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FILED

MAR 20 2018

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. NV-17-1200-BHTa

)

CAPRIATI CONSTRUCTION ) Bk. No. 2:15-BK-15722-ABL

CORPORATION, INC., )

)

Debtor. )

 )

)

CAPRIATI CONSTRUCTION )

CORPORATION, INC., )

)

Appellant, )

)

v. ) M E M O R A N D U M1

)

SPER, INC., )

)

Appellee. )

______________________________)

Argued and Submitted on December 1, 2017, 

at Las Vegas, Nevada

Filed - March 20, 2018

Appeal from the United States Bankruptcy Court

for the District of Nevada

Honorable August B. Landis, Bankruptcy Judge, Presiding

 

Appearances: Aj Kung argued for appellant Capriati Construction

Corporation, Inc.; H. Stan Johnson of CohenJohnson, LLC argued for appellee SPER, Inc. 

 

Before: BRAND, HOULE2 and TAYLOR, Bankruptcy Judges.

1 This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may have

(see Fed. R. App. P. 32.1), it has no precedential value. See 9th

Cir. BAP Rule 8024-1.

2 Hon. Mark D. Houle, Bankruptcy Judge for the Central

District of California, sitting by designation.
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Reorganized debtor Capriati Construction Corp., Inc. appeals

an order denying its motion for contempt against SPER, Inc., for

SPER's alleged violations of the automatic stay and discharge

and/or plan injunction. Capriati alleged that the fraudulent

transfer and alter ego claims SPER was prosecuting in state court

against the non-debtor principal of Capriati were property of

Capriati's bankruptcy estate or of the reorganized debtor;

therefore, SPER's pursuit of those claims prior to confirmation of

Capriati's chapter 113 plan violated the automatic stay and

violated the discharge and/or plan injunction once Capriati's plan

was confirmed. Capriati also appeals the court's order denying

reconsideration. We VACATE and REMAND. 

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. The parties

Capriati is a construction company that historically

generated average annual income of $55-$65 million, primarily from

public work projects. The recent recession ultimately led

Capriati to file for bankruptcy relief. David Rocchio, Sr. is the

owner, sole shareholder and person in control of Capriati. 

SPER is a corporate entity owned by Susan Frankewich, Esq.,

through which she conducts her law practice. Frankewich has

practiced bankruptcy law for over 30 years. Frankewich was the

attorney for Rocchio and his various entities from 2003 to mid

2015. Rocchio did not sign any retention agreements with

SPER/Frankewich individually and was not a guarantor for any

3 Unless specified otherwise, all chapter, code and rule

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and

the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The

Federal Rules of Civil Procedure are referred to as "Civil Rules."

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unpaid legal fees owed by his various entities, including

Capriati.

B. Capriati's bankruptcy filing, the state court action and the

chapter 11 plan 

 

Capriati filed its chapter 11 bankruptcy case on October 7,

2015. The court subsequently approved Capriati's application to

employ Kung & Brown as its bankruptcy counsel. SPER later filed

an unsecured proof of claim for Capriati's unpaid legal fees of

$109,459.50. 

One week later, SPER, represented by Frankewich, sued Rocchio

and his entities in state court for Capriati's unpaid legal fees,

alleging breach of contract, monies owed, quantum meruit,

misrepresentation, alter ego, and fraudulent transfer. SPER did

not name Capriati as a defendant, but SPER's claims for alter ego

and fraudulent transfer alleged that Rocchio (and the other

defendants) manipulated and transferred assets and funds between

Capriati and themselves to avoid payment of creditors, including

SPER. SPER requested that Rocchio be declared the alter ego of

Capriati and be held liable for any judgment. 

Rocchio retained Capriati's bankruptcy counsel, Kung & Brown,

to file a motion to dismiss the state court action as to all

defendants. Rocchio argued that, because SPER's fraudulent

transfer claim alleged that Capriati fraudulently conveyed assets

prior to its filing bankruptcy, such claim had to be heard by the

bankruptcy court. In opposition to SPER's later summary judgment

motion, Rocchio argued that SPER could not recover Capriati's debt

from him or his entities under an alter ego theory, because

Capriati had to be named as a necessary and indispensable party

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but could not be due to the bankruptcy stay. Rocchio also argued

that, to the extent any alleged transfers from Capriati to Rocchio

were avoidable, they would be reclaimed as property of Capriati's

bankruptcy estate; thus, SPER was impermissibly seeking recovery

against property of the estate. 

