In re Thompson

1

In re: Aron R. Thompson and Nicole R. Thompson, Debtors.

No. 22-11921-rmb

United States Bankruptcy Court, W.D. Wisconsin

March 10, 2023

DECISION ON MOTION FOR RELIEF FROM STAY

Rachel M. Blise, U.S. Bankruptcy Judge.

Debtors Aron and Nicole Thompson are the sole owners of Thompson Exteriors LLC. Shortly before the debtors filed their chapter 7 petition, creditor 12 Gauge Construction LLC filed a complaint in Wisconsin state court against Thompson Exteriors and both debtors. Pursuant to 11 U.S.C. § 362(a), the debtors' bankruptcy filing stayed the state court case against the debtors. 12 Gauge Construction now seeks an order confirming that it can proceed with its claims against Thompson Exteriors in state court. For the reasons set forth below, the court grants the motion.

BACKGROUND

12 Gauge Construction alleges the following facts in its motion. 12 Gauge Construction is a general contractor and was hired to construct a mixed-use development project in Wausau Wisconsin. 12 Gauge Construction subcontracted with Thompson Exteriors for the framing and rough carpentry work. After paying Thompson Exteriors a portion of the contract amount 12 Gauge Construction received reports from Thompson Exteriors' subcontractors indicating that they had not been paid. 12 Gauge Construction ultimately terminated its contract with Thompson Exteriors before Thompson Exteriors' work on the project was complete.

On October 18, 2022, 12 Gauge Construction filed a complaint in Wisconsin state court seeking to recover sums that 12 Gauge Construction alleges are owed by Thompson Exteriors and the debtors as its owners. 12 Gauge Construction asserted a claim for breach of contract against Thompson Exteriors and claims for theft by contractor and civil theft against Thompson Exteriors and the debtors. All three of the defendants were served on October 21, 2022, and under Wisconsin state law, their answer to the complaint was due on December 5, 2022.

The debtors filed a voluntary chapter 7 petition on December 5 2022. The same day, their counsel filed a Suggestion of Bankruptcy in the state court that stated "this action has been stayed by operation of 11 U.S.C. § 362." No further activity has occurred in the state court case.

12 Gauge Construction acknowledges that its claims against the debtors are stayed, but it wants to proceed with its claims against Thompson Exteriors, which has not filed bankruptcy. Because the debtors told the state court that the "action" had been stayed by the bankruptcy, 12 Gauge Construction seeks an order confirming that the stay does not apply to Thompson Exteriors or an order granting relief from any stay that may apply to Thompson Exteriors. The debtors agree that the automatic stay generally does not apply to non-debtors such as Thompson Exteriors, but they argue that "inasmuch as a judgment against Thompson Exteriors would have the effect of being a judgment against the Debtors, the automatic stay does apply."

The court held hearings on the motion on February 2 and February 16, 2023. At the latter hearing, the court issued a tentative ruling that 12 Gauge Construction should be permitted to proceed with its claims against Thompson Exteriors. The court now issues this decision and order memorializing and expanding on its tentative oral ruling.

JURISDICTION

This court has jurisdiction under 28 U.S.C. §§ 1334 and 157(a). Venue is proper in this court as provided in 28 U.S.C. § 1409. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and (G).

DISCUSSION

The filing of a bankruptcy petition "operates as a stay applicable to all entities, of . . . 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 [the Bankruptcy Code], or to recover a claim against the debtor that arose before the commencement of the case under [the Bankruptcy Code]." 11 U.S.C. § 362(a)(1).^[1] This stay is "automatic" and self-executing; it does not require the action of the bankruptcy court, or any other court, to be enforceable. In re Galmore, 390 B.R. 901, 905 (Bankr. N.D. Ind. 2008).

The automatic stay is broad, but it "generally does not extend to non-debtors." In re Wiseman, 617 B.R. 906, 911 (Bankr. E.D. Wis. 2020); see also United States v. Wright, 57 F.3d 561, 562 (7th Cir. 1995) ("The automatic stay does not apply to guarantors, sureties, insurers, partners, and other persons liable on the debt."); Pitts v. Unarco Indus., Inc., 698 F.2d 313, 314 (7th Cir. 1983) ("The clear language of Section 362(a)(1) thus extends the automatic stay provision only to the debtor filing bankruptcy proceedings and not to non-bankrupt co-defendants."); Winfield Sols., LLC v. W S Ag Ctr., Inc., No. 17-CV-942-SLC, 2020 WL 8613974, at *2 (W.D. Wis. June 19, 2020) ("The stay, however, protects only the debtor, not non-bankrupt co-debtors[.]").

