In Re: 31 Tozer Road, LLC

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

In re: 31 TOZER ROAD, LLC, *

*

Debtor. *

*************************************

31 TOZER ROAD, LLC and *

MANUEL BARROS *

*

Appellants, *

v. * Civil Action No. 17-cv-10013-IT

*

MARK GREENBERG and MICHAEL *

LAPIERRE, *

*

Appellees. *

MEMORANDUM AND ORDER

TALWANI, D.J.

Before the court is an appeal of two orders of the United States Bankruptcy Court filed by

Appellants 31 Tozer Road, LLC (“Tozer”), a Debtor-in-Bankruptcy, and Manuel Barros. Also

before the court is Appellees Mark Greenberg and Michael LaPierre’s Motion to Strike Portions

of Appellants’ Brief [#12].

I. Background

Greenberg and LaPierre contend that a Security Purchase Agreement (“the Contract”)

afforded them a right to purchase equity in Tozer from Barros. After Tozer filed for bankruptcy,

Greenberg and LaPierre sought a determination that the automatic stay imposed by the

bankruptcy did not apply to the exercise of their contractual rights. In re 31 Tozer Road, No. 16-

14309 (D. Mass. Bankruptcy Ct. Nov. 16, 2016) (Dkt. 10). On December 21, 2016, the

Bankruptcy Court ruled that the automatic stay did not prevent Greenberg and LaPierre from

exercising rights under the Contract. Id. The Bankruptcy Court abstained from resolving the

dispute over those rights under the Contract and instead suspended bankruptcy proceedings

pending the state court resolution of the issue. Id. On December 28, 2016, the Bankruptcy Court

denied a motion for clarification.

Barros and Tozer filed this appeal, seeking reversal of the Bankruptcy Court’s finding

that the automatic stay did not apply to prevent Greenberg and LaPierre from exercising their

purchase rights, and the Bankruptcy Court’s order suspending bankruptcy proceedings. See

Appellants’ Br. [#8]. Greenberg and LaPierre, in turn, filed a Motion to Strike Portions of

Appellants’ Brief [#12], asserting that certain arguments had not been raised below. The court

directed Greenberg and LaPierre to respond to the arguments that they conceded were raised

below, and deferred ruling on the motion to strike.

Meanwhile, Greenberg and LaPierre tendered payment for an equity interest in Tozer,

and then commenced an action in state court, requesting a declaratory judgment that, under the

Contract, they are now the rightful owners of an 80% membership interest in Tozer. Id.

Greenberg v. Barros, 17-00002-BLS1 (Mass. Super. Ct. Sept. 8, 2017) (Dkt. 26). The

Massachusetts Superior Court granted summary judgment to Greenberg and LaPierre in the state

court action, finding that they are entitled to the membership interest in Tozer that they

purchased pursuant to the purchase option in the Contract. Id.

II. Discussion

An automatic stay “springs into being immediately upon the filing of a bankruptcy

petition” and “prevents creditors from taking any collection actions against the debtor or the

property of the debtor's estate for pre-petition debts.” In re Slabicki, 466 B.R. 572, 577 (B.A.P.

1st Cir. 2012); see 11 U.S.C. § 362(a). The purpose of the automatic stay is “to provide a fresh

start to the honest debtor and to ensure a uniform distribution of nonexempt assets to creditors of

the same class.” Id. (quoting In re Panek, 402 B.R. 71, 76 (Bankr. D. Mass. 2009)). For this

reason, the automatic stay is triggered by any “act against either the debtor, [the debtor’s]

property, or the property of [the debtor’s] estate,” but “does not bar acts against non-debtors.” Id.

at 580.

A debtor corporation does not have a property interest in its own equity, and the purchase

of equity is not an act against the debtor or the debtor’s property. See Decker v. Advantage Fund,

Ltd., 362 F.3d 593, 596 (9th Cir. 2004) (“[U]nissued stock is not an interest of the debtor

corporation in property; it is merely equity in the corporation itself.”); Matter of Paso Del Norte

Oil Co., 755 F.2d 421, 424 (5th Cir. 1985) (“It is widely recognized, and we have previously

held, that a corporation, even if a debtor in bankruptcy, has no property interest in the shares of

its stock owned by shareholders.”). The Bankruptcy Court correctly concluded that the automatic

did not prevent Greenberg and LaPierre from pursuing a judicial determination of their rights

under the Contract to purchase equity in Tozer, or from exercising those purchase rights.

