Create an Account or Login to Existing Account
7-Day Free Trial
HTML Document View
Full title: Joint Opposition of the Debtors and the Official Committee of Unsecured Creditors to the Motion for an Order Compelling Assumption or Rejection of Executory Contracts Pursuant to 11 U.S.C. § 365(d)(2) Filed by WILLIAM M. NOALL on behalf of GUMP'S BY MAIL, INC., GUMP'S CORP., GUMP'S HOLDINGS, LLC, THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS (Related document(s)627 Motion to Assume/Reject filed by Interested Party ALI WAMBOLD, Interested Party JONATHAN KAGAN, Creditor SCOTT SKLAR, Creditor MICHAEL MOSCA, Creditor BRIAN TSUNG, Creditor MICHAEL MOYLAN, Creditor PETER HARRIS.) (NOALL, WILLIAM) (Entered: 05/20/2021)
Document posted on May 19, 2021 in the bankruptcy, 19 pages and 0 tables.
Bankrupt11 Summary (Automatically Generated)
26 JOINT OPPOSITION OF THE DEBTORS AND THE OFFICIAL 27 COMMITTEE OF UNSECURED CREDITORS TO THE MOTION FOR AN 28 ORDER COMPELLING ASSUMPTION OR REJECTION OF EXECUTORY CONTRACTS PURSUANT TO 11 U.S.C. § 365(d)(2) 1 2 Mail, Inc. (“Direct” and, with Holdings and Retail, the “Debtors”) and the Official Committee of 3 Unsecured Creditors (the “Committee”) appointed in the Debtors’ above-captioned Chapter 11 4 Cases, by and through their respective counsel of record, Schwartz Law, PLLC on behalf of the 5 Committee and Garman Turner Gordon LLP on behalf of Debtors, hereby file their opposition (the 6 “Opposition”) to the Motion for an Order Compelling Assumption or Rejection of Executory 7 Contracts pursuant to 11 U.S.C. § 365(d)(2) (the “Motion”) filed by Ali Wambold, Jonathan 8 Kagan, Scott Sklar, Michael Moylan, and Peter Harris (collectively, the “Director Defendants”), 9 Michael Mosca (“Mosca”), Brian Tsung (“Tsung” and, collectively with the Director Defendants 10 and Mosca, the “Movants”) seeking an order compelling Debtors to assume or reject: (A) the 11 Holdings Operating A review of Schedule G for each of the Debtors demonstrates the Unsigned Tsung 25 Agreement and Mosca Agreement were not identified as executory contracts by any of the 26 27 4 See Unsigned Tsung Agreement, attached as Exhibit 1 to the Tsung Declaration,July 30, 10 2014) (using bankruptcy case law as precedent to conclude that receiver in federal receivership 11 proceeding could reject arbitration clauses in contracts as separate, severable executory contracts).Indeed, Movants’ own authority concedes that the Arbitration Provision is 13 severable from the terminated Unsigned Tsung Agreement and Mosca Agreement, and that Section 14 365 of the Bankruptcy Code allows the debtor to reject an arbitration agreement, thereby excusing 15 the estate from any specific performance obligations they would otherwise have had: 16As the Alguire Court observed, if arbitration 3 clauses are severable by governing law under the Federal Arbitration Act from their respective 4 Container Contracts, but they are not permitted to be rejected, then the courts will have essentially 5 created through case law and absent express authorization from Congress in the Bankruptcy Code 6 a class of contracts that is not subject to rejection under 11 U.S.C. § 365 and from which the 7 bankruptcy estate cannot free itself from the obligation of providing its required counterparty 8 performance (in the form of specific performance).
List of Tables
Document Contents1 Samuel A. Schwartz, Esq. 2 Nevada Bar No. 10985 Athanasios E. Agelakopoulos, Esq. 3 Nevada Bar No. 14339 Emily D. Anderson, Esq. 4 Nevada Bar No. 13814 601 East Bridger Avenue 5 Las Vegas, NV 89101 6 Telephone: 702.385.5544 Facsimile: 702.385.2741 7 Attorneys for The Official Committee of Unsecured Creditors 8 and 9 GARMAN TURNER GORDON LLP WILLIAM M. NOALL 10 Nevada Bar No. 3549 E-mail: email@example.com 11 GABRIELLE A. HAMM Nevada Bar No. 11588 12 E-mail: firstname.lastname@example.org 7251 Amigo Street, Suite 210 13 Las Vegas, Nevada 89119 Telephone (725) 777-3000 14 Facsimile (725) 777-3112 15 Attorneys for Debtors 16 UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF NEVADA 17 In re: Case No.: 18-14683-MKN 18 Chapter 11 GUMP’S HOLDINGS, LLC, 19 Affects this Debtor. Jointly administered with: 20 Affects all Debtors. Case No.: 18-14684-MKN (In re Gump’s Corp); 21 Case No.: 18-14685-MKN (In re Gump’s By Mail, Inc.) In re: 22 GUMP’S CORP., 23 Affects this Debtor. 24 In re: Hearing Date: June 3, 2021 GUMP’S BY MAIL, INC., 25 Hearing Time: 9:30 a.m. Affects this Debtor. 26 JOINT OPPOSITION OF THE DEBTORS AND THE OFFICIAL 27 COMMITTEE OF UNSECURED CREDITORS TO THE MOTION FOR AN 28 ORDER COMPELLING ASSUMPTION OR REJECTION OF EXECUTORY CONTRACTS PURSUANT TO 11 U.S.C. § 365(d)(2)
