In re: Artem Koshkalda

Opinion

FILED JUL 8 2020 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

In re: BAP No. NC-20-1035-GBS ARTEM KOSHKALDA, Debtor. Bk. No. 3:18-bk-30016-HLB

ARTEM KOSHKALDA, Appellant, v. MEMORANDUM* E. LYNN SCHOENMANN, Chapter 7 Trustee; SEIKO EPSON CORPORATION; EPSON AMERICA, INC., Appellees.

Appeal from the United States Bankruptcy Court for the Northern District of California Hannah L. Blumenstiel, Bankruptcy Judge, Presiding

Before: GAN, BRAND, and SPRAKER, Bankruptcy Judges.

INTRODUCTION

Chapter 71 debtor Artem Koshkalda (“Debtor”) appeals from an

* This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. 1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of (continued...) order denying his motion for leave to sue the chapter 7 trustee, E. Lynn

Schoenmann (the “Trustee”) and her counsel, Fox Rothschild LLP (“Fox”),

in another forum.2 Debtor sought leave to sue the Trustee for breach of

fiduciary duty based on allegations that the Trustee retained non-

disinterested counsel, and with the assistance of Fox, administered the

estate in a manner which resulted in harm to the Debtor.

The bankruptcy court ruled that Debtor failed to allege a prima facie

case as required by Kashani v. Fulton (In re Kashani), 190 B.R. 875 (9th Cir.

BAP 1995) because it had previously ruled that Fox was disinterested and

the other allegations against the Trustee were for actions taken pursuant to

court orders. The bankruptcy court had discretion to deny the motion even

if Debtor alleged a prima facie case. Debtor has not demonstrated how

denial of the motion was an abuse of discretion, and the Kashani factors

support the bankruptcy court’s ruling. We AFFIRM.

1 (...continued) Civil Procedure. 2 The order also denied Debtor’s motion to remove the Trustee pursuant to § 324(a). Debtor does not argue that the court erred in denying his motion to remove the Trustee, and therefore, he has waived the issue. See Smith v. Marsh, 194 F.3d 1045, 1052 (9th Cir. 1999) ("[O]n appeal, arguments not raised by a party in its opening brief are deemed waived."). Additionally, that portion of the order is not final and we lack jurisdiction to review it. SS Farms LLC v. Sharp (In re SK Foods, L.P.), 676 F.3d 798, 802 (9th Cir. 2012).

2 FACTS 3

A. Prepetition Events

In September 2016, Seiko Epson Corporation and Epson America, Inc.

(together “Seiko Epson”) sued Debtor and several other individuals and

entities for trademark infringement, trademark counterfeiting, and related

claims in the Nevada District Court (the “Infringement Action”). The

district court entered orders permitting Seiko Epson to seize finished

goods, components, and instrumentalities which allegedly infringed on

Seiko Epson’s trademarks.

Debtor violated various court orders, failed to appear in court, and

failed to produce discovery. Ultimately, the district court struck Debtor’s

answer and entered a default judgment against him in the amount of $12

million. Debtor appealed the judgment to the Ninth Circuit.

B. The Bankruptcy Case

Prior to entry of the default judgment in the Infringement Action,

Debtor filed a chapter 11 petition. Seiko Epson moved to dismiss the

bankruptcy case as a bad faith filing and also moved for stay relief to

prosecute the Infringement Action, enforce the judgment, and to permit

Debtor to prosecute his appeal.

3 We exercise our discretion to review the bankruptcy court’s docket and relevant adversary proceedings. See Rivera v. Curry (In re Rivera), 517 B.R. 140, 143 n.2 (9th Cir. BAP 2014), aff’d in part & dismissed in part, 675 F. App’x 781 (9th Cir. 2017).

