Durr Mechanical Construction, Inc. v. I.K. Construction Inc.

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re: 	:
:
DURR MECHANICAL CONSTRUCTION, 	:
INC. 	: 	Chapter 11
: 	Case No. 18-13968 (SMB)
Debtor. 	:
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DURR MECHANICAL CONSTRUCTION, 	:
INC. 	:
:
Plaintiff, 	:
:
against 	: 	Adv. Proc. No. 19-01308
:
I.K. CONSTRUCTION INC., 	:
:
Defendant. 	:
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MEMORANDUM DECISION GRANTING MOTION TO
EXTEND AUTOMATIC STAY TO NON-DEBTOR INSURERS
A P P E A R A N C E S:
LAMONICA HERBST & MANISCALCO, LLP
3305 Jerusalem Avenue
Wantagh, New York 11793
Adam P. Wofse, Esq.
Michael T. Rozea, Esq.
Of Counsel
Attorneys for Plaintiff
Bittiger Elias & Triolo P.C.
12 Route 17 North, Suite 206
Paramus, New Jersey 07652
Priscilla J. Triolo, Esq.
Of Counsel
Attorneys for Defendant
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STUART M. BERNSTEIN
United States Bankruptcy Judge:
The Debtor, Durr Mechanical Construction, Inc. (“Durr”), commenced this
adversary proceeding against I.K. Construction Company (“I.K.”), a subcontractor of
Durr, seeking monetary and injunctive relief and objecting to I.K.’s proof of claim. The
matter presently before the Court concerns Durr’s motion to extend the automatic stay
to non-debtors Zurich North America (“Zurich”) and Zurich’s affiliate Fidelity & Deposit
Company of Maryland (“Fidelity” and together with Zurich, the “Insurers”). Fidelity
issued a surety bond (“Payment Bond”) which covers Durr’s alleged breach of the
parties’ subcontract and I.K. has sued Fidelity in New Jersey state court (“New Jersey
Litigation”) to recover on the Payment Bond. The trial is imminent.
For the reasons that follow, the Court concludes that the continuation of the New
Jersey Litigation will have an immediate, adverse economic impact on Durr’s estate.
Accordingly, the Court grants the Durr’s motion to extend the automatic stay and
enjoins I.K. from continuing to prosecute the New Jersey Litigation against Fidelity.
BACKGROUND
The relevant factual background is set forth in Durr’s adversary complaint
(“Complaint”), 1 filed contemporaneously with the instant motion (“Motion”). 2 Where
applicable, the background also draws on facts presented in the Certification of Ian
1 	Complaint against I.K. Construction Inc., dated July 2, 2019 (ECF Doc. # 1). Unless otherwise
indicated, “ECF” refers to the electronic docket in this adversary proceeding; “ECF Main” refers to the
electronic docket in Durr’s main bankruptcy case. The citation “¶” refers to a paragraph in the Complaint.
2 	Debtor’s Motion Seeking the Entry of an Order (i) Granting a Declaratory Judgment Extending
the Automatic Stay to the I.K. State Court Litigation or, in the Alternative, (ii) Granting a Preliminary
and Permanent Injunction, dated July 2, 2019 (ECF Doc. # 2).
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Katwaroo, President of I.K. Construction Inc., in Opposition to the Motion to Extend
the Stay (“Katwaroo Cert.”) (ECF Doc. # 8-1), which is appended to I.K.’s response
(“Response”). 3
A. The Covanta Project
On June 4, 2014, Durr entered into a general contract with Covanta Essex
Company (“Covanta”) to provide construction management and other services relating
to the Essex Baghouse Project, which involved construction of three incinerators at a
site in Newark, New Jersey (“Project”). (¶ 23; Katwaroo Cert. at ¶¶ 2, 3.) Durr
subcontracted with I.K. to perform all structural steel work for the Project and agreed to
pay I.K. $4,410,000. (¶¶ 25, 27.) Their agreement was memorialized in a Subcontract
Purchase Order executed on August 13, 2014 (“Subcontract”). 4 	Durr had the right to
terminate for delay or failure to perform if I.K. failed to cure its default after three-days’
notice:
In the event the Subcontractor delays the progress of the work or the
furnishing of material, or fails in the performance of any of the provisions
of this contract, or becomes bankrupt or insolvent, the Contractor shall
have the right to cancel this contract upon three days written notice mailed
or delivered to Subcontractor at its last known address. In case of such
termination, the Subcontractor shall not be entitled to receive any further
payments under this contract until the performance of the contract has
been completed, at which time if the unpaid balance due Subcontractor
exceeds the cost of completion, said amount shall be paid to
Subcontractor, but if such expense shall exceed such unpaid balance, then
the Subcontractor shall pay the difference to the Contractor. The expenses
incurred by the Contractor shall include all damage and cost incurred
through the default of the Subcontractor.
