Court Opinion

ID: 2968410
Source: CourtListenerOpinion
Date Created: 2015-09-22 05:08:25.685359+00
Date Added: 2024-06-11T13:14:12.260615
License: Public Domain

PUBLISHED

UNITED STATES COURT OF APPEALS
                FOR THE FOURTH CIRCUIT

SANFORD KREISLER; BASK HOLDINGS,         
LLC,
                Plaintiffs-Appellants,
                  v.                           No. 05-2238
GLENN H. GOLDBERG, t/a S. Goldberg-
Cust; SRG PROPERTIES NO. 5, LLC,
                Creditors-Appellees.     
          Appeal from the United States District Court
            for the District of Maryland, at Baltimore.
                  Andre M. Davis, District Judge.
      (CA-05-1528-1-AMD; BK-02-57640-SD; AP-03-05227)

                   Argued: November 28, 2006

                   Decided: February 26, 2007

       Before WILLIAMS and TRAXLER, Circuit Judges,
             and HAMILTON, Senior Circuit Judge.

Affirmed by published opinion. Judge Williams wrote the opinion, in
which Judge Traxler and Senior Judge Hamilton joined.

                           COUNSEL

ARGUED: Paul Dennis Scanlon, Manassas, Virginia, for Appellants.
Andrew Martin Croll, SCARLETT & CROLL, Baltimore, Maryland,
for Appellees. ON BRIEF: Thomas J. Mitchell, Laurel, Maryland,
for Appellants.
2                       KREISLER v. GOLDBERG
                              OPINION

WILLIAMS, Circuit Judge:

   Appellants Sanford Kreisler and Bask Holdings, LLC (collectively
"Kreisler"), debtors in a voluntary Chapter 11 case, appeal the district
court’s order affirming the bankruptcy court’s denial of Kreisler’s
"Motion for Sanctions for Alleged Violation of the Automatic Stay,
to Void Ejectment and to Turn Over Property and Rents Collected."
Kreisler argues that Appellees Glenn H. Goldberg and SRG Proper-
ties No. 5, LLC (collectively "Goldberg") violated the automatic stay
under 11 U.S.C.A. § 362(a) (West 2004 & Supp. 2006) by pursuing
an ejectment action against the debtors’ wholly-owned subsidiary in
Maryland state court. Because the district and bankruptcy courts did
not err in finding that the automatic stay did not apply to actions
against Kreisler’s non-bankrupt subsidiary corporation, we affirm.

                                   I.

   This case involves the consolidated bankruptcy estates of Sanford
Kreisler and Bask Holdings, LLC ("Bask"). Bask filed a voluntary
petition for Chapter 11 bankruptcy protection in December 2001, and
Sanford Kreisler’s Chapter 11 petition followed in May 2002, (J.A.
at 39-95).1 On February 19, 2003, the United States Bankruptcy Court
for the District of Maryland ordered that the estates of the two debtors
be substantively consolidated.

   Bask’s wholly-owned subsidiary, Just Holdings, LLC ("Just"), was
a party to a ground rent lease on a property known as 1741 Bond St.,
Baltimore, Maryland. ("the property").2 The property was titled in
    1
    Sanford Kreisler and Barbara Kreisler had a 99.5% ownership interest
in Bask as Tenants by the Entireties, and Sanford Kreisler had a 0.5%
ownership interest in Bask.
  2
    Ground rent leases are rare in most states but "have been used in
Maryland since Colonial days." Moran v. Hammersla, 52 A.2d 727, 728
(Md. 1947). Under Maryland’s system of ground rent leases, homeown-
ers lease the land under their houses. See A History of Maryland Ground
Rents, The Balt. Sun, Dec. 10, 2006; see also Kolker v. Biggs, 99 A.2d
                          KREISLER v. GOLDBERG                             3
Just’s name, and Goldberg owned the ground rent. Just’s interest in
the property represented its only asset and the reason for the compa-
ny’s organization.

