Business Law

Further Defining Vexatious Litigants in Federal Bankruptcy Cases in 2020 and Beyond

The following is a case summary written by Kathleen A. Cashman-Kramer analyzing In Koshkalda v. Schoenmann (In re Koshkalda), 622 B.R. 749 (9th Cir. BAP 2020).

Summary

The Bankruptcy Appellate Panel for the Ninth Circuit remanded in part and reversed in part the decision of the bankruptcy court for the Northern District of California that entered a pre-filing order upon a finding that a chapter 7 debtor was a vexatious litigant. In doing so, the Ninth Circuit BAP engaged in a very thorough analysis of what is required for a pre-filing order to issue in the Ninth Circuit.

Factual Background

The facts are not complicated but demonstrate a lengthy history of litigation that began with an action filed by creditors Seiko Epson Corporation and Epson America, Inc. (jointly “Epson”) against Artem Koshkalda and others for trademark infringement and counterfeiting, and other claims.  After lengthy litigation (including orders against Koshkalda and others prohibiting their wrongful conduct, as well as noncompliance with court orders, and “severe and repeated discovery abuses” by Koshkalda), the district court struck his answer and entered a default judgment for $12 million in favor of Epson. 

After the district court entered the default but before the judgment was entered, in January 2018 Koshkalda filed a chapter 11 case.  Epson did three things: First, it moved to dismiss the bankruptcy case as a bad faith filing; however, the court instead converted the case and appointed a chapter 7 trustee.  Next, Epson sought and was granted relief from stay to have the default judgment (entered without notice of the bankruptcy filing) retroactively validated entered. (Koshkalda appealed that judgment, but the Ninth Circuit affirmed it in December 2019.  See Seiko Epson Corp. v. Koshkalda, 799 F.App’x 463 (9th Cir. 2019), cert. denied, 141 S.Ct. 956, 208 L.Ed.2d  494 (2020)

Finally, in May 2018, Epson also filed an adversary proceeding in connection with the bankruptcy case seeking to deny Koshkalda a discharge (the “Epson Adversary”).  Ultimately, Epson was granted summary judgment on the section 727 claims.  The Ninth Circuit BAP affirmed the judgment portion, but vacated the bankruptcy court’s denial of costs to Epson, and remanded it to allow Epson to submit its bill of costs.  See Koshkalda v. Epson, 2020 Bankr. LEXIS 1382 * (9th Cir. BAP May 26, 2020); appeal dismissed by Koshkalda v. Seiko Epson Corp. (In re Koshkalda), 2020 U.S. App. LEXIS 30433 (9th Cir., Sept. 23, 2020); decision reached on appeal by, remanded by the instant case.   

While Epson’s adversary proceeding was pending, the Chapter 7 trustee had troubles of her own with Koshkalda.  During the ensuing months, the trustee liquidated over $5 million of estate assets, paid secured and administrative claims, but was unclear to what extent, if any, there would be funds left over to pay unsecured claims, such as the Epson judgment.  The reason for this became clear: Koshkalda objected to most of the trustee’s efforts to sell property, to pay claims, and to pay professionals.  He also filed numerous motions to try to force the trustee to abandon her efforts, and continued to file similar motions even after having received repeated explanations from the court of what he needed to establish.  The final straw happened when Koshkalda objected to the continued employment of the trustee and her counsel and, after those efforts were denied by the court, filed a motion to vacate the court’s order approving retention of the trustee’s counsel.  When the trustee filed her opposition to Koshkalda’s motion to vacate the employment order, she also requested that the court enter “a pre-filing order . . . requiring that he obtain court-permission before being permitted to file any further papers in this bankruptcy case.”  Id. at 756.  The trustee listed eleven separate motions Koshkalda filed in the bankruptcy case, as well as those he filed in the Epson Adversary as evidence of vexatious conduct, as well as the fact that the bankruptcy court and the district court had previously imposed other forms of sanctions against Koshkalda but that these lesser sanctions had not proven successful in curbing Koshkalda’s vexatious conduct. Id.

After denying Koshkalda’s motion to vacate the employment order, the bankruptcy court set the vexatious litigant motion for hearing in February 2020; shortly thereafter Epson joined the trustee’s vexatious litigant motion. However, Epson sought to extend the pre-filing order to the Epson Adversary and cited to numerous frivolous filings and abusive litigation tactics by Koshkalda not only in the bankruptcy case but also in the district court Infringement Action and in the Epson Adversary. Koshkalda opposed both motions, the bankruptcy court vacated the hearing and took the matter under submission. Id.

On February 18, 2020, the bankruptcy court entered its Vexatious Litigant Ruling, in which it granted the trustee and Epson the relief they requested. In its decision, the bankruptcy court detailed the history of Koshkalda’s actions and examined roughly 44 of Koshkalda’s filings in the bankruptcy case and in the Epson Adversary Proceeding. In almost every instance, the bankruptcy court found that each specific paper was frivolous, filed with the intent to harass, or both.

The court then explained that the impetus for its ruling was not the sheer volume of papers Koshkalda filed, but “[r]ather, it is the lack of merit, falsity, and duplicative nature of the disputes instigated by Mr. Koshkalda that forces the court to its conclusion.” The court went on to elaborate:

Each and every time, Mr. Koshkalda raised arguments the court rejected, sometimes several times over. He made factual allegations that were half-true or completely untrue. He lied to the court repeatedly in order to evade Seiko Epson’s efforts to trace allegedly fraudulent transfers in which Mr. Koshkalda had involved his parents. In this judge’s seven years on the bench, no single litigant has soaked up and wasted more resources than Mr. Koshkalda.

