Opinion
Case Nos. 04-74452-MHM, 04-74454-MHM.
July 13, 2006
CONTESTED MATTER
ORDER REGARDING RELIEF FROM THE STAY
Before the court is the motion of WOW! Factor Desserts, Inc. and WOW! Factor Desserts, Ltd. (collectively "WOW") for relief from the automatic stay to proceed with litigation in Canada against the above-captioned Debtors. The action in Canada was filed prepetition and is stayed as a result of the automatic stay of 11 U.S.C. § 362(a). A proceeding arising from the business relationship between Debtors and WOW was filed postpetition by the Chapter 7 Trustee in Cobb County, Georgia, and removed to U.S. District Court for the Northern District of Georgia.
On May 7, 2003, WOW and Debtor Innocentia entered into an agreement (the "Agreement") in which Innocentia would be WOW's distributor in the Southeastern United States, including the Atlanta metropolitan area. The Agreement expressly provides that its terms and conditions are governed by Canadian law of the Province of Alberta. Innocentia's business grew initially but then began to falter. The reasons for Innocentia's demise are in dispute. In March 2004, WOW accepted a promissory note from Innocentia, guaranteed by Debtor Mr. Johnson, for $30,000 owing to WOW for product it provided to Innocentia and for which Innocentia had not yet paid. Innocentia's debt to WOW continued to grow.
In the summer of 2004, Debtors' attorney sent a letter to WOW asserting that the Agreement had been based upon fraud and violation of U.S. franchise law. On August 20, 2004, WOW filed suit against Innocentia in the Court of Queen's Bench at Edmonton, Alberta, Canada, and on August 24, 2004, Mr. Johnson was added as a defendant (the "Canadian Action"). The Canadian Action sounds in simple contract and appears to be a suit on account and suit on a note.
On September 2, 2004, Debtors filed their Chapter 7 bankruptcy petitions. Paul H. Anderson, Jr. was appointed Chapter 7 Trustee in both cases. As a result of the bankruptcy filing, Debtors did not file an answer in the Canadian Action and the Canadian Action was automatically stayed by operation of 11 U.S.C. § 362. On February 10, 2005, WOW filed a proof of claim for approximately $72,000 in Innocentia's bankruptcy case.
On November 8, 2005, Trustee, through Special Counsel, filed a lawsuit against WOW in Superior Court of Cobb County. WOW removed the Cobb County lawsuit to the U.S. District Court for the Northern District of Georgia, Civil Action File No. 1:05-cv-03030-ODE (the "Georgia Action") without opposition from Trustee. On December 29, 2005, WOW filed a motion to dismiss the Georgia Action on international comity grounds. Upon information and belief, the U.S. District Court has deferred ruling on WOW's motion to dismiss until entry of an order in this bankruptcy case on WOW's motion for relief from stay.
Special Counsel was employed by Trustee on a 40% contingency fee basis.
WOW contends it is entitled to relief from stay under 11 U.S.C. § 362(d), for cause, to allow the Canadian Action to proceed. WOW seeks no relief as to the Georgia Action. Trustee opposes relief from the stay because it would prejudice Trustee's efforts to administer Debtors' estates and would result in piecemeal, expensive litigation.
Although substantial case law exists regarding the propriety of granting relief from the stay to allow litigation to proceed in another court, very little case law exists regarding the appropriateness of granting relief from the stay when two parallel actions are pending, one of which is pending in a foreign country. WOW cited a single case involving relief from stay to continue litigation in a foreign country, In re Hakim, 212 B.R. 632 (Bankr. N.D. Cal. 1997). The facts in Hakim are complex and will be condensed for ease of comparison with the facts of the instant case.
The Hakim case arose out of the events commonly known as the Iran-Contra affair. Debtor Hakim had been involved in the secret activities of Lieutenant Colonel Oliver North and Major General Richard Secord in gathering and dispensing the millions of dollars involved in the Iran-Contra affair. When the secret activities were exposed, approximately $12 million was left in Swiss bank accounts in Hakim's possession or control.
In connection with the criminal prosecutions of North, Secord and Hakim, Hakim executed an agreement with the United States regarding the Swiss funds. The agreement did not work out as expected and the United States filed a lawsuit in Switzerland to determine the ownership of the funds. Because of a challenge by Hakim to the Swiss court's jurisdiction, to preserve its rights to litigate regarding the ownership of the funds, the United States filed an action in the U.S. District Court for the Eastern District of Virginia and then obtained a stay of that action pending resolution of the jurisdictional issue by the Swiss courts. The Swiss courts confirmed their jurisdiction and the United States moved to dismiss the Virginia action and the pending counterclaims, but Hakim filed a Chapter 11 bankruptcy petition before the dismissal order was entered. Both the Swiss action and the Virginia action were stayed as a result of Hakim's bankruptcy petition.
In Hakim's bankruptcy case, he listed his primary asset as the $12 million in Switzerland. The United States sought relief from the automatic stay to proceed with the Swiss action and the Virginia action to determine Hakim's rights to the $12 million. Both the Virginia and the Swiss actions had been filed by the United States. The Virginia action had been filed only to preserve its right of action if the Swiss courts found a lack of jurisdiction. Hakim, however, had filed counterclaims in the Virginia action. The United States intended to seek dismissal of those counterclaims, along with dismissal of its own claim. Because Switzerland had confirmed its jurisdiction, the United States sought to litigate in Switzerland the merits of the dispute regarding the funds. Debtor sought to litigate the ownership of the Swiss funds in the bankruptcy court. The United States asserted that Swiss law would apply to determine the issue. Debtor disagreed about application of Swiss law but without support.
