Opinion
Case No. 02-13533 (AJG) Jointly Administered
January 24, 2003.
DECISION AND ORDER GRANTING IN PART AND DENYING IN PART MOTION OF BARNEY SKANSKA CONSTRUCTION CO. FOR RELIEF FROM AUTOMATIC STAY
Upon consideration of the Motion of Barney Skanska Construction Co. ("Movant" or "BSC") for Relief from the Automatic Stay ("Motion") dated December 31, 2002 (Docket Entry #2539); Objection of WorldCom, Inc., et al. ("Debtors") to the Motion of Barney Skanska Construction Co. for Relief from the Automatic Stay dated January 16, 2003 (Docket Entry #2792); Joinder of the Official Committee of Unsecured Creditors of WorldCom, Inc., et al., to Debtors' Objection to Motion of Barney Skanska Construction Co. for Relief from the Automatic Stay dated January 16, 2003 (Docket Entry #2798); Reply of Barney Skanska Construction Co. to Debtors' Objection to the Motion for Relief from the Automatic Stay ("Reply") dated January 17, 2003 (Docket Entry #2861), and; the record of the hearing held on January 21, 2003; this Court finds that Movants request for order modifying the automatic stay pursuant to 11 U.S.C. § 362(d)(1), to pursue its rights under New York lien law, is as set forth below, granted in part and denied in part.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157 and 1334, 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.). Venue of Debtor's bankruptcy case and this Motion is proper pursuant to 28 U.S.C. § 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2).
I. 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. Movant, BSC seeks relief from the automatic stay in order to commence an action in the Supreme Court of the State of New York, County of New York to enforce its rights under a mechanics lien filed by BSC on premises which Debtors lease.
Debtors are lessees of 560 Washington Avenue, New York, New York, designated as Block 596, Lot 1 (the "Premises"). According to Movant, 340 West LLC is the fee owner and lessor of the Premises (the "Landlord"). Debtors lease the premises and use it as a switch facility. The facility handles, directs, and routes a high volume of calls through WorldCom's local network for a large area of New York City. According to Debtors, the Premises houses critical elements of the Debtors' telecommunications network.
At Debtors request, during the period of May 10, 2000 through May 29, 2002, BSC performed labor and provided materials, resulting in improvements to the Premises. The improvements consisted of BSC's providing and installing an emergency generator, and providing material and constructing the framing of the structural support for a Con Ed station in accordance with a master agreement between the Debtors and Beers Construction Company. The agreed price and value of the labor performed and the materials provided was $4,461,887.61. Debtors failed to pay $702,298.54 of the agreed upon price.
On July 2, 2002, BSC filed a Notice of Lien on the Premises pursuant to Lien Law of the State of New York ("New York Lien Law" and "Mechanic's Lien") in an amount of $702,298.54. BSC argues that the proposed state court foreclosure proceeding primarily involves a third party, the Landlord, and the Premises. However, BSC argues that the "Debtors are necessary parties to the foreclosure action, and failure to lift the stay will prevent BSC from exercising its rights under state law." (Motion at ¶ 14). BSC further explains that the state court litigation would establish the value of the pre-petition claims of both BSC and the Landlord relating to the Mechanic's Lien. Further, BSC argues that it is the Landlord will be required to litigate or negotiate BSC's claims. BSC explains that the Landlord is protected by 11 U.S.C. § 365(b) and will be compensated upon the assumption of the lease. In contrast, BSC does not have any similar rights.
BSC seeks an order authorizing it to commence a state court proceeding to foreclose the July 2, 2002 Mechanic's Lien. BSC does acknowledge that should the matter proceed in state court the stay will remain in effect as to enforcement of any resulting judgment against the Debtors or the estate, except that it will retain the right file a proof of claim and or an adversary proceeding.
II. Discussion
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 cause exists to modify the automatic stay for the purpose of permitting BSC to commence a state court proceeding to foreclose its Mechanic's Lien on the Premises ("Proposed Foreclosure Action").
