LSC Wind Down, LLC

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

In re: ) Chapter 11

)

FOREVER 21, INC., et al., )

) Case No. 19-12122 (MFW)

Debtors. ) Jointly Administered

__________________________________ )

)

ALLIED DEVELOPMENT OF ALABAMA LLC, )

)

Plaintiff, )

)

v. )

)

FOREVER 21, INC., et al., and ) Adv. No. 19-50897

JATIN MALHOTRA )

)

Defendants. )

MEMORANDUM OPINION1

Before the Court is a Motion to Dismiss filed by Forever 21,

Inc., et al. (the “Debtors”) and joined by Jatin Malhotra

(collectively, the “Defendants”) for failure to state a claim

upon which relief can be granted. Allied Development of Alabama,

LLC (“Allied”) opposes the Motion. For the reasons stated below,

the Motion will be denied.

1 The Court is not required to state findings of fact or

conclusions of law pursuant to Rule 7052 of the Federal Rules of

Bankruptcy Procedure. Instead, the facts averred in the

Complaint must be accepted as true for purposes of this Motion to

Dismiss. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

I. FACTUAL BACKGROUND

Allied is the owner of a retail center in Alabama. Between

October 2017 and March 2018, Allied and the Debtors’ Vice

President of Real Estate, Jatin Malhotra, negotiated the terms of

a lease for a store at the center. During these negotiations,

the Debtors sought several concessions from Allied, including an

agreement to reimburse the Debtors for making improvements to the

premises. Before responding to the Debtors’ request for

reimbursement, Allied asked for the Debtors’ sales projections

for the store. Mr. Malhotra represented to Allied’s manager,

David Mott, that the Debtors had a comparable store in Mobile,

Alabama, which had annual sales in 2017 of $6 million and that

the Debtors projected at least the same amount of sales at the

store in Allied’s retail center (“the Eastern Shore Store”).

Based on these representations, Allied contends that it

abandoned a tentative agreement with another prospective tenant

and entered into the Lease Agreement with the Debtors for the

Eastern Shore Store in March 2018. Rent under the lease was

dependent on the Debtors’ gross sales at the Eastern Shore Store.

Consistent with the parties’ negotiations and the rider to the

Lease Agreement, Allied reimbursed the Debtors more than $2

million for improvements to the leased premises.

2

After the parties entered into the Lease Agreement, Mr.

Malhotra provided revised projections showing that the Eastern

Shore Store would generate $7 million in annual sales. During

the period that the Eastern Shore Store was open for business,

however, the store significantly underperformed the Debtors’

projections, generating only $1.6 million in gross sales between

October 2018 and September 30, 2019. In addition, after entering

into the Lease Agreement with the Debtors, Allied discovered that

the Debtors’ Mobile Store had generated only $2 million in gross

sales during 2017, not $6 million as Mr. Malhotra had claimed.

II. PROCEDURAL BACKGROUND

On September 29, 2019, the Debtors filed voluntary petitions

for relief under chapter 11. The Debtors advised Allied that

they intended to sell or reject the Lease Agreement because of

the Eastern Shore Store’s poor performance.

On November 22, 2019, Allied commenced this adversary

proceeding against the Defendants. Counts I and II plead claims

for damages against the Debtors and Mr. Malhotra for fraudulent

inducement and negligent misrepresentation, respectively. Count

III also alleges fraudulent inducement but requests rescission of

3

the Lease Agreement as the remedy.2 Count IV pleads an unjust

enrichment claim against the Debtors for the improvement costs

incurred by Allied. Count V seeks a declaratory judgment stating

that: 1) Mr. Malhotra has indemnification rights owed to him from

the Debtors, 2) the Debtors’ liabilities stemming from this

proceeding are covered by the Debtors’ insurance policies, and 3)

the proceeds of the relevant insurance policies are not property

of the Debtors’ estates.

On December 26, 2019, the Debtors filed the Motion to

Dismiss for failure to state a claim. On January 17, 2020,

Allied filed its Brief in Response, and on January 31, 2020, the

Debtors filed their Reply Brief. Mr. Malhotra joined the

Debtors’ Motion and briefs. The matter is now ripe for decision.

