EmCyte Corp. v. Stahl (In re Stahl)

In re: ANNA STAHL, Debtor.

EMCYTE CORP., Appellant, v. ANNA STAHL, Appellee.

BAP No. CC-20-1254-SGF

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT

April 7, 2021

NOT FOR PUBLICATION

Bk. No. 2:20-bk-11739-WB

MEMORANDUM¹

Appeal from the United States Bankruptcy Court for the Central District of California

Julia Wagner Brand, Bankruptcy Judge, Presiding

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

INTRODUCTION

Appellant EmCyte Corp. appeals the bankruptcy court's order confirming debtor Anna Stahl's chapter 13² plan over its objection that Stahl's unsecured debt exceeded the limits allowed under § 109(e). Emcyteargues that the bankruptcy court erred by not including the stated amount of its proof of claim when calculating Stahl's unsecured debt for eligibility purposes.

On the record before us, the bankruptcy court did not abuse its discretion by relying exclusively on the schedules to calculate Stahl's chapter 13 eligibility. Similarly, we reject EmCyte's argument that the bankruptcy court was bound to include the stated amount of its proof of claim in determining Stahl's chapter 13 eligibility because Stahl did not object to its claim.

Accordingly, we AFFIRM.

FACTS

A. Stahl's initial schedules, statement of financial affairs, and plan.

Stahl commenced her chapter 13 bankruptcy in February 2020. In her schedules and statement of financial affairs, she disclosed that she was the principal of two companies - XLmedica, Inc. ("XLmedica") and Lifeform Healing Research LLC ("Lifeform").

In her initial schedules, Stahl listed $47,975.80 in priority unsecured debt and $127,714.79 in nonpriority unsecured debt for a grand total of $175,690.59 in unsecured debt. None of this amount was listed as contingent or unliquidated. Also, none of this amount was attributable to anything she might owe to EmCyte. Stahl listed EmCyte in three different entries in her schedule E/F, but she stated no specific fixed amount of debt in any of these entries. In the first entry, she listed the amount of EmCyte'sclaim as "$0.00" and provided the following additional information: "Debt of $135,000 owed exclusively by [Lifeform], Debtor's now defunct business (closed 2018); notice only" (the "Notice Only Claim"). Stahl listed the Notice Only Claim as disputed, but she did not check the boxes for contingent or unliquidated.

In the second entry naming EmCyte as a creditor, she listed the amount owed as "unknown" and further stated as the basis of the claim: "EmCyte Corp. v. Apex Bilogix, et al; Case No. 2:19-cv-00769-JES-NPM; trademark infringement allegations" (the "Trademark Claim"). Stahl listed the Trademark Claim as disputed, but she did not check the boxes for contingent or unliquidated.

In the third entry naming EmCyte as a creditor, she listed the amount owed as "unknown" and further stated as the basis of the claim: "EmCyte Corp. v. Lifeform Healing Research, LLC et al; Case No. 19-CA-005819; breach of contract allegations" (the "Breach of Contract Claim"). Stahl listed the Breach of Contract Claim as disputed, but again she did not check the boxes for contingent or unliquidated.

Stahl filed her initial chapter 13 plan in March 2020. She proposed a five-year plan, with monthly payments of $1,091.00 per month. She estimated that this would result in payment of $1,868.70 on account of $127,714.79 in general unsecured claims, for a distribution of roughly 1.4%. The remaining balance of plan payments of $63,591.30 would be used to pay trustee's fees and administrative and priority creditors.

B. EmCyte's relief from stay motion and its underlying litigation against Stahl and others.

In April 2020, EmCyte moved for relief from the automatic stay.³ EmCyte sought to modify the stay to permit two lawsuits involving Stahl to proceed in the non-bankruptcy courts in which they were pending. In the process of explaining why it needed relief from stay, EmCyte admitted that its claims arising from the two lawsuits were unliquidated:

EmCyte seeks modification of the automatic stay to adjudicate its claims against Anna Stahl and XLMedica up to the point of final judgment in order to liquidate its claim amounts. EmCyte will look to the respective Estates for any recoveries.

(Emphasis added.)

Of the two lawsuits discussed in the relief from stay motion, one is the federal trademark and unfair competition action referenced above as the Trademark Claim. EmCyte attached to its relief from stay motion as exhibit A its trademark and unfair competition complaint. Generally speaking, EmCyte alleged that Stahl, her wholly-owned corporation XLmedica, and others conspired to unfairly compete with EmCyte and to infringe on its trademark rights by selling blood concentrating products, orsimilar products, that bear EmCyte's registered "PURE" trademarks or similar marks.

