Opinion
Case No. 01-16034 (AJG)
January 13, 2003.
MEMORANDUM DECISION DENYING THE MOTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF HEARTLAND STEEL, INC., FOR RELIEF FROM AUTOMATIC STAY
Before the Court is the Motion of The Official Committee of Unsecured Creditors of Heartland Steel, Inc. ("HSI" or "Movant") For Relief From Stay (the "Motion") and the accompanying brief (the "Brief") both filed by the official committee of unsecured creditors (the "HSI Committee") appointed in HSI's chapter 11 case pending in the United States Bankruptcy Court for the Southern District of Indiana. Enron North America ("ENA") and certain of its affiliated entities (collectively,"Enron" or "Debtors") and the official committee of unsecured creditors appointed in the above-captioned cases (the "Enron Committee") both object (collectively, the "Objections"). Subsequent to the Objections, HSI filed a Reply of the Official Committee of Unsecured Creditors of Heartland Steel, Inc. In Support Of Its Motion [For Relief] From Automatic Stay (the "Reply").
Although the Motion is entitled as a motion for relief from the automatic stay, the Motion only requests a determination that the automatic stay in the above-captioned cases did not enjoin the commencement and does not enjoin the continued prosecution of an adversary proceeding commenced in the United States Bankruptcy Court for the Southern District of Indiana. The issue of terminating the automatic stay was raised in the Reply and at the hearing held before this Court. For the reasons that follow, the Court determines that the automatic stay applies to the adversary proceeding commenced by the HSI Committee in the United States Bankruptcy Court for the Southern District of Indiana, that the HSI Committee's request for the termination of the automatic stay is denied as moot, and that the HSI Committee will be granted leave to request that the automatic stay be annulled rather than terminated.
I. Jurisdiction
The Court has subject matter jurisdiction of this matter under 28 U.S.C. § 1334(b) and 157(a) and the "Standing Order of Referral of Cases to Bankruptcy Judges" of the United States District Court, dated July 10, 1984 (Ward, Acting C.J.). This is a core proceeding as that term is defined by 28 U.S.C. § 157(b)(2)(G).
II. General Background
Beginning December 2, 2001, Debtors and certain of its direct and indirect domestic subsidiaries, including ENA, commenced cases under chapter 11 of the Bankruptcy Code. The Debtors continue to operate their businesses and manage their properties as debtors in possession pursuant to 11 U.S.C. § 1107(a) and 1108 of the Bankruptcy Code.
III. Background
Heartland Steel, Inc. The Adversary Complaint
HSI is a chapter 11 debtor in a bankruptcy case pending in the United States Bankruptcy Court for the Southern District of Indiana. On October 5, 2001, Enron filed a proof of claim for the sum of $19,536,941 in the HSI bankruptcy proceeding. On November 20, 2001, the Indiana bankruptcy court executed an order confirming HSI's third modification to the first amended plan of reorganization (the "Confirmation Order"). Pursuant to the Confirmation Order, the HSI Committee continued to exist for certain specific and limited purposes including, among other things, the filing of actions against, or objections to, the claims of a specific group of HSI creditors, including Enron. The Confirmation Order provides that the HSI Committee shall be entitled to use up to $350,000 to pursue this litigation. (Confirmation Order ¶ 5.) According to counsel for the HSI Committee, HSI's liquid assets have already been distributed and HSI's remaining assets include pursuing certain lawsuits. (See Tr. At 46.)
On May 3, 2002, the HSI Committee filed an adversary complaint on behalf of HSI (the "Adversary Complaint") against Enron, John Hancock Mutual Life Insurance., Ares Leveraged Investment Fund, Massachusetts Mutual Life Insurance, Gerlach and Company, Inc., GATX Capital, Kvaener Investments, US, Inc., Kvaener Corporate Development, Ltd., and Macquarie Infrastructure, Ltd. as defendants (as defined in the Adversary Complaint, the "Control Parties").
