In re Malacina

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CASE NO. 17-20835 (Bankr. N.D. Ind. Aug. 10, 2018)

CASE NO. 17-20835




A. Factual and Procedural Background

On June 23, 2017, Deion Adams, Melanie Adams and Abigail Adams (the "Movants"), by counsel, filed a motion for relief from stay. The motion requests that the automatic stay of 11 U.S.C. § 362 be lifted/modified so that they can continue litigating a pre-petition personal injury action, which arose as a result of an automobile accident, filed against Debtor Mark Malacina ("Debtor"). The case is currently pending in the Lake Superior Court, sitting in Lake County, Indiana, under cause number 45D04-1704-CT-00084 ("State Court Action").

The Movants allege that Debtor is covered under an insurance policy with State Farm Mutual Automobile Insurance Company with liability limits in the amount of $100,000 per person and $300,000 per accident. The Movants seek relief from the automatic stay so that they can proceed with the litigation against Debtor as a nominal defendant and seek recovery in the State Court Action to the extent of Debtor's applicable insurance policy limits.

Debtor filed an objection to the immediate motion and argues that cause does not exist for lifting the automatic stay. Debtor contends that he should not be prejudiced with litigation outside of the bankruptcy court. Specifically, Debtor argues that because the Movants filed a dischargeability action against him pursuant to 11 U.S.C. § 523(a)(6) and (a)(9), it would prejudice him to litigate in two different venues, as it may possibly subject him to inconsistent verdicts. Debtor further contends that lifting the stay would prejudice him because the Movants potentially may obtain a judgment in excess of his insurance policy limits in the State Court Action. According to Debtor, if that happens, and given the pending dischargeability action, the Movants may pursue that judgment against him personally. For the foregoing reasons, Debtor contends that the entire matter should be litigated within the bankruptcy court.

B. Jurisdiction

The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157(b)(1), and N.D.Ind.L.R. 200-1(a)(1) and (2) of the Rules of the United States District Court for the Northern District of Indiana. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(G). This Order constitutes the Court's the findings of fact and conclusions of law.

C. Analysis

This Court must first inquire into the prejudice that Debtor or the bankruptcy estate will suffer if this Court allows the Movants' State Court Action to proceed despite the stay. In this regard, the Seventh Circuit has held that a debtor-defendant suffers little prejudice when he or she is sued by a plaintiff who seeks nothing more than a declaration of liability that can serve as a predicate for recovery against insurers, sureties, or guarantors. In the Matter of Fernstrom Storage & Van Co., 938 F.2d 731, 736 (7th Cir. 1991); see also Matter of Holtkamp, 669 F.2d 505, 508-09 (7th Cir. 1982) (reasoning that allowing a personal injury action against the debtor to proceed did not harm the debtor where the debtor's insurance company had "assumed full financial responsibility for defending that litigation"). In Fernstrom, the court set forth three factors to consider when determining whether "cause" exists to grant relief from the stay and pursue litigation in another forum:

Though § 362(a) provides for a nearly comprehensive stay of proceedings against the debtor, § 362(d) requires the bankruptcy judge "to grant relief from the stay . . . for cause." "'Cause'" as used in § 362(d) "has no clear definition and is determined on a case-by-case basis." In re Tucson Estates, 912 F.2d 1162, 1166 (9th Cir. 1990). See also In re Makarewicz, 121 B.R. 262, 264 (Bankr. S.D. Fla. 1990); In re Revco D.S., 99 B.R. 768, 777 (Bankr. N.D. Ohio 1989). Nevertheless, a number of themes emerge from the cases interpreting § 362(d)'s expansive language. As we wrote in Matthews, 739 F.2d at 251, "suspension of [the automatic stay] may be consonant with the purposes of the Bankruptcy Act when equitable considerations weigh heavily in favor of the creditor and the debtor bears some responsibility for creating the problems." An influential district court opinion adopts a three factor test for determining whether "cause" exists, asking whether

a) Any great prejudice to either the bankrupt estate or the debtor will result from continuation of the civil suit,
b) the hardship to the [non-bankrupt party] by maintenance of the stay considerably outweighs the hardship of the debtor, and
c) the creditor has a probability of prevailing on the merits.

