PAUL W. BONAPFEL, Bankruptcy Judge.
This matter comes before the Court on the Defendants' Motion to Dismiss Amended Complaint, to Abstain, or to Stay, with Supporting Memorandum of Law [AP Doc. 8
Behind the entities involved in this proceeding and related lawsuits are the same handfuls of controlling individuals.
On one side are Carson Good and his entities, including Good Gateway, LLC ("Good Gateway"), and SEG Gateway, LLC ("SEG") (the "Good Entities"). Good Gateway and SEG are defendants in this proceeding; the other defendant, Clay Martin Townsend, is an attorney who represented them in litigation described later.
On the other side are Chittranjan Thakkar ("Mr. Thakkar"), his sons Niloy Thakkar and Rohan Thakkar, and various entities controlled by one or more of the Thakkars (the "Thakkar Entities"). BKGD, LLC ("BKGD"), the plaintiff in this proceeding, is a Thakkar Entity, but it was not organized until December 2015 and was not a party to the previous litigation.
As discussed below, the Good Entities have been engaged in complex business litigation in other courts since late 2009 with various Thakkar Entities arising out of transactions in which Steven Smith, the debtor in a Chapter 7 case in this Court, and entities he controlled, were also involved.
Specifically, Mr. Smith at one point was the sole member of Orlando Gateway, LLC ("Orlando Gateway"). Orlando Gateway, in turn, was one of the members of SEG; the other was Mr. Good's entity, Good Gateway.
An issue in the litigation in other courts has been the disposition of Orlando Gateway's interest in SEG. BKDG presents the same issue here. The Court first provides a summary of the issue and then discusses the facts, prior litigation, and proceedings in this Court in more detail.
At some point, Mr. Smith caused Orlando Gateway to transfer its interest in SEG to Good Gateway, thereby making Good Gateway the owner of all of the interests in SEG and putting Mr. Good in complete control of SEG by virtue of his control of Good Gateway. The parties dispute whether the transfer occurred before or after the filing of Mr. Smith's Chapter 7 case. Mr. Smith's bankruptcy case was closed without administration of any ownership interest in Orlando Gateway he might have had.
Based on this acquisition of Orlando Gateway's interests in SEG, Good Gateway as SEG's sole member caused SEG to assert claims against Mr. Thakkar and several Thakkar Entities. The claims were tried after the closing of Mr. Smith's bankruptcy case, and SEG obtained a multi-million dollar judgment in Florida state court. That judgment is currently on appeal in Florida.
In the Florida trial court, the Thakkar Entities had asserted that SEG lacked standing to assert its claims on the ground that Good Gateway did not control SEG because Good Gateway had not validly and legally acquired Orlando Gateway's interest in SEG. They challenged the transfer of Orlando Gateway's interest to Good Gateway on the grounds that the transfer occurred after the bankruptcy filing; that the bankruptcy filing put Orlando Gateway under the control of Mr. Smith's Chapter 7 trustee; that Mr. Smith thus had no authority to act on behalf of Orlando Gateway to transfer its interest in SEG to Good Gateway; and that the transfer was illegal and void because it violated the automatic stay of 11 U.S.C. § 362(a). Furthermore, they asserted that, because Mr. Smith did not list his interest in Orlando Gateway on his bankruptcy schedules, his interest remained property of the Chapter 7 estate after the closing of his case under 11 U.S.C. § 554(d).
The Florida trial court rejected this argument for reasons discussed in Part I(B), and the issue is now pending on appeal.
Mr. Smith's interest in Orlando Gateway became the subject of proceedings in this Court when the Court reopened his Chapter 7 case to permit administration of his interest as an asset of his estate. The plaintiff, BKGD — a Florida limited liability company organized in December 2015 — purchased whatever interest Mr. Smith had in Orlando Gateway. Because the Chapter 7 trustee quitclaimed the estate's interest to BKGD, the estate has no interest in this proceeding, and the trustee is not a party.
BKGD now contends that it is the owner of all of the membership interests in Orlando Gateway and that Orlando Gateway owns the interest in SEG that Mr. Smith caused Orlando Gateway to transfer to Good Gateway. In this adversary proceeding, BKGD seeks declaratory judgments that BKGD owns Orlando Gateway and that Good Gateway has no authority to control Orlando Gateway or SEG. BKDG supports its claims with the same legal theories that the Thakker Entities advanced in the Florida trial court, which that court rejected.
The Court now turns to a discussion in more detail of the history of the litigation over this issue and how that litigation gives rise to the claims BKGD asserts in this proceeding.
