In re Cincom Ioutsource, Inc., No. 06-12778.

• Decision Date: 31 October 2008
• Docket Number: No. 06-12778.
• Citation: 398 B.R. 223
• Parties: In re CINCOM iOUTSOURCE, INC., Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

398 B.R. 223

In re CINCOM iOUTSOURCE, INC., Debtor.

No. 06-12778.

United States Bankruptcy Court, S.D. Ohio, Western Division.

October 31, 2008.

Mark A. Greenberger, Cincinnati, OH, for Plaintiff.

Jason V. Stitt, Keating Muething & Klekamp PLL, Robert G. Sanker, Cincinnati, OH, for Defendant.

Cincom Systems Mauritius, Inc., pro se.

Cincom Systems India Private Limited, pro se.

Allserve Systems Corp., pro se.

Charles A. Stanziale, Jr., pro se.

James E. Burke, pro se.

ORDER DENYING MOTION TO ENFORCE THE AUTOMATIC STAY, IN PART, UNDER § 362(a)(1) AND GRANTING THE MOTION TO ENFORCE THE AUTOMATIC STAY UNDER § 362(a)(3)

JEFFREY P. HOPKINS, Bankruptcy Judge.

The chapter 7 trustee, Mark Greeberger ("Trustee"), filed a motion to enforce the automatic stay ("Motion") (Doc. 100) under § 362(a) of the Bankruptcy Code in three separate actions filed in federal district courts in New Jersey, California and New York. In two of these actions, the plaintiffs are suing Cincom Systems, Inc. ("Systems"), the parent company of the Debtor, Cincom iOutsource, Inc. ("iOutsource"), and in the forth action, a third party complaint was brought by the defendant against Systems. The Motion seeks a determination that the lawsuits should be stayed by the filing of the bankruptcy petition and the automatic stay. The Court notes that the Trustee has not sought an injunction pursuant to § 105(a) of the Bankruptcy Code enjoining further prosecution of the lawsuits mentioned, and no adversary proceeding has been instituted under Rule 7001(7) for that purpose.

A hearing on the Motion was held on September 9, 2008, at which time no live testimony was presented.¹ The Court will reference the facts suggested by the parties' pleadings and raised during the oral arguments, and will accept them as true for purposes of deciding on the Motion, only. We will refer to the three plaintiffs and the third party plaintiff, hereinafter, as the Respondents.

This is a core is a "core proceeding" as defined in 28 U.S.C. § 157(b)(2)(A), (G) and (O).

SUMMARY OF THE FACTS

iOutsource is a tiered subsidiary of Systems. Systems and its related companies entered into multiple leases and contracts with lenders to provide computer call center equipment and software products. According to Respondents, much of the equipment that was leased or purchased under these agreements was either obsolete, never delivered or did not work as promised, which resulted in the filing of the lawsuits now in dispute. It is alleged that iOutsource and Systems participated in a scheme to defraud these lenders. Subsequently, Respondents sued Systems and iOutsource asserting causes of action under state law sounding in fraud and breach of contract. See All Points Capital Corp. v. Cincom iOutsource, Inc. and Cincom Systems, Inc., Case No. 2:06-cv-03823 (E.D.N.Y.); Citicapital Technology Finance, Inc. v. Cincom Systems, Inc. and Cincom iOutsource, Inc., Case No. 3:06-cv02389 (D.N.J.); Universal Equipment Leasing Company, LLC v. Fifth Third Leasing Company v. Cincom Systems, Inc., Case No. 3:06-cv-07584 (N.D.Cal.). The Trustee contends that each of the Respondents'² lawsuits is stayed under § 362(a)(1)(action "against the debtor" or "to recover a claim against the debtor") and (3)(act "to obtain possession of property of the estate" or "to exercise control over property of the estate"). We are asked by the Chapter 7 Trustee to enforce the automatic stay to prevent further prosecution of the lawsuits pending the Trustee's performance of his prescribed duties under § 704(a)(1) of the Bankruptcy Code.

The Trustee asserts that iOutsource was the alter ego of its parent, Systems; that iOutsource and Systems' affairs were so "intertwined" that a judgment against Systems is, in effect, a judgment against iOutsource; and that a judgment against Systems will interfere with iOutsource's right of indemnification against Systems and possibly obstruct iOutsource's right of recovery of any preferences or fraudulently transferred funds held on account by Systems. The Trustee's adversary complaint against Systems³ filed in this Court seeks relief under the following counts: (1) declaratory judgment of alter ego; (2) breach of fiduciary duty to debtor; (3) breach of fiduciary duty to creditors; (4) fraudulent transfers; (5) liability of directors and shareholders for unlawful distributions; (6) preferential transfers; (7) unjust enrichment/constructive trust; and (8) attorney fees. The complaint also seeks a determination that Systems be found liable for all the debts of iOutsource. It further seeks the imposition of a constructive trust upon "the Debtor's assets" in the possession of Systems.

