Opinion
Civil Action 21-CV-1135-XR 5:21-50519-RBK ADV. PROC. 21-5084-RBK
11-02-2022
In Re Douglas Kevin Smith, Debtor. v. Salubrio, LLC, Defendant. Douglas Kevin Smith, Plaintiff, Douglas Kevin Smith, Appellant, v. Eric B. Terry, Chapter 7 Trustee, Appellee.
ORDER
XAVIER RODRIGUEZ UNITED STATES DISTRICT JUDGE
On this date, the Court considered Appellant Dr. Douglas K. Smith's appeal from an order of the Bankruptcy Court granting Appellee Eric Terry's Motion to Dismiss. The Court has considered the record, applicable law, and the parties' Briefs, including Appellant's Brief (ECF No. 13), Appellee's Brief (ECF No. 14), and Appellant's Reply Brief (ECF No. 16). For the reasons stated below, the judgment of the Bankruptcy Court is AFFIRMED and the appeal is DISMISSED.
BACKGROUND
This is a pro se appeal of an order granting Appellee Chapter 7 Trustee Eric B. Terry's Rule 12(b)(6) Motion to Dismiss Plaintiff's Complaint, entered by the Bankruptcy Court on November 1, 2021. ECF No. 1-1.
Appellant Dr. Douglas K. Smith (“Dr. Smith”) is a Texas-licensed physician and radiologist, who founded Salubrio, a Nevada LLC, in 2013. ECF No. 13 at 7. Salubrio provided diagnostic MRI examinations to individuals suffering from personal injuries. ECF No. 2-5 at 13 (Plaintiff's Original Complaint). On March 11, 2020, Salubrio filed its voluntary petition for relief under Chapter 11, Subchapter V of the Bankruptcy Code in the bankruptcy case styled In re Salubrio, LLC, No. 20-50578-RBK, in the United States Bankruptcy Court for the Western District of Texas, San Antonio Division. ECF No. 6-3 at 4-21.
Salubrio, pursuant to Bankruptcy Code §§ 1107(a) and 1108, operated as a debtor-in-possession until June 10, 2020, when Salubrio as a debtor-in-possession under Chapter 11 was removed for cause. ECF No. 6-3 at 66. On September 23, 2020, Salubrio's bankruptcy case was converted to a Chapter 7 bankruptcy case, and Appellee Eric Terry (“Terry”) was appointed as the Chapter 7 Trustee (“Trustee”) of debtor Salubrio, LLC's bankruptcy estate. Id. at 67, 69.
Dr. Smith initiated Adversary Proceeding No. 20-05067-RBK against Trustee, Trustee's counsel, and creditors in Salubrio's bankruptcy case on November 1, 2020. ECF No. 6-3 at 81142. On December 1, 2020, the Bankruptcy Court ordered that “[t]he automatic stay provided by 11 U.S.C. § 362 of the Bankruptcy Code is hereby enforced against Dr. Smith for his violation of the automatic stay as a result of his filing the complaint which initiated the Adversary Proceeding.” ECF No. 6-3 at 157-59. Furthermore, the Bankruptcy Court found that, “[a]s a necessary and ‘appropriate' gatekeeping procedure, Dr. Smith must first seek leave from this Court before filing any motion or complaint in any forum that seeks relief from or against the Trustee, his professionals, or other creditors or parties in interest . . . .” Id. at 159.
Dr. Smith, on April 30, 2021, filed a voluntary petition under Chapter 11, Subchapter V of the Bankruptcy Code, initiating his personal bankruptcy case styled In re Douglas Kevin Smith, 21-BK-50519-RBK. ECF No. 2-2 at 5-21. This case was converted to a Chapter 7 bankruptcy case on August 18, 2021. Id. at 156-57. Randolph Osherow was appointed as Chapter 7 Trustee of Dr. Smith's individual bankruptcy estate. ECF No. 2-2 at 158.
