Opinion
NOT FOR PUBLICATION
ORDER ON MOTION TO STAY STATE COURT PROCEEDINGS
PETER W. BOWIE, Chief Judge United States Bankruptcy Court.
Debtor filed its petition under Chapter 11 on July 26, 2010, as a "barebones" petition. On August 26, 2010 Citizens Development Corporation filed its own Chapter 11 petition. Matthew DiNofia is president of both entities. On September 16, citizens filed a motion to substantively consolidate Citizens, LSM Hotel, LLC, and other affiliated entities.
On October 21, Citizens filed a motion to stay all non-bankruptcy litigation against Mr. DiNofia for a limited time period, through March 31, to permit Mr. DiNofia to focus on developing the reorganization of the entities. The motion listed a suit by German American Credit Corporation (GACC), filed July 2, 2010, and a suit filed by El Toreador Properties on April 22, 2010. Both are directly against Mr. DiNofia on various counts, including on personal guarantees of the underlying obligations. As of the date of Citizens' motion, the Superior Court in the Toreador litigation had entered a scheduling order setting deadlines: 1) first expert exchange December 2, 2010; 2) second expert exchange December 22; 3) motion and discovery cutoff February 25, 2011; 4) deadline for filing jury fees February 25; 5) trial readiness conference March 4; and 6) trial March 25, 2011.
On November 18, the motion to extend the stay was denied on procedural grounds, for the central reason that it should be brought in the context of an adversary proceeding seeking relief against a third party. Then, on January 27, 2011 the Court granted Citizens' motion for substantive consolidation after multiple days of evidentiary hearing.
In the meantime, LSM Hotel filed an adversary proceeding in its Chapter 11 against Toreador and Mr. Serhan, asserting that the defendants' lien against the hotel should be avoided because it was the result of a fraudulent conveyance. That suit was filed on or about December 23, and amended December 29. Then, on January 13, 2011 LSM Hotel filed an "Emergency Motion to Stay State Court Proceedings Pursuant to Bankruptcy Code Section 105(A) and 362". Following a briefing schedule, this matter was set for hearing before this Court.
As noted, debtor has styled the motion as an "Emergency Motion to Stay". As such, the movant seeks injunctive relief. Because of the full briefing this matter has received, as well as the elapsed time between its filing on January 13 and the hearing on February 4, the Court has proceeded to treat the motion as requesting preliminary injunctive relief, not a temporary restraining order.
In its moving papers seeking to stay only the Toreador state court proceedings against Mr. DiNofia, LSM Hotel argued there was a risk of inconsistent verdicts between the state court action on Mr. DiNofia's guarantee and a bankruptcy court decision avoiding LSM's liability on the same obligation because of the fraudulent conveyance claim. They also argued Mr. DiNofia might have a right of indemnification against LSM Hotel if he was found liable in the state court action. LSM Hotel's third argument was that allowing the state court litigation to go forward against Mr. DiNofia would draw his time and attention away from focusing on the reorganization of the debtor. In support of that argument, they asked the Court to take judicial notice of the declaration Mr. DiNofia filed in the Citizens case in support of the motion there to extend the stay. That declaration was filed on October 21.
In his declaration filed in the Citizens case, Mr. DiNofia stated with the then-pending litigation over substantive consolidation and two significant stay relief matters, he needed "a reprieve from pending litigation." He mentioned the German American lawsuit and the Toreador litigation, and added two others brought by Bank of the West and Telesis, both of which had been settled by him prepetition. He anticipated, however, that those creditors of his might claim a breach of the settlement by the filing of the Chapter 11 petitions. He claimed then that having to allocate time to those litigations would deprive the bankruptcy estates of his availability to assist in defense of the relief from stay matters, prosecution of the substantive consolidation motion, and working on reorganization. He stated: "I expect that the following approximately two months will be spent litigating these Motions, performing discovery, and preparing for trial."
Since that declaration was filed, the German American relief from stay and the substantive consolidation matters have been concluded, in the most part. As already noted, substantive consolidation was granted, and the stay was modified and continued consistent with the deadlines for filing a plan and disclosure statement, and showing evidence of the likelihood of sufficient financial commitments to support a reorganization. As an aside, it appears that on January 6, 2011 Mr. DiNofia filed a cross-complaint in the Toreador litigation.
Curiously, Mr. DiNofia supplied a declaration in support of LSM Hotel's emergency motion to stay the Toreador state court proceedings focusing only on whether LSM Hotel might prevail on its fraudulent conveyance claim against Toreador and Mr. Serhan. His declaration is silent on the need for "a reprieve" from the Toreador litigation, or any other litigation, except by adoption of his October declaration filed in support of the Citizens motion. Most of the grounds asserted in the Citizens motion have since abated, except the argument concerning the need of the debtor for Mr. DiNofia's attention to the now-consolidated debtor's reorganization against the deadlines set by the court in conjunction with the German American stay relief motion. (The Court is aware that Symphony Asset Pool is the successor to German American's interest as of November 19, 2 010, but has continued to refer to the movant as German American for continuity.)
