Le Metier Beauty Inv. Partners LLC v. Metier Tribeca, LLC

LE METIER BEAUTY INVESTMENT PARTNERS LLC, and UNATTAINABLE BEAUTY, LLC, Plaintiffs, v. METIER TRIBECA, LLC, and RICHARD Blanch, Defendants.

No. 13 Civ. 4650 (JFK)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

September 25, 2014

OPINION & ORDER

APPEARANCES

FOR LE METIER BEAUTY INVESTMENT PARTNERS LLC; UNATTAINABLE BEAUTY, LLC

Evan T. Raciti

Vincent Roger Cappucci

ENTWISTLE & CAPPUCCI LLP

FOR METIER TRIBECA, LLC; RICHARD BLANCH

Jordan Michael Kam

Richard Alan Roth

THE ROTH LAW FIRM, PLLC

JOHN F. KEENAN, United States District Judge:

This case was automatically stayed as against Defendant Metier Tribeca, LLC (hereinafter "Metier Tribeca" or "Debtor") in accordance with Section 362(a) of the Bankruptcy Code by the filing of Metier Tribeca's petition for relief in the United States Bankruptcy Court for the Southern District of New York on February 14, 2014. See 11 U.S.C. § 362(a)(1). Plaintiffs subsequently sought discovery in this litigation from Defendant Richard Blanch ("Blanch") and other nonparties. Blanch, the former CEO of Metier Tribeca, now moves to stay the instantaction against him, claiming that (1) an identity of interest exists between Defendants such that the prosecution of the action against Blanch would create an immediate liability to the Debtor; (2) Plaintiffs' discovery requests attempt to inappropriately circumvent the automatic stay and the intention of the bankruptcy court; and (3) Blanch would suffer severe prejudice if the stay is denied, because he will be unable to obtain documents from the Debtor needed for his defense. For the reasons that follow, Blanch's motion is denied.

I. Background

A. The Parties

Plaintiffs Le Metier Beauty Investment Partners LLC ("Le Metier") and Unattainable Beauty LLC ("Unattainable") commenced this action on July 3, 2013, when they filed a complaint alleging securities fraud under section 10(b) of the Exchange Act and Rule 10b-5, common law fraud, and fraudulent inducement with respect to both Defendants; violation of section 20(a) of the Exchange Act and breach fiduciary duties against Blanch; and breach of contract against Metier Tribeca.

The complaint states that Le Metier invested $3.05 million and Unattainable invested $2.175 million in Metier Tribeca in October 2012. Plaintiffs allege that they based their investments on contractual agreements and explicit representations by Blanch and Metier Tribeca that Metier Tribecahad millions of dollars in projected sales and anticipated orders and that the money would be used for the sole purpose of funding Metier Tribeca's capital requirements and would not be used to repay existing company debt. (Compl. ¶¶ 1, 26.) Despite these representations, Plaintiffs allege that Defendants used over 80 percent of the investment to pay, inter alia, aged debt and back salary, including $395,000 transferred to Blanch's and other insiders' bank accounts; that Blanch altered Metier Tribeca's books and records to conceal the fraud; and that Metier Tribeca took out a loan without fulfilling the conditions required by Plaintiffs in exchange for their consent. (Id. ¶¶ 6, 33-35.)

B. Procedural History

Defendants filed a motion to dismiss the Complaint on September 17, 2013, which was fully briefed and filed with the Court on November 15, 2013. (ECF No. 12.) On February 14, 2014, while the motion to dismiss was pending, Metier Tribeca filed their petition for relief under Chapter 11. (ECF No. 18.) A Notice of Bankruptcy Filing and Automatic Stay was subsequently filed in this litigation on February 18, 2014. (Id.)

Plaintiffs filed a notice of appearance in the bankruptcy court on February 24, 2014 and subsequently made several unsuccessful attempts to compel the production of documents by the Debtor, Blanch, and other nonparties as part of thebankruptcy proceeding. (ECF No. 24 at 4.) On March 14, 2014 the bankruptcy court ordered the appointment of a Trustee, who replaced Blanch as manager of Debtor, and on May 22, 2014 the court approved the sale of substantially all of Debtor's assets. (Id. at 4; ECF No. 27 at 7.) In its May 22 order, the bankruptcy court explicitly noted that "nothing herein grants [Plaintiffs] or any other party relief from the automatic stay to pursue claims against the Trustee or the [Debtor's] estate." (ECF No. 24 at 5.) That same day, Plaintiffs served document requests on Blanch and other nonparties in this action. (Id.)

On June 6, 2014, the Trustee sent a letter to Plaintiffs, stating his position that the documents sought "are exclusively the property of the Debtor's estate," and that further attempts to obtain the Debtor's records or property would "be met with a motion by the Trustee in the Bankruptcy Court to hold plaintiffs in contempt of the automatic stay." (Id. at 6; ECF No. 27 at 7.) On June 17, 2014, Plaintiffs sent a letter to this Court requesting that the Court continue its consideration of the motion to dismiss with respect to Blanch. (ECF No. 27 at 9.) Finally, on June 19, 2014, Blanch responded with a letter to the Court requesting leave to file a motion to stay these proceedings.

