Westfield Insurance Company v. Cazon, LLC et al
Filing
69
MEMORANDUM OPINION AND ORDER granting in part and denying in part defendant H. Lynden Graham Jr.'s 24 MOTION to Dismiss or in the Alternative Abstain or Refer to the Bankruptcy Court; granting with respect to the defendant's Bankruptcy Estate of Cazon LLC, H. Lynden Graham Jr. as trustee of the estate, and Cazon, LLC, denying with respect to the remaining defendants; Westfield's claims against the Bankruptcy Estate of Cazon LLC, H. Lynden Graham Jr. as trustee of the estate, and Cazon, LLC violate the automatic stay of the bankruptcy case and are dismissed. Signed by Judge Joseph R. Goodwin on 8/22/2012. (cc: attys; any unrepresented party) (tmh)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA
CHARLESTON DIVISION
WESTFIELD INSURANCE COMPANY,
Plaintiff,
v.
CIVIL ACTION NO. 2:12-cv-00585
CAZON, LLC, et al.,
Defendants.
MEMORANDUM OPINION AND ORDER
Pending before the court is defendant H. Lynden Graham Jr.’s Motion to Dismiss or in the
Alternative Abstain or Refer to the Bankruptcy Court [Docket 24]. For the reasons discussed
below, this motion is GRANTED with respect to defendants Bankruptcy Estate of Cazon LLC, H.
Lynden Graham Jr. as trustee of the estate, and Cazon, LLC and DENIED with respect to the
remaining defendants.
I.
Background
This case is a declaratory judgment action brought by the plaintiff, Westfield Insurance
Company (“Westfield”). Westfield seeks a declaration that claims against several defendants in
an ongoing state court action are not covered by three insurance policies issued by Westfield.
The state court action involves claims brought by Cazon LLC (“Cazon”) and David
Mitchell III against R. Robert Samples II, Ryan McGinn Samples Research, Inc., d/b/a/ RMS
Strategies (“RMS”), Damsel Properties LLC (“Damsel”), Eimors Construction LLC (“Eimors”),
and Aaron Wood. The state court complaint alleges that on April 11, 2006, Damsel and Cazon
entered into a commercial lease agreement. Under the lease agreement, Damsel leased the first
floor of 222 Capitol Street in Charleston, West Virginia, to Cazon for a five-year period of use as a
restaurant. Mitchell signed the lease as one of Cazon’s managing members and a guarantor on the
lease. Wood signed the lease as manager and agent of Damsel. The state court complaint alleges
that on June 1, 2006, Cazon notified Damsel by letter that Damsel was in default of certain
provisions of covenants under the lease agreement. Specifically, Cazon raised concerns about a
significant water leak that had developed in the kitchen area of the restaurant. The state court
complaint further alleges that on August 15, 2007, a second letter was sent asserting that the water
leak had worsened to the point where it had caused a noticeable loss of business due to a
sewer-type smell and an infestation of gnats and flies associated with the leak. The letter asserted
Cazon’s intention to stop paying rent immediately due to the alleged violation of covenants in the
lease. The state court complaint claims that Damsel did not fix the water leak and thereby
breached both the contract and the covenant of good faith and fair dealing. Cazon claims that it
then hired outside consultants to investigate the water leak and discovered that the problem was the
result of negligent construction by Eimors, which had been contracted by Damsel to construct the
restaurant for Cazon. Cazon claims that it is the third-party beneficiary of Eimors’ contract with
Damsel. The state court plaintiffs claim that as a result of the defendants’ actions, Cazon was
forced to close on August 31, 2006. Additionally, Cazon has brought claims against Samples
based on articles that appeared in the Charleston Daily Mail on September 10, 2007, and
September 11, 2007. Cazon claims that in these articles, Samples made false, defamatory
statements about Cazon and its managing members. In addition to the various claims against each
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of the state court defendants, the state court plaintiffs brought claims for civil conspiracy and
vicarious liability for a joint venture. (Compl. [Docket 1]).
On December 18, 2007, Cazon filed a voluntary petition for relief under Chapter 7 of the
United States Bankruptcy Code. H. Lynden Graham Jr. was appointed trustee of Cazon’s
bankruptcy estate. On or about January 29, 2008, defendant Eimors also filed for bankruptcy.
On December 24, 2008, the bankruptcy court entered an Agreed Order Granting Motion for Relief
from Automatic Stay [Docket 28] in the Eimors bankruptcy proceeding, permitting Cazon,
Graham, and David Mitchell to add Eimors as a defendant in the state court action.
On February 27, 2012, Westfield filed the instant suit seeking a declaratory judgment on
three insurance policies: Policy No. C.P.-3657582, which Westfield issued to RMS and Damsel
(“the Samples Policy”), and Policy No. C.P.-3962053 and No. C.P.4051389, both of which
Westfield issued to Eimors (“the Eimors Policies”). Westfield seeks the following declarations:
a. That Claimaints’ claims against Samples, Wood, RMS, Damsel,
and Eimors are not covered under the Samples Policy or the
Eimors Policies;
b. That Samples, Wood, RMS, Damsel and Eimors are not owed a
duty of defense or indemnity by Westfield Insurance Company
under the Samples Policy of the Eimors Policies;
c. That Westfield be dismissed from further involvement in this
action; and
d. That Westfield is entitled to such further and additional relief as
the Court may deem just and proper.
