00598181.DOCX 3

UNITED STATES BANKRUPTCY COURT 

SOUTHERN DISTRICT OF FLORIDA

MIAMI DIVISION

www.flsb.uscourts.gov

In re: Chapter 11

CINEMEX USA REAL ESTATE 

HOLDINGS, INC.,

Case No.: 20-bk-14695

Debtor.

/

NOTICE OF FILING ORDER OF U.S. DISTRICT COURT, SOUTHERN 

DISTRICT OF TEXAS, AND DEBTORS’ BRIEF FILED IN 

ACCORDANCE WITH SAME

Cinemex USA Real Estate Holdings, Inc. (“Debtor”), by and through undersigned

counsel, hereby files this Notice of Filing of the Order entered on April 25, 2020 by the U.S. 

District Court, Southern District of Texas, in Khan v. Cinemex Holdings USA, Inc. et al, 1 Case 

No. 20-cv-01178, attached hereto as Exhibit “A”, and the Debtor-Defendants’ Response 

Regarding Effect of the Automatic Stay on This Court’s Jurisdiction, filed in the same action on 

April 26, 2020, attached hereto as Exhibit “B”.

The Debtor(s) shall continue to keep the Court apprised of this action.

Respectfully submitted: April 26, 2020.

 1

 The Debtor’s affiliate, Cinemex Holdings USA, Inc., joint defendant in the U.S.D.C. action 

cited above, filed a Chapter 11 voluntary petition (Case No. 20-bk-14696) concurrently with this 

case, and a motion for joint administration will be filed with the Court. 

Case 20-14695-LMI Doc 4 Filed 04/26/20 Page 1 of 80
00598181.DOCX 3 2

BAST AMRON LLP

SunTrust International Center

One Southeast Third Avenue, Suite 1400

Miami, Florida 33131

Telephone: 305.379.7904

Facsimile: 305.379.7905

Email: jbast@bastamron.com

Email: bamron@bastamron.com

Email: jleggett@bastamron.com

By: /s/ Brett M. Amron

 Jeffrey P. Bast (FBN 996343)

 Brett M. Amron (FBN 148342)

 Jaime B. Leggett (FBN 1016585)

-andQUINN EMANUEL URQUHART & 

SULLIVAN, LLP

Eric Winston (pro hac vice to be filed)

865 S. Figueroa Street, 10th Floor

Los Angeles, California 90017

Telephone: 213-443-3000

Facsimile: 213-443-3100

Email: ericwinston@quinnemanuel.com

-andJuan P Morillo pro hac vice to be filed)

1300 I Street, NW, Suite 900

Washington, D.C. 20005

Telephone: 202-538-8000

Facsimile: 202-538-8100

Email: juanmorillo@quinnemanuel.com

-andPatricia B. Tomasco (pro hac vice to be filed)

711 Louisiana Street, Suite 500

Houston, Texas 77002

Telephone: 713-221-7000

Facsimile: 713-221-7100

Email: pattytomasco@quinnemanuel.com

PROPOSED COUNSEL FOR CINEMEX 

USA REAL ESTATE HOLDINGS, INC., 

and CINEMEX HOLDINGS USA, INC.

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00598181.DOCX 3 3

CERTIFICATE OF SERVICE

I HEREBY CERTIFY that on April 26, 2020, I electronically filed the foregoing 

document with the Clerk of the Court using CM/ECF. I also certify that the foregoing document 

is being served this day by transmission of Notices of Electronic Filing generated by CM/ECF to 

any parties registered to receive electronic notices of filing in this case.

/s/ Brett M. Amron

Brett M. Amron

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00598181.DOCX 3 4

EXHIBIT “A”

Case 20-14695-LMI Doc 4 Filed 04/26/20 Page 4 of 80
United States District Court

Southern District of Texas

ENTERED

April 25, 2020

David J. Bradley, Clerk

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00598181.DOCX 3 5

EXHIBIT “B”

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UNITED STATES DISTRICT COURT 

FOR THE SOUTHERN DISTRICT OF TEXAS 

HOUSTON DIVISION 

OMAR KHAN, et al. § 

 § 

vs. § Civil Action No. 4:20-cv-01178 

 § 

CINEMEX USA REAL ESTATE § Hon. Andrew S. Hanen 

HOLDINGS, INC., et al. § 

DEBTOR-DEFENDANTS’ RESPONSE REGARDING EFFECT OF THE AUTOMATIC 

STAY ON THIS COURT’S JURISDICTION 

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 1 

SUMMARY OF THE ARGUMENT 

Defendants Cinemex Holdings USA, Inc. (“Cinemex Holdings”) and Cinemex USA Real 

Estate Holdings, Inc. (“Cinemex Real Estate” and, with Cinemex Holdings, the “Debtors”) 

respectfully submit this Response to this Court’s Order entered on April 25, 2020 (ECF No. 40) 

(the “April 25 Order”), directing the parties to address whether this Court may issue two forms 

of relief sought by Plaintiffs and to focus on the narrow question of the effect of the automatic 

stay on this Court’s jurisdiction. 1 Under well-settled law, the automatic stay of 11 U.S.C. 

§ 362(a) forecloses this Court from granting any relief or conducting any further proceedings on 

Plaintiffs’ breach-of-contract claim. No exception to the automatic stay might plausibly apply 

here, where Plaintiffs are bringing a civil claim for monetary relief and for an injunction that 

would dictate the Debtors’ exercise of their property rights. Such a case falls within the 

established heartland of those covered by the automatic stay. Accordingly, this Court should 

stay all further proceedings in this Court. 

BACKGROUND 

On April 25, 2020 (the “Petition Date”), Cinemex Holdings and Cinemex Real Estate 

each commenced cases under chapter 11 of Title 11 of the United States Code in the United 

States Bankruptcy Court for the Southern District of Florida, which is where each has its 

principal place of business. The Debtors are operating as debtors in possession. Subsequent to 

 

1

 The Debtors respectfully file this Response in compliance with this Court’s April 25 Order directing submissions 

on or before 9:00 a.m. CT on April 27, 2020. In so doing, and in complying with any ensuing directives by this 

Court, the Debtors do not waive or release any rights, claims, and defenses arising under the Equity Purchase 

Agreements or any rights, claims, and defenses arising as a result of the Debtors commencing their bankruptcy cases, 

including 11 U.S.C. §§ 362 and 365. To the contrary, the Debtors respectfully contend that the relevant bankruptcy 

provisions are controlling, as stated herein, and they expressly reserve all rights, claims, and defenses thereunder, 

including relative to these Plaintiffs. 

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 2 

the filing, the Debtors filed in this Court a notice of the commencement of the bankruptcy filings. 

(ECF No. 39.) 

As described in the April 25 Order, Plaintiffs are asking this Court to order the Debtors to 

specifically perform the “Equity Purchase Agreements” (the “EPA[s]”), which means to close 

the transaction, pay to Plaintiffs the cash purchase price under the EPA, and to enjoin the 

Debtors from exercising a provision to terminate the EPA pursuant to Section 9.1(F) of the 

EPA.2 

STATEMENT OF THE ISSUES 

Does the Bankruptcy Code’s automatic stay preclude this Court from continuing this 

proceeding by conducting a hearing on or providing relief for Plaintiffs’ breach-of-contract claim 

against the Debtors? 

ARGUMENT 

This Court has jurisdiction to determine if the automatic stay provisions of 

11 U.S.C. § 362(a) apply to an action pending before this Court, insomuch as both the 

Bankruptcy Court and this Court have concurrent jurisdiction to determine whether the automatic 

stay applies. See, e.g., Arnold v. Garlock Inc., 288 F.3d 234, 236 (5th Cir. 2002) (“[D]istrict 

courts retain jurisdiction to determine the applicability of the stay to litigation pending before 

them, and to enter orders not inconsistent with the terms of the stay.”). Even as to this threshold 

inquiry, it is appropriate, and often preferable, for a non-bankruptcy court to defer to a 

bankruptcy court on any question whether the automatic stay applies. See Erti v. Pain Webber 

Jackson & Cutis Inc. (In re Baldwin-United Corp. Litigation), 765 F.2d 343, 349 (2d Cir. 1985) 

 

2

 There are two EPAs related to the transaction, both dated March 10, 2020. (Compl. (“ECF No. 1”) ¶ 2.) Unless 

otherwise indicated, the cited provisions herein are the same in each EPA. 

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 3 

(“The necessary uniformity is best achieved by centralizing construction of the automatic stay in 

the Bankruptcy Court, subject to review in the Sixth Circuit, with ultimate review in the Supreme 

Court available if warranted.”); see also In re Nat’l Gypsum Co., 118 F.3d 1056, 1070 n.24 (5th 

Cir. 1997) (“Our unremarkable statement ... that district courts retain jurisdiction to determine 

the applicability of the [ Section 362(a) automatic] stay to litigation pending before them ... did 

not, of course, foreclose a debtor’s ability to redress violations of the automatic stay through 

contempt proceedings in the bankruptcy court, nor was it intended to diminish the ability of a 

bankruptcy court to entertain actions to enforce or construe the effects of its own orders.”). 

Deferring to the bankruptcy court avoids the circumstance where a non-bankruptcy court 

incorrectly determines the automatic stay does not apply, which can necessitate appellate 

intervention. See, e.g., In re Long, 318 Fed. App’x 891, 894 (9th Cir. 2008) (“Because the 

September 23 order violated the automatic stay, we grant the petition for a writ of mandamus and 

direct the district court to vacate that order.”). Nonetheless, to the extent this Court might 

address the issue in the first instance, governing law does not admit of any plausible argument 

that the automatic stay is somehow inapplicable. 

I. THE AUTOMATIC STAY APPLIES SQUARELY TO THIS LITIGATION 

There are multiple provisions of the Bankruptcy Code establishing that the automatic stay 

necessarily applies here. 

First, Bankruptcy Code Section 362(a)(1) provides that the stay applies to the 

“commencement or continuation ... of a judicial, administrative, or other action or proceeding 

against the debtor that was or could have been commenced before the commencement of the case 

under this title, or to recover a claim against the debtor that arose before the commencement of 

the case under this title.” 11 U.S.C. § 362(a)(1). This is an action against the Debtors that arose 

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 4 

prior to the Petition Date, and Plaintiffs are seeking to recover a claim against the Debtors. The 

Bankruptcy Code defines “claim” broadly as: 

(A) right to payment, whether or not such right is reduced to judgment, 

liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, 

undisputed, legal, equitable, secured, or unsecured; or 

(B) right to an equitable remedy for breach of performance if such breach 

gives rise to a right to payment, whether or not such right to an equitable remedy 

is reduced to judgment, fixed, contingent, matured, unmatured, disputed, 

undisputed, secured, or unsecured. 

11 U.S.C. § 101(5) (emphasis added). Here, Plaintiffs plainly seek a right to payment

(including of the purchase price), and their proposed equitable relief likewise concerns an 

alleged breach that supposedly gives them a right to payment. See, e.g., In re Udell, 18 F.3d 403, 

407 (7th Cir. 1994) (holding “one example of a ‘claim’ is a right to an equitable remedy that can 

be satisfied by an ‘alternative’ right to payment”). Lest there be any doubt, courts routinely 

apply the automatic stay to claims for equitable relief. See, e.g., Municipality of San Juan v. 

Puerto Rico, 919 F.3d 565, 576-77 (1st Cir. 2019) (“The stay includes actions seeking injunctive 

relief or similar relief as well as actions seeking money judgments. ... The stay provision of 

subsection (a)(1) is drafted so broadly that it encompasses all types of legal proceedings, subject 

only to the exceptions provided in section 362(b).”) (quoting 3 Collier on Bankruptcy ¶ 362.03 

(16th ed. 2018)); Ledo Pizza Sys., Inc. v. Singh, Civil No. WDQ-13-2365, 2013 WL 5604339, at 

*2 (D. Md. Oct. 10, 2013) (“Although Tri-Bro has filed for bankruptcy, Ledo seeks injunctive 

relief against it. ... The plain text of the statute suggests that the automatic stay provision applies 

to suits for equitable relief. ... Because Ledo seeks injunctive relief against Tri-Bro for behavior 

that arose before and after the petition was filed, the Court will reject Ledo’s request for 

injunctive relief against Tri-Bro.”); In re Mahurkar Double Lumen Hemodialysis Catheter Patent 

Litig., 140 B.R. 969, 976 (N.D. Ill. 1992) (Easterbrook, J., sitting by designation) (“Nothing in 

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 5 

§ 362(a)(1) suggests any difference between legal and equitable relief. Section 362(b) supports 

this conclusion, for a number of its subsections exclude from the stay certain equitable 

proceedings. These exceptions are unnecessary if § 362(a) does not apply in the first place to 

requests for injunctions.”);3In re Clark, 49 B.R. 704, 707 (Bankr. D. Guam 1985) (“[F]or Paik 

and Sanchez to proceed on May 3 to seek the injunctive relief, after being notified of the filing of 

the Petition in the Bankruptcy Court, is a violation of the automatic stay, especially where the 

real purpose of the action in the Superior Court was to force Debtor to pay Mr. and Mrs. Wilson 

their pre-petition debts.”). 

Notably, Section 362(a)(1) does not limit itself to barring particular forms of relief; it 

bars “continuation” of the “proceeding.” No matter how Plaintiffs may frame their request for a 

preliminary injunction, the proceeding as a whole is obviously one in which Plaintiffs seek to 

recover a claim against the Debtors. For Plaintiffs now to advance legal arguments and evidence 

for obtaining an injunction, or for this Court to issue one, would plainly be a “continuation” of 

the proceeding. See, e.g., Pope v. Manville Forest Prods. Corp., 778 F.2d 238, 239 (5th Cir. 

1985) (“First, if either of the parties takes any step to obtain dismissal, such as motion to dismiss 

or motion for summary judgment, there is clearly a continuation of the judicial proceeding. 

Second, in the more technical sense, just the entry of an order of dismissal, even if entered sua 

sponte, constitutes a judicial act toward the disposition of the case and hence may be construed 

as a ‘continuation’ of a judicial proceeding.”); Ledet v. K-Mart Corp., No. CIV.A. 01-2485, 2005 

WL 357174, at *2 (E.D. La. Feb. 11, 2005) (“The Fifth Circuit has broadly construed 

 

3

 Judge Easterbrook explained why this “is not only good law but also good sense”: “One pressing task [in 

bankruptcy] is to prevent creditors’ actions that grab one aspect of the business and squeeze it for value that, while 

assisting a single creditor, may depress the collective value of the assets. Injunctions requiring debtors to abandon 

one part of their business or dramatically change their methods of doing business have a high holdup value for 

creditors and therefore may lead to this unfortunate consequence.” Mahurkar, 140 B.R. at 976. 

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 6 

‘continuation’ in subsection (a)(1) to encompass any change or occurrence in the action.”); see 

also, e.g., In re Soares, 107 F.3d 969, 974 (1st Cir. 1997) (“[A]cts undertaken in the course of 

carrying out the core judicial function are not ministerial and, if essayed after bankruptcy filing, 

will be deemed to violate the automatic stay.”). It follows that the proceeding simply cannot be 

continued, and the litigation must be stayed. See In re S.I. Acquisition, Inc., 817 F.2d 1142, 1146 

(5th Cir. 1987) (“The automatic stay thus imposes a moratorium on all actions against the debtor 

or its property and assets. It ensures a respite for the debtor so that it may attempt to reorganize 

or decide to liquidate and promotes the overriding bankruptcy policy of equal distribution of a 

debtor’s assets among creditors.” (citing GATX Aircraft Corp. v. M/V Courtney Leigh, 768 F.2d 

711, 716 (5th Cir. 1985)). 

Second, Bankruptcy Code Section 362(a)(3) prohibits “any act to obtain possession of 

property of the estate or of property from the estate or to exercise control over property of the 

estate.” 11 U.S.C. § 362(a)(3); see S.I. Acquisition, 817 F.2d at 1148 (quoting 11 U.S.C. 

§ 362(a)(3)). Plaintiffs’ requested relief falls squarely within Section 362(a)(3) because it seeks 

to force the Debtors to consummate the EPAs (which means to close the transaction and pay the 

purchase price without regard to defenses the Debtors may have) and to enjoin the Debtors from 

exercising a potential right under the EPAs, which right constitutes property of the Debtors’ 

estates. See In re AMR Corp., 730 F.3d 88, 102-03 (2d Cir. 2013) (“[C]ontract rights are 

property of the estate ... protected by the automatic stay.”) (quoting In re Enron Corp., 300 B.R. 

201, 212 (Bankr. S.D.N.Y. 2003); In re Elder-Beerman Stores Corp., 195 B.R. 1019, 1023 

(Bankr. S.D. Ohio 1996) (“Courts have consistently held that contract rights are property of the 

estate, and that therefore those rights are protected by the automatic stay.”) (citing cases). 

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 7 

Third, Bankruptcy Code Section 362(a)(6) bars “any act to collect, assess, or recover a 

claim against the debtor that arose before the commencement of the case under this title.” 

11 U.S.C. § 362(a)(6). Again, that is the relief being sought by the Plaintiffs: to recover a claim 

against the Debtors that arose prior to the Petition Date. See, e.g., Campbell v. Countrywide 

Home Loans, Inc., 545 F.3d 348, 355 (5th Cir. 2008) (“The stay prevents creditors from taking 

any collection actions against the debtor or the property of the debtor’s estate for pre-petition 

debts”). 

Finally, none of the enumerated exceptions to the automatic stay provision is even 

remotely applicable here. Those listed exceptions—which include, for example, “criminal 

proceedings,” 11 U.S.C. § 362(b)(1), and certain family-law proceedings, id. § 362(b)(2)—

plainly do not apply to this action for breach of contract. Not only does no such exception find 

colorable application, but no case law known to these Debtors hints that any such exception 

might arguably obtain in a case like this one. 

II. ONLY THE BANKRUPTCY COURT HAS AUTHORITY TO LIFT THE 

AUTOMATIC STAY 

Once this Court determines that the automatic stay applies, its jurisdiction is at an end. 

“Only the bankruptcy court may grant relief from the automatic stay.” Farley v. Henson, 2 F.3d 

273, 275 (8th Cir. 1993); In re Mosher, 578 B.R. 765, 771 (Bankr. S.D. Tex. 2017) (“Prosecution 

of a motion to lift the automatic stay pursuant to § 362(d) can only occur in a bankruptcy court.”); 

In re Gandy, 327 B.R. 796, 801 n.5 (Bankr. S.D. Tex. 2005) (“The Code allows only the 

bankruptcy court to annul or modify the automatic stay.”); In re Edwin A. Epstein, Jr. Operating 

Co., Inc., 314 B.R. 591, 600 (Bankr. S.D. Tex. 2004) (“It is undisputed that only a bankruptcy 

court has jurisdiction to terminate, annul or modify the automatic stay.”); see also, e.g., In re 

Cont’l Airlines, 928 F.2d 127, 129 (5th Cir. 1991) (“Only the Delaware bankruptcy court may 

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 8 

grant relief from the effect of the automatic stay provision.”); Jones v. Garcia, 63 F.3d 411, 412 

n.3 (5th Cir. 1995) (“It is the effect of the stay itself which is voidable, subject to the broad 

discretion afforded a bankruptcy judge under section 362.” (emphasis removed)); Sikes v. Glob. 

Marine, Inc., 881 F.2d 176, 178-79 (5th Cir. 1989) (“Our colleagues in the Eleventh Circuit ... 

declar[ed] that section 362(d) expressly grants bankruptcy courts the option, in fashioning 

appropriate relief, of ‘annulling’ the automatic stay, in addition to merely ‘terminating’ it. [] We 

agree.”). 

As such, any arguments these Plaintiffs might make for lifting the automatic stay belong 

before the Bankruptcy Court, and only there. Because the automatic stay applies to protect the 

Debtors, their estates and their creditors, employees, and other stakeholders, Plaintiffs are 

obliged to direct their arguments and requests for relief exclusively to the Bankruptcy Court. 

Campbell, 545 F.3d at 353 (“While the automatic stay halts collection efforts, the Bankruptcy 

Code provides creditors a procedure to assert claims against the debtor’s estate. The Bankruptcy 

Code entitles each creditor of the bankruptcy ‘to file a proof of claim—i.e., a document 

providing proof of a ‘right to payment’ against the debtor’s estate.’”) (quoting Travelers Cas. & 

Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 449 (2007) (in turn quoting 11 U.S.C. 

§ 101(5)(a))). 

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 9 

CONCLUSION 

For the foregoing reasons, this Court should abide by the automatic stay and stay all 

further proceedings in this Court, including but not limited to the hearing previously set for April 

27, 2020. 

Dated: April 26, 2020 Respectfully submitted, 

 

 /s/ Patricia B. Tomasco 

 Patricia B. Tomasco (attorney in charge) 

Texas State Bar No. (01797600) 

Federal ID No. (10521) 

Email: pattytomasco@quinnemanuel.com 

QUINN, EMANUEL, URQUHART &

SULLIVAN, LLP 

711 Louisiana Street, Suite 500 

Houston, TX 77002 

Telephone: (713) 221-7010 

Facsimile: (713) 221-7100 

/s/ Juan P. Morillo 

Juan P. Morillo 

Pro Hac Vice granted. 

Email: juanmorillo@quinnemanuel.com 

/s/ Derek L. Shaffer 

Derek L. Shaffer 

Pro Hac Vice granted. 

Email: derekshaffer@quinnemanuel.com 

/s/ Gabriel F. Soledad 

Gabriel F. Soledad 

Pro Hac Vice granted. 

Email: gabrielsoledad@quinnemanuel.com 

QUINN, EMANUEL, URQUHART &

SULLIVAN, LLP 

1300 I Street, NW, Suite 900 

Washington, D.C. 20005 

Telephone: (202) 538-8000 

Facsimile: (202) 538-8100 

Attorneys for Defendants Cinemex USA Real Estate 

Holdings, Inc. and Cinemex Holdings USA, Inc. 

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 10 

CERTIFICATE OF SERVICE 

I certify that this Response has been served on counsel of record by the Court’s ECF 

system on April 26, 2020. 

 /s/ Juan P. Morillo 

 By: Juan P. Morillo 

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UNITED STATES DISTRICT COURT 

FOR THE SOUTHERN DISTRICT OF TEXAS 

HOUSTON DIVISION 

OMAR KHAN, et al. § 

 § 

vs. § Civil Action No. 4:20-cv-01178 

 § 

CINEMEX USA REAL ESTATE § Hon. Andrew S. Hanen 

HOLDINGS, INC., et al. § 

APPENDIX TO DEBTOR-DEFENDANTS’ RESPONSE REGARDING 

EFFECT OF THE AUTOMATIC STAY ON THIS COURT’S JURISDICTION

TABLE OF CONTENTS 

TAB CASE 

A-1 In re Clark, 49 B.R. 704 (Bankr. D. Guam 1985)

A-2 In re Edwin A. Epstein, Jr. Operating Co., Inc., 314 B.R. 591 (Bankr. S.D. Tex. 2004) 

A-3 In re Elder-Beerman Stores Corp., 195 B.R. 1019 (Bankr. S.D. Ohio 1996) 

A-4 In re Gandy, 327 B.R. 796 (Bankr. S.D. Tex. 2005) 

A-5 In re Mahurkar Double Lumen Hemodialysis Catheter Patent Litig., 140 B.R. 969 (N.D. 

Ill. 1992)

A-6 In re Mosher, 578 B.R. 765 (Bankr. S.D. Tex. 2017) 

A-7 Ledet v. K-Mart Corp., No. CIV.A. 01-2485, 2005 WL 357174 (E.D. La. Feb. 11, 2005)

A-8 Ledo Pizza Sys., Inc. v. Singh, No. CIV. WDQ-13-2365, 2013 WL 5604339 (D. Md. 

Oct. 10, 2013) 

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APPENDIX A-1 

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In re Clark, 49 B.R. 704 (1985)

 © 2020 Thomson Reuters. No claim to original U.S. Government Works. 1

49 B.R. 704

United States Bankruptcy Court,

D. Guam.

In re Cynthia A. CLARK, Debtor.

Bankruptcy No. 83–00018.

|

March 25, 1985.

Synopsis

Contempt proceedings were brought against creditors'

counsel. The Bankruptcy Court, Jon J. Chinen, J., held that:

(1) filing of complaint for injunctive relief on behalf of

creditors prior to filing a petition for relief in bankruptcy

court did not violate any automatic stay; however, creditors'

counsel, in proceeding to seek injunctive relief after having

been notified of the filing of the petition in bankruptcy court,

violated automatic stay, and (2) creditors' counsel would be

held jointly and severally liable for attorney fees and costs

incurred by debtor's attorney in bringing order to show cause.

Judgment accordingly.

Attorneys and Law Firms

*705 Russell H. Tansey, Agana, Guam, for debtor.

Ricky Sanchez, pro se.

Ladd A. Baumann, GMF, Guam, for Sam Paik.

MEMORANDUM DECISION

JON J. CHINEN, Bankruptcy Judge.

The contempt proceedings against Sam S. Paik, Esq., (“Paik”)

and Ricky Sanchez, Esq., (“Sanchez”) were separated and

held on two separate days. The hearing for Sanchez was

held on November 9, 1983 and the hearing for Paik was

held on February 28, 1985. At the hearing for Sanchez,

present were Russell H. Tansey, Esq., special counsel for

Cynthia Clark (“Debtor”) in the contempt proceedings, and

Sanchez representing himself. Present as an observer was

Paik's attorney, Ladd Bauman, who had just returned to

Guam from off-island. At the hearing for Paik, present were

J. Cook, substitute counsel for Debtor in the bankruptcy

proceeding, R. Tansey, special counsel for Debtor in the

contempt proceedings, Paik, one of the respondents, Ladd

Bauman, Esq., counsel for Paik, and Timothy Stewart, Esq.,

the Chapter 13 Trustee. Based upon the evidence presented,

the records in the file and arguments of counsel, the Court

finds as follows:

FINDINGS OF FACT

On April 13, 1983, a Motion for Injunction Relief, together

with a Memorandum in Support of Request for Preliminary

Injunction, and a Complaint were filed in the Superior Court

of Guam in Civil Case No. 273–83, Milton O. Wilson

and Beverly H. Wilson v. Cynthia Clark, et al. All of the

documents were executed by Paik as attorney for Mr. and Mrs.

Wilson. The Superior Court set May 3, 1983 at 9:00 a.m. for

the hearing on the Motion for Injunction.

On May 2, 1983 at 4:22 p.m., Tansey, on behalf of Debtor,

filed a Petition for Relief under Chapter 13 in the Bankruptcy

Court of the District of Guam. Then, at 4:40 p.m., a Notice of

Filing Petition in Bankruptcy, and a Notice of Filing Petition

were served by the then legal secretary of Tansey upon the

legal secretary of Paik at Paik's office. The first notice was

addressed to “Clerk of Court (of the Superior Court) and All

Parties and their Counsel of Record”, and the second notice

was addressed to “Creditors of the Above-Named Debtor,

Attorneys for Said Creditors and Marshall, Superior Court of

the Territory of Guam”.

On May 3, 1983, in Civil Case No. 273–83, in the Superior

Court of Guam, both Paik and Sanchez appeared on behalf of

Mr. and Mrs. Wilson. No one appeared on behalf of Debtor.

Paik addressed the Court at the start of the hearing and stated,

“My associate counsel, Mr. Sanchez, will argue the case, your

honor.”

