Opinion
Case No. 02-13533 (AJG)
February 18, 2004
Based upon the motion dated June 30, 2003 ("Motion") by General Physics Corporation ("General Physics") and GP Strategies Corporation ("GP") (General Physics and GP are together referred to as "Plaintiffs" or "Movants") for an order pursuant to 11 U.S.C. § 362(d)(1) modifying the automatic stay to permit Plaintiffs to continue litigating the common law fraud claims they asserted against debtor MCI Communications Corporation ("MCI" and together with the above-captioned Debtors, the "Debtors") in the Supreme Court of the State of New York in an action commenced in January 2001 (the "State Court Action"); the Memorandum of Plaintiffs In Support Of Their Motion For Relief From Stay, dated June 30, 2003; the Debtors' Opposition To The Cross-Motion Of Plaintiffs For Relief From The Automatic Stay, dated July 31, 2003 ("Objection"); the hearing held on October 21, 2003 ("Hearing"); and the entire record of this case, the Court conditionally grants the Motion.
I.
Plaintiffs filed their complaint in the State Court Action on January 3, 2001. MCI is one of six defendants in the State Court Action. The complaint sets forth two fraud claims, one on behalf of General Physics and the other on behalf of GP. The basis of the complaint is that, in connection with Plaintiffs' 1998 acquisition of Learning Technologies ("LT") — an unincorporated division of what were then subsidiaries of MCI — MCI and the other defendants in the State Court Action (1) provided Plaintiffs with a doctored budget for LT's United Kingdom operation ("LT UK") which they falsely represented that LT UK was tracking; (2) failed to disclose that they were projecting a budget shortfall for LT UK which would be sufficient to eliminate its profit for the entire year while, at the same time, falsely assuring Plaintiffs that LT UK was expected to achieve its budget numbers; and (3) falsely represented that MCI was not discussing the sale of its Systemhouse subsidiaries to Electronic Data Systems Corporation ("EDS") even though it was already doing so.
Discovery has been completed in the State Court Action as it relates to all defendants but MCI. Movants contend that MCI did not comply with Movants' discovery requests. On February 22, 2002, MCI served a motion for summary judgment arguing, in part, that the filing of its motion operated to stay discovery ("MCI Motion for Summary Judgment"). The state court, however, ordered all previously scheduled depositions to go forward, notwithstanding MCI's filing of a summary judgment motion.
The other defendants in the State Court Action subsequently cross-moved for summary judgment, adopting the reasons set forth in the MCI Motion for Summary Judgment. Plaintiffs opposed both motions and filed a cross-motion of their own to compel MCI to comply with certain outstanding discovery requests. The MCI Motion for Summary Judgment and cross-motions were fully submitted in April 2002. They had not yet been decided as of the date of MCI's bankruptcy filing. On October 8, 2002, the state court denied the MCI Motion for Summary Judgment as to MCI based on MCI's bankruptcy filing.
Prior to MCI's bankruptcy filing, General Physics filed a demand for arbitration against EDS based on breaches of certain agreements executed in connection with the LT acquisition. MCI is not a party to the arbitration. EDS subsequently sought to stay the State Court Action based on General Physics' arbitration demand and, in a decision dated May 9, 2003, the state court granted EDS's motion. Movants assert that since the amount of damages that General Physics can recover in the arbitration is subject to a contractual limitation, the State Court Action will have to be determined — regardless of the outcome of the arbitration.
Movants argue that the Court should modify the automatic stay because if the automatic stay is not modified and Plaintiffs' claims against MCI are considered by this Court while the claims against the other defendants are determined in state court, the possibility of inconsistent results exists. Moreover, judicial resources would be wasted — and Plaintiffs' resources strained — if duplicative proceedings on the same claims were to take place in two different forums.
Movants further argue that the state court has presided over the State Court Action since 2001. As such, unlike this Court, it is already familiar with Plaintiffs' claims. Allowing the State Court Action to proceed against all defendants, including MCI, will thus preserve the resources the state court has invested in this matter, will avoid a duplication of effort, will ensure that there is no conflict in the interpretation of state law, and will not interfere with this bankruptcy proceeding. Under the circumstances, Movants' contend cause exists for modifying the automatic stay in this case.
At the Hearing, Movants further argued that the State Court Action is not stayed as against MCI. At the Hearing, Movants' counsel stated that:
As far as the state court case being stayed, it is not stayed as to MCI. It is stayed only as to the other defendants. We have discussed with [Justice Cahn] the possibility that the claims would come back, and he said that he would deal with it when it happened. There is no reason to believe that [Justice Cahn] will not sign the summary judgment motion. It is fully briefed.
(Hr'g Tr. at 39.)
II.
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). Section 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).
The are twelve factors that the Court can consider for determining whether there is cause to modify the automatic stay in order to allow litigation to proceed in another forum. See 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 Court will modify the automatic stay to allow the litigants to inquire as to whether Justice Cahn would address the merits of MCI Motion for Summary Judgment prior to the conclusion of the pending arbitration. It is unclear from the Hearing whether counsel for Movants' counsel already knew whether Justice Cahn would consider the merits of the MCI Motion for Summary Judgment if the Court were to modify the automatic stay, or whether Justice Cahn would first consider addressing the merits of the MCI Motion for Summary Judgment awaiting the conclusion of arbitration. To the extent that Justice Cahn decides to proceed with the MCI Motion for Summary Judgment prior to the conclusion of the pending arbitration, Movants have demonstrated cause to modify the automatic stay for purposes of allowing the state court to consider the merits of the MCI Motion for Summary Judgment. The Court relies on Sonnax Factors one (whether relief would result in a partial or complete resolution of the issues) and ten (the interests of judicial economy and the expeditious and economical resolution of litigation) in reaching this conclusion. In the event that Justice Cahn determines to proceed with the MCI Motion for Summary Judgment, upon the entry of a disposition on the MCI Motion for Summary Judgment, either party may seek further appropriate relief before this Court.
The Motion is denied to the extent that the Movants request that the Court modify the automatic stay to proceed with the State Court Action for purposes other than having Justice Cahn consider the merits of the MCI Motion for Summary Judgment as discussed above. The State Court Action is stayed as against all other defendants. In the event Justice Cahn chooses to stay consideration of the MCI Motion for Summary Judgment prior to the conclusion of the pending arbitration, Movants would have failed to establish cause to modify the automatic stay. In this situation it would appear that this Court should address the MCI Motion for Summary Judgment. This Court can completely adjudicate the merits of Movants claims against the Debtors' bankruptcy estates in an expedient and economical manner. See generally Shugrue v. Air Line Pilots Ass'n, Int'l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 989 (2d Cir. 1990) ("[T]he 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."). Upon the entry of a disposition by this Court of the MCI Motion for Summary Judgment, either party may seek further appropriate relief before this Court.
III.
Under the circumstances set forth above the Court will conditionally grant Movants' request for relief from the automatic stay to allow the state court to consider the merits of the MCI Motion for Summary Judgment. The parties will report back to this Court after having a hearing in the State Court Action.
SO ORDERED.