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The Automatic Stay for Non-Debtors, Automatically. Really?

The Automatic Stay for Non-Debtors Automatically Really dplic 72506563 (1).jpg

Queenie, Ltd. v. Nygard Int'l,[1]'s Sweet 16 Bankruptcy is not reserved for the destitute individual.[2] It's more useful for those with something to save than nothing to lose.[3] 

For debtors, extending the automatic stay to its farthest domain seems the immediate strategy.

Automatic Stay for Whom?

It's not hard to imagine an individual debtor and their business as defendants in an action arising from the business' conduct.

The universally accepted rule is that "the automatic stay does not apply to non-debtors."[4]

For whom do you file a case? The individual? The company? Both?[5]

The standard approach is to file a Chapter 11 for the entity, then attempt using Bankruptcy Code § 105(a) (a "105 Action") to extend the automatic stay to the individual.[6] 105 Actions employ the ancient maxim, "when you're up to your bum in alligators, it's hard to remember you're there to drain the swamp."

Enter Queenie

In Queenie, Ltd. v. Nygard Int'l,[7] ("Queenie"), the debtor and his wholly-owned entity were being sued.

The Second Circuit Court of Appeals explained that:

The automatic stay can apply to non-debtors, but normally does so only when a claim against the non-debtor will have an immediate adverse economic consequence for the debtor's estate. Examples are a claim to establish an obligation of which the debtor is a guarantor, a claim against the debtor's insurer, and actions where "there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant . . . " (internal quotations and citations omitted).[8]

Queenie typically applies to an individual debtor as their wholly owned entity's guarantor or co-tortfeasor. However, the standard extends to where "there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant ..."[9] This standard could be wide enough to include your problem property.

Hey Judge, It's the AUTOMATIC Stay!

Some courts see Queenie as the basis for extending the automatic stay through a 105 Action.[10] That's an error. Queenie makes the automatic stay effective immediately. Nothing beyond filing the case is required.[11] That's why it's called the automatic stay.

Split on Queenie in Chapter 13 Cases.

Not Applying --- In re McCormick,[12] "This court notes that the debtors in both Queenie and Calpine filed for protection under Chapter 11 of the bankruptcy code and not Chapter 13 as Debtor has done."

Applying --- In re Konstantinou,[13] Konstantinou rejected McCormick.

Why not? Chapter 13 has been called the "poor person's chapter 11." Chapter 13 is routinely seen as a "reorganization."[14]

Queenie in Chapter 7 Cases

We found no authority applying or rejecting Queenie in Chapter 7 cases. Why would we?

The Queenie paradigm has the debtor preserving their business to reorganize. Chapter 7 debtors generally accept the trustee administering the business in the case. Trustees will abandon to the debtor businesses with no value.[15] The business is de facto protected.

Individual Chapter 7 debtors with valuable business or assets should rethink their decision. See, In re Robinson,[16] "where the Chapter 7 trustee --- the only party with a potential interest in the [taxi] medallions, through the Debtor's ownership of the companies," voiced no objection to lifting the stay.

One day, a resourceful Chapter 7 trustee may try using Queenie for their own purposes.

Meanwhile, Queenie is a debtor's darling, waiting to travel the circuits.

________________________________________________________________ 

[1] 321 F.3d 282, 287-88 (2d Cir. 2003).

[2] See, "Chapter 11 for the High-Net-Worth Individual" American Bankruptcy Institute, October 1, 2010, 100110 ABI-CLE 81.

[3] Another day's discussion.

[4] In re Breitburn Energy Partners L.P., 2018 WL 2121805, at *3 (Bankr. S.D.N.Y) Teachers Ins. & Annuity Ass'n of Am. v. Butler, 803 F.2d 61, 65 (2d Cir.1986)("A bankruptcy petition ordinarily stays litigation against the filing entity and not against principals or affiliates.").

[5] Please avoid "both." That's another discussion for another day.