After Mr. Sanchez argued that the automatic stay did not

apply in the particular case because Mr. and Mrs. Wilson

were merely trying to prevent the Debtor from receiving the

rent and dissipating same, *706 Paik actively joined in the

argument in an effort to convince the Superior Court that it

should issue an injunction to prevent the rent from being paid

over to the Debtor.

The Superior Court expressed concern over the matter of

jurisdiction because of the Notice of the Stay. The Court

stated: “I'm going to study this, continued till tomorrow at

nine o'clock.”

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On May 3, 1983, following the morning hearing in the

Superior Court, at 3:10 p.m., the then legal secretary of Tansey

served upon the legal secretary of Paik a letter dated May 3,

1983 addressed to Paik and Sanchez, in which Tansey stated

that he was preparing documents to hold Paik and Sanchez in

contempt, especially if they continued to pursue the action in

the Superior Court for injunctive relief.

On May 4, 1983, at the outset of the hearing, Sanchez

appeared on behalf of Mr. and Mrs. Wilson and Tansey

appeared on behalf of Debtor. Sanchez acknowledged receipt

of the letter dated May 3, 1983 from Tansey, which was

forwarded to him that morning. During the course of

arguments by Tansey and Sanchez, Paik who was handling

another case in another court, appeared at the hearing and sat

at counsel's table next to Sanchez, but did not argue. After

arguments of counsel, the Court stated: “The Court orders the

proceeding stayed pending bankruptcy disposition.”

On July 6, 1983, Tansey filed a Motion for Issuance of Order

to Show Cause and for Contempt Judgment against both Paik

and Sanchez for attempting to proceed with the Motion for

Injunctive relief in the Superior Court. Because Sanchez was

leaving Guam and because Paik's counsel, L. Bauman, was

off-island, at Sanchez' request for an early hearing, the cases

were separated as above-mentioned.

The primary defense of both Paik and Sanchez is that they

should not be found guilty of contempt for the reason that

their violation of the stay order, if any, was not intentional and

that they were seeking to prevent the dissipation of the assets

of the Debtor by denying Debtor access to the rents from a

dwelling that was being rented by Debtor to a third party.

At the hearing on November 9, 1983, Sanchez, who

testified on his own behalf, claimed that the injunctive

proceeding in the Superior Court was merely to preserve

the status quo. However, on examination by the Court,

Sanchez acknowledged that the proceeding against Debtor

was brought to collect debts which had been incurred prior to

the filing of Debtor's petition in the Bankruptcy Court. It is

also uncontroverted that, in 1983, Sanchez was an employee

of Paik, that he was a recent law school graduate and was

admitted to the bar of Guam only shortly prior to April, 1983.

CONCLUSIONS OF LAW

Section 362(a) of 11 U.S.C. provides as follows:

§ 362. Automatic Stay.

(a) Except as provided in subsection (b) of this section, a

petition filed under section 301, 302, or 303 of this title, or

an application filed under section 5(a)(3) of the Securities

Investor Protection Act of 1970 (15 U.S.C. 78eee(a)(3)),

operates as a stay, applicable to all entities, of—

(1) the commencement of continuation, including the

issuance or employment of process, of a judicial,

administrative, or other action or proceeding against the

debtor that was or could have been commenced before

the commencement of the case under this title, or to

recover a claim against the debtor that arose before the

commencement of the case under this title;

(2) the enforcement, against the debtor or against

property of the estate, of a judgment obtained before the

commencement of the case under this title;

(3) any act to obtain possession of property of the estate

or of property from the estate or to exercise control over

property of the estate.

(4) any act to create, perfect, or enforce any lien against

property of the estate;

*707 (5) any act to create, perfect, or enforce against

property of the debtor any lien to the extent that such lien

secures a claim that arose before the commencement of

the case under this title;

(6) any act to collect, assess, or recover a claim against

the debtor that arose before the commencement of the

case under this title;

(7) the setoff of any debt owing to the debtor that arose

before the commencement of the case under this title

against any claim against the debtor; and

(8) the commencement or continuation of a proceeding

before the United States Tax Court concerning the

debtor.

 The Complaint for Injunctive Relief having been filed prior

to the filing of the Petition for Relief in the Bankruptcy Court,

it is undisputed that filing of such complaint does not violate

any automatic stay. Also, because the May 3, 1983 hearing

had been scheduled in April of 1983 by the Superior Court

of Guam, it was incumbent upon Paik and Sanchez to at

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least appear in the Superior Court on May 3. However, for

Paik and Sanchez to proceed on May 3 to seek the injunctive

relief, after being notified of the filing of the Petition in

the Bankruptcy Court, is a violation of the automatic stay,

especially where the real purpose of the action in the Superior

Court was to force Debtor to pay Mr. and Mrs. Wilson their

pre-petition debts.

Instead of researching the matter on the effect of the automatic

stay, Paik relied on his employee, Sanchez, a young recent

law school graduate, who had informed him that the stay did

not apply and Paik made no effort to suspend the action for

injunction relief pending the bankruptcy proceeding. On the

contrary, Paik actively participated at the May 3rd hearing,

and at the May 4th hearing, Paik sat at counsel's table, and

permitted Sanchez to argue for the injunctive relief.

 Where there is uncertainty about an order of the Bankruptcy

Court, or applicability of the automatic stay, a creditor should

petition the court for clarification. If the creditor does not, he

takes a calculated risk of being held in contempt. In re Pody,

42 B.R. 570 (Bkrtcy.N.D.Ala.1984).

In the instant case, where both Paik and Sanchez were

inexperienced in the field of bankruptcy, in addition to the

research by Sanchez, one or the other should have contacted

an attorney with expertise in the field of bankruptcy. In failing

to do so, they took a calculated risk and violated the automatic

stay.

 And when an individual violates the automatic stay, the

bankruptcy court may award damages, costs and attorney's

fees to debtor's attorney. In re O'Connor, 42 B.R. 390

(Bkrtcy.E.D.Ark.1984).

 Having found both Paik and Sanchez in violation of the

automatic stay, the Court assesses both attorneys' fees and

costs incurred by R. Tansey in bringing this Order to Show

Cause. Paik and Sanchez are liable jointly and severally

for attorney's fees and costs incurred up to and including

November 8, 1983, when the contempt proceeding against

Sanchez was heard, as follows:

For hearing in the Superior Court in Guam

Attorney's fees $500.00

5 hours @ 80.00 $400.00

1 hour @ $100.00 $100.00

$500.00

Costs $136.50

Duplication of taped $ 10.00

proceedings

Transcript $

40.00

xerox copies 44.00

Witness & mileage fee 30.00

Service of subpoena 12.50

$136.50

For hearing in Bankruptcy Court:

Attorney's Fees $630.00

5 hours @ $ 80.00 $400.00

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2.3 hours @ $100.00 $230.00

$630.00

Total $1,266.50

The Court, at this time, is denying five (5) hours of “research”

time (7/11/83, 7/12/83 and 11/08/83) for the November 9,

1983 hearing. The Court is unable to determine *708 from

the time-sheet submitted how the “research” was related to

the contempt proceeding. Where there is no clear statement

as to the nature of the attorney's services and the relation it

bears to the issue at hand, compensation may be denied, In re

Tolan, 41 B.R. 751 (Bkrtcy.M.D.Tenn.1984).

Tansey is granted 20 days from the date of this order to file

a supplemental time-sheet to show the reasons for the time

spent on “research”. In addition, when Tansey submits his

time-sheets for the February 28, 1985 hearing, the Court will

issue a supplemental order covering the additional time spent

on this matter of contempt proceeding.

Let Judgment be entered accordingly.

All Citations

49 B.R. 704

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APPENDIX A-

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In re Edwin A. Epstein, Jr. Operating Co., Inc., 314 B.R. 591 (2004)

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314 B.R. 591

United States Bankruptcy Court,

S.D. Texas,

Houston Division.

In re EDWIN A. EPSTEIN, JR.

OPERATING CO., INC., Involuntary Debtor.

No. 04–50106–H1–7.

|

May 27, 2004.

Synopsis

Background: Following favorable postpetition ruling by

arbitration panel, involuntary Chapter 7 debtor sought

determination that stay did not apply to prevent it from

pursuing its claims before arbitrators or, in alternative, moved

for order annulling stay.

Holdings: The Bankruptcy Court, Marvin Isgur, J., held that:

automatic stay applied, not only to prevent other party to

arbitration proceeding from asserting claims against debtor

for its alleged tortious interference and slander of title

in asserting an interest in oil and gas wells, but also to

prevent arbitrators from hearing debtor's claims to replace this

other party as operator of wells based on debtor's asserted

ownership interest therein;

regardless of whether arbitrators had concurrent jurisdiction

to decide whether automatic stay applied, their exercise of

such jurisdiction was automatically stayed;

postpetition order of arbitration panel regarding effect of stay

on arbitration, having been entered in violation of stay, was

mere nullity, which had no binding effect on bankruptcy court

under Rooker–Feldman doctrine; and

bankruptcy court would not annul stay to retroactively

validate action taken by arbitrators at debtor's request.

Motion denied.

Attorneys and Law Firms

*593 Patrick D. Devine, Ware, Snow, Fogel & Jackson, LLP,

William D. Wood, Adam T. Schramek, Fulbright & Jaworski,

LLP, Houston, TX, for debtor.

Ronald J. Johnson, Attorney at Law, San Antonio, TX, for

Supply Solutions of Texas, Inc., L.G.H. Inc. and Spinnsoft,

Inc.

Richard L. Fuqua, Fuqua & Keim, LLP, Houston, TX, for

Morningstar Gas, Inc.

Jonnie Patterson, Walker & Patterson, P.C., for Edward Abell,

Jr. and Leo LeBlanc.

Diane G. Livingstone, Office of U.S. Trustee, Nancy Lynne

Holley, U.S. Trustee, Houston, TX, for U.S. Trustee.

MEMORANDUM OPINION

MARVIN ISGUR, Bankruptcy Judge.

By separate orders, this Court has (i) voided a determination

made by an arbitration panel; and (ii) authorized the

Involuntary Debtor to prosecute an interlocutory appeal of

that same order. This memorandum opinion sets forth the

basis for those decisions.

Factual background.

In 1995, the Edwin A. Epstein, Jr. Operating Co., Inc.

(“EEOC”) obtained interests/leases in several oil and gas

wells in Starr County, Texas. At the time, EEOC was solely

owned by Edwin A. Epstein, Jr. In 2001, EEOC transferred its

assets to Morningstar Gas, Inc. (“Morningstar”), resigned as

the working interest operator, and named Morningstar as the

successor operator. Morningstar is wholly owned by Veronica

Epstein (Edwin A. Epstein's wife).

*594 On December 4, 2001, the David Clark Trust (the

“Trust”) executed on a judgment 1 against EEOC resulting in

a sheriff's sale of EEOC's property interests in the leases of the

oil and gas wells. On March 8, 2002, Baker Hughes Oilfield

Operations, Inc. (“Baker Hughes”) foreclosed on a security

interest it held on the shares of EEOC. Baker Hughes is now

the sole shareholder of EEOC. 2 After Baker Hughes installed

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new management in EEOC, Baker Hughes discovered the

2001 sheriff's sale.

Less than a month after the foreclosure by Baker Hughes,

EEOC filed for relief under chapter 11 of the bankruptcy

code. 3 EEOC then filed adversary proceedings against

Morningstar and the Trust for turnover. The Trust settled this

dispute and EEOC dismissed the bankruptcy. The terms of

the settlement were that the Trust and EEOC would each

have a percentage of ownership in the Trust res. The Trust

res consisted of the oil and gas interests executed on by the

Trust. 4

On May 10, 2002, EEOC attempted to remove Morningstar

as the operator of the wells and appoint PetroReal, Inc. as

operator. After Morningstar refused to relinquish the property,

EEOC sued in the 169th District Court of Bell County, Texas.

The litigation was then sent to compulsory arbitration by the

state court on December 2, 2002. On September 9, 2003,

before the arbitration panel could hear the merits of the

dispute, Morningstar filed a petition for relief under chapter

11 and the arbitration was stayed by 11 U.S.C. § 362.

5

 On

October 10, 2003, Bankruptcy Judge Greendyke modified the

automatic stay to allow the arbitration to proceed. [Case no.

03–42936 docket no. 30]. 6 The arbitration was again stopped

on March 26, 2004 when an involuntary petition for relief was

filed against EEOC. 7

The filing of the involuntary petition under 11 U.S.C. § 303

invoked the automatic stay arising under 11 U.S.C. § 362.

2 COLLIER ON BANKRUPTCY ¶ 303.12 (15th ed.2004).

Without seeking relief from the stay imposed by the EEOC

involuntary petition, EEOC and Morningstar argued to the

arbitration panel whether the automatic stay applied to the

arbitration proceedings.

*595 After considering legal arguments, the arbitration

panel ruled that the stay did not apply to the pending

action and proceeded to decide the merits of the dispute.

Morningstar took the position that it could not participate

without violating the stay. Accordingly, although Morningstar

did not participate in the proceeding on the merits, the

arbitration panel proceeded to hear the evidence presented by

EEOC. Not surprisingly, EEOC prevailed.

Thereafter, on April 14, 2004, EEOC filed a Motion

for Declaratory Ruling That No Stay Was In Effect, or

Alternatively, For Order Annulling Stay, or Alternatively For

Relief From Stay in its own case [docket no. 94]. 8 The Court

held an evidentiary hearing to determine EEOC's Motion for

a Declaratory Ruling and made a preliminary determination

that the automatic stay did apply to the arbitration proceeding.

Nevertheless, the Court advised the parties that it would

consider whether the Court should enforce or otherwise defer

to the arbitration panel's determination.

The Court requested briefing on whether the arbitration panel

had authority to determine the applicability of the automatic

stay and if so, what level of deference should be given by the

Court to the arbitration panel's determination that the stay did

not apply.

After substantial briefing, these issues were taken up at

a subsequent hearing in which the Court ruled that the

automatic stay barred the panel from determining whether the

automatic stay applied. EEOC later filed a motion for leave

to appeal. The findings and conclusions in this memorandum

opinion apply with equal force to the Court's determination

to void the arbitration panel's decision and the Court's

determination that EEOC should be allowed an interlocutory

appeal. See Federal Trade Comm'n. v. Enforma Natural

Products, Inc., 362 F.3d 1204, 1216 n. 11 (9th Cir.2004);

Bodin v. Gulf Oil Corp., 877 F.2d 438, 440 (5th Cir.1989).

Was the arbitration proceeding subject to the stay?

 EEOC stridently argues in it briefs and memoranda that the

arbitration proceeding was not stayed because § 362 only

stays actions against the debtor that could harm the estate.

EEOC cites Taraska v. Carmel, 223 B.R. 200 (D.Ariz.1998)

for the proposition that the automatic stay does not prevent

the debtor from prosecuting a case that it instigated before the

bankruptcy because such actions are not actions against the

debtor. See id. at 202. EEOC then asserts:

The only issues before the arbitration

panel were the appointment of a

temporary operator being requested by

David Clark and EEOC to preserve

the properties. There was no claim

even before the arbitration panel

which could have negatively affected

EEOC's estate, as Morningstar has

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already wrongfully misappropriated

operations from EEOC.

[docket no. 7 at ¶ 43]. Therefore, EEOC reasons that because

it had nothing to lose in the arbitration, the proceeding was

not an action against the debtor.

While the logic of EEOC's argument is sound, it is inapposite

to the evidence presented to the Court. Before EEOC was

compelled to arbitration, Morningstar made a written demand

for arbitration to EEOC. 9 Morningstar's written demand for

arbitration requested the arbitration panel *596 to decide:

(1) whether EEOC retained any title to the oil and gas; and (2)

whether EEOC is liable for damages and the extent of those

damages for:

(a) violating its obligations and agreements to submit all

disputes to arbitration;

(b) interfering with the operation and development of

the properties;

(c) interfering with the contractual rights and

prospective business relations of Morningstar;

(d) making false and disparaging representations to

third parties;

(e) violating its obligations respecting the

confidentiality of information about the operation

and development of the properties; and

(f) slander of title.

After this demand was made, the Bell County court issued

its order compelling EEOC to arbitrate in accordance with

the provisions of the specified letter agreement. This letter

agreement expressly requires arbitration of all disputes “of

any kind.” Accordingly, the disputes raised in Morningstar's

demand were included in the arbitration. Furthermore, title

was put in issue by EEOC's pleadings in the state court suit

and Morningstar's arbitration demand. 10

In the EEOC/Morningstar arbitration proceeding, the

arbitration panel was authorized by Judge Greendyke's

order to consider all issues between the parties. 11 The

only limitation on the arbitration was that the parties

were instructed to return to the Court to confirm the

arbitration panel's rulings. Therefore, at the time of the EEOC

involuntary petition, there was no restriction on the arbitration

panel's ability to adjudicate the disputes between Morningstar

and EEOC. Furthermore, on February 5, 2004—after the

Morningstar stay was modified—the arbitration panel issued

a letter ruling outlining the issues it would decide. 12 This

letter ruling evidences the arbitration panel's specific intent

to determine the “ownership issues.” Finally, the demand for

arbitration and the governing arbitration agreement show that

the arbitration panel had carte blanche to determine all issues

between the parties.

After the stay was lifted and the arbitration panel began

hearing the disputes between the parties, EEOC requested

the arbitration panel replace Morningstar as operator with

a temporary operator. This temporary operatorship issue

was the subject of the hearing that was interrupted by the

involuntary petition. EEOC contends that even if the overall

action is stayed, this specific sub-issue was not subject to the

automatic stay and therefore the action did not constitute an

action against the debtor. This argument basically assumes

that the stay can be selectively applied to portions of a

proceeding resulting in certain issues in a single action being

stayed while others are not.

The Court recognizes authority stemming from First

Wisconsin National Bank v. Grandlich Development Corp.

(the “First Wisconsin authority”) which is cited for the

proposition that debtor's counterclaims are not stayed because

they are not proceedings against the debtor. See e.g. *597

Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d

1194, 1206 (3d Cir.1991) (citing First Wisconsin National

Bank v. Grandlich Development Corp., 565 F.2d 879 (5th

Cir.1978)) (per curiam). Thus, the First Wisconsin authority

envisions a bifurcation or severing of an action into stayed

and non-stayed claims. While the Court recognizes that this

approach may be appropriate for severable claims, it does

not apply to situations involving non-severable compulsory

counterclaims.

Federal Rule of Bankruptcy Procedure 7013 specifically

incorporates FED. R.CIV. P. 13(a) to mandate parties to assert

compulsory counterclaims in the principal suit. See FED.

R. BANKR.P. 7013; New York Life Ins. Co. v. Deshotel,

142 F.3d 873, 882 (5th Cir.1998) (“[i]t is well settled that

a failure to plead a compulsory counterclaim bars a party

from bringing a later independent action on that claim”)

(citations omitted). Therefore the Court distinguishes the

First Wisconsin authority to the extent that the authority

does not consider the effect of a compulsory counterclaim

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on the stayed action because such claims present the Court

with an inextricably intertwined action that must be heard

as a unit. Additionally, the purpose of Rule 13 is to prevent

multiple actions and to achieve resolution in single lawsuit

of all disputes arising out of common matters. See Southern

Const. Co. v. Pickard, 371 U.S. 57, 61, 83 S.Ct. 108, 9

L.Ed.2d 31 (1962). Therefore, the Court finds it inapposite

of the stated purpose of Rule 13 to divide the case into

stayed/nonstayed segments when claims arise from the same

transaction or occurrence as the underlying dispute. In any

event, no severance occurred in the arbitration.

In the present case, the EEOC claims are subject to

Morningstar's counterclaims discussed supra. Under FED. R.

BANK. P. 7013 these counterclaims would be compulsory

counterclaims because they arise out of the same transaction

or occurrence and do not require for its adjudication the

presence of third parties of whom the court cannot acquire

jurisdiction. Therefore, the suit is of a type not considered in

First Wisconsin.

Despite the Court's hesitancy to recognize the applicability

of the First Wisconsin authority in situations involving

compulsory counterclaims, even if the Court did accept

it, the Court finds that EEOC's request for a temporary

operator is merely an interlocutory request for relief and

therefore not within the gambit of First Wisconsin. In this

case, EEOC was seeking an interlocutory order replacing

Morningstar temporarily as operator. Such interlocutory relief

is a “continuation of a proceeding” under the plain language

of § 362(a)(1) and not a separate proceeding that would be

controlled by First Wisconsin.

However, even if the Court extended the First Wisconsin

authority to compulsory counterclaim actions, and further

found the interlocutory relief fit into this extension, the

action would still be stayed because the Court finds that the

temporary operator issue itself was subject to the stay along

with the rest of the proceeding.

The temporary operatorship issue was EEOC's attempt to

eject Morningstar as operator and insert PetroReal, because

of the irreparable harm allegedly caused by Morningstar's

continued operation of the leases. EEOC contends that this

sub-issue was not an action against the debtor because if

EEOC was not the operator, and the only relief sought was

to appoint EEOC's selection as the operator, how could the

action detract from the estate? Morningstar contends that

there was more than just this temporary operatorship issue

at the hearing because it was necessary to make findings on

the title issue to *598 determine the temporary operatorship

issue. This claim is strengthened by the arbitration panel's

letter ruling made on the temporary operatorship issue. In the

letter ruling, the arbitration panel considered the title issue and

found EEOC has a working interest in the lease.

Consequently, EEOC's assertion that the arbitration panel

was only considering the temporary operatorship issue is

inconsistent with the actual results. Instead, the arbitration

proceedings both in their entirety and in this particular

interlocutory sub-issue pertained to matters affecting title and

claims for affirmative relief against EEOC. Had Morningstar

participated in the arbitration, the arbitration panel may have

made findings that EEOC did not have a working interest

in the lease. Such a finding could then serve as the basis

for not only a denial of PetroReal as the temporary operator,

but as the predicate for the other issue including the tortious

interference and other damage claims. These would constitute

both actions against the debtor and actions against the estate

under § 362(a)(1) and (6). Specifically § 362(a)(1) stays the

“commencement or continuation, including the issuance or

employment of process, of a judicial, administrative, or other

action or proceeding against the debtor that was or could

have been commenced before the commencement of the case

under this title, or to recover a claim against the debtor

that arose before the commencement of the case under this

title.” Id. (emphasis added). The working interest decision in

the operatorship hearing and the totality of issues before the

arbitration panel were subject to the automatic stay.

The working interest decision by the arbitration panel forms

the basis of the business tort claims against EEOC because

Morningstar alleges EEOC is slandering Morningstar and

interfering with its business through EEOC's title claims.

Accordingly, an adverse decision on the working interest

issue decided by the arbitration panel would serve as the

predicate to the business tort claims. This in turn means that

the hearing that EEOC asserts was not against the debtor, was

really a decision on the pivotal fact issue to EEOC's ultimate

liability.

Did the arbitration panel have authority to

determine whether the automatic stay applied?

 Because the proceeding was subject to the automatic stay,

the Court must consider whether the arbitration panel had

the authority to determine the applicability of the stay. 13

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The U.S. Constitution gives Congress plenary power over

bankruptcy thus allowing Congress to limit the jurisdiction

that courts can exercise over the person and property of a

debtor who duly invokes the bankruptcy law. U.S. CONST.,

art. I, § 8; Kalb v. Feuerstein, 308 U.S. 433, 439, 60

S.Ct. 343, 84 L.Ed. 370 (1940). The current bankruptcy

jurisdictional statute, 28 U.S.C. § 1334, defines the role of

the federal district courts in bankruptcy. Section 1334(a)

provides, “[e]xcept as provided in subsection (b) of this

section, the district courts shall have original and exclusive

jurisdiction of all cases under title 11.” 28 U.S.C. § 1334(a).

Section 1334(b) then provides:

(b) Notwithstanding any Act of Congress that confers

exclusive jurisdiction on a court or courts other than the

district courts, the district courts shall *599 have original

but not exclusive jurisdiction of all civil proceedings

arising under title 11, or arising in or related to cases under

title 11.

28 U.S.C. § 1334(b).

In light of this statutory backdrop, the Court is faced with the

issue of what other tribunals are vested with jurisdiction to

determine whether the automatic stay applies.

EEOC quotes Coho Resources, for the proposition that “ ‘the

majority of jurisdictions have held concurrent jurisdiction

to decide whether the stay applies to prepetition state court

actions' ”. 14 See Supplemental Brief, [docket no. 19] at

pg. 3 (citing Chapman v. Bituminous Ins. Co. (In re Coho

Resources, Inc.), 345 F.3d 338, 345 n. 24 (5th Cir.2003)). The

Court disagrees with EEOC's implicit expansion of Coho.

Coho presented the Court inter alia with the narrow issue of

whether an action against a chapter 11 debtor's indemnitor and

its insurance companies were stayed by the debtor's petition

for relief under the bankruptcy Code. See id. at 344–45.

When Coho filed bankruptcy, Coho's insurers removed a

garnishment against them to federal court. The federal court

required the plaintiff/tort creditor to petition the bankruptcy

court for permission to execute the state court judgment. Id.

at 340. On appeal from the bankruptcy court, the district court

allowed the tort creditor to execute against the insurers but

not the debtor. Id. at 342.

On appeal from the district court, the insurer ineffectively

argued that the district court improperly delegated appellate

authority to the Mississippi state courts regarding the

applicability of the automatic stay. Id. at 345. The Fifth

Circuit denounced this proposition noting that state courts

routinely rule on the applicability of the automatic stay in such

situations. Id.

Coho stands for the proposition that state courts are

authorized to rule on the effect of the automatic stay on third

party non-debtors since the stay never applied to them in

the first place. This is a much narrower reading than that

assigned by EEOC. 15 Thus, while EEOC is correct that state

courts have jurisdiction to rule on the applicability of the

automatic stay to non-debtors, they do not have authority to

do so when the automatic stay precludes the continuation of

the proceeding against the debtor.

EEOC also cites Sanders v. City of Brady (In re Brady,

Texas Mun. Gas Corp.), 936 F.2d 212, 217 (5th Cir.), cert.

denied, 502 U.S. 1013, 112 S.Ct. 657, 116 L.Ed.2d 748

(1991) for the proposition that state courts are entitled to

make decisions regarding bankruptcy court matters unless the

Bankruptcy Code specifically disallows them. Of relevance,

Sanders states:

[T]he only aspect of the bankruptcy

proceeding over which the district

courts and their bankruptcy units

have exclusive jurisdiction is “the

bankruptcy petition itself.” See In re

Wood, 825 F.2d 90, 92 (5th Cir.1987).

In other matters arising in or related to

title 11 cases, unless the Code provides

otherwise, state courts have concurrent

jurisdiction ... and bankruptcy courts

are prohibited *600 from relitigating

these matters if the state courts have

already resolved them

Sanders, 936 F.2d at 218 (emphasis added; footnote omitted).

In the context of the automatic stay the code does provide

otherwise. It is undisputed that only a bankruptcy court has

jurisdiction to terminate, annul or modify the automatic stay.

11 U.S.C. § 362(d); see Farley v. Henson, 2 F.3d 273 (8th

Cir.1993); Continental Cas., Co. v. Gullett, 253 B.R. 796

(S.D.Tex.1999).

 Thus, even though a state court has jurisdiction to unilaterally

decide whether the automatic stay applies, and thus bind

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the bankruptcy court by that decision through res judicata

or the Rooker–Feldman doctrine, the issue of whether a

state court has jurisdiction does not affect the outcome

of this case. The issue is whether the exercise of that

concurrent jurisdiction was automatically stayed by act of

Congress. “[B]ecause only an order of the bankruptcy court

can authorize any further progress in the stayed proceedings,

it follows that the continuation of the [stayed] proceeding

can derive legitimacy only from the bankruptcy court order.”

