KSB

Judge Berger

10-20982 Expert South Tulsa, LLC (Doc. # 124) - Document Text

The relief described hereinbelow is SO ORDERED.

Signed April 28, 2011.

United States Bankruptcy Judge

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In re:

EXPERT SOUTH TULSA, LLC Case No. 10-20982
Debtor. Chapter 11

__________________________________
ROBERT D. BERGER
FINAL ORDER GRANTING MOTION TO ENFORCE AUTOMATIC STAY AND
DENYING REQUEST FOR SANCTIONS


Debtor moves to enforce the automatic stay, requests a declaration voiding a post-petition
state court action against Debtor’s principals, and requests sanctions against claimants Tom
Christopolous and South Tulsa Hotel, LLC (collectively, “Plaintiffs”). The motion is granted, in
part. Plaintiff’s Second Amended Petition is void, but each party shall bear their own costs.

Background

On March 30, 2010, another of Debtor’s creditors, Team Viva, filed an involuntary
Chapter 7 petition, which Debtor later voluntarily converted to Chapter 11. Debtor’s business is
to own, develop, and sell commercial property located in Tulsa, Oklahoma. Debtor’s financial
difficulties stem primarily from a failed real estate development known as Memorial Commons.
The project was to include retail shopping, restaurants, and office space. Edwin H. Hawes III

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and Lawrence B. McLellan II are Debtor’s sole members. Debtor is an Oklahoma limited
liability company. Debtor’s primary place of business and its principals are located in Kansas.

Plaintiffs purchased from Debtor an undeveloped hotel site at what was to be Memorial
Commons. Prior to bankruptcy, Plaintiffs filed suit against Debtor, alleging breach of contract
and misrepresentation regarding the sale of the hotel site (the “Oklahoma Litigation”).

Upon initiation of Debtor’s involuntary bankruptcy, the Oklahoma Litigation was stayed
against Debtor.1 The purpose of the automatic stay is to provide creditors protection and not to
allow a single creditor or group of creditors to procure advantage over other creditors who hold
claims against the bankruptcy estate. If a cause of action may be brought by the trustee, which
includes a debtor-in-possession in a Chapter 11 proceeding, the stay prevents individual creditors
from bringing causes of action similar to those which may be brought by the trustee. Post-
petition Plaintiffs filed a second amended petition seeking to hold Hawes and McLellan jointly
and severally liable under an alter ego remedy (“Alter Ego Litigation”). Plaintiffs allege Debtor
was undercapitalized and not an independent entity with the ability to perform its contractual
obligations arising from Memorial Commons.

A. The Alter Ego Doctrine
Limited liability company members, like corporate shareholders, may be held liable for
debts of the company under the alter ego doctrine. The alter ego doctrine allows a plaintiff “to
reach a second corporation or individual upon a cause of action that otherwise would have
existed only against the first corporation.”2 The objective in an alter ego claim is to pierce the

1 See 3 COLLIER ON BANKRUPTCY ¶ 362.03 362.03[1] at 362-23 and 24 (Alan N. Resnick & Henry J.
Sommer, eds., 16th ed. 2010).

2 Bankers Trust Co. v. Lee Keeling & Assocs., Inc., 1992 WL 602830 (N.D. Okla. 1992), quoting 1
FLETCHER, CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 41.28 at 658 n.10 (1990).

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corporate veil of a corporate defendant to reach the assets of the shareholders.3 A finding of fact
of alter ego, standing alone, creates no cause of action. It merely imposes liability against a
second corporation or individual upon an underlying cause of action, such as fraud or breach of
contract, brought against the first corporation.4 One who seeks to disregard the corporate veil
must show the corporate form was abused to the injury of a third party; however, fraud is not a
necessary element under Oklahoma law.5

B. The Automatic Stay
Section 362(a)(1) stays any action or proceedings against the debtor. Generally, the stay
applies only to the debtor and not to non-debtor co-defendants.6 A narrow exception to the
general rule provides the stay may be extended to non-debtors where there is such identity
between the non-debtor defendant and the debtor that a judgment against the former will in effect
be a judgment against the latter.7

While an alter ego action may be an action against a non-debtor third-party, it is also an
action “to recover a claim against the debtor” because absent a claim against the debtor, there is
no independent basis for the action against the principal.8 It is these claims or causes of action
that §362(a)(3) also stays. Dixie Aire, cited by Plaintiffs, involved the inverse order of claims
presented here. The underlying claims of fraud and breach of contract were alleged against a
non-debtor corporation and an individual. Alter ego liability of the debtor would only arise

