Opinion
23-20034
04-07-2023
IN RE: MICHAEL LEVI BELCHER Debtor
I. Statement of Proceedings
Michael Belcher ("Debtor") filed his Chapter 13 Petition on January 11, 2023, thus the §362 automatic stay took effect when the Chapter 13 Petition was filed.
This case is before the Court on a motion filed by the Illinois Central Railroad Company ("IC") on February 13, 2023 for relief from the §362(d)(1) automatic stay to continue with preliminary injunction and contempt proceedings by IC versus the Debtor now pending in the United States District Court for the Northern District of Indiana ("District Court").
A prehearing conference was held on said motion on March 1,2023, and the Court determined sua sponte that said motion may be possibly decided by this Court permissibly abstaining in the interest of justice pursuant to 28 U.S.C. § 1334(c)(1) from hearing all matters now pending between IC and the Debtor in District Court
II. Subject-Matter Jurisdiction and Core Proceeding
No objection was made by counsel to die subject-matter jurisdiction of this Court as to this matter. The Court finds subject-matter jurisdiction to be present pursuant to 28 U.S.C. §1334(b), and that this contested matter is a core proceeding as to IC's motion for stay relief pursuant to 28 U.S.C. §157(2)(G).
III. Conclusions of Law and Discussion
In Carver v. Carver. 954 F.2d 1573,1579 (11th Or. 1992) the Court held that a bankruptcy court may sua sponte abstain under 28 U.S.C. §1334(c)(l). Section 1334(c)(1) indicates that permissive abstention applies to both core and non-core proceedings. In re Bricker. 348 B.R. 28, 34 (W.D. PA. 2006) Affd. 265 Fed. App. 141, 2008 WL 450547. On the other hand, mandatory abstention pursuant to 28 U.S.C. § 1334(c)(2) applies only to non-core or related proceedings. Matter of Gober. 100 F.3d1195, 1206 (5th Cir. 1996).
The Seventh Circuit in the case of Matter of Chicago. Milwaukee. St. Paul & Pacific Rail Co. 6 F.3d 1184,1189 (7th Cir. 1993), set out the factors the Court should consider in determining whether it should exercise discretionary abstention under 28 U.S.C. §1334(c)(1). There the court stated:
Section 1334(c)(1) is somewhat oblique in delineating the criteria that would support a discretionary decision to abstain. See Pan Am. 950 F.2d at 845. The statute speaks only in the most general terms of the "interest of justice," the "interest of comity," and "respect for State law." However, discretionary abstention under section 1334(c)(1) is "informed by principles developed under the judicial abstention doctrines, and courts have usually looked to these well-developed notions of judicial abstention when applying section 1334(c) 1)." Pan Am. 950 F.2d at 945; see also Baumgart v. Fairchild Aircraft Corp.. 981 F.2d 824,833 (5th Cir.), cert, denied. __U.S. __, 113 S.Ct. 2963,125 L.Ed.2d 663 (1993); In re Eastport Assoc. 935 F.2d at 1078-79 & n. 7.
To provide more concrete guidance to courts considering section 1334(c)(1) abstention, the Ninth Circuit has identified the following relevant factors:
(1) the effect or lack thereof on the efficient administration of the estate if the court recommends abstention, (2) the extent to which state law issues predominate over bankruptcy issues, (3) the difficulty or unsettled nature of the applicable law, (4) the presence of a related proceeding commenced in state court or other nonbankruptcy court, (5) the jurisdictional basis, if any, other than 28 U.S.C. §1334, (6) the degree of relatedness or remoteness of the proceeding to the main bankruptcy case, (7) the substance rather than form of an asserted "core" proceeding, (8) the feasibility of severing state law claims from core bankruptcy matters to allow judgments to be entered in state court with enforcement left to the bankruptcy court, (9) the burden of [the bankruptcy court's] docket, (10) the likelihood that the commencement of the proceeding in bankruptcy court involves forum shopping by one of the parties, (11) the existence of a right to a jury trial, and (12) the presence in the proceeding of non-debtor parties.