Casperone v. Landmark Oil & Gas Corp., 819 F.2d 112, 114

(5th Cir.1987). Consequently, EEOC's reliance on Coho and

Sanders is misplaced because concurrent jurisdiction is not

the controlling question.

What is the effect of the automatic stay on

the arbitration panel's power to determine

whether the automatic stay applies?

 The automatic stay is effective upon the filing of

the voluntary or involuntary bankruptcy petition. See 2

COLLIER ON BANKRUPTCY 303.12, (15th ed.2004);

11 U.S.C. §§ 303, 362(a); In re Pierce, 272 B.R.

198, 209 (Bankr.S.D.Tex.2001). It operates to enjoin

the commencement or continuation of any judicial,

administrative, or other proceedings against the debtor,

enforcement of prior judgments, perfection of liens, and “any

act to collect, assess or recover a claim against the debtor

that arose before the commencement of the case.” § 362(a)

(6). Specifically, the automatic stay applies to arbitration

proceedings. 16

 When proceedings are stayed, only an order of the bankruptcy

court can annul, modify, or terminate the stay. See In re Cueva,

371 F.3d 232, 236–37 (5th Cir.2004) (“[t]hrough the broad

discretion granted bankruptcy courts ... § 362(d) provides that

under certain conditions, when a party pursues retroactive

annulment or modification of the automatic stay, a court may

grant relief from a stay by ‘terminating, annulling, modifying,

or conditioning such stay.’ ”) (quoting § 362); see also Farley,

2 F.3d at 276.

 Before the court can grant this relief, the court must find that

there is “cause” to lift/modify/annul the stay. In re Pierce,

272 B.R. at 209 (citing § 362(d)). If the court annuls the stay,

the annulment has the effect of eliminating it (or terminating

it retroactively). See Sikes v. Global Marine, Inc., 881 F.2d

176, 178 (5th Cir.1989) (“[t]he power to annul authorizes

retroactive relief even unto the date of the filing of the petition

giving rise to the automatic stay”). Absent “cause” however,

*601 the stay continues as follows: “in case of act against

property of estate, until property is no longer property of

estate, or, in case of other acts, until earliest of closing of case,

dismissal of case, or time discharge is granted or denied.”

Browning v. Navarro, 743 F.2d 1069, 1083 (5th Cir.1984)

(citations omitted). 17

 While the stay is in place, an act in violation of the stay

is voidable. See Sikes v. Global Marine, Inc., 881 F.2d

176, 178 (5th Cir.1989). While “voidable” appears to mean

valid subject to being made invalid, it actually stands for

the proposition that acts are invalid subject to subsequent

validation. This distinction was endorsed by the Fifth Circuit's

1989 decision in Sikes v. Global Marine, Inc., 881 F.2d 176

(5th Cir.1989). In Sikes, the court held that actions violative

of the automatic stay are voidable, not void. In so holding,

the court was simply using the correct terminology to indicate

that, under some circumstances (like a bankruptcy court

granting retroactive relief from the stay), an act that was

originally null could be rendered valid by judicial act. Id. at

178. Where an action is violative of the stay and the action

is not annulled, the “violation of the stay (is void), of no

effect, and incurable.” In re Pierce, 272 B.R. at 206 n. 16

(interpreting Sikes, 881 F.2d at 176). “And ‘[a]lthough it can

be made valid by retroactive relief from the [automatic] stay,

no one has a right to rely on the transaction until and unless

it is validated by court action.’ ” Cueva, at 236–37 (quoting

Pierce, at 208).

 As applied to the facts of this case, the arbitration panel's

decision to make a determination regarding the applicability

of the automatic stay was itself a “continuation of a

proceeding” as prohibited by § 362(a)(1) that was subject to

the automatic stay as discussed supra. Therefore, the action

of the arbitration panel is invalid unless the Court annuls the

violation of the stay. See Id.; Sikes, 881 F.2d at 176. Absent

such an annulment however, the decision remains invalid and

is now declared to be void. See Cueva, at 236–37; Sikes, 881

F.2d at 176.

Does the Rooker–Feldman doctrine preclude

the Court's consideration of stay issues?

 After concluding that the arbitration panel's decision was

stayed, the next issue is whether the arbitration panel's

erroneous decision that the stay did not apply has a preclusive

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effect on the Court's ability to enforce § 362(a). This issue is

often characterized as the Rooker–Feldman doctrine.

The Rooker–Feldman doctrine, named after two Supreme

Court cases, 18 holds that the inferior federal courts lack

jurisdiction to exercise appellate review over state court

decisions. See Reitnauer v. Tex. Exotic Feline Found., Inc. (In

re Reitnauer), 152 F.3d 341, 343 (5th Cir.1998) (describing

the doctrine). As the Fifth Circuit explains:

*602 [F]ederal district courts, as courts of original

jurisdiction, lack appellate jurisdiction to review, modify,

or nullify final orders of state courts. If a state trial

court errs the judgment is not void, it is to be reviewed

and corrected by the appropriate state appellate court.

Thereafter, recourse at the federal level is limited solely to

an application for a writ of certiorari to the United States

Supreme Court.

Weekly v. Morrow, 204 F.3d 613, 615 (5th Cir.2000)

(quotations and citations omitted).

When presented with the identical question of whether a state

court decision on applicability of the automatic stay has a

preclusive effect on the bankruptcy court, the en banc Ninth

Circuit decision In re Gruntz, 202 F.3d 1074 (9th Cir.2000)

reasoned that it did not. The opinion reads:

In sum, by virtue of the power vested in them by Congress,

the federal courts have the final authority to determine

the scope and applicability of the automatic stay. “The

States cannot, in the exercise of control over local laws

and practice, vest State courts with power to violate the

supreme law of the land.” Kalb, 308 U.S. at 439, 60 S.Ct.

343, 84 L.Ed. 370. Thus, the Rooker–Feldman doctrine

is not implicated by collateral challenges to the automatic

stay in bankruptcy. 19 A bankruptcy court simply does not

conduct an improper appellate review of a state court

when it enforces an automatic stay that issues from its

own federal statutory authority. In fact, a reverse Rooker–

Feldman situation is presented when state courts decide to

proceed in derogation of the stay, because it is the state

court which is attempting impermissibly to modify the

federal court's injunction.

Gruntz, 202 F.3d at 1083 (emphasis added).

Like the Ninth Circuit, the Court finds enforcement of

the automatic stay does not implicate the Rooker–Feldman

doctrine because enforcement of § 362 is not a review of a

state court decision, but rather a refusal to annul a violation of

the stay. Sikes, 881 F.2d at 176. Consequently the arbitration

panel's letter ruling does not have a preclusive effect on the

bankruptcy court because the order was a nullity when made.

Should the Court annul the violation of the stay to

retroactively validate the arbitration panel's decision?

 EEOC alternatively requests the Court to retroactively

annul the violation of the stay under § 362(d) to validate

the arbitration panel's letter ruling. While the Bankruptcy

Code grants a bankruptcy judge the equitable discretion to

annul the automatic stay “for cause,” it is unique because

it asks the court to approve post-petition action which

violated the automatic stay. 11 U.S.C. § 362(d); In re Elder–

Beerman Stores Corp., 195 B.R. 1012 (Bankr.S.D.Ohio

1996). In the present case, Morningstar refused to participate

in the arbitration proceeding because it correctly determined

the proceeding violated the automatic stay. Under these

circumstances, the Court finds that it would be *603

inequitable to annul the stay violation to the detriment of

a party that respected and relied on the stay. Therefore, the

Court refuses to annul the violation of the automatic stay.

The purpose of the stay and the

policies of the Bankruptcy Code are

furthered by the Court's interpretation.

 The purposes of the bankruptcy stay under § 362 “are to

protect the debtor's assets, provide temporary relief from

creditors, and further the equity of distribution among the

creditors by forestalling a race to the courthouse.” Reliant

Energy Servs., Inc. v. Enron Canada Corp., 349 F.3d 816,

825 (5th Cir.2003) (quoting GATX Aircraft Corp. v. M/V

Courtney Leigh, 768 F.2d 711, 716 (5th Cir.1985)). This

in turn protects creditors' postpetition expectations in a

manner consistent with bankruptcy goal of equal treatment

by halting prepetition proceedings that would otherwise result

in a chaotic and uncontrolled scramble for debtor's assets

in variety of uncoordinated proceedings in different courts.

See Hunt v. Bankers Trust Co., 799 F.2d 1060, 1068 (5th

Cir.1986).

Consequently, if a non-federal forum's incorrect

determination of whether the stay applies could bind a

federal court to its determination of whether the stay

applies, the bankruptcy court would lose its role as the

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“gatekeeper,” exposing the debtor to the risk of defending

suits in numerous forums. This is exactly the “chaotic and

uncontrolled scramble” the Code was designed to prevent.

This could create situations in which non-federal forums may

inadvertently subvert the rights and goals of the Bankruptcy

Code by violating a Congressionally-imposed injunction.

Therefore, the Court finds that EEOC's Motion for

Declaratory Ruling (docket no. 7) is denied and the

arbitration letter ruling dated April 12, 2004 is declared

void. Nevertheless, the Court recognizes (as set forth in this

opinion) that EEOC's position is not without some limited

support. Accordingly, the Court grants EEOC's motion for

leave to appeal the order.

All Citations

314 B.R. 591

Footnotes

1 On August 22, 2001, Nabors Drilling USA assigned a judgment against EEOC to Roy L. Barnes, in his capacity

as “Trustee.” On August 17, 2001 however, Roy L. Barnes, Trustee, had already assigned all of his rights in

and to the Nabor's judgment to David Clark, Trustee. The validity of the Clark/Barnes/Nabor's transactions

is not addressed in this opinion.

2 Baker Hughes became the sole shareholder as the result of a Louisiana state court lawsuit in which EEOC

and its president Edwin Epstein entered into a consent judgment and settlement agreement in which he

pledged all of the stock in EEOC to Baker Hughes as collateral for the settlement payments. Thereafter, he

defaulted on the payments and Baker Hughes foreclosed on the stock.

3 In re Edwin Epstein Operating Company, Inc., Case No. 02–33726.

4 This distribution is contested by other parties in interest that claim there was no trust res because the Trust

made a distribution of all Trust property.

5 All references to “§ 362” or the “automatic stay” refer to 11 U.S.C. § 362 and its subsections.

6 This modification allowed the arbitration to continue with the parties returning to the Court for confirmation

of the Panel's orders.

7 This case was transferred to this Court on March 23, 2004 because its relatedness to the Morningstar case.

[docket no. 6]. The Morningstar case had been transferred to this Court after Bankruptcy Judge Greendyke

recused.

8 On April 12, 2004, EEOC also filed a motion to confirm the arbitration order in the Morningstar case (as

required by Judge Greendyke's order).

9 Morningstar also made a similar demand for arbitration upon David Clark.

10 See Edwin A. Epstein, Jr. Operating Company, Inc. v. Morningstar Gas, Inc., Cause No. 193,331–D, In the

District Court of Bell County, Texas, 169th Judicial District, EEOC original petition at ¶¶ 12, 18.

11 It should be noted that the order even encourages that parties and the panel to take up the title issue. [Case

no. 03–42936 docket no. 30].

12 The letter ruling additionally leaves the door open for the parties to submit legal issues for the arbitration

panel's determination at any time.

13 Because it does not affect the outcome of the decision, the Court makes no finding as to the nature and

extent of the arbitration panel's authority. Rather, the Court presumes the arbitration panel has the full grant

of the authority of the state court referring the matter to arbitration.

14 EEOC also cites numerous decisions stating the federal district courts have concurrent jurisdiction. The Court

agrees with these cases because the district courts (from which the bankruptcy courts derive their jurisdiction)

retain jurisdiction over the bankruptcy case. See Picco v. Global Marine Drilling Co., 900 F.2d 846, 850 (5th

Cir.1990).

15 EEOC elects to cite snippets of the opinion, without analyzing the facts of the case.

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16 See generally Mette H. Kurth, Comment, An Unstoppable Mandate and an Immovable Policy: The Arbitration

Act and the Bankruptcy Code Collide, 43 U.C.L.A. L.REV. 999 n. 102 (1996) (citing ABA Creditors' Rights

Subcommittee Program, National Conference of Bankruptcy Judges, The Effect of Bankruptcy on Arbitrationand Vice Versa 1 (1990); H.R.Rep. No. 595, 95th Cong., 1st Sess. 340 (1977), U.S.Code Cong. &

Admin.News 1978, pp. 5963, 6296–97 (stating that the automatic stay under 11 U.S.C. § 362 encompasses

arbitration proceedings)).

17 11 U.S.C. § 362(c) states: Except as provided in subsections (d), (e), and (f) of this section—(1) the stay of

an act against property of the estate under subsection (a) of this section continues until such property is no

longer property of the estate; and (2) the stay of any other act under subsection (a) of this section continues

until the earliest of—(A) the time the case is closed; (B) the time the case is dismissed; or (C) if the case is

a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this

title, the time a discharge is granted or denied.

18 D.C. Ct.App. v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983); Rooker v. Fidelity Trust Co.,

263 U.S. 413, 44 S.Ct. 149, 68 L.Ed. 362 (1923).

19 See Appeal of Gajkowski (In re Highway Truck Drivers & Helpers Local Union # 107), 888 F.2d 293, 299

n. 9 (3d Cir.1989) (noting, in the context of a challenge to the automatic stay, that the “Rooker–Feldman

doctrine does not preclude a collateral attack of state court proceedings or judgments in the context of an

appeal involving an exclusive federal question”); compare Reitnauer v. Texas Exotic Feline Found., Inc. (In

re Reitnauer), 152 F.3d 341, 344 (5th Cir.1998) (“applying Rooker–Feldman to bar district court review, in

bankruptcy case, of state court judgment on state constitutional grounds).” Gruntz, 202 F.3d at 1083 n. 8.

End of Document © 2020 Thomson Reuters. No claim to original U.S. Government Works.

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APPENDIX A-

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In re Elder-Beerman Stores Corp., 195 B.R. 1019 (1996)

35 Collier Bankr.Cas.2d 1446

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195 B.R. 1019

United States Bankruptcy Court,

S.D. Ohio,

Western Division.

In re The ELDER–BEERMAN

STORES CORP., et al., Debtors.

The ELDER–BEERMAN STORES CORP., Plaintiff,

v.

THOMASVILLE FURNITURE

INDUS. INC., Defendant.

Bankruptcy No. 95–33643.

|

Adv. No. 96–3047.

|

May 3, 1996.

Synopsis

Chapter 11 debtor-retailer sought to enjoin furniture

manufacturer from terminating its sales distribution contract

and sought damages for breach of contract. The Bankruptcy

Court, William A. Clark, Chief Judge, held that: (1)

manufacturer's actions in attempting to cancel its contract

with debtor following filing of bankruptcy petition violated

automatic stay; (2) manufacturer's attempted termination of

contract was void ab initio; and (3) request for injunctive

relief was moot.

Injunction denied.

Attorneys and Law Firms

*1019 Richard M. Cieri, Cleveland, Ohio, for debtor.

Lawrence E. Oscar, Hahn Loeser & Parks, Cleveland, Ohio.

*1020 William B. Sullivan, Womble Carlyle Sandridge &

Rice, Winston–Salem, North Carolina.

Richard A. Chesley, Jones, Day, Reavis & Pogue, Columbus,

Ohio.

Randy T. Slovin, Mason Slovin & Schilling Co., L.P.A.,

Cincinnati, Ohio.

DECISION AND ORDER FINDING VIOLATION OF

AUTOMATIC STAY AND DENYING INJUNCTION

WILLIAM A. CLARK, Chief Judge.

FINDINGS OF FACT

1. Plaintiff Elder–Beerman (“Elder–Beerman”) is a

corporation organized under the laws of the State of

Ohio. Elder–Beerman is a complex enterprise engaged

in the ownership, operation, and management of retail

department stores, furniture stores, and related businesses

throughout the United States.

2. Defendant Thomasville Furniture Industries, Inc.

(“Thomasville”) is a corporation organized under the

laws of the State of Delaware, with its principal place of

business in Thomasville, North Carolina. Thomasville is

engaged in the business of manufacturing furniture and

related products.

3. Elder–Beerman has purchased and distributed

Thomasville products for over 35 years. As early as

1985, the parties entered into a written contract for the

sale and distribution of Thomasville furniture products.

That contract contained a provision allowing either

party to terminate without cause. Over the years, the

relationship between Elder–Beerman and Thomasville

expanded, and other written agreements were entered

into. All of the agreements allow for termination without

cause.

4. From the beginning of the relationship between the

parties and through the mid–1970s, the Thomasville

furniture line was an integral part of the Elder–Beerman

furniture operation. Thomasville gave Elder–Beerman

instant name recognition in the furniture business, and

helped bolster the performance of those departments, as

well as the franchise as a whole.

5. Thomasville is well-respected in the furniture industry.

Mr. Max Gutmann, CEO of Elder–Beerman, stated

that Thomasville is a “fine name” and is an essential

line within Elder–Beerman's furniture market. Ron

Bultema, Elder–Beerman's Divisional Merchandising

Manager, stated that Thomasville is the “foundation” of

his business. Thomasville's share of Elder–Beerman's

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furniture business has been characterized as a “lion's

share” (more than 40%).

6. Although Thomasville sales represent less than 1%

of Elder–Beerman's total sales revenues, this figure is

misleading. Thomasville acts as a promotional leader

line for Elder–Beerman. That is, customers are attracted

to shop at Elder–Beerman because of the Thomasville

name. As such, having the Thomasville line in its stores

contributes to sales for Elder–Beerman both inside and

outside of the furniture line.

7. Because of Thomasville's wide range of products, it

may take as many as six to nine vendors to replace

Thomasville in the Elder–Beerman stores. Adding

additional vendors will require significant changes in

Elder–Beerman's operations. There are complications

with multiple delivery sources and order deadlines,

dealing with different representatives and invoices,

advertising, and more vendors means less sales volume

with each individual vendor, which in turn may mean

less incentives offered to Elder–Beerman from each

vendor. In addition, Elder–Beerman's salespeople must

be retrained to sell the new vendors' products.

8. In the course of the parties' relationship, Elder–Beerman

has also expended a great deal of time and money in

order to meet with Thomasville's standards.

9. Between 1989 and 1994, Elder–Beerman renovated

four of its stores in order to accommodate Thomasville

Galleries. These Galleries were located at Elder–

Beerman's Northtowne, Northwest, Southtown, and

Fairborn locations.

10. In order to comply with Gallery Agreements, Elder–

Beerman agreed to expend *1021 substantial amounts

of its own funds to renovate portions of its stores in

accordance with Thomasville's Gallery blueprints. The

total expenditures on these galleries exceed $300,000.

Elder–Beerman constructed, painted, wallpapered, lit,

and furnished the Gallery areas to Thomasville's

specifications.

11. In addition to the significant amount of time

and money that Elder–Beerman spent to build its

Thomasville Galleries, Elder–Beerman also eliminated

its relationships with other furniture manufacturers to

make room for additional Thomasville lines. Elder–

Beerman made these sacrifices because Thomasville

offered a well-established, recognized name, quality

products at the upper middle range of price points, and

the opportunity to control distribution in the Dayton

trading area.

12. Thomasville strongly supported its relationship with

Elder–Beerman during 1994 and 1995. For example,

on August 1, 1994, Michael Nesbit, Thomasville's

representative to Elder–Beerman, wrote a memo to Bill

Carrico, his supervisor, concerning the November grand

opening of Elder–Beerman's fourth Thomasville Gallery

at its Fairborn location. Because Thomasville was

Elder–Beerman's “number one vendor and growing,”

Mr. Nesbit recommended that Thomasville offer

Elder–Beerman support in the form of $22,500 of

products discounts and cooperative advertising funds.

As justification for this expenditure, Mr. Nesbit

indicated his confidence that the Elder–Beerman

relationship would continue to be profitable for

Thomasville.

13. Other indicators show that Elder–Beerman's dealings

in the Thomasville line prior to bankruptcy were

productive. In March 1995, Thomasville approved

Elder–Beerman for yet another Thomasville Gallery

at its Salem Avenue store. And in September of

1995, Michael Nesbit, Elder Beerman's Thomasville

representative, in an internal memorandum to his

supervisor, Dave Scarangella, informed him Elder–

Beerman was considering building up to five more

Thomasville Galleries.

14. In addition, from 1993 through 1995, delivery

and return problems from Elder–Beerman markedly

decreased. During this period, Elder–Beerman's return

ratio was less than Thomasville's national average.

15. The healthy relationship between Elder–Beerman

and Thomasville continued into 1995. During that

year, Elder–Beerman's sales of Thomasville furniture

products “dramatically increased,” according to Mr.

Nesbit. Estimates show the sales figures increased from

$1.6 million in 1994 to $2,226,000 in 1995. Moreover,

projections for the 1996 fiscal year showed that Elder–

Beerman would continue to grow, and could meet or

exceed Thomasville's $3 million sales goal, goals which

none of Thomasville's vendors had met in 1995.

16. On January 4, 1995, Mr. Nesbit recommended a

“customized” discount program for Elder–Beerman

that coordinated Thomasville's promotions with

Elder–Beerman's advertising schedule. These flatCase 4:20-cv-01178 Document 41-1 Filed on 04/26/20 in TXSD Page 19 of 63 Case 20-14695-LMI Doc 4 Filed 04/26/20 Page 36 of 80
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rate discounts allowed Elder–Beerman to better take

advantage of Thomasville's discounts when planning its

own sales. According to Mr. Nesbit, these discounts were

“much more responsive to growing business with Elder–

Beerman.”

17. On September 11, 1995, Mr. Nesbit wrote another

memo to Scarangella recommending strong support

for Elder–Beerman's stores. In this memo, Mr.

Nesbit pointed out that Elder–Beerman had already

doubled its volume with Thomasville and added that

Thomasville made up 25% of Elder–Beerman's total

furniture business, and approximately 50% of its

case goods business. Because Mr. Nesbit approved

of Ron Bultema, Elder–Beerman's new Divisional

Merchandising Manager, and thought that it “behooved”

Thomasville to help stabilize Elder–Beerman, he

recommended a flat-rate discount for the first half of

1996 and possibly the last quarter of 1995.

18. On October 10, 1995, just seven days before Elder–

Beerman filed its bankruptcy petition, Mr. Nesbit again

recommended that Thomasville offer Elder–Beerman

special promotions that could be coordinated *1022

with Elder–Beerman's advertising schedule. These plans

were approved by Mr. Scarangella on October 12, 1995.

19. Prior to the Chapter 11 petition, Thomasville had grown

to represent 25% of Elder–Beerman's wood products

business with projected annual sales in excess of $2.5

million. It has been estimated that termination of the

Thomasville product line may result in lost sales of

$750,000 in wood products and $400,000 in upholstery

business.

20. On October 17, 1995, Elder–Beerman and certain of

its subsidiaries filed voluntary petitions for protection

under Chapter 11 of the Bankruptcy Code, 11 U.S.C. §§

101 et seq. (the “Bankruptcy Code”), in this court.

21. Immediately upon the filing of Elder–Beerman's

bankruptcy petition on October 17, 1995, the

relationship between Elder–Beerman and Thomasville

changed dramatically.

22. Thomasville notified Elder–Beerman that the

customized promotional program designed specifically

for Elder–Beerman by Thomasville had terminated

with the bankruptcy petition. Thomasville never

offered Elder–Beerman another discount or promotional

incentive until April 12, 1996, just one week prior to the

hearing April 19, 1996.

23. On October 18, 1995, Thomasville demanded

that Elder–Beerman return all previously shipped

merchandise. On October 19, 1995, Thomasville

stopped all shipments to Elder–Beerman. Thomasville

did not resume shipments until Elder–Beerman

furnished Thomasville with a $300,000 security, in early

December.

24. On October 20, 1995, Charles Shaffer, Elder–

Beerman's General Merchandising Manager, and Ron

Bultema met with Thomasville representatives to

discuss the bankruptcy filing. Thomasville had already,

earlier in the day, taken steps to replace Elder–Beerman

as they met with Larry Klaben of Morris Furniture, an

Elder–Beerman competitor in Dayton.

25. At the October 20th meeting, Ron Berrier,

Thomasville's Treasurer, expressed Thomasville's

“extreme displeasure over the filing and emphatically

indicated that (Thomasville) would not ship orders in the

backlogue [sic].” In addition, Terry Funk, Thomasville's

Credit Manager, asked how Elder–Beerman was able

to file for bankruptcy given the fact that it had an $80

million net worth. Finally, Mr. Berrier, on behalf of

Thomasville, expressly stated, “we [have] no intention

of continuing to do business with [Elder–Beerman].”

26. Thomasville has offered Elder–Beerman little or

no support since the bankruptcy petition. Mr. Nesbit,

Thomasville's representative to Elder–Beerman, has

stopped his once regular store visits. Thomasville

invited the president of Morris Furniture to the

Midwest Dealer's Meeting, sponsored by Thomasville,

in Chicago, Illinois, yet failed to invite representatives

from Elder–Beerman. In addition, Thomasville failed to

offer Elder–Beerman any of its regular factory discounts

until the week prior to a hearing on April 19, 1996.

27. On January 22, 1996, Thomasville sent notice to Elder–

Beerman that Thomasville was severing the parties'

long-standing relationship. In the notice Thomasville

stated that it would “allow orders for a 60–day period to

allow [Elder–Beerman] to balance inventory and process

sold orders.”

28. On March 14, 1996, before the expiration of

the 60–day period, Elder–Beerman filed a Verified

Complaint for Injunctive Relief. On the same day, Elder–

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Beerman moved for a temporary restraining order and a

preliminary injunction. This court issued its Temporary

Restraining Order (the “Order”) on that date.

29. On March 22, 1996, Elder–Beerman filed its First

Amended Complaint which, in addition to seeking

injunctive relief, requested damages for Thomasville's

breach of contract, both express and implied.

30. Subsequent to a hearing on April 19, 1996, both parties

have adjusted their pleadings to address issues of the

automatic stay. The matter currently before the court

is Elder–Beerman's Emergency Motion for Preliminary

Injunction, and request for injunctive relief under Elder–

Beerman's First Amended Complaint.

*1023 CONCLUSIONS OF LAW

The court has jurisdiction over this matter pursuant to 28

U.S.C. §§ 157(a) & 1334. This proceeding constitutes a core

proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) & (O).

Procedurally, this matter arose from Elder–Beerman's request

for a preliminary injunction. It is clear, however, that the

parties now recognize that the underlying legal principle is the

automatic stay, and that so long as the stay remains in effect,

other injunctive relief is inappropriate.

Had the parties not raised the issue of the automatic stay,

the court would still be empowered to address stay violations

sua sponte. In re Laventhol & Horwath, 139 B.R. 109, 116

n. 6 (S.D.N.Y.1992) (“[I]f necessary, the Bankruptcy Court

could sua sponte modify the automatic stay....”); Furness v.

