Latitude Solutions, Incorporated v. DeJoria, --- F.3d ---- (2019)

67 Bankr.Ct.Dec. 32

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

2019 WL 1923466United States Court of Appeals, Fifth Circuit.

In the Matter of: LATITUDESOLUTIONS, INCORPORATED, Debtor

Carey D. Ebert, Appelleev.

John Paul DEJORIA; Howard Miller Appel; EarnestA. Bartlett, III; Matthew J. Cohen, Appellants

No. 18-10382|

April 30, 2019

SynopsisBackground: Trustee of corporate debtor's Chapter 11estate brought cause of action to recover for allegedbreaches of fiduciary duty by debtor's founder and formerchief financial officer (CFO), as well as against partiesthat allegedly aided and abetted these breaches. Followingjury verdict in trustee's favor, defendants filed motionsfor entry of judgment as matter of law, which the UnitedStates District Court for the Northern District of Texas,Reed Charles O'Connor, J., denied. Defendants appealed.

Holdings: The Court of Appeals, Haynes, Circuit Judge,held that:

trustee of corporate debtor's Chapter 11 estate did nothave Article III standing to assert claim for damagessustained by contractor that had agreed to manufactureequipment on debtor's behalf;

jury's assessment of $ 400,000 in damages against debtor'sfounder and former chief financial officer (CFO), forhis breach of fiduciary duty in allegedly engaging inillegal pump-and-dump scheme, had legally sufficientevidentiary basis;

damages awarded against third parties that aided andabetted fiduciary breaches committed by former CFOcould not be based on gains realized, not by these thirdparties in their individual capacities, but by nomineecompanies; and

award of exemplary damages had to be vacated, andmatter had to be remanded to district court forreassessment of exemplary damages issue.

Affirmed in part, reversed and rendered in part, vacatedin part, and remanded.

Procedural Posture(s): On Appeal; Motion for Judgmentas a Matter of Law (JMOL)/Directed Verdict.

Appeals from the United States District Court for theNorthern District of Texas, Reed Charles O'Connor, U.S.District Judge

Attorneys and Law Firms

Jonathan S. Franklin, Peter B. Siegal, Norton RoseFulbright US, L.L.P., Washington, DC, John C.Anderson, Anderson Law Firm, Baton Rouge, LA,Joseph Elton Cullens, Jr., Esq., Jennifer Wise Moroux,Walters, Papillion, Thomas, Cullens, L.L.C., BatonRouge, LA, Robin Eric Phelan, Haynes & Boone, L.L.P.,Dallas, TX, for Appellee.

Thomas Miles Farrell, Attorney, Charles BedfordHampton, Esq., McGuireWoods, L.L.P., Houston, TX,for Appellant John Paul DeJoria.

Kenneth R. Shemin, Shemin Law Firm, P.L.L.C., Rogers,AR, Grant E. Fortson, Attorney, Lax, Vaughan, Fortson,Rowe & Threet, P.A., Little Rock, AR, for AppellantsHoward Miller Appel, Earnest A. Bartlett, III, MatthewJ. Cohen.

Before BARKSDALE, SOUTHWICK, and HAYNES,Circuit Judges.

Opinion

HAYNES, Circuit Judge:

*1 This appeal involves two competing versions of thehistory and purpose of Latitude Solutions, Inc. (“LSI”).Howard Appel, Earnest Bartlett, Matthew Cohen, andJohn Paul DeJoria (“Appellants”) characterize LSI as apublicly traded company which sought to commercializetechnology that could remediate contaminated waterbut was unsuccessful as a speculative venture. On theother hand, LSI's bankruptcy trustee, Carey Ebert,characterizes LSI as a fraud from its inception—usedonly as a mechanism for Appellants to participate in and

Latitude Solutions, Incorporated v. DeJoria, --- F.3d ---- (2019)

67 Bankr.Ct.Dec. 32

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 2

profit from a securities fraud scheme. Ebert sued severalof LSI's corporate officers, directors, and investors forbreaches of fiduciary duty. By the end of trial, her casefocused primarily on a contract LSI entered into withJabil Inc., one of LSI's bankruptcy creditors. The juryfound Appellants liable and assessed millions of dollarsin compensatory and exemplary damages. Appellantspresent various arguments for why we should overturnthe jury verdict and reduce damages, including whetherEbert has Article III standing and whether there waslegally sufficient evidence for the jury to find as itdid. We AFFIRM in part, REVERSE and RENDERin part, VACATE in part, and REMAND for further

consideration consistent with this opinion. 1

I. Background

This appeal stems from a jury verdict and final judgmentadjudicating Matthew Cohen and John Paul DeJorialiable for breaches of fiduciary duty to LSI and findingHoward Appel and Earnest Bartlett liable for aiding andabetting those breaches. The final judgment awards Ebertcompensatory damages against (i) Appel, Bartlett, Cohen,and DeJoria for $ 6.9 million, jointly and severally, forCohen's breach of fiduciary duty; (ii) Appel and Bartlettfor $ 2.5 million each for aiding and abetting Cohen'sbreach of fiduciary duty; (iii) DeJoria for $ 1.5 millionfor his breach of fiduciary duty; and (iv) Appel for $ 5million, Cohen for $ 2 million, and DeJoria for $ 1 millionin exemplary damages.

A. LSIThe parties disagree on the basic premise of LSI'sformation. Ebert asserts LSI was a sham companyset up to fail from the outset, and a vehicle forAppellants to participate in a securities fraud schemeknown as “pump-and-dump,” while Appellants claim LSIwas legitimately founded to develop and commercializetechnology capable of remediating contaminated water.LSI was a publicly traded company that began operatingin 2009 and developed patented technology for treatmentof wastewater in the oil and gas industry. LSI was aspeculative venture that eventually filed for bankruptcy in

November 2012. 2

B. Matthew Cohen

*2 Cohen was one of the founding members of LSI andserved as an officer and director of LSI from March 2009through June 2012. Cohen was the Chief Financial Officerof LSI from June 2011 to June 2012.

C. Howard AppelAppel was a business consultant to and raised capitalfor LSI. In 2004, before LSI existed, Appel pled guiltyto conspiracy to commit securities fraud as well asconspiracy to commit money laundering and servedtwenty-one months in prison. The parties vehementlydisagree whether this is relevant to LSI. The trustee usesAppel's conviction as evidence of a pattern of nefariousbehavior, while Appellants argue Appel's past is the onlyreason for the trustee's lawsuit, despite no evidence thatAppel engaged in any criminal conduct related to LSI. AnLSI board member introduced Appel to the company in2010, which eventually led to Appel's family and friendsinvesting in LSI beginning in February 2011. Appel wasresponsible for raising at least $ 12 million in capital forLSI through outside investors. Appel did not purchase orsell any shares of LSI stock.

D. Earnest BartlettBartlett is a friend and business associate of Appel.Appel introduced Bartlett to LSI. A company affiliatedwith Bartlett, FEQ Realty, invested in LSI beginningin December 2010. In April 2011, FEQ Realty enteredinto a consulting agreement with LSI. Appel providedhis consulting services to LSI as an outside consultantunder FEQ Realty's consulting agreement. Bartlett neverpurchased or sold any LSI stock.

E. John Paul DeJoriaDeJoria is an entrepreneur and philanthropist with aninterest in developing clean-water solutions. He investedand lost over $ 11 million in LSI beginning in March 2011.For most of 2012, DeJoria was LSI's primary source offunding. DeJoria served on LSI's board of directors fromOctober 2011 to September 2012.

F. Jabil, Inc.Jabil, Inc., is not a party to the case but plays a crucial rolehere. In May 2011, Jabil entered into an agreement withLSI to manufacture remediation equipment. The partiesdispute whether the deal was done for legitimate purposes.

Latitude Solutions, Incorporated v. DeJoria, --- F.3d ---- (2019)

67 Bankr.Ct.Dec. 32

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 3

Jabil is a creditor in LSI's bankruptcy, with a claim for$ 9.55 million. By the end of evidence at trial, the trusteeconceded the only damages the estate could recover were1) the amount of the Jabil debt and 2) the amount of anygains to the defendants that the trustee could specificallylink to fiduciary breaches.

G. LSI's Bankruptcy and the District CourtProceedings

Carey Ebert was appointed as LSI's Chapter 7 bankruptcytrustee, and the matter was eventually converted into aChapter 11 proceeding. As the Chapter 11 trustee, sheattempted to find investors to invest in LSI and leaseequipment to keep LSI operating. Ebert, however, wasunable to generate enough revenue to allow the companyto resume business. Ebert filed the operative complaintin November 2015, raising various claims against overtwenty defendants. With respect to the Appellants, Ebertalleged that Appel gained practical control of LSI andused it to perpetrate securities fraud and engage in insidertrading; that LSI was a fraud formed for an illegitimatepurpose; that Appel and Bartlett made substantial profitthrough manipulative conduct; and that Cohen andDeJoria joined in the conspiracy to profit from stockmanipulation.

*3 By the close of evidence at trial, the lawsuit hadnarrowed significantly—numerous counts and more thana dozen defendants were dismissed. The claims thatwent to the jury were one count each of a breach offiduciary duty owed to LSI against Cohen and DeJoria,and one count of aiding and abetting Cohen's breach offiduciary duty against DeJoria, Appel, and Bartlett. Asnoted above, based upon the evidence presented, the onlydamages remaining at issue were 1) the amount of the Jabildebt and 2) the amount of any gains to the defendants thatthe trustee could specifically link to fiduciary breaches.

Appellants moved for judgment as a matter of law underFederal Rule of Civil Procedure 50(a) and the districtcourt carried the motions. The district court then helda charge conference, at which the parties agreed to thefollowing: Question 1 would determine whether Cohenand DeJoria breached their fiduciary duties with a “yes”or “no” answer. Question 2 would determine whether

Appel, Bartlett, and DeJoria aided and abetted 3 Cohen'sbreach of fiduciary duty. Question 3 limited the trustee'sdamages to the following:

Damage Element No. 1: The reasonable cash marketvalue of liabilities incurred by LSI as a proximate causeof that defendant's breach of fiduciary duty, whichliabilities are still owed and have not yet been paid, ifany.

Damage Element No. 2: The reasonable market valueof any gains to that defendant (including salaries,consulting fees, net proceeds from stock issuances todirectors and/or officers of LSI, and other expenses)proximately caused by that defendant's breach offiduciary duty.

Questions 4 and 5 would determine eligibility for andquantify exemplary damages. The jury found Cohen andDeJoria each committed a breach of fiduciary duty andAppel, Bartlett, and DeJoria aided and abetted Cohen'sbreach. The jury assessed damages as follows:

The jury also assessed exemplary damages of $ 5 millionagainst Appel, $ 2 million against Cohen, and $ 1 millionagainst DeJoria. Following the jury verdict, all fourAppellants renewed their motions for judgment as amatter of law. The district court denied their motions,granted Ebert's motion for judgment, and later deniedmotions for reconsideration. This timely appeal followed.

II. Discussion

A. Ebert Lacks Article III Standing to Recover Jabil'sDamages

Appellants argue that Ebert lacks Article III standing torecover Jabil's damages under Damage Element No. 1 ofthe jury charge. Article III standing requires a plaintiffto have “suffered an ‘injury in fact,’ ” show “a causalconnection” between the injury and the conduct at issue,

and the injury must be redressable by the court. Lujanv. Defenders of Wildlife, 504 U.S. 555, 560, 112 S.Ct. 2130,119 L.Ed.2d 351 (1992). “[A] plaintiff must demonstratestanding for each claim [s]he seeks to press” and have

Latitude Solutions, Incorporated v. DeJoria, --- F.3d ---- (2019)

67 Bankr.Ct.Dec. 32

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 4

“standing separately for each form of relief sought.”

DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 352, 126S.Ct. 1854, 164 L.Ed.2d 589 (2006) (citation omitted).

Ebert's liability theory with respect to Cohen and

DeJoria's breaches of fiduciary duty focused on Jabil. 4

In her closing argument, she claimed “the fraud, theimproper conduct, was entering into the Jabil contractin May 2011 ... that's what caused the damages.” Ebertargued Jabil was misled because they “weren't givenaccess to [LSI's] books,” and were unaware of Appel'sinvolvement or prior criminal history. As for damages,Ebert consistently asserted that she was seeking theamount of the Jabil debt, stating that “we know Jabil lost9.5 million” and asked the jury to “forget about the otherhundred and something creditors ... focus on Jabil.”

*4 Under Damage Element No. 1, the jury was askedto assess “the reasonable cash market value of liabilitiesincurred by LSI as a proximate cause of that defendant'sbreach of fiduciary duty, which liabilities are still owedand have not yet been paid, if any.” But the millions ofdollars awarded under Damage Element No. 1 representJabil's injury, not LSI's. Jabil manufactured and deliveredthe contractually agreed upon equipment to LSI. LSIbenefitted from the equipment, and Ebert even leased andsold the equipment in Chapter 11 proceedings. Moreover,LSI did not pay the invoices on the equipment. Therefore,LSI benefitted and even had cash available for other needs.

Although we have not squarely addressed Article IIIstanding under the circumstances presented in this case,Appellants note several persuasive authorities holdingthere was no Article III standing in factually analogousscenarios. In In re Waterford Wedgwood USA, Inc., 529B.R. 599 (Bankr. S.D.N.Y. 2015), the debtor “failed tocontribute the full amount it owed” to a retirement planit sponsored. Id. at 601. The debtor hired an accountingfirm to audit the retirement plan, but the firm failed tonotify the debtor about the underfunding. Id. at 601. Thebankruptcy trustee for the debtor sued the firm for unpaidliabilities to the retirement plan. Waterford held that thebankruptcy trustee lacked Article III standing becausethe debtor had not suffered an injury. Id. at 604–05. Thecourt reasoned that “the trustee alleges damages to thedebtors, to the extent of the unpaid obligations of thedebtors to the creditors ... [but] the Debtor appears tohave benefitted from not paying the required RetirementPlan contributions by gaining the use of funds that should

have been in the Retirement Plan's possession.” Id. at

605 (citing In re Am. Tissue, Inc., 351 F.Supp.2d 79,93–94 (S.D.N.Y. 2004) (holding that a debtor could notcharacterize its monetary gain as injury)). The WaterfordCourt went on to state that the trustee could “allege aconstitutional injury ... if the bankruptcy estate paid anyof the shortfall.” Id. at 605. Waterford shares the factualcircumstances of this case—a bankruptcy trustee suedand argued a debt it owes constitutes an injury, despitehaving made no payments. In fact, LSI gained even morethan the debtor in Waterford because it benefitted fromnot paying Jabil's invoice and retained and then sold themanufacturing equipment.

In Reneker v. Offill, 2009 WL 804134 (N.D. Tex.Mar. 26, 2009), a receiver for various entities sued theentities' attorneys for negligence, violations of securitieslaws, and the consequent $ 36.5 million liability owed

to investors. Id. at *5. Citing In re American

Tissue, the Reneker Court held the receiver lackedArticle III standing because “the only harm alleged isthe Receivership Estate's inability to satisfy its liabilities.”

Id. at *6. The court held the receiver did not haveArticle III standing to sue for damages his clients didnot suffer, stating “[t]he Receivership Estate's financialinability to satisfy liabilities owed to investors as a resultof securities-laws violations harm[ed] the investors,” not

the receiver. Id. Reneker is also analogous to LSI'scase; the receiver and bankruptcy trustee are similarlysituated, while Appellants are similarly situated to theattorneys accused of negligence. Jabil and the investors in

Reneker are both creditors. In addition, the securitieslaws violations are analogous to the Jabil contract asthe event the receiver and trustee argue caused damages.Based on the triggering events, Ebert and the receiverattempted to recover damages owed because of fraudulentor negligent conduct.

*5 Ebert responds that LSI suffered harm by taking on

millions of dollars in debt. She analogizes to Norrisv. Causey, 869 F.3d 360 (5th Cir. 2017), to argue for

standing. We held in Norris that “[t]he Norrises' injury

is clear: they lost thousands of dollars.” Id. at 366.

