In re: R&G Financial Corporation

• Court: United States Bankruptcy Court, D. Puerto Rico
• Decided: November 18, 2010
• Docket: 10-04124
• Status: Unknown

Opinion

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF PUERTO RICO 2 3 IN RE: : CASE NO. 10-04124 (ESL) 4 : R&G FINANCIAL CORPORATION : CHAPTER 11 5 : : 6 Debtor : ____________________________________: 7 8 OPINION AND ORDER 9 This case is before the court upon Debtor’s motion to determine whether the automatic stay 10 provisions of 11 U.S.C. §§362(a) and 105(a) of the Bankruptcy Code may be extended to R&G 11 Investments Corporation (“RGIC”), a duly dissolved subsidiary of R&G Financial Corporation 12 (hereinafter referred to as “RGFC” or “Debtor”), in relation to certain arbitration proceedings before 13 the Financial Industry Regulatory Authority (“FINRA”) (Docket No. 27). On July 16, 2010, Rebecca 14 A. Diaz-Cruz, Lourdes R. Diaz-Antommattei and José Morales-Steinman (hereinafter referred to as 15 the “FINRA claimants”) jointly filed their brief and memo in opposition to Debtor’s emergency 16 motion for extension of the automatic stay provisions to RGIC arguing that FINRA Rule 13200 17 governs mandatory application of arbitration proceedings and that the claims in controversy in the 18 FINRA arbitration proceedings are non-core matters unrelated to Debtor’s bankruptcy and thus, are 19 governed by the Federal Arbitration Act (“FAA”) (Docket No. 77). For the reasons stated herein, 20 Debtor’s request for the provisions of the automatic stay to be extended to its duly dissolved 21 subsidiary is hereby granted. 22 Facts and Procedural Background 23 RGFC filed a bankruptcy petition under Chapter 11 of the Bankruptcy Code on May 14, 2010. 24 On May 21, 2010, the Clerk of the Court gave notice to creditors, amongst other pertinent 25 information, of the date of the meeting of creditors and of the bar date for all creditors (except a 26 governmental unit) to file a proof of claim, that is, September 21, 2010 (Docket No. 11). RGFC in 27 its original schedules failed to include the claims of the FINRA claimants (Docket Nos. 51). Debtor 28 in line item number four (4) of its Statement of Financial Affairs included the FINRA arbitration 1 proceedings (Docket No. 50). On June 8, 2010, Debtor filed an urgent motion to determine that the 2 provisions of the automatic stay should be extended to Debtor’s dissolved subsidiary, RGIC and thus, 3 stay the FINRA arbitration proceedings based on the following grounds: (i) RGFC, the sole 4 shareholder of RGIC, has assumed liability for all RGIC claims, thus any action against RGIC would 5 be an action against RGFC in conformity with 14 L.P.R.A. §§3008 & 3012; (ii) resolving the FINRA 6 claimants rights in the arbitration proceeding, rather than in the bankruptcy proceeding, will consume 7 the Debtor’s limited financial and managerial resources; since preparation for a complex and technical 8 FINRA arbitration proceeding would entail Debtor to deplete estate assets in the preparation of a 9 proper defense for said arbitration, and such arbitration proceedings would significantly drain its 10 scarce managerial resources; (iii) Debtor will have to bear 100% of all costs since RGIC has no 11 available assets to satisfy the defense costs or any potential indemnification obligations which result 12 from the FINRA arbitration proceedings; and (iv) the arbitration proceeding seeks to adjudicate a core 13 matter, namely the allowance or disallowance of the FINRA claimants claims (Docket No. 27). 14 Debtor also filed a motion requesting an emergency hearing to determine that the automatic stay 15 applies to arbitration proceedings (Docket No. 28). Subsequently, the court entered an interim/bridge 16 order enjoining FINRA claimants from further prosecuting the FINRA arbitration against the Debtor 17 and RGIC, until a final order is entered, and scheduled a hearing for July 6, 2010 (Docket No. 31). 18 The 341 meeting of creditors was held on June 23, 2010, and closed on July 7, 2010 (Docket 19 Nos. 56 & 71). On July 5, 2010, the attorneys representing the FINRA claimants filed a Notice of 20 Appearance and Request of Notices (Docket No. 69). On July 6, 2010, a hearing was held regarding 21 the extension of the automatic stay provisions to RGIC in which the court granted the FINRA 22 claimants ten (10) days to file a legal memorandum in opposition to Debtor’s motion to extend the 23 provisions of the automatic stay to RGIC (Docket Nos. 70 & 75). 