“In determining whom to appoint as the Debtor's 6 representative, this Court also believes that any ‘persons’ who fall into any of the categories 7 set forth in Bankruptcy Rule 9001(5
How later courts described this case
- “In determining whom to appoint as the Debtor's 6 representative, this Court also believes that any ‘persons’ who fall into any of the categories 7 set forth in Bankruptcy Rule 9001(5
- former CEO was the person most knowledgeable “concerning 12 the acts, conduct or property of the Debtor and concerning its liabilities and financial 13 condition as of the filing of the involuntary petition”
- “As of the petition date, [they] were persons ‘in control’ of the Debtor as 10 defined in Bankruptcy Rule 9001(5).”
- the contention that the “complete ouster” rule should not apply in involuntary bankruptcies “runs entirely counter to the very purpose of Chapter 7 bankruptcy.”
Written by the judges who cited it.
The opinion
Case 8:20-cv-02131-DMG Document19 Filed 07/25/22 Pagelof7 Page ID#:377
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8 UNITED STATES DISTRICT COURT
? CENTRAL DISTRICT OF CALIFORNIA
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In re U.S. DIRECT, LLC, Debtor ) Case No. SA CV 20-2131-DMG
13 || DEREK DOHERTY, ORDER RE BANKRUPTCY APPEAL
14 Appellant,
15 V. )
16 JEFFREY I. GOLDEN, CHAPTER Bankruptcy No.: 8:19-bk-11218-MW
17 || TRUSTEE, )
Is Appellee.
19 )
20 )
21
22 Before the Court is an appeal by Appellant Derek Doherty of an Order of the United
23 || States Bankruptcy Court for the Central District of California. [Doc. # 1]. On April 2,
24 2021, the Court received notice that the bankruptcy record was complete. [Doc. # 16].
5 Doherty submitted his Opening Brief on March 21, 2021, and Appellee Jeffrey I.
26 || Golden, the Chapter 7 Trustee (the “Trustee”’) for the Bankruptcy Estate of US Direct, LLC
97 || CUS Direct”), submitted his Answering Brief on April 20, 2021. [Doc. ## 9, 17.] Doherty
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Case 8:20-cv-02131-DMG Document 19 Filed 07/25/22 Page 2 of 7 Page ID #:378
1 did not respond to the Trustee's brief, and his time for doing so has passed. Fed. R. Bankr.
2 P. 8018(a). The Court therefore decides the matter on the two briefs before it.
3 The Court has considered the papers filed in support of and in opposition to the
4 appeal and deems this matter suitable for decision without oral argument. See Fed. R. Civ.
5 P. 78(b); C.D. Cal. L.R. 7-15. For the reasons set forth below, the Court AFFIRMS the
6 Bankruptcy Court’s Order.
7 I.
8 FACTUAL AND PROCEDURAL BACKGROUND
9 On April 1, 2019, Future Logistics, Inc. filed an involuntary Chapter 7 bankruptcy
10 petition against US Direct. See No. 8:19-bk-112180-MW (Bankr. C.D. Cal.). Prior to its
11 bankruptcy, US Direct was a direct mail business. See Appellant’s Appendix (“AA”) at
12 A53 [Doc. # 9-1]. On September 5, 2019, the Trustee filed a motion to appoint Brian
13 Hauck and Derek Doherty as Debtors pursuant to Federal Rule of Bankruptcy Procedure
14 9001(5), and to direct them to cooperate with the Trustee pursuant to 11 U.S.C. §§ 341,
15 343, and 521. Id. at A45. On October 7, 2019, the Bankruptcy Court held a hearing
16 regarding the Trustee’s motion. AA at A69. At the hearing, Doherty’s attorney represented
17 to the Court that Doherty had resigned as an officer of US Direct sometime earlier that
18 same day. Since the Court was unsure as to whether Doherty’s purported resignation would
19 preclude his designation as the “Debtor,” the Court denied the Trustee’s motion without
20 prejudice as to Doherty, while granting it as to Hauck. Id. at A129.
