In re Mylife, 2022 Bankr. LEXIS 3363 (Bankr. C.D. Cal. 2022).

The following is a case update written by Leonard Gumport analyzing a recent case of interest.

SUMMARY

On November 30, 2022, in In re Mylife, 2022 Bankr. LEXIS 3363 (Bankr. C.D. Cal. 2022) (MyLife), United States Bankruptcy Judge Ernest M. Robles granted the motion of MyLife.com, Inc. (“MyLife”), a debtor-in-possession, to enjoin David A. Rancourt (“Rancourt”) from pursuing an arbitration and related litigation in Florida against MyLife’s chairman and CEO, Jeffrey P. Tinsley (“Tinsley”).

To read the full published decision, click here.

FACTS

MyLife operates a website that allows subscribers to run background checks on individuals. Tinsley is the CEO, chairman, and majority shareholder of MyLife. In 2017, the FTC began investigating MyLife for allegedly deceptive trade practices.

On July 27, 2020, the United States of America (“USA”) filed a complaint against MyLife and Tinsley in the United States District Court for the Central District of California (the “California District Court”) in Case No. 2:20-cv-6692-JFW (C.D. Cal.) (the “USA Action”). On November 6, 2020, the California District Court denied Tinsley’s Rule 12(b)(6) motion to dismiss the USA’s complaint against him. United States v. MyLife.com, Inc.,499 F.Supp.3d 751, 753 (C.D. Cal. 2020).

On December 14, 2020, Rancourt filed a complaint against MyLife and Tinsley in Florida state court. Rancourt alleged that MyLife’s website contained defamatory statements about Rancourt. On January 4, 2021, MyLife and Tinsley removed that action to the United States Court for the Northern District of Florida (the “Florida District Court”) in Case No. 4:21-cv-00002-MW (N.D. Fla.) (the “Rancourt Action”). On January 22^, 2021, Rancourt filed an amended complaint against Mylife and Tinsley.

On February 5, 2021, in the Florida District Court, Tinsley and MyLife filed a motion to compel arbitration of Rancourt’s claims and to dismiss those claims. On March 16, 2021, the Florida District Court entered an order compelling arbitration of Rancourt’s claims and staying the Rancourt Action. The Florida District Court agreed with MyLife that Rancourt’s subscription agreement with MyLife included a broad arbitration clause. The Florida District Court analogized the arbitration clause to “a black hole, grabbing hold of anything and anyone that passes in its vicinity.”  

On October 19, 2021, in the USA Action, the California District Court granted a partial summary judgment in favor of the USA. Among other things, the California District Court ruled that MyLife engaged in deceptive acts in violation of Section 5 of the Federal Trade Commission Act. On December 15, 2021, the District Court entered a stipulated consent order (the “Consent Order”) and judgment (the “FTC Judgment”) against MyLife and Tinsley. The Consent Order imposed a judgment of approximately $29 million against MyLife, approximately $5 million against Tinsley, and injunctive relief against MyLife and Tinsley.

On September 2, 2022, MyLife filed a chapter 11 petition in the United States Bankruptcy Court for the Central District of California (the “Bankruptcy Court”) in Case No. 2:22-bk-14858-ER (the “Bankruptcy Case”). MyLife’s bankruptcy schedules represented that Tinsley held undisputed claims for indemnification and reimbursement against MyLife.

On September 16, 2022, in the Rancourt Action, MyLife filed a suggestion of bankruptcy, and the Florida District Court stayed further proceedings on the same day.  

On October 26, 2022, in the Bankruptcy Case, MyLife filed a motion to extend the automatic stay to Tinsley in the Rancourt Action and in the related arbitration proceeding (the “Stay Motion”). On November 2, 2022, the USA responded that it did not oppose the Stay Motion to the extent the relief sought did not affect the USA or the FTC Judgment. Rancourt did not oppose the Stay Motion.  

On November 21, 2022, MyLife filed a reply in further support of the Stay Motion. MyLife stated that it did not seek relief against the USA. On November 30, 2022, the Bankruptcy Court granted the Stay Motion.  

