Viahart, LLC v. Creative Kids Online, LLC

Background

Viahart, LLC brought this action in 2020, alleging that the defendants infringed its intellectual-property rights. A jury trial was scheduled for July 8, 2024. On July 2, 2024, defense counsel notified the court that CK Online, LLC, one of the defendants, had filed a Chapter 7 bankruptcy petition. The bankruptcy filing automatically stayed the case as to CK Online under 11 U.S.C. § 362(a)(1).

Defense counsel also argued that the case should be stayed as to the other defendants, whom the court called the “Remaining Defendants.”

Reasoning

The court stated that the automatic bankruptcy stay generally applies only to the debtor and does not automatically protect non-debtor co-defendants. However, the stay may be extended to non-debtors when continuing the case would have an immediate adverse economic effect on the debtor’s bankruptcy estate or would seriously threaten the debtor’s reorganization efforts.

The court found that this exception applied. Viahart asserted all three causes of action against all defendants collectively, based on the same alleged conduct. At Viahart’s request, the court had also ruled that the jury could attribute one defendant’s actions to the other defendants and that all defendants would be jointly and severally liable for any liability and damages. Joint and several liability would allow Viahart to seek the full amount of any award from any liable defendant, subject to applicable law. The court reasoned that a favorable trial result against the Remaining Defendants could therefore impose liability on CK Online as well, creating an immediate economic effect on its bankruptcy estate.

The court also noted that the claims against CK Online and the Remaining Defendants were closely intertwined. Based on the pretrial conferences, the court understood that Viahart had not received discovery information allowing it to distinguish between the conduct of CK Online and the Remaining Defendants.

Ruling and Effect

Judge Gregory H. Woods granted the Remaining Defendants’ motion and stayed the action as to them. The case was stayed, and all scheduled dates and deadlines—including the July 8, 2024 jury trial—were adjourned without a new date. The stay will remain in effect until the U.S. Bankruptcy Court for the Southern District of New York lifts the stay as to CK Online or the Remaining Defendants, or until the district court otherwise orders. Viahart must file a status-update letter no later than ten days after the bankruptcy court lifts the stay or by January 3, 2025, whichever comes first. The clerk was directed to record the stay on the docket.