IN RE: STRONG BUILT, INC., Debtor. ACADEMY, LTD., ET Al., Plaintiffs v. CHAD AND ALLEN MAYWALD Defendants.

Case No. 03-31317, Adversary No. 03-3027.United States Bankruptcy Court, W.D. Louisiana, Monroe Division.
March 15, 2004

HENLEY HUNTER, Bankruptcy Judge

This matter comes before the Court on a Hearing for injunctive relief by plaintiffs, who seek a temporary stay of litigation in a state court proceeding filed against Bass Pro Shops, Inc. This is a Core Proceeding pursuant to 28 U.S.C. § 157(b)(2)(G). This Court has jurisdiction pursuant to 28 U.S.C. § 1334 and by virtue of the reference by the District Court pursuant to Local District Court Rule 83.4.1 incorporated into Local Bankruptcy Rule 9029.3. No party has sought to withdraw the reference, nor has the District Court done so on its own motion. This Court makes the following Findings of Fact and Conclusions of Law in accordance with F.R.B.P. 7052. Pursuant to these reasons, the Application for Injunctive Relief is GRANTED.

Findings of Fact
This debtor, Strong Built, Inc. (“Strong Built”) is a supplier of camping/hunting merchandise to Academy, Ltd. (“Academy”). Strong Built filed a bankruptcy case under Chapter 11 on June 7, 2003. Thereafter, plaintiffs herein filed this application for injunctive relief to extend the stay as applied to Strong Built to prohibit the litigation of state court proceedings against Academy. The automatic stay has already affected the state court tort actions against the debtor. In this adversary

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proceeding, the plaintiffs seek to stay the pre-petition tort action pending in Harris County, Texas of Chad Maywald and Cody Allen Maywald against Academy, under §§ 105 and 362, based on the existence of contractual and statutory indemnity owed to Academy for damages sustained as a result of a products liability action, and pursuant to debtor’s insurance agreement, the debtor is bound by a self-insured retainer to fund the first $250,000.00 in defense costs. By the terms of the plaintiffs’ pre-hearing memoranda, they are seeking only a temporary extension of the stay, which would expire at the confirmation of a plan of reorganization.

A hearing was held on March 3, 2004, at which the parties relied heavily on the joint pre-trial statement and the written memoranda before the Court. Academy represents about 12% of Strong Built’s business, and is their largest customer. Under the purchase orders between these entities, Strong Built is required to indemnify and hold Academy harmless from any liability resulting from the Maywald action. Strong Built’s insurance policy requires it to fund the first $250,000.00 of defense costs and claims per occurrence.

The Maywald action stems from an accident involving a deer stand manufactured by Strong Built and sold by Academy. Mr. Maywald’s injuries include paralysis. A copy of the state court complaint has been filed in the instant action, showing that the allegations against the plaintiffs are based on Texas products liability law.

Applicable Law Analysis
Defendants assert this Court lacks jurisdiction as to a non-debtor, Academy, under the “arising under,” “arising in,” or “related to” language of 28 U.S.C. § 1334(b), citing Celotex v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 1498 (1995). In support of that contention, they cite various cases dealing with suits where the bankruptcy debtor is not necessarily a party, and,

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correctly argues, that, even where jurisdiction does exist under § 1334(b), it is not without limit under 11 U.S.C. § 362(a). That provision permits claims against non-debtor co-defendants to be severed, unless an exception exists for “unusual circumstances,” recognized by the Fifth Circuit and other courts.

In opposing the relief sought, defendants argue that the relationship between Academy and Strong Built does not constitute a “unity of interest,” sufficient to justify extending the automatic stay to Academy, citing In re Babcox Wilcox, 2001 WL 536305 (E.D.La. 5/18/01). However, this Court questions whether such a finding of unitary interest is even necessary, since what links these two parties is not merely the indemnity contracts, but the fact that they are both named defendants in the products liability suit instituted by the Maywalds, wherein the debtor is the manufacturer, Academy is the seller, and there are no separate allegations of liability made against Academy. Thus, the action is clearly stayed against debtor under 11 U.S.C. § 362(a).

Regarding extension of the automatic stay to the state court litigation against Academy, Reliant Energy Services, Inc. v. Enron Canada Corp., 349 F.3d 816, 824 (5th Cir. 10/29/2003) provides:

The purposes of the bankruptcy stay under 11 U.S.C. § 362 `are to protect the debtor’s assets, provide temporary relief from creditors, and further equity of distribution among the creditors by forestalling a race to the courthouse.’ GATX Aircraft Corp. v. M/V Courtney Leigh, 768 F.2d 711, 716 (5th Cir. 1985). `By its terms the automatic stay applies only to the debtor, not to co-debtors under Chapter 7 or Chapter 11 of the Bankruptcy Code nor to co-tortfeasors.’ Id. This Court has also noted that `[s]ection 362 is rarely, however, a valid basis on which to stay actions against non-debtors.’ Arnold v. Garlock, Inc. 278 F.3d 426, 436 (5th Cir. 2001). However, an exception to this general rule does exist, and a bankruptcy court may invoke § 362 to stay proceedings against nonbankrupt co-defendants 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 and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.’ A.H. Robins Co., 788 F.2d at 999. This Court recognized the A.H. Robins Co.’s exception