Sonnax Factor One requires this Court to examine whether relief from stay would result in a partial or complete resolution of the issues. Movant argues that lifting "the stay will result in a complete resolution of the issues relating to the Mechanic's Lien." (Motion at ¶ 15). Movant explains that it will be able to commence, prosecute, and foreclose on the Mechanic's Lien with respect to the Premises and the Landlord thereby (i) eliminating unnecessary litigation in this Court; and (ii) establishing the value of the claims of both BSC and the Landlord.
Debtors argue persuasively that relief from stay would result in only partial resolution of the issues because the Landlord would have to satisfy the claim to avoid losing its property at a foreclosure sale. Therefore the Landlord would need to seek recovery of costs from the Debtors and that claim would have to be adjudicated before this Court. However, Debtors' position assumes that relief from stay would likely be limited to Movant's cause of action against Landlord to the exclusion of any rights that Movant may have directly against Debtors and that any recoverable cost would not be adjudicated in the Proposed Foreclosure Action.
Nonetheless, Movants have not demonstrated that permitting the matter to proceed in state court will result in "a complete resolution of the issues relating to the Mechanic's Lien." Movant acknowledges that the "only creditor which may be affected by granting the requested relief is the Landlord. The Landlord, under any circumstances, will be required to litigate or negotiate BSC's claims. However the Landlord is protected by the provision of 11 U.S.C. § 365(b), and will be compensated upon assumption of the leases. BSC does not have any similar rights." (Reply at ¶ 10). This Court does not believe that a complete resolution of the issue would occur by substituting the Landlord for Movant. Although the Proposed Foreclosure Action may result in Movant being paid by the Landlord it does not seem to this Court that it would result in a complete resolution of the issue. Instead the determinative issue would remain for this Court to decide.
Sonnax Factor Two requires this Court to examine whether there is a lack of any connection with or interference with the bankruptcy case. Movant argues that the "state court foreclosure proceeding primarily involves a third party (the Landlord) and the Premises, and will not interfere with the bankruptcy case." (Motion at ¶ 14).
Debtors argue persuasively that to permit Movant to litigate its claim, at this point in WorldCom's reorganization process, would interfere substantially with the reorganization effort. Lifting the stay in order to permit this litigation to proceed would open the floodgates to similar litigation. Debtors are parties to over 2,500 prepetition legal proceedings asserting unliquidated claims, and thousands of other claims that were stayed in pre-litigation stages.
Sonnax Factor Three requires this Court to examine whether the other proceeding involves the debtor as a fiduciary. As Debtors' explain, BSC's claim does not involve the Debtors' conduct in any fiduciary capacity, so this factor is not relevant to the case at bar.
Sonnax Factor Four requires this Court to examine whether a specialized tribunal with the necessary expertise has been established to hear the cause of action. As Debtors' explain, no tribunal, specialized or otherwise, has been constituted to resolve the BSC's claims, so this factor is not relevant to the case at bar. However, Movant's request to proceed with a Proposed Foreclosure Action suggests that the state court is a more appropriate forum than the Bankruptcy Court. There are certainly countless claims similar to that of Movant's and to the extent legal issues need to be resolved, this Court will be more conversant in them. Vacating the stay in order to allow liens to be filed or prosecuted would deplete estate resources all over the country.
Sonnax Factor Five requires this Court to examine whether the debtor's insurer has assumed full responsibility for defending it. As Debtors' explain, there is no insurance coverage applicable to this claim, so this factor is not relevant to the case at bar.
Sonnax Factor Six requires this Court to examine whether the action primarily involves third parties. Movant argues that the "state court foreclosure proceeding primarily involves a third party (the Landlord) and the Premises, and will not interfere with the bankruptcy case. However, the Debtors are necessary parties to the Proposed Foreclosure Action, and failure to lift the stay will prevent BSC from exercising its rights under state law." (Motion at ¶ 14).
