In re Tsai

In re: JACK TSAI, Debtor.

Case No. 2:13-bk-27391-PC

UNITED STATES BANKRUPTCY COURT CENTRAL DISTRICT OF CALIFORNIA LOS ANGELES DIVISION

Date: March 10, 2014

Date: March 19, 2014

NOT FOR PUBLICATION

Chapter 11

MEMORANDUM DECISION

Place: United States Bankruptcy Court

Courtroom # 1468

255 East Temple Street

Los Angeles, CA 90012

Debtor, Jack Tsai ("Tsai") seeks an order estimating the unliquidated and disputed claims of Mei Yun Yang ("Yang") pursuant to § 502(c) of the Bankruptcy Code. ¹ Having consideredthe papers, the evidentiary record, and arguments of counsel, the court makes the following findings of fact and conclusions of law pursuant to F.R.Civ.P. 52(a), as incorporated into FRBP 7052 and applied to contested matters by FRBP 9014(c).

I. STATEMENT OF FACTS

On July 5, 2013, Tsai filed a voluntary petition under chapter 11 of the Code. Tsai's father is Chin Ming Tsai ("Mike"), and his mother is Pao Ching Tsai ("Grace"). Grace is Yang's sister, and Mike is Yang's brother-in-law. Tsai is Yang's nephew.

Mike formed J.T. Thompson USA ("JTT"), a real estate development company, in 1999. Mike was the President, CEO, and sole shareholder of JTT. Grace was the CFO of the corporation. Tsai was not a director or shareholder of JTT, and was not an officer of the corporation until the end of 2009. Mike and Grace ran the company.

Tsai began working as an employee of JTT in 2007. His duties included translating documents and running errands. Tsai testified that he worked full-time for approximately 5 months in 2007, and continued to work for JTT in the same capacity in 2008. After becoming a licensed real estate agent in 2009, Tsai's duties began to change at JTT. Mike left the country for China in approximately 2010 and returned in 2011. During his absence, Tsai managed the affairs of JTT. JTT filed a voluntary chapter 7 petition in Case No. 2:12-bk-26473-PC, In re J.T. Thompson, Debtor, in the United States Bankruptcy Court, Central District of California, Los Angeles Division, on May 9, 2012. In its schedules, JTT disclosed Mike as its President, CEO, and sole shareholder. Grace was disclosed as CFO and Tsai as Secretary of the corporation.

When Tsai filed his personal bankruptcy the following year, Tsai was a defendant in Case No. GC 049025, styled Yang v. J.T. Thompson USA, et al., pending in the Superior Court of California, County of Los Angeles, in which Yang was seeking, in pertinent part, a judgment against JTT, Mike, Grace and Tsai for damages on 24 separate causes of action, including alleged breach of contract, breach of fiduciary duty, constructive fraud, inducing breach of contract, conversion, fraudulent transfer of real and personal property, civil conspiracy, aiding and abetting breach of contract, fraud, negligent management, negligent misrepresentation, andunfair business practice. On August 30, 2013, Yang filed the following proofs of claim in this case:

1. Proof of Claim # 7-1 filed by Yang in her individual capacity in the amount of $390,289.54 for alleged breach of contract, fraud, and conversion.²

2. Proof of Claim # 8-1 filed by Yang, as successor-in-interest to the bankruptcy estate of J.T. Thompson USA, in the amount of $795,100.00 for alleged fraud, conversion, embezzlement, and breach of fiduciary duty.³

On December 31, 2013, Debtor Jack Tsai's Motion to Estimate Mei Yun Yang's Claims Pursuant to Section 502(c) of the Bankruptcy Code ("Tsai's Motion") was filed in this case. Tsai seeks an order "estimating [Yang's] Claims no. 7 and no. 8 as General unsecured claims with a value of zero dollars for all purposes in this chapter 11 case, including allowance, voting, and distribution under [Tsai's] Plan of Reorganization."⁴ On January 8, 2014, Yang filed her Opposition to Debtor Jack Tsai's Motion to Estimate Mei Yun Yang's Claims Pursuant to Section 502(c) of the Bankruptcy Code ("Yang Opposition"). Yang argues that her claims are not subject to estimation under § 502(c) because neither claim is contingent or unliquidated. Alternatively, Yang argues that Claim # 7-1 should be estimated at $390,289.54 and Claim # 8-1 should be estimated at $795,100.00. After an initial hearing on January 22, 2014, the court held a continued hearing on March 10, 2014, at which the court received exhibits into evidence and heard the testimony of witnesses pursuant to FRBP 9014(d) with respect to disputed material factual issues. At the conclusion of the evidence, the court heard final arguments and took the matter under submission.

II. DISCUSSION

This court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157(b) and 1334(b). "The bankruptcy court has core jurisdiction to estimate claims for purposes of confirming a chapter 11 plan." In re Roman Catholic Archbishop of Portland in Or., 339 B.R. 215, 219 (Bankr. D. Or. 2006). Venue is appropriate in this court. 28 U.S.C. § 1409(a).