However, Norris is distinguishable; the Norrises wrotechecks for $ 48,000, $ 45,000, and $ 1,000, but the Causeys

Latitude Solutions, Incorporated v. DeJoria, --- F.3d ---- (2019)

67 Bankr.Ct.Dec. 32

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 5

never moved forward with their end of the bargain. Id.at 364. Here, LSI did not pay Jabil's invoice but stillretained Jabil's end of the bargain, the manufacturing

equipment. Ebert also cites Norris for the propositionthat “this litigation can redress the loss through damages,

as the judgment demonstrates.” Id. at 366. But thisargument refers to redressability, not LSI's injury in

fact, and is thus inapposite. 5 Accordingly, all damagesawarded under Damage Element No. 1 against anydefendant must be reversed for lack of Article III standing

(thus leaving no actual damages against DeJoria). 6

B. A Reasonable Jury Could Find Cohen Liable forBreach of Fiduciary Duty Owed to LSI

Cohen argues 7 that he is entitled to judgment as a matterof law because there is not legally sufficient evidence toprove he breached his fiduciary duty to LSI. “We reviewa district court's ruling on a motion for judgment as amatter of law de novo.” Nobach v. Woodland Vill. NursingCtr., Inc., 799 F.3d 374, 377 (5th Cir. 2015) (footnote andcitation omitted). When reviewing a district court's denialof a post-verdict Rule 50(b) motion, we assess “whethera reasonable jury would not have a legally sufficientevidentiary basis to find for the party on that issue.” Id.(quoting FED. R. CIV. P. 50(a)(1)). Despite our holdingin Section II.A, we address this issue because it concernsdamages awarded under Damage Element No. 2.

Texas law required Ebert to prove: 1) that a fiduciaryrelationship existed; 2) that Cohen breached his fiduciaryduty to LSI; and 3) that Cohen's breach resulted in injury

to LSI or benefitted him. Navigant Consulting, Inc. v.Wilkinson, 508 F.3d 277, 283 (5th Cir. 2007). The firstelement is not in dispute. Cohen's fiduciary duty requireda duty of loyalty and duty of care to LSI.

As noted above, Ebert's case began by alleging anelaborate pump-and-dump scheme of LSI's stock andwidescale fraud, but by the time the case was submitted tothe jury, Ebert's argument was based entirely on the Jabilcontract:

the fraud, the improper conduct,was entering into the Jabil contractin May 2011. That's what inevitably

caused this company to collapse,that's what caused the damages, andthat was the impetus of why orpurpose of this fraudulent schemewas to enter into that Jabil contract,make a big splash, make it seem likethis was a legitimate business whenit had no hope for survival.

Ebert provided the following evidence to support herclaim: Cohen took on Appel as an advisor and spoketo him daily; Cohen sent Appel non-public information,including lists of shareholders and stock sales on a weeklybasis; Cohen dealt personally with Jabil; prior to theJabil contract, Cohen had not told anyone at Jabil aboutAppel's conviction for securities fraud manipulation; LSIhad no idea whether the machinery from the Jabil contractwould work; LSI had no business plan, or leads tomonetize the equipment from the contract, but Cohen andAppel drafted LSI press releases together to generate goodnews and publicize it; and while still a director, Cohen soldhis stock in LSI for $ 400,000 because he “needed to havesome money in the bank.”

*6 Cohen contends that his conduct is protected by thebusiness judgment rule. In Texas, the “rule ... protectscorporate officers and directors, who owe fiduciary dutiesto [a] corporation[ ] from liability for acts that arewithin the honest exercise of their business judgment anddecision.” Sneed v. Webre, 465 S.W.3d 169, 173 (Tex.2015) (citation omitted). Negligent, unwise, inexpedient,or imprudent actions are protected so long as “the actions[are] ‘within the exercise of their discretion and judgmentin the development or prosecution of the enterprise inwhich their interests are involved.’ ” Id. at 178 (quoting

Cates v. Sparkman, 73 Tex. 619, 11 S.W. 846, 849(1889)) (footnote omitted). The jury charge, however,instructed the jury on both what is required to showa breach of fiduciary duty, along with the parametersof the business judgment rule. Given Cohen's actions, areasonable jury could weigh the evidence, consider thebusiness judgment rule, but conclude that Cohen breachedhis fiduciary duty to LSI.

Cohen also argues that because the existence ofan attempted pump-and-dump securities fraud schemewould not be clear to a jury, Ebert was required to offerexpert testimony supporting her claim. However, the case

Latitude Solutions, Incorporated v. DeJoria, --- F.3d ---- (2019)

67 Bankr.Ct.Dec. 32

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 6

he cites, Fener v. Operating Engineers ConstructionIndustry & Miscellaneous Pension Fund (LOCAL 66),579 F.3d 401, 409 (5th Cir. 2009), stands for a differentproposition: that proving a loss causation claim under§ 10(b) of the Securities Exchange Act of 1934 requires“the testimony of an expert—along with some kind of

analytical research or event study.” Id. No such claimexists here. Even if we were to apply Cohen's standard,Ebert did put on an expert who testified extensively aboutred flags of a pump-and-dump scheme in the securitiesindustry and how LSI demonstrated a number of thosetraits. We therefore reject this argument.

The jury assessed damages of $ 400,000 against Cohenunder Damage Element No. 2. Cohen argues there isno evidentiary support for this monetary amount. ButCohen himself testified that he made $ 557,109 in salaryfor his time at LSI and sold about $ 400,000 of LSIstock because he “needed to have some money in thebank.” None of Appellants' lawyers objected during thistestimony. Damage Element No. 2 allowed for damagesfrom “the reasonable market value of any gains to thatdefendant (including salaries, consulting fees, net proceedsfrom stock issuances to directors and/or officers of LSI ...)proximately caused by that defendant's breach of fiduciaryduty.”

Considering the jury found Cohen liable for a breachof fiduciary duty based on an alleged pump-and-dumpscheme and improperly propping up LSI by enteringthe Jabil contract for nefarious purposes, there is legallysufficient evidence for a reasonable jury to award $400,000 in damages.

C. Ebert Did Not Provide Legally Sufficient Evidenceto Show Appel and Bartlett Personally Received Gainsfrom Stock Sales

Appel and Bartlett were not liable for damages underDamage Element No. 1. On the other hand, the jury foundAppel and Bartlett liable for $ 2.5 million each underDamage Element No. 2 for aiding and abetting Cohen'sbreach of fiduciary duty, which allowed the jury to awarddamages for the “reasonable market value of any gainsto that defendant (including salaries, consulting fees, netproceeds from stock issuances to directors and/or officersof LSI, and other expenses) proximately caused by thatdefendant's breach of fiduciary duty.”

Appel and Bartlett argue that Ebert presented no evidencethey received gains from stock sales in their individualcapacity and that any evidence instead relates to entitiesaffiliated with them. Ebert cites the expert testimony ofRobert Manz as the “critical evidence” to support Appeland Bartlett's damages calculation. Manz testified thata “nominee company” is one that “stands in the placeof a person or another company,” and is often usedto “hide the identity of a person or another entity.”Manz also testified that Appel owned more than 5% ofLSI's outstanding stock through nominee companies, thatBartlett owned another 1.5% of LSI through nomineecompanies, that Appel, Bartlett, and their associatesearned a total of $ 5.1 million of profit from LSI stock,and that FEQ Realty made $ 2.3 million in profit from LSIstock. In its denial of Appellants' post-verdict motions, thedistrict court cited Manz's testimony to uphold the jury'sverdict.

*7 Through Manz's testimony, however, Ebert tacitlyadmits that she provided evidence only for the nomineecompanies' gains, not for Appel and Bartlett in theirindividual capacity. Manz's calculations were basedprimarily on two documents: Schedule 7.B, which showedmarket sales of LSI stock, and a list of nominee companieswith how many shares of LSI each owned as of September9, 2011. Yet these documents only list companies andprovide no proof of or insight into Appel and Bartlettas individuals. Ebert originally named a number of theseentities as defendants in her lawsuit, including FEQRealty, LLC, DIT Equity Holdings, Capital GrowthRealty, and Wiltomo Redemption Foundation. But sheeventually dismissed them with prejudice. Perhaps mostsignificantly, Manz testified that “I don't know exactlywhat you define as the Appel Group” and acknowledgedthat he had no insight on whether or how a company wasrelated to Appel. Instead, Ebert's counsel simply informedManz “what constituted Appel-related companies” for thedocument. Manz was also unable to answer questionsabout the various entities in his documents and testifiedthat he had not tracked down the alleged gains to Appeland Bartlett individually.

Because Ebert did not provide evidence against Appeland Bartlett in their individual capacities and the entitiesand companies in question were dismissed with prejudice,the only way Appel and Bartlett could be liable is underan alter ego theory. Ebert, however, made no attemptto make such a showing. On appeal, she argues that a

Latitude Solutions, Incorporated v. DeJoria, --- F.3d ---- (2019)

67 Bankr.Ct.Dec. 32

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 7

jury could impose damages based on Appel and Bartlett'snominee companies because “a party cannot invoke thecorporate form ‘as a cloak for fraud or illegality or

to work an injustice,’ ” citing Matthews ConstructionCompany, Inc. v. Rosen, 796 S.W.2d 692, 693 (Tex.1990). However, even if we assumed the most generousreading of her corporate form arguments under Texaslaw, cf. Texas Business Organizations Code § 21.223, sheprovided no evidence to support piercing the corporateveil or any alter ego theory. Thus, Ebert did not providelegally sufficient evidence for a reasonable jury to findAppel and Bartlett liable in their individual capacities.We therefore REVERSE the damages against Appel andBartlett under Damage Element No. 2, leaving no actualdamages against them.

D. Exemplary DamagesNo exemplary damages were awarded against Bartlett.In light of our holding leaving no actual damagesagainst Appel and DeJoria, the judgment awardingexemplary damages against them must be vacated. TEX.CIV. PRAC. & REM. CODE 41.004(a) (requiring morethan nominal damages to be awarded before exemplarydamages can be awarded). Therefore, the only remainingactual damages are the $ 400,000 awarded against Cohenunder Damage Element No. 2. In addition to the damages

cap under Texas law ( TEX. BUS. & COMM. CODE§ 41.008(b)), the jury was instructed to consider “thecharacter of the conduct involved” and “the nature

of the wrong” before assessing exemplary damages. 8

But because portions of the “conduct” and “wrong”are no longer viable as a matter of law, the jury may

have awarded a different amount of exemplary damageagainst Cohen than the $ 2 million it awarded. Neitherparty has briefed the effect of this potential outcomeon the exemplary damages awarded against Cohen. Weconclude that this issue should be addressed in the firstinstance by the district court following full briefing. Wetherefore VACATE the exemplary damages award andREMAND to the district court to consider the legal issuessurrounding exemplary damages against Cohen in the firstinstance.

III. Conclusion

In light of the foregoing decision, Appel, Bartlett, andDeJoria are entitled to judgment rendered in theirfavor: (1) DeJoria, because of the lack of proof of arecoverable injury, see Lindley v. McKnight, 349 S.W.3d113, 124 (Tex. App.—Fort Worth 2011, no pet.) and thecorresponding vacatur of exemplary damages; (2) Appel,because there was no evidence of individual liability andthe corresponding vacatur of exemplary damages; and(3) Bartlett, because there was no evidence of individualliability. Thus, we REVERSE and RENDER judgment infavor of Appel, Bartlett, and DeJoria. As for Cohen, weVACATE damages awarded under Damage Element No.1, AFFIRM damages awarded under Damage ElementNo. 2, and REMAND to the district court to consider howour opinion impacts the award of exemplary damages.

All Citations

--- F.3d ----, 2019 WL 1923466, 67 Bankr.Ct.Dec. 32

Footnotes1 As explained more fully below, we reverse and render judgment in favor of Appel, Bartlett, and DeJoria. As for Cohen,

we vacate damages awarded under Damage Element No. 1, affirm damages awarded under Damage Element No. 2,and remand to the district court to consider the legal issues surrounding exemplary damages against Cohen in the firstinstance.

2 Aside from the allegations regarding each Appellant's conduct, which are discussed below, LSI experienced internalcontrol and accounting issues. For example, its financial team used accounting software that was inadequate for a publiclytraded company and eventually self-reported to the Department of Justice on suspicions of fraud and stock manipulation.

3 Because of our conclusions below, we do not reach the issues surrounding whether “aiding and abetting” a breach offiduciary duty was a proper jury submission in this case.

4 We note one additional point relevant only to DeJoria: DeJoria did not become a director at LSI until October 2011, somefive months after LSI entered into the Jabil contract. Ebert provided no evidence that DeJoria should be liable for thedamages incurred by action that predated his time as an LSI director.

5 In its order denying Appellants' post-verdict motions, the district court held there was sufficient evidence to support a juryfinding that Appellants' breaches of fiduciary duty caused the damages the jury awarded, citing Jabil's proof of claim filed

Latitude Solutions, Incorporated v. DeJoria, --- F.3d ---- (2019)

67 Bankr.Ct.Dec. 32

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 8

in bankruptcy court and the trial testimony of Jabil representatives. But this rationale only addresses what Jabil's injuryand damages were; it does not explain how LSI was injured.

6 We need not address and therefore do not hold that there could not possibly be an Article III injury in fact stemming fromCohen and DeJoria's breaches of fiduciary duty. Instead, we hold there is no Article III injury stemming from the claimsEbert asserted and Damage Element No. 1 of the jury instruction.

7 Ebert argues Cohen has waived this argument but is mistaken; Cohen raised this issue during Rule 50(a) argumentsand in his Rule 50(b) motion, as the district court noted.

8 Texas law requires that the trier of fact “consider the definition and purpose of exemplary damages as provided by Section41.001” in making an award of exemplary damages. TEX. CIV. PRAC. & REM. CODE § 41.010. It further requires thatthe trier of fact consider evidence relating to, among other things, the “nature of the wrong” and the “character of theconduct involved.” Id. at § 41.011.

End of Document © 2019 Thomson Reuters. No claim to original U.S. Government Works.

In Re Clark, 921 F.3d 566 (2019)

67 Bankr.Ct.Dec. 22

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

921 F.3d 566United States Court of Appeals, Fifth Circuit.

IN RE: Daniel CLARK, IV, DebtorAlisha Pate; Yvonne Clark-Thigpen, Appellants

v.Rodney D. Tow, Trustee; Daniel Clark, IV, Appellees

No. 18-20518|

FILED April 23, 2019

SynopsisBackground: Two claimants, each of whom was themother of one of Chapter 7 debtor's children, and neitherof whom allegedly received notice of the bankruptcy caseor a summary of trustee's final report, filed untimelyproofs of claim for child-support arrearages. Trusteeobjected. After claims were allowed not as first-priorityclaims, but as general unsecured claims, claimants movedfor reconsideration. The United States Bankruptcy Courtfor the Southern District of Texas, David R. Jones,J., 2015 WL 3745383, granted motion in part, allowingclaims as tardily-filed claims entitled to second-prioritydistribution. Claimants appealed. The District Court,Alfred H. Bennett, J., 2018 WL 2426662, affirmed, andclaimants appealed.

Holdings: The Court of Appeals held that:

under Illinois law, the Illinois Department of Healthcareand Family Services (IDHFS), from which claimants hadsought child-support enforcement services, and not eitherclaimant, was a “creditor” of debtor, and

trustee’s amendment to his final report did not restart theten-day filing deadline for first-priority proofs of claim.

Affirmed.

Procedural Posture(s): On Appeal; Objection to Proof ofClaim.

*568 Appeal from the United States District Court forthe Southern District of Texas, Alfred H. Bennett, U.S.District Judge.

Attorneys and Law Firms

William D. Weber, Esq., Weber Law Firm, P.C.,Houston, TX, for Appellants.

Julie Mitchell Koenig, Tow & Koenig, P.L.L.C., TheWoodlands, TX, for Appellee RODNEY D. TOW.

John Thomas Black, Houston, TX, for AppelleeDANIEL CLARK, IV.

Before KING, SMITH, and WILLETT, Circuit Judges.

Opinion

PER CURIAM:

Alisha Pate and Yvonne Clark-Thigpen assert claims forchild support arrearages against Daniel Clark. AlthoughClark filed for bankruptcy, Pate and Clark-Thigpen claimthat they never received notice of his bankruptcy case. Asa result, they argue they were denied the opportunity tofile timely proofs of claim. The bankruptcy court foundthat the Illinois Department of Healthcare and FamilyServices, from which Pate and Clark-Thigpen had soughtchild support enforcement services, had received timelynotice and ultimately afforded their claims distributionstatus under 11 U.S.C. § 726(a)(2). The district courtaffirmed the bankruptcy court’s decision. Pate and Clark-Thigpen now appeal to this court. We AFFIRM.

I.

Daniel Clark owes Alisha Pate and Yvonne Clark-Thigpen large sums of child support—$ 58,257and $ 242,550, respectively. Pate and Clark-Thigpenboth sought enforcement services from the IllinoisDepartment of Healthcare and Family *569 Services(the “Department”) for their child support claims. Thus,when Clark filed for Chapter 7 bankruptcy, he listed theDepartment as an unsecured creditor in his bankruptcyschedules. Clark also listed Pate in his bankruptcyschedules, but he provided the wrong address. And heomitted Clark-Thigpen entirely.