The Adversary Complaint, among other things, seeks to subordinate Enron's claim filed against HSI and seeks affirmative monetary relief from Enron. (See Mot. ¶¶ 3, 9.) The HSI Committee seeks to litigate its claims against Enron based on Enron's alleged active participation in the management decisions that resulted in the financial collapse of HSI. (Mot. ¶ 4.)
The Adversary Complaint contains three separate claims for relief of which only one was ultimately raised at the hearing. The first claim for relief ("Count 1") alleges that the defendant Control Parties, including Enron, breached fiduciary duties to HSI and HSI's unsecured creditors. The Control Parties alleged fiduciary duties result from the Control Parties alleged participation and control of HSI during a period where HSI was experiencing financial uncertainty. The HSI Committee seek damages incurred by HSI and HSI's unsecured creditors as a proximate result of the Control Parties' breach of fiduciary duty.
The second claim for relief ("Count 2") alleges that the Control Parties have been unjustly enriched based upon the Control Parties alleged manipulation of trade creditors during the period of financial uncertainty outlined in Count 1 and throughout the Adversary Complaint.
The third claim for relief ("Count 3") alleges that the Control Parties inequitable conduct during the period of financial uncertainty (outlined in Count 1, 2 and throughout the Adversary Complaint) also serves as a basis for equitably subordinating the Control Parties liens and claims pursuant to 11 U.S.C. § 510 of the Bankruptcy Code.
The threshold issue here is whether the Adversary Complaint should be characterized as a counterclaim against the debtor, or whether the Adversary Complaint is merely a defense to Enron's filed proof of claim. The Court notes that at the hearing regarding the Motion, counsel for the HSI Committee stated that they are not going to seek money damages against Enron and that the HSI Committee is satisfied with proceeding with the subordination of Enron's proof of claim only. (Tr. at 47-8.) Hence, Count 3 is the only cause of action at issue subject to the argument that the automatic stay does not bar its prosecution.
IV. Discussion
A. The Automatic Stay
The filing of a bankruptcy petition operates as a stay applicable to all entities regarding the commencement or continuation of judicial proceedings against the debtor or against property of the estate. See 11 U.S.C. § 362(a).
The automatic stay . . . promote[s] two principal purposes of the Bankruptcy Code. First, the automatic stay provides the debtor with a breathing spell from . . . creditors. [Second,] the automatic stay allows the bankruptcy court to centralize all disputes concerning property of the debtor's estate in the bankruptcy court so that reorganization can proceed efficiently, unimpeded by uncoordinated proceedings in other arenas.
Shugrue v. Air Line Pilots Ass'n, Int'l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 989 (2d Cir. 1990) (internal citations and quotation marks omitted).
The automatic stay is broad, see AP Indus., Inc. v. SN Phelps Co. (In re AP Indus., Inc.), 117 B.R. 789, 798 (Bankr.S.D.N.Y. 1990) ("Congress intended that the scope of the automatic stay be broad in order to effectuate its protective purposes on behalf of both debtors and creditors. . . ."), and is a fundamental debtor protection, e.g., Eastern Refractories Co. Inc. v. Forty Eight Insulations Inc., 157 F.3d 169, 172 (2d Cir. 1998), that not only protects debtors but protects creditors as well. See, e.g., Keene Corp. v. Coleman (In re Keene Corp.), 164 B.R. 844, 849 (Bankr.S.D.N.Y. 1994).
In chapter 11 reorganization cases, the:
[automatic] stay is particularly important in maintaining the status quo and permitting the debtor in possession or trustee to attempt to formulate a plan of reorganization. Without the stay, the debtor's assets might well be dismembered, and its business destroyed, before the debtor has an opportunity to put forward a plan for future operations. Secured creditors and judgment creditors might race to seize and sell the debtor's assets in order to obtain satisfaction of their claims, without regard to the interests of other creditors or the value of keeping assets together in an operating business. The stay prevents this piecemeal liquidation, offering the chance to maximize the value of the business.
