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In re Howrey LLP

United States District Court, N.D. California

July 14, 2014

In re: HOWREY LLP, Debtor.
ALLAN DIAMOND, et al., Appellees. ADVANCED DISCOVERY INC., et al., Appellants,


JAMES DONATO, District Judge.


Appellants Advanced Discovery Inc.[1], Howrey Claims, LLC, Kent Daniels & Associates, LLC, and L.A. Best Photocopies, Inc. move for a stay pending appeal to this Court of the bankruptcy court's order approving a settlement between the trustee, a committee of unsecured creditors, and certain former partners of the now defunct law firm, Howrey LLP. Appellants asked the Court to decide the motion on an accelerated basis, which the Court has accommodated. On July 11, 2014, the Court held a telephonic hearing on shortened time. After considering the papers submitted by the parties and the arguments made during the hearing, the Court denies the stay. Appellants have not demonstrated that a stay is warranted because they failed to show a likelihood of success on the merits, the alleged irreparable harm is speculative at best, and the non-moving parties will be significantly injured if the stay is granted.


On April 11, 2011, certain creditors of Howrey LLP filed an involuntary petition for relief under chapter 7 of Title 11 of United States Code. That bankruptcy case, Case No. 11-31376-DM, which is now under chapter 11, is currently pending in the United States Bankruptcy Court of this District.

Appellants are small trade creditors of Howrey LLP. See Dkt. No. 5 at 2. According to their counsel, appellants' unsecured creditor claims amount to less than $175, 000. The Howrey bankruptcy as a whole has approximately $100 million in unsecured creditor claims. See Dkt. No. 17 at 1, n.1. Even giving appellants the full benefit of $175, 000 in claims, their portion of the bankruptcy is less than 2%.

Howrey Claims LLC ("Howrey Claims") is a company formed during the Howrey LLP bankruptcy proceedings that purchased claims from other creditors - thus becoming a creditor itself - and pursued those claims in the bankruptcy. In November 2012, Howrey Claims purported to bring a class action lawsuit in the bankruptcy court to recover damages directly from the former Howrey LLP partners on an alter ego theory. See Dkt. No. 17 at 1-2. The bankruptcy court did not permit Howrey Claims to go forward with that lawsuit, which is the subject of a separate appeal in this District.[2] The bankruptcy court held that the alter ego claim under "either a fraudulent-transfer or a wrongful-distribution-of-capital theory... plainly belongs to the trustee." Dkt. No. 6, Ex. 4 (citing AA 0794-95 at 81:25-82:21).

On March 5, 2014, the chapter 11 bankruptcy trustee, Allan B. Diamond, the Official Committee of Unsecured Creditors, and certain former Howrey LLP partners represented by the law firm of Klee Tuchin Bogdanoff & Stern LLP ("KTBS") filed a Joint Motion to Approve a Settlement with the Former Howrey Partners Represented by KTBS (the "Settlement"). See Dkt. No. 6, Ex. 11. The settlement agreement provides that in exchange for $4, 214, 254, the former Howrey partners represented by KTBS will be fully released from, among other things, the trustee's breach of contract and fraudulent transfer claims (collectively, the "Clawback Claims"). See id. Appellants objected to the Settlement on several grounds, including that it would release alter ego claims that do not belong exclusively to the trustee. See Dkt. No. 6, Ex. 18.[3]

On June 24, 2014, the bankruptcy court held a hearing on the Settlement. See Dkt. No. 6, Ex. 28. Appellants' objections were overruled and the Settlement was approved. See id. During the hearing, appellants made an oral motion to stay any adverse order pending appeal. Id. at 104. The bankruptcy court denied appellants' request. Id. ("I will deny that request because I don't think any of the traditional standards for a stay pending appeal have been satisfied, the primary one being likely to prevail on the merits."). Under Federal Rule of Bankruptcy Procedure 6004(h), an automatic stay is in place through July 14, 2014. See Dkt. No. 5 at 17.

On July 7, 2014, the Court received the Notice of Appeal from the bankruptcy court, and appellants filed a Motion for Stay or Order Approving Sale/Release Pending Appeal. See Dkt. Nos. 1, 5. The next day, appellants filed a Motion to Shorten Time. Dkt. No. 7. The Court held a telephonic status conference on July 8, 2014, and ordered the non-moving parties to respond to the Motion for Stay. Dkt. No. 13. The non-moving parties filed a response to the Motion to Stay on July 10, 2014, and the Court held a telephonic hearing on the Motion to Stay on July 11, 2014. See Dkt. Nos. 17, 20.


I. Standard of Review

A motion for a stay of the judgment, order, or decree of a bankruptcy judge must generally be considered first by the bankruptcy judge. Fed.R.Bankr.P. 8005. Where the bankruptcy court denied a stay under Rule 8005, the appellate court's review is limited to a determination of whether the bankruptcy court abused its discretion. See In re North Plaza, LLC, 395 B.R. 113, 118-19 (S.D. Cal. 2008) (citing In re Wymer, 5 B.R. 802, 807 (9th Cir. BAP 1980); In re Ohanian, 338 B.R. 839, 844 (E.D. Cal. 2006)). At the hearing of this stay motion, appellants agreed the abuse of discretion standard governs here. In reviewing the bankruptcy ...

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