Pavers & Road Builders District Council Welfare Fund v. Core Contracting of N.Y., LLC

536 B.R. 48, 2015 U.S. Dist. LEXIS 108924, 2015 WL 4925351
CourtDistrict Court, E.D. New York
DecidedAugust 18, 2015
DocketNo. 15 Civ. 0207(BMC)
StatusPublished
Cited by10 cases

This text of 536 B.R. 48 (Pavers & Road Builders District Council Welfare Fund v. Core Contracting of N.Y., LLC) is published on Counsel Stack Legal Research, covering District Court, E.D. New York primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Pavers & Road Builders District Council Welfare Fund v. Core Contracting of N.Y., LLC, 536 B.R. 48, 2015 U.S. Dist. LEXIS 108924, 2015 WL 4925351 (E.D.N.Y. 2015).

Opinion

MEMORANDUM DECISION AND ORDER

COGAN, District Judge.

This is an action by administrators of an ERISA pension fund and the Union that created the fund seeking unpaid pension contributions. All four corporate defendants are alleged to be signatories of or, in one case, a former signatory of a collective bargaining agreement that gave rise to pension contribution obligations; all four defendants are also alleged to be alter egos of each other.

Defendants have collectively advised the Court by letter that defendant Canal Asphalt, Inc. has filed for Chapter 11 relief in the Southern District of New York, and they assert that as a result of that, this action is stayed against all defendants pursuant to the Bankruptcy Code’s automatic stay, 11 U.S.C. § 362(a)(1). In response, I entered an Order noting that the automatic stay, by its terms, protects only debtors under the Bankruptcy Code, see id. (a bankruptcy petition “operates as a stay ... of ... the commencement or continuation ... [of an] action or proceeding against the debtor ... ”) (emphasis added), and since this action involves non-debtor defendants in addition to the debtor defendant, the action would continue against those non-debtor defendants. Defendants then submitted an additional letter, asserting that because the complaint contains an alter ego claim, the automatic stay applies to all defendants, both debtor and non-debtor. For this proposition, they cite In re Adler, 494 B.R. 43 (Bankr.E.D.N.Y.2013) (“Adler II’’), asserting that it is “directly on point.”

Adler II is not directly on point; its context is quite different, although it does contain dictum that supports defendants’ position. But in any event, I disagree with that dictum for the reasons set forth below.

Adler was an individual Chapter 7 case. Prior to the filing of the bankruptcy, creditors brought a state court action against Adler and five corporations which he controlled. The claim was against those corporations; Adler was alleged to be liable on the basis of his being their alter ego, and the corporations were alleged to be alter egos of each other. When Adler filed his Chapter 7 petition, the action was not stayed against the non-debtors. Rather, “the State Court severed and stayed the State Court Lawsuit against the Debtor individually, including the cause of action seeking to pierce the corporate veil. The lawsuit continued as against the Corporations only.” In re Adler, 467 B.R. 279, 283 (Bankr.E.D.N.Y.2012) {“Adler /”). Apparently, neither the debtor nor the Chapter 7 Trustee took any action to prevent prosecution against Adler’s corporations. The corporations defaulted, and the creditors obtained judgment against them in state court. In the inquest on damages, the state court also found that the corporations were alter egos of each other.

The judgment creditors then sought to pursue their claims in Bankruptcy Court against Adler and the non-debtors, and objected to the dischargeability of Adler’s debt on the ground of fraud. Adler I constituted the Bankruptcy Court’s determination to pierce the corporations’ veil and hold Adler liable for their debt. Adler II, upon which defendants rely here, held that the debt was non-dischargeable.

Defendants point out that in the course of Adler II, the Bankruptcy Court noted that because it had held in Adler I that Adler was an alter ego of the corporations, [51]*51the state courts’ entry of judgment against the corporations was a nullity. The Bankruptcy Court commented:

The first consequence of the Piercing Ruling arises under § 362(a)(1). As the Debtor and the alter ego Corporations were at all relevant times one and the same entity, the automatic stay in § 362(a)(1) foreclosed any judicial action against the Debtor and the Corporations alike upon the Debtor’s filing of his individual bankruptcy petition on July 28, 2004. Consequently, to the extent any prepetition judicial action against the Corporations continued into the post-petition period, that proceeding violated § 362(a)(1) and was void as a matter of law. Here, since the decision of the New York Supreme Court ... finding the Corporations liable to the Plaintiffs for $2,025,849.97 was issued post-petition, it is such a nullity. Its findings regarding the Corporations’ liability therefore lack any legal effect.

Adler II, 494 B.R. at 53. The Bankruptcy Court went on to conclude, nevertheless, that the corporations and Adler were liable as alter egos in the same amount as had been found by the state court.

The difficulty I have with the Bankruptcy Court’s dictum is twofold. First, it ignores the plain language of the statute, which provides that the automatic stay protects only the debtor, not non-debtor entities. Just because two entities are alter egos does not make them both debtors under the Bankruptcy Code. It simply means they are liable for each other’s debts. If the non-debtor entity wants that protection, it need only file its own petition.

Second, the Bankruptcy Court’s dictum makes the automatic stay into a provision that can only be applied with the benefit of hindsight. It allows extensive litigation in the non-bankruptcy court, and then invalidates everything that occurred even though the debtor made no effort to stop it. If the state court or the Bankruptcy Court had determined, for example, that the corporations were not alter egos, then the automatic stay would never have applied. Moreover, it is well established that non-bankruptcy courts have concurrent jurisdiction with the bankruptcy court to determine the scope of the automatic stay. See In re Baldwin United Corp. Litig., 765 F.2d 343 (2d Cir.1985); see also In re Colasuonno, 697 F.3d 164, 172 n. 4 (2d Cir.2012). It follows from this that the state court in the instant case was free to determine, as it did, that the automatic stay did not protect the non-debtor corporations, and to thereupon proceed to judgment in its case. The state court in Adler was careful, as it should have been, in abstaining from deciding whether Adler was an alter ego of his corporations, leaving that issue for the Bankruptcy Court. But nothing in the Bankruptcy Code required the state court to extend the protection of the automatic stay to entities that might or might not be the debtor’s alter egos.

This is not to suggest that the Bankruptcy Court, either itself or on motion of the debtor or other party in interest, is unable to extend the protection of the automatic stay to non-debtor entities. As the Adler II court pointed out, “because it refers purely to actions against ‘the debtor,’ § 362(a)(1) stays are generally ‘limited to debtors and do not encompass non-bankrupt co-defendants.’ Notwithstanding this rule, if certain unusual circumstances arise during the pendency of a debtor’s bankruptcy case, a bankruptcy court may enjoin actions against third-parties.” Adler II, 494 B.R. at 57 (citation and quotation marks omitted). There are two ways that this typically occurs. First, it is common practice in bankruptcy court [52]

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536 B.R. 48, 2015 U.S. Dist. LEXIS 108924, 2015 WL 4925351, Counsel Stack Legal Research, https://law.counselstack.com/opinion/pavers-road-builders-district-council-welfare-fund-v-core-contracting-of-nyed-2015.