Bankruptcy Judge Schmetterer's Opinion (23)

Bankruptcy Caption: In re Kmart Corporation, et al.

Bankruptcy No. 02 B 02474

Adversary Caption: El Puerto De Liverpool S.A. de C.V. v. Servi Mundo Llantero, et al.

Adversary No. 02 A 01584

Date of Issuance: November 15, 2002

Judge: Jack B. Schmetterer

Appearance of Counsel:

Attorney for Plaintiff: Partrick S. Coffey; Mark S. Melickian (Gardner, Carton & Douglas)

Attorney for Defendants: Brian L. Shaw (Shaw Gussis Fishman Glantz & Wolfson)

Attorneys for Debtors: John William Butler, Jr. (Skadden Arps Slate Meagher & Flom)

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

IN RE ) ) KMART CORPORATION, et al. ) Bankruptcy No. 02 B 02474

Debtors. ) (Jointly Administered) ______________________________________ ) EL PUERTO DE LIVERPOOL S.A. de C.V. )

Plaintiff, ) )

v. ) Adversary No. 02 A 01584

) SERVI MUNDO LLANTERO, U.S.A., ) INC., SERVI MUNDO LLANTERO )

S.A. de C.V., and ENRIQUE KANAREK ) Defendant. )

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Followingtrialon Plaintiff's Motion forPreliminaryInjunction, and hearingonthe submissions filed

bythe Debtors andofficialbankruptcycommittees,the Courtnowmakesand entersthe followingFindings

of Fact and Conclusions of Law.

INTRODUCTION

Plaintiff, ElPuertoLiverpoolS.A. de C.V.("Liverpool") is a Mexicancorporationwhichhadbeen

a joint venturer of Chapter 11 bankruptcy Debtor Kmart, a Michigan company (“Kmart”), in formation

of a Mexican entity Kmart Mexico, S.A. de C.V. ("Kmart Mexico"). Kmart and Liverpool each owned

aninterestin Kmart Mexico, which was incorporated in 1993. After execution of the original joint venture

agreement, Kmart assigned its interest to one of its subsidiaries VTA, Inc., a Delaware corporation

("VTA"). Kmart and VTA are now bankruptcy debtors in Chapter 11.

Liverpoolfiledthe instant adversary, pursuant to Sections 362 and 105 ofthe Code, to staya civil lawsuit in Hildalgo County, Texas which was initially filed against Kmart, Liverpool, Kmart Mexico, and Jose Ortega, a Kmart employee. That suit was initiated by Servi Mundo Llantero USA, Inc. ("Servi Mundo USA"), on behalf of Servi Mundo Llantero S.A. de C.V. ("Servi Mundo Mexico"), a Mexican corporationand its owner Enrique Kanarek ("Defendants"). Although, DefendantsseveredKmartand its relatedentitiesinbankruptcyfromthe Texas suit, Liverpoolassertsthatitsinterestsare sointertwinedwith thoseofKmartthatsuitagainstitconstitutes a suit against Kmarteven. It contended that this Court should enjoin the Texas proceeding against it because the outcome could threaten property of the estate and concomitantlyDebtor's successful reorganization. Kmart did not join orintervene inthe instant Adversary proceeding, but appeared here through its pleading filed and its counsel’s argument in support of Liverpool'smotionfora preliminaryinjunctionto prevent the Texas case from going to trial on November 12, 2002. It supported the Liverpool contention that results in the Texas case could harm the Debtor by being introduced in actions seeking joint venture liabilities and could thereby violate the automatic bankruptcy stay and impair Kmart’s property interests. Kmart's support for injunctive relief was joined byfilings by and argumentsonbehalfofthe bankruptcyOfficialCommittee ofUnsecured Creditors, Official Committee of Equity Security Holders, and Official Financial Institutions' Committee.

In recognition of the impending Texas trial, the motion for preliminary injunction was set for trial on November 5, 6, and 8. At the conclusion of the trial on November 8th, a ruling was announced from the benchdenyingthe Plaintiff'smotionforinjunctive relief and forentryofaninjunctionto protectKmart’s rights to bankruptcy stay protection under 11 U.S.C. § 362. No orders were then entered, pending completion of these Findings and Conclusions.

The following Findings of Fact and Conclusions of Law support the ruling and determination that Liverpool is not entitled to protection under Sections 105 and 362(a) of the Bankruptcy Code, and an order denying the requested injunction will now be entered. However, results in the Texas trial could be used against Kmart with the indirect effect of violating the bankruptcy stay under 11 U.S.C. § 362 and affectingDebtor’spropertyinterests. Kmart can be protected against such consequence and stay violation byaninjunctionpreventinganypartiestothe Texastrialfromusing anyfindings or judgment reachedinthat case against Debtor. To avoid that result a permanent injunction is being entered under authority of 11

U.S.C. §§ 105 and 362 to bar either Texas litigant from ever using findings or judgment entered in the Texas case against the Kmart bankruptcy debtors.

