In re Giga Watt Inc.
| Decision Date | 26 September 2021 |
| Docket Number | 18-03197-FPC7 |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Eastern District of Washington |
| Parties | In re: GIGA WATT INC., Debtor. |
THIS MATTER came before the Court on the motion of Mark D Waldron, as the chapter 7 trustee, for an Order to Show Cause why Jun Dam, the nominal plaintiff in a proposed class action lawsuit, should not be sanctioned for violating the Bankruptcy Code's automatic stay. (ECF No. 889) Trustee Waldron argued that Mr. Dam knowingly violated the automatic stay by filing a complaint in the United States District Court, Eastern District of Washington, Case Number 20-cv-00464-SAB ("the Class Complaint") [1] and the Trustee requests entry of an order requiring Mr. Dam to appear and show cause why he should not be held in contempt and sanctioned. (ECF No. 890)[2]
The procedural posture of this motion complicates the Court's analysis. While both parties agreed[3] the ultimate issue presently before the Court is whether all or some of the claims asserted in the Class Complaint are property of the estate and therefore are subject to the automatic stay, neither party briefed all facets of the issue. However, in light of the parties' agreement that the issue is properly before the Court on this motion, the Court undertakes the analysis necessary to determine if any or all of the claims alleged in the Class Complaint are subject to the automatic stay. As set forth below, the Court concludes that: (1) the first three causes of action in the Class Complaint are subject to the automatic stay; (2) if the Trustee seeks an injunction, the Class could be enjoined from pursuing the final two causes of action; and (3) no order to show cause regarding sanctions will be issued.
Giga Watt was in the business of building and running a large-scale cryptocurrency mining operation.[4] Giga Watt's business failed, and that failure resulted in this bankruptcy proceeding and two lawsuits. The first lawsuit was filed November 19, 2020, by the Trustee as an adversary action in this Court against four defendants: (1) Perkins Coie ("Perkins"), a law firm;[5] (2) Lowell Ness, a partner in the Perkins law firm;[6] (3) Giga Watt PTE, Ltd. ("Giga Watt Singapore"); and (4) Andrew Kuzenny, the CEO of Giga Watt Singapore. (Adv. No. 20-80031, ECF No 6)[7] The second lawsuit was filed December 16, 2020 by Jun Dam, as the nominal plaintiff, in the District Court against defendants Perkins, Lowell Ness, and Perkins' affiliates (U.S. Eastern District of Washington Case No. 20-cv-00464-SAB, ECF No. 1) ("Class Complaint"). Both lawsuits are based on the same core factual allegations that (i) Perkins agreed to hold millions of dollars in escrow until Giga Watt met certain milestones in construction, but Perkins released the money prematurely, and (ii) Perkins' premature release of the escrowed funds caused significant damages.
In this case, both plaintiffs-the Trustee, on behalf of the Debtor, and Jun Dam, on behalf of the proposed class[8] of token purchasers-claim they were directly harmed by the same act of the defendants and claim they are entitled to recover damages at least equal to the amount of funds improperly released. (ECF No. 890 at p.4; ECF No. 903 at pp.1-3) The plaintiffs assert different legal theories to support their respective claims. In determining if the District Court litigation violates the automatic stay, this Court examines the allegations supporting each claim in the Class Complaint to determine if the Class has standing.[9]
The Trustee's lawsuit alleges that by releasing money prematurely from an escrow account, Perkins breached an escrow agreement and thereby breached its fiduciary duty to Giga Watt and aided and abetted other parties' breach of fiduciary duties owed to Giga Watt. (Adv. ECF No. 6) The Trustee alleges that Perkins' wrongful acts caused Giga Watt to break its promise to issue refunds to the token purchasers who did not receive power, and Perkins' wrongful acts pushed Giga Watt into bankruptcy. According to the Trustee, but for Perkins' breach, Giga Watt would have been in a position to issue $10.8 million in refunds to the token purchasers using the escrow account.[10]
An "estate" is created when a bankruptcy petition is filed. See 11 U.S.C. § 541(a); In re FitzSimmons, 725 F.2d 1208, 1210 (9th Cir. 1984). Property of a bankruptcy estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). This broad category includes causes of action. Cusano v. Klein, 264 F.3d 936, 945 (9th Cir. 2001).
