Court Opinion

ID: 6217004
Source: CourtListenerOpinion
Date Created: 2022-02-10 01:00:23.66819+00
Date Added: 2024-06-11T08:57:11.982861
License: Public Domain

Case: 20-10885   Document: 00516196907     Page: 1   Date Filed: 02/09/2022

          United States Court of Appeals
               for the Fifth Circuit                        United States Court of Appeals
                                                                     Fifth Circuit

                                                                   FILED
                                                             February 9, 2022
                            No. 20-10885
                                                              Lyle W. Cayce
                                                                   Clerk
   In the Matter of: PFO Global, Incorporated

                                                                  Debtor,

   VSP Labs, Incorporated, Creditor and Movant,

                                                             Appellant,

                                versus

   Hillair Capital Investments, L.P., Interested Party and
   Respondent; Hillair Capital Management, L.L.C., Interested
   Party and Respondent,

                                                              Appellees,
   ______________________________

   In the Matter of: PFO Global, Incorporated

                                                                  Debtor,

   VSP Labs, Incorporated, Creditor and Movant,

                                                             Appellant,
                                versus

   Hillair Capital Investments, L.P., Hillair Capital
   Management, L.L.C.

                                                              Appellees,
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                                 No. 20-10885

   ______________________________

   In the Matter of: PFO Global, Incorporated

                                                                     Debtor,

   VSP Labs, Incorporated, Creditor and Movant,

                                                                  Appellant,

                                    versus

   Hillair Capital Investments, L.P., Interested Party and
   Respondent; Hillair Capital Management, L.L.C

                                                                   Appellees,
   ______________________________

   In the Matter of: PFO Global, Incorporated

                                                                     Debtor,

   VSP Labs, Incorporated,

                                                                  Appellant,
                                    versus

   Hillair Capital Investments, L.P., Hillair Capital
   Management, L.L.C.

                                                                   Appellees.

                 Appeal from the United States District Court
                     for the Northern District of Texas
                           USDC No. 3:19-CV-1575
                           USDC No. 3:19-CV-1576
                          USDC No. 3:19-CV-1603

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                                    No. 20-10885

                              USDC No. 3:20-CV-47
                              USDC No. 3:19-CV-2525

   Before Higginbotham, Willett, and Duncan, Circuit Judges.
   Patrick E. Higginbotham, Circuit Judge:
          These consolidated cases arise out of the bankruptcy of Pro Fix Optix
   (“PFO”) and a dispute over the validity and scope of the bankruptcy court’s
   orders prohibiting one non-debtor, VSP Labs, Inc., from asserting claims
   against two other non-debtors, Hillair Capital Investments L.P. and Hillair
   Capital Management L.L.C. The district court affirmed the orders of the
   bankruptcy court and VSP appealed to this Court. We affirm.
                                         I.
          In 2012, PFO and VSP entered an agreement for PFO to develop and
   transfer eyewear technology to VSP over four years. Under the agreement,
   VSP had the right to step in and take over development if PFO did not meet
   performance milestones, with PFO responsible for reimbursing VSP for costs
   incurred. VSP claims that PFO failed to meet several milestones, leading VSP
   to step in, but PFO did not reimburse VSP for the resulting expenses. VSP
   filed suit against PFO in California state court in 2013 (the “California
   Action”), asserting claims for breach of contract and seeking declaratory
   relief. PFO filed counterclaims. The California Action was scheduled for trial
   in March 2017.
          In January 2017, PFO filed for bankruptcy under Chapter 11 in the
   Northern District of Texas. The resulting automatic stay paused the
   California Action. Shortly after PFO filed its petition, the bankruptcy court
   approved an asset purchase agreement between PFO and its largest pre-
   petition lender, Hillair, transferring PFO’s counterclaims against VSP in the
   California Action to Hillair.