Liverpoolarguedherethatinjunctionto delay trial against it was necessary to protectKmartfrom consequencesthat might indirectly deprive Debtor ofitspropertyinterestsandstayprotection. However, the injunctionagainstallTexaslitigantspreventsthatconsequencewhile allowingthe Texastrialtoproceed.

Plaintiff has failed to demonstrate that it and Debtor are so necessarily connected in their interests thatonlya delay of trial against Liverpool can protect the Debtor’s interest, but injunctionreliefto protect the automatic stay rights of Kmart and other debtors will supply such protection. There is no need or justification to delay the Texas trial.

FINDINGS OF FACT

The Parties

1. Plaintiff, El Puerto Liverpool S.A. de C.V. ("Liverpool") is a Mexican corporation.
2. Defendant, Servi Mundo Llantero U.S.A., Inc. ("SML USA"), is a Texas corporation.
3. Defendant,ServiMundoLlantero,S.A.deC.V.("SMLMEX"),isaMexicancorporation.

1. Defendant, Enrique Kanarek ("Kanarek," who, collectively with SML USA and SML MEXmaysometimeshereinafterbe referredto as the"Defendants")isanindividualwho previouslyresided in Hidalgo County, Texas and now resides in Florida.
   1. Kmart Corporation ("Kmart") is a Michigan corporation.
   2. VTA, Inc. ("VTA") is a Delaware corporation, and a wholly owned subsidiary of Kmart.
1. Jorge Ortega ("Ortega") isanindividualwhoisanemployee of Kmart and who resides in California.
   1. Kmart, as well as many of its subsidiaries and related corporations including VTA (collectively the "Debtors"), are currently debtors-in-possession in Chapter 11 bankruptcy cases pending in the United States Bankruptcy Court for the Northern District of Illinois under jointly administered case no. 02 B 02474. The Debtors filed their voluntary petitions under Chapter 11 of title 11 U.S.C. (the "Bankruptcy Code") on January 22, 2002 (the "Petition Date"). The automatic stay protecting Debtors under 11 U.S.C. § 362 has not been modified to permit actions against Debtors in the Texas litigation discussed below.
      1. Liverpool is not a subsidiary of, affiliate of, or otherwise related to, Kmart.
      2. Liverpool is not a debtor under any Chapter of the Bankruptcy Code.

1. Liverpoolisaseparateand distinct legal entity fromKmartwithnocommonownershipor management.
2. Liverpool, Kmart, VTA and Ortega wereco-defendantsinalawsuit pending in the 92nd District Court (the "Texas District Court"), Hidalgo County, Texas as case no. C-3263-97-A ("Case 3263-A"), which suit was commenced in 1997 ("the Texas Suit").

13. Defendants herein are the plaintiffs in Case 3263-A.

1. On June 12, 2002, on motion of Servi Mundo the Texas District Court entered an order severing Defendants' claims against Kmart, VTA and Ortega into a separate case bearing the no. C-326397-A(1)("Case3263-A(1)"),whichcasehasbeenstayedduetotheDebtors'bankruptcycases. As such, Ortega, Kmart, VTA (or any Debtor) are no longer parties to Case 3263-A and any claims asserted by or against them cannot be adjudicated within Case 3263-A. The Texas District Court Judge has refused to stay Defendants' claims against Liverpool because of Kmart's and VTA's bankruptcy filings.
2. Defendants' have filed claims against Kmart and VTA (“Debtors”) in their respective bankruptcycasesonaccount ofthe claims thatwereasserted againstKmartand VTAinCase 3263-A(1).
3. The claims asserted against Kmart, VTA and Ortega in Case 3263-A(1) included: (a) fraudulent inducement, (b) civil conspiracy, (c) common law fraud, (d) constructive fraud, (e) promissory estoppel, and (f) tortious interference. More details are set forth below.

17. TheclaimsassertedagainstLiverpoolinCase3263-Aincluded:(a)fraudulentinducement,

(b) negligent misrepresentations, (c) negligence/malice, (d) civil conspiracy, (e) common law fraud, (f) constructive fraud, and (g) promissory estoppel. More details are set forth below.

1. InresponsetoDefendants'complaintintheTexasDistrictCourt,Liverpoolhasarguedthat because Kmart and it are independent corporations, liability cannot be imputed between them.
2. For purposes of this action, details oftheallegedtransactionsbetweenthe parties are not recitedbecausethemeritsofpendinglitigationinTexasand Mexicoarenottobedecidedhere. However, recital of the legal basis claimed for recovery in Texas is pertinent because it demonstrates that such litigation could result in findings and judgment that might harm Kmart Debtors indirectly, and therefore

allowing the Texas case toproceedwithout some protectionto the Debtors -- even at their absence from

trial because they were severed -- could indirectly harmDebtors and thereforecould indirectlyviolatethe

automatic stay.

