J.E. Robert Company et al. v. LLC (2011)

MEMORANDUM OF DECISION

I

Background

On January 6, 2011, a hearing was held concerning the court's November 19, 2010 order for disclosure of assets (# 480).   Counsel for three of the guarantor defendants, Andrew J. Julian, Michael Murray, and Stephanie Lord Drake,¹ appeared at the hearing.   Only defendant Andrew J. Julian appeared at court pursuant to the court's order for disclosure of assets.   At that time the court was advised that the fourth guarantor defendant, Maureen Julian, had filed a bankruptcy petition on the previous day, January 5, 2011, in the United States Bankruptcy Court for the District of Connecticut.   See Notice of Bankruptcy Stay (# 489).

At the hearing, the plaintiff, Shaw's New London, LLC (SNL) contended that the automatic stay under U.S.C. § 362(a) does not stay this matter, except as to Maureen Julian, as the debtor who made a bankruptcy filing, and does not apply to the other guarantor defendants, against whom SNL seeks a deficiency judgment as a result of a commercial loan transaction.   The background of this matter is set forth in numerous memoranda of decisions issued by this court, including its memorandum of decision dated November 19, 2010 (# 478), in which it found that a prejudgment remedy in the amount of $7,308,400 should issue, as set forth in the court's accompanying order granting prejudgment remedy (# 479).   SNL's counsel stated at the hearing that she would file a motion for sanctions as a result of the defendants' failure to comply with the court's orders.

At the hearing, counsel for defendant Stephanie Lord Drake argued that the bankruptcy stay applied to her.   Counsel for defendants Andrew J. Julian and Michael Murray stated that SNL's counsel had provided caselaw to him concerning the automatic stay and that he did not know whether the stay applied to the other guarantor defendants.   The court directed counsel to provide the court with briefs on the issue, by the next day, January 7, 2011.   As a result, the court-ordered examination of defendant Andrew J. Julian concerning disclosure of assets did not occur on January 6, 2011.

Counsel for defendants Andrew J. Julian and Michael Murray filed a memorandum of law concerning applicability of the automatic stay on January 7, 2011 (# 496) (defendants' memorandum).   Counsel for defendant Stephanie Lord Drake adopted that memorandum (# 495).   SNL also filed a memorandum of law addressing the issue on the same date (# 497).

II

DiscussionAAutomatic Stay

11 U.S.C. § 362(a) provides, in relevant part, “[A] petition filed under section 301, 302, or 303 of this title ․ operates as a stay, applicable to all entities, of-(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title ․ (2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title ․” “As a general rule, the filing of a ․ bankruptcy petition does not enjoin litigation against nondebtors.”  (Footnote omitted;  internal quotation marks omitted.)  Burritt Interfinancial Bancorporation v. Wood, 33 Conn.App. 401, 404, 635 A.2d 879 (1994).  “It is well established that a case against a bankrupt debtor and a nonbankrupt debtor, although stayed against the bankrupt debtor, may nevertheless proceed against the nonbankrupt debtor.”  Id., 404-05.

In defendants' memorandum, page 1, they cite Krondes v. O'Boy, 69 Conn.App. 802, 808, 796 A.2d 625 (2002), which provides that “Section 362 of the Bankruptcy Code stays any and all postpetition filing.   Any filing constitutes a judicial act directed toward the disposition of the case in violation of the automatic stay ․ The stay of section 362 is extremely broad in scope and ․ should apply to almost any type of formal or informal action against the debtor or the [debtor's] property ․ 2 W. Collier, Collier on Bankruptcy (15th Ed.1979) § 362.04.” (Internal quotation marks omitted.)

However, the defendants did not cite the very next paragraph of Krondes v. O'Boy, supra, 69 Conn.App. 809, which provides, “Generally, the filing of a bankruptcy petition does not stay actions against nondebtors ․ Nondebtors seeking protection of an automatic stay must move for the extension of the stay in the Bankruptcy Court.”  (Citation omitted;  emphasis added.)   The defendants do not contend that the Bankruptcy Court has extended the stay to them.   Accordingly, the automatic stay does not apply to defendants Andrew J. Julian, Michael Murray, and Stephanie Lord Drake.

