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In re Frantz

Name
IN RE: Michael FRANTZ, Debtor.
Attorney(s)
Jonathan V. Goodman, Law Offices of Jonathan V. Goodman, Milwaukee, WI, for Debtor., Whether there is "cause" to grant relief from the automatic stay is a decision the Bankruptcy Code commits "to the discretion of the bankruptcy court." In re C & S Grain Co., Inc. , 47 F.3d 233, 238 (7th Cir. 1995). In deciding whether to exercise that discretion the court is informed in part by § 362(a)'s purpose: "to protect the debtor from an uncontrollable scramble for its assets in a number of uncoordinated proceedings in different courts, to preclude one creditor from pursuing a remedy to the disadvantage of other creditors". Fox Valley Const. Workers Fringe Ben. Funds v. Pride of the Fox Masonry and Expert Restorations , 140 F.3d 661, 666 (7th Cir. 1998) (quoting A.H. Robins Co., Inc. v. Piccinin (In re A.H. Robins Co., Inc.) , 788 F.2d 994, 998 (4th Cir. 1986) ). As the Seventh Circuit explained in Matthews v. Rosene , "[s]ection 362 is designed to benefit a debtor by preventing harassment and frustration of rehabilitation efforts through pursuit by creditors in individual actions", but "[s]uspension of Section 362 ['s] automatic stay provisions may be consonant with the purposes of the Bankruptcy [Code] when equitable considerations weigh heavily in favor of the creditor and the debtor bears some responsibility for creating the problems[,]" such as commencing litigation that resulted in a judgment on which the creditor later sought collection. 739 F.2d 249, 251 (7th Cir. 1984) (emphasis added)., The circumstances at issue in IBM v. Fernstrom , though, are significantly different from those at issue here. IBM contracted with a warehouse subsidiary of Fernstrom to store computers. A fire at the warehouse destroyed IBM's property. IBM recovered from its insurer. Then IBM (really, IBM's insurer) sued Fernstrom (really, Fernstrom's insurer). Fernstrom and its subsidiary had already filed bankruptcy petitions. Six years of extensive litigation later, Fernstrom sought to dismiss IBM's case against it based on its long-pending bankruptcy case. IBM filed a motion for relief from the automatic stay in the bankruptcy case and stipulated that it would recover only on Fernstrom's insurance policies. The bankruptcy court granted relief from the automatic stay to allow IBM's insurer to continue its civil action. The debtor appealed, and the district court and Seventh Circuit both affirmed. The Seventh Circuit viewed the litigation as being, effectively, against a non-debtor (Fernstrom's insurer) to recover non-estate property (the proceeds of Fernstrom's insurance policies). See id. at 736 ("[D]ebtors-defendants suffer little prejudice when they are sued by plaintiffs who seek nothing more than declarations of liability that can serve as a predicate for a recovery against insurers, sureties, or guarantors."). The court concluded that because IBM's non-bankruptcy litigation was at an advanced stage and would not have an economic effect on the reorganizing debtor, the circumstances supported the district court's decision affirming the bankruptcy court's decision to modify the stay to allow IBM's action to proceed., Any act in continuing the litigation against the non-debtor companies may, therefore, be an "act to collect, assess, or recover a claim against the debtor" or to "exercise control over property of the estate". § 362(a)(3) & (6) ; see, e.g., Klarchek Family Trust v. Costello (In re Klarchek) , 508 B.R. 386, 397 (Bankr. N.D. Ill. 2014) ("[G]iven the potential adverse impact on property of the estate of the action, the action [against a non-debtor] must be stayed pursuant to section 362(a)(3)."). Indeed, as Chief Justice Roberts explained in Wellness International Network, Ltd. v. Sharif , a creditor's allegation that a nominally distinct legal entity is the alter ego of the debtor "fits comfortably" into the matters Congress has assigned to bankruptcy adjudicators for more than a century. See --- U.S. ----, 135 S. Ct. 1932, 1952-53, 191 L.Ed.2d 911 (2015) (Roberts, C.J., dissenting). If Frantz Ventures, L.L.C. is truly the alter ego of Frantz, as Raders alleges, then Frantz Ventures, L.L.C.'s property may be property of Frantz's bankruptcy estate, and whether property is property of a bankruptcy estate is a question Congress has long reserved to the bankruptcy court. See 11 U.S.C. § 542 ; Wellness , 135 S. Ct. at 1953 (Roberts, C.J., dissenting) ("[T]he Bankruptcy Court here had authority to decide whether the assets allegedly concealed in the trust belonged to Sharif's estate."); see also Sampsell v. Imperial Paper & Color Corp. , 313 U.S. 215, 61 S.Ct. 904, 85 L.Ed. 1293 (1941) (holding that "the jurisdiction of the bankruptcy court was properly exercised by summary proceedings" in which a bankruptcy referee "found ... that [a] corporation was 'nothing but a sham and a cloak' devised by [the debtor] 'for the purpose of preserving and conserving his assets' for the benefit of himself and his family[ ] and that the corporation was formed for the purpose of hindering, delaying and defrauding his creditors" and "ordered that the property of the corporation was property of the bankrupt estate and that it be administered for the benefit of the creditors of the estate)., For these reasons, Raders's motion for relief from the automatic stay is denied in its entirety.

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