NIR West Coast, Inc. dba Northern California Roofing

1 NOT FOR PUBLICATION 2 UNITED STATES BANKRUPTCY COURT 3 EASTERN DISTRICT OF CALIFORNIA 4 In re: ) Case No. 20-25090-B-11 ) 5 NIR WEST COAST, INC. Dba ) DC No. RJM-1 NORTHERN CALIFORNIA ROOFING, ) 6 ) ) 7 Debtor(s). ) ________________________________) [8] MEMORANDUM DECISION DENYING MOTION TO CONFIRM THE ABSENCE OF THE 9 AUTOMATIC STAY OF 11 U.S.C. § 362 (a) 10 Introduction 11 The court has before it a Motion to Confirm Absence of the 12 Automatic Stay as to Nonbankrupt Codebtor Gregory T. Lynn filed 13 by Javier Vega Tovar (“Creditor”) on his behalf and on behalf of 14 certain class members. Debtor and debtor in possession NIR West 15 Coast, Inc. dba Northern California Roofing (“Debtor”) filed an 16 opposition. Creditor filed a reply. 17 Creditor requests a so-called “comfort order” or, in other 18 words, an order from this court confirming that the automatic 19 stay of 11 U.S.C. § 362 (a) is inapplicable to Gregory T. Lynn 20 (“Lynn”). Creditor identifies Lynn as the Debtor’s nondebtor 21 codebtor. Creditor’s motion is immediately suspect in that it 22 relies almost exclusively on 11 U.S.C. § 105 (a). Section 105(a) 23 is a catch-all; however, it does not give the bankruptcy court 24 carte blanche to do whatever it wants to do. See Law v. Siegel, [25] 134 S. Ct. 1188, 1197 (2014). Creditor’s motion will be denied 26 without prejudice for the reasons explained below. 27 The court has reviewed the motion, opposition, reply, and 28 all related declarations and exhibits. The court has also reviewed and takes judicial notice of the docket in this case. 1 See Fed. R. Evid. 201(c)(1). The court has determined this 2 matter may be decided on the papers. See General Order No. 618 3 at p.3, ¶ 3 (E.D. Cal. May 13, 2020) (ordering courthouse closure 4 “until further notice” due to the COVID-19 pandemic and further 5 ordering that all civil matters are to be decided on the papers 6 unless the presiding judge determines a hearing is necessary). 7 The court has also determined that oral argument will not assist 8 in the decision-making process or resolution of the motion. See 9 Local Bankr. R. 9014-1(h), 1001-1(f). 10 The hearing on January 5, 2021, at 9:30 a.m. will be 11 vacated. Findings of fact and conclusions of law are set forth 12 below. See Fed. R. Civ. P. 52(a); Fed. R. Bankr. P. 7052, 13 9014(c). [14] 15 Background 16 Lynn is a principal of the Debtor. He is also the Debtor’s 17 sole shareholder. And he apparently is the Debtor’s codebtor. 18 On August 25, 2017, Creditor filed a state court action 19 against the Debtor and Lynn. The state court action seeks 20 damages and restitution for alleged wage theft and banking of 21 hours, among other claims. 22 Prior to this bankruptcy filing, Creditor, Debtor, and Lynn 23 voluntarily settled all claims alleged in the state court action. 24 The parties signed a settlement agreement which the state court 25 approved. The settlement agreement requires the Debtor and Lynn 26 to make certain payments to Creditor and other class members. 27 Creditor asserts that the Debtor and Lynn defaulted under 28 the terms of the settlement agreement. According to Creditor, - 2 - 1 the default permits the state court to enter an agreed-upon 2 stipulated judgment against Lynn which Creditor requested and the 3 state court tentatively indicated it would enter. However, 4 following the state court’s tentative ruling, but before a final 5 hearing on Creditor’s state court motion was held, the Debtor 6 filed its chapter 11 petition. The state court judge thereafter 7 directed Creditor to obtain an order from this court that the 8 automatic stay of § 362(a) is inapplicable to Lynn.1 [9] 10 Discussion 11 Creditor seeks what is typically referred to as a “comfort 12 order.”2 More precisely, Creditor seeks an order from this court 13 declaring not that the automatic stay has in some manner 14 terminated as to Lynn but, rather, that the automatic stay in [16] 1The court takes judicial notice that, as of the date of 17 this memorandum decision, Lynn is not a debtor under any chapter of the Bankruptcy Code. [18] 2As one court has explained the term: 19 The origins of the