Opinion
Case No. 02-13533 (AJG), Jointly Administered
December 18, 2002
Before the Court is a motion by Elena Skibinski and Olga Skibinski ("Movants"), proceeding pro se, who seek relief from the automatic stay in order to continue litigation before the Civil Court of the City of New York — County of New York against WorldCom Wireless, Inc., and MCI WorldCom Communications, Inc., (the "Debtors" or "WorldCom"). Movants request an order modifying the automatic stay pursuant to 11 U.S.C. § 362(d)(1), to permit Movants to proceed in an action entitled Elena Skibinski and Olga Skibinski v. WorldCom Wireless/MCI Telecommunications Corp., Case No. 013987CV2001 (the "Civil Court Action"). Specifically, Movants request permission to determine WorldCom's liability with regard to an alleged breach of contract claim brought by Olga Skibinski.
I. Jurisdiction
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding as that term is defined by 28 U.S.C. § 157(b)(2)(G).
II. General Background
On July 21, 2002, Debtors and substantially all of its direct and indirect domestic subsidiaries 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. Civil Court Action
On April 5, 2001, Elena Skibinski and Olga Skibinski filed a lawsuit against WorldCom in the Civil Court of the City of New York — County of New York alleging fraudulent billing practices. The Civil Court Action alleged that Elena Skibinski was improperly billed for certain charges on residential telephone services provided by MCI WorldCom Communications, Inc., and that Olga Skibinski was improperly and fraudulently billed for certain charges on wireless phone services provided by WorldCom Wireless, Inc. In response WorldCom Wireless, Inc., and MCI WorldCom Communications, Inc. filed a Motion to Dismiss the Civil Court Action on July 5, 2001.
The Civil Court order dated November 19, 2001, dismissed all claims against MCI WorldCom Communications, and converted the fraud claim made by Olga Skibinski against WorldCom Wireless, Inc. to a breach of contract claim. On January 8, 2002, in response to this remaining breach of contract claim by Olga Skibinski, WorldCom Wireless, Inc. filed an answer and crossclaim, denying the allegations of breach of contract.
On January 23, 2002, Olga Skibinski filed a Motion for Summary Judgment on the remaining breach of contract claim in the Civil Court Action. In response, on January 30, 2002, WorldCom Wireless, Inc., filed an opposition to Olga Skibinski's Motion for Summary Judgment. Olga Skibinski's Motion for Summary Judgment was pending before the Civil Court at the time of the commencement of WorldCom's Chapter 11 cases on July 21, 2002.
IV. Discussion A. Applicable Legal Standard
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). Stated another way, the automatic stay reflects a Congressional concern for alleviating a debtor's financial pressures to promote rational choices and for preventing the distributional prejudice incurred by a creditors' race to the courthouse. See H.R. REP. NO. 95-595, at 340 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6296-97; cf. S. REP. NO. 95-989, at 54-55 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5840-41.
The House Report provides, in relevant part, that:
The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from . . . creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove [the debtor] into bankruptcy.
The automatic stay also provides creditor protection. Without it, certain creditors would be able to pursue their own remedies against the debtor's property. Those who acted first would obtain payment of [their] claims in preference to and to the detriment of other creditors. Bankruptcy is designed to provide an orderly liquidation procedure under which all creditors are treated equally. A race of diligence by creditors for the debtor's assets prevents that.
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); 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 these concerns, 11 U.S.C. § 362(d)(1) of the Bankruptcy Code empowers the bankruptcy court to modify the automatic stay for cause. See In re Touloumis, 170 B.R. 825, 828 (Bankr.S.D.N.Y. 1994) ("[A] motion to continue a pre-petition litigation implicates Section 362(d)(1)."). The Bankruptcy Code does not define cause. E.g., Schneiderman v. Bogdanovich (In re Bogdanovich), 292 F.3d 104, 110 (2d Cir. 2002). As stated in the House Report:
[A] desire to permit an action to proceed to completion in another tribunal may provide . . . cause. Other causes might include the lack of any connection with or interference with the pending bankruptcy case. For example, a divorce or child custody proceeding involving the debtor may bear no relation to the bankruptcy case. In that case, it should not be stayed. A probate proceeding in which the debtor is the executor or administrator of another's estate usually will not be related to the bankruptcy case, and should not be stayed. Generally, proceedings in which the debtor is a fiduciary, or involving postpetition activities of the debtor, need not be stayed because they bear no relationship to the purpose of the automatic stay, which is debtor protection from . . . creditors.
H.R. REP. NO. 95-595, at 343-44 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6300.