3 ALAN N. RESNICK FRANK J. SOMMER, COLLIER ON BANKRUPTCY § 362.03[2] (15th ed. rev. 2002) (hereafter "Collier on Bankruptcy"); see also In re Johns-Manville Corp., 57 B.R. 680, 685 (Bankr.S.D.N.Y. 1986) ("[T]he automatic stay is a crucial Congressionally-mandated tool necessary to the larger goal of rendering a total disposition of all claims in a reorganization proceeding.").
Notwithstanding the scope and breadth of the automatic stay, numerous decisions have recognized that the automatic stay does not apply to lawsuits initiated by the debtor. See, e.g., Olick v. Parker Parsley Petroleum Co., 146 F.3d 513, 516 (2d Cir. 1998) (per curiam); Koolik v. Markowitz, 40 F.3d 567, 568 (2d Cir. 1994) (per curiam); Vasile v. Dean Witter Reynolds Inc., 20 F. Supp.2d 465, 499 (E.D.N.Y. 1998); Vitranschert, Inc. v. Levy, No. 00 Civ. 3618 (SHS), 2000 WL 1239081, at *5 (S.D.N.Y. Aug. 31 2000). In reaching this conclusion, courts have been guided by the text of the bankruptcy code. See id; Martin-Trigona v. Champion Federal Savings Loan Assoc., 892 F.2d 575, 577 (7th Cir. 1989); Association of St. Croix Condominium Owners v. St. Croix Hotel Corp., 682 F.2d 446, 448 (3d Cir. 1982); Justus v. Financial News Network Inc. (In re Financial News Network Inc.), 158 B.R. 570, 572 (S.D.N.Y. 1993). By its terms, the bankruptcy code only stays actions or proceedings "against the debtor." See 11 U.S.C. § 362(a)(1).
Section 362(a), provides, in pertinent part, that:
[A] petition . . . operates as a stay, applicable to all entities, of —
(1) the commencement or continuation . . . 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
. . .
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.
In determining whether an action or proceeding is against the debtor for purposes of 362(a)(1), courts should look to the posture of the parties as of the commencement of the action or proceeding. See, e.g., Koolik v. Markowitz, 40 F.3d at 568; Vasile at 499. Although courts begin the analysis by examining the litigation at its inception, the inquiry does not end there because all proceedings in a single case are not categorically lumped together. Vasile at 499 (citing Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1204 (3rd Cir. 1992)). Rather, multiple claims must be disaggregated so that particular claims, counterclaims etc. are treated independently for purposes of determining whether the automatic stay applies. Id.
For example, even where a debtor is the initial plaintiff, counterclaims for affirmative relief implicate the automatic stay. As explained by the court of appeals in Koolik:
[S]ince a defendant who is awarded judgment on a counterclaim is no less a judgment creditor than is a plaintiff who is awarded judgment on a claim asserted in the complaint, we construe the term "action or proceeding," for purposes of § 362(a)(1), to include any pleading that asserts a claim on which relief is sought. Thus, an answer that asserts a counterclaim against a plaintiff who becomes a bankruptcy debtor is an "action or proceeding against the debtor" within the meaning of § 362(a)(1), notwithstanding the fact that the plaintiff initiated the lawsuit.
Koolik, 40 F.3d at 568.
In contrast, where a debtor initiates litigation and no counterclaim is asserted, mere defenses to a debtor's affirmative claims are not proscribed by the automatic stay. See, e.g., Martin-Trigona v. Champion Federal Savings Loan Assoc., 892 F.2d 575, 577 (7th Cir. 1989). As the Martin-Trigona court has explained:
[T]he automatic stay is inapplicable to suits by the bankrupt ("debtor," as he is now called). This appears from the statutory language, which refers to actions "against the debtor," 11 U.S.C. § 362(a)(1), and to acts to obtain possession of or exercise control over "property of the estate," § 362(a)(3), and from the policy behind the statute, which is to protect the bankrupt's estate from being eaten away by creditors' lawsuits and seizures of property before the trustee has had a chance to marshal the estate's assets and distribute them equitably among the creditors. The fundamental purpose of bankruptcy, from the creditors' standpoint[,] is to prevent creditors from trying to steal a march on each other and the automatic stay is essential to accomplishing this purpose. There is, in contrast, no policy of preventing persons whom the bankrupt has sued from protecting their legal rights. True, the bankrupt's cause of action is an asset of the estate; but as the defendant in the bankrupt's suit is not, by opposing that suit, seeking to take possession of it, subsection (a)(3) is no more applicable than (a)(1) is.
