Harker v. Eastport Holdings, LLC (In re GYPC, Inc.)

• Decision Date: 22 November 2021
• Docket Number: Case No. 17-31030,Adv. No. 19-3054
• Parties: IN RE: GYPC, INC., Debtor. Donald F. Harker, III, Chapter 7 Trustee, Plaintiff, v. Eastport Holdings, LLC, Defendant.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio

634 B.R. 983

IN RE: GYPC, INC., Debtor.

Donald F. Harker, III, Chapter 7 Trustee, Plaintiff,

v.Eastport Holdings, LLC, Defendant.

Case No. 17-31030

Adv. No. 19-3054

United States Bankruptcy Court, S.D. Ohio, Western Division.

Signed November 22, 2021

Nick V. Cavalieri, Bailey Cavalieri, Matthew T. Schaeffer, Columbus, OH, for Defendant.

DECISION (1) GRANTING IN PART AND DENYING IN PART DEFENDANT EASTPORT HOLDINGS, LLC'S MOTION FOR PARTIAL SUMMARY JUDGMENT ON COUNT I; (2) GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AS TO COUNT I; AND (3) DENYING PLAINTIFF'S MOTION AS TO COUNTS II AND III (DOCS. 40, 48)

Guy R. Humphrey, United States Bankruptcy Judge

I. Introduction

In this dispute, the Chapter 7 Trustee of GYPC, Inc. ("GYPC") seeks to enforce the automatic stay against Eastport Holdings, LLC ("Eastport"), obtain a declaration that its post-petition actions are in violation of the automatic stay and void, and to recover damages. GYPC filed a voluntary petition for relief under Chapter 11 in 2017. In 2019, upon motion of the United States Trustee, this court ordered the case converted to Chapter 7.

Pre-petition, GYPC sold substantially all of its assets to Eastport's wholly owned subsidiary, Mindstream Media, LLC ("Mindstream"). As part of the purchase price, Eastport granted GYPC a preferred membership interest ("PMI") in Eastport, contingent on several calculations and adjustments to be made after the sale closed. After the bankruptcy filing, Eastport sent two letters that contained reports of its calculations and the resulting adjustments to GYPC's membership interest.

The first letter, sent in August 2017, explained that Eastport discovered a significant shortfall in the estimated working capital below the contractually required minimum and demanded immediate payment. GYPC's counsel informed Eastport of the bankruptcy filing in a reply letter in early September. In the second letter, sent in October, Eastport reported that the acquired business had failed to meet the contractual performance targets during the measurement period, leaving GYPC with no remaining membership interest after the adjustments were applied. The Chapter 7 Trustee disputes these adjustments and maintains that GYPC owns the PMI.

In early 2018, Eastport filed a Tennessee state court lawsuit against GYPC's two principals, primarily to seek indemnification and damages for GYPC's failure to provide the required working capital (the "State Court" or "State Court Action").

After the Trustee filed this adversary proceeding, Eastport asked this Court to abstain from the State Court Action and dismiss this adversary proceeding, suggesting that GYPC could join the State Court Action to resolve its claims against Eastport. Eastport also suggested that the claims in the State Court Action are closely related to those raised in the Trustee's complaint in this adversary proceeding. This Court denied Eastport's motion because, among other reasons, the claims presented require a determination as to whether the PMI remains property of the bankruptcy estate.

Through this decision, the Court finds that Eastport violated the automatic stay when it sent the August 2017 letter reporting a shortfall in the contractually required working capital and demanding payment but cannot be held liable for damages. The Court further finds that Eastport did not violate the automatic stay when it sent the October 2017 letter reporting its calculations of contractually required adjustments to the PMI arising out of the pre-petition sale of GYPC's assets. Eastport did violate the automatic stay by prosecuting the State Court Action against GYPC's insiders, but cannot be held liable for damages. In addition, the decision explains why the validity of the PMI cannot be determined under the governing sale agreement without resolving certain disputed facts. Finally, the decision explains why the court cannot determine on this summary judgment record that Eastport committed a breach of contract in failing to make certain post-closing payments.

The Trustee's complaint (Doc. 1) has three counts: Count I concerns the stay violation, Count II seeks a determination of the value of the PMI, and Count III asserts a claim for breach of contract. Eastport filed a motion for partial summary judgment as to Count I. The Chapter 7 Trustee, Donald F. Harker, III (the "Trustee") has moved for summary judgment on all three counts in the complaint. For the reasons to be explained, the court grants in part and denies in part Eastport's motion for partial summary judgment, and grants in part and denies in part the Trustee's motion as to Count I, and denies the Trustee's motion for summary judgment as to Counts II and III.