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          Seeking to escape the stay, Hillair asked the California court to sever
   its newly acquired counterclaims, and VSP then moved for relief from the
   automatic stay to offset PFO’s counterclaims in the California Action.
          Responding to VSP’s motion, the bankruptcy court entered a Lift Stay
   Order on September 7, 2017, which reads:
          The automatic stay is modified . . . so that VSP Labs, Inc. may
          liquidate the amount of its affirmative claims against Pro Fit
          Optix, Inc. (“PFO”) for the purpose of asserting its rights to
          setoff and recoupment in [the California Action]; provided,
          however, that to the extent monetary damages are awarded to
          VSP Labs, Inc. in excess of any monetary damages awarded to
          [Hillair], or PFO in the California Action, the excess amount
          may only be enforced through a proof of claim filed in the
          above-styled and -numbered case, and, without affecting
          VSP’s rights of setoff or recoupment in defense of claims in the
          California Action, no money damages or other amounts of any
          kind may be recovered from Hillair under any circumstance on
          account of any claims that have been or could have been
          asserted in the California Action[.]
   This language was presented to the bankruptcy court by the parties following
   negotiations between VSP, Hillair, and the trustee.
          VSP alleges that subsequent discovery in the California Action
   revealed that Hillair had directed PFO to breach the 2012 technology
   development agreement. VSP thus sought leave from the California Superior
   Court to file a second amended complaint in the California Action, asserting
   new causes of action against PFO and Hillair, individually and collectively.
   Before the bankruptcy court, Hillair moved for an order prohibiting VSP’s
   assertion of direct claims against it in California under the terms of the Lift
   Stay Order. Before the California Superior Court granted VSP leave to
   amend, the bankruptcy court granted Hillair’s motion and entered the
   Enforcement Order, holding that the Lift Stay Order “entered with the

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   consent of the parties, prohibits the assertion of the claims proposed in the
   VSP Second Amended Complaint against Hillair . . . .”
          VSP moved for reconsideration of the Enforcement Order, arguing in
   part that the bankruptcy court lacked jurisdiction to adjudicate state law
   actions between non-debtor third parties. The bankruptcy court denied
   VSP’s motion.
          Meanwhile, the California Superior Court requested that the parties
   clarify the effect of the bankruptcy court’s order. VSP filed a supplemental
   brief which advised the California Superior Court that the bankruptcy court’s
   Enforcement Order had no effect on VSP’s proposed claims. In response to
   VSP’s supplemental brief in the California Action, Hillair moved for an order
   from the bankruptcy court enforcing the Enforcement Order and sanctioning
   VSP for what Hillair characterized as “[w]illfully [i]gnoring and [v]iolating”
   the original Enforcement Order. Accordingly, the bankruptcy court
   sanctioned VSP and ordered it to pay Hillair’s reasonable attorneys’ fees.
          VSP then moved in bankruptcy court for relief from the Lift Stay
   Order under Federal Rules of Civil Procedure 60(b)(4) and 60(b)(6). The
   bankruptcy court denied VSP’s Motion for Relief under Rule 60(b)(4)
   because it had jurisdiction to enter the Lift Stay Order and subsequent
   interpretive orders because “the outcome of VSP’s causes of action against
   Hillair in the Second Amended Complaint could conceivably have an effect
   on the Debtor’s estate being administered in bankruptcy.” The bankruptcy
   court further denied relief under Rule 60(b)(6) because “[t]he language at
   issue in the Stay Relief Order was negotiated by the parties and submitted to
   the Court by VSP . . . . [and] VSP has enjoyed the benefits of having relief
   from the automatic stay for two years now[.]”

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                                                II.
          VSP appealed to the district court, challenging the bankruptcy court’s
   four 2019 orders interpreting the Lift Stay Order and imposing sanctions.
   VSP argued that the bankruptcy court lacked jurisdiction to prevent VSP’s
   assertion of state law claims against a non-debtor, claims which VSP
   described as “non-core” and unrelated to PFO’s bankruptcy estate.
          In a comprehensive opinion, the district court affirmed each of the
   bankruptcy court’s orders. 1 Specifically, the district court determined that
   the bankruptcy court had jurisdiction over VSP’s state law claims because
   they were non-core proceedings related to the bankruptcy estate and because
   VSP consented to their adjudication by agreeing to the text of the Lift Stay
   Order. 2 The district court also affirmed the bankruptcy court’s interpretation
   of the Lift Stay Order, finding that the order’s text unambiguously prevented
   VSP from asserting “any claims” for damages against Hillair in the California
   Action under “any circumstances” as a condition of partially lifting the
   automatic stay. 3 Finally, the district court found no abuse of discretion in the
   bankruptcy court’s imposition of sanctions against VSP because the
   supplemental brief VSP filed in California violated the valid Enforcement
   Order. 4 VSP timely appealed to this Court.
                                               III.
          We apply the same standards of review to the bankruptcy court as a
   district court, reviewing a bankruptcy court’s legal conclusions de novo and

          1
              See VSP Labs, Inc. v. Hillair Cap. Invs. LP, 619 B.R. 883, 888 (N.D. Tex. 2020).
          2
              Id. at 895–900.
          3
              Id. at 901–03.
          4
              Id. at 904-05.

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                                             No. 20-10885

   its findings of fact for clear error. 5 “The extent of a bankruptcy court’s
   jurisdiction is a legal issue that we review de novo.” 6 While we review purely
   legal issues de novo, we defer to the bankruptcy court’s reasonable
   interpretation of any ambiguities in its orders. 7 We review the bankruptcy
   court’s decision not to abstain from hearing a proceeding and its award of
   attorneys’ fees for abuse of discretion. 8
                                                  IV.
           We first address whether the bankruptcy court had jurisdiction to
   prevent VSP from asserting state law claims in state court. Under 28 U.S.C.
   § 1334, unless an exception applies “district courts shall have original and
   exclusive jurisdiction of all cases under title 11.” 9 This includes “original but
   not exclusive jurisdiction of all civil proceedings arising under title 11, or
   arising in or related to cases under title 11.” 10 The bankruptcy courts in turn
   draw their jurisdiction from the district courts. 11
           The relief from the automatic stay granted by the 2017 Lift Stay Order
   allowing claims against PFO’s estate to advance in the California Action was
   a core proceeding over which the bankruptcy court had jurisdiction.12
   However, the additional provision of the 2017 Lift Stay Order concerning

           5
               Matter of Lopez, 897 F.3d 663, 668 (5th Cir. 2018).
           6
                In re 804 Cong., L.L.C., 756 F.3d 368, 372–73 (5th Cir. 2014).
           7
               In re Nat'l Gypsum Co., 219 F.3d 478, 484 (5th Cir. 2000).
           8
             In re Moore, 739 F.3d 724, 728 (5th Cir. 2014); Matter of Riley, 923 F.3d 433, 437
   (5th Cir. 2019).
           9
                28 U.S.C. § 1334(a).
           10
                28 U.S.C. § 1334(b).
           11
                28 U.S.C. § 157(a).
           12
                28 U.S.C. § 157(b)(2).

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                                           No. 20-10885

   claims by VSP, a non-debtor, against Hillair, another non-debtor, in a
   separate proceeding was not core. 13
          For a bankruptcy court to have jurisdiction over a non-core
   proceeding, the proceeding must be “related to” the bankruptcy case. 14 In
   Celotex Corp v. Edwards, the Supreme Court held that while a bankruptcy
   court’s “related to” jurisdiction is not limitless, it goes beyond “simple
   proceedings involving the property of the debtor or the estate.” 15 It turns on
   “whether the outcome of a proceeding could conceivably have any effect on
   the estate being administered in bankruptcy.” 16 The bankruptcy court had
   “related to” jurisdiction as the outcome of VSP’s claims against Hillair could
   conceivably affect PFO’s estate because successful claims against Hillair
   could reduce the amount of damages for which PFO’s estate is found liable. 17
          Although the bankruptcy court had “related to” jurisdiction, its
   exercise was limited absent party consent. 18 And where the parties consent,
   a bankruptcy judge may “hear and determine and [ ] enter appropriate orders
   and judgments” over proceedings that are not core to the bankruptcy case,
   subject to review by the district court. 19 The parties’ “consent may be either
   express or implied, so long as it is knowing and voluntary; the determination

          13
               Id.
          14
               28 U.S.C. § 157(a).
          15
               514 U.S. 300, 308 (1995).
          16
               In re Prescription Home Health Care, Inc., 316 F.3d 542, 547 (5th Cir. 2002).
          17
               See In re Canion, 196 F.3d 579, 586–87 (5th Cir. 1999).
          18
               28 U.S.C. § 157(c).
          19
               28 U.S.C. §§ 157(c)(2), 158(a).

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                                            No. 20-10885

   whether a party consented to the bankruptcy court’s jurisdiction requires ‘a
   deeply factbound analysis of the procedural history’ in the proceeding.” 20
          Reviewing this factual question for clear error, 21 we find that VSP and
   Hillair knowingly and voluntarily consented to the bankruptcy court’s
   jurisdiction over the claims in the California Action. The parties agreed to
   the language of the Lift Stay Order and presented it to the bankruptcy court,
   which then entered the proposed order. The parties having thus consented,
   the bankruptcy court had jurisdiction to hear and enter appropriate orders
   related to the proceedings surrounding the entry of the Lift Stay Order. 22
          The bankruptcy court also had jurisdiction to enter its four 2019
   orders which interpreted and enforced the 2017 Lift Stay Order. “[T]he
   Bankruptcy Court plainly had jurisdiction to interpret and enforce its own
   prior orders.” 23 This includes jurisdiction to pause state court litigation
   controlled by a prior order and the automatic stay. 24 In sum, we find that the
   bankruptcy court had jurisdiction to enter the Lift Stay Order and it retained
   jurisdiction to interpret and enforce its orders, as it did in the 2019 orders.
                                                 V.
          VSP argues that, even if the bankruptcy court had jurisdiction, it was
   required to abstain from adjudicating VSP’s non-core claims already subject
   to the separate California state court proceeding. Parties can ask the district
   court—and thus the bankruptcy court—to abstain from hearing a proceeding

