Opinion
00 Civ. 2266 (JGK).
November 4, 2000.
Avrum Rosen, for the plaintiff (s).
Charles Crum, for the defendant (s).
OPINION AND ORDER
On September 22, 1997, the plaintiffs, Aly Spencer and Barry Spencer, commenced an adversary proceeding in the United States Bankruptcy Court for the Southern District of New York against Peter Bogdanovich and Louise Bogdanovich ("the debtors") seeking a judgment declaring that certain debts due from the debtors are not dischargeable pursuant to 11 U.S.C. § 523 (a)(2)(A) and § 523(a)(6). On Dec. 7, 1999, the bankruptcy court ordered the lifting of the automatic stay imposed by Section 362(a) of the Bankruptcy Code to allow entry of a judgment in an action in the Superior Court of the State of California for the County of Los Angeles ("California Action") in which a jury had returned a verdict in the plaintiffs' favor for approximately $3.9 million against Peter Bogdanovich. The jury in the California Action had also returned a verdict against Peter Bogdanovich and in favor of Gerald Schneiderman in the amount of $250,000 and Gerald Schneiderman is also a plaintiff in the adversary proceeding. The debtors have moved, pursuant to Rule 8005 of the Federal Rules of Bankruptcy Procedure, for a stay of the bankruptcy court's order pending their appeal of that order.
I.
In February, 1995, the plaintiffs and Gerald Schneiderman commenced the California Action against the debtors and others seeking an award of compensatory and punitive damages for, among other things, breach of contract, fraud, and negligent misrepresentation in connection with the plaintiffs' 1992 sale of a house to the debtors. (Affidavit of Stephen L. Zelig in Support of Motion to Modify Automatic Stay attached to Ex. A of Record on Appeal. ("Zelig Aff."), at ¶ 2 Ex. A.) The plaintiffs alleged in the California Complaint that agents of the debtors falsely represented that Peter Bogdanovich was an extremely honest and honorable man; had paid debts owed to the agents; was a well-known film director with many prospective lucrative deals; had just declared bankruptcy and therefore could not do so again for many years; and was not in debt and now had good credit. (Zelig Aff. Ex. A at ¶ 9.) The plaintiffs further alleged that the debtors' agents concealed from the plaintiffs that Peter Begdanovich's last bankruptcy was not recent; that he in fact did not have prospective lucrative directing contracts; that his reputation as a director was tarnished; that he was in substantial debt to the agents; and that he had a history of not honoring his contractual obligations and did not intend to honor his obligations in connection with the purchase of the house from the plaintiffs. (Zelig Aff. Ex. A at ¶ 10.)
The plaintiffs and the debtors allegedly entered into a contract for the sale of the house in which the debtors' agreed to make payments under notes given to the plaintiffs in specified installments over a 10-year period and make interest payments on a monthly basis. (Zelig Aff. Ex. A at ¶ 11.) The debtors allegedly failed to make the required payments. (Zelig Aff. Ex. A at ¶ 13.)
The plaintiffs and the debtors tried the allegations in the California Complaint before a jury over a period of 10 days in May of 1997. (Zelig Aff. at ¶ 2.) During the course of the trial, the parties called thirteen witnesses to testify and introduced hundreds of pages of exhibits. (Zelig Aff. At ¶ 2.) The Superior Court in California instructed the jury on California law with respect to the elements of the plaintiffs' claims for fraud by intentional misrepresentation, fraud by false promise, fraud by concealment and fraud by negligent misrepresentation. (Zelig Aff. Ex. C at 49:18-53:12.) The Superior Court also instructed the jury on awarding punitive damages. (Zelig Aff. Ex. C at 59:21-24.) On May 29, 1997, the jury rendered a general verdict against debtor Peter Bogdanovich for $687,000 in compensatory damages and $3.25 million in punitive damages. (Zelig Aff. Ex. D.) In addition, the plaintiff Gerald Schneiderman was awarded $250,000 in damages against Peter Bogdanovich. (Zelig Aff. Ex. D.)
The following day, May 30, 1997, the debtors filed their Chapter 7 petition commencing this bankruptcy case. (Affidavit of Charles A. Crum in Support of Motion to Modify Automatic Stay attached to Ex. A of Record on Appeal, ("Crum Aff."), Ex. A ¶ 27.) The automatic stay imposed by section 362(a) of the Bankruptcy Code suspended proceedings in the California Action and judgment based upon the verdict has not yet been entered.
