Like an existential philosopher, Bankruptcy Judge Craig T. Goldblatt of Delaware explored the meaning of “cause” for modification of the automatic stay when the debtor files bankruptcy on the eve of trial in state court.
Although Judge Goldblatt granted the creditor’s motion to modify the stay, he provided rationale for maintaining the stay if the facts were different.
The debtor was the tenant under a lease for commercial real estate. The lease was the debtor’s primary asset and below market.
Well before bankruptcy, the debtor and the landlord had been in a dispute over whether the term of the lease had ended or had been validly extended. In a California state court, the landlord was the plaintiff in an ejectment action, seeking a declaration that the lease had expired.
The day before trial in state court, the debtor filed a chapter 11 petition in Delaware. Judge Goldblatt was confronted with two motions: The debtor moved to assume the lease, and the landlord moved for modification of the automatic stay to allow a trial in state court to decide whether the lease had terminated before bankruptcy.
Saying that the “dispute between the debtor and a third party over ownership of an asset . . . is critical to the debtor’s business,” Judge Goldblatt seemed to imply that he would rule on the lease-expiration question, given the importance to the outcome of the chapter 11 case.
On the merits regarding the existence (or not) of the lease, Judge Goldblatt made an understatement when he said that the “dispute is quite interesting.” Having devoted page after page to a minute recitation of the facts and the parties’ legal theories, he said that both sides had arguments that were “perfectly plausible” and “perfectly reasonable.”
The answer, Judge Goldblatt said, “would certainly warrant consideration,” but “in which court?” In deciding on modifying the automatic stay, he said that “the context of the work being done by the automatic stay in a particular case is critical.”
In some contexts, the Code itself describes the relevant considerations. For instance, Section 362(d)(2) requires attention to the equity in the property and the necessity for a successful reorganization when a creditor wants a stay modification to foreclosure, Judge Goldblatt said.
In other contexts, Judge Goldblatt laid out tests devised by the courts. Delaware bankruptcy courts, for example, sometimes employ a three-part test, where the Second Circuit requires attention to 12 factors. Judge Goldblatt himself had said that the “analysis ultimately boils down to a common-sense judgment about whether it makes good sense to have the case proceed in the court where it was pending as opposed to being heard by the bankruptcy court,” citing In re Medical Tech. Assocs. II, No. 22-50389, 2022 Bankr. LEXIS 3088 at *15 (Bankr. D. Del. Nov. 2, 2022).
Believing that the automatic stay does not apply to litigation outside of bankruptcy court where the debtor is a plaintiff, Judge Goldblatt said that a “substantively identical suit over ownership of the same asset would not be subject to the automatic stay if the debtor was the party who happened to initiate the litigation by filing suit as the plaintiff.”
In the case before him, Judge Goldblatt said, “the work being done by the automatic stay . . . is not to ensure the centralization of disputes in a single forum . . . . Rather, . . . the automatic stay is primarily operating to grant the debtor a breathing spell from the press of non-bankruptcy litigation.” [Emphasis in original.]
Judge Goldblatt said that the argument for modifying the stay “is . . . relatively strong . . . when the debtor is not . . . seeking to obtain a breather from that litigation, but instead intends to pursue the very same litigation, only in a different forum.” If the debtor is in pursuit of a more favorable forum, he said that the court “must necessarily be concerned” that “the bankruptcy filing may be operating as a last-ditch effort by the debtor to stave off impending defeat in another forum.”
The case before Judge Goldblatt raised “two other fundamental bankruptcy principles.” First is whether the debtor is using bankruptcy as a “litigation tactic.” If the filing was a litigation tactic to gain a more favorable forum, he said that the second principle counsels that bankruptcy “should not change the nature of a debtor’s interest in property.”
When the filing falls on the eve of trial in state court, Judge Goldblatt said it is “incumbent on the debtor to provide good reasons why stay relief should not be granted.” He found “[n]othing in the record . . . sufficient to permit the debtor to meet the burden it faces in light of the circumstances of this filing.”
Furthermore, the California court was “better situated” to resolve the lease issues because the case had been “extensively briefed,” Judge Goldblatt said. The debtor retorted by saying it had been afforded insufficient discovery in state court, but Judge Goldblatt found the argument “underwhelming.”
Judge Goldblatt modified the stay to permit the state court to proceed because:
(1) this petition was filed on the eve of trial, (2) the California Superior Court is familiar with these proceedings and has already decided issues relating to the case, (3) the debtor has failed to set forth a compelling reason to keep the stay in place, and (4) the only harm the debtor will suffer raises concerns over forum shopping.
Before ending his opinion, Judge Goldblatt said he might have kept the stay in place “if the action pending in the California court was not yet ‘trial ready.’”
Like an existential philosopher, Bankruptcy Judge Craig T. Goldblatt of Delaware explored the meaning of “cause” for modification of the automatic stay when the debtor files bankruptcy on the eve of trial in state court.
Although Judge Goldblatt granted the creditor’s motion to modify the stay, he provided rationale for maintaining the stay if the facts were different.
The debtor was the tenant under a lease for commercial real estate. The lease was the debtor’s primary asset and below market.