Lilienfield, 35 B.R. 1006 (D.Md.1983) (modifying stay sua

sponte ); Putnam County Sav. Bank v. Bagen (In re Bagen ),

185 B.R. 691, 701 (Bankr.S.D.N.Y.1995) (modifying the stay

sua sponte ); Swift v. Bellucci (In re Bellucci ), 119 B.R. 763,

779 (Bankr.E.D.Cal.1990) (“[B]ankruptcy courts may lift the

automatic stay sua sponte notwithstanding the language in

section 362(d) that permits a ‘party in interest’ to seek relief

from the automatic stay.”); James v. Draper (In re James ),

112 B.R. 687, 700 (Bankr.E.D.Pa.), aff'd in part, vacated in

part on other grounds, 120 B.R. 802 (E.D.Pa.1990), rev'd

on other grounds, 940 F.2d 46 (3d Cir.1991) (“The court is

obliged to raise the issue of the application of the automatic

stay sua sponte.”); In re Clark, 69 B.R. 885, 890 n. 1

(Bankr.E.D.Pa.1987) ( “[W]e have a duty to raise obvious

defenses to, as well as the issue of, the impact of the stay sua

sponte.”).

 Bankruptcy courts then have the power, whether on the

request of a party in interest or sua sponte, to consider both

what acts constitute a violation of the stay and whether or not

relief from stay is appropriate. The matter of relief from stay

has already been considered in a separately issued decision,

where the court declined to annul or terminate the stay. The

court therefore concerns itself here solely with determining

whether or not Thomasville's attempted termination on

January 22, 1996, was in violation of the automatic stay, and

subsequently what effect that determination has on Elder–

Beerman's request for injunctive relief.

 The stay protection in § 362 is “automatic and mandatory”

with the filing of the petition. Cathey v. Johns–Manville

Sales Corp., 711 F.2d 60, 62 (6th Cir.1983). The debtor need

not make any motion in the bankruptcy court to invoke its

protection. Ostano Commerzanstalt v. Telewide Sys., Inc., 790

F.2d 206, 207 (2d Cir.1986).

The automatic stay protects against “any act to obtain

possession of property of the estate or of property from the

estate or to exercise control over property of the estate.” 11

U.S.C. § 362(a)(3) (1994).

Property of the estate is defined in 11 U.S.C. § 541(a).

Such property includes “all legal or equitable interests of the

debtor in property as of the commencement of the case.”

11 U.S.C. § 541(a)(1) (1994). The legislative history to §

541 indicates property of the estate is to be interpreted quite

broadly. “It includes all kinds of property, including tangible

or intangible property [and] causes of action....” H.R.Rep. No.

595, 95th Cong., 1st Sess. 367–68 (1977), reprinted in 1978

U.S.C.C.A.N. at 5963, 6323 (1978).

Courts have consistently held that contract rights are property

of the estate, and that therefore those rights are protected

by the automatic stay. Pester Refining Co. v. Insurance

Co. of North Am. (In re Pester Refining ), 58 B.R. 189,

192 (Bankr.S.D.Iowa 1985) (“Contractual rights constitute

intangible property which is included within the definition

of property of the estate”); Wegner Farms Co. v. Merchants

Bonding Co. (In re Wegner Farms Co.), 49 B.R. 440, 443

(Bankr.N.D.Iowa 1985) (same); Varisco v. Oroweat Food Co.

(In re Varisco ), 16 B.R. 634, 637 (Bankr.M.D.Fla.1981)

(same); accord In re Cardinal Industries, Inc., 116 B.R. 964,

971 (Bankr.S.D.Ohio 1990).

Courts have also consistently held that the automatic stay

also applies to notices of termination. *1024 Rogue

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Valley Stations, Inc. v. Birk Oil Co., 568 F.Supp. 337,

348 (D.Or.1983) (“automatic stay prevents franchisor from

sending notice of termination or nonrenewal without first

securing appropriate relief from stay from the Bankruptcy

Court”); A. Dan Chisholm, Inc. v. B.P. Oil Inc. (In re A. Dan

Chisholm, Inc.), 57 B.R. 718, 719–20 (Bankr.M.D.Fla.1986)

(“Any notice [of termination] sent in violation of the

automatic stay is void and without effect”).

As in the instant case, courts have not hesitated to retain the

stay, even when one party would otherwise have the power

to terminate “at will.” This result is best demonstrated in

the area of insurance policies. Minoco Group of Cos., Ltd.

v. First State Underwriters Agency of New England Reins.

Corp. (In re Minoco Group of Cos., Ltd.), 799 F.2d 517,

519 (9th Cir.1986) (staying the right to cancel insurance

policy under § 362); Pester Refining Co. v. Insurance Co.

of North Am. (In re Pester Refining Co.), 58 B.R. 189,

192 (Bankr.S.D.Ia.1985); In re B. Siegel Co., 51 B.R. 159,

163–64 (Bankr.E.D.Mich.1985); In re Garnas (Garnas v.

American Family Mut. Ins. Co.), 38 B.R. 221, 223–24

(Bankr.D.N.D.1984).

 Thus while parties may otherwise be permitted to terminate

an agreement under state contract law, in bankruptcy such

a termination would be in violation of the stay, and the

parties must seek permission of the court to act. Computer

Communications, Inc. v. Codex Corporation (In re Computer

Communications, Inc.), 824 F.2d 725, 729 (9th Cir.1987)

(holding that even an unassumable executory contract

would be protected from termination by the automatic

stay); In re M.J. & K. Co., Inc., 161 B.R. 586, 595

(Bankr.S.D.N.Y.1993) (granting relief from stay for law

school to exercise at will termination clause against debtor);

Sanden v. Chautauqua Capital Corp. (In re Chautauqua

Capital Corp.), 135 B.R. 779 (Bankr.W.D.Pa.1992) (granting

relief from stay for landlord to evict tenant at will); Coates

v. Peachtree Apartments (In re Coates ), 108 B.R. 823, 826

(Bankr.M.D.Ga.1989) (“[E]ven a month-to-month tenancy at

will is property of the estate which debtor's landlord cannot

terminate until the landlord obtains relief from the automatic

stay.”); Schewe v. Fairview Estates (In re Schewe ), 94 B.R.

938 (Bankr.W.D.Mich.1989) (same).

Finally, much time and energy by the parties has been spent

arguing whether or not this contract is executory, and if it

is, whether § 365(e)(1) should apply. Because of the court's

holding on the automatic stay, which applies whether or not

the contract is executory, In re Pester Refining, 58 B.R. at 191,

this issue has become moot.

 It is therefore clear, that Thomasville's actions in attempting

to cancel its contract with Elder–Beerman were in violation

of the automatic stay.

The treatment of violations of the stay has varied within the

Circuits. The Bankruptcy Code does not state whether such

acts are to be treated as void or voidable. Until recently each

of the Circuits but one that had considered the void/voidable

question had concluded that actions taken in violation of

the automatic stay are void. See In re Smith Corset Shops,

Inc., 696 F.2d 971, 976 (1st Cir.1982); In re 48th Street

Steakhouse, Inc., 835 F.2d 427, 431 (2d Cir.1987), cert.

denied, 485 U.S. 1035, 108 S.Ct. 1596, 99 L.Ed.2d 910

(1988); Raymark Indus., Inc. v. Lai, 973 F.2d 1125, 1132 (3d

Cir.1992); N.L.R.B. v. Edward Cooper Painting, Inc., 804 F.2d

934, 940 (6th Cir.1986); Matthews v. Rosene, 739 F.2d 249,

251 (7th Cir.1984); In re Schwartz, 954 F.2d 569, 574 (9th

Cir.1992); In re Calder, 907 F.2d 953, 956 (10th Cir.1990);

Borg–Warner Acceptance Corp. v. Hall, 685 F.2d 1306,

1308 (11th Cir.1982); Bronson v. U.S., 46 F.3d 1573, 1579

(Fed.Cir.1995). But see Picco v. Global Marine Drilling Co.,

900 F.2d 846 (5th Cir.1990) ( “[A]ctions taken in violation of

an automatic stay are not void.”).

The Sixth Circuit, however, has recently reversed its position,

holding that actions taken in violation of the automatic stay

are not void, but voidable. Easley v. Pettibone Michigan

Corp., 990 F.2d 905, 909–11 (6th Cir.1993). Implicit in the

Sixth Circuit's reasoning is that as void acts are incapable of

cure, the power to cure past violations by annulling under

§ 362(d) precludes these violations from being void. Easley,

990 F.2d at 910. They must, therefore, be voidable. Id. In

so doing, however, the Circuit made it clear that in general

violations should still be *1025 treated as void, that “any

exception to the stay must be applied sparingly.” Easley, 990

F.2d at 911 (quoting In re Smith, 876 F.2d 524 (6th Cir.1989)).

 While it is therefore clear that Thomasville's actions were in

violation of the automatic stay and thus technically voidable,

Easley also makes it clear that in general these acts will be

treated as void.

 It is the court's conclusion that Thomasville's attempted

termination of the contract should be treated as void ab initio,

and that the contract is presently intact. As this court has

previously declined to terminate, annul, modify, or condition

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the stay, the stay remains in effect. There is therefore no

immediate danger of the sales distribution contract being

terminated. Consequently, Plaintiff's request for injunctive

relief against Thomasville and Morris Furniture Co., Inc. is

moot, and should be, and hereby is DENIED.

The court sets a pretrial telephone conference on the Second

Cause of Action in the complaint and on the issue of 11 U.S.C.

§ 362(h) damages for Thursday, May 16, 1996, at 10:00 a.m.,

and a hearing for damages arising from the breach of sales

and distribution contract and violation of the automatic stay

for Tuesday, July 2, 1996, at 9:30 a.m.

All Citations

195 B.R. 1019, 35 Collier Bankr.Cas.2d 1446

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APPENDIX A-

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In re Gandy, 327 B.R. 796 (2005)

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327 B.R. 796

United States Bankruptcy Court,

S.D. Texas,

Houston Division.

In re Ricky Lynn GANDY, Debtor.

In re Elvia Diaz, Debtor.

Elvia Diaz, Plaintiff,

v.

State of Texas, Defendant.

Bankruptcy Nos. 05–30651–

H1–13, 05–32244–H2–13.

|

Adversary No. 05–3253.

|

July 18, 2005.

Synopsis

Background: Chapter 13 debtor brought adversary

proceeding for determination that State of Texas had violated

automatic stay, and state defended on theory that its actions

came within “police and regulatory power” exception to

automatic stay. In separate Chapter 13 case, Texas county and

the Texas Commission on Environmental Quality moved for

determination of nonapplicability of automatic stay to their

actions.

Holdings: Issuing joint memorandum, the Bankruptcy Court,

Marvin Isgur, J., held that:

county and commission, in pursuing cause of action for

purely injunctive relief to prevent debtor's alleged continuing

violations of Texas environmental law, came within “police

and regulatory power” exception to automatic stay; and

state's conduct, in pursuing cause of action both for injunction

and for entry of monetary judgment against Chapter 13

debtor based on her alleged violation of Texas consumer

protection law, also came within “police and regulatory

power” exception to stay.

So ordered.

Attorneys and Law Firms

*798 Reese W. Baker, Baker & Associates LLP, Houston,

TX, for Debtor Ricky Lynn Gandy.

Richard W. Aurich, Jr., Baker & Associates LLP, Houston,

TX, for Debtor Elvia Diaz.

Hal F. Morris, Asst. Atty. Gen. (argued), Ashley F. Bartram,

Asst. Atty. Gen., Texas Atty. General's Office for Texas

Commission on Environmental Quality (TCEQ) and State of

Texas.

Clarissa K. Bauer, Asst. County Atty., Harris County Atty.'s

Office, for Creditor Harris County.

JOINT MEMORANDUM OPINION

MARVIN ISGUR, Bankruptcy Judge.

On April 22, 2005, this Court issued an *799 order in In re

Gandy, 1 finding that the automatic stay did not apply to a

prepetition state court lawsuit brought by governmental units

against Mr. Gandy. On April 29, 2005, this Court denied an

Application for a Temporary Restraining Order in Diaz v.

State of Texas, 2 finding that the automatic stay did not apply

to a prepetition state court suit brought by the State of Texas

against Ms. Diaz. The two decisions involve substantially

similar questions of law. This Joint Memorandum Opinion

provides the findings and conclusions on which the decisions

were based.

Gandy Background

On March 24, 2004, Harris County filed a lawsuit in

state court against Mr. Gandy for violations of various

state environmental laws, including the Texas Solid Waste

Disposal Act and the Texas Clean Air Act. In the state court

suit, the County requested injunctive relief, fees and costs.

On June 25, 2004, the Texas Commission on Environmental

Quality intervened in the suit. The principal allegation in the

lawsuit is that Mr. Gandy used his property to store debris

from site clearing and construction projects. The bulk of the

debris was comprised of wood products (such as tree stumps)

and used building materials. The governmental units allege

that Mr. Gandy's present use of the property violates Texas

law. On August 4, 2004, the state court issued a temporary

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restraining order concerning Mr. Gandy's alleged violations

of state environmental laws.

On January 11, 2005, Mr. Gandy filed a petition for relief

under chapter 13 of the Bankruptcy Code. Mr. Gandy

then filed a suggestion of bankruptcy with the state court

requesting “the observance of the Stay Order under § 362.”

Pursuant to Mr. Gandy's suggestion—and in spite of the

governmental units' arguments that the suit was not subject to

the automatic stay—the state court stayed all proceedings.

On March 17, 2005, Harris County and the Texas

Commission on Environmental Quality filed their Amended

Motion to Determine the Non–Applicability of Stay Pursuant

to 11 U.S.C. § 362(b)(4). Mr. Gandy filed a response on April

14, 2005. The Court conducted a hearing on this matter on

April 22, 2005. At the conclusion of the hearing, the Court

issued an order determining that the stay did not apply to the

state court suit.

Diaz Background

On February 3, 2005, the State of Texas filed a lawsuit against

Ms. Diaz in the 113th Judicial District Court of Harris County.

The lawsuit alleges that Ms. Diaz committed consumer fraud

under the Deceptive Trade Practices Act related to her work

as a notary public. In general, the lawsuit alleges that Ms.

Diaz misrepresented her services as a “notario” with the effect

of misleading Houston's large Mexican immigrant population

into believing that she could serve as an attorney. The State

alleges that the term “notario” is a term used by licensed

attorneys in Mexico and that Ms. Diaz is intending to mislead

the public in violation of Texas law. 3

On February 13, 2005, Ms. Diaz filed a petition for relief

under chapter 13. Apparently, Ms. Diaz's state court counsel

signed an agreed order stipulating to the non-applicability of

automatic stay to the proceeding. Despite this agreed order,

Ms. Diaz filed an application for a temporary restraining order

to prevent the state *800 court from proceeding with the

lawsuit and to seek damages for violations of the automatic

stay. This Court denied the application and Ms. Diaz's request

for damages based on the non-applicability of the automatic

stay.

Analysis

This Court is frequently called upon to determine whether

the automatic stay applies to state court lawsuits involving

a governmental unit's enforcement of police and regulatory

powers. Sometimes—as occurred in Mr. Gandy's case—

despite the plain application of the police and regulatory

power exception, a debtor will file a suggestion of bankruptcy

or affirmatively represent to the state court that the automatic

stay precludes a state court from continuing with its

adjudication. In other instances, as evidenced by Ms. Diaz's

case, debtors seek injunctive relief from the bankruptcy court

to stop the state court litigation based on the application

of the automatic stay. Regardless of form, the debtors'

actions sometimes lead state courts to stay the proceedings

while awaiting an order from the bankruptcy court before

continuing with their cases. Such actions delay state court

proceedings and waste the resources of the parties and

the courts. The Court appreciates the comity shown by

state courts when they decline to proceed in the face of

a pending bankruptcy case. Nevertheless, the Court finds

that its duty of reciprocal comity requires the issuance

of this opinion. Accordingly, this Court issues this Joint

Memorandum Opinion clarifying that the state courts in the

present cases had the authority to determine that the automatic

stay did not apply to the governmental units' actions to enforce

their police and regulatory power.

Concurrent Jurisdiction

 This Court has previously examined the issue of whether

state courts possess jurisdiction and authority to determine

whether the automatic stay applies. In re Edwin A.

Epstein, Jr. Operating Co., Inc., 314 B.R. 591, 598–99

(Bankr.S.D.Tex.2004). In determining that state courts are

vested with jurisdiction, the Court's analysis began with the

jurisdictional grant provided by Congress:

The U.S. Constitution gives Congress plenary power over

bankruptcy thus allowing Congress to limit the jurisdiction

that courts can exercise over the person and property

of a debtor who duly invokes the bankruptcy law. U.S.

CONST., art. I, § 8; Kalb v. Feuerstein, 308 U.S. 433, 439,

60 S.Ct. 343, 84 L.Ed. 370 (1940). The current bankruptcy

jurisdictional statute, 28 U.S.C. § 1334, defines the role of

the federal district courts in bankruptcy. Section 1334(a)

provides, “[e]xcept as provided in subsection (b) of this

section, the district courts shall have original and exclusive

jurisdiction of all cases under title 11.” 28 U.S.C. § 1334(a).

Section 1334(b) then provides: “[n]otwithstanding any Act

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of Congress that confers exclusive jurisdiction on a court

or courts other than the district courts, the district courts

shall have original but not exclusive jurisdiction of all civil

proceedings arising under title 11, or arising in or related

to cases under title 11.”

Id. (emphasis added). In Edwin A. Epstein, Jr. Operating

Co., Inc., an arbitration panel 4 erroneously ruled that the

automatic stay did not apply to various claims against the

debtor's interests in various oil and gas properties. Id. The

effect of this decision was to impermissibly *801 annul

or terminate the automatic stay. Id. 5 Thus, while the Court

found that state courts possess concurrent jurisdiction—

pursuant to § 1334(b)—to determine whether the stay applies,

state courts lack authority to terminate the stay when it in

fact does apply. Id. The bankruptcy court alone has authority

to modify the automatic stay. Id. For the reasons set forth

in Edwin A. Epstein, Jr. Operating Co., Inc., an erroneous

determination of the inapplicability of the automatic stay

would be voidable. Of course, the automatic stay does not

arise when the police and regulatory exception applies. 11

U.S.C. § 362(b)(4). In a police and regulatory exception case

—where the automatic stay has never arisen—the state court

has concurrent jurisdiction to so determine.

The Automatic Stay and the Police

and Regulatory Power Exception

Section 362(a) 6 provides for an automatic stay of certain acts

upon the filing of a bankruptcy petition under any chapter

of the Bankruptcy Code. 11 U.S.C. § 362(a); In re Pierce,

272 B.R. 198, 209 (Bankr.S.D.Tex.2001); 2 COLLIER ON

BANKRUPTCY ¶ 303.12 (15th ed.2004). “The purpose of

the automatic stay is to give the debtor a ‘breathing spell’

from his creditors, and also, to protect creditors by preventing

a race for the debtor's assets.” Browning v. Navarro, 743

F.2d 1069, 1083 (5th Cir.1984) (citations omitted). The stay

prohibits lien enforcement and other actions, judicial or

otherwise, that are attempts to enforce or collect prepetition

claims. 11 U.S.C. § 362. It also stays a wide range of actions

that would affect or interfere with property of the estate,

property of the debtor, or property in the custody of the estate.

Id.

 Although the reach of the automatic stay is broad, it

is not unlimited. Some actions that would otherwise fall

within the scope of the stay are excepted from the stay. The

exceptions are typically based on particular policy objectives.

One important exception to the automatic stay is the police

and regulatory power exception. The police and regulatory

power exception is based on the compelling *802 need

for the government to continue to protect the public when

a debtor files for bankruptcy and to “prevent a debtor from

‘frustrating necessary governmental functions by seeking

refuge in bankruptcy court.’ ” SEC v. Brennan, 230 F.3d 65,

71 (2nd Cir.2000) (citing City of New York v. Exxon Corp.,

932 F.2d 1020, 1024 (2nd Cir.1991)) (internal quotation

marks omitted); In re Commonwealth Cos., Inc., 913 F.2d

518, 527 (8th Cir. BAP 1990) (quoting Commodity Futures

Trading Comm'n. v. Co Petro Mktg. Group Inc., 700 F.2d

1279, 1283 (9th Cir.1983) (“a fundamental policy behind the

police or regulatory power exception ... is ‘to prevent the

bankruptcy court from becoming a haven for wrongdoers.’

”)) The exception accomplishes this goal by allowing the

government to enforce various laws and regulations against a

debtor. Specifically § 362(b)(4) states:

The filing of a petition ... does

not operate as a stay ... of the

commencement or continuation of a

criminal action or proceeding against

the debtor ... of the commencement

or continuation of an action or

proceeding by a governmental unit ...

to enforce such governmental unit's

or organization's police and regulatory

power, including the enforcement of

a judgment other than a money

judgment, obtained in an action or

proceeding by the governmental unit

to enforce such governmental unit's

or organization's police or regulatory

power ....

11 U.S.C. § 364(b)(4) (emphasis added). Thus, “where

a governmental unit is suing a debtor to prevent or

stop violation of fraud, environmental protection, consumer

protection, safety, or similar police or regulatory laws, or

attempting to fix damages for violation of such a law,

the action or proceeding is not stayed under the automatic

stay.” H.R.Rep. No. 95–595, at 343 (1977), reprinted in

1978 U.S.C.C.A.N. 5963, 6299; S.Rep. No. 95–989, at 52,

reprinted in 1978 U.S.C.C.A.N. 5787, 5838. Therefore, while

the majority of actions against a debtor must cease, a bona

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fide 7 governmental unit action to enforce its police and

regulatory power is unaffected by the automatic stay.

 To determine whether an action falls under the police

and regulatory power exception, a court must engage in

a two-prong test. First, the court must determine whether

the plaintiff in the state court action is a “governmental

unit.” See 11 U.S.C. § 362(b)(4) (excepting proceedings “by

a governmental unit”). If the court answers this question

in the affirmative, the court must next determine whether

the governmental unit is seeking to enforce its police and

regulatory power.

The first prong of the test is determined by reference to 11

U.S.C. § 101(27). Under § 101(27) a “governmental unit” is

defined as:

[the] United States; State;

Commonwealth; District; Territory;

municipality; foreign state;

department, agency, or instrumentality

of the United States (but not a United

States trustee while serving as a trustee

in a case under this title), a State, a

Commonwealth, a District, a Territory,

a municipality, or a foreign state; or

other foreign or domestic government.

Thus, if the plaintiff in a state court action fits within the §

101(27) definition, it is considered a governmental unit.

 The more difficult question is whether the governmental

unit is enforcing its police and regulatory power. *803

Courts have developed two tests to define when an

action qualifies as an exercise the government's police and

regulatory power. The first is termed the “pecuniary interest”

test. Commonwealth Cos., 913 F.2d at 523. Under the

pecuniary interest test, the court must determine whether the

governmental unit is pursuing a matter of public interest

rather than advancing the government's pecuniary interest.

See id.; In re Dunbar, 235 B.R. 465, 471 (9th Cir. BAP

1999); In re Charter First Mortgage, Inc., 42 B.R. 380, 382

(Bankr.D.Or.1984). This test requires courts to distinguish

between a police and regulatory enforcement action and an

attempt by a governmental unit to collect money damages

that do not arise from an exercise of a governmental unit's

police or regulatory power. For example, a governmental

unit's action on a debt arising from a normal commercial

transaction to purchase goods or services, 8 or an action

to collect taxes, 9 are generally stayed by the automatic

stay. However, if the money damages are ancillary to the

governmental unit's enforcement of its police and regulatory

power, then the action itself is not stayed, though collection

of the judgment is stayed. Brennan, 230 F.3d at 71–73. As

explained by the Fifth Circuit:

Quite separate from the entry of a money judgment, is a

proceeding to enforce that money judgment. The paradigm

for such a proceeding is when, having obtained a judgment

for a sum certain, a plaintiff attempts to seize property

of the defendant in order to satisfy that judgment. It is

this seizure of a Defendant–Debtor's property, to satisfy

the judgment obtained by a Plaintiff–Creditor, which is

proscribed by subsection 362(b)(5).

Commonwealth Oil Ref. Co., 805 F.2d at 1186. The purpose

of allowing a governmental unit to proceed to judgment

for civil penalties in an enforcement lawsuit is to fix

damages for purposes of the bankruptcy action. SEC v.

Bilzerian, 131 F.Supp.2d 10, 14 (D.D.C.2001) (permitting

an accounting but not actual disgorgement of funds). Thus,

a state court may liquidate the claim and enter a judgment

but the governmental unit is stayed from enforcing the

money judgment against a debtor without an order of the

bankruptcy court.

 The second test is the “public policy” test. See NLRB

v. Edward Cooper Painting, Inc., 804 F.2d 934, 942 (6th

Cir.1986). Under the public policy test, the court must

determine whether the proceeding is designed to “effectuate

public policy” rather than to “adjudicate private rights.”

Dunbar, 235 B.R. at 471 (citing Universal Life Church, 128

F.3d at 1299 (9th Cir.1997)); In re Charter First Mortgage,

*804 Inc., 42 B.R. at 383. Only the former actions are

exempt under § 362(b)(4). N.L.R.B., 804 F.2d at 934. A

governmental unit may not adjudicate the private rights of

its citizens under the guise of public protection to escape

the general stay provision of § 362. See In re Charter First

Mortgage, Inc., 42 B.R. at 383–84. For guidance in this test,

courts should refer to the legislative history of § 362(b)(4)

to determine whether the subject proceeding is one of the

enumerated types of proceedings to which § 362(b)(4) clearly

applies. See In re Eagle Bus Mfg., Inc., 158 B.R. 421, 427

(S.D.Tex.1993). The relevant legislative history of § 362(b)

(4) states:

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[Section 362(b)(4) ] excepts

commencement or continuation

of actions and proceedings by

governmental units to enforce police

or regulatory powers. Thus, where a

governmental unit is suing a debtor

to prevent or stop violation of fraud,

environmental protection, consumer

protection, safety, or similar police or

regulatory laws, or attempting to fix

damages for violation of such a law,

the action or proceeding is not stayed

under the automatic stay.

In re Commonwealth Oil Ref. Co., 805 F.2d 1175, 1182–83

(5th Cir.1986) (quoting H.R.Rep. No. 95–595, at 343 (1977),

reprinted in 1978 U.S.C.C.A.N. 5963, 6299; S.Rep. No. 95–

989, at 52, reprinted in 1978 U.S.C.C.A.N. 5787, 5838).

Thus, where the government is enforcing these enumerated

examples, the governmental unit is clearly enforcing public

rights.

Further examples of governmental unit actions where courts

have applied the police and regulatory power exception

include: state bar disciplinary proceedings, labor law

enforcement proceedings, enforcement of environmental

regulations, 10 enforcement of consumer protection laws, 11

revocations of licenses, 12 and other similar *805 police

or regulatory laws. See 3 COLLIER ON BANKRUPTCY ¶

362.05(b)(5) (15th ed.2004).

Application to In re Gandy

 In applying the “police and regulatory exception” to Mr.

Gandy's case, the plaintiffs—Harris County and the Texas

Commission on Environmental Quality—are governmental

units as defined by § 101(27). Further, the enforcement of

state environmental laws falls within the gambit of the police

and regulatory powers excepted by § 362(b)(4) under either

the pecuniary interest or public policy tests. See Safety—

Kleen, Inc. (Pinewood) v. Wyche, 274 F.3d 846, 859 (4th

Cir.2001).

The action meets the pecuniary interest test because the

governmental units were pursuing a matter of public safety

and welfare through injunctive relief rather than seeking a

monetary award. See, e.g., Commonwealth Cos., 913 F.2d at

523. In the state court action, the governmental units allege

that Mr. Gandy is violating the Texas Solid Waste Disposal

Act and the Texas Clean Air Act. They are seeking injunctive

relief to stop Mr. Gandy from using his property to store debris

and other materials that allegedly violate state law. Thus,

under the pecuniary interest test, Mr. Gandy's state court suit

constitutes enforcement of the governmental units' police and

regulatory power.

