In Re: X-treme Bullets, Inc.

[2] 3 UNITED STATES DISTRICT COURT 4 DISTRICT OF NEVADA 5 * * * 6 IN RE X-TREME BULLETS, INC., Case No. 3:21-cv-00060-MMD 7 Debtor. ________________ Bankruptcy Case No. 18-50609 [8] J. MICHAEL ISSA, as Trustee of the Adversary No. 20-05018-BTB 9 HMT Liquidating Trust, 10 Appellant, ORDER v. [11] CAPITAL CARTRIDGE, LLC, [12] Appellee. [13] 14 I. SUMMARY 15 Before the Court is Appellee Capital Cartridge, LLC’s motion to dismiss (ECF No. 16 11 (“Motion”)) this appeal of two bankruptcy court orders.1 Capital Cartridge argues that 17 Appellant, HMT Liquidating Trust Trustee J. Michael Issa, lacks standing to bring this 18 appeal and, alternatively, has waived his right to appeal the orders of the bankruptcy court 19 in the underlying adversary proceeding. Because the Court finds that Issa has standing 20 to bring this appeal, the Court will deny the Motion. 21 II. BACKGROUND 22 This appeal arises from an adversary proceeding (“Adversary”) related to a 23 Chapter 11 bankruptcy case.2 On June 8, 2018, eight companies in the business of 24 manufacturing, assembling, and selling small arms ammunition (collectively, “Debtors”) [26] 1Appellant responded (ECF No. 22) and Appellee replied (ECF No. 24). [27] 2This appeal arises from the same bankruptcy proceeding as another appeal 28 pending before the Court, Issa v. Royal Metal Industries, Inc., 3:21-cv-00062-MMD. The orders giving rise to both appeals were argued together before the Bankruptcy Court, and 2 one individual—David C. Howell—was the principal of each Debtor.4 (ECF No. 11-2 at 5.) 3 While the bankruptcy proceedings were not consolidated, the Debtors coordinated 4 extensively throughout their respective cases. Aspects of that coordination gave rise to 5 the issues underlying this appeal, as explained below. 6 A. Issa as Chief Restructuring Officer and the Unsecured Creditors’ 7 Committee 8 Approximately three weeks after the Debtors’ petitions were filed, the Debtors filed 9 a motion to engage J. Michael Issa as their Chief Restructuring Officer (“CRO”) (ECF No. 10 11-2 [Bk. DE 69]),5 which the Bankruptcy Court later approved. (ECF No. 11-4 [Bk. DE 11 127].) As CRO, Issa would be “responsible for overseeing the operations of the Debtors 12 and for supervising the administration of the Debtors’ Chapter 11 cases.” (ECF No. 11-2 13 at 2.) The debtors’ motion to engage Issa further clarified that Issa would: 14 supervise the operations of the Debtors’ businesses and all aspects of the Debtors’ financial affairs, assist the Debtors to fulfill their reporting 15 obligations under the Bankruptcy Code and to the Office of the United States Trustee[]; identify, and pursue recovery from the disposition of, 16 assets of the Debtors’ estates; address and resolve disputed claims asserted against the Debtors; and provide business plan analysis and 17 assistance to the Debtors’ counsel with respect to the formulation and preparation of a plan of reorganization and accompanying disclosure 18 statement. 19 (Id. at 6 (emphasis added).) Issa’s engagement was intended to “help to ensure that the 20 cases are administered in a fair and competent manner, for the benefit of Debtors’ 21 creditors.” (Id.) In addition to Issa’s enumerated responsibilities, the motion to engage 22 Issa included an umbrella consideration that he may perform “such other services as may [23] 3The Debtors are X-Treme Bullets, Inc.; Howell Munitions & Technology, Inc.; 24 Ammo Load Worldwide, Inc.; Clearwater Bullet, Inc.; Howell Machine, Inc.; Freedom Munitions, LLC; Lewis-Clark Ammunition Components, LLC; Components Exchange, 25 LLC. 26 4Howell owned 95% of the issued and outstanding stock of Debtor Howell Munitions & Technology, Inc., which in turn was the sole shareholder of four of the 27 Debtors and the complete or majority membership interest owner of the other three Debtors. (ECF No. 11-2 at 5.) [28] 5Debtors supplemented their motion to engage Issa. (ECF No. 11-2, Bk. DE XX.) 2 these cases.” (Id. at 9.) 3 On July 23, 2018, the U.S. Trustee filed a notice in the Bankruptcy Court appointing 4 an official Committee of Unsecured Creditors (the “Committee”), pursuant to 11 U.S.C. § 5 1102(a). (ECF No. 11-5 [Bk. DE 107].) The Committee and the Debtors worked 6 collaboratively on many issues during the pendency of the bankruptcy litigation, including 7 closing a contested sale of the Debtors’ operating assets. (ECF No. 22 at 4.) 