21 After the Trustee and Doherty filed supplemental briefs, the Bankruptcy Court
22 granted the Trustee’s Motion as to Doherty on October 16, 2020. The Bankruptcy Court
23 held that Doherty was a “controlling . . . member” of US Direct and a “person in control”
24 of it within the meaning of Federal Rule of Bankruptcy Procedure 9001(5), which provides
25 that if the debtor is a corporation, the Court can designate “any or all of its officers,
26 members of its board of directors or trustees or of a similar controlling body, a controlling
27 shareholder or member, or any other person in control” as the “Debtor” for purposes of
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1 compelling the attendance of the Debtor for examination. Fed. R. Bankr. P. 9001(5)(A);
2 Id. at A164-67.
3 The Bankruptcy Court found that Doherty was a “Debtor” within the meaning of
4 rule 9001(5) because: (1) US Direct’s Operating Agreement stated that “[t]he management
5 of the business is invested [sic] in the Member,” and the Operating Agreement identifies
6 Doherty and Hauck as “Members”; and (2) Hauck testified that “Mr. Doherty was, for all
7 purposes, the controlling partner in the Debtor, while [Hauck] was more of a figurehead
8 . . . Mr. Doherty controlled the Debtor’s day-to-day operations . . . Mr. Doherty made all
9 final business decisions.” Id. at A165-66. The Bankruptcy Court concluded that the
10 “pattern and practice” of US Direct was that Doherty was the controlling person and ran
11 the business, and therefore designated Doherty as the Debtor for purposes of complying
12 with Rule 9001(5). Id. at A166.
13 The Bankruptcy Court then required Doherty to produce documents requested by
14 the Trustee pursuant to Federal Rule of Bankruptcy Procedure 2004(c), which permits a
15 bankruptcy court to order an “entity” to produce documents. Id. at A166-67. The Trustee
16 sought to compel Doherty to produce documents relating to the “transfers of money or
17 other property from the Debtor to various persons (including various legal entities).”
18 Doherty objected to the production of these documents by asserting his Fifth Amendment
19 privilege against self-incrimination. The Bankruptcy Court concluded that Doherty cannot
20 rely upon this Fifth Amendment privilege because an individual must produce the records
21 of a “collective entity” that are in his possession in a representative capacity. Id.
22 On October 29, 2020, Doherty filed his Notice of Appeal of the Bankruptcy Court’s
23 decision designating him as the “Debtor” and compelling him to produce documents. [Doc.
24 # 1.]
25 II.
26 STANDARD OF REVIEW
27 A district court reviews a Bankruptcy Court's conclusions of law and interpretation
28 of the Bankruptcy Code de novo. In re Greene, 583 F.3d 614, 618 (9th Cir.
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1 2009) (citing In re Salazar, 430 F.3d 992, 994 (9th Cir. 2005)). Factual findings are
2 reviewed for clear error. Id. A district court must accept the Bankruptcy Court's factual
3 findings unless, upon review, the “court is left with the definite and firm conviction that a
4 mistake has been committed by the bankruptcy judge.” Id. (citing Latman v. Burdette, 366
5 F.3d 774, 781 (9th Cir. 2004)).
6 III.
7 DISCUSSION
8 A. Designation of Doherty as the Debtor
9 The Bankruptcy Court’s conclusion that Doherty was a “person in control” of the
10 US Direct, such that he could be a Debtor under Rule 9001(5), is a finding of fact. The
11 Court therefore reviews it under the highly deferential “clear error” standard. Doherty
12 presents no evidence from which to find that the Bankruptcy Court clearly erred.
13 Doherty was one of two members listed on the Debtor’s Operating Agreement who
14 were expressly tasked with “management of the business.” In addition, the other member,
15 Hauck, submitted a declaration stating that Doherty was the controlling partner who
16 oversaw US Direct’s day-to-day operations and made all final business decisions. Hauck,
17 compared to Doherty, “was more of a figurehead.” AA at A164-167. Doherty presented
18 no evidence to controvert this account before the Bankruptcy Court, and he does not do so
19 now. There is no error in concluding that Doherty was sufficiently in control of the Debtor
20 based on this evidence.
