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In re Cobalis Corporation

United States District Court, C.D. California

September 24, 2014

YA GLOBAL INVESTMENTS, L.P., WENETA KOSMALA, Chapter 7 Trustee in Bankruptcy, and DOES 1 through 10, inclusive, Appellees. COBALIS CORPORATION, a Nevada corporation, Appellant, BK No. 8:07-BK-12347-TA AP No. 8:13-ap-01047-TA


JOSEPHINE L. STATON, District Judge.

This case is before the Court on appeal by Appellant Cobalis Corporation from Orders of the United States Bankruptcy Court for the Central District of California. Cobalis has appealed the following Orders of the Bankruptcy Court: (1) Order Granting Weneta M.A. Kosmala's Motion for Order Dismissing First Amended Complaint for Recovery of Usurious Interest Paid, Abuse of Process, and Rescission, dated August 26, 2013 (AP Doc. 130);[1] (2) Order Granting YA Global Investments, L.P.'s Motion for Order Dismissing First Amended Complaint for Recovery of Usurious Interest Paid, Abuse of Process, and Rescission, dated September 16, 2013 (AP Doc. 141); and (3) Order Denying Cobalis' Motion for Reconsideration of Orders Granting Motions of Kosmala and YA Global to Dismiss First Amended Complaint, dated December 5, 2013, (AP Doc. 190) (collectively, the "Dismissal Orders.") Cobalis[2] filed an opening brief (Doc. 11) to which Appellees YA Global Investments, L.P. and Weneta M.A. Kosmala, the Chapter 7 trustee ("Trustee"), responded. (Docs. 12 and 13.) Cobalis filed a reply brief. (Doc. 18.) Having reviewed the papers and taken the matter under submission, the Court AFFIRMS the Bankruptcy Court in all respects.


A. The Bankruptcy Proceedings

This case involves a dispute between Cobalis and YA Global that spans nearly seven years of litigation. Cobalis is a Nevada corporation that developed PreHistin, a healthcare product used to treat hay fever symptoms. (First Amended Complaint for Recovery of Usurious Interest Paid, Breach of Contract, Abuse of Process, Intentional Interference with Prospective Economic Advantage and Recission ("FAC"), AP Doc. 49.) YA Global is a Caymans Island limited partnership that provides financing to companies. In order to acquire additional working capital, Cobalis borrowed $3.85 million from YA Global in December 2006. (FAC ¶ 4.) YA Global provided financing to Cobalis pursuant to a Securities Purchase Agreement ("SPA") in which YA Global paid Cobalis $3.85 million for secured debentures convertible into Cobalis' common stock. ( See id. ¶ 5.) Cobalis also issued four warrants to YA Global to purchase 6, 640, 602 shares of common stock for $5.5 million. ( See id. ¶ 7.) On August 1, 2007, when Cobalis failed to fully redeem the debentures in accordance with the SPA, YA Global filed an involuntary Chapter 7 bankruptcy petition against Cobalis (the "Debtor"). ( See id. ¶ 13.) On November 16, 2007, Cobalis converted the Chapter 7 proceeding into a Chapter 11 proceeding. ( See id. )

On June 9, 2010, the Bankruptcy Court issued an Order confirming Cobalis' Third Amended Plan of Reorganization (the "Plan") which required Cobalis to make monthly payments, into an Escrow Account for the benefit of YA Global. ( See Order on Confirmation of Debtor's Third Amended Plan of Reorganization Dated January 19, 2010 (As Revised) ¶ V(4), BK Doc. 529.[3]) One of the effects of confirming the Plan was to re-vest all of the property of the Estate in the Debtor. (See Plan § VI, ¶ B, BK Doc. 337.) In July 2011, Cobalis defaulted on the Plan by failing to make an escrow payment. ( See FAC ¶ 14.) Consequently, on August 22, 2011, the Bankruptcy Court converted the action back to a Chapter 7 proceeding. ( See BK Doc. 864.) On August 23, 2011, Kosmala was appointed Trustee of the converted Chapter 7 Estate. ( See BK Doc. 866.)

On September 20, 2011, YA Global and Trustee entered into a "Global Settlement Agreement." ( See Notice of Joint Motion Pursuant to Fed. R. Bank. P. 9019 to Approve Global Settlement with YA Global Investments L.P., BK Doc. 902.) In the Global Settlement Agreement, Trustee agreed to release YA Global against "any and all claims... known or unknown, fixed or contingent, arising out of or related to the YA Global Released Parties' transactions with and litigation against Cobalis or the Estate that Cobalis or the Estate may have or claim to have...." (Global Settlement Agreement, Doc. 902, Ex. A ¶ 5.1.) Furthermore, the term "claims" was defined as "any and all claims... whether now known or unknown, whether or not asserted... including but not limited to lender liability, [or] usury...." ( Id. ¶ 1.7.)