Pate and Clark-Thigpen contend that they never receivednotice of the bankruptcy case as required by Federal Ruleof Bankruptcy Procedure 2002(a). Nor did they receivea summary of the trustee’s final report as required by

In Re Clark, 921 F.3d 566 (2019)

67 Bankr.Ct.Dec. 22

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 2

Rule 2002(f). Instead, the Chapter 7 trustee mailed thesummary of the trustee’s final report to all creditors,including the Department, on July 19, 2014. The reportstated that, after the payment of Clark’s secured andadministrative claims, only $ 71,028.27 remained in hisestate. The trustee distributed that remaining amount totwo of Clark’s five unsecured priority creditors who had

timely filed proofs of claim, as required by 11 U.S.C.§§ 507 and 726(a).

Pate and Clark-Thigpen argue that they should havebeen included in this group of priority creditors but weredenied the opportunity to participate in the bankruptcyproceedings because the trustee never provided themwith notice of the bankruptcy case or his final report.Instead, on August 4, 2014, they each learned of thebankruptcy case from another of Clark’s ex-wives. Uponlearning of the bankruptcy, each woman contactedthe Department. Christine Schmidt, the Department’sbankruptcy manager, told them that the Departmentwould file the proofs of claim for them. Schmidt filedthe claims on August 12, 2014. On each proof of claim,Schmidt listed the Department as the creditor and statedthat the basis of the claim was “[c]hild support arrearsowed thru [sic] [the Department].”

The trustee objected to Pate’s and Clark-Thigpen’s proofsof claim as tardily filed, which the bankruptcy courtsustained after a hearing. Thus, the bankruptcy courtdenied priority status to Pate’s and Clark-Thigpen’sclaims under § 726(a)(1), but it allowed them to proceed asgeneral unsecured claims pursuant to § 726(a)(3). Pate andClark-Thigpen moved for reconsideration. After anotherhearing, the bankruptcy court granted the motion in part.It allowed Pate’s and Clark-Thigpen’s claims as tardily-filed claims entitled to distribution under § 726(a)(2),as opposed to § 726(a)(3), finding that the Departmenthad withheld notice of the bankruptcy from them. Butit again declined to allow the claims under § 726(a)(1). During these proceedings, the Department filed astatement asserting that it was a creditor entitled to file aproof of claim.

Classifying Pate’s and Clark-Thigpen’s claims under §726(a)(2) has the same effect as classifying them under§ 726(a)(3)—they are still unable to recover due tothe lack of funds in Clark’s estate. Pate and Clark-Thigpen appealed to the district court, which affirmed

the bankruptcy court’s decision. They now appeal to thiscourt.

II.

When reviewing an appeal from a district court’s review ofa bankruptcy court’s ruling, we apply “the same standardof review to the bankruptcy court decision that the districtcourt applied.” Living Benefits Asset Mgmt., L.L.C. v.Kestrel Aircraft Co. (In re Living Benefits Asset Mgmt.,L.L.C.), 916 F.3d 528, 532 (5th Cir. 2019) (quoting

Galaz v. Galaz (In re Galaz), 765 F.3d 426, 429 (5thCir. 2014)). “Thus, this court reviews factual findings forclear error and legal conclusions de novo.” Id. (quoting

Galaz, 765 F.3d at 429).

*570 III.

Pate and Clark-Thigpen first contest the bankruptcycourt’s application of § 726(a)(1), which states:

(a) Except as provided in section 510 of this title,property of the estate shall be distributed--

(1) first, in payment of claims of the kind specified

in, and in the order specified in, section 507 of thistitle, proof of which is timely filed under section 501of this title or tardily filed on or before the earlier of--

(A) the date that is 10 days after the mailing tocreditors of the summary of the trustee’s finalreport; or

(B) the date on which the trustee commences finaldistribution under this section ....

Pate and Clark-Thigpen argue that the ten-day deadlineto file proofs of claim only begins to run when the creditorreceives the summary of the trustee’s final report; thus,because the trustee did not mail them the summary, theyargue that § 726(a)(1)’s ten-day filing deadline did notbegin to run against them. Although they concede that thereport was properly mailed to the Department, they arguethat they did not appoint the Department as their agentfor the purpose of accepting the trustee’s report. Andregardless of whether their proofs of claim were timely,they contend that their claims must be classified under

In Re Clark, 921 F.3d 566 (2019)

67 Bankr.Ct.Dec. 22

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 3

§ 726(a)(1) because they are priority claims under §507. Finally, if the court determines that their claims wereuntimely filed, they argue that § 726(a)(1) violates theirright to due process under the Fifth Amendment becauseit can be interpreted to deny priority status to a knowncreditor who was not given notice of the bankruptcy case.

These arguments are all predicated on the assumption thatPate and Clark-Thigpen were Clark’s creditors. AlthoughPate and Clark-Thigpen stated at oral argument that therewas no dispute over whether they were creditors, we do notfind the answer to be so clear. The Code defines “creditor”as an “entity that has a claim against the debtor that aroseat the time of or before the order for relief concerning the

debtor.” 11 U.S.C. § 101(10). The Code defines “claim”as the “right to payment, whether or not such rightis reduced to judgment, liquidated, unliquidated, fixed,contingent, matured, unmatured, disputed, undisputed,

legal, equitable, secured, or unsecured.” § 101(5)

(A). Interpreting § 101(5)(A), the Supreme Court hasinstructed that the “ ‘right to payment’ [means] nothing

more nor less than an enforceable obligation.” Johnsonv. Home State Bank, 501 U.S. 78, 83, 111 S.Ct. 2150,115 L.Ed.2d 66 (1991) (alteration in original) (quoting

Pa. Dep’t of Pub. Welfare v. Davenport, 495 U.S. 552,559, 110 S.Ct. 2126, 109 L.Ed.2d 588 (1990), supersededby statute on other grounds, Criminal Victims ProtectionAct of 1990, Pub. L. No. 101-581, § 3, 104 Stat. 2865).Accordingly, we must consider whether Pate and Clark-Thigpen had enforceable obligations against Clark. Thisdetermination “requires an analysis of interests created by

non-bankruptcy substantive law.” Lemelle v. UniversalMfg. Corp., 18 F.3d 1268, 1274 (5th Cir. 1994) (quoting

In re Nat’l Gypsum Co., 139 B.R. 397, 405 (N.D. Tex.1992)).

During the bankruptcy court’s hearing, Pate and Clark-Thigpen argued that they are creditors because after theDepartment collects the money, the Department gives themoney to Pate and Clark-Thigpen. But the ultimate rightto receive the funds is not dispositive to our analysis;instead we must consider whether Pate and Clark-Thigpencould enforce *571 Clark’s child support obligationagainst him.

Illinois law suggests that the Department, rather thanPate and Clark-Thigpen, has the sole authority tocollect money from Clark. Illinois provides child supportobligation enforcement services through the Department.See 305 Ill. Comp. Stat. 5/12-1. Under Illinois law, whena custodial parent receives enforcement services from theDepartment, the non-custodial parent must make all childsupport payments to the state disbursement unit, ratherthan to the custodial parent. 750 Ill. Comp. Stat. 5/507.1.

At the bankruptcy court’s hearing, Schmidt testified thatwhen a custodial parent requests enforcement assistance,all child support must be paid to the Department. TheDepartment confirmed this interpretation in its separatelyfiled statement, averring that “[u]nder Illinois law, theDepartment itself must collect child support for laterdisbursement to parents, so the Department was properlya ‘creditor’ on [Pate’s and Clark-Thigpen’s] [c]laims.”Although Schmidt also testified that a custodial parentreceiving enforcement assistance with child support couldreceive payments directly from the noncustodial parent,she noted that these payments are a “one-time credit” andif a noncustodial parent tried to make a direct paymenta second time, “a credit would not be given on his childsupport case and he would been [sic] sent a letter statingit has to go judicially.” This conforms with our reading ofIllinois law.

Both Pate and Clark-Thigpen sought enforcement of theirclaims through the Department, and they admit in theirbriefing that they have authorized the Department to“receive and disburse child support payments.” Pate andClark-Thigpen could not seek child support paymentsfrom Clark by themselves; under Illinois law, Clark wouldhave had to make any payments to the Department. Andtellingly, when Pate and Clark-Thigpen first learned of thebankruptcy, they turned to the Department, rather thanfiling proofs of claim on their own. Thus, the Departmentis the creditor because it has the right to enforce Pateand Clark-Thigpen’s child support obligations against

Clark. Cf. Fezler v. Davis (In re Davis), 194 F.3d 570,574-75 (5th Cir. 1999) (recognizing that a creditor maybe a person who pursues a debt on another’s behalf,even though the payment will ultimately be distributed toanother party).

Pate and Clark-Thigpen argue that they are also creditorsentitled to notice. But again, Pate and Clark-Thigpenhave handed to the Department the ability to enforce

In Re Clark, 921 F.3d 566 (2019)

67 Bankr.Ct.Dec. 22

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 4

Clark’s child support obligations. Thus, they cannot behis creditor as defined by the Bankruptcy Code. Weacknowledge that “Congress intended the term ‘claim’ to

be given broad interpretation.” Lemelle, 18 F.3d at1275. But we have also stated that the purpose of thisbreadth is “so that ‘all legal obligations of the debtor,no matter how remote or contingent will be able to be

dealt with in the bankruptcy case.’ ” Id. (quoting H.R.Rep. No. 95-595, at 309 (1978), as reprinted in 1978U.S.C.C.A.N. 5787, 6266). Clark’s legal obligation to Pateand Clark-Thigpen is “dealt with” by the Department.Therefore, the Department is properly the creditor for thepurposes of Clark’s child support obligations to Pate andClark-Thigpen.

Finally, Pate and Clark-Thigpen argue that § 726(a)(1)(A)’s ten-day claim filing deadline restarted when theChapter 7 trustee filed his amended report and, therefore,the Department’s proofs of claim should be given priority.To adopt Pate and Clark-Thigpen’s approach wouldrender § 726(a)(1) meaningless, giving every *572 claim

priority status upon amendment of the trustee’s finalreport. Thus, we decline to find that the trustee’samendment to his final report restarted the filing deadline.

In sum, Pate and Clark-Thigpen were not creditors,and the clerk was not obligated to provide them withnotice. There is no dispute that the clerk properly notifiedthe Department of the pending bankruptcy. And theDepartment’s proofs of claim were untimely. Thus, thebankruptcy court appropriately declined to classify Pate’sand Clark-Thigpen’s claims under § 726(a)(1).

IV.

For the foregoing reasons, the judgment of the districtcourt is AFFIRMED.

All Citations

921 F.3d 566, 67 Bankr.Ct.Dec. 22

End of Document © 2019 Thomson Reuters. No claim to original U.S. Government Works.

In re Chlad, --- F.3d ---- (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

2019 WL 1950317Only the Westlaw citation is currently available.United States Court of Appeals, Seventh Circuit.

IN RE: Monik CHLAD, Debtor-Appellant.

No. 18-3056|

Argued April 8, 2019|

Decided May 2, 2019

SynopsisBackground: Creditors brought adversary proceeding todeny debtor a discharge based on her “false oaths.”The United States Bankruptcy Court for the NorthernDistrict of Illinois, Jack B. Schmetterer, J., 2017 WL2861104, entered judgment in favor of creditors, anddebtor appealed. The District Court, No. 1:17-cv-5198,John J. Tharp, Jr., J., 2018 WL 4144627, affirmed. Debtorappealed.

Holdings: The Court of Appeals, Scudder, Circuit Judge,held that:

bankruptcy court did not clearly err in finding thatdebtor had acted knowingly and with fraudulent intent,of kind required by “false oath” discharge exception, inconnection with numerous omissions on her bankruptcypapers, and

debtor's nondisclosures related to existence anddisposition of debtors property, thereby satisfying the“materiality” element of “false oath” discharge exception.

Affirmed.

Procedural Posture(s): On Appeal; Judgment.

Appeal from the United States District Court for theNorthern District of Illinois, Eastern Division. No. 1:17-cv-5198—John J. Tharp, Jr., Judge.

Attorneys and Law Firms

Alanna Morgan, Keevan D. Morgan, Attorneys,MORGAN & BLEY, LTD., Chicago, IL, for Debtor-Appellant.

Peter C. Nabhani, Attorney, LAW OFFICE OF PETERNABHANI, Chicago, IL, for Debtor.

William J. Factor, LAW OFFICE OF WILLIAM J.FACTOR, Jeffrey Kimball Paulsen, Attorneys, Chicago,IL, for Appellees.

David P. Leibowitz, LAKELAW, Chicago, IL, forTrustee.

Before Wood, Chief Judge, and Scudder and St. Eve,Circuit Judges.

Opinion

Scudder, Circuit Judge.

*1 In 2013 Monik Chlad and her husband, Eric Vehovc,filed a joint petition under Chapter 7 of the BankruptcyCode seeking to discharge about $5 million of debt.After Chlad and Vehovc filed financial disclosures inrelation to their petition, two creditors brought anadversary proceeding objecting to the discharge. Allegingthat the filings omitted information material to thedebtors' financial condition, the creditors invoked 11U.S.C. § 727(a)(4) and sought to prevent the discharge.Following a bench trial, the bankruptcy court denied thedischarge, finding that the omissions reflected materialfalse statements made with fraudulent intent. The districtcourt affirmed, and only Chlad has appealed. Seeing noclear error in the bankruptcy court's factual findings, wetoo affirm the denial of discharge.

I

Chlad is the sole owner of a real estate company namedLockwood Development, Inc. Chlad's husband workedfor Lockwood as well, and the two ran the companytogether. They also owned several parcels of real estatein their own names. In connection with their bankruptcypetition, Chlad and Vehovc filed the required Statementof Financial Affairs and bankruptcy schedules. As itsnames implies, the Statement of Financial Affairs requiredthe debtors to disclose information about their finances,

In re Chlad, --- F.3d ---- (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 2

including sources of income, and payments to creditorsand other transfers made within specified time periods.The bankruptcy schedules required the debtors to identifyinterests in property and creditors as of the date of thebankruptcy petition. Chlad and Vehovc accompaniedthese disclosures with a declaration stating under penaltyof perjury that they had reviewed the information in thosedocuments and it was true and correct.

The disclosures in those filings—and more importantly,what was not disclosed—gives rise to this appeal. Twocreditors, Mitchell Chapman and Semy InvestmentsLtd., commenced an adversary proceeding identifyingnumerous omissions in the filings and challenging thedebtors' eligibility for a Chapter 7 discharge. They allegedthat Chlad and Vehovc failed to disclose the existenceof particular real estate, a significant creditor, bankaccounts, a shareholder loan, certain sources of income,and an alternate first name used by Chlad. The absenceof this information from Chlad's financial filings in thebankruptcy court is undisputed.

The omissions underlying the issues on appeal are:

• Chlad did not disclose real estate located on VanBuren Street in Chicago that she and Vehovcjointly owned, and the related fact that the propertysecured mortgages. Chlad misstated that one of thesemortgages was secured by another property.

• Chlad failed to report the existence of a significantcreditor—Edgebrook Bank. Chlad's company,Lockwood, had executed a promissory note for over$800,000 in favor of Edgebrook Bank. While thenote was secured by a mortgage on a parcel ofreal estate, Chlad and Vehovc personally guaranteedLockwood's obligations to Edgebrook Bank.

*2 • Chlad failed to disclose a shareholder loan of over$1 million she had received from Lockwood. From2010 to 2013, Lockwood's tax returns disclosed a loanto a shareholder—Chlad—which was as high as $1.2million at the beginning of 2010. The loan balancefell to $50,000 by the end of 2012, and to $0 by theend of 2013. Chlad neither disclosed Lockwood as acreditor nor any transfers to Lockwood made in theyear preceding the bankruptcy petition.

• Chlad's filings made no mention of two jointly ownedbank accounts—one with her mother and another

with a Lockwood subcontractor—as well as relatedtransfers of funds out of those accounts within thetwo years preceding the bankruptcy petition.

• Chlad likewise failed to report certain sources ofincome received during the two years preceding thebankruptcy petition—child support payments andrental income that provided her more than $4,000 amonth.

• Chlad failed to disclose that, in addition to the name“Monik,” she also used the first name “Monika”in her business affairs, including on multiple bankaccounts and tax returns.

The bankruptcy court resolved the adversary proceedingby holding a bench trial. Chlad testified that the omissionsin her filings were the result of innocent mistakes. Sheexplained that she had shared most of the omittedinformation with her bankruptcy attorney and that he wasat fault for not ensuring the completeness and accuracyof her filings with the bankruptcy court. Chlad's attorneylikewise testified and generally maintained that he wasresponsible for some of the omissions in Chlad's filings.