Id. (citation omitted).
Relying on Martin-Trigona, the district court in Justus v. Financial News Network Inc. (In re Financial News Network Inc.), 158 B.R. 570 (S.D.N.Y. 1993) (hereafter "FNN"), applied a similar rationale to hold that the automatic stay in effect in a chapter 7 debtor's case did not preclude a bankruptcy court from sustaining a chapter 11 debtor's objection to the chapter 7 debtor's proof of claim. FNN involved an appeal from a bankruptcy court order that sustained a chapter 11 debtor's ("FNN") objection to a proof of claim filed by a chapter 7 debtor ("Kaypro") in FNN's chapter 11 case. Kaypro filed bankruptcy in California in March 1990. FNN filed bankruptcy in New York in March 1991. Kaypro filed a proof of claim in FNN's chapter 11 case in April 1991. Kaypro's proof of claim was based on certain contract rights to advertising space. FNN objected to Kaypro's proof of claim based upon a theory that FNN was not a party to that contract and on the additional theory that another party had assumed all obligations emanating therefrom pursuant to bankruptcy court order.
On appeal, Kaypro argued, among other things, that the bankruptcy court's order sustaining FNN's objection to Kaypro's proof of claim violated the automatic stay imposed as a result of Kaypro's bankruptcy case commenced in California. In rejecting Kaypro's argument, the district court first outlined the distinction between actions against the debtor and actions initiated by the debtor. The district court then discussed how the text and purpose of the automatic stay did not prevent the disallowance of Kaypro's proof of claim. The district court reasoned that:
In objecting to Kaypro's proof of claim filed in the New York Bankruptcy Court, FNN acted in a defensive manner to protect its own legal rights and its own bankrupt estate. See Martin-Trigona, 892 F.2d at 577. FNN asserted no claim against Kaypro which could be construed as an active attempt to recover property from Kaypro or an act seeking to gain control or possession of any contract cause of action by Kaypro against FNN. This case is therefore to be distinguished from cases in which creditors of the bankrupt estate or other third parties initiate judicial proceedings or adversary proceedings in an active attempt to circumvent the automatic stay and control the property of the bankrupt estate.
Id.
The district court was apparently satisfied that FNN's objection to Kaypro's proof of claim was merely a defense and not a counterclaim "against the debtor" so as to be proscribed by 11 U.S.C. § 362(a)(1). In addition, the district court rejected the argument that a defense to a claim was an act to gain control or possession of Kaypro's rights evidenced by a proof of claim. By ruling in favor of FNN, the district court distinguished defenses from the automatic stay's proscriptions found in 11 U.S.C. § 362(a)(3). Although not explicitly articulated in FNN, the district court ostensibly relied on the premise that a proof of claim is analogous to a complaint, and an objection to a proof of claim an answer. See Nortex Trading Corp. v. Newfield, 311 F.2d 163, 164 (2d Cir. 1962) (Act case) ("The filing by Nortex of its proof of claim is analogous to the commencement of an action within the bankruptcy proceeding. The trustee's petition is in the nature of an answer . . .") (citation omitted)); In re Dayton Seaside Assocs. No. 2, L.P, 257 B.R. 123, 133 (Bankr.S.D.N.Y. 2000) ("The filing of a proof of claim has been properly analogized to the filing of a complaint, with the debtor's objection the answer or defense."); In re 20/20 Sport, Inc., 200 B.R. 972, 978 (Bankr.S.D.N.Y. 1996) ("In bankruptcy cases, courts have traditionally analogized a creditor's claim to a civil complaint, a trustee's objection to an answer, and an adversarial proceeding to a counterclaim."). Accord Smith v. Dowden, 47 F.3d 940, 943 (8th Cir. 1995); Simmons v. Savell (In re Simmons), 765 F.2d 547, 552 (5th Cir. 1985).