Debtors argue persuasively the Debtors are the true parties in interest in the proceeding, for any claim against the Landlord inevitably will be back against the estate. Debtors further explain that this is not an instance where the claimant has an independent cause of action, rather the claims against the non-debtors exist because the automatic stay precludes BSC from pursuing the Debtors.
Movant acknowledges that "Debtors are necessary parties to the foreclosure action," this simple admission reveals that Debtors are in fact central Movant's claim in state court and thus it is not limited to primarily third parties.
Sonnax Factor Seven requires this Court to examine whether litigation in another forum would prejudice the interests of other creditors. Movant argues that the "only creditor which may be affected by granting the requested relief is the Landlord. The Landlord, under any circumstances, will be required to litigate or negotiate BSC's claims. However the Landlord is protected by the provision of 11 U.S.C. § 365(b), and will be compensated upon assumption of the leases. BSC does not have any similar rights." (Reply at ¶ 10). Movant's position recognizes that if relief from stay is granted, and if Movant prevails in state court, Landlord will be required to compensate Movant. Further, Movant explains that upon that occurrence Landlord will then need to await Debtor's assumption of the lease in order to be compensated. Movant then argues that it has no "similar rights."
Debtors argue persuasively that in order to defend against Movant's claim, human and financial resources will be required at the expense of the reorganization effort. This, Debtors' argue, will prejudice the rights of other WorldCom creditors who have an interest in an efficient reorganization process and preservation of the Debtors' financial resources.
Certainly the Landlord would be prejudiced if it was required to pay the entirety, or some negotiated portion, of Movant's claim, and then await recovery prior to assumption or through Debtors plan. Further, Movant's assertion, that it has no rights similar to that of a lessor entitled to cureage under an assumed lease, is unpersuasive. This Court is not aware that Debtors will actually assume the lease. Assumption or assumption and assignment would require the Debtors to cure the Mechanic's Lien, through payment or placement of a bond. If rejection occurs then Landlord will have a claim for damages. Whether the rights (or really the methods by which payment will be made to the creditors) of these creditors are similar or dissimilar is of little consequence; rather, the central question is will creditors be prejudiced. Indeed, Movants have acknowledged that Landlord will be prejudiced.
Sonnax Factors Eight and Nine are not implicated by Movant. Therefore, these factors are not relevant to the analysis here.
Sonnax Factor Ten requires this Court to examine whether relief from stay would promote the interests of judicial economy and economical resolution of litigation. Movant argues that "BSC's claim arises under non-bankruptcy law, New York Lien Law § 1 et seq., and can most expeditiously be resolved in the non-bankruptcy forum." (Motion at ¶ 14).
Debtors argue persuasively that the interests of judicial economy and the expeditious economical resolution of litigation would not be advanced by lifting the stay. Rather, relief from stay would increase the amount of judicial resources necessary to resolve BSC's claim. To permit the Proposed Foreclosure Action to proceed would shift the burden of payment of BSC's claim to the Landlord. The Landlord in turn would be required to resolve its claim against Debtors. This indicates that relief from stay would result in increased judicial intervention and attendant costs.
Sonnax Factor Eleven requires this Court to examine whether the parties are ready for trial in the other proceeding. Although the Mechanic's Lien was filed prepetition, as Debtors explain, litigation to foreclose the Mechanic's Lien has not yet been commenced.
Sonnax Factor Twelve requires this Court to examine the impact of the stay on the parties and the balance of harms.
Debtors argue persuasively that foreclosure on properties the Debtors lease would substantially interfere with the Debtors' relationships with their landlords and potentially could interfere with the Debtors' use of the properties in question.
