In Re: Thomas Mack and Mary Susan Mack

Filing 15

ORDER AND REASONS REMANDING CASE TO BANKRUPTCY COURT. FURTHER ORDERED that the appeal is dismissed without prejudice. Signed by Judge Martin L.C. Feldman on 3/29/2018.(clc)(CC: BANKRUPTCY)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA

IN THE MATTER OF:

CIVIL ACTION

THOMAS MACK AND
MARY SUSAN MACK

NO. 17-3587

DEBTORS

SECTION "F"

ORDER AND REASONS
Before

the

Court

is

an

appeal

from

the

United

States

Bankruptcy Court’s order denying First Bank’s motion to modify the
automatic stay and to pursue a rule for judgment pro confesso and
motion for accounting filed in state court. For the reasons that
follow,

the

Court

REMANDS

the

decision

for

reconsideration

consistent with this Order and Reasons.

Background
When Thomas and Mary Mack filed for Chapter 11 bankruptcy in
January 2017, an automatic stay prevented their mortgage holder,
First Bank, from pursuing claims against an LLC in which Thomas
Mack owned a majority interest. Despite First Bank’s request, the
Bankruptcy Court would not modify the stay. This appeal followed.
Thomas

and

Mary

Mack’s

home

in

Metairie,

Louisiana

was

destroyed by flooding in 2015, prompting them to relocate to the
Northshore.

Shortly

thereafter,
1

the

first

mortgage

holder

foreclosed upon the Metairie home and successfully bid on the home
at the sheriff sale. The second mortgage holder, First Bank,
received

no

distribution

on

its

second

mortgage

interest.

Accordingly, First Bank sued the Macks to collect the mortgage
deficiency. On September 20, 2012, the 24th Judicial District Court
for the Parish of Jefferson entered a consent judgment requiring
that Thomas Mack (among others) pay about $400,000, plus reasonable
future attorney fees and collection costs. In 2015, the Plaquemines
Parish Sheriff seized and sold a vessel owned by the Macks pursuant
to a writ of fieri facias, resulting in a judgment credit of
$25,000.
Thomas Mack has a membership in two LLCs, Matrix Hospitality
Group, L.L.C. and Matrix Hospitality Group – NOLA, LLC. Matrix
Hospitality Group, 1 L.L.C., a hotel management company, is Mack’s
employer; Mack owns a 60% membership interest in it. Matrix’s
managing member is Ty Angeron. Mack is paid by Matrix in three
ways: (1) a monthly salary as a 1099 employee; (2) a periodic
disbursement of profits as a part-owner; and (3) a performance
bonus paid in April by particular clients if Matrix is able to
meet client-set goals.

1

The parties focus on the conduct of Matrix Hospitality Group,
L.L.C., and Mack’s relationship with it. Although it is unclear to
the Court, it appears that Matrix Hospitality Group – NOLA, LLC is
less active or inactive. Accordingly, the Court’s mention of
“Matrix” refers to Matrix Hospitality Group, L.L.C.
2

On September 2, 2016, a Louisiana state district court granted
First

Bank’s

motion

for

a

charging

order,

and

charged

the

membership interest of Thomas Mack in both LLCs with payment of
the judgment, and named the LLCs as garnishees. Because the Sheriff
was unable to locate the Matrix agent for service of process, it
served Mack, on behalf of Matrix, on October 14, 2016. However,
Matrix Hospitality Group, L.L.C. and Matrix Hospitality Group –
NOLA, LLC failed to respond to the garnishment interrogatories,
and failed to withhold any funds that would otherwise be due to
Mack. Matrix Hospitality Group, L.L.C. paid Mack over $30,000 after
the garnishments and charging order were served. When the LLCs
failed to provide their garnishment answers, First Bank filed a
Rule for Judgment Pro Confesso against both garnishees, and filed
a motion to compel them to account for all sums paid to Mack since
service was effected on January 24, 2017. Three days later, Mack
and his wife filed for Chapter 11 bankruptcy. By then, First Bank’s
judgment had increased to $789,212.85.
First Bank moved for relief from the automatic stay on January
31, 2017. Mack opposed the motion, and the Bankruptcy Court heard
oral argument on the issue on April 6, 2017. Ruling from the bench,
the bankruptcy judge denied First Bank’s motion to modify the stay.

3

First Bank appealed and filed its brief on June 19, 2017. Mack 2
filed his appellee brief on July 18, 2017. Matrix adopted all
arguments made by Mack.

I.
A

district

court

functions

as

an

appellate

court

when

reviewing a bankruptcy court’s decision. In re Matter of Webb, 954
F.2d 1102 (5th Cir. 1992). The standard of review depends on
whether a finding of fact or conclusion of law is being reviewed.
When findings of fact are reviewed, the clearly erroneous standard
applies. United States v. United States Gypsum Co., 333 U.S. 364,
395 (1948). However, if the findings of fact are premised on an
improper legal standard, then that standard is not protected by
the clearly erroneous standard and it is reviewed de novo.

