Seven Talents, LLC v. Neugebauer (In re With Purpose, Inc.)

654 B.R. 715

IN RE: WITH PURPOSE, INC. Debtor.

Seven Talents, LLC, Rhythmic Capital Fund II, LLCAnd J.I.G., LLC, Plaintiffs, v. Toby Neugebauer and Banzai Advisory Group, LLC, Defendants.

Case No. 23-30246-MVL7

Adv. Pro. No. 23-03032-MVL

United States Bankruptcy Court, N.D. Texas, Dallas Division

Filed September 14, 2023

Signed September 13, 2023

Chase Potter, Rogge Dunn Group, PC, Dallas, TX, for Plaintiffs.

Darby Doan, Jennifer H. Doan, Cole Alan Riddell, Joshua R. Thane, Haltom & Doan, Texarkana, TX, Christopher Joshua Osborne, Clay M. Taylor, Bonds Ellis Eppich Schafer Jones LLP, Fort Worth, TX, for Defendants.

ORDER GRANTING PLAINTIFFS SEVEN TALENTS, LLC, RHYTHMIC CAPITAL FUND II, LLC, AND J.I.G., LLC'S MOTION TO REMAND AND ABSTAIN WITH INSTRUCTIONS

Michelle V. Larson, United States Bankruptcy Judge

On May 12, 2023, Plaintiffs Seven Talents, LLC, Rhythmic Capital Fund II, LLC, and J.I.G., LLC (collectively, the "Plaintiffs") filed their Motion to Remand and Abstain¹ and Brief in Support² (collectively, the "Motion to Remand"), seeking remand of Cause Number DC-23-02970, styled Seven Talents, LLC, Rhythmic Capital Fund II, LLC, and J.I.G., LLC v. Toby Neugebauer and Banzai Advisory Group, LLC (the "State Court Litigation"), which was removed by Toby Neugebauer ("Neugebauer") and Banzai Advisory Group, LLC (collectively, the "Defendants") on April 12, 2023, from the 191st Judicial District of the District Court of Dallas County, Texas (the "State Court").³ Pursuant to the Motion to Remand, the Plaintiffs assert that the Court does not have subject matter jurisdiction over this action.⁴ Alternatively, if the Court does have jurisdiction, the Plaintiffs urge the Court to abstain.⁵ On June 2, 2023, the Defendants filed their Response to Plaintiffs' Motion to Remand and Abstain⁶ and Brief in Support⁷ (collectively, the "Response"), opposing remand and asserting that the Plaintiffs' claims were assets of the bankruptcy estate.⁸ On June 19, 2023, the Plaintiffs filed their Reply Brief in Support of Plaintiffs' Motion to Remand and Abstain.⁹

On July 28, 2023, the Court held a hearing on the Motion to Remand. Counsel for the Plaintiffs and Defendants appeared. Counsel to Scott M. Seidel, the Chapter 7 Trustee (the "Trustee") of a related bankruptcy proceeding, In re With Purpose, Inc., Case No. 23-30246-mvl7 (the "Bankruptcy Case"), also appeared. After hearing argument on the underlying issues, the Court took the Motion to Remand under advisement. Accordingly, after considering the issues presented, the applicable authorities, and the briefing and oral arguments of counsel, the Court concludes that the relief requested in the Motion to Remand should be GRANTED with instructions as to what claims constitute property of the estate, as set forth more fully herein. The following constitutes the Court's analysis which underlies the ruling contained herein.

I. Factual and Procedural History.

On February 8, 2023, With Purpose, Inc. d/b/a GloriFi, Inc. (the "Debtor" or "With Purpose") filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code.¹⁰ On March 3, 2023, the Plaintiffs filed the State Court Litigation in Dallas County seeking damages from Neugebauer for allegedly "fraudulently inducing Plaintiffs into investing over $11 million" into With Purpose, which was co-founded by Neugebauer and certain of the Plaintiffs' principals.¹¹ In the original petition, the Plaintiffs asserted causes of actions for (i) fraudulent inducement, (ii) negligent misrepresentation, (iii) breach of fiduciary duty, (iv) unjust enrichment, and (v) exemplary damages. By way of summary, the Plaintiffs alleged that Neugebauer engaged in self-dealing to the detriment of the Debtor and to the benefit of himself individually and/or entities he owned or controlled.¹² The Plaintiffs likewise alleged that Neugebauer made certain misrepresentations which were material to the Plaintiffs and potential investors.¹³

On April 12, 2023, the Defendants filed their Notice of Removal and removed the State Court Litigation to this Court.¹⁴ On April 26, 2023, the Plaintiffs filed their Rule 9027(e) Statement, by which the Plaintiffs denied the allegations in the Notice of Removal that the lawsuit constituted a core proceeding or would invoke any core proceedings.¹⁵ Additionally, on April 26, 2023, the Plaintiffs made a jury demand and informed the Court they do not consent to the Court conducting the jury trial in this lawsuit.¹⁶

