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Zurich American Insurance Company v. Trans Cal Associates; Trans Cal Insurance Associates

December 15, 2011



Plaintiffs Zurich American Insurance Company, American Guarantee and Liability Insurance Company, and American Zurich Insurance Company filed a complaint against defendants Trans Cal Associates, Trans Cal Insurance Associates, Inc. ("Trans Cal Insurance"), Sacramento Surplus Lines Insurance Brokers, Inc., Mark Scott, and Gray Scott, arising from defendants' alleged failure to remit over $1.1 million in insurance premiums that defendants had allegedly collected for plaintiffs. On May 18, 2011, plaintiffs and third-party defendant Zurich American Insurance Company of Illinois (collectively "Zurich") filed a motion to strike Trans Cal Associates, Trans Cal Insurance, and Sacramento Surplus's (collectively "entity defendants") Answer and Trans Cal Associates's Cross-Complaint and to enter their default for failure to retain counsel. (Docket No. 70.) The court had previously granted defendants' counsel's motion to withdraw on May 10, 2011. (Docket No. 69.)

Following the filing of the motion to strike and to enter default, Mark Scott and Gray Scott (collectively "individual defendants") each filed bankruptcy under Chapters 7 and 13, respectively. (Docket Nos. 72, 75.) Mark Scott and Gray Scott have indicated that Zurich has filed complaints in both bankruptcy proceedings contesting the dischargeability of the debts owed to it. (Docket No. 84.)

The court ordered the non-debtor parties to file briefs regarding the effect of the automatic stay pursuant to 11 U.S.C. § 362(a) on this action. (Docket No. 74.) Zurich and Mark Scott filed briefs. (Docket Nos. 75-76.) The entity defendants neither filed briefs with respect to the automatic stay nor filed a response to Zurich's May 18 motion to strike and to enter default. An initial hearing on Zurich's motion to strike and to enter default was held on September 12, 2011, at which the court continued the motion for ninety days in order to give the entity defendants further time in which to retain counsel. (Docket No. 82.) On October 4, 2011, Mark Scott was granted a discharge.*fn1 Recently, entity defendants' former attorney, David F.

Anderson, filed a statement with the court indicating that he had been retained to appear on behalf of the individual defendants, and stating that "[i]f necessary and appropriate, in the future [he] will represent one or more of the defendant entities." (Docket No. 84 at 3:2-3.) Mr. Anderson has not filed an appearance in this case.

I. 11 U.S.C. § 362(a)(1)

The automatic stay of § 362(a)(1) prohibits the "commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title." 11 U.S.C. § 362(a)(1). Once a discharge is granted in a Chapter 7 or a Chapter 13 bankruptcy, a stay issued pursuant to § 362(a)(1) is lifted. 11 U.S.C. § 362(c)(1)(C).

Here, the individual defendants have filed for bankruptcy. Mark Scott obtained a discharge on October 4, 2011. Accordingly, the claims against Gray Scott only are stayed under § 362(a)(1). See 11 U.S.C. § 362(a)(1).

"In the absence of special circumstances, stays pursuant to [§] 362(a) are limited to debtors and do not include [claims against] non-bankrupt co-defendants." Ingersoll-Rand Fin. Corp. v. Miller Mining Co., 817 F.2d 1424, 1427 (9th Cir. 1987) (citing Teachers Ins. & Annuity Ass'n of Am. v. Butler, 803 F.2d 61, 65 (2d Cir. 1986)); see also Cohen v. Stratosphere Corp., 115 F.3d 695, 697 (9th Cir. 1997) ("The automatic stay does not preclude us from deciding this appeal with regard to all parties other than [the bankrupt party], and we now proceed to do so."). When possible, "[m]ultiple claim and multiple party litigation must be disaggregated so that particular claims, counterclaims, cross claims and third-party claims are treated independently when determining which of their respective proceedings are subject to the bankruptcy stay." Parker v. Bain, 68 F.3d 1131, 1137 (9th Cir. 1995) (quoting and adopting Mar. Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1204-05 (3d Cir. 1992)).

The entity defendants have not filed for bankruptcy, and so the claims against them are not automatically stayed by § 362(a)(1).

Gray Scott may be able to "extend" the automatic bankruptcy stay under the "unusual circumstances" exception, a possibility raised by both sides in their supplemental briefs on the effect of extending the automatic stay to this proceeding. "The courts have carved out limited exceptions . . . where: (1) 'there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor,' or (2) extending the stay against co-defendants 'contributes to the debtor's efforts of rehabilitation.'" United States v. Dos Cabezas Corp., 995 F.2d 1486, 1491 n.3 (9th Cir. 1993) (quoting A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986); Matter of S.I. Acquisition, 817 F.2d 1142, 1147 (5th Cir. 1987)) (citations omitted); see Queenie, Ltd. v. Nygard Int'l, 321 F.3d 282, 287 (2d Cir. 2003) (staying the proceedings against not only the debtor individual defendant, but also the non-debtor corporation co-defendant that was wholly owned by him because the "claim against the non-debtor will have an immediate adverse economic consequence for the debtor's estate").

If the "unusual circumstances" exception applies, however, the weight of authority holds that it is the bankruptcy court that must extend the automatic stay, not this court. See Placido v. Prudential Ins. Co. of Am., No. C 09-00668, 2010 WL 334744, at *1 (N.D. Cal. Jan. 22, 2010) (relying on Boucher v. Shaw, 572 F.3d 1087, 1093 n.3 (9th Cir. 2009)); Alvarez v. Bateson, 932 A.2d 815, 821 (Md. Ct. Spec. App. 2007) ("[T]he weight of authority holds that, in order for an automatic stay pursuant to section 362 to be applied to a non-bankrupt co-defendant, the debtor must request and obtain a stay from the bankruptcy court where the current action is pending.").

II. 11 U.S.C. § 362(a)(3)

Section 362(a)(3) prohibits "any act to obtain possession of property of the [bankruptcy] estate or of property from the estate or to exercise control over property of the estate." 11 U.S.C. § 362(a)(3); see 11 U.S.C. § 541 (defining property of the estate). A stay issued under § 362(a)(3) "continues until such property is no longer property of the estate." 11. U.S.C. § 362(c)(1). "The question of what constitutes property of the estate under § 541 is a federal question, although bankruptcy courts will look to state law for assistance in answering that question." In re Loughnane, 28 B.R. 940, 942 (Bankr. D. Colo. 1983).

As discussed above, the bankruptcy court issued Mark Scott a discharge on October 4, 2011, terminating the automatic stay that was in place pursuant to § 362(a)(1). The trustee for his bankruptcy estate has filed a Notice of Assets,*fn2 however, indicating that there are assets remaining in the estate so that the automatic stay under § 362(a)(3) remains in effect. In re Spirtos, 221 F.3d 1079, 1081 (9th Cir. 2000) (noting that "[s]o long as there are assets in the estate, then, the stay [as to the property of the estate] remains in effect"). If Zurich were to obtain a judgment in its favor against Mark Scott, it would turn to the bankruptcy estate in order to collect on that ...

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