SDNY 19 MAD PARK, LLC d/b/a SD26 Restaurant & Wine

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
__________________________________________
:
In re: 	:
:
SDNY 19 MAD PARK, LLC, 	: 	Chapter 11
:
: 	Case No. 14-11055 (ALG)
Debtor. 	:
__________________________________________:
MEMORANDUM OPINION AND ORDER DENYING MOTION
TO EXTEND AUTOMATIC STAY TO THIRD-PARTY
SDNY 19 Mad Park, LLC (the “Debtor”) filed a motion seeking entry of an order
extending the automatic stay imposed by § 362 of the Bankruptcy Code to Antonio Magliulo, a
member and the manager of the Debtor, with respect to two lawsuits (the “Actions”) commenced
against the Debtor and Mr. Magliulo. 	The first was brought by employees alleging that the
Debtor failed to comply with the New York Labor Law (“NYLL”) and the Fair Labor Standards
Act (“FSLA”) by failing to pay tips and alleged overtime to the Plaintiffs (the “Wage Action”).
The second unrelated action was brought by a former employee, alleging malicious prosecution.
The Debtor owns and operates a first-class restaurant and wine bar known as SD26 located
in the Madison Square Park area of New York City (the “Restaurant”). 	Magliulo’s management
of the Restaurant is governed by the Debtor’s Amended and Restated Operating Agreement (the
“Operating Agreement”), which contains an exculpation provision, shielding Magliulo from
liability to the Debtor for any claim, costs, damages or losses arising out of or in connection with
his managerial duties, in the absence of gross negligence or willful misconduct. 	[Operating
Agreement, § 5.1(d)]. 	In addition, the Operating Agreement provides for indemnification of
Magliulo as manager and member of the Debtor, except where there is a judicial determination of
gross negligence, bad faith, fraud or willful misconduct by the indemnitee in the discharge of his or
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her duties. [Operating Agreement, § 10.2, 10.3, 10.4 & 10.6]
The Debtor argues that allowing the Actions to proceed against Magliulo would have a
binding res judicata effect on the claims against the Debtor’s estate, that irreparable harm would be
caused to the Debtor’s estate by allowing continued prosecution of the action against Magliulo
because there is “an absolute identity of interest” between the Debtor and Magliulo, and that
Magliulo’s exculpation and indemnification rights would result in binding claims against the
Debtor’s estate. 	The Debtor further argues that any legal costs incurred by Magliulo in defending
the Actions will impair his ability to fund Debtor’s post-petition operations and impair his ability
to voluntarily defer salary when cash flow is low.
The Wage Action plaintiffs maintain that the Wage Action, which is pending in the District
Court, is ready for trial, that the Debtor’s argument based upon the indemnification provisions is
unavailing because indemnification agreements relating to NYLL and FLSA claims are
unenforceable, and that there is a strong likelihood that indemnification would be denied because
of the intentional/willful nature of Magliulo’s actions.
DISCUSSION
A bankruptcy petition ordinarily stays litigation against the filing entity and not against
principals or affiliates. Teachers Ins. & Annuity Ass’n of Am. v. Butler, 803 F.2d 61, 65 (2d Cir.
1986). 	Courts have, however, extended the automatic stay to principals and affiliates of a debtor
under § 105 of the Bankruptcy Code. 	A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994 (4th Cir.
1986); In re United Health Care Org., 210 B.R. 228 (S.D.N.Y. 1997); In re Johns-Manville Corp.,
26 B.R. 420 (Bankr. S.D.N.Y. 1983). 	Indeed, even in the absence of a motion, the Second Circuit
has concluded that the automatic stay applied as against the individual debtor’s personal holding
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company, where “a claim against the non-debtor will have an immediate adverse economic
consequence for the debtor’s estate.” 	Queenie, Ltd. v. Nygard Int’l, 321 F.3d 282, 287 (2d Cir.
2003).
The grant of a motion staying an action against a debtor’s principal, however, is
extraordinary relief. 	In re FPSDA I, LLC, 2012 WL 6681794, at *8 (Bankr. E.D.N.Y. December
21, 2012). 	As this Court concluded in In re Capitale Ventures I, LLC, 2014 Bankr. LEXIS 3099
at *3 (Bankr. S.D.N.Y. July 21, 2014), another case involving claims of employees against the
principal of a restaurant in chapter 11, the Debtor has not shown entitlement to the relief it seeks on
the record before the Court. 	The possibility that a decision in the District Court litigation will be
precedential or preclusive in litigation against the defendants is not enough. 	As stated by the
Circuit in Queenie,
We have not located any decision applying the stay to a non-debtor solely because
of an apprehended later use against the debtor of offensive collateral estoppel or the
precedential effect of an adverse decision. If such apprehension could support
application of the stay, there would be vast and unwarranted interference with
creditors’ enforcement of their rights against non-debtor co-defendants.
Queenie, 321 F.3d at 288.
