In re Prate
| Decision Date | 05 November 2021 |
| Docket Number | No. 19 B 9980,19 B 9980 |
| Citation | 634 B.R. 72 |
| Parties | IN RE: Shawn S. PRATE, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Attorney for plaintiffs Emmolly Corporation, Inc. and Michael A. Prate: Kevin J. Kuhn, Kuhn Firm P.C., Chicago, IL.
Attorney for defendant Shawn S. Prate: Paul M. Bach, Bach Law Offices, Inc., Northbrook, IL.
After Emmolly Corporation sold its roofing business to Shawn Prate, a former employee and officer, Emmolly's owner, Michael Prate, discovered that Shawn had been submitting false expense reports, embezzling money, and taking kickbacks from subcontractors. Michael and Emmolly sued Shawn in Illinois state court. Three years later, with the state court action still unresolved, Shawn filed a chapter 7 bankruptcy petition. Michael and Emmolly then responded with an adversary proceeding objecting to Shawn's discharge and asserting that Shawn's debt to Michael and Emmolly is nondischargeable. The adversary proceeding has been pending for two years.
Emmolly and Michael now move under 11 U.S.C. § 362(d) to lift the stay so they can resume their state court action. For the reasons discussed below, the motion will be denied.
The court has subject matter jurisdiction under 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). This is a core proceeding. 28 U.S.C. § 157(b)(2)(G) ; In re D/C Distrib., LLC, 617 B.R. 600, 605 (Bankr. N.D. Ill. 2020).
The facts come from the parties’ papers and the state court complaint as well as from the dockets in the bankruptcy case, the adversary proceeding, and the state court action.1 No facts are in dispute.2
Michael Prate owns Emmolly Corporation which in turn operated Michael's Roofing, a roofing and siding business in Lake County, Illinois. Shawn Prate worked for Michael's Roofing from 2009 to 2013, first as a salesman, then as manager, vice president, and secretary. In 2013, Emmolly sold its assets to Shawn and another person for $25,000. In return, Shawn agreed to pay Michael a weekly consultant's fee and a commission on projects he referred to the business.
Two years later, Michael discovered that before the sale, Shawn had been engaged in a scheme to defraud Michael's Roofing, Emmolly, and Michael Prate himself. Specifically, Shawn submitted and received payment for false expense reports. He accepted cash payments for work the business performed and kept the payments. And he inflated the cost of work subcontractors had performed and took kickbacks from the subcontractors. The kickbacks alone totaled roughly $100,000.
In early 2016, Michael and Emmolly sued Shawn in Illinois state court. The six-count complaint alleged claims for fraud and breach of contract and sought damages as well as rescission of the sale. The docket in the action discloses a jury demand. In the three years since the complaint was filed, the parties have conducted what Emmolly and Michael call "voluminous written discovery" and have begun depositions. As far as the record shows, though, the parties have not finished the depositions, discovery has not closed, and no trial date has been set.3
In early 2019, Shawn filed a chapter 7 bankruptcy petition. Michael then filed an adversary proceeding objecting under 11 U.S.C. § 727(a)(2)(A) to Shawn's discharge and alternatively under 11 U.S.C. §§ 523(a)(2), (4), and (6) to the dischargeability of Shawn's alleged $800,000 debt. Discovery in the adversary proceeding closed in September 2020, more than a year ago. A month later, Shawn moved for summary judgment on the complaint. His motion was denied. Seven months after that, Michael and Emmolly moved for partial summary judgment on the section 727(a)(2)(A) claim. Their motion was also denied. The matter is ready for trial, but no trial date has been set.
Although two years have passed and the adversary proceeding is on the brink of trial, Michael and Emmolly now ask to have the stay lifted so they can return to the state court and proceed with their action against Shawn. Shawn opposes the motion.
The motion will be denied. Because the bankruptcy court has exclusive jurisdiction over the section 523(a) claims, only this court can decide all the issues those claims present.4 Maintaining the stay will mean the litigation ends here. Lifting the stay so the parties can litigate in the state court, in contrast, will require a return trip to the bankruptcy court to determine dischargeability even if Emmolly and Michael prevail. The most efficient and least burdensome route for both sides is to have the bankruptcy court dispose of their dispute. And this court is ready to dispose of it; the state court is not.
