Opinion
23-10290-MKN
10-05-2023
In re: T1 PAYMENTS, LLC, Debtor.
Chapter 7
Date: June 7, 2023
ORDER REGARDING MOTION TO MODIFY THE AUTOMATIC STAY FOR JUDGMENT ONLY, NOT ENFORCEMENT, PURSUANT TO 11 U.S.C. § 362(D)(1), REQUEST FOR COMFORT ORDER UNDER 11 USC 362(J) AS TO NON-DEBTORS, AND WAIVER OF THE 14-DAY STAY UNDER FRBP 4001(A)(3)
In this Order, all references to "ECF No." are to the number assigned to the documents filed in the case as they appear on the docket maintained by the clerk of court. All references to "Section" are to the provisions of the Bankruptcy Code, 11 U.S.C. §§ 101-1532. All references to "FRBP" are to the Federal Rules of Bankruptcy Procedure.
Honorable Mike K. Nakagawa United States Bankruptcy Judge
On June 7, 2023, the court heard the Motion to Modify the Automatic Stay for Judgment Only, Not Enforcement, Pursuant to 11 U.S.C. § 362(d)(1), Request for Comfort Order Under 11 USC 362(j) as to Non-Debtors, and Waiver of the 14-Day Stay Under FRBP 4001(a)(3) ("Motion"), brought by creditor New U Life Corporation ("NULC") in the above-captioned proceeding. The appearances of counsel were noted on the record. After arguments were presented, the matter was taken under submission.
BACKGROUND
On January 30, 2023, T1 Payments, LLC ("Debtor") filed a "skeleton" Voluntary Petition for Non-Individuals Filing for Bankruptcy under Chapter 7. (ECF No. 1). The petition is signed by Debra Kaisen as manager of the limited liability company. The case was assigned for administration to Chapter 7 panel trustee Lenard E. Schwartzer ("Trustee"). A Notice of Chapter 7 Bankruptcy Case - No Proof of Claim Deadline ("Bankruptcy Notice") was issued, initially scheduling a meeting of creditors ("341 Meeting") for March 1, 2023. (ECF No. 3).
Item 13 of the Petition, signed by the Debtor's representative, represents that "After any administrative expenses are paid, no funds will be available to unsecured creditors."
Consistent with Debtor's representations in the Petition, the Bankruptcy Notice states: "No property appears to be available to pay creditors. Therefore, please do not file a proof of claim now. If it later appears that assets are available to pay creditors, the clerk will send you another notice telling you that you may file a proof of claim and stating the deadline."
On February 17, 2023, Debtor filed an amended Chapter 7 petition to which it attached its initial schedules of assets and liabilities ("Schedules") and statement of financial affairs ("SOFA"). (ECF No. 12). Part 4, Item 15 of initial property Schedule "A/B" discloses that the Debtor owns 100% of an entity known as T1 Payments, Ltd., as having an "unknown" value. Part 8, Item 47 lists an interest in a 2019 Porsche Turbo S vehicle ("Porsche Turbo") valued at $175,000. Part 11, Item 74 of initial property Schedule A/B discloses three claims as property of the estate. Part 12, Item 91 summarizes that the value of all of the Debtor's property is $560,183.65. Part 1, Item 2.1 of Schedule "D" lists Porsche Financial Services as having a claim in the amount of $172,794.62 secured by the Porsche Turbo. Part 2, Items 3.1 through 3.1590 of Schedule "E/F" lists more than 1500 general unsecured claims against the Chapter 7 estate. Part 3, Item 7 of the initial SOFA lists 9 separate legal proceedings commenced in either the Eighth Judicial District Court, Clark County, Nevada ("Nevada State Court") or the United States District Court for the District of Nevada ("Nevada Federal Court"). Part 13, Item 28 of the initial SOFA listed Debra Kaisen as the manager and 100% owner of the Debtor.
This total value consists of the amount attributed to the Porsche Turbo ($175,000), and a claim held by the estate valued at $385,183.65 (for which litigation has not been concluded).
On February 27, 2023, Debtor filed amended Schedules A/B and an amended SOFA. (ECF No. 15). Part 8, Item 47 of amended Schedule A/B lists the value of the Porsche Turbo as $127,000. Part 11, Item 74 of the amended Schedule A/B discloses four claims as property of the estate. Part 12, Item 91 of amended Schedule A/B summarizes that the value of all of the Debtor's property is $512,183.65. Part 3, Item 7 of the amended SOFA lists 10 separate legal proceedings commenced in either the Nevada State Court, the Nevada Federal Court, or the Superior Court of California, County of Los Angeles ("California State Court").