24 On July 16, 2010, the FINRA claimants filed their opposition to Debtor’s motion to determine 25 that the automatic stay should be extended to RGIC by which they argue the following: (i) FINRA 26 Rule 13200 governs mandatory application of arbitration proceedings; (ii) the claims presented to 27 FINRA arise from a contract amongst the FINRA claimants and RGIC; (iii) the claims in controversy 28 in the FINRA arbitration proceedings are non-core matters unrelated to Debtor’s bankruptcy which 2 1 do not interfere with the Bankruptcy Code, thus the same are governed by the FAA and courts must 2 enforce the same; (iv) the claims in controversy in the FINRA arbitration proceedings are excepted 3 from the provisions of the automatic stay pursuant to 11 U.S.C. §362(b)(6) because they arose “from 4 securities and investments;” and (v) the arbitration process is the most cost efficient and expedited 5 mechanism to solve the specific and highly specialized controversies (Docket No. 77) . Subsequently, 6 Debtor filed its supplemental brief in support of its position on July 26, 2010 (Docket No. 89) by 7 which it argues that the automatic stay provisions should be extended to RGIC based on the 8 following: (i) the arbitration plaintiffs have failed to establish that RGFC is required to participate in 9 the arbitration proceedings in conformity with the FINRA rules or that it has consented to arbitrate 10 before FINRA; (ii) RGIC has no assets or resources, thus any action against RGIC would effectively 11 be an action against Debtor, who has assumed liability for all RGIC claims; (iii) resolving the FINRA 12 plaintiffs’ rights in the arbitration proceedings, rather than in bankruptcy court will consume Debtor’s 13 limited financial and managerial resources; (iv) the arbitration plaintiffs have failed to establish 14 “cause” for lifting the automatic stay to permit the arbitration to proceed against Debtor; and (v) the 15 arbitration plaintiffs through the arbitration proceedings are litigating a “core” bankruptcy matter, 16 namely the allowance of a prepetition claim against the Debtor’s estate which should be administered 17 by the bankruptcy court (Docket Nos. 27& 89). 18 On September 10, 2010, Debtor filed an amended Schedule F- Creditors Holding Unsecured 19 Nonpriority Claims whereby it includes the following claims: (i) creditor Rebecca Diaz Cruz is listed 20 as having a contingent, unliquidated and disputed claim in the amount of $0.00; (ii) creditor Lourdes 21 A. Diaz Antommattei is listed as having a contingent, unliquidated and disputed claim in the amount 22 of $0.00; and (iii) creditor José Morales Steinman is listed as having a contingent, unliquidated and 23 disputed claim in the amount of $0.00, namely the claims of the FINRA claimants (Docket No. 130). 24 On September 10, 2010, Debtor also filed a Notice of Amendment to Schedules of Assets and 25 Liabilities by which it informed those creditors which were added in the amended schedules that in 26 conformity with PR LBR 1009-1(c) they had ninety (90) days from the date of service of this 27 document to file a proof of claim, hence the bar date is December 9, 2010 (Docket No. 132). The 28 court notes that as of the issuance of this Opinion and Order the FINRA claimants have not filed proof 3 1 |jof claims in the instant case. 2 Uncontested Material Facts 3 1. On June 29, 2007, RGFC and RGIC executed an Agreement and Plan of Liquidation and 4 |Dissolution (“Liquidation Agreement’) of its subsidiary (Docket No. 27, Exhibit A). 5 2. Pursuant to the terms of the Liquidation Agreement, RGIC was to transfer certain assets to 6 ||RGFC, and the latter was to assume certain liabilities of RGIC, including “...any contingent liabilities 7 lawsuits or claims made by customers of the Subsidiary” (Docket No. 27, Exhibit A). 8 3. On August 14, 2007, RGIC was duly dissolved per Certification of the Secretary of State 9 the Commonwealth of Puerto Rico (Docket No. 27, Exhibit B). 10 4, On March 1, 2010, the FINRA claimants filed their claims against RGIC, RGFC, Myrsa 11 Acevedo and UBS Financial Services Incorporated of Puerto Rico before FINRA in an arbitration 12 |lproceeding (Docket No. 77). 13] 5. On May 19, 2010, FINRA informed the Debtor that the FINRA arbitration would be stayed 14 las to RGFC and RGIC and that arbitration would proceed against UBS Financial Services 15 |Incorporated of Puerto Rico and Myrsa Acevedo. 16 6. On May 25, 2010, FINRA issued a letter of correction informing that the FINRA arbitration 17 |lproceedings would be stayed with respect to the Debtor, but would proceed against RGIC absent a 18 ordered stay or agreement of the parties. 19 Applicable Law & Analysis 20 |!Extension of automatic stay to Non Debtors pursuant to §$362(a) & 105(a) Procedure & 21 ||Requirements 22 ||Procedure 23 A request for extension of the automatic stay provisions of Section 362(a) to a non debtor 24 |iconstitutes an action for injunctive relief and should be initiated by an adversary proceeding. In re 25 Bora Bora, 424 B.R. 17, 24-25 (Bankr. D.P.R., 2010); Fed. R. Bankr. P. 7001(7); See also; Alan N. 26 Resnick and Henry J. Sommer, 3 Collier on Bankruptcy, 9362.04[1] (16" ed. 2010)(“Rule 7001(7) 27 |\provides that a request for injunctive relief is governed by part VII of the Bankruptcy Rules. This will 28 that when the automatic stay of section 362 does not apply, injunctive relief will have to be

