Opinion
Case No. 8:17-bk-03597-MGW
03-31-2021
IN RE: NILHAN FINANCIAL, LLC Debtor.
R. Scott Shuker, Esq., Shuker & Dorris, P.A., Counsel for Good Gateway, LLC Michael S. Hoffman, Hoffman, Larin & Agnetti, P.A., Counsel for Chittranjan K. Thakkar
R. Scott Shuker, Esq., Shuker & Dorris, P.A., Counsel for Good Gateway, LLC
Michael S. Hoffman, Hoffman, Larin & Agnetti, P.A., Counsel for Chittranjan K. Thakkar
ORDER ON OBJECTION TO CLAIM NO. 3 AND MOTION TO DETERMINE CLAIM NO. 3 IS NOT ENTITLED TO PRIMA FACIE VALIDITY UNDER BANKRUPTCY RULE 3001
Michael G. Williamson, United States Bankruptcy Judge
THIS CASE came on for consideration without a hearing on Chittranjan Thakkar's Objection to Claim No. 3 and his Motion to Determine that Good Gateway, LLC's Proof of Claim is not Entitled to Prima Facie Validity Pursuant to Bankruptcy Rule 3001(f). SEG Gateway filed a $13.9 million proof of claim (Claim No. 3) based on a judgment it obtained against Thakkar. Good Gateway, which took assignment of Claim No. 3 from SEG Gateway, seeks to hold the Debtor liable for the judgment against Thakkar on a reverse veil-piercing theory.
Doc. No. 262. The objection to Claim No. 3 was originally filed by Niloy Thakkar. Id. Chittranjan Thakkar later joined in the objection and then supplemented his claim objection. Doc. Nos. 334 & 468.
Doc. No. 435.
Claim No. 3-1; Doc. No. 202. Based on a settlement among the Trustee, Good Gateway, and SEG Gateway, the amount of the claim was reduced to $9.5 million. Claim No. 3-3.
Claim No. 3-3 references a settlement agreement among the Trustee, Good Gateway, and SEG Gateway as the basis for the claim. Claim No. 3-3, § 8. According to the settlement agreement, "[t]he factual and legal basis of Claim No. 3 stems from the Judgments, and the reverse veil piercing of Nilhan Financial to hold it liable for the debts of Chittranjan K. Thakkar." Id. at Ex. A, ¶ 6.
As a threshold matter, Thakkar asks the Court to disallow Claim No. 3 as a matter of law for three reasons: First, according to Thakkar, reverse veil-piercing is available only against a controlling member of a limited liability company. And there appears to be no dispute that Thakkar is not (and never was) a controlling member of the Debtor. Second, to prevail on its reverse veil-piercing theory, Good Gateway must show the Debtor is Thakkar's alter ego. Thakkar contends that Good Gateway previously litigated whether Thakkar was the alter ego of the Debtor in state court and that a state court jury found he was not. So Thakkar says Good Gateway is collaterally estopped from relitigating that issue. Third, Thakkar says Good Gateway lacks standing because it has failed to provide evidence that it took assignment of Claim No. 3 from SEG Gateway. Assuming Claim No. 3 is not disallowed as a matter of law, Thakkar asks the Court to determine that the claim is not entitled to prima facie validity under Federal Rule of Bankruptcy Procedure 3001(f). Let's start with Thakkar's first argument: Good Gateway cannot prevail on its reverse veil-piercing theory because Thakkar was not a controlling member of the Debtor. Good Gateway concedes that as a general rule, reverse veil-piercing is available only against a company's controlling members. But Good Gateway argues that in Molinos Valle Del Cibao, C. por A. v. Lama , the Eleventh Circuit recognized a "familial" exception to the general rule.
Doc. No. 468.
Id.
Doc. No. 435.
Doc. No. 502, ¶ 7 (Estudios, Proyectos e Inversiones de Centro America, S.A. (EPICA) v. Swiss Bank Corp. (Overseas) S.A. , 507 So. 2d 1119, 1121 (Fla. 3d DCA 1987) ).
