Order to Substitute Real Party in Interest or Show Cause Why V'Guara's Claims Should Not Be Dismissed; Denying Motion to Withdraw the Reference; Denying Motion to Clarify; Denying Motion to Withdraw as Counsel; and Continuing Trial

[ECF 132, 134, 140]

JENNIFER A. DORSEY, District Judge.

V'Guara, Inc. initiated this action by suing Steve Dec and S&D Beverage, LLC for misappropriation of trade secrets, interference with prospective economic advantage, declaratory judgment, and breach of contract.1 Dec responded with counterclaims against V'Guara and third-party claims against Mirek Wierzbowski for fraud, unjust enrichment/quantum meruit, and declaratory judgment.2 Following a failed summary judgment effort by V'Guara and an unsuccessful settlement conference, on August 5, 2015, I scheduled the jury trial on my February 9, 2016, stack.3

Almost one month later, V'Guara noticed the court and the parties that it had filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code.4 Dec then asked me to clarify that the scope of the automatic stay under 11 U.S.C. § 362 does not apply to his third-party claims against Wierzbowski,5 and to withdraw the reference of V'Guara's claims against Dec and Dec's counterclaims against V'Guara from the bankruptcy court.6 V'Guara and Wierzbowski responded by asking me to extend the automatic stay to non-debtor Wierzbowski, stay the entirety of this case until the automatic stay is lifted by the bankruptcy court,7 and allow V'Guara's claims against Dec and Dec's counterclaims against V'Guara to "remain under the jurisdiction of the United States Bankruptcy Court."8

Unfortunately, the parties failed to recognize that, once V'Guara filed for bankruptcy under Chapter 7 of the Bankruptcy Code, V'Guara's standing to pursue its claims in this action passed to its Chapter 7 trustee. V'Guara is, therefore, ordered to substitute its Chapter 7 trustee in as the real party in interest or show cause why its claims should not be dismissed. Additionally, the parties are mistaken in their belief that any claims asserted in this action have been referred to the bankruptcy court. Dec's motion to withdraw the reference [ECF 134] is, thus, denied. And to further the interests of justice and allow sufficient time to brief these burning issues, I will briefly continue the trial date and deny without prejudice Dec's motion for clarification [ECF 132] and Marquis Aurbach Coffing's motion to withdraw as counsel [ECF 140].

Discussion

A. V'Guara lacks standing to pursue or stay its claims in this action.

The filing of a petition for relief under the Bankruptcy Code commences a bankruptcy case and creates an estate.9 With exceptions that are not relevant in this action, 11 U.S.C. § 541 provides that the bankruptcy estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case."10 "Legal causes of action are included within the broad scope of § 541."11 This includes prepetition tort and contract-based causes of action.12 "The Bankruptcy Code provides that the trustee of a bankruptcy estate is the representative of the estate" and who has "the exclusive right to sue on behalf of the estate."13

Because V'Guara has filed for bankruptcy in the United States Bankruptcy Court, District of Nevada, and a Chapter 7 trustee has been appointed, it appears that V'Guara is "no longer a real party in interest in this matter and has no standing to pursue" its prepetition claims in this action against Dec.14 The real-party-in-interest position and standing to sue now belong to V'Guara's Chapter 7 trustee. Because FRCP 17 provides that "[a]n action must be prosecuted in the name of the real party in interest[,]"15 the proper procedure in a situation like this16 is typically for V'Guara to file a motion to substitute or join its Chapter 7 trustee as a party under FRCP 25(c). That did not happen here, and trial is scheduled to begin in less than a month.17

Nonetheless, "[t]he court may not dismiss an action for failure to prosecute in the name of the real party in interest until, after an objection, a reasonable time has been allowed for the real party in interest to ratify, join, or be substituted into the action."18 Accordingly, V'Guara has 30 days from the entry of this order to substitute its Chapter 7 trustee in as the real party in interest in this action or show good cause why its claims should not be dismissed. To further the interests of justice and allow the Chapter 7 trustee time to get up to speed, I will briefly continue trial in this action and deny without prejudice Marquis Aurbach Coffing's motion to withdraw as counsel of record for V'Guara and Wierzbowski.

B. Withdrawal of the reference

All of the parties appear to be under the impression that some portion of this case—perhaps V'Guara's claims against Dec and possibly Dec's counterclaims against V'Guara—were automatically referred to the bankruptcy court upon the filing of V'Guara's voluntary petition for relief.19 But V'Guara's claims in this action are not listed as assets on V'Guara's schedules, and there is no adversary proceeding pending in the bankruptcy court that raises the same issues that are the subject of the claims that have been asserted in this action. Further, no party has moved me to refer any claim or issue that has been raised in this action to the bankruptcy court. As the parties have not demonstrated that any portion of this action has been referred to the bankruptcy court, I deny Dec's motion to withdraw the reference.

C. Automatic stay under 11 U.S.C. § 362(a)

"In order to protect the estate from being depleted by creditors' lawsuits and seizures of property and provide the debtor breathing room to reorganize, 11 U.S.C. § 362(a) imposes an automatic stay."20 To accomplish these goals, § 362 automatically prohibits:

Although the automatic stay sweeps broadly, it "does not prevent a plaintiff/debtor from continuing to prosecute its own claims nor does it prevent a defendant from protecting its interests against claims brought by the debtor."22 The stay also "`does not protect non-debtor parties or their property.'"23 Accordingly, the only claims in this action that were stayed under § 362(a) by the filing of V'Guara's bankruptcy petition are Dec's counterclaims against V'Guara.

Dec moves me to allow all of the claims, counterclaims, and third-party claims in this action to proceed to trial, or at least his third-party claim for fraud against Wierzbowski.24 And V'Guara and Wierzbowski ask me to extend the scope of the automatic stay to cover V'Guara's claims against Dec and Dec's third-party claims against Wierzbowski.25 Because V'Guara itself no longer has standing to make those requests, and I have ordered V'Guara to substitute its Chapter 7 trustee in this action or show cause why its claims should not be dismissed, I deny Dec's motion to clarify and V'Guara and Wierzbowski's request to extend the scope of the automatic stay without prejudice to the parties' ability to re-urge those matters once the trustee's interest has been sorted out.26

Conclusion

Accordingly, IT IS HEREBY ORDERED that V'Guara has until Thursday, February 11, 2016, to substitute its Chapter 7 trustee in as the real party in interest in this action or show cause why its claims in this action should not be dismissed. If the substitution is not made or V'Guara fails to file a document showing good cause by February 11, 2016, its claims in this action will be dismissed in their entirety without prejudice.

IT IS FURTHER ORDERED that: