IN RE: HAROLD E. JONES WANDA C. JONES CASE NO. 87-00391
UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF KENTUCKY
HAROLD E. JONES
WANDA C. JONES CASE NO. 87-00391
d/b/a Harold E. Jones Insurance Agency
DEBTORS CHAPTER 11
This matter is before the court on the motion of UNICO Construction Company for modification of the automatic stay to permit the continuation of an action styled UNICO Construction Co. v. Harold E. Jones and Wanda C. Jones, civil action number 87-CI-274, commenced in Knox Circuit Court in July, 1987.
FINDINGS OF FACT:
According to allegations contained in documents attached to the proof of claim filed by UNICO on September 21, 1988, the debtors were partners in a business known as Bargo and Jones Carpet Outlet. The partnership was dissolved by agreement dated December 31, 1983. In August 1983, prior to dissolution of the partnership, UNICO accepted a bid of Bargo and Jones Carpet Outlet to provide and install carpet in the construction of Corbin Middle School in Corbin, Kentucky. UNICO paid Bargo and Jones Carpet Outlet a total of $11,644 in four installments for material and services provided. Thereafter the Corbin Board of Education notified Harold Jones and UNICO that the carpet did not comply with bid specifications and requested that the carpet be replaced. Bargo and Jones Carpet Outlet allegedly failed to provide new carpet. The Corbin City School District replaced the carpet and assessed UNICO's contract the amount of $12,983.
In July 1987, UNICO Construction Company initiated an action in Knox Circuit Court styled UNICO Construction Co. v. Harold E. Jones and Wanda C. Jones, civil action number 87-CI-274. It appears the defendants filed a third-party complaint against Himes Bargo and Nancy Bargo, Badische Corporation, Wellco Carpet Corporation d/b/a Wellco Business Carpet Corporation and Allied Wholesale, Inc. In its motion for relief from stay, UNICO indicated various cross-claims have been filed by defendants in the state court action.
On November 3, 1987, the debtors filed a petition for relief under chapter 11, Title 11 United States Code. In the schedules accompanying the petition, the debtors listed a claim of Unico Construction Co. in the amount of $12,000 for "suit filed RE: collection of debt owed by Jones Georgia Carpet Outlet" as disputed. On September 21, 1988, UNICO filed a proof of claim in the amount of $12,983.00 plus interest and costs for "Breach of Contract and Warranties by Debtors," attaching thereto a copy of the first amended complaint filed in Knox Circuit Court, civil action number 87-CI-274.
On May 11, 1988, UNICO filed a motion for relief from stay, stating:
This Knox Circuit Court action was filed in July 1987, extensive discovery has been taken, a Motion for Summary Judgment by the movant has been filed, and this case is ready for trial.
Because of this Court's heavy docket, the extensive pleadings, discovery, and motions that have already been made in the Knox Circuit Court action, and the number of parties involved, the following parties now being involved in this pending litigation in addition to the movant and these Debtors: Himes Bargo, Nancy Bargo, Badische Corporation, Wellco Carpet Corporation d/b/a Wellco Business Carpet Corporation and Allied Wholesale, Inc., relief from stay should be granted so that movant and the other above-named parties may proceed in the pending Knox Circuit Court action to determine what, if any, claims by and against the Debtors, Harold E. Jones and Wanda C. Jones, are adjudged to exist. These claims could then be incorporated into this pending Chapter 11 Bankruptcy and the Plan.
A hearing was held on June 1, 1988, at which time the court overruled UNICO's motion for relief from stay. An order to that effect was entered June 3, 1988.
On September 8, 1988, Himes and Nancy Bargo and UNICO filed a motion requesting the court to dismiss the case on the grounds that no plan of reorganization had yet been filed and financial reports were not being served on the movants. A hearing was conducted on September 21, 1988. The motion was overruled by order entered September 21, 1988.
On September 13, 1989, UNICO, David O. Smith (attorney for UNICO), and Himes and Nancy Bargo filed a motion requesting the court to dismiss the chapter 11 case. A memorandum in support of the motion to dismiss was filed on October 10, 1989, stating as grounds for the motion to dismiss that the debtors did not file the chapter 11 petition in good faith and had not yet proposed a plan of reorganization. A hearing was held on October 12, 1989. The motion was overruled by order entered October 25, 1989.
On January 11, 1990, UNICO filed the motion for relief from stay now before the court. The motion is virtually identical to the motion for relief filed on May 11, 1988. A hearing on the motion was held January 17, 1990. Counsel for the debtors in possession did not appear for the hearing.
On July 9, 1990, UNICO, David O. Smith, and Himes and Nancy Bargo again filed a motion to dismiss and memorandum in support thereof, restating the arguments made in the previous motion to dismiss and supporting memorandum.
On August 1, 1990, UNICO filed a pleading denominated "In the Alternative Only to Motion To Dismiss, Motion for Relief From Stay." The motion is essentially identical to the motions for relief previously filed. A hearing was scheduled before Judge William S. Howard on August 16, 1990 on the motion to dismiss and the alternative motion for relief from stay. Judge Howard recused himself from service in this case, and the matters were not heard as scheduled. The case was reassigned on August 20, 1990; the motions have not been noticed for hearing.
CONCLUSIONS OF LAW:
Section 362(a)(1) operates as a stay of "the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title." 11 U.S.C. § 362(a)(1). Section 362(d)(1) permits termination or modification of the stay "for cause." 11 U.S.C. § 362(d)(1).
UNICO argues the stay should be lifted to permit the continuation of an action in state court in which several parties, including the debtors, are subject to various claims and cross-claims involving the furnishing and installation of allegedly defective carpet.
The automatic stay prohibits the continuation of an action against the debtor only and does not preclude the continuation of any action by UNICO against nondebtor defendants or the prosecution by any party of cross-claims or counterclaims against nondebtor parties. Nor does the automatic stay prohibit a party from exercising its right to subpoena Harold Jones or Wanda Jones as a witness in the state court proceeding.
The automatic stay does not bar the debtors from pursuing their causes of action in state court. Any recovery obtained by the debtors in possession against the impleaded defendants in the state court proceeding would not be applied to the satisfaction of any judgment UNICO might have against the debtors, but instead would inure to the benefit of the estate. 11 U.S.C. § 541(a)(1).
Permitting UNICO to proceed with its action against the debtors in state court would not afford complete relief to UNICO. Any judgment obtained by UNICO against the debtors in the state court action would be enforceable only to the extent provided for under a plan of reorganization.
The cause of action asserted by UNICO against the debtors is more appropriately resolved in the process of allowance and disallowance of claims. The claim of UNICO, proof of which was filed on September 21, 1988, is allowed unless a party in interest objects. 11 U.S.C. § 502(a).
The motion of UNICO Construction Company for relief from the automatic stay shall be overruled.
By the court -
Maxie E. Higgason
David O. Smith