But the trial testimony also showed that Chlad activelymanaged her financial affairs and had knowledgeof Lockwood's business dealings and her own assetsand liabilities. Other testimony revealed that, priorto bankruptcy, Chlad hired an assistant to collectinformation about the properties she owned. Chladthen shared the resulting inventory, which included theVan Buren property in Chicago, with her attorney.Furthermore, prior to filing the financial disclosures withthe bankruptcy court, Chlad met multiple times with herattorney and discussed the information in the filings.Chlad's attorney advised her of the consequences ofmaking misstatements in the submissions and togetherthey reviewed the filings page by page before ultimatelyfiling them in the bankruptcy court.

The trial concluded with the bankruptcy court denyingChlad and her husband a discharge under § 727(a)(4)of the Bankruptcy Code. The court determined that theomissions and misstatements were material and reflectedfalse statements made under oath that the debtorsknew or should have known to be false. The courtfurther concluded that, taken together, the omissionsand misstatements demonstrated a reckless disregard forthe truth, which was sufficient to support a finding of

In re Chlad, --- F.3d ---- (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 3

fraudulent intent necessary to deny discharge under §727(a)(4). In a well-reasoned and thorough opinion, thedistrict court affirmed.

II

Discharge under Chapter 7 “is reserved for the ‘honest but

unfortunate debtor.’ ” In re Kempff, 847 F.3d 444, 447

(7th Cir. 2017) (quoting Stamat v. Neary, 635 F.3d 974,978 (7th Cir. 2011)). Section 727 of the Bankruptcy Codeenforces this reservation by providing grounds for denyinga discharge to dishonest debtors. See 11 U.S.C. § 727(a).The creditors' challenge to Chlad's discharge falls under§ 727(a)(4)(A), which withdraws a debtor's eligibility fordischarge where she “knowingly and fraudulently, in orin connection with the case—(A) made a false oath oraccount.” The creditors bear the burden of establishingChlad's ineligibility for discharge by a preponderance of

the evidence. See Kempff, 847 F.3d at 447.

A

*3 We begin with Chlad's contention that the bankruptcycourt's decision denying her discharge should be reviewedde novo. She disagrees most especially with the bankruptcycourt's finding that she acted with fraudulent intentin omitting the required information, insisting that theinquiry is a mixed question of law and fact entitled to denovo review. This position is at odds with our caselaw.

On appeal from a district court's review of a bankruptcycourt's ruling, we review the bankruptcy court's factualfindings for clear error and the legal conclusions of boththe bankruptcy court and the district court de novo. See

Kempff, 847 F.3d at 448. And, with respect to thefraudulent intent inquiry in particular, we have explainedthat “[w]hether a debtor possessed the requisite intent todefraud is a question of fact, which is subject to the ‘clearly

erroneous’ standard of review.” Id. at 449 (quoting

In re Marcus-Rehtmeyer, 784 F.3d 430, 436 (7th Cir.2015)).

This more deferential clear error standard makes sensebecause an “intent determination often will depend upon

a bankruptcy court's assessment of the debtor's credibility,making deference to the court's finding particularly

appropriate.” In re Krehl, 86 F.3d 737, 743 (7thCir. 1996). Indeed, in recognition of the ringside viewthat the bankruptcy court occupies in making the intentdetermination, “where the evidence on the intent questionis such that two permissible conclusions may rationallybe drawn, the bankruptcy court's choice between them

will not be viewed as clearly erroneous.” Id. at 744.We therefore review the bankruptcy court's determinationthat Chlad acted with fraudulent intent—and all of itsother factual findings—for clear error.

B

By its terms, § 727(a)(4)(A) provides a ground for denyingdischarge where the debtor “knowingly and fraudulently”makes a “false oath or account” in connection with thebankruptcy proceeding. We have thus required the partyopposing discharge to prove that the debtor made amaterial false statement under oath, the debtor knew thestatement was false, and the statement was made with

fraudulent intent. See Stamat, 635 F.3d at 978.

All agree that the omissions in Chlad's bankruptcy filingsconstituted false statements made under oath. Fromthere, however, Chlad takes issue with the remainingelements, contending that the omissions were not materialand neither made with knowledge nor intent to defraudthe bankruptcy court or her creditors. She insists thatthe omissions reflected innocent mistakes, includingby her bankruptcy attorney, and in any event, wereinconsequential to the administration of her estate.

The battleground of this appeal lies in § 727(a)(4)'s requirement that the statements be made both“knowingly” and “fraudulently.” We have no troubleconcluding that Chlad had knowledge of the informationomitted from her financial filings in the bankruptcycourt. This is not a scenario in which a debtor had littlefamiliarity with her financial affairs, left business affairsto others, or took care to ensure complete and accuratedisclosures only to learn after the fact of an isolatedmistake or two. Quite the opposite was true. Chlad wasinformed of her own financial condition and the businessand financial affairs of Lockwood, and she devoted timeto gathering information to ensure she had a complete

In re Chlad, --- F.3d ---- (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 4

and accurate picture. Take, for example, the Van Burenproperty that Chlad and her husband owned in Chicago.Chlad hired an assistant to collect information regardingproperties that she, her husband, and Lockwood owned.The trial revealed that she not only reviewed the inventoryof the properties, but also discussed with her assistant andattorney her desire to avoid losing the Van Buren propertyas a result of the bankruptcy.

*4 Chlad raises no real dispute about her knowledgeof the Van Buren property, the guaranty to EdgebrookBank, the joint bank accounts, the additional sourcesof income, and the use of an alternate name in priorfinancial dealings. She contends, however, that she wasunaware of the reduction of the shareholder loan fromLockwood, asserting that the loan reduction was an“accounting function write-down” performed by her taxpreparers. But this only gets Chlad so far, for the recordshows her knowledge of the loan itself. The trial evidencedemonstrated that, every year from 2010 through 2013,Chlad reviewed and signed Lockwood's tax returns, eachof which disclosed the loan she received from Lockwood.Lockwood's tax preparer also testified to discussing theshareholder loan with Chlad. As the bankruptcy courtexplained, “[e]ither the shareholder loan existed as of thePetition Date” and Chlad's schedules were false becausethey failed to identify Lockwood as a creditor, or “Chladrepaid the loan prior to the Petition Date” and Chlad'sStatement of Financial Affairs was false because it failedto list any payment to Lockwood made within one year ofthe bankruptcy petition. Either way, the record leaves nodoubt that Chlad knew of the loan's existence.

At a broader level, Chlad argues that the bankruptcycourt erred in finding the knowledge requirement satisfiedbecause she knew or should have known that her financialfilings contained false statements. Chlad is correct toobserve that a “should have known” standard does notalign with the language of § 727(a)(4), which requiresthat the false statement be made “knowingly.” Yet, apartfrom reciting this standard, the bankruptcy court made nofinding rooted in anything less than Chlad's knowledge.The court found that Chlad knew of each of the assets,liabilities, and other items she omitted from her filings.

To be sure, we do not read § 727(a)(4)'s knowledgerequirement, as Chlad seems to urge, as necessitatingan awareness of a legal obligation to disclose particular

information. Chlad's actual knowledge of the omittedinformation itself suffices to fulfill this element.

We come, then, to the more substantial issue in this appeal—whether the bankruptcy court clearly erred in findingthat Chlad acted “fraudulently” as required by § 727(a)(4).This aspect of the statute focuses on Chlad's mindset whenshe omitted information from her bankruptcy disclosures.We ask whether Chlad did so intending to deceive her

creditors and the bankruptcy court. See In re Katsman,771 F.3d 1048, 1050 (7th Cir. 2014). It is not necessarythat the creditors demonstrate that Chlad “intend[ed] toobtain a pecuniary benefit” through her omissions. See

id. Rather, “[e]vidence of ‘reckless disregard for the

truth is sufficient to prove fraudulent intent.’ ” Kempff,

847 F.3d at 449 (quoting Stamat, 635 F.3d at 982).While “simple negligence or innocent misunderstandings”cannot serve as the basis for a finding of fraudulent intent,

id. at 451, a finding of fraudulent intent “may bebased on inferences drawn from a course of conduct,”

Matter of Yonikus, 974 F.2d 901, 905 (7th Cir. 1992).A debtor's reckless disregard for the truth may be foundthrough an evaluation of the circumstances as a whole andthe pattern of omissions engaged in by the debtor. See

Stamat, 635 F.3d at 982. A finding of fraudulent intentis proper, where, in light of a “larger picture of omissionsand errors ... the totality of the [debtor's] omissions anderrors rises above mere negligence to the level of reckless

disregard for the truth.” Id.

In evaluating Chlad's intent, her knowledge of theomitted information properly informs the inquiry into hermindset in not disclosing the requisite information. Theexplanation of a mistake is more likely to be true where thefacts show that the debtor did not know of a liability orasset or did not fully understand her own financial affairs.Here, however, Chlad took an active role in her financialaffairs and was aware of her assets and liabilities. So, too,was she aware of her bankruptcy proceedings and theneed to file disclosures with the bankruptcy court. Chladsupplied the necessary information to her attorney, metwith him numerous times, and reviewed her filings page bypage with him before they were filed. The resulting filingsincluded a series of omissions and errors that deprived thecourt and Chlad's creditors of an accurate and complete

In re Chlad, --- F.3d ---- (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 5

account of Chlad's financial affairs preceding bankruptcyand financial condition as of the petition date.

*5 The bankruptcy court was right to underscore theoverarching pattern of false statements plaguing Chlad'sfilings. The filings suffered from multiple omissions anderrors, and this pattern contributed meaningfully to thebankruptcy court's finding that she engaged in a “series ofstatements that [she] knew were false and material” andreflected a reckless disregard for the truth.

In reaching this conclusion, the bankruptcy court tookcare to discredit some of Chlad's alternative explanations.The bankruptcy court, for instance, explained that thefact that Chlad knew of the Van Buren property andconducted a detailed review of her schedules with herattorney before submitting them, “casts doubt on [her]testimony that the omission of the Van Buren Propertyfrom [her] Schedules was inadvertent.” For her part,Chlad points out that the bankruptcy court did notconclude that her testimony as a whole was not credible.Perhaps so. But this does not mean we can disregardthe credibility determinations that the court did make.The record shows that the bankruptcy court weighed thetotality of the testimony it heard and other evidence itreceived, and, in the end, determined that Chlad's patternof omissions evinced a reckless disregard for the truth.

Chlad may be right that some of her omissions—if viewedin isolation—may reflect mistakes. Consider, for example,the fact that some of the omitted information—such asthe existence of her alternate first name—was shared withthe bankruptcy trustee. By focusing on isolated omissions,Chlad suggests a reason why each piece of informationwas omitted. But Chlad's patchwork reasoning asksus to ignore the broader pattern clear from the trialevidence: that Chlad made a series of false statementsabout information of which she was aware. Viewingthis evidence in its totality—including the explanationsChlad offered for the omissions—the bankruptcy courtfound that Chlad's actions as a whole evinced a recklessindifference for the truth in the representations madein her filings. And even if we accept Chlad's piecemealapproach, and conclude that the evidence allows “twopermissible conclusions” to be drawn about Chlad'sintent, “the bankruptcy court's choice between them will

not be viewed as clearly erroneous.” Krehl, 86 F.3d at744.

We owe a brief word on Chlad's final argument thatthe omitted information was immaterial. “[A] fact ismaterial ‘if it bears a relationship to the debtor's businesstransactions or estate, or concerns the discovery of assets,business dealings, or the existence and disposition ofthe debtor's property.’ ” Lardas v. Grcic, 847 F.3d 561,

570 (7th Cir. 2017) (quoting Stamat, 635 F.3d at982). Applying that standard here, we find unpersuasiveChlad's arguments that the information was insignificantor related to assets worth nothing to the estate. Chladpoints out, for example, that the undisclosed bankaccount she shared with her mother had only around$2,000 withdrawn from it in two years. No doubt thatthis amount is small relative to the $5 million in debtthat Chlad sought to discharge. But here again Chladlooks at each piece of information in isolation andfails to recognize that it bears a relationship to herbusiness transactions and financial affairs. And we haveemphasized that “[d]ebtors have an absolute duty toreport whatever interests they hold in property, even ifthey believe their assets are worthless or are unavailable to

the bankruptcy estate.” Yonikus, 974 F.2d at 904.

*6 Returning to the example of the undisclosed bankaccounts, those accounts relate to the existence anddisposition of Chlad's property, thereby satisfying themateriality requirement. Chlad's argument regardingmateriality is even weaker with respect to some of herother omissions. Chlad's personal guaranty to EdgebrookBank, for example, imposed an obligation of over$800,000 on her. By no means is this an insignificantamount, even compared to the estate as a whole. Theomitted information bore on Chlad's business dealingsand the disposition of her property and was thereforematerial to her bankruptcy.

At bottom Chlad's appeal asks us to reweigh the evidencein her favor and conclude that her omissions wereimmaterial and the result of inadvertence and innocentmistakes. But we decline to disturb the factual findingsof the bankruptcy court, which find ample support in therecord evidence. Nor can we adopt Chlad's approach ofviewing each piece of omitted information in isolationand ignoring the broader pattern of omissions and errorsunderlying the bankruptcy court's finding that she actedwith fraudulent intent.

On this record, then, we AFFIRM.

In re Chlad, --- F.3d ---- (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 6

All Citations

--- F.3d ----, 2019 WL 1950317

End of Document © 2019 Thomson Reuters. No claim to original U.S. Government Works.

Hill v. Snyder, 919 F.3d 1081 (2019)

67 Bankr.Ct.Dec. 11

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

919 F.3d 1081United States Court of Appeals, Eighth Circuit.

Chad Menter HILL, Appellantv.

James L. SNYDER, Appellee

No. 17-3572|

Submitted: October 16, 2018|

Filed: March 29, 2019

SynopsisBackground: United States Trustee (UST) moved forextension of time to file adversary complaint objectingto Chapter 7 debtor's discharge, and subsequently filedcomplaint. The United States Bankruptcy Court for theDistrict of Minnesota, Katherine A. Constantine, J.,granted the requested extension, and ultimately denieddebtor a discharge. Debtor appealed. The District Court,Susan Richard Nelson, J., 2017 WL 4736714, affirmed,and debtor appealed.

The Court of Appeals, Kelly, Circuit Judge, held that thebankruptcy court did not abuse its discretion by extendingthe deadline for the UST to object to debtor’s dischargewithout an evidentiary hearing.

Affirmed.

Procedural Posture(s): On Appeal; Motion for Extensionof Time.

*1082 Appeal from United States District Court for theDistrict of Minnesota - Minneapolis

Attorneys and Law Firms

Bradley Kirscher, KIRSCHER LAW FIRM, Roseville,MN, for Appellant.

Wendy Cox, U.S. TRUSTEES, Executive Office forU.S. Trustees, Washington, DC, Colin Kreuziger, TrialAttorney, James L. Snyder, U.S. TRUSTEE'S OFFICE,Region 12 District of Minnesota, Minneapolis, MN, forAppellee.

Before SHEPHERD, KELLY, and STRAS, CircuitJudges.

Opinion

KELLY, Circuit Judge.

Chad Menter Hill sought discharge under Chapter 7of the Bankruptcy Code. The United States Trusteerequested and received an extension to file a complaintobjecting to Hill’s discharge after becoming aware ofHill’s ties to business entities that were under a Floridareceivership due to allegations of fraud. The bankruptcy

court 1 ultimately denied Hill’s request for dischargeon the basis of 11 U.S.C. § 727(a)(2)(A) for makingtransfers before filing for bankruptcy with the intent toremove funds from the reach of a creditor. The district

court 2 affirmed the bankruptcy court’s order granting theTrustee’s request for an extension of time and its judgmentdenying discharge. Upon careful consideration, we affirmthe order of the district court.

I

In March 2014, a Florida court appointed Burton Wiandas receiver to marshal and safeguard the assets of severalFlorida entities allegedly used to perpetrate a scheme todefraud hundreds of Florida investors by, among others,Hill’s childhood friend Jeremy Anderson and Anderson’scompany Tri-Med Management, Inc. At the time, Hill waspart owner of Interventional Pain Center (IPC), anotherbusiness entity formed by Anderson, but neither he norIPC was named in the Florida receivership action. AfterWiand’s appointment, Hill transferred funds from IPC tohis own personal bank account, created additional bankaccounts in the names of Tri-Med and IPC, *1083 andthen used the Tri-Med account to transfer funds to IPCand himself.