On July 23, 2021, Dr. Smith filed his Original Complaint in the case related to the subject matter of this appeal, initiating Adversary Proceeding No. 21-05084-RBK against Salubrio. As Subchapter V debtor-in-possession, Dr. Smith alleged seven claims against Salubrio:
1. Breach of contract;
2. Gross negligence;
3. Malicious prosecution;
4. Promissory estoppel;
5. Unjust enrichment;
6. Breach of fiduciary duty; and
7. Sworn account.ECF No. 2-5 at 35-51 (Plaintiff's Original Complaint).
On October 1, 2021, Trustee filed a Rule 12(b)(6) Motion to Dismiss Smith's Complaint, which the Bankruptcy Court granted after an oral hearing on November 1, 2021, with both Trustee and Dr. Smith present. Id. The Court dismissed Dr. Smith's complaint in whole for multiple reasons, including Dr. Smith's failure to adhere to the Gatekeeping Order, no proof of claim, lack of standing, failure to meet the Twombly and Iqbal pleading requirements, and judicial estoppel. ECF No. 15-2 at 52-54 (Oral Hearing Transcript); see also ECF No. 1-1 at 3 (Order Granting Motion to Dismiss).
Appellant Dr. Smith appealed the Bankruptcy Court's decision to this court. Appellee Terry filed a Motion to Dismiss this appeal on December 31, 2021, alleging that Dr. Smith was untimely in filing his designations of record and statement of issues on appeal (ECF No. 5), Appellant responded on January 5, 2022. (ECF No. 8), Appellee replied on January 12, 2022 (ECF No. 9), and Appellant replied on January 19, 2022 (ECF No. 10). The Court denied Appellee's Motion to Dismiss this appeal on May 27, 2022, noting that Trustee Terry had not demonstrated that he had been prejudiced by the untimely filings or dilatory conduct by Dr. Smith. ECF No. 17.
Since Appellant filed notice of this appeal, both Appellant and Appellee have briefed the Court. See ECF Nos. 13, 14, 16.
APPELLANT'S ISSUES ON APPEAL
Appellant's Brief lists 17 issues raised on appeal. ECF No. 13. However, Appellant's previous designation of issues in his Statement of Issues (ECF No. 3), filed before briefing began, lists 11 issues raised on appeal. Appellant is limited to the 11 issues he designated in his Statement of Issues (ECF No. 3) per Federal Rule of Bankruptcy Procedure 8006, which provides that “the appellant shall file with the clerk and serve on the appellee a designation of the items to be included in the record on appeal and a statement of the issues to be presented.” FED. R. BANKR. P. 8006.
Fifth Circuit case law provides that, “even if an issue is argued in the bankruptcy court and ruled on by that court, it is not preserved for appeal under Bankruptcy Rule 8006 unless the appellant includes the issue in its statement of issues on appeal.” In re McCombs, 659 F.3d 503, 510 (5th Cir. 2011). Appellant's subsequently raised six issues are thus not preserved for appeal, and the 11 initial issues raised on appeal are laid out below.
1. Whether the bankruptcy court erred by inequitably applying 11 U.S. Code § 362 with same facts and different ruling wherein initiation of an adversary proceeding by Appellee's managing member is a per se willful violation of 11 U.S. Code § 362 although permitted under Nevada laws although other parties including non-Creditors do not violate stay by initiating a ruling adversary proceeding?
2. Whether the bankruptcy court erred by overlooking post-petition warrantless search and seizure of property Appellant's medical office and sequestration of Appellant's personal property an BK519 estate as excusable reason of Appellant's inability to state more specific claims?3. Whether the bankruptcy court erred by declining to enforce two Subpoenas issued against the court's former law clerk compelling return of personal property and property of
BK519 bankruptcy estate stolen from Appellant's medical office as reported in San Antonio Police report SAPD 21188286.
4. Whether the bankruptcy court erred by ruling Appellee's Trustee had exclusive “capacity to sue or be sued” in 20-bk-50578-rbk pursuant to 11 U.S. Code § 323(b) but that Appellant SCVDIP lacked the same exclusive capacity for the 21-bk-50519-rbk estate?
5. Whether the bankruptcy court erred by ruling that a SCVDIP is not entitled to the same immunity of a Trustee as mandated in Small Business Reorganization Act of 2019?
