Payne v. U.S. Airways, No. S0596-02 CnC (Norton, J ., July 20, 2005)

[The text of this Vermont trial court opinion is un official. It has been reformatted from the original. The accuracy of the text and the accompanying data included in the Vermont trial cou rt opinion database is not guaranteed.]

STATE OF VERMONT SUPERIOR COURT Chittenden County, ss.: Docket No. S0596-02 CnC

PAYNE

v.

U.S. AIRWAYS

ENTRY

This case is about the scope of an automatic stay under the United States Bankruptcy Code for non-debtor parties. Pla intiff Kimberly Payne who has agreed to previous stays in this case has r emoved defendant U.S. Airways, the sole party in bankruptcy, in an attemp t to jumpstart her stalled litigation. The remaining individual defendants mo ve, nevertheless, to stay any further litigation because they claim that an i ndemnity issue unites their identity with debtor party, U.S. Airways. Thus, th ey argue, the automatic stay of 11 U.S.C. § 362 should be extended to them.The general rule is that an automatic stay under 1 1 U.S.C. § 362

applies only to the debtor and not to any co-defend ants. A.H. Robins Co. v.

Piccinin , 788 F.2d 994, 999 (4th Cir. 1986); see also Note, Expanding the Automatic Stay: Protecting Nondebtors in Single Ass et Bankruptcies , 2 Am. Bankr. Inst. L. Rev. 453, 457–58 (1994) (noting that chapters 12 and 13, unlike chapter 11, have stay provisions that ex plicitly extend to nondebtor parties). There are two significant reasons behind this statutory provision. The primary purpose is to give the debt or “breathing room” and a chance to re-organize and consolidate the estate. Id . This avoids a form of death-by-a-thousand-cuts where creditors take th e debtor apart piece by piece while the debtor is trying to put its fiscal house in order. J. Hargrove, Relief from Stay Compendium for State Court Judges , 27 Cal. Bnkr. J. 30, 30 (2003). But, the other major purpose of § 362 i s to protect creditors. By freezing access to the debtor’s estate, § 362 force s all creditors to get in line according to the rules of bankruptcy and the securi ty of their interest. Algemene Bank Nederland, N.V. v. Hallwood Industrie s, Inc. , 133 B.R. 176, 179 (W.D.Pa. 1991); see also Seybolt v. Bio-En ergy of Lincoln, Inc.

, 38 B.R. 123, 127 (D.Mass. 1984) (granting stay wher e litigation would lead to inequality amongst same class of creditors to a debtor partnership). Neither of these policies implicate co-defendants. Thus, the chapter 11 stays do not apply to them.

Because of the importance of these policies, court s apply an exception to § 362's limitations for “unusual circu mstances” that require extending the automatic stay to non-debtor co-defen dants. This is done primarily to preserve the function of § 362 by prot ecting the debtor’s estate

from indirect attacks. As the Fourth Circuit Court of Appeals explained in

the seminal Robins case,This ‘unusual situation,’ it would seem, arises whe n there is such identity between the debtor and the third-party def endant that the debtor may be said to be the real party defendant a nd that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor. . . . To re fuse application of the statutory stay in that case would defeat the ve ry purpose and

intent of the statute.

Id . Many of the federal circuits and state courts ha ve accepted the reasoning of Robins and its progeny, but this acceptance has not been

universal or to the extent that Robins’ broad language might suggest. See, e.g., Credit Alliance Corp. v. Williams , 851 F.2d 119, 121 (4th Cir.1988) (reaffirming the general principle that § 362 stays only apply to debtors); Teachers Ins. Annuity Ass'n v. Butler , 803 F.2d 61, 65 (2d Cir.1986) (predating Robins but still regarded as a valid statement of the 2d Circuit’s position), cited by Superpumper, Inc. v. Nerland Oi l, Inc. , 620 N.W.2d 159, 162–63 (N.D. 2000); see also Algemene Bank , 133 B.R. at 180 (criticizing and distinguishing Robins ). Still, Robins has been generally recognized by the federal circuits, and state courts have applied its standard when considering motions by non-debtor co-defendants for stays. E.g., Superpumper , 620 N.W.2d at 163; but see In re Gruntz , 202 F.3d 1074, 1082–83 (9th Cir. 2000) (noting that although the s tate courts may determine whether an exception to the automatic sta y applies, such findings are subject to review by the bankruptcy court).

