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In an automatic stay application “not of the common garden variety,” a Northern District of New York federal judge has held that while the stay offers a broad protection in bankruptcy, that protection is not so broad as to cover a debtor in a state court breach of contract dispute. Senior U.S. District Judge Howard G. Munson suggested in Covanta Onondaga Limited v. Onondaga County Resource Recovery Agency, 02-CV-0497, that the plaintiff was attempting to manipulate his case to challenge a non-appealable removal order. Munson rejected the attempt and permanently enjoined Covanta from taking further action with regard to an adversary proceeding or an automatic stay. The case involves a company, Covanta Onondaga Limited, which contracted with the Onondaga County, N.Y., Resource Recovery Agency (OCRRA) in 1992. Under the contract, Covanta agreed to post a bond and also agreed that if its credit rating slipped below investment grade, the firm would have 30 days to furnish credit enhancement. If it failed to do so, OCRRA could terminate the agreement. Early this year, Covanta’s credit rating was downgraded and, after the firm failed to provide a credit enhancement, OCRRA exercised its right to end the relationship. Covanta filed a civil suit in the Northern District on Feb. 26, withdrew it two days later for lack of diversity jurisdiction, and then filed another action in state supreme court in Onondaga County. On April 1, Covanta and 120 affiliates filed for bankruptcy protection in the Southern District and, one week later, attempted to have the supreme court case removed to the federal court. Munson refused and remanded to state court. Then, on Sept. 5, Covanta initiated a proceeding in bankruptcy court seeking an order that the automatic stay governed the state court action. Munson last week held that the state court action Covanta brought against OCRRA is not covered by the automatic stay. “The question of stay applicability in this case is not of the common garden variety, for here, the lawsuit in question was started not by a creditor against a debtor, but by a debtor in a state court breach of contract action,” Judge Munson wrote. “Although the scope of the automatic stay is broad, the clear language of [11 U.S.C. �362(a)] and the sweeping authority … confirms that the statute stays only proceedings against a ‘debtor’ — the term used in the statute itself.” Munson went on to describe Covanta’s effort as “nothing more than an indirect attempt to appeal a non-appealable removal proceeding order,” a manipulation “vigorously disapproved by the [U.S.] Supreme Court for well over a century.” Among those appearing were Carter H. Strickland of Mackenzie Hughes in Syracuse, N.Y., for Covanta, and Lee E. Woodard and Wendy A. Kinsella of Martin, Martin & Woodard in Syracuse for OCRRA.

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