III. JURISDICTION

This Court has jurisdiction over this adversary proceeding.

28 U.S.C. §§ 1334(b) and 157(b) & (c). Allied asserts that some

of its claims are non-core, and Allied does not consent to the

2 The heading of Count III states that the cause of action is

rescission, but under Alabama contract law, rescission is not a

cause of action. It is a potential remedy for fraudulent

inducement and negligent misrepresentation. See, e.g., Hillcrest

Ctr., Inc. v. Rone, 711 So. 2d 901, 907 (Ala. 1997), as modified

on denial of reh’g (Nov. 14, 1997) (characterizing rescission as

one available remedy for fraudulent inducement).

4

entry of final orders for its non-core claims but reserves the

right to provide consent at a later date.3 The Defendants

consent to the entry of a final order in connection with this

Motion.4

Even without consent of all parties, however, the Court has

the power to enter an order on a motion to dismiss even if the

matter is non-core and it has no authority to enter a final order

on the merits. See, e.g., Welded Constr., L.P. v Prime NDT

Servs., Inc. (In re Welded Constr., L.P.), 605 B.R. 35, 37

(Bankr. D. Del. 2019); Burtch v. Owlstone, Inc. (In re Advance

Nanotech, Inc.), Adv. Proc. No. 13–51215, 2014 WL 1320145, at *2

(Bankr. D. Del. Apr. 2, 2014); O’Toole v. McTaggart (In re

Trinsum Grp., Inc.), 467 B.R. 734, 739-40 (Bankr. S.D.N.Y.

2012)).

IV. LEGAL STANDARD

A motion to dismiss pursuant to Rule 12(b)(6), as

incorporated by Bankruptcy Rule 7012, tests the factual

sufficiency of a plaintiff’s complaint. Bell Atl. Corp. v.

3 Allied also “demands and explicitly reserves its right to

jury trial with respect to all claims triable.” Adv. D.I. 1 at ¶

6.

4 D.I. 4 at n.3. Because he joined the Debtors’ Motion, Mr.

Malhotra has also consented.

5

Twombley, 550 U.S. 544, 555 (2007). To survive a Rule 12 (b) (6)

motion to dismiss, a plaintiff’s complaint must “contain

sufficient factual content, accepted as true, to state a claim

for relief that is plausible on its face.” Ashcroft v. Iqbal,

556 U.S. 662, 678 (2009) (quoting Twombley, 550 U.S. at 555).

A claim is plausible on its face if it contains “enough

facts to raise a reasonable expectation that discovery will

reveal evidence of the necessary elements of a claim.” Phillips

v. Cnty. of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008).

“Threadbare recitals of the elements of a cause of action,

supported by conclusory statements, do not suffice.” Iqbal, 556

U.S. at 678.

In considering a motion to dismiss, the allegations in the

complaint must be construed “in the light most favorable to the

plaintiff.” Igbal, 556 U.S. at 678; Burtch v. Milberg Factors,

Inc., 662 F.3d 212, 221 (3d Cir. 2011). Determining whether a

complaint states a plausible claim is a context-specific analysis

that is informed by the court’s “judicial experience and common

sense.” Iqbal, 556 U.S. at 679.

“Rule 12(b) (6) authorizes a court to dismiss a claim on the

basis of a dispositive issue of law.” Neitzke v. Williams, 490

U.S. 319, 326 (1989).

V. DISCUSSION

The Debtors raise two legal issues that they say warrant

dismissal of the Complaint: (1) the claims Allied asserts in the

adversary proceeding are all pre-petition claims for damages that

are more properly brought in the claims reconciliation process,

and (2) Allied is violating the automatic stay by seeking to

recover its pre-petition claims. Even if the complaint should

not be dismissed, the Debtors contend that it should be stayed

under section 105 because it is disruptive to the bankruptcy

case.

Allied responds that its claims are properly brought,

because they fit within the definitions in Rule 7001 of what

actions must be brought as adversary proceedings. Specifically,

Allied notes that its complaint includes equitable claims and

claims against a non-debtor. Further, Allied notes that the

majority of courts conclude that there is no violation of the

stay when an action is brought as an adversary proceeding in a

debtor’s bankruptcy case. Finally, Allied argues that the

Debtors have not established cause for the issuance of a stay

under section 105.

