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Section 362 Automatic Stay

Monge v. Rojas, et al. (September 25, 2014)
Issues: Individual Debtors (as Plaintiffs), brought adversary proceeding against multiple Defendants. All secondary Defendants settled prior to and during trial; only primary Defendants remained. Most of Plaintiffs’ claims against remaining Defendants and Defendants’ counterclaims against Plaintiffs were based exclusively on state law causes of action, and some claims and counterclaims were based on the Bankruptcy Code. Prior to trial, all remaining parties consented to entry of a final judgment by the Bankruptcy Court. However, given the recent holdings of the Fifth Circuit regarding the constitutional authority of the Bankruptcy Court to enter a final judgment on state law claims even with consent of the parties, the Bankruptcy Court submitted 178 pages of Proposed Findings of Fact and Conclusions of Law to the District Court for review under 28 U.S.C. §157(c)(2) and Bankruptcy Rule 9033. Following review, the District Court largely adopted the Bankruptcy Court’s proposed findings and conclusions, and entered final judgment for Plaintiffs.

The disputes centered around four different residential properties and commercial property developments located in the States of New Mexico and Texas. In general, Plaintiffs sought turnover of and declaratory relief regarding certain real property in the possession of Defendants, and actual and exemplary damages based on breach of contract, fraud, breach of fiduciary duty, negligence, gross negligence, the Texas Deceptive Trade Practices Act, equitable theories under state law, and violation of the automatic stay. In general, the remaining Defendants asserted counterclaims and affirmative defenses based on the Texas Property Code, breach of contract, equitable theories under state law, statute of limitations, and section 365(i) of the Bankruptcy Code. The Bankruptcy Court conducted a six-day trial on the merits, which featured over 15 witnesses and thousands of documents. Holdings: The Bankruptcy Court proposed (and the District Court adopted) a judgment in favor of Plaintiffs and against the remaining Defendants for turnover of possession of one of the real properties, and actual damages, attorneys fees, and pre-judgment interest totaling about $1 million. In general, the Bankruptcy Court’s proposed findings and conclusions (1) awarded damages to Plaintiffs based on breach of contract and violation of the automatic stay; (2) determined that Plaintiffs were entitled to possession and turnover of certain real property held by Defendants; (3) found that the Texas Property Code did not apply to real property located in the State of New Mexico; (4) found that section 365(i) of the Bankruptcy Code did not apply to a lease/option which expired by its terms prior to Plaintiffs’ bankruptcy filing; (5) found that several of Plaintiffs’ causes of action relating to some of the properties were barred by the statute of limitations; (6) determined that the fraud-based claims of Plaintiffs should be denied; and (7) found that some of the damages sought by both Plaintiffs and Defendants were speculative.

In re S.H Leggitt (April 12, 2011)
Issues:   Plaintiffs had filed a class action suit in state court against certain corporations as Defendants in a district court in Kansas. Previously, the Debtor (one of the named Defendants), and several other corporations had entered into a stock purchase agreement whereby certain funds were deposited into escrow pursuant to an escrow agreement (“Escrow Funds”). Plaintiffs filed a Motion for Relief from Stay in Debtor’s bankruptcy case requesting the Court to determine that the automatic stay of 11 U.S.C. §362 did not apply to the state court suit and the Escrow Funds, or alternatively for relief from stay. The Debtor and Creditors Committee opposed the Motion. Holdings:  The Court determined that the Debtor’s interest in the Escrow Funds was, at a minimum, “arguable property” of the Debtor’s bankruptcy estate and the subject of a “non-frivolous dispute”; and thus the automatic stay of 11 U.S.C. §362 applied to a portion of the Escrow Funds. From the limited evidence presented, it appeared that the Debtor had a right to a portion of the Escrow Funds upon termination of the escrow agreement.  The Court also concluded that a determination and declaration of whether and the extent the Debtor had an interest in such Escrow Funds must be made as part of an adversary proceeding (and not through a motion for relief from stay) due to intertwined and complex facts, numerous potential impacted parties, and complex transactional documents in this particular case.  The Court also lifted the automatic stay for “cause” to allow the state court suit to proceed subject to the limitations placed on the Escrow Funds by the Court, as the state court suit dealt with interpretation of Kansas law and other state laws, issues relating to class certification were pending in state court, and after considering the interests of judicial economy, comity, jurisdiction, and balancing of harms.