Matter of United Imports, Inc.

• Decision Date: 30 October 1996
• Docket Number: Bankruptcy No. BK96-81674.
• Citation: 203 BR 162
• Parties: In the Matter of UNITED IMPORTS, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Nebraska

203 B.R. 162 (1996)

In the Matter of UNITED IMPORTS, INC., Debtor.

Bankruptcy No. BK96-81674.

United States Bankruptcy Court, D. Nebraska.

October 30, 1996.

James Cavanagh and Sandra Dougherty, Omaha, NE, for Debtor.

Sam King, Omaha, NE, for U.S. Trustee.

Paula Wilson, for Heartland.

Robert Bothe and Matthew McGrory, Omaha, NE, for Time Warner Cable of New York City.

MEMORANDUM

TIMOTHY J. MAHONEY, Chief Judge.

Hearing was held on Motion for Relief by Time Warner on September 9, 1996. This memorandum contains findings of fact and conclusions of law required by Fed.Bankr.R. 7052 and Fed.R.Civ.P. 52. This is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(G)

Background

Time Warner Cable of New York City (Time Warner) filed its motion for relief from the automatic stay on August 9, 1996 to continue its lawsuit against the debtor in the Eastern District of New York. (Filing # 17). Resistances to Time Warner's motion have been filed by the debtor (filing # 62), the Official Creditor's Committee (filing # 91), Samsung Electro-Mechanics (filing # 82), and Heartland Printing & Equipment (filing # 64). A hearing on the motion was held on September 9, 1996. Subsequently, Time Warner waived the thirty-day requirement for a decision for the bankruptcy court, and this waiver was accepted in an order dated October 7, 1996.

In the litigation that was stayed by the filing of the debtor's petition, Time Warner alleges that the debtor has violated 47 U.S.C. §§ 553 and 605 and New York Public Service Law § 225.6 by selling and distributing cable television descrambling equipment which Time Warner maintains is used to steal its cable signals. In its complaint, Time Warner has requested the following relief:

(1) Declare that defendants\' unauthorized manufacturing, distribution, modification and sale of equipment designed to decode encrypted cable television signals violated Title 47, sections 553 and/or 605, and that such violations were committed willfully and for purposes of direct or indirect commercial advantage or private financial gain;

(2) In accordance with Title 47, section 605(e)(3)(B)(i) and section 553(c)(2)(A), enjoin defendants . . . from the further sale, modification, distribution or advertising of electronic equipment designed for unauthorized interception of cable television programming services;

(3) In accordance with Title 47, sections 605(e)(3)(B)(ii) and 605(e)(3)(C) award the plaintiff:

(a) the actual damages which the plaintiff has suffered, together with any additional profits earned by the defendants, as a result of the defendants\' unauthorized sales of prohibited electronic equipment; or, alternatively at plaintiff\'s election;

(b) statutory damages in the amount of $200,000 for each violation of Title 47, section 605 and section 553 by defendants;

(4) In accordance with 47 U.S.C. section 605(e)(3)(C)(i)(I) and section 553(c)(3)(A)(i), order an accounting of all profits and expenses realized by the defendants in connection with their violation of the foregoing statutes;

(5) In accordance with the equitable remedy of constructive trust, order that the full value of services converted by virtue of the defendants\' descrambler sales operations be ordered returned by the defendants to plaintiff;

(6) In accordance with 47 U.S.C. §§ 553 and 605, direct defendants to pay plaintiff all of plaintiff\'s costs, including reasonable attorney\'s fees and investigative fees; and

(7) Grant such other and further relief as is just.

(Exhibit 3, Attachment 1).

The suit against the debtor was commenced by Time Warner on July 10, 1996. On that date, Judge Treger entered an ex parte Temporary Restraining Order that froze the debtor's assets and prohibited it from selling the decoder devices. (Exhibit 3, Attachment 5). This was followed by a preliminary injunction order entered either on July 25, 1996 or August 5, 1996.¹ This order prevented the debtor from doing any of the following:

1. enjoined the debtor from selling, transporting, transferring, relocating or advertising and/or offering for sale, modification, manufacture or distribution of cable television non-addressable decoding devices and related equipment;

2. Required the debtor to permit inspection of its stock of decoding devices by the plaintiff at its premises, up to two times per business week;

3. Enjoined the debtor from further advertising its sales of decoding devices, and required the debtor to take steps to curtail the future appearance of such advertisements for which it had previously contracted;

4. Enjoined the debtor from destroying certain business records;

5. Enjoined Joseph Abboud from transferring, removing, encumbering or permitting the withdrawal of any assets or property, presently or formerly belonging to him, whether real or personal;

6. Required the First National Bank of Omaha to comply with a subpoena previously served upon it which sought production of documents reflecting the banking records of the debtor;

7. Required that the debtor continue to provide Time Warner with an accounting listing the total number of sales and purchases of decoders from July 10, 1996 to the present;

8. Required the debtor to provide Time Warner with information contained in documents sent to it by Time Warner;

9. Required the debtor to provide to Time Warner copies of its books and records.

(Exhibit 3, Attachment 8).