On October 21, 2011, the Bankruptcy Court ordered the escrow agent to disburse all property in the Escrow Account, which consisted of $1.6 million, to YA Global. ( See BK Doc. 938 at 2.) On November 3, 2011, the Court approved the Global Settlement Agreement. ( See 11/3/11 Order Granting Joint Motion Pursuant to Fed.R.Bankr.P. 9019 to Approve Global Settlement Agreement with YA Global Investments, L.P. at 2, BK Doc. 958.) The Bankruptcy Court allowed a secured claim in favor of YA Global against Cobalis in the amount of $6 million. ( See id. at 3.) The Court also approved a public auction sale of the Estate's property wherein YA Global was entitled to a credit bid of $4.5 million. ( See id. ) The Global Settlement Agreement provided for dismissal of all pending adversary actions and appeals. ( See id. ) Cobalis did not appeal, or seek a stay of, the Bankruptcy Court's November 3, 2011 Order.

The auction took place as scheduled on November 16, 2011. ( See id. ) YA Global, as the successful bidder, purchased the Estate's assets with a bid of $2.1 million. On December 29, 2011, the Bankruptcy Court approved the sale in an Order Authorizing Trustee to Sell Certain Property pursuant to 11 U.S.C. § 363(f). ( See BK Doc. 987.) The December 29, 2011 Order: (1) authorized Trustee to sell the bankruptcy estate's property; and (2) required the dissolution of Cobalis. ( See id. at 8, 12.) The Court held, inter alia, that: "Conversion of Cobalis' bankruptcy case to chapter 7 caused any property that vested with the reorganized debtor under the Plan to revest in the Estate." ( Id. at 8.) Accordingly, all of the Property was held to be property of the Estate which was subject to sale pursuant to 11 U.S.C. § 363(b). ( See id. )

YA brought two adversary proceedings, numbered 1395 and 1416, seeking a declaratory judgment defining the property of the Estate. The Bankruptcy Court granted summary judgment in favor of YA Global in both adversary proceedings ( See Order Granting Summary Judgment, Doc. 46 in adversary proceeding no. 8:11-ap-01395-TA, and Order Granting Summary Judgment, Doc. 30 in adversary proceeding no. 8:11-ap-011416-TA.) In the Order Granting Summary Judgment in the 1395 adversary proceeding, the Bankruptcy Court held, inter alia, that "any and all assets that vested with reorganized Cobalis revested in Cobalis' chapter 7 bankruptcy estate (the "Estate") upon conversion of Cobalis' chapter 11 case; Cobalis has no assets following the conversion of its bankruptcy case to chapter 7;" and "Cobalis has no rights or standing with respect to any legal action, appellate or otherwise, pending against Plaintiff, as all such rights and standing have vested in the Estate[.]" (AP No.1395 Doc. 46 at 2.)

B. Cobalis' First Amended Complaint

In its First Amended Complaint, Cobalis asserts causes of action for (1) Recovery of Usurious Interest Paid and Overpayment in Breach of Contract and (2) Abuse of Process.[4] (FAC, AP Doc. 49.) In its usury claim, Cobalis alleges that the warrants issued to YA Global as part of the $3.85 million loan had a combined unexercised value of at least $10 million as of the date of the SPA, as calculated by application of the Black-Scholes formula. ( See id. ¶ 10(a).) The amount borrowed was therefore allegedly paid in full at the time the initial transaction closed on December 20, 2006. ( See id. ¶ 10(c).) Accordingly, Cobalis alleges that YA Global was never a creditor of Cobalis ( see id. ¶ 10(d)), and, as a result, Cobalis seeks to vitiate the entire bankruptcy proceeding on the ground that YA Global never had the right to commence an involuntary Chapter 7 proceeding against it in the first place.

With regard to the re-vesting of the usury and overpayment claims in the converted Chapter 7 Estate, Cobalis states:

The claims based on payments in 2006-2008 belong to Cobalis as reorganized debtor because those claims vested in the reorganized debtor at Plan confirmation as they were not otherwise provided for in the Plan nor order of confirmation pursuant to 11 U.S.C. 1141(b) (including that they were not designated as assets with which to fund implementation of the Plan), and did not vest in the converted Chapter 7 estate on conversion to ...

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