(Compl. for Declaratory Relief [Docket 1], at 66).
On April 2, 2012, defendant Graham filed the instant motion, asserting that Westfield’s
pursuit of this action is “in violation of federal bankruptcy law, jurisdictional principles, and
policy.” (Mem. in Support [Docket 25], ¶ 15).
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a. Standard of Law
Section 362(a)(1) of Chapter 11 of the Bankruptcy Code stays “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.” Id. The Fourth Circuit has noted that,
“[t]he purpose of the automatic stay, in addition to protecting the relative position of creditors, is to
shield the debtor from financial pressure during the pendency of the bankruptcy proceeding.”
Winters v. George Mason Bank, 94 F.3d 130, 133 (4th Cir. 1996) (citing In re Stringer, 847 F.2d
549 (9th Cir. 1988)).
b. Analysis
As an initial matter, the court must determine whether the claims against Westfield, the
debtor in the bankruptcy proceeding, violate the automatic stay provision of the Bankruptcy Code.
Section 362(a)(1) of Chapter 11 of the Bankruptcy Code stays “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.” Id. In this case, Cazon is the debtor in a
bankruptcy proceeding. The instant case is a judicial proceeding brought against Cazon and other
defendants. The claims for which Westfield is seeking a “no coverage” determination arose
months prior to Cazon’s bankrtupcy.
This suit “could have been commenced before the
commencement” of Cazon’s bankruptcy, as the claim for which Westfield seeks to deny coverage
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arose months prior to Cazon’s bankruptcy petition. See id. Accordingly, the court FINDS that
Westfield’s claims against Cazon are subject to the automatic stay. There is no evidence in the
record to suggest that Westfield has sought relief from the automatic stay. Accordingly, the court
FINDS that Westfield has violated the automatic stay provision of the Bankruptcy Code and
ORDERS that the plaintiff’s claims against Cazon are DISMISSED.
The court will next consider whether the automatic stay applies to the other defendants in
this case. As a general rule, the automatic stay applies only to the debtor in bankruptcy and not to
the debtor’s solvent co-defendants in a pending civil action. See A.H. Robbins v. Piccinin, 788
F.2d 994, 1000 (4th Cir. 1986) (“Subsection (a)(1) is generally said to be available only to the
debtor, not third party defendants or co-defendants.”). There exists, however, a narrow exception
to this general rule; where “unusual circumstances” are involved, the stay imposed by § 362(a)(1)
may be expanded to include non-debtor co-defendants. Piccinin, 788 F.2d at 1000 (“In order for
relief for such non-bankrupt defendants to be available under (a)(1), there must be unusual
circumstances and certainly something more that the mere fact that one of the parties to the lawsuit
has filed a [petition for] Chapter 11 bankruptcy.”) (internal quotation marks omitted); Winters v.
George Mason Bank, 94 F.3d 130, 133 (4th Cir. 1996) (stating that in Piccinin the court “noted a
narrow exception to the general rule that the automatic stay is not available to third parties”).
The automatic stay may, consistent with its purpose, be expanded in the “unusual
situation . . . when there is such identity between the debtor and 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.” Piccinin, 788 F.2d at 1000;
see also Kreisler v. Goldberg, 478 F.3d 209, 213 (4th Cir. 2007). The example given by the
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Fourth Circuit is “a suit against a third-party who is entitled to absolute indemnity by the debtor on
account of any judgment that might result against them in the case.” Piccinin, 788 F.2d at 1000.
In this case, the debtor’s co-defendants in federal court are defendants in a state court
action brought by the debtor. The debtor, therefore, is a third party beneficiary to the insurance
policies in dispute. It is true that as a third party beneficiary, Cazon cannot recover under the
disputed policies if Westfield prevails in the declaratory judgment proceeding. Nonetheless,
Cazon is not “the real party defendant” in the sense that a judgment against the defendants would
be a judgment against Cazon. If Cazon prevails in state court, it will be entitled to recover from
the state court defendants, regardless of whether or not it can collect that judgment from
Westfield’s insurance policy. The court therefore FINDS that the narrow exception set forth in
Piccinin does not apply in this case. Westfield violated the automatic stay by filing suit against
Cazon, but not by filing suit against the remaining defendants. Accordingly, the defendants’
motion is GRANTED with respect to the Bankruptcy Estate of Cazon LLC, H. Lynden Graham Jr.
as trustee of the estate, and Cazon, LLC, and DENIED with respect to the remaining defendants.
For the reasons discussed above, Westfield’s claims against the Bankruptcy Estate of
Cazon LLC, H. Lynden Graham Jr. as trustee of the estate, and Cazon, LLC, violate the automatic
stay of the bankruptcy case and are hereby DISMISSED.
The court DIRECTS the Clerk to send a copy of this Order to counsel of record and any
unrepresented party.
ENTER:
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August 22, 2012
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