Id. at 756-57.  The court specifically found that it was Koshkalda’s “frivolous and harassing litigation” that directly led to estate funds being used to pay administrative expenses rather than the claims of unsecured creditors.  The court therefore determined that entry of a pre-filing order in the bankruptcy case and in the Epson Adversary was warranted.  Koshkalda timely appealed both orders.

Result and Reasoning

On appeal, the BAP discussed at length the applicable standard in the Ninth Circuit in connection with vexatious litigious conduct, citing cases including: Ringgold-Lockhart v. Cty. of L.A., 761 F.3d 1057, 1062 (9th Cir. 2014); Molski v. Evergreen Dynasty, 500 F.3d 1047 (9th Cir. 2007); United States v. Hinkson, 585 F.3d 1247, 1262-63 & n.21 (9th Cir. 2009); Dyer v. Lindblade (In re Dyer), 322 F.3d 1178, 1196 (9th Cir. 2003); Caldwell v. Unified Capital Corp. (In re Rainbow Magazine, Inc.), 77 F.3d 278, 284 (9th Cir. 1996), and other cases.[1]  The BAP then carefully addressed, discussed and concluded that all of Koshkalda’s grounds for appeal had no merit because: (1) he had adequate notice and opportunity to oppose the motions for pre-filing orders; (2) the bankruptcy court presented an adequate record on review; and (3) the bankruptcy court’s findings of frivolousness and harassment were not clearly erroneous.  Id. at 758-761.  In doing so, the BAP cited considerable details of the conduct by Koshkalda up to that time which had led to, and supported the bankruptcy court’s findings.

However, the BAP declined to go along with the bankruptcy court on one ground: it found that the bankruptcy court’s pre-filing order was not sufficiently narrowly tailored in two respects: (1) as to the pre-filing order issued in the Epson Adversary, the court found no need for a pre-filing order, since the adversary proceeding was no longer pending, and (2) as to the pre-filing order in both cases, the BAP found them to be overbroad because they impermissibly violated the prohibition against pre-filing merits-screening of pleadings.

The BAP also addressed Koshkalda’s argument that the necessary requirement of multiple actions was not satisfied here, since the only “action” he field was the bankruptcy case, and he was a defendant in the Epson Adversary, not the plaintiff.   The BAP concluded that “the absence of multiple lawsuits does not mean that the bankruptcy court must stand by impotently while the estate’s assets are exhausted to litigate Koshkalda’s repetitive, frivolous, and harassing filings after other less severe measures have proven inadequate. The bankruptcy court properly took this into account when finding that Koshkalda’s filings were inordinate and imposing the pre-filing orders as a matter of last resort.”  Id. at 768.

While the BAP ultimately found that Koshkalda was indeed a vexatious litigation, it vacated and remanded the case pre-filing order with instructions for the bankruptcy court to remove the merit review provision, and to only include papers filed in the chapter 7 case.  It also reversed the order in the Epson Adversary as being no longer necessary in light of the case completion.

Author’s Commentary

As a chapter 13 trustee’s counsel for a number of years, I had some experience with pre-filing orders and vexatious litigants.  The decision in this case appears to be correct, based upon the current standards.  But it begs the ultimate question: how much frivolous litigation does a party need to put up with from a litigant who is sufficiently savvy of the court system and the bankruptcy rules, and who manages to draw out litigation for improper purposes and at a great cost? The BAP in this case was careful to note that no court could put a number on the amount of frivolous pleadings that would constitute harassment; rather, the frivolous filings had to be “inordinate” in number (Id. at 760) and it would not set a minimum numbers of filings to determine if the litigant was vexatious.  (Id. at 765).  In short, the court seemed to be taking the position that the facts of each case were determinative; just as the Supreme Court once opined about what constitutes pornography: The oft-paraphrased sentiment was used in 1964 by United States Supreme Court Justice Potter Stewart in his concurring opinion on describing his threshold test for obscenity in Jacobellis v. Ohio, 378 U.S. 184, 197 (1964), when explaining why the material at issue in the case was not obscene and therefore was protected speech that could not be censored:

I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [“hard-core pornography”], and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.

Perhaps this applies to vexatious litigants as well. 

This case has also been a moving target: since this author agreed to write on this case, there have been three more recent decisions involving this debtor and these cases.  Two of these decisions include two denials by the U.S. Supreme Court of Koshkalda’s petitions for writs of certiorari in connection with his litigation with Epson.  See 2020 U.S. LEXIS 6023 (December 14, 2020) and 2021 U.S. LEXIS 713 (January 25, 2021).  All told, there are now at least 29 appellate decisions – and Koshkalda is the appellant in all of them.  

These materials were authored by Kathleen A. Cashman-Kramer, Of Counsel at Sullivan Hill Rez & Engel (Cashman-Kramer@Sullivanhill.com), with editorial contributions from Insolvency Law Committee member Jessica Simon and the Insolvency Law Committee Publications Committee.


[1] In its decision, the BAP itself noted that pre-filing orders are not final and appealable until a judgment is entered concluding the litigation.  It then noted that, while the Epson Adversary was closed, the chapter 7 case was reopened.  To resolve any question in that regard, the BAP granted leave to appeal. 

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