In re Bello

612 B.R. 389

IN RE: Mark M. BELLO, Debtor.

Case No. 19-46824

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed on February 13, 2020

Michelle H. Bass, Wolfson Bolton PLLC, Troy, Michigan, Attorney for Debtor.

Catherine A. Riesterer, Jennifer L. Gross, Cooper & Riesterer, PLC, Brighton, Michigan, Attorneys for creditors Judith Michaelian, Individually and as Personal Representative of the Estate of Marshall S. Michaelian

OPINION REGARDING THE DEBTOR'S MOTION FOR AN ORDER FINDING THE MICHAELIAN PARTIES IN VIOLATION OF THE AUTOMATIC STAY

Thomas J. Tucker, United States Bankruptcy Judge

I. Introduction

This case came before the Court for a hearing on January 29, 2020, on the Debtor's motion entitled "Debtor's Motion for Order Finding Creditors Judith Michaelian and the Estate of Marshall S. Michaelian in Violation of the Automatic Stay," filed on December 9, 2019 (Docket # 78, the "Motion"). Counsel for the Debtor; counsel for the creditors, Judith Michaelian and the Estate of Marshall S. Michaelian (the "Michaelian Parties"); and counsel for the United States Trustee appeared at the hearing. During the hearing, the Court made certain rulings regarding the Motion, but did not fully decide the Motion. For the reasons stated by the Court on the record during the January 29, 2020 hearing, the Court entered an Order on January 30, 2020 (Docket # 112, the "January 30 Order"), which made certain findings and conclusions, allowed certain further briefing by the parties, and scheduled a bench opinion hearing on the Motion, which is currently scheduled for February 27, 2020 at 3:00 p.m.

The Court now has decided to rule on the Motion in writing, rather than by an oral bench opinion.

II. Discussion

The Court finds and concludes as follows.

A. This Court has subject matter jurisdiction over this contested matter under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A) and 157(b)(2)(O).

B. The Court reiterates and adopts the following findings and conclusions that it made in the January 30 Order:

A. The co-debtor stay provided by 11 U.S.C. § 1301(a) does not apply, and has no relevance to the Motion.

[and]

B. This Court's stay-relief order filed on September 13, 2019 (Docket # 57) did not modify the automatic stay under 11 U.S.C. § 362(a) to permit the Michaelian Parties to file a motion, in the case pending in the United States District Court,¹ seeking the appointment of a receiver of the defendant Lawsuit Financial, Inc.²

C. The Court finds persuasive and agrees with the cases that have held that when a bankruptcy debtor owns a 100%, or the majority, interest in a corporation, it is a violation of the automatic stay for a creditor to file a motion seeking the appointment of a receiver of the corporation in a non-bankruptcy case. Those cases reason that the filing of such a motion is an "act ... to exercise control over property of the estate" within the meaning of 11 U.S.C. § 362(a)(3). The Court agrees with the reasoning and holdings of the following cases:

1. Qarni v. Vahora (In re Qarni ), Adv. No. 19-01090-A, 2019 WL 6817106, at *3-5 (Bankr. E.D. Cal. Dec. 11, 2019) (holding that under state law, a Chapter 13 debtor, who was the sole shareholder of a corporation, had a contractual right, based on the corporate bylaws, to control the activities of the corporation; that such right was a property right that became property of the estate upon the debtor's filing a Chapter 13 case; that such property right was protected by the automatic stay; and that therefore a creditor's filing of a lawsuit against the corporation seeking, in relevant part, the appointment of a receiver for the corporation, was an attempt to exercise control over property of the estate in violation of 11 U.S.C. § 362(a)(3), because it would alter the debtor's right to control the activities of the corporation, and would result in the liquidation of the corporation and the loss of the debtor's and the joint debtor's employment and their "ability to fund their Chapter 13 plan").

2. Edisto Res. Corp. v. McConkey (In re Edisto Res. Corp. ), 158 B.R. 954, 957-58 (Bankr. D. Del. 1993) (holding that a minority group of shareholders' filing of a lawsuit, which, in relevant part, sought the appointment of a receiver for a corporation in which the Chapter 11 debtor corporations were majority shareholders (Chapter 11 debtors owned approximately 80% of corporate common stock) was a violation of the automatic stay, because it was an attempt to exercise control over property of the estates of the Chapter 11 debtors).