 The action also satisfies the public policy test because

the purpose of the proceeding is to further public policy

instead of adjudicating private rights. 13 Dunbar, 235 B.R. at

471. Generally, proceedings to enforce environmental statutes

invoke the police and regulatory exception to the automatic

stay. See COLLIER ON BANKRUPTCY ¶ 362.05(b)(5)

(15th ed.2004). This suit is brought to further the State's

public policy of protecting the environment and does not

implicate, much less adjudicate, the personal rights of any

citizen. Accordingly, because the state court proceeding is

enforcing environmental laws, which furthers public policy,

it is excepted from the automatic stay based on the police and

regulatory exception.

 At the hearing on Mr. Gandy's case, there were substantial

evidentiary disputes regarding (i) whether there was any

immediate threat and (ii) whether Mr. Gandy was, in fact, in

violation of the law. This Court will not address the merits

of those disputes. If a governmental unit is attempting to

enforce its police and regulatory powers, this Court (as does a

state court with concurrent jurisdiction) only looks to the four

corners of the complaint to determine if the purpose of the

litigation by the governmental unit is to enforce its police and

regulatory powers. If the purpose of the state court lawsuit is

police and regulatory, the inquiry as to the application of the

automatic stay is completed and the action is not stayed. See

Board of Governors of the Fed. Reserve Sys. v. MCorp Fin.,

502 U.S. 32, 40, 112 S.Ct. 459, 116 L.Ed.2d 358 (1991). This

Court should not examine the merits of the litigation. 14

*806 MCorp contends that in order for § 362(b)(4) to

obtain, a court must first determine whether the proposed

exercise of police or regulatory power is legitimate.... We

disagree. MCorp's broad reading of the stay provisions

would require bankruptcy courts to scrutinize the validity

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of every administrative or enforcement action brought

against a bankrupt entity. Such a reading is problematic....

Id.

Of course, when examining the four corners of the complaint,

this Court and others with concurrent jurisdiction must be

mindful of the need to avoid artifice. If the governmental unit

is not engaged in the bona fide enforcement of its police and

regulatory powers, it is violating the automatic stay and may

not proceed to obtain a determination to the contrary.

Application to In re Diaz

 In the Diaz case, the State of Texas has brought a lawsuit

against Ms. Diaz for alleged violations of the Deceptive Trade

Practices Act. As discussed above, the State is a governmental

unit. Further, the Deceptive Trade Practices Act is a consumer

protection law. See In re First Alliance Mortg. Co., 263

B.R. 99, 108 (9th Cir. BAP 2001) (actions brought by the

State to implement the law are generally an exercise of

its police and regulatory powers). Unlike the facts in Mr.

Gandy's case, however, here the State is seeking damages in

addition to injunctive relief. Despite this difference, the State's

action passes the pecuniary interest test because the State is

seeking injunctive relief. Ms. Diaz argues that the State is

not seeking injunctive relief because she has given up her

notary license and is no longer practicing as a notary. Thus,

she reasons that the only possible purpose of the remaining

litigation is to determine a monetary award against her. Ms.

Diaz's argument is unavailing. Simply because a defendant

has ceased the alleged offensive conduct does not remove a

governmental unit's ability to prosecute under its police and

regulatory power. In re First Alliance Mortg. Co., 263 B.R.

99, 113 (9th Cir. BAP 2001) (application of the police or

regulatory exception to enforcement actions by the Federal

Trade Commission to enjoin illegal lending, even though the

debtor had already agreed to cease loan originations). Further,

although the State is seeking monetary damages, enforcement

of any money judgment is stayed. Accordingly, because the

State is seeking injunctive relief, and because enforcement of

any money judgment is stayed, the State's action passes the

pecuniary interest test.

The public policy test is also met because the government's

lawsuit is not an adjudication of private rights but an

effectuation of public policy. Only proceedings which

effectuate public policy are exempt under § 362(b)(4).

N.L.R.B., 804 F.2d at 934. The purpose of the Deceptive Trade

Practices Act is to further the public policy of protecting Texas

consumers from actions such as those alleged to have been

committed by Ms. Diaz. Head v. U.S. Inspect DFW, Inc., 159

S.W.3d 731, 743 (Tex.App.-Fort Worth 2005). Therefore, the

lawsuit against Ms. Diaz is excepted from the automatic stay

under § 362(b)(4).

All Citations

327 B.R. 796

Footnotes

1 Case no. 05–30651.

2 Case no. 05–32244; Adversary no. 05–3253.

3 Ms. Diaz alleges that she is not currently advertising any services as a “notario” and has given up her Notary

Public license.

4 In the Edwin Epstein Operating Co., Inc., opinion, the Court presumed that the arbitration panel was vested

with the full jurisdiction of a Texas state court. See In re Edwin A. Epstein, Jr. Operating Co., Inc., 314 B.R.

at 598 n. 13.

5 In areas where state courts have concurrent jurisdiction, the jurisdiction may not be exercised when the

automatic stay precludes the matter from proceeding in state court. See In re Brady, Texas Mun. Gas Corp.,

936 F.2d 212, 218 (5th Cir.1991), cert. denied, 502 U.S. 1013, 112 S.Ct. 657, 116 L.Ed.2d 748 (1991). The

Code allows only the bankruptcy court to annul or modify the automatic stay. 11 U.S.C. § 362(d); see Farley

v. Henson, 2 F.3d 273 (8th Cir.1993); Continental Cas., Co. v. Gullett, 253 B.R. 796 (S.D.Tex.1999).

6 Section 362(a) states, “[e]xcept as provided in subsection (b) of this section, a petition filed under section

301, 302, or 303 of this title ... operates as a stay, applicable to all entities of: (1) the commencement or

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continuation, including the issuance or employment of process, of a judicial, administrative, or other action

or proceeding against the debtor that was or could have been commenced before the commencement of the

case under this title, or to recover a claim against the debtor that arose before the commencement of the

case under this title; (2) the enforcement, against the debtor or against property of the estate, of a judgment

obtained before the commencement of the case under this title; (3) any act to obtain possession of property

of the estate or of property from the estate or to exercise control over property of the estate; (4) any act to

create, perfect, or enforce any lien against property of the estate; (5) any act to create, perfect, or enforce

against property of the debtor any lien to the extent that such lien secures a claim that arose before the

commencement of the case under this title; (6) any act to collect, assess, or recover a claim against the

debtor that arose before the commencement of the case under this title; (7) the setoff of any debt owing

to the debtor that arose before the commencement of the case under this title against any claim against

the debtor; and (8) the commencement or continuation of a proceeding before the United States Tax Court

concerning the debtor.”

7 Of course, the government may not act with artifice. If the government proceeds under § 362(b)(4) when

it is not exercising its police and regulatory powers, the governmental unit will have violated the automatic

stay by seeking the determination (based in artifice) from the state court. See In re Edwin A. Epstein, Jr.

Operating Co., Inc., 314 B.R. 591.

8 See In re Coporacion de Servicios Medicos Hospitalarios de Fajardo, 805 F.2d 440, 445–46 (1st Cir.1986)

(stating that “actions by a governmental agency to enforce [its] contractual rights,” even if related in some way

to a regulatory concern, are not police and regulatory; there was no showing that the government's actions

were based on any generally applicable regulatory law, as opposed to rights solely derived from terms of

contract); United States v. Nicolet Inc., 857 F.2d 202, 209 (3rd Cir.1988) (stating that a government suit

would not be excepted when the government is “suing in its role as a consuming participant in the national

economy”).

9 See In re Thomassen, 15 B.R. 907, 909 (9th Cir. BAP 1981) (“State and local governmental units cannot,

by an exercise of their police or regulatory powers, subvert the relief afforded by the federal bankruptcy

laws. When they seek to do so for a pecuniary purpose, they are automatically stayed, notwithstanding the

exception found at 11 U.S.C. § 362(b)(4)”); Matter of Ballentine Bros., Inc. 86 B.R. 198 (Bankr.D.Neb.1988)

(finding that county's real estate tax assessments and levies were pecuniary actions and not acts enforcing

county's police or regulatory power).

10 See Safety—Kleen (Pinewood), Inc. v. Wyche, 274 F.3d 846 (4th Cir.2001) (holding that financial assurance

regulations were a clear exercise of the state's regulatory power because their purpose was to deter

environmental misconduct); Penn Terra, Ltd. v. Dep't of Envtl. Res., 733 F.2d 267 (3rd Cir.1984) (stating

that Commonwealth's injunction was exempt from automatic stay because it was an action or proceeding by

a governmental unit to enforce police or regulatory power); United States v. LTV Steel Co., 269 B.R. 576

(W.D.Pa. 2001) (stating that the automatic stay does not protect Chapter 11 debtors from suit to assess

civil penalties under Clean Air Act); In re Mateer, 205 B.R. 915 (C.D.Ill. 1997) (holding that environmental

enforcement action against Chapter 7 debtor is not stayed); State v. Mirant New York, Inc., 300 B.R. 174

(S.D.N.Y. 2003) (noting that the automatic stay does not preclude the debtor from entering into environmental

consent decree or the state from enforcing it).

11 See In re First Alliance Mortgage Co., 263 B.R. 99 (9th Cir. BAP 2001) (holding that a consumer protection

action brought by the Massachusetts Attorney General which sought not only the cessation of ongoing

consumer fraud, but also a judgment against the debtor for civil penalties, attorneys' fees, and restitution

for the debtor's customers, was excepted from the automatic stay by § 362(b)(4) and noting that while the

exception permitted the state to proceed in its attempt to obtain a monetary judgment, it did not permit

any effort to collect or enforce any judgment so obtained); In re Draughon Training Inst., Inc., 119 B.R.

921 (Bankr.W.D.La. 1990) (stating that consumer protection statutes and court proceedings to determine

violations of consumer protection statutes are both valid exercises of police and regulatory power for purposes

of the automatic stay exception).

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12 See In re FCC, 217 F.3d 125, 131–32 (2d Cir.2000) (noting that § 362(a) did not preclude agency's revocation

of spectrum licenses); In re Yellow Cab Co-op. Ass'n, 132 F.3d 591, 599 (10th Cir.1997) (stating that § 362(a)

did not preclude revocation of taxi company's operating certificate); In re Universal Life Church, Inc., 128

F.3d 1294, 1296 (9th Cir.1997) (stating that § 3629(a) did not preclude IRS revocation of church's tax-exempt

status). However, under section 525(a) of the Bankruptcy Code, 11 U.S.C. § 525(a), an agency may not

revoke a debtor's license “solely” because the debtor is insolvent or has not paid a debt. See NextWave Pers.

Commc'ns, Inc. v. FCC, 254 F.3d 130, 149–52 (D.C.Cir.2001), cert. granted, 535 U.S. 904, 122 S.Ct. 1202,

152 L.Ed.2d 141 (2002) (stating that section 523 may protect debtor even when section 362 does not).

13 This opinion does not address whether a governmental unit's enforcement of a “bad check complaint”—the

remedy to which may be to require the debtor to compensate the check's holder—violates the stay.

14 To engage in a merits inquiry would mean that this Court's decision as to the application of the automatic

stay would be affected by the merits inquiry. Because the merits of the governmental unit's allegations play

no role in the determination of the automatic stay's application, the Court will not indulge in such an inquiry.

Accordingly, in determining that the automatic stay does not apply, this Court is expressing no opinion of the

merits of the government's claims or on the merits of Mr. Gandy's defenses.

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APPENDIX A-

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140 B.R. 969

United States District Court,

N.D. Illinois, Eastern Division.

In the Matter of MAHURKAR

DOUBLE LUMEN HEMODIALYSIS

CATHETER PATENT LITIGATION.

No. MDL 853.

|

May 28, 1992.

Synopsis

In multidistrict patent litigation brought against Chapter

11 debtor and nondebtor codefendant prepetition, plaintiff

requested damages and injunction against debtor, debtor

requested declaratory judgment, and plaintiff filed motion

seeking order that debtor cease its interference with discovery.

After bankruptcy filing, temporary restraining order was

issued by the Delaware Bankruptcy Court. The District Court,

Easterbrook, Circuit Judge, sitting by designation, held that:

(1) district court had authority to interpret automatic stay;

(2) enforcement of temporary restraining order issued by

Delaware Bankruptcy Court was suspended; (3) automatic

stay barred claims against debtor, and debtor's counterclaim

for declaratory relief was also suspended; and (4) automatic

stay did not bar discovery to extent it was calculated to lead

to evidence admissible against nondebtor codefendant.

So ordered.

See also 781 F.Supp. 1295.

Attorneys and Law Firms

*970 Joseph N. Hosteny, Raymond P. Niro, John C. Janka,

and Michael P. Mazza, Niro, Scavone, Haller & Niro,

Chicago, Ill., for Sakharam D. Mahurkar.

Marvin A. Glazer, Cahill, Sutton & Thomas, Phoenix, Ariz.,

and Granger Cook, Jr. and Mark J. Murphy, Cook, Egan,

McFarron & Manzo, Ltd., Chicago, Ill., for IMPRA, Inc.

H. Ross Workman, Brent P. Lorimer, and John C. Stringham,

Workman, Nydegger & Jensen, Salt Lake City, Utah, for

Kendall Med–West.

OPINION

EASTERBROOK, Circuit Judge. *

After a settlement between Vas–Cath and Mahurkar, the initial

adversaries in this patent case, only two accused infringers

remain as parties: IMPRA and Kendall Med–West, a division

of The Kendall Company. We are in the final stages of

discovery, with depositions by the dozen. Trial is set for

August 10.

On May 20 Kendall and its parent filed bankruptcy petitions

in the bankruptcy court for the District of Delaware. Kendall

had been planning the step for more than a year in consort

with its major lenders. Kendall filed a bankruptcy petition

“prepackaged” with a plan of reorganization to which

these creditors had assented. The proposed plan restructures

Kendall's debt obligations, which bear a rate of interest

exceeding the going rate for money in the economy, while

allowing all to avoid recognizing income (and paying tax) on

the reduction of indebtedness.

Sakharam Mahurkar and Quinton Instruments Co., Kendall's

adversaries in this patent litigation, hold contingent debt

claims against Kendall. They were left out *971 of the

negotiations for the bankruptcy proceeding, first learning

of the plans when they read an article in the Wall Street

Journal. This court, too, was taken aback. Kendall did not

mention the preparations at any time while the schedule was

being discussed and set—did not mention it even by a secret

filing that would have preserved whatever confidences were

important to the plan. Instead Kendall took everyone by

surprise, filing its papers in Delaware, walking out of the

ongoing deposition of Dr. Mahurkar, and faxing this court

(and its adversaries) a notice.

Kendall is standing on its rights under the automatic stay,

11 U.S.C. § 362, even though it says it expects the plan of

reorganization to be approved by the end of June. According

to the plan of reorganization, claims such as Mahurkar's will

pass through unaffected. Kendall's action nonetheless throws

the schedule in this court out of whack, awarding itself the

extension that I have repeatedly refused to grant and raising

questions about whether Kendall will be able to catch up in

time to join the trial in August.

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Although the automatic stay halts only litigation against the

debtor in bankruptcy, Kendall instructed a former employee

not to attend his deposition. Apparently in anticipation of

the filing in Delaware, Kendall's lawyer instructed one of its

current employees not to answer certain financial questions

during a deposition, although this court, consonant with

Fed.R.Civ.P. 30(c) (“Evidence objected to shall be taken

subject to the objections.”), had told counsel not to instruct

witnesses to refrain from answering on any ground other than

an assertion of privilege. I had offered to resolve disputes

of any other kind by telephone to avoid exactly the sort of

interruption that has occurred. Kendall's instruction not to

answer had no support in § 362, for Kendall had not yet filed

its petition in bankruptcy.

Disturbed by these tactics, Dr. Mahurkar filed a motion on

May 21 seeking an order that Kendall cease its interference

with discovery pertinent to the ongoing litigation with

IMPRA. Recognizing the force of § 362, Mahurkar conceded

that his dispute in this forum with Kendall is in stasis, insofar

as he seeks damages. But, citing numerous cases, Mahurkar

asked me to rule that the automatic stay does not bar continued

proceedings concerning Kendall's request for a declaratory

judgment (on the ground that this is an action by rather than

against the debtor) or his own counterclaim for an injunction,

to the extent that Kendall's (asserted) infringement continues

during the pendency of the bankruptcy proceeding. Naturally

the first question is whether the forum in which an action

is pending may decide for itself the effect of the automatic

stay or instead whether the bankruptcy court has exclusive

jurisdiction. Mahurkar cited a number of cases holding that

the original forum may interpret § 362 and proceed to the

extent that statute allows. Mahurkar asked me to do so.

On the afternoon of May 21 my staff called counsel for

Kendall and instructed it to file a response by the close

of business on May 26. Further conversations on May 22

conveyed to all counsel two additional decisions: Mahurkar's

reply brief would be due on May 27, and I would hold oral

argument at 10:00 A.M. on May 28.

Kendall filed its brief on May 26, disputing Mahurkar's

interpretation of § 362. An orderly process was in train,

leading to an orderly decision. Preferring a soliloquy to

a dialog, Kendall began an adversary proceeding against

Mahurkar and Quinton and at 2:30 P.M. on May 27 sought

an ex parte order from the bankruptcy judge in Delaware.

Mahurkar's counsel in Chicago had enough notice to engage

a lawyer in Wilmington and fax him some papers, which

arrived at 1:00 P.M. on May 27. This lawyer appeared at the

hearing but conceded that he lacked time to read the papers

and knew next to nothing about the patent litigation. Quinton

was unrepresented. Kendall asked the bankruptcy judge to

enjoin Mahurkar from filing his reply brief or presenting his

request for decision to this court. Kendall presented a draft

order to bankruptcy judge Helen S. Balick, who dated and

signed the draft, giving no written reasons. (Her brief oral

statement also is sketchy.)

*972 What Kendall drafted for the bankruptcy judge

contains formulaic and unreasoned recitations of irreparable

harm (unfathomable, given that the expense of litigation is

not irreparable injury, see Petroleum Exploration, Inc. v.

Public Service Commission, 304 U.S. 209, 222, 58 S.Ct. 834,

841, 82 L.Ed. 1294 (1938); FTC v. Standard Oil Co., 449

U.S. 232, 244, 101 S.Ct. 488, 495, 66 L.Ed.2d 416 (1980);

Renegotiation Board v. Bannercraft Clothing Co., 415 U.S. 1,

24, 94 S.Ct. 1028, 1040, 39 L.Ed.2d 123 (1974)) and contains

these commands:

Defendants [Quinton and Mahurkar]

are hereby ordered and/or restrained

from taking any action or doing any

act, other than by proper motion or

other application before this Court

to commence or continue any action

against The Kendall Company, et al.

in either the United States District

Court for the Northern District of

Illinois, Eastern Division, the United

States District Court for the Central

District of Utah, or the United States

Bankruptcy Court for the District of

Delaware with respect to the matters

set out in the Patent Infringement

Action, including, but not limited to,

filing any reply brief, motions or

memorandum of law, or conducting or

participating in any type of discovery,

except as to forthwith notify the

Clerks of the courts listed above

of the entry of an Order of this

Court restraining any application by

Quinton Instruments Company and/

or Sakharam D. Mahurkar for any

relief or discovery against The Kendall

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Company whatsoever with respect to

the Patent Infringement Action....

In other words, the bankruptcy judge in Delaware not only

asserted exclusive jurisdiction to determine the meaning of

§ 362 but also instructed counsel to remain silent during the

hearing scheduled in this court. (Perhaps even showing up

would be a prohibited “act” to “continue” the proceeding.)

In forbidding Mahurkar and Quinton from “conducting or

participating in any type of discovery” in the entire “Patent

Infringement Action,” this TRO also apparently halts the

litigation with IMPRA. It did not, however, issue in time to

prevent Mahurkar from filing his reply brief.

On learning of this preposterous order (I practically fell out of

my chair, and I have a sturdy chair), I entered the following

order of my own:

Lest there be any misunderstanding about the telephonic

instructions that have previously issued, I now issue my

order in writing.

Counsel for Kendall and Mahurkar are to be present in

court tomorrow morning at 10:00 a.m. This is an order, not

an invitation. Failure to appear will lead to sanctions.

My instructions to appear and argue this case were issued

last week. Any subsequent order from any other court is

ineffectual. Kendall's ex parte application to the bankruptcy

judge in Delaware appears to be an abuse of process.

No bankruptcy court is authorized to instruct litigants in

this court not to obey this court's orders. Any court has

jurisdiction to determine its own jurisdiction, and this

court unquestionably has the authority to determine what

effect the bankruptcy stay has on the litigation. For the

purpose of making that decision, the hearing will proceed

as scheduled, and counsel for all parties are free to make

whatever presentations they deem appropriate.

At the oral argument on May 28, Kendall's lawyers asserted

that the TRO forbade Mahurkar's lawyers from making any

oral argument in support of their motion. I ruled that any

attempt to enforce Judge Balick's prohibition against the

participation of Mahurkar's counsel in the ordinary course of

proceedings here would be treated as a violation of my order

of May 27, and thus contempt of court.

I shall have more to say about that rogue TRO. The first

issue I take up, however, is whether I have any authority

to interpret the automatic stay and decide for myself which

actions may proceed here. Part II of this opinion discusses the

TRO and explains why I am enjoining its enforcement. Part

III discusses the effect of the automatic stay on this patent

action. The final section sets out a formal injunction, binding

on Kendall and all those in privity with it, *973 which will

be entered in compliance with Fed.R.Civ.P. 65(d).

I

Section 362(a) provides that a petition in bankruptcy

“operates as a stay, applicable to all entities, of—(1) the

commencement or continuation, including the issuance or

employment of process, of a judicial ... action or proceeding

against the debtor that was or could have been commenced

before the commencement of the case under this title”. This

statutory prohibition requires no judicial enforcement. But

it requires interpretation. What is the “continuation ... of a

judicial ... action or proceeding against the debtor”? Does

it include declaratory judgment actions filed by the debtor?

Discovery that may be relevant not only to actions against

the debtor but also to actions against other parties? Actions

against the debtor on account of violations of law (such as

infringement of patents) that continue after the filing of the

petition?

Someone must decide these questions. It might make sense

to commit their decision exclusively to bankruptcy judges,

who not only have greater familiarity with bankruptcy law but

also alone possess the power to coordinate the many actions

that may be pending against the debtor throughout the nation.

(Surely this is not the only suit against Kendall, a substantial

firm.) So, too, it might make sense to commit their decision

to the forums in which the cases are pending, which may

have the perspective needed to manage litigation that involves

other parties—as this multidistrict action does—or may be

in the best position to decide whether one of the numerous

exceptions in § 362(b) pertains.

 However such matters might come out on first principles

(the statute itself is silent on the question), it is settled that

both the bankruptcy court and the court in which the other

litigation exists may construe the automatic stay. E.g., Picco v.

Global Marine Drilling Co., 900 F.2d 846, 850 (5th Cir.1990);

Brock v. Morysville Body Works, Inc., 829 F.2d 383, 387

(3d Cir.1987); In re Baldwin–United Corporation Litigation,

765 F.2d 343, 347 (2d Cir.1985). Cf. Board of Governors

of the Federal Reserve v. MCorp Financial, Inc., 502 U.S.

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32, 112 S.Ct. 459, 116 L.Ed.2d 358 (1991); NLRB v. P*I*E

Nationwide, Inc., 923 F.2d 506, 512 (7th Cir.1991) (assuming

that bankruptcy courts do not have exclusive authority to

construe § 362, but without separate discussion). Baldwin–

United even held that a district court may forbid the resolution

of such issues by the bankruptcy court, although the second

circuit thought the exercise of that power imprudent in the

case at hand.

Morysville, rendered by the court of appeals with jurisdiction

over bankruptcy judges in Delaware, is of particular interest.

Mahurkar's bankruptcy lawyer did not have time to read the

papers, but he did cite Morysville (doubtless having been put

on the trail by Chicago counsel, who had cited it in papers

filed here). Kendall's lawyer did not deign to reply, and Judge

Balick did not mention that case.

To be sure, most of the cases holding that bankruptcy judges

lack exclusive jurisdiction to interpret § 362 involve suits by

public agencies, seeking relief excluded by § 362(b)(4). But

the reason why the automatic stay may (or does) not apply

is unrelated to the question: “Which court decides?” All the

cases I have found hold that each court may decide for itself.

So far as I am aware, there is no contrary authority. This

court accordingly not only has jurisdiction to determine its

jurisdiction, Willy v. Coastal Corp., 503 U.S. 131, 112 S.Ct.

1076, 1080, 117 L.Ed.2d 280 (1992); Harmon v. Brucker, 355

U.S. 579, 582, 78 S.Ct. 433, 435, 2 L.Ed.2d 503 (1958); Land

v. Dollar, 330 U.S. 731, 739, 67 S.Ct. 1009, 1013, 91 L.Ed.

1209 (1947), but actually possesses the authority to construe §

362 and decide what effect that statute has on the multidistrict

patent litigation.

II

 Kendall sought and obtained a TRO based on the opposite

premise. Kendall's adversary complaint asserts that the very

filing of a motion in this court seeking an interpretation

of § 362 violates that section, and that “[t]hese violations

of the automatic stay by the Defendants are willful *974

and entitle Kendall to recover actual damages, including but

not limited to, costs, attorneys' fees, interest and punitive

damages.” Kendall did not bring Morysville to the attention of

the bankruptcy court. At oral argument before Judge Balick,

Kendall's lawyers repeatedly treated litigation to determine

the extent of the automatic stay as identical to a violation

of § 362, which could be true only if the bankruptcy judge

possesses exclusive jurisdiction.

 Bankruptcy judges possess authority, by a combination

of 11 U.S.C. § 105(a) and 28 U.S.C. § 157(b)(2), to

issue injunctions in core proceedings. Enforcement of the

automatic stay against fresh litigation or the continuation of

old litigation on the merits is a core proceeding. In re Johns–

Manville Corp., 801 F.2d 60 (2d Cir.1986); cf. In re Davis,

730 F.2d 176 (5th Cir.1984) (declining to issue a writ of

prohibition against such an injunction). But extension of the

statute to forbid any other court from cogitating the meaning

of § 362, and proceeding to the extent that statute allows, is

not a core proceeding. This multidistrict patent litigation is

not a core proceeding by any stretch of the imagination, and

I think it beyond cavil that I have authority to decide, for

example, whether Mahurkar is entitled to take discovery from

former Kendall employees that may be relevant to the action

against IMPRA. Yet Judge Balick issued an order forbidding

Mahurkar to file a reply brief addressing that subject (among

others) or argue his motion orally.

For one federal court to issue an injunction forbidding

litigation in another is extraordinary, given principles of

comity among coordinate tribunals. E.g., Kerotest Mfg. Co.

v. C–O–Two Fire Equipment Co., 342 U.S. 180, 72 S.Ct.

219, 96 L.Ed. 200 (1952); cf. Brillhart v. Excess Insurance

Co., 316 U.S. 491, 62 S.Ct. 1173, 86 L.Ed. 1620 (1942).

For a bankruptcy judge to issue an injunction with the

effect of preempting resolution of a pending motion in a

district court is unheard of. Well, perhaps not un-heard of. I

found one case in which a bankruptcy court did so, and the

district judge brushed the order aside in derision, treating the

order as so patently unauthorized that no further explanation

was warranted. Lower Brule Construction Co. v. Sheesley's

Plumbing & Heating Co., 84 B.R. 638, 644 (D.S.D.1988).