LAW & ANALYSIS

The Trustee's Motion to enforce the stay in the three pending lawsuits references decisions that stay non-bankruptcy litigation against non-debtor entities based upon various statutory provisions. The Court will examine each of those Code sections in turn.

I. 11 U.S.C. § 362(a)(1)

A. Acts Against the Debtor

The Sixth Circuit has made it abundantly clear that the § 362(a)(1) stay of acts "against the debtor" is to be strictly construed. In Patton v. Bearden, 8 F.3d 343 (6 th Cir.1993), the partners of a debtor partnership attempted to use the automatic stay as a sword to stop nonbankruptcy litigation against them as individuals. Rejecting the argument, the Sixth Circuit stated:

Clearly, section 362(a)(1) stays any actions against the debtor ....

... The stay does not extend ... to separate legal entities such as corporate affiliates, partners in debtor partnerships or to codefendants in pending litigation.

Id. at 350 (emphasis added).

Based upon Patton, we conclude that the actions filed by Respondents against Systems and Fifth Third Leasing Company ("Fifth Third") do not constitute acts "against the debtor" or an "act to recover a claim against the debtor" that are stayed by § 362(a)(1).

II. 11 U.S.C. § 105(a)

Our discussion turns next to the third party complaint Fifth Third filed against Systems in California district court. After being sued over its role in assigning UEL rights to a series of alleged sham leases and contracts, Fifth Third filed a third party complaint against Systems for fraud and breach of contract, among other claims. There is no dispute among the parties that the automatic stay applies to iOutsource. However, the dispute in this instance arises because the Trustee (joined not surprisingly by Fifth Third) wishes to see the entire lawsuit in California district court stayed, including the action by UEL against Fifth Third.

Relying on A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994 (4th Cir.1986), the Trustee contends that § 362(a)(1) "extends to nonbankruptcy claims against non-debtors 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' or `a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.'" Motion at 7.

The Sixth Circuit addressed this issue in Patton.

It should be noted that such extensions, although referred to as extensions of the automatic stay, were in fact injunctions issued by the bankruptcy court after hearing and the establishment of unusual need ... to protect the administration of the bankruptcy estate.

Patton, 8 F.3d at 343. Patton concluded that such relief is really a request for injunctive relief under § 105(a). Id.; see also In re National Century Fin. Enters., Inc., 423 F.3d at 567, 579 (6th Cir.2005) ("only when the bankruptcy court enjoins an action under § 105(a) must it consider the four preliminary injunction factors, and apply a standard of clear and convincing evidence").

A request for injunctive relief must be brought by adversary proceeding. See Fed. R. Bankr.P. 7001(7); see also In re Swallen's, Inc., 205 B.R. 879, 880 (Bankr. S.D.Ohio 1997) (denying motion for § 105(a) injunctive relief for failure to seek such relief by adversary proceeding); accord National Century Fin. Enters., Inc., 423 F.3d at 579 ("Normally, a debtor initiates an adversary proceeding in order to request a § 105(a) preliminary injunction."). Even if such relief was available through motion practice, the Trustee failed to present any evidence at the hearing, let alone clear and convincing evidence.

Were these the only arguments for extension of the stay advanced by the Trustee in the Motion, our work would be done. Each of the lawsuits which the Trustee seeks to enforce the stay against would be allowed to proceed without further delay. However, the Trustee also raises the specter that these lawsuits are stayed under § 362(a)(3) which cabins creditor actions "to obtain possession of property of the estate or to exercise control over property of the estate."

III. 11 U.S.C. § 362(a)(3).

A. Acts to Exercise Control Over Property of the Estate

The Trustee also contends that Respondents are asserting causes of action in their complaints that constitute acts "to exercise control over property of the estate," in violation of § 362(a)(3).

1. Claims and Defenses in Other Actions as Property of the Estate

The Trustee argues strenuously that the bankruptcy petition filed by iOutsource stays all "nonbankruptcy claims for additional causes of action pursued by the trustee on behalf of creditors including ... breach of fiduciary duty to debtor and/or creditors, trust fund, and fraudulent transfers." Motion at 10-11. The Trustee, apparently, contends that UEL's lawsuit against Fifth Third is so "inextricably intertwined" with claims he is attempting to recover in the bankruptcy court litigation against Systems as to constitute an act "to exercise control over property of the estate." Moreover, the Trustee asserts that Systems and iOutsource are indispensable parties to the California litigation and that any verdict rendered in that case may have preclusive effect upon claims or defenses that belong to the bankruptcy estate....