20. Servi Mundo originally brought claims for breach of contract, fraud, negligent

misrepresentation, negligence,grossnegligence,civilconspiracy, promissoryestoppel, tortious interference,

alter ego, joint venture and/or single business enterprise.

21. Kmart, VTA and Ortega filed answers in the Texas lawsuit asserting general and special

denials,affirmativedefensesandacross-claimforcontributionandindemnityagainstLiverpool. Liverpool

filedananswerassertinggeneraland specialdenials,affirmative defensesandacross-claimforcontribution

and indemnity against Kmart, VTA and Ortega. (V. Compl. ¶¶ 26-27.)

22. Following severance of Debtors, the Texas District Court Judge refused to stay the

proceedings and trial against co-defendant Liverpool. Liverpool remains the sole defendant in trial set to

begin on November 12, 2002.

23. OnAugust2,2002,ServiMundofileditsEighthAmendedComplaintintheTexaslawsuit.

While this pleading excluded any claim for relief against Kmart, VTA and Ortega, many allegations and

legal theories advanced in earlier pleadings against those parties remain unchanged.

24. For example,ServiMundo'sEighthAmendedComplaintalleges, in summary of pertinent

pleadings, that:

Kmart and Liverpool entered into a joint venture and that the joint venture created Kmart MexicoandComercialKM. That employees, agents and/or representatives of the alleged joint venture madecertainmaterialrepresentations to ServiMundo to induce it to commit substantial financial resources to operate automotive service centers and, that they would provide Servi Mundo with the license to use the Kmart name. In particular, Servi Mundo complained that Ortega, a Kmart officer, made representations concerning the projected growth of the Mexican venture, which Servi Mundo relied on to its detriment.

Aspecialrelationship wascreatedbyLiverpoolandKmartMexico'spossessionofspecial knowledge regarding the Mexican venture that was unknown to Servi Mundo, and the concealment and or failure to disclose this information (by the agents, employees, or representatives of the joint venture) constitutes negligence.

Liverpool conspired with Kmart Corporation and other agents, representatives and employeesofthejointventureto perpetrate afraudagainstServiMundoregardingKmart Mexico's planned operations, Liverpool along with Kmart corporation and other agents, representatives and employees of the joint venture furthered their conspiracy by one or more acts, including with employees like Ortega.

KmartMexico,Liverpooland thejointventure(Kmartknowinglyparticipatedinfraudulent conduct by manipulating their employees to deceive Servi Mundo.

Kmart Mexico, Liverpool and other agents, representatives and employees of [sic] joint venture failed to disclose material facts that were within their exclusive knowledge.

Whenever it is alleged that Liverpool did any act or thing, it is meant that the authorized officers, agents, servants, employees, attorneys or representatives of Liverpool and the joint venture between Liverpool and Kmart corporation did such act or thing and the conduct is imputed to Liverpool. Further and in the alternative, Servi Mundo asserts that the acts and omissions were done with the full authorization of Liverpool or were done in the normal course and scope of employment or responsibility of Liverpool and the joint venture's officers, agents, servants, employees, attorneys, representatives. Moreover, to the extent the acts were not initially authorized, the acts have been ratified and Liverpool is liable under theories of joint and several liability.

Liverpooland Kmartagreed to work in partnership with or as a joint venturewithKmart corporation to carry on their retailmerchandisingbusinessoperationsinMexico. Each of the joint venturers profited because of this joint venture arrangement. Servi Mundo asserts that each participant of the joint venture is liable for the torts committed by the agents, representatives and employees of the joint venture companies. Liverpool is jointly and severally liable because of this joint venture or partnership arrangement.

25. On or about October 23, 2002, Servi Mundo filed pleadings in the Texas lawsuit in

response to a motion for summary judgment filed by Liverpool, contending that:

(a)

Plaintiffs allege the Defendant Liverpool agreed to work in partnership, joint venture, and single business entity with K-Mart Corp., K-Mart Mexico, and Comercial KM, to carry on retail merchandising business operations in Mexico;

(b)

Plaintiffs assert that each participant is therefore liable for the torts committed by the agents, representative and employees of the partnership, joint venture, and single business enterprise companies. Liverpool, as a named Defendant, is therefore, is [sic] jointly and severally liable;

(c)

There is substantial evidence to establish an agency relationship by virtue of Liverpool's, K-Mart Corp. and K-Mart Mexico [sic] formed a partnership, joint venture, and single business enterprise

* * *

Because all three entities worked towards the same common goal and shared the same financial and personnel resources for administrative and operational purposes, they should therefore be treated as being involvedinapartnership/joint venture/single business entity . . .;

(d)

[T]hecorporationformsbetweenthe[sic]K-mart, and Liverpoolforthat matter,[sic]withK-Mart Mexicowere intended to fade from the very beginningK-Mart Mexico was formed; * * * K-Mart Mexico was completely dominated by employees of Liverpool and K-Mart; and

(e)

It also asserted that interests of Liverpool are "intertwined" with the interests of Kmart.