1 by filing a complaint initiating an adversary proceeding and then seeking a temporary 2 |restraining order’’). 3 “The power of the bankruptcy courts to enjoin certain actions not subject to the automatic stay, 4 as an action against non debtor parties, has been recognized, when such action is interfering 5 |jimproperly with the purposes of the bankruptcy law or the debtor’s reorganization efforts.” In re Bora 6 Inc., 424 B.R. 17, 23 (Bankr. D.P.R. 2010) citing A.H. Robins Co., Inc. v. Piccinin, 788 F. 2d 7 1994 (4" Cir. 1986). “Although called an extension of the automatic stay provisions of the Bankruptcy 8 to non-debtor parties, these are in fact injunctions issued by a bankruptcy court under 11 U.S.C. 9 /§105(a), after determining that the situation requires it in order to protect the interests of the 10 bankruptcy estate.” Id. citing In re Cincom jOutsource, Inc. 398 B.R. 223, 227 (Bankr. S.D. Ohio, 11 2008). “Under the Bankruptcy Act, it was believed that the bankruptcy court lacked jurisdiction to 12 such an injunction. Under the Code, broad injunctive power is available under section 105, and 13 issue appears to be one directed to the discretion of the court rather than to its jurisdiction.” Alan 14 |IN. Resnick and Henry J. Sommer, 3 Collier on Bankruptcy, 9362.04 (16" ed. 2010). A preliminary 15 {injunction is an extraordinary and drastic remedy which should only be granted when the movant has 16 |Icarried its burden through clear and convincing evidence. Mazurek v. Armstrong, 520 U.S. 968, 972, 17 Ct. 1865, 138 L. Ed. 2d 162 (1997). Thus, the broad injunctive power under Section 105(a) 18 be used sparingly. In re Lazarus Burman Assoc., 161 B.R. 891, 901 (Bankr. E.D.N.Y. 1993). 19 The court in analyzing whether to extend the protection of the automatic stay to non debtors, 20 determine if the requirements of both Sections 362(a) and 105(a) are satisfied in order to grant 21 preliminary injunction extending the provisions of Section 362(a) to non debtors. In re Bora Bora 22 424 B.R. at 24 referencing In re Philadephia Newspapers, LLC, 407 B.R. 606 (E.D. Pa. 2009). 23 |The court notes that the Debtor failed to follow the appropriate procedural mechanism established in 24 |\Fed. R. Bankr. P. 7001(7) to request an extension of the automatic stay to a nondebtor. Nonetheless, 25 court for the sake of expediency, will entertain Debtor’s request as a contested matter. Fed. R. 26 P. 9014. 27 ||Requirements under Section 362(a) 28 Section 362(a)(1) operates as a stay, “...applicable to all entities, of the commencement or

1 continuation, including the issuance or employment of process, of a judicial, administrative, or other 2 action or proceeding against the debtor that was or could have been commenced before the 3 commencement of the case under this title, or to recover a claim against the debtor that arose before 4 the commencement of the case under this title.” 11 U.S.C. §362(a)(1). The scope of the protection 5 of the automatic stay is broad, but it only stays actions against the debtor, hence the protections of the 6 stay do not extend to entities such as, “sureties, guarantors, co-obligors, or others with a similar legal 7 or factual nexus to the ... debtors.” McCartney v. Integra Nat’l Bank N., 106 F. 3d 506, 509-510 (3rd 8 Cir. 1997) quoting Maritime Elec. Co. v. United Jersey Bank, 959 F. 2d 1194, 1204 (3rd Cir. 1991). 9 However, the protection of the automatic stay may be extended to non debtors if “unusual 10 circumstances” are found such as; “(i) the non debtor and debtor enjoy such an identity of interests 11 that the suit of the non-debtor is essentially a suit against the debtor; or (ii) the third-party action will 12 have an adverse impact on the debtor’s ability to accomplish reorganization.” In re Philadelphia 13 Newspapers, LLC, 407 B.R. at 616. 14 In the instant case, a Liquidation Agreement was executed on June 29, 2007 between RGFC 15 and its subsidiary RGIC. RGFC at the time of the Liquidation Agreement was the sole stockholder 16 of RGIC. The Liquidation Agreement discloses that RGIC’s assets are approximately $10,851,000, 17 its liabilities are approximately $59,000 and its stockholder’s equity is approximately $10,792,000. 