On September 22, 1997, the plaintiffs and Gerald Schneiderman commenced an adversary proceeding against the debtors seeking a determination that their claims against the debtors in connection with the events litigated in the California Action are non-dischargeable under §§ 523(a)(2)(A) and 523(a)(6) of the Bankruptcy Code. (Crum Aff. Ex. A at ¶ 2.) The plaintiffs moved to lift the automatic stay imposed by Section 362(a) of the Bankruptcy Code and to allow entry of judgment in the California Action, arguing that judicial economy would best be served by modifying the stay to permit the plaintiffs to enter judgment in the California Action because the debtors will be collaterally estopped from relitigating the same issues determined in the California Action in the bankruptcy court.
On Dec. 7, 1999, the bankruptcy court granted the plaintiffs' motion to lift the automatic stay imposed by section 362(a) of the Bankruptcy Code and to allow entry of judgment in the California Action. In granting the motion to lift the automatic stay, the bankruptcy court, after analyzing the factors set forth in In re Sonnax Indus. Inc., 97 F.2d 1280 (2d Cir. 1990), noted that the decision to lift the stay was within the bankruptcy court's discretion. (Record on Appeal ("Record"), Ex. E at 10.) The bankruptcy court rejected the debtors' argument that it would be unfair to force them to litigate in the California Action. (Id. at 12.) The bankruptcy court was not persuaded that litigation before it would be less expensive than in California and reasoned that the plaintiffs would suffer if the bankruptcy court was to, in effect, throw out the verdict obtained after a ten day trial by precluding the plaintiffs from entering a final judgment. (Id. at 12-13.)
The bankruptcy court also rejected the debtors' alternative argument that there was no reason to lift the automatic stay because any final judgment obtained from the California Action would not, as a matter of law, have any preclusive effect in this case. (Id. at 13-21.) The bankruptcy court found that the plaintiffs' allegations in the adversary action that the debtors entered into a transaction with the intent not to perform their obligations were actionable under 11 U.S.C. § 523(a)(2)(A). (Id. at 21.) The bankruptcy court did not fully address the debtors' argument with respect to the plaintiffs' claim under 11 U.S.C. § 523(a)(6). (Id. at 22.)
The bankruptcy court, however, did not conclusively decide that the judgment in the California Action should be given preclusive effect in the pending adversary proceeding, but rather, stated that the determination of whether the judgment in the California Action should be given preclusive effect can be made once the issues have been fully litigated. (Id. at 25.) The bankruptcy court found that, in applying the relevant Sonnax factors, "relief from the stay may result in a partial or complete resolution of these issues and promote judicial efficiency and economy by obviating the time, effort and expense associated with relitigating (the plaintiffs'] claims against [the] debtors." (Id.) The Court further stated:
The California Court clearly has the expertise to enter a judgment based upon the jury verdict and determine any appeals filed by the parties. In fact, if debtors do appeal, the appellate court may issue detailed written findings that would assist this court to determine whether the acts committed by debtors are actionable under the statute. Other creditors in this case will not be prejudiced in any way if we modify the stay for this purpose. Finally, balancing the relative harms to the parties, we conclude that stay relief is appropriate. Debtors have already had an opportunity to litigate (the plaintiffs'] claims against them. Should it apply, the purpose of collateral estoppel is to prevent them from having another bite at that apple once they have done so already.
(Id. at 25-26.)
Based on these findings, the bankruptcy court lifted the automatic stay. The debtors then filed this appeal and sought a stay of the bankruptcy court's order lifting the stay pending a hearing of the appeal.II.
Rule 8005 of the Federal Rules of Bankruptcy Procedure provides that a motion for a stay of a Bankruptcy Court order may be made to the District Court pending appeal of the order. See Fed.R.Bankr.P. 8005. To obtain a stay pending appeal, the debtor must show: (1) a strong likelihood of success on the merits of the appeal; (2) that the movant will suffer irreparable injury if the stay is denied; (3) that no substantial harm will be suffered by others if the stay is granted; and (4) that the stay is in the public's interest. See Rodriguez v. DeBuono, 175 F.3d 227, 234 (2d Cir. 1999); In re 1567 Broadway Ownership Assocs., 202 B.R. 549, 552 (S.D.N.Y. 1996); In re Crosswinds Assocs., No. 96 Civ. 4572, 1996 WL 350695 at *1 (S.D.N.Y. June 25, 1996); In re Advanced Mining Systems. Inc., 173 B.R. 467, 468 (S.D.N.Y. 1994). Failure to satisfy any one of these criteria is fatal to the debtor's motion. See Broadway OwnershiD, 202 B.R. at 552; Crosswinds, 1996 WL 350695 at *1; Advanced Mining, 173 B.R. at 468.
A.
