VSP Labs, Inc. v. Hillair Capital Invs., L.P. (In re PFO Global, Inc.)

26 F.4th 245

In the MATTER OF: PFO GLOBAL, INCORPORATED, Debtor,

VSP Labs, Incorporated, Creditor and Movant, Appellant,

v.Hillair Capital Investments, L.P., Interested Party and Respondent; Hillair Capital Management, L.L.C., Interested Party and Respondent, Appellees,In the Matter of: PFO Global, Incorporated, Debtor,VSP Labs, Incorporated, Creditor and Movant, Appellant,

v.Hillair Capital Investments, L.P., Hillair Capital Management, L.L.C., Appellees,In the Matter of: PFO Global, Incorporated, Debtor,VSP Labs, Incorporated, Creditor and Movant, Appellant,

v.Hillair Capital Investments, L.P., Interested Party and Respondent; Hillair Capital Management, L.L.C., Appellees,In the Matter of: PFO Global, Incorporated, Debtor,VSP Labs, Incorporated, Appellant,

v.Hillair Capital Investments, L.P., Hillair Capital Management, L.L.C., Appellees.

No. 20-10885

United States Court of Appeals, Fifth Circuit.

FILED February 9, 2022

Matthew Hogan Davis, Attorney, Locke Lord, L.L.P., Dallas, TX, Annie Amaral, AT, William Ross Warne, Downey Brand, L.L.P., Sacramento, CA, for Appellant.

Jason S. Brookner, William Nelson Drabble, Gray Reed, Dallas, TX, Adam Friedman, Jonathan T. Koevary, Olshan Frome Wolosky, L.L.P., New York, NY, for Appellees.

Before Higginbotham, Willett, and Duncan, Circuit Judges.

Patrick E. Higginbotham, Circuit Judge:

These consolidated cases arise out of the bankruptcy of Pro Fix Optix ("PFO") and a dispute over the validity and scope of the bankruptcy court's orders prohibiting one non-debtor, VSP Labs, Inc., from asserting claims against two other non-debtors, Hillair Capital Investments L.P. and Hillair Capital Management L.L.C. The district court affirmed the orders of the bankruptcy court and VSP appealed to this Court. We affirm.

I.

In 2012, PFO and VSP entered an agreement for PFO to develop and transfer eyewear technology to VSP over four years. Under the agreement, VSP had the right to step in and take over development if PFO did not meet performance milestones, with PFO responsible for reimbursing VSP for costs incurred. VSP claims that PFO failed to meet several milestones, leading VSP to step in, but PFO did not reimburse VSP for the resulting expenses. VSP filed suit against PFO in California state court in 2013 (the "California Action"), asserting claims for breach of contract and seeking declaratory relief. PFO filed counterclaims. The California Action was scheduled for trial in March 2017.

In January 2017, PFO filed for bankruptcy under Chapter 11 in the Northern District of Texas. The resulting automatic stay paused the California Action. Shortly after PFO filed its petition, the bankruptcy court approved an asset purchase agreement between PFO and its largest pre-petition lender, Hillair, transferring PFO's counterclaims against VSP in the California Action to Hillair.

Seeking to escape the stay, Hillair asked the California court to sever its newly acquired counterclaims, and VSP then moved for relief from the automatic stay to offset PFO's counterclaims in the California Action.

Responding to VSP's motion, the bankruptcy court entered a Lift Stay Order on September 7, 2017, which reads:

The automatic stay is modified ... so that VSP Labs, Inc. may liquidate the amount of its affirmative claims against Pro Fit Optix, Inc. ("PFO") for the purpose of asserting its rights to setoff and recoupment in [the California Action]; provided, however, that to the extent monetary damages are awarded to VSP Labs, Inc. in excess of any monetary damages awarded to [Hillair], or PFO in the California Action, the excess amount may only be enforced through a proof of claim filed in the above-styled and -numbered case, and, without affecting VSP's rights of setoff or recoupment in defense of claims in the California Action, no money damages or other amounts of any kind may be recovered from Hillair under any circumstance on account of any claims that have been or could have been asserted in the California Action[.]

This language was presented to the bankruptcy court by the parties following negotiations between VSP, Hillair, and the trustee.

VSP alleges that subsequent discovery in the California Action revealed that Hillair had directed PFO to breach the 2012 technology development agreement. VSP thus sought leave from the California Superior Court to file a second amended complaint in the California Action, asserting new causes of action against PFO and Hillair, individually and collectively. Before the bankruptcy court, Hillair moved for an order prohibiting VSP's assertion of direct claims against it in California under the terms of the Lift Stay Order. Before the California Superior Court granted VSP leave to amend, the bankruptcy court granted Hillair's motion and entered the Enforcement Order, holding that the Lift Stay Order "entered with the consent of the parties, prohibits the assertion of the claims proposed in the VSP Second Amended Complaint against Hillair ...."