Kung & Brown thereafter filed a supplement to its employment

application, disclosing to the bankruptcy court that the firm had

represented Rocchio in the state court action. Kung & Brown

asserted that its limited representation of Rocchio and his

entities did not create a conflict of interest in Capriati's

pending bankruptcy but rather preserved estate assets and

prevented further violation of the automatic stay. Kung & Brown

maintained that any alleged claims of alter ego and fraudulent

transfers by Capriati to Rocchio and his entities were claims

belonging to Capriati's bankruptcy estate, and so the firm had to

act quickly to ensure that SPER did not usurp estate assets. Both

Kung & Brown and Rocchio represented that Rocchio had no adverse

interests to the Capriati estate. 

Capriati filed various reorganization plans and disclosure

statements. SPER was the only party to oppose confirmation of

Capriati's third amended plan of reorganization, which ultimately

became the confirmed plan ("Plan"). In each of its objections to

Capriati's disclosure statements, proposed plans and Plan

confirmation, SPER alleged that Capriati was not accounting for

avoidable fraudulent transfers involving Capriati, Rocchio, his

other entities and his family members. In response to one of

SPER's objections, Capriati's financial expert opined that either

the transfers alleged by SPER were not avoidable fraudulent

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transfers, or, to the extent that any were avoidable, no benefit

existed for the estate and creditors because any amount recovered

would not be collectible. In short, the cost of pursuing such

claims exceeded any likely recovery. 

After a two-day confirmation trial, at which the bankruptcy

court considered SPER's allegations of fraudulent transfers

involving Capriati, the court entered an order confirming the

Plan. The Plan provisions relevant here are:

9.1. Vesting of Assets. Subject to the provisions of

this Plan and as permitted by Section 1123(a)(5)(B) of the

Bankruptcy Code, the Assets, including the Litigation

Claims4 and right, title, and interest being assumed by

Reorganized Debtor in the assumed Executory Contracts,

shall be transferred to Reorganized Debtor on the

Effective Date.

9.2. Preservation of Litigation Claims. In accordance

with Section 1123(b)(3) of the Bankruptcy Code, and except

as otherwise expressly provided herein, all Litigation

Claims shall be assigned and transferred to Reorganized

Debtor. Reorganized Debtor, as the successor in interest

to Debtor and the Estate, may and shall have the exclusive

right to sue on, settle, or compromise any and all

Litigation Claims, including derivative actions existing

against Debtor on the Effective Date.

9.4. Injunction. From and after the Effective Date . . .

all entities that have held, currently hold, or may hold

a Claim . . . that is terminated pursuant to the terms of

this Plan are permanently enjoined from taking any of the

following actions on account of any such Claims . . . : 

(I) commencing or continuing in any manner any action or

other proceeding against Reorganized Debtor or its

property[.] 

(Emphasis added).

4 Section 1.1.41 of the Plan defined "Litigation Claims" as

"[a]ll rights, claims, torts, liens, liabilities, obligations,

actions, causes of action, Avoidance Actions [including under 

§§ 544, 548, 550 & 551] derivative actions, proceedings, debts,

contracts, judgments, damages and demands whatsoever in law or in

equity, whether known or unknown, contingent or otherwise, that

Debtor or the Estate may have against any Person."

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C. Capriati's motion for contempt 

More than a year after SPER was on notice that the fraudulent

transfer and alter ego claims alleged in the state court action

were property of the estate or of the Reorganized Debtor, SPER

filed another amended complaint in the state court action, this

time asserting claims against just Rocchio for Capriati's unpaid

legal fees, including claims for fraudulent transfer and alter

ego. Capriati was not named as a defendant, but SPER alleged that

Rocchio had caused Capriati to transfer its assets to him to avoid

paying creditors, including SPER. SPER again requested that

Rocchio be declared the alter ego of Capriati. 

In response, Capriati filed a motion for contempt in the

bankruptcy court, seeking sanctions against SPER for its alleged

violations of the automatic stay and the discharge and/or Plan

injunction ("Contempt Motion"). Capriati argued that SPER's

fraudulent transfer and alter ego claims, which alleged only

general claims of injury to all creditors of Capriati, were

property of the estate that could only be pursued by Capriati and

which revested in the Reorganized Debtor upon confirmation; thus,

SPER's state court action pursuing those claims after Capriati's

bankruptcy filing and prior to Plan confirmation violated the

automatic stay under § 362(a)(3) and violated the Plan injunction

after confirmation. Capriati requested sanctions against SPER of

$25,000 plus attorney's fees. 