A bankruptcy court's decision to lift an automatic stay is within the discretion of the bankruptcy judge and is reviewable only for an abuse of discretion. See In re Boodrow, 126 F.3d 43, 47 (2d Cir. 1997); Sonnax, 907 F.2d at 1286. In this case, the bankruptcy court granted the plaintiffs relief from the automatic stay under 11 U.S.C. § 362(d)(1) for "cause" shown applying the factors set forth in Sonnax. InSonnax, the Court of Appeals for the Second Circuit endorsed the following twelve factors that are potentially relevant in deciding whether to lift the automatic stay to permit litigation to continue in another forum:
(1) whether relief would result in a partial or complete resolution of the issues; (2) lack of any connection with or interference with the bankruptcy case; (3) whether the other proceeding involves the debtor as a fiduciary; (4) whether a specialized tribunal with the necessary expertise has been established to hear the cause of action; (5) whether the debtor's insurer has assumed full responsibility for defending it; (6) whether the action primarily involves third parties; (7) whether litigation in another forum would prejudice the interests of other creditors; (8) whether the judgment claim arising from the other action is subject to equitable subordination; (9) whether movant's success in the other proceeding would result in a judicial lien avoidable by the debtor; (10) the interests of judicial economy and the expeditious and economical resolution of litigation; (11) whether the parties are ready for trial in the other proceeding; and (12) impact of the stay on the parties and the balance of harms.Sonnax, 907 F.2d at 1286. Not all of these factors will be relevant in every case. Id.
The debtors argue that the likelihood of success on appeal is strong because the bankruptcy court's decision runs directly counter to establish precedent concerning the meaning of 11 U.S.C. § 523(a)(2)(A) and a statement "respecting the debtor's . . . financial condition." The debtors argue that the California Action cannot have collateral estoppel effect in the adversary proceeding because it resulted in a general verdict and the debt resulting from at least some of the allegedly underlying fraudulent statements would be non-dischargeable under the exception to Section 523(a)(2)(A) for a "statement respecting the debtor's . . . financial condition." See In re Tobman, 107 B.R. 20 (S.D.N.Y. 1989). However, the bankruptcy court, in determining that there was sufficient cause to lift the automatic stay did not base its decision on a finding that the judgment in the California Action would have collateral estoppel effect on the issues in the pending adversary proceeding. Although the bankruptcy court determined that the debtors had not shown as a matter of law that the plaintiffs' allegations in the adversary action could not be actionable under 11 U.S.C. § 523 (a)(2)(A), with respect to the issue of the collateral estoppel effect of the California Action, the court stated only that relief from the stay "may result in a partial or complete resolution of these issues" and did not yet conclude that collateral estoppel applied. Indeed, the bankruptcy court explicitly stated: "Once the issues have been fully litigated and the fruits of that litigation are embodied in a final judgment, we can determine whether that judgment should be given preclusive effect in the pending adversary proceeding, perhaps eliminating a great deal of time and expense." (Record Ex. E at 25.)
The bankruptcy court's decision to grant relief from the automatic stay was the result of evaluating the various relevant Sonnax factors. The bankruptcy court, in considering the balance of harms and the impact of the stay, determined that the plaintiffs would suffer prejudice if the stay remained in place because the stay would, in effect, throw out the $3.9 million verdict obtained in the California Action after a ten day trial and prevent the plaintiffs from obtaining a final judgment against the debtors. In addition, the bankruptcy court found that the California Courts had the necessary expertise to hear the appeal and that granting relief from the stay would promote judicial efficiency and economy because resolution of the issues on appeal may obviate the need to relitigate these issues in the present adversary proceeding. The bankruptcy court also reasoned that other creditors would not be prejudiced if the stay was modified. Thus, considering all the relevant Sonnax factors, the bankruptcy court, in this case, found that there was "cause" to grant relief from the automatic stay. The debtors have not made a strong showing that this decision was an abuse of the bankruptcy court's discretion.
Indeed, there is substantial merit to the bankruptcy court's position. All that remained in the California Action was the entry of judgment and appeal. It is possible that the appeal could be expeditiously pursued. The result of that appeal could even be a judgment finding no liability against the debtors, in which event, the adversary proceeding may not be pursued or relief may be foreclosed to the plaintiffs. In any event, the alternative was to begin anew in the adversary proceeding and to redo what was already done in the California Action. While the debtors have maintained that none of the allegedly fraudulent statements by the debtors could have produced any nondischargeable debt and thus the pursuit of any such fraud charges in the California Action or in the adversary proceeding was futile, some of the statements were not "respecting the debtor's . . . financial condition," whether a broad or narrow interpretation of that phrase is used. Compare In re Panaia, 61. B.R. 959, 960 (Bankr. D. Mass. 1986), with, In re Alicia, 230 B.R. 492 (Bankr. S.D.N.Y. 1999). Before proceeding with the costs and expense of the adversary proceeding, it made sense at least to get a final conclusion from the California Action.
