Case Summary:
The bankruptcy court granted a general contractor's motion for an order confirming that it could pursue its claims against the individual debtors' limited liability company.  The general contractor, which had subcontracted with the debtors' LLC for work on a construction project, sued the LLC and and the debtors in state court, alleging theft by contractor and civil theft.  After the individual debtors filed bankruptcy, the general contractor asked the bankruptcy court to confirm that the automatic stay did not apply to the debtors' LLC or to grant relief from the stay if it did.  The bankruptcy court noted that while the stay is broad and automatic, it generally does not apply to nondebtors.  The Seventh Circuit in In re Fernstrom Storage & Van Co., 938 F.2d 731 (7th Cir. 1991), stated that the § 362(a)(1) stay may be applied to a nondebtor when “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.”  See also A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir. 1986) (exception first applied).  The bankruptcy court concluded that such stay of litigation against a nondebtor does not apply automatically and must instead be ordered by the court.  The bankruptcy court determined that the matter did not satisfy the “identity of interest” test under A.H. Robins because any judgment against the debtors’ LLC under Wisconsin's theft-by-contractor statute, Wis. Stat. § 779.02(5), would not necessarily impact their bankruptcy case.  The Wisconsin statute indicated that members of an LLC are liable only if they are "responsible for the misappropriation."  Thus, even assuming the general contractor could prove that the LLC committed theft by contractor, it would also need to prove, at a minimum, that the debtors were responsible for the misappropriation before the debtors would be liable.  Because the general contractor's claims against the LLC could be separated from its claims against the debtors, and the debtors had not demonstrated that success on the claims against the LLC would have an identifiable impact on the debtors or the bankruptcy estate, the court declined to extend the § 362(a)(1) stay to enjoin the general contractor from proceeding against the debtors' LLC in state court.

Statute References: 
11 U.S.C. § 362(a)(1)
Wis. Stat. § 779.02(5)

Key Terms: 
Automatic Stay
Non-Debtor
Enjoin
Theft by Contractor
Limited Liability Company