Opinion
EP-19-CV-196-KC
12-13-2019
FEDERAL TRADE COMMISSION, and, State of Ohio ex rel. Attorney General Dave Yost, Plaintiff, v. EDUCARE CENTRE SERVICES, INC., et al., Defendants.
Christopher E. Brown, J. Ronald Brooke, Jr., Federal Trade Commission, Washington, DC, Erin B. Leahy, William Travis Garrison, Jeffrey Loeser, Office of the Attorney General, Columbus, OH, for Plaintiff. Aldo R. Lopez, Daniel H. Hernandez, Ray, McChristian & Jeans, P.C., Stephen Harrison Nickey, The Law Offices of Stephen H. Nickey, P.C., El Paso, TX, Genevieve C. Bradley, Gregory M. Caffas, Mitchell N. Roth, Roth Jackson Gibbons Condlin, PLC, McLean, VA, Benjamin Eliot New, Jeffrey A. Backman, Richard W. Epstein, Roy Taub, Greenspoon Marder LLP, Fort Lauderdale, FL, Amiad Kushner, Seiden Law Group LLP, New York, NY, Haroon Rafati, The Rafati Law Firm, PLLC, Katy, TX, for Defendants. Sam Madi, pro se. Charles Kharouf, pro se. Globex Telecom, Inc., pro se. 9506276 Canada, Inc., pro se.
Christopher E. Brown, J. Ronald Brooke, Jr., Federal Trade Commission, Washington, DC, Erin B. Leahy, William Travis Garrison, Jeffrey Loeser, Office of the Attorney General, Columbus, OH, for Plaintiff.
Aldo R. Lopez, Daniel H. Hernandez, Ray, McChristian & Jeans, P.C., Stephen Harrison Nickey, The Law Offices of Stephen H. Nickey, P.C., El Paso, TX, Genevieve C. Bradley, Gregory M. Caffas, Mitchell N. Roth, Roth Jackson Gibbons Condlin, PLC, McLean, VA, Benjamin Eliot New, Jeffrey A. Backman, Richard W. Epstein, Roy Taub, Greenspoon Marder LLP, Fort Lauderdale, FL, Amiad Kushner, Seiden Law Group LLP, New York, NY, Haroon Rafati, The Rafati Law Firm, PLLC, Katy, TX, for Defendants.
Sam Madi, pro se.
Charles Kharouf, pro se.
Globex Telecom, Inc., pro se.
9506276 Canada, Inc., pro se.
ORDER
KATHLEEN CARDONE, UNITED STATES DISTRICT JUDGE On this day, the Court considered Plaintiffs' Motion to Compel Responses to Plaintiffs' First Set of Interrogatories and First Request for Production of Documents ("Motion to Compel") as to Defendant Charles Kharouf, ECF No. 76. On December 6, 2019, Defendant filed its Response in Opposition to Plaintiffs' Motion to Compel ("Response"). ECF No. 87. On December 13, Plaintiffs filed their Reply. ECF No. 116. For the reasons set forth below, the Motion to Compel is GRANTED .
I. BACKGROUND
On July 19, 2019, this Court issued a temporary restraining order ("TRO") as to several of the Defendants in this case, including Defendant Charles Kharouf ("Defendant"). Defendant filed an Answer and Grounds of Defense to the Complaint on August 26, 2019, ECF No. 51. According to Plaintiffs, Kharouf then complied with some of the discovery requirements imposed by the TRO, including submission of financial disclosures. Motion to Compel 2. On September 9, 2019, Kharouf submitted a sworn declaration in support of Defendant Mohammad Souheil's Motion to Dismiss, ECF No. 59-2. On September 17, 2019, Kharouf voluntarily testified as corporate representative of Defendant Prolink during a deposition conducted by the FTC. Motion to Compel 2. On October 21, 2019, Plaintiffs served Defendant with interrogatories and requests for document production, pursuant to the TRO's expedited discovery terms. Id. at 3. On November 5, Defendant submitted initial disclosures to Plaintiffs pursuant to the Parties' agreed upon discovery schedule. Id.
On November 15, 2019, Defendant filed a "Suggestion of Bankruptcy" with the Court. ECF No. 72. Prior to the commencement of this action, on May 30, 2019, Defendant had filed for bankruptcy in Canada. Id. On September 12, 2019, MNP Trustee, LTD, acting as foreign representative of Defendant, filed a Petition for Recognition in the U.S. Bankruptcy Court for the Western District of Texas, El Paso Division. Id. ; see Chapter 15 Pet. for Recognition of a Foreign Proceeding, ECF No. 76-2. On October 10, 2019, the bankruptcy court entered an Order Granting Petition for Recognition of Foreign Main Proceeding ("Bankruptcy Order"). See Suggestion of Bankruptcy; Bankruptcy Order, ECF No. 76-3. The Order formally recognizes Defendant's Canadian bankruptcy proceeding pursuant to 11 U.S.C. § 1517, and accordingly enters a "stay of all proceedings" under the U.S. Bankruptcy Code's automatic stay provision, 11 U.S.C. § 362, pursuant to 11 U.S.C. § 1520(a). Bankruptcy Order ¶¶ 2–3.