It cannot be said that the bankruptcy court's decision was an abuse of discretion. Therefore, the debtors have not made a strong showing of a likelihood of success on appeal and are not entitled to a stay pending appeal.
The debtors' failure to demonstrate a strong likelihood of success on the merits, by itself, establishes that the bankruptcy court's order should not be stayed. Although it is unnecessary, see Broadway Ownership, 202 B.R. at 557;Crosswinds, 1996 WL 350695 at *2, the Court will nevertheless consider whether the debtors have met the other three requirements for obtaining a stay.
B.
The debtors argue that they will suffer irreparable harm if a stay pending appeal is not granted. Specifically, they argue that the failure to obtain a stay pending the appeal in this matter would moot the current appeal from the order lifting the automatic stay because it would require the parties to expend both time and money litigating the appeal in the California Action, which would not be recoverable even if the Debtors were to prevail upon appeal. In essence, the debtors argue that they will be required to pay the costs of attorneys' fees in pursuing the appeal in the California Action. At argument on this motion, the debtors represented that the costs in pursuing the appeal to completion would be a minimum of $35,000.
To establish irreparable harm, a party must demonstrate "an injury that is neither remote nor speculative, but actual and imminent." Tucker Anthony Realty Corp. v. Schlesinger, 8088 F.2d 969, 975 (2d Cir. 1989) (internal quotation omitted). "`Mere injuries, however substantial, in terms of money, time and energy necessarily expended in the absence of the stay, are not enough to show irreparable harm.'" Schwartz v. Dolan, 159 F.R.D. 380, 384 (N.D.N.Y. 1995), vacated in part on other grounds, 86 F.3d 315 (2d Cir. 1996) (quoting Mowbray v. Kozlowski, 725 F. Supp. 888, 890 (W.D. Va. 1989) (quotation omitted)); see also In re American Freight System, Inc., 180 B.R. 646, 647 (D. Kansas 1995). In particular, it is well established that "[m]ere litigation expense, even substantial and unrecoupable cost, does not constitute irreparable injury." Renegotiation Board v. Bannercraft Clothing Co., 415 U.S. 1, 24 (1974). Accord Federal Trade Commission v. Standard Oil Co. of California, 449 U.S. 232, 244 (1980); Miss America Organization y. Mattel, Inc., 945 F.2d 536, 545 (2d Cir. 1991); Greater New York Hospital Ass'n v. United States, 98 Civ. 2741 (RCL), 1999 WL 1021561, at *8 (S.D.N.Y. Nov. 9, 1999); Avco Financial Corp. v. Commodity Futures Trading Commission, 929 F. Supp. 714, 719 (S.D.N Y 1996). The debtors have therefore failed to establish any irreparable injury from lifting the automatic stay to allow the litigation to proceed in California.
Moreover, the costs of litigating the appeal in the California Action may provide a valuable benefit to the debtors.Cf. In re Friedberg, No. 91 Civ. 7490, 1991 WL 259038, at *4 (S.D.N.Y. 1991) (denying motion for stay of the bankruptcy court's order appointing trustee pending appeal, finding that, although the trustee may generate fees and expenses in administering the debtor's estate, they are unlikely to be much greater than the value of the protection afforded by having a trustee in place). Should the debtors be successful in litigating their appeal of the California Action, a result in their favor might have collateral estoppel effect on the plaintiffs' claims in the pending adversary proceeding. In addition, appeal of the California Action may resolve some of the issues presented in the pending adversary proceeding. The debtors have not shown that they will be irreparably injured by pursuing the appeal in the California Action for the brief period necessary for this Court to decide their appeal from the order lifting the automatic stay.
C.
A stay pending appeal resulting in a delay of the entry of judgment in the California Action would harm the plaintiffs who have a strong interest in receiving the remedy provided by the California Action. See Harris v. Butler, 961 F. Supp. 61, 63 (S.D.N.Y. 1997) (finding that the plaintiff has a strong interest in receiving the remedy provided by law for his injuries more than six years after the initiation of his action, thus, militating against granting a stay). The plaintiffs obtained a verdict in the California Action in May of 1997 and the entry of judgment has now been delayed for over three years. Granting a stay would further delay the appeal of the California Action and the pending adversary proceeding, thus delaying any possible recovery by the plaintiffs from the debtors. The plaintiffs, therefore, have not sufficiently shown that others would not suffer harm if a stay was granted.
D.
There is no strong public interest implicated in considering whether to grant a stay pending appeal in this case, although the public does have an interest in the expeditious conclusion of litigation.
CONCLUSION
For the foregoing reasons, the motion for a stay pending appeal is denied.
SO ORDERED.