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Original Filed August 9, 1999
UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA
In re No. 98-30535-WDM Chapter 7 INTERNATIONAL CAB COMPANY, INC., a California Corporation, dba NATIONAL CAB COMPANY, Debtor. _________________________________/
MEMORANDUM DECISION
- Introduction
The court issued an order to show cause re contempt to Lisa
Michaels, Jill Weiss, and their counsel Abramson & Smith, LLP,
(collectively, "Respondents") for an alleged violation of the
automatic stay under 11 U.S.C. § 362(a)(3). The trustee
("Trustee") alleged Respondents violated the stay by attempting
to amend a state court judgment against the debtor, International
Cab Co. ("International") to include the names of National Cab
Co. ("National") and James O'Connor ("O'Connor") as alter ego
judgment debtors.
The court has considered the Trustee's Motion for Order to Show
Cause Re Contempt; Respondents' Response to the Motion
("Response"); Respondents' Supplemental Response ("Supplemental
Response"), to which the Trustee has declined the opportunity to
respond in writing; and the arguments of counsel at hearings on
June 30, and July 30, 1999. For the reasons that follow, the
court finds Respondents violated the automatic stay and are in
civil contempt. The court has discretion under 11 U.S.C. §
105(a) to impose sanctions for civil contempt for automatic stay
violations. The Trustee shall be awarded $1,000 against
Respondents as partial compensation for the Trustee's costs and
fees in filing and prosecuting the motion for the Order to Show
Cause.
II. Facts
On September 3, 1997, Lisa Michaels and Jill Weiss obtained a
state court judgment against International for personal injuries
sustained in an accident while passengers in a taxicab owned by
International. At that time, International's insurance company
was in insolvency proceedings and was unable to satisfy any
insurance claims. International petitioned the state court for a
two month stay of execution of the judgment. During this period,
O'Connor incorporated National and immediately transferred
International's assets to National, while leaving all liabilities
in International. O'Connor is the sole shareholder and president
of both companies. International filed a Chapter 7 bankruptcy
petition approximately four months later. Under 11 U.S.C.
§ 362(a), the petition stayed Respondents from enforcing their
judgment against International.
Respondents then filed a fraudulent transfer action in state
court based upon the transfer of International's assets to
National. Fraudulent transfer claims are property of the estate
and can only be asserted by the Trustee.(1) [2] The Trustee notified
Respondents of the automatic stay violation and requested that
Respondents dismiss their suit, which they did.
The Trustee then reached a settlement with O'Connor and National
which released each of them from any further claims by the
Trustee or the estate. Respondents objected to the settlement,
and a hearing was held in which Respondents' objections were
overruled. At the hearing, Respondents were informed that any
alter ego claim based upon the fraudulent transfer was property
of the estate. Following the settlement, Respondents filed a
motion to amend ("Motion to Amend") their state court judgment
for personal injuries to include National and O'Connor as alter
ego judgment debtors under California Code of Civil Procedure
section 187.
III. Issues Presented
May Respondents assert an alter ego claim against National or
O'Connor?
Have Respondents violated the automatic stay by filing the Motion
to Amend?
If the automatic stay has been violated, can Respondents be held
in contempt and thereby ordered to pay damages to the Trustee?
IV. Discussion
A. The Alter Ego Doctrine
The alter ego doctrine is used to establish the direct liability
of a shareholder or owner when that shareholder or owner
improperly uses the corporate entity to commit acts which harm
the corporation itself, or third persons involved with the
corporation. State law determines who has standing to assert an
alter ego claim when the corporate entity which has been abused
subsequently files bankruptcy. CBS, Inc. v. Folks (In re Folks),
211 B.R. 378, 385 (9th Cir. BAP 1997) ("Folks"). Both
International and National are incorporated in California.
O'Connor is a resident of California. Therefore, California law
is controlling on the issue of standing to bring an alter ego
claim in this case.
