Covertech Fabricating, Inc. v. TVM Bldg. Prods., Inc.

COVERTECH FABRICATING, INC., Plaintiff, v. TVM BUILDING PRODUCTS, INC.; TVM INDUSTRIES, INC.; TVM FOAM SYSTEMS, INC.;TVM INSULATION, INC.; TVM SEALANTS, INC.; TVM MANUFACTURING, INC.;TVM HOLDINGS USA, INC.; TVM HOLDINGS, INC.; TVM CANADA, INC.;MITEX INTERNATIONAL, INC.; MITEX BUILDING PRODUCTS, LLC;MITEX FOAM SYSTEMS, LLC; MITEX MANUFACTURING, LLC;MITEX GROUP, INC.; MICHAEL BOULDING; SEAN BOULDING;and WILLIAM TROTTER, Defendants.

Case No. 3:17-cv-196

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

November 13, 2017

JUDGE KIM R. GIBSON

MEMORANDUM OPINION

I. Introduction

This Court is faced with the question of whether the automatic stay provision of the Bankruptcy Code extends to the Non-Debtor Defendants in the above-captioned case. The issue has been fully briefed (see ECF Nos. 24, 25, 26) and is ripe for disposition.

For the reasons described below, this Court finds that the automatic stay extends to the Non-Debtor Defendants. Accordingly, this Court will STAY the above-captioned proceedings as to all claims and all defendants.

II. Background

On May 21, 2013, Covertech Fabricating, Inc. ("Covertech") sued TVM Building Products, Inc. ("TVM BP") for trademark infringement, unfair competition, and various related common law claims. Following a bench trial, this Court awarded Covertech $4,761,319 in damages. See Covertech Fabricating, Inc. v. TVM Bldg. Prod., Inc., 124 F. Supp. 3d 489 (W.D. Pa. 2015), aff'd in part, vacated in part, 855 F.3d 163 (3d Cir. 2017), and aff'd in part, vacated in part, 855 F.3d 163 (3d Cir. 2017). The Third Circuit affirmed-in-part, and remanded with instructions for this Court to enter an amended judgment that included statutory damages. See Covertech Fabricating, Inc., 855 F.3d at 177. Accordingly, this Court entered an Amended Judgment on May 31, 2017. (ECF No. 1-7.)

The instant dispute arises from Covertech's failed attempts to collect on the judgment it received against TVM BP. On October 23, 2017, Covertech filed a nine (9) count Complaint in this Court. (ECF No. 1.) According to the Complaint, Michael Boulding, Sean Boulding, and William Trotter (the "Individual Defendants") orchestrated an elaborate scheme by which they transferred assets out of TVM BP into various shell-corporations (the "TVM Entities" and the "Mitex Entities") which they created for the purposes of enriching themselves and frustrating Covertech's attempts to collect on its judgment. For the purposes of the instant dispute, the counts in Covertech's Complaint can be organized into three groups: (1) violation of the Pennsylvania Uniform Fraudulent Transfers Act against the TVM Entities and the Individual Defendants (Count V); (2) successor liability/de facto merger against TVM BP and Mitex International (Count I), piercing the corporate veil/alter ego liability against Michael Boulding and TVM BP (Count II), piercing the corporate veil/alter ego liability against the TVM Entities (Count III), and piercing the corporate veil/alter ego liability against the Mitex Entities (Count IV); and (3) the civil RICOclaims against the Individual Defendants, TVM BP, Mitex International, and TVM Canada. (Counts VI-IX). (See ECF No. 1 at 33-51.)

On October 24, 2017, Covertech filed an Ex Parte Motion for a Preliminary Injunction and a Temporary Restraining Order. (ECF No. 3.) On October 26, 2017, this Court granted a Temporary Restraining Order, and scheduled a preliminary injunction hearing for November 8, 2017. (ECF No. 7.) On November 7—the day before the preliminary injunction hearing—TVM BP filed a Suggestion of Bankruptcy with this Court, informing the Court that on November 3, 2017, TVM BP voluntarily filed for Chapter 7 Bankruptcy in the Bankruptcy Court for the United States District Court for the Northern District of Texas. (ECF No. 15.) The Suggestion of Bankruptcy stated that the proceedings in this Court should be stayed as to TVM BP, under the automatic stay provisions of 11 U.S.C. § 362(a). (Id. at 1.) It did not extend the automatic stay to the Non-Debtor Defendants.

The preliminary injunction hearing was held before this Court on November 8, 2017. All counsel present¹ agreed that the question of whether the automatic stay applies to the Non-Debtor Defendants must be resolved before this Court rules on the merits of Covertech's Motion for a Preliminary Injunction. After hearing arguments from all sides on the issue of whether the automatic stay applied to the Non-Debtor Defendants, this Court extended the TRO as to all Defendants except TVM BP and William Trotter, and ordered the parties to brief the issue of whether the automatic stay applies to the additional Non-Debtor Defendants. (See ECF No. 19.)