In opposition, SPER argued that Capriati was judicially

estopped from claiming that the fraudulent transfer and alter ego

claims were estate assets: Capriati never disclosed any possible

avoidance actions against Rocchio in its schedules or statements

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of financial affairs; at no time prior to confirmation did

Capriati ever amend its schedules or statements of financial

affairs to disclose the fraudulent transfer and alter ego claims;

neither the Plan nor confirmation order reserved or disclosed the

claims as a "litigation asset" of the estate; the expert report

minimized the value of any fraudulent transfer claim; and the

approved disclosure statement disavowed the existence of any such

claim. Therefore, argued SPER, Capriati could not now assert that

the fraudulent transfer and alter ego claims were estate assets,

when Capriati had previously and successfully asserted before the

bankruptcy court in connection with Plan confirmation that no such

claims existed. 

Next, SPER argued that Rocchio, a non-debtor, was not

protected by the automatic stay or Capriati's discharge. SPER

maintained that the claims against Rocchio in the state court

action were "direct" claims against him under Nevada law, not

derivative corporate claims. SPER argued that at least $1,285,500

in Capriati distributions to Rocchio were recoverable for

unsecured creditors, which was more than double what they were

getting under the Plan. 

In reply, Capriati maintained that it did not list any

avoidance actions against Rocchio in its schedules or statements

of financial affairs because it never believed that any such

claims existed. Moreover, the alleged excessive salary payments

to Rocchio were the subject of SPER's many objections and the crux

of its objection to Plan confirmation, which SPER fully litigated

at the confirmation trial. Capriati maintained that SPER's

allegations of fraudulent transfers were without merit or support

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in fact or law; SPER presented no witnesses at the confirmation

trial and entered only one document into evidence — Capriati's

financial expert's report — which concluded that no viable

fraudulent transfer or avoidance actions against Rocchio existed. 

At the Contempt Motion hearing, counsel for SPER conceded

that SPER had no "direct" claim against Rocchio individually and

independent from Capriati, but then argued that SPER had a direct,

in personam claim against Rocchio as "transferee" of a fraudulent

conveyance. Counsel maintained that such claim did not violate

the automatic stay or the Plan injunction, because it was not an

action to recover the asset for the benefit of Capriati's estate. 

D. The bankruptcy court's ruling on the Contempt Motion

The bankruptcy court first determined that the Contempt

Motion failed on the basis of judicial estoppel. The court

focused on Capriati's prior statement that it did not believe any

fraudulent transfer and alter ego claims against Rocchio existed

and was unaware of any such claims. To the extent Capriati

believed otherwise, Capriati never disclosed the claims in its

bankruptcy papers filed under oath. Thus, because of its failure

to disclose and outright denial of the existence of any such

claims against Rocchio, the court reasoned that Capriati was

judicially estopped from now taking the inconsistent position that

such claims were estate assets revested in the Reorganized Debtor

upon confirmation of the Plan. 

Alternatively, the court held that the Contempt Motion failed 

because neither the automatic stay nor the discharge injunction

applied to Rocchio, a non-debtor Capriati officer and insider. 

Sections 9.4 and 9.5 of the Plan prohibited post-confirmation and

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post-discharge actions against the Reorganized Debtor or its

property but excepted direct liability claims against Capriati's

officers and other insiders. The court summarily concluded that

SPER's claims for fraudulent transfer and alter ego were "direct"

claims against Rocchio individually and therefore not protected by

the automatic stay or the discharge and/or Plan injunction.

Finally, the court found that Capriati failed to meet its

burden of proving either a willful violation of the automatic stay

or the discharge injunction; SPER legitimately believed that its

claims in the state court action were against Rocchio

individually. 

E. Capriati's motion for reconsideration 

Capriati timely moved for reconsideration of the Contempt

Order. The bankruptcy court denied the motion, determining that

Capriati had not presented any grounds for reconsideration.

This timely appeal followed.

II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334

and 157(b)(2)(A). We have jurisdiction under 28 U.S.C. § 158.

III. ISSUES

1. Did the bankruptcy court err by determining that SPER had not

willfully violated the automatic stay or the Plan injunction

without determining first whether the fraudulent transfer and

alter ego claims were either property of the estate or property of

the Reorganized Debtor?

2. Did the bankruptcy court err in determining that SPER had not

willfully violated the automatic stay or the Plan injunction and

therefore abused its discretion by not holding SPER in contempt? 

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3. Did the bankruptcy court abuse its discretion by invoking

judicial estoppel to deny the Contempt Motion?

4. Did the bankruptcy court abuse its discretion in denying the

motion to reconsider? 