For similar reasons, the possibility that Magliulo has indemnification rights against the
Debtor does not tip the balance in favor of a stay. 	First, there is conflicting law on a defendant’s
right to indemnification against a judgment in a case under the NYLL and the FLSA. 	The Wage
Action plaintiffs have cited to cases in this district where the court refused to enforce
indemnification provisions in such suits. 	See, e.g., Goodman v. Port Authority of N.Y. and N.J.,
850 F.Supp.2d 363, 388-389 (S.D.N.Y. 2012); Holt v. Animation Collective, Inc., No. 13 Civ.
2552, 2014 WL 1413548 *3 (S.D.N.Y. Apr. 9, 2014). 	Other courts in this Circuit have enforced
indemnification provisions. 	See e.g., Bogosian v. All American Consessions, No. 06 Civ. 2814,
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2011 WL 4460362 (E.D.N.Y. 2011); Amaya v. Garden City Irr., Inc., No. 03 Civ. 2814, 2011 WL
56471 (E.D.N.Y. 2011).
Without reaching this issue as a matter of substance, the Debtor fails to show that any
indemnification rights that Magliuli may have should result in a stay of the actions against him.
The fact that a Debtor may have to indemnify a third-party is alone not a sufficient basis to extend
the automatic stay to that party because the justification for extending the stay “must be consistent
with the purpose of the stay itself, [which is] to suspend actions that pose a serious threat to a
corporate debtor’s reorganization efforts.” 	FPSDA I, LLC, 2012 WL 6681794, at *11, quoting In
re Uni-Marts, LLC, 399 B.R. 400 (Bankr. D. Del. 2009). 	Although any indemnification claim
that Magliuli might have against the Debtor might arguably be liquidated in the Actions, the
possibility of the offensive use of estoppel in this case does not justify extending the stay to him, as
the Circuit Court held in Queenie. 	There is nothing in the record to indicate that Magliuli’s
defense of the Actions would not be as vigorous as if the Debtor remained a defendant. 	The
possible liquidation of the amount of an indemnification claim does not under the circumstances of
this case provide grounds to extend the stay to him.1
As in Capitale, the allegations here that there will be interference with the Debtor’s
reorganization are not sufficiently supported to justify the relief sought by the debtor. 	To quote
Capitale:
the facts of this case bear no resemblance to the mass tort cases of A.H. Robins and
Johns-Manville, where thousands of personal injury cases were pending against
corporations and the plaintiffs’ attorneys began filing them against management
after the stay against the corporate defendants went into effect. Several courts have
1 After the bankruptcy of a securities issuer, the non-debtor defendants in securities actions routinely assert
indemnification and contribution against the debtor-issuer, but as far as the Court is aware, there is no authority that
these types of lawsuits are subject to the § 105 automatic stay merely on the basis that there might be indemnification
rights against the debtor.
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refused to stay suits brought under the Fair Labor Standards Act and the New York
Labor Law against principals of corporate defendants based on alleged interference
with the principals’ management of a debtor’s affairs.
Capitale, 2014 Bankr. LEXIS 3099 at *4, citing Millard v. Developmental Disabilities Inst., Inc.,
266 B.R. 42 (E.D.N.Y. 2001); FPSDA II, LLC v. Larin (In re FPSDA I, LLC), 10-75439, 2012 WL
6681794 (Bankr. E.D.N.Y. Dec. 21, 2012), as corrected (Dec. 26, 2012), appeal dismissed,
13-CV-1093 JS, 2014 WL 108419 (E.D.N.Y. Jan. 8, 2014).
In determining whether a § 105 injunction is warranted, the following must also be
considered:
The first requirement is that there be danger of imminent, irreparable harm to the
estate or the debtor’s ability to reorganize. Second, there must be a reasonable
likelihood of a successful reorganization. Third, the court must balance the relative
harm as between the debtor and the creditor who would be restrained. Fourth, the
court must consider the public interest; this requires a balancing of the public
interest in successful bankruptcy reorganizations with competing societal
interests.”
In re United Health Care Org., 210 B.R. 228, 233 (S.D.N.Y. 1997), quoting 2 C OLLIER ON
BANKRUPTCY ¶ 105.02[2] at 105–13 (15th ed.1997), quoting In re Monroe Well Serv., Inc., 67
B.R. 746, 752–53 (Bankr.E.D.Pa.1986). 	As noted in Capitale, 2014 Bankr. LEXIS 3099 at *4,
Courts have stayed litigation against individual corporate defendants where a
collection action diverted and substantially interfered with resolution of a
bankruptcy case by foreclosing a definite and fixed source of funding necessary to
resolution of the bankruptcy. See, e.g., In re United Health Care Org., 210 B.R.
228, 233 (S.D.N.Y. 1997).
However, the Debtor has not made the necessary showing on the instant record. 	Although it has a
possibility of a successful reorganization if it is able to conclude a sale of the business, it has not
shown a “danger of imminent, irreparable harm.” Further, it has not shown that the balance of
relative harms tilts in its favor or that the public interest favors a stay.
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Based upon the foregoing, it is hereby
ORDERED, that the Debtor’s motion to extend the § 362 automatic stay is denied.
.
Dated: New York, New York
September 11, 2014
/s/ ALLAN L. GROPPER
UNITED STATES BANKRUPTCY JUDGE
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