Case 8:20-cv-02131-DMG Document19 Filed 07/25/22 Pagelof7 Page ID#:377

! JS-6 3 5 7 8 UNITED STATES DISTRICT COURT ? CENTRAL DISTRICT OF CALIFORNIA 10 In re U.S. DIRECT, LLC, Debtor ) Case No. SA CV 20-2131-DMG

13 || DEREK DOHERTY, ORDER RE BANKRUPTCY APPEAL 14 Appellant, 15 V. ) 16 JEFFREY I. GOLDEN, CHAPTER Bankruptcy No.: 8:19-bk-11218-MW 17 || TRUSTEE, ) Is Appellee. 19 ) 20 ) 21 22 Before the Court is an appeal by Appellant Derek Doherty of an Order of the United 23 || States Bankruptcy Court for the Central District of California. [Doc. # 1]. On April 2, 24 2021, the Court received notice that the bankruptcy record was complete. [Doc. # 16]. 5 Doherty submitted his Opening Brief on March 21, 2021, and Appellee Jeffrey I. 26 || Golden, the Chapter 7 Trustee (the “Trustee”’) for the Bankruptcy Estate of US Direct, LLC 97 || CUS Direct”), submitted his Answering Brief on April 20, 2021. [Doc. ## 9, 17.] Doherty 28

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1 did not respond to the Trustee's brief, and his time for doing so has passed. Fed. R. Bankr. 2 P. 8018(a). The Court therefore decides the matter on the two briefs before it. 3 The Court has considered the papers filed in support of and in opposition to the 4 appeal and deems this matter suitable for decision without oral argument. See Fed. R. Civ. 5 P. 78(b); C.D. Cal. L.R. 7-15. For the reasons set forth below, the Court AFFIRMS the 6 Bankruptcy Court’s Order. 7 I. 8 FACTUAL AND PROCEDURAL BACKGROUND 9 On April 1, 2019, Future Logistics, Inc. filed an involuntary Chapter 7 bankruptcy 10 petition against US Direct. See No. 8:19-bk-112180-MW (Bankr. C.D. Cal.). Prior to its 11 bankruptcy, US Direct was a direct mail business. See Appellant’s Appendix (“AA”) at 12 A53 [Doc. # 9-1]. On September 5, 2019, the Trustee filed a motion to appoint Brian 13 Hauck and Derek Doherty as Debtors pursuant to Federal Rule of Bankruptcy Procedure 14 9001(5), and to direct them to cooperate with the Trustee pursuant to 11 U.S.C. §§ 341, 15 343, and 521. Id. at A45. On October 7, 2019, the Bankruptcy Court held a hearing 16 regarding the Trustee’s motion. AA at A69. At the hearing, Doherty’s attorney represented 17 to the Court that Doherty had resigned as an officer of US Direct sometime earlier that 18 same day. Since the Court was unsure as to whether Doherty’s purported resignation would 19 preclude his designation as the “Debtor,” the Court denied the Trustee’s motion without 20 prejudice as to Doherty, while granting it as to Hauck. Id. at A129. 21 After the Trustee and Doherty filed supplemental briefs, the Bankruptcy Court 22 granted the Trustee’s Motion as to Doherty on October 16, 2020. The Bankruptcy Court 23 held that Doherty was a “controlling . . . member” of US Direct and a “person in control” 24 of it within the meaning of Federal Rule of Bankruptcy Procedure 9001(5), which provides 25 that if the debtor is a corporation, the Court can designate “any or all of its officers, 26 members of its board of directors or trustees or of a similar controlling body, a controlling 27 shareholder or member, or any other person in control” as the “Debtor” for purposes of 28 -2- Case 8:20-cv-02131-DMG Document 19 Filed 07/25/22 Page 3 of 7 Page ID #:379

1 compelling the attendance of the Debtor for examination. Fed. R. Bankr. P. 9001(5)(A); 2 Id. at A164-67. 3 The Bankruptcy Court found that Doherty was a “Debtor” within the meaning of 4 rule 9001(5) because: (1) US Direct’s Operating Agreement stated that “[t]he management 5 of the business is invested [sic] in the Member,” and the Operating Agreement identifies 6 Doherty and Hauck as “Members”; and (2) Hauck testified that “Mr. Doherty was, for all 7 purposes, the controlling partner in the Debtor, while [Hauck] was more of a figurehead 8 . . . Mr. Doherty controlled the Debtor’s day-to-day operations . . . Mr. Doherty made all 9 final business decisions.” Id. at A165-66. The Bankruptcy Court concluded that the 10 “pattern and practice” of US Direct was that Doherty was the controlling person and ran 11 the business, and therefore designated Doherty as the Debtor for purposes of complying 12 with Rule 9001(5). Id. at A166. 13 The Bankruptcy Court then required Doherty to produce documents requested by 14 the Trustee pursuant to Federal Rule of Bankruptcy Procedure 2004(c), which permits a 15 bankruptcy court to order an “entity” to produce documents. Id. at A166-67. The Trustee 16 sought to compel Doherty to produce documents relating to the “transfers of money or 17 other property from the Debtor to various persons (including various legal entities).” 18 Doherty objected to the production of these documents by asserting his Fifth Amendment 19 privilege against self-incrimination. The Bankruptcy Court concluded that Doherty cannot 20 rely upon this Fifth Amendment privilege because an individual must produce the records 21 of a “collective entity” that are in his possession in a representative capacity. Id. 22 On October 29, 2020, Doherty filed his Notice of Appeal of the Bankruptcy Court’s 23 decision designating him as the “Debtor” and compelling him to produce documents. [Doc. 24 # 1.] 25 II. 26 STANDARD OF REVIEW 27 A district court reviews a Bankruptcy Court's conclusions of law and interpretation 28 of the Bankruptcy Code de novo. In re Greene, 583 F.3d 614, 618 (9th Cir. -3- Case 8:20-cv-02131-DMG Document 19 Filed 07/25/22 Page 4 of 7 Page ID #:380