3. Sheehan v. Warner (In re Warner ), 480 B.R. 641, 647 (Bankr. N.D.W. Va. 2012) (holding that "the right to participate in a LLC—a non-economic right—is property of the estate under 11 U.S.C. § 541(a)" and that "because non-economic rights are property of the estate and fit under the canopy of § 362(a)(3)" the action taken by the other members of the LLC to dissociate the debtor, who held 2 of the 12 membership interests, was void).

D. The Debtor, on account of his 100% shareholder interest in Lawsuit Financial, Inc., has certain property rights under state law, including but not limited to, the right to govern and manage the activities of the corporation; the right to receive a salary; and the right to receive distributions from the corporation, which rights became property of the bankruptcy estate on May 3, 2019, when the Debtor filed a voluntary petition for relief under Chapter 13. See Madugula v. Taub , 496 Mich. 685, 853 N.W.2d 75, 93 (2014) (footnotes omitted) (quoting Mich. Comp. Laws § 450.1109(2) ) (explaining that "[u]nder the [Michigan Business Corporation Act] a shareholder is ‘a person that holds units of proprietary interest in a corporation ....’ " and that "through this [shareholder] interest ..., a shareholder retains certain statutory rights that allow the shareholder to protect and gain from his or her interest as a shareholder, including, but not limited to, the right to vote, inspect the books and receive distributions"); cf. In re Modanlo , 412 B.R. 715 (Bankr. D. Md. 2006) (holding that a Chapter 11 trustee of a limited liability company's sole member had the right to exercise the management and governance rights that such sole member had on account of his membership interest).

E. The filing of a motion for the appointment of a receiver of Lawsuit Financial, Inc. ("LFC") (the "Receivership Motion") by the "Michaelian Parties," in the case of Judith Michaelian and Estate of Marshall S. Michaelian v. Lawsuit Financial, Inc. and Mark M. Bello , Case No. 2:17-cv-13321-TGB-MKM (the "District Court Case"), was a violation of the automatic stay under 11 U.S.C. § 362(a)(3). The filing and prosecution of such motion was an attempt to exercise control over, to interfere with, and to alter, property rights the Debtor has on account of his 100% shareholder interest in LFC, which property rights became property of the Debtor's bankruptcy case on the petition date under 11 U.S.C. § 541(a)(1).

F. The Court rejects the argument by the Michaelian Parties that in filing the Receivership Motion "there [was] no attempt by the Michaelian Parties to liquidate [the] Debtor's interest in [LFC] or interfere with his employment with the company such that he would be unable to fund any approved Chapter 11 plan." (See "Supplemental Brief in Opposition to Debtor's Motion for Order Finding Creditors Judith Michaelian and the Estate of Marshall S. Michaelian in Violation of the Automatic Stay" (Docket # 114) at pdf pages 2-3.) The papers filed in the district court contradict this assertion.

Paragraph 4 of the Receivership Motion states that "[a]s set forth more fully in [the Michaelian Parties'] Brief in Support of [the Receivership] Motion, Defendant ... LFC['s] ... precarious financial position will continue to deteriorate if a receiver is not appointed." In the Brief is Support of the Receivership Motion, the Michaelian Parties allege that LFC's precarious financial position is the result of the Debtor's mismanagement and control of LFC and the salary and distributions that the Debtor has used for personal and family expenses. It is clear that the intent of the Michaelian Parties in seeking the appointment of a receiver is to have the receiver take over the control and management of LFC; place all of the assets of LLC out of the reach and control of the Debtor; prevent the Debtor from paying himself a salary and making any distributions to himself to cover personal and family expenses out of the assets of LFC, and either make payments to the Michaelian Parties or escrow any monies received for the benefit of the Michaelian Parties. The Brief in Support of the Receivership Motion states, in relevant part:

It is now therefore imperative that this Court act to secure what assets remain in the business and prevent [the Debtor] from further exhausting the assets of the business.

....

[B]usiness revenues, as well as funds given to LFC by [the Michaelian Parties] and possibly others, are diverted to pay not only business, but personal expenses of LFC's sole owner and his family, as well as to retire business debts. A receiver is necessary to both unwind these improper transactions but to prevent further misuse of [Michaelian Parties'] funds.

....

A receiver is necessary to protect the [Michaelian Parties'] well-established interest in LFC's assets and business revenues. A receiver should "take control of [LFC's] businesses, complete projects, collect revenue[,] pay creditors, and then allow the parties to continue or separately wind up their affairs. As may be appropriate." A receiver would be able to collect revenues from cases as they settle and allocate those payments to payment of LFC's debts. This would not harm the business of LFC in any way; rather, it would help stabilize LFC and prevent its owner from depleting funds for his personal expenditures....

....

If [the

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