The following is a case update written by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLP, analyzing a recent decision of interest:
In NetJets Sales, Inc. v. RS Air, LLC (In re RS Air, LLC),, 2022 WL 1284012 (9th Cir. BAP 2022,) (“NetJets”), in an unpublished decision, the United States Bankruptcy Appellate Panel for the Ninth Circuit (the “BAP”) reversed the Bankruptcy Court’s ruling that the appellant’s motion for creditor standing to bring a claim on behalf of the estate failed to state a claim because the action was unlikely to succeed since the Bankruptcy Court applied the incorrect standard for resolution of the motion.
NetJets can be found here.
Appellant NetJets, Inc. (“NetJets”) held 98% of non-insider debt of debtor/appellee RS Air, LLC (“RSA”)’s non-insider debt when RSA filed its Chapter 11 petition. NetJets quickly moved the Bankruptcy Court for standing to bring an alter ego action to pierce RSA’s corporate veil on the estate’s behalf to reach various affiliates of RSA, including its principal (the “Affiliates” and, together with RSA, the “Appellees”), as RSA’s alter egos liable for the estate’s debt (for the ultimate benefit of its creditors). In the motion, NetJets claimed that the attached draft complaint stated a “colorable” alter ego claim on the estate’s behalf based on allegations that the Affiliates engaged in such conduct as systematic underfunding of the debtor and manipulation of the debtor’s accounts to stash as much of RSA’s money as possible elsewhere in order to insulate the funds from the Debtor’s creditors, leaving a minimal amount in its accounts. This scheme to frustrate the Debtor’s creditors, the motion and draft complaint alleged, culminated in the filing of RSA’s Chapter 11 case when its debts became so overwhelming that the Affiliates concluded that there were too many holes in the dike to plug at once. Finally, NetJets asserted that it had made demand on RSA to bring the alter ego claims itself, but that RSA unjustifiably declined to do so.
The Bankruptcy Court applied the four-part test applicable to such standing motion noted in Morabito v. JH, Inc. (In re Consolidated Nevada Corp.), 2017 WL 6553394 (9th Cir. BAP 2017): the moving creditor demanded that estate bring the alter ego claims, the estate declined to do so, the claims at issue were “colorable” opportunities to recover on the estate’s behalf and the debtor in possession had a duty to bring them. The Bankruptcy Court denied the motion on the grounds that the claims were not colorable; it appears from the BAP’s opinion that the Bankruptcy Court based this conclusion on a finding that the claims were not likely to succeed. NetJets appealed, and the BAP reversed and remanded to the Bankruptcy Court.
The BAP noted initially that it had serious questions whether the alter ego claims even belonged to RSA rather than to individual creditors (such as NetJets). However, because NetJets did not raise the question below, the BAP declined to consider it on the appeal.
The BAP then turned to resolving the appeal as presented to it. The standard of review that it had to apply, it declared, was whether the Bankruptcy Court had abused its discretion. The BAP had no quarrel with the four-part test that the Bankruptcy Court applied to the issue before it. Essentially, it saw the case as turning on application of the standards for decision a motion to dismiss for failure to state a claim under Fed. R. Civ. Pro. 12(b)(6) (as incorporated by Fed. R. Bankr. Pro. 7012). What it did disagree with in the Bankruptcy Court’s decision was the latter’s resort to an assessment not of whether the complaint stated a claim for relief, which is supposed to be determined by assuming the truth of the complaint’s factual allegations and analyzing whether if those facts were established NetJets would be entitled to the relief it sought in the draft complaint, but on whether NetJets was likely to be able to prove its case. In doing, the BAP held, the Bankruptcy Court abused its discretion.
NetJets is a bit opaque. While its analytic framework is informative, the BAP excerpts no written decision or hearing transcript to illustrate how the Bankruptcy Court decided the appeal based not on 12(b)(6) standards but on its assessment of NetJets’ prospects of succeeding on the merits. Thus, the reader has only the BAP’s word for what the Bankruptcy Court did. Therefore, even though unpublished, the opinion’s potential guiding future litigants, counsel and courts is, unfortunately, compromised.
These materials were authored by Adam A. Lewis, Senior Counsel, Morrison & Foerster LLP, a member of the ad hoc group, with editorial assistance by Meredith Jury, (bankruptcy judge, C.D. Cal. (Ret.)), a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.