In re City of Stockton

484 B.R. 372, 68 Collier Bankr. Cas. 2d 1335, 2012 Bankr. LEXIS 5868, 57 Bankr. Ct. Dec. (CRR) 98, 2012 WL 6622605
United States Bankruptcy Court, E.D. California·Decided December 18, 2012·No. No. 12-32118-C-9·Published·Cited by 5 cases

Opinion

CHRISTOPHER M. KLEIN, Bankruptcy Judge.

Another twist in chapter 9 municipal debt adjustment cases is the additional automatic stay imposed by 11 U.S.C. § 922(a). This additional automatic stay supplements the basic automatic stay of 11 U.S.C. § 362 by stopping actions against municipal officers and inhabitants to enforce a claim against the municipality. Here, the § 922(a) stay will not be modified to permit a lawsuit against municipal officers to proceed.

The City of Stockton’s fired Fire Chief is suing the City, the City Manager, and the Deputy City Manager on a variety of federal and state theories to redress his termination. Conceding that the § 362 automatic stay protects the City from his lawsuit, he wants to keep proceeding against the City Manager and Deputy City Manager during the chapter 9 case.

This court holds: (1) that the § 922(a) automatic stay augments the basic § 362 automatic stay specifically to protect the individual defendants during the pendency of this chapter 9 case; and (2) that the City has satisfied its statutory burden of proof to demonstrate the absence of cause for stay relief.

Facts

There is pending in the United States District Court for the Eastern District of California a civil action in the nature of wrongful discharge filed by the former Fire Chief of the chapter 9 debtor City of Stockton. The defendants are the City itself, together with the City Manager and the Deputy City Manager in their official [375]*375and personal capacities. The City has undertaken the defense of the individual defendants. Allegations include violation of federal and state civil rights laws and other theories sounding in wrongful termination.

The District Court, applying conventional § 362 analysis, conducted a detailed examination focused on extent of the identity of interests of the parties and concluded that the facts warranted extending the City’s § 362 automatic stay to the civil action against the officers. Hittle v. City of Stockton, 2012 Westlaw 3886099 (E.D.Cal.2012). It does not appear that the parties advised the District Court, or that the court otherwise realized, that the § 922(a) additional stay obviated the need for going through the § 362 exercise of assessing the extent of the identity of interests before protecting third persons.

The plaintiff now seeks relief from the automatic stay, arguing that no harm will be wrought by allowing him to pursue the City’s officers during the chapter 9 case and theorizing that the City’s insurer will pay defense expenses.

The City turns out to be self-insured for the first $1 million of liability, including cost of defense, and is required by California Government Code §§ 825 and 825.2 to indemnify its officers for liability in their official capacities.

The status of the chapter 9 case is that there presently is an intense effort being undertaken in connection with a court-mandated mediation to enable the various parties in interest to develop the detailed understanding of the City’s finances that will be essential to the determination whether to order relief and to the formulation of a plan of adjustment.

Jurisdiction

With respect to this chapter 9 case, the subject-matter jurisdiction of the United States District Court, of which this bankruptcy court is a unit, 28 U.S.C. § 151, is founded upon federal bankruptcy jurisdiction under 28 U.S.C. § 1334. This motion for relief from stay is a core proceeding a bankruptcy judge may hear and determine. 28 U.S.C. § 157(b)(2)(G).

Federal subject-matter jurisdiction over the movant’s wrongful discharge civil action pending in the District Court is founded on federal question and supplementary jurisdiction pursuant to 28 U.S.C. §§ 1331 and 1367.

Upon the filing of the chapter 9 case, 28 U.S.C. § 1334 added another, but not essential, basis for subject-matter jurisdiction over the movant’s pending claim against the City, making it eligible to be resolved through the bankruptcy claim adjudication process. But, neither the plaintiff nor the City has yet invoked that process by filing or objecting to a proof of claim, and whether that will actually occur is speculative.

The status quo is that the wrongful discharge civil action is a non-core proceeding that has not been referred by the District Court to the Bankruptcy Court under 28 U.S.C. § 157(a). Unless there is a § 157(a) referral, a bankruptcy judge lacks statutory authority to preside over the civil action on either a binding or a non-binding basis. Further, it is open to doubt that such a referral would be made in view of the substantial non-bankruptcy basis for federal subject-matter jurisdiction.

Analysis

For the same reason that geometry holds' that the shortest distance between two points is a straight line, the additional automatic stay of § 922(a),1 rather than [376]*376the § 362 automatic stay, directly protects municipal officers in chapter 9 cases without the need for a court to perform the mental gymnastics required to extend the § 362 automatic stay.

I

Even though this motion is couched in terms of seeking relief from the § 362 automatic stay without reference to § 922(a), the latter section is the controlling provision.

The action against the individual officers is an exercise of the well-known strategy of suing a sovereign by falsely pretending to sue an officer. To the extent that there is a judgment against the individuals, the City, having undertaken their defense, will be required to pay the judgment. Cal. Gov’t Code §§ 825 & 825.2. Hence, the civil action against the individuals “seeks to enforce a claim against the debtor” within the meaning of § 922(a). 11 U.S.C. § 922(a)(1).

It follows that the motion is deemed to have been made under § 922(a).

II

The procedure and standards for obtaining relief from the § 922(a) automatic stay are nominally identical to those for obtaining relief from the § 362 automatic stay.

A

The requisite procedure is familiar.

Rule 4001(a) provides that a motion for relief from an automatic stay, without differentiating among the several bankruptcy automatic stays,2 shall be made by motion as a contested matter in accordance with Rule 9014. Fed. R. Bankr.P. 4001(a)(1).3

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In re City of Stockton, 484 B.R. 372, 68 Collier Bankr. Cas. 2d 1335, 2012 Bankr. LEXIS 5868, 57 Bankr. Ct. Dec. (CRR) 98, 2012 WL 6622605 (Cal. 2012).

484 B.R. 372 (In re City of Stockton) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.

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