In re Rosenblum, Case No. 14–19756–AMC

• Decision Date: 29 February 2016
• Docket Number: Case No. 14–19756–AMC
• Citation: 545 B.R. 846
• Parties: In re Steven Rosenblum, Debtor
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

545 B.R. 846

In re Steven Rosenblum, Debtor

Case No. 14–19756–AMC

United States Bankruptcy Court, E.D. Pennsylvania.

Signed February 29, 2016

545 B.R. 850

Carol B. McCullough, McCullough Eisenberg, LLC, Warminister, PA, for Debtor.

OPINION

Ashely M. Chan, United States Bankruptcy Judge

TABLE OF CONTENTS

I. Introduction...851

II. Facts and Procedural History...851

III. Discussion...853

A. Although This Court Has Original and Concurrent Jurisdiction to Resolve Actions to Avoid Fraudulent Transfers, the State Court Also Has Concurrent Jurisdiction to Resolve Such Actions...853

B. The Trustee Has Exclusive Standing to File Avoidance Actions Under § 544(b)...856

1. The Trustee Has Exclusive Standing to File Avoidance Actions Under § 544(b) to Avoid Fraudulent Transfers...856

2. Kerwin Qualifies as a Present Creditor Under PUFTA §§ 5104–05...857

3. Kerwin May Be Considered a Creditor Even Though He Failed to File a Proof of Claim or an Adversary Complaint in the Bankruptcy Case...858

C. Derivative Standing May Be Granted to Creditors Under Appropriate Circumstances in Chapter 13 Bankruptcies...860

545 B.R. 851

1. Review of Third Circuit Analysis in Cybergenics II...860

2. Application of Cybergenics to Chapter 13 Proceedings...862

D. Plaintiffs Are Entitled to Derivative Standing to Pursue the State Litigation...863

1. The Fraudulent Transfer Claims Are Colorable...863

2. The Second Requirement Is Satisfied When the Trustee Declines to Pursue an Avoidance Action Due to a Lack of Financial Resources and Such Avoidance Action Would Benefit the Estate...870

3. Plaintiffs' Failure to Seek Prior Court Approval Is Not Fatal...871

4. Kerwin's Failure to Petition the Trustee Is Not Fatal...873

E. It Is Appropriate to Hold the Bankruptcy Proceedings in Abeyance Until the State Litigation Is Resolved...873

IV. Conclusion...875

I. INTRODUCTION

This opinion addresses, inter alia, whether the Court may use its equitable power under § 105(a) to confer derivative standing upon a creditor in a Chapter 13 proceeding to avoid a fraudulent transfer action under § 544(b) which would directly benefit the estate. After reviewing the purpose and form of Chapter 13 proceedings, the Court has concluded that, when a Chapter 13 trustee declines to file an avoidance action which will directly benefit the estate because the Chapter 13 trustee has insufficient resources to pursue such action, the Court may use its equitable power under § 105(a) to confer derivative standing upon a creditor to file such action under § 544(b).

II. FACTS AND PROCEDURAL HISTORY

Ryan Kerwin ("Kerwin") and Xtreme Caged Combat ("XCC") filed a trademark infringement action against Steven Rosenblum ("Debtor"), Ofa Donaldson ("Donaldson"), and Extreme Cage Combat Fitness ("ECC Fitness" and collectively with the Debtor and Donaldson, "Trademark Defendants") in the United States District Court for the Eastern District of Pennsylvania ("District Court") on July 12, 2012 ("Trademark Litigation"). Debtor's Answer to Mot. by Creditors, Ryan Kerwin and Xtreme Caged Combat, to "Hold Debtor's Bankruptcy Proceedings in Abeyance" Ex. A ("Compl.") ¶ 7.¹ On August 13, 2014, a judgment ("Judgment") was entered in favor of Kerwin and XCC against the Trademark Defendants in the amount of $76,800. Id. ¶ 12.

On October 21, 2014, the District Court entered an order ("Discovery Order") compelling the Debtor to respond to Kerwin's post-judgment interrogatories and document requests regarding the Debtor's assets and finances. Mot. to Dismiss Steven Rosenblum's Bankruptcy Filing and Set Aside Automatic Stay Pursuant to 11 U.S.C. § 1307(c) & 11 U.S.C. § 362(d)(1) ( "Mot. to Dismiss") 5–6. When the Debtor failed to respond to the Discovery Order, the District Court entered an order requiring the Debtor to show cause why the Debtor should not be sanctioned for failing to comply with the Discovery Order. Id. ¶¶ 7–8. On December 11, 2014, the eve of the show cause hearing, the Debtor filed a voluntary bankruptcy petition under Chapter 13 of the Code. Id. ¶ 9.