A. Rule 7001

The Debtors argue that the complaint should be dismissed

because it is procedurally improper under Bankruptcy Rule 7001.

7

The Debtors assert that Rule 7001 does not permit the filing of

an adversary proceeding merely to recover a pre-petition claim.

According to the Debtors, Allied’s causes of action,

including its actions requesting equitable relief, all seek to

recover money damages for a pre-petition claim. In essence,

Allied is simply seeking to recover the $2 million in lease

improvements that it agreed to pay allegedly because of the

Debtors’ fraudulent misrepresentations about anticipated sales at

the Eastern Shore Store. Because Allied has an adequate remedy

at law, the Debtors assert it cannot assert an equitable claim,

which is its only basis for filing an adversary proceeding.

Instead, the Debtors contend that Allied must pursue its claims

through the claims reconciliation process.

Allied responds that the claims in its complaint all fit

within the definitions in Rule 7001 of the types of proceedings

that must be brought by adversary proceeding. Specifically,

Allied argues that it is asserting claims to recover money,

claims to determine interests in property, claims for equitable

relief, and claims for a declaratory judgment. Fed. R. Bankr. P.

7001(1), (2), (7) & (9). Thus, Allied asserts that its adversary

proceeding against the Debtors is the only procedurally viable

method it has to obtain the relief it seeks. See, e.g., In re

WorldCorp, Inc., 252 B.R. 890, 895 (Bankr. D. Del. 2000) (“Rule

8

7001 designates ten types of actions which must be brought as

adversary proceedings in bankruptcy cases.”).

1. Counts I and II Claims for Damages

In Counts I and II, Allied asserts claims for monetary

damages against the Debtors and Mr. Malhotra for fraud in the

inducement and negligent misrepresentation.

The Debtors argue that many courts conclude that Rule 7001

does not permit a creditor to commence an adversary proceeding

seeking money damages for pre-petition conduct; instead, the

creditor must file a proof of claim. See, e.g., Toscano v. The

RSH Liquidating Trust (In re RS Legacy Corp.), Adv. Proc. No.

16–51033, 2017 WL 3837294, at *2 (Bankr. D. Del. Aug. 31, 2017)

(“because Plaintiff seeks monetary damages from the funds in the

estate, the procedurally proper route must commence through the

claims administrative process”); Evergreen Solar, Inc. v.

Barclays PLC (In re Lehman Bros. Holdings, Inc.), Adv. Proc. No.

08-01633, 2011 WL 722582, at *7–8 (Bankr. S.D.N.Y. 2011)

(dismissing adversary proceeding asserting pre-petition claim for

breach of contract because the claim should have been asserted

through the claims allowance process); Scott v. Aegis Mortg.

Corp. (In re Aegis Mortg. Corp.), Adv. Proc. No. 08–50237, 2008

WL 2150120, at *6 (Bankr. D. Del. May 22, 2008) (holding that an

adversary proceeding for damages arising from pre-petition

9

conduct was improper because the proceeding did not fall within

any of the ten categories of Rule 7001); DBL Liquidating Trust v.

P.T. Tirtamas Majutama (In re Drexel Burnham Lambert Grp.,

Inc.), 148 B.R. 993, 998 (Bankr. S.D.N.Y. 1992) (finding pre-

petition contract damages claim for breach of a letter agreement

was not subject to res judicata because it could not have been

brought in prior adversary proceeding that was dismissed).

Those courts conclude that claims for damages against a

debtor arising from pre-petition conduct cannot be brought by an

adversary proceeding because they are not included in the ten

categories of adversary proceedings listed in Rule 7001. Aegis,

2008 WL 2150120, at *6; Drexel Burnham, 148 B.R. at 998 (citing

Dade Cnty School Dist. v. Johns–Manville Corp. (In re

Johns–Manville Corp.), 53 B.R. 346, 352–55 (Bankr. S.D.N.Y.

1985)). Rather, they conclude that creditors should resolve pre-

petition money damages claims through the claims reconciliation

process by filing proofs of claims.