The California Supreme Court has described the use of the alter
ego doctrine as follows:
The alter ego doctrine arises when a plaintiff comes into court
claiming that an opposing party is using the corporate form
unjustly and in derogation of the plaintiff's interests. (6
Witkin, Summary of Cal. Law (8th ed. 1974) Corporations, § 5,
p.4318.) In certain circumstances the court will disregard the
corporate entity and will hold the individual shareholders liable
for the actions of the corporation: "As the separate personality
of the corporation is a statutory privilege, it must be used for
legitimate business purposes and must not be perverted. When it
is abused it will be disregarded and the corporation looked at as
a collection or association of individuals, so that the
corporation will be liable for acts of the stockholders or the
stockholders liable for acts done in the name of the
corporation." (Comment, Corporations: Disregarding Corporate
Entity: One Man Company (1925) 13 Cal.L.Rev. 235, 237.)
Mesler v. Bragg Management Co., 39 Cal. 3d 290, 300, 702 P.2d
601, 216 Cal. Rptr. 443 (1985).
The case of Automotriz Del Golfo De California v. Resnick, 47
Cal. 2d 792, 306 P.2d 1 (1957) earlier set forth two
prerequisites for the application of the alter ego doctrine.
They are "(1) that there be such unity of interest and ownership
that the separate personalities of the corporation and the
individual no longer exist and (2) that, if the acts are treated
as those of the corporation alone, an inequitable result will
follow." Id. at 796.
B. Generalized Alter Ego Claims
California law distinguishes two types of alter ego claims:
generalized and particularized. Folks, 211 B.R. at 385, 387.
Generalized claims are those which derive from harm to the
corporation and could be asserted by any creditor of the
corporation. Id. at 387. In other words, the corporation itself
is injured in such a way that each of its creditors is injured
vicariously through the injury to the corporation. The
corporation is the initial target of the injury. Where the
injury is to the corporation itself, the claim for that injury is
for the benefit of the corporation, and is therefore the property
of the estate. Id. at 387, 388. "[O]nly the Debtor or Trustee
has standing to assert the alter ego claim where injury to the
corporation is alleged." In re Davey Roofing Inc., 167 B.R. 604,
608 (Bankr. C.D. Cal. 1994).
The resolution of the standing issue depends upon whether the
alter ego claim is the property of the estate or instead belongs
to a particular creditor. Folks, 211 B.R. at 387. If the alter
ego claim is property of the estate, then it can only be asserted
by the Trustee. Davey Roofing, 167 B.R. at 606. Alternatively,
if it is not estate property, then the creditor may assert the
claim. The Trustee "may not enforce rights of action which
belong to the creditors individually because they are not rights
in which the bankrupt claims an interest and are not assets of
the estate in bankruptcy." Stodd v Goldberger, 73 Cal. App. 3d
827, 835, 141 Cal. Rptr. 67 (1977).
In Davey, creditor S-G Wholesale filed a state court claim
against Donald Davey as the alter ego of Davey Roofing, Inc. S-G
Wholesale alleged that Davey had abused the corporate entity by
commingling corporate funds with personal funds, which Davey then
withdrew for personal use. S-G Wholesale alleged that Davey
Roofing was unable to pay its debt due to the transfer of funds.
Davey Roofing then filed a Chapter 11 petition and requested the
bankruptcy court to determine whether S-G Wholesale's alter ego
claim was property of the estate.
The Davey court determined that the alter ego claim was property
of the estate because injury to the corporation had been alleged.
The court stated:
In the case at bar, S-G alleges that Debtor's principal
misappropriated for his own benefit assets belonging to the
bankrupt corporation, to the detriment of the estate and all of
Debtor's creditors, rather than any individual creditor. Thus,
Debtor [or the Trustee in bankruptcy] is the proper party to
assert alter ego claims, and all of Debtor's creditors are bound
by the outcome of the estate's action.
Davey,167 B.R. at 608.