In 2007, Steven Smith and Carson Good became business partners for a multi-use development project near Orlando International Airport (the "Project"). They operated the Project through several limited liability companies, including Orlando Gateway (100% owned by Mr. Smith); Good Gateway (100% owned by Carson Good); and Orlando Gateway Partners, LLC ("OGP"). Good Gateway and Orlando Gateway operated through OGP, which is the entity that acquired and developed real estate for the Project. Two things eventually occurred: (1) Orlando Gateway and Good Gateway formed and became co-members of SEG, whose purpose was to hold their membership interests in OGP; and (2) Niloy & Rohan, LLC ("N & R"), a Thakkar Entity, invested in the Project and became a co-member of OGP with SEG.
The structure and interests in the Project became as follows. OGP had two members: SEG and N & R. SEG was 83.378% owned by Orlando Gateway and 13.622% owned by Good Gateway.
After a series of complicated events and dealings between the parties, Good Gateway filed a lawsuit in July 2010 in Orange County, Florida (the "Florida Litigation"), against Mr. Smith, Orlando Gateway, SEG, OGP, Chittranjan Thakkar, N & R, and several other Thakkar Entities, including Nilhan Hospitality, LLC ("Nilhan Hospitality"), Nilhan Financial, LLC, Southeast Investment Properties, LLC, and NCT Systems, Inc. Good Gateway alleged that Mr. Smith, Mr. Thakkar, N & R, and the other Thakkar Entities conspired to cause OGP to transfer valuable real estate to Nilhan Hospitality for little or no consideration. Good Gateway further alleged that Mr. Smith, without Good Gateway's consent, caused SEG to assign all of SEG's interest in OGP to N & R. The Florida Litigation included causes of action for breach of operating agreement, breach of the covenant of good faith and fair dealing, breach of fiduciary duties, tortious interference, civil conspiracy, conversion, fraud, and rescission.
On October 2, 2010, Mr. Smith filed a Chapter 7 petition in this Court. Mr. Smith's schedule of personal property did not include any interest in Orlando Gateway or any other entity.
In June 2011, Good Gateway obtained a $7,686,108.38 judgment against Orlando Gateway and SEG. At some point, purportedly in partial settlement of Good Gateway's claims, Mr. Smith caused Orlando Gateway to transfer its interest in SEG to Good Gateway. The apparent result was Good Gateway's 100% ownership of SEG. The timing and validity of the transfer are disputed.
In July 2012, SEG (now controlled by Good Gateway) filed cross-claims against Mr. Thakkar, OGP, N & R, and several other Thakkar Entities for breach of fiduciary duty, tortious interference, civil conspiracy, conversion, constructive fraud, and breach of contract.
In July 2014, a jury returned $12 million and $2.5 million verdicts in favor of, respectively, SEG and Good Gateway and against Mr. Thakkar, OGP, N & R, Nilhan Hospitality, and NCT Systems, Inc., for breach of fiduciary duty, tortious interference, civil conspiracy, conversion, and constructive fraud. Additionally the jury returned a $12 million judgment in favor of SEG and against OGP and N & R for breach of contract, with an additional award of $3,376,435.58 for prejudgment interest.
In August 2014, the Florida Litigation defendants moved for a directed verdict as to all of SEG's cross-claims, arguing that SEG lacked standing to sue. The defendants argued, apparently for the first time in the suit, that Mr. Smith's Chapter 7 bankruptcy filing placed Orlando Gateway under control of the Chapter 7 trustee and that Mr. Smith was not authorized to cause Orlando Gateway to transfer its interest in SEG. Furthermore, they argued, because the interest was never disclosed in Mr. Smith's schedules, the interest was not abandoned, and remained property of the estate under 11 U.S.C. § 554(d), when the case closed in March 2013.
The trial judge in the Florida Litigation denied the motion for directed verdict, reasoning:
Judgments were entered on the verdicts in October 2014. The defendants appealed on the issues of Mr. Smith's authority and SEG's standing. The appeal has been pending since November 2014.
Since the entry of judgment, the parties have been attempting to avoid or enforce SEG's judgments in numerous bankruptcy cases, adversary proceedings, and appeals in the bankruptcy courts for the Middle District of Florida and the Northern District of Georgia.
Mr. Smith filed his Chapter 7 petition and schedules on October 2, 2010. As noted, he did not disclose any interest in Orlando Gateway in his original schedules.
On October 23, 2015, the United States Trustee moved to reopen the case [Doc. 80], stating that the former Chapter 7 trustee, Cathy Scarver, had been contacted by a Florida attorney with a client interested in buying the estate's interest in Orlando Gateway for $50,000. Per the United States Trustee's motion, Ms. Scarver contended that Mr. Smith's interest in Orlando Gateway was an unscheduled estate asset.
