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Discretionary Automatic Stays “Pave” Way for More Litigation

By: Joanna Matuza

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

          In Pavers & Road Builders District Council Welfare Fund v. Core Contracting of NY, LLC, the Eastern District Court of New York exercised its discretion with regard to automatic stays in its holding that a corporation’s alter ego status does not permit an automatic stay for non-debtors.[1]  In Pavers & Road Builders District Council Welfare Fund, administrators of an Employee Retirement Income Security Act (“ERISA”) pension fund brought suit against four related corporate defendants for “delinquent contributions and shifting of assets to avoid having to pay workers.”[2]  Canal Asphalt, the defendant-debtor, filed a voluntary petition for chapter 11 relief in the Southern District of New York.  Thus, the cause of action was automatically stayed against the debtor, pursuant to section 362(a)(1) of the Bankruptcy Code.[3]  The other defendants argued in a letter to the District Court of Eastern District of New York that because they are alter egos of one another, the automatic stay arising in the debtor’s case should prevent the action from proceeding against all defendants.[4]  The Eastern District court disagreed, and instead, issued an order stating that the automatic stay only enjoined actions against debtors or their property.[5]

         Under 11 U.S.C. section 362(a)(1), “a petition filed [for voluntary bankruptcy]…operates as a stay, applicable to all entitles, of the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor…or to recover a claim against the debtor that arose before the commencement of the case under this title.”[6]  The statute expressly limits the scope of the automatic stay to debtors.[7]  However, “if certain unusual circumstances arise during the pendency of a debtor’s bankruptcy case” courts will apply the automatic stay to non-debtors. [8]  The Eastern District court in Pavers & Road Builders District Council Welfare Fund reasoned that extending the automatic stay to non-debtors may be necessary to protect the debtor.[9]  For example, “it may be necessary to extend the automatic stay…to protect the non-debtor entities, for not only may they be alter- egos, but they may be holding the assets that should be used to satisfy all of the debtor’s creditors.”[10]  As this reasoning focuses on the debtor and not the non-debtor, it is consistent with the statute’s language.[11]

         The Eastern District court held that a corporate defendant’s status as an alter ego was not enough to intermingle debtor and non-debtor interests, such that the automatic stay would be automatic.[12]  The court pointed out, “[j]ust because two entities are alter egos does not make them both debtors under the Bankruptcy Code.”[13]  The Eastern District court reasoned that it was not in the best position to weigh the “intra- and inter-creditor interests.”[14]  That is a job better suited for the bankruptcy courts.[15]  According to the Eastern District court, upon motion of the debtor, the Bankruptcy Court could issue an injunction on the grounds that the Eastern District court’s resolving the claim would “prejudice other creditors of the debtor in a way that the Bankruptcy Court would consider unfair.”[16]  If the Bankruptcy Court does not issue an injunction, however, the Eastern District court could decide the litigation.[17]

          If a court deems corporations alter egos of one another, it is more likely than not that their interests are joined.  However, like in this case, the automatic stay enjoining actions against a debtor will not necessarily protect a non-debtor, even if they are alter egos.[18]  Under the Pavers & Road Builders District Council Welfare Fund reasoning, a court should first determine whether the debtor and non-debtor corporations are alter egos.  If the corporations are alter egos, the bankruptcy court must then determine if their interests are so intertwined that the automatic stay must also apply to the non-debtor corporations.  Ultimately, the two-tiered analysis will lead to more complex and costly litigation caused by a lack of consistency in the application of the analysis to subsequent cases. Pavers & Road Builders District Council Welfare Fund leaves non-debtors with a precedent that can be applied discretionarily and does not provide non-debtors with any guidance on how to obtain stays.



[1] See No. 15 Civ. 0207, 2015 WL 4925351, at *5 (E.D.N.Y. August 18, 2015)

[2] See id. at *1, 4.

[3] 11 U.S.C. §362(a)(1); See Pavers & Road Builders District Council Welfare Fund v. Core Contracting of NY, LLC, 2015 WL 4925351, at *1.

[4] See id.

[5] See id.

[6] 11 U.S.C. §362(a)(1) (emphasis added).

[7] See 11 U.S.C. §362(a)(1); In re Adler (Adler II), 494 B.R. 43, 57 (Bankr. E.D.N.Y. 2013) (affirming that §362(a)(1) “refers purely to actions against ‘the debtor’”).

[8] See id; see also Queenie, Ltd. v. Nygard Int’l, 321 F.3d 282, 287 (2d Cir. 2003); A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986), cert. denied, 478 U.S. 876 (1986) (holding that a claim against the non-debtor that “will have an immediate adverse economic consequence for the debtor’s estate” is an unusual circumstance that qualifies non-debtor for automatic stay).

[9] Pavers & Road Builders District Council Welfare Fund v. Core Contracting of NY, LLC, 2015 WL 4925351, at *3.

[10] Id.

[11] Id. at *2 (asserting that the “plain language of the statute…provides that the automatic stay protects only the debtor, not the non-debtor entities).

[12] See generally id. at *5.

[13] Id. at *2.

[14] Id. at *4.

[15] See id.

[16] See id.

[17] See id.

[18] See id. at *5.