In re Eastport Assoc. 935 F.2d at 1075-76 (quoting In re Tucson Estates. Inc.. 912 F.2d 1162, 1167 (9th Cir. 1990)). Courts should apply these factors flexibly, for their relevance and importance will vary with the particular circumstances of each case, and no one factor is necessarily determinative. At the same time, because section 1334(c)(1) is concerned with comity and respect for state law, whether a case involves unsettled issues of state law is always significant. See Thompson v. Magnolia Petroleum Co.. 309 U.S. 478,483,60 S.Ct. 628, 630, 84 L.Ed. 876 (1940); Pan Am. 950 F.2d at 846; see also In re L & S Indus.. Inc.. 989 F.2d 929, 935 (7th Cir. 1993) ("Under bankruptcy law the presence of a state law issue is not enough to warrant permissive abstention, but it nevertheless is a significant consideration."); In re United Sec. & Communications. Inc.. 93 B.R. 945, 960 (Bankr. S.D. Ohio 1988); H.R.Rep. No. 595, 95th Cong., 1st Sess. 51 (1977), reprinted in. 1978 U.S.C.C.A.N. 5963, 6012.Id. 6 F.3d at 1189 (footnote omitted). See also Chapman v. Currie Motors. Inc.. 65 F.3d 78, 82 (7th Cir. 1995) (power of federal court to relinquish jurisdiction not dependent on statute).
While the Factors set out in Matter of Chicago, etc. focuses on State Court proceedings, these same factors apply in a case involving a contested matter that also implicates nonbankruptcy Federal Law as well as State Law. See e.g. In re Lightning Technologies Inc. 647 B.R. 76, 99-103 (Bankr. E. D. Mich. 2022).
The §362 automatic stay does not shield a bankruptcy debtor's tortious use of property, nor does it preclude post-petition motions to enjoin unlawful conduct. Dominic's Resturant v. Mantia, 683 F.3d 757, 760-61 (6th Cir. 2012); see also Larami Ltd. v. Yes!Entertainment Corp., 244 B.R. 56, 60 (D.N.J. 2000) ("If this section were read to prevent the injunctive relief [against mark infringement] sought here, bankrupt businesses which operated post-petition could violate [plaintiffs'] rights with impunity.") Bambu Sales, Inc. v. Sultana Crackers Inc., 683 F.Supp. 899,917 (E.D.N.Y. 1988). Similarly the automatic stay does not apply to contempt proceedings, especially in connection with the violation of an injunction. See Larami at 761 ("It is within a court's inherent power to take whatever steps are ncessary to ensure those persons within its power comply with its orders. We cannot conceive that Congress intended to strip a court of this power, and instead permit a party to blatandy violate direct orders of the court and then seek shelter from a bankruptcy judge. If this were so, the court's orders could be rendered almost meaningless.") (internal brackets removed); Seiko Epson Corp. v. Nu-Kote Int., Inc., 190 F.3d 1360,1364 (Fed. Cir. 1999).
Even where the automatic stay does apply, "the court shall grant relief from stay... for cause, including the lack of adequate protection of an interest in property." 11 U.S.C. §362(d)(1). While "cause" has no definition and is interpreted on a case-by-case basis, "suspension of the automatic say may be consonant with the purposes of the Bankruptcy Act when equitable considerations weigh heavily in favor of the creditor and the debtor bears some responsibility for creating the problems." In re Rogan, No. 08-23221 JPK, at *14 (Bankr. N.D. Ind. July 24, 2009). "Cause" is typically evluated by evaluating whether "(a) any great prejudice to either the bankrupt estate or the debtor will result from continuation of a civil suit, (b) the hardship to the non-bankruptcy party by maintenance of the stay considerably outweighs the hardship of the debtor, and © the creditor has a probability of prevailing on the merits of his case." In re Pro Football Weekly, Inc. 60 B.R. 824, 826 (Bankr. N.D.Ill. 1986).