For reasons I elucidate below, Mahurkar asked for too much

in this court. The automatic stay blocks most of the relief he

wants. Yet arguing for a generous view of one's entitlements

under the law is not the same as violating the law. There is

all the difference in the world between a litigant who barges

ahead as if the bankruptcy filing never took place and a

litigant who conscientiously brings the filing to the attention

of the court and asks for interpretation and instruction.

Mahurkar honorably took the latter course. Kendall, by

contrast, treated the two as identical and attempted to avoid

decision by a tribunal where the issues had been fully briefed

in favor of a decision elsewhere after a one-sided spiel.

Kendall's course is an abuse of the judicial process and will

not be tolerated.

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 Section 1651(a) of the judicial code permits district courts

to issue “all writs necessary or appropriate in aid of their

respective jurisdictions and agreeable to the usages and

principles of law.” An injunction forbidding interference with

ongoing proceedings is appropriate (indeed, necessary) in aid

of this tribunal's jurisdiction. The only potential bar lies in

principles of issue and claim preclusion (res judicata and

collateral estoppel) as a result of the bankruptcy judge's

decision. But this is not a final decision, and unreviewable

orders (a TRO is not reviewable by appeal) lack preclusive

effect. I conclude that § 1651 gives me authority to enjoin

the parties from enforcing the TRO, and that no other legal

principle forbids such relief.

 Because of the collateral bar doctrine, even legally erroneous

injunctions must be obeyed until vacated or stayed. Pasadena

Board of Education v. Spangler, 427 U.S. 424, 439–40, 96

S.Ct. 2697, 2706–07, 49 L.Ed.2d 599 (1976). It was to free

Mahurkar's counsel from their (justified) fear that they had

been forbidden to present oral argument in this court that I

issued my order the afternoon of *975 May 27. When at

oral argument bankruptcy counsel for Kendall insisted that

despite my order Mahurkar's lawyers still could not speak, I

replied that I would enjoin enforcement of the TRO, if that

was what it took. To ensure that the collateral bar doctrine

poses no risk to lawyers who have done no more than ask for a

decision by a court, I shall make that order formal at the end of

this opinion. I shall, moreover, direct Kendall to withdraw its

ludicrous demand for punitive damages and other relief said

to be in order to redress the sin of asking me to construe an

act of Congress.

This unseemly war between two federal courts was

occasioned by an unnecessary, incomplete, and deceptive

filing by Kendall in the bankruptcy case. Lawyers who make

ex parte applications have a special duty of candor in light of

the one-sided nature of the presentation. Yet counsel sought to

(and did) confuse rather than enlighten the bankruptcy judge.

Shame on the lawyers responsible. †

III

 Mahurkar asks me to hold that three subjects lie outside the

automatic stay: Kendall's request for a declaratory judgment,

its own request for an injunction against ongoing sales

of catheters, and its demand that Kendall not interfere

in discovery bearing on IMPRA. Mahurkar also contends

that I have the authority to make equitable exceptions to

the automatic stay and should use that authority to keep

discovery going while a prepackaged bankruptcy—which is

not supposed to disrupt the debtor's business—winds up.

Section 362(a) admits of no “equitable” exceptions; it says

that the stay applies “[e]xcept as provided in subsection

(b) of this section”, and subsection (b) contains no grant

of equitable power to disregard subsection (a). There is an

equitable power to release or modify the stay, § 362(d), (f), but

only the bankruptcy court may exercise this power. Mahurkar

should present his request for modification to the only

tribunal that can entertain it. (Given the prepackaged nature

of the reorganization, the parties should be able to agree that

discovery can continue here, leading to a modification of the

stay. But this is for Judge Balick, not me.)

Declaratory relief is the first issue. Kendall began this

litigation, seeking a declaratory judgment that its catheters

do not infringe Mahurkar's patents. Counterclaims for

damages and an injunction came later. Section 362(a)(1)

forbids continuation of an “action or proceeding against

the debtor” (emphasis added), and Kendall's own suit is

not an action “against” the debtor. “By” and “against” are

opposites. Northbrook National Insurance Co. v. Brewer, 493

U.S. 6, 110 S.Ct. 297, 107 L.Ed.2d 223 (1980). See Martin–

Trigona v. Champion Federal Savings, 892 F.2d 575, 577 (7th

Cir.1989); James McCafferty, The Effect of Bankruptcy on

the Debtor's Pending Litigation, 93 Comm.L.J. 214, 218–21

(1987) (citing other cases). Once again a case from the third

circuit (whose jurisdiction includes Delaware) is instructive.

After reciting the language of the statute, the court continued:

All proceedings in a single case are not lumped together for

purposes of automatic stay analysis.... Within a single case,

some actions may be stayed, others not. Multiple claim

and multiple party litigation must be disaggregated so that

particular claims, counterclaims, crossclaims and thirdparty claims are treated independently when determining

which of their respective proceedings are subject to the

bankruptcy stay.

Thus, within one case, actions against a debtor will be

suspended even though closely related claims asserted by

the debtor may continue.

Maritime Electric Co. v. United Jersey Bank, 959 F.2d 1194,

1204-05 (3d Cir. 1992) (emphasis in original). Disaggregating

this case produces three claims: by Kendall for declaratory

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relief, against Kendall for damages, and against Kendall for

an injunction.

 True enough, Mahurkar's counterclaims have become the

center of attention. But “whether an action is by or against

a debtor is determined by the debtor's status at the time the

action was begun, not by *976 who was ahead when the

bankruptcy petition was filed.” In re Berry Estates, Inc., 812

F.2d 67, 71 (2d Cir.1987). Accord, Maritime Electric, 959

F.2d at 1205; St. Croix Condominium Owners v. St. Croix

Hotel Corp., 682 F.2d 446, 449 (3d Cir.1982). So far as the

literal meaning of § 362(a)(1) is concerned, this court may

proceed to decision on the declaratory judgment action as if

no bankruptcy proceeding were pending. And the Supreme

Court champions literalism in interpretation of the bankruptcy

code. E.g., Taylor v. Freeland & Kronz, 503 U.S. 638, 112

S.Ct. 1644, 118 L.Ed.2d 280 (1992); Connecticut National

Bank v. Germain, 503 U.S. 249, 112 S.Ct. 1146, 117 L.Ed.2d

391 (1992).

 That a court has the raw power to do something does not

imply that it should, however. Section 362(a)(1) distinguishes

actions against a debtor from actions by the debtor because

actions by the debtor usually produce recovery for the estate

(or leave its value unaffected). No-risk propositions with

the debtor in control do not present any of the concerns

that lead to collective proceedings, such as races among

creditors to dismember assets or jump the priority queue. As

a practical matter, however, Kendall's declaratory judgment

action exposes the estate to exactly the same risk as

Mahurkar's counterclaims: to lose the action is to suffer a

judgment that Kendall infringed the patents. Concrete relief

might await the lapse of the automatic stay, but the writing on

the wall would be as ominous as a formal opinion deciding

the entire case on the merits in Mahurkar's favor. Whether I

ought to proceed on the declaratory judgment action depends,

then, on whether Mahurkar is right in saying that injunctive

actions lie outside of § 362(a)(1).

Mahurkar has two theories: first, that a suit seeking an

injunction is not a “judicial ... action or proceeding” within

the meaning of § 362(a)(1); second, that even if it is, a

court may issue injunctive relief against wrongs that continue

after the filing of the petition, because such post-petition

conduct does not entail an action that “was or could have been

commenced before the commencement of the case under this

title” (emphasis added).

These two approaches collapse to the same thing, because

an injunction should not issue unless wrongful conduct is

ongoing or impending. Only post-bankruptcy acts (or threats)

need concern us. A reading of § 362 leads me to reject

Mahurkar's arguments whichever way they are phrased.

Distinctions between law and equity were abolished with

the institution of the Rules of Civil Procedure in 1938. See

Fed.R.Civ.P. 2. The Bankruptcy Code of 1978, following

modern practice, speaks of an “action or proceeding” rather

than an action at law or equity. Nothing in § 362(a)(1)

suggests any difference between legal and equitable relief.

Section 362(b) supports this conclusion, for a number of

its subsections exclude from the stay certain equitable

proceedings. These exceptions are unnecessary if § 362(a)

does not apply in the first place to requests for injunctions.

And the continuation during bankruptcy of conduct (such

as the sale of catheters) begun beforehand is most certainly

one in which an action “was or could have been commenced

before the commencement of the case under this title”. This

action could have been, and was, commenced before Kendall

filed its petition in bankruptcy.

For what it is worth, I think that this literal interpretation is not

only good law but also good sense. Bankruptcy is a collective

proceeding, one in which creditors divide claims while the

court attempts to maximize the total value of the assets. Covey

v. Commercial National Bank of Peoria, 960 F.2d 657, 661–

62 (7th Cir.1992); Levit v. Ingersoll Rand Financial Corp.,

874 F.2d 1186 (7th Cir.1989); In re Iowa R.R., 840 F.2d 535

(7th Cir.1988); Boston & Maine Corp. v. Chicago Pacific

Corp., 785 F.2d 562 (7th Cir.1986). One pressing task is to

prevent creditors' actions that grab one aspect of the business

and squeeze it for value that, while assisting a single creditor,

may depress the collective value of the assets. Injunctions

requiring debtors to abandon one part of their business or

dramatically change their methods of doing business have a

high holdup value for creditors and therefore may lead to this

unfortunate consequence.

*977 None of this implies that debtors in bankruptcy may

violate federal law with impunity, selling patented products

or, say, going into the cocaine distribution business. Cf.

Douglas G. Baird, The Elements of Bankruptcy 194–98

(1992). Damages for wrongs done during the bankruptcy

proceeding are administrative claims, and thus paid in full

most of the time. The bankruptcy judge may enjoin ongoing

wrongs, or release the automatic stay to allow another

court to consider claims that debtors are violating the law.

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Public agencies may seek redress under § 362(b)(4). But the

bankruptcy court is the clearinghouse for private actions, and

it has yet to approve Mahurkar's request to pursue his demand

for an injunction. I hold that litigation on Mahurkar's request

for an injunction is barred by the automatic stay. From the

discussion above it follows that I also will stay proceedings

in Kendall's action for a declaratory judgment.

Having resolved the “which court?” issue in Part I on

the basis of precedent, I owe the parties a few words

about the precedents they have earnestly pressed on me. A

number of district courts hold that the stay does not bar

injunctions, but almost all of these decisions rely either on

the 1898 Act (which distinguished “debts” and “damages”

from other claims) or on cases interpreting the 1898 Act.

E.g., Bambu Sales, Inc. v. Sultana Crackers, Inc., 683 F.Supp.

899 (E.D.N.Y.1988); Steak & Brew, Inc. v. Makris, 177

U.S.P.Q. 412 (D.Conn.1973); In re Shenberg, 433 F.Supp.

677 (N.D.Ill.1977); Brennan v. T & T Trucking, Inc., 396

F.Supp. 615 (N.D.Okla.1975). These cases are uninformative

in litigation under a portion of the 1978 Code, § 362(a)(1), that

changed dramatically. Although Bambu was decided under

§ 362(a), it relied only on older cases and is unpersuasive.

Two other cases under the 1978 Act, Doskocil Cos. v. C

& F Packing Co., No. 89 C 600 (N.D.Ill. July 26, 1990)

(Holderman, J.), and In re Vylene Enterprises, Inc., 63 B.R.

900, 906–07 (Bankr.C.D.Cal.1986), also are incompletely

reasoned, and I am unpersuaded.

No authority at the appellate level supports Mahurkar's

argument. Cases such as In re Gull Air, Inc., 890 F.2d

1255 (1st Cir.1989), do not support a general rule that

the automatic stay does not apply to post-bankruptcy acts.

The FAA canceled Gull Air's landing slots at an airport on

account of non-use. Using the slots was a condition of the

property interest, and the court held, consistent with many

cases showing that bankruptcy takes property interests as it

finds them, that this nonbankruptcy rule applies within the

bankruptcy case. See Butner v. United States, 440 U.S. 48, 55,

99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979); Chicago Board of

Trade v. Olsen, 262 U.S. 1, 43 S.Ct. 470, 67 L.Ed. 839 (1923).

Moreover, the non-use began (if a “non” something can be

said to “begin”) and the slots were reallocated after the filing

of the bankruptcy petition, and thus could not have been the

subject of pre-bankruptcy administrative action. Kendall has

been making these catheters for years, and the litigation long

antedates the bankruptcy. I hold, therefore, that the automatic

stay applies to the request for an injunction.

We come, then, to discovery in the multidistrict patent case.

Section 362(a)(1) applies only to actions against the debtor.

At oral argument, counsel for Kendall conceded that the

automatic stay does not affect discovery regarding IMPRA,

and that Kendall is obliged to participate to the extent it

would be as a non-party. Related litigation goes on without

the debtor. Landis v. North American Co., 299 U.S. 248, 254–

55, 57 S.Ct. 163, 165–66, 81 L.Ed. 153 (1936); Wedgeworth

v. Fibreboard Corp., 706 F.2d 541 (5th Cir.1983).

 That concession, which I believe correctly states the law

(although there are no cases on point), means that Mahurkar is

entitled to at least some of the relief he seeks. Kendall has no

ground to interfere with or disrupt discovery that is calculated

to lead to evidence admissible against IMPRA. That a given

witness used to work for Kendall (or still works for Kendall)

is irrelevant, if the discovery has utility other than to facilitate

recovery against Kendall.

Working out the details will require a degree of cooperation

among counsel that is sadly missing at the moment. Bickering

has been at a high level throughout the *978 case,

and Kendall's effort to forbid me from even considering

Mahurkar's request (and to penalize its lawyers if they argued

their motion) did not exactly endear Kendall's lawyers to

Mahurkar's. I will be available by telephone to resolve any

disputes as they arise, and will issue orders as the need arises

clarifying the permitted scope of discovery.

 One final issue. Kendall's pre-bankruptcy instructions to

the witness Scahill not to answer certain financial questions

violated my order that only privilege is a ground for issuing

such instructions. Kendall attempts to justify this by insisting

that Scahill's answers would have revealed terms of the

proposed reorganization in violation of the securities laws.

Kendall does not specify which of the many securities laws,

and this defense of its instructions is risible. The securities

laws forbid withholding certain material information, or

trading while information is unavailable to the public, but

never forbid revealing information! If disclosing details of

a reorganization plan violates the securities laws, how did

Kendall manage to negotiate terms with its (other) creditors?

I can see Kendall's concern that financial information not

be disclosed prematurely, but (a) the deposition was being

conducted under the terms of my protective order, and

(b) Kendall was at liberty to apply to me by telephone

for additional protection. Instead it engaged in self-help.

That violation of my orders (and of the Rules of Civil

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Procedure) cannot go unnoticed. I therefore direct Kendall to

make Scahill available for re-deposition, at its own expense

(including the legal fees borne by Mahurkar's lawyers).

Kendall can, I suppose, contend that even this remedy for a

pre-bankruptcy delict is barred by the automatic stay. But I

remind Kendall, and its lawyers, that sanctions in discovery

may run against counsel personally. Fed.R.Civ.P. 37(a)(4).

Kendall's lawyers are not debtors in bankruptcy and so are

outside the stay. I am indifferent to whether Kendall pays

these costs or its lawyers pay; one way or the other, Mahurkar

is entitled to be reimbursed, and without waiting for the

conclusion of the bankruptcy proceeding.

IV

I now make the following orders, which will also be entered

as a separate injunction complying with Rule 65(d).

1. The Kendall Company, its officers, agents, and all those

acting in concert with them and having actual knowledge

of this order, are permanently enjoined from enforcing or

attempting to enforce the temporary restraining order issued

by the United States Bankruptcy Court for the District of

Delaware on May 27, 1992, in adversary proceeding No. A–

92–57.

2. The Kendall Company shall withdraw adversary

proceeding No. A–92–57.

3. The Kendall Company shall institute no further litigation

in any court designed to prevent Sakharam D. Mahurkar or

Quinton Instruments Company from filing motions in this

court seeking an interpretation of 11 U.S.C. § 362 and any

relief allowed by that statute and otherwise authorized by law.

4. The Kendall Company shall immediately transmit copies

of this opinion and injunction to the United States Bankruptcy

Court for the District of Delaware, to be lodged in bankruptcy

case No. 92–667 as well as adversary proceeding No. A–92–

57.

5. The Kendall Company, its officers, agents, and all those

acting in concert with them and having actual knowledge of

this order, are permanently enjoined from interfering with

or obstructing discovery in the ongoing litigation among

IMPRA, Mahurkar, and Quinton.

As for this litigation: (a) Mahurkar's request for damages and

an injunction against Kendall is stayed by virtue of § 362(a)

until its automatic expiration (following confirmation of the

plan of reorganization) or its modification by the bankruptcy

court. (b) Kendall's request for a declaratory judgment is not

automatically stayed, but I nonetheless halt all proceedings

in that action so long as the automatic stay bars litigation

of the counterclaim seeking damages and an injunction.

(c) Discovery and all other proceedings shall continue in

the litigation among IMPRA, Mahurkar, and Quinton as if

Kendall were *979 an interested non-litigant. In particular,

this means that Mahurkar may take depositions of Kendall's

former (and current) employees, other than depositions under

Fed.R.Civ.P. 30(b)(6), limited to the discovery of evidence

bearing on the IMPRA litigation. Motions for summary

judgment in the dispute among IMPRA, Mahurkar, and

Quinton will be resolved in the ordinary course, just as if

Kendall were no longer a party to the litigation. Kendall is

free, however, to file any briefs it wants in these matters,

just as if it were an amicus curiae. All discovery and other

proceedings against Kendall and its experts are stayed until

the lifting or modification of the automatic stay. Mahurkar

shall give Kendall timely notification of any depositions that

might collaterally affect its interests during the period of this

stay, and shall promptly notify IMPRA of any depositions,

already noticed, that Kendall believes may proceed under this

order to obtain evidence concerning IMPRA.

All Citations

140 B.R. 969, 60 USLW 2781, 23 U.S.P.Q.2d 1903

Footnotes

* Of the Seventh Circuit, sitting by designation.

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† In the interest of protecting reputations, I note that Kendall's lawyers in the patent action do not represent

it in the bankruptcy action. Kendall is represented in the bankruptcy case by Hale & Dorr of Boston and by

Young, Conaway, Stargatt & Taylor of Wilmington.

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APPENDIX A-

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In re Mosher, 578 B.R. 765 (2017)

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578 B.R. 765

United States Bankruptcy Court,

S.D. Texas, Houston Division.

IN RE: Laurance Coleman MOSHER, Jr., Debtor.

Case No. 17–34430

|

Signed 11/09/2017

|

Entered 11/10/2017

Synopsis

Background: United States filed motion to lift automatic stay

in debtor's Chapter 13 case, to allow United States to submit

agreed judgment to district court in tax suit against debtor.

The Bankruptcy Court, Jeff Bohm, J., held that cause existed

to lift the automatic stay.

Motion granted.

Attorneys and Law Firms

*766 Thomas Black, Attorney at Law, Houston, TX, for

Debtor.

David G. Peake, Chapter 13 Trustee, Houston, TX, for

Trustee.

FINDINGS OF FACT AND CONCLUSIONS

OF LAW REGARDING THE UNITED STATES

OF AMERICA'S (INTERNAL REVENUE

SERVICE) MOTION FOR RELIEF FROM THE

STAY REGARDING DISTRICT COURT CASE

Jeff Bohm, United States Bankruptcy Judge

I. Introduction

Laurance Coleman Mosher, Jr., the debtor in this case (the

“Debtor”), filed a voluntary Chapter 13 petition on July

24, 2017. [Doc. No. 1]. He did so in order to stop the

United States of America (the “USA”) from submitting to

U.S. District Judge Keith Ellison an agreed judgment that

the Debtor, through his attorney, had signed consenting to

foreclosure on his homestead. The agreed judgment would

bring to substantial conclusion a certain lawsuit pending in

District Judge Ellison's court (the “Tax Suit”). The Tax Suit

is styled “United States of America v. Laurance Coleman

Mosher, Jr., et al.,” Civil Action Number 4:16–cv–00369; the

USA had initiated this suit in 2016 because the Debtor refused

to pay past due taxes totaling $968,001.16.

In response to the Debtor's filing of his Chapter 13 petition,

the USA, on September 21, 2017, filed a motion to lift stay

(the “Motion”) requesting this Court to lift the automatic stay

to allow the Tax Suit to proceed—i.e., to allow the USA to

submit the Agreed Judgment to District Judge Ellison. [Doc.

No. 32]. On October 3, 2017, the Debtor filed a response

opposing the Motion. [Doc. No. 34]. On October 10, 2017,

this Court held a hearing on the Motion. Two witnesses

—James Ashton (special compliance revenue officer with

the IRS) and the Debtor—gave testimony, and this Court

admitted several exhibits. After hearing closing arguments,

the Court made certain oral findings of fact and conclusions

of law on the record, requested briefing from the parties on

two issues, and continued the hearing for October 24, 2017 to

allow for the Court to give consideration with respect to the

ultimate ruling on the Motion.

On October 23, 2017, the parties each filed their briefs

regarding the two issues that this Court raised at the October

10 hearing. Because the Court was not able to *767 review

these briefs by the next day—i.e., the continued hearing on

the Motion—the Court continued the hearing once again. The

Court now issues its ruling in writing rather than holding

a hearing to issue its ruling from the bench. These written

findings of fact and conclusions of law are made pursuant

to Bankruptcy Rules 7052 and 9014. 1 To the extent that

any finding of fact is construed as a conclusion of law, it is

adopted as such; and to the extent that any conclusion of law

is construed as a finding of fact, it is adopted as such. Finally,

to the extent that any of this Court's oral findings of fact and

conclusions of law—made at the October 10 hearing or at

the November 9 hearing—conflict with the written findings

and conclusions set forth herein, the latter shall govern; and

to the extent that the written findings and conclusions do not

encompass all of the oral findings and conclusions, the latter

shall supplement the former. For the reasons set forth below,

the Court finds that the Motion should be granted and that the

stay should therefore be lifted to allow the USA to submit the

agreed judgment to the District Court in the Tax Suit.

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II. Findings of Fact

1. The Debtor is a 77-year-old attorney at law licensed by

the State of Texas. The Debtor practiced law at Fulbright

& Jaworski from 1967 through 2004. He was a partner

at this law firm when he retired in 2004. Presently,

although his law license is still active, the Debtor is not

practicing law to any appreciable extent. In the Debtor's

own words, his “income for legal services performed is

sporadic.” [Doc. No. 14, p. 61 of 93].

2. The Debtor failed to timely file his tax returns for 1997,

1998, 2000, 2001, and 2002; he finally filed them in

October of 2007 and March of 2008. [Oct. 10, 2017 Tr.

10:21–25]. He did not pay the taxes when he filed these

returns. [Id. at 11:1–7]. The IRS advised him that he

owed taxes, but the Debtor did not respond. [Id. at 11:8–

15]. Therefore, the IRS pursued levy actions. [Id.]. In the

course of doing so, the IRS discovered that the Debtor

had deliberately withdrawn several hundred thousand

dollars from his accounts by obtaining multiple cashier's

checks. [Id. at 11:16–12:20, 62:9–66:9]. Indeed, the

Debtor admitted that he took these actions to avoid

paying the IRS. [Id. at 12:21–13:1]. As a result of the

Debtor's obstructionist tactics, the IRS referred his case

to the Department of Justice to file suit. [Id. at 14:3–9,

23:23–24:5].

3. The Debtor resides at the following address: 407

Greencove Street, Houston, Texas 77024–6734 (the

“Property”). [Doc. No. 14, p. 18 of 93]. The Debtor

claims the Property as his homestead. [Id.].

4. The Property has a present fair market value of

approximately $2.3 million. [Oct. 10, 2017 Tr. 30:21–

25].

5. According to the Debtor's Schedule D (entitled “Secured

Creditors”), the total amount of liens on the Property is

$1,068,207.78. [Doc. No. 14, p. 47 of 93].

6. Of this total amount of $1,068,207.78, the Debtor's

Schedule D represents that the IRS holds a lien in the

amount of $961,621.00. 2 [Id. at p. 45 of 93]. The

*768 remaining liens, which aggregate $106,586.78,

are all held by two taxing authorities: the Spring Branch

Independent School District and the Harris County Tax

Assessor–Collector.

7. Based upon the Debtor's schedules and his testimony at

the October 10 hearing, the Court finds that the Property

has equity in the approximate amount of $1.3 million.

8. The Debtor is presently married to Gaia Mosher (“Ms.

Mosher”). The Debtor and Ms. Mosher are presently

engaged in a very acrimonious divorce proceeding

pending in the District Court of Harris County, Texas.

The suit is styled Gaia T. Mosher v. Laurance C. Mosher,

Jr., Cause No. 2015–47158, in the 257th District Court

of Harris County, Texas (the “Divorce Suit”).

9. On February 11, 2016, the USA initiated the Tax Suit by

filing a complaint against the Debtor, Ms. Mosher, the

Harris County Tax Assessor–Collector, and the Spring

Branch ISD Tax Assessor–Collector. The complaint

asserts that the Debtor failed to pay income taxes for the

tax years 1997, 1998, 2000, 2001, and 2002, and that he

owes the USA the sum of $968,001.16. [USA's Ex. No.

1]. The USA requests District Judge Ellison to enter an

order that: (a) declares that the Debtor owes the amount

of $968,001.16 to the USA; (b) declares the USA to hold

a valid lien in this amount on all property owned by the

Debtor, including the Property; and (c) allows the USA

to foreclose its lien on the Property. [Id.].

10. The Debtor retained counsel to defend him in the Tax

Suit, and this attorney filed an answer on April 4, 2016.

[USA's Ex. No. 5].

11. The other defendants also retained counsel, each of

whom thereafter timely filed answers to the complaint

for their respective clients. [Id.].

12. On March 16, 2017, the USA and the Debtor entered

into a settlement agreement. Under the agreement, the

Debtor was to make a payment within 120 days (or by

July 14, 2017) in lieu of the USA foreclosing the tax lien

on the Property. Additionally, under the agreement, if the

Debtor did not make the payment, the parties agreed to

the entry of an agreed judgment that the Debtor owed the

subject income taxes and that the USA could foreclose

its federal tax lien on the Property, sell the Property and

apply the sale proceeds against his tax liability. [Doc. No.

32, p. 3 ¶ 9]; [Doc. No. 34, p. 2 ¶ 9 (Debtor's response

admitting these allegations) ].

13. Counsel for the USA and counsel for the Debtor

signed a two-page agreed judgment that the parties

agreed would be submitted to District Judge Ellison for

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signature if the Debtor did not pay off the lien held by the

USA by July 14, 2017 (the “Agreed Judgment”). [USA's

Ex. No. 2]. The Agreed Judgment was not filed with the

District Court; rather, counsel for the USA has held the

judgment with the expectation that it would be submitted

to District Judge Ellison if the Debtor failed to make

payment within the 120–day period—i.e., by July 14,

2017.

14. On March 21, 2017, the USA, the Debtor, and all

other parties filed a joint motion to stay deadlines in the

Tax Suit. [USA's Ex. No. 3]. This motion gave District

Judge Ellison notice that the USA and the Debtor had

entered into a settlement agreement. *769 Specifically,

this motion, in pertinent part, represented the following:

On March 16, 2017, the United States and Laurance

C. Mosher, Jr. entered into a settlement agreement.

Under the agreement, Mr. Mosher will make a

payment within 120 days in lieu of the United States

foreclosing the tax lien on the property. Accordingly,

based on this settlement there is no need to continue

discovery and litigate the issues in this matter.

