In re Nir W. Coast, Inc.

• Decision Date: 04 January 2021
• Docket Number: Case No. 20-25090-B-11
• Court: U.S. Bankruptcy Court — Eastern District of California
• Parties: In re: NIR WEST COAST, INC. Dba NORTHERN CALIFORNIA ROOFING, Debtor(s).

In re: NIR WEST COAST, INC. Dba NORTHERN CALIFORNIA ROOFING, Debtor(s).

Case No. 20-25090-B-11

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF CALIFORNIA

January 4, 2021

NOT FOR PUBLICATION

DC No. RJM-1

MEMORANDUM DECISION DENYING MOTION TO CONFIRM THE ABSENCE OF THE AUTOMATIC STAY OF 11 U.S.C. § 362(a)

Introduction

The court has before it a Motion to Confirm Absence of the Automatic Stay as to Nonbankrupt Codebtor Gregory T. Lynn filed by Javier Vega Tovar ("Creditor") on his behalf and on behalf of certain class members. Debtor and debtor in possession NIR West Coast, Inc. dba Northern California Roofing ("Debtor") filed an opposition. Creditor filed a reply.

Creditor requests a so-called "comfort order" or, in other words, an order from this court confirming that the automatic stay of 11 U.S.C. § 362(a) is inapplicable to Gregory T. Lynn ("Lynn"). Creditor identifies Lynn as the Debtor's nondebtor codebtor. Creditor's motion is immediately suspect in that it relies almost exclusively on 11 U.S.C. § 105(a). Section 105(a) is a catch-all; however, it does not give the bankruptcy court carte blanche to do whatever it wants to do. See Law v. Siegel, 134 S. Ct. 1188, 1197 (2014). Creditor's motion will be denied without prejudice for the reasons explained below.

The court has reviewed the motion, opposition, reply, and all related declarations and exhibits. The court has also reviewed and takes judicial notice of the docket in this case. See Fed. R. Evid. 201(c)(1). The court has determined this matter may be decided on the papers. See General Order No. 618 at p.3, ¶ 3 (E.D. Cal. May 13, 2020) (ordering courthouse closure "until further notice" due to the COVID-19 pandemic and further ordering that all civil matters are to be decided on the papers unless the presiding judge determines a hearing is necessary). The court has also determined that oral argument will not assist in the decision-making process or resolution of the motion. See Local Bankr. R. 9014-1(h), 1001-1(f).

The hearing on January 5, 2021, at 9:30 a.m. will be vacated. Findings of fact and conclusions of law are set forth below. See Fed. R. Civ. P. 52(a); Fed. R. Bankr. P. 7052, 9014(c).

Background

Lynn is a principal of the Debtor. He is also the Debtor's sole shareholder. And he apparently is the Debtor's codebtor.

On August 25, 2017, Creditor filed a state court action against the Debtor and Lynn. The state court action seeks damages and restitution for alleged wage theft and banking of hours, among other claims.

Prior to this bankruptcy filing, Creditor, Debtor, and Lynn voluntarily settled all claims alleged in the state court action. The parties signed a settlement agreement which the state court approved. The settlement agreement requires the Debtor and Lynn to make certain payments to Creditor and other class members.

Creditor asserts that the Debtor and Lynn defaulted under the terms of the settlement agreement. According to Creditor,the default permits the state court to enter an agreed-upon stipulated judgment against Lynn which Creditor requested and the state court tentatively indicated it would enter. However, following the state court's tentative ruling, but before a final hearing on Creditor's state court motion was held, the Debtor filed its chapter 11 petition. The state court judge thereafter directed Creditor to obtain an order from this court that the automatic stay of § 362(a) is inapplicable to Lynn.¹

Discussion

Creditor seeks what is typically referred to as a "comfort order."² More precisely, Creditor seeks an order from this court declaring not that the automatic stay has in some manner terminated as to Lynn but, rather, that the automatic stay inthis case is inapplicable to Lynn. There is a material difference in the distinction.

There are very few instances in the Bankruptcy Code where the bankruptcy court may issue an order confirming that the automatic stay is not in effect. These include:

(1) § 362(b)(22)(no automatic stay as to eviction proceedings);

(2) § 362(c)(3)(A)(termination of the automatic stay due to one prior bankruptcy filing);

(3) § 362(c)(4)(A)(ii)(no automatic stay due to serial bankruptcy filings);

(4) § 362(h)(1)(termination of the automatic stay for failure to comply with duties under § 521(a)(2));

(5) § 362(j)(confirming under subsection (c) that the automatic stay has been terminated).

None of these apply here. The matter before the court does not concern an eviction. It is not the third or fourth time that Lynn has filed a bankruptcy petition. And Lynn is not a debtor which means he has no Bankruptcy Code duties with which he has not complied.

