Automatic stay extended to nondebtor lawyer

Where the nondebtor’s finances were intertwined with the those of the debtors, but she could not file for bankruptcy protection because it could put her law license, and the only source of income for the debtor, at risk, there was good cause to extend the automatic stay to her.

Background

Cornus Montessori LLC owned and operated a Montessori school in Chantilly beginning in January 2017 that ceased operations in March 2020 due to the COVID-19 global pandemic.

Cornus is owned and operated by its sole owner, Lloyd Telford. Telford is married to Venous Memari, an attorney licensed to practice under the laws of Bermuda. While Memari does not directly own equity in Cornus, or actively participate in the business, the landlord required Memari and Telford to personally guarantee the lease.

Despite two years of seemingly successful operations, Telford was unable to draw a salary from Cornus. As a result, the family primarily relied on Memari’s income and family savings to survive. Memari’s income has also been used to fund business shortfalls as well as the initial retainers of counsel for both Cornus and Telford. At the hearing on this matter, Memari also testified that her income would be used to fund the Chapter 11 cases.

In December 2020, the landlord filed an unlawful detainer action against Cornus, seeking to terminate Cornus’ possession of the property and to recover rent arrearages in the amount of $146,180.98. The landlord sought recovery against both Cornus, and Telford and Memari as guarantors. A trial was scheduled in the unlawful detainer for Feb. 12, 2021.

On Feb. 11, 2021, the debtors each filed petitions under Chapter 11 of title 11 of the United States Code. Memari did not file with Telford because doing so would put her at risk of losing her law license in Bermuda, and therefore, the family’s and Cornus’ only current source of income. On Feb. 19, 2021, the debtors filed a joint motion to extend the automatic stay to protect Memari in relation to her guarantee obligations under the lease. The request to extend the automatic stay to a nondebtor is considered under the standards applicable to issuing a preliminary injunction.

Likelihood of success

The record before the court establishes that the unlawful detainer against Memari arises from Cornus’ debt to the landlord, not direct personal obligations of Memari to the landlord. Although the school was shuttered by COVID-19, easing governmental restrictions and the introduction of various vaccine programs may provide the opportunity for this business to effectively propose a plan. With a brief “respite from protracted litigation” Telford and Memari may be able to propose a workable reorganization. The finances of Cornus and Telford were inextricably intertwined with those of Memari long before these cases were filed. Accordingly, the court finds that the debtors are likely to succeed on the merits by proposing a confirmable Chapter 11 plan.

Irreparable harm

Proposing a confirmable plan would be impossible without the active participation of Memari. Memari testified, and the record has made clear, she is the source of funding for these cases. If Memari were forced to file her own bankruptcy case, she would risk losing her law license, and therefore, the income that would be used to fund the debtors’ reorganizations.

While funding these cases alone is not a basis for extending the stay, when combined with the unique prepetition and continuing economic interdependence between Memari, her husband Telford and Cornus, the court is satisfied that irreparable harm would result to the debtors’ ability to reorganize if collection efforts continue against Memari.

Remaining factors

The landlord will suffer little or no harm as a result of a temporary stay of collection efforts against Memari. The stay imposed by this court’s order is not permanent. To the extent the equities change, the landlord is free to seek relief from this court. Finally the court finds that there is an identity of interests between Memari and the debtors constituting unusual circumstances sufficient to extend the automatic stay to Memari in this case. Therefore, under the circumstances, the public interest weighs in favor of extending the stay.

Joint motion to extend automatic stay for nondebtor granted.

In re: Cornus Montessori LLC, Nos. 21-10213, 21-10216, April 16, 2021. EDVA Bankr. at Alexandria (Kindred). VLW No. 021-4-004. 7 pp.