On December 21, 2014, Hill filed a voluntary bankruptcypetition under Chapter 7 of the Bankruptcy Code inMinnesota. The bankruptcy court set March 16, 2015,as the deadline for interested parties to object to Hill’sdischarge. On March 10, Wiand filed a motion seekingan extension of the objection deadline and authorizationto examine Hill under Rule 2004 of the Federal Rulesof Bankruptcy Procedure, which permits the bankruptcycourt to order the examination of the debtor regarding

Hill v. Snyder, 919 F.3d 1081 (2019)

67 Bankr.Ct.Dec. 11

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 2

matters that may affect his right to discharge. Amongother things, Wiand asserted that he wanted to examineHill’s ties to IPC and Anderson, because he had evidencethat Hill had received funds traceable to the fraudulentscheme in Florida and that Hill may have conspiredwith Anderson to conceal proceeds of the Florida fraudfrom Wiand. Wiand also claimed that Hill had “grosslymisrepresented” in his disclosures the amount of money hehad received from entities associated with the fraudulentscheme and that, as the Florida receiver, Wiand might bea creditor in Hill’s Minnesota bankruptcy case. On April2, the bankruptcy court authorized Wiand to conductthe Rule 2004 examination of Hill and extended Wiand’sobjection deadline.

On June 5, Wiand conducted his Rule 2004 examinationof Hill. On June 8, Wiand filed a motion seeking anotherextension of the deadline to object to Hill’s discharge,asserting that he needed time to review the documentsHill had produced at the examination. Hill objected. Ata July 29 hearing, the bankruptcy court rejected Hill’sargument that Wiand had enough information to objectby March 10, stating that if Wiand had objected to Hill’sdischarge in March, “it would have been perhaps subjectto a successful Rule 8 motion or other motion under therules for insufficient pleading.”

On June 8, the Trustee also sought—under Rule 4004(b)(2) of the Federal Rules of Bankruptcy Procedure—anextension of the deadline to object to Hill’s discharge. Rule4004(b)(2) provides that:

A motion to extend the time toobject to discharge may be filed afterthe time for objection has expiredand before discharge is granted if(A) the objection is based on factsthat, if learned after the discharge,would provide a basis for revocationunder § 727(d) of the [Bankruptcy]Code, and (B) the movant did nothave knowledge of those facts intime to permit an objection. Themotion shall be filed promptly afterthe movant discovers the facts onwhich the objection is based.

The Trustee requested additional time to investigate,among other things, the documents Hill had producedat the Rule 2004 examination. Hill objected, claimingWiand’s March 10 motion already gave the Trusteeknowledge of sufficient facts to file an objection bythe March 16 deadline. At the July 29 hearing, theTrustee stated that nobody in the Trustee’s office hadseen Wiand’s March 10 motion requesting an extensionand authority to conduct Rule 2004 discovery untilshortly before Hill’s Rule 2004 examination. However,even if they had, the Trustee argued, six days wouldhave been insufficient to put together allegations withthe particularity required under the rules. Hill arguedthat the requested extension must be denied because theTrustee had failed to show that it did not have knowledgeof Wiand’s March 10 motion when there was evidencethat the filing notice was sent to the Trustee’s CM/ECFmailbox.

The bankruptcy court granted the Trustee’s request foran extension of the objection deadline. The bankruptcycourt concluded *1084 that “it is ... actual knowledgethat is in play here,” but added, “if [Hill] wanted to insiston an evidentiary hearing on this issue, I don’t think itwould do [him] much good because in [discussing Wiand’sJune 8 motion] we talked a little bit about” whether therewas “sufficient information in [Wiand’s] March 10th”motion to file an objection “and I don’t think that thereis, that was the whole point of doing [Rule] 2004 examsthereafter.”

After the bankruptcy court entered final judgmentdenying Hill’s discharge, Hill appealed to the districtcourt. Hill argued that the bankruptcy court hadcommitted reversible error because receipt of Wiand’sMarch 10 motion gave the Trustee constructiveknowledge of sufficient facts to file its objection by theoriginal March 16 deadline and therefore the Trustee’smotion for an extension should have been denied. In thealternative, he argued that the bankruptcy court shouldhave allowed an evidentiary hearing as to whether theTrustee had actual knowledge of Wiand’s March 10motion. The district court affirmed, concluding that thebankruptcy court did not abuse its discretion in grantingthe Trustee’s request without an evidentiary hearingbecause its decision clearly rested on its “factual findingthat the Trustee had neither actual nor constructiveknowledge of sufficient facts to bring an objection beforethe deadline.” Hill appeals.

Hill v. Snyder, 919 F.3d 1081 (2019)

67 Bankr.Ct.Dec. 11

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 3

II

“As the second court of appellate review, we conduct anindependent review of the bankruptcy court’s judgmentapplying the same standards of review as the districtcourt.” Fix v. First State Bank of Roscoe, 559 F.3d 803,808 (8th Cir. 2009) (quoting In re Falcon Prods., Inc., 497F.3d 838, 841 (8th Cir. 2007)). We review orders denyingor granting an extension of time to file an objection for

abuse of discretion. See Chorosevic v. MetLife Choices,600 F.3d 934, 946 (8th Cir. 2010). “An abuse of discretionoccurs where ‘the bankruptcy court relies upon erroneouslegal conclusions or clearly erroneous factual findings.’ ”In re Goodwin, 437 B.R. 844, 847 (B.A.P. 8th Cir. 2010)(quoting Dial Nat’l Bank v. Van Houweling (In re VanHouweling), 258 B.R. 173, 175 (B.A.P. 8th Cir. 2001)).A “finding is ‘clearly erroneous’ when although there isevidence to support it, the reviewing court on the entireevidence is left with the definite and firm conviction that

a mistake has been committed.” Anderson v. City ofBessemer, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d

518 (1985) (quoting United States v. U.S. Gypsum Co.,333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948)).

The sole issue on appeal is whether the bankruptcy courtabused its discretion by extending the deadline for theTrustee to object to Hill’s discharge under Rule 4004(b)(2) without an evidentiary hearing. Upon review, weagree with the district court that the bankruptcy courtdid not abuse its discretion by finding that the facts theTrustee was aware of, either actually or constructively,were insufficient to permit an objection by March 16.Ruling on the June 8 motions seeking additional time, thebankruptcy court openly questioned whether an objectionbased on Wiand’s March 10 motion, which containedallegations that Hill had received funds traceable tothe fraudulent scheme in Florida and had attemptedto conceal proceeds of the Florida fraud from Wiand,could survive the pleading threshold of Rule 8 of the

Federal Rules of Civil Procedure. It explained that the“whole point” of authorizing Rule 2004 discovery was toallow Wiand the opportunity to prepare more fulsomepleadings. There is no clear error in its determinationthat six days would be insufficient for the Trustee toinvestigate further and compose allegations with sufficientparticularity to satisfy the applicable pleading standards.

*1085 Hill contends that the bankruptcy courtcommitted reversible error because Rule 4004(b)(2)(B)refers to constructive knowledge, not actual knowledge,and the bankruptcy court had no evidentiary basis toconclude that, having received Wiand’s motion in itsCM/ECF box on March 10, the Trustee did not haveconstructive knowledge of sufficient facts to object bythe March 16 deadline. But we need not determinewhether Rule 4004(b)(2)(B) refers to actual knowledge orconstructive knowledge because even under Hill’s theoryof constructive knowledge, the Trustee could not havefiled an objection by the initial deadline: the bankruptcycourt found that the allegations set forth in Wiand’smotion were insufficient to permit an objection by March16. And, contrary to Hill’s assertions, the bankruptcycourt was not required to hold an evidentiary hearingbefore determining that six days was not enough timeto investigate Wiand’s allegations. The bankruptcy courtneeded only to examine and analyze the contents ofWiand’s March 10 motion to make this determination.In these circumstances, “[w]e will not second guess thebankruptcy court’s decision that the record was sufficientto make its ruling, and that nothing would be gained”by holding an evidentiary hearing. Behrens v. U.S. Bank,N.A. (In re Behrens), 501 B.R. 351, 356 (B.A.P. 8th Cir.2013). The bankruptcy court did not abuse its discretionby granting the Trustee an extension under Rule 4004(b)(2) without an evidentiary hearing.

Accordingly, the order of the district court is affirmed.

All Citations

919 F.3d 1081, 67 Bankr.Ct.Dec. 11

Footnotes1 The Honorable Katherine A. Constantine, United States Bankruptcy Judge for the District of Minnesota.

2 The Honorable Susan Richard Nelson, United States District Judge for the District of Minnesota.

Hill v. Snyder, 919 F.3d 1081 (2019)

67 Bankr.Ct.Dec. 11

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 4

End of Document © 2019 Thomson Reuters. No claim to original U.S. Government Works.

Matter of 8Speed8, Inc., 921 F.3d 1193 (2019)

67 Bankr.Ct.Dec. 33, 19 Cal. Daily Op. Serv. 3754

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

921 F.3d 1193United States Court of Appeals, Ninth Circuit.

In the MATTER OF 8SPEED8, INC.Vibe Micro, Inc., Appellant,

v.Sig Capital, LLC, Appellee.

No. 17-16277|

Argued and Submitted November15, 2018 San Francisco, California

|Filed April 29, 2019

SynopsisBackground: After the filing of involuntary bankruptcycase, fifty percent equity holder in putative debtor filedmotion to dismiss, and also moved for award of attorneyfees, costs, and actual and/or punitive damages. TheUnited States Bankruptcy Court for the District ofNevada granted dismissal motion, but declined to awardfees, costs, or damages, and 50% equity holder appealed.The District Court, No. 2:14-cv-01618-RFB, Richard F.Boulware II, J., 2017 WL 2225569, affirmed, and 50%equity holder appealed.

Holdings: The Court of Appeals, Thacker, Circuit Judge,held that:

only the putative debtor has standing to seek award ofactual and/or punitive damages following dismissal ofinvoluntary bankruptcy petition, and

equity holder that had successfully moved to dismissinvoluntary petition filed against a putative corporatedebtor did not have standing to seek award of reasonableattorney fees and costs, or even of actual and/or punitivedamages on “bad faith” theory.

Affirmed.

Bennett, Circuit Judge, filed dissenting opinion.

Procedural Posture(s): On Appeal; Motion for Attorney'sFees; Motion for Costs; Other.

Attorneys and Law Firms

Torrence E.S. Lewis (argued), Law Offices of TorrenceE.S. Lewis, Pittsburgh, Pennsylvania, for Appellant.

David A. Stephens (argued), Stephens Gourley &Bywater, Las Vegas, Nevada, for Appellee.

Appeal from the United States District Court for theDistrict of Nevada, Richard F. Boulware II, DistrictJudge, Presiding, D.C. No. 2:14-cv-01618-RFB

Before: Susan P. Graber, Stephanie Dawn Thacker, * andMark J. Bennett, Circuit Judges.

OPINION

THACKER, Circuit Judge:

This case asks whether a 50% shareholder of aninvoluntary debtor may seek damages under 11 U.S.C. §303(i). We hold that it may not. Accordingly, we affirmthe decision of the district court.

In March 2012, 8Speed8, Inc. was incorporated in the stateof Nevada. Appellant Vibe Micro, Inc. is a 50% ownerof 8Speed8’s voting stock. Appellee SIG Capital, Inc. isa creditor of 8Speed8 and owns 20 million contingentshares.

On December 13, 2013, SIG filed the involuntarybankruptcy petition at the center of this dispute. 8Speed8never appeared in the bankruptcy action. Instead, onJanuary 10, 2014, Vibe Micro filed a motion to dismissthe bankruptcy. Vibe Micro also asked for costs, fees,and actual and punitive damages under § 303(i). Thebankruptcy court held a hearing August 28, 2014. At thehearing, SIG conceded that dismissal was appropriate.The bankruptcy court agreed but denied Vibe Micro’srequest for statutory attorney’s fees and damages.

The court concluded that Vibe Micro did not havestanding under § 301(i). The district court affirmed thatdecision, and this appeal followed.

We review the bankruptcy court’s interpretation of

bankruptcy statutes de novo. See Sofris v. Maple-Whitworth, Inc. (In re Maple-Whitworth, Inc.), 556 F.3d

Matter of 8Speed8, Inc., 921 F.3d 1193 (2019)

67 Bankr.Ct.Dec. 33, 19 Cal. Daily Op. Serv. 3754

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 2

742, 745 (9th Cir. 2009). No deference is given to the

district court’s review of that decision. See Higgins v.Vortex Fishing Sys., Inc., 379 F.3d 701, 705 (9th Cir. 2004).

Section 303(i) provides:

If the court dismisses a petition under this section otherthan on consent of all petitioners and the debtor, and ifthe debtor does not waive the right to judgment underthis subsection, the court may grant judgment–

(1) against the petitioners and in favor of the debtorfor–

(A) costs; or

(B) a reasonable attorney’s fee; or

(2) against any petitioner that filed the petition in badfaith, for–

(A)any damages proximately caused by such filing;or

(B) punitive damages.

11 U.S.C. § 303(i) (emphasis added).

In In re Miles, we considered whether third parties

may seek damages under § 303(i). See Miles v. Okun(In re Miles), 430 F.3d 1083, 1093–94 (9th Cir. 2005).Specifically, we examined two interpretations of standingto seek § 303(i) damages: Either the presence of the phrase“in favor of the debtor” in § 303(i)(1) (regarding costsand attorney’s fees) limits standing to collect all § 303(i)damages to the debtor, or the omission of that phrasefrom § 303(i)(2) (regarding other damages for bad faithfilings) allows persons other than the debtor to collectdamages for bad faith filings, but not costs and attorney’s

fees. See id. at 1093. In evaluating those competinginterpretations, we considered legislative history, relevantcaselaw, and public policy to determine the proper reading

of the statute. See id. (citing Barstow v. IRS (In reBankr. Estate of MarkAir, Inc.), 308 F.3d 1038, 1043–46(9th Cir. 2002)). With those factors in mind, we concludedthat § 303(i) limits standing to recover statutory damagesresulting from an involuntary bankruptcy proceeding tothe debtor. Those same factors compel a similar resulthere.

First, the relevant House and Senate Reports suggest thatonly the debtor has standing to seek § 303(i) damages.See H.R.Rep. No. 95-595, at 324 (1977), reprinted in 1978U.S.C.C.A.N. 5963, 6280; S.Rep. No. 95-989, at 34 (1978),reprinted in 1978 U.S.C.C.A.N. 5787, 5820. According tothose reports, “if a petitioning creditor filed the petitionin bad faith, the court may award the debtor any damagesproximately caused by the filing of the petition.” Id. “Thisspecific reference to the ‘debtor’ is a strong indication thatCongress intended only the debtor to have standing toseek damages.” Franklin v. Four Media Co. (In re MikeHammer Prods., Inc.), 294 B.R. 752, 754 (9th Cir. B.A.P.2003).

Second, appellate courts in this circuit have twiceconsidered whether a non-debtor can seek damagesunder § 303(i), and twice those courts have decided it

cannot. See In re Miles, 430 F.3d at 1093–94; In reHammer, 294 B.R. at 753–54. Appellant’s attempts to

distinguish Miles on its facts are unavailing. Appellant

notes that, in Miles, the debtor actually appeared inthe involuntary proceedings, but in contrast, 8Speed8never appeared in this case. Although true, Appellant’sdistinction does not require disparate treatment.

Appellants would have this court believe they are meremartyrs, standing up for the interests of 8Speed8 when noone else would. But, as valiant as Vibe Micro’s intentionsmay have been, they were unnecessary. The Code haswithin its sections a remedy for cases like this: Section305 gives the bankruptcy court the power to dismiss aninvoluntary petition sua sponte. “The court, after noticeand a hearing, may dismiss a case ... at any time if ...the interests of creditors and the debtor would be betterserved by such ....” 11 U.S.C. § 305(a); see also In reAccident Claims Determination Corp., 146 B.R. 64, 67–68 (Bankr. E.D.N.Y. 1992) (dismissing an involuntarypetition where the petitioning creditors were intending to

harass the debtor and its principals); In re WesterleighDev. Corp., 141 B.R. 38, 41 (Bankr. S.D.N.Y. 1992)(dismissing an involuntary petition after finding that thepetition was filed by a corporate shareholder to gainleverage over another shareholder). Accordingly, VibeMicro’s appearance in this case was just as voluntary as

was the appearance of the third parties in Miles.