18 Clause 1.1. of the Liquidation Agreement established that RGIC would transfer to RGFC all the assets 19 (as defined in the Liquidation Agreement) in exchange for the assumption by RGFC of all of the 20 liabilities (as defined in the Liquidation Agreement) namely, the accrued expenses and other liabilities 21 of RGIC and any contingent liabilities for lawsuits or claims made by customers of RGIC; the 22 cancellation of the intercompany advance agreement (defined as “...the agreement executed by the 23 Stockholder and the Subsidiary to evidence the advance made to the Stockholder, dated June 7, 2007, 24 in the amount of $8,000,000.00.”); and the complete redemption and cancellation of all the shares. 25 Clause 1.2 of the Liquidation Agreement also establishes that on the effective date (June 29, 2007), 26 RGIC shall declare and pay a dividend to RGFC in the amount of $3,092,516. 27 The Department of State of the Commonwealth of Puerto Rico issued RGIC’s Certificate of 28 Dissolution on August 14, 2007. Article 9.08 of the General Corporations Law of 2009, as amended, 6 1 of the Commonwealth of Puerto Rico, 14 L.P.R.A. §37081 establishes that all dissolved corporations 2 shall continue to exist as a corporate entity for three (3) years from the date of dissolution and it 3 further provides that if any proceeding is commenced before the three (3) year period lapses, the 4 corporation shall continue as a corporate body. Article 9.12 of the General Corporations Law, 14 5 L.P.R.A. §37122, provides that a stockholder of a dissolved corporation, whose assets were 6 distributed, will be liable the lesser of his or her pro rata share of the claim or of the amount actually 7 distributed by the corporation, if the proceeding is commenced prior to the three (3) year term 8 referenced in Article 9.08. This court concludes that RGFC as RGIC’s sole stockholder in conformity 9 10 1 Article 9.08 of the General Corporations Law of 2009, as amended, provides: 11 “[a]ll corporations, whether they expire by their own limitation or are otherwise dissolved, shall continue to exist as corporate entity for a period of three (3) years from the date of extinction or 12 dissolution, or for any such longer period which the Court of First Instance (Superior Part) may, in its discretion, direct for purposes of advancing any suits initiated by the corporation and 13 continuing the defense of the suits pending against it, whether civil, criminal or administrative, as 14 well as for purposes of liquidating and terminating the business of the corporation, of complying with its obligations and distributing the remaining assets to the stockholders. The legal entity 15 shall not continue for the purpose of continuing the business for which the corporation was 16 organized. With respect to any action, suit or proceeding filed or initiated by or against the 17 corporation before its extinction, or within the period of three (3) years following its extinction or dissolution, the corporation shall continue as a corporate body after the three (3) year term, and 18 until all judgments, orders or decrees with respect to the aforementioned actions, suits or 19 proceedings are fully executed, without the need for any special provision to that effect by the Court of First Instance (Superior Part).” 14 L.P.R.A. §3708. 20 21 2Article 9.12 of the General Corporations Law of 2009, as amended, provides: “(a) [a] stockholder of a dissolved corporation whose assets were distributed, to the stockholders 22 shall not be liable for any claim against the corporation in an amount in excess of his pro rata share of the claim or of the amount distributed to him by the corporation, whichever is less. 23 24 (b) A stockholder of a dissolved corporation whose assets were distributed to the stockholders shall not be liable for any claim against the corporation in which such action, suit or proceeding is not 25 begun prior to the expiration of the term provided in §3708 of this title. 26 (c) The total liability of a stockholder of a dissolved corporation for claims filed against the 27 dissolved corporation shall not exceed the amount distributed to the stockholder in the dissolution.” 14 L.P.R.A. §3708. 28 7 1 the General Corporations Law of 2009, as amended of the Commonwealth of Puerto Rico, is 2 |\statutorily the only party that may be potentially liable to the FINRA claimants depending on the 3 jloutcome of their claims. 4 In the instant case, the arbitration proceedings against RGIC are essentially and statutorily 5 |jagainst the Debtor, given that their identity of interests are in essence merged into RGFC, as its sole 6 ||stockholder, and as the real party in interest RGFC will have to prepare and incur all legal defense 7 |\fees and may ultimately be liable depending on the outcome of the FINRA claimants claims. Thus, 8 “unusual circumstances” to extend the protection of the automatic stay pursuant to Section 362(a) 9 present. 