The Court in applying the factors set out in the Seventh Circuit in Chicago, etc.. 6 F.3d 1189, finds the following factors supports IC's motion for stay relief pursuant to §362(d)(l) for cause:
1. Effect on Administration of Estate
Abstention will have a positive effect on the administration of the Debtor's bankruptcy estate because this Court will not have to spend time relitigating and acquainting itself with issues that the District Court has already ruled on. The District Court has already heard and granted two temporary restraining orders, received a fully briefed Motion for Contempt due to Debtor's alleged defiance of die District Court's orders, received all necessary pleadings, held multiple hearings, received IC's Motions for Preliminary Injunction and Expedited Discovery, and handled numerous interim disputes, including third-party briefing by the United States Copyright Office. The most efficient method of determining what the Debtor owes IC for his alleged misconduct, if any, will be to permit the District Court to proceed.
2. Predominance of State Court Iusses
State Law predominates the District Court claims by IC. Five of IC's six causes of action-including breach of contract, breach of die duty of loyalty, conversion, trespass to chattels, and violation of Indiana's Uniform Trade Secrets Act- arise under Indiana law.
3. Complex Nature of Applicable Law
The law surrounding the Debtor's alleged misappropriation of IC's trade secrets is no
doubt complex. A case regarding the alleged theft of a source code and other intellectual property by the Debtor is better suited for the expertise already developed in this matter by the District Court.
4. Presence of a Related Proceeding
This matter has already been proceeding in the District Court since October 20, 2022, and the District Court Docket already comprises 74 entries.
5.Jurisdictional Basis Other Than 28 U.S.C. §1334
The District Court proceeding is based on that court's original and supplemental jurisdiction over DTSA actions pursuant to 28 U.S.C. §1367.
6. Degree of Relatedness or Remoteness to Bankruptcy Proceeding
The sole relation between the dispute between IC and the Debtor and this bankruptcy case is the fact that determination of IC's causes of action will determine the size of its claim against the Debtor's estate. All substantive issues arising from that dispute are separate from those at issue in the bankruptcy case.
7. Substance of "Core" Proceeding
A dispute regarding the alleged misappropriations of trade secrets and related claims by the Debtor in the District Court are not core proceedings pursuant 28 U.S.C. §157(b)(2).
8. Feasibility of Severing Claims from Core Bankruptcy
It is entirely feasible for liability and damages on IC's claims against the Debtor can be determined by the District Court. The District Court will simply address the non-bankruptcy issues of determining the Debtor's alleged liability and IC's alleged entitlement to damages, and then the District Court judgment will be subject to the same rules on proofs of claim and distributions determined by the Bankruptcy Court.
9.Likelihood of Forum Shopping
While the Debtor's need for bankruptcy may be genuine, his Chapter 13 Petition appears to additionally be motivated by the possibility of removing the case from District Court.
10. Right to a Jury Trial
Both IC and the Debtor have asserted their rights to jury trial in the claims pending in District Court, furthers supporting the Bankruptcy Court's exercise of abstention.
11. Presence in the Proceeding of Non-Debtor Parties
The only parties to the District Court action are IC and the Debtor.
The Debtor in his Answer Brief agrees that the Motion of IC should be granted, in part, and denied in part. The Debtor agrees that this Court should permissibly abstain in the interest of justice pursuant to 28 U.S.C. §1334(c)(1) as to all matters presently pending between IC and the Debtor in the District Court as to the ownership of intellectual property. However, the Debtor asserts that said motion should be denied, in part, in that the automatic stay should remain in effect as to the right of IC to seek collection of any damages that may be property of the Debtor's bankruptcy estate. The Court notes that IC in its Memorandum agrees that the District Court should simply address the non-bankruptcy issues as to the Debtor's alleged liability and damages to IC, and then any District Court Judgment will be subject to the same bankruptcy rules on proof of claims and distribution by this Court. See Memorandum P.4, Section 8.
The Court in applying the various factors as set out in Chicago, etc. decides that the motion shall be granted, in part, for cause, and denied in part. The §362 automatic stay shall be modified, rather than vacated. IC may proceed to litigate all proceedings now pending in the District Court between IC and the Debtor.
When a final nonappealable Judgment or Order is entered by the District Court, this Court shall give claim preclusion or Res Judicata effect thereto. The Motion for Stay Relief is denied, in part, in that the enforcement of any nonappealable Order or Judgment shall be stayed and shall be subject to the same bankruptcy rules on proofs of claims and distribution to which this Court retains jurisdiction.
SO ORDERED.