6. Whether the bankruptcy court erred by disregarding Chapter 86 Nevada Revised Statutes (“NRS 86”) governing statutory obligations of a Nevada Limited Liability Company to members and officers?
7. Whether the bankruptcy court erred by disregarding Appellee's Nevada Articles of Incorporation specifying its contractual obligations of Appellee to Appellant as Director and managing member?
8. Whether the bankruptcy court erred by disregarding Nevada NRS 86.371 and Appellee's Articles of Organization that limit personal liability of Appellant as a member and former officer of Nevada LLC?
9. Whether the bankruptcy court erred by disregarding Nevada NRS 86.421 and Appellee's Articles of Organization as a contract between Appellee and Appellant containing remedies for alleged purely economic damages to Appellee by its member and officer?
10. Whether the bankruptcy court erred by disregarding ECONOMIC LOSS RULE prohibiting recovery for purely economic tort damage claims when a contractual agreement, Salubrio's Operating Agreement, exists between the parties that contains remedies for alleged purely economic damages that even if they had occurred would have within capacity as officer applying business judgement?
11. Whether the bankruptcy court erred by issuance of a default judgement in Appellee's 21-AP-5091 case against Appellant based upon untimely response by Appellant SCVDIP to Appellee's complaint in 21- AP-05091 considering Appellee's warrantless seizure and sequestration of estate property required for Appellant SCVDIP to provide an accurate and timely response to Appellee's Complaint supra?
DISCUSSION
I. Appellate Standard of Review
A district court has jurisdiction to hear appeals from final judgments, orders, and decrees of bankruptcy judges entered in cases and proceedings referred to bankruptcy judges. See 28 U.S.C. § 158(a). On appeal, a bankruptcy judge's conclusions of law are reviewed de novo, whereas findings of fact will not be set aside unless they are found to be clearly erroneous. In re National Gypsum Co., 208 F.3d 498, 503 (5th Cir. 2000). The district court reviews mixed questions of law and fact de novo. Id.
The court reviews discretionary decisions of the bankruptcy court for abuse of discretion. See Mendoza v. Temple-Inland Mortgage Corp. (In re Mendoza), 111 F.3d 1264, 1270 (5th Cir. 1997). A bankruptcy court abuses its discretion when “its ruling is based on an erroneous review of the law or on a clearly erroneous assessment of the evidence.” In re Yorkshire, LLC, 540 F.3d 328, 331 (5th Cir. 2008) (quoting Chaves v. M/V Medina Star, 47 F.3d 153, 156 (5th Cir. 1995)).
II. Analysis
A. Standing
Bankruptcy courts are not created by Article III of the Constitution and thus are not necessarily bound by traditional standing requirements. In re Coho Energy Inc., 395 F.3d 198, 202 (5th Cir. 2004). Previous versions of the Bankruptcy Code provided that to have standing to appeal a bankruptcy court's order, one must be a “person aggrieved” by the order of a bankruptcy referee. 11 U.S.C. § 67(c) (1976). This provision has since been omitted from the Code, but the “person aggrieved” test has survived as the baseline for standing in bankruptcy appeals in many circuits, including the Fifth Circuit. In re Coho, 395 F.3d at 202. This test is more exacting than traditional constitutional standing and requires a stronger causal nexus between act and injury. Id. Thus, this inquiry asks whether an appellant was “directly and adversely affected pecuniarily by the order of the bankruptcy court.” Id. (internal quotations omitted).