On November 18, 2019, Defendant served Plaintiffs with an "Objection to Discovery in Light of Stay," indicating his intent not to comply with his outstanding discovery obligations—the October 21, 2019, interrogatories and document production requests—on grounds of the stay issued in the Bankruptcy Order. Motion to Compel 3. On November 22, 2019, the Parties met unsuccessfully to attempt to resolve the discovery dispute, and on November 29, 2019, Plaintiffs filed this Motion to Compel. See id.
II. ANALYSIS
a. Recognition of foreign bankruptcy proceedings
Chapter 15 of the U.S. Bankruptcy Code was enacted in 2005 to provide effective mechanisms for dealing with cases of cross-border insolvency. See In re Ran , 607 F.3d 1017, 1020 (5th Cir. 2010) (citing 11 U.S.C. § 1501(a) ). It replaced the Bankruptcy Code's prior framework for recognizing international proceedings, Section 304. Id. Whereas Section 304 provided for a largely discretionary comity analysis, Chapter 15 "creates a formal structure for administering" foreign proceedings, including its requirement that "a foreign representative must now obtain recognition prior to pursuing remedies in the United States." In re Loy , 432 B.R. 551, 558 (E.D. Va. 2010) ; see also In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd. ("Bear Stearns "), 389 B.R. 325, 333 (S.D.N.Y. 2008) ("[A]ll relief under section 304 was discretionary and based on subjective, comity-influenced factors.... By establishing a simple, objective eligibility requirement for recognition, Chapter 15 promotes predictability and reliability.").
Chapter 15 allows a debtor in a foreign bankruptcy proceeding to obtain relief under the U.S. Bankruptcy Code—including the automatic stay provision's protections, staying all pending legal proceedings against the debtor—when certain prerequisites are met. See In re Ran , 607 F.3d at 1021–22. A "foreign representative," as appointed by the foreign body, must file a Chapter 15 Petition for Recognition with the bankruptcy court, along with accompanying documentation. 11 U.S.C. § 1515(a) – (c). The bankruptcy court may then enter an order recognizing the foreign bankruptcy as a "foreign main proceeding," meaning the pending bankruptcy proceeding is taking place where the debtor has the center of its main interest. In re Ran , 607 F.3d at 1021–22 (citing 11 U.S.C. §§ 1502, 1517 ). Upon recognition, " sections 361 and 362 apply with respect to the debtor and the property of the debtor that is within the territorial jurisdiction of the United States." 11 U.S.C. 1520(a)(1) ; see In re Ran , 607 F.3d at 1021.
Section 362's familiar automatic stay provision stays any pending or future actions against a debtor in order to "protect the debtor's assets" and "provide temporary relief from creditors." In re Halo Wireless, Inc. , 684 F.3d 581, 586 (5th Cir. 2012) (quoting Reliant Energy Servs., Inc. v. Enron Can. Corp. , 349 F.3d 816, 825 (5th Cir. 2003) ). There are, however, exceptions to the generally broad stay provision. Id. Section 362(b)(4) codifies the "police and regulatory power" exception, which excepts from the stay actions brought by a governmental unit to enforce police or regulatory powers. Id. at 586–87 (explaining that the exception discourages debtors from using bankruptcy proceedings to evade governmental efforts and prevents the bankruptcy court from becoming a haven for wrongdoers).
b. Defendant's objection to discovery based on the Bankruptcy Order
In this case, Plaintiffs argue that Defendant's objection to their discovery requests lacks legal authority because the Bankruptcy Order imposes § 362—including its exceptions—upon the debtor, as required by Chapter 15. See Motion to Compel 4. Defendant argues that "Plaintiffs are wrongly proceeding as though 11 U.S.C. § 362 applies" even though, "[a]s a Canadian citizen, Mr. Kharouf never sought protection under 11 U.S.C. § 362 and therefore the exception on which Plaintiffs rely under Section 362(b)(4) is inapplicable." Resp. 0.
Whether the automatic stay provision applies to a given action is an issue of law within the jurisdiction of both the bankruptcy court and the court in which the litigation is pending. Hunt v. Bankers Trust Co. , 799 F.2d 1060, 1069 (5th Cir. 1986). Here, the bankruptcy court clearly ordered that " 11 U.S.C. §§ 361 and 362 apply with respect to the Debtor and property of the Debtor that is within the territorial jurisdiction of the United States." Bankruptcy Order ¶ 3. Furthermore, the bankruptcy court stated that
This Order does not constitute a determination by this Court that the automatic stay of 11 U.S.C. § 362(a) applies to the suit against the Debtor styled Federal Trade Commission et al. v. Educare Centre Services, Inc. et al. , cause no. 3:19-CV-0196-KC pending in the U.S. District Court for the Western District of Texas, El Paso Division. See 11 U.S.C. § 362(b)(4).