The parties agree that the stay extends to Covertech's claims against TVM BP. Thus, thesole issue is whether, the claims against the Non-Debtor Defendants should also be stayed. As explained below, the resolution of this issues turns on whether the assets that Covertech seeks from the Non-Debtor Defendants are property of TVM BP's bankruptcy estate and, thus, subject to the automatic stay.

III. Discussion

Covertech argues that the automatic stay applies only to TVM BP and does not extend to the Non-Debtor Defendants. Covertech notes that only TVM BP filed for bankruptcy. (ECF No. 26 at 4.) Covertech asserts (1) that its claims against the Non-Debtor Defendants are completely independent of TVM BP's bankruptcy, (2) that Pennsylvania law defines the property of TVM BP's bankruptcy estate, and (3) that, under Pennsylvania law, Covertech's alter ego, successor liability, piercing the corporate veil, and RICO claims are not property of TVM BP's bankruptcy estate, and, thus, are not subject to the automatic stay. (See ECF No. 26 at 6-10.) Covertech also argues that the Non-Debtor Defendants are trying to "have it both ways." In litigation independent of the instant matter, Michael Boulding, speaking for Defendant Mitex International, stated under oath that TVM BP and Mitex International had no relationship whatsoever (Id. at 4; see ECF No. 26-4 at 3), but, here, the Non-Debtor Defendants—which, according to Covertech, are all controlled by Michael Boulding—contend that the are so closely related to TVM BP that their assets are subject to the automatic stay arising from TVM BP's bankruptcy.

The Non-Debtor Defendants argue that the automatic stay applies to all Defendants and all claims in the instant litigation. (See ECF No. 24 at 7.) The Non-Debtor Defendants assert that the automatic stay can extend beyond the entity that has filed for the protections of the Bankruptcy Code in "unusual circumstances," such as when the non-debtor defendant and thedebtor are so closely related that a judgment against the non-debtor will, in effect, be a judgment against the debtor. (Id., citing McCartney v. Integra Nat. Bank North, 106 F. 3d 506, 509-510 (3d Cir. 1997)). According to the Non-Debtor Defendants, this is an "unusual circumstance" where extension of the automatic stay is required, because the overall gist of Covertech's Complaint is that the Michael Boulding used the Non-Debtor Defendants as repositories for funds that he fraudulently transferred out of TVM BP in an attempt to avoid the judgment that Covertech won against TVM BP. (See ECF No. 24 at 10-11.)

After reviewing the parties' filings,² this Court is persuaded by Defendant Trotter's arguments and finds that the automatic stay extends to the Non-Debtor Defendants. Accordingly, this Court will stay Covertech's claims in this Court pending resolution of the bankruptcy proceedings in the Northern District of Texas.

A. The Bankruptcy Code Provides for an Automatic Stay

The filing of a bankruptcy petition stays any "judicial, administrative, or other action or proceeding against the debtor." 11 U.S.C. § 362(1)(a). The automatic stay extends to "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). "'[A]ll legal and equitable interests of the debtor in property as of the commencement of the case are included in the bankruptcy estate." In re Allentown Ambassadors, Inc., 361 B.R. 422, 436 (Bankr. E.D. Pa. 2007) (quoting 11 U.S.C. § 541(a)(1)). "The Third Circuit has 'emphasized Congress' intent to delineate in broad terms what constitutesproperty of the estate.'" In re Segen, 445 B.R. 467, 468 (Bankr. E.D. Pa. 2010) (quoting In re O'Dowd, 233 F.3d 197, 202 (3d Cir.2000)).³

While § 362 of the Bankruptcy Code only provides for an automatic stay of actions against a "debtor," "[t]his prohibition... has been liberalized in a number of cases where courts have applied the automatic stay protection to nondebtor third parties." McCartney v. Integra Nat. Bank N., 106 F.3d 506, 510 (3d Cir. 1997). As the Third Circuit has recognized, "courts have extended the automatic stay to nonbankrupt codefendants in 'unusual circumstances.'" Id. (quoting A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986). "[C]ourts have found 'unusual circumstances' where 'there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.'" McCartney, 106 F.3d at 510 (quoting A.H. Robins Co., 788 F.2d at 999).

B. Circuit Courts Have Extended the Automatic Stay to Non-Debtor Third-Parties in Factual Circumstances Similar to Those Presently Facing the Court

To this Court's knowledge, the Third Circuit has not addressed whether an automatic stay extends to non-debtor third-party defendants in factual circumstances similar to those presently before this Court. However, this Court is persuaded by two Fifth Circuit cases cited by Trotter, which feature factually similar circumstances to the case at bar.

In In re MortgageAmerica Corp., 714 F.2d 1266 (5th Cir. 1983), American National Bank of Austin...