Manchester CP v. Konstantinou et al
OPINION AND ORDER Reversing and Vacating the Bankruptcy Court's January 6, 2017 Order Extending the Automatic Stay to Certain Non-Debtor Entities and Remanding for Further Proceedings. Signed by Chief Judge Christina Reiss on 11/16/2017. (pac)
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UNITED STATES DISTRICT COURT
DISTRICT OF VERMONT
SARONIS, LLC, and
MHOP RESTAURANT CORP.,
JJn NOV 16 Pl1 1: lt2
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Case No. 2:17-cv-9
OPINION AND ORDER REVERSING AND VACATING
THE BANKRUPTCY COURT'S JANUARY 6, 2017 ORDER EXTENDING THE
AUTOMATIC STAY TO CERTAIN NON-DEBTOR ENTITIES AND
REMANDING FOR FURTHER PROCEEDINGS
Manchester CP ("Appellant"), a creditor in Argirios Konstantinou's ("Debtor")
chapter 13 bankruptcy proceeding, appeals a January 6, 2017 order of the United States
Bankruptcy Court for the District of Vermont extending the automatic stay under 13
U.S.C. § 362(a) to non-debtor entities Saronis, LLC ("Saronis") and MHOP Restaurant
Corp. ("MHOP") in pending state court litigation ("the state court litigation") under
Queenie, Ltd. v. Nygard Int'l, 321 F.3d 282 (2d Cir. 2003).
Appellant argues that the Bankruptcy Court committed legal error by extending
the automatic stay of bankruptcy to Saronis and MHOP in the circumstances of this case
because Debtor neither owns, nor controls, nor is inextricably intertwined with either of
those entities. Debtor counters that Saronis and MHOP are integral to the success of his
chapter 13 reorganization plan and asserts that he will suffer an immediate adverse
economic consequence if state court litigation against those non-debtor entities is
permitted to proceed. Alternatively, Debtor argues that extension of the automatic stay to
Saronis and MHOP was within the Bankruptcy Court's equitable authority under
11 U.S.C. § 105(a).
On June 21, 2017, the parties completed their briefing. On September 20,2017,
this court heard oral argument, after which the court took the matter under advisement.
Appellant is represented by Patrick J. Bernal, Esq. and Debtor is represented by Rebecca
A. Rice, Esq.
Factual and Procedural Background.
In July 2014, Appellant filed a breach of contract suit against Debtor and A&A
Restaurant, Inc. ("A&A"), alleging amounts due under a commercial lease between A&A
and Appellant for certain real property located in the Manchester Shopping Center, 263
Depot Street, Manchester, Vermont ("the leased property"). Debtor operated a pizzeria
through A&A at the leased property.
In early June 2014, after allegedly failing to make rental payments to Appellant for
the leased property, A&A vacated the property without notice and moved the pizzeria to
real property located at 315 Depot Street in Manchester owned by Saronis (the "Saronis
property"). MHOP presently operates the pizzeria at the Saronis property. In July 2014,
Appellant declared its lease with A&A in default and initiated litigation in Vermont
Superior Court, claiming approximately $500,000 in compensatory damages.
Thereafter, on October 24, 2014, Appellant amended its state court complaint to
include Saronis and MHOP as defendants. In its amended complaint, pursuant to alter
ego and successor-in-liability theories, Appellant alleges that Saronis and MHOP are
responsible for the damages resulting from A&A's breach of contract with regard to the
leased property. More specifically, Appellant's amended complaint alleges in Count I
that A&A breached the lease agreement which Debtor guaranteed and that A&A and
Debtor are liable to Appellant for damages caused by that breach. In Count II, Appellant
asserts a breach of contract claim against MHOP, alleging that MHOP is the corporate
successor to A&A and is liable for its debts owed to Appellant under the lease agreement
and is also the alter ego of Debtor who allegedly "controls MHOP and is using its
corporate form to evade his contractual responsibilities." (Doc 2-6 at 17, ,-[ 36.) In Count
III, Appellant alleges a breach of contract claim against Saronis as the alter ego of
Debtor, asserting that Debtor "controls Saronis and is using its corporate form to evade
his contractual responsibilities." !d.
41. In Counts II and III, Appellant asks that a
judgment be entered against MHOP and Saronis, respectively.