Id. at ¶ 8 (citing Molinos Valle Del Cibao, C. por A. v. Lama , 633 F.3d 1330, 1349 (11th Cir. 2011) ).
In Molinos , the plaintiff sought to hold individual defendants liable for a worthless check issued by two companies—Chipstek and Expertek—by piercing the corporate veil. None of the individual defendants, however, were shareholders of Chipstek or Expertek. Rather, Chipstek and Expertek were owned by Globaltek, which was owned by ORLS International Holdings, which, in turn, was owned by L&S Corporation. The defendants had an ownership interest in L&S Corporation—Chipstek and Expertek's indirect parent. The district court dismissed the worthless check claim.
Molinos , 633 F.3d at 1338.
Id. at 1336 – 37.
Id.
Id. at 1339.
On appeal, the Eleventh Circuit rejected the plaintiff's argument that Florida law permitted veil-piercing against non-shareholders. In support of that argument, the plaintiff had cited Walton v. Tomax Corp. There, Florida's Fifth District Court of Appeal permitted veil-piercing against a corporate officer even though the corporate officer was not a shareholder. In distinguishing Walton , the Eleventh Circuit noted that the corporate officer's wife in Walton was a shareholder.
632 So. 2d 178, 181 (5th DCA 1994).
The Eleventh Circuit predicted that the Florida Supreme Court would have likely found that fact dispositive because the wife's interest likely benefitted the entire family:
[T]he sole shareholder in that case was the defendant-officer's wife. The Florida Supreme Court would likely find that ... fact dispositive; a wife's ownership interest is a very close analogue to the husband's ownership because the economic proceeds likely benefit the entire family unit.
Thus, Good Gateway's reads Molinos as implicitly creating an exception to the general rule—i.e., that veil-piercing is only available against a controlling shareholder—where there is a familial relationship.
In fact, Chief U.S. Bankruptcy Judge Laurel Isicoff read Molinos exactly that way in In re Trujillo . There, the Chapter 7 Trustee asserted an alter ego claim against corporate defendants. Even though the debtor was not a shareholder of the corporate defendants, Chief Judge Isicoff denied a Rule 52(c) motion for judgment on partial findings and allowed the Trustee to proceed with his alter ego claim, explaining that in Molinos , the Eleventh Circuit recognized a non-shareholder's interest in a corporation through a "familial relationship."
607 B.R. 734, 740 (Bankr. S.D. Fla. 2019).
Id.
What's more, Chief Judge Isicoff noted that Molinos ' "familial-relationship" exception was not limited to a husband and wife. For one thing, Molinos "talks about the benefit to ‘the entire family unit.’ " For another, Chief Judge Isicoff noted "[t]here is no reason to limit the family unit to husband and wife," particularly considering Molinos mentions "ownership" several times as the critical factor in deciding to permit veil-piercing. Indeed, Chief Judge Isicoff concluded that the need for a familial-relationship exception is more acute when the party seeking to pierce the corporate veil alleges that the wrongdoer is, in fact, the "true owner" of the corporation.
Id.
Id.
Id.
[T]he implicit interest due to familial relationship that the Eleventh Circuit recognized in Molinos as an exception to the "shareholder" rule is even more telling when the allegation of the plaintiff is that the defendant is, in truth, the true owner of a corporation, such as is the allegation of the Plaintiffs with respect to the equitable ownership claim. There is no factual distinction between the presumed economic benefit and consequent availability of alter ego as a theory of recovery arising from the bonds of family, and the presumed economic benefit arising from actual equitable ownership if so proven.
Id.
Id.
Because the Florida Supreme Court has not addressed the "familial-relationship" exception, this Court must predict how the Florida Supreme Court would rule on that issue. "Decisions of the intermediate appellate courts—here, the Florida District Courts of Appeal—provide data for this prediction." This Court agrees with Chief Judge Isicoff's reading of Molinos: based on the Fifth District Court of Appeal's decision in Walton , the Eleventh Circuit predicted that the Florida Supreme Court would recognize a "familial-relationship" exception to the "shareholder" rule.
