Bankruptcy Code’s Automatic Stay Does Not Extend to Alleged Alter Egos of the Debtor, New York Federal Court Says

By Peter D. DeChiara

Posted October 2015

If a pension fund brings suit for unpaid contributions against a group of affiliated companies, contending they are alter egos of one another, does the Bankruptcy Code’s automatic stay apply to all the companies if one of them files for bankruptcy?  No, according to a recent decision of the federal district court for the Eastern District of New York, see Pavers & Road Builders District Council Welfare Fund et al. v. Core Contracting of N.Y., LLC, et al., Case No. 15-cv-0207 (E.D.N.Y. Aug. 18, 2015), the automatic stay applies only to the bankrupt debtor, not to its alleged alter egos

 In Pavers, administrators of a pension fund brought a delinquent contributions suit in federal district court against four corporations, claiming that the defendants were signatories to the applicable collective bargaining agreement and were also alter egos of one another.  One of the defendants, Canal Asphalt, Inc. (“Canal”), filed for Chapter 11 protection.  The defendants in the district court suit then claimed that the automatic stay in Section 362 of the Bankruptcy Code applied to all of them and blocked the suit.  As precedent, the defendants cited In re Adler, 494 B.R. 43 (Bankr. E.D.N.Y. 2013), aff’d, 518 B.R. 228 (E.D.N.Y. 2014), a case in which a bankruptcy court wrote that the automatic stay applied to a debtor’s alter egos since the debtor and alter egos are “one and the same entity.”  494 B.R. at 53.

District judge Brian Cogan disagreed with the defendants’ position and allowed the fund’s collection suit to continue against Canal’s alleged alter egos.  “Just because two entities are alter egos does not make them both debtors under the Bankruptcy Code,” he explained.  “It simply means they are liable for each other’s debts.”  He wrote that the bankruptcy court in the Adler case, by indicating otherwise, had ignored the plain language of the Bankruptcy Code.  Another problem with extending the automatic stay to alleged alter egos, the judge wrote, is that it would make the automatic stay “into a provision that can only be applied with the benefit of hindsight,” since determining whether one entity is in fact the alter ego of another typically requires litigation.  Applying a stay of litigation only after the litigation has occurred makes little sense.

While holding that the automatic stay does not reach alleged alter egos, Judge Cogan explained that a bankruptcy court may, when circumstances warrant, protect certain non-debtors from suit, either by issuing an anti-suit injunction under Section 105(a) of the Bankruptcy Code or by approving a provision in the debtor’s plan of reorganization that prevents litigation against specified non-debtors.  Judge Cogan, who once co-authored a chapter on bankruptcy in a legal treatise, devoted part of his opinion to a discussion of what circumstances might justify such bankruptcy court protection of non-debtors.  However, Judge Cogan wrote that whether the particular circumstances in Canal’s bankruptcy would justify such non-debtor protection was a question entirely for the bankruptcy court, adding “[t]hat is just not my problem.”

Pavers is a sensible decision that sheds some needed light on the sometimes murky intersection of bankruptcy law and the alter ego doctrine.