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Litton Loan Servicing, L.P. v. Dennis Schubert

Summarizing by Amir Shachmurove

In re Leucadia Group, LLC

Case Type:
Case Status:
Ninth Circuit Bankruptcy Appellate Panel Case No. SC-20-1066-GFB (9th Circuit, Nov 04,2020) Not Published
Full Faith and Credit Act requires bankruptcy courts to give the same preclusive effect to a state court judgment. Under Georgia law, a voluntary dismissal with prejudice operates as an adjudication upon merits. Under Georgia law, claim preclusion includes: (1) an identity of the cause of action; (2) an identity of the parties or their privies; and (3) a previous adjudication on the merits by a court of competent jurisdiction. Considering Georgia statutes and case law, the Panel agreed with the Trustee's argument that the Claimant (CHPL) was precluded. Therefore, the Claim was disallowed.
Procedural context:
Chapter 7 Trustee commenced an adversary against Claimant, CHPL, seeking to disallow the Claim as barred by claim preclusion. CHPL filed a cross motion for summary judgment. The bankruptcy court entered a tentative ruling stating its intention to grant the Trustee's motion for summary judgment denying the Claim. At the hearing the bankruptcy court focused on whether Debtor was a "party" in the Georgia Action and whether the state court had personal jurisdiction for purposes of claim preclusion. The bankruptcy court determined that service of the Georgia Action on Miller (who was the Debtor's registered agent at the time, under Georgia law was sufficient to confer personal jurisdiction over the Debtor to make it a party to the Georgia Action. Therefore, under Georgia law claim preclusion applied and the Trustee's motion for summary judgment seeking to disallow CHPL's Claim was granted. CHPL timely appealed.
The Debtor is a California LLC that was originally formed by Robert Miller (Miller) and Sean Frisbee (Frisbee) in 2013, each holding a 50% ownership. Miller initiated discussions with Daryl Moody (Moody) about opportunities to invest in the Debtor. Debtor entered into an agreement with one of Moody's companies Mast Nine, Inc. (Mast Nine) that gave Mast Nine the option to make a convertible loan up to $1,575,000 to be secured by Debtor's assets (Loan Agreement). Mast Nine assigned its interest in the Loan Agreement to UAS, which was also controlled by Moody. UAS loaned Debtor a total of $650,000. In 2015 Miller informed Moody and Frisbee the Debtor was not going to financially be able to continue operating. Shortly thereafter, Frisbee appointed Moody as a direct, and, collectively they removed Miller as president of the Debtor. On the same day as the removal, UAS and Frisbee commenced a lawsuit naming the Debtor and Miller in Georgia for breach of contract and injunctive relief (Georgia Action). UAS and Frisbee filed an amended lawsuit naming only Miller and removing the Debtor. The amended lawsuit was served on Miller. Even though Miller was purportedly removed as president of the Debtor, he was still listed as the service agent for the Debtor. Frisbee dismissed all of his claims in the Georgia Action without prejudice; and, was removed as a plaintiff. Miller sought to disqualify UAS's counsel; and, in response UAS filed an unopposed motion to dismiss the Georgia Action as to the Debtor with prejudice. The court entered the order dismissing the Debtor with prejudice. During the time the Georgia Action was pending, UAS commenced an involuntary Chapter 11 as to the Debtor. The bankruptcy court entered an order for relief and converted the case to Chapter 7. UAS filed a Proof of Claim in the amount of $716,010.61 based upon the Loan Agreement. UAS asserted that $696,010.61 of its Claim was secured and unsecured in the amount of $20,000. UAS later partially assigned its Claim to CHPL. The Trustee's position was that the Claim was barred by claim preclusion in that the Debtor's liability under the Loan Agreement was at issue in the Georgia Action; and, dismissal with prejudice operated as an adjudication. CHPL's position was that claim preclusion does not apply because Debtor was not served the lawsuit and Debtor never appeared in the Georgia Action; at the time of dismissal, by amending the Georgia Action and removing the Debtor, UAS manifested the intent to continue performance under the Loan Agreement; and, if the Claim is barred - then the bankruptcy court should dismiss the involuntary bankruptcy case. The bankruptcy court did not opine on CHPL's 3rd argument, stating it needed to be sought in the administrative case.
Honorable Gan, Faris, and Brand, Bankruptcy Judges

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