Public Pension Fund Group et al v. KV Pharmaceutical Company et al

Filing 161

MEMORANDUM AND ORDER; IT IS HEREBY ORDERED that the motion of plaintiff Public Pension Fund Group to modify court order granting stay with respect to non-debtor defendant [Doc. # 149 ] is granted. IT IS FURTHER ORDERED that the August 10, 2012 order staying all proceedings in this case is vacated only as to defendant Marc Hermelin. The proceedings in this case remain stayed as to defendant KV Pharmaceutical Company. Signed by District Judge Carol E. Jackson on 03/28/2013; (DJO)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
EASTERN DIVISION
PUBLIC PENSION FUND GROUP, et al.,
Plaintiffs,
vs.
KV PHARMACEUTICAL COMPANY, et al.,
Defendants.

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No. 4:08-CV-1859 (CEJ)

MEMORANDUM AND ORDER
This matter is before the Court upon the motion of plaintiff Public Pension Fund
Groups to modify the order granting a stay with respect to non-debtor defendant.
Memoranda in opposition have been filed by KV Pharmaceutical Company, the debtor
defendant, and Marc Hermelin, the non-debtor defendant. The issues are fully briefed.
I. Background
On December 2, 2008, Joseph Mas filed a complaint against KV and its executive
officers alleging that they had issued materially false and misleading statements
regarding KV’s compliance with federal regulations as well as KV’s current and future
financial prospects. The lawsuit was brought as a class action on behalf of purchasers
of KV securities. Subsequently, two additional class action lawsuits were filed against
KV alleging similar violations.
In an order dated April 15, 2009, the Court consolidated the three securities
class actions and appointed Public Pension as lead plaintiff. On May 22, 2009, Public
Pension filed a consolidated amended complaint against defendants KV, Marc
Hermelin, and two other individuals, alleging violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5(a)-(c) promulgated thereunder. The
defendants filed separate motions to dismiss which were granted by the Court.

On March 18, 2010, Public Pension filed a motion for relief from the order of
dismissal and for leave to amend the complaint. Public Pension also filed a notice of
appeal of the order of dismissal. On October 20, 2010, Public Pension’s motion for
relief was denied and the notice of appeal was docketed in the United States Court of
Appeals for the Eighth Circuit. On June 4, 2012, the Court of Appeals issued an opinion
affirming in part and reversing in part, and the case was remanded to this Court.
On August 4, 2012, KV filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of New York. On August 10, 2012, pursuant to 11 U.S.C. § 362(a),
this Court, sua sponte, entered an Order staying all proceedings in this action pending
completion of the bankruptcy case. The phrase “all proceedings” meant that all actions
against KV and Hermelin were temporarily stayed.
On November 28, 2012, Public Pension filed a motion with the Bankruptcy Court
seeking relief from the stay order as it related to KV so that Public Pension could file
an amended complaint. Public Pension subsequently withdrew this motion.1 On
December 6, 2012, Public Pension filed the instant motion before this Court to modify
the stay as it relates to Hermelin.
II. Discussion
Public Pension does not dispute the Court’s authority to stay the proceedings as
to the debtor KV.

Indeed, the automatic stay codified in 11 U.S.C. § 362(a)(1)

provides, in relevant part:

1

In its reply brief Public Pension states that the motion was “voluntarily
withdrawn without prejudice when it was determined that any recovery against KV’s
bankruptcy estate was unlikely given the priority scheme of the Bankruptcy Code and
the likely subordination of any securities law claims.”
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(a)
Except as provided in subsection (b) of this section, a petition filed
under section 301, 302, or 303 of this title . . . operates as a stay,
applicable to all entities, 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 . . .
11 U.S.C. § 362(a)(1) (emphasis added).
Public Pension argues, however, that the stay should not have extended to the nondebtor defendant Hermelin.
The parties acknowledge that there is an exception to § 362(a)(1) that “relate[s]
[] to nonbankrupt codefendants in unusual circumstances[.]” See In re Panther
Mountain Land Dev., LLC, 686 F.3d at 921. When such circumstances exist, the stay
may be extended to non-debtors. Id. However, the Eighth Circuit has not definitively
answered the question of whether a district court or a bankruptcy court should
determine the applicability of the exception.
In his response brief, Hermelin points to various cases which hold that a court
other than a bankruptcy court is not precluded from determining whether a matter
pending before it is subject to a stay. Nieto v. Unitron, LP, 2006 WL 2255435, *4 (E.D.
Mich. 2006) (citing Singleton v. Fifth Third Bank, 230 B.R. 533, 539 (B.A.P. 6th Cir.
1999); N.LR.B. v. Edward Cooper Painting, Inc., 804 F.2d 934, 938-39 (6th Cir. 1986)
(the court in which litigation is pending has jurisdiction to determine whether the stay
applies). “Whether [a] stay applies to litigation otherwise within the jurisdiction of a
district court . . . is an issue of law within the competence of [] the court within which
the litigation is pending.” In re Baldwin-United Corp. Litigation, 765 F.2d 343, 347 (2nd

