VSP Labs, Inc. v. Hillair Capital Invs. LP

• Decision Date: 21 August 2020
• Docket Number: CIVIL ACTION NO. 3:19-CV-1575-S
• Citation: 619 B.R. 883
• Parties: VSP LABS, INC. v. HILLAIR CAPITAL INVESTMENTS LP and Hillair Capital Management LLC
• Court: U.S. District Court — Northern District of Texas

619 B.R. 883

VSP LABS, INC.

v.HILLAIR CAPITAL INVESTMENTS LP and Hillair Capital Management LLC

CIVIL ACTION NO. 3:19-CV-1575-S

United States District Court, N.D. Texas, Dallas Division.

Signed August 21, 2020

Thomas Allan Connop, Matthew Hogan Davis, Locke Lord LLP, Dallas, TX, Annie Amaral, Pro Hac Vice, Jamie P. Dreher, William Ross Warne, Downey Brand LLP, Sacramento, CA, for VSP Labs, Inc.

Jason S. Brookner, Lydia Rogers Webb, Gray Reed & McGraw LLP, Dallas, TX, Adam H. Friedman, Jonathan T. Koevary, Pro Hac Vice, Olshan Frome Wolosky LLP, New York, NY, for Hillair Capital Investments LP, Hillair Capital Management LLC.

MEMORANDUM OPINION AND ORDER

KAREN GREN SCHOLER, UNITED STATES DISTRICT JUDGE

This appeal covers complex litigation in two states, spanning seven years, in three courts with respect to five bankruptcy court orders. Although the history of this litigation is complicated, and the parties have asserted numerous arguments, resolution of the appeal turns on two key issues. First, did the Bankruptcy Court have jurisdiction to enter an order that precludes a non-debtor from asserting state law claims against another non-debtor? Second, did the Bankruptcy Court correctly interpret the language of its own order as precluding such state law claims? To resolve the second issue, the Court must determine the meaning of a 178-word sentence in that order.

I. INTRODUCTION

Pending before the Court is VSP Labs, Inc.'s ("VSP") appeal of the following five orders of the United States Bankruptcy Court for the Northern District of Texas:

(1) Order Granting in Part Emergency Motion of Hillair Capital Investments LP and Hillair Capital Management LLC (collectively, "Hillair") for Order (I) Enforcing, and in Aid of, this Court's Prior Orders and (II) Granting Related Relief, entered on May 3, 2019 ("Enforcement Order");¹

(2) Order Denying Motion for Reconsideration of the Enforcement Order, entered on June 24, 2019 ("Enforcement Reconsideration Order");

(3) Order Granting in Part Emergency Motion of Hillair Capital Investments LP and Hillair Capital Management LLC for Order (I) Enforcing this Court's May 2, 2019 Order, (II) Sanctioning VSP Labs, Inc. for Willfully Ignoring and Violating the Same and (III) Granting Related Relief, entered on June 24, 2019 ("Sanctions Order");

(4) Order Denying VSP Labs, Inc.'s Motion for Relief from Automatic Stay Order Dated September 7, 2017, entered on October 8, 2019 ("Lift Stay Reconsideration Order");² and (5) Order Awarding Fees Pursuant to Sanctions Order, entered on December 12, 2019 ("Attorney's Fees Order").³

The Enforcement Order, Enforcement Reconsideration Order, Sanctions Order, Lift Stay Reconsideration Order, and Attorney's Fees Order shall be referred to collectively as the "Orders." After reviewing the briefs, the applicable law, and the relevant parts of the record, the Court AFFIRMS the Orders of the Bankruptcy Court.

II. BACKGROUND

A. Breach of Contract Dispute Between VSP and Debtor

On April 20, 2012, VSP and Pro Fit Optix, Inc. ("Debtor") entered into a $6 million, four-year Technology Transfer and Development Agreement ("Agreement") relating to Debtor's "ongoing development of eyewear measurement technology for VSP." Br. of Appellant 10. Under the Agreement, VSP had "step-in-rights" to "take over development at [Debtor's] expense if [Debtor] could not meet its performance obligations." App. in Supp. of Br. of Appellant 0643 [hereinafter "Appellant's App."]. According to VSP, Debtor was unable to fulfill its obligations under the Agreement and, in 2013, VSP hired third parties to fulfill Debtor's obligations. Br. of Appellant 10. After Debtor refused to reimburse VSP for these expenses, VSP filed a lawsuit in 2013 against Debtor in the California Superior Court ("California Court") for breach of contract ("California Action"). Id. at 11; Appellant's App. 0425. Debtor subsequently filed counterclaims⁴ ("Counterclaims") against VSP alleging that VSP had breached the same Agreement. Appellant's App. at 11-12.