The defendants' omission of this Connecticut appellate authority, stated in Krondes v. O'Boy, supra, which is directly adverse to their position, is compounded by their later reference, at pages 4-5 of their memorandum, to other portions of that decision, at 69 Conn.App. 810-11.

In its memorandum, pages 6-9, SNL cited other Connecticut Appellate Court decisions which also make it clear, as stated above, that the Bankruptcy Court, not the state court, is the only court that can extend the automatic stay to non-debtor defendants.   See Burritt Interfinancial Bancorporation v. Wood, supra, 33 Conn.App. 404;  Metro Bulletins Corp. v. Soboleski, 30 Conn.App. 493, 497-98, 620 A.2d 1314, cert. granted on other grounds, 225 Conn. 923, 625 A.2d 823 (1993) (appeal withdrawn June 4, 1993).   They also cited Krondes v. O'Boy, supra, 69 Conn.App. 809, which, as set forth above, provides, “Nondebtors seeking protection of an automatic stay must move for the extension of the stay in the Bankruptcy Court.”  (Emphasis added.)

Thus, the defendants' selective citation of pertinent Connecticut appellate authority was explicitly pointed out to them in SNL's memorandum.   Nevertheless, the defendants have not withdrawn their memorandum or asked the court not to consider it.   This raises concerns under Rule of Professional Conduct 3.1 (meritorious claims and contentions).²

Similar deficient citation of authority is repeated by the defendants in their memorandum, at pages 2 and 3, concerning their citation of McCartney v. Integra National Bank North, 106 F.3d 506 (3d Cir.1997).   There, at 106 F.3d 510-11, the court agreed that the plaintiff bank could not have proceeded further against Lamar's, the borrower, to obtain a deficiency judgment, because it would have been required under Pennsylvania's Deficiency Judgment Act to name McCartney, the guarantor/bankruptcy debtor, as a respondent in its state court petition “and thereby violate the automatic stay protecting him.”   Id., 511.

Here, Pennsylvania law is inapplicable and the defendants cite no analogous Connecticut statute which applies.   Instead, the defendants' reference to McCartney v. Integra National Bank North, supra, ignores the pertinent earlier discussion therein, at pages 509-10, which also is directly adverse to their position, and which states, “[i]t is universally acknowledged that an automatic stay of proceedings accorded by § 362 may not be invoked by entities such as sureties, guarantors, co-obligors, or others with a similar legal or factual nexus to the ․ debtor ․ As one court has reasoned, a primary rationale for refusing to extend the automatic stay to nonbankrupt third parties is to insure that creditors obtain the protection they sought and received when they required a third party to guaranty the debt.”  (Citations omitted;  collecting cases;  emphasis added;  internal quotation marks omitted.)

Citing Queenie, Ltd v. Nygard International, 321 F.3d 282, 287 (2d Cir.2003), the defendants contend, in their memorandum, pp. 2-3, that an unusual circumstance in which the automatic stay has been extended to enjoin litigation against non-bankrupt co-defendants “is the typical situation of a creditor who has asserted ‘a claim to establish an obligation of which the debtor is a guarantor.’  “ Queenie, which involved an individual and his wholly owned corporation, not guarantors of a loan, did not state that such a situation was “typical.”   Rather, it cited McCartney v. Integra National Bank North, supra, stating, “[t]he automatic stay can apply to non-debtors, but normally does so only when a claim against the non-debtor will have an immediate adverse economic consequence for the debtor's estate.   Examples are a claim to establish an obligation of which the debtor is a guarantor, McCartney v. Integra National Bank North, 106 F.3d 506, 510-11 (3d Cir.1997) ․” Queenie, Ltd v. Nygard International, supra, 321 F.3d 287.   As discussed above, since Pennsylvania law does not apply here, the example in McCartney is inapplicable.   Similarly inapposite is the defendants' reference to In re Pitts, United States Bankruptcy Court, Eastern District of New York, No. 808-74860-reg (December 8, 2009), which also did not involve guarantors of a loan, but which cited Queenie.³

The defendants' reliance on DAB Three, LLC v. Landamerica Financial Group, Inc., Superior Court, judicial district of Fairfield at Bridgeport, Docket No. CV 06 5004236 (April 15, 2009, Bellis, J.), is unpersuasive.   That case did not discuss the Connecticut Appellate Court decisions cited above.

