Raudonis v. RealtyShares, Inc.

507 F.Supp.3d 378

Walter RAUDONIS, AS TRUSTEE FOR the WALTER J. RAUDONIS 2016 REVOCABLE TRUST, Brad Honeycutt, David Holland and Jeremy Davis, individually and on behalf of all others similarly situated, Plaintiffs,

v.REALTYSHARES, INC., RS Lending, Inc., Navjot Athwal, Edward Forst, IIRR Management Services, LLC, and John Does I-VII, Defendants.

Civil Action No. 20-10107-PBS

United States District Court, D. Massachusetts.

Filed December 16, 2020

Adam M. Stewart, Edward F. Haber, Ian J. McLoughlin, Michelle H. Blauner, Patrick J. Vallely, Shapiro Haber & Urmy LLP, Boston, MA, for Plaintiffs.

Nicholas D. Marais, Pro Hac Vice, R. Adam Lauridsen, Pro Hac Vice, Erin E. Meyer, Keker, Van Nest & Peters LLP, San Francisco, CA, Thomas H. Curran, Curran Antonelli, LLP, Boston, MA, for Defendants RealtyShares Inc., RS Lending Inc., Navjot Athwal, Edward Forst.

Douglas M. Evans, Kroll, McNamara, Evans & Delehanty LLP, West Hartford, CT, for Defendant IIRR Management Services, LLC.

MEMORANDUM AND ORDER

Saris, D.J.

INTRODUCTION

Plaintiffs filed this class action against defendants RealtyShares, Inc. (RealtyShares); RS Lending, Inc. (RS Lending); IIRR Management Services, LCC (IIRR); Najvot Athwal; and Edward Forst¹ . They assert violations by all defendants of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. ; California's Blue Sky Law, Cal. Corp. Code § 25401 et seq. ; and the common law. They allege that the individuals were directors and officers of RealtyShares and RS lending and are liable as control persons under Section 20(a) of the Exchange Act and state law.

RealtyShares filed a petition for bankruptcy under Chapter 7 of the United States Bankruptcy code, triggering an automatic stay of proceedings against the company. RealtyShares's codefendants filed motions to suspend deadlines and extend the stay to all non-debtor defendants. For the reasons set forth below, the Court ALLOWS the defendants’ motions to suspend deadlines and stay proceedings.

FACTUAL BACKGROUND

RealtyShares owns an online investment platform for real-estate crowdfunding services. The members of the plaintiffs’ putative class used the RealtyShares platform to purchase debt securities for private real estate investments allegedly worth millions of dollars. The plaintiffs claim that RealtyShares and its subsidiary, RS Lending, made false representations about the investments. For instance, they assert that the defendants falsely represented that they had conducted due diligence on a loan sponsor and borrower, Franchise Growth, LLC. They further allege that the defendants falsely conveyed that certain loans would be structured so that proceeds would be disbursed over time, when in fact the loans were disbursed upfront.

On August 5, 2020, IIRR, the successor to RealtyShares, filed notice with this Court stating that RealtyShares had filed a voluntary petition for bankruptcy relief in the Northern District of California. The notice further explained that the bankruptcy petition by RealtyShares operates as a stay on proceedings pursuant to 11 U.S.C. § 362(a)(1). IIRR further asserted that, as a result of the stay imposed pursuant to 11 U.S.C. § 362, the continuation of the present case is stayed to all parties.

IIRR then filed a motion to suspend deadlines, arguing that the automatic stay should apply to all parties. Defendants RS Lending, Athwal, and Forst filed a separate motion to stay proceedings. They requested that this Court find that the case was automatically stayed in light of the bankruptcy proceedings, or, in the alternative, that this Court use its discretion to stay the case to avoid duplicative proceedings.

MOTIONS TO STAY PROCEEDINGS AND SUSPEND DEADLINES

I. Legal Standards

11 U.S.C. § 362(a)(1) provides that the filing of a petition under Sections 301, 302, or 303 of the United States Bankruptcy Code operates as a stay of

the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title.

Such stays also prohibit "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." Id. § 362(a)(3).

Courts recognize that a stay can apply to non-debtors "when a claim against the non-debtor will have an immediate adverse economic consequence for the debtor's estate." Queenie, Ltd. v. Nygard Int'l, 321 F.3d 282, 287 (2d Cir. 2003). "[E]xtensions of the stay to protect non-debtor parties are the exception, not the rule," however, "and [they] are generally not favored. Thus, the movant must show by ‘clear and convincing evidence’ that extension of the stay is warranted," and the extension of an automatic stay to non-debtors is considered "extraordinary relief." FPSDA II v. Larin (In re FPSDA I, LLC ), Ch. 11 Case No. 10-75439, Adv. No. 12-08032, 2012 WL 6681794, at *8 (Bankr. E.D.N.Y. Dec. 21, 2012), as corrected (Dec. 26, 2012) (emphasis in original).

