Khalil Zaghian v. THQ Inc et al

Filing 46

MINUTE ORDER IN CHAMBERS by Judge Gary A. Feess: Order re: Request for Further Briefing. The Parties' briefing so far contains insufficient information for the Court to determine whether any D&O policy exists. Accordingly, Defendants Farrell an d Pucino are hereby ORDERED to submit supplemental briefing indicating whether they might be protected by any D&O policy, and whether such a policy might be considered property of the THQ estate. The Court also notes that THQ has not yet been formall y dismissed; although a notice of dismissalwas lodged, it was not filed, and therefore has not yet taken effect. Since they are still involved in this case, the Court ORDERS THQ to file its own supplemental briefing addressing these issues. If a D&O policy exists, THQ should provide it to the Court. The Parties briefing may be no more than 5 pages, excluding exhibits, and should be submitted no later than Friday, October 3, 2014. The hearing on Plaintiff's pending motion 44 is hereby CONTINUED to Monday, October 20, 2014 at 9:30 a.m. before Judge Gary A. Feess. See document for details. (smo)

LINK: 44
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

CV 12-5227 GAF (JEMx)

Title

Khalil Zaghian v. THQ Inc et al

Present: The Honorable

Date

September 25, 2014

GARY ALLEN FEESS

Stephen Montes Kerr
Deputy Clerk

None
Court Reporter / Recorder

N/A
Tape No.

Attorneys Present for Plaintiffs:

Attorneys Present for Defendants:

None

None

Proceedings:

(In Chambers)
ORDER RE: REQUEST FOR
FURTHER BRIEFING

Plaintiff named three Defendants in this securities class action: THQ, Inc., its CEO Brian
Farrell, and its CFO Paul Pucino. (Docket No. 1.) THQ filed for bankruptcy a few months later,
and the Court stayed the entire action pending completion of those proceedings. (Docket No.
37.) Plaintiff now asks that the stay be lifted. (Docket No. 44.)
Bankruptcy stays are governed by 11 U.S.C. § 362. In part, this Section stays the
“continuation . . . of a judicial, administrative, or other action or proceeding against the debtor.”
11 U.S.C. § 362(a)(1). This rule generally applies only to the debtor, and does not extend to
actions against co-defendants. United States v. Dos Cabezas, Corp., 995 F.2d 1486, 1491 (9th
Cir. 1993). However, an exception to the co-defendant rule exists. “Though it has neither
explicitly adopted nor repudiated it, the Ninth Circuit recognizes that other courts have carved
out a limited exception to this general rule in certain cases where there is such identity between
the debtor and the third-party defendant that the debtor may be said to be the real party
defendant and that a judgment against the third-party defendant will in effect be a judgment or
finding against the debtor.” Yates v. Delano Retail Partners, LLC, 2012 U.S. Dist. LEXIS
44079, at *3–4 (N.D. Cal. Mar. 29, 2012) (quoting Dos Cabezas, 995 F.2d at 1491 n.3) (internal
quotation marks and brackets omitted).
THQ’s bankruptcy action has not yet concluded; in light of Yates, Plaintiff’s current
motion might therefore be deemed premature. In an effort to avoid this difficulty, though,
Plaintiff has lodged a dismissal of THQ. (Docket No. 45-1.) Typically, dismissing THQ might
be sufficient to avoid the so-called “unusual circumstances” exception described in Yates. But
the Court is confronted with another concern here—a concern left unaddressed by any Party.
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LINK: 44
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

CV 12-5227 GAF (JEMx)

Title

Date

September 25, 2014

Khalil Zaghian v. THQ Inc et al

Once a bankruptcy petition has been filed, Section 632 also “precludes ‘any act to obtain
possession of property of the estate.’” Metro. Inv. Sec., Inc. v. Cauvel (In re Metro. Mortg. &
Sec. Co.), 325 B.R. 851, 855 (Bankr. E.D. Wash. 2005) (quoting 11 U.S.C. § 362(a)(3)). This
estate “includes intangible or contingent interests of the debtor as well as intangible property
itself.” Cauvel, 325 B.R. at 855. And though the issue has not been squarely addressed by the
Ninth Circuit, several bankruptcy courts, as well as the Bankruptcy Appellate Panel, have found
that certain types of insurance proceeds might be deemed “property of the estate.” See id. at
857; Groshong v. Sapp (In re MILA, Inc.), 423 B.R. 537, 543 (B.A.P. 9th Cir. 2010) (“whether
D & O policy proceeds are an estate asset has not been decided in the Ninth Circuit”); Imperial
Corp. of Am. v. Milberg, Weiss, Bershad, Spechtrie & Lerach (In re Imperial Corp. of Am.), 144
B.R. 115, 118 (Bankr. S.D. Cal 1992) (“the debtor’s estate is worth more with [insurance policy
proceeds] than without them”).
This line of cases is crucial to the Court’s determination here, because company officers
frequently have recourse to D&O insurance policies purchased by their companies. And
Defendants Farrell and Pucino were the CEO and CFO, respectively, of Defendant THQ. The
Court therefore has concerns that a judgment against them in this action may implicate property
belonging to THQ’s estate.
The Parties’ briefing so far contains insufficient information for the Court to determine
whether any D&O policy exists. Accordingly, Defendants Farrell and Pucino are hereby
ORDERED to submit supplemental briefing indicating whether they might be protected by any
D&O policy, and whether such a policy might be considered property of the THQ estate. The
Court also notes that THQ has not yet been formally dismissed; although a notice of dismissal
was lodged, it was not filed, and therefore has not yet taken effect. (See Docket No. 45-1.)
Since they are still involved in this case, the Court ORDERS THQ to file its own supplemental
briefing addressing these issues. If a D&O policy exists, THQ should provide it to the Court.
In drafting their responses to this order, the Parties should consider an unusually helpful
law review article, which explains that:
Generally, if the D&O policy provides direct coverage, then the proceeds are
not property of the estate and the bankruptcy court will not extend the
automatic stay. Similarly, if the debtor’s plan of reorganization extinguishes
directors’ and officers’ claims under D&O policies, the automatic stay should
not be extended. For indirect and entity coverage situations, however, if the
debtor-company is exposed in any way to claims covered under the D&O
policy, the proceeds are property of the estate.
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LINK: 44
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
CIVIL MINUTES - GENERAL
Case No.

CV 12-5227 GAF (JEMx)

Title

Date

September 25, 2014

Khalil Zaghian v. THQ Inc et al

John M. Wunderlich, Bankruptcy’s Protection for Non-Debtors from Securities Fraud Litigation,
16 Fordham J. Corp. & Fin. L. 375, 400–01 (2011) (citations omitted). Explaining whether any
D&O policy obtained by THQ provides direct or indirect coverage would therefore be most
helpful. The Parties briefing may be no more than 5 pages, excluding exhibits, and should be
submitted no later than Friday, October 3, 2014. The hearing on Plaintiff’s pending motion is
hereby CONTINUED to Monday, October 20, 2014 at 9:30 a.m.
IT IS SO ORDERED.

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