10 |Requirements under Section 105(a) 11 The movant requesting the preliminary injunction under Section 105(a) must satisfy the four 12 ||(4) factor test which consists of the following (1) that the debtor would suffer irreparable injury if the 13 |jinjunction were not granted; (2) that such injury outweighs any harm which granting injunctive relief 14 inflict on a defendant; (3) that the debtor has exhibited a likelihood of success on the merits; 15 (4) that the public interest will not be adversely affected by the granting of the injunction. In re 16 ||Codfish, 97 B.R. 132, 135 (Bankr. D.P.R. 1987) citing In re Supermecado Gamboa, 68 B.R. 230, 232 17 (Bankr. D.P.R. 1986). “Evidence that goes beyond the unverified allegations of the pleadings and 18 {motion papers must be presented to support or oppose a motion for a preliminary injunction.” 11A 19 Wright, Miller & Kane, Federal Practice and Procedure: Civil 2d §2949 at 214. 20 The Supreme Court has stated that, “the basis of injunctive relief in the federal courts has 21 jjalways been irreparable harm and inadequacy of legal remedies.” Sampson v. Murray, 415 U.S. 61, 22 1188, 94S. Ct. 937, 952 39 L. Ed. 2d 166, 185 (1974) (quoting Beacon Theatres, Inc. v. Westover, 359 23 500, 506-507, 3L. Ed. 2d 988, 79S. Ct, 948 (1959)). “The sine qua non is whether the [movants] 24 |lare likely to succeed on the merits.” Acevedo Garcia v. Vera-Monroig, 296 F. 3d. at 16 (quoting 25 ||Weaver v. Henderson, 984 F. 2d 11, 12 (1* Cir. 1993)); New Comm Wireless Services, Inc. v. 26 ||Sprintcom, Inc., 287 F. 3d 1, 9 (1* Cir. 2002). However, the degree of likelihood of success is not 27 ||\determinative as it must be balanced with the hardships caused to the parties if the injunction is not 28 |\granted. If plaintiff's showing of probable success on the merits is uncertain, he may be entitled to

1 preliminary injunction ifhe demonstrates a strong probability that he will be injured if the court fails 2 |Ito act. 11A Wright, Miller & Kane, Federal Practice and Procedure: Civil 2d § 2948.3 at 189 & 194- 3 To establish irreparable harm, the movant does not need to show that the injunctive relief will 4 fatal to the business, only that its legal remedies are inadequate. Ross-Simons of Warwick, Inc. 5 Baccarat, Inc., 102 F. 3d 12, 15 (1* Cir. 1996). “If the plaintiff suffers a substantial injury that is 6 accurately measurable or adequately compensable by money damages, irreparable harm is a 7 \natural sequel.” Id. The Supreme Court has defined the concept of irreparable harm as follows, “[t]he 8 ||key word in this consideration is irreparable. Mere injuries, however substantial, in terms of money, 9 and energy necessarily expended in the absence of a stay, are not enough. The possibility that 10 |ladequate compensatory or other corrective relief will be available at a later date, in the ordinary 11 of litigation, weighs heavily against a claim of irreparable harm.” Sampson v. Murray, 415 12 |U.S. at 90 (quoting Virginia Petroleum Jobbers Association v. FPC, 104 U.S. App. D.C. 106, 259 F. 13 2d 921 (D.C. Cir. 1958). 14 In the instant case this court finds that Debtor would sustain irreparable harm or injury if the 15 ||continuation of proceedings against RGIC (a defunct entity with no assets) is not stayed, since as 16 |jalready explained herein, Debtor would be the entity legally and financially responsible in providing 17 only all the legal costs of RGIC’s defense in the FINRA arbitration proceedings but also its 18 |\limited managerial resources would also be diverted in assisting towards the preparation for such 19 proceedings, meaning that its automatic stay protections under Section 362(a)(1) would in essence 20 violated. Moreover, at this juncture, the FINRA claimants have not requested from this court to 21 }lift the automatic stay with respect to the Debtor in order to proceed with the arbitration proceedings. 22 The second prong of the preliminary injunction test, “likelihood of success,” has been defined 23 |ifor the purposes of an injunction in a bankruptcy case “as the probability of a successful 24 |lreorganization.” Lazarus Burman Assocs. v. National Westminster Bank USA Lazarus Burman 25 |Assocs.), 161 B.R. 891, 901 (Bankr. E.D.N.Y. 1993). The second prong is related to the first prong, 26 that it would contravene the protections afforded to debtors under Section 362, namely to 27 \\provide the same a breathing spell by halting all collection efforts and harassment by creditors while 28 |lpermitting the debtor to attempt a plan of reorganization. See H.R. Rep. No. 595, 95" Cong., 1* Sess.

