Contributed by Brian Wells
Today’s post covers a recent decision by the United States Bankruptcy Court for the Southern District of Texas in the Chiron Equities, LLC case. In that case, the court ordered a preliminary injunction to stop non-bankruptcy court litigation in a dispute between a majority shareholder, a minority shareholder, and his wife. The case serves as a colorful reminder to be mindful of the limits of legal “creativity,” particularly when interpreting court orders.
The dispute involved certain causes of action of the debtor, Chiron Equities, LLC, including alleged claims that the minority shareholder, as manager, had breached fiduciary duties and denuded assets, among others. The majority shareholder filed a proof of claim against the estate in the amount of $5,500,000, which may give some measure of that shareholder’s view of the damages caused by the minority shareholder. In any event, the chapter 7 trustee held an auction for the causes of action. The auction was competitive, with bidding by both the majority holder and the minority holders’ wife. Ultimately, she prevailed at a purchase price of $31,500. A bill of sale was executed and she obtained the purchased claims per the court-approved sales procedures and order.
Almost a year following the auction, the majority holder commenced a state court action asserting “direct claims” against the minority holder, including claims for breach of fiduciary duty, fraudulent concealment, breach of contract, and others. The wife responded with a motion in the bankruptcy court seeking to enjoin the majority holder’s state court claims on the basis that she had purchased those claims at the auction held by the bankruptcy court.
The bankruptcy court noted that the key issue driving its analysis was whether the claims asserted by the majority holder in the state court action were derivative claims, in which case they had been sold to the wife, or direct claims, in which case they had not. After a quick review of applicable Texas law, the court made short change of the majority holder’s claims and called foul. Each claim, the court concluded, was a derivative action “pure and simple.” The majority holder’s attempt to characterize them as direct was a disingenuous attempt to “go after the [minority holder] with a pitchfork.”
The bankruptcy court granted the preliminary injunction, finding that (1) there was a substantial likelihood that the wife would prevail on the argument that the claims had been sold, (2) allowing a collateral attack on the bankruptcy court’s jurisdiction would result in irreparable harm to bankruptcy policy, and also to the wife given the majority holders’ history of dodging enforcement of judgments, (3) there was no outweighing harm to the majority holder from an injunction, and (4) the public interest was in ensuring that final, non-appealable orders (i.e., the sale order) are enforced, and thus weighed in favor of granting an injunction.
On the last point, the court thoroughly excoriated the majority holder, finding that its decision to pursue claims that were so clearly derivative actions had made “a mockery of the auction that [the bankruptcy court] held in 2015 and of the Sale Order . . . .” Surely parties in that court will think twice before trying to circumvent future orders with loose and disingenuous interpretations, lest they rouse the embarrassing – and public – ire of a United States Bankruptcy Judge.
Brian Wells is an Associate at Weil Gotshal & Manges, LLP in New York.