REASONING

11 U.S.C. § 105(a) gives bankruptcy courts the power to stay actions that are not otherwise subject to the automatic stay but threaten the integrity of the bankruptcy estate. The standard governing issuance of a preliminary injunction also governs issuance of a § 105 injunction, except that, “in lieu of showing a likelihood of success on the merits, the debtor ‘must show a reasonable likelihood of a successful reorganization.’” MyLife, at *5 (quoting Solidus Networks, Inc. v. Excel Innovations, Inc. (In re Excel Innovations, Inc.), 502 F.3d 1086, 1095 (9th Cir. 2007)).

“A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest.” MyLife, at *5 (quoting Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20 (2008) (Winter)). In the Ninth Circuit, a preliminary injunction may also issue where the likelihood of success is such that there are serious questions going to merits and the balance of hardships tips sharply in the plaintiff’s favor, provided that the plaintiff also shows that there is a likelihood of irreparable injury and that the injunction is in the public interest. MyLife (quoting Alliance For the Wild Rockies v. Cottrell, 632 F.3d 1127, 1131 (9th Cir. 2011)).

The Bankruptcy Court ruled the Stay Motion met the four-part standard for a preliminary injunction. First, MyLife showed that it had a reasonable likelihood of successfully reorganizing. Post-petition, MyLife operated a business that generated meaningful revenue and even a small profit. This was a sufficient showing of a likelihood of a successful reorganization.

Second, MyLife showed that it would likely suffer irreparable harm unless the Stay Motion was granted. Without the injunction, Tinsley would be required to spend significant time attending depositions and pretrial hearings and responding to discovery in the arbitration in the Rancourt Action. If not stayed, the demands on Tinsley’s time would prevent him from sufficiently focusing on the reorganization, thereby irreparably harming MyLife.

Third, MyLife showed that the balance of equities weighed in MyLife’s favor. Rancourt did not oppose the Stay Motion and denying it would likely irreparably harm MyLife by preventing Tinsley from having sufficient time to devote to focus on the reorganization.

Fourth, MyLife showed that the preliminary injunction was in the public interest, because its ability to reorganize would likely be impaired without the injunction. “There is a great public interest in the efficient administration of the bankruptcy system.” MyLife (quoting Adelson v. Smith (In re Smith), 397 B.R. 134, 148 (Bankr. D. Nev. 2008)).    

The Bankruptcy Court stayed the Rancourt Action as to Tinsley until such time as MyLife confirmed a chapter 11 plan. The stayed applied to both the proceeding in the Florida District Court and the arbitration proceeding.

AUTHOR’S COMMENTARY

MyLife is best understood as a case where the debtor’s motion to enjoin litigation against a non-debtor entity was unopposed. “A preliminary injunction is an extraordinary remedy never awarded as of right.” In re Mariner Health Cent., Inc., 2023 Bankr. LEXIS 114, at *20 (Bankr. N.D. Cal. 2023) (quoting Winter, 555 U.S. at 20). Rancourt’s decision to refrain from filing opposition is understandable. He was a Florida resident pursuing Florida litigation about information damaging to his Florida reputation. The Florida District Court compelled him to arbitrate his claims, while commenting that MyLife’s arbitration clause was analogous to a “black hole.” Subsequently, MyLife filed its bankruptcy in Los Angeles. It does not appear from the docket in MyLife that Rancourt incurred the expense of hiring California counsel. On March 2, 2023, the Bankruptcy Court approved a settlement between Rancourt, on the one hand, and, on the other, MyLife and Tinsley. According to the terms of the written settlement, the parties agreed to exchange releases and bear their own costs.  These materials were written by Leonard L. Gumport, shareholder of Gumport Law Firm, PC, located in Pasadena, California (lgumport@gumportlaw.net), with editorial assistance by Marc A. Lieberman, partner of FLP Law Group, LLP, in Los Angeles, California (marc.lieberman@flpllp.com).