Molinos Valle Del Cibao, C. por A. v. Lama , 633 F.3d 1330, 1348 (11th Cir. 2011) ("Where the highest court—in this case, the Florida Supreme Court—has spoken on the topic, we follow its rule. Where that court has not spoken, however, we must predict how the highest court would decide this case.") (citations omitted).
Id.
To be sure, the Eleventh Circuit's prediction is, as Thakkar contends, dicta. But the Eleventh Circuit's reasoned view, even if dicta , is persuasive authority in predicting whether the Florida Supreme Court would recognize a "familial-relationship" exception. Guided by Molinos , this Court concludes the Florida Supreme Court would permit a veil-piercing claim when there is a familial relationship.
And like Chief Judge Isicoff, this Court declines to limit a familial relationship to a husband and wife. Here, there is evidence that Thakkar and his sons treat the Debtor as a family company. Plus, there are allegations that Thakkar is the Debtor's true owner. This Court therefore concludes that Good Gateway is not precluded from veil-piercing simply because Thakkar never had a controlling interest in the Debtor.
Doc. No. 502, ¶ 12. On that score, it's worth noting that it appears the Debtor's sons (who each held a 50% interest in the Debtor) gave Thakkar a 20% interest in the Debtor so that he could have standing to object to claims against an entity he supposedly has no interest in.
Nor is Good Gateway collaterally estopped from reverse veil-piercing. As Thakkar points out, two of the elements of collateral estoppel are that the issue (here, that the Debtor is Thakkar's alter ego) was actually litigated in the prior suit and that the determination of that issue was a critical and necessary part of the judgment.
Doc. No. 468 at (citing I.A. Durbin, Inc. v. Jefferson Nat'l Bank , 793 F.2d 1541, 1549 (11th Cir. 1986) ).
Here, SEG Gateway previously filed a crossclaim against the Debtor in state court that contained allegations that the Debtor was Thakkar's alter ego. Those allegations, Thakkar argues, "formed the entire basis for all of the claims against the Debtor" and that the "Debtor's alleged liability was entirely imputed from other defendants through the alter ego allegations." Because the state court jury ruled in favor of the Debtor on SEG Gateway's claims against the company, Thakkar reasons that the jury necessarily determined the Debtor was not Thakkar's alter ego.
Doc. No. 502, Ex. B.
Doc. No. 468 at 5 – 6.
This argument is built on a faulty premise—i.e., that "the alter ego allegations formed the entire basis for all of the claims against the Debtor." A careful reading of the crossclaim reveals that SEG Gateway asserted direct claims against the Debtor for tortious interference, conspiracy, injunctive relief, declaratory judgment, breach of fiduciary duty, and constructive fraud based on its own alleged wrongful conduct. Consistent with that reading of the crossclaim, the jury verdict reflects that the jury determined whether the Debtor owed SEG Gateway a fiduciary duty; whether it breached any such duty; whether the Debtor tortiously interfered with SEG Gateway's business; whether the Debtor engaged in a civil conspiracy; and whether the Debtor wrongfully converted SEG Gateway's property. Nowhere in the jury verdict does it indicate that the jury considered whether the Debtor is Thakkar's alter ego.
See, e.g., Doc. No. 502, Ex. B, ¶ 87 (the Debtor, among others, intentionally procured a breach of contract); ¶ 92 (the Debtor, among others, engaged in a plan, scheme, or unlawful conspiracy to engage in illegal, unlawful, or actionable acts); ¶ 107 (the Debtor, among others, engaged in wrongful actions); ¶ 139 (the Debtor disagrees with SEG Gateway's position); ¶¶ 145 – 150 (the Debtor, among others, owed SEG Gateway a fiduciary duty and breached that duty); ¶ 170 (the Debtor, among others, made false representations to SEG Gateway).
Id. , Ex. C.
Id.