This amended total value reflects the reduction of the Porsche Turbo by $48,000, and the same value of the claim that is still the subject of litigation. Because the secured creditor's claim exceeds the value of the vehicle, however, there appears to be no equity available to the Chapter 7 estate. The litigation claim is not liquidated either. It thus appears that there currently are no liquid assets available to the Trustee to finance litigation to pursue additional recoveries..
No further amendments to the Schedules have been filed. On amended Schedule A/B, Debtor has scheduled four claims in favor of the bankruptcy estate in the following order: (1) a claim for breach of fiduciary duty and professional negligence against Eugene Romes, Esq. and Rome & Associates of "unknown" value; (2) a claim against Payvision, B.V. for improper retention of credit card processing of "unknown" value; (3) a civil action in Nevada State Court against Bullion Holdings, LLC, Shannon Nicole Forsythe for breach of contract, Case No. A-21-833412-C, valued at $385,183.65; and (4) a civil action in California State Court against Lisa Kaye and GOAT Payments, Inc. for misappropriation of trade secrets, Case No. 21STCV31033.
On March 27, 2023, notice was given that the 341 Meeting was continued to June 8, 2023. (ECF No. 28).
As of the date the hearing on the instant Motion was heard, the continued 341 Meeting scheduled for June 8, 2023, obviously had not been held.
On April 7, 2023, NULC filed amended proof of claim No. 1-2 ("NULC POC 1-2") in the unsecured amount of $5,260,109.28. The claim is signed under penalty of perjury by Vanessa B. Pierce as legal and general counsel to NULC. Part 1, Item 8 of the proof of claim directs NULC to attest: "What is the basis of the claim?" The basis is identified as "Federal lawsuit for fraud & theft of payment processing funds (Case No. 2:19-cv-01816-ART-DJA)." Attached to the proof of claim is a "Statement itemizing claim, including interest, required by Bankruptcy Rule 3002(c)(2)(A) for Creditor New U Life Corporation." Attached as Exhibit "A" to that Statement is a redacted copy of the Second Amended Counterclaim filed by NULC in Case No. 2:19-cv-01816-ART-DJA styled as T1 Payments LLC v. New U Life Corporation ("2019 Federal Lawsuit"). In other words, NULC POC 1-2 is based on the outcome of NULC's counterclaim in the 2019 Federal Lawsuit pending before the Nevada Federal Court.
On April 24, 2023, Debtor filed a further amended SOFA. (ECF No. 39). Part 3, Item 7 of the further amended SOFA lists the same 10 separate legal proceedings commenced in either the Nevada State Court, the Nevada Federal Court, or the California State Court. Included with the amended SOFA is a Disclosure of Compensation of Attorney for Debtor(s) ("Compensation Disclosure") attesting that counsel employed by the Debtor to commence the Chapter 7 proceeding was paid a fee of $30,000 by an individual named Donald Kasdon.
No further amendments to the SOFA have been filed. Debtor has disclosed in the SOFA that it is or was a party to ten civil actions in the following order: (1) T1 Payments, LLC v. Bullion Holdings, et al, Nevada State Court Case No. A-21-833412-C, alleging breach of contract; (2) T1 Payments, LLC v. Nu Life Corporation, Case No. 2:19-cv-01816-ART-JCA, for declaratory relief as to amount owed (i.e., the 2019 Federal Lawsuit); (3) Vida DiVina, LLC v. T1 Payments, LLC, Nevada Federal Court Case No. 2:21-cv-01005-JCM-VCF, for collection of payments; (4) Ibuumerang, LLC v. T1 Payments, Ltd., et al., Nevada Federal Court Case No. 2:21-cv-1899-JCM-VCF (dismissed); (5) Household Appliance UK, LTD v. T1 Payments, LLC, et al, Nevada Federal Court Case No. 2:22-cv-01611-JAD-NJK, alleging wrongful retention of funds; (6) Gaia Ethnobotanical, LLC v. T1 Payments, LLC, et al., Nevada Federal Court Case No. 2:21-cv-01611-JCM-VCF and 2:21-cv-1005- JCM-VCF, alleging breach of contract; (7) First Capital Venture Co. v. T1 Payments, LLC, et al., Nevada State Court Case No. A-21-8346-C, for breach of contract (dismissed); (8) Gaia Ethnobotanical, LLC v. T1 Payments, LLC, Nevada State Court Case No. A-22-852775S-C (removed to Nevada Federal Court); (9) T1 Payments, LLV v. Beyond Wealth PTE, LLC, Nevada Federal Court Case No. 20-cv-1405-JCM-VCF, for declaratory relief as to amount owed (dismissed); and (10) T1 Payments, LLC v. Lisa Kaye and GOAT Payments, Inc., California State Court Case No. 21STCV31033, for misappropriation of trade secrets.
