Capitale Ventures I, LLC

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	:
: 	Chapter 11
CAPITALE VENTURES I, LLC, 	:
: 	Case No. 14-11984 (ALG)
Debtor. 	:
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MEMORANDUM DECISION AND ORDER DENYING MOTION FOR AN
EMERGENCY STAY
On July 2, 2014 debtor Capitale Ventures I, LLC (“Capitale”) filed a chapter 11 petition
in this Court and on the next day, MM 130 Bowery Rest. Corp. d/b/a Capitale filed a similar
petition. At the time of the filings both entities were defendants in an action in the District Court
captioned Patrick Westropp, on behalf of himself and others similarly situated against MM 130
Bowery Rest. Corp., Capital [sic] Ventures I, LLC and Seth Greenberg, 13 Civ. 4958, pending
before District Court Judge Woods.
The Westropp action is brought on behalf of a putative class (not certified as of this date)
and charges the defendants with violations of the Fair Labor Standards Act, 29 U.S.C. §§ 201 et.
seq. and the New York Labor Law. There is no dispute that the bankruptcy filings automatically
stayed the Westropp action against the defendants that had filed chapter 11 petitions and that the
action was not automatically stayed against the individual defendant, Greenberg, the president
and controlling person of Capitale, who did not file personally.
Capitale has now filed a motion under § 105 of the Bankruptcy Code to extend the
automatic stay so as to suspend the Westropp action against Greenberg personally. The motion
seeks a stay until confirmation of a plan, dismissal of the bankruptcy case or further order of this
Court on the ground that continuation of that suit will expose the Debtor to risks of being
collaterally estopped by determinations therein, will burden or distract Greenberg from pursuing
reorganizational efforts, and will use resources that would otherwise benefit all of Capitale’s
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creditors (who assertedly stand to receive a 100% recovery on their claims in the Debtor’s
chapter 11 case). Debtor’s Motion, p. 3. The Westropp plaintiffs oppose the motion for a stay and
assert that they intend to proceed forthwith against Greenberg personally in the litigation.
DISCUSSION
There is no question that 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). On the other hand, there is also no question that courts have, under
§ 105 of the Bankruptcy Code, extended the automatic stay to principals and affiliates of a
debtor. 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). In Queenie, Ltd. v. Nygard Int’l, 321 F.3d 282, 287 (2d Cir. 2003), the Circuit Court held
that even in the absence of a motion the automatic stay applied to an individual debtor’s personal
holding company, where “a claim against the non-debtor will have an immediate adverse
economic consequence for the debtor’s estate.” Id.
Notwithstanding the theoretical availability of the relief Capitale seeks, it has not shown
entitlement thereto 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 the Circuit said 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.
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As to interference with the management of the Debtor, 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 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. 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). The possibility
that Greenberg will be unable to manage the Debtor because of the lawsuit is speculative based
on the instant record, especially as Capitale may not be actively engaged in business at present.
Finally, Capitale asserts that a stay will preserve resources for its creditors, who allegedly
stand to recover 100% of their claims. 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).
There the District Court quoted from a bankruptcy treatise and stated “the test for issuance of a
§ 105 injunction is best stated as follows:
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.”
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210 B.R. at 233, quoting 2 Collier 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).
The Debtor here has not made the necessary showings on the instant record. It has not
shown a “danger of imminent, irreparable harm.” It has not shown the likelihood of a successful
reorganization. It has not shown that the balance of relative harms tilts in its favor. It has not
shown that the public interest favors a stay. Based on the current record, the motion for a stay is
denied, without prejudice.
IT IS SO ORDERED.
Dated: New York, New York
July 21, 2014
s/Allan L. Gropper
UNITED STATES BANKRUPTCY JUDGE
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