Thus, there is no record evidence that the parties actually litigated whether the Debtor is Thakkar's alter ego—much less that the jury determined that issue and that its determination was a critical and necessary part of the judgment. Because two of the central elements for collateral estoppel have not been established, Good Gateway is not collaterally estopped from litigating whether the Debtor is Thakkar's alter ego.
At this point, the Court also declines to find that Good Gateway lacks standing to prosecute Claim No. 3. When a claim is transferred for security after a proof of claim has been filed, as is apparently the case here, Federal Rule of Bankruptcy Procedure 3001(e)(4) requires the transferee to file evidence of the terms of the transfer. It is true, as Thakkar contends, that Good Gateway has not filed evidence of the terms of the assignment and an agreement regarding SEG Gateway's and Good Gateway's relative rights respecting payment of Claim No. 3. When that is the case, though, this Court "shall enter such orders respecting these matters as may be appropriate."
Id.
The Court concludes it would not be appropriate to disallow Claim No. 3 based on lack of standing, as Thakkar requests. Instead, the appropriate relief would be to require Good Gateway to prove up the terms of the assignment at a trial on Thakkar's claim objection. This will allow the Court to determine whether Good Gateway has standing and, if so, the relative rights of SEG Gateway and Good Gateway regarding any distribution if Claim No. 3 is allowed.
That leaves for consideration Thakkar's final request for a determination that Claim No. 3 is not entitled to a presumption of prima facie validity. "When a proof of claim contains all the information required under Rule 3001, it ‘constitutes prima facie evidence of the validity and amount of the claim.’ " Thakkar argues that Claim No. 3 does not include all the information required by Rule 3001. In fact, Thakkar notes that the entire basis for Good Gateway's reverse veil-piercing claim is summed up in one sentence in a settlement agreement among the Chapter 7 Trustee, SEG Gateway, and Good Gateway: "The factual and legal basis of Claim No. 3 stems from the Judgments, and the reverse veil piercing of Nilhan Financial to hold it liable for the debts of Chittranjan K. Thakkar."
In re Walston , 606 F. App'x 543, 546 (11th Cir. 2015) (quoting Fed. R. Bankr. P. 300(f))
Doc. No. 435.
Doc. No. 435, ¶ 9; Claim No. 3-3, Ex. A, ¶ 6.
Nowhere in its response to Thakkar's motion does Good Gateway dispute that Claim No. 3 does not include all the information required by Rule 3001. So what does that mean? Just because a claim does not enjoy the presumption of prima facie validity doesn't mean the claim is disallowed. When a claim is not entitled to the presumption of prima facie validity, the claimant bears the initial burden of producing evidence of the validity of its claim at trial. Here, Good Gateway will bear the burden of producing evidence of the validity of its claim, as well as the ultimate burden of proving its claim by a preponderance of the evidence.
Doc. No. 502.
N. Plains Feeders, Inc. v. Badami (In re AFY) , 482 B.R. 830, 842 (D. Neb. 2012).
Id.
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Accordingly, it is
ORDERED :
1. Thakkar's objection to Claim No. 3 is OVERRULED, in part, to the extent set forth in this Order. Good Gateway is not precluded from reverse veil-piercing simply because Thakkar was not a controlling member of the Debtor. Nor is Good Gateway collaterally estopped from litigating whether the Debtor is Thakkar's alter ego. And the Court declines, at this point, to find that Good Gateway lacks standing to pursue Claim No. 3.
2. Thakkar's motion to determine that Claim No. 3 is not entitled to prima facie validity is GRANTED to the extent set forth in this Order. Claim No. 3 is not entitled to a presumption that it is prima facie valid. Good Gateway bears the burden of producing evidence of the validity and amount of its claim and the ultimate burden of proving its claim by a preponderance of the evidence. Good Gateway's initial burden of producing evidence and ultimate burden of proof includes the burden of proving it has standing to pursue Claim No. 3 and that it qualifies for the familial-relationship exception to the general rule that reverse veil-piercing is available only against controlling members of a limited liability company.
3. All other defenses raised in Thakkar's claim objection are preserved for trial.
4. The Court will enter a separate order scheduling a trial on the Objection to Claim No. 3.