On April 25, 2023, the instant Motion was filed along with a Declaration of Vanessa B. Pierce ("Pierce Declaration"), who also signed NULC POC 1-2. NULC seeks relief from the automatic stay so that it can proceed in the 2019 Federal Lawsuit. The Motion was noticed to be heard on May 24, 2023. (ECF Nos. 40-42).
Attached to the Notice of Hearing is a Certificate of Service identifying the parties and counsel who were provided notice by first class mail.
On May 10, 2023, the Trustee filed opposition ("Trustee Opposition") to the Motion. (ECF No. 45). The Trustee opposes relief from stay to permit NULC to proceed in the 2019 Federal Lawsuit on its counterclaim against the Debtor, but does not oppose relief against non-debtor parties that do not implicate property of the Chapter 7 estate.
On May 10, 2023, creditors HYPER SLS LTD D/B/A HYPER TECH ("HYPER"), D.N.G. D/B/A TECH DAILY X ("DNG"), and G COM PTE LTD ("GCOM") (collectively "Objecting Creditors") filed a joint opposition to the Motion ("Creditors Objection"). (ECF No. 47). Like the Trustee, Creditors also oppose relief from stay to permit NULC to proceed against the Debtor, but not against the non-debtor parties in the 2019 Federal Lawsuit.
Attached to the joint opposition as Exhibit 1 is a copy of a Complaint that may have been filed in the Nevada Federal Court on September 13, 2022, styled as HYPER SLS LTD D/B/A HYPER TECH, D.N.G. D/B/A TECH DAILY X ("DNG"), AND G COM PTE LTD v. T1 PAYMENTS, LLC.
On May 10, 2023, a joinder in the Trustee Opposition was filed by counsel for the Debtor ("Debtor Opposition"). (ECF No. 48).
Because the Chapter 7 Trustee controls the legal interests of the Debtor, it is not entirely clear how Debtor's counsel has the authority or even the necessity to file a joinder to the Trustee Opposition.
On May 12, 2023, Objecting Creditors filed three separate proofs of claim ("GCOM POC 3-1," "HYPER POC 4-1," and "DNG POC 5-1") in the amounts of $230,904.70, $348,478.29, and $224,308.07, respectively.
The proofs of claim seek the same amount of damages as the complaint that may have been filed by the same creditors in the Nevada Federal Court. See note 10, supra.
On May 17, 2023, NULC filed a reply in support of its Motion ("NULC Reply"). (ECF No. 49).
On June 7, 2023, after several continuances requested by counsel, oral arguments were presented, and the Motion was taken under submission.
As of the hearing date on the Motion, the 341 Meeting had not been concluded and the Trustee had not filed a report of whether there are any assets available for distribution to creditors. Accordingly, a deadline for creditors to file proofs of claim has never been established.
DISCUSSION
By the instant Motion, NULC seeks limited relief from stay to proceed in the Nevada Federal Court in the 2019 Federal Lawsuit. That civil action was commenced on October 17, 2019, when the Debtor filed a complaint against NULC for a judgment declaring the amounts owing between the parties under a prior "Card Payment Processing Agreement." NULC counterclaimed against the Debtor and multiple additional parties were joined in the action.When the Debtor filed its Chapter 7 petition for liquidation on January 30, 2023, the automatic stay arose under Section 362(a)(1) at least with respect to the continued pursuit of any counterclaims against the Debtor.
The Pierce Declaration accompanying the Motion provides two documents. Exhibit "1" is a copy of a Card Payment Processing Agreement between T1 Payments and NULC dated October 26, 2018. Exhibit "2" is a copy of the Civil Case Docket maintained by the Nevada Federal Court in the 2019 Federal Lawsuit which reflects 302 discrete documents or entries between October 17, 2019 (when the case was commenced) through April 24, 2023 (when the bankruptcy Trustee filed a status report). Docket Entry No. 222, on May 23, 2022, is an Order whereby the NULC Counterclaim was placed under seal. Sealing of the second amended counterclaim was required to comply with a prior stipulated protective order. A redacted version of the NULC Counterclaim is before the court as an attachment to NULC POC 1-2.
The following entities or individuals are named as defendants to the NULC Counterclaim: T1 Payments, LLC, Donald Kasdon, Debra Karen King aka Debra Karen Kason, Amber Fairchild, T1 Payments Ltd., TGlobal Services LLC, Pixxles Ltd., and Pixxles LLC (collectively "T1 Parties"). See Motion at 5:12-21. According to the Civil Case Docket, counsel of record appeared for each of the named counterclaim defendants. NULC served the instant Motion on such counsel. See note 9, supra. Other than T1 Payments, LLC, none of these individuals and entities are debtors in this Chapter 7 proceeding. Additionally, none of these non-debtor individuals and entities have filed proofs of claim in this Chapter 7 proceeding and none are among the group of Objecting Creditors. According to the Compensation Disclosure, however, Donald Kasdon paid Debtor's counsel for such counsel's services in this Chapter 7 proceeding.