3 In March 2018, the bankruptcy court converted the case to chapter 7,

and the Trustee was appointed. The Trustee filed an application to employ

Fox, and disclosed that Fox concurrently represented Seiko Epson in

unrelated matters. The bankruptcy court determined that Fox did not

represent any interest adverse to the estate and was a disinterested person

within the meaning of the Bankruptcy Code.

In May 2018, the Trustee and Seiko Epson filed a stipulation for stay

relief and annulment to validate the default judgment in the Infringement

Action, and to permit the Trustee to liquidate certain property seized

pursuant to district court orders. Debtor opposed the stipulation and filed a

motion to compel abandonment of the appeal and litigation rights in the

Infringement Action as well as other claims against Seiko Epson. While the

motion was pending, Debtor filed suit against Seiko Epson in the Central

District of California for wrongful seizure (the “Wrongful Seizure Action”).

In July 2018, the bankruptcy court granted stay relief retroactively to

the petition date. The bankruptcy court also partially granted Debtor’s

motion to compel abandonment to permit Debtor to pursue his appeal in

the Infringement Action. The court denied abandonment of the Wrongful

Seizure Action, and stated that because Debtor did not possess the

authority to commence the action, the Trustee was specifically authorized

4 to dismiss it.4 The default judgment in the Infringement Action was

subsequently affirmed by the Ninth Circuit in December 2019.

In May 2018, Seiko Epson filed an adversary complaint seeking a

denial of discharge under § 727 and nondischargeability of its claim under

§ 523. The Trustee also filed an adversary complaint seeking a denial of

discharge under § 727. Because of the overlap of claims, the bankruptcy

court stayed the Trustee’s adversary proceeding pending a final judgment

in the Seiko Epson proceeding. In September 2019, the bankruptcy court

granted Seiko Epson’s motion for summary judgment and entered an order

denying Debtor’s discharge under §§ 727(a)(2)(a), (a)(3), and (a)(7).

C. Debtor’s Motions To Disqualify

In October 2019, Debtor filed a motion to disqualify Fox and sought

disgorgement of its fees. Debtor argued that Fox was not disinterested and

held an adverse interest based on its concurrent representation of Seiko

Epson in unrelated matters. The bankruptcy court denied the motion and

stated that Fox’s representation of Seiko Epson was fully disclosed nearly

two years before Debtor’s motion to disqualify. Debtor had notice and an

opportunity to object at that time. The court reiterated its prior ruling that

Fox’s relationship with Seiko Epson did not give rise to an actual conflict

4 The bankruptcy court subsequently granted Debtor’s renewed motion to compel abandonment of the Wrongful Seizure Action after the Trustee dismissed the case with prejudice.

5 and that Fox was disinterested. Debtor filed a motion for reconsideration,

which the court denied. Debtor then filed a petition for writ of mandamus,

which the Ninth Circuit denied.

In December 2019, Debtor filed a motion asking the court to vacate its

order approving the employment of Fox as void under Civil Rule 60(b)(4),

made applicable by Rule 9024. Debtor argued that the original order was

void because it was entered without notice or due process. The bankruptcy

court denied the motion because although Rule 2014 does not require the

Trustee to serve the Debtor with a motion to employ counsel, the Trustee

did serve all creditors and the Debtor, and no objections were filed.

D. The Motion For Leave and the Court’s Ruling

In December 2019, Debtor filed a motion for leave to sue the Trustee

and Fox in an alternate forum. Debtor argued that leave was appropriate

because the Trustee breached her fiduciary duty while administering the

estate. Debtor supported the motion with a declaration and a draft of a

proposed complaint which outlined the causes of action Debtor sought to

pursue against the Trustee and Fox. The draft complaint alleged that the

Trustee breached her fiduciary duty by: (1) hiring Fox; (2) failing to

supervise the estate’s accountants; (3) allowing dismissal of the Wrongful

Seizure Action with prejudice; (4) allowing the default judgment in the

Infringement Action; and (5) assisting Seiko Epson in its adversary

proceeding.