The automatic stay in section 362(a) of the Bankruptcy Code halts a variety of creditor actions against the debtor, the debtor's property, and property of the estate during the bankruptcy case. 11 U.S.C. § 362(a) ; Dean v. Trans World Airlines, Inc. , 72 F.3d 754, 755-56 (9th Cir. 1995) (internal quotation omitted). The stay is "one of the fundamental debtor protections provided by the bankruptcy laws," Midlantic Nat'l Bank v. New Jersey Dep't of Env'tl Prot. , 474 U.S. 494, 503 (1986) (internal quotation omitted), because it preserves the estate and gives the debtor some respite from creditors, In re Grede Foundries, Inc. , 651 F.3d 786, 790 (7th Cir. 2011) ; Dean , 72 F.3d at 755-56. Unless estate property is concerned, the stay remains in effect until the case is closed or dismissed or the debtor is discharged, whichever occurs first. 11 U.S.C. § 362(c).
That said, even before the stay expires under the Code it may be lifted for, among other things, "cause." 11 U.S.C. § 362(d)(1). "Cause" is not defined (except as a lack of adequate protection) and depends on a "balancing of the costs and benefits of maintaining the stay" under "the facts of the specific case." In re Comdisco, Inc. , 271 B.R. 273, 276 (Bankr. N.D. Ill. 2002). When a creditor asks for the stay to be lifted to proceed with an action in another court, courts in this circuit consider three factors:
IBM v. Fernstrom Storage & Van Co. (In re Fernstrom Storage & Van Co.) , 938 F.2d 731, 735 (7th Cir. 1991) ; see also In re Udell , 18 F.3d 403, 410 (7th Cir. 1994). Whether to lift the stay is committed to the bankruptcy court's discretion. Colon v. Option One Mortg. Corp. , 319 F.3d 912, 916 (7th Cir. 2003).
Here, the first two factors collapse into one, because both sides will be better off if the motion is denied and the stay remains in place. That is so because only one court, the bankruptcy court, can dispose of all the issues no matter who wins. If the stay is lifted and Shawn wins in the state court, the parties’ dispute will be over. The same is true if the stay remains in place and Shawn wins: again, the dispute will be over. If the stay is lifted, on the other hand, and Emmolly and Michael win in the state court, the parties will have to return to this court – because the state court cannot determine whether Shawn's debt is dischargeable. Only this court can. See 11 U.S.C. § 523(c)(1) ; In re Kontrick , 295 F.3d 724, 733 (7th Cir. 2002), aff'd sub nom. Kontrick v. Ryan , 540 U.S. 443, 124 S.Ct. 906, 157 L.Ed.2d 867 (2003). But if the stay remains in place and Emmolly and Michael win, the dispute will be over because this court can liquidate Shawn's debt, Siragusa v. Collazo (In re Collazo) , 817 F.3d 1047, 1053 (7th Cir. 2016) ; N.I.S. Corp. v. Hallahan (In re Hallahan) , 936 F.2d 1496, 1508 (7th Cir. 1991), and also decide its dischargeability.5 Only by maintaining the stay, then, will there be no risk of splitting the dispute between two courts.
The parties will also have their dispute decided sooner if the stay remains in place. According to the parties, the state court action is still in the discovery stage. Written discovery has been conducted and some depositions have been taken. But some depositions appear to remain, and discovery is not closed. No trial date has been set. The adversary proceeding, meanwhile, is further along. Discovery has been closed for more than a year, and both sides filed potentially dispositive motions that were denied. The proceeding is ready for trial. It can be tried as soon as February 2022 if the parties and counsel are available.
The third factor, finally, is neutral. The creditor's likelihood of success on its claim presumably is relevant when the creditor can pursue its claim only in another forum, something the stay is preventing. Here, however, Michael and Emmolly can pursue their fraud claims against Shawn – and in fact are pursuing them – in the bankruptcy court. If they prevail, Michael and Emmolly can obtain both a money judgment against Shawn and a decision on the judgment's dischargeability. They are not put to the choice of litigating in the state court or not at all. When it comes to where they must litigate, the strength of their claims is beside the point.6
Because maintaining the stay will ensure that one court, not two, decides the parties’ dispute, and because the litigation has advanced further in the bankruptcy court than in the state court, the hardship to both parties from lifting the stay outweighs the hardship (if any) from keeping it in place. Michael and Emmolly's motion to lift the stay will be denied.
For their part, Michael and Emmolly argue mainly that Shawn is wrong to say Fernstrom "precludes the Court from granting [relief from the stay]." (P. Supp. Mem. at 1). They contend Fernstrom is "easily distinguishable" because the decision was a case under chapter 11, not chapter 7, and involved a subrogation...
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In re Garcia
...... orders will be entered consistent with this opinion. . 13 . . --------- . . . Notes: . . . [ 1 ] The court can take judicial notice of. its own docket and the dockets of other courts in related. matters. In re Prate , 634 B.R. 72, 75 n.1 (Bankr. N.D.Ill. 2021). . . . [ 2 ] Julio Garcia also sued Biggers in. Illinois state court seeking specific performance of the. contract. Biggers removed the action to the district court,. but before the two actions could be ......