The Court granted the motion to reopen on November 10, 2015 [Doc. 82], and Ms. Scarver was re-appointed as Chapter 7 trustee [see Doc. 89]. The trustee moved to sell the estate's interest in Orlando Gateway to BKGD for $100,000 free and clear of interests and to set auction bidding procedures. [Doc. 93].
Two of the defendants in this proceeding—Good Gateway and SEG—along with Carson Good and James Balletta,
Good Gateway and SEG took the position that this Court had to first determine the estate's ownership in Orlando Gateway before approving the sale. [See Doc. 102 at ¶¶ 19, 20; Doc. 103 at ¶¶ 19, 29]. Good Gateway simultaneously filed an adversary proceeding against the trustee seeking a declaratory judgment that Mr. Smith's membership interest in Orlando Gateway never entered the estate and that Good Gateway owned the membership interests.
The Court approved the proposed bidding procedures at an April 12, 2016, hearing, over the objections of Good Gateway and SEG. The Court scheduled a hearing on the sale motion itself for April 26. At that hearing, the trustee and BKGD announced that the proposed sale would not be free and clear of Good Gateway's and SEG's claims; instead, the transfer would be "as is, where is," with no express or implied representations or warranties. Good Gateway and SEG objected, again, on the basis that the Court had to determine ownership interests in Orlando Gateway before approving the sale.
The Court continued the hearing so that Good Gateway and SEG could obtain witnesses to testify to the estate's lack of interest in Orlando Gateway. The Court made it clear at the April 26 hearing, however, that: (1) the Court did not think it had to determine ownership interests before approving a quitclaim bill of sale; (2) even assuming the estate had no interest because Mr. Smith had transferred it prepetition, the Court would approve a quitclaim bill of sale from the trustee to a third party; and (3) post-sale, the Court expected the parties to litigate ownership of Orlando Gateway elsewhere.
The hearing was continued to June 14. At that hearing, Good Gateway and SEG renewed their argument that the Court had to determine ownership interests in Orlando Gateway before approving the trustee's sale. They did not introduce evidence. The Court concluded that it could—without first determining the estate's ownership interest—approve the sale of the estate's interest in Orlando Gateway to BKGD.
Good Gateway thereafter voluntarily dismissed its adversary proceeding against the trustee.
On June 9, 2016—after the April 26 hearing at which the Court stated it would approve a quitclaim bill of sale, but before the June 14 hearing at which the Court formally approved the sale—Good Gateway and SEG filed a lawsuit in Orange County, Florida (the "Declaratory Judgment Suit"), against BKGD, Mr. Thakkar, and Orlando Gateway.
BKGD and Mr. Thakkar removed the Declaratory Judgment Suit to the Bankruptcy Court for the Middle District of Florida as an adversary proceeding related to the Chapter 7 cases of OGP and Nilhan Hospitality
The bankruptcy court remanded the Declaratory Judgment Suit on August 19, 2016. The court noted, "This recently filed state court action concerns the ownership of Orlando Gateway and directly relates to the issues on appeal to the Florida Fifth District Court of Appeals."
On remand, the Florida state court entered defaults against Orlando Gateway on August 24 and against BKGD on September 2. On September 8, the Florida court entered a Default Final Judgment against Orlando Gateway. It stated, in relevant part:
On September 23, BKGD, Mr. Thakkar, and Orlando Gateway moved to set aside the entry of default against BKGD and the Default Final Judgment against Orlando Gateway. As to the Default Final Judgment, they argued: (1) service on Orlando Gateway was improper because SEG and Good Gateway served Mr. Smith rather than the trustee of his Chapter 7 estate; (2) the lawsuit was void as a violation of the automatic stay in Mr. Smith's Chapter 7 case; and (3) excusable neglect.
On December 16 the Florida court granted the motion to set aside entry of default against BKGD but denied the motion to set aside the Default Final Judgment against Orlando Gateway. As to the denial of the motion to set aside Default Final Judgment, the court concluded: (1) Mr. Smith remained the registered agent on file with the Georgia Secretary of State, and the defendants had not shown that the Chapter 7 trustee had become a registered agent, manager, or member such that service on her was permitted; (2) the Order authorizing the sale specifically contemplated adjudication of ownership of Orlando Gateway in another forum; and (3) the purported excusable neglect was not supported by an affidavit or sworn statement setting forth the facts surrounding the neglect.
On December 30, the defendants in the Declaratory Judgment Suit moved to reconsider the order denying the motion to set aside the Default Final Judgment. The Florida court denied that motion on February 22, 2017.