Id. ¶ 6.
Similarly, in extending the foreign representative authority over the debtor's business, as provided in Chapter 15, 11 U.S.C. § 363, the bankruptcy court qualified, "except that MNP Trustee may not operate the Debtor's business that is the subject of the suit styled Federal Trade Commission et al. v. Educare Centre Services, Inc. et al. , cause no. 3:19-CV-0196-KC pending in the U.S. District Court for the Western District of Texas, El Paso Division." Id. ¶ 3. Given this exception, and the bankruptcy court's explicit qualification that its order was not applying the automatic stay provision to this case—citing § 362(b)(4) —it appears that the bankruptcy court exercised its discretion to find the stay does not apply to this action due to the police powers exception.
To the extent there is any ambiguity in the Bankruptcy Order's lack of an affirmative statement finding as much, this Court also has discretion to find that the stay does not apply. See Hunt , 799 F.2d at 1069. It so finds. The Bankruptcy Order clearly imposes " sections 361 and 362 with respect to the Debtor," not merely 362(a), such that § 362(b)(4)'s exception attaches. See Bankruptcy Order ¶ 3. And there is little question that the FTC is a "governmental unit" as referred to in the statute and that its enforcement actions fall under the 362(b)(4) exception's purview. See, e.g., FTC v. Direct-Prom, Inc. , No. 3:05-cv-186-FM, 2005 WL 1313846, at *1 (W.D. Tex. May 26, 2005) ; FTC v. Rensin , 771 F. App'x 84, 85 (2d Cir. 2019) ; FTC v. Commerce Planet, Inc. , 815 F.3d 593, 597 n.1 (9th Cir. 2016) ; see also H.R. Rep. No. 95–595, at 343, reprinted in 1978 U.S.C.C.A.N. 5963, 6299 (stating, in the House Report accompanying § 362's enactment, "where a governmental unit is suing a debtor to prevent or stop violation of ... consumer protection ... or regulatory laws, or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the automatic stay"). Indeed, Chapter 15 itself, under which the Bankruptcy Order's authority is derived, anticipates that its imposition of § 362 may impact governmental enforcement actions, and specifically provides that "[t]he court may not enjoin a police or regulatory act of a governmental unit, including a criminal action or proceeding, under this section." 11 U.S.C. § 1521(d).
Therefore, the Court concludes that the automatic stay of proceedings imposed upon the Defendant by the Bankruptcy Order does not stay this action pursuant to § 362(b)(4)'s police powers exception, and accordingly, the Bankruptcy Order does not provide Defendant legal authority to object to discovery. Defendant responds that the Court should not be applying the U.S. Bankruptcy Code at all, instead contending that this case is stayed as to Defendant pursuant to the Canadian proceeding's authority. Resp. 3 ("[T]his case should be stayed in light of Canada's automatic stay provision in Canada's Bankruptcy and Insolvency Act (‘BIA’) § 69 – not 11 U.S.C. § 362 – and under principles of comity."). Defendant states that he "never sought protection under 11 U.S.C. § 362" and that "the sole purpose of the U.S. bankruptcy proceeding was to seek recognition [of] the consumer proposal proceedings according to principles of comity." Id. at 1–2.
The Court also notes that Defendant participated in the litigation in multiple capacities—filing an answer, submitting financial disclosures, serving as deponent for a corporate defendant—despite the existence of the Canadian bankruptcy proceeding and its respective stay of proceedings. See Motion to Compel 2–3. Furthermore, Defendant submitted his initial disclosures to Plaintiffs on November 5, 2019, following the bankruptcy court's October 10, 2019 issuance of the Bankruptcy Order. Id. at 3. The Court is weary of sanctioning use of the Bankruptcy Order to selectively abstain from particular discovery obligations.
