MEMORANDUM
Melvyn A. Woloshin and his law firm, Woloshin, Lynch, Natalie & Gagne, P.A. (collectively ‘Woloshin”) filed a motion seeking termination of the bankruptcy stay under 11 U.S.C. § 362(d)(1). This chapter 7 debtor opposes the motion. A hearing was held, at which the parties agreed that the relevant facts were not in dispute. For reasons that follow, the instant motion shall be denied.
I.
The debtor filed a voluntary petition in bankruptcy under chapter 7 on December 8, 2010. Before the bankruptcy petition was filed, the debtor had been named as a defendant in a lawsuit filed in Delaware state court by New Castle Shоpping, LLC (“NCS”), docketed in that court as C.A. No. 4257-VCL. See Woloshin Motion and Answer, ¶ 7, ex. A.
According to its first amended and verified complaint, NCS alleged that it holds a ground lease of the entire Penn Mart Shopping Center, located in New Castle, Delaware. This ground lease dates from 1986. At the time it obtained the 1986 ground lease, NCS, as lessor, entered into a long-term lease agreement (until 2015 with an option to extend until 2045) of store space to Mr. Ronald Gibellino, at terms highly favorable to Mr. Gibellino. Mr. Gibellino was to operate a liquor store at his leasehold.
Under the terms of the lease between Mr. Gibellino and NCS, thе favorable lease terms would run only in favor of Mr. Gi-bellino and “any other person(s) or entity(ies) of which Ronald Gibellino or a member of his family hold the controlling interest,” with the phrase “family member” defined in the agreement to include his daughter. Ex. A, ¶ 14. The agreement further provided that if Mr. Gibellino or his family member sought to assign or sublet the store lease to any person or entity not entitled to favorable lease terms, such assignment or sublease required NCS’s prior approval.
In November 1986, Mr. Gibellino subleased his liquor store leasehold to an entity known as Penn Mart Discount Liquors, LTD (“PMDL”). This entity wаs controlled by his daughter, the instant chapter 7 debtor, who is identified in NCS’s first amended complaint as Camella Burkhart. It is alleged by NCS that, until 2000,
NCS asserts that in 2000 the debtor conspired to transfer her interest in PMDL in a manner that would allow her to continue to pay NCS below-market rent while receiving higher rent from the transferees. To that end, and knowing of the rights of NCS, a series of agreements were entered into among the transferees, PMDL and the debtor, which agreements were drafted by Woloshin. Woloshin allegedly knew that NCS approval was required, but nonetheless drafted agreements that “provided the illusion that [the debtor] remained in control” of PMDL and therefore could continue to pay rent to NCS on favorable terms. Ex. A, ¶¶ 22, 23, 28.
NCS also contends that these third-party transferees, while in de facto control of the liquor store operations, paid significant rent to PMDL for a number of years as sublessees, while the debtor tendered far lesser sums to NCS based upon the rent fixed by the 1986 lease. Furthermore, NCS maintains that Woloshin, on behalf of the debtor and PMDL, knowingly and falsely represеnted to NCS that the debtor still held a controlling interest in PMDL.
NCS asserts that it first learned of the true nature of the debtor’s 2000 sale transaction involving PMDL in 2008. Thereafter, NCS brought suit in Delaware state court against the debtor, Mr. Woloshin, the Woloshin law firm, and the third-party transferees. In its multi-count complaint, NCS, as landlord, seeks the following relief:
[F]or declaratory relief, fraud, breach of contract, breach of the implied covenant of good faith and fair dealing, interference with contract, eviction, civil conspiracy, and damages arising out of the defendant-tenants’ fraud, misrepresentation and breach of a commercial lease agreement all orchestrated by their legal counsel. Plaintiff seeks rescission of the lease agreement, a declaration that the Defendants have breached the April 16, 1986 lease, an order enjoining defendants from possessing the premises as hereinafter defined, and damages in an amount to be determined at trial.
Ex. A, ¶ 1.
Also before the debtor filed the instant bankruptcy case, Mr. Woloshin and his law firm, as defendants, filed an answer denying any wrongful conduct on their part. They also filed a cross-claim against all of their co-defendants, including the debtor, asserting a right of contribution under Delaware’s Uniform Contribution Among Tortfeasor’s Act, 10 Del. C. §§ 6301-6305, as well as a common law right of indemnification. Woloshin Motion and Answer, ¶ 8, ex. B.
When she filed her chapter 7 petition, the debtor included NCS among her unsecured creditors. Thus, NCS received notice of her bankruptcy filing. In January 2011, NCS sought relief from the bankruptcy stay to prosecute its pending state court litigation against the debtor. Specifically, it stated in its lift-stay motion:
Debtor will not be prejudiced by allowing the State Court Aсtion to resume. All parties were prepared to move forward with mediation when Debtor filed her petition on the night before mediation was to commence. Upon information and belief, one of Debtor’s co-defendants, Woloshin, has insurance coverage for this type of matter. NCS seeks only to proceed against all defendants in the State Court Action, and to liquidate its claim against the Debtor, and not the enforcement of any judgment or remedy against Debtor.