26. OnApril24,2002,Liverpoolfiledamotionin the bankruptcy case seeking bymotionthe

almost identical injunction relief sought in this proceeding. On May 9, 2002, the judge presiding denied

the April24, 2002, Motionaftera contestedhearing, but onlyon the proceduralbasis thatLiverpoolcould

not request injunctive relief pursuant to motion practice without filing an Adversary complaint as required

by Rule 7001 Fed.R.Bankr.P.

27. By the end of May 2002, mediation regarding the claims asserted in Case 3263-A had

failed. On July 30, 2002, the Texas District Court entered an Order setting Case 3263-A for final pretrial conferenceonNovember1,2002,andfortrialNovember 6, 2002. Subsequently, an order was entered moving the trial date to November 12, 2002. The Texas District Court Judge indicated that no further continuances will be granted.

1. On October 16, 2002, Plaintiffs filed the instant complaint (the "Adversary Complaint"), and onOctober17, 2002, filedthe subjectmotion(the "InjunctionMotion"), initially presented in court on noticeonOctober 29, 2002. Kmart and threeofficialcommitteesintheKmartbankruptcysupportedthe motion through statements filed and argument of counsel, though they did not intervene in the Adversary.
2. Many contested proceedings and appeals proceeded through the Texas state trial and appeal courts wherein Liverpool's several efforts to obtain trial delay or avoid trial were rejected. The Texas Appellate Court for the 13th District denied Plaintiff's most recent appeal, and mandated that trial onCase3263-Abe held. That mandate has not been withdrawn. PlaintiffpetitionedtheTexasSupreme Court’sruling, but the TexasDistrictCourt's rulingdenialofitsspecialappearance, but the TexasSupreme Court has yet to respond to that petition.
3. In or about September 2001, Plaintiff commenced a new lawsuit against Defendants in Mexico (the "Mexican Suit") alleging that Defendants' suit against it in Texas was frivolous and seeking substantial damages on account of its defense of Case 3263-A. The Mexican Suit has not been stayed.
   1. IftheNovember12, 2002, trial date is stayed,Defendantswillbeprejudicedbecause(a) they will be forced to wait an indefinite period before they can have their dayincourtand seek economic recovery (because testimony concerning the intent of Debtors to seek their Plan confirmation by mid-year 2003 express speculative hopes rather than certainty); (b) days of trial preparation both of counsel and witnesses will be wasted at least partially and will need to be redone; (c) the travel plans of many out-of
   2. town witnesses, including experts, will be cancelled or postponed at the last minute; (d) as a result of (b) and (c), Defendant will incur substantial legal and expense costs; and (e) it would give Liverpool an opportunity to seek judgment in the Mexican Suit before going to trial in the Texas suit, and thus have a related issue decided in its favorintherecent Mexican Suit. Also, the Texas trial court would be obliged to reset a lengthy trial to some future indefinite dates and could not decide upon new trial dates until the bankruptcy confirmation process will be completed.
4. AfterCase3263-A(1)wassevered from Case3263-A,neitherKmart,itscounselorany of its personnel have appeared in either Case 3263-A or Case 3263-A(1). Any testimony of current or former Kmartpersonnelintended to be used at the trial on Case 3263-A has already been elicited under oath by deposition. Defendants do not intend to call or otherwise require Kmart, VTA and any other Debtororanyoftheir personnel to appear at or participate in the trial on Case 3263-A, though they may offerthedepositiontestimonythereof. Plaintiff has not issued any trial subpoenas or any pending discovery requests to Kmart, VTA or any of their personnel in Case 3263-A. Debtors' counsel conceded on the record of this proceeding that none of the Debtors'personnelor employeesisexpected to take part in the trial on Case 3263-A.
5. No significant disruption will be caused to Kmart personnel through need to supply trial witnesses to attend trial, since their depositions have been taken. Since both of the Texas case litigants have already filed substantial claims in bankruptcy against Debtor, the possibility of trial and judgment in Texasthatmightrelatetothe veryclaims alreadyonfileshould notresult inbad publicityor concernamong employees or customers that are materially greater than publicityand concerns causedalreadyby filing of the pending claims in bankruptcy.
6. Defendants offered to stipulate that no findings of fact or conclusions of law rendered in Case 3263-A will be binding upon Kmart, VTA oranyofthe Debtorsso as toavoid any such findings or conclusions impacting against Kmart in indirect violation of the automatic bankruptcy stay.
7. Neither Kmart, VTA or anyotheroftheDebtors have contractually guaranteed payment ofany debt owed by Liverpool to Defendants. Liverpool clearlyhasnoabsoluteand/orcontractualright of indemnification from Kmart, VTA or any of the other Debtors on account of any judgment rendered against Liverpool in Case 3263-A, although it might seek indemnification of such judgment under Texas law or other nonbankruptcy law.
8. Kmart, VTA and the other Debtors deny that they would have any liability to Liverpool on account of any judgment rendered against Liverpool in Case 3263-A and would oppose any indemnification or contribution claims that may be asserted against them on account of such a judgment against Liverpool. Liverpool has denied the existence of any joint venture liability between it and Kmart or VTA in Case 3263-A.