3 Bankers Trust, at *1, citing Home-Stake Production Co. v. Talon Petroleum, 907 F.2d 1012, 1018 (10th
Cir. 1990); Wallace v. Tulsa Yellow Cab Taxi & Baggage Co., 61 P.2d 645 (Okla. 1936); and Tara Petroleum Corp.

v. Hughey, 630 P.2d 1269, 1275 n.20 (Okla.1981).
4 Fanning v. Brown, 85 P.3d 841, 846-48 (Okla. 2004).
5 1 FLETCHER, CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS §41.10 (1990); Sautbine v. Keller,
423 P.2d 447, 451 (Okla. 1966); Sampson v. Hunt, 233 Kan. 572, 579 (1983).

6 Dixie Aire Title Services, Inc. v. SPW, L.L.C., 389 B.R. 222, 225 (W.D. Okla. 2008).

7 Id., citing A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986).

8 Thomas v. Vertigo, Inc., 900 P.2d 458, 460 (Okla. App. 1995).

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secondarily. Dixie Aire found the stay did not apply to the underlying claims pending against the
non-debtors but did apply to the alter ego claim against the debtor.9 In this case, breach of
contract and misrepresentation claims are pending directly against Debtor, with alter ego claims
asserted against the non-debtors. Thus, Dixie Aire does not apply.

C.
Does the Automatic Stay Apply to the Alter Ego Claims Against Non-
Debtors?
Case law is divided as to whether an alter ego action, or an action to pierce the corporate
veil, becomes property of the estate upon the corporate debtor's bankruptcy. Some cases hold an
alter ego action against shareholders does not constitute property of the corporate debtor's estate
because an alter ego action is personal to each of the corporation's creditors, since a corporate
entity will be disregarded only if the entity has been abused to the detriment of a third party.10
Some cases also recite as support that the corporation cannot bring a cause of action under the
alter ego theory against itself; however, these cases miss the obvious legal effect that upon the
filing of a petition in bankruptcy under Chapter 11, a new fictitious entity, separate and very
different from the pre-petition fictitious entity, is created. Also, contrary authority holds an alter
ego cause of action constitutes property of the corporate debtor's estate even though, outside of
bankruptcy, such an action is usually asserted by the corporation's creditors.11 According to
these cases, upon a corporate debtor's bankruptcy, a trustee has exclusive standing to bring the
alter ego claim to collect assets for the benefit of all creditors over a specific creditor seeking to
collect an asset for itself.

9 Dixie Aire Title Services, 389 B.R. at 225.
10 See, e.g., In re Ozark Restaurant Equipment, Co., Inc., 816 F.2d 1222 (8th Cir. 1987).
11 See, e.g., Koch Refining v. Farmers Union Cent. Exchange, Inc., 831 F.2d 1339 (7th Cir. 1987).


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Although federal bankruptcy law determines what is property of a bankruptcy estate, it is
state law that determines property rights. Generally, the law of the state of incorporation of the
debtor is the law that applies with regard to the alter ego claim. Likewise, it is probably state
law that determines whether the debtor has standing to bring an action under the alter ego theory
and, implicitly, whether this Court has jurisdiction over the claim. Not lost in the analysis is that
the debtor is a separate entity from the pre-petition fictitious entity and that the driving purpose
of bankruptcy is to benefit the bankruptcy estate and all of the creditors of that estate, to include
an equal distribution of assets for all those similarly situated creditors in conformity with the
directives of the Bankruptcy Code.

Whether an alter ego action will be included in a corporate debtor's estate depends upon
state law.12 State law determines whether a corporation has an interest in an alter ego cause of
action against its shareholders. Federal law determines whether any such interest is property of
the corporate debtor’s estate. Corporations do not usually seek to disregard their own corporate
form; rather, corporations seek remedies from its officers and directors for breach of duties or
mismanagement.13 Such derivative suits become property of the estate. Whether a creditor’s
alter ego remedy also becomes property of the estate depends upon whether the underlying claim
redresses a specific injury to a particular creditor or is a general claim which could inure to the
benefit of any creditor dealing with company.14 The remedy remains with the creditor if it
addresses a personal claim.15 A general claim, on the other hand, may be asserted by either the
corporation or its creditors. These claims arise when the corporation was allegedly mismanaged