6 The bankruptcy court denied the motion and ruled that Debtor failed

to make out a prima facie case as required by Kashani. The court stated that

it had previously rejected Debtor’s arguments concerning Fox’s

disinterestedness, the sufficiency of the accountants’ work, and the

dismissal of the Wrongful Seizure Action. The bankruptcy court also stated

that the stay relief order which validated the default judgment in the

Infringement Action was made by the bankruptcy court, not the Trustee,

and any allegations of wrongdoing against the Trustee in that action were

mooted by the Ninth Circuit’s affirmance of the judgment. Debtor timely

appealed.

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C.§§ 1334 and

157(b). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Did the bankruptcy court abuse its discretion by denying Debtor’s

request for leave to sue the Trustee and her counsel in an alternate forum?

STANDARD OF REVIEW

We review an order granting or denying leave to sue the trustee for

an abuse of discretion. In re Kashani, 190 B.R. at 881. A bankruptcy court

abuses its discretion if it applies the wrong legal standard, or misapplies

the correct legal standard, or if it makes factual findings that are illogical,

implausible, or without support in inferences that may be drawn from the

7 facts in the record. See TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832

(9th Cir. 2011) (citing United States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir.

2009) (en banc)).

DISCUSSION

A. Scope of Appeal

As an initial matter, we must determine whether the order denying

Debtor’s motion is final such that we have jurisdiction over this appeal. The

Trustee argues that the order is interlocutory.

An order is final if it “resolves and seriously affects substantive

rights” and “finally determines the discrete issue to which it is addressed.”

Dye v. Brown (In re AFI Holdings, Inc.), 530 F.3d 832, 836 (9th Cir. 2008)

(citations omitted). An interlocutory order is one which only decides an

intervening matter and does not finally determine a cause of action. In re

Kashani, 190 B.R. at 882.

In Kashani we determined that the order denying leave to sue the

trustee was interlocutory, but that order created a specific period of time

for the debtors to refile the motion, along with a proposed complaint. Id.

The order here does not contemplate any further action by the Debtor. It

finally determined Debtor’s request for leave to sue the Trustee and her

counsel in another forum and is therefore a final, appealable order. See In re

USA Baby Inc., 520 F. App’x 446, 447 (7th Cir. 2013).

8 B. The Bankruptcy Court Did Not Abuse Its Discretion By Denying Leave To Sue The Trustee And Her Counsel In An Alternate Forum

A bankruptcy trustee is an officer of the appointing court and is

entitled to a form of derivative judicial immunity for actions within the

scope of her official duties. Bennett v. Williams, 892 F.2d 822, 823 (9th Cir.

1989); In re Kashani, 190 B.R. at 883. However, a trustee may be liable for

intentional or negligent actions which violate the trustee’s legal duties.

Bennett, 892 F.2d at 823. Before a party can file suit against a bankruptcy

trustee in an alternate forum, it must first obtain leave from the bankruptcy

court. Beck v. Fort James Corp. (In re Crown Vantage, Inc.), 421 F.3d 963, 970

(9th Cir. 2005).

A party seeking leave from the bankruptcy court must set forth a

prima facie case against the trustee. In re Kashani, 190 B.R. at 885. The

purpose of the prima facie requirement is to allow the bankruptcy court to

determine the nature of the claims and make its independent

determination of whether to grant leave. Id. The court can also “determine

whether the claims have been previously decided on the merits and should

not be pursued by the movants or proposed plaintiffs on the basis of res

judicata or collateral estoppel.” Id. at 887. The bankruptcy court’s analysis

should include a balancing of the interests of all parties involved. Id at 886.

Even if the party seeking leave has set forth a prima facie case, the

bankruptcy court has discretion to deny leave and retain jurisdiction of the

9 claims. Id. at 887.