37. Facts set forth in the Conclusions of Law will stand as additional Findings of Fact.

Conclusions of Law stated in the Findings, if any, will stand as additional Conclusions of Law. CONCLUSIONS OF LAW

Jurisdiction and Venue

Core jurisdiction over the present matter lies here under 28 U.S.C. §§ 1334(a) which gives exclusive jurisdiction to the District Court over cases arising in or under the Bankruptcy Code (title 11 U.S.C.) and under 28 U.S.C. § 157(a)(b)(2)(G). Issues in this case arise under 11 U.S.C. §§ 362 (the automatic stay) and § 105 (giving authority to enter orders “necessary or appropriate to carry out the provisions of this title” including orders to protect stay protections). This case is referred here under the standingreferralofDistrictcourtInternalOperatingProcedure15(a). Venue is appropriate in this District. 28 U.S.C. § 1409(a).

The Automatic Stay

Section362(a) lies at the heart of the Code. It provides one of the most fundamental protections afforded to debtors by preventing the piecemeal destruction of the debtor’s property. Without the stay provided by 11 U.S.C. § 362(a), there would be a race to the courthouse to claim assets of the debtor, andasuccessfulreorganizationwouldbeimpossible.Theautomaticstay protects the debtor’s assets while giving the debtor breathing room so that it can reorganize. Section 362(a) bars “the commencement or continuation, includingthe issuance or employment of process, ofa judicial, administrative,orotheraction or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title. . . .” 11 U.S.C. § 362(a).

Byitsownterms,Section362(a) onlyappliesto debtorsundertitle 11. Fox Valley Construction WorkersFringeBenefitsFundsv.Prideof theFoxMasonryandExpertRestorations, 140 F.3d 661, 666 (7th Cir. 1998); Pitts v. Unarco Industries, Inc.,et al., 698 F.2d 313, 314 (7th Cir. 1983).

However, courts have extended the application of Section 362(a) to nondebtorswhere“there is such identity betweenthe debtor and the third-party defendant that the debtor may be said to be the real partydefendant and that ajudgment againstthe third-partydefendant willineffectbe a judgment or finding against the debtor.” In re Fernstrom Storage and Van Co., 938 F.2d 731, 736 (7th Cir. 1991) (quoting

A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986)). In A. H. Robins, the court held that nondebtor co-defendants of the debtor were entitled to enjoin proceedings against them where the codefendantswereindemnifiedbythe debtor and were also insured under the debtor’s insurancepolicy. Id. at 1007-08. The thrust of the court’s opinion was that Section 105 empowered the trial court to enjoin actions that would frustrate or potentially thwart the debtor’s ability to reorganize. Id. at 1003-08.

Authorityinthis Circuit hasadoptedthis rule and articulatedtwo exceptions tothe generalrule that bars extensionofthe staytonondebtors:the firstiswherethereissufficient identitybetweenthe debtorand nondebtor such that the litigation against the nondebtor threatens propertyofthe estate, and the second is wherethecontinuationofthe proceedings againstthe nondebtorcould causeirreparable harmtothedebtor by diverting resources need for its reorganization. Fernstrom, 938 F.2d at 736. Cases illustrating the first exception include situations where the debtor has an absolute duty to indemnify the nondebtor either by contract or operation of law or where the costs of the nondebtor’s defense are borne by the debtor. See Trimec, Inc. v. Zale Corporation, 150 B.R. 685, 687 (N.D. Ill. 1993) (staying proceeding against a joint venturer where the debtor was a guarantor of joint venturer); In re Eagle-Picher Industries, Inc., 963 F.2d 855, 860 (6th Cir. 1992) (upholding injunction where debtor had to indemnify its executives and reimburse legal cost); A. H. Robins, 788 F.2d at 1007 (same); In re American Film Technologies, 175

B.R. 847, 850-51 (Bankr. D. Del. 1994) ( enjoining suit against officers of debtor because of indemnification and collateral estoppel).

Contribution claims between parties might in some cases create a sufficient identify of interest to warrant staying litigation against nondebtors. See A.H. Robins, 788 F.2d at 1005, 1008; In re ContinentalAirlines,Inc.,177B.R.475,479-81(D.Del.1993). However, cases applying that principle generally find indemnification against debtor's assets a necessary consequence not a mere unlitigated possible claim.

