Koshkalda v. Schoenmann (In re Koshkalda)

622 B.R. 749

IN RE: Artem KOSHKALDA, Debtor.

Artem Koshkalda, Appellant,

v.E. Lynn Schoenmann, Chapter 7 Trustee; Seiko Epson Corporation; Epson America, Inc., Appellees.

BAP No. NC-20-1050-SGB

BAP No. NC-20-1051-SGB (Related Appeals)

Bk. No. 18-30016

Adv. No. 18-03020

United States Bankruptcy Appellate Panel of the Ninth Circuit.

FILED December 7, 2020

Appellant Artem Koshkalda argued pro se.

Henry S. David of The David Firm argued for appellees Seiko Epson Corporation and Epson America, Inc.; Jack Praetzellis of Fox Rothschild LLP argued for appellee E. Lynn Schoenmann, Chapter 7 Trustee.

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

OPINION

SPRAKER, Bankruptcy Judge:

INTRODUCTION

Chapter 7¹ debtor Artem Koshkalda appeals the bankruptcy court's orders determining that he is a vexatious litigant and imposing pre-filing restrictions against him in his main bankruptcy and in an adversary proceeding challenging his discharge. Though we find no error in the bankruptcy court's findings that Koshkalda was a vexatious litigant, we must vacate the pre-filing order in the main case to address a few defects. Additionally, we must reverse the vexatious litigant order entered in the adversary proceeding. By the time the bankruptcy court entered this vexatious litigant order, it already had disposed of the adversary proceeding by entering summary judgment against Koshkalda. There was insufficient postjudgment evidence of an ongoing need for pre-filing restrictions to control his future filings in the adversary proceeding. Accordingly, we REVERSE the adversary pre-filing order, VACATE the case pre-filing order, and REMAND, so the bankruptcy court can make the necessary changes to the case pre-filing order.

FACTS

A. Pre-bankruptcy litigation.

Prior to his bankruptcy filing, appellee Seiko Epson Corporation and Epson America, Inc. (jointly, "Epson") sued Koshkalda and his affiliates in the United States District Court for the District of Nevada for trademark infringement, trademark counterfeiting, unfair competition, and false advertising ("Infringement Action"). The district court eventually entered a series of injunctions and orders prohibiting Koshkalda and the other defendants from engaging in wrongful conduct and restricting their ability to use or transfer assets. As a result of Koshkalda's noncompliance with these orders and severe and repeated discovery abuses, the district court ultimately struck his answer and entered a default judgment for $12 million in favor of Epson on January 16, 2018.

B. Koshkalda's chapter 11 case filing and conversion to chapter 7.

On January 5, 2018, after the district court entered default against Koshkalda but before entry of the default judgment, Koshkalda filed a voluntary chapter 11 petition. Koshkalda was represented by counsel at the commencement of his bankruptcy.

Within days of the bankruptcy filing, Epson moved to dismiss the case, asserting that it had been filed in bad faith in furtherance of Koshkalda's efforts to thwart the district court litigation. The bankruptcy court declined to dismiss the case but instead ordered it converted to chapter 7. Appellee E. Lynn Schoenmann was appointed to serve as chapter 7 trustee. Schoenmann then employed Fox Rothschild, LLP as counsel for the chapter 7 estate. In the declaration submitted in support of Fox Rothschild's employment, the law firm disclosed that Epson was a current client in unrelated matters. The application to employ Fox Rothschild and the declaration in support were mailed to Koshkalda and his counsel. The court approved the estate's employment of Fox Rothschild as counsel for the estate without objection.

In June 2018, Epson obtained an order annulling the automatic stay. This order retroactively validated the district court's entry of the $12 million default judgment and also permitted Koshkalda to proceed with his appeal from that judgment. The Ninth Circuit affirmed that judgment in December 2019.

During the course of the case, Schoenmann liquidated over $5 million in estate assets, often over Koshkalda's objections. After the costs of sale, the payoff of secured claims, and the payment of administrative expenses, it is unclear to what extent, if any, there will be funds left over for a distribution to Koshkalda's unsecured creditors. Much of the administrative expenses incurred can be attributed to Koshkalda's litigation conduct.

C. The Epson Adversary Proceeding.

In May 2018, Epson commenced an adversary proceeding objecting to Koshkalda's discharge under § 727 and seeking to except the judgment debt from discharge under § 523 ("Epson Adversary Proceeding"). The bankruptcy court later stayed some of the § 523 claims pending resolution of Epson's § 727(a) claims and its claims under § 523 based on fraud.²

In September 2019, the bankruptcy court granted Epson summary judgment on its claims under §§ 727(a)(2)(A), (a)(3), and (a)(7). The bankruptcy court then dismissed as moot the rest of the claims and entered final judgment in Epson's favor.