During the 3 years, 3 months, and 7 days the 2019 Federal Lawsuit was pending before this bankruptcy proceeding was commenced, multiple pleadings were filed and substantial discovery and motion practice ensued. The latter included NULC's motion asking the Nevada Federal Court to appoint a receiver over the Debtor with respect to the sums in dispute. There is no apparent dispute that the receivership motion was heard by the Nevada Federal Court on October 14, 2022, but that the Debtor filed its Chapter 7 petition on January 30, 2023, before the Nevada Federal Court could enter a ruling. There also is no dispute that on February 22, 2023, the Nevada Federal Court entered a minute order acknowledging the automatic stay and dismissed without prejudice any outstanding motions relating to counterclaims against the Debtor.
No evidence has been offered identifying the determinations required to be made by the Nevada Federal Court in connection with the receivership motion, e.g., the validity of the claims between the Debtor and NULC, or the amount owing between the parties.
The Civil Case Docket at Item 300 contains the following: MINUTE ORDER IN CHAMBERS of the Honorable District Judge Anne R. Traum on 2/22/2023. Given the Notice of Bankruptcy filed by T1 Payments (ECF No. 299), the automatic stay provided for in 11 U.S.C. § 362(a) is now in effect. Accordingly, outstanding motions relating to claims filed against the debtor, T1 Payments, are dismissed without prejudice and with leave to refile (ECF Nos. 182, 186, 223, 226, 253, 287). See In re Censo, 638 B.R. 416, 424 (B.A.P. 9th Cir. 2022). In addition, due to allegations by Defendant and Counter Plaintiff New U Life that Pixxles Limited and other individuals and corporate entities are effectively alter egos of the debtor, T1 Payments, the Court further dismisses the following motions without prejudice and will grant leave to refile at such a time when the Bankruptcy Court determines whether the relevant Counter Defendants are subject to the automatic stay under § 362(a) or actions against them are otherwise enjoined under § 105(a) (ECF Nos. 254, 266). Additionally, now that prior Counter Defendant Payvision B.V. is no longer a party to this action (see ECF No. 298), the Court dismisses Payvisions Motion to Dismiss (ECF No. 239) and New U Lifes Motion for Leave to File Sur-Reply (ECF No. 273) as moot. The parties are to submit a joint status report no later than April 24, 2023 updating the Court on the bankruptcy proceedings and the status of this action. (no image attached) (Copies have been distributed pursuant to the NEF - PJM) (Entered: 02/22/2023) (Emphasis added).
By the instant Motion, NULC seeks an order modifying the automatic stay to permit it to proceed with the 2019 Federal Lawsuit for two primary purposes: (1) to seek entry of a judgment against the Debtor in its favor on the NULC Counterclaim, and (2) to proceed on the NULC Counterclaim against the non-debtor defendants. To accomplish the first purpose, NULC seeks to modify the automatic stay for cause under Section 362(d)(1). NULC would seek a determination of liability and amount owed by the Debtor, but would not seek appointment of a receiver inasmuch as the Trustee already is in constructive possession of the Debtor's assets. For the second purpose, NULC seeks a "comfort order" ostensibly under Section 362(j) confirming that it may proceed on its counterclaim against non-debtor defendants. In contrast to the Debtor, NULC would seek installation of a receiver with respect to the assets of non-debtor defendants. See Motion at 10:1-9.
Pursuing these purposes is problematic, however, because of certain allegations contained in the NULC Counterclaim, such as the following:
227. As alter egos of T1, the T1 Payments Entities and Pixxles entities are liable for the tortious conduct of T1.
228. The T1 Payments Entities, Fairchild, and King were co-conspirators and aided and abetted the fraudulent misrepresentations by operating a single enterprise through common employees and one website through which they all participated in the credit card laundering scheme and related fraud scheme.See Motion at 13:9-13. See also NULC Counterclaim at ¶¶ 15 and 16; and ¶¶ 238, 239, 248, 249, 270, 271, 281, 282, 295, 296. NULC maintains that the alter ego determinations sought against the non-debtor counterclaim defendants are independent of any alter ego determinations that may be entered in favor of the bankruptcy estate. See Motion at 11:12 to 14:5, citing, e.g., In re Davey Roofing, Inc., 167 B.R. 604, 608 (Bankr.C.D.Cal. 1994) (distinguishing between alter ego theories controlled by a bankruptcy trustee versus alter ego theories retained by a creditor).