          20
             Saenz v. Gomez, 899 F.3d 384, 391 (5th Cir. 2018) (quoting Wellness Int’l
   Network, Ltd. v. Sharif, 575 U.S. 665, 684–85 (2015)).
          21
               Id.
          22
               See 28 U.S.C. § 157(c)(2).
          23
               Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151 (2009).
          24
               In re Lothian Oil, Inc., 531 F. App’x 428, 436–44 (5th Cir. 2013).

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   where the issue is based on state law and the federal court would not have
   jurisdiction absent 28 U.S.C. § 1334. 25
          VSP waived this argument by failing to present this issue to both the
   bankruptcy court and the district court. As we sit as a court of second review,
   “[e]ven if an issue is raised and considered in the bankruptcy court, this court
   will deem the issue waived if the party seeking review failed to raise it in the
   district court.” 26 Because VSP did not raise its abstention argument before
   district court, it did not sufficiently preserve this issue for appeal.
          While VSP admits it did not “specifically” move for abstention; it
   nevertheless urges that a motion for abstention can be gleaned from its filings
   and that the lower court should have looked beyond the labels VSP applied
   to its own motions. However, in its motions before the bankruptcy court,
   VSP did not make a cognizable motion for abstention; it only challenged the
   bankruptcy court’s jurisdiction. A motion explicitly challenging a bankruptcy
   court’s jurisdiction does not implicitly constitute a motion for abstention. 27
   And we see no grave miscarriage of justice in finding that VSP waived its
   abstention argument. 28 We do not require a bankruptcy court to read beyond
   the text of motions in search of implicit arguments, and we decline to do so
   here. In sum, the bankruptcy court would not have abused its discretion in
   refusing to abstain under 28 U.S.C. § 1334(c)(2) as there was no timely
   motion for abstention.

           25
                28 U.S.C. § 1334(c)(2).
           26
                In re Bradley, 501 F.3d 421, 433 (5th Cir. 2007).
           27
                In re Moore, 739 F.3d at 729.
           28
             In re Bradley, 501 F.3d at 433 (considering an argument waived “in the absence
   of any perceived miscarriage of justice”).

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                                               VI.
           Turning to the reading of the Lift Stay Order, VSP first contends that
   lower courts should have analyzed the Lift Stay Order under California law
   rather than Texas law. VSP also argues that the lower courts misinterpreted
   the Lift Stay Order and that it did not prohibit the assertion of VSP’s
   allegedly undiscovered claims against Hillair. These arguments are
   unavailing. We hold that the district court correctly interpreted the Lift Stay
   Order as prohibiting VSP’s assertion of claims against Hillair in the
   California Action.
                                               A.
           VSP contends that the Lift Stay Order should be interpreted under
   California law rather than Texas law. VSP’s argument for the application of
   California law rather than Texas law is waived because VSP did not present
   this argument prior to appealing to this Court. 29
                                                B.
           VSP further contends that the district court misinterpreted the Lift
   Stay Order because the district court ignored the parties’ intent and
   surrounding circumstances, failed to review the entirety of the Lift Stay
   Order, and read the Lift Stay Order to produce an unreasonable result. As
   the language of the Lift Stay Order was jointly proposed to the bankruptcy
   court following negotiations amongst the parties, the district court properly

           29
              In re Martin, 222 F. App’x 360, 362 (5th Cir. 2007) (“[W]e will not consider any
   issues on appeal that were not raised before the bankruptcy court.”); see also In re Bradley,
   501 F.3d at 433.

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   relied on ordinary principles of contract interpretation when analyzing the
   Lift Stay Order. 30
          Where a contract’s terms are unambiguous, it must be enforced
   irrespective of the parties’ subjective intent; the same applies to an
   unambiguous court order such as the Lift Stay Order. 31 The Lift Stay Order
   unambiguously conditioned the partial lift of the automatic stay by ordering
   that “no money damages or other amounts of any kind may be recovered
   from Hillair under any circumstance on account of any claims that have been
   or could have been asserted in the California Action[.]” Thus, VSP’s reliance
   on its subjective intent when proposing the language of the Lift Stay Order is
   unavailing: the plain text controls. The circumstances of formation are also
   irrelevant when interpreting an unambiguous consent order. 32 Regardless,
   they at best lend no support to VSP.
          VSP argues that a holistic reading of the Lift Stay Order shows that its
   purpose was to allow VSP to pursue claims against PFO and that the
   condition was only to prevent VSP from recovering from Hillair under VSP’s
   claims against PFO. VSP further argues that independent claims asserted
   directly against Hillair are not prohibited. The Lift Stay Order clearly
   prohibits VSP from asserting “any claims that have been or could have been
   asserted in the California Action[.]”VSP’s suggested reading would
   constrain “any claims” to apply only to those claims arising from the
   purchased counterclaims, but there is no such constraint in the text. We must