11 2 Mail, Inc. (“Direct” and, with Holdings and Retail, the “Debtors”) and the Official Committee of 3 Unsecured Creditors (the “Committee”) appointed in the Debtors’ above-captioned Chapter 11 4 Cases, by and through their respective counsel of record, Schwartz Law, PLLC on behalf of the 5 Committee and Garman Turner Gordon LLP on behalf of Debtors, hereby file their opposition (the 6 “Opposition”) to the Motion for an Order Compelling Assumption or Rejection of Executory 7 Contracts pursuant to 11 U.S.C. § 365(d)(2) (the “Motion”) filed by Ali Wambold, Jonathan 8 Kagan, Scott Sklar, Michael Moylan, and Peter Harris (collectively, the “Director Defendants”), 9 Michael Mosca (“Mosca”), Brian Tsung (“Tsung” and, collectively with the Director Defendants 10 and Mosca, the “Movants”) seeking an order compelling Debtors to assume or reject: (A) the 11 Holdings Operating Agreement; (B) Mosca’s Agreement; and (C) Tsung’s Agreement (the 12 “Motion”). In support of the Opposition, Debtors and the Committee respectfully state and 13 represent as follows:1 14 I. RELEVANT FACTS AND PROCEDURAL BACKGROUND. 15 A. THE HOLDINGS OPERATING AGREEMENT. 16 1. Holdings is a Nevada limited liability company and is governed by the Thirteenth 17 Amended and Restated Operating Agreement for Gump’s Holdings, LLC, effective as of July 16, 18 2014 (the “Holdings Operating Agreement”).2 19 2. Notably, the Motion does not indicate whether indemnity agreements were entered 20 into with any of the Director Defendants. 21 B. THE MOSCA AGREEMENT. 22 3. Prior to the Petition date, Mosca entered into an Employment Agreement with 23 Holdings, which had an effective date of February 2, 2018 (the “Mosca Agreement”).3 24 25 26 1 The Committee also joins in the arguments set forth in the Debtors’ Opposition to the Motion for the reasons stated therein, the papers and pleadings on file herein, and any oral argument that the Court may entertain at the time 27 of any hearing of the Motion. 2 See Holdings Operating Agreement, attached as Exhibit 1 to the Kagan Declaration, Docket No. 631. 28 3
21 2 director and officer insurance for Mosca, yet Mosca is taking advantage of insurance coverage for 3 which he did not bargain. (Id.; ECF No. 629, ¶ 8). The Mosca Agreement was terminated when 4 Mosca resigned on or around July 27, 2018 – prior to the Bankruptcy Case. (See ECF No. 629). 5 C. THE UNSIGNED TSUNG AGREEMENT. 6 5. On November 28, 2017, Tsung allegedly entered into an employment agreement 7 with Holdings – however, the contract attached to Tsung’s declaration is unsigned (the “Unsigned 8 Tsung Agreement” and, together with the Holdings Operating Agreement and the Mosca 9 Agreement, the “Agreements”).4 10 6. The Unsigned Tsung Agreement does not contain an indemnification provision, nor 11 does it contain a requirement for Holdings to maintain director and officer insurance for Tsung. 12 (Id.) Yet, like Mosca, Tsung is taking advantage of insurance coverage for which he did not 13 bargain. (Id.; ECF No. 630, ¶ 7). The Unsigned Tsung Agreement was terminated when Tsung 14 resigned on or around July 27, 2018 – prior to the Bankruptcy Case. (See ECF No. 630, ¶ 4). 15 D. THE BANKRUPTCY CASE. 16 7. Each of the Plaintiffs filed a voluntary petition on August 3, 2018, in the United 17 States Bankruptcy Court for the District of Nevada, commencing the Bankruptcy Case5 under 18 Chapter 11 of the Bankruptcy Code, to which the Adversary Proceeding relates. As of the Petition 19 Date, the members of Holdings’ Board of Managers were the Director Defendants as well as John 20 Chachas. (See Case No. 18-14863-mkn, Adv. ECF No. 1, at 21). 21 8. The deadline by which creditors were required to file proofs of claim was October 22 2, 2018. The deadline for filing proofs of claim by governmental units was January 30, 2019. 23 Both deadlines have long-since passed. 24 9. A review of Schedule G for each of the Debtors demonstrates the Unsigned Tsung 25 Agreement and Mosca Agreement were not identified as executory contracts by any of the 26 27 4 See Unsigned Tsung Agreement, attached as Exhibit 1 to the Tsung Declaration, Docket No. 630. 28 5 See Case No. 18-14863-mkn (Holdings); Case No. 18-14864-mkn (Retail); and Case No. 18-14865-mkn
31 2 of the Debtors’ cases.7 3 10. The Adversary Proceeding8 was commenced on August 1, 2020, pursuant to Rule 4 7001, et seq. of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”). 5 11. On December 11, 2020, the Court entered its Order on Motion of Defendant Kathi 6 Lentzsch to (A) Stay Adversary Proceeding Pending Arbitration; or, Alternatively, (B) Compel a 7 More Definitive Statement Pursuant to FRCP Rule 12(e), wherein the Court granted Ms. 8 Lentzsch’s motion for a stay of the Adversary Proceeding as against Ms. Lentzsch, pending 9 completion of mediation and arbitration pursuant to arbitration provisions of Section 15 of the 10 Consulting Agreement. (Case No. 20-01085-MKN, Adv. ECF No. 60). On January 6, 2021, Ms. 11 Lentzsch filed a separate motion seeking the same relief as Movants do herein, and the Debtors 12 and the Committee filed opposition to Ms. Lentzsch’s motion. (ECF No. 562). 13 12. On March 5, 2021, Debtors filed Debtors’ Joint Plan of Liquidation (as Revised) 14 (the “Plan”). (Case No. 18-14683, ECF No. 585). Section 6.1 of the Plan provides as follows: 15 Executory Contracts. Except for Executory Contract and Unexpired Leases specifically addressed in this Plan, assumed pursuant to prior 16 order of the Bankruptcy Court, or set forth on the schedule of Assumed Executed Contracts and Unexpired Leases attached as Schedule 6.1 17 hereto (which may be supplemented and amended up to the Confirmation Date), all Executory Contracts and Unexpired Leases that 18 exist on the Confirmation Date shall be deemed rejected by Debtors on the Effective Date. (See id. at pg. 25 of 31, § 6.1) (emphasis added). 19 13. On March 22, 2021, the Court issued an order denying the Lentzsch Motion on the 20 ground that Ms. Lentzsch did not have standing under Section 365(d)(2) of the Bankruptcy Code 21 to seek an order compelling assumption or rejection of the Consulting Agreement because Ms. 22 Lentzsch was not a named counterparty to the Consulting Agreement. (ECF No. 607, pg. 3 of 4). 23 24 25 6 Case No. 18-14683-mkn, ECF No. 76, p. 12; Case No. 18-14684-mkn, ECF No. 48, p. 317; Case No. 18-14685-mkn, ECF No. 40, p. 364. 26 7 Case No. 18-14683-mkn, ECF No. 67 (notice); see Claims Register generally (Person has filed no claims). 27 8 As plead in the Complaint and discussed in the Opposition to the Motion to Compel Arbitration, Ms. Lentzsch had fiduciary obligations to the Debtors Retail and Direct by operation of law, separate and apart from the Interim 28 CEO Consulting Agreement with Debtor Holdings. See Case No. 20-01085-mkn (Gump’s v. Lopez, et al.) (the