Another exception is illustrated by cases where the debtor’s key personnel are diverted from the reorganization by the demands of discovery related to the third-party suit. Id. at 481 (D. Del. 1993) (enjoining suit against officers of debtor which could distractdebtor fromreorganization); In re Sudbury, Inc., 140 B.R. 461, 465 (Bankr.N.D.OH1992)(irreparableharmresultswhenresourcesofdebtorare consumed in third-party litigation). However, it is important to note that joint torfeasors who are independently liable for third-party claims are not covered bythe automatic stay. FoxValley,140 F.3d at 666; A.H. Robins, 788 F.2d at 999(citationanquotationomitted); C.H. Robinson Co. v. Paris & Sons, Inc., 180 F. Supp.2d 1002, 1017, (N.D. Ia. 2001).

Here, Liverpool must show that Kmart will be irreparably harmed if the Texas suit is allowed to proceed. It did not rely on the precedents focusingoncommoninsurancepolicies(and indeed none were proven here), but attempted to meet its burden by showing identity between it and Kmart because the pleadings in the Texas case make it clear that Kmart is a target of that suit and by arguing that Liverpool is entitled to indemnification from Kmart. Moreover, Liverpool asserted that the Texas case will have the practical effect of disrupting Kmart’s reorganization. However, the evidence adduced at trial does not support those arguments. There Is No Identity Between Liverpool and Kmart

The instant case is readily distinguishable from precedents where courts have found identity between a debtor’s interest and those of the nondebtors. Servi Mundo has not tried to target any debtor indirectly by suing its officers. On its motion the Texas court severed all entities and individuals related to Kmart from the Texas suit. Hence, Kmart has no obligation to fund the litigation cost of the Texas case. Under Texaslaw, the findings ofthe suit to be tried may not necessarily bind Kmart under the doctrine of res judicataor collateralestoppel. See Webb v. Persyn, 866 S.W.2d106, 107 (Tex. Ct. App. 1993) (res judicata only applies to claims that were actually litigated); Mann v. Old Republic Title Insurance Co., 975 S.W.2d 347, 350 ( Tex. Ct. App. 1998) (collateral estoppel only applies to issues litigated between the parties which were essential to judgment).

The claims asserted against Liverpool in the Texas lawsuit should not properly be stayed under 11

U.S.C. § 362(a) unlessadversefindings or inferencesmadeagainstLiverpoolcould be imputed to Kmart by operation of law and therefore would indirectly effect the debtor its assets, or its ability to pursue a successfulplanofreorganization. Servi Mundo's claims premised on theories of joint venture, agency, civil conspiracy, partnership, and enterprise liability make it implausible that Liverpool could be found liable except on facts that would impose liability on Kmart if findings and judgment in the Texas case could be used subsequently against Kmart. However, Servi Mundo has agreed to stipulate that it will not use any findings derivedfromthe trialagainstKmart,and this Court has authority under § 105 to prevent such use by either party.

It is appropriate to exercise that authority because findings in the Texas case might otherwise indirectly be offered against Kmart at a later date. Moreover, Liverpool itself should be precluded from using the trial to lay a foundation for its own eventual joint enterprise claim in bankruptcy against Kmart. Liverpool’s argument thatitwillbe harmedby such an order is without merit. Nothing in the Code allows creditorsthatare suedoutsideofbankruptcyto usetheir defeatinnonbankruptcylitigationtoenhancetheir claims against the debtor at the expense of other creditors.

However, Liverpool and the Debtor do not share sufficient identityofinterestto invoke on behalf of Liverpool either the protections of the automatic stay or a discretionary injunction under § 105 of the

Bankruptcy Code. GAF Armstrong v. Johns-Manville Corp., 26 B.R. 405, 413 (Bankr. S.D.N.Y. 1983); American Imaging Services, Inc. v. Eagle Picher Industries, Inc. (Eagle-Picher Industries, Inc.), 963 F.2d 855, 862 (6th Cir. 1992).

Liverpool has failed to show that it has an absolute right to be indemnified by Kmart either under contract or by operation of law. It concedes that there is no indemnification agreement under the joint venture contract betweenthe parties.Moreover, Kmart has not undertaken any obligation as a guarantor or insurer of any party to that suit. Liverpool’s claim for contribution rests on a common law claim under itstheoryofjoint enterpriseliability. But such liability is not automatic and underTexaslawLiverpoolmust establish four factorsto sustainsucha claim: (1) an agreement, express or implied among the members of the group; (2) a common purpose to be carried out by the group; (3) a community of pecuniary interest inthatpurpose;and (4) anequalright to avoiceinthe directionofthe enterprise,which gives an equalright to control. Texas Dept. Of Transportation v. Able, 35 S.W.3d 608, 613 (Tex. 2000). Thus, issues as to Liverpool’sclaimagainstKmartwillbe resolved through the normal claims process inKmart’spending bankruptcy.