NCS Lift Stay Motion, ¶ 20 (docket entry #22).
In addition, the chapter 7 trustee filed his report that his examination of the debt- or and her affairs led him to conclude that there were no non-exempt assets available for distribution to creditors. See docket entry 1/10/2011. Thus, this bankruptcy case was classified as a no-asset chapter 7 case.
In February 2011 Woloshin filed its present lift-stay motion under section 362(d)(1). Thereafter, as no сomplaint objecting to the debtor’s discharge having been filed by the March 8, 2011 bar date established under Fed. R. Bankr.P. 4004(a), a chapter 7 discharge was entered pursuant to Fed. R. Bankr.P. 4004(c). Woloshin, however, did timely file a complaint seeking a determination of nondis-chargeability against the debtor pursuant to 11 U.S.C. § 523(a) and Fed. R. Bankr.P. 4007(c). NCS did not file any such complaint. Woloshin’s adversary proceeding is still pending in this court. According to the parties, the Delaware state court litigation is scheduled to be tried in July 2011.
II.
Although its motion does not expressly so state, Woloshin’s counsel exрlained at the hearing that these defendants seek the same relief under section 362(d)(1) as did NCS: the ability to prosecute their indemnity and contribution crossclaim against the debtor, albeit without execution until their nondischargeability complaint is determined. Essentially, they request that the bankruptcy stay be terminated so that the Delaware state court litigation be allowed to proceed and determine all claims against the debtor, not just NCS’s claims, with the adversary proceeding in this court held in abeyance.
They further argue that if the Woloshin defendants are found liаble to NCS, and if their crossclaim is upheld in the state court litigation, only then would Woloshin’s nondischargeability adversary proceeding against the debtor under section 523(a) be tried. If the Woloshin defendants were found not liable to NCS, or if the debtor were found not liable on the crossclaim, then the adversary proceeding would be dismissed.
Woloshin also contends that the factual findings made by the state court on NCS’s fraud claim and Woloshin’s crossclaim against the debtor would have collateral estoppel effect in the adversary proceeding.
See generally Grogan v. Garner,
In opposing Woloshin’s requested relief the debtor argued at the hearing that the recent entry of her chapter 7 discharge renders Woloshin’s contentions incorrect. She maintains that NCS is no longer able to prosecute its claims against her in light of 11 U.S.C. § 524(a)(2); nor should Wol-oshin. Moreover, she contends that the adversary proceeding should be tried first, especially because she has bankruptcy counsel to represent her in this forum, but
At the outset, I note that the entry of discharge precludes my terminating the bankruptcy stay in favor of Woloshin under section 362(d). Section 362(c) states:
(c) Except as provided in subsections
(d), (e), (f), and (h) of this section—
(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate;
(2) the stay of any other act under subsection (a) of this section continues until the earliest of—
(A) the time the case is closed;
(B) the time the case is dismissed; or
(C) if the case is a case under chapter 7 of this title concerning an individual or a case under chapter 9, 11, 12, or 13 of this title, the time a discharge is granted or denied;
Therefore, by virtue of section 362(c)(2)(C), the bankruptcy stay imposed upon Woloshin by section 362(a)(1) and (a)(6) — which enjoined prosecution of Wol-oshin’s prepetition crossclaim against the debtor that sought damages,
i.e., in per-sonam
relief
2
— has itself expired with the entry of the discharge order. Although the automatic stay was in effect at the time Woloshin filed the instant motion, it has since ended.
See, e.g., In re Kowalske,
It is well-recognized, however, that the entry of a chapter 7 discharge replaces the statutory stay found in section 362 with a statutory injunction found in section 524(a).
See, e.g., In re Winterland,
(a) A discharge in a case under this title—
(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or anact, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived;
11 U.S.C. § 524(a)(2);
see In re Joubert,
It was obvious to both parties at the hearing that, if Woloshin’s motion was simply dismissed as moot, Woloshin would then file a similar motion seeking relief from the scope of the discharge injunction to prosecute its state court crossclaim against the debtor.
3
Rather than have the parties undergo that time and expense, and with their consent, I shall treat the instant motion as having sought relief from the scope of section 524(a)(2).
See In re Shivani,
Some courts have opined that a bankruptcy court has the power to grant relief to a creditor from the discharge injunction under section 524(a)(2) so that the creditor may prosecute litigation against the debtor.
