Alvarez v. Bateson

WOODWARD, J. The instant appeal calls upon this Court to decide, for the first time, whether a Maryland trial court can grant a stay of a judicial proceeding, under the automatic stay provision of 11 U.S.C. § 362 , as to a non-bankrupt co-defendant of a debtor without a prior order granting such a stay from the bankruptcy court administering the debtor’s estate. We hold that the trial court cannot. Appellants, Jose Alvarez, Ramon Jimenez, Augustin Lemus, Anselmo Reyes, Lucio Rivera, and Amoldo Salgado obtained judgments in the Circuit Court for Montgomery County against Bateson Construction, Inc. (“Bateson Construction”) and appellees, Cynthia and Dean Bateson, jointly and severally, for unpaid regular and overtime wages. Appellants then transmitted their judgments to the Circuit Court for Howard County for the purpose of executing on real property solely owned by Cynthia Bateson.

The circuit court granted a writ of execution on Cynthia Bateson’s property. Thereafter, a ¹³⁸ Suggestion of Bankruptcy was filed because Bateson Construction had previously filed for protection under the federal bankruptcy laws. 1 The circuit court granted a stay of all proceedings as to Bateson Construction, but not as to appellees. Appellees then filed a motion to vacate the writ of execution and to stay all proceedings as to them. The circuit court granted appellee’s motion.

Appellants timely noted this appeal and present one question for our review, which we have slightly rephrased: Did the circuit court err in applying the bankruptcy stay, 11 U.S.C. § 362 , to appellees, who are not in bankruptcy proceedings? 2 For the reasons set forth herein, we reverse the judgment of the circuit court and remand for further proceedings consistent with this opinion. BACKGROUND On March 23, 2005, appellants filed a complaint in the Circuit Court for Montgomery County against Bateson Construction and appellees, individually, in order to recover unpaid regular and overtime wages pursuant to the Maryland Wage and Hour Law, 3 the Maryland Wage Payment and Collection Law, 4 and the Fair Labor Standards Act (FLSA). 5 On December 20, 2005, appellants filed a motion for summary judgment. No response was filed by Bateson Construction or appellees. In an Order and Judgment filed January 18, 2006, ¹³⁹ the Circuit Court for Montgomery County granted appellants’ motion for summary judgment and entered judgments against Bateson Construction and appellees, jointly and severally. 6 On February 13, 2006, appellants filed a Request for Transmittal of the judgments to the Circuit Court for Howard County, and on March 10, 2006, the judgments were recorded in Howard County.

On March 10, 2006, appellants also filed in the Circuit Court for Howard County a Request for Writ of Execution on Real Property owned solely by Cynthia Bateson in order to “satisfy the amount due” on the judgments obtained in Montgomery County. 7 On March 21, 2006, the circuit court issued an Order Directing Issuance of Writ of Execution on Real Property, and the writ was thereafter served by the Sheriff. Appellees and Bateson Construction filed a Suggestion of Bankruptcy in the Circuit Court for Howard County on March 27, 2006. Therein, it was stated that on July 6, 2005, Bateson Construction had filed a petition for relief under Chapter 7 of Title 11 of the United States Bankruptcy Code and, pursuant to 11 U.S.C. § 362 , the bankruptcy petition “operate[d] as a stay of any further proceedings in th[e] instant action until the United States Bankruptcy Court for the District of Maryland grants relief from the stay, the case is closed, or the case is dismissed.” On March 29, 2006, appellants filed an opposition to the Suggestion of Bankruptcy, asserting that “[t]he stay pursuant to 11 U.S.C. § 362 [ ] only operates as a stay to [ ] Bateson Construction.” Thus, appellants claimed, “pro ¹⁴⁰ ceedings as to [appellees], ... including the Writ of Execution as to real property held in the name of Cynthia Bateson alone, should proceed.” In an Order dated March 31, 2006, the Circuit Court for Howard County stayed the proceedings as to Bateson Construction, but not as to appellees. On April 13, 2006, appellees filed a motion to vacate the writ of execution and to stay the proceedings against them.

In their motion, appellees argued that the case should have been stayed both as to Bateson Construction and as to appellees, individually. Appellants filed an opposition, contending that the stay of proceedings as to appellees was not supported by law and thus the court should keep the stay in effect as to Bateson Construction only. By Order dated April 25, 2006, the Circuit Court for Howard County granted appellees’ motion, vacating the writ of execution and staying “the entire proceeding.” Appellants filed a timely Notice of Appeal to this Court. DISCUSSION Appellants maintain that the Circuit Court for Howard County “erred when it extended the 11 U.S.C. § 362 bankruptcy stay to [appellees].” Appellants argue that the automatic stay of section 362(a)(1) is limited to debtors only and does not extend to non-bankrupt co-defendants.