Liverpool alsoclaims a statutoryright tocontributionfromKmart.However,the express language of the statute governing contribution claims under Texas law states that the statue does not apply to claims undercommonlaw. TexasCivil Practice & Remedies Code § 32.001. Further, the statue only applies to a co-defendant “against whom judgment is also rendered.” Id. at § 32.002. Thus, given that Kmart has been severed from the Texas proceeding, there appears to be no right of contribution under that statute either by or against it.

The duplicative or multiple litigation that may result as a consequence of the Debtors' bankruptcy cases and the severance of Debtors' claims against Kmart, VTA and Ortega from the Defendants' claims against Liverpool is a result under the Bankruptcy Code and a by-product of bankruptcy law. Klaff v. Weiboldt Stores, Inc., 1988 WL 142163 * 5 (N.D. Ill.) (J. Rovner), citing Lynch v. Johns-Manville Sale Corp., 710 F.2d 1194 (6th Cir. 1983).

Any hardship placed on the nondebtor Liverpool from its becoming the sole defendant in Case 3263-Aas aresult ofthe Debtors'bankruptcyfilingsisnotrelevant to the Court’sconsiderationofwhether relief should be granted pursuant to the Adversary Complaint or the pending Motion. Williford v. Armstrong World Industries, Inc.,715F.2d124,126-27(4th Cir.1983) (stayonlyavailable to debtors).

In light of the forgoing, Liverpool has failed to show that sufficient identity exists between it and Kmart to justify extending the automatic stay to the Texas proceeding. The Texas suit Will Not Interfere With Kmart’s Reorganization

Likewise, Liverpool has not proven that the trial wi jeopardize Kmart’s reorganization by siphoningawayresources.The uncontroveted evidence shows that Kmart has not participated in the trial since being severed from the case. Servi Mundo has shown that it will not call any Kmart employees to testify and that it will not make any further discovery request on the Debtor. Further, it appears that Liverpool is unlikely to request any further burdensome discovery from Kmart given the impending trial date.

Finally, thereis no merit to the argument that a judgment entered against Liverpoolmightthreaten Kmart’s reorganization. According to Kmart, the bad publicity surrounding a judgment against Liverpool could undermine the confidence of its creditors and employees. However, this perceived threat is speculative at best. It is equally likely that a judgment against Liverpool might benefit Kmart because it could lessenthe likelihoodthatServi Mundo would pursue itsclaiminthe bankruptcycase.Moreover,the balanceofequitiesdoesnotfavordelayingServiMundo’strialbecause itcould potentiallyhave anadverse psychological effect on Kmart’s constituents. In sum, Liverpool has not shown that the trial threatens to irreparably harm Kmart.

Other Issues

1. Merits

Although Liverpool argued the merits of issues in the Texas case, merits of the claims asserted in Case 3263-A(1) and Case 3263-A are not relevant to consideration here of whether relief should be grantedpursuanttotheAdversarycomplaint or the pendingMotion. Authorities addressing the possibility of extending the automatic stay to protect nondebtors do not address success on the merits of the underlying substantiative nonbankruptcy suit, let alone such merits as a basis to decide whether or not to stay a proceeding.

2. Rooker-Feldman

The TexasDistrictCourt'spreviousdiscretionarydecisionnottoimpose subject Case 3263-A to a discretionary stay because of Kmart's, V.A.'s and the Debtor's bankruptcy cases does not under the Rooker-Feldman Doctrine (and contrary to Defendant’s argument) prohibit this Court from deciding whether to impose a discretionarystay Downs v. Westphal, 78 F.3d 1252, 1256 (7th Cir. 1996), because that doctrine applies to final state court judgments, not interlocutory rulings, Manley v. City of Chicago, 236 F.3d 392 (7th Cir. 2001).

3. Mexican Case

It is at least possible that judgment in the Mexican case would provide impact on the Texas case if the latter case is stayed. Generally, under principals of international comity, U.S. Federal Courts will honorjudgmentsenteredinforeigncountriesif:[a]the participantsweregiventhe opportunityfor a fulland fair trial; [b] the trialwasconductedbeforeacourtofa competent jurisdiction; [c]the proceedings followed duecitationorvoluntaryappearance;[d]the trialwasconducteduponregularproceedings;[e]the trialwas under a system ofjurisprudencelikelyto secure an impartial administration of justice between the citizens of this country and those of other countries; and [f] there was no evidence of [i] fraud in procuring the judgment; [ii] prejudiceinthe country'ssystemoflaws;[iii] prejudiceinthe court;or [iv] any other reasons why comity should not be observed." Herbstein v. Bruetman (In re Bruetman), 259 B.R. 649, 669 (Bankr. N.D. Ill. 2001), and cases cited, aff'd at 266 B.R. 676 (N.D. Ill. 2001); see also, Hunt v. BP Exploration Co. (Libya) Ltd., 492 F. Supp. 885, 894 (N.D. Tex. 1980); Compania Mexicana Rediodifusora Franteriza v. Span, 41 F. Supp. 907 (N.D. Tex. 1941) aff'd at 131 F.2d 609 (5th Cir. 1942) (enforcing Mexicanjudgment forcosts againstunsuccessful litigant in Mexican litigation). See also Society of Lloyds v. Asheunder, 233 F.3d 473, 476-77 (7th Cir. 2000) (generally discussing the "international concept of due process").