Similarly, in Folks, creditor CBS Inc., alleged that Byron Folks,
as the alter ego of BYCA , Inc., had "failed to observe any
corporate formalities with respect to BYCA and used bank accounts
and funds of BYCA for personal and family expenditures. This is
a general claim because all creditors are affected and no
particularized injury to CBS exists." Folks, 211 B.R. at 387.
C. Particularized Alter Ego Claims
Particularized alter ego claims are distinguished by direct harm
to a creditor and do not derive from general harm to the
corporation. If a claim is particularized, then it is not
property of the estate because it only benefits that particular
creditor. Folks, 211 B.R. at 387. The trustee cannot assert the
claim because he can only assert claims which benefit the entire
estate. In that situation, the individual creditor is the proper
person to assert the claim. "In California, only a creditor with
a particularized injury has standing to assert an alter ego
claim." Id. at 385.
The case of Variable-Parameter Fixture Development Corporation v.
Morpheus Lights, Inc. and John Richardson, 945 F. Supp. 603
(S.D.N.Y. 1996) provides an example of an alter ego claim based
upon a particularized injury.(2) [3] Variable involved a claim of
patent infringement against Morpheus, and against Richardson as
the alter ego of Morpheus. Richardson was the sole shareholder
and president of Morpheus. Variable claimed that Richardson had
"actively participated in the willful infringement of the
...patent and [was] personally liable for the damages arising
from his tortuous conduct." The patent infringement suit was
subsequently stayed when Morpheus filed a bankruptcy petition.
Variable, 945 F.Supp. at 605, 606.
The court in Variable determined that although the bankruptcy
petition stayed the suit against Morpheus, it did not stay the
suit against Richardson. Id. at 608. The court reasoned that
the alter ego claim against Richardson was for a particularized
injury and was therefore not property of the bankruptcy estate,
and not subject to the automatic stay. Id. This reasoning was
based upon the fact that Richardson's alleged patent infringement
had not harmed the debtor corporation, Morpheus, but had instead
caused harm directly to Variable. The Variable court explained
that the basis of the alter ego claim was that Richardson had:
directly and actively participated in ... willful infringement
[of the patent]. Variable claims that as the alter ego of
Morpheus, Richardson caused harm directly to Variable. In other
words, Variable has alleged a "particularized injury" and not
solely injury to the corporation. Accordingly, the claims do not
fall within the ambit of the automatic stay applicable to
Morpheus.
Id.
D. Respondents' Alter Ego Claim
In their Response, Respondents state: "The purpose of the Motion
to Amend Judgment in the state court is to add the names of the
defendants, National Cab Company, Inc. and James E. O'Connor,
both of which are nondebtors, pursuant to California's alter ego
doctrine, in the personal claims of Lisa Michaels and Jill Weiss
for damages for personal injury." (Response, page 2, lines 4-7.)
This statement assumes that Respondents can assert a
particularized alter ego claim based on their personal injuries.
To assert a particularized alter ego claim, Respondents must
allege direct injuries caused by an abuse of the corporate
entity. The abuse of the corporate entity in this case relates
only to the fraudulent transfer, not to the personal injuries.
Injury resulting from the fraudulent transfer is not a direct
injury particularized to Respondents. Instead, the fraudulent
transfer injured International directly, and each of its
creditors indirectly. At the second hearing, Respondents
conceded that any contract creditor of International could have
stated a claim based on the fraudulent transfer. Therefore, an
alter ego claim arising out of the fraudulent transfer is
generalized.
In the Motion to Amend, Respondents state:
James E. O'Connor manipulated the assets of International and
this taxicab business so that he and National would continue to
benefit from the assets now maintained by National while the
liabilities remained with International. Once James E. O'Connor
singlehandedly accomplished the transfer of all International's
assets to National, he drove the undercapitalized corporation
into bankruptcy with $1.6 million in debts. Clearly, the
transfers of International's assets to National were to the
detriment of International's creditors.
Motion to Amend, page 9, lines 26-28, page 10, lines 1-3.