IV. STANDARDS OF REVIEW

Determining whether the bankruptcy court applied the correct

legal standard is a question of law reviewed de novo. Emmert v.

Taggart (In re Taggart), 548 B.R. 275, 286 (9th Cir. BAP 2016). 

An erroneous view of the law may induce the bankruptcy court to

make a clearly erroneous finding of fact. Ozenne v. Bendon (In re

Ozenne), 337 B.R. 214, 218 (9th Cir. BAP 2006) (citing Power v.

Union Pac. R.R. Co., 655 F.2d 1380, 1382–83 (9th Cir. 1981)).

Whether property is included in a bankruptcy estate is a

question of law subject to de novo review. Cisneros v. Kim (In re

Kim), 257 B.R. 680, 684 (9th Cir. BAP 2000).

We review for abuse of discretion the bankruptcy court's

decision to apply judicial estoppel, or preclusion of inconsistent

positions, to the facts of a case. Hamilton v. State Farm Fire &

Cas. Co., 270 F.3d 778, 782 (9th Cir. 2001); Diamond Z Trailer,

Inc. v. JZ L.L.C. (In re JZ L.L.C.), 371 B.R. 412, 416 (9th Cir.

BAP 2007). 

We review for an abuse of discretion the bankruptcy court's

decision whether to hold a party in civil contempt. Knupfer v.

Lindblade (In re Dyer), 322 F.3d 1178, 1191 (9th Cir. 2003);

Rediger Inv. Servs. v. H. Granados Commc'ns, Inc. (In re H

Granados Commc'ns, Inc.), 503 B.R. 726, 731 (9th Cir. BAP 2013). 

The underlying factual findings are reviewed for clear error. 

In re Dyer, 322 F.3d at 1191; In re H Granados Commc'ns, Inc.,

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503 B.R. at 731-32. A finding is clearly erroneous when it is

illogical, implausible or without support in the record. United

States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en banc). 

We review for an abuse of discretion the bankruptcy court's

decision to deny a reconsideration motion under Civil Rule 59. 

Ybarra v. McDaniel, 656 F.3d 984, 998 (9th Cir. 2011); Cruz v.

Stein Strauss Tr. # 1361, PDQ Invs., LLC (In re Cruz), 516 B.R.

594, 601 (9th Cir. BAP 2014).

A bankruptcy court abuses its discretion if it applies the

wrong legal standard, misapplies the correct legal standard, or if

it makes factual findings that are illogical, implausible or

without support in inferences that may be drawn from the facts in

the record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d

820, 832 (9th Cir. 2011).

V. DISCUSSION

A. The bankruptcy court's failure to determine ownership of the

fraudulent transfer and alter ego claims led to error. 

The bankruptcy court denied the Contempt Motion in the first

instance based on its determination that judicial estoppel barred

the relief sought by Capriati, and second, summarily, on the

alternative grounds that the automatic stay and discharge and/or

Plan injunction did not apply to preclude SPER's filing and

pursuit of its "direct" claims for fraudulent transfer and alter

ego against Rocchio, a non-debtor third party and Capriati

insider. The bankruptcy court never determined whether the

fraudulent transfer and alter ego claims were property of the

estate or property of the Reorganized Debtor. This approach puts

the cart before the horse. The omission led to the erroneous or

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incomplete finding that SPER's claims for fraudulent transfer and

alter ego were exclusively "direct" claims against Rocchio; the

record and the law are to the contrary. And this conclusion

improperly colored the determinations that followed. 

Property of the estate includes "all legal or equitable

interests of the debtor in property as of the commencement of the

case." § 541(a)(1). A debtor's "causes of action" are "property

of the estate." Smith v. Arthur Andersen LLP, 421 F.3d 989, 1002

(9th Cir. 2005) (citing United States v. Whiting Pools, Inc.,

462 U.S. 198, 205 n.9 (1983)). Thus, the trustee, or in this case

the debtor-in-possession, stands in the shoes of the debtor

corporation and has standing to bring any suit that the debtor

corporation could have instituted had it not filed for bankruptcy

relief. Id. The trustee's standing to sue on behalf of the

estate is exclusive; a debtor's creditors cannot prosecute such

claims belonging to the estate absent abandonment. Estate of

Spirtos v. One San Bernardino Cty. Super. Ct., 443 F.3d 1172, 1175

(9th Cir. 2006).

