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Dorsett-Felicelli, Inc. v. County of Clinton

June 5, 2009

DORSETT-FELICELLI, INC., DOING BUSINESS AS PYRAMIDS AND PYRAMID PRE-SCHOOL, INC., PLAINTIFFS
v.
COUNTY OF CLINTON, PAULA CALKINS LACOMBE, INDIVIDUALLY AND IN HER OFFICIAL CAPACITY AS DIRECTOR OF THE COUNTY OF CLINTON DEPARTMENT OF PUBLIC HEALTH, KATHERINE O'CONNOR, INDIVIDUALLY AND IN HER OFFICIAL CAPACITY AS EARLY INTERVENTION OFFICIAL AND PRE-SCHOOL RELATED SERVICE COORDINATOR, AND NORTH COUNTRY KIDS, INC., STEPHANIE GIRARD, KELLY MCCAULEY, AND MELISSA PUCHALSKI, DEFENDANTS.



The opinion of the court was delivered by: Randolph F. Treece United States Magistrate Judge

MEMORANDUM-DECISION and ORDER

This case has traveled an unusually circuitous routein addressing the nature of the claims.*fn1 Recently, this case has been confounded by yet another obstacle that may derail it further from a punctual resolution of all of the attending issues. Currently, the Court is confronted by a rather anomalous matter triggered by the Plaintiffs' recent filing of petitions for bankruptcy. The issue bedeviling the Court is whether 11 U.S.C. § 362, an automatic stay provision, is applicable at this time to all features of this litigation.

The Court remains unaware as to when both Plaintiffs filed petitions for bankruptcy but we can presume that such filings occurred after the filing of the Complaint. It was not until April 20, 2009, when the Court was first notified that currently pending in the United States Bankruptcy Court for the Northern District of New York, are Chapter 11 petitions for Pyramids Child Development Center and Dorsett-Felicelli, Inc. Dkt. No. 54, County Defs.' Lt.-Br., dated Apr. 20, 2009. Apparently Plaintiffs' Counsel made an application before the Bankruptcy Court for permission to act as special counsel in this litigation. Id.*fn2 Realizing that there are now parties to this litigation who have pending bankruptcy matters, the Court pondered whether the automatic stay provision of 11 U.S.C. § 362 was applicable to this civil litigation. To cut to the quick on this issue, the Court immediately held a telephone conference on May 4, 2009. The Conference did not resolve the particular issue of whether only Defendants' potential claims are stayed or if the entire litigation, including Plaintiffs' Complaint, should be stayed as well. Because the breadth of the automatic stay remained indeterminate, the Court directed the parties to brief ths issue. See Dkt. Nos., 61, Pls.' Lt.-Br., dated May 13, 2009, 62, North Country Defs.' Lt.- Br., dated May 19, 2009, & 63, County Defs.' Lt.-Br., dated May 20, 2009.

Apparently, the parties are in agreement that Defendants' prospective counterclaims*fn3 are stayed, pursuant to 11 U.S.C. § 362(a). Acands, Inc. v. Travelers Cas. and Sur. Co., 435 F.3d 252, 259 (3d Cir. 2006) (finding that the stay would not preclude nor prevent any defense interposed by defendants to a debtor plaintiff's cause of action).*fn4 Where the parties continue to differ is whether any stay automatically imposed in this action extends to Plaintiffs' Complaint as well. Plaintiffs posit that it does not, while the Defendants unanimously proffer that it does, or should.

11 U.S.C. § 362(a)(1) states that

[e]xcept as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of--(1) the commencement or continuation, including the issuance or employment of process, 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 this title, or to recover a claim against the debtor that arose before the commencement of the case under this title; (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title; (3) 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; (4) any act to create, perfect, or enforce any lien against property of the estate; (5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title; (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; (7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and (8) the commencement or continuation of a proceeding before the United States Tax Court concerning a corporate debtor's tax liability for a taxable period the bankruptcy court may determine or concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title.