Paragraphs 227 and 228 are part of the First Claim for Relief alleging fraud against all counterclaim defendants, including the Debtor. Paragraph 227 refers to the counterclaim defendant T1 Payments Entities and Pixxles as alter egos of the Debtor. Paragraph 228 refers to counterclaim defendant T1 Payments Entities, Fairchild and King as co-conspirators of the Debtor and as aiders and abettors of the Debtor. No authority is cited that fraud liability as a co-conspirator, or fraud liability as an aider and abettor, requires application of the alter ego doctrine to achieve a remedy. In other words, NULC may well have independent claims against the non-debtor counterclaim defendants separate and apart from any alter ego status.
Paragraph 15 provides: "Counterclaim Defendants T1UK, TGlobal Services LLC, TGlobal Services Ltd., Pixxles LLC, and Pixxles Ltd. are wholly-owned alter egos of T1 Payments LLC (collectively, T1 Payments, LLC, T1UK, TGlobal Services Ltd., and TGlobal Services LLC are referred to as the "T1 Payments Entities," and Pixxles LLC and Pixxles Ltd. are together referred to as "Pixxles").
Paragraph 16 provides: "Counterclaim Defendants have conducted the business practices described herein through the interrelated T1 Payments Entities, which has a common business purpose, business functions, and employees; have commingled funds; and are all controlled by Kasdon and others acting at his behest."
Those allegations are found in the First through Seventh Claims for Relief. The First, Second, Third, Fifth, Sixth, and Seventh Claims are against the Debtor and/or other counterclaim defendants. The remaining Eighth, Ninth, Tenth and Eleventh Claims are against only the Debtor, but do not contain any discrete alter ego allegations.
None of the eleven claims for relief alleged in the NULC Counterclaim is styled as an "alter ego claim for relief" or an "alter ego cause of action." Most jurisdictions treat alter ego status as a legal doctrine to provide a remedy to collect a judgment rather than as a separate cause of action. See, e.g., Giron v. Zeytuna, Inc., 597 F.Supp.3d 29, 44 (D.D.C. 2022) ("[C]ourts generally find that neither alter ego or successor liability nor piercing the corporate veil is a 'claim' in the sense of a cause of action; rather, each is a theory of liability that can be raised in connection with an underlying cause of action.:). Nevada is different. Where there is a prior judgment, a separate alter ego claim must be brought against the latter as an independent cause of action. See Allstate Insurance Company v. Nassiri, 2023 WL 2610162, at *4 (D.Nev. Mar. 22, 2023), citing, e.g., Magliarditi v. TransFirst Group, Inc., 450 P.3d 911, at *1 (Nev. Oct. 21, 2019).
Not surprisingly, the Trustee suggests that any interest in alter ego relief relating to the Debtor, if any, are assets of the Chapter 7 estate. See Trustee Opposition at 6:25 to 7:22. The Objecting Creditors maintain that NULC should not be able to proceed to pursue the non-debtor defendants if the assets of those defendants might be subject to claims of the Chapter 7 estate. See Creditors Objection at 9:4-11. Debtor simply joins in the Trustee Opposition but acknowledges that it lacks standing. See Debtor Opposition at 2 n.1. More important, the Trustee, joined by the Objecting Creditors, maintains that relief from stay on NULC's counterclaim against the Debtor is unnecessary and inappropriate because NULC POC 1-2 already has been filed and is subject to the usual claim objection procedure followed in bankruptcy proceedings. See Trustee Opposition at 4:1 to 6:23; Creditors Objection at 9:13-14.
Debtor simply joins in the Trustee Opposition but acknowledges that it lacks standing. See Debtor Opposition at 2 n.1.
I. Relief from Stay to Pursue the Counterclaim Against the Debtor.
Each of the four separate proofs of claim filed by NULC and the Objecting Creditors are signed under penalty of perjury. Because the proofs of claim are signed under penalty of perjury, they constitute prima facie evidence of validity and amount asserted by the creditor. See Fed.R.Bankr.P. 3001(f). See also Sloan v. Sandton Credit Solutions Master Fund IV (In re Sloan), 2022 WL 17716448, at *3 (B.A.P. 9th Cir. Dec. 15, 2022). Unless there is an objection to a proof of claim, the claim is deemed allowed. See 11 U.S.C. § 502(a). An objecting party, including a bankruptcy trustee, must overcome the presumption of validity by presenting sufficient evidence of probative force equal to the allegations of the proof of claim. See Burke v. Reno-Sparks Indian Colony (In re Affordable Patios & Sunrooms), 2022 WL 1115413, at *3 (B.A.P. 9th Cir. Apr. 22, 2022); Reger v. Essex Bank (In re Landes), 626 B.R. 531, 545 (Bankr. E.D. Cal. 2021). Because the Trustee in this case has not concluded the 341 Meeting, a notice of assets and claims deadline has never been issued. Other than the four proofs of claim on file, there is no information as to whether any of the other scheduled unsecured creditors, exceeding 1500, see discussion at 2, supra, will ever file proofs of claim. Because there may be little or no funds available for distribution, however, it makes little economic sense for the Trustee or any party to object to the proofs of claim that already have been filed. As of the hearing on the instant Motion, NULC's claim against the Debtor is deemed allowed as a matter of law.