Before discussing the specific facts of Plaintiff’ s case, it is worth noting how the “unusual circumstances” exception to § 362 functions. In

Robins , a case involving a class action against manufactu rers of the Dalkon Shield, the court extended § 362's stay to a non-de btor insurer, whose policies were nevertheless a large part of the debt or’s estate. Robbins , 788 F.2d at 996, 999. Other cases have extended the ex ception to cover co-defendant companies owned by the debtor (In re Neum an , 128 B.R. 333,

336–37 (S.D.N.Y.1991)); spouses who share business assets (Marroquin v.. D & N Funding Inc. , 943 S.W.2d 112, 115 (Tex.App.1997)); or parties t hat are “closely related” through intertwined relations hips (Superpumper , 620 N.W.2d at 163). See generally G. Ishii-Chang, Lit igation and Bankruptcy: the Dilemma of the Codefendant Stay , 63 Am. Bankr. L.J. 257 (1989).

Despite the factual disparity and the varying appr oaches courts have taken, these cases have several unifying features t hat can be drawn out as consistent concepts involved int this type of stay. First, the cases have by and large involved significant portions of the debt or’s estate. This does not mean large sums of money but rather percentages, ho w much of the debtor’s estate is threatened by the action. E.g., In re Neuman , 128 B.R. at 336–37. Second, the debtors and non-debtors have s hared a close relationship, either as insurer–insured or director –corporation. E.g.,

Robbins , 778 F.2d at 996, 999. Mere employment with a ban krupt company has not been held in any of the cases as en ough to create this type of “identity of interest.” Third and finally, the relationship has been one that was well-defined. Whether by contract or by l aw, these parties, debtor and non-debtor, were obligated to one another in a very specific and enforceable manner. E.g., Seybolt v. Bio-Energy of Lincoln, Inc. , 38 B.R. 123, 127–28 (D. Mass. 1984); see also P.Glassman, T hird-party Injunctions in Partnership Bankruptcy Cases , 49 Bus. Law. 1081, 1089–90 (1994). Each of these three commonalities corresponds direc tly back to the dual policies of § 362 to shelter the debtor’s estate an d to keep creditors from cutting in line. By focusing on these issues, a co urt can look not only to the language of § 362 and cases within the “unusual cir cumstances” exception but to the policies behind them.Ms. Payne’s case is a civil rights case. She clai ms that the individual

defendants, all employees of U.S. Airways and actin g in that capacity, harassed her and drove her away from her job follow ing her workers’ compensation claim. Ms. Payne originally brought h er suit in 2002 but voluntarily stayed it for all defendants while U.S. Airways went through its first bankruptcy. This led to a partial settlement with U.S. Airways in accordance with the bankruptcy court. After U.S. A irways emerged from bankruptcy, Ms. Payne attempted to reignite her lit igation, but U.S. Airways soon re-filed for chapter 11 bankruptcy. I n response, Ms. Payne has dropped her claims against U.S. Airway and is a ttempting to kick-start her case against the individual defendant employees

.

It is these co-defendants that now seek to retain the judicial inertia through a further extension of the § 362 stay. The y base their claim for a stay on two grounds. The first is that U.S. Airway s has promised to indemnify and cover all litigation expenses for the co-defendants. This promise does not come from any contract or pre-exis ting agreement but comes from an internal review that the company cond ucted where it

determined that the co-defendants acted in the best interests of the company and in a manner that U.S. Airways believes did not violate Ms. Payne’s rights. As a result, U.S. Airways has promised thr ough affidavits to indemnify and defend these individuals. The second ground that the codefendants argue is the employment relationship wit h debtor U.S. Airways is a close relationship triggering § 362's exceptio n. Co-defendants note that all of Ms. Payne’s claims against them come from th eir alleged mistreatment of her in the workplace where they wer e also employed. They remain employed with U.S. Airways and argue that th eir liability stems not

from their individual actions but their formal role s as supervisors and coworkers to Ms. Payne and is, thus, more about U.S. Airways.Neither of these grounds meet the standard of an e xception to § 362.

To begin with the second ground, Ms. Payne has rais ed independent claims against the individual co-defendants that are separ ate from the debtor. As

she notes, each of her claims have a factual and le gal basis against the employee co-defendants separate and apart from U.S. Airways. These are claims based on their individual and personal actio ns. That these actions took place on the debtor’s premises while the co-de fendants were in its employ is irrelevant. Since it has been removed as a party, U.S. Airways is not directly implicated by these claims and is not subject to liability as a joint tortfeasor. The co-defendants’ relationship to U.S. Airways can be separated from their actions, and the liability at issue here is not so intertwined as to raise serious questions of bringi ng the debtor back into the litigation.

