In re LeBlanc
| Decision Date | 10 November 2020 |
| Docket Number | CASE NO: 20-11412 SECTION A |
| Parties | IN RE: SAMUEL C. LEBLANC, JR., DEBTOR. |
| Court | U.S. Bankruptcy Court — Eastern District of Louisiana |
Before the Court is the Motion for Relief from Automatic Stay, (the "Lift-Stay Motion"), [ECF Doc. 32], filed by Wayne Papania and Beverly Papania (the "Movants"), and the Response thereto (the "Response"), [ECF Doc. 47], filed by Samuel C. LeBlanc (the "Debtor"). In the Lift-Stay Motion, the Movants request that this Court lift the automatic stay pursuant to 11 U.S.C. § 362(d) so that they may return to the 22nd Judicial District Court in St. Tammany Parish (the "State Court") to conclude a trial between the Movants and the Debtor. The Court held a hearing on this matter on September 24, 2020, and took the matter under submission. [ECF Doc. 56]. For the reasons that follow, this Court finds cause to GRANT the Lift-Stay Motion.
This Court has jurisdiction to grant the relief provided for herein pursuant to 28 U.S.C. § 1334. The matter presently before the Court constitutes a core proceeding that this Court may hear and determine on a final basis under 28 U.S.C. § 157(b)(2)(A), (G) & (O). The venue of the Debtor's chapter 11 case is proper under 28 U.S.C. §§ 1408 and 1409(a).
The Movants are third-party plaintiffs in Isaac Robinson v. Wayne and Beverly Papania and Pyrenees Investments, LLC, Case No. 2005-11367, pending in the State Court. (the "Lawsuit"). The Lawsuit arises out of the construction of Movants' home in Covington, Louisiana. [ECF Doc. 32, at 2]. Litigation began in March 2005 when a subcontractor filed suit on an open account against the Movants and Pyrenees Investments, LLC ("Pyrenees"), the general contractor on the project, seeking payment for work performed in conjunction with the construction. Id. Pyrenees, in which the Debtor is a 100% member, filed its own no-asset chapter 7 bankruptcy case in this Court, In Re: Pyrenees Investments, LLC, No. 20-11411, which was closed on October 19, 2020. After fifteen years of litigation, which has included numerous amendments to the Petition, a partial reversal of the trial court's grant of summary judgment, and subsequent remand, the Movants' claims against the Debtor at this time include "fraud, negligent misrepresentation, and general negligence under an alter ego doctrine." [ECF Doc. 32, at 2-3].
After several continuances, the State Court held a bench trial on June 22, 23, and July 2, 2020. Id. at 4. The trial was expected to conclude on the fourth day, August 14, 2020; however, the Debtor filed for bankruptcy relief under chapter 11 of the Bankruptcy Code on August 2, 2020. Accordingly, the Lawsuit was automatically stayed under 11 U.S.C. § 362. Id. The Movants filed the Lift-Stay Motion "to permit the conclusion of a trial between Movants and Debtor," thereby liquidating their claims against the estate Id. at 1. Through the Lift-Stay Motion, the Movants ask this Court to terminate the stay to finish the fourth day of trial and reduce the Lawsuit to judgment, but state they will return to this Court to be paid "pursuant to any confirmed plan of reorganization" and they "will not attempt to collect any amounts awarded by the State Court outside the bankruptcy process." Id.
In his Response, the Debtor explained that the Lawsuit "actually consists of two distinct actions for the purpose of this bankruptcy case." [ECF Doc. 47, at 2]. "One action involves theories of general negligence, which, if and when determined, will give Movant a noncontingent liquidated claim as a general unsecured creditor." Id. at 3-4. Separate from the negligence claim,however, are "the assertions in State Court of issues grounded in fraud." Id. at 3. The Debtor "opposes continuation of the litigation before the State Court on any issue pertaining to a judicial determination of fraud." Id. But the Debtor does not oppose this Court lifting the stay to resume the proceedings in State Court "for the sole purpose of determining Debtor's liability, if any, and quantification of associated damages under a theory of general negligence." Id. The Debtor also does not oppose allowing "the State Court (after ruling on negligence) to issue Findings of Fact as to theories involving fraud," for this Court to consider whether those findings are sufficient to establish fraud under the non-dischargeability standard found in § 523 of the Bankruptcy Code. Id. The Debtor proposes that this Court sever the fraud claims from the ongoing litigation for later determination by this Court or "allow the State Court (after ruling on negligence) to issue Findings of Fact as to theories involving fraud, for this Court's later determination as to whether those Findings of Fact are sufficient to establish fraud under the non-dischargeability standard[.]" Id.