21 Doherty primarily argues that he cannot be designated as a Debtor because he
22 supposedly resigned from his position at US Direct after the Trustee filed its motion. First,
23 the Bankruptcy Court appears to have rejected the factual contention that Doherty
24 “resigned” the same morning as the hearing, which was based solely on the representation
25 of Doherty’s counsel. Second, the Bankruptcy Petition was filed on April 1, 2019, and
26 Doherty is said to have resigned from his position on October 7, 2019—over six months
27 after the filing of the Petition. AA at A129. The filing of the Bankruptcy Petition is the
28 point in time at “which the status and rights of the bankrupt, the creditors, and the trustee
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1 in other particulars are fixed.” In re Gilbraith, 523 B.R. 198, 203 (Bankr. D. Ariz. 2014)
2 (quoting Myers v. Matley, 318 U.S. 622, 626 (1943)). The Petition date of April 1, 2019
3 is therefore the relevant date for determining who can be designated as the Debtor, and any
4 attempt to resign after then is irrelevant. See In re Red River Energy, Inc., 409 B.R. 163,
5 176 (Bankr. S.D. Tex. 2009) (“In determining whom to appoint as the Debtor's
6 representative, this Court also believes that any ‘persons’ who fall into any of the categories
7 set forth in Bankruptcy Rule 9001(5) must have ties to the Debtor at the time of the filing
8 of the bankruptcy petition.”); In re N.W. Associates, Inc., 245 B.R. 183, 188 (Bankr.
9 E.D.N.Y. 1999) (“As of the petition date, [they] were persons ‘in control’ of the Debtor as
10 defined in Bankruptcy Rule 9001(5).”); In re Continuum Care Services, Inc., 375 B.R. 692,
11 694 (Bankr. S.D. Fla. 2007) (former CEO was the person most knowledgeable “concerning
12 the acts, conduct or property of the Debtor and concerning its liabilities and financial
13 condition as of the filing of the involuntary petition”).1
14 This rule makes sense, because in a bankruptcy proceeding, the appointment of a
15 trustee effectuates the “ouster” of a corporate debtor’s management. See Commodity
16 Futures Trading Commn. v. Weintraub, 471 U.S. 343, 352–53 (1985) (during Chapter 7
17 bankruptcy proceedings, “the powers of the debtor's directors are severely limited. Their
18 role is to turn over the corporation's property to the trustee and to provide certain
19 information to the trustee and to the creditors. Congress contemplated that when a trustee
20 is appointed, he assumes control of the business, and the debtor's directors are completely
21 ousted.”) (internal quotations omitted). Doherty cannot resign from a position from which
22
1 Doherty makes the confusing argument that this line of reasoning relies on an outdated version
23
of the Bankruptcy Code, from prior to 1978 when debtors received an automatic grant of immunity from
24 criminal prosecution for their testimony and consequently could not invoke the Fifth Amendment. See In
re THC Financial Corp., 446 F. Supp. 1337, 1338 (D. Haw. 1978). Setting aside the fact that, as shown
25 above, there are plenty of post-1978 cases supporting the Trustee’s position, though this case does involve
the invocation of the Fifth Amendment, it is unclear how the presence or absence of an automatic
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immunity has anything to do with the designation of a Debtor under Rule 9001(5). Doherty also attempts
27 to make a distinction out of the fact that this is an involuntary bankruptcy, but that is a distinction without
a difference. Many cases have named individual corporate representatives as Debtors in involuntary
28 proceedings. See, e.g., Red River Energy, 409 B.R. at 166; N.W. Associates, 245 B.R. at 184-185.