3 	See Opposition to the Motion to Extend the Stay filed on behalf of I.K. Construction Inc., dated
July 14, 2019 (ECF Doc. # 8).
4 	A copy of the Subcontract is annexed to the Complaint as Exhibit B.
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(Terms & Conditions of the Subcontract, Ex. B, Attachment B ¶ 6, at ECF pp. 8 of 30
(ECF Doc. # 1-2).)
According to Durr, I.K.’s financial condition continued to deteriorate, it had
insufficient funds to make payroll and on February 18, 2018, its workers walked off the
Project. (¶¶ 37, 38.) That same day, Durr sent I.K a three-day notice stating that the
walk off had caused a delay to the progress of the work and warned that if the situation
was not corrected within three days, Durr would take corrective action, including
terminating the Subcontract.5 (¶ 39.) When I.K. failed to cure, Durr sent a letter, dated
March 2, 2018, terminating the Subcontract (“Termination Letter”). 6 (¶¶ 40-42.) The
unpaid balance under the Subcontract totaled $533,700 but Durr’s actual costs to
complete the scope of work totaled $1,305,614. (¶ 51.)
I.K. contends that Durr wrongfully terminated the Subcontract after I.K.
completed approximately 95% of the agreed-upon work, including full completion of
two of the three incinerators. (Katwaroo Cert. at ¶¶ 3, 6.) As of the date of the
Termination Letter, I.K. estimates that it needed less than one month to complete its
work, all materials necessary to finish the Project were on site, and I.K.’s union workers
were still showing up for work every day except Sunday. (Katwaroo Cert. at ¶¶ 3, 8.)
Moreover, despite Durr’s wrongful termination, it retained I.K.’s union workers to
complete the Project and the official job minutes do not reflect any delays. (Katwaroo
Cert. at ¶¶ 10, 11.) I.K. also claims that any delay may have been attributable to a
5 	A copy of the three-day notice is annexed to the Complaint as Exhibit C.
6 	A copy of the Termination Letter is annexed to the Complaint as Exhibit D.
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separate, intervening contract between Durr and Covanta that interrupted the schedule
for I.K.’s Subcontract performance. (Katwaroo Cert. at ¶¶ 13, 14.)
B. 	The Payment Bond and Indemnity
On July 1, 2008, Durr and others executed an Agreement of Indemnity with the
Insurers (“Indemnity”), which provided in pertinent part:
The Contractor [i.e., Durr] and Indemnitors shall exonerate, indemnify, and keep
indemnified [Zurich and its affiliates, including Fidelity] from and against any
and all liability for losses and/or expenses of whatsoever kind or nature
(including, but not limited to, interests, court costs and counsel fees) and from
and against any and all such losses and/or expenses which the surety may sustain
and incur: (1) by reason of having executed or procured the execution of the
Bonds, (2) by reason of the failure of the Contractor or Indemnitors to perform or
comply with the covenants and conditions of this Agreement or (3) in enforcing
any of the covenants and conditions of this Agreement.