The Seventh Circuit has identified two situations in which the § 362(a)(1) stay could be extended to non-debtors. See In re Fernstrom Storage & Van Co., 938 F.2d 731, 736 (7th Cir. 1991). "The first is applicable 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.'" Id. (quoting A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986)). "The second operates where the pending litigation, though not brought against the debtor, would cause the debtor, the bankruptcy estate, or the reorganization plan 'irreparable harm.'" Id. The parties here focus on the "identity of interest" test, which was first recognized by the Fourth Circuit in A.H. Robins.

A. Whether the § 362(a)(1) Stay Applies to Thompson Exteriors

Before proceeding to consider the merits of the parties' arguments under A.H. Robins, we must pause to consider an important procedural issue. 12 Gauge Construction filed what it called a motion for relief from the stay. However, the primary relief sought in the motion is not relief from the stay; rather, 12 Gauge Construction primarily wants an order confirming that the stay does not apply to Thompson Exteriors.^[2] If the stay does apply, 12 Gauge believes relief from the stay is warranted under 11 U.S.C. § 362(d). The debtors oppose the motion, arguing that the stay extends to Thompson Exteriors and that there is not sufficient cause to lift the stay.

Both parties seem to take for granted that if the stay under § 362(a)(1) extends to Thompson Exteriors under the A.H. Robins "identity of interest" test, the extension is automatic and happens by operation of the statute rather than by court order. But that does not appear to be the case. A.H. Robins involved an adversary proceeding filed by the debtor in which the debtor sought to enjoin a group of plaintiffs from pursuing claims against several non-debtor co-defendants in cases pending outside the bankruptcy. 788 F.2d at 996. The court entered the requested injunction, relying for authority on 11 U.S.C. § 105(a) and § 362(a). Id. Unlike a stay or injunction imposed under § 105(a), the stay imposed by § 362(a) is automatic and requires no action from any court to be enforceable. The injunction would not have been necessary if the § 362(a)(1) stay automatically extended to the non-debtors. The court could have instead declared that the automatic stay was already in effect. That the court took affirmative action to impose a stay indicates that application of the stay to the non-debtor co-defendants was not, in fact, automatic.

Many of the courts applying A.H. Robins have held that "extensions of the automatic stay to preclude the continuation of a suit against a non-debtor are essentially a utilization of the bankruptcy court's equity jurisdiction under section 105 to issue an injunction extending the stay." C.H. Robinson Co. v. Paris & Sons, Inc., 180 F.Supp.2d 1002, 1011 (N.D. Iowa 2001) (collecting cases). In a thorough opinion that analyzed case law around the country regarding the "identity of interest" test, as well as the legislative history of § 362(a), the court in C.H. Robinson Co., concluded that "the automatic stay under section 362(a)(1) of the Bankruptcy Code is not truly 'automatic' when invoked against non-debtor codefendants." Id. at 1018. The court held that "[t]he party seeking to invoke an extension of the stay must affirmatively seek an order from the bankruptcy court, which has authority to extend the protections of 362(a) pursuant to its equity powers under section 105." Id.

The Seventh Circuit has not yet considered whether the § 362(a)(1) stay could extend automatically to non-debtors, or indeed whether it could be extended to non-debtors at all. In the two cases in which the Seventh Circuit considered A.H. Robins, the court concluded that the circumstances did not satisfy the "identity of interest" test. See Fernstrom, 938 F.2d at 736 (holding that A.H. Robins did not apply because there was only one claimant under the insurance policy at issue); Fox Valley Constr. Workers Fringe Ben. Funds v. Pride of the Fox Masonry & Expert Restorations, 140 F.3d 661, 666 (7th Cir. 1998) (holding that the district court had authority to sanction the debtor's lawyer based on pre-petition conduct in a non-bankruptcy case). The Seventh Circuit has in other cases stated that the § 362(a) stay does not extend to non-debtors, suggesting that if the stay can be extended to non-debtors the Seventh Circuit would require a bankruptcy court to affirmatively impose the stay using its power under § 105(a). See Wright, 57 F.3d at 562 (holding that "[t]he automatic stay does not apply to...