The bankruptcy court’s analysis should include consideration of the

following factors: (1) whether 28 U.S.C. § 959(a) is applicable; (2) whether

the claims pertain to the trustee’s actions while administering the estate;

(3) whether the claims involve the trustee acting within the scope of her

authority under the Bankruptcy Code or orders of the court; (4) whether

the prospective plaintiff seeks a judgment against the trustee personally;

and (5) whether the claims involve negligent or intentional breaches of

fiduciary duty. Id. at 886-87. One or more of these factors may provide a

basis for the bankruptcy court to retain jurisdiction. Id. at 887. Therefore,

the bankruptcy court abused its discretion only if none of the Kashani

factors provide a basis to retain jurisdiction.

Although the bankruptcy court denied leave based on Debtor’s

failure to show a prima facie case, it also addressed the validity of the

underlying claims and determined that the factual bases for the claims had

either been previously decided or involved actions taken pursuant to court

orders. Debtor argues that the bankruptcy court should not have

considered the merits of his claims and should have limited its analysis to

whether the allegations stated a claim for relief. He argues that the

bankruptcy court did not previously decide whether the Trustee breached

her fiduciary duty or whether Debtor was damaged.

The bankruptcy court properly evaluated Debtor’s factual allegations

10 in determining whether to grant leave. Debtor has not shown that the court

abused its discretion by denying the motion, and the Kashani factors

provide ample support for the bankruptcy court’s decision to retain

jurisdiction.

Debtor acknowledged that the claims involved the Trustee’s actions

while administering the estate. Thus, the first two Kashani factors support

the court’s decision to retain jurisdiction. In re Crown Vantage, Inc., 421 F.3d

at 972 (quoting Carter v. Rodgers, 220 F.3d 1249, 1254 (11th Cir. 2000))

(“Section 959(a) does not apply to suits against trustees for administering

or liquidating the bankruptcy estate.”).

The third Kashani factor also favors retaining jurisdiction because

virtually all of the allegations of wrongdoing involve the Trustee’s actions

taken pursuant to bankruptcy court orders. The Trustee retained Fox

pursuant to the bankruptcy court’s order authorizing employment under

§ 327. Similarly, the default judgment in the Infringement Action was

validated by the bankruptcy court’s order annulling the stay. It was not

“allowed” by the Trustee.

Although Debtor sought to sue the Trustee personally for negligent

or intentional breaches of fiduciary duty, the allegations against the Trustee

and Fox involve actions taken in administering the estate pursuant to court

orders or under the authority of the Bankruptcy Code.

Additionally, many of the underlying issues were previously

11 determined by the bankruptcy court. The bankruptcy court repeatedly

determined that Fox was disinterested and did not hold or represent an

adverse interest. By retaining jurisdiction, the bankruptcy court avoided

the possibility of inconsistent rulings, especially given that Debtor has

appealed those prior rulings.5 The bankruptcy court did not abuse its

discretion by denying leave to sue the Trustee in another forum.

C. Appellees’ Additional Arguments

The Trustee and Seiko Epson urge us to find that Debtor lacked

standing to bring a breach of fiduciary duty claim against the Trustee

because the asserted damages were “general and common” to the estate

and not “peculiar and personal” to Debtor under the holding of Stoll v.

Quintanar (In re Stoll), 252 B.R. 492, 496 (9th Cir. BAP 2000). However,

because the bankruptcy court properly retained jurisdiction of the

proposed claims, we do not reach the question of Debtor’s standing to

bring the underlying claims. The bankruptcy court will be able to

determine the issue of Debtor’s standing and any other defenses at the

appropriate time.

CONCLUSION

For the reasons set forth above, we AFFIRM the bankruptcy court's

5 Debtor appealed several orders related to Fox’s employment. See BAP Case Nos. 19-1288, 19-1335, and 20-1008. These appeals were dismissed as interlocutory, but Debtor retains the ability to appeal when the orders become final.

12 order denying Debtor’s motion for leave to sue the Trustee and Fox in an

alternate forum.