1 2009) (citing In re Salazar, 430 F.3d 992, 994 (9th Cir. 2005)). Factual findings are 2 reviewed for clear error. Id. A district court must accept the Bankruptcy Court's factual 3 findings unless, upon review, the “court is left with the definite and firm conviction that a 4 mistake has been committed by the bankruptcy judge.” Id. (citing Latman v. Burdette, 366 5 F.3d 774, 781 (9th Cir. 2004)). 6 III. 7 DISCUSSION 8 A. Designation of Doherty as the Debtor 9 The Bankruptcy Court’s conclusion that Doherty was a “person in control” of the 10 US Direct, such that he could be a Debtor under Rule 9001(5), is a finding of fact. The 11 Court therefore reviews it under the highly deferential “clear error” standard. Doherty 12 presents no evidence from which to find that the Bankruptcy Court clearly erred. 13 Doherty was one of two members listed on the Debtor’s Operating Agreement who 14 were expressly tasked with “management of the business.” In addition, the other member, 15 Hauck, submitted a declaration stating that Doherty was the controlling partner who 16 oversaw US Direct’s day-to-day operations and made all final business decisions. Hauck, 17 compared to Doherty, “was more of a figurehead.” AA at A164-167. Doherty presented 18 no evidence to controvert this account before the Bankruptcy Court, and he does not do so 19 now. There is no error in concluding that Doherty was sufficiently in control of the Debtor 20 based on this evidence. 21 Doherty primarily argues that he cannot be designated as a Debtor because he 22 supposedly resigned from his position at US Direct after the Trustee filed its motion. First, 23 the Bankruptcy Court appears to have rejected the factual contention that Doherty 24 “resigned” the same morning as the hearing, which was based solely on the representation 25 of Doherty’s counsel. Second, the Bankruptcy Petition was filed on April 1, 2019, and 26 Doherty is said to have resigned from his position on October 7, 2019—over six months 27 after the filing of the Petition. AA at A129. The filing of the Bankruptcy Petition is the 28 point in time at “which the status and rights of the bankrupt, the creditors, and the trustee -4- Case 8:20-cv-02131-DMG Document 19 Filed 07/25/22 Page 5 of 7 Page ID #:381

1 in other particulars are fixed.” In re Gilbraith, 523 B.R. 198, 203 (Bankr. D. Ariz. 2014) 2 (quoting Myers v. Matley, 318 U.S. 622, 626 (1943)). The Petition date of April 1, 2019 3 is therefore the relevant date for determining who can be designated as the Debtor, and any 4 attempt to resign after then is irrelevant. See In re Red River Energy, Inc., 409 B.R. 163, 5 176 (Bankr. S.D. Tex. 2009) (“In determining whom to appoint as the Debtor's 6 representative, this Court also believes that any ‘persons’ who fall into any of the categories 7 set forth in Bankruptcy Rule 9001(5) must have ties to the Debtor at the time of the filing 8 of the bankruptcy petition.”); In re N.W. Associates, Inc., 245 B.R. 183, 188 (Bankr. 9 E.D.N.Y. 1999) (“As of the petition date, [they] were persons ‘in control’ of the Debtor as 10 defined in Bankruptcy Rule 9001(5).”); In re Continuum Care Services, Inc., 375 B.R. 692, 11 694 (Bankr. S.D. Fla. 2007) (former CEO was the person most knowledgeable “concerning 12 the acts, conduct or property of the Debtor and concerning its liabilities and financial 13 condition as of the filing of the involuntary petition”).1 14 This rule makes sense, because in a bankruptcy proceeding, the appointment of a 15 trustee effectuates the “ouster” of a corporate debtor’s management. See Commodity 16 Futures Trading Commn. v. Weintraub, 471 U.S. 343, 352–53 (1985) (during Chapter 7 17 bankruptcy proceedings, “the powers of the debtor's directors are severely limited. Their 18 role is to turn over the corporation's property to the trustee and to provide certain 19 information to the trustee and to the creditors. Congress contemplated that when a trustee 20 is appointed, he assumes control of the business, and the debtor's directors are completely 21 ousted.”) (internal quotations omitted). Doherty cannot resign from a position from which 22 1 Doherty makes the confusing argument that this line of reasoning relies on an outdated version 23 of the Bankruptcy Code, from prior to 1978 when debtors received an automatic grant of immunity from 24 criminal prosecution for their testimony and consequently could not invoke the Fifth Amendment. See In re THC Financial Corp., 446 F. Supp. 1337, 1338 (D. Haw. 1978). Setting aside the fact that, as shown 25 above, there are plenty of post-1978 cases supporting the Trustee’s position, though this case does involve the invocation of the Fifth Amendment, it is unclear how the presence or absence of an automatic 26 immunity has anything to do with the designation of a Debtor under Rule 9001(5). Doherty also attempts 27 to make a distinction out of the fact that this is an involuntary bankruptcy, but that is a distinction without a difference. Many cases have named individual corporate representatives as Debtors in involuntary 28 proceedings. See, e.g., Red River Energy, 409 B.R. at 166; N.W. Associates, 245 B.R. at 184-185. -5- Case 8:20-cv-02131-DMG Document 19 Filed 07/25/22 Page 6 of 7 Page ID #:382