This was not, however, the sole purpose of the bankruptcy proceeding. "[R]elief under Chapter 15 is available only after a foreign representative commences an ancillary proceeding for recognition" in the bankruptcy court, and "[i]n the absence of recognition under chapter 15, this Court has no authority to consider [the debtor's] request for a stay." See United States v. Jones Constr. Grp. , 333 B.R. 637, 638–39 (E.D.N.Y. 2005) (emphasis added); In re Vitro S.A.B. de CV , 701 F.3d 1031, 1044 (5th Cir. 2012). Thus, the bankruptcy court proceeding, initiated when Defendant's foreign representative filed a Chapter 15 Petition for Recognition, was a prerequisite to Defendant's raising a stay of proceedings argument in this Court. See Reserve Int'l Liquidity Fund, Ltd. v. Caxton Int'l Ltd. , No. 09 Civ. 9021(PGG), 2010 WL 1779282, at *4 (S.D.N.Y. Apr. 29, 2010) ("The statute requires that a ‘foreign representative’ must obtain recognition pursuant to 11 U.S.C. § 1517 —typically by petitioning a bankruptcy court—before he or she may apply directly to a court in the United States for appropriate relief in that court.") (internal quotations omitted); In re Ran , 607 F.3d at 1021–22. Had Defendant's foreign representative not first obtained the Bankruptcy Order, this Court would have no basis to even consider the Canadian proceeding as the basis for a stay as Defendant requests. See id. (noting the House Report accompanying Chapter 15's enactment stated that "Chapter 15 is intended to be the exclusive door to ancillary assistance to foreign proceedings") (quoting H.R. Rep. No. 109-31, at 110–11 (2005)) (emphasis added). Therefore, Defendant did, in fact, seek protection under § 362 when he sought to obtain a stay of all proceedings in the United States based on his Canadian bankruptcy proceeding, even if he now hopes to avoid application of its exceptions.
Defendant disagrees, urging that the Court could enter such a stay absent the Bankruptcy Order based on principles of comity rather than Chapter 15's statutory framework. But Chapter 15 was enacted in place of § 304—which did rely on highly discretionary comity analyses—specifically to prevent such arguments. See id. (noting that § 304's "procedure is undesirable, because there is room for abuse of comity" and "[p]arties would be free to avoid ... the expert scrutiny of the bankruptcy court by applying directly to a state or Federal court"); Bear Stearns , 389 B.R. at 333 ("[Chapter 15 is] a condition to nearly all court access and consequently as a condition to granting comity," which "distinguishes Chapter 15 from its predecessor section 304 ... [because] all relief under section 304 was discretionary and based on subjective, comity-influenced factors.").
Thus, Defendant urges the Court to ignore Chapter 15's framework—and its mandatory imposition of § 362 —and instead unilaterally recognize the Canadian bankruptcy's proceeding, and its accompanying stay provision, based on comity principles as would be analyzed under § 304. However, the Fifth Circuit has clearly rejected such theories:
Lavie urges the court to recognize the Israeli proceeding to effect the principles of comity and deference[.] ... This argument has no merit. The plain language of Chapter 15 requires a factual determination with respect to recognition before principles of comity come into play. See 11 U.S.C. § 1507. By arguing comity without first satisfying the conditions for recognition, Lavie urges this court to ignore the statutory requirements of Chapter 15.
In re Ran , 607 F.3d at 1026.
Therefore, this Court rejects them here as well.
Indeed, Defendant states that "Plaintiffs are wrongly proceeding as though 11 U.S.C. § 362 applies" and that doing so is "[c]ontrary to every district court opinion of which Mr. Kharouf's counsel is aware. " Resp. 0 (emphasis added). However, with a single exception, Defendant only cites cases from prior to 2005, when Chapter 15 was enacted and § 304 was repealed. See generally Resp.
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Finally, Defendant argues that the Bankruptcy Order did not have the effect of applying § 362 to Defendant because "the Bankruptcy Court stated ... [‘]U.S.C. §§ 361 and 362 apply with respect to the Debtor and property of the Debtor that is within the territorial jurisdiction of the United States. ’ " Resp. 5 (quoting Bankruptcy Order ¶ 3) (emphasis in original). Therefore, Defendant argues, "Mr. Kharouf does not have property within the United States and so Section 362 is inapplicable." However, as Plaintiffs point out, Defendant's statement effectively "read[s] the words ‘with respect to the debtor’ out of the statute." Reply 3. That Defendant does not have property in the United States has no bearing on whether he is subject to the Bankruptcy Order obtained by his foreign representative for the purpose of staying the proceedings he is party to in the United States. See In re ABC Learning Centres Ltd. , 728 F.3d 301, 304, 311 (3d Cir. 2013).
The bankruptcy court properly recognized the Canadian proceeding pursuant to Chapter 15 and applied § 362 to Defendant as is required by the statute. Because this Court finds that the present action falls under § 362(b)(4)'s police and regulatory powers exception to § 362(a)'s automatic stay provision, Defendant has no authority to object to Plaintiffs' discovery requests on the basis of a stay of this proceeding due to his Canadian bankruptcy.
III. CONCLUSION
For the foregoing reasons, the Plaintiffs' Motion to Compel, ECF No. 76, is GRANTED.
Defendant is hereby ORDERED to comply with Plaintiffs' request for interrogatories and production of documents and to otherwise comply with all discovery obligations imposed by the TRO.