Sanchez v. Freddie Records, Inc. et al

Filing 27

ORDER entered GRNATING IN PART and DENYING IN PART 25 MOTION for Reconsideration of 23 Order on Motion for Leave to File.(Signed by Judge Lee H Rosenthal) Parties notified.(leddins, )

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
ADAN SANCHEZ,
Plaintiff,
v.
FREDDIE RECORDS, INC., et al,
Defendants.

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CIVIL ACTION NO. H-10-2995

ORDER
This court granted Adan Sanchez’s motion to file an amended complaint. (Docket Entry No.
23). The defendants are Freddie Records, Inc. and fourteen other entities. The amended complaint
alleges copyright infringement; misappropriation of name, image, and likeness; fraudulent transfers;
negligence; and conspiracy. The amended complaint seeks remedies that include a constructive trust
and declaratory judgment. Five individual defendants who “serve in a capacity” with Big. F,
Inc.—which asserts that it is the successor-in-interst to Freddie Records—along with Big F, moved
to reconsider the order, arguing that all claims in this case are stayed under 11 U.S.C. § 362.
(Docket Entry No. 25). Sanchez responded. (Docket Entry No. 26). For the reasons explained
below, the motion for reconsideration is granted in part and denied in part.
Section 362 applies to stay proceedings related to a debtor in bankruptcy. Beran v. World
Telemetry Corp., 747 F. Supp. 2d 719, 722 (S.D. Tex. 2010). Section 362(a)(1) provides for an
automatic stay of any judicial “proceeding against the debtor.” 11 U.S.C. § 362(a)(1). “Section
362(a)(3) provides that the filing of a petition ‘operates as a[n] [automatic stay] applicable to all
entities, of . . . any act to obtain possession of property of the estate or of property from the estate.’”
Matter of S.I. Acquisition, Inc., 817 F.2d 1142, 1148 (5th Cir. 1987) (quoting 11 U.S.C. § 362(a)(3)).

Big F filed a suggestion of bankruptcy, stating that it filed for voluntary bankruptcy under chapter
7. (Docket Entry No. 21). Sanchez does not dispute that a stay of proceedings is warranted as to
Big F. The fraudulent transfer claims against the remaining movants must also be stayed. A suit
to avoid fraudulent transfers “is essentially one for property that properly belongs to the debtor and
which the debtor has fraudulently transferred in an effort to put it out of the reach of creditors.” See
In re MortgageAmerica Corp., 714 F.2d 1266, 1272–76 (5th Cir. 1983) (staying fraudulent transfer
claims against nondebtors under § 362).
The § 362 stay does not automatically extend to the debtor’s codefendants. Courts are
required to stay proceedings against nondebtor defendants only when “there is such an 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 third-party defendant will in effect be a judgment or
finding against the debtor.” Reliant Energy Servs., Inc. v. Enron Can. Corp., 349 F.3d 816, 825 (5th
Cir. 2003) (quoting A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (5th Cir. 1986)); Beran, 747 F.
Supp. 2d at 722–23. “[I]dentical allegations against the debtor and nondebtor defendants are an
insufficient ground to extend the stay to nondebtors.” Beran, 747 F. Supp. 2d at 724. “The Fifth
Circuit has stated that a § 362 stay should extend to nonbankrupt codefendants only when there is
a formal or contractual relationship between the debtor and nondebtors such that a judgment against
one would in effect be a judgment against the other.” Id. at 723–24 (citing cases). While a district
court has discretion to stay a case even if § 362 does not require it, id. at 723, a “stay can be justified
only if, based on a balancing of the parties’ interests, there is a clear inequity to the suppliant who
is required to defend while another action remains unresolved and if the order granting a stay can
be framed to contain reasonable limits on its duration,” GATX Aircraft Corp. v. M/V Courtney Leigh,

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768 F.2d 711, 716 (5th Cir. 1985) (citing Wedgeworth v. Fibreboard Corp., 706 F.2d 541, 545 (5th
Cir. 1983)).
The defendants argue that “[a]ll defendants serve in a capacity under the [d]ebtor,” that there
is no differentiation between defendants and the debtor,” and that continuing without the debtor
would prejudice the all parties. The defendants do not specify how such prejudice would occur. The
defendants argue that judicial economy favors a stay because bankruptcy liquidation may make
funds available to satisfy Sanchez’s claims. (Docket Entry No. 25, at 3).
The arguments that the defendants are associated with Big F and that their conduct is the
same as Big F’s alleged conduct do not warrant an extension of the § 362 stay under Fifth Circuit
precedent. See Beran, 747 F. Supp. 2d at 724 (refusing to stay a case against officers of debtor
absent proof of an indemnification obligation).

Nor does the defendants’ argument merit a

discretionary stay. The defendants have not met their burden to show that this court should require
Sanchez to wait for the resolution of the bankruptcy proceedings to pursue his case against the
remaining defendants. Beran, 747 F. Supp. 2d at 724–25; see also Wedgeworth, 706 F.2d at 546
(“Defendants have not shown that any hardship complained of is the result of proceeding to trial
now. Nor is there a showing that the difficulties inherent in the general situation, including potential
judicial inefficiency, constitute a sufficient offset to the plaintiffs’ right to proceed without
inordinate delay to resolution of their claims.”). Sanchez has asserted claims against the individuals,
and the defendants have not demonstrated that he should not be able to press those claims now.
The claims against Freddie Records and the fraudulent transfer claims are stayed. All other
claims will are severed and will proceed. See Hamel-Schwulst v. Country Place Mortg. Ltd., 406
F. App’x 906, 911 (5th Cir. 2010) (per curiam) (summary calendar) (unpublished) (“[I]t is

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well-established ‘that the protections of § 362 neither apply to co-defendants nor preclude
severance.’” (quoting Wedgeworth, 706 F.2d at 544)).
SIGNED on August 10, 2011, at Houston, Texas.
______________________________________
Lee H. Rosenthal
United States District Judge

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