Case 08-10928-JKO Doc 3196 Filed 09/21/09 Page 1 of 8 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF FLORIDA FORT LAUDERDALE DIVISION www.flsb.uscourts.gov In re: ) Chapter 11 Cases ) Case No. 08-10928-JKO TOUSA, INC., et al., ) Jointly Administered ) Debtors. ) ) DEBTORS OMNIBUS OBJECTION TO CERTAIN DRYWALL CLAIMANTS MOTIONS FOR RELIEF FROM THE AUTOMATIC STAY TOUSA, Inc. and its affiliated debtors and debtors in possession (collectively, the Debtors ) in the above-captioned, jointly administered chapter 11 cases hereby submit this omnibus objection to two motions (together, the Motions ) 1 seeking relief from the automatic stay provided in section 362 of the title 11 of the United States Code (the Bankruptcy Code ) to pursue two pending actions in the Twentieth Judicial Circuit for Lee County, Florida, Case Numbers 09-CA-001158 and 09-CA-003031. Each of the Motions asserts claims against debtors TOUSA Homes Florida, L.P. and TOUSA Homes, L.P. arising from their alleged use of defective building materials. In support of this objection, the Debtors respectfully state as follows: Factual Background 1. The Motions seek relief from the automatic stay to allow them to proceed with certain state court litigation seeking damages that the Movants allegedly suffered from the 1 Specifically the Motions are as follows: (a) Motion for Relief from Stay [D.E. #3044] filed by Joyce Dowdy Revocable Trust; and (b) Motion for Relief from Stay [D.E. #3103] filed by Jeremy and Carla Banks, Shannon Cambric, Walter J. and Marie Grasmeier, Helene and Christina Kranz, Anthony J. Patti, Jay and Sandie Seavers, Mohammad and Ruth Serajuddowla, Santos and Martha Sierra, Thomas E. Simonian, Barbara R. Petty and Qi Ming Su. The non-debtor parties to the Motions are referred to collectively as the Movants. 1
Case 08-10928-JKO Doc 3196 Filed 09/21/09 Page 2 of 8 Debtors alleged use of defective building material, including the use of drywall originating from China ( Chinese Drywall ), solely to the extent of any available and applicable insurance coverage. Further, the Motions seek relief from the stay to afford the Movants the ability to negotiate any possible settlements of such claims with the applicable insurance carrier. 2. In addition to the pending litigation to which the Motions relate, numerous demands under Florida statutory law have been brought against the Debtors arising out of the Debtors alleged use of Chinese Drywall in certain projects and developments. Moreover, a motion has been filed in these chapter 11 cases seeking entry of an order allowing the late filing of a class proof of claim against TOUSA Homes, Inc., on behalf of a group of individuals who also allegedly suffered damages from the Debtors alleged use of Chinese Drywall. 2 3. The Debtors continue to evaluate the nature, scope and validity of all potential claims arising from Chinese Drywall in these chapter 11 cases including whether and to what extent such claims are covered by the Debtors insurance and anticipate addressing such claims at a later time during the chapter 11 cases or in the context of a chapter 11 plan. In order to permit the Debtors to develop a comprehensive approach to these and similar claims, including any claims that the Debtors may have against their insurance carriers, the installers and manufacturers of Chinese Drywall, the Debtors believe that litigation in connection with, or related to, Chinese Drywall should be addressed globally in these chapter 11 cases and not in a 2 The Motion of Ana Maria Plaza for Entry f an Order Allowing Late Filed Class Proof of Claim was resolved through an agreed order [D.E. #2919] that allowed the movant to file a proof of claim, but expressly preserved the Debtors, the statutory committee of unsecured creditors (the Committee ) and other interested parties rights to object to the claim on any ground whatsoever, except timeliness. Moreover, the agreed order expressly provided that nothing contained therein should be construed as approval of class certification under Federal Rule of Civil Procedures 23 or Federal Rule of Bankruptcy Procedure 7023 or limit the right of any party in interest to object to the claim on such grounds. 2
