--- type: court_doc id: "court_ctb_3985_0" court: "CTB" case_no: "22-50073" doc_number: 3985 doc_type: "UNKNOWN" filed_date: "2025-01-21" lang: "zh" url: "https://mubeitech.com/court/court_ctb_3985_0" json_url: "https://mubeitech.com/api/court/court_ctb_3985_0" --- # 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 UNITED STATES BANKRUPTCY COURT DISTRICT OF CONNECTIC > 原始法庭文件为英文；下方为英文全文，顶部为中文摘要。 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 UNITED STATES BANKRUPTCY COURT DISTRICT OF CONNECTICUT BRIDGEPORT DIVISION IN RE: . Chapter 11 . Case No. 22-50073 (JAM) HO WAN KWOK, *et al., .* . (Jointly Administered) Debtors. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEEE FOR THE . No. 24-05005 (JAM) ESTATE OF HO WAN KWOK, . . Plaintiff, . . v. . . AGORA LAB, INC., . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05006 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . Courtroom 123 . Brien McMahon Federal Building AMAZON WEB SERVICES, . 915 Lafayette Boulevard INC., . Bridgeport, Connecticut 06604 . Defendant. . Wednesday, January 15, 2025 . . . . . . . . . . . . . . 12:55 p.m. - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 1 of 125 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05010 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . DIRECT PERSUASION, LLC, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05015 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . FOX NEWS NETWORK, LLC, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05031 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . ARRI AMERICAS, INC., . . Defendant. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 2 of 125 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05044 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . TERIS-PHOENIX, LLC, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05047 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . PHILLIPS NIZER, LLP, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05048 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . MARK GUNDERSON, . . Defendant. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 3 of 125 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05055 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . 270 W. 39th Street . Co., LLC, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05056 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . FFP (BVI) LIMITED, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05057 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . AMAZON.COM, INC., HING . CHI NGOK, ALEX . HADJICHARALAMBOUS, . CHUNGUANG HAN, and MEI . GUO, . . Defendants. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 4 of 125 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05058 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . ANTHEM HEALTH PLANS, . INC., . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05059 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . FEDERAL EXPRESS . CORPORATION, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05063 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . DJD CREATIVE, LLC, . . Defendant. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 5 of 125 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05069 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . B&H FOTO & ELECTRONICS . CORP., HING CHI NGOK, . ALEX HADJICHARALAMBOUS, . and CHUNGUANG HAN, . . Defendants. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05077 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . AMERICAN EXPRESS COMPANY, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05082 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . OHTZAR SHLOMO SOLOMON . TREASURE, LLC, . . Defendant. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 6 of 125 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05092 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . ZETA GLOBAL CORP., . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05100 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . GROCYBER, LLC, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05108 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . CONSERVATIVE CAMPAIGN . TECHNOLOGY, LLC, . . Defendant. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 7 of 125 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05110 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . AARON MITCHELL, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05112 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . EMPIRE BLUE CROSS BLUE . SHIELD and ANTHEM . HEALTHCHOICE ASSURANCE, . INC., . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05114 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . MODSQUAD, INC., . . Defendant. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 8 of 125 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05115 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . CLOUDFARE, INC., . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05120 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . 3 COLUMBUS CIRCLE, LLC, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05122 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . INDIUM SOFTWARE, INC., . . Defendant. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 9 of 125 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05128 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . MILLER MOTORCARS, INC., . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05130 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . ON THE SPOT HOME . IMPROVEMENT, INC., . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05134 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . V.X. CERDA & . ASSOCIATES, P.A., . . Defendant. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 10 of 125 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05135 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . LIBERTY JET MANAGEMENT . CORP., . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05138 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . TARGET ENTERPRISES, LLC, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05141 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . FLAT RATE MOVERS, LTD., . . Defendant. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 11 of 125 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05147 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . JAMESTOWN ASSOCIATES, . LLC, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05162 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . NARDELLO & CO., LLC, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05168 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . THE FRANCIS FIRM PLLC, . . Defendant. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 12 of 125 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05186 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . BERKELEY ROWE LIMITED, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05196 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . MORVILLO ABRAMOWITZ GRAND . IASON & ANELLO, P.C., . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05199 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . LAWALL & MITCHELL, LLC, . and AARON MITCHELL, . . Defendants. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 13 of 125 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05202 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . CLAYMAN ROSENBERG . KIRSHNER & LINDER, LLP, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05204 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . G4S SECURITY SYSTEMS . (HONG KONG) LTD., . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05208 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . ZEISLER & ZEISLER, P.C., . . Defendant. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 14 of 125 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05211 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . PUTNAM'S LANDSCAPING, . LLC, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05219 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . JASON MILLER, . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05222 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . SEDGWICK REALTY CORP., . . Defendant. . . . . . . . . . . . . . . . - Cont'd - Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 15 of 125 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05225 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . CIRRUS DESIGN . CORPORATION, and QIANG . GUO, . . Defendants. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05226 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . ACASS CANADA, LTD., . . Defendant. . . . . . . . . . . . . . . . . LUC A. DESPINS, CHAPTER . Adversary Proceeding 11 TRUSTEE FOR THE ESTATE . No. 24-05229 (JAM) OF HO WAN KWOK, . . Plaintiff, . . v. . . MARCUM, LLP, . . Defendant. . . . . . . . . . . . . . . . TRANSCRIPT OF HEARING BEFORE THE HONORABLE JULIE A. MANNING UNITED STATES BANKRUPTCY JUDGE Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 16 of 125 | | Case 22-50073 | Doc 3985 | Filed 01/21/25 | Entered 01/21/25 13:49:43 | Page 17 of | |----|---------------|----------|----------------|-------------------------------------------------------|------------| | | | | 125 | | 17 | | 1 | | | | APPEARANCES OF COUNSEL | | | 2 | | | | Luc A. Despins | | | 3 | | | | Paul Hastings LLP
200 Park Avenue | | | 4 | | | | New York, NY 10166 | | | 5 | | | | Rowena A. Moffett
Brenner, Saltzman & Wallman, LLP | | | 6 | | | | 271 Whitney Avenue
New Haven, CT 06511 | | | 7 | | | | Benjamin D. Feder
Kelley Drye & Warren LLP | | | 8 | | | | Canterbury Green
201 Broad Street | | | 9 | | | | Stamford, CT 06901 | | | 10 | | | | Nicholas A. Bassett
Paul Hastings, LLP | | | 11 | | | | 2050 M Street NW | | | 12 | | | | Washington, DC 20036 | | | 13 | | | | Patrick R. Linsey
Neubert Pepe & Monteith, P.C. | | | 14 | | | | 195 Church St
13th Fl | | | 15 | | | | New Haven, CT 06510 | | | 16 | | | | Stuart M. Sarnoff
O'Melveny & Myers LLP | | | 17 | | | | 1301 Avenue of the Americas
Ste 1700 | | | 18 | | | | New York, NY 10019 | | | 19 | | | | Eric S. Goldstein
Shipman & Goodwin LLP | | | 20 | | | | One Constitution Plaza
Hartford, CT 06103 | | | 21 | | | | Brian T. Peterson | | | 22 | | | | K&L Gates LLP
925 4th Ave Suite 2900 | | | 23 | | | | Seattle, WA 98104 | | | 24 | | | | Darryl S. Laddin
Arnall Golden Gregory LLP | | | 25 | | | | 171 17th Street, NW, Suite 2100
Atlanta, GA 30363 | | | | | | | | | | | Case 22-50073
Doc 3985 | Filed 01/21/25
Entered 01/21/25 13:49:43 | Page 18 of | | |----|-----------------------------------------------------|----------------------------------------------------------------|------------|--| | | | 125 | 18 | | | 1 | | APPEARANCES (CONTINUED) | | | | 2 | | Jeffrey M. Sklarz | | | | 3 | | Green & Sklarz LLC
One Audubon Street | | | | 4 | | 3rd Floor
New Haven, CT 06511 | | | | 5 | | Stephen M. Kindseth
Zeisler & Zeisler | | | | 6 | | 10 Middle Street
15th Floor | | | | 7 | | Bridgeport, CT 06604 | | | | 8 | | | | | | 9 | | | | | | 10 | | | | | | 11 | | | | | | 12 | | | | | | 13 | | | | | | 14 | | | | | | 15 | | | | | | 16 | | | | | | 17 | | | | | | 18 | | | | | | 19 | (APPEARANCES CONTINUED) | | | | | 20 | Audio Operator: | Electronically recorded | | | | 21 | Transcription Company: | Reliable
The Nemours Building | | | | 22 | | 1007 N. Orange Street, Suite 110
Wilmington, Delaware 19801 | | | | 23 | | Telephone: (302)654-8080
Email:
8 | | | | 24 | Proceedings recorded by electronic sound recording, | | | | | 25 | | transcript produced by transcription service. | | | | | | | | | | | | | | | 19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 INDEX MOTIONS: PAGE Matter No. 3857 Order Scheduling Hearing on Motions to Dismiss and Motions for Judgment on the Pleadings. 5 Court's Ruling: -- Matter No. 17 Motion to Dismiss Adversary Proceeding Filed by Jeffrey M. Sklarz on behalf of FFP (BVI) Limited, Defendant Court's Ruling: Matter No. 19 Motion to Dismiss Adversary Proceeding Filed by Jeffrey M. Sklarz on behalf of Aaron Mitchell, Defendant Court's Ruling: Matter No. 16 Motion to Dismiss Adversary Proceeding Filed by Jeffrey M. Sklarz on behalf of V.X. Cerda & Associates P.A., Defendant Court's Ruling: Matter No. 15 Motion to Dismiss Adversary Proceeding Filed by Jeffrey M. Sklarz on behalf of The Francis Firm PLLC, Defendant Court's Ruling: Matter No. 35 Motion to Dismiss Adversary Proceeding Filed by Jeffrey M. Sklarz on behalf of Berkeley Rowe Limited, Defendant Court's Ruling: Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 19 of 125 | | Case 22-50073 | Doc 3985 | Filed 01/21/25
125 | Entered 01/21/25 13:49:43 | Page 20 of | | | |----|------------------|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|------------|------|--| | | | | | | | 20 | | | 1 | | | | INDEX | | | | | 2 | MOTIONS: | | | | | PAGE | | | 3 | Matter | | | | | | | | 4 | No. 11 | | Motion to Dismiss Adversary Proceeding Filed
by Jeffrey M. Sklarz on behalf of Weddle Law
PPLC, Defendant | | | | | | 5 | | | Court's Ruling: | | | | | | 6 | Matter
No. 21 | | | | | | | | 7 | | | | Motion to Dismiss Adversary Proceeding Filed | | | | | 8 | | | by Jeffrey M. Sklarz on behalf of Lawall &
Mitchell, LLC, Aaron Mitchell, Defendants | | | | | | 9 | | | Court's Ruling: | | | | | | 10 | Matter
No. 19 | | | | | | | | 11 | | | Amended Motion to Dismiss Adversary Proceeding
Filed by Michelle Amanda Antao on behalf of
G4S Security Systems (Hong Kong) Ltd.,
Defendant | | | | | | 12 | | | | | | | | | 13 | | | Court's Ruling: | | | | | | 14 | Matter | | | | | | | | 15 | No. 26 | | Motion to Dismiss Adversary Proceeding re
Second Amended Complaint Filed by Jeffrey M.
Sklarz on behalf of ACASS Canada LTD., | | | | | | 16 | | Defendant | | | | | | | 17 | | | Court's Ruling: | | | | | | 18 | Matter
No. 19 | | | | | | | | 19 | | | | Motion to Dismiss Adversary Proceeding Filed
by Patrick Tomasiewicz on behalf of Liberty
Jet Management Corp., Defendant | | | | | 20 | | | | | | | | | 21 | | | Court's Ruling: | | | | | | 22 | Matter
No. 17 | | Motion for Judgment on the Pleadings on Claim
I of Complaint Filed by Nicholas A. Bassett on
behalf of Luc A. Despins, Plaintiff | | | | | | 23 | | | | | | | | | 24 | | | Court's Ruling: | | | | | | 25 | | | Transcriptionist's Certificate | | | 125 | | #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 21 of 125 | 1 | (Proceedings commenced at 10:17 a.m.) | |----|---------------------------------------------------------------| | 2 | THE DEPUTY:
Okay.
Case Number 22-50073, Ho Wan | | 3 | Kwok -- excuse me -- Adversary Number 24-0506, Despins v FFP | | 4 | BVI Ltd.; Adversary 24-5110, Despins v Mitchell; Adversary | | 5 | 24-5168, Despins v The Francis Firm PLLC; Adversary 24-5186, | | 6 | Despins v Berkeley Rowe Limited; Adversary 24-5188, Despins v | | 7 | Weddle Law, PLLC; Adversary 24-5199, Despins v Lawall & | | 8 | Mitchell LLC, et al.; Adversary 24-5204, Despins v G4S | | 9 | Security Systems Hong Kong, Ltd.; Adversary 24-50 -- sorry -- | | 10 | 24-5226, Despins v ACASS Canada, Ltd.; Adversary 24-5135, | | 11 | Despins v Liberty Jet Management Corp.; Adversary 24-5208, | | 12 | Despins v Zeisler & Zeisler P.C. | | 13 | THE COURT:
Okay.
Good morning. | | 14 | If we could have appearances for the record, | | 15 | beginning with the Chapter 11 Trustee, please. | | 16 | MR. DESPINS:
Good morning, Your Honor. | | 17 | Luc Despins, Chapter 11 Trustee.
I believe that | | 18 | one of the matters may have been left off, which is 5134, | | 19 | Despins v Serta & Associates. | | 20 | THE COURT:
That may be. | | 21 | Good morning. | | 22 | MS. MOFFET:
Good morning, Your Honor. | | 23 | THE COURT:
Counsel, would you mind coming | | 24 | forward, just because we can't hear you unless the microphone | | 25 | picks up your voice for recording purposes.
Thank you. | | | | 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MS. MOFFETT: Yes, Your Honor. I just wanted to note another adversary proceeding that I believe was left off: 5 -- 24-5196, Despins v Morvillo Abramowitz Grand Iason & Anello P.C. THE COURT: Okay. Thank you. MS. MOFFETT: Thank you, Your Honor. THE DEPUTY: So, I'm sorry, I did not get the attorney's name, please? MS. MOFFETT: Oh, I'm sorry. My apologies. THE COURT: That's okay. MS. MOFFETT: Rowena Moffett, on behalf of the adversary defendant I just mentioned. THE COURT: Thank you very much. I think we have, maybe, other counsel that might want to come forward? MR. LINSEY: I think, Your Honor -- THE COURT: Just hold on a second, Attorney Linsey. MR. LINSEY: Sure. THE COURT: I'll just hear from counsel first and then we'll go from there. MR. FEDER: Yes, good morning, Your Honor. Benjamin Feder of Kelley, Drye & Warren, appearing on behalf of Indium Software, in the matter of Despins v Indium Software, Number 24-05122. Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 22 of 125 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: I don't think that matter was on this calendar. UNIDENTIFIED SPEAKER: (Indiscernible.) THE COURT: Yeah. You're party to the joint brief, Counsel, your client, correct? MR. FEDER: Correct. THE COURT: Yeah, correct. And I think Attorney Moffett's client is, as well. So, we're not calling all the adversary proceedings that are parties to the joint brief. What we did at the status conference last week, and I'm not sure if either of you were participating in that conference, we took a list of all the parties that have agreed to be part of the joint brief, and that's part of the record. But as far as today is concerned, for -- we put the joint brief as one matter and then the other adversaries that are called are not joint brief Defendants, okay? MR. FEDER: Understood. Thank you. THE COURT: So it's not your -- it's a little - it's a little confusing, obviously. There's hundreds of adversary proceedings. And so the other matters that are on the calendar that are motions to dismiss or motions to dismiss for judgment on the pleadings, are parties who are not joint Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 23 of 125 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Defendants to the joint brief -- MR. FEDER: Okay. Thank you. THE COURT: -- and weren't subject to mediation, essentially. MR. FEDER: Thank you for clarifying, Your Honor. THE COURT: Yes, believe me, I understand, okay. So, thank you, though, both of you, and just so you know, you are part of the argument today and your clients are part of the list of the joint Defendants and you all signed on to the joint brief. MR. FEDER: Okay. Thank you, thank you, Your Honor. THE COURT: Okay. Thank you. All right. Go ahead, Attorney Bassett. MR. BASSETT: Yes, good afternoon -- sorry -- good morning, Your Honor. Nick Bassett from Paul Hastings, counsel for the Chapter 11 Trustee. THE COURT: Good morning. MR. LINSEY: Good morning, Your Honor. Patrick Linsey, Neubert Pepe & Monteith, counsel for the Chapter 11 Trustee. THE COURT: Good morning. MR. SARNOFF: Good morning, Your Honor. Stuart Sarnoff of O'Melveny Myers, on behalf of Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 24 of 125 Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 25 of 1 2 3 4 5 6 7 8 9 10 12 25 creditor PAX. THE COURT: Good morning. MR. GOLDSTEIN: Good morning, Your Honor. Eric Goldstein from Shipman & Goodwin, on behalf of: Anthem Health Assurance, Inc.; Anthem Health Plans, Inc.; Cedric Realty Corp.; Direct Persuasion LLC; On the Spot Home Improvement, Inc.; and Federal Express Corporation. THE COURT: Good morning. MR. PETERSON: Good morning, Your Honor. Brian Peterson, K&L Gates, on behalf of 125 11 Amazon.com, Inc. and the Amazon Web Services, Inc. THE COURT: Good morning. 13 14 15 16 MR. LADDIN: Good morning, Your Honor. Darryl Laddin of Arnall Golden Gregory, on behalf of American Express Company, one of the joint Defendants. THE COURT: Good morning. 17 18 19 20 21 22 23 24 25 You don't have to note your appearance if you're one of the joint Defendants, but that's fine. Thank you. The reason I say that, Counsel, the only reason I say that is we talked about who was going to make the argument on behalf of the joint Defendants and yesterday, as I requested, and it was done and I appreciate that. There was a document filed that Attorney Goldstein and Attorney Peterson are going to be making the arguments on behalf of the joint Defendants. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 26 of 125 | 1 | One of the reasons I did what I did last week with | |----|---------------------------------------------------------------| | 2 | the attendance was to make sure that all of the Defendants, | | 3 | including your client, was part of the record.
