S.I. Acquisition, Inc., Matter of

• Decision Date: 29 May 1987
• Docket Number: No. 86-1598,86-1598
• Citation: 817 F.2d 1142
• Parties: , 17 Collier Bankr.Cas.2d 207, 16 Bankr.Ct.Dec. 505, Bankr. L. Rep. P 71,841 In the Matter of S.I. ACQUISITION, INC., Debtor. S.I. ACQUISITION, INC., Plaintiff-Appellant, v. EASTWAY DELIVERY SERVICE, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1142

817 F.2d 1142

55 USLW 2671, 17 Collier Bankr.Cas.2d 207,

16 Bankr.Ct.Dec. 505,

Bankr. L. Rep. P 71,841

In the Matter of S.I. ACQUISITION, INC., Debtor S.I. ACQUISITION, INC., Plaintiff-Appellant, v. EASTWAY DELIVERY SERVICE, INC., Defendant-Appellee.

No. 86-1598.

United States Court of Appeals, Fifth Circuit.

May 29, 1987.

Kammerman, Overstreet & Hurren, Adrian M. Overstreet, David J. Gallo, Austin, Tex., for plaintiff-appellant.

David Randell, James E. Reaves, Houston, Tex., for defendant-appellee.

Appeal from the United States District Court for the Western District of Texas.

Before EDWARDS ^*, POLITZ, and HILL, Circuit Judges.

ROBERT MADDEN HILL, Circuit Judge:

S.I. Acquisition, Inc. (S.I.A.), a debtor in chapter 11 bankruptcy reorganization, appeals complaining that the district and bankruptcy courts erred in deciding that a state court action by a creditor of S.I.A.'s, Eastway Delivery Service, Inc. (Eastway), brought against S.I.A. and three nonbankrupt defendants based upon the alter ego doctrine was not stayed by 11 U.S.C. Sec. 362 as to the nonbankrupt defendants. Finding that Eastway's action against the nonbankrupt defendants was stayed, we reverse.

I.

In December 1984 Eastway and S.I.A. entered into a contract under which Eastway was to provide delivery services for S.I.A. in Houston, Texas, and S.I.A. would compensate Eastway pursuant to a negotiated rate schedule. By March 1985 S.I.A. was delinquent in paying Eastway as agreed under the contract terms.

After several demands for payment were made, partial payment was remitted to Eastway. A payment was made to Eastway by a check drawn on an account owned by Abel Contract Furniture & Equipment Co., Inc., d/b/a Abel Interiors & Stationers (Abel). A second payment was made to Eastway from the same account. ¹ As a result of these payments, Eastway continued to supply S.I.A. with delivery services, but no further payments from S.I.A. or Abel were forthcoming.

On August 9, 1985, Eastway filed an action in the 165th District Court of Harris County, Texas, to recover the balance due under its contract with S.I.A. and damages. Eastway's state court action named as defendants, S.I.A., Abel, TPO, Inc. (TPO), and Thomas P. O'Donnell, the registered agent of all three corporations. Eastway alleged that S.I.A. was liable on the contract and that Abel, TPO, and O'Donnell were accountable for S.I.A.'s debts because S.I.A. was completely controlled by Abel, TPO, and O'Donnell. Specifically, Eastway alleged:

"that Defendant S.I.A. and Defendant ABEL are in fact owned and controlled by Defendant TPO, INC., ... that Defendants TPO, INC., S.I.A. and ABEL are liable on the contract sued upon herein for the reason that S.I.A. and ABEL are but conduits by which the parent corporation, TPO, INC. does business, and that S.I.A. and ABEL operate functionally as arms or departments of the Defendant TPO, INC. This arrangement is used merely as a cloak to conceal fraud, wrongs, and injustice, and to insulate TPO, INC. from legal and financial responsibility for wrongs committed by S.I.A. and other subsidiaries.... [A]nd that Defendants S.I.A., ABEL, and TPO, INC. are but alter egos for the personal business affairs of Defendant THOMAS P. O'DONNELL ... and that THOMAS P. O'DONNELL's control and domination of Defendants S.I.A., ABEL, and TPO, INC. exists to the extent that said purported corporations' actions are in substance the actions of Defendant THOMAS P. O'DONNELL."

Soon after Eastway initiated its state court action, S.I.A. filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code. Eastway responded to S.I.A.'s bankruptcy filing by severing S.I.A. from its state court action because 11 U.S.C. Sec. 362(a)(1) automatically stayed the proceeding against S.I.A. See Wedgeworth v. Fibreboard Corp., 706 F.2d 541, 544 (5th Cir.1983) (party that files bankruptcy may be severed from state court action to avoid stay violation).

