Zwick Partners, LP v. Quorum Health Corp.

456 F.Supp.3d 949

ZWICK PARTNERS, LP and Aparna Rao, individually and on behalf of all others similarly situated, Plaintiffs,

v.QUORUM HEALTH CORP., et al., Defendants.

No. 3:16-cv-02475

United States District Court, M.D. Tennessee, Nashville Division.

Filed April 27, 2020

Corey D. Holzer, Marshall Dees, Holzer & Holzer, LLC, Atlanta, GA, J. Alexander Hood, II, Jeremy A. Lieberman, Michael J. Wernke, Pomerantz LLP, New York, NY, James A. Holifield, Jr., Holifield Janich Rachal & Associates, PLLC, Knoxville, TN, Patrick V. Dahlstrom, Pomerantz LLP, Marc C. Gorrie, Chicago, IL, Paul Kent Bramlett, Robert P. Bramlett, Bramlett Law Offices, Nashville, TN, for Plaintiff Aparna Rao.

Paul Kent Bramlett, Bramlett Law Offices, Nashville, TN, Michael J. Wernke, Pomerantz LLP, New York, NY, for Plaintiff Zwick Partners LP.

Brandon R. Keel, Jessica Perry Corley, Lisa R. Bugni, King & Spalding LLP, Atlanta, GA, Gary A. Orseck, Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, DC, James Auman Haltom, John Thompson Baxter, William W. Drinkwater, Nelson, Mullins, Riley & Scarborough, LLP, Nashville, TN, for Defendant Quorum Health Corporation.

Gary A. Orseck, Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, DC, James Auman Haltom, John Thompson Baxter, William W. Drinkwater, Nelson, Mullins, Riley & Scarborough, LLP, Nashville, TN, Jessica Perry Corley, Lisa R. Bugni, King & Spalding LLP, Atlanta, GA, for Defendants Thomas D. Miller, Michael J. Culotta.

Gary A. Orseck, Jack A. Herman, Lauren M. Cassady, Wendy Liu, William J. Trunk, Robbins, Russell, Englert, Orseck, Untereiner & Sauber LLP, Washington, DC, Jason W. Callen, Lauren Patten, Robert Jackson Walker, Butler Snow LLP, Nashville, TN, for Defendants Community Health Systems, Inc., Wayne T. Smith, W. Larry Cash.

ORDER

WAVERLY D. CRENSHAW, JR., CHIEF UNITED STATES DISTRICT JUDGE

Quorum Health Corporation ("Quorum") recently filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq., and the parties agree that any claims against Quorum are subject to the automatic stay provision of 11 U.S.C. § 362(a)(1). (See Doc. No. 303.) That provision stays any "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). The parties disagree, however, as to whether the Court should stay the case as to the other Defendants, including Community Health Systems, Inc. ("CHSI") and the individual defendants (collectively, "non-Quorum Defendants"). Based on this disagreement, the non-Quorum Defendants filed the instant Motion for a Temporary Stay on Account of Quorum's Chapter 11 Proceedings (Doc. No. 310), which Plaintiffs oppose (Doc. No. 311).¹

"Clearly, section 362(a)(1) [automatically] stays any actions against the debtor. " Patton v. Bearden, 8 F.3d 343, 349 (6th Cir. 1993). But actions against non-debtor defendants are stayed under § 362(a)(1) only in "unusual circumstances," which arise when "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.’ " In re Eagle-Picher Indus., Inc., 963 F.2d 855, 861 (6th Cir. 1992) (quoting A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986) ). "Courts interpreting this directive have stayed actions against non-debtor co-defendants ‘where they have found that the bankrupt estate would be adversely affected because the creditor's action would prevent the non-debtor from contributing funds to the reorganization, or would consume time and energy of the non-debtor that would otherwise be devoted to a reorganization effort.’ " In re MCSi, Inc., 371 B.R. 270, 271–72 (S.D. Ohio 2004) (quoting Gray v. Hirsch, 230 B.R. 239, 243 (S.D.N.Y. 1999) ); see also NHI REIT of TX-IL, LLC v. LaSalle Grp., Inc., 387 F. Supp. 3d 850, 851–52 (M.D. Tenn. 2019).

Courts sometimes frame the issue as whether they should "extend" the automatic stay, but it is important to note the distinction between enforcing an automatic stay under § 362(a) and extending an automatic stay beyond its statutory terms. Although both actions require a court to find the presence of unusual circumstances, the latter refers to the bankruptcy court's decision to extend the automatic stay's coverage to non-debtors by issuing an injunction under § 105(a) of the Bankruptcy Code. See In re Nat. Century Fin. Enterprises, Inc., 423 F.3d 567, 578 (6th Cir. 2005) ; see also In re Johnson, 548 B.R. 770, 788 (Bankr. S.D. Ohio 2016). Because the district court cannot "extend" the statutory terms of a § 362(a) stay, the actual issue before the Court is whether the automatic stay protecting Quorum also protects the non-Quorum Defendants.

The Court is not convinced that unusual circumstances exist such that the automatic stay applies to the non-Quorum Defendants. The burden of showing "unusual circumstances" to invoke an automatic stay falls on the party seeking the stay. See LaSalle, 387 F. Supp. 3d at 851–52 (citations omitted). Here, the non-Quorum Defendants have neither shown that a judgment against them would effectively be a judgment against Quorum, nor have they shown that Quorum's reorganization efforts would be adversely affected by them proceeding forward in this case. See MCSi, 371 B.R. at 271–572. Instead, the crux of their argument is that "the claims against Quorum are inextricably intertwined with the claims against its former officers ... and the CHSI Defendants," and "[i]t would be wildly inefficient to allow the claims against the non-Quorum Defendants to proceed without the participation of Quorum, only to have to relitigate those same issues once Quorum emerges from bankruptcy." (Doc. No. 310 at 2.) However, just because the non-Quorum Defendants share a similar legal or factual nexus to Quorum does not mean they can invoke an automatic stay of proceedings under § 362(a). See, e.g., Lynch v. Johns-Manville Sales Corp., 710 F.2d 1194, 1199 (6th Cir. 1983) ("It is universally acknowledged that an automatic stay of proceeding accorded by § 362 may not be invoked by entities such as sureties, guarantors, co-obligors, or others with a similar legal or factual nexus to the Chapter 11 debtor."); Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1205 (3d Cir. 1991) ("the automatic stay is not available to non-bankrupt co-defendants of a debtor even if they are in a similar legal or factual nexus with the debtor"). Thus, because the non-Quorum Defendants have not met their burden to show "unusual circumstances" to justify the automatic stay under § 362(a)(1),² the Court does not find that the automatic stay applies to the non-Quorum Defendants.

Nor have the non-Quorum Defendants convinced the Court to exercise its inherent authority to stay this case in the interests of judicial economy. See Landis v. N. Am. Co., 299 U.S. 248, 254, 57 S.Ct. 163, 81 L.Ed. 153 (1936) ("the power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants"). Although the Court agrees that allowing the claims against the non-Quorum Defendants to proceed without Quorum's participation may be somewhat inefficient and potentially duplicative, the Sixth Circuit has explained "that any duplicative or multiple litigation which may occur is a direct by-product of bankruptcy law. As such, the duplication, to the extent that it may exist, is congressionally created and sanctioned."...