Matter of 8Speed8, Inc., 921 F.3d 1193 (2019)

67 Bankr.Ct.Dec. 33, 19 Cal. Daily Op. Serv. 3754

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 3

Third, reading § 303(i) to permit only the debtor toseek damages is consistent with its purpose and thepolicy interests underlying it. Section 303(i) is intended toalleviate the consequences that involuntary proceedingsimpose on the debtor. Those consequences include “lossof credit standing, inability to transfer assets and carry

on business affairs, and public embarrassment.” In reReid, 773 F.2d 945, 946 (7th Cir. 1985). A third party,who intervenes freely in an involuntary action, does notface those same consequences. Even if it did, § 303(i)would still not guarantee costs, fees, or damages. Anaward under § 303(i) —which states that the court “may”award costs, fees, or damages—is not mandatory. See

Susman v. Schmid (In re Reid), 854 F.2d 156, 159 (7thCir. 1988) (explaining that an award of attorney’s feesunder § 301(i) is “committed to the discretion of the district

court”); Bankers Tr. Co. BT Serv. Co. v. Nordbrock(In re Nordbrock), 772 F.2d 397, 400 (8th Cir. 1985)(stating that a motion for attorney’s fees is addressed in

the discretion of the court); In re Kidwell, 158 B.R. 203,217 (Bankr. E.D. Cal. 1993) (stating that “the better viewis that [an award of costs and fees is] discretionary and

not mandatory”); In re Johnston Hawks Ltd., 72 B.R.361, 365 (Bankr. D. Haw. 1987) (stating that “the awardof attorney’s fees and costs is discretionary”). Indeed, “theplain language of the statute clearly contemplates that feesand costs will not be awarded in all cases, even thougha party will ordinarily incur attorneys’ fees in seeking to

dismiss the petition.” In re Reid, 854 F.2d at 159.

AFFIRMED.

Dissent by Judge Bennett

BENNETT, Circuit Judge, dissenting:

The Majority holds that, under Miles v. Okun (In reMiles), 430 F.3d 1083 (9th Cir. 2005), a third party whoappears for a debtor and successfully defends against aninvoluntary bankruptcy petition can never request thatthe debtor be awarded costs, a reasonable attorney’sfee, or damages. The Majority finds that this is thecase even when, as here, the debtor never appearedin the involuntary bankruptcy action, was preventedfrom appearing by its deadlocked governance, and the

third party who appeared on behalf of the debtorsuccessfully defended the involuntary bankruptcy. Thisrule, according to the Majority, is absolute, regardless ofhow closely related the third party is to the debtor, andeven though the third party only seeks an award in favor

of the debtor. 1 Because Miles never went so far, andbecause I believe the Majority’s rule is inconsistent withboth the relevant statutory text and the policies underlyingthe Bankruptcy Act, I respectfully dissent.

Appellant Vibe Micro, Inc. owned 50% of the debtor8Speed8’s vested voting shares. Appellee SIG, LLC ownedcontingent shares in 8Speed8, which had not vested at thetime of the involuntary bankruptcy petition. 8Speed8’sboard of directors reflected its collective ownership, witha director appointed from each of the owners, includingSIG. Any action taken on behalf of the company requireda two-thirds majority of the directors or the shareholders.

On December 13, 2013, SIG filed an involuntarybankruptcy petition against 8Speed8. According to VibeMicro, both SIG and Luxor Entertainment, Inc.—theother 50% shareholder—intended to liquidate 8Speed8contrary to Vibe Micro’s position and inconsistent withits interests. Since “no one else could or would appear,”Vibe Micro filed a motion to dismiss on behalf of 8Speed8,which the bankruptcy court granted. Vibe Micro alsosought, on behalf of the debtor, 1) costs or a reasonableattorney’s fee, pursuant to 11 U.S.C. § 303(i)(1); and 2)“damages proximately caused by” what it claimed wasthe bad faith filing of the petition, pursuant to 11 U.S.C.§ 303(i)(2). The bankruptcy court granted Vibe Micro’smotion to dismiss, but it (and later the district court) heldthat Vibe Micro did not have standing to seek either feesor damages that would be awarded to the debtor becauseVibe Micro was not actually “the debtor.”

Involuntary bankruptcy is a drastic course of actionthat carries significant consequences, and “[f]iling aninvoluntary petition should be a measure of last resort.”

Higgins v. Vortex Fishing Sys., Inc., 379 F.3d 701, 707(9th Cir. 2004). The fee-shifting and damages provisionsof § 303(i) are intended to deter frivolous filings. See

id. (regarding fee-shifting under § 303(i)(1)); In reFox Island Square P’ship, 106 B.R. 962, 968 (Bankr.N.D. Ill. 1989) (regarding damages under § 303(i)(2))(“This deterrent should be directed not merely to thepetitioning creditor in the case at bar, but also should

Matter of 8Speed8, Inc., 921 F.3d 1193 (2019)

67 Bankr.Ct.Dec. 33, 19 Cal. Daily Op. Serv. 3754

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 4

serve as an example for similar circumstances in future

cases.” (quoting In re Advance Press & Litho, 46 B.R.700, 706 (Bankr. D. Colo. 1984) ). Appropriate deterrenceserves not only to protect debtors from the very significant(and often irreparable) consequences that flow from an

involuntary bankruptcy petition 2 , but also to try toinsulate the bankruptcy court from being unnecessarilyand improperly used as a tool to resolve disputes. See

Advance Press, 46 B.R. at 702 (“It is ... obvious that theuse of the bankruptcy court as a routine collection device

would quickly paralyze this court.” (quoting In re SBAFactors of Miami, 13 B.R. 99, 101 (Bankr. S.D. Fla. 1981)).For these reasons, “there must be available some remedyfor the improper filing of an involuntary petition.” In reEd Jansen’s Patio, Inc., 183 B.R. 643, 644 (Bankr. M.D.Fla. 1995) (permitting the assignee for benefit of creditorsto assert a claim for costs, fees, and damages on behalf ofthe debtor under § 303(i)).

In keeping with the purpose and nature of § 303(i), partieswith a close relationship to a debtor, who have actuallydefended against an involuntary bankruptcy petition,have been allowed to collect damages and fees. See,

e.g., Fox Island, 106 B.R. at 967 (holding that non-petitioning partners can collect damages for defending thepartnership against an involuntary petition filed by other

partners); see also Havens v. Leong P’ship, 586 B.R. 760(Bankr. N.D. Cal. 2018) (holding that an alleged partnerin a fictitious partnership had standing to seek damages),

appeal docketed, No. 18-15679. 3

Similarly, the Southern District of New York foundthat a 50% shareholder had standing to contest aninvoluntary bankruptcy petition: “[T]he debtor in theinstant case is unable to answer the petition becauseits only two shareholders are on either side of thecase, with neither having authority to act for the

corporation.” 4 In re Westerleigh Dev. Corp., 141

B.R. 38, 40 (Bankr. S.D.N.Y. 1992); see also In reSynergistic Techs., Inc., No. 07-31733-SGJ-7, 2007 WL2264700, at *5 (Bankr. N.D. Tex. Aug. 6, 2007) (“[W]henthere is a corporate governance deadlock that prevents acorporate debtor from taking a position with regard to aninvoluntary bankruptcy petition, the court should allowshareholders to assert positions [including requests fordamages under § 303(i)] on behalf of the alleged debtor.”).

Decisions allowing third parties that successfully defendagainst involuntary bankruptcy petitions to seek feesand damages that would be awarded to the debtorare in accord with the actual language of § 303(i)(1)which permits a judgment for fees or costs “against thepetitioners and in favor of the debtor,” and are certainlynot inconsistent with § 303(i)(2), which permits an awardof damages against a petitioner that files a petition in badfaith. See Ed Jansen’s Patio, 183 B.R. at 644.

Here, Vibe Micro owned 50% of the debtor’s stock andstepped into the debtor’s shoes to defend against theinvoluntary bankruptcy proceeding, and the party thatfiled the involuntary bankruptcy petition was itself ashareholder and on the board of directors. SIG admittedthat 8Speed8 was essentially non-functional because of theshareholders’ disputes: “[T]here was a breakdown. Therewas a lack of communication. There was a shareholdermeeting called that was—that not all the shareholderswanted to attend.” Any action on behalf of 8Speed8required a two-thirds majority, either of the board (whichincluded SIG) or of the shareholders (which were split 50–50). There is no indication that a vote of any kind ever tookplace. Under these circumstances, it is likely that VibeMicro was the only party willing or able to defend 8Speed8against involuntary bankruptcy, as it has asserted. Thebankruptcy court should have at least determined whetherVibe Micro was correct in its assertion that, but for itsactions, the debtor’s interests would have gone whollyunrepresented and undefended. If Vibe Micro was trulythe only party willing and able to act for 8Speed8, it shouldhave been allowed to seek fees and damages under § 303(i).

The cases cited by the Majority do not support itsrule. In re Mike Hammer Productions, Inc., which theMajority cites for the proposition that “Congress intendedonly the debtor to have standing to seek damages,”Maj. Op. at 1195, stands only for the commonsenseproposition that if a party lacks standing to contest aninvoluntary bankruptcy petition—as creditors do in mostcircumstances—then it also lacks standing to collect costs,fees, or damages under § 303(i). Franklin v. Four MediaCo. (In re Mike Hammer Prods., Inc.), 294 B.R. 752,754–55 (9th Cir. B.A.P. 2003). The case says nothing

about third parties who step into a debtor’s shoes. 5

In fact, the court in Hammer appears to recognize thatthird parties have standing to seek damages when theyrepresent the debtor. 294 B.R. at 755 (noting that inEd Jansen’s Patio, 183 B.R. at 644, the “assignee for

Matter of 8Speed8, Inc., 921 F.3d 1193 (2019)

67 Bankr.Ct.Dec. 33, 19 Cal. Daily Op. Serv. 3754

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 5

benefit of creditors” was eligible to recover damages as a“representative of the debtor’s estate”; observing that the

third party with standing in Fox Island, 106 B.R. at 968,had “represented the Partnership”; and citing approvinglyto an American Law Reports analysis of § 303(i)(1)(B)entitled “Standing of parties other than alleged debtor toseek award of attorney’s fees”).

The Majority primarily relies on Miles to support itsholding that a third party can never collect damages,contending that “Appellant’s appearance in this case was

just as voluntary as the third parties in Miles.” Maj.

Op. at 1196. But Miles involved true third parties—relatives of the debtors—who filed a separate suit instate court and who never appeared in the underlying

bankruptcy cases. 430 F.3d at 1086. Vibe Micro is notsuch an independent third party—it was acting as a 50%shareholder during a corporate governance breakdown.Vibe Micro has always asserted that no other entity waswilling to defend 8Speed8, and Vibe Micro claimed feesand damages, not after the fact and not for itself, as in

Miles, but in the bankruptcy proceeding and for thedebtor, as part of its motion to dismiss filed on the debtor’sbehalf.

Miles primarily dealt with the meaning of § 303(i)(2), which allows for “damages against any petitioner”proximately caused by the bad faith filing of an

involuntary petition. Miles found that the language in§ 303(i)(1)—that fees and costs could only be awarded“in favor of the debtor”—should be read into § 303(i)

(2). 430 F.3d at 1093–94. Consequently, § 303(i)(2) didnot allow relatives of the debtors to recover damages theypersonally suffered, even if proximately caused by the badfaith filing of an involuntary petition against their family

members. Id. at 1094. Miles says nothing about a non-debtor who obtains a dismissal for the debtor and requeststhat damages be awarded to the debtor under § 303(i)(2).Moreover, reading the words “in favor of the debtor”

into § 303(i)(2), as Miles does, would seem to support,rather than defeat, the claim made here by Vibe Micro.

And, Miles certainly should not be read to bar a non-debtor who successfully obtains dismissal of a petitionfrom obtaining “judgment ... in favor of the debtor for ...A) costs; or B) a reasonable attorney’s fee” pursuant to §

303(i)(1). 6 Such a rule is inconsistent with the purposes

underlying § 303(i) and takes Miles beyond both itsfacts and its holding.

Of course, Vibe Micro should not automatically get itsfees and damages. I would remand this case for factualfindings that were never made. The bankruptcy courtwould need to, inter alia, 1) determine whether any partyother than Vibe Micro could have appeared on 8Speed8’s

behalf, see Fox Island, 106 B.R. at 967 (making afactual finding that a non-petitioning partner representedthe partnership); 2) decide whether the filing was in badfaith; and 3) calculate the appropriate damages and fees—if any—in light of the totality of the circumstances,

Higgins, 379 F.3d at 707. I cannot agree with theMajority’s determination that Vibe Micro lacks standingto seek fees and damages that would be awarded to thedebtor, regardless of the debtor’s ability to defend itselfin the bankruptcy action, and notwithstanding that VibeMicro actually obtained a dismissal on behalf of thedebtor. Accordingly, I respectfully dissent.

All Citations

921 F.3d 1193, 67 Bankr.Ct.Dec. 33, 19 Cal. Daily Op.Serv. 3754

Footnotes* The Honorable Stephanie Dawn Thacker, United States Circuit Judge for the U.S. Court of Appeals for the Fourth Circuit,

sitting by designation.

1 I don’t believe Appellant’s position on this is unclear—it sought fees and damages to be awarded to the debtor. My dissentgoes to this circumstance only—a third party asking that fees and damages be awarded to the debtor in a case wherethe debtor has not appeared, and the third party appeared on behalf of the debtor.

2 “An allegation of bankruptcy is a charge that ought not to be made lightly. It usually chills the alleged debtor’s credit and

his sources of supply. It can scare away his customers. It leaves a permanent scar, even if promptly dismissed.” Inre SBA Factors of Miami, 13 B.R. 99, 101 (Bankr. S.D. Fla. 1981); see also 2 Collier on Bankruptcy ¶ 303.37 (16th ed.

Matter of 8Speed8, Inc., 921 F.3d 1193 (2019)

67 Bankr.Ct.Dec. 33, 19 Cal. Daily Op. Serv. 3754

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 6

2018) (“Since the Code was enacted in 1978, some people have used section 303 as a means of harassment; this wasan effective technique in the sense that even if the wrongful cases were dismissed (after effort to be sure), they resultedin serious consequences for the victim of the wrongful filing.”).

3 In fact, the cases in which non-debtors successfully claimed damages each involved a debtor who did not appear anda third party closely aligned with the debtor. Compare, e.g., Ed Jansen’s Patio, 183 B.R. at 644 (assignee for benefit of

non-petitioning creditors) and In re Synergistic Techs., Inc., No. 07-31733-SGJ-7, 2007 WL 2264700, at *6 (Bankr.N.D. Tex. Aug. 6, 2007) (33% shareholder and board member), with Franklin v. Four Media Co. (In re Mike HammerProds., Inc.), 294 B.R. 752 (9th Cir. B.A.P. 2003) (holding creditors, who had no other affiliation to the debtor, did nothave standing to seek costs or damages under § 303(i)).

4 The Majority cites Westerleigh for the proposition that a bankruptcy court can dismiss a petition sua sponte if it isfiled by a shareholder to gain leverage against another shareholder. Maj. Op. at 1195–96. But the bankruptcy court in

Westerleigh did not act sua sponte. Rather, the court found that the non-petitioning 50% shareholder had standing to

contest the involuntary bankruptcy petition and granted that shareholder’s motion to dismiss. 141 B.R. at 41.

5 There was no suggestion that the non-petitioning creditors in Hammer were acting on behalf of the debtor—they were,in fact, simultaneously suing the debtor in state court. See 294 B.R. at 753.

6 We do not here face the question of whether Miles bars a third party closely related to the debtor from collecting feesor damages for itself when it acts on behalf of a non-appearing debtor in successfully defending against an involuntarybankruptcy proceeding (though I note the policies underlying the statute would counsel in favor of allowing such awards).As noted, we are here faced only with the question of whether a third party closely related to the debtor can obtain feesor damages for the debtor in a case where the debtor did not appear, and the third party obtained a dismissal of theinvoluntary petition on the debtor’s behalf.

End of Document © 2019 Thomson Reuters. No claim to original U.S. Government Works.

In re Falls Event Center LLC, Slip Copy (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

2019 WL 1549727Only the Westlaw citation is currently available.

United States Bankruptcy Court, D. Utah.

IN RE: The FALLS EVENT CENTER LLC; TheFalls at Gilbert, LLC; The Falls at McMinnville,

LLC; The Falls at St. George, LLC; The Fallsof Littleton, LLC; The Falls at Fresno, LLC;

and, The Falls at Clovis, LLC; Debtors.

Bankr. Case No. 18-25116, Bankr. Case No.18-25419, Bankr. Case No. 18-25492, Bankr. CaseNo. 18-26653, Bankr. Case No. 18-27111, Bankr.