Furthermore, § 1141(b) "vests all of the property of the

estate, scheduled and unscheduled, in the debtor upon plan

confirmation, unless the court or plan provides otherwise." In re

JZ L.L.C., 371 B.R. at 418 (emphasis in original). Hence, because

of § 1141(b), the general rule under § 554(d) — that property of

the estate that is not scheduled and not otherwise administered

before the case is closed and is not abandoned to the debtor at

the time of closing, but rather remains property of the estate,

forever — does not apply. Id. Thus, even undisclosed assets in a

chapter 11 case vest in the debtor under § 1141(b), unless the

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plan provides otherwise. Id. at 419. Section 9.1 of the Plan

provides that all Litigation Claims, including all known or

unknown causes of action, Avoidance Actions and derivative

actions, vested in the Reorganized Debtor on the effective date. 

This is not inconsistent with § 1141(b). 

1. The fraudulent transfer claim

The crux of SPER's fraudulent transfer claim was Capriati's

alleged over-payment of salary to Rocchio, which SPER argued was a

transfer in fraud of all creditors and harmful to Capriati. In

other words, SPER's complaint alleged a direct injury to Capriati,

from which an injury to SPER was derived. "If a cause of action

alleges only indirect harm to a creditor (i.e., an injury which

derives from harm to the debtor), and the debtor could have raised

a claim for its direct injury under the applicable law, then the

cause of action belongs to the estate." Schertz-Cibolo-Universal

City, Indep. Sch. Dist. v. Wright (In re Educators Grp. Health

Tr.), 25 F.3d 1281, 1284 (5th Cir. 1994). 

We conclude that SPER's fraudulent transfer claim asserted in

the state court action was property of Capriati's bankruptcy

estate by virtue of § 544(b) once Capriati filed its bankruptcy

petition, and such claim could only be pursued by Capriati. 

§ 548(a); The Cadle Co. v. Mims (In re Moore), 608 F.3d 253, 261

(5th Cir. 2010) (fraudulent transfer claims become estate property

"once bankruptcy is under way" by virtue of trustee's successor

rights under § 544(b)); Nat'l Tax Credit Partners, L.P. v. Havlik,

20 F.3d 705, 708-09 (7th Cir. 1994) (same). See also Whiting

Pools, Inc., 462 U.S. at 205 ("Section 541(a)(1) is intended to

include in the estate any property made available to the estate by

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other provisions of the Bankruptcy Code," which would include

property made available through § 544). 

We reject SPER's argument that it could pursue a direct claim

against Rocchio as the "transferee" of a fraudulent transfer under

Nevada law, namely NRS 112.220, which provides for recovery of the

value of the asset transferred from the transferee, during the

chapter 11 case. That statute does not consider the effect of a

corporate debtor's bankruptcy filing and the fact that a

prepetition claim for injury to the debtor by an insider's

fraudulent transfers is property of the corporate debtor's estate. 

2. The alter ego claim

Whether the alter ego claim was property of the estate or of

the Reorganized Debtor is not as easy to determine. The alter ego

doctrine is used to establish the direct liability of a

shareholder when that shareholder improperly uses the corporate

entity to commit acts which harm the corporation. Here, SPER

alleged a traditional veil-piercing (alter ego) claim, whereby a

creditor attempts to place liability for a debtor-corporation's

obligations on its shareholders.

 Whether an alter ego claim is property of the bankruptcy

estate depends on two things: (1) whether under state law where

the corporate debtor is incorporated, the debtor is permitted to

pierce its own corporate veil; and (2) whether the claim is a

general one, of the type that could be brought by any creditor of

the debtor. Kalb, Voorhis & Co. v. Am. Fin. Corp., 8 F.3d 130,

132-33 (2d. Cir. 1993); S.I. Acquistion, Inc. v. Eastway Delivery

Serv., Inc., 817 F.2d 1142, 1152-53 (5th Cir. 1987); CBS, Inc. v.

Folks (In re Folks), 211 B.R. 378, 384, 387 (9th Cir. BAP 1997);

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Murray v. Miner, 876 F. Supp. 512, 516 (S.D.N.Y. 1995); In re

Landmark Fence Co., 424 B.R. 461, 463 (Bankr. C.D. Cal. 2010);

In re Davey Roofing Inc., 167 B.R. 604, 608 (Bankr. C.D. Cal.

1994). If the answer to both of these questions is yes, then the

alter ego claim is property of the estate, belongs to the trustee

or debtor-in-possession, and cannot belong to any individual

creditor. In re Folks, 211 B.R. at 387 (citing Davey Roofing,

Inc., 167 B.R. at 606). "This rule ensures that all of a debtor's

creditors receive equal treatment: otherwise, those who asserted

alter ego claims first would obtain payment of the claims in

preference to and to the detriment of other creditors, despite

having no greater claim on the alter ego's assets." Murray,

876 F. Supp. at 516 (internal quotation marks and citation

omitted). 