41 2 adding IOE as a movant. 3 14. On April 27, 2021, Movants filed the instant Motion requesting similar relief. 4 15. On April 29, 2021, the Court (i) approved the Disclosure Statement Concerning 5 The Debtors’ Joint Plan Of Liquidation (as Revised) and (ii) confirmed Debtors’ Second Amended 6 Joint Plan Of Liquidation (as Revised). A proposed form of confirmation order confirming the 7 Plan has been lodged with the Court. 8 II. LEGAL ARGUMENT 9 A. THE DIRECTOR DEFENDANTS HAVE NOT ESTABLISHED STANDING 10 16. The Director Defendants do not establish, or even allege, that they are parties to the 11 Operating Agreement. (See Docket No. 631-1). If the Director Defendants are not parties to the 12 Operating Agreement, however, they cannot move to compel its assumption or rejection. (See 13 ECF No. 607 at pg. 3 of 4) (“Although the Consulting Agreement provided Lentzsch with rights 14 thereunder as a third-party beneficiary, she is not a party to the Consulting Agreement in her 15 individual capacity and does not have standing as a party to such contract…Lentzsch therefore 16 lacks standing under Section 365(d)(2) to compel Debtors to assume or reject the Consulting 17 Agreement.”). (emphasis added) (citation and footnote omitted). 18 17. The introductory paragraph to the Operating Agreement provides: 19 This Thirteenth Amended and Restated Operating Agreement of 20 Gump’s Holdings, LLC, a Nevada Limited Liability Company (“Agreement”), is made and to be effective as of July 16, 2014 by and 21 among the individuals and entities set forth on Exhibit A. 22 Exhibit A, however, is missing from the Operating Agreement that accompanies the Motion. (See 23 Docket No. 631-1, at pg. 72 of 95). Without Exhibit A to the Operating Agreement, it is impossible 24 to identify with any certainty the actual parties to the Operating Agreement. 25 18. When evidence submitted to the Court is incomplete, Federal Rule of Evidence 106 26 applies; specifically: 27 If a party introduces all or part of a writing or recorded statement, an adverse party may require the introduction, at that time, of any 28 other part—or any other writing or recorded statement—that in fairness ought to be considered at the same time.
51 ED VID ED ANKR 2 Federal Rule of Evidence 106, Holdings requires that the Director Defendants produce Exhibit A 3 to the Operating Agreement for Exhibit A to be considered for the purposes of this Motion. Absent 4 the production of Exhibit A’s, Debtors and the Committee respectfully submit that the Court 5 should not base its judgment on the copy of the Operating Agreement produced by the Movants. 6 19. The list of Equity Security Holders required by Bankruptcy Rule 1007(a)(3) and 7 attached to Debtor Holdings’ voluntary petition (albeit an imperfect approximation of the list of 8 entities who may be a party to the Operating Agreement), lists only one of the Director Defendants. 9 (See Docket 1 at pg. 11 of 21). Moreover, the Director Defendants admit that they are not parties 10 to the Holdings Operating Agreement, stating, instead, “the Director Defendants served under the 11 terms of Holdings’ operating agreement.” (See ECF No. 627, at pg. 2 of 19) (emphasis added). 12 20. It is essential to the analysis of this Motion that the Director Defendants first 13 establish that they are parties to the Operating Agreement. Should the Director Defendants be 14 found not to be parties to the Operating Agreement, then they will each lack statutory standing 15 pursuant to 11 U.S.C. 365(d)(2) because they will not be in the zone of interests in terms of the 16 class of persons authorized to seek relief under that statute. See, e.g. In re Jackson, 451 B.R. 24, 17 27-28 (Bankr. E.D. Cal. 2011) (citations omitted); see also Bank of N.Y. Mellon v. 2298 Driftwood 18 Tide Trust (In re Barrett), 833 Fed. Appx. 668, 670 (9th Cir. Oct. 28 2020) (applying the zone of 19 interests test from Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 129 (2014) 20 in the context of bankruptcy litigation under the automatic stay) (citing Sierra Club v. Trump, 929 21 F.3d 670, 700 (9th Cir. 2019)). 22 B. THE UNSIGNED TSUNG AGREEMENT AND THE MOSCA AGREEMENT EXPIRED WHEN EACH OFFICER RESIGNED 23 PREPETITION. 24 21. Section 365 of the Bankruptcy Code provides: “[e]xcept as provided in . . . 25 subsections (b), (c), and (d) of this section, the trustee, subject to the court’s approval, may assume 26 or reject any executory contract or unexpired lease of the debtor.” 11 U.S.C. § 365(a). The first 27 necessary step in employing Section 365 for the purpose of rejection or assumption is determining 28 if the Consulting Agreement is executory.