A hearing was then held in the bankruptcy court on the debtor's emergency motion to stay the effect of the preliminary injunction. On August 19, 1996, an order was entered by this court finding that the automatic stay of 11 U.S.C. § 362(a) stayed the affirmative discovery obligations of the injunction.

On August 21, 1996, a hearing was held in New York regarding the effect of the bankruptcy on the previous injunction entered by that court. (Exhibit 3, Attachment 10). The New York court entered an order the following day which provided that a portion of the injunction ordering the debtor to perform an affirmative discovery obligation was not stayed by the bankruptcy filing. The portion of the order held not to be stayed is as follows:

Ordered that defendants shall, within thirty (30) days, provide to the plaintiff the information contained in the documents sent by them to the plaintiff on July 24, 1996 and admitted during the July 25, 1996 hearing as Plaintiff\'s Exhibit "14B," in a format which will permit ready determination of the number of sales and returns of decoding devices made by defendants to customers in TWCNYC\'s franchise area during the period from July 10, 1993 to July 10, 1996, and shall within 60 days, also provide, in a similar format, the identical information for the period July 10, 1990 to July 9, 1993, as previously ordered by the Court and with respect to which defendants have not yet complied and have represented to the Court will require additional time for compliance.

(Exhibit 4, Attachment D).

The debtor appealed the New York court's orders of July 25/August 5 and August 22 to the Second Circuit and requested a stay pending appeal. Judge Treger denied the motion on September 9, 1996. (Exhibit 8, Attachment 1). However, the Second Circuit Court of Appeals did grant a stay of the orders pending oral argument of the appeal.

On September 30, 1996, the debtor and the debtor's president plead guilty to felonies in the Northern District of Georgia. (Supplemental Exhibit). Although the conduct for which the guilty pleas were entered is not the actual conduct which is the basis for the New York litigation between Time Warner and the debtor, the conduct is of a similar nature.

Decision

Because Time Warner has not yet filed a claim in bankruptcy and, through its lawsuit, is seeking to impose a constructive trust on assets that are currently property of the bankruptcy estate, Time Warner's motion for relief from the stay to continue the New York litigation must be denied.

Discussion

Time Warner seeks relief from the automatic stay pursuant to § 362(d)(1) of the Bankruptcy Code to continue its litigation against the debtor in New York. That section provides as follows:

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, modifying, or conditioning such stay —

(1) for cause . . .

11 U.S.C. § 362(d)(1).

I. Continuation of the New York Litigation

Although cause is not defined in the Code, Congress did intend that the automatic stay be lifted to allow litigation involving the debtor to continue in nonbankruptcy forums under certain circumstances. See, H.R.Rep. No. 595, 95th Cong., 1st Sess. 341 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 50 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5836, 6297 ("It will often be more appropriate to permit proceedings to continue in their place of origin, when no great prejudice to the bankruptcy estate would result, in order to leave the parties to their chosen forum and to relieve the bankruptcy court from any duties that may be handled elsewhere.") "`Cause' for granting relief from the stay may exist if the equities in a particular case dictate that a lawsuit . . . should proceed in a forum other than the bankruptcy court for the purpose of liquidating the claim on which the lawsuit is premised." In re Marvin Johnson's Auto Service, Inc., 192 B.R. 1008 (Bankr.N.D.Ala.1996). In determining whether cause exists, the bankruptcy court must balance the potential hardship that will be incurred by the party seeking relief if the stay is not lifted against the potential prejudice to the debtor and the bankruptcy estate. Internal Revenue Service v. Robinson (In re Robinson), 169 B.R. 356 (E.D.Va.1994).

There are two cases that are primarily relied upon by other courts which provide a number of factors a court should consider in balancing the equities of the case to determine whether cause exists. The first is In re Curtis, 40 B.R. 795 (Bankr....