On July 29, 2016, after the commencement of the state court litigation, Debtor
filed for chapter 13 bankruptcy protection. The Vermont Superior Court subsequently
stayed Appellant's lawsuit against Debtor pursuant to§ 362(a)'s automatic stay.
Thereafter, on August 5, 2016, the state court issued an entry order requiring the parties
to brief whether proceedings should be stayed as to non-debtors A&A, Saronis, and
MHOP. Debtor asked the court stay the entire lawsuit, while Appellant opposed any stay
for non-debtor entities.
Initially, the Vermont Superior Court refused to extend the automatic stay to
A&A, Saronis, and MHOP under Queenie, finding the "extraordinary relief' Queenie
authorized "has only been applied in situations where the business was wholly owned by
the debtor, which is not the case here." (Doc. 2-6 at 8, 9.) Finding it irrelevant whether
Manchester CP, in its role as a plaintiff, "treated [A&A, MHOP, and Saronis] as the alter
egos of [Debtor,]" id. at 9, especially when Debtor disclaimed that status, the Vermont
Superior Court concluded that the automatic stay could not be extended merely because
of some relationship or dependency between Debtor and non-debtor entities. Finding the
district court's reasoning in In re McCormick, 381 Bankr. 601, 602 (Bankr. S.D.N.Y.
2008) persuasive, the Vermont Superior Court quoted it at length:
The Court understands that Debtor is employed by the LLC, and any action
against the LLC may impact his "employment" and ultimately his ability to
reorganize under chapter 13. The Court does not find this argument
persuasive. The Debtor has never provided this Court with a satisfactory
explanation for why he could not cause the LLC to file its own bankruptcy
case which, as his counsel admitted during the hearing, would invoke the
automatic stay on behalf of the company and thereby stay all pending
collection actions against it.
(Doc. 2-6 at 9) (quoting In re McCormick, 381 Bankr. at 602). The Vermont Superior
Court similarly found that "[t]here is no reason why any of the remaining Defendants
here could not file for bankruptcy, thus triggering the automatic stay on their behalf." !d.
Having rejected the extension of the automatic stay under Queenie, the Vermont
Superior Court nonetheless stayed the case on alternative grounds, citing the "copious
number of motions filed[,]" its need to decide "disputes a second time after [Debtor's]
automatic stay is lifted[,]" and "its inherent powers [to] stay the proceeding in the interest
of controlling its docket." !d. (the "August 15,2016 Stay Order").
On September 16, 2016, A&A declared chapter 7 bankruptcy. On October 5,
2016, the Vermont Superior Court reconsidered its August 15, 2016 Stay Order, allowing
the claims against Saronis and MHOP to proceed, but staying proceedings against A&A
pursuant to the automatic stay.
On November 21, 2016, the Bankruptcy Court confirmed Debtor's chapter 13
reorganization plan. On November 22, 2016, in response to the Vermont Superior
Court's decision to allow Appellant's suit to proceed against Saronis and MHOP, Debtor
filed an adversary proceeding in the Bankruptcy Court, seeking an extension of the
automatic stay to Saronis and MHOP. In his complaint, Debtor argued that the Second
Circuit's decision in Queenie required an extension of the stay to Saronis and MHOP and
that the Bankruptcy Court's equitable powers under 11 U.S.C. § 105(a) authorized this
result as well.
On December 2, 20 16, Appellant moved to dismiss the adversary proceeding on
the grounds that the complaint failed to state a claim for relief and that any extension of
the automatic stay to non-debtor entities would constitute extraordinary relief not
authorized by the Bankruptcy Code. On December 5, 2016, Debtor opposed Appellant's
motion to dismiss and requested a determination of the extent of the automatic stay on an
On December 9, 2016, the Bankruptcy Court held a joint hearing with the
Vermont Superior Court to determine whether the automatic stay should extend to
Saronis and MHOP. Debtor argued that the automatic stay should extend to Saronis and
MHOP because: (1) his interests in Saronis and MHOP are property of the bankruptcy
estate and proceeding against them would violate § 362(a)'s stay as to his property
interests in those entities; (2) his sole source of income to fund his recently confirmed
chapter 13 reorganization plan is derived from Saronis and MHOP; and (3) as a principal
member of both Saronis and MHOP, Debtor would be responsible for defending against
Appellant's action in state court during the pendency of his chapter 13 reorganization.