, 938 F.2d at 735. However, the court in In re Londrigan, No. 14-70025, 2014 Bankr. Lexis 3730, at *13-14 (Bankr. C.D. Ill. Sept. 3, 2014), pointed out that the foregoing factors are not an exhaustive list of factors to consider and that a court may consider and weigh other factors as well:
Because the Seventh Circuit has listed factors to be considered [in Fernstrom] but has not issued a rule of decision, other factors may also be considered in weighing whether cause for stay relief to pursue litigation in another forum has been established. See In re Grogg, 295 B.R. 297, 305 (Bankr. C.D. Ill. 2003) (Perkins, J.). The additional factors include, inter alia, the connection of the litigation to the bankruptcy case, whether a specialized tribunal with particular expertise has been established to hear the matter, whether insurance coverage is available, and whether there are interests of judicial economy to be served.

, 2014 Bankr. Lexis 3730, at *14.

In this case, the Movants filed an adversary proceeding against Debtor seeking to except from discharge a debt that allegedly arose as a result of an automobile accident. The Movants request relief from the automatic stay so that they can proceed with the litigation in the state court against Debtor as a nominal defendant and seek recovery to the extent of Debtor's insurance coverage. In other words, in the State Court Action, the Movants seek a declaration of liability with no real monetary consequences for Debtor, as opposed to his insurer.

The Court appreciates Debtor's concern that there is a risk that a judgment entered against him in the State Court Action potentially may be in excess of his insurance policy limits. However, the Movants' claim will need to be liquidated for purposes of their dischargeability action anyway and, at this point, the state court is poised to do just that. Further, in the event that a judgment is entered in excess of the policy limit, the Movants will be stayed from attempting to collect it until this Court determines to what extent, if any, the judgment rendered in the State Court Action is excepted from discharge pursuant to 11 U.S.C. § 523(a)(6) or (a)(9).

It is worth noting that the state court and the bankruptcy court do have concurrent jurisdiction to determine whether a debt is excepted from discharge pursuant to 11 U.S.C. § 523(a)(9). In re Hagan, 256 B.R. 784, 786 (Bankr. E.D. Wis. 2000); See, Collier on Bankruptcy, ¶ 523.03 (16th ed.). However, this Court has exclusive jurisdiction over the action brought by the Movants under 11 U.S.C. § 523(a)(6) and the facts litigated in the State Court Action may allow this Court to expedite such a determination.

The issue of dischargeability, under § 523(a)(9), is a matter to be decided by a court and not by a jury. Hagan, 256 B.R. at 786 (citing, In re Hallahan, 936 F.2d 1496, 1507 (7

In In re Martin, 542 B.R. 199 (B.A.P. 6th Cir. 2015), a bankruptcy appellate panel had to determine whether the bankruptcy court abused its discretion by holding in abeyance an adversary proceeding, brought pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4) and (a)(6), and lifting the stay so that a creditor could proceed in state court on its fraud claims against the debtor. The Martin court held that the bankruptcy court did not abuse its discretion and reasoned:

[A]lthough bankruptcy courts have exclusive jurisdiction to determine dischargeability issues, this "does not require the bankruptcy court to redetermine all the underlying facts" of the case if they were previously determined in an earlier lawsuit. Spilman v. Harley, 656 F.2d 224, 227 (6th Cir.1981). The Supreme Court has specifically held that issue preclusion principles are applicable to nondischargeability proceedings in bankruptcy cases. Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). See also Powers v. Powers (In re Powers), 385 B.R. 173, 177 (Bankr.S.D.Ohio 2008). "The fact that [a bankruptcy] Court may give preclusive effect to the state court judgment does not mean that is deferring to the state court to determine dischargeability." Jaffe v. Dawson (In re Dawson), 338 B.R. 756, 763 (Bankr.N.D.Ohio 2006). "The dischargeability of a debt must be recognized as a matter separate from the merits of the debt itself." Sill v. Sweeney (In re Sweeney), 276 B.R. 186, 195 (6th Cir. BAP 2002). Accordingly, the bankruptcy court does not improperly abdicate its role by holding an adversary proceeding to determine the dischargeability of a potential debt in abeyance in order to allow completion of on-going state court litigation regarding the cause of action giving rise to the potential debt.

In re Martin
, 542 B.R. at 202-03. Based on the conclusions reached in the foregoing cases, this Court finds that Debtor would suffer little prejudice from a continuation of the State Court Action.

This Court will next inquire whether the hardship to the Movants, by maintenance of the stay, considerably outweighs the hardship to Debtor. This Court finds that a decision continuing the application of the stay to the Movants' State Court Action would cause them significant hardship, as it would force them to write off much of the time they had spent and the expenses they had incurred while completing discovery over the last several years. "Where the stayed non-bankruptcy litigation has reached an advanced stage, courts have shown a willingness to lift the stay to allow the litigation to proceed." Fernstrom, 938 F.2d at 737 (citations omitted). "The attention paid to the stage to which the non-bankruptcy litigation has progressed is based on the sound principle that the further along the litigation, the more unfair it is to force the plaintiff suing the debtor-defendant to duplicate all of its efforts in the bankruptcy court." Id. (internal citations and quotations omitted).

At the final hearing on the instant motion, the parties reported that little discovery and briefing has been completed in the adversary proceeding pending before this Court. Conversely, the Movants reported that discovery in the State Court Action was near completion and that the case, which was initiated in January of 2014, is now ready to proceed to trial. At the very least, Debtor acknowledged that discovery in the State Court Action was substantially complete. Clearly, the State Court Action is at a more advanced stage of litigation than the adversary proceeding. Based on the advanced stage of litigation in the State Court Action, the Court finds that the Movants would endure significant hardship if the Court did not lift the stay and allow the trial to proceed.

While there are other factors that a court could consider, Debtor has not demonstrated in this case that any other factors weigh against relief from the automatic stay. Accordingly, the Court finds that sufficient cause exists to grant relief from the automatic stay.

D. Conclusion

For the reasons discussed above, the Court finds that, pursuant to 11 U.S.C. § 362(d)(1), the Movants have established sufficient cause showing that they are entitled to relief from the automatic stay and, therefore, their motion is hereby GRANTED. The automatic stay is lifted and modified to allow the Movants to proceed with their personal injury action, pending in the Lake Superior Court under cause number 45D04-1704-CT-00084, and to determine the amount, if any, of their claim against Debtor. Additionally, until further order of this Court, the related adversary proceeding (Cause No. 17-02059) is held in abeyance.

If a judgment is entered against Debtor in the State Court Action, the Movants are authorized to seek recovery against Debtor's insurer to the extent of the insurance policy limits. Moreover, if a judgment in excess of the insurance policy limits is entered against Debtor, or in the event Debtor's insurer denies coverage, the Movants are stayed from proceeding personally against Debtor or the property of this bankruptcy estate until a court has determined to what extent, if any, that amount is excepted from discharge pursuant to 11 U.S.C. § 523(a)(6) or (a)(9).

All of the foregoing is hereby Ordered, Adjudged, and Decreed.

Dated at Hammond, Indiana on August 10, 2018.

/s/ James R. Ahler

James R. Ahler, Judge

United States Bankruptcy Court Distribution:
Debtor, Attorney for Debtor
Trustee, US Trustee,
Counsel of Record

th Cir. 1991)). With that said, if a state court declines (or is not asked) to address the issue of dischargeability under this section, then the bankruptcy court would.