The Second Circuit has endorsed certain factors for determining whether there is cause to modify the automatic stay in order to allow litigation to proceed in another forum. Sonnax Indus., Inc. v. Tri Component Products Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280, 1286 (2d Cir. 1990). Specifically,
(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.
Id. (citing In re Curtis, 40 B.R. 795, 799-800 (Bankr.D.Utah 1984) (hereafter "Sonnax Factor(s)")). All twelve Sonnax Factors will not be relevant in every case, Mazzeo v. Lenhart (In re Mazzeo), 167 F.3d 139, 143 (2d Cir. 1999), nor will the court accord equal weight to each element. Burger Boys, Inc. v. South St. Seaport Ltd. P'Ship (In re Burger Boys, Inc.), 183 B.R. 682, 688 (S.D.N.Y. 1994); In re New York Medical Group, P.C., 265 B.R. 408, 413 (Bankr.S.D.N.Y. 2001).
The burden of proof on a motion to modify the automatic stay is a shifting one. Sonnax, 907 F.2d at 1285. The initial burden rests on the movant to show cause to modify the stay. Bogdanovich, 292 F.3d at 110; Mazzeo, 167 F.3d at 142; Sonnax, 907 F.2d at 1285. Only if the movant makes an initial showing of cause does the burden then shift to the party opposing the relief. Mazzeo, 167 F.3d at 142. Once a legally sufficient basis, or cause, is demonstrated by the movant, the party opposing the relief must prove that it is entitled to the continuing protections of the automatic stay. In re M.J. K. Co., Inc., 161 B.R. 586, 590 (Bankr.S.D.N.Y. 1993). If the movant fails to meet its initial burden of demonstrating cause, relief from the automatic stay should be denied. Bogdanovich, 292 F.3d at 110; Mazzeo, 167 F.3d at 142; Sonnax, 907 F.2d at 1285. The determination whether to modify the automatic stay depends upon the facts of each motion. Bogdanovich, 292 F.3d at 110.
Here, the issue before the Court is whether there is cause to modify the automatic stay for the purpose of permitting the Civil Court Action to proceed.
In their papers, WorldCom references a prior decision by this Court regarding a movant's burden in determining whether the automatic stay should be modified at the early stages of a bankruptcy case. Specifically, the Court has relied on the general rule that during the early stages of a case, unsecured claimants should not be granted relief from the automatic stay unless extraordinary circumstances are established to justify such relief. See, e.g., In re Pioneer Commercial Funding Corp., 114 B.R. 45, 48 (Bankr.S.D.N.Y. 1990) ("[D]uring the first four months in a Chapter 11 case in which the debtor is given the exclusive right to put together a plan . . . an unsecured, unliquidated claimholder should not be permitted to pursue litigation against the debtor in another court unless extraordinary circumstances are shown."). Upon further review of the applicable case law, the Court finds that the necessity of demonstrating extraordinary circumstances to establish cause is largely a distinction without a difference under Sonnax. It will be unusual for an unsecured creditor to establish cause in the early stages of a chapter 11 case in order to proceed with prepetition litigation because the debtor is generally focusing all its efforts on stabilizing its business and formulating a plan of reorganization (implicating Sonnax Factor two) and the equities of this process typically favor allowing the debtor to continue that focus (implicating Sonnax Factor twelve). Therefore, for the sake of clarity this Court will confine its analysis regarding a request by an unsecured creditor to lift the automatic stay to proceed with pre-petition litigation to the Sonnax analytical framework.
B. Application of the Facts to the Applicable Legal Standard
To establish cause to modify the automatic stay, Movants contend that they have been injured in two ways. First, Movants allege that WorldCom committed a breach of contract and perpetrated certain acts of fraud. Second, Movants allege that their due process and equal protection rights were violated in the Civil Court Action. Movants desire to vacate the automatic stay to allow Olga Skibinski to return to Civil Court in order to prosecute the breach of contract cause of action.
There is allegedly no insurance coverage and no fiduciary relationship between the Movants and WorldCom. (See Sonnax Factors 3, 5). Although there is a summary judgment motion pending in the Civil Court Action, there is no indication that resolution of the motion would result in a determination of all of the outstanding issues in the case. (See Sonnax Factor 1). Assuming the summary judgment motion does not dispose of all of the outstanding issues in the case, the record does not otherwise indicate that the case is ready for trial. (See Sonnax Factor 11). Thus, Movants have failed to establish that continuation of the Civil Court Action would foster judicial economy. (See Sonnax Factor 10).
One of the purposes of the automatic stay is to provide a debtor with breathing space in order to assess its business and formulate an exit strategy from bankruptcy. See H.R. REP. NO. 95-595, at 340 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6296-97. "Absent a plenary respite, including relief from even minor harassments . . . debtors are unable fully to concentrate upon the task before them, namely, regenerating the necessary capacity to address bankruptcy in a responsible and effective manner." In re Colin, Hochstin Co., 41 B.R. 322, 325 (Bankr.S.D.N.Y. 1984).