In the course of their proceeding, the Bankruptcy Court and the Vermont Superior
Court heard evidence that Debtor and his wife are the sole shareholders of A&A and that
Debtor guaranteed A&A's lease obligations to Appellant for the leased property. The
evidence further established that Debtor controls 10% ofMHOP's shares and the
remaining shares are owned by Debtor's wife (49.8%) and Debtor's daughter (40.2%).
Debtor receives dividends in accordance with his 10% interest in an unspecified amount.
He is not employed by MHOP, nor is there any evidence that he is an officer of that
entity. In the affidavit he filed with the Bankruptcy Court, although he states he
"provide[s] services to MHOP Restaurant Corp. [which] are based upon [his] physical
ability and [he is] not on the payroll[,]" he claims no role in MHOP's daily operations
and avers that he has "limited physical capacity to work." (Doc. 2-6 at 21.) He further
avers that his "sole source of income is dividend income from MHOP, wages that [his]
wife earns from MHOP and assistance from [his] daughter who works for the
corporation." !d. 1
Debtor and his wife are the sole members of Saronis and own their interests in that
limited liability company as tenants by the entirety. The Bankruptcy Court found Debtor
therefore had a "50% interest in Saronis[.]" (Doc. 2-17 at 4.) Debtor is not employed by
Saronis, and claims no title, office, or management role over its operations in the affidavit
he filed in the Bankruptcy Court.
Although the Bankruptcy Court found that "Debtor's sole source of income for funding his
chapter 13 plan is from the operations ofMHOP and Saronis[,]" (Doc. 2-17 at 4), it based this
finding on the fact that "Saronis is the owner ofMHOP's business location." !d. at n.8. There is
no evidence that Debtor receives any actual income from Saronis.
Thereafter, the Bankruptcy Court and the Vermont Superior Court apparently
agreed that the Bankruptcy Court would decide the disputed issue. On December 9,
2016, the Bankruptcy Court issued an oral ruling extending the automatic stay to Saronis
and MHOP under Queenie. In a subsequent written Memorandum of Decision, the
Bankruptcy Court explained that the allegations in the adversary complaint were
sufficient to state a plausible claim for relief because there was a reasonable inference
"that a continuation of the state court proceeding against MHOP and Saronis would
violate the Debtor's automatic stay and jeopardize his efforts to reorganize." (Doc. 2-17
at 5.) The Bankruptcy Court further found that the state court litigation against Saronis
and MHOP "would have an immediate, substantial, and adverse effect on the Debtor's
orderly reorganization, and constitute an action to obtain possession of property of the
estate, in violation of the automatic stay imposed by§ 362." !d.
Noting that its equitable powers under§ 105 were even broader than the exception
in Queenie, the Bankruptcy Court ruled that "weighing the equities presented, the scales
tip decidedly in favor of the Debtor" because "[n]ot extending the stay would
permanently destroy all chances of the Debtor's successful reorganization, whereas
extending the stay would only temporarily enjoin [Appellant's] collection efforts,
deferring its action for no more than 5 years." (Doc. 2-17 at 10.) Because the
Bankruptcy Court did not squarely address whether Debtor, MHOP, and Saronis had
demonstrated a likelihood of success on the merits in the state court litigation and did not
address the requirements of irreparable harm or the posting of a bond, it is not clear
whether the Bankruptcy Court grounded its injunctive relief in§ 105(a). It, however,
entered judgment on the pleadings in favor ofDebtor, MHOP, and Saronis, finding that
Appellant had "failed to present any persuasive legal argument, under either the
Bankruptcy Code or pertinent case law, which would defeat the Plaintiffs' right to the
relief they seek in the [Adversary Proceeding] Complaint." (Doc. 2-17 at 11.)
On January 20, 2017, Appellant timely filed its notice of appeal, raising three
Whether the Bankruptcy Court committed an error of law in
extending the automatic stay of bankruptcy to non-debtor Saronis in
which Debtor owns a 50% interest and by which he alleges he is not
Whether the Bankruptcy Court committed an error of law in
extending the automatic stay of bankruptcy to non-debtor MHOP
Restaurant Corp. in which Debtor owns a 10% interest and by which
he alleges he is not employed.
Whether the Bankruptcy Court committed an error of law in
enlarging the holding of Queenie and extending a chapter 13
automatic stay to non-debtor entities thus depriving Appellant of its
opportunity to prosecute its state court action against those entities.
Conclusions of Law and Analysis.