However, if Mr. Mosher defaults under the settlement

agreement, the United States will move forward to

foreclose the tax liens against the property. And if

this occurs, discovery and further litigation will be

necessary to determine the interest of the parties in

the property. Thus, the deadlines for discovery and

motions should be stayed.

[USA's Ex. No. 3]. In reliance upon the representations

made in the joint motion, District Judge Ellison granted

the relief requested and signed an order staying the

deadlines in the Tax Suit. [Civ. Act. No. 4:16–cv–00369,

Doc. No. 40].

15. In order to pay off the USA's lien, the Debtor attempted

to obtain a reverse mortgage on the Property. [Oct. 10,

2017 Tr. 41:13–23]. However, on June 23, 2017, he

received notice from the proposed lender (HomeBridge

Financial Services, Inc.) that his reverse mortgage

application had been denied. [Id.]; [USA's Ex. No. 8].

The Debtor thereafter failed to pay off the tax lien by

the deadline of July 14, 2017 imposed by the settlement

agreement.

16. On July 19, 2017, counsel for the Debtor, counsel for

the USA, and counsel for all of the other parties in

the Tax Suit filed a joint status report that included the

following language:

The issues between the United States and Laurance

C. Mosher have been resolved and the United

States anticipates filing an Agreed Judgment Against

Laurance C. Mosher shortly. Accordingly, the United

States intends to move forward to foreclose the tax

liens against the property. However, the interests,

if any, of Defendant Gaia Mosher in the property

remain to be determined by this Court. Accordingly,

the parties request that the matter be reinstated and

a scheduling order be entered to allow for a short

discovery period and dispositive motion deadline.

[USA's Ex. No. 4].

17. In order to prevent counsel for the USA from submitting

the Agreed Judgment to District Judge Ellison—thereby

allowing the USA to foreclose its lien on the Property—

the Debtor filed a Chapter 13 petition on July 24, 2017.

[Oct. 10, 2017 Tr. 35:11–13]. At some point between

July 19, 2017 and July 24, 2017, the Debtor decided

that, contrary to the terms of the settlement agreement,

he wanted to continue residing at the Property, and he

therefore now opposes the USA foreclosing its tax lien

thereon. [See Oct. 10, 2017 Tr. 50:1–2, 54:12–13].

18. The Debtor's schedules represent that the Debtor has

the following debts:

a. $961,621.00 secured claim of the IRS

b. $29,901.26 secured claim of the Harris County Tax

Assessor–Collector

c. $9,047.03 secured claim of the Harris County Tax

Assessor–Collector

d. $54,563.40 secured claim of Spring Branch ISD

Tax Office

e. $12,547.18 secured claim of Spring Branch ISD Tax

Office

f. $527.91 secured claim of Spring Branch ISD Tax

Office

*770 g. $2,500.00 priority, unsecured claim of J.

Thomas Black, P.C.

h. $7,841.00 non-priority, unsecured claim of Capital

One

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i. $8,187.83 non-priority, unsecured claim of Capital

One

j. $23.00 non-priority, unsecured claim of Citicards

Cbna

k. $12,741.00 non-priority, unsecured claim of

JPMorgan Chase Bank

l. $8,919.00 non-priority, unsecured claim of

JPMorgan Chase Bank

[Doc. No. 14, pp. 44–53 of 93].

19. In his Schedule I, the Debtor represents that he

has monthly income of $11,531.22, which includes his

monthly social security check, his monthly pension

payment from Fulbright & Jaworski, income from

legal services that he continues to render, and other

miscellaneous income. [Id. at p. 60 of 93].

20. The Debtor's proposed plan as of the October 10

hearing on the Motion calls for the Debtor to make 36

monthly payments to the Chapter 13 trustee, with the

first payment to be in the amount of $1,000.00, the next

34 payments to each be in the amount of $2,200.00, and

the final payment to be in the amount of $45,000.00—

for an aggregate amount of $120,800.00. [Doc. No. 41].

Additionally, pursuant to paragraph 17 of the plan, as

well as the Debtor's testimony, the Debtor also proposes

to obtain a reverse mortgage on the Property to satisfy in

full all of the taxes owed on the Property. [Id. at p. 8 of

11]; [Oct. 10, 2017 Tr. 47:17–25, 54:2–7]. The funds to

be received from the reverse mortgage will be paid in a

balloon payment in month 36 and will be used to retire

all of the Debtor's tax liens. [Oct. 10, 2017 Tr. 48:3–6,

54:8–11]. Thus, the Debtor's plan allows him to keep the

Property and continue to reside there and bars the USA

from foreclosing its lien on the Property.

III. Credibility of Witnesses

Two witnesses testified at the October 10 hearing: James

Ashton, a special compliance revenue officer with the IRS,

and the Debtor. The Court finds that both of these individuals

gave forthright answers to the questions posed to them;

therefore, the Court finds their testimony to be credible and

gives their testimony equal weight.

IV. Conclusions of Law

A. Jurisdiction, Venue, and Constitutional Authority to

Enter a Final Judgment

1. Jurisdiction

This Court has subject matter jurisdiction over this contested

matter pursuant to 28 U.S.C. §§ 1334(b) and 157(a). Section

1334(b) provides that “the district courts shall have original

but not exclusive jurisdiction of all civil proceedings arising

under title 11 [the Code], or arising in or related to cases under

title 11.” District courts may, in turn, refer these proceedings

to the bankruptcy judges for that district. 28 U.S.C. § 157(a).

In the Southern District of Texas, General Order 2012–6

(entitled General Order of Reference) automatically refers all

eligible cases and proceedings to the bankruptcy courts.

This matter is a core proceeding because it is a request to lift

the automatic stay, and such a request is expressly defined as a

“core proceeding” pursuant to 28 U.S.C. § 157(b)(2)(G). This

dispute is also core under the general “catch-all” language

because such a dispute is the type of proceeding that can only

arise in the context of a bankruptcy case. See In re Southmark

Corp., 163 F.3d 925, 930 (5th Cir. 1999) (“[A] proceeding

is core under § 157 *771 if it invokes a substantive right

provided by title 11 or if it is a proceeding that, by its

nature, could arise only in the context of a bankruptcy case.”).

Prosecution of a motion to lift the automatic stay pursuant to

§ 362(d) can only occur in a bankruptcy court. There is no

state law equivalent of this action.

2. Venue

Venue is proper pursuant to 28 U.S.C. § 1408(1).

3. Constitutional Authority to Enter a Final Order

There is no question that an order lifting the automatic stay

is a final order. Matter of Chunn, 106 F.3d 1239, 1241

(5th Cir. 1997) (holding that an order granting relief from

the automatic stay is a final order). The Supreme Court's

decision in Stern v. Marshall recognized certain limitations

on bankruptcy courts' authority to enter final orders. 564 U.S.

462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Therefore,

this Court has a duty to question its constitutional authority

to enter a final order for any matter brought before it. The

Court concludes that the facts in the pending matter are

distinguishable from those in Stern, and that this Court has

the authority to enter a final order on the Motion.

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In Stern, the debtor filed a counterclaim based solely on state

law, and the resolution of this counterclaim did not resolve the

validity, or invalidity, of the claim held by the defendant. Id.

Here, the matter before the Court is not a counterclaim by the

Debtor or the estate brought pursuant to state law, but rather

is a request from a creditor—the USA—to lift the automatic

stay pursuant to § 362(d), which is an express provision of the

Bankruptcy Code. Therefore, this Court has the constitutional

authority to enter a final order in this dispute.

Finally, in the alternative, this Court has the constitutional

authority to enter a final order on the Motion because

the Debtor and the USA have consented, impliedly if not

explicitly, to adjudication of this dispute by this Court.

Wellness Int'l Network, Ltd. v. Sharif, ––– U.S. ––––, 135

S.Ct. 1932, 1947, 191 L.Ed.2d 911 (2015) (“Sharif contends

that to the extent litigants may validly consent to adjudication

by a bankruptcy court, such consent must be expressed. We

disagree. Nothing in the Constitution requires that consent

to adjudication by a bankruptcy court be expressed. Nor

does the relevant statute, 28 U.S.C. § 157, mandate express

consent....”). Indeed, the USA filed the Motion, the Debtor

filed his response in opposition thereto, and the parties

proceeded to adduce testimony and introduce exhibits at the

hearing held on October 10, 2017. Moreover, they thereafter

filed briefs in support of their respective positions. At no

time did either party object—orally or in writing—to this

Court's authority to enter a final order on the Motion. If these

circumstances do not constitute consent, nothing does.

B. Applicable Law

There are two avenues available under § 362 for a creditor to

obtain a lifting of the stay. First, under § 362(d)(2), a creditor

can obtain a lifting of the stay if two elements are satisfied: (1)

the property that is the subject of the motion has no equity; and

(2) the property is not necessary to an effective reorganization

of the debtor. In the matter at bar, the Property unquestionably

has substantial equity—approximately $1.3 million. [Finding

of Fact No. 7]. Therefore, the USA cannot obtain a lifting of

the stay under § 362(d)(2).

*772 That leaves the other avenue for the USA to pursue.

Under § 362(d)(1), a creditor can obtain a lifting of the stay

“for cause.” The term “cause” is not defined in the Code.

Whether cause exists is a fact-intensive inquiry that must be

determined on a case-by-case basis. In re Xenon Anesthesia of

Texas, PLLC, 510 B.R. 106, 112 (Bankr. S.D. Tex. 2014); In

re Bovino, 496 B.R. 492, 502 (Bankr. N.D. Ill. 2013). “Each

case must be viewed on the basis of its own particular facts,

and there must be a balancing of the interest of the debtor

with the interest of the secured creditor in its collateral.” In re

Bovino, 496 B.R. at 502. “The decision of whether to lift the

stay is committed to the discretion of the bankruptcy judge.”

In re Syndicom Corp., 268 B.R. 26, 43 (Bankr. S.D.N.Y.

2001). Finally, “[t]he burden of proof on a motion to lift the

automatic stay is a shifting one: section 362(d)(1) requires

an initial showing of cause by the movant; then, with the

exception of the debtor's equity in the property (which is not

at issue on a motion under section 362(d)(1), like this one),

section 362(g) places the burden of proof on the debtor for all

other issues.” Id.

C. Factors to Consider When Assessing Whether to Lift

the Automatic Stay for Cause

One court has stated that:

Factors generally looked to in

determining whether to modify the

stay for cause include interference

with the bankruptcy, good or bad

faith of the debtor, injury to the

debtor and other creditors if the stay

is modified, injury to the movant

if the stay is not modified, and

the proportionality of the harms

from modifying or continuing the

stay.” None of these factors alone is

outcome determinative. The factors

in the present case must be weighed

within the context of all the relevant

circumstances. Courts must weigh the

costs and benefits of maintaining the

stay.

In re Bovino, 496 B.R. at 502 (citations omitted).

Aside from these factors, one of the undersigned judge's

former colleagues (now retired) set forth various factors to

consider in specifically determining whether to lift the stay

to allow litigation against the Debtor to proceed in another

forum—which is exactly what the USA is requesting to do

here, as it wants to proceed to file the Agreed Judgment in

the Tax Suit. [See Finding of Fact No. 16]. In In re Xenon

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Anesthesia of Texas, PLLC, Bankruptcy Judge Letitia Paul,

citing several prior cases, set forth twelve factors to consider:

1) whether the relief will 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 Debtor as a fiduciary; 4)

whether a specialized tribunal has

been established to hear the particular

cause of action; 5) whether the

debtor's insurer has assumed full

responsibility; 6) whether the action

primarily involves third parties; 7)

whether litigation in the other 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 would

result in a judicial lien avoidable by

the debtor; 10) interests of judicial

economy and the expeditious and

economical resolution of litigation;

11) whether the proceedings have

progressed to the point that parties are

ready for trial; and 12) impact of the

stay on the parties and the balance of

harm.

510 B.R. 106, 112 (Bankr. S.D. Tex. 2014) (citations omitted).

*773 In total, Bovino and Xenon articulate a universe of

seventeen factors to consider in evaluating whether cause

exists to lift the stay. This Court believes that some, but not all,

of these factors are relevant in the dispute at bar. This Court

will therefore address those factors that it believes are relevant

in determining whether to lift the automatic stay for cause to

allow the USA to proceed forward in the Tax Suit.

1. Good or Bad Faith of the Debtor

The Debtor's conduct has been less than stellar. First, he is

an attorney at law, [Finding of Fact No. 1], who has a duty

to follow the law. Yet, he thumbed his nose at the law by

failing to timely file numerous tax returns and paying taxes.

Matter of Crayton, 169 B.R. 243, 245 (Bankr. S.D. Ga. 1994)

(“The Internal Revenue Code imposes a duty to file federal

income tax returns.”) (citing 26 U.S.C. §§ 6001, 6011); In re

Vines, 200 B.R. 940, 944 (M.D. Fla. 1996) (stating that the

debtor's argument that filing a tax return is purely voluntary

as “entirely meritless and is clearly contrary to established

law” and that “[i]n addition to the legal requirement, the filing

of taxes is also a necessary element for full disclosure in the

bankruptcy court which is a court of equity.”). Second, he

was a partner at one of the largest law firms in the country,

[Finding of Fact No. 1], so he was doubtless generating

substantial income; yet, he chose not to pay taxes for several

years while practicing law at this firm, [Finding of Fact No.

2]. Third, when the IRS tried to communicate with him in

an effort to negotiate payment of the past due taxes, he gave

the IRS the silent treatment. [Id.]. Further, when the IRS

initiated levy actions to collect the taxes, the Debtor quickly

withdrew hundreds of thousands of dollars by obtaining

cashier's checks. [Id.]. Fifth, once the USA sued him in the

Tax Suit, he entered into a settlement agreement promising

to pay the past due taxes by July 14, 2017, or, if he failed

to do so, to allow the USA to submit the Agreed Judgment

to the District Court so that the USA could foreclose its lien

on the Property. [Finding of Fact No. 12]. But then, when he

failed to pay off the taxes by the deadline, the Debtor reneged

on the settlement agreement by filing this Chapter 13 petition

and informing this Court that he wants to keep the Property.

[Finding of Fact No. 17].

Overall, the Court finds the Debtor's conduct to be shameful

and, accordingly, finds him to be in bad faith. But, there

is more. By filing his Chapter 13 petition and taking the

position that the USA should not be able to foreclose its lien

on the Property, the Debtor is undermining the integrity of

the judicial process. This Court, now invoking the doctrine

of judicial estoppel, will not allow the Debtor to continue to

pursue this strategy.

Judicial estoppel should apply when the following elements

are present: “(1) the party against whom judicial estoppel

is sought has asserted a legal position which is plainly

inconsistent with a prior position; (2) a court accepted the

prior position; and (3) the party did not act inadvertently.”

Reed v. City of Arlington, 650 F.3d 571, 574 (5th Cir. 2011).

Here, in the Tax Suit, the Debtor asserted a specific position in

the joint motion to stay deadlines: namely, that he had settled

with the USA, one of the terms of which is that he would pay

off the tax lien by July 14, 2017, or else allow the USA to

foreclose its lien on the Property. [Finding of Fact No. 14].

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The Debtor made this representation to District Judge Ellison

in order to convince him to abate the deadlines imposed by

the District Court in the Tax Suit. [Id.]. District Judge Ellison,

in reliance upon the representation by the Debtor that he had

settled with the USA, approved the motion and signed the

order. [Id.]. Stated differently, District *774 Judge Ellison

accepted the Debtor's position that he had settled with the

USA.

However, when the Debtor failed to pay off the tax lien by

the July 14, 2017 deadline, rather than abide by the terms of

the settlement agreement, he filed his Chapter 13 petition and

proceeded to file a plan proposing to allow him to keep the

Property and also opposed the Motion by vigorously arguing

that the stay should not be lifted. Thus, the Debtor is now

asserting a legal position (i.e., that no cause exists to allow the

USA to submit the Agreed Judgment so that it can foreclose

on the Property) that is plainly inconsistent with his prior

position in the Tax Suit (i.e., that the USA should be allowed

to submit the Agreed Judgment if he fails to pay the tax lien

by July 14, 2017).

Moreover, the Debtor's filing of his Chapter 13 petition, the

filing of his proposed plan allowing him to keep the Property

and to continue to reside thereon, and his vigorous opposition

to the Motion are not inadvertent acts. He has intentionally

undertaken this strategy in a last ditch effort to thwart the

USA. This Court will not allow the Debtor to do so. Pursuant

to the doctrine of judicial estoppel, this Court finds that the

Debtor is estopped from now arguing that the USA should

not be allowed to submit the Agreed Judgment to District

Judge Ellison. Stated differently, the Debtor's actions have

undermined the integrity of the judicial process, which means

that the Debtor has acted in bad faith.

For all of the reasons set forth above, this factor strongly

favors lifting the automatic stay.

2. Injury to the Debtor and Other Creditors if the Stay is

Lifted

Lifting the stay to allow the USA to submit the Agreed

Judgment to the District Court will presumably lead to a

foreclosure sale on the Property. Such an action will not

harm the taxing authorities because their liens will be paid

prior to the tax lien held by the IRS. Moreover, the Debtor's

unsecured creditors, who hold aggregate debts of $40,211.83,

[see Finding of Fact No. 18], can be paid from the Debtor's

substantial monthly income of $11,531.22, [see Finding of

Fact No. 19]. Indeed, that is what the Debtor's plan essentially

proposes. [See Finding of Fact No. 20]. Accordingly, these

creditors are not harmed if the stay is lifted. The Debtor's wife,

Ms. Mosher, will not be harmed, either. She and the Debtor are

in divorce proceedings, and she is not residing at the Property,

as she moved out after the divorce petition was filed.

So, if there is anyone harmed by lifting of the stay, it will

only be the Debtor. However, it is not as if he will be out on

the streets without a roof over his head. The Property—which

has substantial equity, [Finding of Fact No. 7], will indeed

be sold, but in a deliberate, well-advertised sale pursuant to

IRS procedures, so it is highly likely that after all tax liens are

paid from the sale proceeds, there will be substantial funds

remaining that will be remitted to the Debtor. Accordingly, he

will be able to purchase a new homestead, although perhaps

not as palatial as the Property. Given the Debtor's bad faith

conduct, as already described above, the Court finds that any

such harm is de minimis.

In sum, this factor favors a lifting of the stay.

3. Injury to the Movant if the Stay is Not Lifted

The Debtor argues that if the stay is not lifted, the Movant

will not be injured because the Property has substantial equity.

Hence, so the argument goes, if the Property ever has to be

sold, there will be sufficient proceeds to completely retire the

USA's lien.

*775 If the Debtor had not entered into the settlement

agreement and signed the Agreed Judgment, [see Finding of

Fact Nos. 12 & 13], his argument would have much merit.

However, by signing these documents and also filing the joint

motion to stay deadlines, [Finding of Fact Nos. 12, 13, & 14],

the Debtor was able to convince the USA to stand down in

the Tax Suit for several months to allow him time to obtain

a reverse mortgage on the Property in order to retire the tax

lien. [Finding of Fact No. 14]. However, he failed to procure

a reverse mortgage and instead of abiding by the terms of

the settlement agreement and allowing the USA to foreclose

on the Property, the Debtor has reneged on the terms and is

now using his Chapter 13 case to buy more time to obtain

a reverse mortgage. [Finding of Fact Nos. 15 & 17]. The

injury to the USA if this Court does not lift the stay, therefore,

is that it will not receive the benefit of the bargain it made

when it entered into the settlement agreement. This injury is

significant for two reasons. First, as already discussed above,

the Debtor's actions undermine the integrity of the judicial

system. Second, the taxes owed by the Debtor have remained

unpaid for approximately twenty years while the Debtor has

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continued to live the “life of Riley” in what is accurately

described as a mansion in the Piney Point neighborhood of

Houston, Texas.

For all of these reasons, the Court finds that if it does not lift

the stay to allow the USA to submit the Agreed Judgment

to District Judge Ellison, then the USA will be substantially

injured.

4. Whether the Relief will Result in a Partial or Complete

Resolution of the Issues

Lifting the stay to allow the Tax Suit to proceed will definitely

result in a partial resolution of the issues in the Tax Suit.

Specifically, if the stay is lifted, the USA would be free to

submit the Agreed Judgment to District Judge Ellison. His

entering the Agreed Judgment would resolve a major issue

of the Tax Suit: namely, whether the USA should be allowed

to foreclose on the Property. The remaining issue left for

resolution would be whether Ms. Mosher has an interest in

the Property.

Under these circumstances, this factor weighs in favor of

lifting the automatic stay.

5. Whether the Judgment Claim Arising from the Other

Action is Subject to Equitable Subordination

The Agreed Judgment to be submitted to District Judge

Ellison is not subject in any way to equitable subordination.

There is absolutely nothing in the record to indicate that the

USA has taken any actions that merit equitable subordination

of its tax lien.

Under these circumstances, this factor weighs in favor of

lifting the automatic stay.

6. Whether the Movant's Success Would Result in a

Judicial Lien Avoidable by the Debtor

The movant here—the USA—holds a valid tax lien on the

Property. There is no judicial lien that could be avoidable by

the Debtor in this Chapter 13 case.

Under these circumstances, this factor weighs in favor of

lifting the automatic stay.

V. Conclusion

In assessing whether cause exists to lift the stay, this Court

finds that the factors discussed above strongly weigh in favor

of *776 immediately lifting the automatic stay for cause.

Lifting the stay will allow the USA to submit the Agreed

Judgment to the District Court, and to take all other actions

necessary to protect its lien in the Tax Suit—and, additionally,

to bring to closure the major issue in the Tax Suit: namely,

allowing the USA to foreclose its tax lien on the Property.

Admittedly, the Debtor, who is a 77-year-old man, will lose

his homestead, but he has only himself to blame. He has

been gaming the system for much too long by first not

filing tax returns, and then not paying past due taxes, and

then deliberately moving substantial sums of money to avoid

the IRS' efforts to collect the taxes, and then negotiating a

settlement in the Tax Suit, but then reneging on the terms of

this settlement by filing the petition initiating this Chapter 13

case. The Debtor is highly sophisticated individual who has

shirked too many of his responsibilities. It is time to draw the

line in the dust and bring an end to his gamesmanship. The

Court does so by lifting the automatic stay immediately so

that the USA can proceed to submit the Agreed Judgment to

the District Court in the Tax Suit.

An order consistent with these Findings of Fact and

Conclusions of Law is entered simultaneously on the docket

herewith.

All Citations

578 B.R. 765

Footnotes

1 Any reference to a “Rule” is a reference to the Federal Rules of Bankruptcy Procedure. Further, any reference

to “the Code” refers to the United States Bankruptcy Code, and reference to any section (i.e., §) refers to a

section in 11 U.S.C., which is the United States Bankruptcy Code, unless otherwise noted.

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2 The IRS has filed a proof of claim setting forth that its secured claim is $969,353.95. [USA's Ex. No. 7].

Therefore, the parties do not materially disagree on the amount of the USA's lien.

End of Document © 2020 Thomson Reuters. No claim to original U.S. Government Works.

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APPENDIX A-

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Ledet v. K-Mart Corp., Not Reported in F.Supp.2d (2005)

2005 WL 357174

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2005 WL 357174

Only the Westlaw citation is currently available.

United States District Court,

E.D. Louisiana.

Annette LEDET, wife of,

Patrick Ledet, and Lisa Land

v.

K-MART CORPORATION

No. Civ.A. 01-2485.

|

Feb. 11, 2005.

Attorneys and Law Firms

Michael Hudson Ellis, Chehardy, Sherman, Ellis, Breslin,

Murray & Recile LLP, Metairie, LA, for Plaintiffs.

Jack Etherton Truitt, Ingrid Cruz, The Truitt Law Firm,

Madisonville, LA, for Defendant.

ORDER AND REASONS

BERRIGAN, J.

*1 Before the Court is Defendant K-Mart Corporation's

(“K-Mart”) Motion for Dismissal with prejudice under

Fed.R.Civ.P. 12(b)(6). After considering the motion and

memorandum in support, the memorandum in opposition

thereto, and the applicable law, the Court hereby DENIES the

Motion to Dismiss.

I. Background

This case originated as a personal injury suit under the Court's

diversity jurisdiction pursuant to 28 U.S.C. § 1332 after the

plaintiffs, Annette Ledet and Lisa Land, alleged they were

struck by falling boxes in the defendant's store in Boutte,

Louisiana. (Rec. Doc. 1 at 2). However, before the case was

settled or proceeded to trial, K-Mart filed for Chapter 11

bankruptcy protection in the Northern District of Illinois.

(Rec.Doc. 16). The next day, on February 2, 2002, this Court

administratively closed the case. (Rec.Doc. 17). While the

Court retained original jurisdiction, the parties were given

leave to return the matter to the trial docket upon the filing

of a motion. (Id.)

Meanwhile in the bankruptcy proceeding, the Bankruptcy

Court on April 1, 2004 issued an Order Disallowing and

Expunging or Otherwise Reducing or Reclassifying Certain

Claims Set Forth in the Twenty-First Omnibus Objection

(Certain Personal Injury and Other Claims) [hereinafter

“Reclassification Order”], under its jurisdiction over the core

proceeding pursuant to 28 U.S.C. §§ 157(b)(2) and 1334.

1

Under this Reclassification Order, the value of the plaintiff's

personal injury claim was set at $5,000, with no apparent

challenge to this sum by the plaintiffs. 2 (Rec. Doc. 18 at 2-3,

Ex. 1). On July 30, 2004, a few days before the instant Motion

to Dismiss was filed, the defendant's former counsel, Jack

Truitt, allegedly contacted the plaintiffs by mail indicating

that the value of the claim to be settled was $15,000, and that

a settlement draft with said sum was “in the process of being

mailed.” 3 (Rec.Doc. 23, Ex. A).

II. Law and Analysis

Defendant argues that the Reclassification Order resolved

the claim that gave rise to the tort action before this Court,

thus permitting dismissal under Fed.R.Civ.P. 12(b)(6). (Rec.

Doc. 18 at 3). While the plaintiffs appear to concede the

validity of the Reclassification Order, they allege that no

such settlement draft reached their counsel. Plaintiffs further

allege that neither the defendant's former counsel (Truitt) nor

its new counsel, Neil Abramson of Phelps Dunbar, LLC,

have forwarded an amount for settlement as required under

the Reclassification Order. (Rec.Doc. 23). Nonetheless, the

defendant requests that the Court dismiss the underlying

claims.

The Court cannot grant the defendant's request because to do

so would violate the automatic stay on proceedings, which the

defendant itself noticed on January 31, 2002. The filing of a

petition for Chapter 11 bankruptcy

operates as a stay, applicable to all

entities, of the commencement or

continuation, including the issuance or

employment of process, of a judicial,

administrative, or other action or

proceeding against the debtor that

was or could have been commenced

before the commencement of the case

under this title, or to recover a claim

against the debtor that arose before the

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commencement of the case under this

title.

*2 11 U.S.C. § 362(a)(1) (emphasis added). The Fifth

Circuit has broadly construed “continuation” in subsection (a)

(1) to encompass any change or occurrence in the action. See

Pope v. Manville Forest Products Corp., 778 F.2d 238 (5th

Cir.1985). In Manville, the appeals court unequivocally found

that the automatic stay under § 362(a)(1) affected motions for

dismissal:

[O]rdinarily the stay must be construed

to apply to dismissal as well.