Case No. 18-27713, Bankr. Case No. 18-28140|

Signed April 8, 2019

Attorneys and Law Firms

Michael F. Thomson (# 9707), Peggy Hunt (# 6060),John J. Wiest (# 11210), DORSEY & WHITNEY LLP,111 South Main Street, 21st Floor, Salt Lake City,UT 84111-2176, Telephone: (801) 933-7360, Facsimile:(801) 933-7373, Email: thomson.michael@dorsey.com,hunt.peggy@dorsey.com, wiest.john@dorsey.com,Attorneys for Michael F. Thomson, Chapter 11 Trusteeof The Falls Event Center LLC

FINDINGS OF FACT AND CONCLUSIONS OFLAW IN SUPPORT OF ORDER GRANTING

MOTION TO SUBSTANTIVELY CONSOLIDATETHE FALLS EVENT CENTER LLC WITH

DEBTORS THE FALLS AT GILBERT, LLC, THEFALLS AT ST. GEORGE, LLC, THE FALLS OFLITTLETON, LLC, THE FALLS AT FRESNO,LLC, AND THE FALLS AT CLOVIS, LLC; and

NON-DEBTORS THE FALLS AT CUTTENROAD, LLC, THE FALLS AT STONE OAK

PARKWAY, LLC, THE FALLS AT BEAVERTON,LLC, AND THE FALLS AT ROSEVILLE, LLC

R. KIMBALL MOSIER, U.S. Bankruptcy Judge

*1 The matter before the Court is the Chapter 11Trustee's Motion To Substantively Consolidate The FallsEvent Center, LLC with Debtors The Falls at Fresno, LLC,The Falls at Gilbert, LLC, The Falls at McMinnville, LLC,The Falls at St. George, LLC, and The Falls of Littleton,

LLC; and Non-Debtors The Falls at Austin Bluffs, LLC,The Falls at Cutten Road, LLC, The Falls at Stone OakParkway, LLC, The Falls at Beaverton, LLC, and TheFalls at Roseville, LLC (the “Motion”) filed in each of theabove-captioned cases. TFEC Docket No. 327; GilbertDocket No. 32; McMinnville Docket No. 68; St. GeorgeDocket No. 35; Littleton Docket No. 24; Fresno DocketNo. 24; Clovis Docket No. 20. A hearing on the Motionwas held on March 18, 2019 (the “Hearing”). Appearanceswere made on the record.

1. These Findings of Fact and Conclusions of Law (the“Findings and Conclusions”) are in support of the OrderGranting Motion To Substantively Consolidate The FallsEvent Center, LLC with Debtors The Falls at Gilbert, LLC,The Falls at St. George, LLC, The Falls of Littleton, LLC,The Falls at Fresno, LLC, and The Falls of Clovis, LLC;and Non-Debtors The Falls at Cutten Road, LLC, TheFalls at Stone Oak Parkway, LLC, The Falls at Beaverton,LLC, and The Falls at Roseville, LLC (the “Order”) filedconcurrently herewith.

2. In entering the Order and these Findings andConclusions, the Court considered the pleadings anddocuments filed in conjunction with the Trustee's requestfor substantive consolidation, including the following:

a. The Motion;

b. The Memorandum of Law [TFEC Docket No. 331;Gilbert Docket No. 33; McMinnville Docket No. 70;St. George Docket No. 36; Littleton Docket No. 25;Fresno Docket No. 26; Clovis Docket No. 21] (the“Memorandum”) in support of the Motion;

c. The Declaration of Michael F. Thomson, Chapter 11Trustee of The Falls Event Center LLC [TFEC DocketNo. 332; Gilbert Docket No. 34; McMinnville DocketNo. 71; St. George Docket No. 37; Littleton Docket No.26; Fresno Docket No. 27; Clovis Docket No. 22] (the“Trustee Declaration”) in support of the Motion;

d. The Declaration of Gil A. Miller [TFEC Docket No.333; Gilbert Docket No. 35; McMinnville Docket No.72; St. George Docket No. 38; Littleton Docket No.27; Fresno Docket No. 28; Clovis Docket No. 23] (the“Miller Declaration”) in support of the Motion;

e. The Certificate of Service [TFEC Docket No. 337;Gilbert Docket No. 36; McMinnville Docket No. 73;St. George Docket No. 39; Littleton Docket No. 28;

In re Falls Event Center LLC, Slip Copy (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 2

Fresno Docket No. 29; Clovis Docket No. 24] (the“Certificates of Service of Motion Documents”) ofthe Motion, Memorandum, Trustee Declaration, andMiller Declaration on all parties who have requestedECF notification in each of the above-captionedbankruptcy cases;

f. The Notice of Hearing [TFEC Docket No. 335;Gilbert Docket No. 37; McMinnville Docket No. 74;St. George Docket No. 40; Littleton Docket No. 29;Fresno Docket No. 30; Clovis Docket No. 25] (the“Notice”) on the Motion;

g. The Certificate of Service [TFEC Docket No. 366;Gilbert Docket No. 38; McMinnville Docket No. 75;St. George Docket No. 41; Littleton Docket No. 30;Fresno Docket No. 31; Clovis Docket No. 26] (the“Certificate of Service of Notice”) of the Notice on allcreditors and parties in interest;

*2 h. The Objection [TFEC Docket No. 361](the “American Objection”) to the Motion filed byAmerican Savings Life Insurance Co. (“American”);

i. The Objection [TFEC Docket No. 362; McMinnvilleDocket No. 82] and Second Declaration of JohnRasmussen [TFEC Docket No. 363; McMinnvilleDocket No. 83] (together, the “Museum Objection”)to the Motion filed by Evergreen Aviation andSpace Museum and the Captain Michael King SmithEducational Institute (the “Museum”); and

j. The Declaration of Michael F. Thomson ConcerningService of Notice [TFEC Docket No. 383; GilbertDocket No. 54; McMinnville Docket No. 91; St.George Docket No. 47; Littleton Docket No. 43;Fresno Docket No. 40; Clovis Docket No. 35] the(“Declaration Concerning Service”).

3. In entering these Findings and Conclusions, the Courthas also considered the representations made and evidencein support of the Motion presented by the Trustee atthe Hearing, lack of objections to the consolidationas set forth in the Order, and the entire record ofthese bankruptcy cases. Based on the foregoing, theCourt makes the following Findings and Conclusionspursuant to Federal Rule of Civil Procedure 52(a), madeapplicable to this matter by Rules 7052 and 9014(c) of theFederal Rules of Bankruptcy Procedure (the “BankruptcyRules”). Under Bankruptcy Rule 7052, findings of factshall be construed as conclusions of law, and conclusions

of law shall be construed as findings of fact, whenappropriate.

I. FINDINGS OF FACT AND CONCLUSIONS OFLAW

A. JURISDICTION AND VENUE4. On July 11, 2018, TFEC filed a petition seeking reliefunder Chapter 11 of the Bankruptcy Code (the “TFECPetition Date”).

5. The Court has jurisdiction over the Motion pursuant to

28 U.S.C. §§ 157 and 1334. This is a core proceeding

pursuant to 28 U.S.C. § 157(b).

6. Venue is proper pursuant to 28 U.S.C. §§ 1408 and

1409.

B. BACKGROUND

1. TFEC and the Affiliated Companies

7. TFEC operates event centers located in multiple statesand a water park located in Oregon. It also is the solemember and manager of fifteen “Affiliated Companies”described below.

8. Eight of the Affiliated Companies own or lease the realproperty where business operations take place, as follows:

a. The Falls at Elk Grove, LLC (“Elk Grove”)previously held title to real property located at8280/8290 Elk Grove Blvd., Elk Grove, California,where an event center is operated by TFEC. That realproperty was sold at a post-petition foreclosure sale andTFEC now leases the real property directly from thecurrent owner.

b. The Falls at Fresno, LLC (“Fresno”) holds title toreal property located at 4105 W. Figarden Dr., Fresno,California, where an event center is operated by TFEC.

c. The Falls at Gilbert, LLC (“Gilbert”) holds titleto real property located at 4635 East Baseline Road,Gilbert, Arizona, where an event center is operated byTFEC.

In re Falls Event Center LLC, Slip Copy (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 3

d. The Falls of Littleton, LLC (“Littleton”) holds title toreal property located at 8199 Southpark Ct., Littleton,Colorado, where an event center is operated by TFEC.

e. The Falls at McMinnville, LLC (“McMinnville”)holds title to real property located at 510 NortheastCaptain Michael King Smith Way, McMinnville,Oregon, where an event center and Wings and WavesWaterpark (the “Waterpark”) are operated by TFEC.The Waterpark operations are a dba of TFEC, but thereal property on which the Waterpark sits is titled in thename of McMinnville.

*3 f. The Falls at Roseville, LLC (“Roseville”) holdstitle to real property located at 240 Conference CenterDr., Roseville, California, where an event center isoperated by TFEC.

g. The Falls at St. George, LLC (“St. George”) holdstitle to real property located at 170 South Mall Drive,St. George, Utah, where an event center is operated byTFEC.

h. The Falls at Trolley Square, LLC (“Trolley”) leasesreal property located at 580 S. 600 E, Salt Lake City,Utah, where an event center is operated by TFEC.

9. The other seven Affiliated Companies own realproperty and have no other business operations. TheseAffiliated Companies are as follows:

a. The Falls at Austin Bluffs, LLC (“Austin Bluffs”)holds title to real property located at Township 13South Range 66 West El Paso County, Colorado.

b. The Falls at Beaverton, LLC (“Beaverton”) holdstitle to real property located at 12655 SouthwestMiliken Way, Beaverton, Oregon.

c. The Falls at Bricktown, LLC (“Bricktown”) holdstitle to real property located at 108 East California Ave.,Oklahoma City, Oklahoma.

d. The Falls at Burr Ridge, LLC (“Burr Ridge”) holdstitle to real property located at 120 Harvester Drive,Burr Ridge, Illinois.

e. The Falls at Clovis, LLC (“Clovis”) holds title toreal property located at 250 & 270 North Clovis Ave.,Clovis, California.

f. The Falls at Cutten Road, LLC (“Cutten Road”)holds title to real property located at 13455 CuttenRoad, Houston, Texas.

g. The Falls at Stone Oak Parkway, LLC (“Stone Oak”)holds title to real property located at S. Side of StoneOak Parkway West of Highway 281, San Antonio,Texas.

Consideration of the Motion as to McMinnville andAustin Bluffs has been continued until the dates specifiedin ¶ 44 infra, and these Findings of Fact and Conclusionsof Law do not apply to McMinnville and AustinBluffs. For the avoidance of doubt, the term “AffiliatedCompanies” hereinafter does not include McMinnvilleand Austin Bluffs.

2. Management

10. All of the Affiliated Companies are wholly-ownedsubsidiaries of TFEC.

11. Since their inception, TFEC and the AffiliatedCompanies have had common managers, and TFEC hasdirected all actions of the Affiliated Companies.

12. Steven L. Down (“Down”) founded TFEC, and from2011 to 2018, he was the Chief Executive Officer. Downand his brother, David W. Down, were also managers ofTFEC and the Affiliated Companies. TFEC Docket No.72, ¶ 29.

13. On or about June 28, 2018, Brooks Pickering becameChief Restructuring Officer of TFEC.

14. On or about August 30, 2018, Mr. Pickering resignedand Gil A. Miller was appointed Chief RestructuringAdvisor of TFEC. TFEC Docket No. 99. Mr. Millerserved in this role until the appointment of the Trustee.

15. On November 27, 2018, the Court entered an OrderApproving Appointment of Chapter 11 Trustee, approvingthe appointment of the Trustee as the Chapter 11 trusteeof the TFEC estate. TFEC Docket No. 214.

16. The Trustee manages the Affiliated Companiesthrough TFEC, which is the sole member of the AffiliatedCompanies.

In re Falls Event Center LLC, Slip Copy (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 4

3. TFEC Capitalization

17. Down capitalized TFEC primarily through privateinvestor funding and hard money loans.

18. Prior to the Petition Date, on May 10, 2018, theSecurities and Exchange Commission filed a Complaintagainst TFEC and Down in the United States DistrictCourt for the District of Utah (Case No. 2:18-cv-00382),a copy of which is attached to the Trustee's Memorandumas Exhibit A. The Complaint alleges that Down hadraised approximately $ 120 million from approximately300 investors since 2011, and Down misrepresented theprofitability of TFEC even after he was fully informedthat TFEC was not profitable and had never beenprofitable. On May 11, 2018, the District Court entereda Final Judgment in this lawsuit in which TFEC andDown consented to entry of the Final Judgment withoutadmitting or denying the allegations in the Complaint,Down agreed to pay $ 150,000 in civil penalties, and TFECand Down were enjoined from violating securities laws.Case No. 2:18-cv-00382 Docket No. 7.

*4 19. The Trustee's investigation to date indicates thatinformation that Down provided to investors about theprofitability of TFEC's enterprise was not accurate, andthe funds obtained from operating the event center andWaterpark businesses were not sufficient to sustain theentire enterprise.

4. Affiliated Companies' Capitalizationand Property Acquisition

20. None of the Affiliated Companies has ever had asource of income.

21. The debts of each of the Affiliated Companies havebeen paid by TFEC.

22. Each of the Affiliated Companies acquired title to realproperty through hard money or traditional loans thatwere secured by the real property they held. TFEC causedeach of the Affiliated Companies to enter into these loans,and any cash down payments or debt service on the loanswas made from TFEC funds.

23. TFEC guaranteed or is otherwise obligated for themajority of the Affiliated Companies' real property loans.

5. Business Operations

24. TFEC's corporate office is located in a building that itleases located in West Jordan, Utah (the “Office”). TFECruns its operations and manages each of the AffiliatedCompanies from the Office, and none of the AffiliatedCompanies have separate offices.

25. All books and records of TFEC and the AffiliatedCompanies are located in the Office.

26. TFEC has approximately two hundred and twenty-five employees. The Affiliated Companies have noemployees, and to the extent that they require services theyrely on TFEC.

27. TFEC manages each of the Affiliated Companieswithout receiving compensation or remuneration,including providing bookkeeping services and attendingto management of property owned or leased by theAffiliated Companies.

28. TFEC's business includes operating event centers anda waterpark at the real properties held by some of theAffiliated Companies. TFEC has no written contractswith the Affiliated Companies for use of the properties.

29. TFEC attends to all aspects of running the eventcenters and executing events, including contracting withpersons wanting to hold events, securing prepayments,servicing events, contracting with vendors that assist inservicing the events, and collecting final payments.

30. All activity for TFEC and the Affiliated Companieshas always been filed on consolidated tax returns as theAffiliated Companies are considered to be disregardedentities by the Internal Revenue Service.

6. Cash Management and Accounting

31. Prior to the TFEC Petition Date TFEC had 3 bankaccounts. TFEC Docket No. 72 (Schedule B).

In re Falls Event Center LLC, Slip Copy (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 5

32. Prior to the TFEC Petition Date, none of the AffiliatedCompanies had bank accounts, and creditors of theAffiliated Companies were therefore paid on checks issuedby TFEC using its accounts.

33. Prior to the TFEC Petition Date, TFEC maintainedtwo sets of accounting records. The first containedactivity for TFEC corporate overhead and all activityfor operating and non-operating Affiliated Companies(“TFEC QuickBooks”). The second file contained onlythe activity for Waterpark operations, even thoughthe Waterpark is a dba of TFEC. Within the TFECQuickBooks, all real property, debt and operationalincome and expenses of the Affiliated Companies wereconsolidated. Each transaction was identified to aparticular “Class” representing the Affiliated Company towhich the transaction related. There was no attempt madeto book intercompany receivables and payables to identifyTFEC's payment of any of the Affiliated Companies'obligations, such as debt service or property taxes.

*5 34. The Trustee's investigation, while still preliminaryand ongoing, indicates that TFEC used the funds itobtained from business operations and investors to fundwhatever the needs of the entire enterprise were at anygiven time.

35. The assets and business activities of TFEC andthe Affiliated Companies have been treated as a singleenterprise.

7. The Affiliated Companies' Bankruptcy Filings

36. After the TFEC Petition Date, the followingcompanies filed cases seeking relief under Chapter 11 ofthe Bankruptcy Code: Elk Grove (July 16, 2018, Case No.18-25208), Gilbert (July 25, 2018, Case No. 18-25419),McMinnville (July 27, 2018, Case No. 18-25492), St.George (September 6, 2018, Case No. 18-26653), Littleton(September 24, 2018, Case No. 18-27111), Fresno(October 15, 2018, Case No. 18-27713), Bricktown(October 17, 2018, Case No. 18-27766), and Clovis(October 31, 2018, Case No. 18-28140) (collectively, withTFEC, the “Debtors”).

37. As the trustee of TFEC, the Trustee manages theseDebtors as debtors in possession.

38. To date, the following companies have not soughtbankruptcy protection: Austin Bluffs, Burr Ridge, CuttenRoad, Cedar Park, Stone Oak, Beaverton, Roseville, andTrolley (the “Non-Debtors”).

C. CONSOLIDATION39. The Court finds that it is in the best interestsof creditors and all parties in interest to substantivelyconsolidate the following Debtor and Non-DebtorAffiliated Companies with TFEC as of the TFECPetition Date: Gilbert, St. George, Littleton, Fresno,Clovis, Cutten Road, Stone Oak, Beaverton, Roseville(collectively, the “Falls Parties”).