Jurisdiction and Standard of Review.
The Bankruptcy Court has subject matter jurisdiction over Debtor's chapter 13
bankruptcy and the adversary proceeding under 28 U.S.C. § 1334 and§ 157(a). It
entered a final judgment in the adversary proceeding on January 6, 2017. This court has
jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a)(l).
The Bankruptcy Court's findings of fact are reviewed for clear error. In re
Lehman Bros. Holdings Inc., 855 F.3d 459,469 (2d Cir. 2017); In re Manville Forest
Prods. Corp., 896 F.2d 1384, 1388 (2d Cir. 1990). Its conclusions oflaw are reviewed
de novo. In re Lehman Bros., 855 F.3d at 469; In re Manville Forest Prods., 896 F.2d at
Applicability of§ 362(a) to Non-Debtors Saronis and MHOP under
Section 362(a) of the Bankruptcy Code provides in relevant part that "a petition
filed under [the Bankruptcy Code] ... operates as a stay, applicable to all entities,
o:fl] ... the commencement or continuation ... of a judicial ... action or proceeding
against the debtor that was or could have been commenced before the commencement of
the case under [the Bankruptcy Code.]" 11 U.S.C. § 362(a)(l) (emphasis supplied).
"The stay is designed to give the debtor time to organize its affairs-which includes
protection from having to defend claims brought against the estate as well as continuing
to pursue judicial proceedings on its own behalf." Teachers Ins. & Annuity Ass 'n ofAm.
v. Butler, 803 F.2d 61, 65 (2d Cir. 1986). The automatic stay thus "provides the debtor
with 'a breathing spell from his creditors."' Id. at 64 (quoting S. Rep. No. 95-989, at 5455 (1978)).
Generally, section 362(a)'s automatic stay provisions do not apply to non-debtors.
See Nippon Fire & Marine Ins. Co. v. Skyway Freight Sys., Inc., 235 F.3d 53, 58 (2d Cir.
2000) ("'It is well established that stays pursuant to§ 362(a) are limited to debtors and do
not encompass non-bankrupt co-defendants."') (quoting Butler, 803 F .2d at 65)
(collecting cases)); see also McCartney v. Integra Nat 'I Bank N., 106 F .3d 506, 509-10
(3d Cir. 1997) ("[l]t is universally acknowledged that an automatic stay of proceedings
accorded by§ 362 may not be invoked by entities such as sureties, guarantors, coobligors, or others with a similar legal or factual nexus to the ... debtor.") (quoting
Lynch v. Johns-Manville Sales Corp., 710 F.2d 1194, 1196-97 (6th Cir. 1983)). "As one
court has reasoned, a primary rationale for refusing to extend the automatic stay to
nonbankrupt third parties is to insure that creditors obtain 'the protection they sought and
received when they required a third party to guaranty the debt."' McCartney, 106 F.3d at
510(quotingCreditAll. Corp. v. Williams, 851 F.2d 119,121 (4thCir.1988)). In
Queenie, the Second Circuit recognized a limited exception to this general rule, holding
that the automatic stay may extend to non-debtors in the following circumstances:
The automatic stay can apply to non-debtors, but normally does so only
when a claim against the non-debtor will have an immediate adverse
economic consequence for the debtor's estate. Examples are a claim to
establish an obligation of which the debtor is a guarantor, McCartney v.
Integra Nat'! Bank N, 106 F.3d 506, 510-11 (3d Cir. 1997), a claim against
the debtor's insurer, Johns-Manville Corp. v. Asbestos Litig. Grp. (In re
Johns-Manville Corp.), 26 B.R. 420, 435-36 (Bankr. S.D.N.Y 1983) (on
rehearing), and actions 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[.]" A.H Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir.
Queenie, 321 F.3d at 287-88. "Under these principles, [the Second Circuit held] the stay
applies to Queenie because it is wholly owned by [the debtor] Gardner, and adjudication
of a claim against the corporation will have an immediate adverse economic impact on
Gardner." !d. at 288.