II. Jurisdiction

This court has jurisdiction pursuant to 28 U.S.C. § 1334 and the Standing Order of Reference (Amended General Order 05-02) of the District Court for the Southern District of Ohio. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (O), and this court has constitutional authority to enter a final judgment.

III. Summary Judgment Standard

Federal Rule of Civil Procedure 56(a), made applicable to adversary proceedings through Federal Rule of Bankruptcy Procedure 7056, sets forth the standard to address the parties’ filings. It states, in part, that a court must grant summary judgment to the moving party if the movant shows that there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). In order to prevail, the movant, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett , 477 U.S. 317, 331, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). All inferences drawn from the underlying facts must be viewed in the light most favorable to the party opposing the motion. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp. , 475 U.S. 574, 587–88, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (quoting United States v. Diebold, Inc. , 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962) ).

IV. Effect of Taggart v. Lorenzen on the Evidentiary Standard for Damages for Automatic Stay Violations Involving Non-Individual Debtors

Damages for stay violations in cases involving individuals are determined under 11 U.S.C. § 362(k). See also 11 U.S.C. § 101(41) (defining the term "persons" as including "individuals, partnership, and corporation"). A willful violation of the stay under § 362(k) occurs when the creditor knew of the automatic stay and violated the stay through an intentional act, even if the creditor did not specifically intend to violate the stay. TranSouth Fin. Corp. v. Sharon (In re Sharon ), 234 B.R. 676, 687 (B.A.P. 6th Cir. 1999) ; Squire v. Stringer , 820 F. App'x. 429, 434 (6th Cir. 2020) ("Here, Creditors knew of the § 362 stay and pursued their state court collection action anyway, without prior approval from the bankruptcy court, in willful violation of the stay."). Because corporate entities such as GYPC do not have the benefit of a statutory private right of action for a stay violation, they must proceed under a § 105 civil contempt theory. Elder-Beerman Stores Corp. v. Thomasville Furniture Indus. Inc. (In re Elder-Beerman Stores Corp. ), 197 B.R. 629, 632 (Bankr. S.D. Ohio 1996).

Recently, the Supreme Court resolved the standard to be applied in determining whether a creditor may be held in civil contempt for violating a debtor's discharge injunction. Taggart v. Lorenzen , ––– U.S. ––––, 139 S. Ct. 1795, 204 L.Ed.2d 129 (2019). In a unanimous decision, the Court rejected both subjective and strict liability standards and, instead, applied an objective one. Id. at 1801-03. It determined that a bankruptcy court may only hold a creditor in civil contempt for violating the discharge injunction if there is no fair ground of doubt as to whether the discharge injunction barred the creditor's conduct. Id. at 1799. No fair ground of doubt was defined as "when there is no objectively reasonable basis for concluding that the creditor's conduct might be lawful under the discharge order." Id. at 1801. The standards under §§ 524 and 105(a) of the Bankruptcy Code "bring with them ‘old soil’ " on how injunctions are enforced. Id. This "old soil includes the ‘potent weapon of contempt.’ " Id. (quoting Longshoremen v. Philadelphia Marine Trade Assn. , 389 U.S. 64, 76, 88 S.Ct. 201, 19 L.Ed.2d 236 (1967)).

With Taggart having applied the objective standard to contempt proceedings in the context of discharge injunction litigation, the issue arises as to whether that standard applies to the similar stay violation civil contempt proceedings. The Court noted that "[t]his standard reflects that civil contempt is a severe remedy, and that the principles of basic fairness require[e] that those enjoined receive explicit notice of what conduct is outlawed before being held in civil contempt." Id. at 1801-02 (cleaned up).

At least in the Sixth Circuit, it is beyond debate that the § 362(k) willful standard for proving a debtor is entitled to damages for a stay violation is easier to prove than the Taggart discharge violation standard. Prior to Taggart , the courts within the Sixth Circuit (and in many other jurisdictions) applied what Taggart described as a standard "akin to strict liability." Id. at 1803. Courts sanctioned creditors for violations of the stay if the creditor knew about the stay (i.e. that the debtor filed the bankruptcy), yet intentionally engaged in the conduct that violated the stay, even if the creditor subjectively believed that his conduct would not violate the stay. Id. at 1803-04 ; Sharon , 234 B.R. at 687. Courts commonly refer to this principle as a "willful" violation of the stay. See id. In a decision shortly before Taggart was decided, the Sixth Circuit at least implicitly approved this standard in a case arising out of this district involving a corporate debtor. Lowe v. Bowers (In re Nicole Gas Prod. ), 916...