441 B.R. 401
Bankr. D.P.R.2010Background
- RGFC filed a Chapter 11 petition on May 14, 2010 for reorganization and to address claims by FINRA claimants arising from a FINRA arbitration.
- RGIC, a wholly owned subsidiary dissolved August 14, 2007, was allegedly liable for RGIC claims and was the subject of arbitration with FINRA claimants.
- Debtor sought to extend the automatic stay under 11 U.S.C. §§ 362(a) and 105(a) to RGIC to stay FINRA arbitration proceedings.
- FINRA claimants argued that FINRA Rule 13200 mandates arbitration and that the claims are non-core and governed by the FAA, not the bankruptcy stay.
- A liquidation agreement (June 29, 2007) and Puerto Rico corporate law place potential liability for RGIC claims on RGFC as RGIC’s sole stockholder.
- FINRA proceedings were stayed against RGFC and RGIC in May 2010, but FINRA would proceed against RGIC absent a court stay or agreement.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether extension of the stay to RGIC is permissible | RGFC and RGIC are interrelated; unusual circumstances exist to extend stay. | Failure to follow Rule 7001(7) is fatal; however, stay extension may be entertained. | Yes; the stay extended to RGIC is granted. |
| Whether RGIC can be protected under 362(a) when it is dissolved | RGFC's liability for RGIC claims makes RGIC essentially the same party for purposes of the stay. | If RGIC is dissolved, stays may not apply to a defunct entity absent unusual circumstances. | Unusual circumstances exist; stay extended to RGIC. |
| Whether 362(b)(6) exemptions apply to the FINRA claims | Exemption for setoffs applies to securities-related contracts and may exempt FINRA actions. | FINRA claims arise from securities law violations before dissolution; 362(b)(6) does not apply. | 362(b)(6) exemption does not apply. |
| Whether FAA governs and whether arbitration is compelled | FINRA disputes are subject to arbitration under FINRA rules and FAA; some claims may be core/non-core. | No motion to compel arbitration has been filed; premature to decide arbitrability. | Not compelled to arbitrate at this stage; analysis premature. |
Key Cases Cited
- In re Bora Bora Inc., 424 B.R. 17 (Bankr.D.P.R. 2010) (extension of stay to non-debtors involves injunctive relief under 105(a))
- In re Lazarus Burman Assocs., 161 B.R. 891 (Bankr.E.D.N.Y. 1993) (irreparable harm and balance of equities in preliminary injunctions)
- In re Philadelphia Newspapers, LLC, 407 B.R. 606 (E.D. Pa. 2009) (unusual circumstances and framework for extending stay to non-debtors)
- Bethlehem Steel Corp. v. Moran Towing Corp. (In re Bethlehem Steel Corp.), 390 B.R. 784 (Bankr.S.D.N.Y. 2008) (four-factor test for FAA arbitrability and stay considerations)
- In re S.W. Bach & Co. (Togut v. RBC Dain Corp.), 425 B.R. 78 (Bankr.S.D.N.Y. 2010) (four-prong test for ARB and FAA considerations)