(Indemnity at ¶ 2.) 7 	Durr’s obligations under the Indemnity were secured by all or
substantially all of Durr’s assets, (Indemnity at ¶ 3), and Zurich filed a UCC-1 Financing
Statement in connection with the Indemnity on July 10, 2018. (See Debtor-In-
Possession Loan Agreement and Joint Prosecution Agreement (“DIP Agreement”),
Recital D) (Main ECF Doc. # 111-1).) 8
On July 8, 2008, Fidelity provided Durr with the Payment Bond in favor of
various obligees.9 (Motion at 2.) The parties agree that Payment Bond covers Durr’s
7 	A copy of the Indemnity is annexed to the Complaint as Exhibit A.
8 	The DIP Agreement was authorized and approved under the Interim Order (I) Pursuant to 11
U.S.C. §§ 105(A), 361, 362 and 364 of the Bankruptcy Code Authorizing Post-Petition Secured Financing
from Zurich American Insurance Company and (II) Pursuant to Federal Rule of Bankruptcy Procedure
9019(A), Authorizing the Debtor and Zurich American Insurance Company to Jointly Prosecute the
Debtors Litigated Claims, dated Jan. 17, 2019 (“Interim DIP Order”) (Main ECF Doc. # 111).
9 	The Payment Bond does not appear to have been filed in either the main case or adversary
proceeding.
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unpaid obligations, if any, to I.K. under the Subcontract to the extent set forth in the
Payment Bond.
On May 1, 2016, and following the termination of the Subcontract, I.K. filed a
Bond Claim against Fidelity, asserting amounts owed under the Payment Bond for
“retainage of $489,729.00, change orders of $395,364.80, and a [sic] to be calculated
amount for contract payments.” 10 (See ¶ 44.) In response to an inquiry from Fidelity,
I.K. provided a breakdown of its claim which totaled $1,249,687.35. (Complaint, Ex. C.)
On February 20, 2017, I.K. filed an Amended Bond Claim, which revised I.K.’s total
claim upwards to $1,924,128.00.11 (See ¶ 48.)
C. 	The New Jersey Litigation
On February 24, 2017, I.K. filed the New Jersey Litigation against Durr, the
Insurers and others. (See Complaint filed in the Superior Court of New Jersey, dated
Feb. 24, 2017 (“NJ Complaint”) (ECF Doc. # 8-12).) 12 I.K sought damages in the
amount asserted in the Amended Bond Claim. The New Jersey court subsequently
granted Zurich’s motion to dismiss. (Triolo Cert. at ¶ 7.) On August 17, 2017, Durr filed
a counterclaim against I.K. for breach of the Subcontract and asserted damages in the
sum of $1,305,614.00, corresponding to “$942,500.02 in direct labor, $87,496.95 in
tools and material and $308,194.08 for vendors and subcontractors” (“Counterclaim”).
(¶¶ 51, 62.)
10 	A copy of the Bond Claim is annexed to the Complaint as Exhibit E
11 	A copy of the Amended Bond Claim is annexed to the Complaint as Exhibit F.
12 	A copy of the NJ Complaint is annexed as Exhibit C to the Certification of Priscilla J. Triolo, Esq.
in Opposition to the Motion to Extend the Stay, dated July 13, 2019 (“Triolo Cert.”) (ECF Doc. # 8-9).
The Triolo Cert. is appended to the Response.
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After Durr filed a chapter 11 petition in this Court on December 7, 2018, the New
Jersey court issued an order on December 14, 2018 (“Disposition Order”)13 addressing
the effect of Durr’s bankruptcy on the New Jersey Litigation. It provided, in relevant
part, that any party making a claim against Durr had to file a formal application with
this Court within thirty days for permission to continue the New Jersey Litigation
against Durr. Within thirty days after receiving such permission (i.e., an order granting
relief from the automatic stay), either Durr or any party seeking relief against Durr had
to file a formal motion to vacate the Disposition Order and restore the claims to the
active calendar. Failure to follow the procedure outlined by the New Jersey court would
constitute a waiver of all rights to proceed under the New Jersey Litigation caption.
No party sought relief from the automatic stay, and accordingly, Durr was
administratively dismissed from the New Jersey Litigation. (¶ 3.) However, I.K’s cause
of action against Fidelity, the remaining defendant Insurer, remains live and the New
Jersey court has scheduled the trial to begin on August 26, 2019.
D. 	The Adversary Proceeding
On March 7, 2019, I.K. filed Proof of Claim no. 60-1 (“I.K. Claim”). The I.K.
