Opinion
Case No. 99-15213-SSM
December 15, 1999
Roy B. Zimmerman, Esquire, Alexandria, VA, Of Counsel for the debtor
H. Jason Gold, Esquire, Gold Morrison Laughlin, P.C., Alexandria, VA, for Chapter 7 trustee
John W. Toothman, Esquire, Toothman White, P.C., Alexandria, VA, of Counsel for Richard S. Mendelson, Special Receiver
Patrick J. Kearney, Esquire, Freedman, Levy, Kroll Simonds, Washington, D.C., of Counsel for Covell Holdings, Ltd.
MEMORANDUM OPINION AND ORDER
Before the court is the emergency motion of Covell Holdings Corporation ("Covell"), which claims to be a 49% limited partner of Interlase, L.P. ("Interlase"), for a stay pending appeal of this court's order of November 24, 1999, which suspended proceedings in Interlase's chapter 7 case in favor of a state court receivership proceeding that had been pending for over 9 months at the time the chapter 7 case was commenced.
The order was not entered on the docket until December 2, 1999.
Briefly, this chapter 7 case was filed on July 1, 1999, in the United States Bankruptcy Court for the Northern District of Georgia. The petition was signed by one Mohica Nixon on behalf of an entity called Decree, Inc. ("Decree"), which in turn purported to act on behalf of Lucre Investments, Inc. ("Lucre"), which is represented to be the sole general partner. Decree is a Panamanian corporation, while Lucre is a Turks Caicos Islands corporation with a business address in the Bahamas. Covell likewise is an offshore entity with a business address in the Bahamas. The bankruptcy court in Georgia transferred the case to the United States District Court for the Eastern District of Virginia, which in turn referred it to this court.
At the time the chapter 7 petition was filed, Interlase had been for some nine months the subject of a receivership in the Circuit Court of Arlington County, Virginia. The receivership action had been filed by Coster Family L.P. ("Coster"), the only other limited partner of the debtor and the holder of a 49% equity interest. The apparent impetus for the receivership was a charging order that had been obtained by Wendy Fox to satisfy a divorce award against her husband, Dr. Kenneth Fox. Dr. Fox's interest in four United States patents for medical laser devices had been transferred to an entity called Pillco and then to Interlase. After the receiver was appointed September 14, 1998, Interlase transferred the patents to an entity called White Star Holdings ("White Star"), which the state court found to a sham entity and the alter ego of Dr. Fox. The state court further found the transfer to White Star was fraudulent as to Wendy Fox and Coster and ruled that Interlase was the owner of the transferred patents. Based on the state court rulings, the United States District Court for this district entered summary judgment against White Star (which had filed suit in that court against a company called Spectranetics Corp. ("Spectranetics") to recover unpaid royalties). In that action, Spectranetics filed an interpleader cross-claim and has paid into the registry of the United States District Court something over $600,000 in royalties to abide a determination as to who is entitled to receive them.
The state court receiver, supported by Wendy Fox and Coster, moved to dismiss the chapter 7 case. After hearing argument and reviewing the exhibits offered by the parties, I concluded that, based on an order entered by the state court in the receivership action, Lucre had no authority to act for the debtor in filing a chapter 7 petition, and that, even if it did have such authority, the circumstances strongly suggested that the chapter 7 filing had been orchestrated by Dr. Fox solely for the purpose of forum shopping. Rather than dismiss the bankruptcy case outright, however, I determined that it was appropriate to retain the ability to at some future time to take control over the liquidation of the debtor's assets if it appeared that bankruptcy administration was more likely to promote the interest of creditors than the receivership action. Accordingly, I ruled that it was appropriate, as permitted by 11 U.S.C. § 305, to suspend the proceedings in this court and to further review the matter in approximately six moths. It is from this order that Covell has filed a notice of appeal and with respect to which it seeks a stay pending appeal.
In order to obtain a stay pending appeal, the party seeking the stay must show (1) that it will likely prevail on the merits of the appeal; (2) that it will suffer irreparable injury if the stay is denied; (3) that other parties will not be substantially harmed by the stay; and (4) that the public interest will be served by granting the stay. Long v. Robinson, 432 F.2d 977, 979 (4th Cir. 1970); In re Kent 145 B.R. 843 (Bankr. E.D.Va. 1991). With respect to the first factor, a literal application of the test would be somewhat unfair, since in the very nature of things trial courts do not make rulings they believe are "likely" to be reversed. I conclude, therefore, that it is sufficient if the party applying for the stay shows that the issue to be argued on appeal is sufficiently grave, novel, unsettled, or difficult that reversal is a real possibility, even if it is not "likely" in the everyday sense of that term. In this connection, the permissible limits of abstention in the bankruptcy context are not well defined, and there are relatively few reported decisions. Additionally, since the most immediately available assets — the royalties being paid by Spectranetics into the registry of the district court — are protected so long as they remain undisbursed, no significant harm is likely to be suffered by creditors if the effect of the court's ruling is stayed for the relatively brief period of time — typically two to four months — that is required for determination of an appeal by the district court. At the same time, it is difficult to see what irreparable harm results to Covell. Covell, after all, is not a creditor but an equity interest holder. It is the work of the state court receiver that has resulted in the recovery of the patents and the establishment of the debtor's rights to the royalties from Spectranetics. Put another way, without the receiver's efforts Covell would be the 49% owner of nothing. As the holder of an equity interest, Covell is entitled to be paid only after all valid debts are paid. What Covell is really alleging as the "irreparable harm" is that the state court will find that Wendy Fox has a valid claim and that her claim will come ahead of its equity interest. But even if that happens, Covell has a remedy from any error by the state court in the form of an appeal from its rulings. Additionally, given the strong circumstantial evidence in this case that the debtor's chapter 7 filing was orchestrated by Dr. Fox solely for the purpose of shifting the litigation from one forum into another, a stay pending appeal simply plays into his hands and furthers his goal of delay. On balance, I cannot conclude that a sufficient basis has been shown for granting a stay pending appeal. Nevertheless, given the unusual facts of this case, and mindful that the district court may view the matter of likelihood of success on the merits differently, I will grant a ten-day stay in order to give Covell an opportunity to seek a further stay from the district court.
ORDER
For the foregoing reasons, it is
ORDERED:
1. The motion for stay pending appeal is granted in part and denied in part. The effectiveness of the order of November 24, 1999, suspending proceedings in this case is stayed through and including December 25, 1999. The motion for stay is otherwise denied.
2. The clerk will mail a copy of this order to the parties listed below.