61 2 terms, it is not executory and not subject to assumption to rejection under Section 365 of the 3 Bankruptcy Code. See In re Texscan Corp., 107 B.R. 227, 230 (B.A.P. 9th Cir. 1989), aff’d, 976 4 F.2d 1269 (9th Cir. 1992) (“It is axiomatic that before 11 U.S.C. § 365 can apply a contract must 5 exist.”). Indeed, “[c]ontracts that expire by their own terms before a § 365(a) motion is brought 6 or a plan of reorganization providing for assumption is confirmed cannot be assumed because there 7 is nothing left to assume . . . Thus, such contracts are not executory.” Id.; accord In re 47 Hops 8 LLC, No. 17-02440-WLH11, 2020 WL 2485808, at *4 (Bankr. E.D. Wash. May 13, 2020) 9 (“Bankruptcy law does not generally revive contracts that have expired or been terminated 10 pursuant to their own terms.”); In re Jaytee LLC, No. AP 16-00723, 2017 WL 1653153, at *4 11 (Bankr. N.D. Ill. May 1, 2017) (“there is no right to assume a contract which has expired by its 12 own terms. Also, there is no point in assuming a contract the performance of which is impossible”) 13 (quoting In re Mellen, 79 B.R. 385, n.1 (Bankr, N.D. Ill. 1987)). “[W]here the executory contract 14 expires by its own terms during the . . . pre-assumption/rejection period the debtor-in-possession 15 has nothing to assume or reject.” In re Jaytee, 2017 WL 1653153, at *4 (citing In re Nat’l Steel 16 Corp., 316 B.R. 287, 304 (Bankr. N.D. Ill. 2004)). 17 23. Here, the Unsigned Tsung Agreement provides: 18 10.1 At-Will Termination 19 The Executive’s employment is “at-will.” This means that either the Executive or the Company may terminate the Executive’s 20 employment under this Agreement at any time, with or without cause and with or without notice. Executive agrees to provide 21 the Company and the Board at least sixty (60) days’ notice prior to resigning without Good Reason. 22 . . . . 23 10.2 Compensation on Termination. 24 10.2.1 Payments due at time of termination. 25 Except in the circumstances described in Section 10.2.2 and 10.2.3 below, when the Executive’s employment terminates 26 for any reason (including as a result of the death or disability of the Executive) whether initiated by the Executive or by 27 the Company, with or without cause, then the Company shall have no further obligations to the Executive other than the 28 payment of the Executive’s base salary (including unpaid
71 2 (See Exhibit 1 to ECF No. 630). The Mosca Agreement contains these identical provisions. (See 3 Exhibit 1 to ECF No. 629). 4 24. Accordingly, when Mosca and Tsung resigned pursuant to Paragraph 10.1, the 5 contracts were terminated. Indeed, if Mosca or Tsung received the payments in Paragraph 10.2.1 6 due to them upon termination, then such is definitive evidence that both agreements terminated on 7 July 27, 2018. Therefore, the universally accepted bankruptcy authority controlling this issue 8 forecloses the possibility of treating either agreement as an executory contract and requires that 9 the Motion be denied. . 10 C. OPERATING AGREEMENTS ARE NOT EXECUTORY CONTRACTS. 11 25. The Operating Agreement cannot be an executory contract, but, instead, is a 12 corporate governance document. Indeed, an operating agreement in no way fits the “Countryman 13 Test” adopted by the Ninth Circuit to identify an executory contract: “[A] contract is executory if 14 ‘the obligations of both parties are so far unperformed that the failure of either party to complete 15 performance would constitute a material breach and thus excuse the performance of the other.’” 16 See Movitz v. Fiesta Invs., LLC (In re Ehmann), 319 B.R. 200, 203-04 (Bankr. D. Ariz. 2005) 17 (holding LLC operating agreement was not executory contract and chapter 7 trustee’s rights under 18 the agreement were asset of the estate governed by section 541); accord In re Alameda Invs., LLC, 19 No. 6:09-BK-10348-PC, 2013 WL 3216129, at *2 (Bankr. C.D. Cal. June 25, 2013) (same), aff'd, 20 No. BAP CC-13-1333, 2014 WL 868605 (B.A.P. 9th Cir. Mar. 5, 2014). 21 26. As pointed out in In re Denman, “a member’s breach or default of its duties and 22 obligations under an LLC operating agreement does not necessarily excuse the future performance 23 of other members. To qualify as an executory contract, the breach must excuse the other parties' 24 future performance as discussed in the Countryman standard.” In re Denman, 513 B.R. 720, 726 25 (Bankr. W.D. Tenn. 2014) (holding LLC agreement is not an executory contract as a matter of 26 law); Hanckel v. Campbell (In re Richardson Miles Hanckel, III), No. 2:14-CV-2898, 2015 WL 27 7251714, at *6 (D.S.C. Mar. 10, 2015) (same); Meiburger v. Endeka Enters., LLC (In re 28
81 2 2156162 (E.D. Va. July 19, 2007). 3 27. Here, the Holdings Operating Agreement fails to set forth circumstances for 4 material breach or default. As emphasized in In re Denman, there is no circumstance where a 5 material breach would excuse the performance of the Director Defendants under the Operating 6 Agreement. Rather, the only consequence for a violation of the Operating Agreement is set forth 7 in Section 4.3: 8 Upon any attempted Transfer of a Member’s Membership Interests in violation of Article 7, all rights associated with the Membership 9 Interests, other than Economic Interest, held by such Member shall be terminated by the Board of Managers and thereafter such Member 10 shall be deemed an Assignee only. See Exhibit 1 to Docket No. 630. 11 28. As explained in In re Denman, “LLC operating agreements are unique instruments 12 under the law that must accord with the respective state’s LLC laws. The rights and duties of an 13 operating agreement function akin to corporate by-laws, establishing the structure and form of an 14 entity and arising by adoption by its members or shareholders.” In re Denman, 513 B.R. at 723. 15 Indeed, LLCs can consist of a single member, making the concept of a contractual operating 16 agreement absurd: 17 A single member LLC operating agreement does not have multiple members and, therefore, can satisfy neither the mutual assent element 18 nor the exchange of consideration element of contract law. This simple problem highlights the underlying problem with considering LLC 19 operating agreements as executory contracts because it demonstrates that LLC members are not contracting amongst themselves but instead 20 are organizing and structuring a new entity to receive their 21 contributions, whether cash, services to be performed, or otherwise. Applying contract logic, the single member LLC seemingly becomes an 22 absurdity. 23 In re Denman, 513 B.R. at 724-25 (emphasis added). 24 29. As the “overwhelming majority” of courts have determined that the governance 25 documents of a limited liability company are not executory contracts upon examination, Denman, 26 513 B.R. at 725 n.4 (collecting cases), the Court should deny the Director Defendants’ Motion. 27 28