The filing of a bankruptcy petition "operates as a stay, applicable to all entities, of . . . the commencement or continuation . . . of a judicial, administrative or other action or proceeding against the debtor that was or could have been commenced before the commencement of" the bankruptcy case. 11 U.S.C. § 362(a). The automatic stay has three basic purposes: "(1) to provide the debtor a breathing spell from his or her creditors by stopping all collection efforts[;] (2) to protect creditors from each other by stopping the race for the debtor's assets and preserving the assets for the benefit of all creditors[;] and[] (3) to provide for an orderly liquidation or administration of the estate." Prewitt v. N. Coast Vill., Ltd. ( ), 135 B.R. 641, 643 (9th B.A.P. Cir. 1992); see also Commonwealth Oil Ref. Co. v. U.S. Envtl. Prot. Agency (In re Commonwealth Oil Ref. Co.), 805 F.2d 1175, 1182 (5th Cir. 1986).
Creditors may obtain relief from the automatic stay by showing cause. See 11 U.S.C. § 362(d)(1). "The term 'cause' as used in 11 U.S.C. § 362(d)(1) is not defined in the Code and whether cause exists must be determined on a case by case basis." In re Xenon Anesthesia of Tex., PLLC, 510 B.R. 106, 112 (Bankr. S.D. Tex. 2014). Indeed, the Fifth Circuit has stated that "this lack of definition affords 'flexibility to the bankruptcy courts.'" Bonneville Power Admin. v. Mirant Corp. (In re Mirant Corp.), 440 F.3d 238, 253 (5th Cir. 2006) ). The Bankruptcy Code gives courts broad discretion to provide appropriate relief from the automatic stay. See Atkins v. Atl. Ambulance Assocs., Inc. (In re Atl. Ambulance Assocs., Inc.), 166 B.R. 613, 615 (Bankr. E.D. Va. 1994).
When ruling on modifications to the automatic stay to allow litigation to proceed in another forum, some courts have considered whether the litigation that the movant wishes to continue would result in "great prejudice" to the estate or debtor and whether "the hardship to the [movant] caused by the continuance of the stay considerably outweighs the hardship caused to the debtor by modification of the stay." In re Fowler, 259 B.R. 856, 859-60 (Bankr. E.D. Tex. 2001) (quoting In re McGraw, 18 B.R. 140, 142 (Bankr. W.D. Wis. 1982)). The Movants argue that lifting the stay will not result in great prejudice to the Debtor because the parties need "less than one full day" to complete the trial and the parties are prepared to complete the trial. [ECF Doc. 32, at 7]. The Movants aver that if the stay is not lifted, they "will suffer the added expense of litigating these issues a second time" in this Court, which "is unfamiliar with the facts and issues involvedin the Lawsuit." Id. Finally, the Movants contend that they have a probability of success in prevailing in the Lawsuit. Id. at 8.
In response, the Debtor contends that allowing the State Court to proceed on the fraud claims, "would create a quagmire forcing the Debtor to defend itself on two different playing fields" and, therefore, prejudice the Debtor. [ECF Doc. 47, at 6]. In response to the Movants' suggestion that the State Court may determine whether the claim is dischargeable, the Debtor discusses at length the differences between findings of fraud in State Court and this Court's determinations of fraud under 11 U.S.C. § 523(a)(2). [ECF Doc. 32, at 7; ECF Doc. 47, at 3-5]. The Debtor avers that this Court cannot defer a determination of non-dischargeability for fraud to another forum. Id. at 3.
The Debtor is correct that bankruptcy courts have sole authority to decide whether a debt is nondischargeable. "The ultimate finding of whether [a debt is nondischargeable, as 'defined' by the bankruptcy law] is solely [in] the province of the bankruptcy court." Dennis v. Dennis (In re Dennis), 25 F.3d 274, 278 (5th Cir. 1994) (citing Harold V. Simpson & Co. v. Shuler (In re Shuler), 722 F.2d 1253, 1256 (5th Cir. 1984)). But a determination by the State Court as to whether the Debtor engaged in fraudulent inducement under Louisiana law is not a determination of nondischargeability. The Fifth Circuit has stated that bankruptcy courts must "look beyond the labels which state courts—and even parties themselves—give obligations which debtors seek to have discharged." Id. at 277; see also Davidson v. Davidson (In re Davidson), 947 F.2d 1294, 1296 (5th Cir. 1991); Benich v. Benich (In re Benich), 811 F.2d 943, 945 (5th Cir.1987); Nunnally v. Nunnally (In re Nunnally), 506 F.2d 1024, 1027 (5th Cir.1975). Therefore, if Movants reduce their Louisiana fraud claim to a judgment, this will not—and in fact could not—preclude this Court"from inquiring into the true nature of the debt—and ruling contrary to the first court's judgment if necessary." In re Dennis, 25 F.3d at 278 (citing Brown v. Felsen, 442 U.S. 127, 138 (1979)).
Accordingly, this...
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