This Court also has the authority to stay proceedings on equitable grounds to ensure judicial economy. See Landis v. N. Am. Co., 299 U.S. 248, 254-255, 57 S.Ct. 163, 81 L.Ed. 153 (1936). This power is discretionary. Yiming Wang v. Xinyi Liu, 584 B.R. 427, 434 (D. Mass. 2018). A stay based on the court's discretion may be appropriate when "the allegations against co-defendants are derivative of claims against the [co-defendant] company [in bankruptcy proceedings]." Id.

II. Analysis

A. IIRR

The parties agree that, because IIRR is a successor to RealtyShares, the plaintiffs cannot proceed against IIRR without also proceeding against RealtyShares. Accordingly, the Court grants IIRR's motion seeking to stay proceedings against IIRR.

B. RS Lending and the Individual Defendants

1. Whether the Proceedings Must Be Stayed under 11 U.S.C. § 362(a)

As the defendants concede, "[g]enerally, the automatic stay is limited to debtors and does not encompass non-bankrupt co-defendants." Mercier v. GMAC Mortg. LLC, No. 3:11-CV-1379 (CSH), 2012 WL 1856443, at *1 (D. Conn. May 21, 2012) (citations omitted); see also Bankart v. Ho, 60 F. Supp. 3d 242, 246 (D. Mass. 2014). "A non-debtor can claim the protection of a debtor's stay only in ‘unusual circumstances.’ " Gray v. Hirsch, 230 B.R. 239, 242 (S.D.N.Y. 1999) (quoting A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir. 1986) ). "Such circumstances arise when: (i) the non-debtor and debtor enjoy such an identity of interests that the suit of the non-debtor is essentially a suit against the debtor; or (ii) the third-party action will have an adverse impact on the debtor's ability to accomplish reorganization." In re Slabicki, 466 B.R. 572, 580 (B.A.P. 1st Cir. 2012) (internal quotation marks and citations omitted); see also A.H. Robins Co., 788 F. 2d at 999 (holding that extensions of a stay to a non-debtor arise when there is "such identity between the debtor and [non-debtor] that the debtor may be said to be the real party defendant and that a judgment against the [non-debtor] will in effect be a judgment ... against the debtor."). In these rare cases, the protections of the bankruptcy code are extended to non-debtors. The Fourth Circuit said that one such circumstance was where a non-debtor is "entitled to absolute indemnity by the debtor." A.H. Robins Co., 788 F.2d at 999.

The defendants argue that RealtyShares, and not RS Lending, Athwal, or Forst, is the real party in interest to this suit, and that the others share an identity of interest.

In support of this contention, the defendants cite Villafañe-Colon v. B Open Enters., Inc., 932 F. Supp. 2d 274 (D.P.R. 2013). There, the court issued an injunction extending an automatic stay where the plaintiff conceded that "the non-debtor defendants have almost a complete identity of interests with [the debtor defendant] and proceedings against them have the potential to impact [the debtor defendant's] bankruptcy." Id. at 280. Because all of the defendants were commonly owned and managed, with "interrelated, intertwined and intermingled" business operations, the court determined that "unusual circumstances ... justifying a stay against the non-debtor defendants" were present. Id. at 281.

In the present case, similarly, the defendants point out that RS Lending was merely a "wholly owned subsidiary" with the sole purpose of issuing notes and processing payments through the online platform owned and operated by RealtyShares. But cf. In re Panther Mountain Land Dev., LLC, 686 F.3d 916, 923–24 (8th Cir. 2012) (explaining that an "automatic stay does not, in general, apply to actions against parties who enjoy factual or legal relationships with a debtor, such as a debtor's wholly owned subsidiaries," but "recogniz[ing] the possibility of expanding the automatic stay when presented with unusual, rare, or limited circumstances" (internal quotation marks omitted) (emphasis in original)). They argue that the plaintiffs do not take issue with the notes issued by RS Lending or any action by RS Lending in isolation. And they contend that the plaintiffs do not identify any independent cause of action against RS Lending that does not also involve RealtyShares. Finally, they note that the plaintiffs seek to hold RS Lending, as well as the individual defendants, jointly and severally liable with RealtyShares.

The plaintiffs, in response, argue that their complaint alleges direct misrepresentations by RS Lending and the individual defendants, and not just RealtyShares. For instance, they allege that RS Lending made direct representations in the Private Placement Memoranda that it issued to the plaintiffs. But, in their complaint, the plaintiffs indicate that both RealtyShares and RS Lending provided them with the Placement Memoranda. Because the plaintiffs make no allegations...