Gral v. Gral (In re Gral)
| Decision Date | 31 March 2020 |
| Docket Number | Case No. 16-21329-GMH,Adv. Proc. No. 17-2277-GMH |
| Citation | 615 B.R. 276 |
| Parties | IN RE: Michael A. GRAL, Debtor. Donald A. Gral et al., Plaintiffs, v. Michael A. Gral and the Bankruptcy Estate of Michael A. Gral, Defendants. |
| Court | U.S. Bankruptcy Court — Eastern District of Wisconsin |
Susan K. Allen, Stafford Rosenbaum LLP, Mark L. Metz, Leverson Lucey & Metz S.C., Milwaukee, WI, for Plaintiffs and Interested Parties.
Jonathan V. Goodman, Law Offices of Jonathan V. Goodman, Milwaukee, WI, for Defendant.
Jeffrey E Altshul, Kaplan Saunders Valente & Beninati LLP, John F. Hiltz, Hiltz & Zanzig LLC, Chicago, IL, for Intervenor Official Committee of Unsecured Creditors of Michael A. Gral.
Nathaniel Cade, Jr., Cade Law Group LLC, Milwaukee, WI, for Trustee Chapter 7 Steven R. McDonald.
G. Michael Halfenger, Chief United States Bankruptcy Judge The plaintiffs in this adversary proceeding are twenty individuals and entities related to or associated with Michael Gral, the debtor in the underlying chapter 7 bankruptcy case. Gral's creditors sued the plaintiffs in state court seeking to recover from them debts owed by Gral. Some of the claims asserted in state court are of a type that Gral's bankruptcy estate could assert against the plaintiffs to recover on behalf of Gral's creditors collectively; they commenced this adversary proceeding to request declarations that those claims lack merit. The bankruptcy estate, first through a committee of creditors holding unsecured claims (when the case was under chapter 11), and then through the chapter 7 trustee (after conversion), has attempted to plead counterclaims against the plaintiffs several times.
This decision addresses the plaintiffs' contentions that (1) the estate's operative pleading fails to state any counterclaims on which relief can be granted and (2) the court should dismiss the counterclaims with prejudice and without leave to amend. The decision also dismisses the plaintiffs' claims and affords them notice of, and an opportunity to be heard on, the court's tentative conclusion that developments in this proceeding and the bankruptcy case warrant abstention from any further adjudication of their requests for declaratory relief.
Before Michael Gral filed a chapter 11 bankruptcy petition in February 2016, judgment creditors Bielinski Bros. Builders, Inc. ("Bielinski") and SB1 Cedarburg LLC ("SB1") had made repeated efforts to collect judgments owed to them by Michael Gral. Two of those efforts provide necessary background to the present dispute.
The first effort was Bielinski's 2009 collection action against Michael Gral and his father and guarantor, Donald A. Gral (the "Collection Action"). The state court overseeing the Collection Action appointed a supplementary receiver ("Receiver") and a special master ("Special Master") and later entered a charging order against twelve entities in which Michael Gral held an interest. Case No. 16-21329, ECF No. 18-5, at 1–2, & ECF No. 18-7, at 1–2. The charging order directed those entities to pay Bielinski and inform the Receiver of all distributions, payments, and transfers "to, on behalf of, or for the benefit of Defendant Michael A. Gral" until the judgment was fully paid. See Case No. 16-21329, ECF No. 18-5, at 2–5. The charging order also directed the Special Master and the Receiver to supervise the entities' compliance with the payment and reporting requirements. Id. at 6. The state court later amended the charging order at Bielinski's request to add, among other things, eight additional entities in which Michael Gral held an interest. Case No. 16-21329, ECF No. 18-6, at 2.
The Receiver in the Collection Action noted that Michael and Donald A. Gral had assets that included "membership and ownership interests in more than a dozen LLCs or other entities, most unilaterally controlled by the Gral family", and that "[t]he multiple entities, lenders, inter-company loans, and other transactions in this case constitute one of the most complex networks of ownership entities [he] ha[d] seen in [his] 13 years of practice as a receiver." Case No. 16-21329, ECF No. 18-7, at 3. Based on this, the Receiver "concluded that a full forensic accounting" of entities in which Michael and Donald A. Gral held a membership interest was "necessary to sort through who is entitled to what and whether transfers were made in fraud of creditors." Id.
In 2013 Bielinski commenced the second collection effort that is relevant here: a state-court lawsuit against Michael Gral, his wife, family members, and legal entities owned by those individuals and others alleging claims for fraudulent transfers, conspiracy, and reverse veil-piercing against the entity defendants (the "Reverse Alter Ego Action"). Case No. 16-21329, ECF No. 18-3. SB1 later intervened as a plaintiff in the Reverse Alter Ego Action, and the court appointed the same Special Master as in the Collection Action. Case No. 16-21329, ECF No. 18-8.