FRBP 3002 generally requires unsecured creditors to timely file a proof of claim in order for the claim to be allowed. Section 704(a)(5) requires the assigned bankruptcy trustee, "if a purpose would be served," to examine proofs of claim and object if the claim is improper. FRBP 3009 provides for Chapter 7 allowed claims to be paid as promptly as practicable. Section 726(a)(2) requires allowed unsecured claims to be paid, if at all, from the funds available to the Chapter 7 trustee after priority claims are paid in full under Section 726(a)(1).
See Trustee Opposition at 4:11-15 ("New U Life has already filed a proof of claim in this bankruptcy case and is subject to the claim objection procedure before this Court pursuant to FRBP 3007. At present, there are no assets held by the Trustee for this bankruptcy estate, so there may be no need for the estate to pay for counsel to object to and litigate New U Life's claim against the Debtor if the bankruptcy estate ultimately has no assets.").
Unfortunately, NULC, the Trustee, and the Objecting Creditors spend considerable time arguing whether relief from the automatic stay should be granted for cause under Section 362(d)(1). All three discuss whether relief is appropriate under the "Sonnax/Curtis factors" commonly applied in determining whether pending non-bankruptcy litigation should be permitted to proceed. See Motion at 8:3 to 10:9; Trustee Opposition at 3:54:6; Creditors Objection at 3:22 to 8:20. While this court has addressed the Sonnax/Curtis factors on several occasions, see, e.g., In re EB Holdings II, Inc., 591 B.R. 10, 15-16 (Bankr.D.Nev. 2018) (petitioning creditor in involuntary Chapter 7 proceeding denied relief from stay to initiate new litigation in different forum), the court is aware of no case involving a creditor seeking to have a non-bankruptcy court liquidate a claim against a bankruptcy debtor that: (1) is not currently in dispute, and (2) will not be discharged. See discussion at note 31, infra. Under these circumstances, none of the Sonnax/Curtis factors, particularly "the interests of judicial economy, and the expeditious and economical resolution of litigation," favor burdening the Nevada Federal Court with an unnecessary expenditure of judicial resources. In other words, cause for relief from stay at this time simply has not been demonstrated.
II. Relief from Stay to Pursue the Counterclaim Against Non-Debtors.
The automatic stay does not apply with respect to the Debtor's claim against NULC nor against any other parties. See Censo, LLC v. NewRez, LLC (In re Censo, LLC), 638 B.R. 416, 424 (B.A.P. 9th Cir. 2022). The automatic stay in the Debtor's bankruptcy proceeding also does not apply to claims by non-debtors against any other non-debtor parties in the 2019 Federal Lawsuit. See Chugach Forest Products v. Northern Stevedoring & Handling Corp. (In re Chugach Forest Products, Inc.), 23 F.3d 241, 246 (9th Cir. 1994); Aerodynamics Incorporated v. Caesars Entertainment Operating Company, 2020 WL 5995488, at *2 (D. Nev. Oct. 9, 2020). The automatic stay also does not bar the Debtor or its principal from being subjected to discovery or to being called as a percipient witness in the 2019 Federal Lawsuit. See RS Air, LLC v. NetJets Aviation, Inc. (In re RS Air, LLC), 651 B.R. 538, 544 (B.A.P. 9th Cir. 2023). Thus, as a matter of law, the automatic stay arising from the instant Chapter 7 proceeding does not apply to NULC's independent counterclaims, if any, against the non-debtor defendants in the 2019 Federal Lawsuit.
The Censo decision was referenced in the Minute Entry of February 22, 2023, appearing at Civil Case Docket No. 300. See note 17, supra.