And by | | 4 | signing on to the joint brief, we will make certain that if a | | 5 | transcript is required and requested, that all of the parties | | 6 | that are parties to the joint brief, and their counsel, will | | 7 | be listed as part of that proceeding. | | 8 | MR. LADDIN:
Thank you, Your Honor. | | 9 | THE COURT:
Okay.
Thank you. | | 10 | MR. SKLARZ:
Good morning, Your Honor. | | 11 | Jeffrey Sklarz, Green & Sklarz, for various non | | 12 | joint Defendants, as listed in the report filed by the | | 13 | trustee.
I won't go through all of my Defendants at this | | 14 | time. | | 15 | THE COURT:
Thank you. | | 16 | MR. SKLARZ:
Thank you. | | 17 | MR. KINDSETH:
Good morning, Your Honor. | | 18 | THE COURT:
Good morning. | | 19 | MR. KINDSETH:
Stephen Kindseth, Zeisler & | | 20 | Zeisler, for Zeisler & Zeisler. | | 21 | THE COURT:
Good morning. | | 22 | So, when we had our status conference last week, | | 23 | we talked about the arguments that are going to be made | | 24 | today, time limits on arguments, and Attorney Sklarz and | | 25 | Attorney Kindseth were the two non-joint Defendants' counsel | ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 27 of 125 27 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 who I allowed, because everybody made their statements last week, to also make arguments at this hearing. So the way that we will proceed is the way we discussed last week, that the joint Defendants will make their arguments, with regard to the issues that the joint Defendants put forth for the Court back in September of last year. I actually looked back and saw if I had -- and I did have, Attorney Goldstein, the document that you had submitted to the Court at that time, that was the list of the issues that the joint Defendants had agreed to argue. And I wanted to just make sure that the language that was in the order that was issued back after that status conference, that set forth the four issues was the same and it is actually the same. I don't think there's any deviation from the language that your -- you submitted on behalf of all of the joint Defendants. So I did go back and check that. Obviously, as you all know, there are many, many issues in all of these adversaries, but I did go back and make sure that we, in the order, clarified -- not clarified -- excuse me, that's the incorrect word -- included the four issues that -- and it's based -- it seems, to me, to be verbatim of the -- that the joint Defendants asked the Court to consider as legal issues in connection with the motions to dismiss or motions for judgment on the pleadings. So, again, I appreciate that yesterday, a document #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 28 of 125 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 was filed that said that Attorney Peterson would address Issues 1 and 3 and Attorney Goldstein would address Issues 2 and 4. And that's how we would proceed. I believe, but I will listen to any opinions to the contrary, that given the four issues that the joint Defendants put before the Court, that we should take them in order, unless, somehow, Attorney Goldstein or Attorney Peterson, you want to argue -- and I think Attorney Peterson, you're 1 and 3, and Attorney Goldstein is 2 and 4. MR. GOLDSTEIN: Thank you, Your Honor. Eric Goldstein. The way that Attorney Peterson and I tried to organize it so to have a, not a broken-up, disjointed presentation, is if we could, have him do Issue 1 and 3 and then pass to me to do 2 and 4. We think we can do that in a way that flows and makes sense and builds on each other and it doesn't break up with us having to switch to the podium, if that's okay? THE COURT: That's fine. But I will watch your time, right, on each issue, because we did talk about -- because I gave you 15 minutes per issue and I gave the trustee half an hour to respond. MR. GOLDSTEIN: Understood. THE COURT: So, if you're going to do that, Attorney Peterson, that's fine, but I will watch the clock, #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 29 of 125 29 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 okay, and I need you to be -- the issues that the joint Defendants put together are four separate issues and you may argue that 1 and 3 are connected. Well, I think they're all connected, quite frankly, so I'm not going to necessarily agree that you can be arguing about 1 and 3 at the same time or if you do that, I might not, you know, take all of that into consideration. These are four legal issues that the joint Defendants prepared and requested and that request was met by the Court, to address as legal issues, okay. So, if either of you have any questions about that, just -- this would be the time to ask them. MR. GOLDSTEIN: The only clarifying question, Your Honor, is to the extent that I take less than 15 minutes on one of the issues, does that extra time get allotted to my issues? THE COURT: I'm not sure. We'll have to see how that goes; how about that? MR. GOLDSTEIN: Okay. All right. Fair enough, Your Honor. THE COURT: I don't have any lights or anything, so I don't know that that -- but I understand your question and we'll see how that goes. MR. GOLDSTEIN: Okay. THE COURT: Okay. All right. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 30 of 125 30 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Then, Trustee Despins, is there any questions that you have before we begin? MR. DESPINS: No, Your Honor. THE COURT: Okay. Then, Attorney Peterson, please proceed with Issues 1 and 3. Oh, and may I say something, too, before anybody starts. I think you probably noticed, we don't need to talk about standards on motions to dismiss and motions for judgments on the pleadings. This is just talking about the legal issues, okay. I did say that originally in the order, but I want the record to be clear that no one is disputing the legal standards with regards to motions to dismiss and motions for judgment on the pleadings, okay. MR. GOLDSTEIN: I understand. THE COURT: All right. So -- MR. GOLDSTEIN: And I appreciate any guidance, Your Honor. THE COURT: All right. So it's 10:30, please proceed. MR. PETERSON: Again, Your Honor, Brian Peterson, K&L Gates, on behalf of Amazon.com, Inc. and Amazon Web Services, Inc. So, as we just discussed, I'll be addressing Issues 1 and 3. The first issue is whether the trustee can avoid an initial transfer by a nondebtor entity. Your Honor, ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 31 of 125 1 2 3 4 5 6 the joint Defendants filed their omnibus motion to dismiss because we have a fundamental disagreement with the trustee regarding the scope of his avoidance action powers. We believe that the trustee's claims under 548, 549, and 544 fail as a matter of law because they seek the avoidance of transfers made by nondebtor entities. 7 8 9 10 11 12 13 14 We believe that the trustee's approach in these alter ego -- in these avoidance action adversaries, Your Honor, is overreaching and is not consistent with the Bankruptcy Code. Now, I do want to address one point that the trustee makes in his brief, Your Honor, and that is, if you were to rule in the Joint Defendants' favor, you would somehow deprive the trustee of his recourse to remedy a fraud. 15 16 17 18 19 20 21 22 23 We don't believe that's accurate, Your Honor. The trustee has recourse against the alter-ego entities themselves and their assets. The trustee also has recourse against the principals of the alter-egos, to the extent they aided and abetted any fraud, but more fundamentally, Your Honor, the trustee's duty in this case is not to remedy a fraud; the trustee's duty is to administer the bankruptcy estate of Kwok in a manner that complies with the directives of the Bankruptcy Code. 24 25 So, as we often do, let's start with the plain language of the Bankruptcy Code. Section 548 provides that a ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 32 of 125 1 2 3 4 trustee may avoid a transfer of an interest of the debtor and property; similarly, Section 549 allows the trustee to avoid a transfer of property of the debtor -- property of the debtor. 5 6 7 8 Now, 5 -- excuse me -- a transfer of an interest or property of the estate. Property of the estate is defined as legal or equity interests of the debtor and property, as of the commencement of the case. 9 10 11 In turn, the debtor, under the Code, is defined as an entity or a person that is subject to a case under you Title 11. 12 13 14 15 16 544 reads the same and references, specifically, the debtor. It allows -- gives the trustee the rights of a hypothetical lien creditor and grants the trustee the ability to avoid a transfer of property of the debtor, that is avoidable by a hypothetical creditor of the debtor. 17 18 19 20 The trustee's attempt to avoid transfers made by nondebtor entities is important because it deprives the Joint Defendants of their statutory defenses, including the subsequent transfer of good faith to funds. 21 22 23 24 25 Now, Your Honor, what is the basis for the trustee to make this distinction and overlook the plain language of the Bankruptcy Code. It's the trustee's position that the alter-ego entities and the debtor are one in the same; that the alter-ego determinations that this Court made convert ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 33 of 125 33 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 those entities into debtors under the Code. And that's what we have a disagreement about, Your Honor. We disagree that the effect of those alter-ego determinations was to convert them into debtors under the Code. And to that point, Your Honor, we don't believe that we're asking you, in any way, to overrule any prior decision you made, with respect to the nondebtor transferors and whether or not they may be alter-egos. The narrower issue before this Court that we're here to address, and the issues that we have raised, is the effect of those alter-ego determinations. And the effect is not to grant the trustee avoidance action powers, with respect to transfers made by those nondebtor entities. That brings us to Question 2, which is: What is the effect of the alter-ego or reverse veil-piercing determination under applicable law? THE COURT: You mean -- it's actually Issue 3 -- MR. PETERSON: Oh, yeah. It's -- THE COURT: -- just to be clear, for the -- MR. PETERSON: Yes, it is Issue 3. THE COURT: -- your second argument, but just to be clear for the record, okay. Thank you. MR. PETERSON: Yes, thank you. THE COURT: Go ahead. MR. PETERSON: Thank you, Your Honor. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 34 of 125 | 1 | As a matter of law, the alter-ego determinations | |----|---------------------------------------------------------------| | 2 | does not give the trustee standing to avoid transfers of | | 3 | nondebtors.
As we have set forth in our briefing, Your | | 4 | Honor, at most, what that alter-ego determination does is it | | 5 | results in vicarious liability against those alter-egos. | | 6 | And we cited multiple decisions for this | | 7 | conclusion: In re Stillwater, 559 B.R. 563; that's a | | 8 | bankruptcy decision out of the Southern District of New York. | | 9 | The Court rejected the alter-ego theory to selectively pool | | 10 | assets of the Delaware entity with the debtor entity for | | 11 | purposes of creating causes of action under 544. | | 12 | And the Court specifically stated it knows of no | | 13 | support for the idea that alter-ego theories can be used in | | 14 | this selective and self-serving way. | | 15 | That issue came before the Court on a Ms. Convoy's | | 16 | and the Court granted the motion to dismiss.
Similarly, | | 17 | in -- In re Wardle, the Ninth Circuit BAP decision, the Court | | 18 | determined that -- | | 19 | THE COURT:
Can you spell the name of that case, | | 20 | please, the one that you just noted. | | 21 | MR. PETERSON:
The one I -- | | 22 | THE COURT:
Wardle. | | 23 | MR. PETERSON:
Wardle? | | 24 | In re Wardle, it's W-a-r-d-l-e. | | 25 | THE COURT:
Thank you. | | | | ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 35 of 125 35 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MR. PETERSON: The BAP determined that the trustee did not have standing to pursue Chapter 5 avoidance action claims against a nondebtor -- or brought through a nondebtor entity, stating: "An alter-ego determination will not somehow transmogrify the alleged alter-ego's funds into property of the debtor's estate." The Court noted: "That unless there's substantive consolidation or a bankruptcy petition filed by that nondebtor, there's no corporate bankruptcy estate and, therefore, the trustee cannot pursue 547 and 548 actions in the nondebtor's name." We cited additional decisions, Your Honor, for the same proposition: In re Silver and In re Dumouchelle. And those are both bankruptcy decisions out of Michigan. THE COURT: I apologize. Would you spell for the record, the second of the two Michigan cases. Like, silver, we've got, but ... MR. PETERSON: Yep, Dumouchelle. It's D-u-m-o-uc-h-e-l-l-e. THE COURT: Thank you. MR. PETERSON: And in that decision, the Court rejected fraudulent transfer claims based on transfers from the Debtor's alter-ego company formed under Michigan law, which applied the vicarious liability approach to alter-ego. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 36 of 125 36 1 2 3 4 5 6 Your Honor, as stated in the court, in the Pavers, which is a District Court case out of the Eastern District of New York, just because two entities are alter-egos does not make them both debtors under the Bankruptcy Code. It simply means they are liable for each other's debts. That's at page 51 of the decision. 7 8 9 10 11 12 Your Honor, the Joint Defendants do acknowledge that some courts have recognized the "identity theory," and in, In re Howland, the Sixth Circuit described how this distinction between vicarious liability and identity theory can be relevant to the determination of whether alter-ego confers standing on a trustee. 13 14 15 16 17 18 19 20 There, the Court granted the Defendants motion for judgment on the pleadings and the Sixth Circuit affirmed. And the basis for the Court's ruling was that, and its conclusion that an individual debtor, a trustee of an individual debtor, could not avoid under 548, the transfer made by a nondebtor alter-ego under a veil-piercing theory is because the Court applied Kentucky law and it determined that Kentucky law is a vicarious liability state. 21 22 23 Importantly, Your Honor, Delaware law, we believe, applies a vicarious liability approach to alter-ego; in other words, Delaware is not an identity theory state. 24 25 Before the hearing, Your Honor, in preparation for this argument, we did discover that the Delaware Chancery 37 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Court issued opinion -- an opinion in the middle of December, just a month ago. It's Gracey v Albawardi. THE COURT: All right. Hold on one second -- MR. PETERSON: Uh-huh. THE COURT: -- because that isn't in any of the papers, then, correct? MR. PETERSON: Correct. THE COURT: All right. So would you please spell the names for the record. MR. PETERSON: Yeah, and we also have -- we have copies of the case and we've already -- THE COURT: Thank you. MR. PETERSON: -- provided them to opposing counsel. If I may approach, please? THE COURT: Yes, please. But, again, when you have a chance, Attorney Peterson, if you could just spell the name of the case for the record, please, since this is not in any of the briefs. MR. PETERSON: Sure. It's Gracey, G-r-a-c-e-y v Albawardi, A-l-b-a-w-a-r-d-i. And the Westlaw citation is 2024 WL 5116368. Why do we think this decision is important and why are we addressing it with you right now at this hearing? Well, it's the Delaware Court's most recent Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 37 of 125 Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 38 of 125 38 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 description of the effect of a reverse veil-piercing. In that decision, the Court considered the Plaintiff's request for declaratory judgment, that certain entities were alteregos of Albawardi. In describing the request, the Court said that Gracey sought reverse veil-piercing, which the Court described as, quote, "The imposition of liability on a business uh organization for the liabilities of its owners." And that statement is at the end of page 4. Thus -- THE COURT: What page, I'm sorry? MR. PETERSON: 4. THE COURT: 4? MR. PETERSON: That's the Westlaw page. THE COURT: Uh-huh. MR. PETERSON: So, Your Honor, we're citing that decision as the most recent description of the effect of veil-piercing under Delaware law, which we believe supports our position that an alter-ego determination results in vicarious liability. We also -- THE COURT: So, may I just -- I just wanted to follow what you said about the Gracey -- MR. PETERSON: Sure. THE COURT: -- because, obviously, I haven't seen 39 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 it until now, which is absolutely fine. MR. PETERSON: Uh-huh. THE COURT: I think what you're reading is, am I correct, you're reading a paragraph that starts with the number A -- with the number -- the letter A, alter-ego theory liability, and it says: "And in Count 1 of the amended petition --" MR. PETERSON: Uh-huh. THE COURT: -- "Gracey seeks declaratory judgment that Dial and Dial subsidiaries --" I don't even know if I'm saying that properly, even -- "are alter-ego of Albawardi, and, therefore, liable to her for all monies due and owing under the judgment." MR. PETERSON: Uh-huh. THE COURT: And, then, I think this is the sentence that you were just referring to, but I want to make sure that it's the sentence, that is: "Gracey seeks reverse veil-piercing -- quote, the imposition of a liability on a business organization for the liabilities of its owners." MR. PETERSON: Correct. THE COURT: Okay. So the Court is just stating what the cause of action is in that paragraph, correct? MR. PETERSON: We believe, Your Honor, the Court is describing what the reverse veil-piercing is. Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 39 of 125 40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: Well, what is Footnote 58, apparently? Let's see, I don't know. MR. PETERSON: That's a citation to Manichaean. THE COURT: Well, it cites to Manichaean, 58, right? MR. PETERSON: Uh-huh. THE COURT: And then it says: "As noted from the organizational chart above," which of course I haven't looked at yet, but it's there, apparently, "the Dial entities are ultimately held through trusts. See super notes 24, 25. Even if Gracey's claim were stronger, I would hesitate to veil-pierce since any financial benefit Albawardi derived from the Dial entities would seem to be as a trust beneficiary, not as an owner of the Dial entities. I need not grapple with these complexities in any event, because Gracey's claim is non-viable. So, I don't know if it's really -- implement not sure yet, because I haven't read the whole case. MR. PETERSON: Okay. THE COURT: But I'm not sure if the quote that you're taking that from case, from the Gracey case actually says what the status of reverse veil-piercing is. It cites to Manichaean Capital -- MR. PETERSON: Yeah. Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 40 of 125 #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 41 of 125 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 THE COURT: -- which talks about reverse veilpiercing and which finds that reverse veil-piercing is a viable claim. That's what Manichaean Capital says. MR. PETERSON: I understand your point, Your Honor, which is, you know, ultimately, in Gracey, it looks like the Court did not allow the alter-ego claim to go forward, right. So, did the Court really need to make a legal determination as to what the effect of veil-piercing would be in that particular case, right? Now, Your Honor, we believe that's the same as Manichaean. In Manichaean, the Plaintiffs in that case actually sought to enforce a judgment or a charging order -- THE COURT: A charging order, right. MR. PETERSON: -- against the alter-ego. And the Plaintiff wasn't seeking a determination that the entities were one in the same for all purposes. So any supportive statement in Manichaean was actually *dicta* in that case, too. So, if -- 20 21 22 23 24 25 THE COURT: But in Manichaean, the Court, the Delaware Chancery Court was dealing specifically with Delaware statutes, with regard to how the shareholders could bring a cause of action for value of their shares under a statute created by Delaware Legislature in order to avoid the, essentially, stopping of a merger; isn't that true? And ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 42 of 125 42 1 2 that's what happened in Manichaean Capital, that the shareholder got its charging order -- MR. PETERSON: Uh-huh. 3 6 4 5 THE COURT: -- the company wouldn't -- the company against whom they got the charging order wouldn't pay. MR. PETERSON: Uh-huh. 7 8 9 10 11 12 THE COURT: That company was merged into another company and they brought another cause of action, asserting both, the alter-ego or reverse veil-piercing, both, to the merged company and to the subsidiaries that were still in existence from the company that merged from the new company. MR. PETERSON: Uh-huh. 13 14 15 16 17 18 19 THE COURT: So, I -- but under Delaware, under that case, they're not talking about things being held in trust. They're talking about corporate entities and merger issues and specific Delaware statutes that deal with the manner, the only manner in which, according to Manichaean Capital, anyway, that shareholder could assert that they were not being paid the value of their shares upon the merger. 20 21 22 23 24 25 MR. PETERSON: I think in both instances, and the reason, you know, our position, the Joint Defendants' position with respect to both decisions, is in expressing alter-ego and the relief sought, the Court's articulation of that was in a description of that relief as a form of vicarious liability, both in Manichaean, and in Gracey. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 43 of 125 43 1 2 3 4 5 6 7 8 9 10 And understanding there could be limitations with Gracey in terms of if the claim was not viable; ultimately, that's what the Court determined. But if we're going to look to Delaware law to see how you courts have described alterego, they have not described them as -- alter-ego theory as an identity theory; instead, they described it as vicarious liability and the way they've articulated it. THE COURT: But I don't -- you -- I haven't ready copies of Gracey, but I didn't think they used the words "vicarious liability" in Manichaean Capital. And I could be 11 wrong, Counsel, so please correct me. 12 13 14 MR. PETERSON: Well, I was planning on addressing Manichaean later, but I'll address it now. So, at its most basic level -- this is the quote from the decision: 15 16 17 "Reverse veil-piercing involves the imposition of liability on a business organization for the liabilities of its owners." 18 19 That, Your Honor, that quote right there, that's vicarious liability. 20 21 Now, what the trustee relies on is the second, later sentence: 22 23 24 25 "In the parent subsidiary context, where the subsidiaries and their alter-ego, the parent, the Court will treat the assets of the subsidiary as those of the parent." We think that that sentence is taken out of ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 44 of 125 1 2 3 4 context. It's talking about the parent subsidiary scenario and we believe that it's -- the Court is merely saying the parent can look to the assets of the sub to satisfy the liability. 5 6 7 8 9 In Manichaean, plaintiff's claim for reverse veilpiercing, according to Court, sought to quote, "Hold source HOV Holdings' subsidiary liable for its debts." That's at page 700 of the decision. So they didn't seek consolidation of the two entities for all purposes. 10 11 12 13 14 And so given the scenario, given the posture of the case, any statement that the trustee is relying on, Your Honor, is *dicta*. That issue wasn't before the Court. The Court was determining whether it could hold an entity vicariously liable. 15 16 17 18 19 20 21 22 23 In addition, it's contradicted. That *dicta* was contradicted by the Court's prior citation, Footnote 84. And there, they cite Sky Cable, a quote there that says, Reverse veil-piercing attached is just liability to the entity for a judgment against the individuals who hold an ownership interest in the entity. For all of those reasons -- THE COURT: Footnote 84? MR. PETERSON: Footnote 84. 24 25 THE COURT: Go ahead. I just wanted to make sure I got you properly. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 45 of 125 | 1 | MR. PETERSON:
One more point on man chemo, right, | |----|-----------------------------------------------------------------| | 2 | is the Court, for the favorable quote that we believe is just | | 3 | a straight sentence that the trustee takes out of context, | | 4 | the Court cites to Spring Real Estate.
Spring Real Estate, | | 5 | we believe, doesn't carry weight.
Spring Real Estate relied | | 6 | on American International Refinery, and in that case, the | | 7 | Court applied Nevada law, not Delaware law, and Nevada law, | | 8 | more clearly, adopts the identity theory of alter-ego. | | 9 | So, I'll go back to our previous discussion.
We | | 10 | talked about Gracey and the effect of the alter-ego | | 11 | determination.
Your Honor, the Joint Defendants believe that | | 12 | RS Air, the Ninth Circuit BAP decision from 2023, speaks | | 13 | directly to the issue. | | 14 | THE COURT:
Would you spell that, again, I | | 15 | apologize.
But it's helpful for the record. | | 16 | MR. PETERSON:
Sure, Your Honor. | | 17 | RS Air, LLC V NetJets Aviation, Inc. at 651 B.R. | | 18 | 538. | | 19 | THE COURT:
Thank you. | | 20 | MR. PETERSON:
Why is RS Air important? | | 21 | RS Air is important because it's a BAP-level | | 22 | decision and it's the most recent bankruptcy decision | | 23 | discussing the effect of alter-ego under Delaware law.
Ninth | | 24 | Circuit BAP determined the contours of the alter-ego doctrine | | 25 | under Delaware law and the context of determining whether | ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 46 of 125 | | 46 | |----|---------------------------------------------------------------| | 1 | certain creditors violated the discharge injunction by filing | | 2 | a State Court action against the debtor's alleged alter-egos. | | 3 | The Court said: | | 4 | "Although the alter-ego doctrine requires a | | 5 | showing that the two entities operated as a single economic | | 6 | entity, the result is not to deem the entities the same, but | | 7 | to hold one liable for the other's debts." | | 8 | So, what is the Court saying in RS Air?
The Court | | 9 | is saying in RS Air, that even if you have a nondebtor | | 10 | determination -- a determination that a nondebtor is an | | 11 | alter-ego, that alter-ego doesn't get the benefit of the | | 12 | discharge injunction.
It doesn't magically become a debtor | | 13 | entity. | | 14 | For the same reason, Your Honor, we don't believe | | 15 | that the trustee should be able to argue that these nondebtor | | 16 | entities in this case magically become debtors and, | | 17 | therefore, he has standing to assert alter-ego actions | | 18 | against the Joint Defendants. | | 19 | Additional decisions, Your Honor, that we cited to | | 20 | support our conclusion, statements in Otto Candies and | | 21 | NetJets Aviation v LHC Communications; that's a Second | | 22 | Circuit decision stating that under Delaware law, the | | 23 | distinction between the entity and its owner may be | | 24 | disregarded and require an owner to answer for the entity's | | 25 | debts. | | | | ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 47 of 125 47 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Wilson v Thorn Energy and BFI Waste Systems of America, LLC [sic] v Shaw Environmental & Infrastructure, Inc.; all of those cases talked about the alter-ego determination allows for a veil-piercing to hold another entity vicariously liable for one's debts. Now, Your Honor, I think that the trustee knows that the weight of these decisions, Wardle, RS Air, In re Stillwater, and especially in the bankruptcy context, all lead and should lead this Court to the conclusion that he does not have standing to pursue transfers made by nondebtor entities. And I see in the briefing, really, two arguments. One is, well, federal common law should apply, not State law. And the other is the trustee relies on additional authority, but we think, Your Honor, is hardly distinguishable, is *dicta*, or applies non-Delaware law, like, invalid law. And, first, Your Honor, I want to talk about this 18 19 20 21 assertion that somehow federal common law applies. We start with Butner. The property interests are created and defined by state law and unless some federal interest requires a different result. 22 23 24 25 More importantly, what if courts said in the context of alter-ego claims, they've held that state law governs, In re 10th Avenue Distributors [sic]. It is clear that the contours of the alter-ego cause of action are to be ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 48 of 125 48 1 determined with reference to state law. 2 3 4 5 6 McElroy v FirstEnergy Corp. -- that's a Third Circuit case -- the Court said the same. The only federal common law that could support the trustee's theory in this case is substantive consolidation and that's not the claim that the trustee has chosen to pursue. 7 8 9 The trustee fails to cite a single case in which the Court has concluded that federal common law applies to the alter-ego doctrine. And Duckworth really sums it up: 10 11 12 13 "Piercing the corporate veil is a state law, common, equitable remedy that has nothing to do with federal bankruptcy law. And it goes without saying, it is never applied by State Court's in a bankruptcy context." 14 15 16 17 18 Now, the Court or the trustee, Your Honor, has relied on statements and certain decisions saying, once a state law interest is determined under non-bankruptcy law, federal law determines whether such interests constitute property of the estate. 19 20 21 22 23 24 25 Your Honor, that just means you look to the state law first to determine the existence and the extent of a property interest and then you look to the Bankruptcy Code and bankruptcy law to determine whether some contrary, whether the Bankruptcy Code mandates a different result. By way of example, 541 is broadly worded, but it also, specifically, carves out certain property from property of ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 49 of 125 49 1 2 the estate: retirement account funds, college savings funds are not included as property of the estate. 3 4 5 6 7 8 9 10 11 12 Section 552 of the Bankruptcy Code allows the debtor to exempt property from the bankruptcy estate. The bankruptcy filing itself doesn't create new property interests or enhance existing state law interests. All of the decisions the trustee cites to, or many of them -- In re Ground Round, In re Chardon, In re Nejberger, Nicole Gas Production, Commodore Business Machines, and others, none of those cases were alter-ego cases. And in all of those cases, the Court actually looked to state law to determine the scope of the estate's interests in property. 13 14 15 16 Now, next, Your Honor, the trustee says that as a consequence of alter-ego, even under state law, that there is this merger of entities. And we believe, Your Honor, that's incorrect. Because if you reach that conclusion -- 17 18 19 THE COURT: Would you repeat? I'm sorry, I didn't hear exactly what you said. If you would say that again, I'm sorry. MR. PETERSON: Sure. 20 21 22 23 24 25 Your Honor, in addition to arguing making the federal law a common law argument, the trustee also says even under state law, the results of the alter-ego determination is to make the alter-egos one in the same with the debtor. We disagree and we believe, Your Honor, if you ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 50 of 125 50 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 were to side with the trustee on that issue, you would have to disagree. All of the authorities we have cited in our brief, especially the authorities that specifically discuss the alter-ego determination in the context of bankruptcy. That's In re Wardle. It's In re RS Air. It's In re Stillwater. It's Duckworth, as well. All of these decisions make it clear that the consequence of the alter-ego is not to magically transmogrify property of a nondebtor into property of the estate. We discussed Manichaean; that's a case that the trustee relies on. In addition, the trustee cites to In re Blatstein, a Third Circuit decision. The Court never ruled on the effect of alter-ego in that decision. In re Palmieri is another case that the trustee cites to. This -- the Court's statement in that case was pure *dicta*. The Court said that if the trustee eventually prevails on its claim, that will lead to the conclusion that the debtor owned its home when it was transferred to his girlfriend's company. In addition, the Court never provided any citation for that statement that the trustee relies on. In re American International Refinery, as I mentioned previously, I think, Your Honor, that case does not control. It applied Nevada alter-ego law, which clearly adopts the identity theory. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 51 of 125 | 1 | ASARCO.
ASARCO, Your Honor, involved a suit | |----|-----------------------------------------------------------------| | 2 | against an insider parent company of the debtor and the Court | | 3 | in that case, we believe, Your Honor, got it wrong.
They | | 4 | cited to Polly Petroleum as Delaware law, but Polly Petroleum | | 5 | is a 1968 case.
It didn't concern avoidance actions and it | | 6 | involved a Delaware entity suing another entity to exercise | | 7 | control over a Mexican subsidiary to stop it from prosecuting | | 8 | litigation. | | 9 | I also didn't have any support for the statement | | 10 | that the trustee relied on in that decision, so it was dicta. | | 11 | In addition, the transfer at issue was by the debtor's | | 12 | subsidiary or the immediate parent.
So all these -- the | | 13 | companies involved were closely related. | | 14 | Insiders were affiliates of each other and the | | 15 | Court addressed the argument that this was effectively | | 16 | substantive consolidation and said that there was no risk to | | 17 | the subsidiary's creditors in the case.
So we think it was | | 18 | wrongly decided under applying and wrongly applied Delaware | | 19 | law, but it's also distinguishable for a number of reasons. | | 20 | THE COURT:
I'm going to give you two more | | 21 | minutes. | | 22 | MR. PETERSON:
Okay.
Two more minutes.
I'll uh | | 23 | go to my concluding thoughts, Your Honor. | | 24 | The trustee's avoidance action powers are limited | | 25 | to transfers by a debtor of their interest in property.