On March 21, the defendants appealed the orders denying the motion to set aside the Default Final Judgment and denying the motion to reconsider that order.
Around the time BKGD, Mr. Thakkar, and Orlando Gateway were seeking to set aside entry of default and the Default Final Judgment in the Declaratory Judgment Suit, BKGD filed two adversary proceedings in this bankruptcy court.
On September 29, 2016, BKGD filed Adv. Proc. No. 16-5244-wlh against Good Gateway and SEG. That proceeding is related to the Chapter 11 case of Bay Circle Properties, LLC, 15-58440-wlh, and cases jointly administered under the same case number.
BKGD initiated this adversary proceeding on October 4, 2016.
Aside from requests unique to the Smith and Bay Circle bankruptcy cases, the two adversary complaints request substantially the same relief—declaratory judgments that BKGD owns Orlando Gateway and that Good Gateway has no authority to control Orlando Gateway or SEG.
The complaint in this proceeding, as amended on October 24, 2016, has four counts. Count 1 is for "willful and vengeful violation of the automatic stay" by SEG, Good Gateway, and their attorney Clay Townsend by filing the Declaratory Judgment Suit.
Count 2 seeks a determination that Mr. Smith owned Orlando Gateway when he filed his Chapter 7 petition, that after filing, only the trustee had the rights to operate and manage Orlando Gateway, and that any attempts to transfer Mr. Smith's interest in Orlando Gateway or its assets are void.
Count 3 seeks a determination that the judgment against Orlando Gateway in the Florida Litigation is void as obtained in violation of the automatic stay in Mr. Smith's bankruptcy case.
Count 4 seeks a determination that the Chapter 7 trustee's sale of the estate's interest in Orlando Gateway conveyed all rights, title, and interest in Orlando Gateway—including Orlando Gateway's 86.378% interest in SEG—to BKGD.
In this proceeding and in Adv. Proc. No. 16-5244-wlh, the defendants moved to dismiss, abstain, or stay. Numerous responses and replies have followed in each proceeding. In Adv. Proc. No. 16-5244-wlh, Judge Hagenau heard the defendants' motion to dismiss, abstain, or stay on February 9. Judge Hagenau stayed the counts seeking a declaratory judgment regarding ownership and authority over Orlando Gateway and SEG. Those matters are stayed pending the adjudications of this proceeding, the appeal in the Florida Litigation, and the Declaratory Judgment Suit.
No hearing has been set or requested on the motions currently before the Court.
The defendants have moved this Court to abstain from, or to stay a determination of, the counts seeking declaratory relief, pending the outcomes of the Florida Litigation and the Declaratory Judgment Suit.
Under 28 U.S.C. § 1334(c)(1), the Court may abstain from hearing a particular proceeding "in the interest of justice, or in the interest of comity with State courts or respect for State law." The purpose of permissive abstention under § 1334(c)(1) is to "ensure that the jurisdiction of the bankruptcy court is exercised only when appropriate to the expeditious disposition of bankruptcy cases." Queen v. Bank of America, N.A. (In re Queen), No. 13-57784-WLH, 2013 WL 6116864, at *2 (Bankr. N.D. Ga. Nov. 18, 2013) (quoting Graham v. Yoder Machinery Sales (In re Weldon F. Stump & Co.), 373 B.R. 823, 828 (Bankr. N.D. Ohio 2007)).
As explained below, the Court will abstain under 28 U.S.C. § 1334(c)(1) from determining Counts 2, 3, and 4.
Bankruptcy courts generally look to the following non-exclusive factors to determine whether abstention is appropriate:
Flyboy Aviation Props., LLC v. Franck (In re Flyboy Aviation Props., LLC), 2013 WL 2317628, at *2 (Bankr. N.D. Ga. May 21, 2013) (quoting Lester v. TitleMax of South Carolina (In re Titlemax Holdings, LLC), 447 B.R. 896, 900 (Bankr. S.D. Ga 2010)). The Court has discretion to determine each factor's relevant weight in a given proceeding. Id.
The factors that weigh heaviest in the Court's decision to abstain here are those focusing on related state court proceedings (factors 4 and 13 above), the relation to and effect on the bankruptcy estate (factors 1, 5, 6, 7, and 12), and the likelihood that the proceeding involves forum shopping (factor 10).
The Court cannot grant the relief BKDG requests without determining that the trial court in the Florida Litigation was wrong when it ruled that Mr. Smith had authority as Orlando Gateway's manager or president to transfer Orlando Gateway's interest in SEG. BKGD requests, in essence, that this Court (1) rule on a matter that has been pending on appeal in Florida since November 2014 and (2) reverse the Florida Litigation trial court's ruling on Mr. Smith's authority.