The Court disagrees with the suggestion that there is a per

se rule against resolving a pre-petition claim for damages in the

adversary process. Nothing in the express language of Rule 7001

prohibits it; instead, Rule 7001 simply lists claims that must be

prosecuted as adversary proceedings. In fact, there are several

instances where pre-petition claims are adjudicated in adversary

10

proceedings. While the Comment to Rule 7001 does note that

proofs of claim and objections thereto are governed by the claims

allowance process in Rules 3001 et seq., it also states that when

an objection to a claim is joined with a demand for relief of the

kind specified in Rule 7001, it must be brought as an adversary

proceeding. See Fed. R. Bankr. P. 3001, comment; Fed. R. Bankr.

P. 3007(b) (“A party in interest shall not include a demand for

relief of a kind specified in Rule 7001 in an objection to the

allowance of a claim, but may include the objection in an

adversary proceeding.”).

Further, Rule 7001(10) provides that actions which are

removed from other courts are adversary proceedings.5 Removed

actions typically assert pre-petition claims against the debtor.

Nonetheless, they are resolved in the adversary proceeding, not

in the claims resolution process.

Even if Rule 7001 were read to require that an action fit

into one of the categories in order to warrant an adversary

proceeding, Allied argues that the claims in Counts I and II fit

within Rule 7001(1) as “a proceeding to recover money or

5 Rule 7001(10) states that “a proceeding to determine a claim

or cause of action removed under 28 U.S.C. § 1452” constitutes an

adversary proceeding. Fed. R. Bankr. P. 7001(10).

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property.”6 The claims against Mr. Malhotra, who is not a debtor

in this case, cannot be asserted by the filing of a proof of

claim in this bankruptcy case and properly fit within Rule

7001(1). While the Debtors contend that Rule 7001(1) does not

include pre-petition damages claims against a debtor, the Rule

does not expressly state that. Further, because the claims

against the Debtors are based on the same facts and issues of law

that support the claims against Mr. Malhotra, the Court finds

that they should be heard together in this adversary proceeding

pursuant to Rule 7042.7

Similarly, the claims for equitable relief brought in Counts

III, IV, and V are based on the same facts and issues of law that

support the claims in Counts I and II. For the reasons stated in

Parts 2 and 3 below, the equitable claims must be brought by

adversary proceeding. Thus, the Court concludes that the claims

against the Debtors in Counts I and II should be consolidated

with the other claims in the Complaint under Rule 7042 and heard

in this adversary proceeding. See, e.g., RS Legacy, 2017 WL

6 Rule 7001(1) provides in full that “a proceeding to recover

money or property, other than a proceeding to compel the debtor

to deliver property to the trustee, or a proceeding under §

554(b) or § 725 of the Code, Rule 2017, or Rule 6002” shall be

brought by an adversary proceeding. Fed. R. Bankr. P. 7001(1).

7 Fed. R. Civ. P. 42, made applicable in adversary proceedings

by Rule 7042, allows the Court to consolidate matters that

involve a common question of law or fact.

12

3837294, at *3 (acknowledging adversary may be treated as

informal proof of claim but dismissing it because it was filed

after the bar date); Wilson v. Residential Cap. (In re

Residential Cap.), Adv. Pro. No. 12-01936, 2014 WL 3057111, at *7

(Bankr. S.D.N.Y. July 7, 2014) (concluding that pre-petition

damages claim included in adversary proceeding with request for

equitable relief would be treated as an informal proof of claim).

2. Counts III & IV Claims for Equitable Relief

Count III’s fraudulent inducement claim seeks rescission of

the Lease Agreement, and Count IV’s unjust enrichment claim seeks

restitution for the improvement costs Allied incurred. Under

applicable state law both are claims for equitable relief. See,

e.g., Ex parte Montgomery Cnty. D.O.H.R, 10 So. 3d 31, 39 (Ala.

Civ. App. 2008) (recognizing rescission as an equitable remedy);

Avis Rent A Car Systems, Inc. v. Heilman, 876 So. 2d 1111, 1123

(Ala. 2003) (holding that unjust enrichment is an equitable

remedy).

Pre-petition claims seeking equitable relief, such as

restitution and unjust enrichment, are expressly required to be

brought by adversary proceedings under Rule 7001. Fed. R. Bankr.