See, e.g., In re Hendrix,
Typically, those limited circumstances will arise when: the amount of the creditor’s claim must be fixed so that a chapter 7 trustee may make distributions tо creditors and it is more economical to permit a non-bankruptcy forum to fix such a claim in the pending non-bankruptcy litigation than to resolve an objection to the claim under section 502; or, the prosecution of the pending litigation in a non-bankruptcy forum would efficiently resolve, via collateral estoppel, issues arising in a pending adversary proceeding under section 523(c).
See In re Eastburg,
The scope of claims against a debtor that a plaintiff may pursue once the discharge is entered depends on whether the following requirements are met: 1) the cause of action to establish the debt and a claim of non-discharge ability in a pending adversary proceeding are based on the same conduct, transactions and occurrences; 2) the non-dischargea-ble character of the debt is at issue inthe adversary proceeding; and 3) the creditor is prosecuting the cause of action in state court for the purpose of applying collateral estoppel to avoid re-litigating the validity and extent of the debt in the adversary proceeding,
(footnote omitted). 4
The existence оf circumstances warranting any modification of section 524(a)(2) must be clear. Generally, a determination of a pending nondischargeability complaint should precede prosecution of pending litigation against a debtor in a non-bankruptcy forum. If the complaint is denied, the non-bankruptcy litigation remains enjoined. As recently observed by a colleague:
Even so, the discharge injunction may replace the restraint of the automatic stay. See 11 U.S.C. § 727(b) (discharge applies to all debts that arose before the order for relief); id. § 524(a)(2) (discharge operates as an injunction against, inter alia, continuation оf action to collect a discharged debt). Thus, unless Mr. Yogel prevails in the pending § 523(a) dischargeability proceeding, resumption of his litigation against the Debtor in state court would run afoul of the discharge injunction. In these circumstances, creditors typically forbear from resuming collection activity until resolution of a pending dischargeability proceeding in the bankruptcy court, especially proceedings based on § 523(a)(2), (4) or (6), over which the bankruptcy court has exclusive jurisdiction. See id. § 523(c). To the extent that a creditor might contend that it has the right to рroceed in state court after termination of the automatic stay because the discharge injunction is inapplicable to the debt whose dischargeability is as yet undetermined, it would be within the bankruptcy court’s power to restrain the creditor from proceeding in state court pending the conclusion of the dischargeability proceeding and, generally speaking, it is difficult to envision the circumstances in which a bankruptcy court would not exercise that power. The bottom line here is that the impending entry of the discharge order and the pоssible termination of the automatic stay in the near future, by themselves, are not compelling reasons for terminating the automatic stay at this time. The Debtor’s interest in obtaining a resolution of the dischargeability of the subject debt outweighs the interest of Mr. Yogel in resuming litigation against the Debtor in the state court.
In re Edler,
In addition, upon review of the state court pleadings attached to the Woloshin motion and admitted as authentic by the debtor, I conclude that it is improbable that the state court litigation would result in any claim preclusion in the pending nondischargeable adversary proceeding if Woloshin were found liable to NCS and its indemnity and/or contribution crossclaim upheld by the state court.
Among the issues in the Delaware state court litigation are whether Woloshin made any false representations or false pretenses to NCS, or whether Woloshin knowingly aided and abetted the debtor in her allegedly deceptive conduct to NCS. NCS has not alleged that Woloshin, if in
Even in such an instance of liability, Woloshin may be able to sеek contribution or indemnity from the debtor under Delaware law.
To prevail in its adversary proceeding in this court, it will be necessary for Woloshin to prove that the debtor acted fraudulently as to Woloshin, not as to NCS.
See In re Cossu,
For example, in
Builders and Managers, Inc. v. Dryvit Systems, Inc.,
The right to contribution is triggered when it is appropriate for liability to be apportioned among codefendants. In Delaware, contribution is governed by the [Uniform Contribution Among Tort-feasors Law], which provides the parameters for determining when contribution is appropriate and how it is to be decided. The inherent requirement is that the parties are joint tortfeasors who share a “common liability.” Defendant Dryvit argues that Plaintiff cannot show any common liability. Section 6302(b) of the UCATL provides as follows:
A joint tort-feasor is not entitled to a money judgment for contribution until he or she has by payment discharged the common liability or has paid more than his or her рro rata share thereof.
This Court has previously stated that a finding of common liability is supported if the facts alleged in the Complaint support “some theory of negligence” against the defendant. In this case, the Complaint alleges numerous instances of negligence on Dryvit’s part in regard to its installation system, including, inter alia, failing to provide for drainage of water that could potentially seep behind the system, failing to provide a water barrier behind the system, failing to insure that the installer was properly trained, and failing to warn that a Dry-vit rep should have been prеsent for the installation. Viewing these allegations in the light most favorable to Plaintiff, the Court concludes that the Complaint survives the UCATL requirement that a showing of common tort liability be made.