The Hakim court began its analysis by reciting the various factors employed by other courts in determining whether to grant relief from the automatic stay to proceed with litigation in a non-bankruptcy court. The court noted, however, that the issue of international litigation is not adequately addressed by the usual factors. The court then reviewed the factors considered in connection with permissive abstention and the factors set forth in 11 U.S.C. § 304 (Cases ancillary to foreign proceedings). Finally, the Hakim court reviewed the factors enunciated in Colorado River Water Conservation District v. United States, 424 U.S. 800 (1976), which concerned federal abstention in cases of "exceptional circumstances." The six factors the Hakim court considered were: "(1) whether a court has assumed jurisdiction of the res at issue; (2) the inconvenience of the federal forum; (3) the avoidance of piecemeal litigation; (4) the order in which the forums obtained jurisdiction; (5) which law controls in a choice of law analysis; and (6) the adequacy of the alternative forum." Hakim, 212 B.R. at 642. Following consideration of these factors, the Hakim court granted relief from stay to the United States to proceed in the Virginia and the Swiss actions.
In the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Section 304 was eliminated and replaced with Chapter 15 — Ancillary and Other Cross-Border Cases. Debtors' cases were filed, however, prior to the effective date of BAPCPA.
Although the discussion in the Hakim opinion is instructive, the posture of the instant case contains some significant differences. First, the Hakim bankruptcy case was a Chapter 11 reorganization case. The instant case is a Chapter 7 case. Trustee, a fiduciary with the duty to marshall and liquidate assets for the benefit of all creditors, is the real party in interest in Debtors' claims against WOW. Debtors' estates lack the resources to pursue litigation in Canada. Second, in the Hakim case, an identifiable res, the $12 million, was the focus of the parties' litigation and that res was located in Switzerland. In the instant case, the estates' claims against WOW asserted in the Georgia Action are intangible and unliquidated claims. Finally, in the Hakim case, significant litigation had occurred in the non-bankruptcy courts, but, except for the motion for relief from stay, no litigation had occurred in the bankruptcy court (Debtor's choice of forum) regarding the funds at issue. In the instant case, the Canadian action was stayed before even an answer was filed. The Georgia Action has proceeded no further than WOW's motion to dismiss. Because the Georgia Action is an action filed by Trustee to recover an asset for the estates, it is not subject to the automatic stay. Brown v. Armstrong, 949 F.2d 1007 (8th Cir. 1992); Farley v. Henson, 2 F.3d 273 (8th Cir. 1993); Gordon v. Whitmore (In re Merrick), 175 BR 333 (9th Cir. BAP 1994). Any counterclaim that WOW may seek to file in the Georgia Action is stayed, however. Parker v. Bain, 68 F.3d 1131 (9th Cir. 1995).
In the instant case, several obvious factors favor granting relief from stay to WOW to pursue the Canadian Action. The Canadian Action was the first-filed action and the Agreement that is central to WOW's claims is governed by Canadian law. WOW asserts that several witnesses are located in Canada and not subject to subpoena in the Georgia Action. The degree to which those witnesses are critical to WOW's claims against Debtor and to which those witnesses would refuse to appear without a subpoena is unclear.
On the other hand, both the Canadian Action and the Georgia Action are in their infancies, the Canadian Action even more so than the Georgia Action. WOW has filed a proof of claim in Innocentia's bankruptcy case, asserting an unsecured claim against Innocentia, which would be dischargeable in Debtors' bankruptcy cases. Although some witnesses are located in Canada, Debtors are located in Georgia and Debtors' business and its records are located in Georgia. The burden to Debtors' estates of litigating in Canada is likely to be too high to make such litigation feasible for Trustee, thus resulting in the abandonment of a possibly significant asset for both estates. Although Canadian law applies to the terms and conditions of the Agreement, Debtors' claims against WOW of fraud and violation of United States franchise law would not appear to be governed by Canadian law. No right to jury trial appears to be at risk as a result of choosing a Georgia forum over a Canadian one. The risk of piecemeal litigation also appears to be low. WOW did not seek relief from the automatic stay to file counterclaims in the Georgia Action. Seeking such relief may, in fact, be premature and possibly inconsistent with WOW's motion to dismiss filed in the Georgia Action. Nevertheless, as WOW has filed a proof of claim with the bankruptcy court, WOW would not be deprived of a forum in which to protect its claim, and the claims administration process in this court is likely to provide a simpler and less expensive means to fully assert its claim against Debtor. Indeed, in light of the paucity of Debtors' assets in comparison with their liabilities, the expense of liquidating WOW's claim, even in a Canadian court, appears unjustified except as a tactic to force abandonment of Trustee's claim against WOW. The likely harm to Debtors's estates that would result from granting WOW's motion for relief from stay far outweighs any harm that denial of the motion will impose upon WOW. Accordingly, it is hereby
ORDERED that the motion of WOW! Factor Desserts, Inc. and WOW! Factor Desserts, Ltd. for relief from the automatic stay is denied. The Clerk, U.S. Bankruptcy Court, is directed to serve a copy of this order upon Debtors, counsel for Debtors, Movants, counsel for Movants, the Chapter 7 Trustee, and counsel for the Chapter 7 Trustee.
IT IS SO ORDERED.