The trademark and unfair competition complaint does not specify what amount Stahl owes EmCyte for her allegedly wrongful acts. Instead, the complaint contemplates that damages will be determined at trial.

The second lawsuit discussed in EmCyte's relief from stay motion is the Florida state court action referenced above as the Breach of Contract Claim. EmCyte attached to its relief from stay motion as exhibit D a copy of its state court complaint. In it, EmCyte alleges causes of action against Stahl, Lifeform, and XLmedica for accounting, fraud, breach of contract, usurpation of corporate opportunities, alter ego, and misappropriation of trade secrets. But the heart of that complaint is EmCyte's contention that Stahl both individually and through Lifeform and XLmedica breached her distributorship agreement with EmCyte by competing for direct sales with EmCyte. The complaint also alleges that Stahl and her affiliated entities misappropriated EmCyte's trade secrets and sold to customers products manufactured by EmCyte's competitors.

Like its trademark and unfair competition complaint, EmCyte's state court breach of contract complaint does not specify an amount of damages but instead contemplates that the damages amount will be determined at trial.

EmCyte additionally referenced a third lawsuit. It attached the findings of fact, conclusions of law, and judgment from this third lawsuitas exhibit E to its relief from stay motion. The lawsuit, however, did not include Stahl as a party. Rather, EmCyte obtained a Florida state court judgment against a business associate of Stahl's named Emery Smith. The judgment includes findings of fact and conclusions of law regarding Smith's misconduct, which overlap with the alleged misconduct of Stahl, LifeForm, and XLmedica as stated in the breach of contract lawsuit and the trademark infringement lawsuit.

In the process of rendering judgment against Smith in this third lawsuit, the state court made a number of findings involving Lifeform. As best we can discern from the record, Lifeform was not a named party in this third lawsuit, and no judgment was entered against it. Neither Stahl nor XLmedica were parties to the action involving Smith. Even so, the state court stated in its findings that Lifeform owed EmCyte a total of $312,434.07. That amount is the sum of: (1) $147,739.07 owed based on Lifeform's procurement and sale of EmCyte products; and (2) an additional $164,695.00 owed based on Lifeform's conversion of EmCyte's direct sales customers.

In June 2020, the bankruptcy court entered an order granting EmCyte's relief from stay motion.

C. EmCyte's proof of claim.

Around the same time EmCyte moved for relief from the stay, it also filed a proof of claim. EmCyte filed an unsecured claim for $312,434.07, the same amount found - but not adjudged - against Lifeform in the thirdlawsuit. The exhibits attached to EmCyte's proof of claim largely mirror those attached to its relief from stay motion.

EmCyte explained that its proof of claim was based on the complaints from its federal trademark and unfair competition lawsuit and from its state court breach of contract lawsuit. While there is some overlap between these two lawsuits and the third lawsuit against Smith, neither the defendants nor the misconduct alleged completely overlap. More importantly, there is nothing in these complaints or anywhere else in the record fixing the amount of damages Stahl might owe EmCyte individually or as an alter ego of Lifeform and XLmedica.

D. The objections to Stahl's plan.

In July 2020, the chapter 13 trustee objected to Stahl's plan. The trustee raised several concerns, some pertaining to the reasonableness and necessity of Stahl's claimed expenses and others pertaining to her reporting of her taxes, her income, and the finances of XLmedica.

In September 2020, EmCyte objected to Stahl's plan. EmCyte joined in the trustee's objections but also stated a few of its own. According to EmCyte, Stahl was not allocating all of her disposable income to her proposed plan and instead was diverting funds from XLmedica to her sisters, which funds should have been paid instead to Stahl and made available for a larger distribution to her unsecured creditors.⁴ EmCyteasserted that Stahl's handling of XLmedica's funds amounted to bad faith for purposes of Stahl's chapter 13 plan.

But EmCyte mainly argued that Stahl's unsecured debts exceeded § 109(e)'s unsecured debt eligibility limit. According to EmCyte, the combined unsecured claims reflected in Stahl's schedules and in the claims register - including EmCyte's $312,434.07 proof of claim - demonstrated that Stahl had total unsecured claims exceeding $500,000.00. EmCyte pointed out that § 109(e) capped the eligibility limit at $419,275.00 in noncontingent, liquidated, unsecured debts. In short, EmCyte contended that its $312,434.07 proof of claim was liquidated - even though it had sought relief from stay to proceed with its non-bankruptcy litigation for the specific purpose of liquidating its claim against Stahl.

EmCyte attached to its plan objection a declaration and numerous pages of exhibits. These exhibits included a copy of its proof of...