   On July 31, 2002, Goldberg3 initiated an action for ground rent it
claimed was due on the property by filing a Complaint in Ejectment
in the Circuit Court for Baltimore City. The circuit court entered a
default judgment against Just on November 15, 2002. Pursuant to
Bask’s bankruptcy, the Bankruptcy court issued a Notice of Auto-
matic Stay, which Kreisler filed in the ejectment action on December
30, 2002, and the circuit court accordingly stayed further proceedings
in the ejectment action. On June 16, 2003, Goldberg filed a motion
to terminate the stay. The circuit court granted the motion on July 8,
2003. On November 29, 2003 and again on December 27, 2003, the
bankruptcy court denied Bask’s motion to enforce the automatic stay
regarding the property.

743, 745 (Md. 1953) ("In the ground rent lease, as used in Maryland, the
owner of the land . . . leases it for the period of 99 years, with a covenant
for renewal from time to time forever upon payment of a small renewal
fine, upon the condition that the lessee will pay a certain rent and that
if the payment is in default the lessor may reenter and terminate the
lease."). The lessee’s estate is considered personal property, but "in prac-
tical effect the relation of the lessee to the property is that of owner of
the land and improvements thereon, subject to the payment of annual rent
and all taxes on the property." Moran, 52 A.2 at 728. If a homeowner
fails to pay the ground rent, however, the ground-rent holder has the right
to eject the homeowner from the property; in doing so, the ground-rent
holder takes possession of the house as well as the land. See Fred Schulte
and June Arney, Part 1 of 3: On Shaky Ground: An Archaic Law is
Being Used to Turn Baltimoreans out of Their Homes, The Balt. Sun,
Dec. 10, 2006, at 1A.
   3
     The ground rent was originally held by two persons in their individual
capacities and as trustees of five separate trusts, all trading together as
"S. Goldberg - Cust." These two people initiated the ejectment action as
plaintiffs. They are the members of SRG Properties No. 5, LLC ("SRG"),
and during the course of the ejectment action, SRG was substituted for
the individuals as the plaintiff. According to Goldberg’s brief, SRG is
now the only party in interest in the ejectment action.
4                        KREISLER v. GOLDBERG
   The property was sold at auction on March 16, 2005, but the sale
ultimately fell through, presumably because the purchaser was unable
to obtain title insurance due to the cloud on the title created by the
case before us. On March 22, 2005, Bask and Just filed an "Expedited
Motion for Violation of the Automatic Stay, to Void Ejectment
Action and to Turn Over Property and Rents Collected" in the bank-
ruptcy court. The bankruptcy court denied the motion on April 7,
2005. On April 28, 2005, the bankruptcy court denied a motion for
reconsideration. Kreisler appealed to the district court on May 10,
2005. The district court affirmed, and this appeal followed. We have
jurisdiction pursuant to 28 U.S.C.A. § 158(d) (West 2006) (conferring
jurisdiction on courts of appeals to review final decisions of district
courts reviewing bankruptcy decisions).

                                    II.

   "We review the judgment of a district court sitting in review of a
bankruptcy court de novo, applying the same standards of review that
were applied in the district court." In re Duncan, 448 F.3d 725, 728
(4th Cir. 2006) (internal quotation marks omitted). "We review find-
ings of fact for clear error and questions of law de novo." Id.

   Pursuant to 11 U.S.C.A. § 362(a),4 the filing of a Chapter 11 bank-
ruptcy petition automatically stays all proceedings against the bank-
ruptcy debtor and all actions to obtain possession of or to exercise
control over property of the bankruptcy estate. 11 U.S.C. § 362(a)(1),
(3). Kreisler argues that Bask, one of the bankruptcy debtors, should
be treated as the real party in interest in the suit against Just, that the
ground rent realty was property of Kreisler’s bankruptcy estate, and
that even if it was not, the automatic stay should have nevertheless
applied. We address these arguments in turn.

                                    A.