The automatic bankruptcy stay enjoins "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." 11 U.S.C. § 362 (a)(3). "The automatic stay is self- executing, effective upon the filing of the bankruptcy petition." Gruntz v. Cnty. of Los Angeles, 202 F.3d 1074, 1081 (9th Cir. 2000).
A bankruptcy trustee "stands in the shoes of the bankrupt corporation and has standing to bring any suit that the bankrupt corporation could have instituted had it not petitioned for bankruptcy." Ahcom, Ltd. v. Smeding, 623 F.3d 1248, 1250 (9th Cir. 2010) (quoting Smith v. Arthur Andersen LLP, 421 F.3d 989, 1002 (9th Cir. 2005)) (internal quotation marks omitted); 11 U.S.C. §§ 704(1), 541(a)(1). The trustee may assert only "claims belonging to the debtor corporation and 'has no standing generally to sue third parties on behalf of the estate's creditors.'" Ahcom, 623 F.3d at 250 (quoting Smith, 421 F.3d at 1002). When the trustee has standing to assert a debtor's claim, that standing is exclusive and divests all creditors of the power to bring the claim. Ahcom, 623 F.3d at 250 (citing Estate of Spirtos v. One San Bernardino Cnty. Superior Court Case, 443 F.3d 1172, 1176 (9th Cir. 2006)).
Generally, the automatic stay protects only the debtor, property of the debtor or property of the estate. See 11 U.S.C. §§ 362(a); 541(a) (); accord Boucher v. Shaw, 572 F.3d 1087, 1092 (9th Cir. 2009) (). The stay In re Chugach Forest Prod., Inc., 23 F.3d 241, 246-47 (9th Cir. 1994); see e.g., In re Lockard, 884 F.2d 1171, 1178-79 (9th Cir. 1989) (automatic stay was not extended to enjoin claims against a debtor's surety).
Although the question whether an interest claimed by creditors is property of the estate is a federal question to be decided by federal law, bankruptcy courts first look to state law to determine whether and to what extent the debtor has a legal or equitable interest in the property as of the commencement of the case. Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) ().
In this motion, neither party urged the Court to apply the law of a certain state or country to determine whether Class claims are property of the estate. Nor is the answer clear by examining the parties' respective complaints. The Trustee's complaint alleges that partners are liable for the partnership debts, and cites both the Washington partnership statute, RCW 25.05.120, and the Singapore Partnership Act, §5. The Class Complaint does not cite law related to the first three counts but relies exclusively on Washington statutes for counts 4 and 5: the Washington Consumer Protection Act, RCW 19.86.020 and the Washington Escrow Agent Registration Act, RCW 18.44.011(8). (Class Complaint ¶¶ 56-80)
In Ninth Circuit bankruptcy cases, federal common law choice of law rules apply. In re Vortex Fishing Sys., Inc., 277 F.3d 1057, 1069 (9th Cir. 2002). Federal choice of law rules follow the approach of the Restatement (Second) of Conflict of Laws ("the Restatement"). Id. at 1069. Application of the Restatement principles determine whose law applies to the Class action claims. The first cause of action in the Class Complaint alleges a combination of a contract breach giving rise to a tort, the second and third causes of action are based in contract and the fourth and fifth causes of action are based on violations of Washington statutes.
The Restatement analysis for determining which state law applies to torts and contract claims utilizes similar factors. See Restatement (Second) of Conflict of Laws §§ 145(1); 188(1) (1971). Generally, the rights and obligations of contracting parties are "determined by the local law of the state which ... has the most significant relationship to the transaction and the parties ...." Id. § 188(1). Similarly, the rights and liabilities of parties to a tort are determined by "the local law of the state which, with respect to that issue, has the most significant relationship to the occurrence and the parties…." Id. at § 145.
In determining "the most significant relationship" test, the court considers factors such as the place where the injury occurred, the place where the conduct causing the injury occurred, the domicile, residence, nationality, place of incorporation and place of business of the parties, and the place where the relationship, if any, between the parties is centered. Id. at § 6. "These contacts are to be...
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