On December 15, 2014, Kerwin filed a Motion to Dismiss the Debtor's bankruptcy case based upon the Debtor's alleged

545 B.R. 852

bad faith. Id. ¶¶ 13–16. The Motion to Dismiss also sought relief from the automatic stay. Id.

On January 8, 2015, the Debtor filed a proposed Chapter 13 Plan ("Plan") which offered to pay a total of $34,666.80 to the Trustee, allocated as follows: $25,000 payable to the IRS; $2,300 payable to the Pennsylvania Department of Revenue; $2,400 payable to the City of Philadelphia for real estate taxes; and $1,500 payable to the Debtor's attorneys. Chapter 13 Plan, 1–2, Jan. 8, 2015. The balance of any funds remaining after such Plan distributions would be paid pro rata to the Debtor's other creditors, including Kerwin. Id.

Kerwin and XCC failed to file a formal proof of claim in connection with their Judgment by the June 2, 2015 bar date deadline. Notice of Chapter 13 Bankruptcy Case, Meeting of Creditors, & Deadlines 1. However, Kerwin is pro se and, as evidenced in his Motion to Dismiss, has asserted his right to collect the Judgment since the inception of this case. Mot. to Dismiss ¶¶ 13–16. Kerwin also has indicated his intent to file an adversary complaint under § 523(c) of the Code in order to obtain a determination that the Judgment is nondischargeable as a willful and malicious injury pursuant to § 523(a)(6) of the Code. Order and Mem. Op. of Sept. 11, 2015 ("Extension Order") at 2. The Court has extended the deadline for Kerwin to file such an action until ten days after resolution of the Motion to Dismiss. Id. at 4.

On June 1, 2015, during a telephonic scheduling conference in connection with the Motion to Dismiss, Kerwin disclosed that, on May 29, 2015, he and XCC ("Plaintiffs") had unilaterally filed a fraudulent transfer complaint ("Complaint") in the Bucks County Court of Common Pleas ("State Litigation") against third parties who allegedly received certain property from the Debtor prior to the Debtor's bankruptcy filing.² Specifically, Plaintiffs sued Michelle Zarro, who is allegedly a close friend of the Debtor ("Zarro"), and Allan Rosenblum, who is the Debtor's father ("Rosenblum" and collectively with Zarro, "Defendants"). Compl. ¶¶ 3–6, 21, 31.

The Complaint alleges that the Debtor transferred 100% of his ownership interest in a Torresdale gym to Zarro, and 50% of his ownership interest in a Levittown gym to Rosenblum, without receiving any consideration in exchange for those transfers. Id. 28, 37, 40. Accordingly, the Complaint seeks to set aside the transfers to Zarro and Rosenblum under the Pennsylvania Uniform Fraudulent Transfer Act ("PUFTA"), 12 Pa. Stat. and Cons.Stat. Ann. §§ 5101–5110 (West 2015). See Compl. ¶¶ 1, 38–50 (raising claims under PUFTA §§ 5104–05, hereinafter referred to as the "PUFTA Claims").³

The Court then requested briefing on Plaintiffs' right to file the State Litigation. In response, Plaintiffs filed a Motion to Hold Debtor's Bankruptcy Proceedings in Abeyance ("Abeyance Motion") pending the conclusion of the State Litigation. Mem. of Law in Supp. of Mot. to Hold Debtor's Bankruptcy Proceedings in Abeyance ("Creditors' Abeyance Br.") 5–6. The Debtor subsequently objected to the Abeyance Motion. At a hearing held on the Abeyance Motion on July 20, 2015, the

545 B.R. 853

Court sua sponte raised the question of Plaintiffs' standing to pursue the fraudulent transfer claims in light of the Trustee's exclusive standing to pursue fraudulent transfers under § 544(b) of the Code.⁴ Accordingly, the Court requested that the parties submit supplemental briefing to address whether Plaintiffs were entitled to derivative standing to pursue the State Litigation. Both parties filed briefs on the derivative standing issue and this Court held a hearing on that issue on September 15, 2015. At the hearing, Kerwin represented, inter alia, that any proceeds received in connection with the State Litigation would be turned over to the Chapter 13 Trustee ("Trustee"). Hearing Tr. 16:12–24, Sept. 15, 2015.

III. DISCUSSION

The parties raised certain jurisdictional issues in their briefs related to the proper forum for the adjudication of the PUFTA Claims. As discussed in full below, the Court has concluded that, although this Court has original and concurrent jurisdiction to hear an avoidance action under § 544(b) to address the PUFTA Claims, the state court also has concurrent jurisdiction to resolve such claims. The Court has further concluded that the Trustee has exclusive standing to file avoidance actions under § 544(b).

With respect to the derivative standing issue, the Third Circuit has not yet resolved whether a bankruptcy court may, under its equitable power, confer derivative standing on a creditor in a Chapter 13 proceeding to pursue an avoidance action under § 544(b). As discussed...