This | | | | #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 52 of 125 1 2 3 4 is the plain language of 548, 549, and 544. The trustee has chosen strategically to assert that nondebtor entities or alter-egos of Kwok and claims that this means that they are debtors, themselves. 5 6 7 8 9 10 That's not the case. We're deprived of our defenses. If you were to rule in the trustee's favor. And it rejects and is in appear sit with Wardle, RS Air, Stillwater, Pavers, In re Silver, In re Duckworth, all of the bankruptcy decisions that discuss the issue, which we think Your Honor should focus on. 11 12 13 14 15 16 Your Honor, the only decision, as far as the Joint Defendants can tell where a Court applying Delaware law specifically ruled that veil-piercing confers avoidance action standing on the trustee, is the ASARCO decision that I just discussed. That's one. One case. That's it. And we believe Your Honor should reject that case. 17 18 19 20 21 22 In addition, the trustee doesn't cite a single indication authorizing the trustee to avoid a 549 claim made by a nondebtor under a veil-piercing theory under Delaware law. We put that in brief, in our brief, opening brief in bold and there wasn't a specific response in the trustee's brief to that argument. 23 24 25 We think you should rely on RS Air, Stillwater, and rule that the trustee has failed to state a claim for relief against the Joint Defendants. 53 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: Thank you. MR. PETERSON: Good morning -- we're still morning, Your Honor. THE COURT: Good morning. MR. PETERSON: So, I'm going to take Issues 2 and 4. Just as a shorthand, when I -- I'm going to use in my presentation the phrase "nondebtor transferors," which is referencing the handful of entities that are alleged to have made transfers to the Joint Defendants. So, rather than spelling them out each time, I'm just going to use that as a shorthand. THE COURT: Go right ahead. MR. PETERSON: Okay. So, Issue 2. Whether applicable law allows to reverse veil-piercing or alter ego determinations, I'm going to jump right into the Manichaean decision that Your Honor was discussing with Attorney Peterson. That case wrestled with whether or not Delaware would recognize a reverse veil-piercing claim and ultimately concluded that, quote, "In limited circumstances and in circumscribed execution, it would." The Court reached that conclusion by first can value-maximizing the courts that have rejected it. And they -- the Manichaean courts framed that, the courts that do reject it as, you know, the concern was that it would, quote, facilitate harm through judicial decree to innocent shareholders and third-party creditors. Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 53 of 125 #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 54 of 125 54 1 2 3 And the Manichaean Court characterized that concern as well-founded. It was a serious concern in allowing the reverse veil-piercing. 4 5 6 7 8 9 10 The Court, then, continued in its analysis to look at some of the other Court's decisions that have tried to navigate this issue and recognize that there are some court decisions out in the country where they say, Well, we'll allow it. We'll allow reverse veil-piercing in certain, limited instances, where those risks to third parties don't exist. 11 12 13 For example, the Manichaean Court looked to the CF Trust, Inc. v First Flight case, which is a Virginia Supreme Court decision, which allowed the reverse veil-piercing. 14 15 16 17 But the mean chemical Court, as they put it, they said it required a claimant to, quote, demonstrate that reverse veil-piercing will not cause harm to innocent investors or innocent secured and unsecured creditors. 18 19 20 21 22 23 24 25 Taking a lead from that latter line of cases, the Chancery Court said out of frame worked, a carefully circumscribed reverse veil-piercing doctrine. In doing that, the Chancery Court warned that if appropriate standards were not applied, reverse veil-piercing can, quote, threaten innocent third-party creditors and shareholders and lead to a host of unpredictable outcomes for those constituents -- for these constituencies; page 714. #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 55 of 125 55 1 2 3 4 5 Thus, the Chancery Court held, also at page 714: "Only in cases alleging egregious facts, coupled with the lack of real and substantial prejudice to third parties, should the Court even consider utilizing the reverse veil-piercing doctrine." 6 7 8 9 10 So, it's your view that under the Manichaean Court's circumscribed test or framework for reverse veilpiercing, that it's a pleading requirement that there not be real and substantial prejudice to third parties, such as the target entity creditors. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Noting parenthetically, that in that Gracey decision that Attorney Peterson was discussing, that very recent Delaware Chancery Court case, among the numerous pleading deficiencies that the Court identified there, one of the issues that they cropped up was the risk of harm to third parties. In that instance, the Court -- and I know Your Honor hasn't looked at it and will, but when you get there, the Court talked about the fact that these subsidiaries, that they wanted to pierce the veil into, where it involved in decades' worth of real estate transactions, which raised the specter of harm to third parties, as well as the ultimate ownership involved people, other than the Defendant, so that there could be impacts on the ultimate ownership through the trust to these beneficiaries, who are other than the Defendant. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 56 of 125 56 1 2 3 4 5 6 7 8 9 10 11 12 13 So, again, it was identified as one, as among many pleading deficiencies identified in the case. So, turning to our case for the cases against the Joint Defendants, the trustee is using the reverse veilpiercing doctrine to create initial transferee avoidance liability against the Joint Defendants. We don't believe that's allowed and consistent with the test set forth in Manichaean, which says that you can only use the doctrine when you're not trying to prejudice third parties. So there's no allegations that third parties of the nondebtor transferors will not suffer real and substantial prejudice by use of reverse veil-piercing to create avoidance liability here, nor could there be. On the 14 15 16 very face of these claims that they're intended to create millions of dollars of avoidance liability to the Joint Defendants. 17 18 19 20 21 22 23 In addition, there's a more nuanced issue, which again, Attorney Peterson touched on, which is that by trying to use the veil-piercing doctrine to create initial transferee liability, you're cutting off a subsequent transferee defense that would be available if the claims were being brought against the Joint Defendants as, subsequently, transferees under 550. 24 25 So, I want to just address some of the responses that the trustee has made to this interpretation of #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 57 of 125 57 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Manichaean. So, in the opposition, the trustee argues that harm to third-party creditors is just a factor, it's part of a balancing test and it's not dispositive. Not even -- what I think about it is a gating issue. But that's not what the Court said in Manichaean; rather, as noted just a second ago, they said only in cases alleging lack of real substantial prejudice creditors, should the Court even consider utilizing the doctrine. The support for the trustee's position that it's a factor as part of a balancing test, right, where they cite to In re Petters Company, Inc. and Sky Cable, LLC -- and it's Petters with two Ts, for the transcript -- that that - those cases stand for the proposition that it's a factor in a balancing test. Well, those decisions were years before 16 17 18 19 20 Manichaean, right, and those were a bankruptcy decision from Minnesota, a Fourth Circuit decision, where they were just trying to divine what the Delaware Supreme Court might one day say, because the Delaware Supreme Court hadn't said what the reverse veil-piercing test would be. 21 22 And in Petters, in addition to Delaware law, they were also applying Minnesota law. 23 24 25 But we now know the answer. We know the answer because they said it in Manichaean, right, about what the test is. And I guess if you step into the thinking in #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 58 of 125 58 1 2 3 4 5 Manichaean, they cite to In re Phillips in that decision, which is a Colorado Supreme Court case, 130 -- it's a Colorado Supreme Court case, which held that the reverse veil-piercing may only be employed when an equitable result would be achieved. 6 7 8 9 10 11 12 13 14 And the Colorado Supreme Court said, when innocent shareholders or creditors would be prejudiced by outside reverse veil-piercing, an equitable result is not achieved. And, note, that was one of lines of cases that Manichaean kind of adopted its framework on where they recognize the threat, they recognize the risk, but still said, Okay, as long as we can isolate and know that that risk isn't going to occur, well, then, we can allow the reverse veil-piercing doctrine to go forward. 15 16 17 18 19 20 21 22 23 24 The other arguments that were raised by the trustee is that it was -- that it's premature, right, it's premature at this stage of the case. Well, we view it, and I think Manichaean lays it out, but it's an element to be pled, right. It's a gating issue, whether or not you get to reverse veil-piercing and it should be allegedly. It should be alleged under Rule 11 for facts sufficient to give rise to a recognizable claim that's joint before we have to incur the costs of litigation beyond the pleading stage, and they have not done so. 25 The other argument that's made is that, well, you ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 59 of 125 59 1 2 3 4 5 6 7 8 know, the Joint Defendants are not going to suffer any harm here because they could file claims under 502(h). Well, that's -- they're not offering that they'll be able to refund all the money, plus interest to account for the time value. And we all know that the timing of any recovery is likely years' away and the quantum, wholly uncertain. So, just monetarily, that's not a satisfactory response to the real prejudice that the Joint Defendants would fair. 9 10 11 12 13 14 And then there's that more subtle issue, right, which is we're being -- by trying to use alter-ego to create initial transferee liability, we, then, would be losing the carefully-balanced defenses that Congress set out in 550 for subsequent transfers, where we'd be able to talk about good faith and value as a defense. 15 16 17 18 19 So, you know, the allegations of real and substantial prejudice to third parties is a gating issue under Delaware law, for the imposition of the equitable doctrine of reverse veil-piercing against the Joint Defendants. 20 21 22 23 24 25 The complaints against the Joint Defendants do not allege the absence of real and substantial prejudice, and they can't, because the whole idea is to impose prejudice on the trade creditors by making them targets of these initial transferee alter-ego claims and taking away their 550 defenses as a subsequent transferee. So, on this ground #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 60 of 125 60 1 2 alone, we think the motions submitted by the Joint Defendants should be granted. 3 4 5 6 7 8 9 And with that, I'm going to pivot to Issue 4. Okay. So Issue 4 is whether a determination of reverse veilpiercing on -- or alter-ego may be applied retroactively. And when I am addressing this issue, I'm just going to assume for the sake of argument, right, that let's say they can allege a viable, reverse veil-piercing claim under Delaware law and let's assume Delaware is identity theory, okay. 10 11 12 13 14 15 16 17 18 19 20 Well, even so, the alter-ego doctrine can't be applied retroactively to allow the trustee to assert these initial transferee avoidance claims against the Joint Defendants. They're trying to treat transfers from nondebtor transferors, as (indiscernible) the debtor, even though these occurred years before any rulings just regarding their corporate form. That is, what the trustee is trying to do here is merge the nondebtor transferor's assets, right, into one unified estate with the debtor retroactive to the petition date for these 549 claims, and retroactive back to further in time for these fraudulent transfer claims. 21 22 23 And from that unified set of assets, claims would be paid of creditors, including the Joint Defendants' 502(h) claims against this unified estate. 24 25 Well, in my mind, what that is, in essence, is substantive consolidation. And I think the case law, because ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 61 of 125 1 2 3 4 5 the result is the same, right. You're pooling assets and pooling liabilities into one unified estate. Because the outcome is the same, I think the case law governing substantive consolidation retroactively, *nunc pro tunc*, is helpful to look at, right. It provides us some guideposts. 6 7 8 9 10 11 12 13 And that's really -- we could start with the DC Circuit's seminal decision in Auto-Train, where it observed that, in addition to the very difficult tests that have been set out in, you know, in Augustino and in Auto-Train and in other cases for substantive consolidation, you need to take an additional and slightly different balancing test to avoid havoc that you would wreak on creditors by retroactively changing what a petition date would be. 14 15 16 17 18 So, in Auto-Train, the facts are, you know, we should revisit it because there's analogies to this case. So, in Auto-Train, the debtor filed in September 1980 and its subsidiary, Railway Services Company, had made transfers to Midland Ross in June and July of 1980. 19 20 21 22 In November 1980, the trustee for Auto-Train obtained a substantive consolidation order, substantively consolidating Railway into Auto-Train's bankruptcy case and did so *nunc pro tunc*, back to September 8th, 1980. 23 24 25 So, what does that do? That makes the transfers to Midland Ross into the preference period. So Midland Ross challenged on appeal the proprietary of using *nunc pro tunc* ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 62 of 125 substantive consolidation to create this avoidance liability under 547. And the trustee in Auto-Train asserted that the *nunc pro tunc* order, just like the trustee here, quote: "Merely caused the record to reflect a fact that already existed; namely, that Railway had no existence 7 separate from Auto-Train." 1 2 3 4 5 6 8 9 The D.C. Circuit rejected that argument and it explained that, quote -- and this is at page 276: 10 11 12 13 14 15 "Even if the Bankruptcy Court's finding on this issue sufficed for purposes of consolidation, they do not justify putting a *nunc pro tunc* spin on the order. Here, in fact, we believe that the *nunc pro tunc* feature prejudices Midland Ross in a manner contrary to the purposes of the Bankruptcy Code." 16 17 18 19 20 21 22 23 24 25 The Court went on to, then, explain that the problem with the trustee's position is that it requires transferees to disgorge solely on the basis of a bankruptcy filing by their -- the debtors' apparently distinctive affiliate, which undermines some of the Code's core policies, right. Those core policies were to incentivize creditors to continue to deal with troubled entities, right; the financially distressed entities or affiliates of financiallydistressed entities and not have a rush to the courthouse, right, to try to get at their assets because if there's a 63 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 fear. That they wouldn't be able to pay. So the argument that the D.C. Circuit rejected in Auto-Train is the argument that we're hearing today, but it's just being done under the banner of alter-ego, right; we're just changing the names. But the clash with the policies of the Code are even more stark; particularly, even these 549 claims, and I want to talk about that. So you're running, still, headlong into that same issue, which is you're disincentivizing creditors from dealing with nondebtor affiliates, you know, and this rush to the courthouse. But it also clashes with specific parts of the Code. If the -- it robs the Joint Defendants of that ability to have come before this Court and obtained an order under 363 that, well, what, with the transactions that they had were being asked to engage in were approved or ordinary course, and if they didn't get such relief from this Court, they could have stopped U.S. Trustee doing business and not exposed themselves to risking liability. In addition, you've got the subsequent transferee defenses, which are now being removed, but that's not all. If you look at 549(b), which is a protection for creditors who deal with the debtor during a gap period, between an involuntary filing and order for relief, 549(b) says, Look, #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 64 of 125 64 1 2 3 4 those transferees, they're not going to have any risk. They won't have any liability, even if they know of the involuntary case, for the transfers, manufactured that they're giving value. 5 6 7 8 9 10 11 12 13 So the Bankruptcy Court clearly offers protections to creditors that dealt with the debtor. They knew this is a debtor, subject to an involuntary case, but under the trustee's view, the Joint Defendants, who are not alleged to have any notice if Mr. Kwok's bankruptcy case or connections between the nondebtor transferors and Mr. Kwok, they have liability under 549 and they have no such protections that would be offered to, you know, if the transferees knew of a case of involuntary. 14 15 16 17 18 19 Finally, unlike Midland Ross and Auto-Train, which it would have had a robust set of defenses under 547(c), those similar types of defenses don't exist under 549. So, the concern that was dug up in Auto-Train, which that the D.C. Circuit rejected, is apparent here. It's just under the banner of alter-ego. 20 21 22 23 24 25 And, utility, you find the transferees, the Joint Defendants' are in an impossible situation, right, in the sense that they would have no way of knowing that the entity that they're dealing with is really, actually, an entity in bankruptcy. And this is an observation that Judge Kaplan made in the Oncology Associates of Ocean County case. That ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 65 of 125 65 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 was a case where a 549 whose claim was brought based on a transfer of a nondebtor affiliate and the transfer was made between the affiliate's bankruptcy filing and a substantive consolidation order. So the transfer happened between those two dates and the substantive consolidation order wasn't *nunc pro tunc* in the case. And Judge Kaplan, you know, in rejecting the 549 claim, pointedly observed that, quote: "One wonders how any attorney could counsel the transferees to the risks associated with post-petition transfers, where the transferor wasn't in bankruptcy." So, what's the response we get to this from the trustee? Well, the trustee says, you know, this is a strong man argument because alter-ego is different. And for this proposition, the trustee cites to In re Star Mountain Resources, which does have a discussion of differences between substantive consolidation and alter-ego in its usual sense. But Star Mountain goes on to explain that in Star Mountain, importantly, it was a Nevada case, so they applied that identity theory. They explained in Footnote 86, as follows: "An alter-ego claim has a different effect in the bankruptcy context than in the traditional civil trial setting, where a specific creditor brings a judgment against ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 66 of 125 1 2 3 4 the alleged alter-ego. An alter-ego finding in bankruptcy is more similar to substantive consolidation, bringing the assets of the alter-ego into the debtor's estate to be shared collectively with the debtor's creditors." 5 6 7 8 9 10 11 12 13 14 And then the Court went on at page 7 of the decision to just characterize the ultimate relief in that case, where using alter-ego with Nevada law as being similar to substantive consolidation. The only distinction that the Court made in Star Mountain was that it said that trying to do substantive consolidation after you've confirmed a plan, you have to cut off the rights there. So you can't do substantive consolidation after you've confirmed a plan, but alter-ego can live on; you can preserve that. That was the only difference. 15 16 17 18 19 20 21 22 23 24 So if the result is the same, why apply a different set of rules, right; the two equitable doctrines being used to achieve the same purpose, to me, it does not make any sense. And, in fact, if you accept that, we could just slap the label "alter-ego" on this equitable relief and you disregard the protections that would have been afforded if you were using the substantive consolidation doctrine. Well, then, nobody is going to use substantive consolidation; you'd just always use alter-ego because it'll be easier. So -- but let's not stop there. Let's look at, now, the alter-ego cases and there's not a lot of them. This 25 #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 67 of 125 67 1 2 3 4 5 is fairly novel, but there are a few. And the few that there are, there's none, not a single one in this country that allows a finding that a nondebtor as an alter-ego retroactively create 549 liability. There's not one, I've looked. 6 7 8 9 10 11 12 13 14 15 So, let's start with the Duckworth adversaries, which Mr. Peterson talked about. And it's worth a quick dip into the facts in Duckworth. So the debtor, who was a grain for farmer, right, and he had a significant secured bank debt that was secured by his crops. And what the guy did is he, leading up to the year or so before his filing, he created a column of LLCs to defraud his creditor. He created these LLCs to use them to trade grain -- to sell his crops or to sell his grains, without freeing it of the bank's liens to keep the proceeds. 16 17 18 19 20 And then, having done that, in the weeks before filing Chapter 7, he took the money from those LLCs, created a new LLC called "Power Trading," put the money into there, filed Chapter 7, and then used the money in Power Trading to pay for his personable expenses post-petition. 21 22 23 24 Okay. So in the first adversary proceeding against Casey's General Store, the trustee sought to avoid about 70 post-petition transfers that went from Power Trading to Casey's General Stores. 25 Like the trustee here, the Duckworth trustee's ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 68 of 125 68 1 2 3 4 5 6 7 8 9 10 11 theory uh no the 549 liability was premised on the use of the alter-ego doctrine to write to combine the assets of Power Trading with those of the debtor. And so, because Power Trading was in Indiana, a limited liability company, the Bankruptcy Court started its analysis using Indiana principles governing alter-ego. And it framed out why this was happening, you know, why was the trustee using a state law equitable remedy to assert a 549 claim, as opposed to doing a 548 claim against the subsequent transferee. And reason was to strip Casey's of its subsequent transferee defenses under 550, right, which the Court refused to do. 12 13 14 15 16 17 18 Now, I want to pause here for a second because the trustee tries to distinguish Duckworth by saying that, well, there were no facts in that case that would cause the Court to disregard the Corporate Forum of Power Trading or that the trustee didn't dispute that Power Trading was a validly formed, under state law, and thus, couldn't prove an alterego on that ground. 19 20 21 22 23 24 25 I think that's a wrong reading. First, the reference to power trading existing and being formed under state law, it's just that; it was formed under state law, just like every single one of the nondebtor transferors. They were formed under state law. They made them register to do business in the state. They submitted their filings with the Secretary of State. Like, that's what the Court is ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 69 of 125 1 2 3 referencing there. And that no decision at the time of the transfers had rendered, to me, to strip them of their Corporate Forum. 4 5 6 7 8 9 10 11 Second, the Court acknowledged at page 7 and Footnote 12 of that decision, and we actually pulled up the judgment and attached it as Exhibit A to our reply, that, in fact, the Corporate Forum of Power Trading had been disregarded, because the remaining assets in the bank account that he had put into Power Trading were brought back in. They were turned over to the estate at a prior -- not in the same adversary proceeding; in a different one. 12 13 14 15 16 17 18 So -- and it really wasn't a close call, right. THE WITNESS: That this was an alter-ego. I mean, Duckworth conceded he had full dominion and control. He was using it to pay his personal living expenses. It was to use to provide asset protection and hide his assets, and he ultimately entered a guilty plea and it's a lot of similarities to what we're dealing with here. 19 20 21 22 23 So, the problem that the Court had in Duckworth was taking that doctrine, that equitable doctrine to create 549 liability, it was extending it. It had no problem bringing the assets from Power Trading into the estate. It was extending it to create this 549 liability. 24 25 And I just want to put a few parts from the Court's decision at page 8, which are telling. First, the ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 70 of 125 | 1 | Court says, You've got to approach -- you've got to prove, | |----|----------------------------------------------------------------| | 2 | when you're using alter-ego with a Bankruptcy Court-type | | 3 | claim like this -- let me just queue up the quote: | | 4 | "As such, extreme caution is warranted when a | | 5 | Bankruptcy Court is asked it apply the remedy in the context | | 6 | of a bankruptcy cause of action, such as that created | | 7 | by 549." | | 8 | Then two sentence later, the Court says: | | 9 | "Here, the trustee contends that the alter-ego | | 10 | doctrine may be used to recreate a different set of facts, to | | 11 | rewrite history, so to speak, for a purpose cognizable only | | 12 | under the bankruptcy law.