Despite SPER's assertion and the bankruptcy court's finding

to the contrary, the alter ego claim alleged here was a general,

as opposed to a personal or individualized, claim. "A cause of

action is personal if the claimant himself is harmed and no other

claimant or creditor has an interest in the cause." In re Folks,

211 B.R. at 387 (internal quotation marks and citation omitted). 

"A general claim exists if the liability is to all creditors of

the corporation without regard to the personal dealings between

such officers and such creditors." Id. (internal quotation marks

and citation omitted). In other words, if the alter ego claim

alleges acts that harmed the financial condition of the

corporation as a whole and all creditors equally, such claims are

general alter ego claims. Id. See Kalb, Voorhis & Co., 8 F.3d at

133; In re Landmark Fence Co., 424 B.R. at 463-64; In re Davey

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Roofing, Inc., 167 B.R. at 608. 

SPER's alter ego claim alleging that Rocchio (1) had failed

to observe corporate formalities with respect to Capriati,

(2) used corporate funds for his own personal use, and (3) had

manipulated Capriati's assets and funds to avoid payment of

creditors was a general claim because all creditors are affected;

no particularized injury to SPER existed that could not be brought

by other Capriati creditors harmed by Rocchio's alleged bad acts. 

Accordingly, the bankruptcy court clearly erred to the extent that

it found SPER had a "direct" or personal alter ego claim against

Rocchio that was not an asset of the chapter 11 estate. 

As for the question of whether Capriati could pierce its own

corporate veil, the parties have been operating under the

assumption that Nevada alter ego law applies. However, Capriati

is a Rhode Island corporation. Thus, as noted above, Rhode Island

alter ego law applies. 

Rhode Island recognizes the equitable doctrine of alter ego. 

McFarland v. Brier, 769 A.2d 605, 613 (R.I. 2001) (alter ego

doctrine permits creditors of a corporation to reach assets of

individual(s) that control the corporation). However, we could

not locate any Rhode Island Supreme Court case answering the

question of whether a corporation may pierce its own veil. 

In any event, the general rule in most (if not all) states is

that "alter ego" is not an independent cause of action, but is an

equitable remedy — a legal theory or doctrine used to impose

liability against the alter ego defendant under another cause of

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action.5 We could not locate a Rhode Island Supreme Court case

stating whether this is the law in Rhode Island, but based on that

Court's use of the terms "equitable" and "doctrine" in cases

discussing alter ego, we can assume that Rhode Island follows this

general rule. See Heflin v. Koszela, 774 A.2d 25, 30 (R.I. 2001)

("To invoke the equitable alter ego doctrine . . . ."). 

Thus, we question what value SPER's alter ego claim has as a

remedy absent the ability to pursue the fraudulent transfer claim. 

3. SPER violated the automatic stay

The bankruptcy court determined that SPER could not have

violated the automatic stay by filing and pursuing its "direct"

claims for fraudulent transfer and alter ego against Rocchio

individually in the state court action. We do not argue the point

that generally a non-debtor is not protected by the automatic

stay. However, as we have determined, SPER's fraudulent transfer

claim was not a "direct" claim against Rocchio, because it became

property of the estate once Capriati filed its bankruptcy case. 

The automatic stay continues to protect property of the

estate so long as it retains that status. § 362(c)(1). While the

automatic stay did not apply to Rocchio, it did apply to claims

against property of the estate prior to confirmation under 

5 For example, in California "[a] claim against a defendant,

based on the alter ego theory, is not itself a claim for

substantive relief, e.g., breach of contract or to set aside a

fraudulent conveyance, but rather, procedural . . . " Hennessey's

Tavern, Inc. v. Am. Air Filter Co., 204 Cal. App. 3d 1351, 1359

(1988). "Alter ego is merely a legal theory, or doctrine,

employed to make a substantive cause of action applicable to the

'alter ego defendant' where otherwise that claim could only be

stated against the corporate entity." Id.

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§ 362(a)(3).6 As a result, SPER violated the automatic stay when

it asserted the fraudulent transfer and related alter ego claims

in its state court complaint. And acts in violation of the stay

are void, absent an annulment of the stay. SPER cannot rely on

those claims for relief either as initially pled or as amended. 

Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571 (9th

Cir. 1992) (actions taken in violation of the automatic stay are

void).

