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Kearney v. Abruzzo

United States District Court, D. New Mexico

October 19, 2018

LOUIS ABRUZZO, et al., Appellees.



         THIS MATTER comes before the Court on Appellant's Emergency Motion for Stay Pending Appeal [ECF No. 3]. Appellant seeks a stay of the Bankruptcy Court's order modifying the automatic bankruptcy stay pursuant to 11 U.S.C. § 362. Having reviewed the parties' submissions, the record, and applicable law, the Court will deny the motion.


         Appellant is the beneficiary of trusts established by his late wife, Mary Pat Abruzzo. ECF No. 6 at 56. Appellees Louis and Benjamin Abruzzo are the contingent remainder beneficiaries of their sister's trusts. Id. In 2013, the Appellant and the Abruzzo brothers filed cross-claims in New Mexico's Second Judicial District Court (State Court) for breach of fiduciary duty, as they all functioned as co-trustees. Id. at 70. The State Court concluded Appellant breached his fiduciary duties and that “good cause … exists for modification of the Mary Pat Abruzzo Trust, including but not limited to appointment of a Successor Trustee….” Id. at 71.

         On September 1, 2017, before any trust modifications were made, Appellant filed a Chapter 11 bankruptcy case. See No. 17-12274-t11, Bankruptcy Docket No. (“BK No.”) 1. The State Court action was automatically stayed pursuant to 11 U.S.C. § 362. About a week after the bankruptcy filing, the Abruzzo brothers filed a motion for relief from the automatic stay to resolve the remaining issues in the State Court litigation. BK No. 13. The Bankruptcy Court (Hon. David Thuma) heard the motion on November 22, 2017 and determined “all parties would be better served by attempting to mediate their differences and negotiate a plan of reorganization, rather than incurring attorney fees in further litigation.” BK No. 111. Another Bankruptcy Judge, Hon. Robert Jacobvitz, agreed to act as mediator. Id. The Bankruptcy Court kept the stay motion under advisement but reserved the right to terminate the automatic stay “at any time it perceives that continuing the stay no longer benefits the [Abruzzo brothers] and the estate.” Id. at 3.

         Around the same period, the United States Trustee appointed an unsecured creditors' committee (UCC) in accordance with 11 U.S.C. § 1102. BK No. 103. The Abruzzo brothers are not members of the UCC, presumably because they may qualify as secured creditors by virtue of the trusts. Id. The UCC, Appellant, and the Abruzzo brothers participated in the mediation, but it was unsuccessful. BK No. 111. On August 13, 2018, the UCC proposed an amended Chapter 11 Plan of Reorganization (UCC Plan), which contemplates trust modifications. BK No. 360. The key points of the proposed UCC Plan are as follows:

1. The family business founded by the Abruzzos (ARCO) will pay $12, 571, 799 to Appellant's trusts in exchange for all ARCO stock held by the trusts.
2. The Abruzzo brothers will deliver a $3 million trust payment to Appellant, which would be delivered to creditors.[2]
3. Appellant's $350, 890.55 priority tax debt will be paid from net income that would otherwise be distributable to Appellant from the trusts.

Id. at 6. Confirmation[3] of the UCC Plan is contingent upon State Court approval of these items, which are hereinafter referred to as the “Three Actions.” ECF No. 3 at 1. Appellant proposed a competing Chapter 11 Plan of Reorganization (Debtor's Plan), which did not contemplate such trust modifications. BK No. 381.

         On September 4, 2018, the Bankruptcy Court modified the automatic stay pursuant to 11 U.S.C. § 362 to allow the Abruzzo brothers to obtain a State Court hearing on the Three Actions. ECF No. 1 at 8. The Bankruptcy Court entered a second, substantive order modifying the automatic stay on September 18, 2018. Id. at 11-12. The second order permitted the Abruzzo brothers to pursue the Three Actions against Appellant in State Court. Id. Together, the orders are hereinafter referred to as the “Section 362 Orders.”