No state law corollary to deprive | | 13 | a Defendant of the statutory good faith transferring defense, | | 14 | provided by Section 550(b)(1). | | 15 | In this Court's view, adopting the trustee's | | 16 | theory will constitute a gross overextension of the alter-ego | | 17 | doctrine, far beyond its identifiable state law parameters | | 18 | and purposes." | | 19 | The Duckworth Court had a chance to think about | | 20 | this and reconsider its decision, because seven months later, | | 21 | there was another adversary proceeding that came up for | | 22 | decision in Big Al's Speakeasy, which was another trade | | 23 | creditor that the debtor had been spending money from the | | 24 | Power Trading account with. | | 25 | But the Duckworth Court, and this is a 2013 | ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 71 of 125 71 1 2 3 4 5 6 7 decision, again, refused to reconsider its decision; again, rejected the use of the alter-ego doctrine and went on to explain that you can't use an equitable remedy to strip people of their statutory rights, which is exactly what the trustee was trying to do, expunge a 550 defense. And observing that no Federal Court has permitted this doctrine, the doctrine of alter-ego to be used for that purpose. 8 9 10 11 The Court also rejected the fact that it could be justified on the basis that they would be bringing in assets to benefit creditors, that that wasn't a reason to strip people of their rights to a subsequent transferee defense. 12 13 14 15 So again, this is what's happening here: same thing. And as Duckworth observed and as we hope this Court would observe, is that it should remain an unprecedented legal theory. 16 17 18 19 20 21 22 23 Beyond that case, there's also the Lawler case, which we also cite in our brief, which I'll just touch on very briefly. That is not an avoidance action case, but it was whether or not -- what happened in that case is that there was a bankruptcy filing. About eight months later, a mortgagee went to foreclose and sale property that was owned by the Debtor's brother in a Family Trust and that foreclosure sale went forward. 24 25 But, then, a few years later, the Bankruptcy Court held that a trust that owns half that property was an alter- ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 72 of 125 72 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ego of the debtor since its conception. And on the strength of that ruling, the debtor, then, brought claims saying, Well, look, we need to avoid that foreclosure sale because it was selling property that was -- it violated the stay because if the trust is me, is the debtor, that's -- I have an ownership interest and the foreclosure sale violated the stay. But the Court refused to do so on the basis that today's would work an injustice against the foreclosing mortgagee, who's entitled to rely on the separateness of the trust at the time. So the last things I draw, at least, from Duckworth and Lawler are quite simple, right. The equitable doctrine of alter-ego cannot be used to retroactively create liability under the Bankruptcy Code against non-insider creditors. And so, my fault, my time -- THE COURT: No, you still have time. MR. GOLDSTEIN: All right. I only need to address a couple of other things, then, real quickly about with the trustee's argument in my few minutes that remain. One, they say that, well, look, an alter-ego finding, you're an alter-ego for forever, right. If you're an alter-ego now, you've always been an alter-ego and there's no *nunc pro tunc*y thing about this. Well, one, I don't think ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 73 of 125 73 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that that's inconsistent with Auto-Train, inconsistent with Duckworth, inconsistent with Lawler. But the citation for that is in Adler, this Adler decision. It was a Bankruptcy Court decision of the Eastern District of New York in 2013. That was a 720 -- THE COURT: Is Adler, A-d-l-e-r? MR. GOLDSTEIN: Yes. Sorry. I'm sorry, A-d-l-er. THE COURT: No, no, that's fine. Go ahead. MR. GOLDSTEIN: That was a 727 case. So the issue there was that the debtor had us quote five or so closing of corporations and that were ultimately determined to be the debtor's alter-ego. But the legal issue at play there didn't impact third parties; it impacted the debtor. And if the debtor was using its closely-held companies for shenanigans, that violated 727. That was the legal issue at play, there. Second, I mean, there are some statements in Adler that other courts have taken issue with. And that was, there was a decision from the District Court for the Eastern District of New York, which was cited by Mr. Peterson, the Pavers case, which is 536 B.R. 48, which disagreed with such a broad view of the alter-ego concept and said, quote: "Just because two entities are alter-ego doesn't make them both debtors under the Bankruptcy Code; it simply ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 74 of 125 74 1 2 3 means they're liable for liable for each other's debts. If the nondebtor wants the protection, it needs to file its own petition." 4 5 6 7 8 So, I think, one, Adler comes up in extraordinarily different circumstances. It didn't even involve third parties; it just involved the debtor and a 727 case. And some of its broad language has been criticized by the District Court in the Eastern District of New York. 9 10 11 12 13 14 15 16 17 So the other cases cried by the trustee do not disturb the conclusion that you can't use alter-ego to marry together with this initial transferee avoidance liability theory. First off, as we've said, there's not a single case in this country where a Court condoned the trustee's use of alter-ego to create, after-the-fact 549 liability against a non-insider. And, second, of all the cases they've cited, there is only one case that is even arguably against a noninsider, arguably, and I'll get to why it's arguable. 18 19 20 21 22 23 24 25 The rest of them all are insider cases; it's transfers to the spouse, the girlfriend, the best friend. It's shenanigans like that. And this distinction between insider versus non-insiders is crucial. See, it's the protection of the non-insider third-party creditors that kind of animates the Court's rulings in Auto-Train, Duckworth, and Lawler. There, they're trying to protect the trade creditors' reliance interests that they were dealing with ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 75 of 125 1 2 distinct, nondebtor entities, right, that that should be protected. 3 4 5 6 On the other hand, that's not true if you're dealing with an insider who's either involved in the scheme prepetition or certainly knew about the debtor being in bankruptcy post-petition. 7 8 9 10 11 The reason I say, "arguably, about the one case that they say is against non-insiders, that's the American International Refinery case. Just two quick points about that and I'm going to, then, conclude, just to be mindful of my time. 12 13 14 15 16 17 18 19 One -- the first issue on that, that that's not a 549 case. That is only a 548 case. There's some stray references in the Court's decision to Sections 547 and -549, but the transfer that was being challenged there was only a prepetition transfer. There's -- the impact of the postpetition transfer that's discussed in that case was expressly approved by the Bankruptcy Court, so that is not a 549 case. It is a fraudulent transfer case. 20 21 22 23 24 25 Second, there's a little bit less of an arm'slength relationship with the transferee there, but long story short, the transferee there, what they wound up doing is they became partners. They bought the stock owned by the debtor subsidiary, who they said was an alter-ego of the debtor. That subsidiary owns 100 percent of an entity that had gas ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 76 of 125 76 1 2 3 4 5 interests in Kazakhstan. They sold 85 percent to the transferee bridge and kept 15 percent. So the two of them remain partners in the venture and the transferee was supposed to have gotten a bunch of financing to support the venture. 6 7 8 9 And, secondarily, they hired the CEO, the president of the debtor to come onboard after about a year after the fact. So, whether they were truly arm's-length is questionable. So, I'm going to conclude there. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 There's a through-line in the decisions surrounding reverse veil-piercing and Manichaean retroactive substantive consolidation in Auto-Train, and their retroactive application of the alter-ego doctrine to create an additional transferee avoidance in Duckworth. That is - these extraordinarily and sparingly used equitable remedies cannot be used to prejudice third parties and there are reasonable expectations of dealing with separate and distinct entities. And they certainly cannot doze through in a manner that's contrary to the (indiscernible) policies, such as undermining the incentive to continue to transact with distressed companies or even their affiliates, or in a manner to strip these third parties of their rights they would have under the Code: seek a comfort order under 363; have a subsequent transferee defense under 550. Because there's no allegations the Joint ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 77 of 125 | 1 | Defendants were insiders.
There's no allegation that they | |----|-----------------------------------------------------------------| | 2 | were anything more than trade creditors who sold goods and | | 3 | services to the nondebtor transferors. | | 4 | The trustee should not be able to employ the | | 5 | alter-ego finding retroactively to create an additional | | 6 | transfer of liability.
And on that ground, we believe the | | 7 | motion should also be dismissed. | | 8 | So, I went about a minute over and I appreciate | | 9 | your indulgence.
Thank you. | | 10 | THE COURT:
Thank you very much. | | 11 | Attorney Sklarz? | | 12 | MR. SKLARZ:
Good morning, Your Honor.
Jeffrey | | 13 | Sklarz. | | 14 | THE COURT:
Good morning. | | 15 | MR. SKLARZ:
The extraordinary relief that the | | 16 | trustee is seeking is certainly not typically; essentially, | | 17 | it amounts to a request to amend the 2022 bankruptcy | | 18 | petitions to include new debtors that have never filed | | 19 | bankruptcy under the Bankruptcy Code. | | 20 | This is not typical retroactive relief.
In prior | | 21 | hearings, Your Honor has mentioned, well, you enter a | | 22 | judgment on a breach of contract action today, but it relates | | 23 | to a breach in 2017.
This is more akin to you enter an order | | 24 | today, but find everybody in contempt for violating that | | 25 | order because they should have known about it back in 2017. | ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 78 of 125 78 1 2 3 4 5 The trustee seeks to turn back time. In the briefing in my clients' cases, we refer to this as the "time travel theory" to effectively amend all the bankruptcy petitions to include all of the nondebtor transferors, as if there were dozens of petitions filed then. 6 7 8 9 10 11 Only Mr. Kwok and shortly thereafter, the Genever Company filed bankruptcy. There is not a single nondebtor transferor that has a bankruptcy petition, bankruptcy schedules, statement of financial affairs. There's been no 341 meeting or any of the other protections afforded to creditors or parties in interest under the Bankruptcy Code. 12 13 14 15 16 17 And as Counsel has said, as the Supreme Court has said, as innumerable courts have said, as Your Honor has said, we start with the Code. There are two sections ensure the Bankruptcy Code that govern petitions: 301 and 303. 301 is involuntary; it is voluntary petitions. You file one. There is no petition for these entities. 18 19 20 21 22 23 If the trustee has always been the trustee of these entities, as he claims, where's the petition? Where's the schedules? Where's the identification of the assets of each of the entities? If the trustee has always been the trustee of these supposed debtors, he hasn't done any of the requirements under the Bankruptcy Code. 24 25 The other option is -- is an involuntary case under 303. There, it's a very reticulated scheme. First, ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 79 of 125 79 1 2 3 4 5 6 7 8 9 10 11 you file an involuntary petition, alleging that a debtor should be in bankruptcy and there is a process and, in fact, under 303 and related statutes, how creditors are treated during the gap period is of particular concern, as noted by counsel. The trustee simply cannot rewrite the petitions to say everybody knows they've always been in bankruptcy. That is precisely the opposite of what Auto-Train permits. Recasting the claims as anything other than substantive consolidation, is a facade. For example, if all the debtors, if all the 12 13 14 15 nondebtor transferors were, in fact, debtors as of 2022, why did the trustee need to file hundreds of applications for Rule 2004 exams? He should have just gotten the documents from his constituents. 16 17 18 If he already controlled the entities, he didn't need to do any of that. He didn't need to file the omnibus alter-ego case. 19 20 21 22 23 24 25 There's no provision that affords the relief under the Bankruptcy Code that the trustee seeks. As stated, the trustee lacks standing. The joint Defendants have argued this. I won't go through it again, other than to note that it has been said over and over again, and I think very well in the Picard v JPMorgan case, 464 B.R. 84, 92. It is settled law that that precludes the trustee from, quote, ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 80 of 125 1 2 3 effectively stepping into the shoes of Mr. Kwok's actual creditors, for purposes of pursuing the common law claims against the debtors. 4 5 6 7 8 9 10 11 12 13 14 It's because if Kwok -- Kwok can't sue himself for being an alter-ego. It wouldn't make sense. It's not an asset of the bankruptcy estate. It's not -- there's no standing under 541 for these types of claims. The only basis would be under 544, and as Counsel said, that doesn't work. Further, Your Honor, given how the trustee seeks to reorder the assets and the capital structures of the nondebtor transferors, policy considerations are of great concern. And this was well-stated in the Manichaean decision where the Delaware Court of Chancery really struggles over this remedy. 15 16 17 18 19 20 And as an initial note, what's odd about this case and makes it completely different than any other alter-ego, alleged alter-ego case that I've been involved in or I've seen in the briefing, the misconduct by the bad actor, Mr. Kwok, augments his estate. So he stole from the alteregos. 21 22 23 24 25 The complaints the trustee filed say he used these alter-egos, these nondebtor transferors, so enrich himself. He bought Ferraris. He bought homes. He took money and brought it and used it for his personal use. That is an augmentation of the estate. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 81 of 125 1 2 In Mankassian (phonetic) or Manichaean -- I apologize, I always mispronounce this case -- 3 4 THE COURT: I'm not exactly sure what the exact pronunciation is, either. 5 6 7 MR. GOLDSTEIN: -- as well as Gracey and any of the other reverse veil-piercing cases, it's the opposite. There's a diminution in the estate. 8 9 10 11 In the Mankassian, the debtor entity that the - what was the subject of the minority oppression rights, the buyer schemed to make money bypass that target acquisition vehicle so that it didn't have to pay the Plaintiffs. 12 13 14 15 16 Here, if money is recovered from the nondebtor entity creditors which, for the most part, are ordinary course transferees or my clients are ordinary course transferees or law firms, then that's benefiting someone who never received any benefit of those services. 17 18 19 20 21 22 23 24 25 There was -- there would be a further augmentation of the Kwok estate at a time when there's already been money, allegedly, stolen from these nondebtor transferors by Mr. Kwok. So it's multiple dipping. There's no connection between the harm and the remedy; it's an inversion. It would further diminish an estate that was already diminished by Mr. Kwok. His estate is better off having committed the fraud. He can't -- the trustee can't, then, double-dip that way. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 82 of 125 82 1 2 3 4 5 6 7 Again, going back to the specific Code, with respect to the 549 claims, it speaks specifically to transfers of the estate. It doesn't -- and to have an estate, you need a bankruptcy. So, going back to my initial argument, no petition, no estate, no bankruptcy. You can't spin the world back and say, Hey, we really did file all these petitions. They've never filed a petition. 8 9 10 And, finally, Your Honor, the trustee is not the Department of Justice. The trustee has no roving commission to do whatever he views his brand of justice is. 11 12 13 His sole dictate under the Bankruptcy Code is to administer the estate, which is in Chapter 11, and to recover for the benefit of creditors of that estate. 14 15 16 17 Victims of the alleged misconduct of Mr. Kwok will be dealt with through restitution and the Department of Justice. And there's money that has been seized and that will be dealt with through the civil forfeiture process. 18 19 20 21 22 23 24 To be clear, no trustee has ever attempted to bring the types of claims that have been brought here. The type -- and certainly not on a massive scale. Allowing retroactive rearrangement of the capital structure of the northern transferors without regard to creditor and ugh stakeholder rights would be unprecedented and not allowed. As Counsel pointed out, there has to be specific allegations of a lack of harm. That is not in there. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 83 of 125 | 1 | There's -- it could not be in the pleadings.
There's no | |----|----------------------------------------------------------------| | 2 | basis for the trustee to make those claims. | | 3 | The trustee seeks to invert and pervert the law, | | 4 | which should not be allowed.
For these reasons, the motions | | 5 | to dismiss for my client should be granted.
Thank you. | | 6 | THE COURT:
Thank you. | | 7 | MR. KINDSETH:
Good morning, Your Honor. | | 8 | Stephen Kindseth, Zeisler & Zeisler, for Zeisler & | | 9 | Zeisler.
As to the four issues, Your Honor, I don't have | | 10 | anything to add.
