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In re Irwin, Bky. No. 10-14407, 2011 BL 236759 (Bankr. E.D. Pa. Sept. 15, 2011) The United States Bankruptcy Court for the Eastern District of Pennsylvania granted a receiver’s motion seeking a determination that the automatic stay of 11 U.S.C. § 362 did not apply to her filing claims against a debtor’s immediate family, as non-debtor defendants, to recover property which originated from a Ponzi scheme orchestrated by the debtor’s client. At the same time, the bankruptcy court denied the motion to the extent that it sought relief from the stay to file claims against the debtor individually and against property held jointly with his wife, holding that the automatic stay applied to these claims and the receiver had failed to establish “cause” under 11 U.S.C. § 362(d) to lift the stay.
Debtor’s Alleged Involvement in Forte’s Ponzi SchemeFor fifteen years, John Irwin (“Debtor”), an accountant and principal of Jacklin Associates, Inc. (“Jacklin”), provided accounting and consulting services to Joseph Forte and Joseph Forte, L.P (collectively “Forte”). For several of those years, Forte was engaged in a Ponzi scheme. Upon discovery of the Ponzi scheme, a receiver (“Receiver”) was appointed over Forte. The Receiver filed a lawsuit against Debtor seeking to recover money or property that Debtor had obtained through his alleged participation in Forte’s Ponzi scheme. However, the lawsuit was stayed upon Debtor’s filing for chapter 11 bankruptcy protection on May 27, 2010.
Court-Appointed Receiver’s Motion for Relief from StayIn response to Debtor’s bankruptcy filing, the Receiver filed a motion seeking a declaration that the automatic stay did not apply to claims that she intended to assert against Debtor’s wife Lucy Irwin and their daughters (collectively, the “Non-Debtor Defendants”) to recover property transferred to them by Debtor. The Receiver argued that the stay did not apply to these parties because they were non-debtor defendants. Additionally, the Receiver sought to recover Debtor’s exempted property as well as property Debtor and Mrs. Irwin owned jointly as tenants by the entirety. The Receiver acknowledged that prosecution of these claims against Debtor was restrained by 11 U.S.C. § 362(a), but sought relief from the stay for “cause” as defined under § 362(d).
Automatic Stay Did Not Apply to the Non-Debtor DefendantsThe bankruptcy court held that the automatic stay did not apply to the claims the Receiver intended to bring against the Non-Debtor Defendants. Moreover, the bankruptcy court explained that § 362(a), does not create a general, automatic stay of a creditor’s right to assert claims against non-debtor parties who are related to the debtor in some fashion. See, e.g., Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1205 (3d Cir. 1991). To that end, the bankruptcy court determined that the property the Receiver sought to recover, namely the property Debtor received from Forte and then transferred to Mrs. Irwin pre-petition, was not property of Debtor’s bankruptcy estate. See 11 U.S.C. § 541(a)(1). In so holding, the bankruptcy court rejected the Non-Debtor Defendants' argument that permitting the receiver to proceed on her state law fraudulent transfer claims would violate 11 U.S.C. § 362(a)(3)’s prohibition against taking action against property of the estate because the claims were, in essence, transfer avoidance claims available to the bankruptcy estate under chapter 5 of the Bankruptcy Code. Instead, the bankruptcy court found it to be sufficient that the Receiver had agreed to assert only a constructive trust claim against the Non-Debtor Defendants as subsequent transferees of the transfers of property from Forte, rather than initial transferees of property from Debtor. While acknowledging that this holding might put the Receiver in competition with the bankruptcy estate if the bankruptcy estate later sought to recover the same assets from the Non-Debtor Defendants, the bankruptcy court resolved that this concern did not justify restraining the Receiver under § 362 simply because the bankruptcy estate held a distinct claim against the Non-Debtor Defendants. See In re Reliance Acceptance Group, Inc., 235 B.R. 548, 561-62 (D. Del. 1999).
Non-Debtor Defendants’ Collateral Estoppel and Rule 19 ArgumentsNext, the bankruptcy court rejected the Non-Debtor Defendants’ argument that the stay applied to the Receiver’s intended claims based on the principles stated in McCartney v. Integra Nat’l Bank, 106 F.3d 506, 510 (3d Cir. 1997). In McCartney, the Third Circuit observed that courts have extended the stay to third parties in instances where “there is such identity between the debtor and the third party defendants that the debtor may be said to be the real party defendant.” The Non-Debtor Defendants argued that impressing a constructive trust on the assets Debtor received from Forte would result in a consequential finding that Debtor did not receive a beneficial interest in those assets which, in turn, would expose the the bankruptcy estate to a collateral estoppel defense in any subsequent attempt to set aside the Debtor’s transfers under 11 U.S.C. §§ 544, 547, 548 and 550. However, the bankruptcy court decided that the risk of impediment to any subsequent action by the bankruptcy estate was minimal given that the doctrine of collateral estoppel requires that the party against whom the bar is asserted be a party to the prior proceeding and, in the present case, Debtor would not be a party to the Receiver's action. Likewise, the bankruptcy court declined to accept the Non-Debtor Defendants’ assertion that the stay applied because the Receiver could not seek to recover from them without setting aside the transfers from Forte to Debtor, which required joinder of the bankruptcy estate as an indispensable party under Federal Rule of Bankruptcy Procedure 19. While acknowledging that Rule 19 potentially barred the Receiver’s claims, the bankruptcy court concluded that the existence of such a defense did not justify construing § 362 as automatically staying the action. Instead, it stated that the issue should ultimately be determined by the forum in which the Receiver eventually filed her claims.
Receiver’s Request Relief from Stay to Proceed against Debtor’s PropertyLastly, the bankruptcy court ruled that the stay applied to the Receiver’s claims for recovery of assets that Debtor received as part of the transfers from Forte which later became part of either Debtor’s exempt assets or assets owned jointly with Mrs. Irwin. The bankruptcy court explained that these assets were initially property of the bankruptcy estate, were claimed as exempt by Debtor, and remained as property of Debtor. Further supporting the conclusion that the Receiver had failed to establish “cause” to lift the stay, the bankruptcy court noted that an unsecured creditor is entitled to relief from a stay under § 362(d) only in “extraordinary circumstances,” see, e.g., In re Brown, 311 B.R. 409, 413 (E.D. Pa. 2004), and resolved that the Receiver had failed to demonstrate such circumstance given that Debtor had yet to confirm a plan and it had not yet been determined whether the Receiver’s claims against Debtor were nondischargeable. Therefore, citing the possibility that the Receiver’s claims might be sufficiently tied to the reorganization process so as to render the bankruptcy court the appropriate forum for the resolution of the dispute, the bankruptcy court denied the Receiver’s request for relief from stay to proceed against property owned by Debtor, either individually or jointly with Mrs. Irwin.
Bankruptcy Court Partially Grants Receiver’s Stay MotionUltimately, the bankruptcy court granted the Stay Motion to the extent that the Receiver was seeking to file a constructive trust claim against the Non-Debtor Defendants, but denied the Stay Motion as to the claims against Debtor and his property. Notably, in so deciding, the bankruptcy court remarked that any victory obtained by the Receiver as a result of the decision may be a hollow one given that the claims against the Non-Debtor Defendants may be barred if the court in which the claims are eventually filed determines that the Debtor is an indispensable party to the action under Federal Rule of Bankruptcy Procedure 19.
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