In this case, the Bankruptcy Court concluded that Queenie's requirements for
extending the automatic stay to MHOP and Saronis were satisfied because "the
undisputed facts demonstrate the success of the Debtor's [c]hapter 13 reorganization is
entirely dependent upon the continued operations of those two non-debtor entities" and
because Appellant's claims against these non-debtors posed a risk of "immediate adverse
economic consequence" to Debtor's chapter 13 plan. (Doc. 2-17 at 8.) The Bankruptcy
Court held that "Debtor's ownership interest in [MHOP and Saronis] is not
While ownership may not be the only grounds for extension of the automatic stay
to a non-debtor entity, the Queenie court made one reference to Gardner's status as
Queenie's president and six references to Queenie's wholly-owned status by Gardner in
the course of its ten-page opinion. More importantly, it held that "the stay applies to
Queenie because it is wholly owned by [the debtor] Gardner, and adjudication of a claim
against the corporation will have an immediate adverse economic impact on Gardner."
Queenie, 321 F.3d at 288 (emphasis supplied). The degree of the debtor's ownership
over the non-debtor was thus an essential component of the Second Circuit's holding.
The Queenie court's citation of"examples" in which extension of the automatic
stay may be proper underscores the conclusion that the relationship between the debtor
and a non-debtor cannot be attenuated or indirect. For example, in McCartney, the Third
Circuit recognized "'unusual circumstances'" permitting the extension of the automatic
stay to a non-debtor included not only where "a judgment against the third-party
defendant will in effect be a judgment or finding against the debtor[,]" but also where
"stay protection is essential to the debtor's efforts of reorganization." McCartney, I 06
F .3d at 51 0. In support of the latter exception, the Third Circuit cited two cases and an
article in which the stay was extended to: (1) the non-debtor principals of debtor
partnerships because only the principles could "effectively formulate, fund, and carry out
debtors' plans of reorganization[;]" (2) a non-debtor guarantor of the debtor corporation's
obligations where the "guarantor was president of [the] debtor and [its] services,
expertise and attention were essential to the reorganization of the debtor[;]" and
(3) where ownership of a non-debtor entity was the only asset in the debtor's bankruptcy
estate. Jd. (citations omitted). None ofthose circumstances are present here. Debtor
does not operate or control MHOP or Saronis, he is not employed by either of them, they
will not formulate, fund, and carry out his reorganization plan, and neither MHOP nor
Saronis constitute the sole asset of his bankruptcy estate.
In Johns-Manville, the second example cited by the Second Circuit, the
bankruptcy court temporarily extended the automatic stay to the debtor's "key operating
personnel ... who are presently working for [debtor] at very high levels in numerous
divisions of the company" in light of the "massive drain on these numerous individuals'
time and energy at this crucial hour of plan formulation in either defending themselves or
in responding to discovery requests [which] could frustrate if not doom their vital efforts
at formulating a fair and equitable plan of reorganization." In re Johns-Manville, 26
Bankr. at 426. The district court limited this protection to "certain officers, directors,
employees and agents who are themselves named parties in litigation and who are vital to
plan formulation and reorganization" and allowed the debtor to designate no more than
twenty-five individuals who warranted the extension of the automatic stay on this basis.
Id. at 434. Declining to extend the automatic stay to other individuals employed by the
corporate debtor, the bankruptcy court ruled that the requirements for a preliminary
injunction, most notably irreparable harm, had not been established.
Debtor's relationship to MHOP and Saronis in the instant case and the demands of
the state court litigation cannot be deemed analogous to the overwhelming litigation
burdens faced by the corporate debtor and its employees in Johns-Manville. The only
finding the Bankruptcy Court made in this respect was that Debtor "would be a primary
witness in the [state court] litigation" (Doc. 2-17 at 4) which had been pending for over
two years when Debtor filed his chapter 13 bankruptcy petition. There is no record as to
what, if any, burdens the state court litigation will impose on Debtor other than his status
as a witness.
In A.H Robins Co. v. Piccinin, the third and final example cited by the Queenie
court, the Fourth Circuit agreed that extension of the automatic stay to non-debtor
codefendants or third parties should be governed by a preliminary injunction standard
requiring irreparable harm and either a likelihood of success on the merits or the
existence of sufficiently serious questions going to the merits and the balance of
hardships tipping in the debtor's favor. It cabined such relief to "unusual circumstances"
where the non-debtor's "interests are so intimately intertwined with those of the debtor
that the latter may be said to be the real party in interest[.]" Piccinin, 788 F.2d at 1001.