We support and embrace the arguments of | | 11 | counsel for the Joint Defendants and Attorney Sklarz. | | 12 | THE COURT:
Okay. | | 13 | MR. KINDSETH:
But thank you very much for | | 14 | providing me with an opportunity to make an argument -- | | 15 | THE COURT:
Thank you. | | 16 | MR. KINDSETH:
-- if I had one to add. | | 17 | THE COURT:
Thank you.
I appreciate it. | | 18 | All right.
Attorney Bassett, your reply? | | 19 | MR. BASSETT:
Your Honor, may I approach? | | 20 | THE COURT:
Yes, please. | | 21 | MR. BASSETT:
Good morning, Your Honor. | | 22 | Again, Nick Bassett for the record, from Paul | | 23 | Hastings, counsel to the Chapter 11 Trustee. | | 24 | Your Honor, I'll try to fit my argument, | | 25 | obviously, within my allotted time.
There's a lot of points | | | | #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 84 of 125 84 1 2 to respond to. And I'm also, obviously, happy to answer any questions that the Court may have. 3 4 5 6 7 8 9 10 Your Honor, in the arguments from counsel today, and you saw in the papers, as well, you heard a lot about the equities involved in this case and in the adversary proceedings that the trustee has filed. That's not particularly surprising because, of course, the Bankruptcy Court is a court of equity. But, but in that vein, I think it is very important to take a step back and look at how the equities really weigh in this case. 11 12 13 14 15 16 Now, the Defendants have done an admirable job of trying to play victim and tell the Court all the reasons why they feel they would be prejudiced by the relief that the trustee seeks. But, Your Honor, the result that the Defendants ask this Court to reach would be the very opposite of an equitable result. 17 18 19 20 21 22 23 24 25 Now, to level set, this bankruptcy case and its thousands of docket entries, with which this Court and the parties are very familiar, is all about Mr. Kwok's fraudulent years-long scheme to file for bankruptcy, contending to have zero assets, after hiding all of his assets that he does own in a web of shell companies. And, Your Honor, the scale of that fraud perpetuated by Mr. Kwok is truly massive; in fact, I don't think it's going out on a limb at all, to say that there's never been a bankruptcy case quite like this one, at ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 85 of 125 1 2 3 4 5 6 7 least not of this magnitude, where you have an individual debtor who is, in reality, a billionaire, living the most lavish lifestyle one could imagine, who then files for bankruptcy, claiming to own, essentially, nothing, because he had operated his life and his affairs in a way where he tucked all of his wealth into shell companies under his control. 8 9 10 11 12 13 14 Now, what the Defendants ask of this Court to do practically, by denying the trustee's avoidance claims, is to legitimize Kwok's years-long fraudulent scheme by holding that his shell companies were, in fact, truly separate companies, such that when they transferred assets to the Defendants, those transfers were not transfers of Kwok's assets. 15 16 17 18 19 20 21 22 23 Stated differently, in the Defendant's world, any individual who operates their affairs the way Kwok did, could file for a bankruptcy, claiming to have no assets, despite that person being a billionaire. And then the trustee in that bankruptcy case could never assert avoidance claims against anyone, because the transfers that took place prior to the bankruptcy or thereafter, were, according to them, not transfers by the debtor, but, rather, transfers by his separate shell companies. 24 25 Your Honor, as applied to this case, where they're trying to eviscerate the trustee's ability to even pursue ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 86 of 125 86 1 2 3 4 5 avoidance claims because Mr. Kwok had no assets, is a truly absurd outcome that is fundamentally at odds with the Bankruptcy Code. Now, Attorney Peterson mentioned that the result they seek is noted trying to deprive the trustee of remedies, but that's exactly what they're trying to do. 6 7 8 9 10 11 12 13 14 15 The cause of action that the trustee is pursuing are causes of action that are consistent with the reality in which Mr. Kwok operated. He had all of his assets in shell companies and then those shell companies conducted his affairs. They made transfers to parties. They did other things. And the only way, consistent with that reality for the trustee to pursue his claims and to pursue his rights under the Bankruptcy Code, is to pursue transfers of those assets, consistent with the economic reality that they were transfers of Mr. Kwok's assets. 16 17 18 19 Now, Your Honor, I'll Attorney Kim through the various arguments that Counsel had made on the four issues this we're here to discuss today and explain why the Defendants are wrong on each one of them. 20 21 22 23 24 25 Now, there was a lot of discussion about the Manichaean case and the Defendants used that case and other authorities to contend that the trustee's alter-ego claims must fail, and by extension, his fraudulent transfer and Section 549 claims must fail, because the Defendants are, equity holder allegedly quote, unquote, inconsistent third ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 87 of 125 87 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 parties who had no involvement in or knowledge of Mr. Kwok's fraud. Your Honor, there are several problems with this argument. First, and I'm not going to get law of the case because I know that's an argument that the Court does not want to hear, but law of the case or not, as a matter of precedent, this Court has already issued rulings, finding that Lamp Capital, Golden Spring, Greenwich Land, and the HGHK entities are the debtors' alter-egos. We submit those rulings were correct and they should not be disturbed. Second, the Defendants are wrong in their description of how alleged harm to third parties factors into the alter-ego analysis under Delaware law. Now, the Defendants seem to contend, based on their reading of Manichaean and other cases, that an alterego finding under Delaware law is unavailable, if there will be a single, quote, unquote, innocent person, who could be harmed by that outcome. But that is fundamentally not the law. If you look at what the cases say, the law focuses on the overall equities of the situation, not whether a single party will be harmed, and, in particular, the doctrine is focused on preventing fraud, just like that which occurred here. Now, to discuss Manichaean, the Defendants, of course, seize on language in Manichaean where the Chancery ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 88 of 125 | 1 | Court said that it would, you know, only even consider | |----|---------------------------------------------------------------| | 2 | reverse veil-piercing if there's a lack of real prejudice, | | 3 | real and sustainable prejudice to third parties.
But they | | 4 | are selective in how they quote the case, because they ignore | | 5 | critical other language from the Chancery Court that provides | | 6 | additional context to what the Court really meant in issuing | | 7 | its ruling, describing the availability of reverse veil | | 8 | piercing under Delaware law. | | 9 | Specifically, the Chancery Court said: | | 10 | "The risks that reverse veil-piercing may be used | | 11 | as a blunt instrument to harm innocent parties and to disrupt | | 12 | the expectations of arm's-length arbiting, while real, do | | 13 | not, in my view, justify the rejection of reverse veil | | 14 | piercing outright; rather, the recognition of the risks | | 15 | creates an opportunity to manage them and do so in a manner | | 16 | that serves the interests of equity. | | 17 | The Court also stated that without reverse veil | | 18 | piercing, quote: | | 19 | "Fraudulent members of the company could hide | | 20 | assets in plain sight to avoid paying a judgment, which would | | 21 | be, quote, an unacceptable outcome." | | 22 | Again, I think that's exactly what we're dealing | | 23 | with here with Mr. Kwok. | | 24 | And, finally, the Court said, quote: | | 25 | "Fundamentally, reverse veil-piercing, like | | | | ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 89 of 125 1 2 3 traditional veil-piercing, is rooted in equity and the Court must consider all relevant factors to reach an equitable result." 4 5 6 7 8 9 10 In summary, Manichaean stands for the proposition that under Delaware law, reverse veil-piercing can and should be used to prevent someone like Mr. Kwok from using his shell companies to carry out a fraudulent scheme and to achieve an overall, equitable result for the parties. That is exactly what we are trying to do with our avoidance claims in this case. 11 12 13 14 15 16 17 Now, Your Honor -- with our alter-ego claims in this case -- now, Your Honor, there are, to be sure, that support the same result from other jurisdictions by framing the alter-ego analysis as a balancing test that's specifically designed to prevent fraudulent schemes from being upheld and recognized, even if other creditors or certain parties could potentially be harmed by that. 18 19 20 The In re Mass case that we cite in our papers is instructive. That's at 178 B.R. 626. It's a Middle District of Pennsylvania case. 21 22 23 24 25 In that case, debtors' shareholders moved for turnover of funds deposited in a bank account of their wholly-owned corporation on a reverse veil-piercing theory under Pennsylvania law, alleging that the corporation was the alter-ego of the shareholders and, therefore, they were ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 90 of 125 90 entitled to turn over the monies in the account. 1 2 3 4 5 6 The Court granted that motion over the objection of the creditor who did business with the alter-ego, arguing that it would be harmed by that result. In doing so, the Court noted that reverse veil-piercing in that instance, rather than harming third parties would, quote: 7 8 9 10 11 Aid all creditors of the bankruptcy estate and that the business creditor Defendant who objected to the relief is a -- should not enjoy preferential treatment, simply because that party happened to contract with a sham corporation. 12 13 14 15 16 17 18 19 20 21 22 23 In other words, in a situation like this, where there are parties who -- and I'll get to whether or not these Defendants are even actually harmed -- but it resulted -- the trustee seeks to believe they are not, but even if they were, the relief that the trustee is seeking is simply to put them on equal footing with all other creditors of the debtor, to not give them preferential treatment and not allow them, Your Honor, to benefit from the years-long scheme that Kwok had perpetuated by asking the Court to uphold that scheme and allow their -- the monies that they received from Kwok shell companies to not be subject to the avoidance provisions of the Bankruptcy Code. 24 25 It furthers the fundamental principle underlying bankruptcy that all of the debtors' assets should be gathered ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 91 of 125 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and distributed for ratable distribution to his creditors. Your Honor, there are other cases, as well, that we cite in our brief that talked about reverse veil-piercing designed to achieve an overall equitable result, which I won't repeat here. One of them is the In re Schuster case. Another is the Petters Co. case. But I want now to turn -- THE COURT: Can you -- I'm not -- can you just spell those for the record, please. MR. PETERSON: Sure. Schuster is S-c-h-u-s-t-e-r. And Petters Co. is P-e-t-t-e-r-s. THE COURT: All right. MR. PETERSON: Now, Your Honor, I want to address another point that the Defendants raised on multiple occasions, which is that in their view, if it is true that Delaware law prevents reverse veil-piercing in a situation where innocent parties may be harmed by that outcome, they contend that, then, that somehow transforms that issue into a pleading requirement, such that the trustee must have affirmatively plead in his complaint that no party could possibly be harmed by the results that he seeks. Again, that's not the law, but even if it were the law, it's certainly not a pleading requirement. And I find it ironic that the Defendants rely exclusively on Manichaean ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 92 of 125 | 1 | to support that argument.
If you look at what happened in | |----|---------------------------------------------------------------| | 2 | Manichaean, Your Honor, and this is at page 718 of that | | 3 | decision, the Court specifically held that it is not a | | 4 | pleading requirement, because in that case when the Court | | 5 | analyzed the alter-ego factors and ultimately determined that | | 6 | reverse veil-piercing was appropriate, it noted that a party | | 7 | had document forward and made an argument about harm. | | 8 | And the Court rejected it at that stage saying, | | 9 | quote: | | 10 | "To be clear, factual allegations related to the | | 11 | alleged alter-ego's third-party creditors are not in the | | 12 | complaint.
And for now, at least, my analysis is conformed | | 13 | to the four corners of the pleading." | | 14 | So Manichaean stands for the exact opposite | | 15 | proposition on that issue, Your Honor. | | 16 | But, finally, even if there were a pleading | | 17 | requirement, even if the innocence of parties who might be | | 18 | harmed by reverse veil-piercing, even if that were all | | 19 | relevant under Delaware law, which it is not, allowing the | | 20 | trustee to pursue avoidance claims against these Defendants | | 21 | in bankruptcy cases does not mean that they will be quote, | | 22 | unquote, harmed by the alter-ego ruling. | | 23 | As this Court well knows, and as the Defendants | | 24 | and their counsel well know, innocent -- quote, unquote, | | 25 | innocent parties are unknowingly affected by bankruptcy all | ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 93 of 125 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 the time, especially through preference and avoidance actions. Now, this may be unfortunate for parties in that position, but that is, unfortunately, just the way bankruptcy works, because, again, it is part of the fundamental process of ensuring a ratable distribution of assets for a debtor's creditors and treating all of those creditors equally. This can be seen through some easy examples in the Code, Your Honor. For example, the law is clear that on a Section 548 fraudulent transfer claim, the Court looks only to the debtor/transferor's intent in determining whether the transfer is fraudulent and it doesn't matter whether the transferee acted with fraudulent intent. The transferee could be innocent. It would not affect the viability of a 548 claim by a trustee or a debtor-in-possession. The same is true for a Section 549 claim, Your Honor. The Code says nothing about the transferee who received a 549 claim needing to have known that it received an unauthorized transfer from a debtor in bankruptcy. There's no knowledge requirement. There's no requirement that the transferee not be innocent; all that matters is that the transfer occurred post-petition and was unauthorized. So, here, Your Honor, the Defendants, we would submit, are not being harmed at all, at least not in the 25 context of the way is that bankruptcy works. They are simply ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 94 of 125 1 2 3 4 5 6 subject to the same avoidance provisions of the Bankruptcy Code as any other party. To the extent they have defenses that they want to raise to the trustee's claims, such as a value defense under Section 548(c) or otherwise, they can offer those defenses, but it does not mean that the trustee's claims are defective. 7 8 9 10 11 12 13 Last point, Your Honor, on this issue is I would note that any harm they allege, at least potential economic harm that they allege, is entirely premature, because to the extent the Defendants end up needing to pay a judgment to the trustee on account of the trustee's fraudulent transfer or post-petition transfer claims, they have the right to assert a claim under Section 502(a) to the Bankruptcy Code. 14 15 16 17 18 19 20 21 22 23 24 Now, I agree with Counsel, we're not saying -- I'm not standing here today saying that all creditors, including these avoidance Defendants, to the extent they assert claims, are going to be paid whole on their claims in this case; creditor recovery levels obviously remain to be determined. My point is that their harm argument is, at least, (A), premature, and (B), this is consistent with the derivative in Manichaean that innocent parties who might be in some way affected by an alter-ego ruling should, when a Court issues that ruling, have some way to manage their risk, consistent with equity. 25 The Bankruptcy Code provides for that. It #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 95 of 125 1 2 3 provides for that through defenses they can assert under the Bankruptcy Code. It provides to that through a Section 502(a) claim, Your Honor. 4 5 6 7 8 9 Your Honor, I next want to address, and I realize I don't have a whole lot of time left, but I want to make sure I address the other arguments. Now, the Defendants spent a lot of time talking about the consequences of alterego and whether or not that results in the alter-ego's assets becoming property of the debtor. 10 11 12 13 14 15 16 17 18 Again, the Court decided this issue. We think its prior rulings are precedential, you know, separate and apart from law of the case, which we're not talking about today. And in any event, though, this argument, Your Honor, fails on its merits for two reasons. First, as we discussed in our papers, the question of whether or not an alter-ego ruling results in the assets becoming property of the estate is fundamentally a question of federal bankruptcy law, not state law. 19 20 21 22 23 Second, even if state law applies, and there is this distinction that Defendants' claim exists between the so-called vicarious liability theory and the identity theory, we made the clause clear that Delaware follows the identity theory. 24 25 Now, on the federal v state law distinction, Your Honor, we cite cases in our brief. These are at pages -- #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 96 of 125 96 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 sorry -- paragraphs 25 through 27 of our objection. Numerous courts have explained this general concept that, while -- and that is wholly consistent with the Supreme Court's decision in Butner -- that while the nature and extent of property rights in bankruptcy are, in the first instance, determined by the state substantive law. Once that determination is made, federal bankruptcy law, namely, Section a 41 of the Bankruptcy Code, dictates to what extent that interest becomes property of the estate. Again, I would point the Court to the cases assembled at paragraphs 25 through 27 of our objection that stand for that general proposition. And, Your Honor, I think it's important to recognize that, you know, this notion that federal law controls on the property of the estate issue makes perfect sense because defining what constitutes property of the estate is absolutely fundamental to the bankruptcy process. And I'd point the Court to the comments that Justice Roberts made in his dissent in the Wellness case, which is cited at Footnote 17 of our objection, where he said: "The defining property of the estate is the quote, unquote, necessary starting point of every bankruptcy case and it is, quote, inescapable central to the restructuring of the debtor-creditor relationship and in his view, therefore, #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 97 of 125 1 2 the Bankruptcy Court has jurisdiction, core jurisdiction to consider alter-ego claims." 3 4 5 6 7 8 9 10 Now, courts have taken this principle about the fundamental nature of the property of the estate questions to bankruptcy to heart when analyzing alter-ego claims. Courts have found, despite what defense counsel may claim, that in bankruptcy, an alter-ego claim brings property into the estate even if that same claim outside of bankruptcy is more often used by creditors to render one entity liable for another's debts. 11 12 13 14 15 16 So there's two steps. Under state law, is there a viable, reverse veil-piercing or alter-ego theory? The second step, in bankruptcy is, if so, what is the effect of that? That makes sense, Your Honor, because the claim in bankruptcy, as it is here, is asserted under Section 541 of the Bankruptcy Code. 17 18 19 Now, a decision that's instructive Your Honor, is the Yerushalmi case that we cite in our papers. I'll spell that one. That's Y-e-r-u-s-h-a-l-m-i, that's 487 B.R. 98. 20 21 22 23 24 25 In that case, Your Honor, Chapter 7 Trustee sought a declaratory judgment that a certain trust was really an alter-ego of the debtor seeking turnover of its assets. The Bankruptcy Court first determined whether the entity was an alter-ego under state law, which in this case was New York law; however, the Court later found that the effect of that ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 98 of 125 98 1 2 3 4 5 6 7 8 9 10 11 12 13 alter-ego ruling buzz an issue of bankruptcy law. And the reason this mattered and the reason it came up in that case was because the Defendant there changed the trustee's alter-ego claim by contending that the state law statute of limitations had applied. The Court rejected that argument because it found that the cause of action was being brought under Section 541 and 542 of the Bankruptcy Code. In the course of reaching its ruling, the Court explained that, quote: "The facts of this case, that is, a bankruptcy trustee seeking to recover estate assets on an alter-ego theory, are distinguishable from non-bankruptcy alter-ego 14 15 16 cases pursued by and for the benefit of an individual creditor's seeking to hold an alter-ego liable for the obligations of another." 17 18 19 20 21 22 23 24 25 Your Honor, that's exactly the situation here. This is not a non-bankruptcy alter-ego cause of action being brought by one of Mr. Kwok's creditors outside of bankruptcy; this is the trustee seeking to use the alter-ego doctrine as a means to, consistent with economic reality and consistent with the way the debtor had operated his affairs, issue a ruling that his, the assets that he kept at his shell companies were, in fact, his own assets and, therefore, are assets that are property of the estate. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 99 of 125 99 1 2 3 4 5 6 7 8 9 10 11 12 Your Honor, another case that I won't discuss in detail now that said the exact same thing about the effective alter-ego being different in bankruptcy compared to outside of bankruptcy is the Star Mountain case, which we cite in our brief. In addition to those cases, Your Honor, we cited a number of other decisions; these are at paragraphs 30 to 34 of our objection that talk about alter-ego theories in bankruptcy and the fact that they would augment the estate and result in the assets of the alter-ego becoming property of the estate. I will list these cases out. I won't discuss them in detail, but the point, Your Honor, is that in none of 13 14 15 16 17 18 19 20 21 22 23 24 these cases, where the Court is focused on this so-called distinction between the identity theory and the vicarious liability theory, they, instead, were issuing a determination about the effect of the alter-ego decision under bankruptcy law, not under the claimed nuanced distinctions that the Defendants want the Court to recognize under state law. That's the In re Blatstein case, Your Honor, that we cite in our papers; the 10th Ave. Record Distributors case; In re Pearlman; In re Concepcion; In re Deckelbaum; In re Palmieri; and In re Adler, Your Honor. All cases that refer to the result of an alter-ego finding being that the assets become property of the estate. 25 Your Honor, on the question of, even if there is #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 100 of 125 100 1 2 3 4 5 6 this distinction of the identity theory versus the vicarious liability theory and that's relevant in bankruptcy, we submit the law is very clear that in Delaware, the identity theory controls. Your Honor, I point the Court to the Spring Real Estate decision. There's been a lot of discussion about that case. 7 8 9 10 11 12 13 The Defendants claim that the Court's pronouncement in that case about the effect of an alter-ego ruling under Delaware law was *dicta*. But, Your Honor, *dicta* or not, it is a pronouncement by the Chancery Court as to its view of the result of an alter-ego theory, not only under Delaware law, but in relation to a bankruptcy case. And they have cited no law to the contrary. The Court said in that case, quote: 14 15 16 17 18 19 "Where there is a mere alter-ego of the parent to the extent that the Court may engage in reverse veilpiercing, the Court may treat assets of the subsidiary as those of the parent for purposes of a trustee standing to void allegedly fraudulent transfers of assets." 20 21 22 23 24 25 Your Honor, that is exactly on point. And while the Defendants claim that the Court there cited Nevada law for that proposition, Your Honor, the Court was applying Delaware law, and to the extent that it cited a Nevada case, it cited that Nevada case because it felt that Nevada law was consistent with the Delaware law and/or to agree with the ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 101 of 125 | 1 | trustee that the effect of an alter-ego claim in bankruptcy | |----|-----------------------------------------------------------------| | 2 | is different than it is outside of bankruptcy. | | 3 | I would also note, Your Honor, that Manichaean, | | 4 | the Court that -- the decision that the Defendants rely on so | | 5 | heavily, cited approvingly to the Spring Real Estate case for | | 6 | that same exactly proposition.
I would say, Your Honor, at a | | 7 | minimum, I think what the Manichaean decision makes clear is | | 8 | to the extent there's any, you know, distinction between the | | 9 | vicarious liability theory and the identity theory, I think | | 10 | what Manichaean actually shows is that either that | | 11 | distinction really does not exist or that in Delaware, the | | 12 | effect is both.
And, again, that can be seen by the language | | 13 | that Defense counsel cited in Manichaean at page 710, where | | 14 | the Court, in two senses, back-to-back, stated the issue in | | 15 | both ways.
It first said, quote: | | 16 | "At its most basic level, reverse veil-piercing | | 17 | involves the imposition of liability on a business | | 18 | organization for the liabilities of its owners." | | 19 | And the very next sentence, it said in the parent | | 20 | subsidiary context: | | 21 | "Whether the subsidiary is a mere alter-ego of the | | 22 | parent, where the subsidiary is a mere alter-ego of the | | 23 | parent, the Court will treat the assets of the subsidiary as | | 24 | those of the parent." | | 25 | So Manichaean, itself, makes clear, Your Honor, | | | | ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 102 of 125 1 2 3 that this rigid distinction that the Defendants asked the Court to recognize is not one that courts in Delaware have actually, themselves, recognized in their decisions. 102 4 5 6 7 8 Your Honor, I know I'm short on time, but the last argument that I do want to make sure I address is this retroactivity argument. Your Honor, I want to put to rest any notion that the trustee is actually seeking *nunc pro tunc* relief from the Court. The trustee is not. 9 10 11 12 13 14 15 And I think in the Court's comments in September at the hearing were exactly correct that the way to look at this is if the Court were, for example, asked to rule whether a contract was breached five years ago and the Court rules that it was, then that's what happened. The Court is not granting *nunc pro tunc* relief; it is simply adjudicating the issue put before it. 16 17 18 19 20 21 22 23 And I would point the Court to the In re Adler case that we cite, and that's at page 58 of the decision, Your Honor, where the Court noted -- and that was a Court dealing with New York law -- but I think for purposes of discussing how an alter-ego claim works, it is instructive. And what the Court said is that the alter-ego finding comes into effect and establishes the relative rights of the alterego and the controlling party, quote: 24 25 "At the moment in time at which the factual elements for alter-ego are satisfied." #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 103 of 125 | 1 | So, that's exactly what the Court has found and | |----|----------------------------------------------------------------| | 2 | that's what we're asking the Court to, again, reiterate today | | 3 | in these adversary proceedings, is that these entities, these | | 4 | transferor entities were always Mr. Kwok's alter-egos from | | 5 | the beginning of time.
It's not that they became his alter | | 6 | egos after the bankruptcy.
It's not that they became his | | 7 | alter-egos at any other point in time.
They were always his | | 8 | alter-egos and, therefore, their assets were always | | 9 | Mr. Kwok's assets. | | 10 | That is the issue we're asking the Court to | | 11 | adjudicate, based on the facts that we are putting forward. | | 12 | It's not nunc pro tunc relief at all. | | 13 | On the issue of retroactive relief, Your Honor, | | 14 | the Defendants noted that they don't think there's been a | | 15 | single case cited where a Court has used an alter-ego theory | | 16 | to allow Section 549, post-petition fraudulent transfer | | 17 | claims to proceed.
There are at least a few examples of | | 18 | that, Your Honor.
The In re Schuster case that I already | | 19 | cited is such an example, where the Court allowed -- where | | 20 | the Court said that Section 549 claims could go forward, | | 21 | following an alter-ego finding. | | 22 | The In re Deckelbaum case that I cited is another | | 23 | case.
We cite the In re Harman case from the Bankruptcy | | 24 | Court, for the Northern District of Georgia, in our papers. | | 25 | That's another case where that happened.
And, also, as | #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 104 of 125 104 1 2 3 Counsel acknowledged, the American International Refinery indication is, yet, another example, as is the -- so that - sorry. 4 5 6 7 8 9 10 11 Those are the examples of 549 cases, Your Honor, and those are in addition to the cases that we cite where courts like the Spring Real Estate case, In re Palmieri, and others have held that an alter-ego finding certainly allows the pursuit of fraudulent transfer claims based on transfers of assets made by those alter-egos prior to the alter-ego finding. Again, no discussion of *nunc pro tunc* relief in those cases because it was simply not necessary. 12 13 14 15 16 17 18 19 20 21 22 Just two more completing points before I wrap up, Your Honor. First, I want be to make sure I address the Duckworth cases that the Defendants rely on so heavily. Those cases are distinguishable for a number of reasons. First of all, Duckworth, that was a Chapter 7 case out of Illinois, applying Indiana law. It involved a Chapter 11 debtor who transferred certain assets to his shell company's bank account just before his bankruptcy and then right after the bankruptcy, those shell companies, then, made transfers to third parties who ended up becoming Defendants in the avoidance action. 23 24 25 Now, the Court ended up rejecting the trustee's claim as the Defendants described, but the decision and its reasoning is inapposite here for at least four reasons. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 105 of 125 105 1 2 3 4 5 6 First of all, the Court, in that case, declined to apply the alter-ego doctrine in the first place. It noted that the applicable state law, as I said, was Indiana law and the Court predicted that the Indiana Supreme Court would not even apply the doctrine. Obviously, that's not the case here. Delaware recognizes the trustee's alter-ego claims. 7 8 9 10 11 12 13 14 15 16 Second, Your Honor, the Court declined to apply alter-ego to permit the Section 549 claims to proceed in that case, in part, because the only parties who had found to be harmed by the alter-ego relationship were secured creditors who had not even benefited from the trustee's pursuit of the claims. So there was no real benefit to constituents of the estate by the trustee successfully pursuing the claims; again, not the case here. All the debtors' creditors will benefit from the trustee's avoidance claims, should they be successful. 17 18 19 20 21 22 23 24 Third, Your Honor, and this is critical and the Defense counsel spent a lot of time on this, the Court felt that in that case, it was very clear that the trustee was using alter-ego as a litigation tactic to try to get around the defenses that the Defendants would otherwise have as subsequent transferees under Section 550 of the Bankruptcy Code. But that was highly dependent on the facts of That case, Your Honor. 25 In that case, as I said, right before the debtor #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 106 of 125 106 1 2 3 4 5 filed for bankruptcy, he took money from his account, transferred it into the bank accounts of his shell company, and then after the bankruptcy, those shell companies further transferred the funds to certain third parties who became Defendants. 6 7 8 9 10 11 12 13 Under those circumstances, the Court observed that consistent with that factual record and that factual reality, the Court thought the trustee should have asserted 548 claims, based on the prepetition transfer by the debtor to the shell company and then sought to obtain relief, if at all, from the Defendants through a subsequent transferee claim and then the Defendants could assert their Section 550 defenses. 14 15 16 17 18 19 20 21 22 23 24 But, Your Honor, that is absolutely not even close to what happened here. That is not our facts. There is absolutely no record to support that that is how the trustee is trying to use his alter-ego and avoidance claims in this case. This is not a situation where Mr. Kwok sat around with a bunch of money in a bank account and divvied it outed to his shell companies before the bankruptcy and then we decided rather than suing the shell companies and then these Defendants as subsequent transferees, we would just try to collapse it and pursue Section 549 claims. That's not it at all, because that's not how Kwok 25 operated; Kwok operated his affairs by keeping all of his #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 107 of 125 107 | 1 | assets with these shell companies and then using them as he | |----|----------------------------------------------------------------| | 2 | saw fit to pursue his own personal ends. | | 3 | And so, Your Honor, the way we are pursuing our | | 4 | claims, just, it fits that reality and it is the -- it's | | 5 | really the -- it wouldn't make sense to pursue the claims in | | 6 | the way that the Court in Duckworth suggested, because that's | | 7 | not what happened here.
The transferees, the holders of the | | 8 | assets were the Kwok shell companies; they were his assets | | 9 | and that's why we are pursuing these claims as transferors of | | 10 | assets of the estate. | 11 12 13 14 15 16 17 18 19 20 The last reason that Duckworth is distinguishable, Your Honor, because -- and this is sort of similar total last point that I made -- is that the Court emphasized that the trustee was seeking to use alter-ego in a selected way. And if you look at the 2013 decision, the second decision from that case, this is at page 6 of the opinion, the Court emphasized the fact that the trustee was not seeking alterego for all purposes. He was seeking it, specifically and solely, for the purpose of pursuing those avoidance claims; again, not the case here, Your Honor. 21 22 23 24 25 The trustee has pursued alter-ego claims against these entities to establish that they are and always have been, consistent with reality, alter-egos of Mr. Kwok that were used to hold and hide his assets from his creditors. And a consequence of that, Your Honor, unlike in the | | Case 22-50073
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125 | |----|------------------------------------------------------------------------------------------------| | | 108 | | 1 | Duckworth case, is that all other creditors of those entities | | | | | 2 | will have the opportunity to assert claims.
We've made this | | 3 | point in the past. | | 4 | All consequences of the alter-ego ruling follow | | 5 | from the Court's orders, not simply -- it's not simply a | | 6 | litigation tactic or vehicle by the trustee. | | 7 | The last point -- | | 8 | THE COURT:
I'm going to have you wrap up, okay, | | 9 | to be fair. | | 10 | MR. BASSETT:
Yes, Your Honor. | | 11 | The last point I'll make is just on the | | 12 | relationship between the claims that the trustee is seeking | | 13 | and substantive consolidation.
Your Honor, the relief that | | 14 | the trustee seeks may, in fact, and I would agree, does, seek | | 15 | a result that is similar to substantive consolidation, but | | 16 | the doctrines are not the same and they can and do coexist. | | 17 | On this point, I would refer the Court to the Star | | 18 | Mountain case.
There, there was a confirmation order in | | 19 | place that specifically precluded substantive consolidation. | | 20 | The trustee, the litigation trustee, after confirmation, | | 21 | sought to pursue alter-ego claims and the question was | | 22 | raised:
Well, can the trustee pursue those claims in light | | 23 | of the confirmation order? | | 24 | And the Court said, Yes, the trustee could pursue | | 25 | the claims because, although alter-ego sought a result | | | | # Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 109 of 125 1 2 3 4 5 6 similar to substantive consolidation, it is, in fact, a different legal doctrine and, in particular, substantive consolidation is not one that is predicated solely on demonstrating that a debtor had used other entities to effectuate fraud. It's based on creditor expectations and hopeless entanglement. 7 8 9 10 And because of the standards that apply to subcon, it makes sense in many instances for courts to take a step back and consider whether a subcon result should apply retroactively, or *nunc pro tunc*, to the petition date. 11 12 13 14 15 16 But here, Your Honor, we're not seeking subcon; we're seeking a ruling, as I described before, from this Court simply recognizing the economic reality of how Mr. Kwok operated. He has always held his assets with shell companies and he's done that for the purpose of keeping all of his wealth outside the reach of his creditors. 17 18 19 20 21 We think for the Court to issue the relief that the Defendants are asking the Court to issue would effectively bless that fraudulent fiction and result in significant prejudice to the estate and to the debtor's creditors, Your Honor. 22 23 And with that, I have nothing further unless the Court has questions. 24 25 THE COURT: I do not have any questions, thank you. #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 110 of 125 | 1 | What I will do is I will take a short recess and I | |----|-----------------------------------------------------------------| | 2 | will allow the Joint Defendants and the trustee, one, you can | | 3 | reply; two, Attorney Bassett, and Attorney Bassett, you can | | 4 | reply to their reply.
One final, short argument, here, I'm | | 5 | going to allow you to do. | | 6 | I'm probably not going to give you more than 10 | | 7 | minutes apiece and you will have to decide who you want to | | 8 | have argue that, okay.
And what I'll do now is I will take a | | 9 | recess and I'll be back at 12:35 and then I'll give the Joint | | 10 | Defendants 10 minutes and the trustee 10 minutes and then we | | 11 | will conclude the hearing. | | 12 | Does anyone have any questions? | | 13 | (No verbal response) | | 14 | THE COURT:
Okay.
Thank you. | | 15 | Then, court is in recess until 12:35. | | 16 | THE DEPUTY:
All rise. | | 17 | The court is in recess until 12:35. | | 18 | (Recess taken at 12:25 p.m.) | | 19 | (Proceedings resumed at 12:37 p.m.) | | 20 | THE DEPUTY:
All rise. | | 21 | The court is in session after recess. | | 22 | THE COURT:
Please be seated.
Thank you. | | 23 | Well, I don't know if everybody is here yet, but | | 24 | that's okay, they'll come back, I hope.