This passage provides the basis for a generalized alter ego
claim, not a particularized alter ego claim. All of
International's creditors were harmed by the actions of O'Connor,
not just Respondents. Respondents have not been harmed directly
by O'Connor's abuse of the corporate entity, but rather
indirectly through his transfer of assets which caused
International to be unable to satisfy Respondents' judgment. The
harm caused to Respondents is that International cannot pay its
debts to Respondents and other creditors. This is the same harm
caused to all of International's creditors. Respondents have
suffered no particularized injury.
Respondents assert that their claims are particularized because
Respondents suffered direct personal injuries while there was no
"personal" injury to International. This argument focuses on
the state court personal injury claims. As stated previously, no
alter ego claim can be stated based upon the personal injuries.
Respondents have not alleged that O'Connor used International in
a manner that caused the personal injuries.
In the Supplemental Response, Respondents rely upon Caplin v.
Marine Midland Grace Trust Co., 406 U.S. 416, 92 S. Ct. 1678, 32
L. Ed.2d 195 (1971) and Williams v. California First Bank, 859
F.2d 664 (9th Cir. 1988) to support the proposition that the
Trustee does not have standing to assert an alter ego claim based
upon Respondents' personal injuries because the personal injury
judgment is not recoverable on behalf of the estate. While
Caplin and Williams do stand for the proposition that a trustee
may not assert claims on behalf of individual creditors, the
facts of the instant case are distinguishable from Caplin and
Williams.
The issue here is not what actions the trustee may bring but what
actions Respondents (or any other creditors of this estate) may
not bring. Caplin involved an attempt by a trustee under former
Chapter X of the Bankruptcy Act to sue an indenture trustee for
the debtor's debentures based upon the indenture trustee's
alleged failure to fulfill obligations under the indenture. The
Supreme Court rejected the trustee's contentions, holding that
nothing in the Bankruptcy Act (and certainly nothing similar
exists under the Bankruptcy Code today) authorizes a trustee to
collect money not owed to the estate. Caplin, 406 U.S. at 428.
Further, the debenture holders themselves could pursue claims
directly against their indenture trustee and a suit by the
trustee on behalf of the indenture holders might be inconsistent
with independent actions they might be allowed to bring
themselves. Id. at 431, 432.
In Williams, the Ninth Circuit followed Caplin and rejected an
attempt by a trustee to prosecute claims that individual
creditors held against a third party and assigned to the trustee.
Williams, 859 F.2d at 667.
The Trustee in the instant case has settled a fraudulent transfer
claim which benefits all of International's creditors. The issue
of National's and O'Connor's liability for the generalized injury
to the estate has already been resolved. What remains for
Trustee concerns payment of the settlement debt; this affects all
of International's creditors, and was resolved by the Trustee's
settlement of the fraudulent transfer. The Trustee in not
attempting to assert a personal injury claim which belongs to
Respondents.
Respondents make the additional argument that their injuries are
particularized because the fraudulent transfer, and therefore,
the alter ego liability, was in response to their personal injury
judgments. No case law has been found, and none has been
offered, to suggest that the type of alter ego claim may be
determined by the alleged alter ego's motivations. Respondents'
aggressive pursuit of the state court judgment may have been the
reason that O'Connor acted, but still the harm is to the
corporation. Even if the fraudulent transfer was a specific
effort to avoid Respondent's judgment, the alter ego claim is
determined by the injury directly caused by the fraudulent
transfer. International has been directly harmed by the
fraudulent transfer. Therefore, Respondents cannot assert a
particularized alter ego claim based upon the personal injuries,
or upon the fraudulent transfer.