         Appellant filed the instant appeal challenging the Section 362 Orders on September 20, 2018. ECF. No. 1. He first sought a stay pending appeal in the Bankruptcy Court, as required by Bankruptcy Rule 8007(a)(1), which was denied. ECF No. 3 at 6. On the eve of the State Court hearing, Appellant removed the Three Actions to Federal District Court. ECF No. 1 in No. 18-cv-922 JCH/SCY. Appellees filed a motion to remand or abstain. ECF No. 4 in No. 18-cv-922 JCH/SCY. The Court (Hon. Judith Herrera) transferred the Three Actions to Bankruptcy Court in accordance with the standing referral of all bankruptcy jurisdiction. ECF No. 8 in No. 18-cv-922 JCH/SCY.

         Between October 8 and 9, 2018, Appellant filed three emergency motions. In the first two motions, filed in No. 18-cv-922 JCH/SCY, Appellant asked the Court to withdraw the standing reference of bankruptcy jurisdiction and/or to stay proceedings. The Court initially entered a text-only order advising that Appellant was not entitled to relief on an emergency basis. ECF No. 10 in No. 18-cv-922 JCH/SCY. Appellant filed a second emergency motion the next day, prompting the Court to deny both motions. ECF No. 10 in No. 18-cv-922 JCH/SCY.

         Appellant filed the emergency motion for a stay pending appeal in this proceeding on October 9, 2018. ECF No. 4. He seeks an order staying the Section 362 Orders in accordance with Bankruptcy Rule 8007. Id. The Court set an expedited briefing schedule, and the matter is fully briefed. ECF No. 6, 7, and 8. Appellees advise that since the motion was filed: (1) the Bankruptcy Court remanded the Three Actions to State Court; and (2) a State Court hearing on the Three Actions is set for October 23, 2018. ECF No. 6 at 4; ECF No. 7 at 6.


         Appellant contends a stay must issue for two reasons. First, he argues the appeal divested the Bankruptcy Court of all jurisdiction pertaining to the Chapter 11 Plan confirmation process and the removal/remand proceeding. ECF No. 3 at 5-6; 16-19. Alternatively, Appellant argues the traditional injunction standards favor a stay. Id. at 6-16. For the reasons below, the Court is unpersuaded by either argument.

         A. The Divestiture Doctrine Does Not Justify Relief

         “The filing of a notice of appeal is an event of jurisdictional significance.” Griggs v. Provident Consumer Disc. Co., 459 U.S. 56, 58 (1982). “[I]t confers jurisdiction on the court of appeals and divests the district court of its control over those aspects of the case involved in the appeal.” Id. A notice of appeal does not stay the Bankruptcy Court from all further action, however. See Fed. R. Bankr. P. 8001. In accordance with Bankruptcy Rule 8007(e)(1), all “other proceedings in the [bankruptcy] case” may continue unless and until the Bankruptcy Court suspends them.

         Appellant argues the remand proceedings and Plan confirmation process constitute “aspects of the case involved in” the Section 362 appeal.[4] ECF No. 3. Appellee UCC contends they constitute other, unrelated proceedings. ECF No. 6. Having considered the interplay between different sections of the Bankruptcy Code, the Court agrees with Appellee UCC. Section 362 “give[s] a debtor a breathing spell from his creditors, ” who must obtain Bankruptcy Court approval before continuing any pre-bankruptcy state court lawsuit. In re Calder, 907 F.2d 953, 957 (10th Cir. 1990) (quotations omitted). A creditor who willfully continues a pre-bankruptcy lawsuit without Court approval is subject to monetary sanctions. 11 U.S.C. § 362(k). Thus, the Section 362 Orders allowed the Abruzzo brothers to continue to pursue the State Court “proceeding against the debtor” and/or attempt to “recover a [pre-bankruptcy] claim against the debtor” without risking sanctions. 11 U.S.C. § 362. The Section 362 ...

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