Morabito v. JH, Inc. (In re Morabito), BAP No. NV-17-1304-TaBKu

Decision Date30 October 2018
Docket NumberAdv. No. 3:16-ap-05043-GWZ,BAP No. NV-17-1304-TaBKu
CourtBankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit



Argued and Submitted on September 27, 2018 at Reno, NVAppeal from the United States Bankruptcy Court for the District of Nevada

Honorable Gregg W. Zive, Bankruptcy Judge, Presiding

Appearances: David Shemano of ShemanoLaw argued for appellants; Gerald M. Gordon of Garman Turner Gordon LLP argued for appellees JH, Inc., Jerry Herbst, and Berry-Hinckley Industries; John Francis Murtha of Woodburn & Wedge argued for appellee William A. Leonard, Jr., Chapter 7 Trustee.

Before: TAYLOR, BRAND, and KURTZ, Bankruptcy Judges.


Chapter 7 debtors Paul A. Morabito and Consolidated Nevada Corporation ("CNC") (collectively, the "Morabito Parties") have been involved in a decades-long dispute with JH, Inc., Jerry Herbst, and Berry-Hinckley Industries (collectively, the "Herbst Entities") over a stock acquisition agreement.

The Herbst Entities prevailed in state court and obtained a significant judgment for fraud. While the judgment was on appeal, the parties entered into a settlement and, as part of it, vacated the fraud judgment. The Morabito Parties defaulted on the settlement agreement, and the HerbstEntities filed a stipulated confession of judgment and successfully instituted involuntary bankruptcy proceedings against the Morabito Parties.

The Morabito Parties now claim that the Herbst Entities procured the state court judgment and settlement agreement through fraud. They brought a multi-count action in Nevada state court to vindicate their position. And realizing that at least some of the causes of action belonged to their respective bankruptcy estates, they filed a motion seeking to prosecute the claims on behalf of their estates or to compel chapter 71 trustee William A. Leonard, Jr. (the "Trustee") to abandon them. The bankruptcy court denied the motion and determined that all causes of action in the complaint belonged to the bankruptcy estates. We affirmed on appeal.

In the meantime, the Herbst Entities removed the action to the bankruptcy court; the Morabito Parties filed a motion to remand. The bankruptcy court denied that motion and, based on its earlier determination that the Morabito Parties' lacked standing to assert estate claims, authorized the Trustee to file a notice of voluntary dismissal. He did so, and the Morabito Parties appealed.

We conclude that the bankruptcy court properly determined that the complaint pled only estate claims. As a result, the Morabito Parties lack prudential standing to assert them, and the bankruptcy court properly denied the motion to remand.

Accordingly, we AFFIRM the bankruptcy court's order denying the motion to remand.


This is not the parties' first trip to the BAP. We borrow liberally from our earlier memorandum, Morabito v. JH Inc. (In re Morabito), BAP No. NV-17-1211-FLTi (9th Cir. BAP Dec. 21, 2017).

Prepetition Events. In 2007, JH, Inc. agreed to purchase the stock of Berry-Hinckley Industries from P.A. Morabito & Co. Ltd., CNC's predecessor in interest. Mr. Herbst guaranteed JH, Inc.'s obligations, while Mr. Morabito guaranteed those of P.A. Morabito & Co. He also agreed to serve as the construction manager for certain development sites and represented that Berry-Hinckley Industries had $3,100,000 of working capital.

The deal rapidly went south. The Morabito Parties filed suit against the Herbst Entities in Nevada state court, and the Herbst Entities filed counterclaims.

Before trial, the Nevada state court appointed independent accountants to examine the working capital issue. The state court approvedand adopted their report, which favored the Herbst Entities. And after a bench trial in May 2010, the state court found that the Morabito Parties breached the stock sale agreement and engaged in fraud in the inducement and misrepresentation; it awarded the Herbst Entities over $149,000,000 in compensatory and punitive damages.

After both parties appealed, they executed a settlement agreement providing for dismissal of the state court action with prejudice and payment to the Herbst Entities of more than $13,000,000 over time. To support this payment obligation, the Morabito Parties agreed to execute a $85,000,000 Confession of Judgment and Stipulation to Confession of Judgment, wherein Mr. Morabito admitted he acted in bad faith and committed fraud. The Morabito Parties agreed that the Herbst Entities could file the Confession of Judgment if the Morabito Parties breached the settlement agreement.