This is a Chapter 7 liquidation rather than a Chapter 11 reorganization. Because non-debtor parties will not be contributing their resources to assist in confirming a plan of reorganization, there is no reason to prevent NULC or any other creditor from pursuing independent claims against the non-debtor parties or their personal assets. While a "co-debtor stay" occasionally is imposed under Section 105(a) to protect non-debtor parties who might contribute effort or resources to confirming a Chapter 11 plan of reorganization, no such relief has been sought or granted with respect to the non-debtor counterclaim defendants. Compare Dunaway v. Purdue Pharmaceuticals L.P. (In re Purdue Pharmaceuticals L.P.), 619 B.R. 38, 57 (S.D.N.Y. 2020) (affirming preliminary injunction to bar pursuit of governmental enforcement and private lawsuits against owners, directors, officers and associated entities of Chapter 11 debtors). See also Purdue Pharma L.P. v. The City of Grande Prairie (In re Purdue Pharma L.P.), 69 F.4th 45, 60 (2nd Cir. 2023) ("Three days after the bankruptcy filing, the Debtors sought an injunction halting all other lawsuits (almost 3,000 actions against Purdue and over 400 actions against the Sacklers concerning liability for OxyContin). On October 11, 2019, the bankruptcy court enjoined all litigation."). In the instant case, the Debtor is not reorganizing in Chapter 11 and none of the non-debtor defendants in the NULC Counterclaim would be contributing effort or resources to a possible plan of reorganization. Section 105(a) authorizes the court to enter orders that are "necessary or appropriate to carry out the provisions of" the Bankruptcy Code, but none appear to be necessary or appropriate to achieve a Chapter 7 liquidation.
Similarly, any independent claims that NULC may have against the counterclaim defendants would not be property of the Chapter 7 estate. More important, however, any alter ego claims pursued by NULC that are determined to be property of the estate would remain property of the Chapter 7 estate unless administered or abandoned by the Trustee. See 11 U.S.C. §554(d). In this instance, Debtor's property schedules do not list any alter ego claims whatsoever and no claims against the defendants named in the NULC Counterclaim. See note 6, supra. Because such claims have never been scheduled, they would not be abandoned administratively under Section 554(c) if the Trustee simply closed the Chapter 7 case. See Stevens v. Whitmore (In re Stevens), 15 F.4th 1214, 1219 (9th Cir. 2021). No motion has been brought by the Trustee to abandon the alter ego claims of the estate, if any, encompassed by the NULC Counterclaim. See 11 U.S.C. §554(a). No motion has been brought by NULC or any other party in interest to compel the Trustee to abandon alter ego claims of the estate, if any, encompassed by the NULC Counterclaim. See 11 U.S.C. §554(b). Under these circumstances, NULC's pursuit of independent claims against the non-debtor counterclaim defendants may pose little risk to the Trustee: if the unabandoned claims subsequently are determined to be alter ego claims belonging to the Chapter 7 estate, the proceeds of any recovery would be property of the Chapter 7 estate.
Whether NULC sufficiently alleged alter ego claims against the Debtor or independent claims against the non-debtor defendants was addressed by the Nevada Federal Court in connection with NULC's prior counterclaim. See Order entered January 21, 2022. (2019 Federal Lawsuit ECF No. 194). That order granted NULC leave to file the second amended counterclaim, i.e., NULC Counterclaim, pursuit of which is the subject of the instant Motion.
Section 554(d) expressly provides: "Unless the court orders otherwise, property of the estate that is not abandoned under this section and that is not administered in the case remains property of the estate." 11 U.S.C. §554(d) (emphasis added).
In Stevens, the Ninth Circuit held that a failure to list a cause of action in the debtor's schedules did not result in an administrative abandonment under Section 554(c), even though the debtor has disclosed the action in the SOFA and otherwise informed the assigned Chapter 7 trustee. In this instance, the 2019 Federal Lawsuit has never been scheduled, see note 6, supra, even though it was disclosed in the SOFA. See note 8, supra.
It is undisputed that as a non-individual entity, the Debtor cannot obtain a discharge of its personal liability for any debt through this Chapter 7 proceeding. See 11 U.S.C. §707(a)(1). To obtain a discharge through bankruptcy, a non-individual entity must reorganize through Chapter 11 rather than liquidate. See 11 U.S.C. §1141(d)(3). Moreover, any property of a Chapter 7 estate that an assigned Chapter 7 trustee does not administer is abandoned when a Chapter 7 case is closed. See 11 U.S.C. §554(c). Because causes of action, claims for relief and other legal interests of a debtor are property of a bankruptcy estate under Section 541(a)(1), see generally Sierra Switchboard Co. v. Westinghouse Electric Corp., 789 F.2d 705, 707 (9th Cir. 1986), any causes of action or claims for relief that a Chapter 7 trustee does not pursue will be abandoned to the Chapter 7 debtor once the case is closed. When a Chapter 7 estate cannot obtain counsel to pursue a civil action, an otherwise meritorious claim might not be administered by the assigned trustee. The end result would be that a non-individual entity completes a Chapter 7 proceeding without obtaining a discharge of personal liability for its pre-bankruptcy debts while regaining control of property that the Chapter 7 trustee does not liquidate.