1 340 (1977); S. Rep. No. 989, 95th Cong. 2d Sess. 54-55 (1978), reprinted in App. Pt. 4(d)(i) and 2 4(e)(i) infra. (“The automatic stay is one of the fundamental debtor protections provided by the 3 bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, 4 all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or 5 reorganization plan, or simply to be relieved of the financial pressures that drove him into 6 bankruptcy”). Thus, this court finds that Debtor meets the second prong of the preliminary injunction 7 test because it would hamper its attempt for a successful reorganization if the protections of the 8 automatic stay were not provided to Debtor. 9 The third prong of the preliminary injunction test, the relative harm to be suffered or the 10 balance of relevant positions, is met by the Debtor because the degree of harm that would be imparted 11 to the Debtor and its estate outweighs the harm that the FINRA claimants would face if a preliminary 12 injunction were not issued, given that the preliminary injunction will not invalidate the alleged rights 13 of the FINRA claimants but it will simply delay the enforcement of those rights. See In re Lazarus 14 Burman Assocs., 161 B.R. at 901. 15 Lastly, the fourth prong of the test, the public interest in the context of a bankruptcy 16 proceeding, consists in promoting a successful reorganization. Id at 901. This court concludes that 17 the public interest is best protected if the Debtor continues to work in their reorganization rather than 18 having to face immediate adverse economic consequences stemming from legal fees in the arbitration 19 proceedings and the syphoning off of its limited managerial resources in such proceedings. 20 Exemption from the Automatic Stay under §362(b)(6) 21 Section 362(b)(6) exempts from the automatic stay, “...the exercise by a commodity broker, 22 forward contract merchant, stockbroker, financial institution, financial participant, or securities 23 clearing agency of any contractual right (as defined in section 555 or 556) under any security 24 agreement or arrangement or other credit enhancement forming a part of or related to any commodity 25 contract, forward contract or securities contract, or of any contractual right (as defined in section 555 26 or 556) to offset or net out any termination value, payment amount, or other transfer obligation arising 27 under or in connection with 1 or more contracts, including any master agreement for such contracts.” 28 11 U.S.C. §362(b)(6). “The Financial Netting Improvements Act of 2006 clarifies that this stay 10 1 exception includes the exercise by such entities of any contractual right (as defined in section 555 or 2 556) under any security agreement, arrangement or other credit enhancement in or related to any 3 commodity contract, forward contract or securities contract.” Alan N. Resnick and Henry J. Sommer, 4 3 Collier on Bankruptcy, ¶362.05[6] (16th ed. 2010). 5 The FINRA claimants argue that they are exempted from the automatic stay pursuant to the 6 provisions of Section 362(b)(6), but their reliance is misplaced given that such section allows for 7 setoffs, which involve mutual debts and claims, which in turn originate from short-term contracts 8 (such as securities and commodities contracts which involve margin calls) and entered into by certain 9 entities described in said section. The court in the instant case, is simply not before this type of 10 scenario (transaction), rather the FINRA claimants causes of actions arise from alleged violations of 11 securities laws which occurred with respect to RGIC before the same was liquidated on June 29, 12 2007. 13 The FINRA claimants citing In re Coachworks Holdings, Inc., 418 B.R. 490 (Bankr. M.D. Ga. 14 2009) and Smith v. Tricare Rehabilitation Sys. (In re Tricare Rehabilitation), 181 B.R. 569 (Bankr. 15 N.D. Ala. 1994) argue that the existence of pending litigation against the debtor in a non-bankruptcy 16 case may constitute case for lifting the automatic stay. The court in both of these cases was presented 17 with motions for relief from the automatic stay pursuant to Section 362(d)(1). This issue is simply 18 not before the court, given that the FINRA claimants have not filed before the court a motion 19 requesting relief from the automatic stay pursuant to Section 362(d)(1) and (g). 20 Mandatory Arbitration under FINRA Rules 21 FINRA claimants argue that FINRA Rule 13200 establishes mandatory application of 22 arbitration proceedings. FINRA Rule 13200 must be employed in conformity with the Code of 23 Arbitration Procedure for Industry Disputes. FINRA Rule 13200 provides, 24 “ (a) Except as otherwise provided in the Code, a dispute must be arbitrated under the Code if the dispute arises out of the business activities of a member or an associated 25 person and is between or among: Members; Members and Associated Persons; or Associated Persons. 26 (b) Disputes arising out of the insurance business activities of a member that is also an insurance company are not required to arbitrate under the Code.” FINRA Rule 27 13200. 28 FINRA Rule 13100 defines the following terms: 11 1 “(f) Code- The term ‘Code’ means the Code of Arbitration Procedure for Industry Disputes. For disputes involving customers, see the FINRA Code of Arbitration 2 Procedure for Customer Disputes. 