8 Two years later, Issa entered into a stipulated agreement (the “Stipulation”) with 9 the Committee which purported to grant the Committee derivative standing to commence, 10 prosecute, and resolve certain claims and causes of action on behalf of the Debtors. (ECF 11 No. 11-6 [Bk. DE 921].) The Stipulation granted the Committee the authority to pursue 12 claims relating to certain pre-petition transactions between certain Debtors and third 13 parties. (Id. at 2-3.) One such third-party was Capital Cartridge. (Id. at 3.) The Bankruptcy 14 Court approved the Stipulation the following day and entered an order granting the 15 Committee derivative standing according to the Stipulation’s terms (the “Stipulation 16 Order”). (ECF No. 11-7 [Bk. DE 923].) 17 B. The Adversary 18 On June 5, 2020, two days after the Stipulation Order was entered, the Committee 19 commenced the Adversary against Capital Cartridge. (ECF No. 11-11 [Adv. DE 1].) The 20 Adversary sought to avoid transfers and recover previously transferred property pursuant 21 to 11 U.S.C. §§ 544 , 548, and 550, and further sought to disallow claims pursuant to 11 22 U.S.C. § 502 (d). (Id. at 2.) The Committee sought avoidance and turnover of more than 23 $300,000 in fraudulent transfers from Debtor Howell Munitions & Technology to Capital 24 Cartridge. (ECF No. 22 at 5.) 25 Capital Cartridge filed a motion to dismiss the Adversary complaint on September 26 2, 2020, based in large part on the Committee’s standing to bring the claims in the 27 Adversary. (ECF No. 11-12 [Adv. DE 6].) In its motion to dismiss, Capital Cartridge 28 argued: (1) the Committee lacked Article III standing to bring the Adversary; (2) the 2 action on the claims alleged against Capital Cartridge; and (3) neither the Bankruptcy 3 Court, nor Issa, nor the Debtors were able to authorize the Committee to pursue the 4 claims in the Adversary complaint without express Congressional authorization. (ECF No. 5 11 at 6.) The Committee responded that the injury suffered by the Debtors, as alleged in 6 the Adversary, had been assigned to the Committee via the Stipulation Order. (ECF No. 7 11-13 [Adv. DE 12].) In its reply, Capital Cartridge objected that no causes of action had 8 been assigned to the Committee. (ECF No. 11-14 [Adv. DE 13].) 9 The Bankruptcy Court held a hearing on October 13, 2020, on Capital Cartridge’s 10 motion to dismiss the Adversary complaint. (ECF No. 11-23 [Adv. DE 54].) At the hearing, 11 the Committee invited counsel for the Debtors to make an appearance and argue. (Id. at 12 40.) Capital Cartridge objected that such an appearance would be improper because the 13 Debtors were not a party to the Adversary, had not filed any brief in the Adversary, and 14 had otherwise not taken any action in the Adversary. (Id. at 41.) The Bankruptcy Court 15 sustained the objection, and counsel for the Debtors was not permitted to argue. (Id.) 16 Capital Cartridge further argued at the hearing that its motion to dismiss implicated 17 the Stipulation Order, and asked that its arguments also be considered a motion for 18 reconsideration of the Stipulation Order. (Id. at 6-7.) The Bankruptcy Court agreed. At the 19 conclusion of argument, the Bankruptcy Court granted Capital Cartridge’s motion to 20 dismiss and ordered the parties to prepare an order in compliance with that holding. (Id. 21 at 41.) 22 Ten days later, the Bankruptcy Court entered an order granting Capital Cartridge’s 23 motion to dismiss the Adversary (the “Dismissal Order”). (ECF No. 11-15 [Adv. DE 14].) 24 The Dismissal Order also granted relief from the Stipulation Order. Neither the hearing 25 transcript nor the Dismissal Order explained the reasoning for the Bankruptcy Court’s 26 changed ruling. 