summary, it enjoins efforts to prosecute claims against debtors or gain possession or control the
bankruptcy estate’s[5] property.The Automatic Stay: a.) offers debtors “breathing room” during the period of financial
reshuffling; b.) protects the debtor’s assets from “disorderly, piecemeal dismemberment …
outside the bankruptcy proceedings; and c.) centralizes all disputes in the bankruptcy court.[6] As
the term states, it is “automatic”[7] and self-executing.[8]
For Debtors Only?
The general rule is that the Automatic Stay is limited to debtors and does not encompass
non-bankrupt co-defendants.[9] We add: “except when it does”
Queenie v. Nygard created an exception that general rule. The Automatic Stay can apply
to non-debtors when a claim against the non-debtor “will have an immediate adverse economic
consequence for the debtor’s estate.”[10] Examples of that condition include: a,) claims to establish
obligation guarantied by the; b.) claims against the debtor’s insurer, and c.) actions where “there
is such identity between the debtor and the non-debtor defendant that the debtor may be said to
be the real party defendant.”[11]
In Queenie, the Automatic Stay enjoined an action against a debtor’s non-debtor, wholly-
owned corporation. This occurred because adjudicating a claim against that debtor’s non-debtor,
wholly owned corporation would “have an immediate adverse economic impact on” that
debtor.[12]
Enter Fogarty
Recently, the Second Circuit issued its decision in Fogarty.[13]Fogarty’s big news was its:
“. . . bright-line rule that, so long as the debtor is a named party in a proceeding or
action, the automatic stay applies to the continuation of that proceeding, and to
the enforcement of, a judgment rendered in that proceeding.”[14] (Emphasis
supplied)
Fogarty rejected the:
“ . . contention that, even if the debtor is a named party, the precise contours of
and reasons for the debtor’s status in an action or proceeding affect whether the
automatic stay imposed by Section 362(a)(1) or (a)(2) applies.”[15]
Significantly Fogarty’s language applies the “automatic stay . . . to the continuation of
that proceeding” [16] It did not limit the automatic stay the continuation of that proceeding as
against the debtor, only. Fogarty did not differentiate between applying the Automatic Stay to
actions where: a.) debtors are named defendants; and b.) debtors and non-debtors are defendants
in the same action. Fogarty’s terms apparently hold that the Automatic Stay stays actions
naming debtor and non-debtor-defendants, even where the non-debtors are not protected by 11
U.S.C. § 362(a), outside of that action.
Experienced bankruptcy practitioners and judges may say this reading of Fogarty undoes
established authority. However, the Second Circuit recognized:
We recognize that our holding may be viewed as formalistic.. . . To the extent that
the effects of the automatic stay effects may be inequitable, Congress has
provided a means of addressing that concern through Section 362(d)’s provision
for relief from the stay.[17]
We must assume that a court of the Second Circuit’s high echelon said what it meant.[18]
Therefore, we should take the Second Circuit “at its word,”[19] or words. The Second Circuit’s
words in Fogarty are, ”so long as the debtor is a named party in a proceeding or action, the
automatic stay applies to the continuation of that proceeding.”[20] Fogarty’s words stay the entire
proceeding. It does not limit the stay to the proceeding as it applies to debtors, only.
Fogarty’s plain reading applies to Automatic Stay to actions where debtors and non-
debtors are parties. Therefore, it seems the Second Circuit Court of Appeals effectively
extended the Automatic Stay to non-debtors, when they are co-defendants with a debtor in a
stayed action.
We’ll see to where the non-believers lead us.[21]
[1]© Wayne Greenwald 2023
[2]This article is dedicated to the memory of Richard (“Dick”) Lieb (1930-2022) A friend
to many. A teacher for us all.
