Summary:
These decisions have proceeded in parallel matters, first the bankruptcy case of Wireless Solutions and then the lawsuit brought in federal district court individually by Mr. and Mrs. Gross, the owners of Wireless Solutions, against Smartsky Networks.
In the bankruptcy case, Smartsky sought a finding of contempt and an award of sanctions against Mr. and Mrs. Gross for bringing suit in federal court against it as individuals, when such causes of action belonged to the bankruptcy estate of Wireless Solutions. Mr. and Mrs. Gross, however, contend that they control the potential claims following the abandonment of those by the Chapter 7 Trustee (which returned those claims to Wireless Solutions) and their assignment by Wireless Solutions to Mr. and Mrs. Gross. Smartsky countered that the abandonment excluded the intellectual property of Wireless Solutions, to which these claims were inseparably tied. The bankruptcy court agreed that the claims were related to the Intellectual Property of WSS, which was specifically excluded from the abandonment by the Trustee., and that the Grosses had failed to demonstrate a valid transfer of these claims under state law, making the purported transfer document invalid. Even had the abandonment and transfer been complete and utter, the court held that Wireless Solutions as the debtor held interests that continued to be subject to the automatic stay, preventing the Grosses from asserting them without obtaining relief from the stay. Accordingly, the court ordered the Grosses to cease pursuing any claims in the District Court Action that belong to WSS or involve its Intellectual Property, but declined to hold them in contempt or impose monetary sanctions, as there had been was a "fair ground of doubt" about the wrongfulness of their conduct and no clear evidence of harm to SmartSky directly related to this bankruptcy case.
In the parallel appeal, after SmartSky Networks, LLC successfully obtained a judgment declaring a $2.5 million arbitration award against Mr. Gross to be non-dischargeable as a willful and malicious injury. Mr. Gross then filed a motion for a new trial based on new evidence, which the bankruptcy court denied and he appealed, arguing that new evidence warranted a new trial. The district court reviewed the bankruptcy court’s order under the standards of Rule 59, which allows for a new trial in cases of newly discovered evidence, an intervening change in law, or to correct clear error or prevent manifest injustice, but found that Mr. Gross did not present new evidence in his initial motion to the bankruptcy court, rendering the motion deficient.
Commentary:
It is worth noting that the "willful and malicious injury" that was declared non-dischargeable against Mr. Gross in Chapter 7 pursuant to 11 U.S.C. . § 523(a) (6) would, since it appears to have been for willful and malicious injury to the (intellectual) property of a corporation. Had Mr. Gross instead filed Chapter 13 (back when he might have squeaked in under the now expired debt limit), under 11 U.S.C. § 1328(a)(4) that obligation would have been dischargeable, both because he caused a property injury and not personal injury, but also because only injuries to individuals and NOT corporations are nondischargeable in Chapter 13. Perhaps this is one of the rare unicorn examples of the Bankruptcy Code treating real people better than fake people. (Since I have been disabused of my success in spotting such a fantastical beast several times now by the author of that distinction, I will wait for her opinion before being too confident.)
As can occasionally happen in bankruptcy cases, witness the Hamilton v. Lanning case years ago, the regular positions of parties in bankruptcy cases can be reversed from what would normally be expected. Here a creditor was seeking enforcement of the automatic stay, not the debtor, but such decisions, while helpful for the Smartsky in this particular case, can have unintended consequences for creditors in other cases. This decision shows that while abandonment terminates the automatic stay as to property of the estate, it is not, pursuant to 11 U.S.C. 362(c)(2), actually terminated as to the property of the debtor until the earliest of the closure, dismissal or denial of discharge.
This also leads to the question of whether consumer debtors, seeking to bring cause of action against creditors or even personal injury, divorce or other legal actions, are required to file a Motion for Relief from Stay in their own bankruptcy case before proceeding.
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