First, if either of the parties takes

any step to obtain dismissal, such

as motion to dismiss or motion

for summary judgment, there is

clearly a continuation of the judicial

proceeding. Second, in the more

technical sense, just the entry of an

order of dismissal, even if entered

sua sponte, constitutes a judicial act

toward the disposition of the case

and hence may be construed as a

‘continuation’ of a judicial proceeding.

Third, dismissal of a case places the

party dismissed in the position of

being stayed ‘to continue the judicial

proceeding,’ thus effectively blocking

his right to appeal. Thus, absent the

bankruptcy court's lift of the stay, or

perhaps a stipulation of dismissal, a

case such as the one before us must, as

a general rule, simply languish on the

court's docket until final disposition of

the bankruptcy proceeding.

Manville Forest Products Corp., 778 F.2d at 239. In the

instant case, the Court administratively closed the plaintiffs'

case to avoid the inadvertent languishing referenced in the

Manville decision.

The Court denies the defendant's motion on four grounds.

First, contrary to the Court's Order, K-Mart failed to petition

the Court to re-open the case such that it could file its 12(b)(6)

motion. (See Rec. Doc. 17). Second, to the knowledge of the

undersigned, the Bankruptcy Court in the Northern District

of Illinois has not lifted the stay. Third, as mentioned above,

an adjudication of the defendant's motion would constitute

a continuation of judicial action in violation of § 362(a)(1).

Finally, as the disposition of the Reclassification Order is

satellite to the core proceeding 4 and falls within the purview

of the Bankruptcy Court, the Bankruptcy judge is obviously

best positioned to remove whatever barriers to the resolution

of the plaintiffs' claims. The defendant is thus directed to

file any dispositive motions in the Bankruptcy Court. The

plaintiffs are likewise instructed to address themselves to

the Bankruptcy Court should they feel that the defendant is

dilatory in satisfying the command of the Reclassification

Order with respect to their pending tort claim.

Accordingly,

IT IS ORDERED that Defendant's Motion to Dismiss

be DENIED, and that the above-caption case remain

ADMINISTRATIVELY CLOSED.

All Citations

Not Reported in F.Supp.2d, 2005 WL 357174

Footnotes

1 K-Mart had filed its Twenty-First Omnibus Objection to facilitate the resolution of a large number of tort claims

asserted against it in the Chapter 11 bankruptcy proceeding.

2 It is undisputed that prior to the reclassification, the plaintiffs had leave from the Bankruptcy Court to proceed

with their claim when they were unable to settle with K-Mart under the Bankruptcy Court's Order Approving

Procedures for Liquidating and Settling Personal Injury Claims Through Direct Negotiation and/or Alternative

Dispute Resolution issued on July 18, 2002.

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3 The Court notes in passing the discrepancy of $10,000 between the value assigned to the claim under the

Reclassification order and the apparent settlement offer in Mr. Truitt's correspondence.

4 Under § 157(b)(2)(B), a core proceedings includes “allowance or disallowance of claims against the estate or

exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming

a plan under chapter 11.”

End of Document © 2020 Thomson Reuters. No claim to original U.S. Government Works.

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APPENDIX A-

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Ledo Pizza System, Inc. v. Singh, Not Reported in F.Supp.2d (2013)

2013 WL 5604339

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2013 WL 5604339

Only the Westlaw citation is currently available.

United States District court, D.

Maryland, Northern Division.

LEDO PIZZA SYSTEM, INC., et al., Plaintiffs,

v.

Inderjit SINGH, et al., Defendants.

Civil No. WDQ–13–2365.

|

Oct. 10, 2013.

MEMORANDUM OPINION

WILLIAM D. QUARLES, JR., District Judge.

*1 Ledo Pizza System, Inc. and Ledo Pizza Carryouts, Ltd.

(collectively “Ledo”) sued Defendants Tri–Bro, Inc. (“Tri–

Bro”) and Inderjit Singh for violations of the Lanham Act,

and other claims. ECF No. 1. Pending is Ledo's motion for

a temporary restraining order and preliminary injunction.

ECF No. 2–1. No hearing is necessary on the motion for a

temporary restraining order (“TRO”). See Local Rule 105.6

(D.Md.2012). For the following reasons, Ledo's motion for a

TRO will be granted in part and denied in part.

I. Background 1

On June 8, 2007, Ledo and the defendants signed a franchise

agreement, which authorized the defendants to operate a

Ledo pizza restaurant in Lorton, Virginia. ECF No. 2–1 at

2. Beginning in 2010, the defendants defaulted on several

of their obligations under the agreement. Id. at 3. According

to Ledo, the defendants now owe Ledo tens of thousands

of dollars in overdue franchise and other fees. ECF No. 4

at 9 ¶ 47. On May 14, 2012, Ledo terminated the franchise

agreement. ECF No. 2–1 at 3.

On May 31, 2012, Ledo and the defendants entered

into a forbearance agreement. ECF No. 2–1 at 4. Under

this agreement, Ledo refrained from exercising its posttermination rights under the franchise agreement, to give the

defendants an opportunity to sell the franchise or dispose

of its assets. ECF No. 2–1 at 4–5. Although this agreement

expired in November 1, 2012, ECF No. 2–8 at 2, Ledo agreed

in June 2013 to extend the forbearance period to July 31,

2013. ECF No. 2–1 at 5. 2 Ledo contends that the defendants

continued to operate the franchise following the termination

of the franchise agreement and after the forbearance periods.

Id.

On August 14, 2013–two weeks after the extended

forbearance period-Ledo moved for a TRO and a preliminary

injunction. ECF No. 2–1. The motion seeks to enjoin the

defendants from the continued use of Ledo's trademark and

trade dress, allegedly in violation of the Lanham Act and

Ledo's common law trademark rights. Id. at 6.

Ledo also seeks the defendants' compliance with the posttermination obligations in the franchise agreement, id. at 8, 3

and the agreement's covenant-not-to-compete, id. at 12–13. 4

The amended complaint seeks a permanent injunction, see

e.g., ECF No. 4 at 17, and specific performance, ECF No. 4 at

12–15. Ledo also requests damages for breach of contract 5

and costs and attorneys' fees against defendant Singh only,

because Tri–Bro had declared bankruptcy. 6See id. at 216, 12.

Both Defendants were served on August 19, 2013. ECF No. 7;

ECF No. 8. The parties held a telephone conference on August

22, 2013, during which counsel for Tri–Bro confirmed that

the company had filed for Chapter 11 Bankruptcy protection.

Counsel for both defendants were instructed to file their

responses to Ledo's motion by mid-day August 26, 2013.

Only Tri–Bro's counsel responded and, by letter, declined to

file a response to the motion because Ledo no longer sought

damages against it. ECF No. 10. On August 30, 2013, the

parties jointly stipulated to entry of a consent order that would

have given the defendants 0 days to wind down the business,

after which the Court would order dismissal of the action or

grant injunctive relief depending on whether the defendants

complied with the agreement. See ECF No. 11 at 6–9. On

September 4, 2013, the Court informed the parties that, due to

concerns that the defendants would not have sufficient time to

wind down the business, it would not enter the consent order.

ECF No. 12. Instead, the Court would treat the consent order

as a tentative settlement and request to stay the litigation. Id.

On October 7, 2013, Ledo renewed its request for injunctive

relief, because the defendants did not comply with the terms

of the consent order. 7 ECF No. 13 at 5.

II. Analysis

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A. Bankruptcy Filing

*2 Although Tri–Bro has filed for bankruptcy, Ledo seeks

injunctive relief against it. ECF No. 4 at 2. Under 11 U.S.C.

§ 362, a bankruptcy petition “operates as a stay ... of ... the

commencement or continuation ... of a judicial ... action or

proceeding against the debtor that was or could have been

commenced before the commencement of the [bankruptcy

proceeding.]” § 362(a) (1). The plain text of the statute

suggests that the automatic stay provision applies to suits

for equitable relief. See id. In Advanced Computer Servs.

of Michigan, Inc. v. MAI Sys. Corp., 161 B.R. 771, 772,

774 (E.D.Va.1993),

8

 the plaintiffs sought declaratory and

injunctive relief after the defendant filed for bankruptcy.

The court held that the § 362 “automatic stay bars claims

for declaratory and injunctive relief, as well as claims for

monetary relief and that the stay also bars claims based on

conduct that commenced pre-petition and continues into the

post-petition period.” Id. at 772. 9

Ledo's amended complaint states that Tri–Bro filed for

bankruptcy on May 20, 2013. ECF No. 4–1 at 2. Ledo

contends that the basis for Ledo's motion for injunctive relief

is conduct before, and after, Tri–Bro's bankruptcy filing. See,

e.g., ECF 4–1 at 5, 8. Because Ledo seeks injunctive relief

against Tri–Bro for behavior that arose before and after the

petition was filed, the Court will reject Ledo's request for

injunctive relief against Tri–Bro. 10

B. Preliminary Injunction Standard 11

A preliminary injunction is an “extraordinary remed[y]

involving the exercise of very far-reaching power to be

granted only sparingly and in limited circumstances.”

MicroStrategy Inc. v. Motorola, Inc., 245 F.3d 335, 339

(4th Cir.2001) (internal quotation marks omitted). Because a

preliminary injunction “requires that a district court, acting

on an incomplete record, order a party to act, or refrain

from acting, in a certain way,” “[t]he danger of a mistake

in this setting is substantial.” Hughes Network Sys., Inc. v.

InterDigital Commc'ns Corp., 17 F.3d 691, 693 (4th Cir.1994)

(internal quotation marks omitted).

To obtain a preliminary injunction, the movant must

demonstrate that: (1) he is likely to succeed on the merits;

(2) he is likely to suffer irreparable harm absent preliminary

relief; (3) the balance of equities favors him; and (4) an

injunction is in the public interest. 12 The movant must show

more than a “grave or serious question for litigation;” instead,

he bears the “heavy burden” of making a “clear showing that

[he] is likely to succeed at trial on the merits.” Real Truth,

575 F.3d at 347, 351. All four elements must be satisfied. Id.

at 346.

C. Lanham Act Trademark Infringement

1. Likelihood of Success on the Merits

To prevail on its Lanham Act claims, Ledo must show that it

“has a valid, protect[a]ble trademark and that the defendant's

use of a colorable imitation of the trademark is likely to

cause confusion among consumers.” Lone Star Steakhouse &

Saloon, Inc. v. Alpha of Virginia, Inc., 43 F.3d 922, 930 (4th

Cir.1995) (citing 15 USC § 1141(1)). In a directly analogous

case involving a terminated pizza franchise agreement, the

court held that a franchisee's continued use of a franchisor's

trademarks following the termination of the agreement was

likely to cause confusion among consumers. See Prosperity

Systems, Inc. v. Ali, CIV. CCB–10–2024, 2010 WL 5174939,

at *2 (D.Md. Dec.15, 2010) (citing Merry Maids Ltd. P'ship v.

Kamara, 33 F.Supp.2d 443, 445 (D.Md.1998)). In this context

it is probable that consumers will be misled or confused “as

to the source of the goods in question.” See Ohio Learning

Ctrs., LLC v. Sylvan Learning, Inc., CIV.A. RDB–10–1932,

2012 WL 1067668, at *10 (D.Md. Mar.27, 2012).

13

*3 Ledo likely owns the trademark “Ledo Pizza.” 14

Here, the defendant is using Ledo's actual trademark,

not a “colorable imitation.” ECF No. 4 at 8. The

defendant's customers are likely to erroneously believe they

are patronizing an authorized Ledo restaurant. Ledo has

established its likelihood of success on the merits.

2. Irreparable Harm

Ledo argues that it has suffered irreparable harm from the

defendant's infringement of its trademark rights. ECF No. 2–

1 at 6–7. A finding of irreparable harm usually follows a

finding of unlawful use of a trademark and a likelihood of

confusion. 15

Ledo asserts that the defendant's continued use of its

trademark and trade dress, and his continued operation of a

now-unauthorized Ledo pizza restaurant “undermine[s] the

good will, reputation and loyal patronage” of Ledo. ECF No.

2–1 at 7. The defendant's customers erroneously believe that

the defendant's restaurant is an authorized Ledo franchise,

and expect that the restaurant will provide the quality of

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services and products received at authorized franchises. See

id. at 7, 11–12. Ledo can no longer control the quality of

products and services at the defendant's restaurant because of

the termination of the franchise agreement. Id. at 11. Ledo also

claims that the defendant's restaurant is diverting customers

from authorized Ledo franchises, decreasing Ledo's profits.

Id. This loss of control of the defendant's restaurant, the threat

to Ledo's reputation and goodwill, and the ongoing loss of

profits qualify as irreparable harm. See, e.g., Merry Maids, 33

F.Supp.2d at 445.

3. Balance of Equities

Ledo argues that the balance of equities favors it, because

“[t]he potential harm to the Defendants in granting [this

motion] ... is relatively minimal” compared to the harm Ledo

will suffer by defendant's continued infringement. ECF No.

2–1 at 7. Although several analogous cases conclude that

the balance of equities generally favors the franchisor, some

of these cases also recognized that the former franchisees

suffer great harm from the closure of their businesses. See

NaturaLawn, 484 F.Supp.2d at 403; Prosperity, 2010 WL

5174939, at *5. However, when the defendant's “hardships

have been created by their own willful acts,” the balance

favors the plaintiffs. 16

Here, it is likely that the defendant will suffer serious

economic harm from the closure of his restaurant, especially

since the defendant is apparently attempting to find a buyer

for the business or its assets. Nonetheless, the defendant's

hardship appears self-inflicted. Ledo has produced numerous

invoices sent to the defendant showing overdue balances

which demonstrate that the defendant was on notice of likely

termination of the franchise. ECF No. 2–5. The defendant

also received several letters from Ledo requesting that he

cease operating as a Ledo pizza restaurant following the

termination. See, e.g., ECF No. 1–5 at 2. Accordingly, the

balance of equities tips in Ledo's favor, despite the economic

hardship the defendant will likely suffer.

4. Public Interest

*4 Ledo argues that the public “has a strong interest

in the protection of trademarks,” justifying the injunction.

ECF No. 2–1 at 8. Several cases in this district emphasize

the public interest in enforcement of trademark rights,

particularly noting that the public has a strong interest in

avoiding consumer confusion “ ‘about the identity of the

enterprise from which goods and services are purchased.’ ”

See Prosperity, 2010 WL 5174939, at *6 (quoting Toolchex,

Inc. v. Trainor, 634 F.Supp.2d 586, 594 (E.D.Va.2008));

Merry Maids, 33 F.Supp.2d at 446. Because Ledo seeks to

protect its trademark rights, and so avoid consumer confusion,

the public interest favors granting Ledo's requested relief. See

Merry Maids, 33 F.Supp.2d at 446.

5. Ledo's Other Trademark Claims

Ledo also asserts common law trademark infringement

claims. See ECF No. 2–1 at 6–8. Because Ledo appears

to satisfy the requirements for an injunction on its Lanham

Act claims, granting this injunction, which prohibits further

infringement of Ledo's trademark by the defendant, will also

protect Ledo's common law trademark rights.

D. Contract Claims 17

1. Likelihood of Success on the Merits

Ledo is likely to establish that: (1) Ledo and the defendant

entered into a contract, the franchise agreement; 18 (2)

the franchise agreement was terminated; 19 and (3) the

agreement requires defendant's compliance with several

post-termination obligations, including the covenant-not-tocompete. 20 As Ledo has failed to establish the requisite

imminent irreparable harm for entitlement to immediate

injunctive relief, the covenant-not-to-compete and other posttermination obligations will not be enforced now.

2. Covenant-not-to-compete

Ledo asserts that defendant's continued operation of the

franchise has caused irreparable harm. ECF No. 2–1 at 14–

15. Ledo contends that the defendant's continued operation

threatens Ledo's “good will and reputation,” especially since

any departure by the defendant from Ledo's standard quality

of goods and services will be attributed to Ledo generally.

See id. at 15. Ledo also contends that it will likely need two

years to find a new franchisee for the area. Id. at 16. Finally,

Ledo argues that “the ability of a franchisee to terminate

a franchise agreement and continue to offer products and

services similar to the franchisor is likely to send a clear signal

to other franchisees that they can terminate their franchise

agreements and continue to [offer] such products and services

in essentially the same manner.” Id. at 15.

Assuming the covenant-not-to-compete is enforceable under

Maryland law, Ledo has not established sufficiently imminent

irreparable harm that would entitle it to immediate

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enforcement of the covenant at this stage in the suit. Because

the Court will grant Ledo's request for immediate injunctive

relief on Ledo's trademark infringement claims, the defendant

will be immediately barred from operating as a Ledo pizza

restaurant.

*5 Ledo has not shown that the defendant's potential

violation of the covenant-not-to-compete will irreparably

harm Ledo's goodwill and reputation, or prevent Ledo

from soliciting new franchisees, given that the defendant

is prohibited from associating any future restaurant with

the Ledo pizza brand. The injunctive relief the Court will

grant will prohibit the defendant from offering “products and

services in essentially the same manner” as it had before.

Thus, Ledo has failed to show that immediate enforcement of

the covenant-not-to-compete is necessary. See MicroStrategy,

245 F.3d at 339.

21

3. Defendant's Post–Termination Obligations

a. Standard

Ledo seeks the defendant's compliance with several

contractual obligations that arose out of the termination of the

franchise agreement, many of which require the defendant's

affirmative action. 22 “Ordinarily, preliminary injunctions are

issued to protect the status quo and to prevent irreparable

harm during the pendency of a lawsuit ultimately to preserve

the court's ability to render a meaningful judgment on the

merits.” Perry v. Judd, 471 F. App'x 219, 223 (4th Cir.2012)

(internal quotation marks omitted). “[M]andatory preliminary

injunctive relief in any circumstance is disfavored, and

warranted only in the most extraordinary circumstances.” Id.

(internal quotation marks omitted).

b. Irreparable Harm and Balance of Equities

Ledo recycles several arguments for defendant's immediate

compliance with the post-termination obligations. Ledo

again notes that defendant's continued operation of the

business threatens its goodwill and profits and prevents it

from controlling its reputation. ECF No. 2–1 at 11. Ledo

does not, however, specify any threat of irreparable harm

from defendant's failure to immediately change the store's

phone number, change the location's decor, or return Ledo's

operating manuals, when the defendant ceases operations

as a Ledo Pizza store. Moreover, many of Ledo's requests,

particularly modifying the physical interior and exterior of the

restaurant, will likely result in some expense to the defendant.

The hardship to the defendant of awarding mandatory relief

now may outweigh the hardship to Ledo when the defendant's

business stops operating. Thus, given that the injunctive relief

that will be ordered remedies the primary source of the injury

to Ledo-the defendant's continued operation of the restaurantLedo likely has not met its heightened burden to justify the

award of a mandatory injunction now.

III. Conclusion

In conclusion, the Court will grant Ledo's request for a TRO

enjoining the defendant from further infringement of the Ledo

trademark. The Court will deny Ledo's requests for relief on

its breach of contract claims.

All Citations

Not Reported in F.Supp.2d, 2013 WL 5604339

Footnotes

1 The facts are taken from the complaint, (ECF No. 1), amended complaint, (ECF No. 4), their supporting

documents, the motion, (ECF No. 2–1), and the August 26, 2013 letter of counsel for Tri–Bro, (ECF No. 10).

2 Neither the motion nor the complaint explains the reason for the long gap between the expiration of the first

forbearance agreement and the agreement extending the forbearance period.

3 The agreement states that the obligations arise “[u]pon termination or expiration of the franchise for any

reason whatsoever .” ECF No. 2–1 at 8. These obligations, which require affirmative acts, include, inter alia,

returning all copies of Ledo's operating manuals, assigning the restaurant's phone numbers to Ledo, and

modifying the interior of the restaurant to no longer reflect the color schemes or physical appearance of Ledo

restaurants. Id. at 9. According to Ledo, the defendants have yet to comply with any of these post-termination

obligations. See ECF No. 4 at 13.

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4 The covenant is effective upon Ledo's termination of the franchise agreement, whether or not that termination

occurs in accordance with the agreement. See ECF No. 2–1 at 13. The covenant prohibits the defendants from

engaging in “any dine in or carry-out food products business” within ten miles of any Ledo pizza restaurant

for a period of two years. Id. Ledo asserts that, by continuing to operate following termination of the franchise

agreement, the defendants have breached this covenant. See id. at 14.

5 The complaint asserts that the defendants owe several thousand dollars in unpaid advertising and royalty

fees and outstanding invoices under the franchise agreement. ECF No. 4 at 9 ¶ 47. The complaint also

asserts that the defendants owe $100,000 in liquidated damages for breach of the covenant-not-to-compete.

Id. at 11 ¶ 59.

6 The complaint asserts that the franchise agreement requires the defendants to pay Ledo's costs and

attorney's fees, “incurred in any action brought to enforce the Franchise Agreement.” ECF No. at 11 ¶ 60.

The complaint seeks attorneys' fees for all the claims. See, e.g., ECF No. 4 at 16–17 ¶ 91.

7 Ledo also requested “that a Default Judgment be entered against the Defendants,” because they have not

yet answered the Amended Complaint. ECF No. 13 at 5. However, no default has been entered as to the

defendants. Thus, entry of a default judgment at this time is not warranted. See F.D.I.C. v. Danzig, 10 F.3d

806, at *2 n. 5 (4th Cir.1993).

8 The Advanced Computer court noted that the question of the effect of the automatic stay on the availability

of injunctive and declaratory relief is “seldom-litigated.” Id. at 773.

9 See also In re Enron Corp., 314 B.R. 524, 533 (Bankr.S.D.N.Y.2004) (stating, in the discussion of the

applicability of § 362 to equitable relief, that “[t]he scope of the automatic stay is broad”); Neighbors Law Firm,

P.C. v. Highland Capital Mgmt., L.P., 5:09–CV–352–F, 2010 WL 5477260, at *1 (E.D.N.C. Dec.28, 2010)

(noting that the court held plaintiff's motion for preliminary injunction in abeyance “pending the resolution” of

defendants' bankruptcy action).

10 Accordingly, this opinion's references to the defendant, mean Defendant Singh individually. One court has

held that § 362 does not stay actions for injunctive relief, because an injunction does not interfere with the

policies behind the Bankruptcy Act but instead “correct [s] a continuing offense against the public interest.”

See Brennan v. T & T Trucking, Inc., 396 F.Supp. 615, 617–18 (N.D.Okla.1975). Given the plain language

of the statute, however, the Court finds Brennan unpersuasive.

11 See General Parts Dist., LLC v. St. Clair, Civ. No. 11–3556–JFM 2011, WL 6296746, at *2 (D.Md. Dec. 14,

2011) (stating that the standards for a TRO and a preliminary injunction are the same).

12 Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 20, 129 S.Ct. 365, 172 L.Ed.2d 249 (2008); Real Truth

About Obama, Inc. v. Fed. Election Comm'n, 575 F.3d 342, 346 (4th Cir.2009), vacated on other grounds,

559 U.S. 1089, 130 S.Ct. 2371, 176 L.Ed.2d 764, reinstated in relevant part on remand, 607 F.3d 355 (4th

Cir.2010) (per curiam).

13 See also Anheuser–Busch, Inc. v. L. & L. Wings, Inc., 962 F.2d 316, 318 (4th Cir.1992) (“[A]n unauthorized

use of a trademark infringes the trademark holder's rights if it is likely to confuse an ‘ordinary consumer’ as

to the source or sponsorship of the goods.”).

14 Ledo alleges that it is “the owner of the federally registered trademark/servicemark Ledo Pizza® (USPTO

Reg. Nos. 2712869 and 1760125).” ECF No. 2–1 at 2.

15 See Prosperity Systems, 2010 WL 5174939, at *5; Merry Maids, 3 F.Supp.2d at 445. In the franchise context,

multiple cases note that the franchisor loses control of its business reputation when a terminated franchisee

continues to operate its former franchise, and thus suffers irreparable harm. See Merry Maids, 33 F.Supp.2d

at 445 (citing Long John Silver's, Inc. v. Washington Franchise, Inc., 1980 U.S. Dist. LEXIS 16635, at *12,

1980 WL 30249 (E .D. Va. June 24, 1980)). Irreparable harm may also arise in the franchise context “where

there is an inherent injury to the goodwill and reputation of the plaintiff” resulting from the “[v]iolation of a

trademark.” See NaturaLawn of Am., Inc. v. W. Grp., LLC, 484 F.Supp.2d 392, 401 (D.Md.2007) (finding that

former franchisees' continued use of the franchisor's trademark, trade secrets, and customer lists qualified

as inherent injury).

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16 See NaturaLawn, 484 F.Supp.2d at 403; Meineke Car Care Centers, Inc. v. Bica, 3:11–CV–369–FDW–DCK,

2011 WL 4829420, at *4 (W.D.N.C. Oct.12, 2011) (citing S & R Corp. v. Jiffy Lube Int'l, Inc., 968 F.2d 371,

379 (3d Cir.1992) (“[Franchisee] is certainly harmed by the threat of loss of his franchise, but his self-inflicted

harm is far outweighed by the immeasurable damage done Jiffy Lube by the infringement of its trademark.”)).

17 Although the Court will not decide the merits of Ledo's breach of franchise claims now, Maryland law likely

governs the enforceability and construction of the franchise agreement. The franchise agreement provides

that, “this Agreement ... is governed by the laws of the State of Maryland.” ECF No. 1–2 at 32143. A federal

court exercising diversity jurisdiction must apply the choice-of-law principles of the state in which the federal

court is located. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477

(1941). Under Maryland law, this Court should presume that the parties' choice of law is enforceable. See

Meena Enters., Inc. v. Mail Boxes Etc., No. DKC 12–1360, 2012 WL 4863695, at *6 n. 8 (D.Md. Oct.11, 2012)

(internal quotation marks omitted).

18 See ECF No. 1–2.

19 On May 11, 2012, Ledo sent a Notice of Termination letter to the defendants. ECF No. 1–5. This letter followed

a Notice of Default letter which detailed the defendants' outstanding financial obligations to Ledo under the

franchise agreement. ECF No. 1–4. The complaint claims that the defendants failed to pay these amounts

owed. ECF No. 4 at 9147. Ledo has also verified the complaint. ECF No. 1–1.

20 See ECF No. 2–1 at 8.

21 One court has held that the balance of equities favors the defendant franchisee when enforcement of the noncompete provision according to its terms will cause substantial harm to the defendant. Prosperity Systems,

2010 WL 5174939, at *5 (finding that substantial economic harm to franchisee resulting from prohibition

against operating a pizza restaurant in his own name outweighed harm to franchisor, when defendant likely

had established “his own good will with customers” after operating for many years).

22 Ledo requests that the Court enjoin the defendant to:

i. [Cease] operations as a food or related products carryout business for a period of two years at the

Business premises;

ii. [Return] all copies of the Ledo Pizza Operating Manual;

iii. [Cancel] all assumed names or equivalent registrations relating to the use of any mark used pursuant

to the Agreement'

iv. [Notify] the telephone company and all listing agencies, including classified and other directory listings,

of the termination of the Defendants' right to use any Ledo Pizza trademark or trade dress;

v. [Authorize] the telephone company and all listing agencies to transfer all telephone numbers and

directory listings to Ledo Pizza system;

vi. [Remove] all signs and other interior and exterior decor associated with Ledo Pizza System's trademark

or trade dress; and

vii. [Cease] the use of trade secrets developed by the Plaintiffs[.]

ECF No. 4 at 14.

End of Document © 2020 Thomson Reuters. No claim to original U.S. Government Works.

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