And a breach by the Morabito Parties followed; the Herbst Entities filed the Confession of Judgment in the state court.

The involuntary chapter 7 petitions and nondischargeability litigation. The Herbst Entities also filed involuntary chapter 7 petitions against Mr. Morabito and CNC. The bankruptcy court entered orders for relief; we affirmed on appeal.

The Herbst Entities filed a $77,000,000 proof of claim in each debtors' bankruptcy cases. They also obtained partial summary judgment againstMr. Morabito rendering the claim nondischargeable under § 523(a)(2).

The Morabito Parties' fraud on the court complaint. While the bankruptcy cases were pending, the Morabito Parties filed a complaint in Nevada state court (the "Fraud Action") against the Herbst Entities for fraud on the court, fraud, fraudulent inducement, and fraudulent misrepresentation (the "Fraud Claims"). They sought a declaration that the Confession of Judgment was unenforceable because it was procured by fraud and also sought monetary recovery.

The Herbst Entities removed the Fraud Action to the bankruptcy court.

The Morabito Parties' motion for authority to prosecute claims or to compel abandonment and the resulting appeal. After removal, the Morabito Parties filed a motion seeking authority for them to file and prosecute the Fraud Claims or, in the alternative, for their abandonment (the "Prosecution Motion").

In the motion, they categorized the Fraud Claims as falling into three categories: first, a declaratory relief claim asserting that the Herbst Entities committed fraud in the state court action and that the Herbst Entities should not benefit from the fraud (the "Declaratory Relief Claim"); second, a claim for damages caused by the fraud; and third, a fraudulent transfer claim seeking to avoid the settlement agreement and Confession of Judgment and to recover the money the Morabito Parties paid under thesettlement agreement. They asserted that, although the bankruptcy estates had standing to prosecute the Declaratory Relief claim, they also had independent standing to bring it; they acknowledged that the Trustee had exclusive authority to prosecute the remaining Fraud Claims. Nonetheless, they argued that they should be allowed to prosecute all claims.

The bankruptcy court denied the motion. In its accompanying findings of fact and conclusions of law, the bankruptcy court found that the claims were not colorable. It also concluded that the Trustee had exclusive standing to assert all claims as pled.

The Morabito Parties appealed. We affirmed. The Morabito Parties appealed to the Ninth Circuit.

The Morabito Parties' motion to remand and its denial. The month after the Morabito Parties filed their Prosecution Motion, but before it was decided, they also filed a motion requesting remand of the Fraud Action based on 28 U.S.C. § 1452(b). The Herbst Entities and the Trustee opposed.

At a hearing, the bankruptcy judge laid out his thoughts on the case by analyzing the complaint. To start, he observed that the complaint failed to indicate whether it was brought on behalf of the debtors or the estate. He then noted that in the papers there were references to a declaratory relief claim, but he could not find it:

I have read the complaint. I find four causes of action . . . . Fraud on the court, that's number one; second cause of action, NRCP 60(b)(3) fraud; third cause of action, fraudulentinducement; fourth cause of action, fraudulent misrepresentation. I do not see a declaratory relief claim for relief.

Hr'g Tr. (Aug. 3, 2017) 4:11-18. He acknowledged that the prayer sought a declaration but explained that the prayer was for remedies and not separate claims.

Next, the bankruptcy judge turned to the claim the Morabito Parties wanted to assert (i.e., fraud upon the court). He, first, confirmed with the Morabito Parties that the complaint was based in part on Nevada Rule of Civil Procedure 60(b)(3), which concerns motions for reconsideration based upon fraud. He then read from another part of Nevada Rule of Civil Procedure 60, which states that the "rule does not limit the power of a court to entertain an independent action to relieve a party from a judgment, order, or proceeding to set aside a judgment for fraud upon the court." Id. at 31:13-16. So, the bankruptcy judge explained, he expected that the Morabito Parties would read Nevada Rule of Civil Procedure 60 and then just file their independent action after the adversary proceeding was dismissed.

But the bankruptcy judge acknowledged another possibility: if the complaint included a fraud upon the court independent action, he could sever that claim from the complaint and remand it, and only it, to state court. He concluded that the complaint, however, did not include one—this despite the Morabito Parties' counsel's attempts to convince him otherwise.

The bankruptcy judge clearly expressed his intent to not prejudice the Morabito Parties' separate claims,2 and he also discussed the various remand factors and made findings on each. The bankruptcy judge then ruled from the bench. He concluded:

I don't think there's any jurisdiction to

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