Debtor makes no claim to a similar relationship with either MHOP or Saronis and the
Bankruptcy Court did not ground its analysis in such a finding. Accordingly, none of the
Queenie court's examples support the outcome reached in this case. 2
As for the argument that an adverse result in the state court litigation may have a
negative impact on Debtor and his reorganization, the Queenie court refused to extend the
automatic stay to Gardner's and Queenie's counterclaim co-defendants on that basis.
Queenie, 321 F.3d at 284 ("We conclude that the automatic bankruptcy stay applies to
Gardner and to Queenie, his wholly owned corporation, but not to the other judgmentdebtors, Heavenly or Heaven"). In so ruling, the Queenie court rejected the proposition
that the automatic stay extends to any litigation that has the potential for an adverse
impact on the debtor:
Gardner contends that the stay should also apply to the Heavenly
Appellants because "[i]fthis Court decides the pending appeal of the nondebtor co-judgment debtors, it is effectively deciding Mr. Gardner's stayed
appeal." In essence, Gardner seeks to apply the stay to the Heavenly
Appellants to avoid the later use against himself and his corporation of
Other Circuits have similarly declined to extend section 362(a) to non-debtors absent a showing
that the debtor and the non-debtor seeking the benefits of the automatic stay are "inextricably
intertwined." In re Excel Innovations, Inc., 502 F .3d 1086, 1098 (9th Cir. 2007) (declining to
apply the "unusual circumstances" exception where the bankruptcy court's findings did not
indicate sufficient identity between debtor and non-debtor); Arnold v. Garlock, Inc., 278 F .3d
426, 436 (5th Cir. 2001) (affirming denial of stay where only alleged connection between debtor
and non-debtor was a claim for contribution); Credit All. Corp. v. Williams, 851 F.2d 119, 12122 (4th Cir. 1988) (enforcing a default judgment against a nondebtor guarantor during the
corporate obligor's bankruptcy).
offensive collateral estoppel arising from a ruling on this appeal adverse to
these Appellants or at least to guard against the precedential effect of such a
We have not located any decision applying the stay to a non-debtor solely
because of an apprehended later use against the debtor of offensive
collateral estoppel or the precedential effect of an adverse decision. If such
apprehension could support application of the stay, there would be vast and
unwarranted interference with creditors' enforcement of their rights against
Id. at 288 (footnote omitted) (alteration in original).
Debtor's argument that the state court litigation may result in an adverse outcome
for his bankruptcy estate further misapprehends the legal theories on which Appellant
seeks to proceed. Although the Bankruptcy Court concluded that Appellant "does not
allege any direct claims against MHOP or Saronis" (Doc. 2-17 at 4 ), both entities are
named defendants in the state court litigation and Appellant asserts claims against each of
them. Moreover, the type of claims Appellant asserts do not depend on Debtor's liability
and are not derivative of it.
The Vermont Supreme Court has recognized "reverse" piercing of the corporate
veil claims to allow creditors to reach the assets of a corporation where the conduct of an
individual shareholder is designed to "shelter the assets ... from lawful claims[.]" Winey
v. Cutler, 678 A.2d 1261, 1262-63 (Vt. 1996) (internal quotation marks omitted). The
premise of reverse piercing is based on the same equitable considerations which underpin
traditional alter ego claims; namely, that individual debtors cannot evade responsibility to
their creditors by sheltering assets in a corporation over which they exercise exclusive
control. See 1 Fletcher Cyclopedia ofCorp. § 41.70; see also LiButti v. United States,
107 F.3d 110, 119 (2d Cir. 1997) ("The factors employed under alter ego analysis are
essentially designed to attack the corporate structure, such as ' ... siphoning off of funds
by the dominant shareholder[.]"') (quoting Bridgestone/Firestone, Inc. v. Recovery
Credit Servs., Inc., 98 F.3d 13, 18 (2d Cir. 1996)).