Whether SPER has a post-Plan confirmation "direct" claim is

an issue for further consideration, but it must assert such a

claim as a new matter after confirmation and without reliance on

void assertions during the course of the case. However, SPER's

new attempt would remain subject to potentially successful attack

based on the discharge and Plan injunction and subject to defenses

such as the statute of limitations, as applicable.

Section 362(k) permits the recovery of damages resulting from

a stay violation. This subsection, however, applies only to

individuals, not corporations. In re H Granados Commc'ns, Inc.,

503 B.R. at 733. Nonetheless, a corporation may be entitled to

recovery for a stay violation under § 105(a) as a sanction for

civil contempt. Id. 

To find a party in civil contempt for a stay violation, the

threshold inquiry focuses on a finding of "willfulness." Id.

(citing In re Dyer, 322 F.3d at 1191). The bankruptcy court must

find that: (1) the party knew of the automatic stay; and (2) the

6 Under § 362(a)(3), the automatic stay prohibits "any act

to obtain possession of property of the estate or of property from

the estate or to exercise control over property of the estate."

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party's actions that violated the stay were intentional. Id. 

Whether the party exhibited bad faith or had a subjective intent

to violate the stay is irrelevant. Id. The movant bears the

burden of showing by clear and convincing evidence that the party

violated the stay. Id. 

SPER has never claimed that it did not receive notice of

Capriati's bankruptcy filing. Indeed, it was careful not to

include Capriati as a defendant in the state court action, filed

just one week after Capriati filed its chapter 11 case. Further,

Frankewich, a bankruptcy attorney of over 30 years, is certainly

familiar with the rules of the automatic stay and knew or should

have known that usurping property of the bankruptcy estate is a

willful violation of the automatic stay. Her subjective belief

that the claims in the state court action were against Rocchio

only and not Capriati makes no difference for purposes here,

despite the bankruptcy court's ruling to the contrary. Because

the court applied an incorrect legal standard, its finding that

SPER had not willfully violated the automatic stay is clearly

erroneous. In re Ozenne, 337 B.R. at 218. 

The record supported a determination that SPER willfully

violated the automatic stay by filing and continuing to pursue the

fraudulent transfer claim against Rocchio in the state court

action after Capriati filed its bankruptcy case and prior to

confirmation of the Plan. Therefore, the bankruptcy court abused

its discretion by not holding SPER in contempt.

4. Whether SPER violated the discharge and/or Plan

injunction can be determined on remand. 

Per § 1141(b) and Sections 1.1.41, 9.1, 9.2 and 9.4 of the

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Plan, the fraudulent transfer claim (and maybe the alter ego claim

if viable under Rhode Island law and if it was property of the

estate) appears to be a "Litigation Asset" that reverted to the

Reorganized Debtor upon confirmation of the Plan, gave the

Reorganized Debtor exclusive right to sue on, settle or compromise

that claim, and permanently enjoined any other parties from

commencing or continuing any action regarding that claim. 

Capriati argues that the bankruptcy court erred by not holding

SPER in contempt for willfully violating the Plan injunction and

confirmation order, when it was clear that SPER was attempting to

take control over claims belonging to the Reorganized Debtor. 

The contempt remedy is also available with respect to

violations of the discharge injunction under § 105(a). ZiLOG,

Inc. v. Corning (In re ZiLOG, Inc.), 450 F.3d 996, 1007 (9th Cir.

2006); Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 507 (9th

Cir. 2002); In re Taggart, 548 B.R. at 286. The party seeking

contempt sanctions has the burden of proving, by clear and

convincing evidence, that the alleged contemnor "(1) knew the

discharge injunction was applicable and (2) intended the actions

which violated the injunction." In re ZiLOG, Inc., 450 F.3d at

1007; Renwick v. Bennett (In re Bennett), 298 F.3d 1059, 1069 (9th

Cir. 2002) ("The moving party has the burden of showing by clear

and convincing evidence that the contemnors violated a specific

and definite order of the court."). Knowledge of the injunction

is a question of fact that can normally be resolved only after an

evidentiary hearing. In re ZiLOG, Inc., 450 F.3d at 1007. 

However, where the facts are not in dispute, no hearing need be

held. Id. at 1007 n.11 (citing In re Dyer, 322 F.3d at 1191-92).

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Here, the bankruptcy court applied the correct legal standard

for a willful violation of the discharge or Plan injunction. It

is undisputed that SPER knew of the Plan injunction and

confirmation order given its objections to Plan confirmation,

which were overruled at the confirmation trial, and that SPER

continued to pursue the state court action post-confirmation. 