Accepting the creditors' contentions that Michael Gral had "creat[ed] a labyrinth of legally intertwined and inter-independent [sic] entities that amount[ed] to nothing more than a shell game intended to block any meaningful attempts from the plaintiffs to collect that which [wa]s owed to them", Case No. 16-21329, ECF No. 18-12, at 65, the state court entered an order enjoining the vast majority of the defendants from "making any sales, purchases, transfers, distributions, advances, or loans of any kind to any entity or party ... [and] from refinancing any existing loans or obligations or incurring any new obligations of any kind", except that the defendants, several of which were entities that owned or managed commercial and residential real estate, could still "collect rents and ... make expenditures necessary to operate their businesses". Id. at 1–2 & 4–5.
Immediately before Michael Gral filed his bankruptcy case, the Special Master concluded that the defendants in both the Collection Action and the Reverse Alter Ego Action were in contempt because they had made payments that the Receiver and the Special Master believed violated the state-court orders. Case No. 16-21329, ECF No. 18-14.
Shortly after Michael Gral filed his chapter 11 case, Bielinski filed a motion to dismiss or, in the alternative, abstain or appoint a trustee. Case No. 16-21329, ECF No. 17. SB1 also asked the court to appoint a trustee. Case No. 16-21329, ECF No. 30. After Bielinski withdrew its motion and the court denied SB1's motion, Case No. 16-21329, ECF No. 146, at 3–4, Bielinski and SB1 filed proofs of claim and were later appointed, under 11 U.S.C. § 1102, to the three-creditor Official Committee of Unsecured Creditors (the "Committee"). Case No. 16-21329, ECF No. 262.
Soon after appointment of the Committee Michael Gral proposed to compromise any claim the bankruptcy estate might have against his co-defendants in the Reverse Alter Ego Action for $140 thousand, $30 thousand of which was to be contributed by Capital Ventures, LLC, an entity owned by Michael Gral that had also commenced a chapter 11 case.
Case No. 16-21329, ECF No. 314, at 4. In exchange for this settlement payment the bankruptcy estate would release each of Michael Gral's state-court co-defendants from "all claims held by the estate and exercisable for the benefit of all creditors ... based on fraudulent transfers, other avoidable transfers, or theories of alter ego, veil-piercing, reverse veil-piercing or conspiracy to defraud creditors generally." Case No. 16-21329, ECF No. 314, at 4. The Committee, the United States trustee, Bielinski, SB1, and other creditors objected to the proposed compromise. Case No. 16-21329, ECF Nos. 374, 377, 388, 389, 390 & 402.
Before the court could hold a hearing on the debtor's motion to compromise, the debtor filed a motion requesting that the court appoint an examiner for the limited purpose of evaluating the debtor's settlement proposal, as outlined in the debtor's motion to compromise. Case No. 16-21329, ECF No. 379. After a hearing on the motion, on request of the United States trustee, the court appointed Michael Dubis, a long-time member of the chapter 7 trustee panel, as examiner. Case No. 16-21329, ECF Nos. 485, 586 & 605. The court directed Dubis to examine and analyze various pre-petition state-court actions initiated against Michael Gral and report to the court "regarding which claims, if any, he would pursue if he were in the position of a Chapter 7 trustee, as well as the reasonableness of the proposed compromise of those claims from the perspective of a hypothetical Chapter 7 trustee." Case No. 16-21329, ECF No. 605, at 6–8.
The court specifically directed Dubis to "consider and report on alter ego claims, abuse of corporate or limited liability company or limited partnership form, veil piercing, conspiracy, fraudulent transfer, and other claims that may be brought against the Debtor, Capital Ventures LLC, Gral Holdings Key Biscayne LLC, and non-debtor individuals and entities identified in the Creditors' state-court pleadings." Id. at 8. In conducting this examination, Dubis was authorized "to take informal or formal discovery of the Debtor or any other person or entity", and the court ordered the debtors and all interested parties to cooperate fully with Dubis. Id. at 8–9.
Several months later, in March 2017, Dubis reported his conclusions. Case No. 16-21329, ECF Nos. 696, 704 & 750. There was "absolutely no doubt in [his] mind that Michael Gral [wa]s the alter ego of each of the entities involved, that own the real estate at least." Case No. 16-21329, ECF No. 750, at 8. He was "not very impressed with the fraudulent conveyance actions": although he "found evidence of fraudulent conveyances", they were "not necessarily fraudulent conveyance by the debtor, but fraudulent conveyances to the debtor". Id. at 9 (emphasis added). He believed that the debtor had been able to draw funds out of entities that were ultimately owned at least in part by the debtor and his...
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