Thus, appellants reason, because only Bateson Construction filed for protection under Chapter 7 of the Bankruptcy Code and Chapter 7 “contains no provision to protect non-debtors who are jointly hable on a debt with the debtor,” the proceeding should not have been stayed as to appellees. Further, appellants point out that, although the case of A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir.), cert. denied, 479 U.S. 876 , 107 S.Ct. 251 , 93 L.Ed.2d 177 (1986), recognized that “unusual circumstances” may exist to justify a stay of proceedings against a non-bankrupt co-defendant, no “unusual circumstances” exist in the instant case, because appellees and Bateson Construction are jointly and severally hable to appellants on the judgments. ¹⁴¹ Appellees have not filed a brief in the instant appeal. However, in their Motion to Vacate Order Granting Writ of Execution filed in circuit court, appellees contended that, pursuant to AH. Robins Co., “unusual circumstances” existed from which the circuit court could properly stay the proceedings against them, as non-bankrupt co-defendants.

In particular, appellees argued that, because the Articles of Incorporation of Bateson Construction provide for absolute indemnity of appellees from any judgment arising out of their having been an officer or director of Bateson Construction, “any judgment obtained against [appellees] would be imputed to the debtor, Bateson Construction.” Thus, appellees reasoned, the automatic stay contained in section 362 of the Bankruptcy Code “clearly applies to both Bateson Construction, [ ] (the debtor in the pending Chapter 7 proceeding) as well as [appellees].” As a general rule, under 11 U.S.C. § 362 (a), an automatic stay will apply to halt any judicial proceeding against a defendant who has filed a petition for protection under Title 11 of the Bankruptcy Act. In AH. Robins Co., the United States Court of Appeals for the Fourth Circuit set forth the purpose of the automatic stay: The purpose of this section by its various subsections is to protect the debtor from an uncontrollable scramble for its assets in a number of uncoordinated proceedings in different courts, to preclude one creditor from pursuing a remedy to the disadvantage of other creditors, and to provide the debtor and its executives with a reasonable respite from protracted litigation, during which they may have an opportunity to formulate a plan of reorganization for the debtor. 788 F.2d at 998 . The automatic stay, however, is generally not available to non-bankrupt co-defendants 8 and applies only to bar pro ¹⁴² ceedings against the debtor.

See, e.g., S.I. Acquisition, Inc., v. Eastway Delivery Serv. Inc. (In re S.I. Acquisition), 817 F.2d 1142, 1147 (5th Cir.1987); A.H. Robins Co., 788 F.2d at 999 ; Lynch v. Johns-Manville Sales Corp., 710 F.2d 1194 , 1196 (6th Cir.1983); Williford v. Armstrong World Indus., Inc., 715 F.2d 124 , 126-27 (4th Cir.1983); C.H. Robinson Co. v. Paris & Sons, Inc., 180 F.Supp.2d 1002, 1009 (N.D.Iowa 2001). In Lynch, the United States Court of Appeals for the Sixth Circuit explained in detail why non-bankrupt co-defendants are not generally covered by the automatic stay: The legislative history of § 362 discloses a congressional intent to stay proceedings against the debtor, and no other, to preserve the status quo of the estate in an effort to ultimately effect and implement, to the extent possible, a successful and equitable reorganization or liquidation. The Notes of the Committee on the Judiciary identify the debtor as the intended primary congressional beneficiary of the stay: The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws.

It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy. The stay of proceedings was intended to promote an orderly reorganization or liquidation of the debtor’s estate thereby benefitting, secondarily, creditors of the estate: The automatic stay also provides creditor protection.

Without it, certain creditors would be able to pursue their own remedies against the debtor’s property. Those who acted first would obtain payment of the claims in preference to and to the detriment of other creditors. Bankruptcy is designed to provide an orderly liquidation procedure under which all creditors are treated equally. A ¹⁴³ race of diligence by creditors for the debtor’s assets prevents that.

