Opinion
Case No. 1:04-cv-466.
November 2, 2005
ORDER
This matter is before the Court on defendant Foundation Insurance Company's ("Foundation") Motion for Stay of Proceedings, plaintiff's memorandum contra, and Foundation's reply memorandum. (Docs. 53-55.)
Foundation is requesting a stay of the entirety of the instant case pursuant to an Order of Judge J. Ernest Kinard, Jr. of the State of South Carolina, Richland County Court of Common Pleas, in a civil action against Foundation pursuant to the South Carolina Insurer's Supervision, Rehabilitation and Liquidation Act. Specifically, on October 7, 2005, Judge Kinard issued a Consent Order declaring defendant Foundation insolvent and commencing rehabilitation proceedings. The Order further granted "an automatic stay applicable to all persons and proceedings," prohibiting, inter alia, the "further prosecution of any actions or proceedings involving Respondent [Foundation]." ( See Doc. 53, Ex. 1.)
While plaintiff concedes that the instant case must be stayed as to Foundation, plaintiff asserts that the stay should not apply to proceedings against defendant Steven M. Mariano. Plaintiff argues that the Order of stay does not speak to proceedings against Mariano, and, therefore, that the granting of a stay of all proceedings herein would be overbroad.
Plaintiff's complaint identifies defendant Mariano as the president of Foundation. Four of the five counts in plaintiff's amended complaint are asserted against both Foundation and Mariano, including an alleged cause of action against Mariano sounding in fraud. According to defendants' pleadings, Foundation is funding the defense of Mariano to the extent that Mariano was acting within the course and scope of his employment with Foundation.
The nub of the dispute presently before this Court is whether the stay entered by the South Carolina court applies only to proceedings against Foundation and not to proceedings against Mariano, individually.
In the analogous field of federal bankruptcy law, the automatic stay of 11 U.S.C. § 362(a) applies only to the debtor. See In re Kmart Corp., 385 B.R. 679, 688 (Bankr. N.D. Ill. 2002). The automatic stay does not stay the continuation of litigation against non-debtor third parties (including officers and directors) because the stay's applicability does not extend beyond the debtor itself. See, e.g., Winters v. George Mason Bank, 94 F.3d 130, 134-35 (4th Cir. 1996).
Although § 362(a) of the Bankruptcy Code may not by itself give to the debtor the ability to stay automatically all actions against the debtor's directors and officers, section 105(a) of the Bankruptcy Code gives the bankruptcy court the power to enter "any order . . . that is necessary or appropriate to carry out the provisions of [Title 11]." 11 U.S.C. § 105(a). Thus, pursuant to section 105(a), in "limited" or "unusual" circumstances, courts will enjoin parties from proceeding against non-debtor third parties. See A.H. Robins Co. V. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986).
Unlike the stay under section 362(a), stays issued under section 105(a) are not automatic upon the commencement of a case. In re CCDC Fin. Corp., 143 B.R. 946, 949 (D. Kan. 1992). Rather, the courts typically apply the usual rules governing the issuance of preliminary injunctions in determining whether a section 105(a) stay is appropriate. See In re Eagle Pitcher Indus., Inc., 963 F.2d 855, 858 (6th Cir. 1992). Some courts have applied a modified test often stated as follows:
The first requirement is that there be a danger of imminent, irreparable harm to the estate or the debtor's ability to reorganize. Second, there must be a reasonable likelihood of a successful reorganization. Third, the court must balance the relative harm as between the debtor and the creditor who would be restrained. Fourth, the court must consider the public interest; this requires a balancing of the public interest in successful bankruptcy reorganizations with other competing societal interests. 2 Collier on Bankruptcy § 105.02 (15th ed. Rev. 2003) (citations omitted).
The crux of the court's analysis is primarily grounded upon a determination whether or not the continuation of an action against a third party non-debtor (e.g., the debtor's president) would threaten to derail the debtor's reorganization efforts and prospects. See LTV Corp. V. Miller, 109 B.R. 613, 621 (S.D.N.Y. 1990).
Here, this Court believes that the South Carolina court is well situated to evaluate whether its own order of stay applies, or should apply, to Mariano, a third party non-debtor. For example, this Court has no information before it as to the likelihood of a successful rehabilitation of Foundation via the South Carolina proceedings, a factor this Court would need to weigh in determining whether to extend a stay against the proceedings as to Mariano.
Accordingly, this Court orders the parties to seek a determination by the South Carolina court. In the meantime, this Court vacates the pending scheduling order, stays these proceedings as against Foundation, and holds in abeyance the motion to stay as to Mariano. The parties agree that no further proceedings shall occur in this case until the South Carolina court addresses the issue or declines to do so; or until further Order of this Court. Further, the parties shall provide a joint status report in writing to this Court by January 31, 2006.
IT IS SO ORDERED.