It would be wrong, however, to characterize "reverse" piercing claims as
"derivative" and "dependent" because "[w ]hen a court engages in reverse piercing, it
imposes liability directly on a corporation." S.E. C. v. Hickey, 322 F.3d 1123, 1130 (9th
Cir. 2003); see also Chao v. Occupational Safety & Health Review Comm 'n, 401 F.3d
355, 364 (5th Cir. 2005) (the purpose of reverse piercing is "to hold ... corporations
liable for the acts oftheir individual shareholder[s]"); Am. Fuel Corp. v. Utah Energy
Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997) ("reverse piercing ... seeks to hold a
corporation accountable for actions of its shareholders.") (internal quotation marks
omitted). As a result, under Vermont law, in the event Appellant obtains a judgment
against Saronis and MHOP, or either of them, the liability will be imposed on them and
paid from their assets without any judgment imposed on Debtor or his assets. See Winey,
678 A.2d at 1262-63 (observing that "corporations are not intended to be used to shelter
the assets of shareholders from lawful claims of judgment creditors" and when that
occurs, "reverse piercing" will allow a party "to hold a corporation liable for the
obligations of a shareholder") (internal quotation marks omitted). In the context of
bankruptcy, a debtor "cannot be accurately described as the real-party defendant in [a]
suit" which results in "(a] judgment" against a third party that "imposes no obligations or
liability on [the debtor.]" In re Panther Mountain Land Dev., LLC, 686 F.3d 916, 923
(8th Cir. 2012) (quoting Kreisler v. Goldberg, 478 F.3d 209, 213 (4th Cir. 2007)).
Successor liability mandates no different outcome. As the Vermont Supreme
Court held in Gladstone v. Stuart Cinemas, Inc., 2005 VT 44, 178 Vt. 104, 878 A.2d 214
although generally '"the liabilities of a predecessor corporation will pass to the successor
only when the change is occasioned by statutory merger or consolidation[,]'" an
exception is "when the [successor] corporation is merely a continuation or reincarnation
of the [predecessor] corporation" which allows "a creditor to recover from the successor
corporation[.]" Gladstone, 2005 VT 44,
14, 19. Under Gladstone, if Appellant
prevails on its successor liability claims in the state court litigation, those claims will be
in no way derivative of Debtor's liability or result in a de facto judgment against him. To
the contrary, at best, MHOP or Saronis, or both of them, will be deemed liable for A&A's
Finally, although Debtor has established that he would like to participate in the
state court litigation and has an interest in continued receipt of dividends from MHOP
and gifts of income from Saronis to fund his chapter 13 reorganization plan, he makes no
claim that MHOP and Saronis are somehow precluded from seeking bankruptcy
protection on that basis. Debtor's chapter 13 plan thus does not so much "depend upon
[these] two entities' continuing operations" (Doc. 2-17 at 7), as it depends on Debtor's
family members' continued generosity.
For the foregoing reasons, the Bankruptcy Court erred as a matter of fact and law
when it concluded that Appellant's claims against MHOP and Saronis are "derivative" of
and "dependent on" Debtor's liability and that Appellant "does not allege any direct
claims against MHOP or Saronis." !d. at 4, 10. Its conclusion that "Plaintiffs are entitled
to an extension of the stay to MHOP and Saronis to enjoin the pending state court suit
which seeks relief based solely upon derivative liability relating back to the Debtor" is
thus in error and must be vacated. ld at 10. The relationship between Debtor and
MHOP and Saronis is not "inextricably intertwined" and Debtor is not the real party in
interest with regard to Appellant's claims against those non-debtor entities. Queenie
therefore does not authorize extension of the automatic stay to non-debtors MHOP and
Saronis in the circumstances of this case.
Whether 11 U.S.C. § 105(a) Authorizes Extending the Automatic Stay
in Chapter 13 Cases to Non-Debtor Co-Defendants.
As an alternative ground for extending the automatic stay to Saronis and MHOP,
the Bankruptcy Court cited its equitable authority under 11 U.S.C. § 105(a) to "issue any
order, process, or judgment that is necessary or appropriate to carry out the provisions of
The Bankruptcy Court observed that "[i]n order for Manchester CP to prevail in state court with
its successor liability claim against MHOP, it must persuade the state court to rule against A&A
and its president, Mr. Konstantinou, and any such suit or ruling against the Debtor is prohibited
by§ 362." (Doc. 2-17 at 10.) Neither Gladstone nor the cases upon which it relies require a
finding against a corporation's president as a condition precedent to successor liability.
[the Bankruptcy Code]." 11 U.S.C. § 105(a). Section 105(a) authority includes the
power to enjoin third parties in matters related to a bankruptcy proceeding. See Queenie,
321 F.3d at 288 (noting that§ 105(a) "grants broader authority" than§ 362(a)). The
"usual preliminary injunction standard applies to stays of proceedings against nondebtors under§ 105(a)." In re Excel Innovations, Inc., 502 F.3d at 1094.
