DAVID W. HERCHER, Bankruptcy Judge.
The plaintiff, Edward Hickam, is the debtor in this chapter 13 case. The defendant, Robert Westphal, has moved to dismiss this action.
On August 18, 2017, Hickam filed the chapter 13 petition initiating this case.
On September 14, 2018, Westphal filed in this main case an adversary-proceeding complaint against Hickam and others.
Hickam initiated this action on February 19, 2019. The complaint includes the following allegations:
Westphal has not answered the complaint.
I will refer to Westphal's 2018 state-court complaint (by contrast to his 2017 state-court complaint discussed below) as the state-court complaint. Copies of the state-court complaint appear as exhibits both to Westphal's motion
The state-court complaint includes the following general allegations.
The state-court complaint contains four claims for relief. Each of the general allegations of the complaint is expressly incorporated into each of the four claims for relief. The first claim is entitled "successor liability."
The second claim is entitled "piercing corporation veil."
The third claim is entitled "Fraudulent Transfer Act, O.R.S. § 95.200 et seq."
The fourth claim is entitled "claw-back of assets distributed in dissolution, O.R.S. § 60.645."
Westphal filed his motion to dismiss on April 27, 2019.
As filed, the motion seeks dismissal under Federal Rule of Bankruptcy Procedure (Bankruptcy Rule) 7012 and Federal Rule of Civil Procedure (Civil Rule) 12(b)(6), alleging that the complaint fails to state a claim for relief. Because the motion asks me to consider factual matters outside the pleadings, I told the parties that I would treat it as one for summary judgment under Bankruptcy Rule 7056 and Civil Rule 56.
Considering my treatment of the motion as one for summary judgment, I interpret it to make two primary arguments. First, by reason of Westphal's disclaimer in the state-court complaint, he argues that the state-court complaint is not based on any prepetition actions of Hickam, nor does it seek to recover from assets that Hickam allegedly bought from Old Ed's before bankruptcy. Thus, Westphal implies, as a matter of law the state-court complaint does not violate the automatic stay.
Second, Westphal argues that Hickam cannot prove that Westphal knew of Hickam's alleged prepetition transfer to himself of any of Old Ed's assets other than equipment, leases, and inventory.
Hickam has filed an objection to the motion
I heard oral argument on June 20, 2019.
Summary judgment is proper if the movant is entitled to judgment as a matter of law based on facts about which there is no genuine dispute.
In the complaint in this action, Hickam alleges that the state-court action is barred by 11 U.S.C. § 362,
As noted above, Westphal's motion makes two primary arguments for dismissal. First, he argues that his state-court complaint on its face cannot be a stay violation because it contains the disclaimer, limiting its claims to actions or omissions after the petition date and disclaiming any recovery from property transferred from Old Ed's to Hickam.
Westphal's theory appears to be that there are two possible outcomes of the state-court litigation with respect to Hickam: either (1) the state court will find that events giving rise to Hickam's liability occurred after the petition date, in which case Westphal wins and there is no stay violation, or (2) the state court will find that those events occurred before bankruptcy, in which case Westphal loses on the merits—but there's still no stay violation due to his disclaimer. Hickam's position is that at least some of the specific acts that Westphal alleges in support of his claims—the undated alleged looting of Old Ed's assets—occurred before bankruptcy.
I don't agree with Westphal that he can circumvent the stay by characterizing the claims as having accrued after the petition date and disclaiming both any right to recover at all if the claims instead turn out to have accrued before bankruptcy and in any case from property that Hickam acquired from Old Ed's before bankruptcy. Granted, if the claims turn out to be ones that accrued before bankruptcy, Westphal will have pleaded himself out of state court by his disclaimer. So, there is some logic to his argument that Hickam has nothing to fear if the claims are found to have accrued before bankruptcy. But the function of the stay is not just to prevent imposition of liability for prepetition claims; it is also to protect the debtor from having to defend litigation in a nonbankruptcy forum over prepetition debts. The litigation itself is the harm that the stay is designed to prevent. If Hickam must try the state-court case to final judgment just to find out that the claims accrued before bankruptcy and are therefore stayed, the damage will have been done.
Westphal's argument would be stronger had the state-court complaint unequivocally relied only on postpetition events to support his claim that Hickam is liable to Westphal. After describing the prepetition litigation that Westphal commenced on February 22, 2017, the state-court complaint says that Hickam "then fraudulently looted Old Ed's, transferring all of its assets to himself without meeting the corporation's obligations to its creditors."
In addition to his first primary argument—that the disclaimer immunizes him from stay-violation liability as a matter of law—the motion can be read to include three alternate, subordinate arguments challenging Hickam's ability to prove that his liability to Westphal arose before bankruptcy.
Under Civil Rule 56(c)(2), a summary-judgment movant or opponent may object that material cited by the opponent to support or dispute a fact "cannot be presented in a form that would be admissible in evidence."
In a footnote in the motion, Westphal anticipatorily challenges the admissibility of the lease assignments and bill of sale on the ground that the copies attached to the complaint are not authenticated.