VSP moved for reconsideration of the Enforcement Order, arguing in part that the bankruptcy court lacked jurisdiction to adjudicate state law actions between non-debtor third parties. The bankruptcy court denied VSP's motion.

Meanwhile, the California Superior Court requested that the parties clarify the effect of the bankruptcy court's order. VSP filed a supplemental brief which advised the California Superior Court that the bankruptcy court's Enforcement Order had no effect on VSP's proposed claims. In response to VSP's supplemental brief in the California Action, Hillair moved for an order from the bankruptcy court enforcing the Enforcement Order and sanctioning VSP for what Hillair characterized as "[w]illfully [i]gnoring and [v]iolating" the original Enforcement Order. Accordingly, the bankruptcy court sanctioned VSP and ordered it to pay Hillair's reasonable attorneys' fees.

VSP then moved in bankruptcy court for relief from the Lift Stay Order under Federal Rules of Civil Procedure 60(b)(4) and 60(b)(6). The bankruptcy court denied VSP's Motion for Relief under Rule 60(b)(4) because it had jurisdiction to enter the Lift Stay Order and subsequent interpretive orders because "the outcome of VSP's causes of action against Hillair in the Second Amended Complaint could conceivably have an effect on the Debtor's estate being administered in bankruptcy." The bankruptcy court further denied relief under Rule 60(b)(6) because "[t]he language at issue in the Stay Relief Order was negotiated by the parties and submitted to the Court by VSP .... [and] VSP has enjoyed the benefits of having relief from the automatic stay for two years now[.]"

II.

VSP appealed to the district court, challenging the bankruptcy court's four 2019 orders interpreting the Lift Stay Order and imposing sanctions. VSP argued that the bankruptcy court lacked jurisdiction to prevent VSP's assertion of state law claims against a non-debtor, claims which VSP described as "non-core" and unrelated to PFO's bankruptcy estate.

In a comprehensive opinion, the district court affirmed each of the bankruptcy court's orders.¹ Specifically, the district court determined that the bankruptcy court had jurisdiction over VSP's state law claims because they were non-core proceedings related to the bankruptcy estate and because VSP consented to their adjudication by agreeing to the text of the Lift Stay Order.² The district court also affirmed the bankruptcy court's interpretation of the Lift Stay Order, finding that the order's text unambiguously prevented VSP from asserting "any claims" for damages against Hillair in the California Action under "any circumstances" as a condition of partially lifting the automatic stay.³ Finally, the district court found no abuse of discretion in the bankruptcy court's imposition of sanctions against VSP because the supplemental brief VSP filed in California violated the valid Enforcement Order.⁴ VSP timely appealed to this Court.

III.

We apply the same standards of review to the bankruptcy court as a district court, reviewing a bankruptcy court's legal conclusions de novo and its findings of fact for clear error.⁵ "The extent of a bankruptcy court's jurisdiction is a legal issue that we review de novo. "⁶ While we review purely legal issues de novo , we defer to the bankruptcy court's reasonable interpretation of any ambiguities in its orders.⁷ We review the bankruptcy court's decision not to abstain from hearing a proceeding and its award of attorneys' fees for abuse of discretion.⁸

IV.

We first address whether the bankruptcy court had jurisdiction to prevent VSP from asserting state law claims in state court. Under 28 U.S.C. § 1334, unless an exception applies "district courts shall have original and exclusive jurisdiction of all cases under title 11."⁹ This includes "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11."¹⁰ The bankruptcy courts in turn draw their jurisdiction from the district courts.¹¹

The relief from the automatic stay granted by the 2017 Lift Stay Order allowing claims against PFO's estate to advance in the California Action was a core proceeding over which the bankruptcy court had jurisdiction.¹² However, the additional provision of the 2017 Lift Stay Order concerning claims by VSP, a non-debtor, against Hillair, another non-debtor, in a separate proceeding was not core.¹³

For a bankruptcy court to have jurisdiction over a non-core proceeding, the proceeding must be "related to" the bankruptcy case.¹⁴ In Celotex Corp v. Edwards , the Supreme Court held that while a bankruptcy court's "related to" jurisdiction is not limitless, it goes beyond "simple proceedings involving the property of the debtor or the estate."¹⁵ It turns on "whether the outcome of a proceeding could conceivably have any effect on the estate being administered in bankruptcy."¹⁶ The bankruptcy court had "related to" jurisdiction as the outcome of VSP's claims against Hillair could...