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Cir. 2001). However, none of these cases involved a situation where the district court
was requested to extend a § 362(a)(1) stay to a non-debtor.
Some courts have held that the proper procedure for extending the stay to a
non-debtor is for the debtor to submit a motion with such a request to the bankruptcy
court. The bankruptcy court would then determine whether the non-debtor satisfies
the unusual circumstances standard. See Zurich Am. Ins. Co. v. Trans Cal Assocs.,
2011 U.S. Dist. LEXIS 145080, *7 (E.D. Cal. Dec. 15, 2011); Alvarez v. Bateson, 932
A.2d 815, 821 (Md. Ct. Spec. App. 2007) (“[T]he weight of authority holds that, in
order for an automatic stay pursuant to section 362 to be applied to a non-bankrupt
co-defendant, the debtor must request and obtain a stay from the bankruptcy court
where the current action is pending.”);In re Trans-Service Logistics, Inc., 304 B.R.
805, 806-807 (Bankr. S.D. Ohio 2008) (district court directed the bankruptcy court to
determine whether the stay should be extended to non-debtors); Patton v. Bearden,
8 F.3d 343, 349 (6th Cir. 1993) (“Even if we [the Court of Appeals] were to adopt the
unusual circumstances test, the bankruptcy court would first need to extend the
automatic stay under its equity jurisdiction pursuant to 11 U.S.C. § 105.”); Wilmoco
Capital Mgmt., LLC v. UBS Fin Servs., 2007 U.S. Dist. LEXIS 82567 (E.D. Mich. Nov.
7, 2007) (whether a stay should be extended to a non-bankrupt entity because of
unusual circumstances is a question for the bankruptcy court).
In Lee v. RCN Corporation, 2004 WL 2108577, *1 (N.D. Ill. 2004), the court was
faced with a set of facts almost identical to those in this case. Plaintiff filed an action
in the district court against RNC, the debtor corporation, and Robert Currey, the nondebtor officer of RNC. Id. After RNC filed a voluntary bankruptcy petition, Currey filed
a motion in the district court to stay proceedings pursuant to § 362, arguing that the

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automatic stay should also be applicable to him. Id. The district court acknowledged
the existence of the “unusual circumstances” exception. Id.

Currey argued that

extending the stay to him was warranted because RCN had an obligation to indemnify
him. Id. However, despite acknowledging that such an argument made a “colorable
claim for extension” the court denied Currey’s motion. Id. at *1-2. The district court
wrote:
The bankruptcy court is in the best position to evaluate the effect on the
bankruptcy estate, if any, of litigation against a nondebtor co-defendant.
And the request should be filed by the debtor because it is the debtor’s
interests, not those of the nondebtor co-defendants, that are intended to
be protected by an extension of the stay.
Id. at *1.
In C.H. Robinson Co. v. Paris & Sons, Inc., 180 F. Supp. 2d 1002 (N.D. Iowa
2001), the Northern District of Iowa wrote: “[I]t is this court’s opinion that the Eighth
Circuit Court of Appeals would agree . . . to require that the debtor affirmatively move
the bankruptcy court to extend the automatic stay to actions involving non-bankrupt
codefendants.” Id. at 1015. The district court then went on to cite several other cases
involving other nonbankruptcy courts that refused to extend the stay on the same
basis.
Taking into consideration all authority pertinent to the jurisdictional issue, the
Court finds that its August 10, 2012 order staying the proceedings against Hermelin
was inappropriate. Therefore, the stay order shall be vacated pursuant to Fed. R. Civ.
P. 60 as it pertains to Hermelin only. See Fed. R. Civ P. 60(b)(1) (“On motion and just
terms, the court may relieve a party . . . from a final judgment, order, or proceeding
for . . . (1) mistake [or] inadvertence[.]”).

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IT IS HEREBY ORDERED that the motion of plaintiff Public Pension Fund Group
to modify court order granting stay with respect to non-debtor defendant [Doc. #149]
is granted.
IT IS FURTHER ORDERED that the August 10, 2012 order staying all
proceedings in this case is vacated only as to defendant Marc Hermelin.

The

proceedings in this case remain stayed as to defendant KV Pharmaceutical Company.

____________________________
CAROL E. JACKSON
UNITED STATES DISTRICT JUDGE
Dated this 28th day of March, 2013.

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