B. Debtor Files for Bankruptcy and Hillair Purchases Debtor's Counterclaims Against VSP

Shortly before trial in early 2017, Debtor, and certain affiliates,⁵ filed for bankruptcy, and the Bankruptcy Court stayed the California Action. Id. at 12; Appellant's App. 0344; Br. of Appellee 10. On May 5, 2017, the Bankruptcy Court entered an order, as part of the settlement of Debtor's estate, authorizing Hillair,⁶ the estate's largest creditor, to purchase the Debtor's Counterclaims against VSP in the California Action. Br. of Appellant 12; Br. of Appellees 9. On June 20, 2017, Debtor and Hillair filed a motion to sever the Counterclaims from VSP's claims in the California Action and set only the Counterclaims for trial.⁷ Id. ; Appellant's App. 0425-26. In response, VSP filed a motion for relief from the automatic stay ("Lift Stay Motion") with the Bankruptcy Court seeking to lift the bankruptcy stay on the California Action. Appellant's App. 0424-25. VSP filed the Lift Stay Motion "to ensure its ability to set off any damages [Debtor] might be awarded against VSP with any damages that VSP might be awarded against [Debtor]." Br. of Appellant 12. Hillair subsequently filed a limited objection to the Lift Stay Motion expressing concern about the wording of VSP's proposed order. Appellant's App. 0503-05 ("VSP should make clear the relief sought. If the Motion is granted, the proposed order should clarify that the purpose of pursuing setoff and recoupment is to prove its claim against the Debtors and not to seek recoveries from Hillair. Even if recovery against Hillair was not VSP's purpose in bringing the Motion, Hillair is concerned that the proposed order as drafted may lend itself to such a construction by another court or otherwise."). The Bankruptcy Trustee ("Trustee") also filed an objection to the Lift Stay Motion for other reasons.⁸ Id. at 0509-10.

On August 23, 2017, counsel for VSP, Hillair, the Trustee, and the committee of unsecured creditors convened for a hearing on the Lift Stay Motion. Tr. of Aug. 23, 2017 Hr'g. During the hearing, VSP's counsel represented to the Bankruptcy Court that: (1) "all parties" agreed that the California Action could proceed; (2) VSP and Hillair agreed that if VSP recovered a net amount in the California Action, VSP would not seek to recover this amount from Hillair; and (3) VSP and Hillair had agreed on the language of a proposed order to that effect. Id. at 5:3-6:4.

The Trustee's counsel then asked the Bankruptcy Court to include additional language in its order to address the Trustee's concern on an issue not related to the instant appeal.⁹ Id. at 12:12-14:1. As a result, the Bankruptcy Court directed VSP to consult with the Trustee and submit a proposed order with additional language that would address the concern. Id. at 16:21-18:17. VSP and the Trustee were not able to agree on the language of the order. Appellant's App. 0055. Accordingly, VSP and the Trustee each submitted their own proposed version of the order granting the Lift Stay Motion to the Bankruptcy Court. Id. Relevant to the instant appeal, both versions included the following language:

without affecting VSP's right of setoff or recoupment in defense of claims in the California Action, no money damages or other amounts of any kind may be recovered from Hillair under any circumstance on account of any claims that have been or could have been asserted in the California Action.

Id. at 0055-56. On September 7, 2017, the Bankruptcy Court entered the Order Granting VSP Labs, Inc.'s Motion for Relief from Automatic Stay ("Lift Stay Order"), which included the above, agreed-upon language. Id. at 0056.

C. VSP Attempts to Pursue State Law Claims Against Hillair, and the Bankruptcy Court Finds that Such Claims Are Prohibited by the Lift Stay Order

In 2018, in the California Action, VSP sought discovery of information regarding Debtor's relationship with Hillair. Appellant's App. 0381. A dispute ensued, and VSP successfully obtained an order from the California Court requiring Debtor to comply with VSP's discovery requests. Id. Around this time, Hillair also complied with a subpoena issued in the California Action. Id. After reviewing the produced documents in 2019—nearly two years after the Lift Stay Order had been entered—VSP contends it discovered new facts giving rise to direct claims against Hillair for Hillair's own misconduct "in the context of its investments with [Debtor]." Br. of Appellant 14. According to VSP, during the course of its four-year Agreement with Debtor, Hillair provided Debtor with capital of approximately $10 million and instructed Debtor not to devote this money to fulfilling Debtor's contractual obligations to VSP. Id. at 14-15. Instead, Hillair allegedly directed Debtor to start a new company, "even though Hillair and [Debtor] knew that VSP was incurring millions of dollars in third-party expenses to develop the measurement technology that [Debtor] had promised to deliver." Id. at 15. Based on this new information, VSP sought leave to amend its complaint in the California Action to assert direct claims against Hillair. Id. at 16. In VSP's proposed Second Amended Complaint ("Second Amended Complaint") filed with the California Court, VSP asserted causes of action against Hillair for intentional interference with contractual relations, aiding and abetting fraudulent transfer, and unfair business practices. Id. at 17.

In response, Hillair filed an emergency motion with the Bankruptcy Court seeking to prohibit VSP from pursuing such claims against Hillair in the California Action. Appellant's App. 0139. Hillair sought relief on several grounds.¹⁰ Relevant to the instant appeal, Hillair argued that the Lift Stay Order prohibited VSP from asserting claims against Hillair in the California Action. Id. at 0163.

The Bankruptcy Court conducted a hearing on the motion on May 1, 2019, and entered the Enforcement Order on May 3, 2019. Tr. May 1, 2019 Hr'g;...