Appellants separately contend that the Bankruptcy Court abused its discretion by

abstaining from deciding the rights of Barros, Greenberg, and LaPierre under the Contract and by

suspending bankruptcy proceedings pending resolution of that dispute in state court. See

Appellants’ Br. 35-39 [#8]. This argument, too, is without merit. A bankruptcy court may choose

to abstain or suspend proceedings under 11 U.S.C. § 305(a) based on a number of factors,

including “(1) the purpose of the bankruptcy; (2) the necessity of federal proceedings to achieve

a just and equitable solution; (3) the availability of another forum to resolve the unsettled issues;

(4) the efficiency and economy of having the bankruptcy court settle the matter; (5) the possible

prejudice to the various parties; and (6) whether the bankruptcy forum is being used to resolve

what is in essence a two-party dispute.” In re Efron, 529 B.R. 396, 405 (B.A.P. 1st 2015). The

Bankruptcy Court determined that the contract dispute was a dispute only among the current and

potential equity owners, not a dispute with Tozer itself, and that it was in the best interest of

Tozer and its creditors to obtain a state court determination of the various parties’ equity interests

in Tozer. As state courts are the authority on the interpretation of private contracts, see Volt

Information Sciences, Inc., v. Board of Trustees of Leland Stanford Junior University, 489 U.S.

468, 474 (1989), the state court was a just, equitable, and efficient forum for the dispute.

Appellants offer additional arguments that are the subject of Appellee’s motion to strike.

First, Appellants contend that Greenberg and LaPierre cannot exercise their purchase rights

under the Contract because Tozer is barred from issuing new membership interests other than

under a plan of reorganization. This argument, along with all but one of the other arguments

identified in the motion to strike, rests on the premise that Greenberg and LaPierre’s exercise of

their purchase rights would require Tozer to issue new membership interests.1 The

1 Specifically, in the second argument identified by in Appellees’ motion to strike, Mot. to Strike

2 [#12], Appellants argue that the Bankruptcy Court erred in abstaining from determining the

ownership of Tozer because the Bankruptcy Court made an “erroneous factual finding that the

Debtor had no role in the issuance of new membership interests” under the Contract. Appellants’

Br. 35 [#8]. In the third and fourth arguments identified, Mot. to Strike 2 [#12], Appellants argue

that the exercise of the purchase options is barred by the automatic stay because “causing Tozer

to issue and distribute new membership interests to Greenberg and LaPierre” is an act to obtain

possession of property of the bankruptcy estate or to exercise control over property of the

bankruptcy estate, Appellants’ Br. 23-24 [#8]. In the fifth argument identified, Mot. to Strike 2

[#12], Appellants argue that Appellees’ exercise of their purchase options should be barred by

the automatic stay because “requiring Tozer, as the Debtor, to issue new membership interests . .

. constitute the assertion of claims against the Debtor,” Appellants’ Br. 25 [#8]. In the seventh

and ninth arguments identified, Appellants argue that Greenberg and LaPierre’s exercise of their

purchase option constitutes the assertion of a claim against Tozer and should therefore be

subordinated to other creditors. Mot. to Strike 2-3 [#12]. In the eighth argument identified,

Appellants argue that the exercise of the purchase options is void because it would require Tozer

to purchase its stock. Mot. to Strike 3 [#12]. In the tenth argument identified, Appellants contend

that Tozer is entitled to reject the Contract because it is an executory contract that would require

Tozer to issue membership interests. Mot. to Strike 3 [#12]; Appellants’ Br. 32-33 [#8].

Massachusetts Superior Court found, however, that the Contract does not require Tozer to issue

new membership interests. Greenberg v. Barros, 17-00002-BLS1 (Mass. Super. Ct. Sept. 8,

2017) (Dkt. 26). In the final argument, Appellants argue that appellees lack any statutory ground

for relief from the stay under 11 U.S.C. § 362(d). Mot. to Strike 3 [#12]. However, the

Bankruptcy Court did not grant Appellees relief from the automatic stay under 11 U.S.C.

§ 362(d), but instead determined that the stay did not apply. As none of the ten arguments

identified in the motion to strike would affect this court’s ruling, the motion is DENIED as moot.

III. Conclusion

In light of the foregoing, the December 21 and 28, 2016, orders of the Bankruptcy Court

are AFFIRMED.

IT IS SO ORDERED.

January 9, 2018 /s/ Indira Talwani

United States District Judge