91 THE MEANING OF SECTION 365 OF THE BANKRUPTCY CODE. 2 30. Even if the Agreements did not expire on their own terms, they fail to meet the 3 definition of an executory contract for purposes of Section 365. “Although the Bankruptcy Code 4 contains no definition of an executory contract, the Ninth Circuit has adopted the Countryman 5 Test: a contract is executory if the obligations of both parties are so far unperformed that the failure 6 of either party to complete performance would constitute a material breach and thus excuse the 7 performance of the other.” In re Ehmann, 319 B.R. 200, 203–04 (Bankr. D. Ariz. 2005) 8 (emphasis added) (internal quotes omitted) (citing Unsecured Creditors’ Comm. v. Southmark 9 Corp. (In re Robert L. Helms Constr. and Dev. Co., Inc.), 139 F.3d 702, 705 (9th Cir. 1998); 10 accord In re Gencor Indus., Inc., 298 B.R. 902, 909 (Bankr. M.D. Fla. 2003) (“[A]n executory 11 contract is a contract under which the obligation of both the bankrupt and the other party to the 12 contract are so far unperformed that the failure of either to complete performance would 13 constitute a material breach excusing the performance of the other. Thus, unless both parties have 14 unperformed obligations that would constitute a material breach if not performed, the contract is 15 not executory”). 16 31. In this context, for any of the three Agreements “to be executory there would . . . 17 have to be some material obligation owing to the [counterparty].” Ehmann, 319 B.R. at 204. 18 Further, “such [counterparty]’s obligation must be so material that if the [he or she] did not perform 19 it, [the principal party to the contract] would owe no further obligations to that [counterparty].” 20 Id. 21 32. Here, all parties to these three Agreements have fully performed their material 22 obligations pursuant to the contract, such that there are no material obligations of both parties so 23 far unperformed that the failure of either party to complete performance would constitute a material 24 breach and thus excuse the performance of the other. 25 i. The Holdings Operating Agreement Is Not Executory Under 26 Section 365. 27 33. At the outset, Holdings did not list its own Operating Agreement as an executory 28 contract in its Schedule G. (See Docket No. 76, at pg. 12 of 23). Accordingly, Holdings
101 2 34. To support the Director Defendants’ position that the Holdings Operating 3 Agreement is executory, they point to the following: (a) acts following the filing of Bankruptcy 4 Case, (b) indemnification, (c) directors’ liability insurance policy, and (d) attorneys’ fees. 5 35. First, the Director Defendants focus on the fact that they did not deliver their 6 resignations until after the filing of the Bankruptcy Case on August 3, 201810 and list purported 7 tasks they completed following the Petition Date. (See ECF No. 631, ¶¶ 5 and 7). The Director 8 Defendants fail to explain, however, under what authority they acted on behalf of Holdings after 9 the Petition Date. 10 36. On or around July 20, 2018 the Director Defendants executed The Action By 11 Written Consent Of Preferred Class C Members And The Board Of Managers Of Gump’s 12 Holdings, LLC (the “Holdings’ Board Resolution”). (See ECF No. 1, pg. 17 of 21). The 13 Holdings’ Board Resolution designated Tony Lopez as the responsible person in the Company’s 14 Chapter 11 bankruptcy case pursuant to Fed. R. Bankr. P. 9001(5). Id. 15 37. Indeed, the Holdings’ Board Resolution provides “that the Responsible Person, and 16 such other persons as the Responsible Person shall from time to time designate, and any employees 17 or agents (including counsel) designated by or directed by any such person, be and each hereby is, 18 authorized, empowered, and directed, in the name and on behalf of the Company to . . . .” Id. 19 There is no evidence attached to the Motion to indicate that Mr. Lopez, the responsible person, 20 requested any assistance from the Director Defendants. Thus, unless the Director Defendants can 21 produce evidence that the responsible person requested that the Director Defendants take on tasks 22 that require the exercise of their fiduciary duties, the argument fails for this reason alone. 23 38. Second, the indemnification provision set forth in Paragraph 10.1 is a mere 24 authorization to offer indemnity to the Director Defendants. Indeed, Paragraph 10.1 provides 25 “upon authorization by the Board of Managers, shall enter into indemnity agreements from 26 9 Notably, the only employment agreement listed as executory was Mr. Lopez’s agreement, not the Unsigned 27 Tsung Agreement or the Mosca Agreement. Id. 28 10 Sklar and Harris resigned from Holdings’ Board of Managers on August 12, 2018; whereas the resignation