27 On October 27, 2020, the Committee filed a motion for reconsideration of the 28 Dismissal Order. (ECF No. 11-16 [Adv. DE 17].) The Debtors, who were not a named 2 (ECF No. 11-18 [Adv. DE 25].) The Bankruptcy Court held a hearing on the motion for 3 reconsideration on January 7, 2021. (ECF No. 11-22 [Adv. DE 45].) At the hearing, Capital 4 Cartridge orally moved to strike the joinder motion on the grounds that the Debtors were 5 not a party in the Adversary. (Id. at 12-25.) The Bankruptcy Court orally denied the motion 6 for reconsideration and entered a written order on January 22, 2021 (“Reconsideration 7 Order”).6 (ECF No. 11-21 [Adv. DE 30].) Issa filed a notice of appeal of the Dismissal 8 Order and the Reconsideration Order.7 9 C. The Plan and This Appeal 10 The Debtors filed their First Amended Joint Plan (the “Plan”) on July 17, 2020. 11 (ECF No. 11-8 [Bk. DE 973].) Per the Plan’s terms, all of the Debtors’ assets, including 12 any avoidance causes of action, would be transferred to and vested in a liquidating trust 13 (the “Trust”) upon the Plan’s effective date. (Id. at 36-38.) The Trust would be 14 administered by J. Michael Issa, as Trustee, who would become responsible for 15 prosecuting or settling avoidance causes of action for each Debtor, and otherwise 16 oversee the Trust for the benefit of each Debtor’s creditors. (Id.) Moreover, upon the 17 Plan’s effective date, Issa would become the legal representative of each Debtor’s estate. 18 (Id. at 40.) Specifically, the Plan states: 19 as the representative of each Debtor’s Estate, the Liquidating Trust Trustee shall succeed to all of the rights and powers of each Debtor and its Estate 20 with respect to all Causes of Action of the Debtor, and shall be substituted for, and shall replace, the Debtor as the party-in-interest in all such litigation 21 pending as of the Effective Date. 22 (Id.) The Plan further states that all right to and interest in any cause of action would 23 automatically transfer to Issa upon the Plan’s effective date. (Id. at 42.) The Bankruptcy 24 Court entered an order confirming the Plan on October 1, 2020 (“Confirmation Order”). [25] 6The Bankruptcy Court did not make any express ruling on the joinder issues, 26 instead simply denying the motion for reconsideration. 27 7Issa’s initial notice of appeal was filed January 22, 2021 (ECF No. 11-20, Adv. DE 28), and appealed only the Dismissal Order. Issa filed an amended notice of appeal on 28 February 4, 2021 (ECF No. 11-24, Adv. DE 50), which appealed both the Dismissal and Reconsideration Orders. 2 No. 11-10 [Bk. DE 1066].) 3 Issa now appeals—through the Committee—the Dismissal Order and 4 Reconsideration Order as trustee of the Liquidating Trust and successor-in-interest to the 5 Committee.8 (ECF No. 1 at 2.) Capital Cartridge moves to dismiss the appeal, arguing 6 alternatively that Issa either lacks standing because he is not the successor-in-interest to 7 the Committee, or that Issa waived and forfeited the right to appeal the Dismissal and 8 Reconsideration Orders because he did not appear in the underlying Adversary. (ECF 9 No. 11 at 9-12.) 10 III. LEGAL STANDARD 11 The Ninth Circuit requires that both Article III and prudential standing be satisfied 12 for a particular appellant to appeal a bankruptcy order. See In re Sisk, 962 F.3d 1133 , 13 1143 (9th Cir. 2020). Article III standing demands that a party demonstrate “(1) an injury 14 in fact, (2) a causal connection between the injury and the conduct complained of, and 15 (3) a likelihood that the injury will be redressed by a favorable decision.” Id. at 1141 16 (quoting Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992)). 17 The prudential standing test in bankruptcy, otherwise known as the “person18 aggrieved” doctrine, considers whether the bankruptcy court’s order “diminish[es] the 19 [appellant’s] property, increase[s] his burdens, or detrimentally affect[s] his rights.” Id. 20 (quoting In re Fondiller, 707 F.2d 441, 442 (9th Cir. 1983)). The “person-aggrieved” 21 doctrine typically only applies when the appellant is not the party who brought the motion 22 at issue in the bankruptcy court “because the purpose of the doctrine—limiting the 23 appeals of remote non-parties—is not implicated when the appellant is the party below 24 and remains integrally connected to the issues on appeal.” Id. (citing In re Sherman, 791 25 F.3d 948 , 957 n.8 (9th Cir. 2007)). [26] 27 8Issa states that the Committee may maintain the litigation pursuant to Federal Rule of Civil Procedure 25(c), which provides: “If an interest is transferred, the action may 28 be continued by or against the original party unless the court, on motion, orders the transferee to be substituted in the action or joined with the original party.” 