  Section 362(a)(1) of Chapter 11 of the Bankruptcy Code stays "the
commencement or continuation . . . of a judicial . . . action or pro-
ceeding against the debtor that was or could have been commenced
    4
   The 2006 amendments to the Bankruptcy Act do not alter 11 U.S.C.A.
§ 362 (West 2004 & Supp. 2006) in any way relevant to this appeal.
                         KREISLER v. GOLDBERG                          5
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.A. § 362(a)(1). "Subsection (a)(1) is
generally said to be available only to the debtor, not third party defen-
dants or co-defendants." A.H. Robins Co., Inc. v. Piccinin, 788 F.2d
994, 999 (4th Cir. 1986). An exception to this general rule exists,
however, allowing bankruptcy courts to extend the protections of the
automatic stay to non-bankrupt codefendants in "unusual circum-
stances." Id. In Piccinin, we explained that an "unusual situation . . .
arises when there is such identity between the debtor and the third-
party defendant that the debtor may be said to be the real-party defen-
dant and that a judgment against the third-party defendant will in
effect be a judgment or finding against the debtor." Id. We noted that
"[a]n illustration of such a situation would be a suit against a third-
party who is entitled to absolute indemnity by the debtor on account
of any judgment that might result against them in the case." Id.

   In the instant case, there exists no basis for us to conclude that
there is such identity between Bask and its wholly owned subsidiary,
Just, that a judgment against Just would effectively operate as a judg-
ment against Bask. It is a fundamental precept of corporate law that
each corporation is a separate legal entity with its own debts and
assets, even when such corporation is wholly owned by another cor-
porate entity. See Turner v. Turner, 809 A.2d 18, 61 (Md. Ct. Spec.
App. 2002) (noting that "[a] corporation is regarded as a separate
legal entity"); Mylan Labs., Inc. v. Akzo, N.V., 2 F.3d 56, 62 (4th Cir.
1993) (noting that Maryland courts generally will not pierce the cor-
porate veil between a parent and a subsidiary corporation if the sub-
sidiary has "some independent reason for its existence, other than
being under the complete domination and control of another legal
entity simply for the purpose of doing its act and bidding" (internal
quotation marks omitted)). Just did not exist to do Bask’s act and bid-
ding; it was established to hold title to property. Moreover, because
Just is a distinct legal entity, a judgment against Just imposes no obli-
gations or liability on Bask. Just is a Limited Liability Company
(LLC) under Maryland law, and under Maryland law, an LLC is
treated as a separate legal entity for purposes of liability and property
ownership. Cf. McCleary v. McCleary, 822 A.2d 460, 466 (Md. Ct.
Spec. App. 2003) (holding that a trial court in a divorce proceeding
erred in piercing the corporate veil of a limited liability company to
6                        KREISLER v. GOLDBERG
classify the debt of the limited liability company as non-marital debt
of the husband). Bask therefore cannot be accurately described as the
real-party defendant in the suit against Just. Accordingly, had Just
wished to receive the protections afforded by § 362(a)(1), it must
have filed for bankruptcy.

                                   B.

   Subsection 362(a)(3) automatically stays "any act to obtain posses-
sion of property of the estate or of property from the estate or to exer-
cise control over property of the estate." 11 U.S.C.A. § 362(a)(3).
Kreisler argues that Bask’s interest in Just represents property of the
bankruptcy estate. As the district court recognized, Bask does have an
interest in Just and this interest in the subsidiary corporation does
form part of Kreisler’s bankruptcy estate. The fact that a parent corpo-
ration has an ownership interest in a subsidiary, however, does not
give the parent any direct interest in the assets of the subsidiary.
Although Bask could have established an ownership interest in the
property, it chose not to do so. Instead, it created an LLC for the pur-
pose of holding title to the property. Having assumed whatever bene-
fits flowed from that decision, it cannot now ignore the existence of
the LLC in order to escape its disadvantages. See Terry v. Yancey,
344 F.2d 789 (4th Cir. 1965) (explaining that "where an individual
creates a corporation as a means of carrying out his business purposes
he may not ignore the existence of the corporation in order to avoid
its disadvantages"). The district court therefore correctly distin-
guished between Bask’s interest in Just and Just’s direct interest in the
property known as 1741 Bond St., Baltimore, Maryland. The assets
of Just belonged to Just and did not form part of Bask’s bankruptcy
estate. Consequently, an action to obtain possession or exercise con-
trol over Just’s property was not an action to obtain possession or
exercise control over property of Kreisler’s bankruptcy estate.