E. The Automatic Stay
Respondents argue that they are not in violation of the automatic
stay because they are not attempting to amend their judgment to
include the name of the debtor, International. In their Response,
Respondents state "[t]he automatic stay applies only to the
debtor, International Cab Company, Inc. and it does not apply to
any person or entity except the debtor." (Response, page 2,
lines 14-15.) While the automatic stay does not apply to claims
against nondebtors, it does apply to claims against property of
the estate under 11 U.S.C. § 362(a)(3). The facts which provide
the basis for Respondents' state court amendment are the same
facts used by the Trustee to assert the fraudulent transfer. In
the Motion to Amend, Respondents state:
Said motion is made pursuant to Code of Civil Procedure Section
187, on the grounds that plaintiffs obtained a judgment against
International Cab Company, Inc.; after the entry of said judgment
International Cab Company, Inc. transferred all of its assets to
National Cab Company, Inc. for inadequate consideration and for
the purpose of fraudulently avoiding plaintiff's judgment against
it.
Motion to Amend, page 1, lines 24-28.
Respondents are essentially reasserting the fraudulent transfer
claim. Because Respondents are in effect pursuing the fraudulent
transfer claim, although under a different name, they are
attempting to enforce a claim which is property of the estate.
The Trustee's settlement of the fraudulent transfer included the
release of O'Connor and National from any further claims based on
that cause of action. The settlement is property of the estate
under 11 U.S.C. § 541 (a)(1) because it is derived from the
fraudulent transfer claim which is property of the estate.
Respondents are interfering with this property because the Motion
to Amend, if granted, would jeopardize the release of O'Connor
and National agreed to in the settlement. 11 U.S.C. § 362 (a)(3)
provides that the filing of a bankruptcy petition operates as a
stay of "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[.] Respondents' attempt to interfere with
the terms of the settlement is an attempt to exercise control
over property of the estate.
Respondents' interference with the settlement, in a larger sense,
prospectively undermines the Trustee's ability to settle general
alter ego claims. If individual creditors are subsequently
allowed to take actions which argue the same claims that the
Trustee is empowered to settle, the ability of the Trustee to
settle such claims is weakened. The Trustee must be able
conclusively to release parties from future claims as part of a
settlement. All creditors claiming through a generalized alter
ego claim must abide by the settlement negotiated by the Trustee.
Davey Roofing, 167 B.R. at 608.(3) [4]
The Trustee negotiated a settlement under which the estate is
currently receiving payments secured by the assets of National.
The Trustee contends that the Motion to Amend could jeopardize
the ability of National to continue making these payments, thus
damaging the estate. In addition, if Respondents are allowed to
amend the state court judgment, nothing would prevent
International's other creditors pursuing O'Connor and National in
a similar manner. This potential scenario violates one of the
main objectives of the automatic stay. That is, the ability of
the Trustee to administer the assets of the estate in an orderly
and equitable manner.
The automatic stay is one of the fundamental debtor protections
provided by the bankruptcy laws. ... The automatic stay also
provides creditor protection. Without it, certain creditors
would be able to pursue their own remedies against the debtor's
property. Those who acted first would obtain payment of the
claims in preference to and to the detriment of other creditors.
Bankruptcy is designed to provide an orderly liquidation
procedure under which all creditors are treted equally.
Harsh Investment Corp. v. Bialac (In re Bialac), 712 F.2d 426,
431 (9th Cir. 1983), citing H.R. Rep. No. 95-595, 95th Cong., 2d
Sess. at 340 (1977).
F. Sanctions for Contempt of the Automatic Stay
Violations of the automatic stay are normally sanctioned under 11
U.S.C. § 362(h) which states: "An individual injured by any
willful violation of a stay provided by this section shall
recover actual damages, including costs and attorneys fees, and,
in appropriate circumstances, may recover punitive damages."
Although a trustee is not an "individual" who may recover damages
for violation of the automatic stay under 11 U.S.C. § 362(h), a
bankruptcy court may award sanctions to a trustee under its
contempt power. Havelock v. Taxel (In re Pace), 67 F.3d 187, 193
(9th Cir. 1995).