P. 7001(7) (adversaries include “a proceeding to obtain an

injunction or other equitable relief”).

13

The Debtors argue, however, that Allied’s claims for

equitable relief are improper because equitable relief is only

appropriate where there is no remedy at law. In this case, the

Debtors note that Allied asserts such a legal claim for damages

in Counts I and II. Further, the Debtors contend that Allied’s

rescission and restitution claims themselves could result in a

monetary award, and therefore, the actions are “claims” which

must be pursued in the claims reconciliation process. See 11

U.S.C. § 101(5) (defining claims to include “right to an

equitable remedy for breach of performance if such breach gives

rise to a right to payment”). Thus, the Debtors contend that

determining whether the adversary proceeding is proper hinges on

whether the complaint asserts “claims” as defined in section

101(5). If the causes of action assert “claims,” then the

Debtors argue that they cannot be brought in an adversary

proceeding but must be brought by filing a proof of claim.

The Court disagrees with the Debtors’ analysis. The

definition of claim in section 101(5) is not relevant to the

determination of whether that claim can be brought in an

adversary proceeding. Rather, it is the language of Rule 7001

that is conclusive. The express language of Rule 7001 provides

that requests for equitable relief must be brought by adversary

proceeding. Fed. R. Bankr. P. 7001(7).

14

Further, the Court cannot at this stage of the proceedings

dismiss Allied’s equitable claims, because it cannot conclude

whether Allied has an adequate remedy at law. It is, therefore,

proper for Allied to plead alternatively both a legal damages

claim and claims for equitable relief. In addition, the mere

fact that Allied could receive a monetary award on some of those

equitable claims does not transform those claims into legal

claims. Even though an equitable claim may result in a monetary

award, courts have concluded that it is properly brought as an

adversary proceeding. See, e.g., Conn v. Dewey & LeBoeuf LLP (In

re Dewey & LeBoeuf LLP), 487 B.R. 169, 176 (Bankr. S.D.N.Y. 2013)

(concluding that WARN Act claims for unpaid pre-petition wages

could be asserted by adversary proceeding because the claims

sought restitution which is equitable relief); Watson v. TSC

Global, Inc. (In re TSC Global, LLC), Adv. Proc. No. 12-50119,

2013 WL 6502168, *3 (Bankr. D. Del. June 26, 2013) (holding that

WARN Act claim was an equitable claim even though the Plaintiffs

sought to recover back pay).

Thus, the Court concludes that Counts III and IV are

properly brought in this adversary proceeding under Rule 7001(7)

and dismissal of them is not warranted.

15

3. Count V Claim for Declaratory Judgment

In Count V, Allied seeks a declaratory judgment that Mr.

Malhotra’s indemnification rights are covered by the Debtors’

director and officer insurance policies and that those policies

are not property of the estate.

The Debtors argue that only declaratory relief which relates

to one of the types of proceedings expressly listed in Rule

7001(1) - (8) is properly brought as an adversary proceeding

under Rule 7001(9). Fed. R. Bankr. P. 7001(9) (“a proceeding to

obtain a declaratory judgment relating to any of the foregoing”).

The Debtors argue that Count V’s declaratory relief does not

relate to any of the other provisions in Rule 7001.8

As the Court has held above, however, Counts I - IV are

properly brought against Mr. Malhotra and the Debtors under Rule

7001(1) and (7). The request for declaratory relief seeks a

determination that the Debtors have an obligation to indemnify

Mr. Malhotra for those other claims and that the Debtors’

insurance covers those claims. Thus, the Court concludes that

the declaratory relief does relate to claims brought under Rule

7001(1) and (7).

8 The Debtors also argue that the request for declaratory

relief ought to be brought by motion, without any citation. In

light of the express language of Rule 7001(9), the Court rejects

this argument.

16

In addition, in seeking a determination that the insurance

policies are not property of the estate, Count V clearly relates

to an action under Rule 7001(2) which requires an adversary

proceeding for an action to determine an interest in property.

Thus, the Court concludes that Count V is expressly required to

be brought by an adversary proceeding under Rule 7001(9).