As previously stated, the threshold issue here is whether the Adversary Complaint should be characterized as a counterclaim against the debtor, or whether the Adversary Complaint is merely a defense to Enron's filed proof of claim. The Court notes that at the hearing regarding the Motion, HSI essentially withdrew their argument that the automatic stay does not apply to Count 1 or Count 2 of the Adversary Complaint. Count 1 of the Adversary Complaint seeks money damages from Enron, among others, for Enron's alleged breach of fiduciary duties. Count 2 of the Adversary Complaint requests the recovery of amounts by which the Control Parties were unjustly enriched during the operation of the corporation. The issue before the Court is whether Count 3 of the Adversary Complaint regarding equitable subordination under § 510 is a defense or a counterclaim subject to the automatic stay.
Specifically, counsel for the HSI Committee stated that they are not going to seek money damages against Enron and that the HSI Committee is satisfied with proceeding with the subordination of Enron's proof of claim only. (Tr. at 47-8.)
B. Applying the Relevant Arguments to the Applicable Legal Standard
HSI argues that the automatic stay imposed by the filing of Enron's bankruptcy petition does not stay or otherwise preclude the commencement or continuation of the causes of action in the Adversary Complaint. HSI contends that the HSI Committee is entitled to subordinate and file a "counterclaim" against Enron because Enron filed a proof of claim against HSI. (See Mot. ¶ 7.) According to the HSI Committee, "it is clear from the plan of reorganization and from the [Adversary] Complaint itself that the main purpose of the action and the main thrust of the action against Enron is to subordinate [Enron's] $19 million claim . . ." (Reply at § I, p. 2.) Hence, HSI asks this Court to draw the conclusion that HSI's equitable subordination claim (Count 3) is more defensive than in the nature of a counterclaim and therefore not stayed. To support this proposition, HSI directs this Court to the plan of reorganization and the Adversary Complaint. The Court will discuss these items below.
See footnote 4, infra, regarding HSI's use of the term counterclaim.
As discussed, supra, even where a debtor is the initial plaintiff, counterclaims for affirmative relief implicate the automatic stay. Koolik, 40 F.3d at 568.
The Court does not draw an adverse inference against HSI based on HSI's use of the term "counterclaim" in the Motion. It does not appear that HSI sought to compromise the internal consistency of their argument by the use of that term.
Regarding the plan of reorganization, none of HSI's exhibits contained the plan of reorganization. The Court will presume that HSI actually wanted this Court to examine the Confirmation Order which was attached to HSI's Motion as Exhibit A. Pursuant to the Confirmation Order, the HSI Committee continued to exist for certain specific and limited purposes including, among other things, "to pursue any actions against, or objections to, the Claims of the Sub-debt Group." (Confirmation Order ¶ 5.) The Confirmation Order provides that the HSI Committee shall be entitled to use up to $350,000 to pursue litigation regarding the Claims of the Sub-debt Group. (Confirmation Order ¶ 5.) In addition, the Confirmation Order also authorizes the HSI Committee to pursue under 11 U.S.C. § 510(c) the equitable subordination of the Sub-debt Group Claim. (Confirmation Order ¶ 12.)
Regarding the Adversary Complaint, the complaint provides the following summary:
I. SUMMARY OF ACTION.
1. This is an action to recover damages from and to subordinate the claims of the Defendants who through their control of the Board of Directors caused HSI to engage in inequitable conduct to the detriment of HSI's creditors. The Defendants are responsible for allowing the undercapitalized Debtor to incur trade debt when Defendants knew Debtor to be insolvent and unable to pay trade creditors and for allowing and causing Debtor to continue operations and artificially extending the life of the Debtor thus deepening the insolvency of the Debtor.