Creditor cites no provision of the Bankruptcy Code that directs or authorizes the bankruptcy court to enter an order that declares the automatic stay inapplicable-or otherwise recognizes its absence-to a nondebtor.³ Nevertheless, a number of courts recognize that even when the Bankruptcy Code does not require it, "[t]he [Bankruptcy] Court . . . retains the discretion to enter a comfort order if warranted by the facts." Ross, 2019 WL 480269at *3. Here, however, for at least two reasons this court is not convinced that the facts of this case warrant an issuance of the requested "comfort order" even if authority to issue such an order as it pertains to a nondebtor exists.

First, if anything, "[a] 'comfort order' is a bankruptcy term of art for an order confirming an undisputed legal result, and often is entered to confirm that the automatic stay has terminated." In re Hill, 364 B.R. 826, 827 n.1 (Bankr. M.D. Fla. 2007) (emphasis added). Not only is the request here not one for an order that the automatic stay has terminated as to Lynn, but, on the record before it the court cannot conclude that the legal result of Creditor's motion is undisputed. In other words, as explained below, Creditor has not demonstrated that he is entitled to the requested "comfort order" as a matter of law.

Second, it is true that as a general rule the automatic stay does not protect nondebtors and it protects only debtors, debtors' property, and property of the estate. See 11 U.S.C. §§ 362(a), 541(a); Advanced Ribbons and Office Prods., Inc. v. U.S. Interstate Distrib., Inc., 125 B.R. 259, 263 (9th Cir. BAP 1991) (citation omitted). However, the Fourth Circuit in A.H. Robins v. Piccinin, 788 F.2d 994 (4th Cir. 1986), cert. denied, 479 U.S. 876 (1986), developed an exception to the general rule. Piccinin held that the automatic stay may be extended to a nondebtor if unusual circumstances make the interests of the debtor and the nondebtor inextricably interwoven. Id. at 998-1004 (affirming stay of actions against debtor's officers under a combination of § 362(a), § 105(a), and the court's inherent equitable powers); see also S.I. Acquisition, Inc. v. Eastway Delivery Serv., Inc.(In re S.I. Acquisition, Inc.), 817 F.2d 1142, 1147-50 (5th Cir. 1987) (extending the § 362(a) automatic stay to action against debtor's alleged alter egos).

The Ninth Circuit has not expressly adopted the "unusual circumstances" exception. See Klinkenborg Aerial Spraying and Seeding, Inc. v. Rotorcra Dev. Corp., 690 Fed.Appx. 540 (9th Cir. 2017) (citation omitted). At the same time, it has not expressly rejected it either.

The Ninth Circuit has declined to apply the "unusual circumstances" exception in three general instances:

(1) where a nondebtor has obligations that are independent, primary, not derivative of the debtor, Chugach Timber Corp. v. Northern Stevedoring & Handling Co. (In re Chugach Forest Prods.), 23 F.3d 241, 247 (9th Cir. 1994), and O'Malley Lumber Co. v. Lockard (In re Lockard), 884 F.2d 1171, 1179 (9th Cir. 1989);

(2) where it was not raised in the lower court, U.S. v. Dos Cabezas Corp., 995 F.2d 1486, 1492-93 n.3 (9th Cir. 1993); and

(3) where the automatic stay was not extended in the first instance by the bankruptcy court in exercise of its equity jurisdiction, Rotocraft Dev., 690 Fed.Appx. at 541.

The Ninth Circuit has been receptive to the exception in a number of case. For example, in an early opinion it stated that "in the absence of special circumstances, stays pursuant to section 362(a) are limited to debtors and do not include non-bankrupt co-defendants." Ingersoll-Rand Fin. Corp. v. Miller Mining Co., 817 F.2d 1424, 1427 (9th Cir. 1987) (emphasis added).

Several years later, in Chugach Forest Prods., 23 F.3d 241, the Ninth Circuit suggested that the exception may apply when necessary to "advance the aims of the bankruptcy scheme" or"promote reorganization [or] protect [the debtor's] other creditors[,]" id. at 247, and if necessary to protect the administration of the bankruptcy estate.⁴ Id. at 247 n.6.

In Solidus Networks, Inc. v. Excel Innovations, Inc. (In re Excel Innovations, Inc.), 502 F.3d 1086 (9th Cir. 2007), the Ninth Circuit reversed not because the bankruptcy court and the bankruptcy appellate panel applied the exception but because they both applied the exception incorrectly. The court explained:

In sum, our usual preliminary injunction standard applies to applications to stay actions against non-debtors under § 105(a).

[ . . .]

Both the bankruptcy court and the BAP applied incorrect legal standards.

[ . . . ]

The BAP treated the 'unusual circumstances' doctrine and the usual preliminary injunction standard as separate and distinct bases for affirming the stay. That is error, because the 'unusual circumstances' doctrine does not negate the traditional preliminary injunction standard. As we have noted, stays under the doctrine, '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 take this action to protect the administration of the bankruptcy estate.' Chugach Forest Prods., 23 F.3d at 247 n. 6 (quoting Patton v. Bearden, 8 F.3d 343, 349 (6th Cir. 1993)). Indeed, Piccinin itself applied the usual preliminary injunction standard in affirming the stay. 788 F.2d at

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