          30
              See United States v. Chromalloy Am. Corp., 158 F.3d 345, 349 (5th Cir. 1998)
   (“General principles of contract interpretation govern the interpretation of a consent
   decree.”).
          31
               Travelers, 557 U.S. at 151–52.
          32
               Robinson v. Vollert, 602 F.2d 87, 92 (5th Cir. 1979).

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   read the order as written, 33 such that “any claims that have been or could
   have been asserted in the California Action” includes the claims that VSP
   now seeks to include in its VSP’s proposed Second Amended Complaint.
   VSP’s assertion of new claims against Hillair in the California Action is thus
   prohibited.
            Even if the term “any claims” were ambiguous as to whether it
   included claims directly against Hillair, we would defer to the bankruptcy
   court’s reasonable resolution of any ambiguities in the Lift Stay Order. 34 The
   bankruptcy court provided a reasonable interpretation, finding that VSP’s
   pursuit of claims against Hillair violated the Lift Stay Order.
                                                    C.
            VSP argues that the district court’s interpretation—and thus the
   bankruptcy court’s interpretation—produces an unreasonable result. That
   the district court’s interpretation of the unambiguous text is unfavorable to
   VSP does not make it unreasonable. Our precedent has found the plain text
   of a contract to be unreasonable only in limited situations, such as when a
   contract would have prevented one party from taking government-mandated
   action 35 or when the only explanation for the result is error or inadvertence
   by the parties. 36 Here, however, the district court’s interpretation does not
   lead to “a senseless result.” 37 We affirm the district court’s interpretation of

            33
                 United States v. Armour & Co., 402 U.S. 673, 682 (1971).
            34
                 In re Nat’l Gypsum Co., 219 F.3d at 484.
            35
                 Apache Deepwater, L.L.C. v. W&T Offshore, Inc., 930 F.3d 647, 657 (5th Cir.
   2019).
            36
                 Makofsky v. Cunningham, 576 F.2d 1223, 1230 (5th Cir. 1978).
            37
                 Motor Vehicle Cas. Co. v. Atl. Nat. Ins. Co., 374 F.2d 601, 605 (5th Cir. 1967).

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   the Lift Stay Order and the bankruptcy court’s interpretation in its 2019
   orders interpreting and enforcing the Lift Stay Order.
                                                VII.
           The bankruptcy court awarded Hillair attorneys’ fees as a civil
   contempt sanction after determining that VSP’s supplemental brief violated
   the Lift Stay Order and the Enforcement Order. VSP argues that the
   bankruptcy court abused its discretion in awarding attorneys’ fees because
   VSP did not act in bad faith and because the bankruptcy court acted with an
   erroneous view of the merits of VSP’s arguments.
           First, VSP argues that the bankruptcy court abused its discretion by
   awarding attorneys’ fees because VSP was not acting in bad faith when it
   sought to enter its Second Amended Complaint and argued before the
   California Superior Court that the bankruptcy court’s order was void.
   However, “[g]ood faith is not a defense to civil contempt; the question is
   whether the alleged contemnor complied with the court’s order.” 38 VSP’s
   disagreement with the Enforcement Order did not entitle it to judge the
   validity of the bankruptcy court’s order or to set the order aside by its own
   act of disobedience. 39 The bankruptcy court did not abuse its discretion in
   awarding attorneys’ fees in an order of civil contempt for VSP’s failure to
   comply with an extant court order. 40 VSP’s argument that it did not act in
   bad faith is unavailing. We affirm the award of attorneys’ fees.

           38
                Chao v. Transocean Offshore, Inc., 276 F.3d 725, 728 (5th Cir. 2002).
           39
             In re Bradley, 588 F.3d at 265 (quoting Gompers v. Buck’s Stove & Range Co., 221
   U.S. 418, 450 (1911)).
           40
                FDIC v. LeGrand, 43 F.3d 163, 170 (5th Cir. 1995).

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          Second, VSP argues the award was an abuse of discretion because the
   bankruptcy court erred as to the merits of VSP’s arguments. We here affirm
   the earlier bankruptcy court’s orders.
                                      VIII.
          The judgement of the district court is AFFIRMED.

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