Matter

of Missionary Baptist Foundation of America, 818 F.2d 1135 (5th
Cir. 1987). Jurisdiction is a legal determination that is reviewed
de novo. See Matter of U.S. Brass Corp., 301 F.3d 296, 303 (5th
Cir. 2002).

II.

2

Only Thomas Mack is the target of First Bank’s appeal of the
Bankruptcy Court’s order denying relief or modification of the
automatic stay.
4

The issue on appeal is whether the Bankruptcy Court erred in
denying First Bank’s motion for relief from the automatic stay so
it could proceed in its action against Matrix in state court.
Ruling from the bench, the bankruptcy judge stated “I am going to
deny the Motion to Modify the Automatic Stay. And my reasoning is
that this is a relatively new Chapter 11. . . . The mover, First
Bank and Trust, has the burden of proving its entitlement to a
modification of the stay to allow it to go forward in state court.
And I am not at all sure what the effect on the inchoate or budding
Chapter 11 would be if First Bank goes back to state court and
proceeds against the LLC. And because of that and because the bank
has the burden of proof I’m denying the motion.”
A.
As

a

preliminary

matter,

the

appellant

argues

in

the

alternative that the Bankruptcy Court did not have jurisdiction
over this matter. It is undisputed that Matrix is a non-debtor.
The appellant, First Bank, contends that the Bankruptcy Court does
not have jurisdiction to resolve the dispute between non-debtors,
absent some impact on the bankruptcy estate. Because there has
been no showing that the state proceedings would impact the estate,
First Bank argues, the Bankruptcy Court does not have authority to
resolve the dispute between the bank and Matrix. Accordingly, the
parties should be permitted to return to state court to resolve
their dispute.
5

First Bank’s position is not supported by law. Federal law
vests

district

courts

with

“original

but

not

exclusive

jurisdiction of all civil proceedings arising under title 11, or
arising in or related to cases under title 11.” 28 U.S.C. § 1334.
District courts may refer such cases to the bankruptcy judges for
the district, as this Court has done here. 28 U.S.C. § 157(a). The
bankruptcy judge is authorized to “determine all cases under title
11 and all core proceedings arising under title 11,” including
motions

to

modify

the

automatic

stay.

28

U.S.C.

§

157

(b)(1),(b)(2)(G). Core proceedings also include “other proceedings
affecting the liquidation of the assets of the estate or the
adjustment of the debtor-creditor or the equity security holder
relationship.” The state proceeding affects the liquidation of
Mack’s assets because Mack’s entire income, and therefore funding
source for the bankruptcy plan, is contingent on Matrix’s existence
and continued pay out, which the state proceeding may effect.
Therefore, the Bankruptcy Court had jurisdiction to rule on Frist
Bank’s motion to modify the stay.
B.
The parties focus on the scope of the automatic stay. An
automatic stay is issued when a debtor files for bankruptcy under
Section 11. 11 U.S.C. § 362. The purpose of the stay is to “protect
the debtor’s assets, provide temporary relief from creditors, and
further equity distribution among the creditors by forestalling
6

the race to the courthouse.” GATX Aircraft Corp. v. M/V Courtney
Leigh, 768 F.2d 711, 716 (5th Cir. 1985). The automatic extension
applies only to debtors, but there are exceptions. Reliant Energy
Services, Inc. v. Enron Canada Corp., 349 F.3d 816, 825 (5th Cir.
2003). Automatic stays apply to non-debtors in rare and “unusual
circumstances” where “there is such identity between the debtor
and the third-party defendant that the debtor may be said to be
the real party defendant and that a judgment against the thirdparty defendant will in effect be a judgment or finding against
the debtor.”

3

Reliant Energy, 349 F.3d at 825 (quoting A.H. Robins

Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986)). A bankruptcy
court may extend an automatic stay to non-debtors if “a claim
against

the

non-debtor

will

have

immediate

adverse

economic

consequences for the debtor’s estate.” In re Long, No. 12-13590,
2013 WL 663287, at *2-3 (Bankr. E.D. La. 2013) (quoting Queenie,
Ltd. V. Nygard Int’l, 321 F.3d 282, 287 (2d Cir. 2003)); Reliant
Energy, 349 F.3d at 825. Courts consider whether “the bankrupt
estate would be adversely effected because the creditor’s action