2. Defendants controlled the operations of HSI. They served on, advised or had agents on the Board of Directors. In a futile effort to recover money invested in the Debtor, the Defendants made decisions to extend the life of the corporation ignoring the corporation's insolvency and undercapitalization. The Defendants knowingly or recklessly continued to induce the unsecured creditors to provide goods and services notwithstanding the inevitable consequences of their actions: business failure, Chapter 11 bankruptcy and, ultimately, liquidation. The Defendants took action extending the life of Debtor to the detriment of HSI and other creditors motivated by their own hope for payment rather than the long-term best interest of HSI and its creditors.
(Mot. Ex. B ¶¶ 1, 2.)
Moreover, as a jurisdictional basis, the Adversary Complaint provides: "In addition, this is a counterclaim to the claims filed by Enron North America, John Hancock Mutual Life Insurance., Ares Leveraged Investment Fund, Massachusetts Mutual Life Insurance, and GATX Capital." (Mot. Ex. B ¶ 3.)
In addition, Count 3 alleges:
THIRD CLAIM FOR RELIEF (SUBORDINATION OF THE CONTROL PARTIES CLAIMS)
69. The Committee repeats and realleges the allegations contained in paragraphs 1 through 68 as if fully set forth herein.
70. The Control Parties acted inequitably by, among other things, knowingly or recklessly disregarding HSI's insolvency to induce creditors to continue to provide goods and services when the Control parties were implementing a plan to stretch unsecured creditors. The Control Parties were insisting on timely interest payments and early payment for goods and services provided by certain Control Parties.
71. The Control Parties acted inequitably by among other things knowingly or recklessly hindering, delaying or defrauding the Debtor's unsecured creditors.
72. The Control Parties knew that without the manipulation of the trade debt, the Debtor would be compelled to acknowledge its business failure and proceed to bankruptcy and liquidation. These actions also deepened the insolvency of the Debtor.
73. The inequitable conduct of the Control parties resulted in injury to the unsecured creditors of the Debtor.
74. Equitable subordination of the Control Parties' liens and claims is consistent with the provisions of the Bankruptcy Code.
75. In addition, the Control parties are, essentially, equity holders rather than creditors, whose `claims' are already contractually subordinated. For these additional reasons, the liens and [claims] of the Control Parties should be subordinated to the claims of all unsecured creditors.
76. By reason of the foregoing, pursuant to § 510 of the Bankruptcy Code, the [HSI] Committee is entitled to judgment.
(Mot. Ex. B ¶¶ 69-76.)
Finally, the demand for Count 3 requests relief "pursuant to § 510 of the Bankruptcy Code and applicable non-bankruptcy law, subordination of the Control Parties' claims and liens to the claims of all unsecured creditors."
On the foregoing basis, HSI contends that it is clear that the main purpose and thrust of the adversary proceeding against Enron is to subordinate Enron's claim. (Reply at § I, p. 2.) HSI's argument relies on the premise that subordinating Enron's claim is "defensive" rather "offensive" in nature, and therefore not stayed.
According to Debtors, the Adversary Complaint cannot be characterized as defensive because neither the Adversary Complaint nor the Motion contest the amount or validity of Enron's claim. The Enron Committee interposes a similar argument. Specifically, that the HSI Committee is not merely defending itself against Enron's proof of claim because the HSI Committee does not impose an objection to the validity or allowance of Enron's claim in the Adversary Complaint. Under these circumstances, both the Debtors and the Enron Committee argue that the Adversary Complaint is offensive and therefore stayed pursuant to § 362.
The Court agrees with the Debtors and the Enron Committee that the Adversary Complaint is offensive and therefore stayed for the following reasons.
