. R-1 with Ex. P-B. This Court is constrained by the guidance provided by the Fifth Circuit in Arnold and Reliant Energy Services, Inc. in supporting the A.H. Robins Co. exception for the extension of the stay to non-debtors that "unusual circumstances" or "something more than the mere facts that one of the parties to the lawsuit has filed a Chapter 11 bankruptcy must be shown in order that proceedings be stayed against non-bankrupt parties."
The Request for Recovery of Attorneys' Fees and Costs by Frescos Tomver, [ECF No. 23, ¶ 40], does not comply with the American Rule or the requirements of Fed. R. Bankr.P. 9011 and is therefore denied.
An Order consistent with this Memorandum Opinion will be entered on the docket simultaneously herewith.