Case 08-10928-JKO Doc 3196 Filed 09/21/09 Page 3 of 8 piecemeal fashion. Specifically, the Debtors believe that claims arising from or related to Chinese Drywall are better dealt with through discussions with the Debtors key creditor groups in the context of a chapter 11 plan. 4. Among other things, the Debtors are aware of the recent plan of reorganization confirmed in the chapter 11 cases of WCI Communities, Inc. and certain of its affiliates (collectively, WCI ) in which WCI successfully managed its liability with respect to Chinese Drywall by implementing a global strategy that will address Chinese Drywall claims through the use of a trust, a channeling injunction and claims liquidation procedures. Additionally, the plan of reorganization permitted WCI to efficiently address its claims against its insurance carriers as well as the installers and manufacturers of Chinese Drywall. While the Debtors continue to analyze their own Chinese Drywall cases and their prospects for a chapter 11 plan, the WCI approach offers one possible alternative to piecemeal litigation of Chinese Drywall claims. 3 5. The Debtors intend to work with their major creditor constituencies in an effort to establish a global strategy with respect to claims arising from or relating to Chinese Drywall. This global strategy will prevent a race to insurance proceeds by similarly situated claimants that will have the negative effect of depleting the amount of insurance available to satisfy other claims or, otherwise, impact the Debtors ability, as a practical matter, to craft a more comprehensive resolution of the Chinese Drywall-related claims. To that end, the Debtors intend to involve the alleged holders of Chinese Drywall-related claims and the Debtors insurance carriers in any such discussions. Based on the Debtors desire to develop a global resolution of the Movants and similar claims, the Debtors have filed this objection. 3 See WCI Communities, Inc., Case No. 08-11643 (Bankr. D. Del. Aug. 26 2009) (order affirming plan of reorganization). 3
Case 08-10928-JKO Doc 3196 Filed 09/21/09 Page 4 of 8 Response A. The Movants Have Failed to Established Sufficient Cause to Justify Relief from the Automatic Stay. 6. The filing of a bankruptcy petition operates to stay litigation involving prepetition claims against a debtor. 11 U.S.C. 362(a). An interested party may obtain relief from the automatic stay upon application to the court; specifically, section 362(d)(1) of the Bankruptcy Code allows a court to grant relief from stay for cause. 11 U.S.C. 362(d). It is well established in this jurisdiction and others that the moving party has the burden of establishing a prima facie case that it is entitled to relief from the automatic stay. See, e.g., In re Cummings, 221 B.R. 814, 819 (Bankr. N.D. Ala. 1998) ( The party requesting relief from the automatic stay must first, of course, present at least a prima facie showing of cause. ); In re Compass Van and Storage Corp., 61 B.R. 230, 234 (Bankr. E.D.N.Y. 1986) (same). 7. Cause is not defined in the Bankruptcy Code and, instead, must be determined on a case by case basis by the court. In re Paxson Elec. Co., 242 B.R. 67 (Bankr. M.D. Fla. 1999) ( The Bankruptcy Code does not define the term cause, therefore, courts must determine when relief from stay is appropriate on a case-by-case basis. ). Generally, in making a determination of whether cause has been shown, the court must balance the potential hardship that will be incurred by the party seeking relief if the automatic stay is not lifted, against the potential prejudice to the debtor and the debtor s estate. In re Paxson, 242 B.R. at 69; see also In re Robinson, 169 B.R. 356 (E.D. Va. 1994) (internal citation omitted). What constitutes cause is based on the totality of the circumstances in the particular case. In re Trident Assoc., 52 F. 3d 127, 131 (6th Cir. 1995) (holding that whether cause exists for lifting automatic stay must be determined on case-by-case basis, under totality of circumstances). 4
Case 08-10928-JKO Doc 3196 Filed 09/21/09 Page 5 of 8 8. In addition to these general considerations, with respect to determining whether modifying or terminating the stay is appropriate to permit pending prepetition litigation to proceed, courts in the Eleventh Circuit have adopted the following three-prong test for determining whether the stay should be lifted for cause : (a) whether any great prejudice to either the bankruptcy estate or the debtor will result from prosecution of the lawsuit; (b) whether the hardship to the non-debtor party by continuation of the automatic stay considerably outweighs the hardship to the debtor; and (c) whether the creditor has a probability of success on the merits of his case. See, e.g., In re Robertson, 244 B.R. 880 (Bankr. N.D. Ga. 2000); In re R.J. Groover Const., L.L.C., 2008 WL 6781831 (Bankr. S.D. Ga. 2008). Moreover, certain courts have provided that when analyzing whether cause to lift the automatic stay exists in the case at issue a court must be cognizant of the entire bankruptcy case and its progress, and adjudicate stay relief issues from this perspective. In re Santa Clara County Fair Ass n, 180 B.R. 564 (9th Cir. BAP 1995). Here, the Movants have failed to carry their burden with respect to each of these factors and considerations. (i) Granting the Motions Will Prejudice the Debtors Ability to Develop a Global Strategy With Respect to the Movants and Other Similar Claims. 