40. The Trustee also sought consolidation of DebtorMcMinnville and Non-Debtor Austin Bluffs. See Motion.

1. Basis for and Benefit ofConsolidation of the Falls Parties

41. The Court finds that it is in the best interestsof creditors and all parties in interest to substantivelyconsolidate the Falls Parties with TFEC for reasonsgeneral to all of the Falls Parties as well as reasons specificto certain of the Falls Parties.

42. The following considerations general to most or all ofthe Falls Parties support consolidation:

a. The Falls Parties are alter egos of TFEC.

b. Substantive consolidation will make it unnecessaryto quantify and prosecute intercompany claims thatmay exist between TFEC and the Falls Parties,thus conserving considerable resources of the separateestates or entities. For example, at this time, arguably,the Falls Parties on whose properties TFEC wasconducting business have claims against TFEC for useof their properties, and TFEC has claims against eachof the Falls Parties for, among other things, costsof managing the Falls Parties and monies it used topurchase properties and pay the debts of the FallsParties. The cost of quantifying these claims will likelyexceed any benefit that might result. Among otherthings, (a) to the extent that TFEC may have claimsagainst the Falls Parties, those Parties have no sourceof income to pay TFEC other than from any equitythat may exist in their respective properties; (b) the Falls

In re Falls Event Center LLC, Slip Copy (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 6

Parties' primary creditors are those claiming to holdclaims secured by property, and therefore, any equity inthe property will be paid to TFEC.

c. Substantive consolidation of the Falls Parties withTFEC will resolve corporate governance and authorityissues as to these Affiliated Companies.

*6 d. For the Non-Debtor Falls Parties, substantiveconsolidation will allow the Trustee to include theseentities in a reorganization or orderly liquidation,including the benefits associated with bankruptcy saleprovisions and bankruptcy transparency. Specifically,substantive consolidation will allow the Trustee tosell real property owned by Cutten Road, Stone

Oak, Beaverton, and Roseville under Section 363of the Bankruptcy Code for a higher price than ifthat property were sold without the protections of

Section 363, and thus realize a higher return forcreditors.

e. Substantive consolidation will greatly streamlinethe TFEC case and the cases of the Debtor FallsParties, thus, among other things, reducing costs anddelays related to separate administration, minimizingconfusion by parties in interest created by the variouscases (and non-cases), and consolidating noticingissues.

f. Substantive consolidation will benefit the creditorsof the individual Falls Parties by giving those creditorsrecourse against TFEC and all of the Falls Parties ratherthan simply the individual company against which theycurrently hold a claim.

g. Substantive consolidation will benefit TFEC'screditors by allowing the Trustee to realize greaterreturns on the sale of the Falls Parties' properties andthen upstream those funds more easily and efficientlyto TFEC for the benefit of its creditors. Further,substantive consolidation will not expose TFEC tosignificantly greater liability than it currently has.TFEC has already guaranteed the debt of Fresno,Cutten Road, and Stone Oak and will incur noadditional liability by being consolidated with thosethree companies. Consolidation will make TFEC liablefor possible deficiency claims held by the creditorsof Gilbert, Littleton, and Roseville, but even shouldthose claims accrue, they would, based on informationavailable at this time, constitute only about 2.5% of

the total unsecured claims against TFEC, and thus donot represent a significant dilution to TFEC unsecuredcreditors, whose claims at this time are estimated toexceed $ 100 million.

43. Other means of administering the Debtors' bankruptcycases would be less efficient and less likely to maximize thevalue of assets for the benefit of creditors. For example,appointment of a trustee for each of the Debtors may notbe beneficial given that, in the absence of consolidation,one person likely could not serve as a trustee for TFECand the Affiliated Companies given the significant andcomplicated intercompany claims. Multiple trustees andprofessionals would greatly increase administrative coststo the detriment of all creditors. Accordingly, substantiveconsolidation of the Falls Parties with TFEC is in thebest interests of all parties in interest and the respectivebankruptcy estates.

2. Companies Not Consolidated at this Time.

44. Due to the American Objection and the MuseumObjection, the Court reserves consideration of the Motionas it relates to Non-Debtor Austin Bluffs and DebtorMcMinnville. A hearing on the American Objection isscheduled for April 17, 2019, and a hearing on theMuseum Objection is scheduled for May 6, 2019.

45. The Court makes no findings regarding theappropriateness of consolidating the following companieswith TFEC at this time: Debtor Elk Grove, DebtorBricktown, Non-Debtor Cedar, Park Non-Debtor BurrRidge, and Non-Debtor Trolley.

3. Notice and Objections

46. Based on the Notice, the Certificate of Serviceof Motion Documents, the Certificate of Service ofNotice, and the Declaration Concerning Service, theCourt finds that notice of the Motion and the Hearingwas properly served on all creditors of TFEC, the FallsParties, McMinnville, and Austin Bluffs giving them anopportunity to object to the relief sought in the Motion.Such notice is sufficient, and no further notice or serviceis required.

In re Falls Event Center LLC, Slip Copy (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 7

*7 47. No objections were filed as to substantiveconsolidation of Gilbert, St. George, Littleton, Fresno,Clovis, Cutten Road, Stone Oak Parkway, Beaverton, andRoseville with TFEC.

48. American filed the American Objection, objecting onlyto the substantive consolidation of Austin Bluffs withTFEC.

49. The Museum filed the Museum Objection, objectingonly to the substantive consolidation of McMinnville withTFEC.

50. At the hearing, the Court continued the hearing onthe Motion as to consolidation of Austin Bluffs andMcMinnville, and counsel for American and the Museumdid not object to the consolidation of the Falls Parties, asdefined herein, with TFEC.

51. Accordingly, there are no objections to the substantiveconsolidation of the Falls Parties with TFEC.

52. The Court finds that all parties who were served withthe Notice and did not object have consented to the Courtexercising jurisdiction over Non-Debtors Cutten Road,Stone Oak Parkway, Beaverton, and Roseville.

53. Based on the notice that has been provided, this Courtmay order substantive consolidation of the Debtor andNon-Debtor Falls Parties with TFEC.

II. CONCLUSIONS OF LAW

A. THE COURT HAS AUTHORITY TOSUBSTANTIVELY CONSOLIDATE THE FALLSPARTIES WITH TEFC

54. Substantive consolidation is an extraordinary remedy,arising out of federal common law for the purpose ofadvancing the equitable powers of the bankruptcy courts.

See 11 U.S.C. § 105(a); In re Owens Corning, Inc., 419F.3d 195, 205, 208 & 216 (3d Cir. 2005); see also In reGeorge Love Farming, LC, 366 B.R. 170, 180 (Bankr. D.Utah 2007) (Thurman, J.) (recognizing same). The resultis that “claims of creditors against separate debtors morph

to claims against the consolidated survivor.” OwensCorning, 419 F.3d at 205. The Court of Appeals for theTenth Circuit has stated:

The power to consolidate authorizesthe court to pierce the severalcorporate veils and to disregard theexistence of the separate corporateentities. Thus where a corporation isa mere instrumentality or alter egoof the bankrupt corporation, withno independent existence of its own,equity would favor disregarding theseparate corporate entities. It is,of course, proper to disregard aseparate legal entity when suchaction is necessary to avoid fraud orinjustice.

Federal Deposit Ins. Corp. v. Hogan (In re Gulfco Inv.Corp.), 593 F.2d 921, 928-29 (10th Cir. 1979) (relying on

Fish v. East, 114 F.2d 177, 191 (10th Cir. 1940) ).

55. “The bankruptcy court's power of substantiveconsolidation has been considered part of the bankruptcycourt's general equitable powers since the passage of the

Bankruptcy Act of 1898.” Alexander v. Compton (Inre Bonham), 229 F.3d 750, 763 (9th Cir. 2000) (citing in

part Sampsell v. Imperial Paper & Color Corp., 313 U.S.215, 219 (1941) ). This power is widely accepted under theBankruptcy Code, including by this Court in reliance on

the Tenth Circuit's decisions in In re Gulfco Inv. Corp.,

593 F.2d at 921, and Fish v. East, 114 F.2d at 177,which were both decided under the Bankruptcy Act. See

also Owens Corning, 419 F.3d at 206-209 (discussinghistory and concluding that although extraordinary, “[n]ocourt has held that substantive consolidation is not

authorized”); Bonham, 229 F.3d at 765 (same); GeorgeLove Farming, 366 B.R. at 180 (same); see also In reHorsley, No. 99-30458 JAB, 2001 WL 1682013, at *3(Bankr. D. Utah Aug. 17, 2001) (Boulden, J.) (stating thatthe ability to order substantive consolidation was “impliedfrom the bankruptcy court's general equitable powers”);

Heller v. Langenkamp (In re Tureaud), 59 B.R. 973,975-77 (N.D. Okla. 1986) (affirming order consolidatingindividual debtor with non-debtor entities controlled by

In re Falls Event Center LLC, Slip Copy (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 8

the debtor); In re Mansfield Corp., Bankr. Case No.02-28236, Docket No. 245 (Bankr. D. Utah) (Boulden, J.),Order Substantively Consolidating Cases.

B. SUBSTANTIVE CONSOLIDATION OF THEFALLS PARTIES WITH TFEC IS APPROPRIATEUNDER APPLICABLE LAW

*8 56. “The propriety of ordering substantiveconsolidation is primarily a factual question and isdetermined by a balancing of interests” of those seeking

consolidation and those opposing it, if any. Matter ofBaker & Getty Fin. Servs., Inc., 78 B.R. 139, 142 (Bankr.N.D. Ohio 1987); see In re F.A. Potts & Co., 23 B.R.569 (Bankr. E.D. Pa. 1982). In Fish v. East, the TenthCircuit set forth the following ten factors to consider in aconsolidation analysis:

(1) The parent corporation owns all or majority of thestock of the subsidiary;

(2) The parent and subsidiary corporations havecommon directors or officers;

(3) The parent corporation finances the subsidiary;

(4) The parent corporation subscribes to all the capitalstock of the subsidiary or otherwise causes itsincorporation;

(5) The subsidiary has grossly inadequate capital;

(6) The parent corporation pays the salaries or expensesor losses of the subsidiary;

(7) The subsidiary has substantially no business exceptwith the parent corporation or no assets except thoseconveyed to it by the parent corporation;

(8) In the papers of the parent corporation, and in thestatements of its officers, the subsidiary is referred toas such or as a department or division;

(9) The directors or executives of the subsidiary do notact independently in the interest of the subsidiary buttake direction from the parent corporation; and

(10) The formal legal requirements of the subsidiaryas a separate and independent corporation are notobserved.

Fish, 114 F.2d at 191

57. In In re Horsley, this Court stated: “The Gulfco/Fishcriteria can be reduced into two general components:(1) the extent to which the entity to be substantivelyconsolidated was managed or controlled by the debtor,and (2) whether the entity to be substantively consolidatedhad an economic existence independent from the Debtor.”Horsley, 2001 WL 1682013, at *4.

58. The Gulfco/Fish factors are met—in short, as notedin Horsely, the Falls Parties are controlled by commonmanagement and they have no economic existenceseparate and apart from each other. These entities trulyhave been treated as a single enterprise. See ¶¶ 20-36,supra.

59. Specifically --

• the Affiliated Companies are all wholly-ownedsubsidiaries of TFEC, ¶¶ 7, 10, supra;

• since their inception, TFEC and the AffiliatedCompanies have had common managers, and TFECdirects all actions of the Affiliated Companies, ¶ 11,supra;

• none of the Affiliated Companies ever had a source ofincome, ¶ 20, supra;

• the debts of the Affiliated Companies have been paidby TFEC, ¶ 21, supra;

• TFEC caused each of the Affiliated Companies toenter into real property loans, and any cash downpayment or debt service on those loans was madefrom TFEC's funds, ¶ 22, supra;

• TFEC guaranteed or is otherwise obligated to paymany of the Affiliated Companies' loans, ¶ 23, supra;

• the business operations of the TFEC and the AffiliatedCompanies were operated on a consolidated basis,with the Affiliated Companies relying on TFEC foruse of an office, employees, and management andthere was no consideration provided for the same, ¶¶24-29, supra;

• there are no written contracts for TFEC's use of theAffiliated Companies' properties, ¶ 28, supra;

• the Affiliated Companies did not even have bankaccounts prior to the TFEC Petition Date, and

In re Falls Event Center LLC, Slip Copy (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 9

creditors of the Affiliated Companied were thereforepaid on checks issued by TFEC using its accounts, ¶32, supra;

*9 • TFEC and the Affiliated Companies have alwaysfiled consolidated tax returns and have consolidated

financial records, ¶ 30, supra; see, e.g., Nesbit v.Gears Unlimited, Inc., 347 F.3d 72, 86 n.7 (3d Cir.2003) (noting that many bankruptcy courts haveused the In re Vecco seven-factor test to determineif substantive consolidate is appropriate, whichtest considers, among other factors, “the presenceor absence of consolidated financial statements”);

In re Worldcom, Inc., 2003 WL 23861928, at *8(Bankr. S.D.N.Y. 2003) (considering the filing ofconsolidated financials as a factor in determiningwhether debtors were operationally integrated for

substantive consolidation purposes); In re WorldAccess, Inc., 301 B.R. 217, 253–56 (Bankr. N.D. Ill.2003) (declining substantive consolidation but notingthe filing of consolidated financials with the SEC asa factor in determining the debtors' public perceptionto creditors for substantive consolidation);

• accounting protocols typically used for separateentities were not followed, ¶¶ 32-34, supra; and

• cash was used by TFEC to fund whatever needs of theenterprise were at any given time, ¶ 34, supra.

60. In short, TFEC and the Affiliated Companies are alteregos.

61. As a result of these facts, the Court has determinedthat, for the reasons set forth herein and basedon the evidence proffered at the hearing, substantiveconsolidation of TFEC and the Falls Parties isappropriate and in the best interests of creditors andparties in interest of both TFEC and the Falls Parties.

62. Substantive consolidation is the most efficient and bestway to maximize the value of assets and distributions tocreditors. See ¶¶ 42-43, supra.

63. Thus, the Falls Parties are substantively consolidatedwith TFEC.

C. CONSOLIDATION OF THE FALLS PARTIESWITH TFEC SHALL BE EFFECTIVE AS OF THETFEC PETITION DATE

64. Substantive consolidation of the Falls Parties withTFEC shall take place as of the TFEC Petition Date.

65. The analysis of whether to order substantiveconsolidation nunc pro tunc “closely parallel[s]” theanalysis of whether to substantively consolidate entitiesin the first place. In re Bonham, 226 B.R. 56, 99 (Bankr.

D. Ala. 1998) (citing In re Auto-Train Corp., 810 F.2d

270, 277 (D.C. Cir. 1987) ), aff'd, 229 F.3d 750, 771(9th Cir. 2000). Courts have adopted two tests for nunc protunc consolidation, with the key factor under both testsbeing whether there was “reliance on an entity's apparentseparateness.” Bonham, 226 B.R. at 99.

66. The first test is established in In re Auto-TrainCorporation, 810 F.2d 270 (D.C. Cir. 1987), where theCourt of Appeals for the D.C. Circuit held that nuncpro tunc consolidation requires the movant to show thatsuch consolidation is necessary to achieve some benefitor avoid some harm. If this showing is made, nunc protunc consolidation will be allowed unless any opposingparty proves that it relied on the separate credit of one ofthe entities to be consolidated and that the harm to it inshifting a filing date will outweigh the benefits of nunc pro

tunc consolidation. Id. at 277.

67. The second test for nunc pro tunc consolidation wasset forth by the Court of Appeals for the Sixth Circuit

in In re Baker & Getty Financial Srvcs., Inc., 974 F.2d712 (6th Cir.1992). Under this test, the following twofactors are considered in determining whether substantiveconsolidation should occur as of the petition date: (1)whether the creditors dealt with the consolidated entitiesas if they were the same, or (2) the affairs of theconsolidated entities are so entangled that it would notbe feasible to identify and allocate all of their assets andliabilities. Id.

68. Under either of these tests, substantive consolidationof Falls Parties as of the TFEC Petition Date isappropriate. The Falls Parties had no corporate existenceoutside of the TFEC corporate group. The Falls Parties'affairs are so entangled with those of TFEC that it would

In re Falls Event Center LLC, Slip Copy (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 10

be most efficient to consolidate them as of the TFECPetition Date, which allows the Trustee to capture theFalls Parties' assets as assets of the consolidated estate.

*10 69. No party in interest has objected to substantiveconsolidation as of the TFEC Petition Date.

70. Accordingly, the Falls Parties are substantivelyconsolidated with TFEC as of the TFEC Petition Date.

All Citations

Slip Copy, 2019 WL 1549727

End of Document © 2019 Thomson Reuters. No claim to original U.S. Government Works.