The Trustee has requested that Respondents be sanctioned in this
matter. The court has discretion under 11 U.S.C. § 105(a) to
impose sanctions for contempt for violation of the automatic
stay. Id. Section 105(a) provides:
The court may issue any order, process, or judgment that is
necessary or appropriate to carry out the provisions of this
title. No provision of this title providing for the raising of
an issue by a party in interest shall be construed to preclude
the court from, sua sponte, taking any action or making any
determination necessary or appropriate to enforce or implement
court orders or rules, or to prevent an abuse of process.
The Ninth Circuit has stated that "[section 105(a) is broad
enough to provide relief to those entities that are injured by
willful violations of the automatic stay, but cannot recover
under § 362(h)." State of California Employment Development
Dept. v. Taxel (In re Del Mission Limited), 98 F.3d 1147, 1152
(9th Cir. 1996). A violation of the automatic stay may be
considered willful even in the absence of any intent to violate
the stay. The violation is willful if "the defendant knew of the
automatic stay and ... the defendants's actions which violated
the stay were intentional." Goichman v. Bloom (In re Bloom),
875 F.2d 224, 227 (9th Cir. BAP 1989). Respondents were clearly
aware of the automatic stay, and their actions in filing the
motion to amend the state court judgment were intentional.
Respondents have been advised twice that any claim based on a
fraudulent transfer is property of the estate: once when the
Trustee requested that Respondents dismiss their state court
fraudulent transfer action, and again at the hearing on approval
of the Trustee's settlement with National and O'Connor.
Therefore, it may be inferred that Respondents have chosen to
disregard the instructions of the court, and are therefore in
contempt.
V. Disposition
For the foregoing reasons, Respondents have violated the
automatic stay and are in contempt. The court acknowledges that
the issues raised by this controversy are difficult and not
always clear to practitioners not familiar with the applicable
bankruptcy doctrines at play. Because it is a particularly
obtuse area of the law, and further because the court is
satisfied that Respondents seemed to have made a good faith
effort to attempt to avoid the reach of 11 U.S.C. § 362(a),
including their consultation with bankruptcy counsel, the court
does not regard the violations as malicious or in bad faith.
That being said, Respondents will have to get the message once
and for all that they may not interfere with the Trustee's
rights. They were warned once by the Trustee when they attempted
to prosecute their fraudulent transfer action; they were
admonished by the court at the hearing on the settlement. Thus
today's decision, while not in the nature of injunctive relief
(as none was sought) should constitute a severe warning to
Respondents to put this entire matter behind them as difficult as
that may be. The court will temperate sanctions based upon the
foregoing reasons and further because of the very difficult
situation Ms. Michaels and Ms. Weiss have encountered after
suffering personal injuries. If there is any further disregard
for these bankruptcy principles, however, the court will not be
so considerate.
Attorney's fees and costs are appropriate as a basis for awarding
damages for violation of the automatic stay under 11 U.S.C. §
105(a). In re Pace at 192. Therefore, the court will order that
within ten days of service of the order to be presented,
Respondents shall pay $1,000 to the Trustee as partial
compensation for the Trustee's costs and fees in filing and
defending the motion to show cause re contempt for violating the
automatic stay.
The Trustee should submit a form of order consistent with the
foregoing and shall comply with B.L.R. 9021-1 and 9022-1.
Dated: August 9, 1999 ______________________________ Dennis Montali United States Bankruptcy Judge
1. Under 11 U.S.C. § 541, the bankruptcy estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." These interests include fraudulent transfer actions. American National Bank of Austin v. MortgageAmerica Corp. (In re MortgageAmerica Corp.), 714 F.2d 1266 (5th Cir. 1983).
2. This case was decided in the Southern District of New York using California law to analyze the alter ego claims. The court stated that because "defendants are both residents of California and because the alter ego claim will bear directly on the legal status of a California corporation, California law will be applied to the alter ego claims." Variable, 945 F.Supp. at 607.
3. Respondents did not appeal this court's order approving the Trustee's settlement with O'Connor and Nati