In re: Rs Air, LLC

FILED
APR 26 2022
SUSAN M. SPRAUL, CLERK
NOT FOR PUBLICATION U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. NC-21-1102-GTB
RS AIR, LLC
Debtor. Bk. No. 20-51604
NETJETS SALES, INC.; NETJETS
AVIATION, INC.; NETJETS SERVICES,
INC.,
Appellants,
v. MEMORANDUM*
RS AIR, LLC; STEPHEN G. PERLMAN;
REARDEN LLC,
Appellees.
Appeal from the United States Bankruptcy Court
for the Northern District of California
M. Elaine Hammond, Bankruptcy Judge, Presiding
Before: GAN, TAYLOR, and BRAND, Bankruptcy Judges.
INTRODUCTION
NetJets Sales, Inc, NetJets Aviation, Inc, and NetJets Services Inc.
(collectively “NetJets”) appeal the bankruptcy court’s order denying its
motion for derivative standing to pursue claims on behalf of the estate of
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
chapter 111 debtor, RS Air, LLC (“Debtor”) and against Debtor’s principal,
Steven G. Perlman (“Perlman”), his trust, and Rearden LLC (“Rearden”
and collectively “Appellees”). NetJets sought standing to pierce Debtor’s
corporate veil to make Appellees liable for the underlying contractual debt
owed to NetJets.
The bankruptcy court’s analysis turned solely on whether NetJets
could assert a colorable claim on behalf of the estate. Although the
bankruptcy court based its decision on the sufficiency of the facts alleged
by NetJets, we question whether the claim which NetJets sought to assert
was really a claim belonging to the estate or an equitable remedy belonging
to the creditor.
But this question was not presented to the bankruptcy court, and the
record was not developed on this issue. Consequently, we do not decide
whether the purported action is property of the estate or whether the estate
has exclusive standing to pursue such action.2
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
2 It is undisputed that prior to Debtor’s bankruptcy filing, NetJets had standing
to file an action to pierce Debtor’s corporate veil. Debtor argues that under Delaware
law, it also had standing to pierce its own corporate veil and, after filing the petition, its
standing became exclusive.
We note that even if the estate has exclusive standing to pierce its corporate veil,
Debtor’s plan does not administer or otherwise dispose of the purported veil-piercing
action, and to the extent Debtor has exclusive standing, it will terminate upon the
confirmation order becoming effective. See Koch Refin. v. Farmers Union Cent. Exch., Inc.,
2
Because the bankruptcy court erred in its application of the
colorability standard, we VACATE and REMAND.3
FACTS 4
In November 2020, Debtor filed a chapter 11 petition. NetJets is
Debtor’s largest, non-insider creditor and holds approximately 98% of the
total non-insider debt. Debtor filed both initial and amended chapter 11
plans. Neither provided for full payment of NetJets’ claim.
NetJets responded with a motion for standing to commence and
prosecute an action on behalf of the estate to pierce Debtor’s corporate veil
(the “Standing Motion”). It argued that the bankruptcy case was filed as a
litigation tactic to avoid judgment against Debtor in a state court
proceeding and to shield the other Appellees from potential liability.
NetJets urged the bankruptcy court to dismiss the case or alternatively
allow NetJets to pursue claims against Appellees.
831 F.2d 1339, 1346 n.9 (7th Cir. 1987); Stein v. United Artists Corp., 691 F.2d 885, 890 (9th
Cir. 1982); CBS, Inc v. Folks (In re Folks), 211 B.R. 378, 388 (9th Cir. BAP 1997), abrogated
on other grounds by Ahcom, Ltd. v. Smeding, 623 F.3d 1248, 1252 (9th Cir. 2010).
3 Because we concurrently affirm the confirmation order by separate order,
further proceedings will be necessary only if the confirmation order is vacated by a
subsequent appellate decision. The effectiveness of the confirmation order is stayed by
our order in BAP No. NC-21-1227-BGT which will expire fourteen days after entry of
our written disposition in that case. Upon the confirmation order becoming effective,
any right of the estate to assert a veil-piercing action will terminate.