3 (o) Member- For purposes of the Code, the term ‘member’ means any broker or dealer admitted to membership in FINRA, whether or not the membership has been 4 terminated or cancelled, and any broker or dealer admitted to membership in a self- regulatory organization that, with FINRA consent, has required its members to 5 arbitrate pursuant to the Code and/or to be treated as members of FINRA for purposes of the Code, whether or not the membership has been terminated or cancelled. 6 (a) Associated Person- The term ‘associated person’ or ‘associated person of a 7 member’ means a person associated with a member, as that term is defined in paragraph (r). 8 (r) Person Associated with a Member- The term ‘person associated with a member’ 9 means: (1) A natural Person who is registered or has applied for registration under 10 Rules of FINRA; or (2) A sole proprietor, partner, officer, director, or branch manager of a 11 member, or other natural person occupying a similar status or performing similar functions, or a natural person engaged in the investment banking or 12 securities business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from 13 registration with FINRA under the By-Laws or the Rules of FINRA.” FINRA Rule 13100(a), (f), (o) and (r). 14 In the instant case, the FINRA claimants are citing FINRA Rule 13200 which is used for 15 industry disputes amongst members of FINRA or persons that are associated with a FINRA member. 16 The dispute in this case is between RGIC (a former FINRA member) and the FINRA claimants which 17 are not FINRA members. Thus, the applicable FINRA Rules would be those in conformity with Code 18 of Arbitration Procedure for Customer Disputes. FINRA Rule 12200 provides the following: 19 “Parties must arbitrate a dispute under the Code if: Arbitration under the Code is 20 either: (1) Required by a written agreement, or 21 (2) Requested by the customer3 The dispute is between a customer and a member4 or associated person5 of a 22 23 24 3FINRA Rule 12100(i) defines customer as, “[a] customer shall not have include a broker or dealer.” 25 4FINRA Rule 12100(o) defines member as follows; “[f]or purposes of the Code, the term 26 ‘member’ means any broker or dealer admitted to membership in FINRA, whether or not the 27 membership has been terminated or cancelled; and any broker or dealer admitted to membership in a self regulatory organization that, with FINRA consent, has required its members to arbitrate 28 pursuant to the Code and/or to be treated as members of FINRA for purposes of the Code, whether 12 1 member; and The dispute arises in connection with the business activities of the member or 2 the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.” FINRA Rule 3 12200. 4 RGIC is a defunct entity which was duly dissolved on August 14, 2007.6 FINRA Rule 12202 5 provides the following regarding claims against inactive members: 6 “[a] claim by or against a member in one of the following categories is ineligible for arbitration under the Code unless the customer agrees in writing to arbitrate after the claim 7 arises: A member whose membership is terminated, suspended, cancelled or revoked; 8 A member that has been expelled from FINRA; or A member that is otherwise defunct.” 9 In the instant case, the entity that would be incurring in the costs of legally representing 10 RGIC in the arbitration proceedings would be RGFC, because RGIC has no assets since it was 11 liquidated on June 29, 2007. RGFC is not a former or a current FINRA member, or a natural person 12 associated with a member. Thus, FINRA may not oblige RGFC to arbitrate in said arbitration 13 proceedings. 14 However, this issue does not control the outcome because this court has ordered the provisions 15 of the automatic stay to be extended to RGIC. Moreover, even if RGFC were obligated by the FINRA 16 Rules to participate in said arbitration proceedings, the FINRA claimants would have had to file a 17 18 or not the membership has been terminated or cancelled.” 19 5FINRA Rule 12100(a) defines associated person as follows; “[t]he term ‘associated person’ 20 or ‘associated person of a member means a person associated with a member, as that term is defined 21 in paragraph (r).” FINRA Rule 12100(r) defines person associated with a member as follows; “[t]he term ‘person associated with a member’ means: (1) A natural person who is registered or has 22 applied for registration under the Rules of FINRA; or (2) A sole proprietor, partner, officer, director, or branch manager of a member, or other natural person occupying a similar status or 23 performing similar functions, or a natural person engaged in the investment banking or securities 24 business who is directly or indirectly controlling or controlled by a member, whether or not any such person is registered or exempt from registration with FINRA under the By-Laws or the Rules 25 of FINRA. For purposes of the Code, a person formerly associated with a member is a person associated with a member.” 26 27 6However, without making any factual findings the court assumes that RGIC’s membership with FINRA terminated or the same withdrew its application with FINRA on June 28 26, 2007 pursuant to an online FINRA BrokerCheck Report. 