B. The Automatic Stay

The Debtors argue that Allied’s adversary proceeding should

be dismissed because it undermines the policy inherent in the

automatic stay. The Debtors note that “the automatic stay is one

of the fundamental debtor protections provided by the bankruptcy

laws. It gives the debtor a breathing spell from his creditors.”

In re Wedgewood Realty Group, Ltd., 878 F.2d 693, 696 (3d Cir.

1989) (quoting S. Rep. No. 989, 95th Cong., 2d Sess. 54,

reprinted in 1978 U.S.C.C.A.N. 5787, 5840).

Section 362(a) of the Bankruptcy Code provides that a

bankruptcy petition “operates as a stay, applicable to all

entities, of . . . the commencement or continuation . . . of a

judicial . . . action or proceeding against the debtor that was

or could have been commenced before the commencement of the case

. . . or to recover a claim against the debtor that arose before

the commencement of the case . . . [or] any act to obtain

possession of property of the estate . . . or to exercise control

17

over property of the estate.” 11 U.S.C. § 362(a). The Debtors

contend that the filing of the adversary proceeding violates that

provision. See, e.g., In re Penny, 76 B.R. 160, 161 (Bankr. N.D.

Ca. 1987) (concluding that it was nonsense for creditor to

believe it could circumvent the automatic stay by filing an

adversary proceeding asserting a pre-petition claim).

Even if filing the adversary proceeding did not violate the

stay, the Debtors contend that the Court must still make a

determination whether relief from the stay would be appropriate

before allowing the litigation to proceed. In re Sciortino, 114

B.R. 423, 427 (Bankr. E.D. Pa. 1990). The Debtors assert that

Allied has failed to meet its burden of showing that cause exists

for lifting the automatic stay.

Allied argues that its adversary proceeding does not violate

the automatic stay because not only is the filing of its

adversary proceeding against the Debtors in the Debtors’ home

bankruptcy court permitted, it is expressly required by Rule

7001.

The Court rejects the Debtors’ arguments and concludes, as

have the majority of courts, that “the Code implicitly permits

the filing of suit in the bankruptcy court against a debtor

without violating the automatic stay.” Nat’l City Bank v.

Lapides (In re Transcolor Corp.), 296 B.R. 343, 358 (Bankr. D.

18

Md. 2003) (holding that filing of adversary proceeding against

debtors did not violate automatic stay and collecting cases).

See also Civic Center Square, Inc. v. Roxford Foods, Inc. (In re

Roxford Foods, Inc.), 12 F.3d 875, 878 (9th Cir. 1993) (holding

that the automatic stay did not apply to suit commenced in the

bankruptcy court where the bankruptcy case was pending);

Cellceutix Corp. v. Nickless (In re Formatech, Inc.), 496 B.R.

26, 35 (Bankr. D. Mass. 2013) (“agree[ing] with the majority view

that the automatic stay does not prohibit the commencement of an

adversary proceeding against a debtor (or its trustee) in the

bankruptcy court”); Charan Trading Corp. v. Uni-Marts, LLC (In re

Uni-Marts, LLC), 399 B.R. 400, 418 (Bankr. D. Del. 2009) (holding

that adversary proceeding in home bankruptcy court did not

violate automatic stay and noting that it was akin to filing a

proof of claim). Thus, the Court concludes that Allied’s claims

in the adversary proceeding against the Debtors are not barred by

the automatic stay.

Further, there is no stay of the claims against Mr.

Malhotra. The automatic stay only protects debtors, not non-

debtor parties. Brown v. Jevic, 575 F.3d 322, 328 (3d Cir.

2009); McCartney v. Integra Nat. Bank N., 106 F.3d 506, 510 (3d

Cir. 1997). It is true that some courts have extended section

362(a)’s protections to non-debtors in “unusual circumstances,”

19

such as where “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 third-party

defendant will in effect be a judgment or finding against the

debtor.” McCartney, 106 F.3d at 510 (quoting A.H. Robins Co.,

Inc. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986)). “Courts

have also extended the stay to non-debtor third parties where

stay protection is essential to the debtor’s efforts of

reorganization.” McCartney, 106 F.3d at 510.

In this case, neither the Debtors nor Mr. Malhotra have

established grounds for extension of the automatic stay to him.