111 2 such terms and conditions as the Board of Managers deems appropriate in its business judgment.” 3 (See id. para. 10.1) (emphasis added). There is no evidence in the Motion that any indemnity 4 agreements were executed by Director Defendants. Thus, unless these agreements exist, Holdings 5 has no obligation whatsoever to indemnify anyone pursuant to the Operating Agreement. 6 39. Third, it is undisputed that, prior to the Petition Date, U.S. Specialty Insurance 7 Company issued the Directors, Officers and Organization Liability Insurance Policy No. 14-MGU-8 18-A43229 (the “D&O Policy”), to Holdings for the initial Policy Period of March 14, 2018 to 9 March 14, 2019.11 10 40. Fourth, the attorneys’ fees issue is similar to what the Ninth Circuit considered in 11 Unsecured Creditors' Comm. v. Southmark Corp. (In re Robert L. Helms Constr. & Dev. Co.), 139 12 F.3d 702, 706 (9th Cir. 1998) (Southmark). In Southmark, the Court addressed contingent 13 obligations and clarified that not all option contracts are executory, holding: 14 We therefore reject Easebe’s broad rule that all options are executory contracts. Instead, we look to outstanding obligations at the time the petition 15 for relief is filed and ask whether both sides must still perform. Performance due only if the optionee chooses at his discretion to 16 exercise the option doesn't count unless he has chosen to exercise it. An option may on occasion be an executory contract, for instance, where the 17 optionee has announced that he is exercising the option, but not yet followed through with the purchase at the option price. 18 The question thus becomes: At the time of filing, does each party have 19 something it must do to avoid materially breaching the contract? 20 Id. 21 41. Here, the payment of fees and costs, like the indemnification, were contingent 22 obligations when the Bankruptcy Case was filed. Unlike in Southmark, where the Court concluded 23 that an option contract that was exercised before the petition date would be executory (because it 24 was no longer contingent), none of these provisions had been invoked or exercised prior to the 25 Petition Date in this case. Id. Put simply, because they were contingent, neither Movants nor 26 Debtors had something each must do to avoid materially breaching the contract. 27 11 See Declaration of Robert Andrew Morgan filed on December 9, 2020, Docket No. 545(3). Although the 28 D&O Policy was subsequently extended on or around March 14, 2019 to August 3, 2024, the renewal of the policy is
121 2 words, they only give rise to a claim in the bankruptcy case. Thus, even if the “monetary 3 obligations did in fact constitute a material remaining performance obligation, it is clear that such 4 obligations merely represent obligations for the payment of money only and are therefore 5 insufficient to make these . . . [a]greements executory.” Id. at 347; see also Matter of Newcomb, 6 744 F.2d 621, 624 (8th Cir. 1984) (escrow’s obligation to turn over money is insufficient to render 7 the agreement executory); THC Financial Corp., 686 F.2d at 804 (“courts have consistently held 8 that contracts that only required payment by the debtor are not executory”); In re Unishops, Inc., 9 422 F.Supp. 75, 78–80 (Bankr. S.D.N.Y. 1975). Thus, the Holdings Operating Agreement does 10 not satisfy any definition of executory under Section 365. 11 ii. Neither the Unsigned Tsung Agreement Nor The Mosca Agreement Is Executory Under Section 365. 12 43. At the outset, Holdings did not list the Unsigned Tsung Agreement or the Mosca 13 Agreement as executory contracts in its Schedule G. (See ECF No. 76, at pg. 12 of 23). 14 Accordingly, Holdings, through Mr. Lopez, determined that the Operating Agreement, Unsigned 15 Tsung Agreement, and the Mosca Agreement are not an executory contracts. 16 44. To support Tsung’s position that the Unsigned Tsung Agreement is executory, he 17 points to three specific provisions: (a) binding arbitration, (b) attorneys’ fees and costs, and (c) an 18 unsigned confidentiality agreement. Likewise, to support Tsung’s position that the Mosca 19 Agreement is executory, he points to four specific provisions: (a) binding arbitration, (b) attorneys’ 20 fees and costs, (c) an unsigned confidentiality agreement, and (d) indemnification. 21 45. First, the Arbitration Provisions of the Mosca Agreement and Tsung Agreement 22 separate and independent severable executory contracts that will be rejected on the effective date 23 of the Plan, and, thus, specific performance will not lie as a remedy as to the representative of 24 Debtors’ bankruptcy estates. The purpose of the Federal Arbitration Act is to place arbitration 25 agreements on equal or even footing with other contracts, not in an exalted category of their own 26 that is treated better than other contracts that are subject to rejection in bankruptcy. See Prima 27 Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-404 (1967) (expressly recognizing 28
131 2 contracts, but not more so.”). 3 46. The arbitration clause in the Unsigned Tsung Agreement and Mosca Agreement 4 qualifies as a separable/severable executory contract. See Prima Paint Corp. v. Flood & Conklin 5 Mfg. Co., 388 U.S. 395, 403-404 (1967) (“[A]rbitration clauses as a matter of federal law are 6 separable from the contracts in which they are embedded . . . .”); accord, Buckeye Check Cashing, 7 Inc. v. Cardegna, 546 U.S. 440, 445, 126 S. Ct. 1204, 1209 (2006) (“[A]s a matter of substantive 8 federal arbitration law, an arbitration provision is severable from the remainder of the contract.”); 9 see also Janvey v. Alguire, 2014 U.S. Dist. LEXIS 193394, **97, 117-119 (N.D. Tex. July 30, 10 2014) (using bankruptcy case law as precedent to conclude that receiver in federal receivership 11 proceeding could reject arbitration clauses in contracts as separate, severable executory contracts). 12 47. As the Supreme Court noted in Prima Paint, arbitration agreements within other 13 contracts (the “Container Contract”) are severable from the remainder of the Container Contract. 14 See 388 U.S. at 403-404 (using the concepts of “severability” and “separability” interchangeably). 15 The Supreme Court’s construction of arbitration agreements set forth within larger Container 16 Contracts as severable from the same is in line with this Circuit’s construction of 11 U.S.C. § 365, 17 which permits severable contracts set forth in larger Container Contracts to be rejected or assumed 18 separately. See, e.g., Otto Preminger Films, Ltd. v. Qintex Entm’t, Inc. (In re Qintex Entm’t, Inc.), 19 950 F.2d 1492, 1496 (9th Cir. 1991); see also In re Plitt Amusement Co. of Wash., Inc., 233 B.R. 20 837, 839 (Bankr. C.D. Cal. 1999). California law is to the same effect on the issues of the 21 severability of a contract or lease. See, e.g., In re Pollack, 139 B.R. 938, 940 (B.A.P. 9th Cir. 22 1992) (recognizing that the issue of contractual severability must first be answered by reference to 23 applicable state law and then holding that California law allows contracts to be severed into 24 separately assumable and/or rejectable parts.). 25 48. “Viewed as an independent contractual obligation of the parties, an arbitration 26 agreement is a classic executory contract since neither party has substantially performed the 27 arbitration agreement at the time enforcement is sought.” Jay Lawrence Westbrook, The Coming 28 Encounter: International Arbitration and Bankruptcy, 57 Minn. L. Rev. 595, 622 (1983) (emphasis
