Quarrato v. Madison Global LLC

Background

The plaintiffs sued their former employers under the Fair Labor Standards Act, a federal wage law, and Articles 6 and 19 of the New York Labor Law. The defendants include Madison Global LLC, referred to as the Corporate Defendant, and Thomas Makkos and Marcia Maksymowcz, referred to as the Individual Defendants.

On September 28, 2023, Madison Global filed for protection under Chapter 7 of the Bankruptcy Code in the Southern District of New York Bankruptcy Court. That filing automatically paused this action as to Madison Global under 11 U.S.C. § 362. The Corporate Defendant later stated that it had moved to convert its bankruptcy case to Chapter 11.

The defendants asked the court to extend the bankruptcy stay to the Individual Defendants and to pause the entire action. They argued, among other things, that Madison Global’s missing operating agreement might contain an indemnification obligation benefiting the Individual Defendants and that the relationship between the defendants made Madison Global the real party defendant. The plaintiffs opposed extending the stay and asked that the case against the Individual Defendants proceed.

Court’s Analysis

The court explained that the automatic bankruptcy stay generally applies to the debtor, the debtor’s property, or property of the bankruptcy estate. It normally does not pause claims against non-debtors, although it can apply when a claim against a non-debtor would have an immediate adverse economic effect on the bankruptcy estate. Examples include claims establishing an obligation guaranteed by the debtor or cases in which the debtor is effectively the real party defendant.

The court also explained that the stay generally cannot be extended to non-debtors when they are jointly liable or when their liability is based on their own breach of duty. The possibility that a debtor might have to indemnify a third party, by itself, is not enough to extend the stay. The court noted that indemnification may be unavailable or unenforceable for employers held liable under the Fair Labor Standards Act and New York Labor Law.

The court found that the defendants had not shown that refusing to extend the stay to the Individual Defendants would cause an immediate adverse economic consequence to Madison Global’s bankruptcy estate. The court further noted that an ownership interest in a debtor does not automatically make the debtor the real party defendant. It also stated that discovery from a debtor as a third-party witness is not automatically barred when the discovery concerns claims against non-debtor parties.

Rulings

The court denied the defendants’ motion to extend the automatic bankruptcy stay to the Individual Defendants and to stay the entirety of the action. The court clarified that the action is stayed as to Madison Global LLC alone.

The court also denied as moot the plaintiffs’ motion to file a sur-reply to the defendants’ reply letter supporting the motion to stay. The Clerk of Court was directed to close the motions at Docket Nos. 23 and 29.