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Court Affirms Retroactive Relief From Stay For Creditor Without Notice of Bankruptcy

Tuesday, February 26, 2013
By Stephanie M. Acree

A bankruptcy court's decision to retroactively annul an automatic stay of Bankruptcy Code Section 362 was affirmed Feb. 4 by the U.S. District Court for the Middle District of North Carolina (Kadlecek v. Schwank USA Inc., M.D.N.C., No. 1:12-cv-00096-TDS, 2/5/13).

Judge Thomas D. Schroeder found that the bankruptcy court considered the proper factors in deciding to retroactively annul the stay and that no Fourth Circuit precedent requires distinguishing between prospective and retroactive relief from the stay.

Trade Secrets
Debtor Kristopher Michael Kadlecek began working for Schwank USA Inc., a manufacturer of commercial and industrial-grade heating equipment, in June 2007. Three years later, Kadlecek was terminated for falsifying $9,000 in expense reports. At the time of his termination, Kadlecek also failed to comply with a demand from Schwank for the return of certain company property, including a laptop computer, copier, cell phones, computer software, and computer and customer files.

Shortly after his termination, Kadlecek accepted employment with two of Schwank's competitors. Concerned that Kadlecek was misappropriating trade secretes, Schwank brought suit against Kadlecek in Georgia state court seeking a temporary restraining order and an injunction. Schwank's complaint against Kadlecek alleged violations of the Georgia Trade Secrets Act, breach of contract, fraud, trover, and quantum meruit.

No Notice of Bankruptcy
However, Kadlecek had filed for Chapter 7 protection shortly before Schwank filed the suit. Schwank was unaware of the bankruptcy filing because Kadlecek had not listed Schwank as a creditor on his schedules despite Schwank's demand for the return of the company property. In March 2011, the Georgia court held a two-day hearing on Schwank's motion for a preliminary injunction. Kadlecek appeared pro se at the hearing but did not advise the court or Schwank of his pending bankruptcy. After the injunction was granted, Kadlecek finally notified Schwank of the bankruptcy.

Schwank initiated an adversary proceeding against Kadlecek in the bankruptcy court and moved for retroactive relief from the automatic stay. Kadlecek filed an answer asserting a counterclaim for violation of the stay. The bankruptcy court granted Schwank relief from the automatic stay and annulled the stay retroactive to Feb. 8, 2011, in order to validate the state court action and allow the parties to liquidate Schwank's claims against Kadlecek in the Georgia court. Kadlecek appealed to the district court.

Robbins Factors
Pursuant to Section 362(d)(1) of the Bankruptcy Code, a bankruptcy court shall grant relief from the automatic stay for “cause,” which is not defined by the Code. In order to determine if cause existed, the bankruptcy court examined the three factors outlined by the U.S. Court of Appeals for the Fourth Circuit in Robbins v. Robbins (In re Robbins), 964 F.2d 342 (4th Cir. 1992). The three factors articulated inRobbins are: “(1) whether the case involves only state law so that the expertise of the bankruptcy court is unnecessary; (2) whether modifying the stay will promote judicial economy and whether there would be greater interference with the bankruptcy case if the stay were not lifted because matters would have to be litigated in the bankruptcy court; and (3) whether the estate can be protected properly by a requirement that creditors seek enforcement of any judgment through the bankruptcy court.”

The bankruptcy court found cause in this case because: (1) Schwank had not received notice of the bankruptcy filing; (2) Schwank's claims exclusively involved state law; (3) Kadlecek's estate would be protected; and (4) modifying the stay would promote judicial economy.

Prospective vs. Retroactive
Kadlecek argued that the bankruptcy court erred in applying the Robbins factors because Schwank was seeking the “extraordinary remedy of retroactive relief that may be granted only in unique circumstances.” Schwank argued that there is no Fourth Circuit precedent that requires a court to distinguish between prospective and retroactive relief from the stay.

The district court agreed with Schwank that “no Fourth Circuit precedent requires distinguishing between prospective and retroactive relief from the stay and the level of cause necessary to obtain relief.” The court did note that in an unpublished case with no precedential value, In re Wiencko,99 F. App'x 466 (4th Cir. 2004), the Fourth Circuit found that the application of the Robbins factors, “while not exhaustive, can suffice for finding cause to retroactively annul the automatic stay is logical.”

Shield Not Sword
Finally, the court concluded that the bankruptcy court did not misapply the Robbins factors. The court agreed that the resolution of Schwank's claims would involve the exclusive application of Georgia law. The court also found that modifying the stay would promote judicial economy because the Georgia court would be better equipped than the bankruptcy court to hear Schwank's claims. The court also found that Kadlecek's estate would be properly protected because any judgment obtained by Schwank could not be collected without the bankruptcy court's approval.

The court also said that despite Kadlecek's contentions, the bankruptcy court did not limit its analysis to the Robbins factors. The bankruptcy court also considered the fact that Kadlecek had failed to list Schwank on his bankruptcy schedules or otherwise alert Schwank to the bankruptcy. The court found that Kadlecek was attempting to use the stay “not as the shield it was intended to be, but as a sword.” The court said that the bankruptcy court was correct in not permitting Kadlecek to exploit the protection of the stay. Accordingly, the bankruptcy court's order was affirmed.

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