In any case, in opposition to the motion, Hickam has submitted declarations of himself, Patrick, and Milam, which, when read together, are evidence that the lease assignments and bill of sale preceded bankruptcy. Hickam declared that he transferred all assets of Old Ed's to himself at the time he filed his petition. Patrick declared that he prepared the lease assignments and bill of sale, and copies attached to his declaration are dated August 13, 2017, and appear to bear Hickam's signature. And Milam declared that she witnessed the asset transfers before bankruptcy.
Westphal's reply repeats the anticipatory admissibility challenge to the documents attached to the complaint. But it does not mention, much less oppose my consideration of, any of the declarations or the copies of the lease assignments and bill of sale.
Westphal argues that the lease assignments and bill of sale copies attached to the complaint in this action "do not even pretend to show that the company's underlying and ongoing business operations, goodwill, intellectual property, key contracts, accounts receivable, or $917.69 bank balance were purchased or otherwise transferred" on August 13, 2017.
It is true that the bill of sale does not purport to transfer the categories of assets listed by Westphal. But I have only Westphal's argument—and no evidence—that those assets existed. Hickam says in his declaration that Old Ed's conveyed to him "all of the assets" of Old Ed's.
And even if Westphal had proved the existence of the categories of Old Ed's assets not conveyed by the bill of sale, he has not demonstrated that the omission of those assets from its otherwise complete prebankruptcy asset transfer to Hickam prevented Hickam from acquiring prebankruptcy successor liability for Westphal's claim.
Westphal argues that Hickam "stole" more than $200,000 from Old Ed's after the petition date.
If Hickam's explanation is true, then he was not stealing money from Old Ed's after the petition date; he was putting his own money into an account with Old Ed's name on it, then taking it out again. Whether his explanation is true is another question for trial—as is whether Hickam's alleged looting of Old Ed's after the petition date would prevent him from becoming liable for Westphal's debt before bankruptcy, such as by acquiring the leases and property conveyed by the bill of sale.
Westphal's second primary argument in his motion is that Hickam cannot "prove that Mr. Westphal had any knowledge of his alleged pre-petition transfer of anything other than equipment, leases, and inventory to himself"
By negative implication, Westphal's argument allows me to assume, at least for summary judgment, that he, either individually or through his lawyer, did know before filing the state-court complaint that Hickam alleged to have transferred to himself before bankruptcy at least Old Ed's equipment, leases, and inventory. If I were to decide at trial that those items were transferred before bankruptcy, giving rise to any liability by Hickam to Westphal, knowledge by Westphal of those transfers could satisfy the willfulness requirement of section 362(k).
At the end of Westphal's lack-of-knowledge argument, he adds that "it should also be noted" that is that Hickam did not pay Old Ed's for its inventory. But Westphal doesn't explain why nonpayment is significant, so I won't address that argument now.
In his reply brief, Westphal raises two new arguments. First, he argues that Hickam's purported prepetition transfer of assets from Old Ed's to himself was void and thus any transfer must have occurred after the petition date.
Westphal points to a series of Oregon statutes, a 1939 decision of the Oregon Supreme Court, and an Oregon bar publication to support this argument. The statutes lay out the corporate formalities that are required for a sale of all a corporation's assets, but they don't provide that the transaction is void if the formalities are ignored, as Westphal argues. The supreme court decision, Erickson v. Grande Ronde Lumber Co.,
A second argument that Westphal raises in his reply brief is that he cannot have violated section 362(a)(3) (the stay against actions to obtain property of the estate) because all estate property revested in Hickam upon plan confirmation.
Hickam has not cited section 362(a)(3) in his complaint or objection to the motion, and I don't understand it to be part of his claim. He does cite section 362(a)(1)
Thus, I also reject Westphal's revesting argument.
At oral argument, Westphal's lawyer suggested that the state-court action is not a stay violation because I told him to bring that action. I disagree. He apparently refers to the stipulated order dismissing Westphal's adversary proceeding, which dismissed without prejudice claims against Hickam "for actions and omissions by him after the filing of his Chapter 13 petition." That order did not direct or authorize the filing of his state-court complaint, nor did it determine whether pursing the claims dismissed without prejudice would violate the stay.
Because there are genuine issues of fact about whether Hickam transferred any assets from Old Ed's to himself before bankruptcy, there are also genuine issues of fact about whether Hickam became liable to Westphal before bankruptcy and whether the state-court action is therefore stayed because it could have been brought before bankruptcy or it seeks to recover a claim that arose before bankruptcy.
By denying the motion, I decide only that—on this summary-judgment record—Hickam could have incurred personal liability for Old Ed's debt to Westphal before his bankruptcy, and thus any effort to collect that debt after the petition date—regardless of any post-bankruptcy events—could violate the stay. I will determine at trial, based only on the trial record, whether Westphal's claims in fact violate the stay. In other words, by denying summary judgment, I have not determined my ruling on the trial record whether Westphal's state-court action violates the stay. I have also not decided, and won't decide at trial, the merits of Westphal's state-court claims.
I will separately prepare and enter an order denying the motion—as well as Westphal's included request for an award of fees and costs under Bankruptcy Rule 9011 and 28 U.S.C. § 1927. I remind the parties that, under Bankruptcy Rule 9011(c)(1)(A), any request for sanctions under that rule must be made by separate motion and not be contained in another motion.
At the July 16, 2019, continued pretrial conference, the parties should be prepared with witness availabilities in order to discuss scheduling the trial in this action.
