Case No. 11-47422-wsd.United States Bankruptcy Court, E.D. Michigan, Southern Division — Detroit.
September 12, 2011
OPINION AND ORDER IN CONNECTION WITH DEBTOR’S MOTION TO QUASH STATE COURT SHOW CAUSE ORDER (DOCKET NO. 79) AND MOTION TO STAY FURTHER STATE COURT PROCEEDINGS (DOCKET NO. 80)
WALTER SHAPERO, Bankruptcy Judge
I. FACTS AND BACKGROUND
The Court held a hearing on the above referenced Motions on September 8, 2011, at which the attorneys for the Debtor, the bankruptcy attorney for the state court receiver, and the state court attorney for the state court receiver appeared. Incident thereto, and as gleaned from the pleadings and prior extensive hearings in this case, the following appear to be the salient facts relevant to disposition of the indicated Motions:
1. Katony Corporation and Stanley Mitchell obtained a judgment against Debtors, Steven Vannoy and Patricia Vannoy, and Kidz Playland Corporation in the Wayne County Circuit Court on or about October 1, 2009;
2. Steven Vannoy and Patricia Vannoy are husband and wife and are the principals, owners, and operating officers and managers of the Debtors; They both have and continue to take an active role in its affairs;
3. Thereafter, on October 15, 2009, the state court entered an Order Appointing Receiver (“Receivership Order”) over the judgment Debtors with respect to nine specified properties “in the possession of, under the control of, or held in the name of” said judgment Debtors, with the ultimate goal of liquidating same and applying the proceeds to the Receivership expenses and the judgment debt;
4. The appointed Receiver, Gregory Saffady, commenced performing his duties and obligations under the Receivership Order, including taking steps to sell some or all of saidPage 2
properties; He also initiated proceedings to seek state court approval of some of those sales and for other relief, some of which was contested by Debtors and/or the Vannoys;
5. As recited in a state court order dated February 10, 2011, the Receivership Order was expanded, apparently by an order dated July 20, 2010, to encompass “all of Defendants’ non-exempt property” and to provide for actions with respect to specified property of Patricia Vannoy; That state court order of February 10, 2011, also restrained the said Defendants “from any action or transfer of rights or assets that might reduce Receiver’s ability to carry out” that order;
6. On March 18, 2011, Debtors filed this Chapter 11 bankruptcy petition;
7. Soon thereafter, Debtors moved to have all of the realty covered by the Receivership Order (and/or the proceeds of any previously effected sales thereof) turned over to the Debtors, pursuant to 11 U.S.C. § 543; That section generally, and with specified exceptions and protections, requires a custodian (defined as including a receiver) of a debtor’s property to turn such over to a bankruptcy debtor (in a Chapter 11 case) or to the case trustee in a Chapter 7 case;
8. Extensive evidentiary hearings were held on Debtors’ Turnover Motion; Those hearings were concluded on June 24, 2011, at which time the Court issued a bench opinion stating its conclusions and findings and requiring Debtors to prepare and present an order for entry consistent therewith; On August 31, 2011, this Court issued its “Order Governing Receiver and Debtor in Possession Pursuant to the Court’s Findings After the Evidentiary Hearing as to the Applicability of 11 U.S.C. § 543” (Docket No. 87) effectuating its June 24, 2011 findings and conclusions (this Court has previously directed that a copy of that Order be given to the state court); Among other things, that Order states that all nine parcels of real estate which were the subject of the original Receivership Order “are property of the bankruptcy estate;” That Order also goes on to permit, and indeed direct, the state court receiver to (a) consummate sales of any of such properties that were the subject of a signed purchase agreement prior to the filing of the bankruptcy case, and (2) turnover to the Debtors of the remaining properties and all proceeds of all sales, whether before or after the bankruptcy filing (such to be separately held by the Debtors and not disbursed pending further Bankruptcy Court order); That Order further provides for extensive reporting, accounting, and other requirements designed to wind up the receivership with a view to ultimate accounting for, and disposition of, realized proceeds pursuant to orders of this Court, as is contemplated and required by 11 U.S.C. § 543.
9. On August 4, 2011, the Receiver’s state court attorney filed in the state court a “Petition for Order to Show Cause Why Defendant and Those Acting in Concert with Defendant Should Not be Held in Contempt,” which was signed by said attorney and verified by the state court receiver, requesting that court to enter its “order directing that the following persons appear before the Court and show cause why they should not be held in contemptPage 3
for failure to comply with the court’s order and/or for interfering with the Court’s appointed receiver in carrying out his duties:
Defendant Steven Vannoy
Defendant Patricia Vannoy
Defendants’ Bankruptcy Attorney, Robert Reed
Defendants’ Bankruptcy Hearing Witness who offered to purchase Receivership property in an obviously sham transaction”
10. On August 5, 2011, the state court issued its Order to Show Cause (with the name Sherri S. Saad inserted in the order as the referred to Bankruptcy Hearing Witness) setting a hearing thereon for September 16, 2011, at 9:00 a.m.; There is no indication in the record when or how that order and the initiating petition were served on the subjects of that order; That order requires the above named individuals to show cause “why they should not be held in contempt for failure to cooperate with and for interfering with the court Appointed Receiver in carrying out the Receiver’s duties as ordered by this court”;
11. On August 29, 2011, the Debtors filed the Motions referred to in the title of this Opinion, and this Court issued an Order setting an expedited hearing for September 8, 2011. In essence, Debtors seek to prevent the state court show cause hearing, scheduled for September 16, 2011, from taking place at all;
12. Previously, this Court had issued a Case Management Order, which, among other things, set a deadline of July 18, 2011, for the filing of a Combined Plan and Disclosure Statement; Debtors filed such on September 1, 2011; Debtors have indicated it would be shortly filing an amended Plan; If that is done in normal course, the Court would promptly review it for disclosure statement adequacy, and if such was adequate, the Court would issue a preliminary approval order setting a confirmation date and setting the other deadlines designed to move the case toward confirmation; The expectation being that such could occur within the next 90 days or so, depending on objections to the proposed Plan and other justiciable issues related to Plan confirmation;
13. Incident to other matters in this Chapter 11 case which were heard by this Court at its September 8, 2011, hearing, it appears that all sales of property permitted to consummated by the Receiver under this Court’s Order of August 31, 2011, will not likely be finalized, if at all, before December 8, 2011; This Court, with the input of the parties including the Receiver and his state court attorney, has set a conference on that date (which will be on the record) to determine the status of all such permitted sales; Pursuant to that Order, a full and final accounting from the Receiver will not likely be rendered until some time thereafter, and it appears that the status of such sales and/or the rendering and finalization of such accounting could be important, if not conditions precedent, to confirmation of any plan put forth by the Debtors.
II. DISCUSSION
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Commencing with the bankruptcy case filing, 11 U.S.C. § 362
enjoins continuation of proceedings to collect a claim against the Debtors, the enforcement of a pre-petition judgment against the Debtors, and any act to obtain possession of property of the estate or to exercise control over property of the estate, and any act to collect, assess or recover a claim against the Debtors that arose before the commencement of the bankruptcy estate. This Court’s referred to Order of August 31, 2001, very carefully and specifically defines what the Receiver can (and must) do and what he cannot do. As noted, all of the real estate parcels specifically covered by the Receivership Order are property of the estate and, except as specifically directed or permitted in this Court’s indicated Order, the Receiver is not allowed or permitted to do anything else with reference to that property.
The state court’s Show Cause Order as worded is overly broad and clearly encompasses, and its language allows for, the very real possibility of that court finding Mr. and Mrs. Vannoy and their bankruptcy attorney, Robert Reed, to be in contempt with respect to matters involving those nine parcels of property and the very acts which the Receiver is precluded from engaging in under this Court’s August 31, 2001, Order with reference to that property. Therefore, any actions the Receiver may pursue and/or the state court might take at that hearing related to those indicated properties (or the disposition thereof) or the indicated individuals, which is in any way inconsistent with the provisions of this Court’s August 31, 2011, Order, can and will be considered by this Court to be in violation of that Order, and likely to be in violation of the 11 U.S.C. § 362 stay. This covers actions against (1) Mr. and Mrs. Vannoy, as well as those through whom the corporate debtor acts, and (2) Robert Reed, the Debtors’ bankruptcy attorney, and (3) Sherri S. Saad. Nor can the fact of filing the bankruptcy case be a basis for the sought after contempt. The provision in the Receivership Order which might be a basis for such may not, as worded, be applicable to the
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bankruptcy filing, but more importantly is likely unenforceable as a matter of public policy to the extent it has the effect of appropriating Debtors’ property for the benefit of some, but not all, of its creditors, and thus is likely offensive to the purpose and stated meaning of § 543 and the bankruptcy process.
A more significant issue here is the extent to which the Receiver can proceed in the state court against Mr. and Mrs. Vannoy individually, and with respect to their non-exempt (if any) individually owned property, for liquidation and application of same to their individual liability on the judgment to the extent permitted under the Receivership Orders. As argued, § 362 applies only to the Debtors and the Debtor’s property. There are disagreements among bankruptcy courts as to the extent to which, and under what circumstances they can in effect extend the stay (or issue injunctions) to protect co-obligors with, or guarantors of, obligations owed by a debtor. That inquiry is fact intensive and normally involves criteria and tests applied to preliminary injunctive relief, developed in an appropriate evidentiary hearing directed essentially to the likelihood that, and the extent to which, if any, non-bankruptcy proceedings against non-debtors will materially adversely affect the reorganization process.
III. CONCLUSION AND ORDER
Taking all of the foregoing into consideration, the Court concludes and orders as follows:
1. With the exception of those hereinafter specifically set forth, any and all proceedings in the state court pursuant to (a) the referred to August 4, 2011, Petition for Order to Show Cause, etc., (b) the Order to Show Cause issued pursuant thereto, and (c) the hearing scheduled thereunder for September 16, 2011, or thereafter, are and will be in violation of
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both the automatic stay provided for under § 362 of the Bankruptcy Code and this Court’s above referred to Order of August 31, 2011, and by reason thereof are hereby enjoined;
2. The above noted exception is that the indicated state court proceeding may go forward, but only with respect to Steven Vannoy and Patricia Vannoy; and only then, (a) with respect to any of their personally owned non-exempt property (other than their interests in the Debtors or the property of the bankruptcy estate) to the extent that such individually owned property may presently be the subject of the existing Receivership Order; and (b) with respect only to any actions of Steven Vannoy and Patricia Vannoy in their individual capacities, and not in their capacities as members, principals, employees, officials, managers of, or agents acting on behalf of the Debtors;
3. The Court will hold an evidentiary hearing on October 5, 2011, at 10:00 a.m., for the purpose of determining whether or not, or the extent to which, if any, the Court should enjoin all proceedings, including any allowed under Par. 2 above, against Steven Vannoy and Patricia Vannoy during some part of this bankruptcy case on the grounds that such may materially adversely affect the reorganization process;
Pending that hearing and issuance of this Court’s Order in connection therewith, the Court finding that short delay would not be prejudicial and, in the interest of avoiding conflict between the two courts, any and all proceedings against said individuals permitted under Par. 2 above in the state court are also hereby temporarily enjoined.
IT IS SO ORDERED.