2 bankruptcy cases.” In re Wrightwood Guest Ranch, LLC, 896 F.3d 1109 (9th Cir. 2018) 3 (citing In re Point Ctr. Fin., Inc., 890 F.3d 1188, 1193 (9th Cir. 2018)). Instead, these 4 considerations “relate to whether a party has waived or forfeited its right to appeal.” Id. 5 Whether a party waived its right to appeal is not a jurisdictional question of standing, but 6 rather a procedural rule which may be dispensed with at the discretion of the appellate 7 court. See In re Point Ctr Fin., Inc., 890 F.3d at 1193 . 8 IV. DISCUSSION 9 It is undisputed that upon confirmation of the Plan, Issa (acting as Trustee) became 10 the proper party to all the Debtors’ claims. Issa argues that the Adversary claims belonged 11 at all times to the Debtors, including while the Committee pursued them on the Debtors’ 12 behalf. Accordingly, Issa argues, he assumes the role as the proper party to pursue this 13 appeal because the Debtors’ claims were consolidated in the Liquidating Trust and it is 14 the Trustee’s responsibility to prosecute those claims. Capital Cartridge argues 15 alternatively that the Stipulation could not have conferred derivative standing on the 16 Committee or that the Debtors’ assigned their claims to the Committee, and therefore the 17 Adversary was pursued by the Committee in its own name. Because the Issa does not 18 have any right to pursue the Committee’s claims, Capital Cartridge argues, he is not the 19 proper party to bring this appeal. Whether Issa has standing in this appeal therefore turns 20 on whether the Stipulation assigned the claims to the Committee or authorized the 21 Committee to act on behalf of the Debtors’ estates for those estates’ benefit. 22 Because the Court finds that there was no assignment of claims and that the 23 Stipulation authorized the Committee to bring the Debtors’ claims on the Debtors’ behalf 24 and for the benefit of the Debtors’ estates, the claims rightfully belonged to the Debtors. 25 Accordingly, when the Plan was confirmed, the Debtors’ causes of actions were 26 consolidated in the Liquidating Trust and Issa became proper party to assert this appeal 27 as the Trustee per the terms of the Plan. For these reasons and as explained further [28] 2 Capital Cartridge’s Motion. 3 A. Assignment and Derivative Standing 4 As a preliminary matter, the Court addresses whether an assignment occurred. If 5 the Debtors’ assigned the rights and benefits to the Committee, then the claims in the 6 Adversary would not have been consolidated at the time the Plan was confirmed. 7 Because the Court finds that no assignment occurred, the Court will then consider 8 whether the Committee was acting on behalf of the Debtors when it initiated the 9 Adversary, or whether it pursued the Adversary in its own name. 10 Capital Cartridge maintains that the Committee commenced the Adversary “in its 11 own name and on its own behalf.” (ECF Nos. 11 at 10, 24 at 2.) This assertion—that the 12 Debtors had fully assigned its alleged injuries from and causes of action against Capital 13 Cartridge to the Committee—derives from a position taken in the Committee’s response 14 brief to the motion to dismiss the Adversary: 15 the Debtor and its estate has suffered an injury, which has been assigned to the Committee. [Capital Cartridge] admits that an injury occurred to the 16 Debtor. [Capital Cartridge] admits that the Debtor assigned the action to the Committee. Therefore, the Committee has, in addition to being harm, 17 obtained direct injury through assignment by the Debtor.9 18 (ECF No. 11-13 at 7.) As explained further below, this articulation of the relationship 19 between the Committee and the Debtors is inaccurate, and has caused not a little 20 confusion, which the Court now endeavors to untangle. 