term ‘comfort order’ are elusive, but comfort orders are generally sought as declarations 20 from a bankruptcy judge that the automatic stay has been terminated or else never came into existence with [21] regard to some element of the bankruptcy case. Comfort 22 orders are usually sought so that the movant can proceed with legal action in some other court (such as, 23 in this case, a foreclosure action in state court). The term ‘comfort order’ does not appear in BAPCPA, but 24 it is referred to conceptually in § 362(j) of the Code, which provides that ‘[o]n request of a party in [25] interest, the court shall issue an order under 26 subsection (c) confirming that the automatic stay has been terminated.’ § 362(j) (emphasis added). [27] In re Ross, 2019 WL 480269 at *3 (Bankr. N.D. Miss. Feb. 6, 28 2019). - 3 - 1 this case is inapplicable to Lynn. There is a material 2 difference in the distinction. 3 There are very few instances in the Bankruptcy Code where 4 the bankruptcy court may issue an order confirming that the 5 automatic stay is not in effect. These include: 6 (1) § 362(b)(22)(no automatic stay as to eviction proceedings); [7] (2) § 362(c)(3)(A)(termination of the automatic stay 8 due to one prior bankruptcy filing); 9 (3) § 362(c)(4)(A)(ii)(no automatic stay due to serial bankruptcy filings); [10] (4) § 362(h)(1)(termination of the automatic stay for 11 failure to comply with duties under § 521(a)(2)); 12 (5) § 362(j)(confirming under subsection (c) that the automatic stay has been terminated). [13] None of these apply here. The matter before the court does [14] not concern an eviction. It is not the third or fourth time that [15] Lynn has filed a bankruptcy petition. And Lynn is not a debtor [16] which means he has no Bankruptcy Code duties with which he has [17] not complied. [18] Creditor cites no provision of the Bankruptcy Code that [19] directs or authorizes the bankruptcy court to enter an order that [20] declares the automatic stay inapplicable-or otherwise recognizes [21] its absence-to a nondebtor.3 Nevertheless, a number of courts [22] recognize that even when the Bankruptcy Code does not require it, [23] “[t]he [Bankruptcy] Court . . . retains the discretion to enter a [24] comfort order if warranted by the facts.” Ross, 2019 WL 480269 [26] 27 3At least one court has questioned its authority to issue these so-called “comfort orders.” In re Rosenblum, 2019 Bankr. 28 LEXIS 2277 at *6 (Bankr. D. Nev. July 17, 2019). - 4 - 1]}at *3. Here, however, for at least two reasons this court is not 2 |} convinced that the facts of this case warrant an issuance of the 3 requested “comfort order” even if authority to issue such an order as it pertains to a nondebtor exists. 5 First, if anything, “[a] ‘comfort order’ is a bankruptcy 6] term of art for an order confirming an undisputed legal result, 7 and often is entered to confirm that the automatic stay has 8 || terminated.” In re Hill, 364 B.R. 826 , 827 n.1 (Bankr. M.D. Fla. 9/2007) (emphasis added). Not only is the request here not one for 10 |} an order that the automatic stay has terminated as to Lynn, but, 11 the record before it the court cannot conclude that the legal 12 || result of Creditor’s motion is undisputed. In other words, as 13 explained below, Creditor has not demonstrated that he is entitled to the requested “comfort order” as a matter of law. 15 Second, it is true that as a general rule the automatic stay 16 || does not protect nondebtors and it protects only debtors, 17 | debtors’ property, and property of the estate. See 11 U.S.C. §§ 18 |} 362(a), 541(a); Advanced Ribbons and Office Prods., Inc. v. U.S. 19 |) Interstate Distrib., Inc., 125 B.R. 259, 263 (9th Cir. BAP 1991) 20 |] (citation omitted). However, the Fourth Circuit in A.H. Robins Piccinin, 788 F.2d 994 (4th Cir. 1986), cert. denied, 479 U.S. 221876 (1986), developed an exception to the general rule. Piccinin 23} held that the automatic stay may be extended to a nondebtor if 24 |) unusual circumstances make the interests of the debtor and the 25 || nondebtor inextricably interwoven. Id. at 998-1004 (affirming 26 stay of actions against debtor’s officers under a combination of 27 362(a), § 105(a), and the court’s inherent equitable powers); 28!) see also S.1. Acquisition, Inc. v. Eastway Delivery Serv., Inc. ~5 - 1 (In re S.1. 