CUSTOM TOOL & MANUFACTURING CO. v. ATLANTIC AUTOMATION, INC., CNC MACHINES, and ANDY BALES, Individually
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RENDERED:
August 28, 1998; 10:00 a.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
No.
97-CA-0063-MR
CUSTOM TOOL & MANUFACTURING
CO.
v.
APPELLANT
APPEAL FROM FAYETTE CIRCUIT COURT
HONORABLE LEWIS G. PAISLEY, JUDGE
ACTION NO. 96-CI-3099
ATLANTIC AUTOMATION, INC.,
CNC MACHINES, and ANDY BALES,
Individually
APPELLEES
OPINION
AFFIRMING
* * * * * * * * * * * * * * * * * * *
BEFORE:
ABRAMSON, BUCKINGHAM, and COMBS, Judges.
BUCKINGHAM, JUDGE.
Appellant, Custom Tool & Manufacturing Co.
(Custom Tool), appeals from an order of the Fayette Circuit Court
dismissing its complaint against Bales-Atlantic Automation Group,
Inc. (Bales-Atlantic), Atlantic Automation, Inc. (Atlantic
Automation), CNC Machines, Inc. (CNC), and Andy Bales (Bales),
individually.
For the reasons set forth hereinafter, we affirm.
Bales-Atlantic was a Kentucky corporation engaged in
the business of manufacturing specialized machine tables, and
Bales was the sole shareholder.
In April and May 1996, Bales
ordered machine parts from Custom Tool to be used in the
manufacturing of the machine tables.
The bill, which exceeded
$12,000, was sent to Bales-Atlantic.
Custom Tool claims that it
was not paid for the machine parts, and it filed its complaint in
the Fayette Circuit Court against Bales, individually, and the
three corporate entities in September 1996.
In response to the
complaint, Bales-Atlantic filed a Notice of Abatement Due to
Bankruptcy, indicating that it had filed for bankruptcy in August
1996 and that such filing operated as an automatic stay in the
case.
Atlantic Automation, CNC, and Bales individually filed a
joint motion to dismiss on the ground of lack of subject matter
jurisdiction due to the exclusive jurisdiction of the bankruptcy
court.
The circuit court granted the motion to dismiss, finding
that it lacked jurisdiction “because the matters set forth in the
Complaint are subject to the exclusive jurisdiction of the United
States Bankruptcy Court of the Eastern District of Kentucky
. . . .”
Custom Tool’s appeal herein followed.
Atlantic Automation and CNC are apparently closely held
corporations formed by Bales in 1996.
Custom Tool alleges that
CNC actually used the same employees, clients, and principal
place of business as Bales-Atlantic and that Bales began ordering
large quantities of machine parts from Custom Tool in 1996 to be
used in tables being manufactured by Atlantic Automation and CNC.
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Custom Tool contends that Bales knew he would have Bales-Atlantic
file for bankruptcy in the near future and that he wanted to
procure large quantities of machine parts for himself and his
other two closely held corporations.
Custom Tool alleges that
Bales perpetrated a fraud on Custom Tool by having it send the
bill for the goods to Bales-Atlantic, although the goods were
actually used by the other two corporations and by Bales
individually.
Although the trial court did not elaborate in its order
dismissing Bales and the other two corporations and staying the
action against Bales-Atlantic, the trial court apparently
reasoned that the automatic stay provided in 11 U.S.C. § 362
(1993) would also extend to the codefendants (Atlantic
Automation, CNC, and Bales individually) in this case.
11 U.S.C.
§ 362 provides in relevant part that:
(a) Except as provided in subsection (b) of
this section, a petition filed under section
301, 302, or 303 of this title, or an
application filed under section 5(a)(3) of
the Securities Investor Protection Act of
1970, operates as a stay, applicable to all
entities, of—
(1) the commencement or continuation,
including the issuance or employment of
process, 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[.]
Citing Lynch v. Johns-Manville Sales Corp., 710 F.2d
1194, 1196-97 (6th Cir. 1983), Custom Tool argues that the
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automatic stay provisions of 11 U.S.C. § 362 were designed only
to protect the bankrupt debtor and not to extend to nonbankrupt
third parties or codefendants.
While Custom Tool acknowledges
that the bankruptcy court may have sole jurisdiction over BalesAtlantic, it contends that the circuit court had jurisdiction
over its fraud action against Bales individually and its action
against Atlantic Automation and CNC for unjust enrichment due to
Bales’s fraud.
On the other hand, the appellees argue that the
bankruptcy court has exclusive jurisdiction of this matter and
that the bankruptcy trustee may avoid any such fraudulent
transfers on behalf of the debtor’s estate pursuant to 11 U.S.C.
§ 548 (1993), which provides in relevant part:
(a) The trustee may avoid any transfer of
an interest of the debtor in property, or any
obligation incurred by the debtor, that was
made or incurred on or within one year before
the date of the filing of the petition, if
the debtor voluntarily or involuntarily—
(1) made such transfer or incurred such
obligation with actual intent to hinder,
delay, or defraud any entity to which the
debtor was or became, on or after the date
that such transfer was made or such
obligation was incurred, indebted . . . .
The appellees also argue that Custom Tool’s pursuit of its
fraudulent conveyance claims in state court could defeat the
rights of other creditors in Bales-Atlantic’s assets.
Citing In
re Sunshine Precious Metals, Inc., 157 B.R. 159 (Bkr. D. Idaho
1993), the appellees argue that Custom Tool’s claim is a
“general” claim which is merely derivative of an injury to the
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debtor (i.e., each creditor has suffered injury only because of a
decline in the debtor’s financial position and thus all creditors
are affected by the claim) and is not a claim which is personal
to Custom Tool.
Id. at 164.
While the automatic stay provided in 11 U.S.C.
§ 362(a)(1) is generally only available to the debtor and not to
codefendants, Lynch, supra, the stay may be applicable to
nonbankrupt defendants where there are “unusual circumstances.”
A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir. 1986).
The
court in that case held that “[t]his ‘unusual situation,’ it
would seem, arises when there is such identity between the debtor
and the third-party defendant that the debtor may be said to be
the real party defendant and that a judgment against the thirdparty defendant will in effect be a judgment or finding against
the debtor.”
Id. at 999.
We believe that the trial court was correct in
determining that the bankruptcy court had exclusive jurisdiction
of Custom Tool’s claim as a creditor.
The sale of the machine
parts by Custom Tool resulted in a debt owed by Bales-Atlantic as
evidenced by the bill sent to it.
If the goods were ultimately
transferred to the other two corporations for their use, then a
fraudulent conveyance may have occurred.
However, the bankruptcy
trustee had the power to deal with such a conveyance, and
jurisdiction over it was exclusively held by the bankruptcy
court.
See In re MortgageAmerica Corp., 714 F.2d 1266 (5th Cir.
1983).
This provides creditor protection, without which “certain
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creditors would be able to pursue their own remedies against the
debtor’s property.
Those who acted first would obtain payment of
the claims in preference to and to the detriment of other
creditors.”
Sunshine Precious Metals, supra at 163, citing H.R.
Rep. No. 595, 95th Cong., 2nd Sess. 340, reprinted in 1978 U.S.
Code Cong. & Admin. News 5787, 5963, 6297.
The order of the Fayette Circuit Court is affirmed.
All CONCUR.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEE:
Thomas D. Bullock
Lexington, KY
Albert F. Grasch, Jr.
Lexington, KY
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