Later, on July 19, 2023, the Plaintiffs filed their Motion for Determination that Automatic Stay Does Not Apply to Their Lawsuit Against Toby Neugebauer or, in the Alternative, for Relief from the Automatic Stay (the "Lift Stay Motion")¹⁷ in the Bankruptcy Case. Pursuant to the Lift Stay Motion, the Plaintiffs request that the Court enter an order reflecting that the automatic stay does not apply to their lawsuit against Neugebauer, or alternatively, if the automatic stay does apply, that the Court lift the automatic stay for cause to allow their lawsuit against Neugebauer to proceed in State Court.¹⁸ The Plaintiffs attached a proposed First Amended Petition, by which the Plaintiffs seek to pursue only Neugebauer for the following causes of action: (i) fraudulent inducement; (ii) negligent misrepresentation; and (iii) exemplary damages.¹⁹ On July 27, 2023, Neugebauer filed an objection to the relief requested by the Lift Stay Motion, asserting, among other things, that the First Amended Petition still does not establish that the claims in the State Court Litigation are not property of the bankruptcy estate.²⁰ On July 28, 2023, the Trustee filed an objection to the Lift Stay Motion.²¹ The Trustee does not take the position that the Plaintiffs could never plead direct claims arising from Neugebauer's alleged misrepresentations, but asserts that the First Amended Complaint does not provide sufficient allegations to allege a direct claim.²²

For purposes of the instant Motion to Remand, the Court will analyze the causes of action as reflected in the proposed First Amended Petition. The Court has contemporaneously signed an order granting the Lift Stay Motion in the Bankruptcy Case, which incorporates fully the analysis contained herein resolving the Motion to Remand.

II. Analysis.

Three principal questions are before the Court by virtue of the Motion to Remand. First, the Court must determine whether the claims are direct injuries to the Plaintiffs that they alone can assert or whether they are derivative claims for which only the bankruptcy estate has standing to pursue. Second, if the claims are not property of the bankruptcy estate, the Court must determine whether it has subject matter jurisdiction over the claims, nonetheless. Finally, the Court must determine whether to abstain from hearing the claims, either by statutory mandate or in its discretion. The following constitutes the Court's analysis as to each of these questions.

A. Property of the Estate

The Plaintiffs contend that they assert direct and personal state law claims against the Defendants, which should be remanded to the State Court.²³ The Defendants, however, assert that the claims are not direct claims for which the Plaintiffs suffered an individual injury, but rather are thinly disguised and artfully pleaded claims more akin to a breach of fiduciary duty claim, which can only be brought by the Trustee of the bankruptcy estate.²⁴ The Court has reviewed the caselaw, the claims asserted in the proposed First Amended Petition, and the arguments of the parties and finds that although not artfully pleaded, the fraudulent inducement and negligent misrepresentation causes of action could constitute direct claims, not derivative of the bankruptcy estate.²⁵

The filing of a bankruptcy petition creates an estate that is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case."²⁶ This includes "rights of actions" such as claims based on state or federal law.²⁷ If a cause of action belongs to the bankruptcy estate, the Trustee has exclusive standing to assert the claim.²⁸ If, however, a cause of action belongs solely to the estate's creditors, the Trustee has no standing to bring the cause of action.²⁹ Whether a particular state cause of action belongs to the estate depends on whether under applicable state law the Debtor could have raised the claim as of the commencement of the case.³⁰ As part of the inquiry, the Court must look at the nature of the injury for which relief is sought and consider the relationship between the Debtor and the injury.³¹

"If a cause of action alleges only indirect harm to a creditor (i.e., an injury which derives from harm to the debtor), and the debtor could have raised a claim for its direct injury under the applicable law, then the cause of action belongs to the estate. Conversely, if the cause of action does not explicitly or implicitly allege harm to the debtor, then the cause of action could not have been asserted by the debtor as of the commencement of the case, and thus is not property of the estate."³² Thus, to determine whether the Plaintiffs' causes of action for fraudulent inducement and negligent misrepresentation are property of the estate, the Court must look at whether, under applicable state law, the claims could have been asserted by the Debtor and whether, under the test put forward by the Fifth Circuit in Educators and Seven Seas, the Plaintiffs assert an injury that is not merely derivative of an injury of the Debtor.³³

With Purpose is a Delaware corporation and could have asserted any claims at the commencement of the case that, under Delaware law, sought enforcement of the corporation's rights.³⁴ In Tooley v. Donaldson, Lufkin & Jenrette, Inc.,³⁵ the Delaware Supreme Court set forth the test to be applied in determining whether a stockholder's claim is derivative or direct:

[The] issue must turn solely on the following questions: (1) who suffered the alleged harm (the

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