4 We provide a complete recitation of facts in our disposition of the related
appeal from the order confirming Debtor’s chapter 11 plan. See BAP No. NC-21-1227-
BGT.
3
NetJets attached a draft complaint which it argued set forth colorable
claims that had significant potential value to the estate. NetJets alleged that
Debtor and Appellees shared resources, and, although Debtor provided air
travel to Appellees and others, it had no independent income. NetJets
claimed Perlman completely controlled Debtor’s finances by transferring
funds from his personal account to satisfy Debtor’s obligations and
manipulated Debtor’s account to prevent NetJets and other creditors from
recovering their claims. NetJets averred that it made a demand on the
Debtor to pursue the veil-piercing claims, but Debtor failed to respond, and
its inaction was unjustified.
The draft complaint included allegations that Perlman created Debtor
solely to obtain the benefits of Debtor’s fractional jet ownership for himself,
Rearden, and other affiliated entities, and Debtor never observed corporate
formalities or had its own employees. NetJets claimed that Perlman was
the sole source of funding for Debtor, and he ensured that, after paying its
bills, Debtor maintained less than $10,000 in its account, for the purpose of
thwarting collection efforts if Perlman chose not to pay a particular debt.
Debtor further asserted that Perlman manipulated and misused Debtor’s
corporate form for his own strategic purposes by ceasing to fund Debtor’s
obligations to NetJets or pay its litigation costs and by instead placing
Debtor into bankruptcy.
The bankruptcy court denied the Standing Motion after applying the
four-part test set forth in Canadian Pacific Forest Products, Ltd. v. J.D. Irving,
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Ltd. (In re Gibson Group, Inc), 66 F.3d 1436 (6th Cir. 1995) and cited in
Morabito v. JH, Inc. (In re Consolidated Nevada Corp.), BAP Nos. NV-17-1210-
FLTi, NV-17-1211-FLTi, 2017 WL 6553394 (9th Cir. BAP 2017). Under that
test, a bankruptcy court may grant a creditor derivative standing where: (1)
the creditor made a demand upon the debtor to take action; (2) the demand
was declined; (3) creditor alleges a colorable claim that would benefit the
estate if successful, based on a cost-benefit analysis performed by the court;
and (4) the inaction by the debtor is unjustified in light of the debtor’s
duties in a chapter 11 case. In re Gibson Group, 66 F.3d at 1446.
The court’s decision turned solely on whether the claims asserted by
NetJets were colorable. In evaluating colorability, the bankruptcy court
employed the Civil Rule 12(b)(6) standard and determined that NetJets
failed to allege sufficient facts to state a claim for relief. In April 2021, the
bankruptcy court entered its order denying the Standing Motion and
NetJets timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court abuse its discretion by denying the
Standing Motion?
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STANDARD OF REVIEW
We review for abuse of discretion the bankruptcy court’s decision
whether to grant derivative standing to pursue claims of the estate. In re
Consol. Nev. Corp., 2017 WL 6553394 at *4; PW Racing Enters., Inc. v. N.D.
Racing Comm’n (In re Racing Servs., Inc.), 540 F.3d 892, 901 (8th Cir. 2008). A
bankruptcy court abuses its discretion if it applies an incorrect legal
standard or its factual findings are illogical, implausible, or without
support in the record. TrafficSchool.com v. Edriver Inc., 653 F.3d 820, 832 (9th
Cir. 2011).
DISCUSSION
A. Colorable Claims Under Delaware Law
The parties agree that the bankruptcy court properly used the Gibson
Group test to determine whether to grant NetJets derivative standing, and
we have previously held that test to be appropriate. See In re Consol. Nev.
Corp., 2017 WL 6553394 at *7. The only issue on appeal is whether the
bankruptcy court erred in determining that NetJets did not assert a
colorable claim that would benefit the estate.
We held in Consolidated Nevada Corporation that the test for
“colorability” is analogous to a Civil Rule 12(b)(6) inquiry. 2017 WL
6553394 at *7 n.5. In determining colorability, the court should evaluate the
sufficiency of the claims without speculating whether the claims would be
successful. Id. at *7. The parties also agree that because Debtor is a
Delaware LLC, Delaware law governs.