141 2 Arbitration Provisions set forth in the Unsigned Tsung Agreement or the Mosca Agreement. 3 49. Once the Arbitration Provisions are severed from the Unsigned Tsung Agreement 4 and Mosca Agreement, it will be rejected as of the effective date of the Plan. At that point, the 5 Debtors’ bankruptcy estates would be relieved from having any further specific performance 6 obligations under the rejected Unsigned Tsung Agreement, and Mosca Agreement. Any right 7 Mosca and Tsung may have had to specific performance would be reduced to a prepetition 8 damages claim. See, e.g., 11 U.S.C. §§ 365(g)(1) and 502(g); see also Mission Prod. Holdings v. 9 Tempnology, LLC, ___ U.S. ___, 139 S. Ct. 1652, 1659 (2019) (“A rejection convert[s] a debtor’s 10 unfulfilled obligations to a pre-petition damages claim.”) (internal quotation marks and citations 11 omitted); Sunbeam Prods. v. Chi. Am. Mfg., LLC, 686 F.3d 372, 376-377 (7th Cir. 2012) 12 (Easterbrook, J.) (“What § 365(g) does by classifying rejection as breach is establish that in 13 bankruptcy, as outside of it, the other party’s rights remain in place. After rejecting a contract, a 14 debtor is not subject to an order of specific performance.) (emphasis added) (citing NLRB v. 15 Bildisco & Bildisco, 465 U.S. 513, 531 (1984)). As Judge Easterbrook explained in Sunbeam: 16 The debtor’s unfulfilled obligations are converted to damages; when a debtor does not assume the contract before rejecting it, these damages are treated as 17 a pre-petition obligation, which may be written down in common with other debts of the same class. But nothing about this process implies that any rights 18 of the other contracting party have been vaporized…and rejection is not the functional equivalent of recission, rendering void the contract and requiring that 19 the parties be put back in the positions they occupied before the contract was formed…It merely frees the estate from the obligation to perform and has 20 absolutely no effect upon the contract’s continued existence. 21 Sunbeam, 686 F.3d at 377 (emphasis added) (internal quotation marks and citation omitted); see 22 also Mission Prod. Holdings, ___ U.S. at ___; 139 S. Ct. at 1659, 1662 (largely adopting Judge 23 Easterbrook’s line of analysis). 24 50. Any rejection of the Arbitration Provision or the Unsigned Tsung Agreement or the 25 Mosca Agreement under 11 U.S.C. § 365(g)(1) does not fundamentally change anything with 26 respect to indemnification rights (if any) they had on the petition date. Either way, the most the 27 Officer Defendants could hope for by way of the Arbitration Provision or the indemnification 28 clause for indemnification claims based on the claims asserted in the Complaint predicated upon
151 2 Center, 821 F.2d at 1373. Moreover, to the extent that either agreement is enforceable, Debtors 3 have substantially performed all of their material obligations such that they cannot be found to be 4 in material breach of either agreement. 5 51. With these principles in mind, rejection of the Arbitration Provisions, the Unsigned 6 Tsung Agreement, and Mosca Agreement, to the extent executory, would give rise only to a 7 prepetition damages claim. Rejection would not give the Officer Defendants, as they seem to 8 suggest in the Motion, the right to specific performance from the Debtors’ bankruptcy estates (in 9 the form of compelled arbitration) or to have their indemnification claims somehow elevated to 10 administrative expense status. This is simply not the law, and the Officer Defendants have not 11 established their entitlement to such treatment in the Motion. 12 52. Indeed, Movants’ own authority concedes that the Arbitration Provision is 13 severable from the terminated Unsigned Tsung Agreement and Mosca Agreement, and that Section 14 365 of the Bankruptcy Code allows the debtor to reject an arbitration agreement, thereby excusing 15 the estate from any specific performance obligations they would otherwise have had: 16 Furthermore, in addition to being a separate contract, the arbitration clause is executory at the time a petition is filed . . . Now, an arbitration clause is 17 generally an agreement that provides for the reciprocal obligations of each party to refer to arbitration some or all future disputes arising out of the contract in 18 which they are contained. Assuming that no arbitration proceedings were initiated prior to the bankruptcy filing, the reciprocal obligations of the parties 19 to arbitrate said disputes remain outstanding at the time the bankruptcy petition is filed. Furthermore, the failure of either party to abide by their duty to arbitrate 20 would constitute a material breach, as it would go to the essence of the arbitration agreement between the parties and defeat its purpose. Although, 21 for this very reason, the FAA protected arbitration agreements from breach by providing for their specific performance, thereby making 22 material breach an impossibility outside of bankruptcy, § 365 of the Bankruptcy Code allows for such a material breach in the context of 23 bankruptcy, thus making arbitration agreements executory for purposes of the rule. 24 André Albertini, Arbitration in Bankruptcy: Which Way Forward?, 90 Am. Bankr. L.J. 599, 622-25 623 (2016) (footnotes omitted). Therefore, the Arbitration Provisions will be rejected by operation 26 of law as a severable executory contract upon the Effective Date of the Plan, giving rise to no more 27 than prepetition claims for damages. 28