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). 4 The Ninth Circuit has not expressly adopted the “unusual 5 |} circumstances” exception. See Klinkenborg Aerial Spraying and 6 || Seeding, Inc. v. Rotorcra Dev. Corp., 690 Fed.Appx. 540 (9th Cir. 7 2017) (citation omitted). At the same time, it has not expressly rejected it either. 9 The Ninth Circuit has declined to apply the “unusual 10 || circumstances” exception in three general instances: 11 (1) where a nondebtor has obligations that are independent, primary, not derivative of the 12 debtor, Chugach Timber Corp. v. Northern Stevedoring & Handling Co. (In re Chugach Forest 13 Prods.), 23 F.3d 241 , 247 (9th Cir. 1994), and O'Malley Lumber Co. v. Lockard (In re Lockard), [14] 884 F.2d 1171 , 1179 (9th Cir. 1989); 15 (2) where it was not raised in the lower court, U.S. v. Dos Cabezas Corp., 995 F.2d 1486 , 1492-93 n.3 16 (9th Cir. 1993); and 17 (3) where the automatic stay was not extended in the first instance by the bankruptcy court in exercise 18 of its equity jurisdiction, Rotocraft Dev., 690 Fed.Appx. at 541 . [19] The Ninth Circuit has been receptive to the exception in a [20] number of case. For example, in an early opinion it stated that [21] “in the absence of special circumstances, stays pursuant to [22] section 362(a) are limited to debtors and do not include [23] non-bankrupt co-defendants.” Ingersoll-Rand Fin. Corp. v. Miller [24] Mining Co., 817 F.2d 1424, 1427 (9th Cir. 1987) (emphasis added). [25] Several years later, in Chugach Forest Prods., 23 F.3d 241 , [26] the Ninth Circuit suggested that the exception may apply when [27] necessary to “advance the aims of the bankruptcy scheme” or [28] - 6 - 1] “promote reorganization [or] protect [the debtor’s] other 2\ creditors[,]” id. at 247, and if necessary to protect the 3 || administration of the bankruptcy estate.* Id. at 247 n.6. 4 In Solidus Networks, Inc. v. Excel Innovations, Inc. (In re 5] Excel Innovations, Inc.), 502 F.3d 1086 (9th Cir. 2007), the 6]/Ninth Circuit reversed not because the bankruptcy court and the 7 || bankruptcy appellate panel applied the exception but because they both applied the exception incorrectly. The court explained: 9 In sum, our usual preliminary injunction standard applies to applications to stay actions against non10 debtors under § 105(a). 11 [.. .] 12 Both the bankruptcy court and the BAP applied incorrect legal standards. [13] [ .. . ] [14] The BAP treated the ‘unusual circumstances’ doctrine 15 and the usual preliminary injunction standard as separate and distinct bases for affirming the stay. 16 That is error, because the ‘unusual circumstances’ doctrine does not negate the traditional preliminary 17 injunction standard. As we have noted, stays under the doctrine, ‘although referred to as extensions of the 18 automatic stay, were in fact injunctions issued by the bankruptcy court after hearing and the establishment of 19 unusual need to take this action to protect the administration of the bankruptcy estate.’ Chugach 20 Forest Prods., 23 F.3d at 247 n. 6 (quoting Patton v. Bearden, 8 F.3d 343, 349 (6th Cir. 1993)). Indeed, 21 Piccinin itself applied the usual preliminary injunction standard in affirming the stay. 788 F.2d at 22 1008. 23 Id. at 1096. [24] 29 “Such relief would not be inconsistent with American 26 || Hardwoods, Inc. v. Deutsche Credit Corp. (In re American Hardwoods), 885 F.2d 621 (9th Cir. 1989), in which the Ninth 27 Circuit concluded that bankruptcy courts have jurisdiction to enjoin actions that could conceivably have any effect on 28 | administration of reorganization plan. Id. at 624 . - 7J- 1 In Boucher v. Shaw, 572 F.3d 1087 (9th Cir. 2009), the Ninth Circuit recognized that it would not be improper for the 3 || bankruptcy court to extend the automatic stay to a nondebtor 4] through its equity jurisdiction “if the liability of the 5 |} non-debtor party were to affect the property of the bankruptcy 6]/estate, such as by a requirement that the debtor indemnify the 7! non-debtor or by payment of the liability from a director’s and 8 | officer’s insurance policy[.]” Id. at 1093 & n.3 (emphasis in original). 