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Los Angeles Bankruptcy Court Rules on Whether Automatic Stay in Personal Bankruptcy Applies to Corporation Owned by Debtors

Coolcaesar at en.wikipedia [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0) or GFDL (http://www.gnu.org/copyleft/fdl.html)], from Wikimedia CommonsTwo debtors, a married couple, brought an adversary proceeding against a bank, claiming that it violated the automatic stay by continuing to prosecute a lawsuit in state court against a corporation in which they were the sole shareholders, by filing another lawsuit against a related corporation after they filed their bankruptcy petition, and by continuing various collection actions against them individually. The court granted the creditor’s motion to dismiss the adversary proceeding, finding that nothing prohibited the creditor from actions against the corporations, which were not parties to the bankruptcy. In re Licursi, No. 1:10-bk-26168 (Bankr. C.D. Cal., Jan. 17, 2014).

A complicated sequence of events led to the bankruptcy court’s January 2014 order. California Bank & Trust (CB&T) filed a lawsuit in Los Angeles County Superior Court against the debtors and Spectrum Glass & Aluminum, Inc. (Spectrum Aluminum), in May 2010. The debtors were the sole owners of Spectrum Aluminum. CB&T obtained a default against all three defendants in July 2010. The debtors filed for bankruptcy on December 28, 2010, triggering the automatic stay.

CB&T filed a notice of stay in the state court lawsuit in January 2011, then requested abstracts of judgment and entered the default judgment only as to the corporation. It obtained a nonsuit without prejudice of the lawsuit in September 2011. At various times during 2012, CB&T sought orders to appear against the husband debtor as the owner of Spectrum Aluminum, as well as against the wife in her capacity as CEO of Spectrum Glass & Mirror (Spectrum Mirror). It always removed them from the court’s calendar. In October 2013, CB&T filed a new lawsuit, only naming Spectrum Mirror as defendant. The debtors filed an adversary proceeding in bankruptcy court the following month for alleged automatic stay violations.

In its motion to dismiss the adversary proceeding, CB&T argued that the automatic stay did not apply to Spectrum Aluminum, which was not a party to the bankruptcy. Any further action on the original lawsuit, it claimed, was directed towards Spectrum Aluminum, and was necessary to complete the default judgment granted before the bankruptcy began. The orders to appear sought by CB&T were directed at Spectrum Aluminum’s directors and officers, “who happen[ed] to be the Debtors.” Its claim against Spectrum Mirror identifies it as the successor to Spectrum Aluminum.

The debtors argued that CB&T willfully violated the automatic stay by seeking orders to appear against them individually. They cited a decision in which the court imposed sanctions against a creditor for initiating an eviction action against a debtor during the automatic stay. In re H. Granados Communications, Inc., No. CC-13-1145, opinion (BAP 9th Cir., Dec. 24, 2013). The court disagreed, finding that the debtors’ situation differed from the cited case, since the defendant in CB&T’s lawsuit was a non-party rather than the debtors themselves. It granted the motion to dismiss, holding that “the automatic stay is simply not as broad as the Debtors would like to make it.”

Since 1997, bankruptcy attorney Devin Sawdayi has represented clients in Los Angeles who have found themselves without sufficient income to service their debts. We help people create plans that enable them to pay certain debts on a manageable schedule in Chapter 13 cases, and to eliminate their dischargeable debts in Chapter 7 cases. To schedule a free and confidential consultation to see how we may help you, please contact us today online or at (310) 475-9399.

More Blog Posts:

Failure to Disclose Lease of Residential Property in Chapter 13 Bankruptcy Proceeding Results in Prison Sentence for California Debtor, Los Angeles Bankruptcy Lawyer Blawg, January 7, 2014

Creditor Challenges Debtor’s Transfer of Business Assets to Himself Prior to Chapter 13 Bankruptcy Filing, Los Angeles Bankruptcy Lawyer Blawg, December 16, 2013

Evictions During Bankruptcy Under California Law, Los Angeles Bankruptcy Lawyer Blawg, November 29, 2013

Photo credit: Coolcaesar at en.wikipedia [CC-BY-SA-3.0 or GFDL], from Wikimedia Commons.