II. Discussion

A. Legal Standard

This Court possesses independent statutory authority to determine whether the automatic stay issued in the Debtor's bankruptcy proceeding should be extended to Plaintiffs' action against Blanch. 28 U.S.C. § 1334(b); see In re Baldwin-United Corp. Litig., 765 F.2d 343, 347 (2d Cir. 1985).

Section 362(a) of the Bankruptcy Code provides for an automatic stay of "proceeding[s] against the debtor" upon the filing of a petition under Chapter 11. § 362(a)(1). Generally, the scope of the stay extends only to the debtor and does not give shelter to nondebtor codefendants or third parties. See Residential Capital, LLC v. Fed. Hous. Fin. Agency, No. 12 Civ. 5116, 2013 WL 4056195, at *1 (S.D.N.Y. Aug. 12, 2013). A narrow exception may be available, however, where "unusual circumstances" bind the interests of the debtor and nondebtor so that "a judgment against the [nondebtor] defendant will in effect be a judgment or finding against the debtor." See A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986).

The crux of this exception, as articulated by the Second Circuit in Queenie, Ltd. v. Nygard International, is whether there are "strong ties" between the nondebtor and the debtor such that a judgment against the nondebtor "will have an immediate adverse economic consequence for the debtor's estate"or the liability of the nondebtor will be imputed to the debtor by operation of law. 321 F.3d 282, 287 (2d Cir. 2003); see also Robert Plan Corp. v. Liberty Mut. Ins. Co., No. 09 Civ. 1930, 2010 WL 1193151, at *3 (E.D.N.Y. Mar. 23, 2010); DeSouza v. Plusfunds Grp., Inc., No. 05 Civ. 5990, 2006 WL 2168478, at *2 (S.D.N.Y. Aug. 1, 2006). Courts should also consider whether such an extension "would work a hardship on plaintiffs, by giving an unwarranted immunity from suit to solvent co-defendants." CAE Indus. Ltd. v. Aerospace Holdings Co., 116 B.R. 31, 32 (S.D.N.Y. 1990).

In order for the unusual circumstances exemption to be warranted, however, the purpose served by extending the automatic stay to a nondebtor must also be consistent with the purpose of the stay itself. Gray v. Hirsch, 230 B.R. 239, 243 (S.D.N.Y. 1999). As courts within the Second Circuit have recognized, the automatic stay under Section 362(a) is intended to "permit the debtor to organize his or her affairs without creditor harassment and to allow orderly resolution of all claims." CAE Indus. Ltd., 116 B.R. at 32. Therefore, while courts in the Southern District have extended the automatic stay to nondebtor officers and principals of debtor corporations, they have done so "only where the stayed actions would have posed a serious threat to the debtors' reorganization efforts" or otherwise inhibited resolution of the debtor's bankruptcy.See Gray, 230 B.R. at 243; accord In re Uni-Marts, LLC, 404 B.R. 767, 781 (Bankr. D. Del. 2009). The movant bears the burden of demonstrating the need for such a stay. See LaSala v. Needham & Co., Inc., 399 F. Supp. 2d 421, 427 (S.D.N.Y. 2005).

C. Analysis

Blanch argues that a stay of these proceedings under Section 362(a) is appropriate and necessary because the complaint inextricably intertwines the identities of Blanch and the Debtor. In support of this position, Blanch makes two assertions: (1) that the claims against him clearly arise out of actions taken in his capacity as Debtor's officer and (2) that he is "undisputedly" entitled to indemnification, such that any claims against him create an immediate liability for the Debtor. Blanch therefore contends that sufficiently "strong ties" exist between himself and the Debtor so as to warrant the application of the "unusual circumstances" exception set out in A.H. Robins and applied by courts in the Second Circuit. See Queenie, 321 F.3d at 282, 87; In re Saint Vincents Catholic Med. Ctrs. of N.Y., 449 B.R. 209, 214 (S.D.N.Y. 2011).

1. The Unusual Circumstances Exception

Blanch has not established that his liability would be derivative of his former status as the Debtor's officer or that he has an absolute right to indemnification, such that a judgment against him would create an immediate adverseconsequence for the Debtor. See Cano v. DPNY, Inc., 287 F.R.D. 251, 261-62 (S.D.N.Y. 2012). First, claims based upon a corporate officer's personal actions are direct and not derivative in nature. See CAE Indus. Ltd., 116 B.R. at 33-34. Second, although New York law allows a corporation to indemnify an officer for actions undertaken in the scope of his employment, indemnification is not allowed where the actions of the officer were undertaken in bad faith, "were the result of active and deliberate dishonesty," or where the officer gained "a financial profit or other advantage to which he was not legally entitled." N.Y. Bus. Corp. Law §§ 721-722. Courts in the Second Circuit have therefore declined to extend the automatic stay where a nondebtor...