A Chapter 7 trustee, of course, may simply lack the funds necessary to hire counsel to pursue any litigation much less possible alter ego claims. A bankruptcy filing does not open or create a spigot of cash enabling a debtor or a trustee in bankruptcy to pursue claims against other parties. An assigned bankruptcy trustee can pursue claims held by a bankruptcy estate, settle such claims, sell them to another party, or simply abandon them. A bankruptcy trustee also may be an attorney, but is not required provide legal representation to the bankruptcy estate without being paid or having a prospect of being compensated. In other words, a bankruptcy rustee without the resources to pursue possibly meritorious claims has the same predicament as any other claimant. Moreover, in this particular Chapter 7 case, the Debtor commenced significant litigation and has left the Trustee holding the bag after even more significant litigation chaos ensued. Unless the Trustee finances or sells any assets, the result of this Chapter 7 proceeding may be that none of the Debtor's pre-bankruptcy debts will be discharged, and the Trustee will have no resources to complete the litigation commenced by the Debtor nor to gather evidence required to object to the proofs of claim. In other words, during the bankruptcy proceeding, the automatic stay will have served only to hinder or delay continued prosecution or completion of multiple lawsuits pending in three different courts.
It is not too surprising that alter ego claims were not scheduled by the Debtor inasmuch as the funds for Debtor's bankruptcy counsel were provided by Donald Kasdon who is one of the named defendants to the NULC Counterclaim.
Inasmuch as the 2019 Federal Lawsuit has been proceeding for more than three years, it is not clear whether the Trustee can find counsel willing to pursue the alter ego claims, if any, on a contingency basis. It also is not clear whether the Trustee will attempt to sell the estate's alter ego claims, if any, against the non-debtor defendants named in the NULC Counterclaim in exchange for a cut of the proceeds of any recovery.
Bankruptcy trustees do have certain powers generally unavailable outside of bankruptcy, such as recovering preferential transfers under Section 547, obtaining turnover of property of the estate under Section 542, conducting examinations of persons having information regarding the estate's assets under FRBP 2004, and waiving the attorney-client privilege previously held by a non-individual debtor. Whether to exercise such powers typically rests with the sound business judgment of the assigned trustee.
As explained above, the automatic stay arising in this Chapter 7 proceeding does not apply to any independent claims that NULC may pursue against the non-debtor parties named in he NULC Counterclaim. Therefore, the court concludes that cause under Section 362(d)(1) has not been demonstrated to grant relief from stay to pursue such claims.
III. Entry of a Comfort Order Under 11 U.S.C. § 362(j).
The Motion also requests the issuance of a so-called "comfort order" pursuant to Section 362(j) with respect to "non-debtors." The language of that statute is straightforward: "On request of a party in interest, the court shall issue an order under subsection (c) confirming that the automatic stay has been terminated." 11 U.S.C. § 362(j). As previously discussed, the automatic stay under Section 362(a) applies only to the bankruptcy debtor, property of the bankruptcy debtor, and property of the bankruptcy estate.
On its face, Section 362(j) applies only to orders issued under Section 362(c) terminating he automatic stay. Section 362(c) addresses only the circumstances in which the automatic stay erminates by occurrence of a specific event rather than action by the court, e.g., abandonment of estate property, case closure or dismissal, grant or denial of a Chapter 7 discharge, or default by repeat filers. Absent relief from stay obtained under Section 362(d), the automatic stay might terminate under Section 362(c) without an express order from the bankruptcy court. For that reason, Section 362(j) permits a party in interest to obtain an order confirming that the stay has been terminated. In this instance, the circumstances under Section 362(c) do not apply to NULC's request to pursue the non-debtor counterclaim defendants and therefore Section 362(j) also does not apply.
Under these circumstances, the comfort order requested by NULC must be denied.
IV. Conclusion.
For the reasons discussed, cause for relief from the automatic stay is not present at this time to allow NULC to pursue its counterclaim against the Debtor in the 2019 Federal Lawsuit. Cause for relief from the automatic stay also is not necessary with respect to any independent claims against non-debtor counterclaim defendants that NULC pursues in the 2019 Federal Lawsuit inasmuch as the automatic stay does not apply to those non-debtor parties. Finally, Section 362(j) does not apply to the relief sought by NULC.
IT IS THEREFORE ORDERED that the Motion to Modify the Automatic Stay for Judgment Only, Not Enforcement, Pursuant to 11 U.S.C. § 362(d)(1), Request for Comfort Order Under 11 USC 362(j) as to Non-Debtors, and Waiver of the 14-Day Stay Under FRBP 4001(a)(3), brought by creditor New U Life Corporation in the above-captioned proceeding, Docket No. 40, be, and the same hereby is, DENIED.