A. Yang's Claims Must Be Estimated Under § 502(c)(1).

Section 502(c)(1) states that "[t]here shall be estimated for purpose of allowance . . . any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case." 11 U.S.C. § 502(c)(1).⁵ Bankruptcy courts may estimate or temporarily allow a contingent or unliquidated claim for a variety of reasons in a chapter 11 case. See, e.g., Pizza of Hawaii, Inc. v. Shakey's, Inc. (In re Pizza of Hawaii, Inc.), 761 F.2d 1374, 1382 (9th Cir. 1985) ("Until the bankruptcy court has estimated the value4 of Shakey's claim, it is impossible to determine whether $291,295.99 is sufficient to effectuate the plan and enable Pizza to continue in business."); In re Trident Shipworks, Inc., 247 B.R. 513, 514 (Bankr. M.D. Fla. 2000) ("[T]he estimation proceeding may be used for the purpose of voting on a Plan of Reorganization, and also to determine the allowed amount for distribution purposes."). "When actual liquidation of claims would unduly delay administration of the bankruptcy estate, estimation is mandatory." Roman Catholic Archbishop, 339 B.R. at 219.

The court rejects Yang's assertion that her claims are neither contingent or unliquidated, and therefore, not subject to estimation under § 502(c). Yang's proofs of claim each involve unliquidated and disputed tort claims against Tsai. Of the twenty four causes of action alleged in the state court complaint, only three relate to breach of contract. The remaining causes of action are tort causes of action for, among other things, fraud, conspiracy, embezzlement, breach offiduciary duty and negligence. Yang admits that Claim # 8-1 is based on embezzlement.⁶ Yang further admits that Claim # 7-1 is "primarily based on [Tsai's alleged] fraud in diverting funds held in trust by [JTT] for the benefit of creditors, including [Yang]," and Tsai's alleged breach of a "fiduciary duty owed to [JTT's] creditors by diverting [JTT's] assets and misappropriating [JTT's] funds while [JTT] was insolvent."⁷ While breach of contract may be one of the many causes of action alleged in Yang's state court complaint, Yang's unliquidated and disputed tort claims form the basis for Claim # 7-1 and Claim # 8-1. Neither claim is liquidated because they are not subject to ready determination and precision. See Fostvedt v. Dow (In re Fostvedt), 823 F.2d 305, 306 (9th Cir. 1987) ("[W]hether a debt is liquidated turns on whether it is subject to 'ready determination and precision in computation of the amount due.'" (citation omitted)).

Secondly, estimation of Yang's Claim # 7-1 and Claim # 8-1 for purposes of voting and confirmation issues is necessary to avoid undue delay in determining confirmation of Tsai's plan of reorganization. On September 5, 2013, the court lifted the automatic stay at Yang's request to permit Yang to proceed to judgment in the state court on the claims made the basis of her complaint. At that time, Yang represented to the court that a trial date was scheduled for November 25, 2013. After receiving relief from the stay, however, Yang sought a continuance of the trial date to conduct further discovery. Even though a trial is now set for May 27, 2014, Yang admits that discovery remains pending in the state court action.⁸ At this point, the court has little reason to believe a state court trial will be commenced on May 27 and concluded shortly thereafter. But even if a trial was concluded and judgment entered, there will likely be an appeal and further proceedings before any judgment liquidating Yang's claims becomes final. Liquidation of the claims is not necessary for purposes of determining confirmation issues under § 1129, such as feasibility and the best interests test. Requiring Tsai to wait until Yang'sdisputed claims are completely liquidated in state court before determining the confirmation issues under § 1129 would result in undue delay.

Finally, the estimation of an unliquidated claim for the limited purpose of confirmation has no collateral estoppel effect with respect to the merits of the claim. In re Hungerford, 2001 WL 36211305, at *12 (Bankr. D. MT 2001). "Where a claim is estimated, and the determination of its ultimate validity is postponed until after confirmation, res judicata will not prevent further litigation regarding the claim." In re Clark, 172 B.R. 701, 705 n.5 (Bankr. S.D. Ga 1994). "The order of confirmation works together with the order on the claim to reserve consideration of the claim to a later date, so the issue cannot be said to have been finally determined." Id.

B. Method of Estimation.

The method used to estimate the value of a contingent and unliquidated claim is subject to the court's discretion. See, e.g., Ryan v. Loui (In re Corey), 892 F.2d 829, 834 (9th Cir. 1989) ("A court has broad discretion when estimating the value of an unliquidated claim"); Matter of Brints Cotton Mktg., Inc., 737 F.2d 1338, 1341 (5th Cir. 1984) ("'In estimating a claim, the bankruptcy court should use whatever method is best suited to the circumstances.'" (citation...