21 Apart from this paragraph, neither party asserted at any other time that any claims 22 were “assigned” to the Committee. In fact, both parties argued the opposite. During the 23 Bankruptcy Court’s hearing on the motion to dismiss the Adversary, when Capital 24 Cartridge argued the Committee lacked standing to bring the suit on behalf of the Debtors, 25 Capital Cartridge argued that “[t]he debtor also has not assigned these causes of action 26 to the Committee, nor does the debtor have the ability to assign these causes of action [27] 9As correctly noted at the hearing on the motion to dismiss the Adversary, Capital 28 Cartridge did not admit that it injured the Debtor in question, nor did it admit that any injury was assigned to the Committee. 2 16.) Indeed, Capital Cartridge’s stance at the hearing was that the order engaging Issa 3 “did not include assigning away causes of action that are owned exclusively by the 4 bankruptcy case estate.” (Id. at 39.) Similarly, the Committee maintained the Debtors had 5 granted the Committee derivative standing to pursue claims belonging to the estate, not 6 that they had assigned the claims to the Committee. (ECF No. 11-23 at 18-30, 40.) After 7 the Adversary was dismissed, the Committee made its stance clear at the hearing on its 8 motion for reconsideration: “We’ve never argued that the actual causes of action were 9 assigned to the creditors’ committee. We’ve argued that derivative standing was 10 conferred upon the creditors’ committee.”10 (ECF No. 11-22 at 14.) 11 Yet in this appeal, Capital Cartridge appears to reverse its own position. At the 12 Bankruptcy Court hearing on the Committee’s motion for reconsideration, Capital 13 Cartridge argued the Adversary must be dismissed because “[t]he Committee did not step 14 into the shoes of the debtor[ and t]here was no assignment of those claims.” (ECF No. 15 11-22 at 33.) Indeed, Capital Cartridge even argued that assignment would have been 16 impossible because fraud claims may not be assigned. (Id. at 33.) Now, however, Capital 17 Cartridge argues that Issa does not succeed to the claims in the Adversary because the 18 Committee “had received a full assignment of the injury(s) [sic] and causes of action from 19 the Debtors . . . Hence, the Committee filed the adversary case in its own name and on 20 its own behalf.” (ECF No. 11 at 10.) 21 The Stipulation did not assign the claims to the Committee. “Generally, questions 22 as to the validity, enforceability, or effect of an assignment are governed by the law of the 23 place where the assignment was made.” 6 Am. Jur. 2d Assignments § 9 (Nov. 2021); see 24 also In re Silver States Helicopters, LLC, 403 B.R. 849, 864 (Bankr. D. Nev. 2009) (“The 25 assignability of rights generally depends on local law.”). Under Nevada law, “[w]here a 26 Chapter 11 bankruptcy plan of reorganization grants a creditor the right to pursue a claim [27] 10Capital Cartridge rejected this interpretation of the Stipulation, noting that “the 28 Committee has taken the position that an assignment occurred, and so they can’t now take a position that there wasn’t an assignment.” (ECF No. 11-22 at 16.) 2 of the estate, and where the representative ‘has no independent claim to any proceeds 3 from a successful prosecution, there has been no assignment’ of the claim.” Tower 4 Homes v. Heaton, 377 P.3d 118 , 122 (Nev. 2016). Consequently, although some 5 provision of state or federal law may prohibit certain claims from being assigned to other 6 parties, those parties may sue as representatives of the estate “because the 7 representative ‘does not own the claim and is entitled only to reimbursement for incurred 8 expenses and a reasonable hourly fee for its services.’” Id. However, if the party 9 purporting to represent the estate transfers the “control and proceeds of the claim” to the 10 representative, the representative cannot be said to bring a suit on behalf of the estate. [11] Id. 12 Per the terms of the Stipulation, the Debtors consented only to granting the 13 Committee derivative standing “to investigate, commence, prosecute and resolve” certain 14 causes of action. (ECF No. 11-6 at 3.) Standing was limited to asserting certain claims 15 against certain targets “on behalf of the Debtors’ estates.” (Id.) The Debtors reserved their 16 rights “with respect to any motion filed seeking to approve any settlement of the Derivative 17 Causes of Action.” (Id. at 4.) The Adversary complaint reflects this arrangement. 