Accordingly, the automatic stay does not bar Allied’s claims

against Mr. Malhotra.

C. Section 105 Stay

Lastly, the Debtors argue that even if the adversary

proceeding is not dismissed or the automatic stay does not apply,

the Court should stay it pursuant to section 105 to provide them

with breathing room and to allow them to conserve precious

resources. See In re Prewitt, 135 B.R. 641, 643 (9th Cir. B.A.P.

1992); In re Am. Spinning Mills, Inc., 43 B.R. 365, 367 (Bankr.

E.D. Pa. 1984).

Allied argues that the adversary proceeding will not unduly

strain the Debtors’ resources as it is the only adversary

20

proceeding that has been filed against the Debtors.

Section 105 of the Bankruptcy Code states that “[t]he court

may issue any order, process, or judgment that is necessary or

appropriate to carry out the provisions of this title.” 11

U.S.C. § 105(a). “Section 105(a) of the Bankruptcy Code

supplements courts’ specifically enumerated bankruptcy powers by

authorizing orders necessary or appropriate to carry out

provisions of the Bankruptcy Code. However, section 105(a) has a

limited scope. It does not ‘create substantive rights that would

otherwise be unavailable under the Bankruptcy Code.’” In re

Continental Airlines, 203 F.3d 203, 211 (3d Cir. 2000) (quoting

United States v. Pepperman, 976 F.2d 123, 131 (3d Cir. 1992)).

Instead, the bankruptcy court’s powers under section 105(a) can

only be used in furtherance of other provisions of the Code. In

re Joubert, 411 F.3d 452, 455 (3d Cir. 2005).

Generally, courts apply the traditional preliminary

injunction test when deciding whether to issue an injunction

pursuant to section 105(a). Wedgewood, 878 F.2d at 700-01; In re

W.R. Grace & Co., 412 B.R. 657, 665 (D. Del. 2009). Thus, to

obtain injunctive relief under section 105, the Debtors bear the

burden of showing a “substantial likelihood of success on the

merits, irreparable harm to the movant, harm to the movant

outweighs harm to the nonmovant, and injunctive relief would not

21

violate public interest.” Wedgewood, 878 F.2d at 701.

An action to obtain equitable relief, including an

injunction, generally requires an adversary proceeding. Fed. R.

Bankr. P. 7001(7). See, e.g., Residential Cap., 480 B.R. at 538

(stating that debtor must pursue section 105 injunction staying

actions against non-debtors through an adversary proceeding); In

re Irwin, 457 B.R. 413, 423 n.21 (Bankr. E.D. Pa. 2011) (noting

an extension of the automatic stay by a section 105 injunction

requires the initiation of an adversary proceeding); In re The

Fairchild Corp., Bankr. No. 09-10899, 2009 WL 4546581, at *7

(Bankr. D. Del. Dec. 1, 2009) (stating that entry of injunctive

relief requires initiation of an adversary proceeding). Where an

adversary proceeding has already been commenced, however,

injunctive relief in that proceeding can be sought by motion.

See Fed. R. Bankr. P. 7065 (incorporating Fed. R. Civ. P. 65,

which allows motions for preliminary injunctions in civil

actions).

In this case, however, the Debtors did not even file a

motion for an injunction; they simply included a request for a

stay of the action in their briefs in support of their motion to

dismiss. (D.I. 5 at ¶¶ 34-37; D.I. 18 at ¶¶ 25-29.) The request

to extend the stay to Mr. Malhotra was contained in a footnote in

their briefs. (D.I. 5 at n.5; D.I. 18 at n.7.) This is

22

procedurally improper. See, e.g., Fairchild Corp., 2009 WL

4546581, at *7 (denying debtor’s request for extension of the

stay contained in its response to motion for determination of

extent of the automatic stay as improper because such relief can

only be obtained by filing an adversary proceeding). Therefore,

the Court will not consider that request.

V. CONCLUSION

For the foregoing reasons, the Court will deny the

Defendants’ Motion to Dismiss.

An appropriate Order is attached.

Dated: October 7, 2020 BY THE COURT:

Mary F. Walrath

United States Bankruptcy Judge

23