This is particularly true because this proceeding involves exclusively non-debtor parties and because the outcome will have no effect on the administration of Mr. Smith's estate. As BKGD is aware, the Court has consistently stated its view that the Court did not have to determine the estate's interest in Orlando Gateway if the issue was not relevant to the administration of the estate.
This Court's jurisdiction with regard to these matters is based on BKGD's assertions that Orlando Gateway and Mr. Smith's interest in it were property of the estate and that those interests were not properly transferred six years ago. A proceeding to determine whether an asset is property of the estate, to be sure, is a core proceeding. But once that asset has been transferred — especially when it is quitclaimed and the purchaser is fully aware of existing disputes with regard to the estate's interest, it is no longer property of the estate. Determination of whether an asset was property of the estate has nothing to do with its current administration or the outcome of the case and therefore does not involve the substance of the Court's jurisdiction over core proceedings.
With regard to forum shopping, the Court notes that it is the most recent of several attempts by a Thakker Entity to challenge the results of the Florida Litigation in bankruptcy courts.
When the Florida Litigation was, post-judgment, removed to the Bankruptcy Court for the Middle District of Florida (where the bankruptcy cases of OGP and Nilhan Hospitality were pending), the Florida Litigation defendants moved the bankruptcy court for reconsideration of the final judgment. The bankruptcy court denied the motion on July 26, 2016, stating:
In a different adversary proceeding, also related to OGP's and Nilhan Hospitality's bankruptcy cases, another Thakkar Entity, Nilhan Financial, LLC, sought a declaration that Orlando Gateway's transfer of SEG was invalid because only Ms. Scarver, the trustee of Mr. Smith's estate, was authorized to effect the transfer. The bankruptcy court dismissed the claim on collateral estoppel grounds and, alternatively, permissively abstained, noting:
BKGD and Mr. Thakkar fared no better when they removed the Declaratory Judgment Suit to the Bankruptcy Court for the Middle District of Florida. The bankruptcy court promptly remanded the Declaratory Judgment Suit, noting, "This recently filed state court action concerns the ownership of Orlando Gateway and directly relates to the issues on appeal. . . . Remand is appropriate to allow my sister court . . . to resolve any issues remanded upon appeal."
The Court notes that the above litigation and rulings took place in bankruptcy cases where the issues mattered—the bankruptcy debtors are also Florida Litigation judgment debtors. After Thakker Entities lost in state court and had no success in the bankruptcy court where these issues are relevant, another Thakker Entity has come to this Court for a different result. This Court's exercise of jurisdiction in these circumstances is not appropriate.
The Court, therefore, concludes that the interests of justice require abstention as to Counts 2, 3, and 4 of the Amended Complaint. Accordingly, the Court will abstain under 28 U.S.C. §1334(c)(1) from deciding those counts and will dismiss them, without prejudice.
BKGD alleges that the filing of the Declaratory Judgment Suit constituted a "willful and vengeful violation of the automatic stay." BKGD seeks a judgment voiding the filing of the Declaratory Judgment Suit and an award of damages for the fees and costs of this proceeding and of the Declaratory Judgment Suit.
The defendants have moved to dismiss this count for failure to state a claim on which relief can be granted. The defendants argue dismissal is appropriate because (1) BKGD lacks standing to bring this claim, as it is not the trustee, the debtor, or a creditor of Mr. Smith's estate; (2) the Chapter 7 trustee has not asserted a stay violation; and (3) BKGD has suffered no damages because everyone contemplated eventual litigation over ownership of Orlando Gateway.
The Court questions whether Count 1 can or should proceed. The Court will hold a status conference on BKGD's claim for willful violation of the automatic stay. The status conference will be set for April 25, 2017, at 10:00 o'clock a.m. The Court instructs counsel for the parties to be prepared to address the question of whether Count 1 can or should proceeding, including (but not limited to) the issues of (1) whether BKGD has standing to assert violations of the automatic stay and (2) whether it is appropriate for the Court to annul the automatic stay.
For the forgoing reasons, it is hereby
This Order has not been prepared for publication and is not intended for publication.
Good Gateway initially filed suit in December 2009 with a co-plaintiff, Good Capital Group, Inc. The 2010 lawsuit bifurcated the claims of those two plaintiffs, leaving Good Gateway as the sole plaintiff in the 2010 case.
Because the Court abstains from deciding the claims to which the transfers are relevant, the Court need not address these disputes.
