United States District Court, N.D. Illinois, Eastern Division
September 15, 2004.
STEPHEN LEE, Plaintiff,
RCN CORPORATION and ROBERT CURREY, Defendants.
The opinion of the court was delivered by: JOHN GRADY, Senior District Judge
Before the court is defendant Currey's motion to stay
proceedings. For the reasons that follow, the motion is denied.
Lee filed this action against RCN and Robert Currey alleging
that he was unlawfully deprived of stock at the time of a merger
between RCN and other related entities. Currey was an officer of
one of these related entities at the time of the merger, and
became an officer of RCN after the merger.
On May 27, 2004, RCN filed a voluntary petition for Chapter 11
bankruptcy protection in the Bankruptcy Court for the Southern
District of New York. On August 11, 2004, Currey filed the
instant motion to stay the proceedings arguing that the automatic
stay applicable to RCN pursuant to 11 U.S.C. § 362 should be
extended to him as well.
The purpose of the automatic stay is to "protect the debtor from an uncontrollable scramble for its assets in a number of
uncoordinated proceedings in different courts, to preclude one
creditor from pursuing a remedy to the disadvantage of the other
creditors. . . ." Fox Valley Constr. Workers v. Pride of the Fox
Masonry & Expert Restorations, 140 F.3d 661, 666 (7th Cir. 1998)
(quoting A.H. Robins Co. v. Piccinin, 788 F.2d 994, 998 (4th
Cir. 1986)). It is clear from a plain reading of § 362(a) that
the automatic stay applies only to Chapter 11 debtors.
11 U.S.C. § 362(a)(1); see also Fox Valley, 140 F.3d at 666; Pitts v.
Unarco Indus., Inc., 698 F.2d 313, 314 (7th Cir.), cert.
denied, 464 U.S. 1003 (1983). Adopting a literal reading of §
362(a) comports with the overall purpose of the statute the
section was intended to protect the assets of the debtor for the
benefit of creditors, and was "not designed to afford collateral
benefits to non-debtor parties involved in litigation with the
debtor as party defendants or as co-defendants. The debtor is not
stayed from pursuing claims in its favor and plaintiffs are free
to pursue the debtor's codefendants." In re. Koop, 2002 WL
1046700, at *3 (Bankr. N.D. Ill. May 23, 2002) (emphasis added).
In certain unusual circumstances, however, an automatic stay
under § 362 may be extended to nondebtor co-defendants. See In
re. Fernstrom Storage & Van Co., 938 F.2d 731, 736 (7th Cir.
1991). The first exception, known as the "identity of interest"
exception, applies 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." Id. (quoting A.H. Robins, 788 F.2d at 999). The
second exception operates when "the pending litigation, though
not brought against the debtor, would cause the debtor, the
bankruptcy estate, or the reorganization plan irreparable harm."
Id. (citations and internal quotations omitted).
Currey focuses his attention on the "identity of interest"
exception. Currey submits that RCN is obligated under its
Articles of Incorporation to indemnify him and that RCN in fact
has been paying for his defense in the present action. These
facts, which appear uncontroverted, make out a colorable claim
for extension of the stay under the "identity of interest"
exception. See In re. Kmart Corp., 285 B.R. 679, 688 (Bankr.
N.D. Ill. 2002). Simply, a judgment against Currey may in effect
constitute a judgment against RCN. But Currey has another
problem. The weight of authority holds that a request to extend a
§ 362 stay is to be filed in the court where the bankruptcy
action is pending, and further, that the request is to be filed
by the debtor. See, e.g., In re. Richard B. Vance & Co.,
289 B.R. 692, 697 (Bankr. C.D. Ill. 2003); In re. Lennington,
286 B.R. 672, 674 (Bankr. C.D. Ill. 2001); C.H. Robinson Co. v.
Paris & Sons, Inc., 180 F.Supp.2d 1002, 1015 (N.D. Iowa 2001).
This makes sense. The bankruptcy court is in the best position to evaluate the effect on the bankruptcy estate, if any,
of litigation against a nondebtor co-defendant. And the request
should be filed by the debtor because it is the debtor's
interests, not those of the nondebtor co-defendants, that are
intended to be protected by an extension of the stay.
Accordingly, Currey's motion for a stay of the proceedings is
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