Debtor argues that although § 105 "does not apply in [c]hapter 13 cases, there is
nothing in 11 U.S.C. § 105 which precludes its use in [c]hapter 13." (Doc. 2-6 at 6.)
Appellant counters that§ 105(a) is inapplicable to bankruptcies filed under chapter 13
because 11 U.S.C. § 1301, commonly referred to as the co-debtor stay, provides that:
after the order for relief under this chapter, a creditor may not act, or
commence or continue any civil action, to collect all or any part of a
consumer debt of the debtor from any individual that is liable on such debt
with the debtor, or that secured such debt[.]
Id. at§ 1301(a). In contrast, chapter 11 contains no analogous provision for staying
actions against co-debtors. See Queenie, 321 F.3d at 287 (noting that unlike in chapter
11, the stay set forth in 11 U.S.C. § 130l(a) extends the automatic stay in chapter 13
proceedings to '"any individual that is liable on [a] debt with the debtor"'). Appellant
argues that this reflects congressional intent to limit a bankruptcy court's power to enjoin
litigation against third party non-debtors in chapter 13 cases. In support of this
proposition, Appellant cites In re McCormick, 381 B.R. at 598, which declined to extend
the co-debtor stay in§ 1301 or the automatic stay in§ 362(a) to a non-debtor LLC that
was wholly owned and controlled by the debtor. The McCormick court concluded that
because Queenie was decided in the context of a chapter 11 case and because of the
presence of the co-debtor stay provision in chapter 13, it could not invoke§ 105(a) to
stay proceedings against the non-debtor LLC in a chapter 13 case. The Bankruptcy Court
for the Southern District of Ohio reached this same conclusion in In re Saleh, 427 B.R.
415,422 (Bankr. S.D. Ohio 2010).
Both the McCormick and Saleh courts observed that their review of the case law
revealed no instances in which a stay was issued under§ 105(a) in favor of a non-debtor
third party in a chapter 13 case. This court's own inquiry has yielded the same result.
While nothing in the text of§ 105(a) or the Second Circuit's decisions interpreting it
expressly restricts the scope of a bankruptcy court's authority to issue injunctions in
chapter 13 cases, § I 05(a) power is not unlimited and the absence of authority is telling.
In this case, to allow the extension of the automatic stay to non-debtor entities
would exceed the Bankruptcy Court's equitable authority. See In re Smart World Techs.,
LLC, 423 F.3d 166, 184 (2d Cir. 2005) ("[§ 105(a)] does not authorize the bankruptcy
courts to create substantive rights that are otherwise unavailable under applicable law, or
constitute a roving commission to do equity."); In re Barbieri, 199 F.3d 616, 621 (2d Cir.
1999) ("In short, although§ 105(a) grants a Bankruptcy Court broad powers, it does not
authorize the Court to disregard the plain language of[the Code]."). Even ifthe
Bankruptcy Court possessed this authority, Debtor's need for income for his
reorganization does not alone satisfy the requirements for a preliminary injunction,
especially when he seeks to obtain this income from non-debtor entities alleged to have
engaged in fraud.
A party "seeking a preliminary injunction must establish that he is likely to
succeed on the merits, that he is likely to suffer irreparable harm in the absence of
preliminary relief, that the balance of equities tips in his favor, and that an injunction is in
the public interest." Winter v. Nat. Res. Def Council, Inc., 555 U.S. 7, 20 (2008). "A
preliminary injunction is an extraordinary remedy never awarded as of right." !d. at 24.
In this case, the Bankruptcy Court did not find a likelihood of success on the
merits in the state court litigation, irreparable harm, address the public interest, or require
the posting of a bond or security in the event Appellant was wrongfully injured. It is
therefore doubtful that it grounded its decision on§ 105(a). To the extent it did, in
addition to the absence of authority for extending the § 105(a) stay to chapter 13 cases,
the record falls far short of establishing Debtor's, MHOP's, and Saronis's entitlement to
the extraordinary relief of a preliminary injunction. Any injunction issued pursuant to
§ 105(a) was therefore in error.
For the reasons set forth above, the court REVERSES the Bankruptcy Court's
decision and VACATES the automatic stay as to non-debtors MHOP and Saronis, and
REMANDS the case to the Bankruptcy Court for further proceedings consistent with this
Dated at Burlington, in the District of Vermont, this
day ofNovember, 2017.
United States District Court
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