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Delaware Bankruptcy Court Won’t Allow Automatic Stay To Be Used As Litigation “Sword”

In re Scarborough-St. James Corp., No. 15-10625, 2015 WL 4940043 (LSS) (Bankr. D. Del. Aug. 18, 2015)

In her Honor’s first published Opinion, Judge Silverstein refused to permit a debtor to use the automatic stay as an offensive litigation tactic and granted a landlord’s motion for relief of the stay so that it could proceed with an eviction proceeding against the debtor.  Using the familiar three-pronged balancing test, the Court held that cause exists to allow the continued action because the debtor will not suffer great prejudice, the hardship to the landlord considerably outweighs the hardship to the debtor, and the landlord made the requisite “slight” showing of probability of success on the merits.

The procedural history between Scarborough-St. James Corporation (the “Debtor”) and 67500 South Main Street, Richmond, LLC (the “Landlord”) is complex on account of the substantial pre-petition litigation between the parties, neither of which are original parties to the shopping center lease in question.  In the current round of litigation, the parties dispute, among other things, whether the lease terminated and the extent to which rent is owed.  The dispute was subject to an arbitration award in favor of the Landlord, which was appealed and affirmed pre-petition by the New York Supreme Court.  The New York court then issued a judgment against the Debtor, again pre-petition, who appealed post-petition, but did not seek a stay pending appeal.  After the New York Supreme Court’s affirmance but before it entered judgment, the Landlord instituted eviction and accounting proceedings in Michigan state court.  The Michigan court entered its “Modified Interim Order Awarding Injunctive Relief to Landlord”, which preserved the status quo between the parties pending final adjudication in New York.  After the New York court entered its judgment, but before the Michigan court could hear the matter, the Debtor filed its bankruptcy petition.

Importantly, in the five months since the Debtor filed its petition, it sought no assistance from the Bankruptcy Court in administering its case.  In re Scarborough-St. James Corp., 2015 WL 4940043, at *7 (Bankr. D. Del. Aug. 18, 2015).  On its schedules, the Debtor lists very few creditors, of which the Landlord’s claim represents the lion’s share, no secured creditors, and the Debtor stated that it was generally paying its debts as they came due.  Id. at *5.  Upon the filing of the petition, the Landlord promptly filed its motion for relief from the automatic stay to allow the Michigan litigation to conclude as well as a motion for adequate protection.

In reviewing the standard for determining “cause” for relief from the automatic stay, the Court easily found in favor of the Landlord.  First, it was found that the Debtor will not suffer great prejudice if the stay is lifted because the administration of its bankruptcy case (or lack thereof) will not be affected.  Of particular importance to the Court was the necessary determination of the Debtor’s interest (or lack thereof) in the lease (the Debtor’s primary asset), which the Michigan court was better suited to make given the familiarity with the dispute.  Second, in weighing the hardships, the Court found that the Landlord will suffer prejudice if the lease dispute is not adjudicated by the Michigan court.  Third, the Court found that the Landlord “made (at least) the requisite slight showing of the probability of success on the merits of the Michigan Litigation.”  Id. at *7.  The Court determined the Landlord’s probability of success based on the arbitrator’s award, which is difficult to overturn, and the New York court’s final judgment, but noted that its ruling, made in the context of a stay relief motion, should not affect the Michigan court’s adjudication on the merits.  Id. at *8 n.21.

Finally, the Court bolstered its decision with the policies behind the automatic stay:  “the stay is a shield, not a sword that should help the debtor deal with his bankruptcy for the benefit of himself and his creditors.”  Id. at *5 (quoting In re Residential Capital, LLC 2012 WL 3249641, at *2 (Bankr. S.D.N.Y. Aug. 7, 2012)).  In the Debtor’s case, the Court found that it is not seeking “breathing room” from litigation, but rather, is propounding litigation as it has since removed the dispute to federal court in Michigan and filed an adversary proceeding in the Bankruptcy Court regarding the lease dispute.  For these reasons, the Court granted the Landlord’s motion for relief from the stay, allowing the Michigan proceeding to continue.