[3]11 U.S.C. § 362(a):
(a) Except as provided in subsection (b) of this section, a petition filed under section
301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the
Securities Investor Protection Act of 1970, 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;
(2) the enforcement, against the debtor or against property of the estate, of a
judgment obtained before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from
the estate or to exercise control over property of the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien
to the extent that such lien secures a claim that arose before the
commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose
before the commencement of the case under this title;
(7) the setoff of any debt owing to the debtor that arose before the
commencement of the case under this title against any claim against the
debtor; and
(8) the commencement or continuation of a proceeding before the United
States Tax Court concerning a tax liability of a debtor that is a corporation
for a taxable period the bankruptcy court may determine or concerning the
tax liability of a debtor who is an individual for a taxable period ending
before the date of the order for relief under this title.
Exceptions to the automatic stay are listed in 11 U.S.C. § 362(b).
[4]Midlantic Nat’l Bank v. New Jersey Dep’t of Envtl. Prot., 474 U.S. 494, 503, 106 S.Ct.
755, 88 L.Ed.2d 859 (1986), quoting S. Rep. No. 95–989, at 54 (1978); H.R. Rep. No. 95–595, at
340 (1977).
[5]11 U.S.C. § 541.
[6]See, In re Smith, 910 F.3d 576, 580–81 (C.A.1 (Me.), 2018).
[7]Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1204 (C.A.3 (N.J.),1991),
[8]Shader v. Brattleboro Sav. & Loan Ass’n, 2014 WL 7140612, at *8 (D.Vt.,2014)
[9]See, Queenie, Ltd. v. Nygard Intern., 321 F.3d 282, 287 (C.A.2 (N.Y.),2003), citing, Teachers Insurance and Annuity Ass’n v. Butler, 803 F.2d 61, 65 (2d Cir.1986); Wedgeworth v. Fibreboard Corp., 706 F.2d 541, 544 (5th Cir.1983) and In re Fogarty, 39 F.4th 62, 72 (C.A.2,
2022) (“Fogarty”).
[10]Queenie, at 287-288.
[11]Id.
[12]Id.,at 288.
[13]39 F.4th 62, 72 (C.A.2, 2022).
[14]Id., at 76.
[15]Id.
[16]Id.
[17]Id., at 80.
[18] U.S. v. Maung, 267 F.3d 1113, 1121 (C.A.11 (Fla.),2001), CBS Inc. v. PrimeTime 24
Joint Venture, 245 F.3d 1217, 1222 (C.A.11 (Fla.),2001), In re Pete, 541 B.R. 917, 919
(Bkrtcy.N.D.Ga., 2015)(. . .”we assume the Supreme Court. . .said what it meant”)
[19]Erica P. John Fund, Inc. v. Halliburton Co., 131 S.Ct. 2179, 2182 (U.S., 2011)(The Supreme Court takes the Court of Appeals at its word.), Rose v. Hodges, 96 S.Ct. 175, 177, 423
U.S. 19, 21 fn. 2 (1975) (“We are forced to take the Court of Appeals at its word.”, In re Citron,
2011 WL 4711942, at *1 (Bkrtcy.E.D.N.Y.,2011)(“This Court chooses to accept the Supreme
Court at its word.”), Kampshoff v. Smith, 698 F.2d 581, 587 (2nd Cir. 1983)(“We take the Court,
as we must, at its word.”),), U.S. v. Blackburn, 461 F.3d 259, 270 (2nd Cir., 2006)(“I take the
district court at its word”); In re Pali Holdings, Inc., 488 B.R. 841, 851 (Bkrtcy. S.D.N.Y.,
2013)(“[W]e take the Supreme Court at its word.”), Dandamudi v. Tisch, 686 F.3d 66, 78 (2nd
Cir. 2012)(“[W]e should “tak[e] the Supreme Court at its word.” ), Parents Involved in Community Schools v. Seattle School Dist. No. 1, 127 S.Ct. 2738, 2764, 551 U.S. 701, 740
(U.S.,2007)(“We take the Grutter Court at its word”).
[20]Id., at 76.
[21]Courts in the Second Circuit appear bound to follow Fogarty, even if it is wrong. See J.
J. Cranston Constr. Corp. v City of New York, 20CV04902DGRML, 2022 WL 1289690, at *4
(EDNY Apr. 29, 2022).