First, and as a general matter, HSI has failed to sufficiently identify how the Adversary Complaint is an objection to claim. According to the Confirmation Order, the HSI Committee was authorized to both object to Enron's proof of claim or file actions against Enron. (Confirmation Order ¶ 5.) Further, the Adversary Complaint contains the assertion that the Adversary Complaint "is a counterclaim to the claim filed by Enron. . . ." as a basis for jurisdiction for in the Bankruptcy Court for the Southern District of Indiana. Thus, other than a categorical assertion to the contrary, the Court has been offered nothing from which to conclude that the Adversary Complaint is anything other than an action against Enron within the meaning of 11 U.S.C. § 362(a)(1). The Court bases this conclusion on the fact that the Adversary Complaint fails to specifically delineate that the Adversary Complaint is an objection to Enron's proof of claim and the fact the Adversary Complaint suggests that it is a counterclaim. As it has been noted:
The best practice is to denominate an objection to a claim as just that. The body of the objection should identify the claim. It should also, at a minimum, allege those facts necessary to support the objection . . . and provide a description of the theories on which it is based. In short, proofs of claim have been held analogous to complaints initiating civil actions; an objection to a claim should therefore meet the standards of an answer. It should make clear which facts are disputed; it should allege facts necessary to affirmative defenses; and it should describe the theoretical bases of those defenses.
9 Collier on Bankruptcy ¶ 3007.01[3] (footnotes omitted).
Likewise, this Court would have expected that the Adversary Complaint would clearly delineate that the purpose of the Adversary Complaint was an objection to proofs of claim and that certain types of relief are defensive. Because the Adversary Complaint was filed months after Enron's bankruptcy petition, at the very least the Adversary Complaint should have identified that the Adversary Complaint was an objection to Enron's proof of claim and that the relief requested was defensive. The fact that the Adversary Complaint does not do either of these things justifies this Court in concluding that the Adversary Complaint is merely an attempt by the HSI Committee to circumvent the automatic stay in Enron's bankruptcy case. See Justus v. Financial News Network Inc. (In re Financial News Network Inc.), 158 B.R. at 573. From a policy perspective, there is no reason for this court to conclude that by prosecuting the Adversary Complaint that the HSI Committee is not attempting to procure a benefit not otherwise available to Debtors' other creditors in violation of the automatic stay. Unlike the court in FNN, this Court is not satisfied that the Adversary Complaint is an objection to claim and therefore merely HSI's attempt at defending HSI's legal rights vis-a-vis Enron.
Second, equitable subordination under 11 U.S.C. § 510(c) is not a defense to a debtor's liability on a proof of claim. In re Mid-American Waste Systems, Inc., 284 B.R. 53, 68 (Bankr. D. Del. 2002). As this Court recently noted, "[e]quitable subordination can only be used to reorder priorities, not to disallow claims." Official Committee of Unsecured Creditors v. Morgan Stanley Co., Inc., (In re Sunbeam Corp.), 284 B.R. 355, 363 (Bankr.S.D.N.Y. 2002) (citing 80 Nassau Assocs. v. Crossland Fed. Sav. Bank (In re 80 Nassau Assocs.), 169 B.R. 832, 837 (Bankr. S.D.N.Y. 1994)). Whereas equitable subordination concerns the distribution and classification of an allowed claim based upon equitable principles, an objection to claim under 11 U.S.C. § 502 concerns the allowance of such claim. See Francis v. Holmes Land Co. (In re GEX Kentucky, Inc.), 100 B.R. 887, 891 (Bankr.N.D.Ohio 1988) Stated another way, "equitable subordination is a legally distinct proceeding which seeks to re-prioritize the order of allowed claims based on the equities of a case, rather than to allow or disallow the claim in the first instance." In re Mid-American Waste Systems, Inc., 284 B.R. at 68. This is so because "the inquiry as to whether equitable subordination applies does not focus upon the validity of the underlying debt at all. Rather, this fact is presumed, or otherwise admitted." In re County of Orange, 219 B.R. 543, 559-60 (Bankr.C.D.Cal. 1997). Thus, equitable subordination under § 510 is qualitatively different than an objection to a proof of claim under § 502. Although under applicable non-bankruptcy law equitable subordination may serve as a basis for the disallowance of a proof of claim under 11 U.S.C. § 502, see 4 Collier on Bankruptcy § 510.02 ("Under some circumstances, a creditor may engage in conduct vis-a-vis the debtor which will result, under applicable law, in the unenforceability of the creditor's claim. In such a case, the claim of the creditor is disallowed. Examples would be unenforceability under state law due to usury, fraud or unconscionability.") (footnote omitted)), the invocation of 11 U.S.C. § 510 in the demand of the Adversary Complaint leads this Court to the conclusion that Count 3 to the Adversary Complaint was intended as an offensive use of federally-created rights to alter the priority of Enron's proof of claim only. On this basis, the Court finds that Count 3 is not a defense to Enron's proof of claim because equitable subordination is distinct from an objection to a proof of claim.