As to the U.S. Airways’ indemnity agreement, this is too weak a connection to implicate the debtor’s estate. U.S. Airways’ promise does not represent a contractual obligation that directl y threatens its assets. This obligation, while commendable, is entirely voluntar y on U.S. Airways behalf and is a gratuitous promise that it made aft er entering into bankruptcy without any consideration. While U.S. A irways’ unequivocal nature in asserting this promise may create relianc e and estoppel issues that the co-defendants could use to enforce it, this onl y obliges U.S. Airways to further litigation—from which it could have a legit imate § 362 stay—rather than any direct contractual connections. Cf. Robin s , 788 F.2d at 996, 999 (insurance company contractually obliged to indemni fy and this policy, which plaintiffs sought was a substantial portion o f debtor’s estate). A mere gratuitous promise to indemnify simply cannot support going beyond § 362 extending the stay to non-debtors.In a similar vein, the tenuous nature of Ms. Payne ’s claim and the

lack of any judgment make U.S. Airway’s dire predic tions implausible. At this stage in the litigation, it is unclear what li ability, if any, U.S. Airways actually faces. As little or no discovery has been conducted, it is impossible to see how viable Ms. Payne’s claims are . Certainly, U.S. Airways believes that Ms. Payne’s claims are less t han credible as it is standing by its employees and promising to defend a nd indemnify them against any judgments. This is probably not from a ltruistic tendencies but a

firm belief, based on evidence, that the co-defenda nts are not liable for the wrong Ms. Payne alleges. To stay litigation indefi nitely, based on such speculative liability does not further this case or the bankruptcy reorganization. Algemene Bank , 133 B.R. at 180 (“If anything, allowance of judgment against Hallwood now might assist RAC’s reorganization by replacing the claims of Algemene, a clearly hostile creditor, with Hallwood’s claim for indemnification.”).

Under this argument, the co-defendants also claim that the promise to pay for the litigation is a drain on the U.S. Ai rways’ bankruptcy estate that must be stopped by a stay in the litigation. This argument fails on two points. First, the litigation expenses at this sta ge of the case are hardly a

substantial drain on the debtor’s assets. U.S. Air ways is a multi-billion dollar corporation. This litigation cannot represe nt even a minute, fractional percentage of that estate. As noted ear lier, “unusual circumstances” almost always involve at lest a subs tantial percentage of the debtor’s estate. E.g., Neuman, 128 B.R. at 337 (de btor’s major assets were

78% of the stock of non-debtor co-defendant its who lly-owned subsidiary). These expenses simply do not rise to that level or trigger any particular concerns about U.S. Airways’ assets.More importantly, these litigation expenses should not be consider

as the same type of threat that a judgment would be to the debtor’s assets. These are ultimately business expenses, obligations that the debtor has

taken on in the course of business. In this case, U.S. Airways is paying to protect what it considers good employees from work- related liabilities. While a judgment in this case may be an obligation against its asset, the litigation expenses are an on-going benefit to its employees. Looking at these litigation expenses otherwise leads to the il logical conclusion that U.S. Airways’ health insurance premiums and worker -safety equipment should also be subject to the same type of stay as these litigation expenses. Naturally, such business expenses are not subject t o a stay as they are the costs that U.S. Airways must incur to keep its plan es in the air and its employees happy. As the purpose of § 362 and its e xception do not apply to such business expenses—costs that keep revenue c oming into the company—it cannot extend a stay to non-debtors for similar expenses. By extension, it does not create the type of intimate relationship that touches and concerns the policies of § 362. Therefore, ext ending a stay to codefendants under § 362 would be inappropriate.

It is the general conclusion of this court that a § 362 stay would be inappropriate given the lack of any intimate relati onship between U.S. Airways and the co-defendants that would qualify as an “unusual

circumstance” under Robins . The employment and voluntary indemnity relationships as well as Ms. Payne’s renewed litiga tion against codefendants does not trigger any of the concerns beh ind § 362. U.S. Airways’ bankruptcy estate is simply not threatened by this litigation at this

time.It is also entirely possible that the situation ma y change with further

discovery and litigation. Yet, it is fair to say t hat this court’s primary concern is with the litigation of Ms. Payne’s claim s and not the rules of bankruptcy or U.S. Airway’s chapter 11 filings. Wh ile the court has the power to make such determinations, it is really the purview of the bankruptcy court, which also has the final say abou t the extent and scope of a § 362 stay or any other stay under the bankruptcy code. In re Gruntz , 202 F.3d at 1082–83. Under that court’s plenary power, it can also assess other potential grounds for a stay under § 105 of the ban kruptcy code and the parties’ equitable positions. Furthermore, it has the resources and

information about the debtor’s assets and liabiliti es to make a better

assessment.

Co-defendants acknowledge that their questions are more properly raised in a bankruptcy court. They have asked in t he alternative to granting a § 362 stay that this court grant at least a tempo rary stay so that they can apply to the bankruptcy court The court declines such a request. There is no reason evident through this court’s admittedly l imited knowledge of bankruptcy law to understand how co-defendants are eligible for the limited stays under chapter 11. Co-defendants are welcome to make such an appeal, but it would be improper to grant temporary stay for what may be either a fool’s or a knight’s errand.

Based on the foregoing, Defendants’ Motion to Stay is Denied.

Dated at Burlington, Vermont________________, 2005

.