Following S.I.A.'s severance, Eastway next served written interrogatories in its state court action. The interrogatories were served on only the remaining nonbankrupt defendants Abel, TPO, and O'Donnell. The interrogatories delved into the financial and control relationship between the three corporations and O'Donnell. In response S.I.A. filed a motion to show cause in the bankruptcy court as to why Eastway should not be held in contempt for violating the automatic stay provisions of section 362.

While S.I.A.'s motion to show cause was pending, on October 25, 1985, Abel filed for relief under chapter 11 of the Bankruptcy Code. On December 1, 1985, S.I.A. requested the bankruptcy court consolidate its reorganization proceedings with those of Abel. S.I.A.'s Motion for Substantive Consolidation asserted that S.I.A. and Abel were wholly-owned subsidiaries of TPO, that they operated from a central office, that they shared a central line of credit with a secured lender, that inventory owned by one company was sold at retail by the other, and that assets of each were commingled in bank accounts. In February 1986 the court substantively consolidated the S.I.A. and Abel bankruptcy cases. ²

On November 22, 1985, the bankruptcy court held a hearing on S.I.A.'s motion to show cause. S.I.A.'s motion sought to hold Eastway in contempt for violating the stay provision of section 362 by serving interrogatories on Abel, TPO, and O'Donnell. The issue before the court, therefore, was whether the automatic stay provision of section 362 applied to bar further proceedings against nonbankrupt defendants in a state court action premised on piercing the corporate veil of the debtor, S.I.A. S.I.A. argued that the automatic stay applied to all defendants in Eastway's state court action because Eastway's alter ego claims alleged the defendants were one in the same. Eastway responded that the stay did not prohibit further prosecution against the nonbankrupt defendants because the debtor was no longer part of the state action.

On March 12, 1986, the bankruptcy court entered an order denying S.I.A.'s motion, accompanied by a memorandum opinion. In its opinion, the court concluded that Eastway's state court action against the nonbankrupt defendants was not stayed by section 362. See In re S.I. Acquisition, Inc., 58 B.R. 454 (Bankr.W.D.Tex.1986).

The bankruptcy court's judgment rests on two separate conclusions. First, the court found that Eastway's alter ego action was not "a claim assertable by the debtor-in-possession S.I.A. or a trustee in bankruptcy under 11 U.S.C. Sec. 544." Id. at 462. Secondly, since the alter ego claim could not have been brought by the debtor or trustee, the court found that it was not property of S.I.A.'s bankruptcy estate. Id. at 459 (relying upon American National Bank of Austin v. MortgageAmerica Corp. (In re MortgageAmerica ), 714 F.2d 1266 (5th Cir.1983)). The court thus concluded that the stay provision of section 362 did not apply to Eastway's cause of action against the nonbankrupt defendants. Id. at 462.

Pursuant to 28 U.S.C. Sec. 158(a), S.I.A. appealed the bankruptcy court's judgment to the district court. The district court affirmed the bankruptcy court's decision without opinion. From the district court's order, S.I.A. filed an appeal to this court. We have jurisdiction pursuant to 28 U.S.C. Sec. 158(d).

II.

The issue presented for our review is a relatively simple one to state: What is the scope of the automatic stay provided for in section 362 of the Bankruptcy Code, 11 U.S.C. Sec. 362? But as is often true, a simply stated question may elicit a difficult and complex answer. We find that to be the case here. We supply our response to the issue below, hopefully with as little obtuseness as possible, but first we set out the relevant law that will guide our decisionmaking process.

A.

We begin with the Bankruptcy Code contained in title 11 of the United States Code and section 362. The automatic stay provision in section 362 reads in relevant part:

Except as provided in subsection (b) of this section, a petition filed under sections 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970 (15 U.S.C. 78eee(a)(3)), operates as a stay, applicable to all entities, of--

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

* * *

* * * (3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;

* * *

* * *

11 U.S.C. Secs. 362(a)(1), (3).

The automatic stay provision of section 362 is a key component of federal bankruptcy law. In a chapter 11 reorganization proceeding, the stay prevents the dissipation or diminution of the bankrupt's assets while rehabilitative efforts are undertaken and prohibits the proliferation of numerous claims in different forums against the debtor. The legislative history of section 362(a) underscores its importance:

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors. It stops all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.

The automatic stay also provides creditor protection. Without it, certain creditors would be able to pursue their own remedies against the debtor's property. Those who acted first would obtain payment of the claims in preference to and to the detriment of other creditors. Bankruptcy is designed to provide an orderly...