161 2 would seriously undermine bankruptcy policy. As the Alguire Court observed, if arbitration 3 clauses are severable by governing law under the Federal Arbitration Act from their respective 4 Container Contracts, but they are not permitted to be rejected, then the courts will have essentially 5 created through case law and absent express authorization from Congress in the Bankruptcy Code 6 a class of contracts that is not subject to rejection under 11 U.S.C. § 365 and from which the 7 bankruptcy estate cannot free itself from the obligation of providing its required counterparty 8 performance (in the form of specific performance). Not only does this stand the governing law in 9 bankruptcy discussed above on its head, it also contravenes Congress’s policy in enacting the 10 FAA—namely, to place arbitration agreements on equal or even footing with other contracts, not 11 in an exalted category of their own that is treated better than other contracts subject to rejection in 12 bankruptcy. 13 54. The Arbitration Provision as a separate and severable agreement is currently slated 14 for rejection by operation of 11 U.S.C. § 365(g)(1) and section 6.1 of Debtors’ Plan on the 15 Effective Date of Debtors’ Plan. The Officer Defendants’ remaining and statutorily mandated 16 remedy for such rejection is the ability to file a proof of claim seeking damages for such breach. 17 See 11 U.S.C. §§ 365(g) and 502(g). 18 55. Furthermore, by bringing the Motion, Mosca and Tsung have waived their right to 19 compel arbitration. “The right to arbitration, like other contractual rights, can be waived.” Martin 20 v. Yasuda, 829 F.3d 1118, 1124 (9th Cir. 2016) citing United States v. Park Place Assocs., Ltd., 21 563 F.3d 907, 921 (9th Cir. 2009). “[A] party seeking to prove waiver of a right to arbitration 22 must demonstrate: (1) knowledge of an existing right to compel arbitration; (2) acts inconsistent 23 with that existing right; and (3) prejudice to the party opposing arbitration resulting from such 24 inconsistent acts.” Id. 25 56. Under governing Ninth Circuit law, a party that may otherwise be eligible to have 26 its claims litigated in an arbitral forum may waive such rights by, for example, seeking a 27 determination on the merits of an action in a judicial forum. See, e.g., Marin v. Yasuda, 829 F.3d 28 1118, 1125 (9th Cir. 2016). “We find this element satisfied when a party chooses to delay his right
171 2 See id. 3 57. Here, Mosca and Tsung have waived their right to seek arbitration. It is 4 indisputable that they knew of their right to seek to have an arbitrator determine whether the 5 Unsigned Tsung Agreement or the Mosca Agreement have been breached by Debtors such that 6 Debtors would be unable to maintain an action for breach of contract against them. 7 58. Nevertheless, they seek to compel the Debtors to accept or reject the Agreements 8 with the sole purpose of prejudicing Plaintiffs in the Adversary proceeding; specifically stating: 9 Although Movants believe that Debtors’ claims have no merit and will ultimately fail, if Holdings rejects the contracts, Movants will be able to seek 10 summary adjudication dismissing their claims and, if Holdings assumes the contracts, Movant will have their rights to indemnification and/or 11 attorneys’ fees (which would offset their possible liability) treated as administrative expenses, rather than general unsecured claims. If Holdings is 12 not compelled to assume or reject the executory contracts, Movants will lose these benefits, for which compensation under the Bankruptcy Code is not 13 available. 14 (See Docket No. 67, pg. 18). 15 59. The foregoing passage from the Motion clearly lays out what Mosca and Tsung 16 hope to accomplish; specifically, irrespective of the Debtors’ choice of assumption or rejection, 17 they intend to take the position that the Plaintiffs’ claims against them in the Adversary Proceeding 18 is eliminated or barred. Id. It is apparent from the foregoing passage that should Movants prevail 19 on the Motion, they intend to bring a motion to summarily resolve the Adversary Proceeding, 20 emphasizing that Movants are affecting the Adversary Proceeding to the prejudice of the Plaintiffs, 21 who are left with no recourse other than to oppose this Motion and the others like it. 22 60. Therefore, the Motion must fail because (A) by their own terms, the Unsigned 23 Tsung Agreement and Mosca Agreement terminated in July 2018 when they resigned; (B) the 24 Operating Agreement as well as the Unsigned Tsung Agreement and Mosca Agreement may not 25 be assumed or rejected because they do not meet the definition of an executory contract 26 contemplated by Section 365 of the Bankruptcy Code; and (C) if the Arbitration Provision makes 27 the Agreements executory, then the Arbitration Provisions will be severed and rejected, and, thus, 28 unenforceable on the Effective Date of the Plan. Lastly, Tsung and Mosca have waived their right
181 2 Case rather than focus on their pending Motion to Stay the Adversary Action and Compel 3 Arbitration. 4 III. CONCLUSION. 5 WHEREFORE, for the foregoing reasons and in consideration of the above authority, the 6 Committee respectfully requests that the Court: (1) deny the Motion as the Unsigned Tsung 7 Agreement and Mosca Agreement expired by their own terms on July 27, 2018; (2) find the 8 Agreements do not meet the definition of an executory contract; (3) find that Mosca and Tsung 9 have waived their right to arbitration; and (4) grant any further relief the Court deems necessary 10 or appropriate. 11 Dated May 20, 2021. 12 Respectfully Submitted, 13 /s/ Athanasios E. Agelakopoulos Samuel A. Schwartz, Esq. 14 Nevada Bar No. 10985 15 Athanasios E. Agelakopoulos, Esq. Nevada Bar No. 14339 16 Emily D. Anderson, Esq. Nevada Bar No. 13814 17 601 East Bridger Avenue Las Vegas, NV 89101 18 Telephone: 702.385.5544 19 Facsimile: 702.385.2741 Attorneys for The Official Committee of Unsecured 20 Creditors 21 and 22 GARMAN TURNER GORDON LLP 23 /s/ Gabrielle A. Hamm 24 WILLIAM M. NOALL Nevada Bar No. 3549 25 GABRIELLE A. HAMM Nevada Bar. No. 11588 26 7251 Amigo Street, Suite 210 27 Las Vegas, Nevada 89119 Tel: (725) 777-3000 28 Fax: (725) 777-3112