10 Citing Piccinin, the Ninth Circuit Bankruptcy Appellate Panel has also recognized that “[t]he automatic stay may protect 12 1 nondebtors only under ‘unusual circumstances’ where the interests 13 the debtor and the nondebtor are inextricably interwoven.” Ripon Self Storage, LLC v. Exchange Bank (In re Ripon Self 15] Storage, LLC), 2011 WL 3300087 at *6 (9th Cir. BAP April 1, 16] 2011); see also Hemaratanatorn v. Pasternak (In re MBE Digital, 17} Inc.), 2016 WL 6699313 at *4 n.4 (9th Cir. Nov. 9, BAP 2016) (“We 18 || have recognized that the bankruptcy court may extend the 19] automatic stay to nondebtors under the ‘unusual circumstances’ 20 || doctrine, where the interests of the debtor and the nondebtor are 21} inextricably interwoven.”). At the same time, the BAP also noted that “any extension of the automatic stay to nondebtors does not 23} occur automatically but requires the filing of an adversary 24} proceeding requesting the bankruptcy court to act under § 105(a).” Ripon, 2011 WL 3300087 at *6. 26 The point here is that the “unusual circumstances” exception 27 to the general rule that the automatic stay protects only debtors 28} (and debtors’ property and property of the estate) remains viable ~g- 1 in the Ninth Circuit if sought through an adversary proceeding. 2 And therein lies Creditor’s problem. 3 Creditor recites two critical facts which have the potential 4 to trigger application of the “unusual circumstances” exception 5 in this case: (1) Lynn is the Debtor’s codebtor; and (2) Lynn is 6 a principal of the Debtor. Based on those facts alone and the 7 record before it, the court is unable to conclude that Creditor 8 has an undisputed right, if any at all, to the requested “comfort 9 order.” Put another way, Creditor has not demonstrated an 10 entitlement to the relief requested in the form of a “comfort 11 order” as a matter of law. 12 Further contributing to Creditor’s problem is that 13 Creditor’s request for a “comfort order” is effectively a request 14 for declaratory relief made in the context of a watered-down 15 contested matter which lacks the protections of an adversary 16 proceeding or, at a minimum, application of adversary procedures 17 through Bankruptcy Rule 9014(c). See In re Fagan, 559 B.R. 718 , 18 724-25 (Bankr. E.D. Cal. 2016); Gray v. CPF Associates, LLC, 614 19 B.R. 96, 107-08 (D. Ariz. 2020). Moreover, whereas Creditor 20 would have the burden in an action for declaratory relief, here, 21 Creditor does not explain (1) the extent of Lynn’s codebtor 22 liability, i.e., independent, derivative, or if it would give 23 Lynn some claim against the Debtor or estate property, or (2) the 24 impact, if any, of Lynn’s entanglement in state court litigation 25 on the Debtor’s reorganization or the administration of the 26 chapter 11 case. The court declines to grant Creditor 27 declaratory relief under these circumstances. Cf. In re Running 28 Horse, LLC, 2007 WL 2669480 at *2 (Bankr. E.D. Cal. 2007) - 9 - 1 (declining to issue a “comfort order” regarding debtor’s interest 2 in property without an adversary proceeding or agreement of all 3 parties). 4 At the same time, the Debtor’s request for the court to 5 extend the automatic stay to Lynn requires an adversary 6 proceeding or, perhaps, an evidentiary hearing under the auspices 7 of the federal rules of procedure. The Debtor has initiated 8 neither. The Debtor’s request for an extension of the automatic 9 stay to Lynn (or more accurately a § 105(a) injunction for Lynn’s 10 benefit) will therefore also be denied without prejudice. [11] 12 Conclusion 13 For the foregoing reasons, Creditor’s motion is denied 14 without prejudice. The hearing on January 5, 2021, at 9:30 a.m. 15 is vacated. 16 A separate order will issue. [28] - 10 - 1 INSTRUCTIONS TO CLERK OF COURT SERVICE LIST [2] The Clerk of Court is instructed to send the attached 3 document, via the BNC, to the following parties: 4 Julie E. Oelsner 400 Capitol Mall 11th Fl 5 Sacramento CA 95814 6 Rick Morin 555 Capitol Mall Suite 750 7 Sacramento CA 95814 8 Jason M. Blumberg 501 I St #7-500 9 Sacramento CA 95814 [28] - 11 -