In addition, the Bankruptcy Code provides a comprehensive claims resolution process whereby most disputes concerning the amount and validity of claims can be determined efficiently in a centralized proceeding. See, e.g., Addison v. Langston (In re Brints Cotton Marketing, Inc.), 737 F.2d 1338, 1340 (5th Cir. 1984) (discussing Congress' intentions regarding the disposition of claims in bankruptcy and the bankruptcy court's claims estimation powers under 11 U.S.C. § 502(c); Maxwell v. Seaman Furniture Co., Inc. (In re Seaman Furniture Co.), 160 B.R. 40, 42 (S.D.N.Y. 1993) ("Estimation is an expedient method for setting the amount of a claim that may receive a distributive share from the estate"). Hence, there is often no compelling reason for allowing a claim to be determined in another forum where such action would be inconsistent with the administrative needs of the bankruptcy case and the proposed claim can be dealt with before the bankruptcy court.
As alleged by Movants, the pending controversy in Civil Court between Olga Skibinski and WorldCom is based upon facts that demonstrate the potential existence of a consumer dispute arising out of a cellular telephone service agreement. Here, WorldCom has consistently maintained throughout the course of this case that there are approximately 2,500 similar pre-petition litigations in various stages of preparedness in different courts that were pending as of the petition date. Although the Court recognizes that determinations to modify the automatic stay are made on a case-by-case basis, the Court could hardly imagine a more profound impact on the administration and of this case in light of the underlying policies of the automatic stay, than the prospect of diverting WorldCom's resources and collective energies to staving off pre-petition litigations. Allowing this to happen contravenes the congressional mandate of affording the debtor a breathing spell upon the filing of a chapter 11 petition and would render some of the benefits of the automatic stay illusory. See Order Denying Motion to Modify the Automatic Stay in the Matter of Roman Alexander v. MCI WorldCom, Inc. Pending Before the United States District Court for the Southern District of New York (Oct. 15, 2002).
Allowing the Civil Court Action to proceed at this stage of the case would unduly abridge WorldCom's contemplated breathing spell. See Order Denying Peggy Hill's Motion to Modify the Automatic Stay to Continue Prosecution of Federal Civil Action to Extent of Insurance Coverage (Oct. 18, 2002). The size and scale of WorldCom's operations coupled with the fact that WorldCom's case is less than five months old only serves to underscore these considerations because during this period WorldCom's exclusive right to formulate and propose a plan of reorganization has continued. Such a plan of reorganization will necessarily make some accommodation for claims, including the one at issue in this matter. WorldCom's efforts should be fixed at this time on the myriad requirements attendant to WorldCom's obligations as a debtor in possession like formulating a plan, reviewing executory contracts, or even finalizing its voluminous list of creditors.
In contrast to WorldCom's likely harm, Movants will, at the very least, be able to protect their interests before this Court by filing a proof of claim, and perhaps even have this Court estimate such claim pursuant to 11 U.S.C. § 502(c). In fact, during oral argument it was represented to this Court that a proof of claim in the amount of $25,000.00 has been filed with respect to the underlying dispute in the Civil Court Action.
The exclusivity period offers the Debtors' a chance to develop a plan and adopt a bankruptcy strategy that will enable it to efficiently deal with the thousands of claims it faces. On balance, it is imprudent to forego the stability offered by the exclusivity period in favor of permitting pre-petition litigation to continue and distract the Debtors.
According to the November 19, 2001 Decision and Order in the Civil Court Action, Olga Skibinski has a cause of action for breach of contract. Even if this Court were to permit the Civil Court Action to proceed, and Olga Skibinski were to succeed in the Civil Court Action, in all likelihood the payment of any money judgment against the Debtors would have to await a distribution under a plan of reorganization. Therefore, there is no reason to require the Debtors to continue defending against the Civil Court Action.
The Court understands Movants' desire to receive a speedy adjudication to the merits of their controversy. However, with WorldCom in Chapter 11, Movants' claim can be efficiently addressed within the bounds of the bankruptcy process.
In sum, upon balancing the equities here with judicial economy and based upon the available record, the Court concludes that the relevant Sonnax Factors weigh heavily in favor of WorldCom.
V. Conclusion
Upon consideration of all relevant Sonnax Factors, Movants have failed to demonstrate cause for relief from the automatic stay at this stage of WorldCom's bankruptcy case. Thus, Movants' request for a modification of the automatic stay is DENIED.
SO ORDERED.