3

Additionally, the Fifth Circuit has held that a court has
discretionary power to stay proceedings against a non-debtor “in
the interest of justice and in control of their dockets.”
Wedgeworth v. Fibreboard Corp., 706 F.2d 541, 545 (5th Cir. 1983).
The party seeking a stay bears the burden of justifying a delay
and ‘must make out a clear case of hardship or inequity in being
required to go forward, if there is even a fair possibility that
the stay for which he prays will work damage to someone else.’”
Id. (quoting Landis v. North American Co., 299 U.S. 248, 255
(1936)).
7

would

prevent

the

non-debtor

from

contributing

funds

to

the

reorganization, or would consume time and energy of the non-debtor
that would otherwise be devoted to a reorganization effort.” In re
United Health Care Organization, 210 B.R. 228, 233 (S.D.N.Y. 1997).
There is not an “identity of interest” if there is “no claim of a
formal tie or contractual indemnification . . . between the debtor
and nondebtor.” Reliant Energy, 349 F.3d at 825. “This Court
reviews the scope of an automatic stay de novo.” Id.
Section 362 provides that the court may grant relief from the
automatic stay “for cause.” 11 U.S.C. § 362(d)(1). The statute
provides that the party seeking relief “has the burden of proof on
the issue of the debtor’s equity in property,” but the party
seeking to maintain the stay “has the burden of proof on all other
issues.” 11 U.S.C. § 362(g). The party invoking the stay has the
burden to demonstrate that the exception applies and the stay may
be extended to them. Beran v. World Telemetry, Inc., 747 F.Supp.2d
719, 723-24 (S.D. Tex. 2010); Luppino v. York, 562 B.R. 894, 898
(W.D. Tex. 2016)(“The party seeking to invoke the stay through
this exception has the burden to show that it is applicable.”)
The appellant contends that because both First Bank and Matrix
are non-debtors, Matrix, not First Bank, had the burden to prove
that no cause exists to modify the stay. Because they did not meet
that burden, the stay should have been modified. Mack ignores the
burden of proof issue, and instead contends that the present
8

circumstances warrant the Bankruptcy Court to extend the coverage
of the automatic stay to Matrix. Mack claims that Matrix is Mack’s
sole source of employment and sole source of funding for his plan
of reorganization. Mack argues that the purpose of the Bankruptcy
Code is to provide debtors with space from creditors to re-organize
without their interference, so if First Bank is permitted to
proceed in enforcing a judgment against Matrix in state court,
which he is entirely reliant on to develop and fund his plan, it
will disrupt Mack’s bankruptcy proceedings and undermine the very
purpose of the Code.
The

Court

is

unable

to

evaluate

the

Bankruptcy

Court’s

decision in denying the modification of the scope because the
Bankruptcy Court never made a finding on whether the scope of the
stay included Matrix. Although it is arguably implied that the
Bankruptcy Court determined that it did because it denied First
Bank’s motion for relief, neither party raised the issue and the
Bankruptcy Court did not state on the record whether the automatic
stay applies to Matrix. Further, the Bankruptcy Court held that
First Bank had the burden to modify the automatic stay, but the
appellees, the parties seeking to maintain the stay, actually had
the burden. The Bankruptcy Court failed to apply the appropriate
standard to determine if modifying the stay was appropriate.
Because the Bankruptcy Court did not require the appellees to meet
their burden, the factual record is not sufficiently developed for
9

this Court to determine whether the circumstances justify the rare
finding that the stay applies to non-debtors. 4 The Bankruptcy
Court, and not this Court, is in the better position to determine
whether the scope of the automatic stay can include Matrix. Or
differently stated, if the Mack and Matrix interests are so united
that a judgment against Mack could be said to be a judgment against
Mack.
The Court remands to the Bankruptcy Court to determine whether
Mack and Matrix can satisfy their burden that an exceptional
circumstance exists and the automatic stay applies to Matrix, a
non-debtor, under the standard articulated in Reliant Energy. 5 If
the Bankruptcy Court determines that Matrix is not within the scope
of the automatic stay, then First Bank is entitled to proceed
against Matrix in state court. Conversely, if Matrix is within the
scope of the automatic stay, Mack is entitled to continue with his
bankruptcy proceeding, and First Bank’s judgment against Matrix
will be stayed until the conclusion of the proceeding.

4

For instance, it would be useful to know the extent of any
contractual relationship between Mack and Matrix, if Matrix has
any relevant corporate governance provisions, specifics of
Matrix’s business and profit stream, and the extent to which Mack
and Matrix’s financial assets are intertwined.
5 The Bankruptcy Court may justify a finding that the scope of the
automatic stay includes Matrix based on other exceptions besides
Reliant. Wedgeworth v. Fibreboard Corp., 706 F.2d 541, 545 (5th
Cir. 1983). Above all, the Bankruptcy Court should provide a legal
basis for departing from the typical course of action of limiting
a stay to the judgment debtor.
10

Accordingly, IT IS ORDERED: that the case is REMANDED to the
Bankruptcy Court for a determination of the scope of the automatic
stay consistent with the standards discussed herein. IT IS FURTHER
ORDERED: that the appeal is dismissed without prejudice.

New Orleans, Louisiana, March 29, 2018

_____________________________
MARTIN L. C. FELDMAN
UNITED STATES DISTRICT JUDGE

11