However, Movant argues that New York Lien Law § 17 entitled "Duration of Lien," requires it to take steps to prevent the extinguishment of its Mechanic's Lien within one year of filing of the Notice of the Mechanic's Lien. Movant argues that its Mechanic's Lien is in jeopardy of lapsing if it does not commence an action before the expiry of the one year tolling period. Movant recognizes that any claims it may have against Debtors is tolled by applicable Bankruptcy Code provisions yet it seeks to proceed against the Landlord and Debtors. At a minimum, Movant argues that it could proceed against the Landlord and thereby seek recovery of its claim against WorldCom through Landlord. Nonetheless, BSC seeks this relief because, as it argues in its Reply at ¶ 13 "[w]hile 11 U.S.C. § 108(c) may toll BSC's claims against the Debtor [sic], it will not toll its claim against the Landlord. Furthermore, if the Debtor is an indispensable party to a lien foreclosure action, BSC is precluded from commencing the action against the Debtor [sic] for the requested relief . . ."
Therefore there are two issues implicated under this Sonnax Factor: (i) whether Movant may proceed with taking the necessary steps to commence a Proposed Foreclosure Action against a non-debtor party when commencement and prosecution of such an action requires Debtors to be named; and (ii) whether Movant should be granted relief from stay to pursue Debtors.
First, Movant's argument to this Court is that were it to proceed with a Proposed Foreclosure Action, it must name the Debtors as a party, otherwise the action may be subject to dismissal in state court.
Debtors argue that the court in In re 360 Networks, 282 B.R. 756 (Bankr.S.D.N.Y. 2001) addressed the issue presented herein by Movant. The court in 360 Networks found that "[j]oinder of one or more of the Debtors would permit [Movant] to file its action against the nondebtor owners without greatly prejudicing the Debtors." 360 Networks, 282 B.R. at 765.
The court in 360 Networks explained that In re Valley Transit Mix of Ruidoso, Inc. v. Miller, 928 F.2d 354, 356 (10th Cir. 1991) (holding that a claimant's assertion of a mechanic's lien against real property leased by a debtor in bankruptcy is subject to the automatic stay and that § 108(c) therefore tolls any applicable state-law period for the commencement of foreclosure proceedings against the property owner) is not necessarily the law of this circuit.
This Court need not determine whether 108(c) tolls the action against Landlord because Debtors have represented to this Court that WorldCom will consent to being named as a defendant in the Proposed Foreclosure Action. Therefore, based upon Debtors consent, Movant may commence the Proposed Foreclosure Action and name Debtors as a defendant.
Second, unlike the moving party in 360 Networks which sought a comfort order (and represented that if it were granted relief from stay to file against the nondebtor it would leave the matter stayed in state court) Movant acknowledges that if it receives relief from stay it will litigate the matter and "the stay will remain in effect as to enforcement of any resulting judgment as against the Debtors or the estate . . ." (Motion at ¶ 18). This Court understands Movant's argument to request relief from the automatic stay in order to commence and prosecute the Proposed Foreclosure Action against Debtors up to enforcement of a judgment.
A balance of harms indicates that granting relief from the automatic stay at this phase of the reorganization would require Debtors to expend resources on litigation that would be better allocated to its restructuring efforts. Also, as previously indicated, Debtors are attempting to determine which leases should be assumed or rejected. Permitting foreclosure proceedings to burden this process is unproductive and, on balance, will produce more harm.
Therefore, this Court denies the request for relief from stay to prosecute the Proposed Foreclosure Action against Debtors.
III. Conclusion
Upon consideration of all relevant Sonnax Factors, and as more fully set forth above, this Court finds that (i) based upon Debtors' consent, the automatic stay is modified to permit Movant to commence the Proposed Foreclosure Action and name Debtors as a defendant; and (ii) Movant's request for relief from stay to prosecute the Proposed Foreclosure Action against Debtors is denied, except as to the relief permitted under (i) above. Therefor, it is hereby
ORDERED, that in accordance with the above, Movant's request for modification of the automatic stay is GRANTED IN PART AND DENIED IN PART.