12 See, e.g., Baillie Lumber Co., LP v. Thompson, 413 F.3d 1293 (11th Cir. 2005).
13 Delgado Oil Co., Inc. v. Torres, 785 F.2d 857, 861 (10th Cir. 1986); Ford Motor Credit Co. v. Minges,


473 F.2d 918, 920-21 (4th Cir. 1973).

14 Koch Refining, 831 F.2d at 1346; In re Schimmelpenninck, 183 F.3d 347, 359 (5th Cir. 1999).

15 Ozark Restaurant Equipment, 816 F.2d at 1225 (interpreting Arkansas law).

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or abused, but the third-parties transacting business with it were not directly harmed; rather, they
were indirectly harmed by the alleged misconduct. Whether the claim is personal or general
depends upon the alleged misconduct and resulting injury underlying the alter ego claim.16

Oklahoma law does not provide a clear answer, but it is likely to follow Koch Refining
and hold the corporation has standing to pursue an alter ego claim which benefits its creditors
generally.17 Furthermore, where state law is unclear, courts turn to federal bankruptcy law to
determine whether the trustee has standing to bring, settle and release alter ego claims which
inure to creditors generally. Bankruptcy law favors the trustee’s standing because its ultimate
goal is the equitable distribution of assets and the prevention of one creditor recovering a fund
rightfully belonging to other creditors similarly situated.18 Underscoring this goal, some cases
note the similarities between piercing a corporate debtor’s veil and substantive consolidation.19
When the corporate shell is dissolved, the two entities become one. Likewise, in bankruptcy,
collapsing a debtor corporation into another entity or individual brings both parties’ assets and
liabilities into the estate for equitable administration.20

In this case, Plaintiffs allege undercapitalization and Debtor’s inability to complete
Memorial Commons as promised. These are general claims any creditor transacting business

16 Koch Refining, 831 F.2d at 1349.

17 Resolution Trust Corp. v. Greer, 911 P.2d 257, 264 (Okla. 1995); Transportation Alliance Bank, Inc. v.
Arrow Trucking Co., – F. Supp. 2d –, 2011 WL 213462 (N.D. Okla.). Kansas law holds the alter ego remedy
belongs to creditors generally and should not inure to the benefit of a single creditor to the prejudice of others.
Commerce Bank, N.A. v. Liebau-Woodall & Assocs., L.P., 28 Kan. App. 2d 674, 680-81 (2001), citing Pemco, Inc. v.
Kansas Dept. of Revenue, 258 Kan. 717, 723 (1995).

18 See, e.g., Transportation Alliance Bank, Inc. v. Arrow Trucking Co., 2011 WL 213462, at *9; S.I.
Acquisition, Inc. v. Eastway Delivery Service, Inc. (In the Matter of S.I. Acquisition, Inc.), 817 F.2d 1142, 1153 (5th
Cir. 1987).

19 Mather v. G.K. Pipe Corp., (In re Moran Pipe & Supply Co., Inc.), 130 B.R. 588 (Bankr. E.D. Okla.
1991); Helena Chemical Co. v. Circle Land and Cattle Corp., (In re Circle Land and Cattle Corp.), 213 B.R. 870
(Bankr. D. Kan. 1997).

20 In re Moran Pipe & Supply Co., Inc., 130 B.R. at 593.

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with the Debtor could assert. Accordingly, the claim is property of the estate to be administered
or abandoned.

D. Violation of the Automatic Stay
The Court finds that the Plaintiffs violated the bankruptcy automatic stay under
§362(a)(1) and (a)(3) from and beginning with any and all actions taken in the Oklahoma
Litigation and the Alter Ego Litigation since the date that the involuntary bankruptcy was filed
for this Debtor on March 30, 2010; further, the Court finds that any and all actions in said
litigation on or after March 30, 2010, are void and of no legal effect. The Oklahoma Litigation
and the Alter Ego Litigation remain stayed. However, considering the complexity of the
Oklahoma Litigation and the divergence of pertinent case law, the Court does not impose
monetary sanctions upon the Plaintiffs.

Conclusion

Debtor’s Motion to Enforce the Automatic Stay is GRANTED.
IT IS SO ORDERED.
###
ROBERT D. BERGER

U.S. BANKRUPTCY JUDGE
DISTRICT OF KANSAS
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