11 U.S.C. 362(a) (1)-(8).

Courts have found the operative words within this statutory scheme to be "against the debtor." It is settled law within this Circuit, as well as other circuits, that the stay provision of § 362 is applicable solely to all proceedings against a bankrupt debtor. Koolik v. Markowitz, 40 F.3d 567 (2d Cir. 1994) (citing Teachers Ins. & Annunity Ass'n of Am. v. Butler, 803 F.2d 61, 62 (2d Cir. 1986); Acands, Inc. v. Travelers Cas. and Sur. Co., 435 F.3d at 259 (quoting Ass'n of St. Croix Condominium Owners v. St. Croix Hotel Corp., 682 F.2d 446, 448 (3d. Cir. 1982); Kilmer v. Flocar, Inc., 212 F.R.D. 66, 73 (N.D.N.Y. 2002) (confirming that the operative statute stays only proceedings against a "'debtor' - the term used by the statute itself").*fn5 The stay is automatic and does not require a formal request; "rather, the onus is on the party seeking to proceed to petition the Bankruptcy Court for relief from the stay." Arcands, Inc. v. Travelers Cas. and Sur. Co., 435 F.3d at 259. Whether a stay becomes operative is determined by the posture of the parties at the commencement of the action or proceeding. Koolik v. Markowitz, 40 F.3d at 568. The purpose of the stay is to serve the interests of both the debtor and creditor and to prevent any diminution in the bankrupt estate; accordingly, even the debtor cannot waive nor limit the stay in any manner. Ostano Commerzanstalt v. Telewide Sys. Inc., 790 F.2d 206, 207 (2d Cir. 1986); Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir. 1992). Nonetheless, the statute does not specifically address actions brought by the debtor. Ass'n of St. Croix Condominium Owners v. St. Croix Hotel Corp., 682 F.2d at 448. Actually, based upon the precedents reviewed by this Court, it appears that a plaintiff's action is not stayed but rather permitted and expected to proceed since it is an asset of or inures to the benefit of the bankruptcy estate. Maritime Elec. Co. Inc. v. United Jersey Bank, 959 F.2d 1194 (defendant debtor's counterclaims against plaintiff father's corporation were not stayed); Ruff v. Fiondella, 2008 WL 5220980 (D. Conn. Super Nov. 21, 2008) (the statute "does not . . . operate as a stay in the plaintiff's case against the defendant."); Kilmer v. Flocar, Inc., 212 F.R.D. 66 (plaintiff's tort action was allowed to proceed notwithstanding the plaintiff's Chapter 7 bankruptcy filing). Therefore, in weighing the facts of this Court, it appears that Plaintiffs may proceed with their civil rights action even though Defendants are stayed from prosecuting any counterclaim that they may muster.

Both groups of Defendants argue that Acands, Inc. v. Travelers Cas. & Sur. Co., provides the requisite ammunition to stay Plaintiffs' causes of action as well as their prospective counterclaim(s) during the pendency of this bankruptcy. 435 F.3d at 259- 260. They argue that if Plaintiffs proceed with their claims and then lose, Defendants would be entitled to an affirmative relief of attorney fees and costs, under 42 U.S.C. § 1988. And, in such event, it would be a significant diminution of the bankrupt estate, an consequence Congress sought to avoid by enacting 11 U.S.C. § 362(a). The genesis of their argument is the Third Circuit's dictum that reads:

[f]or a claim to fall within the scope of § 362(a)(3), it must also be shown that the grant of affirmative relief to Travelers constitutes an act to obtain possession of ACandS's contractual right to a 45% allocation of claims to the operations coverage. Although it cannot accurately be said that Travelers obtained ACandS's rights under the policy, we nevertheless hold that the grant of affirmative relief was an act barred by the automatic stay. The possession or control language of Section 362(a)(3) has consistently been interpreted to prevent acts that diminish future recoveries from a debtor's insurance policies.

Id. at 260 -261 (citations omitted).

Therein, the Third Circuit was rightfully concerned about an arbitration award diminishing an insurance policy which was an important asset of the estate.

Yet this Court is not persuaded it must legally and logically extrapolate from the concerns in Acands to prevent acts that may diminish future recoveries, that this principle should be extended to the possibility of an award of attorney fees should Plaintiffs' lawsuit fail. That possibility is too contingent and remote for it to neatly enfold within the concept of affirmative relief as contemplated by the statute and appellate interpretation. Defendants did not provide, nor was this Court able to find, any precedent that even implies that the imposition of attorney fees and costs should be a factor in calculating whether debtor's suits should be stayed during a bankruptcy. Accordingly, on this basis, the Court does not grant a stay of the entire lawsuit.

Next, Defendants submit that the Court should use the equity authority provided by 11 U.S.C. § 105 to stay the entire litigation. 11 U.S.C. § 105(a) states that "[t]he court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." The County Defendants submit that 11 U.S.C. § 105(c) in conjunction with 11 U.S.C. § 362(a) give this Court authority to issue a more comprehensive stay in this case. 11 U.S.C. § 105(c) states that "[t]he ability of any district judge . . . to exercise any of the authority or ...


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