Blogs

Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: March 10, 2018

Court Denies Stay Despite Necessary Party Being Bankrupt

On February 6, 2018, Justice Kornreich of the New York County Commercial Division issued a decision in D.E. Shaw Composite Holdings, L.L.C. v. TerraForm Power, LLC, 2018 NY Slip Op. 30232(U), denying a stay despite a necessary party being bankrupt, explaining:

CPLR 1001 governs the necessary joinder of parties. CPLR 1001(a) provides that persons ought to be parties if complete relief is to be accorded between the persons who are parties to the action or who might be inequitably affected by a judgment in the action shall be made plaintiffs or defendants, and that when a person who should join as a plaintiff refuses to do so he may be made a defendant. Here, there is no question that plaintiffs can obtain complete relief from defendants (the amounts allegedly due under the PSA). While defendants dispute their joint and several liability under section 2.04(g) of the PSA, if they are indeed jointly and severally liable, plaintiffs can obtain compete recovery from defendants, regardless of the absence of SunEdison. That is the very point of joint and several liability.

That said, defendants contend that SunEdison is a necessary party because it would be inequitably affected by the judgment. While the court rejects this argument below, even if defendants were correct, a finding that a person or entity is a necessary party under CPLR 1001 (a) does not mandate dismissal of the action. Rather, under CPLR 1001 (b), joinder of a necessary party is excused if jurisdiction over him can be obtained only by his consent or appearance. That is the case here, since SunEdison cannot be joined because it is subject to the automatic stay. CPLR 1001(b) provides that, in such an instance, the court, when justice requires, may allow the action to proceed without his being made a party, and dictates that, in determining whether to allow the action to proceed, the court shall consider: 1. whether the plaintiff has another effective remedy in case the action is dismissed on account of the nonjoinder; 2. the prejudice which may accrue from the nonjoinder to the defendant or to the person not joined; 3. whether and by whom prejudice might have been avoided or may in the future be avoided; 4. the feasibility of a protective provision by order of the court or in the judgment; and 5. whether an effective judgment may be rendered in the absence of the person who is not joined. The Court of Appeals has cautioned that each of the five factors, where applicable, must be considered, and that the motion court’s discretionary determination should be guided by the principle that dismissal for failure to join a necessary party should eventuate only as a last resort.

The fifth factor is the easiest to address since, as discussed above, plaintiffs’ can obtain an effective judgment against defendants in the absence of SunEdison. Regrading the first factor, while plaintiffs, in theory, might also be able to recover against defendants in the bankruptcy action, the court notes that forcing plaintiffs to do so imposes an undue burden on plaintiffs (and, indeed, the already complicated bankruptcy case). The parties bargained in the PSA to litigate in this court, and the court will hold defendants to that bargain.

The court now turns to the critical question of prejudice, which is relevant to the court’s CPLR 1001(a) analysis, and also the third and fourth factors of CPLR 1001(b). Courts, naturally, take a cynical view of a defendant’s self-serving assertions of prejudice to the debtor when that debtor, indisputably aware of the state court action, does not seek to intervene. Thus, courts have routinely recognized that the ability of a non joined party to intervene in an action to avoid prejudice is a compelling factor in determining whether to dismiss a case for failure to join a necessary party. Hence, it is not only telling, but also legally significant, that neither SunEdison nor its other creditors have taken the position that SunEdison will be prejudiced if plaintiffs proceed with this action while the bankruptcy proceedings are pending. They are indisputably aware of this action, as evidenced by Judge Bernstein’s mention of it in one of his decisions, but have not sought to extend the automatic stay or intervene to seek a stay of this action.

This is unsurprising because the only possible adverse affect on SunEdison is a ruling by this court that the proper computation of the Earnout Project Payments is greater than what SunEdison may believe that amount should be. Yet, since SunEdison is not a party to this case and since it is not in privity with defendants, it is not bound by this court’s decision on this issue. Were it worried about possibly conflicting decisions, it presumably would have sought a stay. Moreover, as noted earlier, a judgment against defendants in this action would actually decrease SunEdison’s liability to plaintiffs. To be sure, a finding of liability on the part of defendants might impel them to seek contribution from SunEdison. That possibility, however, does not warrant a stay. Simply put, SunEdison suffers no prejudice by virtue of this action proceeding, and it may well stand to benefit. Defendants face no prejudice other than the prospect of a more expeditious adjudication of their potential liability (which, on its own, is certainly not grounds for a stay).

Finally, the fourth factor weighs against dismissal. To the extent there is some incidental procedural complexity that results from the pendency of this action, given the extremely competent counsel of record here arid in federal ┬Ěcourt, this court has confidence that all of the parties’ interests can be adequately protected. Additionally, where warranted, discovery may be coordinated, not only to ensure efficiency, but aiso to ensure that no one seeks to evade Judge Bernstein’s order that discovery in state court litigation not be used as an end run around what is permitted in the bankruptcy proceedings.

For these reasons, the court declines to reach the parties’ arguments about when an absent party with either several or joint and several liability for an underlying debt is considered a necessary party within the meaning of CPLR 1001(a). That is because even if SunEdison is a necessary party, the circumstances of this case warrant the court’s exercise of its discretion to excuse it absence. This simply is not a case where the drastic, last resort remedy of dismissal under CPLR 1001 is warranted.

(Internal quotations and citations omitted).

This decision arises from the provision in federal bankruptcy law that stays all other actions relating to a debtor’s assets during a bankruptcy: commonly called the automatic bankruptcy stay. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where an opponent has declared bankruptcy.

Click here to subscribe to this or another of Schlam Stone & Dolan’s blogs.

View posts