Nothing in the legislative history counsels that the automatic stay should be invoked in a manner which would advance the interests of some third party, such as the debtor’s co-defendants, rather than the debtor or its creditors. This Court concurs with the district court’s conclusion that it would distort congressional purpose to hold that a third party solvent co-defendant should be shielded against his creditors by a device intended for the protection of the insolvent debtor and creditors thereof. 710 F.2d at 1197 (emphasis added) (internal citations and quotations omitted) (footnote omitted). These principles were recognized in Maryland in the case of Collier v. Eagle-Picher Indus., Inc., 86 Md.App. 38 , 585 A.2d 256 , cert. denied, 323 Md. 33 , 591 A.2d 249 (1991). Writing for this Court, then Chief Judge Alan Wilner stated: Title 11 U.S.C. § 362 (a) provides, in relevant part and with certain exceptions not applicable here, that the filing of a petition under Chapter 11 of the Bankruptcy Act operates as a stay of judicial proceedings pending against the debtor when the petition was filed....

It is universally acknowledged, however, 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. In conformance with this principle, it is well established that an automatic stay under § 362 does not usually affect a State court’s ability to proceed with either a trial or an appeal involving a debtor’s co-defendants, so long as the proceeding is stayed as to the debtor. Id. at 47-48, 585 A.2d 256 (emphasis added) (internal citations and quotations omitted). Nevertheless, in A.H. Robins Co., the Fourth Circuit recognized a narrow exception to the general rule that the automatic stay provision is applicable only to debtors, holding that if “unusual circumstances” exist, the automatic stay can be ¹⁴⁴ extended to cover non-bankrupt co-defendants. 788 F.2d at 999 . 9 The court reasoned: [T]here are cases [under 362(a)(1)] where a bankruptcy court may properly stay the proceedings against non-bankrupt co-defendants but, ... in order for relief for such non-bankrupt defendants to be available under (a)(1), there must be unusual circumstances and certainly [something more than the mere fact that one of the parties to the lawsuit has filed a Chapter 11 bankruptcy must be shown in order that proceedings be stayed against non-bankrupt parties.

This unusual situation, it would seem, arises 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. An illustration of such a situation would be a suit against a third-party who is entitled to absolute indemnity by the debtor on account of any judgment that might result against them in the case. To refuse application of the statutory stay in that case would defeat the very purpose and intent of the statute. Id.

(alteration in original) (internal quotations omitted). The United States District Court for the District of Maryland described the “unusual circumstances” exception in Gee v. Lucky Realty Homes, Inc., 210 F.Supp.2d 732 , 736 n. 7 (D.Md.2002) (quoting A.H. Robins Co., 788 F.2d at 999 ), as the “ ‘unusual situation’ in which the debtor’s identity is intertwined with that of the non-debtor — such as, for example, a non-debtor entitled to absolute indemnity from the debtor.” 10 ¹⁴⁵ Although the court in A.H. Robins Co. held that the automatic bankruptcy stay was available to non-bankrupt co-defendants in certain “unusual circumstances,” it never answered the procedural issue of how and where non-bankrupt co-defendants must proceed in order to obtain the automatic stay already provided for the debtor. In other words, what is the appropriate court to grant such a stay and who is the proper party to make such a request? In Collier , we alluded to this procedural question, but did not decide it.

Collier involved eight plaintiffs suing three defendants to recover for injuries resulting from the plaintiffs’ exposure to asbestos-containing products. 86 Md.App. at 42 , 585 A.2d 256 . After appeals were noted from the trial court’s reduction of the verdicts pursuant to the Uniform Contribution Among Tort-Feasors Act, now codified at Md.Code (1974, 2006 Repl. Vol), §§ 3-1401 to 3-1409 of the Courts and Judicial Proceedings Article, two of the three defendantappellees filed for protection under Chapter 11 of the Bankruptcy Code. Collier, 86 Md.App. at 47 , 585 A.2d 256 .

This Court then stayed the appeals as to the debtor-appellees. Id. The remaining non-bankrupt appellee, however, sought to extend the automatic stay to the appeal against it. Id.

In denying the request to stay the appeal against the non-bankrupt appellee, we first observed that “ ‘there are instances where a bankruptcy court may properly stay proceedings against non-bankrupt co-defendants.’ ” Id. at 48 , 585 A.2d 256 . (quoting In re Johns-Manville Corp., 26 B.R. 405, 410 (Bankr. S.D.N.Y.1983) (emphasis in Collier)). In Collier , however, no stay had been entered by a bankruptcy court that prevented this Court from proceeding against the non-bankrupt appellee.

Id. at