As to the receiver, the court concludes the automatic stay is not applicable.   The automatic stay does not operate to protect a separate legal entity, such as Signature Properties, LLC, the owner of the property which is the subject of the receivership.

For the reasons stated above, the court concludes that the automatic stay applies only to defendant Maureen Julian and not to the other defendants.   Accordingly, the court has set forth below orders pertaining to them.

B

Meritorious Contentions

“The trial court has the authority to regulate the conduct of attorneys and has a duty to enforce the standards of conduct regarding attorneys.”  (Internal quotation marks omitted.)  Bergeron v. Mackler, 225 Conn. 391, 397, 623 A.2d 489 (1993).

Rule of Professional Conduct 3.1 provides, in relevant part, “[a] lawyer shall not bring or defend a proceeding, or assert or controvert an issue therein, unless there is a basis in law and fact for doing so that is not frivolous, which includes a good faith argument for an extension, modification or reversal of existing law.”   The Commentary thereto states, in relevant part, “[t]he advocate has a duty to use legal procedure for the fullest benefit of the client's cause, but also a duty not to abuse legal procedure.   The law, both procedural and substantive, establishes the limits within which an advocate may proceed.”   It also states, “[w]hat is required of lawyers, however, is that they inform themselves about the facts of their clients' cases and the applicable law and determine that they can make good faith arguments in support of their clients' positions.   Such action is not frivolous even though the lawyer believes that the client's position ultimately will not prevail.   The action is frivolous, however, if the lawyer is unable either to make a good faith argument on the merits of the action taken or to support the action taken by a good faith argument for an extension, modification or reversal of existing law.”   Here no good faith argument for an extension, modification or reversal of existing law, as set forth in Connecticut Appellate Court decisions, cited above, has been presented.

An opportunity to brief an issue is not to be used to burden the court with misleading citations.   Instead of withdrawing their memorandum or asking the court not to consider it, the defendants' counsel, by allowing it to be considered by the court in adjudicating the applicability of the automatic stay, have maintained all of the arguments presented in it.

The court has set forth above, at pages 3-4, applicable Connecticut appellate authority which the defendants' presentation ignored.   As set forth in an accompanying order, defendants' counsel are directed to appear at a hearing before the court, on January 25, 2011, after the court-ordered examinations of their clients are concluded (see No. 1 below), to address whether they should be found to have violated Rule of Professional Conduct 3.1 and whether disciplinary actions should be taken and/or whether other sanctions should be imposed.

CONCLUSION

This matter is stayed as to the defendant Maureen Julian only, and not as to the other defendants.

1. The defendants, Andrew J. Julian, Michael Murray, and Stephanie Lord Drake, are ordered to appear in court, Room 312, on January 25, 2011, at 10:00 a.m., to be examined, under oath, by SNL's counsel, as provided in the court's November 19, 2010 order for disclosure of assets (# 480).   Failure to appear may subject a defendant to a finding of contempt and other sanctions.

2. SNL shall file its motion for sanctions by January 25, 2011.   The defendants shall file their responses thereto by February 10, 2011.

It is so ordered.

BY THE COURT

ROBERT B. SHAPIRO

JUDGE OF THE SUPERIOR COURT

FOOTNOTES

FN1. For ease of reference, these three defendants are referred to below collectively as “defendants.”.  FN1. For ease of reference, these three defendants are referred to below collectively as “defendants.”

FN2. See part B below..  FN2. See part B below.

FN3. Also unavailing is the defendants citation of 48th Street Steakhouse, Inc. v. Rockefeller Group, Inc., 835 F.2d 427, 431 (2d Cir.1987), cert. denied, 485 U.S. 1035, 108 S.Ct. 1596, 99 L.Ed.2d 910 (1988), which concerned the effect on an assignee of sending a lease termination notice..  FN3. Also unavailing is the defendants citation of 48th Street Steakhouse, Inc. v. Rockefeller Group, Inc., 835 F.2d 427, 431 (2d Cir.1987), cert. denied, 485 U.S. 1035, 108 S.Ct. 1596, 99 L.Ed.2d 910 (1988), which concerned the effect on an assignee of sending a lease termination notice.

Shapiro, Robert B., J.