Where appellants requested for relief from the automatic stay in order to continue a tort action against the debtor in the Puerto Rico courts, a U.S. Bankruptcy Court order denying stay relief must be vacated because the court abused its discretion when assessing the factors set forth in Sonnax Indus., Inc. v. Tri Component Prods. Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280 (2d Cir. 1990).
“The above-named appellants (the ‘Appellants’) have filed two appeals in the chapter 13 debtor’s bankruptcy case. In the first appeal, the Appellants challenge the bankruptcy court’s order denying their request for relief from the automatic stay to continue a tort action against the debtor in the Puerto Rico courts. … For the reasons discussed below, we vacate the order denying stay relief and remand to the bankruptcy court for further proceedings consistent with this opinion.
“In the second appeal, the Appellants challenge the order confirming the debtor’s chapter 13 plan of reorganization. … Finding no error, we affirm the confirmation order. …
“… The bankruptcy court denied the Stay Relief Motion due to the Appellants’ failure to meet the Sonnax factors. We conclude, however, that while the bankruptcy court correctly identified the legal standard for determining whether to grant relief from stay to continue litigation in another forum, the court ignored a material issue deserving of significant weight. …
“The bankruptcy court found that the following Sonnax factors weighed against granting stay relief: (1) interference with the bankruptcy case; (2) the cost to the bankruptcy estate to continue litigation in the local court; (3) that no insurer would cover the costs of litigation, although the court acknowledged that this was a disputed issue; (4) the prejudice that the Puerto Rico litigation would have on the interests of other creditors, ‘taking into consideration that the resources used for the litigation are resources that would not be able to fund the plan’; and (5) the balance of harms. Although the bankruptcy court did not articulate the undisputed facts underlying its assessment of the Sonnax factors, it is apparent from the bankruptcy court’s statements at the October 17, 2023 hearing that its overarching concerns when considering these Sonnax factors were: (1) the cost to the bankruptcy estate to continue the Puerto Rico litigation and the impact those costs would have on the feasibility of the Debtor’s plan and the amounts available for distribution to other creditors; and (2) the Appellants’ failure to demonstrate that recovery from the insurance companies was ‘even a possibility.’ These factors, however, were weighed and considered by the court based on the faulty premise that the bankruptcy court would not need to estimate or liquidate the Appellants’ tort claim in the bankruptcy case, even if the claim were not liquidated in the local court. …
“The bankruptcy court failed to address, however, that if the Appellants’ claim is not liquidated in the local court, it will still need to be liquidated (or estimated) in the bankruptcy case before the pro rata distribution of $14,256 to the five holders of allowed unsecured claims can be made from the estate. … For these reasons, the bankruptcy court’s decision to deny stay relief because litigating the Appellants’ claim in the local court would be costly for the bankruptcy estate — without acknowledging that the claim will still need to be estimated or liquidated in some court — constituted error.
“As the cost and burden of liquidating the claim in the local court was the linchpin of the bankruptcy court’s cause analysis under the Sonnax factors, we conclude that the bankruptcy court abused its discretion in denying the Stay Relief Motion on that basis. … Therefore, we vacate the Order Denying Stay Relief and remand this matter to the bankruptcy court for further proceedings consistent with this opinion.”
In Re: Torres Reyes, David (Lawyers Weekly No. 03-006-24) (21 pages) (Katz, J.) Appealed from the U.S. Bankruptcy Court for the District of Puerto Rico (BAP Nos. PR 23-033 and PR 24-002) (Dec. 17, 2024).
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