Third, the Court disagrees with HSI's characterization that the main thrust of the Adversary Complaint is defensive. A simple reading of how the HSI Committee summarizes the relief requested therein, undermines this contention.
For the foregoing reasons, the Court finds that the Adversary Complaint is stayed pursuant to 11 U.S.C. § 362(a)(1) as an action or proceeding against the Debtors.
V. Alternative Relief Raised in the Reply and at the Hearing, But Not in the Initial Motion, to Modify the Automatic Stay
In the alternative, HSI argues that the automatic stay should be "lifted" in order to permit Count 3 of the Adversary Complaint to proceed. (Tr. at 46; Reply at § II, p. 3.) The Debtors and the Enron Committee both object. The Court notes that despite the title of the HSI Motion, HSI did not assert any legal arguments regarding cause to modify the automatic stay. However, in the Reply and at the hearing held before the Court, HSI raised the issue of terminating the automatic stay.
The Reply provides, in pertinent part, that "the twelve factors that the Second Circuit uses to assist the Court in exercising its discretion would require a lifting of the stay in this matter." (Reply at § II, p. 3.)
HSI requests the incorrect form of relief under 11 U.S.C. § 362(d). HSI should have requested that this Court annul, rather than "lift" or terminate, the automatic stay because the Adversary Complaint was filed after the imposition of the automatic stay. Actions in violation of the automatic stay are void in this circuit, Eastern Refractories, 157 F.3d at 172, unless otherwise validated nunc pro tunc through bankruptcy court order. See In re Best Payphones, Inc., 279 B.R. 92, 97-8 (Bankr. S.D.N.Y. 2002) (describing the distinction between annulment and termination and finding that the difference is more than semantic. Ultimately, the bankruptcy court concluded that relief from the automatic stay to proceed with an appeal was moot because the order to be appealed was void in the absence of a request for an annulment). The difference between termination and annulment is substantive. Whereas terminating the automatic stay only operates prospectively, annulling the stay operates to validate on otherwise void act. See id. Applied here, HSI should have requested that this Court validate the filing of the Adversary Complaint against Enron by requesting an annulment because the Adversary Complaint was filed after Enron's bankruptcy petition. Absent such relief, terminating the automatic stay to proceed with a complaint that is void as against Enron makes no sense. The Court will provide the HSI Committee leave to request appropriate relief.
VI. Conclusion
Having found that the automatic stay under 11 U.S.C. § 362(a)(1) applies to the Adversary Complaint, the Court directs the HSI Committee to forthwith cease any act that may be violative of such automatic stay as it pertains to the Adversary Complaint. Moreover, the Court directs the HSI Committee by February 10, 2003 to either (i) request that this Court annul the automatic stay to any, or all, counts in the Adversary Complaint against Enron, (ii) if such motion is filed, dismiss the balance of the remaining counts, if any, in the Adversary Complaint against Enron not subject to such motion, or (iii) if a motion to annul is not filed, dismiss all counts in the Adversary Complaint against Enron.
Based on the foregoing, the relief requested by the HSI Committee is DENIED. A separate order will be entered contemporaneously herewith.