Case 3262-A is subject to Texas substantive and procedural law. Pursuant to the Texas RecognitionAct,a courtmustrecognize a foreign country'sjudgment assessingmoneydamagesunlessthe judgment debtor establishes one of the following grounds for non-recognition: (a) the judgment was rendered under a system that does not provide and impartial tribunal or procedure compatible with due process of law; (b) the foreign court did not have personal jurisdiction over the judgment debtor; (c) the foreign court did not have subject matter jurisdiction over the matter; (d) the judgment debtor did not receive sufficient notice of the proceeding; (e) the judgment was obtained by fraud; (f) the cause of action onwhichthe judgment isbasedis repugnant to Texas public policy; (g) the judgment conflictswithanother final, conclusive judgment, (h) the foreign proceeding is contrary to an agreement between the parties as to how the dispute was to be resolved; (i) if jurisdiction was solely based on personal service, the forum was seriously inconvenient, and (j) the foreign country does not recognize judgments rendered in Texas. Southwest Livestock and Trucking Company, Inc. v. Ramon, 169 F.3d 317, 321 (5th Cir. 1999) (finding that District Court erred in refusing to enforce Mexican judgment on public policy grounds); see also TX Civ. Prac. & Rem. §§ 36.004, 36.0044, and 36.005.

Accordingly, delay of the Texas case might allow Liverpool to obtain a judgment in the recent Mexican case and thereby create new defensive issues for the Texas court and parties to further delay the much older Texas case. It would be anabuseofthis Court’s authority to use an injunction to aid Plaintiff in such a tactic.

CONCLUSION

A party seeking a preliminary injunction is required to demonstrate a likelihood of success on the merits, that it has no adequate remedy at law, and that it will suffer irreparable harm if the relief is not granted. Ty, Inc. v. Jones Group, 237 F.3d 891, 895 (7th Cir. 2001) (citing Abbott Labs v. Mead Johnson & Co., 971 F.2d 6, 11 (7th Cir. 1992)). If the moving party can satisfy these conditions, the courtmustthenconsideranyirreparableharmthataninjunctionwould causethe nonmovingparty. Ty, 237 F.3dat895. Finally, the court must consider any consequencestothepublicfromdenyingorgrantingthe injunction.. Id. Sitting as a court of equity, the court then weighs all these factors employing a sliding-scale approach. Abbott Labs, 971 F.2d at 12. That is, the more likely the plaintiff’s chance of success on the merits, the less the balance of harms need weigh in its favor. Id.

Plaintiff has not shown entitlement to injunction and therefore has no likelihood of success in its Adversary proceeding herein, has not shown that it lacks adequate remedy it law (because it can defend itself in the Texas suit) and fails to show that necessity of defending itself in that case will give rise to irreparable harm apart from the possibility of losing. The Kmart debtors can and will be protected from any possible harmful consequences of the litigation.

Pursuant to the foregoing, it is apparent that Plaintiff has not met its burden to entitle it to an injunctiontoblocktheTexastrialagainstit. Therefore, its Motion for Preliminary Injunction will be denied. However,the Kmartdebtors have reasonable concernthatfindings and judgment inthe Texascase against Liverpool might under Texas or other nonbankruptcy law be held binding against them under a theory of joint enterprise liability or otherwise -- even though they were severed from the trial. Consequently, to protect Kmart debtors from such a consequence, an injunction must be entered under authority of 11

U.S.C. § 105 to implement and protect the automatic stay protection of debtors under 11 U.S.C. § 362. Such injunction will permanently bar both the Plaintiff and Defendants from ever asserting any findings of fact, conclusions of law, or judgment that may be entered in the Texas case against any of the Kmart partiesinbankruptcyor inanycourtproceeding, providedhoweverthatthe dollaramount ofanyjudgment against Liverpool as to which it may seek to obtain indemnification against debtors now in bankruptcy or any of them may be used by it forthe limitedpurpose ofshowingthata judgment hasbeenentered against it.

ENTER:

Jack B. Schmetterer United States Bankruptcy Judge

Entered this 15th day of November 2002.