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To state a “veil-piercing claim” under Delaware law, “the plaintiff
must plead facts supporting an inference that the corporation, through its
alter-ego, has created a sham entity designed to defraud investors and
creditors.” Crosse v. BCBSD, Inc., 836 A.2d 492, 497 (Del. 2003). A court may
pierce an entity’s corporate veil if the plaintiff shows: (1) that the
corporation and its owner operated as a single economic entity; and (2) an
overall element of injustice or unfairness. Burtch v. Opus, L.L.C. (In re Opus
East, L.L.C.), 480 B.R. 561, 570 (Bankr. D. Del. 2012). Both elements may be
established by a common set of facts. Harrison v. Soroof Int’l, Inc., 320 F.
Supp.3d. 602, 620 (D. Del. 2018) (“[U]nder Delaware law, the same facts
used to show that the business entities operated as a single enterprise can
lend the requisite fraud or inequity. In other words, a plaintiff making an
alter ego claim can argue that the very same factual allegations it uses to
show a lack of corporate separateness . . . demonstrate why it would also
be an injustice for the parent to absolve itself from liability as to the
plaintiff’s claim against the subsidiary.” (cleaned up)).
Specific facts which a court may consider in deciding whether to
pierce the corporate veil under Delaware law include: “(1) whether the
company was adequately capitalized for the undertaking; (2) whether the
company was solvent; (3) whether corporate formalities were observed; (4)
whether the dominant shareholder siphoned company funds; and
(5) whether, in general, the company simply functioned as a façade of the
dominant shareholder.” Smith v. Weinshanker (In re Draw Another Circle),
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602 B.R. 878, 905 (Bankr. D. Del. 2019) (quoting Doberstein v. G-P Indus., No.
9995-VCP, 2015 WL 6606484, at *4 (Del. Ch. Oct. 30, 2015)). The decision to
pierce the corporate veil “generally results not from a single factor, but
rather some combination of them, and ‘an overall element of injustice or
unfairness must always be present, as well.’” Doberstein, 2015 WL 6606484,
at *4 (quoting MicroStrategy Inc. v. Acacia Research Corp., No. 5735-VCP,
2010 WL 5550455, at *11 (Del. Ch. Dec. 30, 2010)).
B. Application Of The Civil Rule 12(b)(6) Standard
The bankruptcy court concluded that NetJets did not have a colorable
claim because, under the Civil Rule 12(b)(6) standard, it could not allege
sufficient facts to establish either element necessary to pierce the corporate
veil under Delaware law.
The Civil Rule 12(b)(6) standard requires a plaintiff to allege “enough
facts to state a claim to relief that is plausible on its fact.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007). In considering a motion under Civil Rule
12(b)(6), all well-pleaded factual allegations must be accepted as true and
construed in the light most favorable to the plaintiff. Johnson v. Riverside
Healthcare Sys., LP, 534 F.3d 1116, 1122 (9th Cir. 2008). The issue is not
whether the plaintiff will ultimately prevail, but whether it is entitled to
offer evidence in support of its claims. Schneider v. Cal. Dep’t of Corr., 151
F.3d 1194, 1196 (9th Cir. 1998). Although it may appear that recovery is
remote, this is not the test. Id.8
Persuading a court to pierce the corporate veil under Delaware law is
a difficult task. Wallace v. Wood, 752 A.2d 1175, 1183 (Del Ch. 1999). But the
decision to pierce the corporate veil is an equitable remedy that depends on
an amalgam of factors. Because no single factor is dispositive, dismissal
under Civil Rule 12(b)(6) is appropriate only if NetJets failed to allege any
facts supporting any of the factors.
But NetJets made factual allegations which, taken as true, can
establish some of the factors which courts may rely upon under Delaware
law, including that Debtor was not adequately capitalized, ignored
corporate formalities, and functioned as a façade. In concluding that the
allegations were insufficient to warrant piercing the corporate veil, the
bankruptcy court improperly weighed their probative value. The court
abused its discretion by determining that the claim was not colorable for
purposes of derivative standing.
CONCLUSION
Based on the foregoing, we VACATE the bankruptcy court’s order
denying the Standing Motion and REMAND for further proceedings
consistent with this disposition.
9