However, it is not clear on this record whether SPER was aware

that the Plan injunction applied to its claims against Rocchio for

fraudulent transfer and alter ego. The bankruptcy court may need

to conduct an evidentiary hearing on remand to make that

determination.

B. We need not decide whether the bankruptcy court abused its

discretion by invoking judicial estoppel to deny the Contempt

Motion.

Capriati argues that the bankruptcy court misapplied and

grossly over-extended the doctrine of judicial estoppel. We do

not fault the court for wanting to apply some sort of equitable

doctrine in this case to deny Capriati's request for monetary

damages for contempt, which is all it requested. Like the

bankruptcy court, we question why a corporate debtor like Capriati

would concern itself with a creditor’s pursuit of a third party,

albeit a corporate insider, in state court. The fairly obvious

reason Capriati was seeking monetary damages for contempt in the

bankruptcy court was to protect and benefit Rocchio, Capriati’s

principal and sole shareholder.

Judicial estoppel is an equitable doctrine that precludes a

party from gaining an advantage by asserting one position, and

then later seeking an advantage by taking a clearly inconsistent

position, either in the same or different actions. Hamilton,

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270 F.3d at 782-83. The court invokes judicial estoppel not only

to prevent a party from gaining an advantage by taking

inconsistent positions, "but also because of general

considerations of the orderly administration of justice and regard

for the dignity of judicial proceedings, and to protect against a

litigant playing fast and loose with the courts." Id. (internal

quotation marks and citation omitted).

Although Capriati as a chapter 11 debtor-in-possession and

revested debtor had exclusive standing to sue on causes of action

that were property of the estate, that right is subject to certain

equitable constraints. In re JZ, L.L.C. 371 B.R. at 418; § 1107.7

As the Panel has noted:

Section 1141(b) vesting does not mean that a debtor

necessarily has unfettered control over property of the

estate. It neither authorizes nor condones mischief, such

as omitting to schedule property. For that reason,

equitable constraints may be imposed in order to preserve

the integrity of the system. In principle, the full

panoply of equitable remedies, from constructive trust

through equitable and judicial estoppel, are available to

assure that debtors do not overreach.

In re JZ L.L.C., 371 B.R. at 420. Accordingly, as JZ L.L.C.

instructs, the bankruptcy court had discretion to apply an

equitable doctrine like judicial estoppel to deny Capriati

contempt damages. We simply disagree that applying the doctrine

without recognizing that a stay violation occurred and that SPER

continues to rely on void claims for relief is appropriate. 

On remand, the bankruptcy court may certainly revisit any

equitable doctrine it deems appropriate to deny contempt damages 

7 Under § 1107(a), the debtor in possession is vested with

the rights, powers, and duties of a trustee, including the right

to sue and be sued. See § 323(b) (trustee has capacity to sue and

be sued).

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to Capriati. 

C. The bankruptcy court abused its discretion in denying the

motion to reconsider. 

A motion under Civil Rule 59(e) should not be granted unless

the court is presented with newly discovered evidence, committed

clear error, or if there is an intervening change of controlling

law. 389 Orange St. Partners v. Arnold, 179 F.3d 656, 665 (9th

Cir. 1999). Capriati asked the bankruptcy court to reconsider its

ruling on the Contempt Motion, arguing that the court had erred

when it determined that (1) SPER had a direct claim against

Rocchio, (2) that judicial estoppel authorized the court to allow

a single creditor to bring postpetition and post-confirmation

fraudulent transfer and alter ego claims, which were property of

the estate and of the Reorganized Debtor, for the creditor's sole

benefit, and that (3) SPER had not willfully violated the

automatic stay or Plan injunction. Because we have determined

that the court applied incorrect standards of law and made clearly

erroneous findings of fact based on its erroneous view of the law,

it abused its discretion by not granting Capriati's motion to

reconsider.8

VI. CONCLUSION

For the foregoing reasons, we VACATE and REMAND the Contempt

Order for the bankruptcy court to determine what sanctions are

8 SPER requests sanctions against Capriati for filing a

frivolous appeal. First, Capriati has prevailed in this appeal. 

In addition, we deny SPER's request because it fails to comply

with Rule 8020, which requires a party to request sanctions for a

frivolous appeal by separate motion. State of Cal. Emp't Dev.

Dep't v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147, 1154 (9th

Cir. 1996).

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appropriate for SPER's willful violation of the automatic stay and

perhaps willful violation of the Plan injunction. We leave to the

court's discretion as to whether any further proceedings are

necessary for it to make that determination.

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