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Saxon Industries, Inc. v. Schnell (In re Saxon Industries, Inc.)
Citations: 33 B.R. 54; 1983 Bankr. LEXIS 5430Docket: Bankruptcy No. 82 B 10697 (EJR); Adv. No. 83-5244A
Court: District Court, S.D. New York; September 13, 1983; Federal District Court
On April 15, 1982, Saxon Industries, Inc. (Saxon), a Delaware corporation, filed a Chapter 11 reorganization petition and continues to operate as a debtor in possession. Seymour Schnell, a shareholder, filed a derivative action in 1980 (Schnell v. Schnall) against the Icahn Group, which acquired approximately 9.9% of Saxon's stock. The Icahn Group's Schedule 13D claimed the shares were bought for investment purposes, but Schnell alleges this was misleading, arguing they aimed to force a sale of Saxon for profit and threatened management. The district court denied a motion to dismiss Schnell's derivative 10(b) claims on March 31, 1981. The Icahn Group responded and filed third-party claims against Saxon's directors regarding the stock repurchase, which is also being challenged in a separate state court action (the Masri Action) for fiduciary breaches. After Saxon's bankruptcy filing, the Masri plaintiffs sought to lift the automatic stay, leading to a limited waiver allowing their case to proceed. On March 4, 1983, Saxon initiated an adversary proceeding against Schnell to stay the Schnell Action, while Schnell moved to terminate the stay. Saxon bears the burden of proof to justify continuing the stay under 11 U.S.C. 362(g)(2), but has not met this burden. Saxon argues it can decide the maintenance of derivative suits based on precedent, but the court finds this interpretation of Meyer v. Fleming too broad. The court determined that derivative litigation does not automatically end when a corporation's reorganization petition is approved under section 77 of the Bankruptcy Act of 1898. The case was remanded to the district court to assess whether continuing the derivative suit would conflict with the debtor's reorganization plan. Saxon's claim that the Schnell Action would lead to inefficient duplication and disrupt the reorganization process was found to be minimal, as Schnell had completed discovery, and any additional discovery could proceed concurrently with another case. The Schnell Action is pursued on a contingency fee basis, requiring no involvement from the Saxon estate. Saxon contended that a judgment in the Schnell Action could have res judicata effects on the Masri Action due to overlapping claims. However, the potential for res judicata was deemed speculative, as the district court could choose not to consider the state common law claims. Saxon failed to demonstrate its claims, leading to the granting of Schnell’s motion to terminate any applicable stay. The court did not address the defendant's other requests for relief, including an evidentiary hearing regarding Saxon's motivations or transferring the matter to the United States District Court, as the resolution of the motion made them unnecessary.