9. The Debtors estates will be prejudiced if the Motions are granted because the claims to which the Motions relate are just a few of many claims and/or demands that have been brought or are likely to be brought against the Debtors with respect to the alleged use of Chinese Drywall. Therefore, allowing the Movants to proceed with their state court litigation even if the recoveries, if any, are limited solely to the extent of any available and applicable insurance coverage has the potential to open the door to other motions requesting relief in connection with similar claims and creating a race to insurance proceeds by similarly situated claimants 5
Case 08-10928-JKO Doc 3196 Filed 09/21/09 Page 6 of 8 that will prevent the Debtors from addressing all such claims in a fair and global fashion and will also limit the Debtors ability to globally address potential claims against their insurance carriers as well as Chinese Drywall manufacturers and installers. Such a piecemeal approach is likely to be inefficient and will likely affect the Debtors, their estates and the recoveries that all such similarly situated claimants will obtain in these chapter 11 cases. Indeed, the Debtors remain committed to considering all potential alternatives with respect to their potential liability on account of claims arising from Chinese Drywall liability, including an approach similar to that taken by WCI. 10. Crafting a reasoned, comprehensive approach to Chinese Drywall claim will be difficult if not impossible if the Court agrees to an ad hoc modification or termination of the stay with respect to Chinese Drywall claims. (ii) Denying the Movants Request to Modify the Stay Will Not Cause Undue Hardship. 11. The Debtors believe that the Movants will suffer no hardship if the Court does not modify the stay at this time. First, the actions underlying both of the Motions were very recently filed and, therefore, the imposition of the automatic stay will not threaten to undo significant amounts of effort or resources previously expended by the Movants. Similarly, because of the early nature of the litigation, it is premature to make any determination as to the likelihood of success on the merits of the Movants claims against the Debtors; thus, the Debtors submit that the Movants have failed to carry their burden in demonstrating a substantial likelihood of prevailing on the merits of their claims. Finally, as discussed above, the Debtors expect to address the treatment of all potential Chinese Drywall claims in a more comprehensive approach, and the Debtors do not believe that requiring Movants to wait until that process will unduly burden or prejudice their claims against the Debtors. 6
Case 08-10928-JKO Doc 3196 Filed 09/21/09 Page 7 of 8 Conclusion 12. Permitting the Movants litigation to proceed on a course outside of the Debtors chapter 11 cases is likely to complicate the Debtors ability to address these and similar claims in the context of a plan of reorganization. Conversely, the Debtors believe that the Movants will not suffer undue prejudice if the Motions are not granted at this time and, instead, the Movants are required as are all other of the Debtors holders of prepetition claims to participate in the bankruptcy process to obtain a recovery on account of their claim in these chapter 11 cases. 7
Case 08-10928-JKO Doc 3196 Filed 09/21/09 Page 8 of 8 WHEREFORE, for the foregoing reasons, the Debtors request that the Court deny the Motions in their entirety. I HEREBY CERTIFY that I am admitted to the Bar of the United States District Court for the Southern District of Florida, and I am in compliance with the additional qualifications to practice in this Court as set forth in Local Rule 2090-1. Dated: September 21, 2009 Respectfully submitted, BERGER SINGERMAN, P.A. /s/ Paul Steven Singerman Paul Steven Singerman (Florida Bar No. 378860) 200 Biscayne Boulevard, Suite 1000 Miami, FL 33131 Telephone: (305) 755-9500 Facsimile: (305) 714-4340 -and- KIRKLAND & ELLIS LLP Richard M. Cieri (New York Bar No. 420712) M. Natasha Labovitz (New York Bar No. 2813251) Joshua A. Sussberg (New York Bar. No. 4316453) 601 Lexington Avenue New York, NY 10022 Telephone: (212) 446-4800 Facsimile: (212) 446-4900 Co-Counsel to the Debtors 8