For our purposes, the most salient feature of the Epson Adversary Proceeding was not the judgment itself. Rather, it was the amount of motion practice and discovery disputes it generated. As the bankruptcy court later observed in its order determining Koshkalda to be a vexatious litigant ("Vexatious Litigant Ruling"):

The court entered orders concerning twelve discovery disputes initiated through the court's informal discovery procedures, every single one of which arose from either Mr. Koshkalda's unreasonable demands or his obstinate, baseless refusal to cooperate with Seiko Epson's legitimate discovery requests. At one point, the court found Mr. Koshkalda in contempt and imposed issue and monetary sanctions against him for abusive discovery practices.

In addition to the dozen discovery disputes attributable to Mr. Koshkalda's belligerence, he also filed eighteen motions in the AVP, all of which the court denied. All but two of these motions were entirely lacking in merit. The court ruled on many of them without oral argument, and a few without even requiring an opposition.

D. The withdrawal of Koshkalda's counsel and the resulting matters filed by Koshalda.

On September 26, 2018, the bankruptcy court granted the motion to withdraw filed by Koshkalda's counsel. Unrestrained by counsel, Koshkalda mounted continuous and repetitive challenges to Schoenmann's administration of the estate. Koshkalda filed a series of motions to compel her to abandon estate property back to him, even though some of the property was subject to ongoing sale or settlement efforts.

In addition, Koshkalda began a concerted effort to remove Schoenmann and her counsel for their failure to litigate against Epson and its claim. As part of these efforts, Koshkalda objected to the continued employment and compensation of both the trustee and her counsel. On a number of occasions, his arguments in these objections overlapped with positions he took in the Epson Adversary Proceeding as part of his motions and discovery practice. Koshkalda's actions in the main case and the Epson Adversary Proceeding largely took place between October 2018 and January 2020.

E. Schoenmann's motion for a pre-filing order and Epson's Joinder.

On December 26, 2019, Koshkalda filed his motion to vacate the court's order retaining Fox Rothschild, seeking to set aside the law firm's employment by the estate. Koshkalda filed this motion roughly a week after the court denied his prior motion to disqualify Fox Rothschild as the trustee's counsel. Together with her opposition to the motion to vacate, Schoenmann requested that the court enter "a pre-filing order ... requiring that he obtain court-permission before being permitted to file any further papers in this bankruptcy case." To support her request, Schoenmann listed eleven separate motions Koshkalda filed in the bankruptcy case. She urged that each of these motions demonstrated his vexatious conduct, as well as those he filed in the Epson Adversary Proceeding. She further pointed out that both the bankruptcy court and the district court already had imposed other forms of sanctions against Koshkalda but that these lesser sanctions had not proven successful in curbing Koshkalda's vexatious conduct. The next day, the bankruptcy court entered an order denying the motion to vacate and set the vexatious litigant motion for hearing in February 2020.

A few days after entry of the court's scheduling order, Epson joined Schoenmann's vexatious litigant motion. But the "joinder" actually sought additional relief over and above the trustee's motion. Epson sought to extend the pre-filing order to adversary proceedings filed in Koshkalda's bankruptcy case – including the Epson Adversary Proceeding. In support of its joinder, Epson maintained that Koshkalda's frivolous filings and abusive litigation tactics occurred not only in the bankruptcy case but also in the district court Infringement Action and in the Epson Adversary Proceeding. Epson proceeded to discuss numerous specific examples of Koshkalda's vexatious conduct in the Epson Adversary Proceeding. Koshkalda opposed both Schoenmann's motion and Epson's "joinder motion."

The bankruptcy court vacated the hearing and took the matter under submission. On February 18, 2020, the bankruptcy court entered its Vexatious Litigant Ruling, in which it granted Schoenmann and Epson the relief they requested. In its decision, the bankruptcy court detailed the history of Koshkalda's actions and examined roughly 44 of Koshkalda's filings in the bankruptcy case and the Epson Adversary Proceeding. In almost every instance, the bankruptcy court found that each specific paper was frivolous, filed with the intent to harass, or both.

The court then explained that the impetus for its ruling was not the sheer volume of papers Koshkalda filed, but "[r]ather, it is the lack of merit, falsity, and duplicative nature of the disputes instigated by Mr. Koshkalda that forces the court to its...