Claim seeks $1,924,128.00, the same amount asserted under the Amended Bond Claim
and the NJ Complaint. The I.K. Claim was not filed with any supporting documentation
but is clearly premised on Durr’s alleged breach of the Subcontract.
With the trial date of the New Jersey Litigation fast approaching, Durr filed the
Complaint on July 2, 2019 seeking declaratory and/or injunctive relief against I.K. In
13 	A copy of the Disposition Order is annexed as Exhibit G to the Complaint.
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addition to money damages for breach of the Subcontract (duplicating the Counterclaim
in the New Jersey Litigation), the Complaint seeks to extend the automatic stay to or
otherwise enjoin the New Jersey Litigation against the Insurers and includes an
objection to the I.K. Claim.
On the same day, Durr filed the Motion seeking to extend the automatic stay to
the Insurers or to preliminarily enjoin the continuation of the New Jersey Litigation
against the Insurers. First, Durr contends that the continuation of the New Jersey
Litigation will have an immediate, adverse economic impact on the estate. Durr has an
absolute obligation under the Indemnity to indemnify Fidelity for its litigation expenses,
including its attorneys’ fees. Its indemnity obligation will increase the secured claim
under the Indemnity and diminish the recovery available to other creditors. Second, the
New Jersey Litigation will necessarily draw Durr and its personnel into protracted
litigation on Fidelity’s behalf, draining valuable time and resources from Durr at a
critical juncture in the bankruptcy case. 14 I.K.’s principal objection to the Motion is that
enjoining the New Jersey Litigation would inequitably compel I.K. to re-assert its breach
of contract claims after litigating them in the Superior Court for nearly two-and-a-half
years and less than a month from trial. (Response at 11-12; see also Hr’g Tr. (7/15), at
10:22-11:1, 26:19-23.) I.K. also states generally that Durr has failed to show any
immediate, adverse economic consequence that would follow from the continued
prosecution of the New Jersey Litigation against the Insurers. (Id. at 8.)
14 	At a hearing held on August 5, 2019, Durr decided to forego an evidentiary hearing on the second
ground and proceed solely on the first prong of the Motion.
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DISCUSSION
As a rule, the automatic stay under 11 U.S.C. § 362(a) does not apply to non-
debtors. See Nippon Fire & Marine Ins. Co. v. Skyway Freight Sys., Inc., 235 F.3d 53,
58 (2d Cir. 2000) (“It is well established that stays pursuant to § 362(a) are limited to
debtors and do not encompass non-bankrupt co-defendants.”) (citation and quotation
marks omitted); see also McCartney v. Integra Nat’l Bank N., 106 F.3d 506, 509–10
(3d Cir. 1997) (“[I]t is universally acknowledged that an automatic stay of proceedings
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 . . . debtor.”).
However, in Queenie v. Nygard Int’l, 321 F.3d 282 (2d Cir. 2003), the Second
Circuit recognized a limited exception to this general rule, holding that the automatic
stay may extend to non-debtors in circumstances where a claim against the non-debtor
will have an immediate, adverse economic impact on the estate. Accord Picard v.
Fairfield Greenwich Ltd., 762 F.3d 199, 212 (2d Cir. 2014). The Queenie Court provided
three specific examples that would warrant an extension of the stay: (1) a claim to
establish an obligation as to which the debtor is a guarantor, id. at 287 (citing
McCartney, 106 F.3d at 510–11); (2) a claim against the debtor’s insurer, id. at 287-88
(citing Johns–Manville Corp. v. Asbestos Litig. Grp. (In re Johns–Manville Corp.), 26
B.R. 420, 435–36 (Bankr. S.D.N.Y 1983)); and (3) actions where “there is such identity
between the debtor and the third-party defendant that the debtor may be said to be the
real party defendant[.]” Id. at 288 (citing A.H. Robins Co. v. Piccinin, 788 F.2d 994,
999 (4th Cir. 1986)).
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Durr contends that it continues to be the real party defendant in the New Jersey
Litigation because it has an absolute obligation to indemnify Fidelity. In A.H. Robins,
cited by the Queenie Court, the Fourth Circuit articulated the circumstances under
which a debtor and non-debtor will have the requisite identity of interests to warrant an
extension of the stay:
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.
