Summary of a Recent
Judicial Development in
Bankruptcy

Court Considers Factors in Determining Whether to Grant Relief from Automatic Stay

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Henderson, 352 B.R. 439 (Bankr. N.D. Tex. 2006), the United States Bankruptcy Court for the Northern District of Texas, Lubbock Division, after considering a list of factors enumerated by the Fifth Circuit courts, held that cause for modification of automatic stay did not exist and denied a creditor's motion for relief.

Background

Monsanto brought suit against the Debtor in District Court for patent infringement, conversion, unjust enrichment and breach of contract related to the Debtor's planting of Roundup Ready cotton seed. Id. at 440. The Debtor subsequently filed for Chapter 12 bankruptcy which stayed the suit. Id. Monsanto then brought suit in the bankruptcy court, alleging the same causes of action and adding that the debts should not be dischargeable. Id. at 440-41.

Arguments

Debtors argued that they should not be required to litigate Monsanto's claim in Missouri state court, and instead Monsanto's claim should be litigated in the bankruptcy court. Id. at 442-43.

Monsanto argued that the Debtor's obligations should be declared nondischargeable under § 523(a)(6) of the Bankruptcy Code because the Debtor "willfully and maliciously infringed on Monsanto's patented seed technology." Id. at 442. It further argued that its state court action should be allowed to proceed first, because resolution of the "willful and malicious conduct" issue would also apply to the subsequent dischargeability hearing pursuant to the doctrine of collateral estoppel. Id. at 443.

Analysis and Holdings

In determining whether to modify an automatic stay to allow a state court action to proceed, a court must consider, inter alia, the following factors: (1) judicial economy; (2) trial readiness; (3) the resolution of preliminary bankruptcy issues; (4) the creditor's chance of success on the merits; and (5) the cost of defense or other potential burden to the bankruptcy estate and the impact of the litigation on other creditors. Id. at 442. As for Monsanto's collateral estoppel argument, the court recognized that the doctrine would work both ways; the dischargeability hearing would also include and resolve all of the same issues from the state court action. Id. at 443. In the interest of judicial economy, it made sense to have the dischargeability hearing first, and then there would be no need for a subsequent state court action. Id. Moreover, the court opined that to allow the state court action to proceed could interfere with the bankruptcy case, because Chapter 12 bankruptcy proceeds on a fast track; a Chapter 12 debtor is expected to submit a plan within 90 days of filing for relief, and the plan is generally confirmed within 45 days after it is submitted. Id. Delaying the dischargeability action could potentially prolong the bankruptcy case. Id. at 444. Therefore, the court denied Monsanto's request for modification of automatic stay. Id.

The case was decided on September 25, 2006.