Id.,
Accordingly, Woloshin must prove for its contribution claim under Delaware law that, if it is liable to NCS, the debtor was a joint tortfeasor, with the amount of contribution determined by the allocation of fault. Woloshin has not pled in state court, nor need it prove, that it was defrauded by the debtor. Thus, the issue of
Similarly, Delaware recognizes a right of indemnification, even if there is no express contractual provision between the parties:
“Indemnity in its most basic sense means reimbursement and may lie when one party discharges a liability which another rightfully should have assumed, and it is based on the principle that everyone is responsible for his or her own wrongdoing, and if another person has been compelled to pay a judgment which ought to have been paid by the wrongdoer, then the loss should be shifted to the рarty whose negligence or tortious act caused the loss.” The right to indemnification can rest on any one of three grounds: (1) an express contract; (2) a contract implied-in-fact; or (3) equitable concepts arising from the tort theory of indemnity, i.e., indemnification implied-in-law.
Lagrone v. American Mortell Corp.,
Equity may impose indemnity when there is “a ‘great difference’ in the gravity of the fault of the two tortfeasors; or that it rests upon a disproportion or difference in character of the duties owed by the two to the injured plaintiff.”
Id.,
[T]he remedy [оf implied indemnification] is not available to joint tortfeasors who allegedly are concurrently liable for active negligence. In such instances, an allocation of fault and contribution in accordance with the allocation is the appropriate and exclusive remedy among joint tortfeasors. Indemnification is available as a common law remedy only when the putative indemnitee faces liability of a different character than that faced by the putative indemnitor. The distinction is a matter of character of fault, not dеgree of fault. To be clear, the indemnitee must be liable only for “passive negligence” and the indemnitor must be liable for “active negligence.”
Id.,
Again, resolution of Woloshin’s indemnification claim against the debtor would not be based upon any fraud committed by the debtor upon Woloshin, but upon any difference in the nature of their liability to NCS. Therefore, even if Woloshin were to prevail in its indemnification claim, it would be unable to assert issue preclusion in its pending nondischargeability proceeding.
III.
In summary, section 524(a)(2) presently enjoins Woloshin’s crossclaim against the debtor. Moreover, to the extent this court has the power to do so, this creditor has not demonstrated any equitable basis to proceed against the debtor before a resolution of its pending adversary proceeding occurs. Therefore, its motion for leave to prosecute its crossclaim will be denied. Instead, a pretrial order will issue to bring about a reasonably prompt determination of Woloshin’s nondischargeability claim. If Woloshin prevails, then it will be free to prosecute its state court claim against the debtor and execute thereupon, consistent with section 522(c).
Notes
. NCS is not a party in this contested matter. Therefore, I decline to resolve the parties' disagreement whether the discharge injunction in section 524(a)(2) trumps the earlier entered order in favor of NCS terminating the stay under section 362(d). I do note, however, that courts have held that the binding nature of a confirmed chapter 13 plan, under section 1327(a), may have such an effect.
See, e.g., In re Diviney,
. Neither party argues, perhaps in light of the Third Circuit's recent decision
In re Grossman’s Inc.,
. I do not understand Woloshin to be seeking a declaratory judgment concerning the scope of the discharge injunction, which arguably procedurally should be sought through the filing of an adversary proceeding undеr Fed. R. Bankr.P. 7001(a)(9).
. Woloshin does not assert that the debtor is a nominal defendant whose liability must be established so as to trigger the liability of third parties not protected by the bankruptcy stay, such as an insurer.
See generally In re Loewen Group, Inc.,
. I appreciate that
In re Eastburg
disagreed with the above-quoted holding in
In re Edler.
My review of section 523(c)(1) causes me to reach a different conclusion than Eastburg. That subsection states:
(c)(1) Except as provided in subsection (a)(3)(B) of this section, the debtor shall be discharged from a debt of a kind specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6), as the case may be, of subsection (a) of this section.
Thus, this provision renders a debt dis-chargeable "unless” the bankruptcy court concludes that section 523(a)(2), (4) or (6) is applicable; not the reverse. Indeed, at trial, the allocation of the evidentiary burden supports this interpretation: the creditor/plaintiff has the burden of persuasion to demonstrate nondischargeability under sections 523(a)(2), (4), and (6).
See, e.g., Grogan v. Garner,
Therefore, to the extent that a bankruptcy сourt has exclusive jurisdiction to determine the nondischargeability of a debt, as required by section 523(c)(1), the injunction under section 524(a)(2) applies until such a determination is made, or the court grants relief from such injunction.
This conclusion suggests to me that Congress probably intended that relief from the section 524(a) injunction can be granted in limited circumstances. For example, section 108(c) may extend the statute of limitations of claims against the debtor for a period of 30 days after "termination or expiration of the stay under section 362....”
See generally In re Hermosilla,