The Bankruptcy Court's Order Granting the Motion to Dismiss Dr. Smith's complaint was proper because Dr. Smith is not a creditor of Salubrio's bankruptcy estate and thus lacks standing to appeal the Bankruptcy Court's Order. Under penalty of perjury, Dr. Smith was not listed as a creditor on Salubrio's sworn schedules. ECF No. 6-3 at 22-65 (Schedule A/B: Assets -- Real and Personal Property). Furthermore, because he does not own the accounts receivable that are the basis of the seven issues he raised in his Complaint, he lacks standing as someone who will be affected by the relief he seeks in the Complaint. Dr. Smith is attempting to assert rights of the Trustee in ownership of the accounts receivable, but those accounts receivable are property of the Salubrio bankruptcy estate, and Dr. Smith's only capacity is as a Subchapter V debtor-in-possession. Dr. Smith, under penalty of perjury, listed the accounts receivable of Salubrio as the property of Salubrio. Id. at 24. Dr. Smith thus lacks standing because he is not a “person aggrieved” for purposes of appeal (he is not a creditor), and he is not “directly and adversely affected pecuniarily” by the dismissal of the Adversary Proceeding at issue in this case (because the accounts receivable that are the basis of his Complaint are not his property). The Court therefore affirms the Bankruptcy Court's Order Granting the Motion to Dismiss.
B. Judicial Estoppel
Judicial estoppel is “a common law doctrine by which a party who has assumed one position in his pleadings may be estopped from assuming an inconsistent position. The purpose of the doctrine is to protect the integrity of the judicial process, by preventing parties from playing fast and loose with the courts to suit the exigencies of self interest.” In re Coastal Plains, Inc., 179 F.3d 197, 205 (5th Cir. 1999) (internal citations and quotations omitted). In order for judicial estoppel to apply and prevent a party from asserting contrary positions in litigation, two requirements must be satisfied: (1) the position of the party to be estopped must be clearly inconsistent with its previous one; and (2) that party must have convinced the court to accept that previous position. Id. at 206; Blankenship v. Buenger, No. 15-50974, 653 Fed.Appx. 330, 336-37, 2016 WL 3538829, at *4 (5th Cir. June 28, 2016).
The Court finds that Dr. Smith is judicially estopped from claiming that the accounts receivable at issue in his Complaint are his personal property, and not the property of the bankruptcy estate, and therefore affirms the Bankruptcy Court's Order Granting the Motion to Dismiss. Because Dr. Smith, under penalty of perjury, previously listed the accounts receivable of Salubrio as the property of Salubrio (ECF No. 6-3 at 24 (Schedule A/B: Assets -- Real and Personal Property)), and only in the Complaint does he begin to allege that the accounts receivable are his personal property (ECF No. 2-5 at 13 (Plaintiff's Original Complaint)), the doctrine of judicial estoppel bars his claims. Dr. Smith's position in his Complaint is clearly inconsistent with his position in the Salubrio schedules. Secondly, the Court, because the schedules were signed under penalty of perjury, accepted those previously held positions.
The Bankruptcy Court correctly reached the same conclusion, holding that “Dr. Smith previously listed the accounts receivable of Salubrio as the property of Salubrio and he's tried to switch and now say that somehow the accounts receivable are his personally because he's the physician [. . . ] that's running the whole operation or was running the whole operation. But he's sworn under oath in the schedules in the Salubrio case that he's not the owner, that the owner of the causes of action against the various personal injury claimants and their attorneys is Salubrio.” ECF No. 15-2 at 54.
For the reasons listed above, both because Appellant lacked standing and was judicially estopped from raising his claims against Appellee, the Bankruptcy Court's Order Granting the Motion to Dismiss was proper. The Court need not consider at this time any other pending arguments made by Appellant or Appellee regarding the Bankruptcy Court's Order, as the appeal can be resolving on standing and judicial estoppel grounds alone.
CONCLUSION
The Court has carefully considered the record and the arguments and authorities presented in Appellant's Brief (ECF No. 13), Appellee's Brief (ECF No. 14), and Appellant's Reply Brief (ECF No. 16). The Court has conducted a de novo review of the Bankruptcy Court's Motion to Dismiss Order with respect to the issues raised on appeal. The Court, even after taking into consideration Appellant's supplemental exhibits (ECF No. 15), including the hearing record, made available after Appellee's Brief was filed, finds that the Bankruptcy Court's order was proper. Thus, for the foregoing reasons, the decision of the Bankruptcy Court is AFFIRMED. A final judgment pursuant to Rule 58 will follow.
IT IS SO ORDERED.