Maybe they decided | | 25 | to leave? | 111 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Laughter) THE COURT: No, I'm only kidding; I know they were outside talking, but maybe somebody could get them. Oh, here they come. Here they come. (Pause) MR. GOLDSTEIN: Apologies, Your Honor. This is one of the things that happens when you have a lot of cooks in the soup. (Laughter) THE COURT: Not a problem. MR. GOLDSTEIN: Thank you for your indulgence. THE COURT: I just wanted to make sure you didn't leave. (Laughter) MR. GOLDSTEIN: And miss this? No. THE COURT: No. So, Attorney Peterson and Attorney Goldstein, which of the two of you will make the concluding argument? MR. GOLDSTEIN: I guess I drew the short straw, yet again, so... THE COURT: Go right ahead, then; please proceed. MR. GOLDSTEIN: Okay. All right. A few points, Your Honor, just targeted. I don't even think I'm going to take my 10 minutes -- famous last words, but I think that's where I'm going to land. Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 111 of 125 ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 112 of 125 112 1 2 3 4 5 6 7 8 9 The point we made on the 549 cases was, and I didn't hear when Attorney Bassett was saying it, but he may have said it and I maybe missed it, was that we said it's not a non-insider 549 case that we're trying, right. So, Harman, Schuster, both involved the debtor and their spouse. I think Deckelbaum, I think, was one of the cases they cited, also, was actually the law firm that was setting up the entities post-petition that's kind of involved in it. American International, which I addressed 10 11 12 initially, which was also a set, I think, cited, also, was they never dealt with 549. The transparent issue in that case was a prepetition transfer, so we'll leave that there. 13 14 15 16 17 18 19 20 21 22 23 24 You know, in Duckworth they were trying to distinguish Duckworth. One of the grounds was the fact that, oh, well, there was only -- the only party who would benefit would be the secured creditor. But, you know, reading -- if you read the Duckworth decision, the Duckworth Court says - and I lost my page when I was coming in, but I had it -- the Court says after discussing that issue, the fact that, potentially, the party to benefit would be the secured creditor. It goes on and says -- and this is at page 4 - the more serious problem with the trustee's actions, concerns the overbroad application of the alter-ego doctrine. So, I don't think you can just discount the analysis. 25 The other issue raised in trying to distinguish #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 113 of 125 113 1 2 3 4 5 Duckworth was that the -- I think, if I remember hearing Attorney Bassett right -- was that saying, well, you know, this is just -- the debtor deposited money in Power Trading and then Power Trading, you know, made these payments to the trade creditor. 6 7 8 9 10 11 12 13 14 The scheme was a little bit more involved than that, right. The money went to these two LLCs, which he used to defraud his creditor, to shield his money, even by using them to take the proceeds to the grain sales. The debtor withdrew the money from that account, and as I read the Court's decision, and Your Honor can read it, as well, he then deposited the money in Power Trading. So, he was trying to keep the money in the LLCs in a very similar fashion that was alleged here. 15 16 Let me see if there's anything else in Duckworth that I was going to say. 17 (Pause) 18 19 MR. GOLDSTEIN: Yeah, I think that covers the waterfront there. 20 21 22 23 24 25 There was a reference to the In re Mass case, M-as-s, and I just wanted to address that very quickly, about that there's not a harm for having to return funds based on reverse veil-piercing. See, that was a turnover case; that was an instance where a judgment creditor, who -- the judgment creditor had a judgment against the entity and it ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 114 of 125 114 1 also had a guaranty debt against the debtor. 2 3 4 5 6 7 Post-petition, that judgment creditor, then, seized the funds in an account that was called a "DIP account," a debtor-in-possession account. So it was -- it didn't even involve any avoidance claims. You don't have that 550 issue overlay; it was a 542 turnover claim, so it's a different type of claim here. 8 9 10 11 Moreover, you have this issue of a creditor who had to have known of the bankruptcy and then seized an account that was titled the "debtor-in-possession account." So, I think it's distinguishable on its facts there. 12 13 14 15 16 17 18 You know, I think -- just two concluding points. There's an argument that if you allow -- if you, Your Honor, determines to have the protections that we've discussed in Manichaean for third-party creditors, the protections in Auto-Train, the protections in Duckworth, in Lawler, that you're somehow, we'd be somehow, essentially, like, letting Mr. Kwok get away with what he did or blessing his fraud. 19 20 21 22 23 24 25 Again, you know, not so. There are other remedies. They could have pursued an involuntary petition. They could have pursued claims as a subsequent transferee, but it's also a reflection of the balancing, right, it's ultimately a reflection of a balancing, a balancing of trying to, you know, through avoidance powers and the like to recover assets to benefit creditors. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 115 of 125 115 1 2 3 4 5 6 7 8 9 10 But it's also not to harm, you know, third parties in their reasonable expectations, that the entity that they're dealing with are distinct. And it gets to the same, that concern in Auto-Train, like, you know, when we start upsetting the apple cart, particularly on a 549 claim, which you can't, you know, innocent creditors can talk about risk with 547 and 548, because you have defenses. You have ordinary course, or 547, subsequent new value; 548, you have the 548(c) defense. 549 is a whole different animal, right. You have much less. 11 12 13 14 15 16 17 But it's that balance, right. It's the balancing of those harms. And then, finally, in conclusion, you know, I think what it was telling was kind of at the end, right, where Attorney Bassett said, look, at the end of the day, this is kind of the same result as substantive consolidation, right. That's what we're doing; we're consolidating assets, consolidating liabilities. 18 19 20 21 22 23 24 So, again, I'll end with one of the -- where I mentioned in my presentation, which is how do you impose two equitable doctrines, right, substantive consolidation and alter-ego, but you're doing it in such a different way, where it's the same fact pattern. It's the same concerns that were at issue in Auto-Train, whether the Court hesitated in doing it *nunc pro tunc* to the prejudice of Midland Ross. 25 It just makes no sense where you employ the two #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 116 of 125 116 1 2 3 equitable doctrines in such a distinct manner. And unless my colleagues -- you know, okay. They're saying that I finished, so thank you very much." THE COURT: Okay. Thank you. Attorney Bassett? 4 5 6 7 MR. BASSETT: Again, Your Honor, for the record, Nick Bassett, counsel for the Chapter 11 Trustee. 8 9 10 11 12 13 Your Honor, just a few concluding points. First of all, to respond to Attorney Goldstein's comments about the Section 549 cases that I mentioned during my presentation, his points that he just made was that they don't believe any of those cases involved non-insiders. So that all of those cases involve 549 claims against insiders. 14 15 16 17 18 19 20 21 22 I would challenge the Court to review those cases and to find anywhere in those cases that distinguish between insiders and non-insiders. That was not at all the basis for the decisions by those courts. The basis for the decision by those courts was simply that they recognized that there was an alter-ego finding. The consequence of that alter-ego finding was that the alter-ego's assets were always assets of the estate. And the transfers of the assets that occurred, occurred after the petition date, full stop. 23 24 25 I'd challenge the Court to look at Section 549 and find any distinction in Section 549 between claims to insiders and claims to non-insiders. It doesn't exist. ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 117 of 125 117 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Conversely, I would make the point that the Defendants have not cited a single case like this one, where a debtor -- there may be other cases where debtors have had alter-egos and courts have dealt with those in a variety of different manners. This case, and I stressed this at the outset of my presentation and I'll stress it again, I would submit is unlike any other case in the history of Chapter 11 bankruptcy, at least on this scale. We're talking about a billionaire who filed for bankruptcy, saying he had zero assets, because every single one of the assets that he had, that he used to live his lavish lifestyle, that he used to conduct his affairs, was tucked into a shell company. The consequence of the ruling there, asking the Court to make would be in that situation, that's tough. The trustee cannot pursue a single avoidance claim because every transfer of every asset that occurred prior to the bankruptcy and after the petition date, was not a transfer by the debtor of his assets; it was a transfer by this fictional shell company that Mr. Kwok created. That would be an incredibly unjust result that is inconsistent with economic and practical reality, and inconsistent with the law. Your Honor, I'll respond to the balancing point that Attorney Goldstein concluded with. I think I tried to 25 and you look at what the courts say, it is a balance of all be very clear in my presentation, if you look at Manichaean ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 118 of 125 118 1 the factors. We're not disputing that. 2 3 4 5 6 What we are disputing is this notion that there's a requirement in the law that there cannot even be a possibility of harm to any party before the Court can issue an alter-ego ruling. That's fundamentally not what the case law says. 7 8 9 10 11 12 13 14 15 16 17 I also need to emphasize, again, that this whole argument shouldn't even be being raised right now because there's not a pleading issue. To the extent they want a to come forward later and say, you know what, we're innocent. We had no idea, and, by the way, I do not conceded that all these Defendants were, in fact, innocent. I didn't know about these transfers that they received from Mr. Kwok, but to the extent they want to make that argument, they can come forward and make that argument later as an affirmative defense. As Manichaean, the case that they say the Court should follow said, that is not a pleading issue. 18 19 20 21 22 23 In addition, Your Honor, on this whole idea of balance, I don't see any better way to balance the harms and benefits of the ruling that the trustee is seeking by relying on the Bankruptcy Code. I think that's why so many cases have said an alter-ego claim operates differently in bankruptcy. 24 25 In bankruptcy, you have inherent protections built in by the Bankruptcy Code. These parties can pursue defenses ## Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 119 of 125 1 2 3 4 5 6 that they have. They're not completely being deprived of defenses. They may wish that they were being sued as subsequent transferees, even though that's not the way the facts point out here, but they had defenses of a subsequent transferee. But they have other defenses under the Bankruptcy Code. 7 8 9 10 11 12 13 14 15 16 17 They can also assert claims, as I said, against the estate; that's the whole point. That's how this works. People affected by Mr. Kwok's fraud, who have been harmed in the wake of his years-long fraudulent scheme, all have recourse under the Bankruptcy Code. The Bankruptcy Code first requires us to collect assets and distribute them in a ratable way, which is why we were pursuing these avoidance actions and then the parties who end up having to repay the estate could have its claim under Section 502(h) of the Bankruptcy Code for recourse. That's the balance. The Code builds that in. 18 19 20 21 22 23 24 25 So, Your Honor, we think the case law that we've cited fully supports the relief that we're asking the Court to enter and we also think that that relief needs to be entered, understanding that this is being done in the context of a very unique case, unlike any other in history where a debtor simply did nothing, other than hide his assets in shell companies. It's unlike any other case and the result should be consent with the reality of how Mr. Kwok has | | Case 22-50073
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125 | |----|------------------------------------------------------------------------------------------------| | | 120 | | 1 | operated for many, many years. | | 2 | Thank you, Your Honor. | | 3 | THE COURT:
Thank you. | | | | | 4 | All right.
I have listened, obviously, to the | | 5 | parties.
There were some issues that were raised today in a | | 6 | case, or two, raised today that I have not reviewed, | | 7 | including the Gracey case that was presented today, which is | | 8 | fine, and I will review that.
I will review, obviously, all | | 9 | of the submissions again, in light of the oral arguments made | | 10 | today. | | 11 | The hope is that, you know, obviously, I will rule | | 12 | sooner as opposed to later.
It will take some time.
I'll | | 13 | have to go through all these issues.
But a decision will | | 14 | enter. | | 15 | With regard to the record of this hearing, as I | | 16 | said at the start, what the Court will do is make sure that | | 17 | the record of the hearing -- and I'm looking to the courtroom | | 18 | deputy now -- will have a list of all the Joint Defendants, | | 19 | but what we'll do is we'll indicate who argued today for the | | 20 | Joint Defendants and then for the specific Defendants, and | | 21 | then who argued for the trustee, and then following that will | | 22 | most likely be the list of the remaining Joint Defendants | | 23 | that joined the brief, okay. | | 24 | And then, because I'm -- the transcriber isn't | | 25 | going to understand it if we don't do it in that manner and | | | | 121 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 we want the transcriber to obviously understand it, and we'll go from there. Does anyone have any questions? MR. SKLARZ: Your Honor, just for logistically on behalf of my clients who have quote, unquote, non-joint issues -- THE COURT: Right. MR. SKLARZ: -- during the status conference, Your Honor, I indicated we would schedule argument that was later. THE COURT: Right. MR. SKLARZ: Would you expect -- and, again, I apologize for putting you on the spot -- would you want that argument to occur prior to your issuing a decision? THE COURT: I don't think that that will happen. MR. SKLARZ: Fair enough. THE COURT: I think that those arguments will happen after I issue a decision on the issues in the joint brief. MR. SKLARZ: Thank you, Your Honor. THE COURT: I can't say that with certainty, but that's what I believe. I don't think you're putting me on the spot; you're asking me a question. And my answer is, I believe that these issues will be decided first and then with regard to other Defendants, who are not Joint Defendants, but have pending motions to Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 121 of 125 #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 122 of 125 | 1 | dismiss, those will all have to be scheduled in some way, | |----|-----------------------------------------------------------------| | | | | 2 | shape, or form, and I believe that that scheduling will not | | 3 | happen, or whatever is going to happen with those matters, | | 4 | will not happen until after this decision is rendered. | | 5 | So, for example, could an order come out in your | | 6 | cases that say, There's going to be a hearing on the motion | | 7 | to dismiss on whatever date -- we'll just pick a date -- | | 8 | March 31st.
That could happen, but I would probably schedule | | 9 | that date thinking that I will have rendered a decision on | | 10 | all of these issues first. | | 11 | Does that make sense? | | 12 | MR. SKLARZ:
It does. | | 13 | THE COURT:
Okay.
Thank you. | | 14 | MR. GOLDSTEIN:
Your Honor, Eric Goldstein. | | 15 | I got one question from the Joint Defendants group | | 16 | about just the logistics.
We're rendering a decision on what | | 17 | we just did and the work that we've done today. | | 18 | Would it happen in the main case or would it | | 19 | happen in the adversary? | | 20 | THE COURT:
Well, you know, like we've done in the | | 21 | past is, the issues -- not in the past -- what we've done in | | 22 | connection with the joint brief is there was an orders issued | | 23 | in the main case, a brief filed in the main case, but then | | 24 | there was a filing made in every corresponding adversary | | 25 | proceeding. | #### Case 22-50073 Doc 3985 Filed 01/21/25 Entered 01/21/25 13:49:43 Page 123 of 125 | 1 | Who's going to make that filing?
I don't know.
I | |----|---------------------------------------------------------------| | 2 | mean, you know, sitting here right now, whether the trustee | | 3 | is going to do it, whether the Clerk's Office is going to do | | 4 | it, however we're going -- I don't know.
But there will | | 5 | be -- there has to be something in every adversary | | 6 | proceeding, okay, because in order for the record of each | | 7 | adversary proceeding to be complete. | | 8 | Now, will that relate you back to the main case? | | 9 | I don't know.
Sitting here, I don't know, but we'll figure | | 10 | that out. | | 11 | MR. GOLDSTEIN:
Fair enough. | | 12 | Thank you, Your Honor. | | 13 | THE COURT:
All right.
Thank you. | | 14 | Anyone else have any questions? | | 15 | Okay.
Well, I do appreciate the thorough briefing | | 16 | and the oral arguments of the parties.
Obviously, everyone | | 17 | spent a great deal of time on these issues and have provided | | 18 | me with much to think about and to review in determining | | 19 | these issues, so I do appreciate that and I appreciate that | | 20 | although the parties obviously don't agree that you've -- on | | 21 | these issues that you've worked cooperatively, and I do | | 22 | appreciate that -- that makes the job a little easier from | | 23 | the Court's perspective. | | 24 | So, this is the last matter on today's calendar, | | 25 | so Court is adjourned. | | | | | | Case 22-50073 | Doc 3985 | Filed 01/21/25
125 | Entered 01/21/25 13:49:43 | Page 124 of | |----|---------------|----------|-----------------------|---------------------------------------|-------------| | | | | | | 124 | | 1 | | | Thank you, all. | | | | 2 | | | THE DEPUTY: | All rise. | | | 3 | | | Court is adjourned. | | | | 4 | | | | (Proceedings concluded at 12:55 p.m.) | | | 5 | | | | | | | 6 | | | | | | | 7 | | | | | | | 8 | | | | | | | 9 | | | | | | | 10 | | | | | | | 11 | | | | | | | 12 | | | | | | | 13 | | | | | | | 14 | | | | | | | 15 | | | | | | | 16 | | | | | | | 17 | | | | | | | 18 | | | | | | | 19 | | | | | | | 20 | | | | | | | 21 | | | | | | | 22 | | | | | | | 23 | | | | | | | 24 | | | | | | | 25 | | | | | | | | | | | | | | | | | | | | | | Case 22-50073
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125 | | 1 | CERTIFICATION | | 2 | I certify that the foregoing is a correct | | 3 | transcript from the electronic sound recording of the | | 4 | proceedings in the above-entitled matter to the best of my | | 5 | knowledge and ability. | | 6 | | | 7 | /s/ William J. Garling
January 17, 2025 | | 8 | William J. Garling, CET-543 | | 9 | Certified Court Transcriptionist | | 10 | For Reliable | | 11 | | | 12 | | | 13 | | | 14 | | | 15 | | | 16 | | | 17 | | | 18 | | | 19 | | | 20 | | | 21 | | | 22 | | | 23 | | | 24 | | | 25 | | | | | | | |