[6] E.g., In re James F. Humphreys & Assocs., L.C., 558 B.R. 758 (Bankr. S.D.W. Va. 2016), In re ATLS Acquisition, LLC, 2014 WL 490931, at 2 (Bankr. D. Del), In re Republic Techs. Int'l, LLC, 283 B.R. 483, 491-92 (Bankr. N.D. Ohio 2002).

[7] 321 F.3d 282, 287-88 (2d Cir. 2003).

[8] In re Robinson, No. 17-10275, 2019 WL 178831, at *2 (Bankr. S.D.N.Y. Jan. 11, 2019).

[9] See, Queenie, 282, 287-88.

[10] See. Inv'r Prot. Corp. v. Bernard L. Madoff Inv. Sec., LLC, 460 B.R. 106, 121-22 (Bankr. S.D.N.Y. 2011), aff'd, 474 B.R. 76 (S.D.N.Y. 2012) and In re McCormick, 381 B.R. 594, 600 (Bankr. S.D.N.Y. 2008).

[11] See, discussion in In re SDNY 19 Mad Park, LLC, 2014 WL 4473873, at *1 (Bankr. S.D.N.Y.):

A bankruptcy petition ordinarily stays litigation against the filing entity and not against principals or affiliates. Teachers Ins. & Annuity Ass'n of Am. v. Butler, 803 F.2d 61, 65 (2d Cir.1986). Courts have, however, extended the automatic stay to principals and affiliates of a debtor under § 105 of the Bankruptcy Code. A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994 (4th Cir.1986); In re United Health Care Org., 210 B.R. 228 (S.D.N.Y.1997); In re Johns-Manville Corp., 26 B.R. 420 (Bankr.S.D.N.Y.1983). Indeed, even in the absence of a motion, the Second Circuit has concluded that the automatic stay applied as against the individual debtor's personal holding company, where "a claim against the non-debtor will have an immediate adverse economic consequence for the debtor's estate." Queenie, Ltd. v. Nygard Int'l, 321 F.3d 282, 287 (2d Cir.2003).

[12] 381 B.R. 594, 602 (Bankr. S.D.N.Y. 2008).

[13] 2017 WL 83350, at *5 (Bankr. D. Vt. Jan. 6, 2017), rev'd in part sub nom. Manchester CP v. Konstantinou, 2017 WL 5508350 (D. Vt.)(Reversed due to entity not being wholly owned by debtor.)

[14] See, Law v. Siegel, 571 U.S. 415, 416, 134 S. Ct. 1188, 1191, 188 L. Ed. 2d 146 (2014), In re Melo, 496 B.R. 253, 256 (B.A.P. 1st Cir. 2013), In re Weber, 719 F.3d 72, 78 (2d Cir. 2013) ("Chapter 13 personal reorganizations"), In re Mondelli, 558 F. App'x 260, 263 (3d Cir. 2014), Mort Rana v. Gorman, 721 F.3d 241, 259 (4th Cir. 2013), In re Ragas, 700 F.3d 220, 222 (5th Cir. 2012), In re Fielding, 2015 WL 1676877, at *4 (Bankr. N.D. Tex. ) (Chapter 13 is reorganization chapter), United States v. Carroll, 667 F.3d 742, 744 (6th Cir. 2012) (A Chapter 13 reorganization is the individual equivalent of a Chapter 11corporate reorganization), Palomar v. First Am. Bank, 722 F.3d 992, 995 (7th Cir. 2013), In re Lashburn, 579 F.3d 934, 936 (8th Cir. 2009), Zachary v.California Bank & Tr., 811 F.3d 1191, 1193 (9th Cir. 2016), In re Chernushin,911 F.3d 1265, 1269 (10th Cir. 2018), In re Brown, 742 F.3d 1309, 1315 (11th Cir. 2014).

[15] 11 U.S.C. § 544.

[16] 2019 WL 178831, at *2.

Wayne M. Greenwald

Wayne M. Greenwald
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