18 Explaining its role in its own words, the Committee claimed it “was authorized and given 19 derivative standing to assert, on behalf of the Debtors’ estates, certain causes of action, 20 including the causes of action set forth in this Complaint.” (ECF No. 11-11 at 3.) The relief 21 requested likewise shows that the Committee was operating as a representative of the 22 estate. As its remedy for recovery of unlawfully transferred funds, the Committee sought 23 judgment “directing [Capital Cartridge] to return to the Debtors’ estates the amount of the 24 Fraudulent Transfers.” (Id. at 16.) The “proceeds” of the claims would benefit the Debtors 25 and their estates and would not be retained by the Committee itself. See Tower Homes, 26 377 P.3d at 122. It is clear that throughout the Adversary, the Committee was pursuing 27 the Debtors’ claims for the benefit of the estate, effectively as a representative party. No 28 assignment therefore occurred. 2 indicate that the Committee was not, in fact pursuing the Adversary in its own name. 3 Through the complaint and repeatedly during the hearings on the motion to dismiss the 4 adversary and motion for reconsideration, the Committee reiterates that it is acting on 5 behalf of the Debtors. At no point have the Debtors argued the Committee was not acting 6 on its behalf, and the Debtors even sought to join the motion for reconsideration of the 7 Dismissal Order. The Court is simply not persuaded that the Committee was attempting 8 to assert fraudulent transfer claims against Capital Cartridge in its own name. 9 Because the Debtors did not “assign” their claims to the Committee, the Debtors 10 retained ownership of the claims even during the pendency of the Adversary. When the 11 Plan was confirmed on October 26, 2020, those claims vested in the Liquidating Trust 12 and Issa became the sole person authorized to prosecute and pursue claims belonging 13 to the Trust. (ECF No. 11-8 at 42.) Despite the confusing statements made in the 14 Committee’s response brief, the Committee clearly was pursuing the Adversary claims 15 on behalf of the Debtors’ estate. Issa is therefore the proper party to bring this appeal. 16 B. Waiver and Forfeiture 17 Capital Cartridge’s arguments that Issa has somehow waived or forfeited his right 18 to appeal are inapposite. Issa was not a named party to the Adversary because he was 19 not the Trustee during the pendency of the Adversary, as there was no Liquidating Trust 20 until the Plan became effective. Moreover, the waiver and forfeiture doctrine that Capital 21 Cartridge relies upon is inapplicable to Issa as he has direct standing to pursue claims on 22 behalf of the Debtors’ estates and need not rely on a theory of “person aggrieved” 23 prudential standing. See In re Sisk, 962 F.3d at 1141 . Even if the Court were to consider 24 Issa a new participant or a “remote” party who must satisfy the “person aggrieved” test, 25 the Court still would not find that the Debtors (or their representative) had waived their 26 appearance in the Adversary. The Debtors clearly demonstrated their interest and 27 investment in the outcome of the Adversary by attempting to appear and argue at both 28 hearings and attempting to join the motion for reconsideration. The fact that the 1 || Bankruptcy Court denied their attempts to join does not convince this Court that the 2 || Debtors waived or forfeited their right to bring this appeal, even if their representative did 3 || not have direct standing as the successor to the party below. V. CONCLUSION 5 The Court notes that the parties made several arguments and cited to several 6 || cases not discussed above. The Court has reviewed these arguments and cases and 7 || determines that they do not warrant discussion as they do not affect the outcome of the 8 || issues before the Court. 9 It is therefore ordered that Appellee’s motion to dismiss (ECF No. 11) is denied. 10 It is further ordered that the stay of the briefing schedule is lifted. Appellee’s 11 || response brief is due within 14 days. Appellant's reply brief is due 14 days after Appellee’s 12 || response is filed. 13 DATED THIS 24" Day of January 2022. [14] i ASLO MIRANDA M. DU 16 CHIEF UNITED STATES DISTRICT JUDGE