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1 he had already been “ousted.”2 If the “person in control” of the corporation were not fixed
2 at the petition date, then corporate management would effectively never be able to be
3 designated as the Debtor under Rule 9001(5). This cannot be. The Rule expressly refers
4 to the corporate debtor’s “officers, members of its board of directors or trustees or of a
5 similar controlling body, a controlling stockholder or member, or any other person in
6 control.” Fed. R. Bankr. P. 9001(5).
7 Since Doherty did not “resign” until six months after the petition date, his
8 “resignation” does not preclude him from designation as the Debtor under Rule 9001(5).
9 Moreover, the evidence in the record indicates that Doherty was and continued to be a
10 person in control.
11 B. The Collective Entity Doctrine
12 The collective entity rule provides that an individual is not permitted to invoke a
13 Fifth Amendment privilege to preclude the production of the records of a
14 corporation. See Bellis v. United States, 417 U.S. 85, 88 (1974). The Bankruptcy Court
15 held that under this rule, Doherty could not invoke the Fifth Amendment to prevent the
16 production of US Direct’s records in his possession. Doherty cites the Ninth Circuit’s
17 summary disposition in In re Grand Jury Proceedings, 71 F.3d 723 (9th Cir. 1995)
18 (“Mora”), which held that the collective entity rule does not apply to a former employee
19 who is no longer acting on behalf of the collective entity. But Doherty was not a former
20 employee at least as of the petition date, which as discussed is the relevant date in
21 determining the status of the parties in bankruptcy proceedings. Moreover, the brief
22 holding in Mora rested entirely upon the Second Circuit’s decision in In re Grand Jury
23 Subpoenas Duces Tecum Dated June 13, 1983 & June 22, 1983, 722 F.2d 981 (2d Cir.
24 1983) (“Saxon”). Saxon involved a narrow exception to the collective entity rule where
25 the act of document production itself, aside from the content of the documents, might
26 incriminate a former employee because the former employee’s removal and possession of
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2 The “complete ouster” rule applies in involuntary bankruptcies. See In re C.W. Mining Co., 636
28 F.3d 1257, 1265 (10th Cir. 2011) (the contention that the “complete ouster” rule should not apply in
involuntary bankruptcies “runs entirely counter to the very purpose of Chapter 7 bankruptcy.”).
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Case 8:20-cv-02131-DMG Document19 Filed 07/25/22 Page 7of7 Page ID #:383
1 ||corporate documents is probative of a guilty state of mind. /d. at 987. That is not the
2 ||situation here. Additionally, Saxon may no longer be good law, and district courts in the
3 || Ninth Circuit have read Mora and Saxon narrowly. See In re Grand Jury Subp. Dated Nov.
4 1991, FGJ 91-5 (MIA), 957 F.2d 807, 810 (11th Cir. 1992) (rejecting Saxon due to
5 || intervening Supreme Court case law); United States v. Prince, No. CR 10-00153 JF (PSG),
6 |}2011 WL 13150172, at *2 n.7 (N.D. Cal. July 25, 2011) (“Neither Saxon nor Mora,
7 || however, addressed the circumstances present here, where the target is not merely a former
8 ||employee but a founder and shareholder of the corporate entities at issue[.]’’).
9 The Bankruptcy Court correctly applied the collective entity rule in concluding that
10 || Doherty could not invoke the Fifth Amendment to shield the production of US Direct’s
11 || corporate records in his possession. Doherty provides no facts or law that would suggest
12 || this decision was erroneous.
13 IV.
14 CONCLUSION
15 In light of the foregoing, the Court AFFIRMS the Bankruptcy Court’s ruling
16 ||designating Doherty as a “Debtor” pursuant to Federal Rule of Bankruptcy Procedure
17 ||9001(5) and compelling the production of documents pursuant to Federal Rule of
18 || Bankruptcy Procedure 2004.
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99 | AT IS SO ORDERED.
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22 ||DATED: July 25, 2022
23 Mrtiy In. has
24 LLY M. GEE
UNITED STATES DISTRICT JUDGE
cc: Bankruptcy Court
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