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in Arnold, but declined to extend it in that case because no claim of a formal tie or contractual indemnification had been made to create an identity of interests between the debtor and nondebtor. 278 F.3d at 436. Also, in Edwards v. Armstrong World Industries, this Court refused to extend the A.H. Robins exception to a surety, holding that a supersedeas bond may be executed against the surety of a judgment debtor. 6 F.3d 312, 316-17 (5th Cir. 1993), reversed on other grounds, 514 U.S. 300, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995).
Though the district court found that the exception should extend to Enron Canada in this case, its order was premised largely on its finding that Enron Canada was not obligated under the contract to pay for the debts of the other Enron parties. The district court’s conclusion that the Netting Agreement does not impose joint liability upon the different Enron Parties was actually a part of its analysis as to whether or not the bankruptcy stay should extend to Enron Canada. As the district court premised its decision on its interpretation of the Netting Agreement, and as we have held that the Netting Agreement is ambiguous, we vacate the district court’s decision to extend the bankruptcy stay, and remand to the district court to reconsider this issue in light of its findings as to the meaning of the Netting Agreement. Should the district court find that the Netting Agreement imposes no obligation upon Enron Canada to cover the debts of the other Enron parties, then the bankruptcy stay issue will become moot. If, however, the district court finds that a joint obligation is imposed by the Netting Agreement, then it will have to re-visit this issue in light of that new finding.

As applied to the case at bar, the indemnity contract imposing a $250,000.00 self insured retainer, alone, does not rise to the level of an obligation to pay the debts of Academy such that Strong Built can be said to be the real party defendant and that a judgment against the Academy will in effect be a judgment or finding against the debtor. Further, even the indemnity agreement whereby the debtor agrees to indemnify Academy for the damages incurred by way of the debtor’s supplied product, does not link the two parties such that it is the real party at interest, if Academy could be held liable for its negligent conduct apart from a products liability claim. The indemnity agreement does not require the debtor to be liable for all of the debts of Academy such that the debtor takes on the exposure to litigation not related to its own product supplied.

However, in finding whether a judgment against Academy will in effect be a judgment or

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finding against the debtor, the Court must look to the state court complaint, which is attached herein as an exhibit to the complaint for injunctive relief. Therein, the tort claimant alleges a products liability and negligence action against the debtor and Academy. Looking at the state court complaint, even though the complaint states that Academy was negligent in its selling the deer stand despite an alleged failure to warn of the risk of injury, this is not an allegation of negligence separate from that which stems from the Texas products liability cause of action, but rather is wholly connected to the manufacturer’s alleged negligence under Texas C.P.R.C. § 82.002. Despite the attempt in an amended complaint in that case to couch the complaint in the alternative as a separate negligence action, it is still a products liability “failure to warn” complaint as defined by Texas C.P.R.C. § 82.001(2), and thus there is no separate allegation of liability against Academy made by the Maywalds. Further, not only on the basis of contractual indemnity, but also as a matter of products liability law in Texas, a judgment against seller Academy, in this tort action, would constitute a judgment against the manufacturer-debtor, Strong Built.[1] Texas C.P.R.C. § 82.002, Manufacturer’s Duty to Indemnify.

This Court concludes that limited injunctive relief should be granted. The temporary nature of the relief upsets the defendants’ argument that such a ruling would be a de facto
discharge for Academy. In addition to the foregoing, considering the fact that this seller is the debtor’s largest customer, it is beyond peradventure that a judgment against the debtor would imperil its efforts at

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reorganization, and that an expenditure of $250,000.00 for defense costs that are not budgeted in its case would adversely impact the reorganization. There is no showing that limited injunctive relief would harm the Maywald plaintiffs. The public interest suggests that affording debtor an opportunity to reorganize to pay its creditors, including the several other tort-plaintiffs, militates in favor of injunctive relief.

The debtor obtained an order extending the exclusivity period for the filing of a plan in the related bankruptcy case dated October 1, 2003, which extended the exclusivity period for the filing of a plan for 120 days and 180 days to seek acceptances of such plan, to be reckoned from October 7, 2003, the date of expiration of the original exclusivity period. Accordingly, this Court will order a preliminary injunction to terminate 120 days from October 1, 2003, and to extend another 60 days, without further order of the court, if debtor files a plan within the period allowed under the October 1, 2003, order.

Pursuant to the foregoing reasons, the plaintiffs’ application for preliminary injunctive relief is GRANTED. A separate and conforming Order will enter.

[1] Counsel for the Maywalds participated in the March 3 hearing by telephone, and therein informed the Court that a non-suit had been entered against Strong Built in the state court proceeding the preceding day. This Court observed that such an action was without relief being granted by this Court. Under Eighth Circuit jurisprudence, such actions in violation of the stay are voidable. It would appear difficult for the Maywald plaintiffs to dismiss all of their demands against Strong Built in such a manner as to avoid implicating Texas law and/or the indemnity agreements. Nevertheless, such action cannot be taken without this Court’s imprimatur.

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