788 F.2d at 999; accord Tenas-Reynard v. Palermo Taxi Inc., No. 14 CIV. 6974 (PGG),
2016 WL 1276451, at *6 (S.D.N.Y. Mar. 30, 2016) (where debtor’s liability was
“automatic and co-extensive” with non-debtor defendant’s liability, the automatic stay
extended to non-debtor because “a claim against [the non-debtor] will, when entered,
constitute a claim (and hence, an ‘immediate adverse economic consequence’) against
[the debtor’s] estate.”) (citation omitted); Robert Plan Corp. v. Liberty Mut. Ins. Co.,
No. 09-CV-1930 (JS), 2010 WL 1193151 (E.D.N.Y. Mar. 23, 2010) (stay extended to
contempt action against the officers of debtor corporation because the debtor was
required to indemnify them if they lost and, win or lose, was required to indemnify them
for their legal fees).
Here, Fidelity’s liability under the Payment Bond is wholly derivative of Durr’s
liability for its alleged breach of the Subcontract and Durr has an absolute obligation to
indemnify Fidelity for its losses should it lose and its legal expenses and attorneys’ fees,
win or lose. Furthermore, the indemnification obligation is secured by Durr’s assets.
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Thus, the continuation of the New Jersey Litigation against Fidelity will have an
immediate, adverse economic impact on the estate and its unsecured creditors.
The adverse impact is exacerbated, in part, by I.K.’s own actions and inactions.
I.K. did not seek relief from the automatic stay in accordance with the Disposition Order
to continue the New Jersey Litigation against Durr. As a result, the claims against Durr
were dismissed. I.K. subsequently filed the I.K. Claim, as was its right, but in doing so,
it submitted to the equitable jurisdiction of this Court to decide its claim that Durr
breached the Subcontract and owes damages. Langenkamp v. Culp, 498 U.S. 42, 44
(1990) (“[B]y filing a claim against a bankruptcy estate the creditor triggers the process
of ‘allowance and disallowance of claims,’ thereby subjecting himself to the bankruptcy
court's equitable power.”) (quoting Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 58
(1989)); see also Stern v. Marshall, 564 U.S. 462, 518 (2011) (“By filing a proof of claim,
the creditor agrees to the bankruptcy court's resolution of that claim, and if the creditor
wins, the creditor will receive a share of the distribution of the bankruptcy estate.”). 15
Durr filed the adversary proceeding to object to the Claim and to assert its own
counterclaim under 28 U.S.C. § 157(b)(2)(b)(C) and Fed. R. Bankr. P. 3007(b).
Consequently, unless the Court extends the automatic stay, Durr will have to pay for the
same trial twice, once in New Jersey (against Fidelity) and once in this Court (as part of
the claims allowance process).
15 	I.K. implores the Court to deny the Motion in order to preserve its purported right to a jury trial,
(see Response at 10 (“There is no reason why IK should be prohibited from proceeding at trial to prove the
substance of the Bond Claim, as amended, and obtain a verdict.”)), but that right was forfeited once I.K.
filed a claim against the Durr bankruptcy estate. Langenkamp, 498 U.S. at 45 (“Respondents filed claims
against the bankruptcy estate” and “[c]onsequently, they were not entitled to a jury trial”).
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Furthermore, the trial of the I.K. Claim objection and Durr’s counterclaim will
resolve the entire controversy because the resolution of who breached the Subcontract is
integral to the allowance or disallowance of the I.K. Claim. At a prior hearing, the
Insurers’ counsel stated that the Insurers would be amenable to a procedure by which all
disputes would be tried in this Court. In this way, all of the claims can be tried once
instead of twice, and in one court instead of two.
Accordingly, the motion to extend the automatic stay is granted. The Court has
considered I.K.’s remaining arguments and concludes that they lack merit. Durr is
directed to settle an order on notice to I.K. and the Insurers.
Dated: New York, New York
August 12, 2019
/s/ Stuart M. Bernstein
STUART M. BERNSTEIN
United States Bankruptcy Judge
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