Federal Deposit Insurance Corporation v. Vann et al

Filing 70

WRITTEN Opinion entered by the Honorable Joan H. Lefkow on 2/24/2012: Vann's motion to stay the briefing schedule pending ruling by the bankruptcy court [#66] is denied without prejudice. Status hearing is set for 3/27/2012 at 8:30 a.m. See Statement for further details. Mailed notice(mad, )

Order Form (01/2005)

United States District Court, Northern District of Illinois
Name of Assigned Judge
or Magistrate Judge

Joan H. Lefkow

CASE NUMBER

11 C 3491

CASE
TITLE

Sitting Judge if Other
than Assigned Judge

DATE

2/24/2012

FDIC vs. Vann

DOCKET ENTRY TEXT

Vann’s motion to stay the briefing schedule pending ruling by the bankruptcy court [#66] is denied without
prejudice. Status hearing is set for 3/27/2012 at 8:30 a.m. See Statement for further details.

O[ For further details see text below.]

Notices mailed by Judicial staff.

STATEMENT
Defendant and third-party plaintiff Thomas Vann has moved for an entry of an order staying the briefing
schedule in this case until such time as the bankruptcy court has confirmed that the automatic stay imposed
in In re Kenneth Barrick, Case No. 12-02646, does not apply to the present case. Vann also requests that his
counsel be given time to confirm that there is no conflict of interest given that he represents Brenda Helms,
the United States Bankruptcy Trustee in the Barrick bankruptcy, in another case involving substantially
similar facts and legal issues.
Section 362(a) provides that the filing of a bankruptcy petition operates as an automatic stay 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;
***
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of
the case under this title;
11 U.S.C. §§ 362(a)(1) & (6). This automatic stay is “generally only available to the debtor, and not [to]
related third-party defendants or solvent co-defendants.” Trimec, Inc. v. Zale Corp., 150 B.R. 685, 687
(N.D. Ill. 1993) (collecting cases). Two exceptions to the general rule apply. “[T]he first is where there is
sufficient identity between the debtor and nondebtor such that the litigation against the nondebtor threatens
property of the estate, and the second is where the continuation of the proceedings against the nondebtor
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STATEMENT
could cause irreparable harm to the debtor by diverting resources needed for its reorganization.” In re Kmart
Corp., 285 B.R. 679, 688 (N.D. Ill. 2002) (citation omitted). The Seventh Circuit has also recognized that
“there may . . . be an exception where the debtor is an indispensable party to the litigation.” Matter of James
Wilson Assocs., 965 F.2d 160, 170 (7th Cir. 1992) (citations omitted). “The thinking here is that if the
debtor is an indispensable party, protected by the stay from involvement in the litigation, the litigation
cannot proceed in his absence and therefore must be stayed as against the third party.” Id. These
exceptions, however, are narrowly construed and applied only in unusual circumstances. See, e.g., A.H.
Robins Co., Inc. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986); In re Lennington, 286 B.R. 672, 674 (C.D.
Ill. 2001); In re Richard B. Vance & Co., 289 B.R. 692, 697 (C.D. Ill. 1993).
Vann’s amended third-party complaint contains two counts against Kenneth Barrick. Count I is for common
law fraud and Count II is for declaratory relief. [Compl. Dkt. #47.] Vann claims that the FDIC’s
predecessor in interest, Arcola Bank, along with Prism Title and others, conspired with Barrick to commit
fraud on Vann, which resulted in some $500,000 being transferred to Barrick at Vann’s expense. Vann
further claims that Barrick should be held jointly liable with certain co-conspirators for the fraud. Although
proceedings against Barrick have been stayed, Vann is concerned that if he proceeds with his claims against
Barrick’s alleged co-conspirators, then he will be in violation of bankruptcy code sections 362(a)(1) and/or
(6) and subject to the penalties contained in section 362(k).
Case law indicates otherwise, however. The Seventh Circuit has held that “[t]he clear language of Section
362(a)(1) . . . extends the automatic stay provision only to the debtor filing bankruptcy proceedings and not
to non-bankrupt co-defendants.” Pitts v. Unarco Indus., Inc., 698 F.2d 313, 314 (7th Cir. 1983) (collecting
cases); see also Royal Truck & Trailer v. Armadora Maritima Salvadorean, 10 B.R. 488, 491 (N.D. Ill.
1981). Moreover, courts to consider this issue have generally held that “joint tortfeasors,” like Barrick and
his alleged co-conspirators, “who are independently liable for third-party claims are not covered by the
automatic stay.” In re Kmart Corp., 285 B.R. at 689 (collecting cases); see, e.g., Variable-Parameter
Fixture Dev. Corp. v. Morpheus Lights, 945 F. Supp. 603, 608 (S.D.N.Y. 1996) (“[W]here the debtor and
non-debtor co-defendant are joint tortfeasors or where the non-debtor’s liability rests upon his own breach of
duty, a stay clearly cannot be extended to the non-debtor.”) (internal quotation marks and citations omitted);
In re Ne. Glass, Inc., 112 B.R. 475, 477 (D. Mass. 1990) (“[Section 362(a)(6)] should not be construed to
enjoin creditors from proceeding against nondebtor entities—such as guarantors, sureties, joint tort feasors,
co-obligors—who are liable with the debtor on the creditors’ claims.”) (citations omitted); In re Metal Ctr.,
Inc., 31 B.R. 458, 462 (D. Conn. 1983) (“[I]n situations where a codefendant is independently liable as, for
example, where the debtor and another are joint tort feasors or where the nondebtor’s liability rests upon his
own breach of a duty, then the protection afforded a debtor under the automatic stay would clearly not
extend to such nondebtor.”); Matter of Johns-Manville Corp., 26 B.R. 405, 413–14 (S.D.N.Y. 1983)
(declining to extend the stay to third-party non-debtors because “the only relationship demonstrated between
the co-defendants is that of joint tortfeasors” and “joint tortfeasors are not considered indispensable
parties.”).
Given the limited nature of the aforementioned exceptions, the court is skeptical that the Barrick stay would
extend to third-party defendants in this case. Nonetheless, the proper course of action is to allow the
bankruptcy court to decide whether the stay should extend to non-debtor third- parties in this situation. See
In re Richard B. Vance & Co., 289 B.R. at 698 (“Despite how most courts construe the scope of the stay, this
Court believes that the better procedure is to raise the issue of the continuation of pending multi-defendant
litigation with the bankruptcy court as soon as possible. The bankruptcy court is the proper forum to address
whether the litigation may proceed without adversely affecting the bankruptcy case and whether, for valid
bankruptcy reasons, the litigation ought to go forward against the debtor as well as non-debtor
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STATEMENT
codefendants.”). Vann’s motion to stay the briefing schedule pending ruling by the bankruptcy court [#66]
is denied without prejudice to his presenting the motion to the bankruptcy court. Briefing on motions
directed at Vann’s amended affirmative defenses and amended counterclaims [#60 & #63] is stayed.

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