                                   C.

   Kreisler argues that even if the property was not part of the bank-
ruptcy estate, the automatic stay nevertheless applies to the ejectment
action because Just’s loss of its property would cause Bask’s interest
in Just to lose value. Just existed for the sole purpose of holding title
to the property and had no other assets. Kreisler contends that, as a
                         KREISLER v. GOLDBERG                          7
result, Bask’s ownership interest in Just would lose all value if Just
were ejected from the property. The fact that Bask’s interest in Just
may lose value, however, is not dispositive. The nature and extent of
Bask’s interest in Just remains unchanged by Just’s loss of the prop-
erty. For this reason, courts faced with similar situations have held
that an automatic stay does not prevent a non-debtor company from
taking an action that might affect the value of a debtor’s stock, see
In re Calvert, 135 B.R. 398, 402 (Bankr. S.D. Cal. 1991), and that the
bankruptcy of one partner does not stay an action against the partner-
ship, even though the debtor’s partnership interests may lose value as
a result of the action, see In re Cardinal Indus., 105 B.R. 834, 849
(Bankr. S.D. Ohio 1989) ("While the Debtors’ Partnership Interests
may lose value if the Partnership Properties . . . are taken away, each
partner’s rights to its designated shares remains. The Partnerships
may acquire new properties or embark upon new enterprises for
which the Debtors’ shares of profits, losses and distributions remain
unchanged.").

   In contrast, courts have held that an action against a third party is
barred by § 362(a)(3) when a judgment against the third party would
effectively operate to foreclose on property of the bankruptcy estate,
depriving a debtor of an interest in property, rather than merely affect-
ing an asset’s value. See 48th Street Steakhouse, Inc. v. Rockefeller
Group, Inc., 835 F.2d 427, 430-31 (2d Cir. 1987) (holding that a land-
lord’s action against a third-party prime lease holder was barred by
the automatic stay, because under the applicable state law, if the
prime lease failed, the debtor’s sublease would necessarily fail as
well); In re Bialac, 712 F.2d 426, 431-32 (9th Cir. 1983) (holding that
the automatic stay prohibited a creditor from foreclosing on property
in which a debtor had a right of redemption, even though non-
bankrupt third parties owned the property). Accordingly, because
Just’s loss of the property affected only the value of Bask’s interests,
we agree with the district court that § 362(a)(3) does not apply to the
ejectment action against Just.

                                   D.

   We note that although the automatic stay under 11 U.S.C.A.
§ 362(a) is inapplicable to the ejectment action, Kreisler could have
sought injunctive relief if he believed that the ejectment action would
8                        KREISLER v. GOLDBERG
deprive them of funds needed for their reorganization or put detrimen-
tal pressure on their reorganization effort, as 11 U.S.C.A. § 105(a)
gives the bankruptcy court jurisdiction to "issue any order, process,
or judgment that is necessary to carry out the provisions of this title."
11 U.S.C.A. § 105(a) (West 2004 & Supp. 2006). This provision "em-
powers the bankruptcy court to enjoin parties other than the bankrupt
from commencing or continuing litigation." Piccinin, 788 F.2d at
1002 (internal quotation marks omitted). In addition, "the bankruptcy
court under its comprehensive jurisdiction as conferred by section
1334, 28 U.S.C., has the inherent power of courts under their general
equity powers and in the efficient management of the[ir] dockets . . .
to grant a stay." Id. at 1003 (internal quotation marks omitted). Kreis-
ler chose not to pursue these avenues, however, so the propriety of
injunctive relief apart from the automatic stay is not at issue in this
case.

                                  III.

   In sum, we conclude that the automatic stay under 11 U.S.C.A.
§ 362(a) did not apply to Goldberg’s ejectment action against Just
because the proceeding was not against a bankruptcy debtor and was
not an action to obtain ownership or control of property of Kreisler’s
bankruptcy estate. Accordingly, we affirm the district court’s order
affirming the bankruptcy court’s denial of Kreisler’s "Motion for
Sanctions for Alleged Violation of the Automatic Stay to Void Eject-
ment and to Turn Over Property and Rents Collected."

                                                            AFFIRMED