1 he had already been “ousted.”2 If the “person in control” of the corporation were not fixed 2 at the petition date, then corporate management would effectively never be able to be 3 designated as the Debtor under Rule 9001(5). This cannot be. The Rule expressly refers 4 to the corporate debtor’s “officers, members of its board of directors or trustees or of a 5 similar controlling body, a controlling stockholder or member, or any other person in 6 control.” Fed. R. Bankr. P. 9001(5). 7 Since Doherty did not “resign” until six months after the petition date, his 8 “resignation” does not preclude him from designation as the Debtor under Rule 9001(5). 9 Moreover, the evidence in the record indicates that Doherty was and continued to be a 10 person in control. 11 B. The Collective Entity Doctrine 12 The collective entity rule provides that an individual is not permitted to invoke a 13 Fifth Amendment privilege to preclude the production of the records of a 14 corporation. See Bellis v. United States, 417 U.S. 85, 88 (1974). The Bankruptcy Court 15 held that under this rule, Doherty could not invoke the Fifth Amendment to prevent the 16 production of US Direct’s records in his possession. Doherty cites the Ninth Circuit’s 17 summary disposition in In re Grand Jury Proceedings, 71 F.3d 723 (9th Cir. 1995) 18 (“Mora”), which held that the collective entity rule does not apply to a former employee 19 who is no longer acting on behalf of the collective entity. But Doherty was not a former 20 employee at least as of the petition date, which as discussed is the relevant date in 21 determining the status of the parties in bankruptcy proceedings. Moreover, the brief 22 holding in Mora rested entirely upon the Second Circuit’s decision in In re Grand Jury 23 Subpoenas Duces Tecum Dated June 13, 1983 & June 22, 1983, 722 F.2d 981 (2d Cir. 24 1983) (“Saxon”). Saxon involved a narrow exception to the collective entity rule where 25 the act of document production itself, aside from the content of the documents, might 26 incriminate a former employee because the former employee’s removal and possession of 27 2 The “complete ouster” rule applies in involuntary bankruptcies. See In re C.W. Mining Co., 636 28 F.3d 1257, 1265 (10th Cir. 2011) (the contention that the “complete ouster” rule should not apply in involuntary bankruptcies “runs entirely counter to the very purpose of Chapter 7 bankruptcy.”). -6- Case 8:20-cv-02131-DMG Document19 Filed 07/25/22 Page 7of7 Page ID #:383

1 ||corporate documents is probative of a guilty state of mind. /d. at 987. That is not the 2 ||situation here. Additionally, Saxon may no longer be good law, and district courts in the 3 || Ninth Circuit have read Mora and Saxon narrowly. See In re Grand Jury Subp. Dated Nov. 4 1991, FGJ 91-5 (MIA), 957 F.2d 807, 810 (11th Cir. 1992) (rejecting Saxon due to 5 || intervening Supreme Court case law); United States v. Prince, No. CR 10-00153 JF (PSG), 6 |}2011 WL 13150172, at *2 n.7 (N.D. Cal. July 25, 2011) (“Neither Saxon nor Mora, 7 || however, addressed the circumstances present here, where the target is not merely a former 8 ||employee but a founder and shareholder of the corporate entities at issue[.]’’). 9 The Bankruptcy Court correctly applied the collective entity rule in concluding that 10 || Doherty could not invoke the Fifth Amendment to shield the production of US Direct’s 11 || corporate records in his possession. Doherty provides no facts or law that would suggest 12 || this decision was erroneous. 13 IV. 14 CONCLUSION 15 In light of the foregoing, the Court AFFIRMS the Bankruptcy Court’s ruling 16 ||designating Doherty as a “Debtor” pursuant to Federal Rule of Bankruptcy Procedure 17 ||9001(5) and compelling the production of documents pursuant to Federal Rule of 18 || Bankruptcy Procedure 2004. 19 99 | AT IS SO ORDERED. 21 22 ||DATED: July 25, 2022 23 Mrtiy In. has 24 LLY M. GEE

UNITED STATES DISTRICT JUDGE

cc: Bankruptcy Court

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