Boiling the motion down to essentially what is left, LSM Hotel asks this court to stay the Toreador litigation presently pending in the Superior Court for a finite period of time. At argument, it was not clear whether debtor was asking for relief only until the plan and disclosure statement is filed on or before March 31, or whether the relief sought would extend through May 25 when the continued hearing is set. LSM Hotel LLC is not a party to the Superior Court proceedings. The remaining argument in support of the motion is the need for Mr. DiNofia's time and attention to reorganization of the now-consolidated debtor, rather than having his attention consumed with defending himself in the state litigation.
The controlling authority in the Ninth Circuit on the issue of granting injunctions/stays of third party proceedings is In re Excel Innovations, Inc., 502 F.3d 1086 (2007). There, the court held: 1) "the usual preliminary injunction standard applies to stays of proceedings against non-debtors under § 105(a)" (the court commented: 'The usual standard helps to ensure that stays would not be granted lightly'), 502 F.3d at 1094-95; 2) "a debtor seeking to stay an action against a non-debtor must show a reasonable likelihood of a successful reorganization", id., at 1095; 3) "the relative hardship of the parties"; and 4) "any public interest concerns if relevant", id., at 1096.
In this proceeding, the focus of LSM Hotel seems to have been on the likelihood of success on its fraudulent conveyance adversary, not on the likelihood of a successful reorganization. In Excel, the Bankruptcy Appellate Panel had found a reasonable likelihood of a successful reorganization, but the Court of Appeals held such a finding was an abuse of discretion because the record did not provide evidentiary support for it. The instant proceeding finds the debtor in a similar position, with scant, if any, evidence provided in this motion on the likelihood of a successful reorganization. In years past, this Court has followed the Fourth Circuit decision in A.H. Robins Co. v. Piccinin, 788 F.2d 994 (1986), and this Court would likely have concluded that the request of debtor here was reasonable for a finite period of time because of the effort required to reorganize a financially troubled business, especially in times of tight financing. If the business can be reorganized in a reasonable period of time, that benefits most of the parties in interest. (Here, that might not be as clear since LSM Hotel is looking to avoid its liability of over $3 million through its fraudulent conveyance adversary). But Excel has raised the bar for movants seeking to enjoin non-debtor third party litigation even for a finite period of time. Here, the record is virtually silent on the reasonable likelihood of a successful reorganization.
The Excel decision reminds us:
The moving party must show:
(1) a strong likelihood of success on the merits, (2) the possibility of irreparable injury to plaintiff if preliminary relief is not granted, (3) a balance of hardships favoring the plaintiff, and (4) advancement of the public interest (in certain cases). Alternatively, a court may grant the injunction if the plaintiff demonstrates either a combination of probable success on the merits and the possibility of irreparable injury or that serious questions are raised and the balance of hardships tips sharply in his favor.
As we have said many times regarding the two alternative formulations of the preliminary injunction test: these two formulations represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases. They are not separate tests but rather outer reaches of a single continuum. 502 F.3d at 1093.
With respect to hardships, Excel instructs: "A bankruptcy court must 'identify the harms which a preliminary injunction might cause to defendants and . . . weigh these against plaintiff's threatened injury.'" 502 F.3d at 1097. In Excel, the court found that the fact the individual defendant might raise a defense of indemnification, that denying the stay might lead to inconsistent results, and that the individual defendant might disclose privileged communications were "insufficient to support the conclusion that Excel stands to suffer irreparable harm if arbitration proceeds." 502 F.3d at 1097. The Excel court also found that the bankruptcy court had ignored the harm to the party to be enjoined. That party "had argued that it would suffer harm from losing its bargained-for right to bring an arbitration claim against Hoffman at a time of its choosing." Id, The court reiterated: "'A plaintiff must do more than merely allege imminent harm sufficient to establish standing; a plaintiff must demonstrate immediate threatened injury as a prerequisite to preliminary injunctive relief.'" 502 F.2d at 1099.
With the Excel standard in sharp focus, the Court concludes that movant LSM Hotel has failed to demonstrate either a reasonable possibility of reorganization, or that it would suffer relative hardship, much less irreparable injury sufficient to warrant issuance of an injunction to stay state court proceedings involving non-debtor third parties.
Conclusion
For the foregoing reasons, LSM Hotel's motion for a stay of the so-called Toreador state court litigation shall be, and hereby is denied.
IT IS SO ORDERED.