13 1 ||motion to compel arbitration before this court, and they have not as of this date. 2 |The Federal Arbitration Act & Bankruptcy’ 3 The Federal Arbitration Act (“FAA”), 9 U.S.C.S. §1 et seg., requires federal courts to 4 enforce arbitration agreements and to stay litigation that contravenes it. See 9 U.S.C. §§ 2& 3; Burns 5 |lv. New York Life Ins. Co., 202 F. 3d 616, 620 (2d Cir. 2000). The FAA represents a “congressional 6 |\declaration of a liberal federal policy favoring arbitration agreements,” and “any doubts concerning 7 ||the scope of arbitrable issues should be resolved in favor of arbitration.” Moses H. Cone Mem’! Hosp. 8 |lv. Mercury Constr. Corp., 460 U.S. 1, 23, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983). However, “like 9 |jany statutory directive, the Arbitration Act’s mandate may be overridden by a contrary congressional 10 command.” Shearson/Am. Express Inc. v. McMahon, 482 U.S. 220, 226, 96 L. Ed. 2d 185, 107 S. 11 2332(1987). 12 A bankruptcy court presented with a motion to compel arbitration must apply a four (4) prong 13 [test which consists of the following: (i) whether the parties agreed to arbitrate; (ii) the scope of the 14 llagreement; (iii) if federal statutory claims are asserted, it must consider whether Congress intended 15 claims to be nonarbitrable; and (iv) if the court concludes that some, but not all, of the claims 16 the case are arbitrable, it must then decide whether to stay the balance of the proceedings pending 17 jlarbitration. Togut v. RBC Dain Correspondent Servs. (In re S.W. Bach & Co.), 425 B.R. 78, 87 18 (Bankr. S.D.N.Y. 2010) (citing Bethlehem Steel Corp. v. Moran Towing Corp. (Inre Bethlehem Steel 19 !Corp.), 390 B.R. 784,789)(Bankr. S.D.N.Y. 2008) (quoting Oldroyd v. Elmira Sav. Bank, FSB, 134 20 3d 72, 75-76 (2d Cir. 1998). 21 In the instant case, the court has not been presented with a motion to compel arbitration by 22 FINRA claimants, thus it would be premature for the court to enter into the four prong test 23 jjanalysis and make a determination as to whether the FINRA claimants’ claims are core or non-core, 24 whether the same are arbitrable or non-arbitrable. 25 26 ’The parties do not dispute that the FAA applies to arbitration proceedings brought before 28 || FINRA. 14

1 Conclusion 2 In view of the foregoing, the court finds and concludes as follows: (1) RGFC, as RGIC’s sole 3 stockholder in conformity with the General Corporations Law of 2009, as amended of the 4 Commonwealth of Puerto Rico, is statutorily the only party that may be potentially liable to the 5 FINRA claimants depending on the outcome of their respective claims. Thus, the arbitration 6 proceedings against RGIC are essentially and statutorily against the Debtor, given that RGFC as its 7 sole stockholder, and as the real party in interest will be ultimately liable to the FINRA claimants; (2) 8 the “unusual circumstances” to extend to RGIC the protection of the automatic stay pursuant to 9 Section 362(a) are present in the instant case; (3) the exemption from the automatic stay provided by 10 Section 362(b)(6) is simply inapplicable because this particular section allows for setoffs, that involve 11 mutual debts and claims, which in turn originate from short-term contracts (such as securities and 12 commodities contracts which involve margin calls) and entered into by certain entities described in 13 said section. The court is not before this type of transaction, rather the FINRA claimants causes of 14 actions arise from alleged violations of securities laws which occurred prior to the June 29, 2007 15 liquidation date of RGIC; (4) furthermore, this court finds that the FINRA claimants’ argument 16 regarding that the existence of pending litigation against a debtor in a non-bankruptcy forum may 17 constitute cause for lifting the automatic stay is misplaced. The FINRA claimants have not filed 18 before this court a motion requesting relief from the automatic stay pursuant to Section 362(d)(1) and 19 (g); (5) in the instant case, FINRA pursuant to either the Code of Arbitration Procedure for Industry 20 Disputes or the Code of Arbitration Procedure for Customer Disputes may not oblige RGFC to appear 21 in the arbitration proceedings because they have not as of this date filed a motion to compel 22 arbitration before this court; and (6) given that the FINRA claimants have not presented to this court 23 a motion to compel arbitration, it would be premature for this court to enter into the four (4) prong 24 test analysis to determine whether the FINRA claimants’ claims are core or non-core and whether the 25 same are arbitrable or non-arbitrable. 26 27 28 15 1 In summary, this court concludes that Debtor has satisfied the requirements pursuant to 2 |\Sections 362(a) and 105(a) for the extension of the automatic stay to be extended to its duly dissolved 3 |subsidiary, namely RGIC. Consequently, the Debtor’s motion requesting the provisions of the 4 |jautomatic stay to be extended to RGIC is hereby GRANTED. 5 In San Juan, Puerto Rico, this 17" day of November 2010. 6

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