ZCAP EQUITY FUND et al. v. LUXURBAN HOTELS INC.
- Paul Engelmayer
- 1:24-cv-01030
- U.S. District Court · Southern District of New York
- 4
In ZCAP Equity Fund v. LuxUrban Hotels, Judge Engelmayer denied individual defendants’ requests to stay securities litigation during LuxUrban’s bankruptcy.
The claims against Brian Ferdinand and Shanoop Kothari could proceed, while LuxUrban remained subject to the previously imposed bankruptcy stay as a party.
What happened
In ZCAP EQUITY FUND et al. v. LUXURBAN HOTELS INC. et al., plaintiffs’ securities-fraud claims alleged that the defendants falsely described LuxUrban’s growth. LuxUrban had filed for Chapter 11 bankruptcy, and the court had stayed the case against the company.
Brian Ferdinand and Shanoop Kothari asked the court to extend LuxUrban’s bankruptcy stay to the claims against them, or to issue a separate discretionary stay. They argued that continuing the case could harm LuxUrban’s bankruptcy estate, including through possible indemnification obligations and the effect of rulings against them.
Judge Engelmayer denied the requests. He found that insurance covering at least $15 million in defense costs meant the litigation would not immediately harm LuxUrban’s estate, and the defendants had not shown another financial or reorganization-related harm. The case would proceed against the individual defendants.
The detailed version
- ZCAP EQUITY FUND et al. v. LUXURBAN HOTELS INC. · No. 1:24-cv-01030
- Paul Engelmayer
- Oct. 16, 2025
Background
Plaintiffs brought claims under the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, alleging that defendants made false public statements about LuxUrban’s growth. On September 24, 2025, the court stayed the action against LuxUrban under 11 U.S.C. § 362(a) after LuxUrban notified the court that it had filed for Chapter 11 bankruptcy.
The individual defendants, Brian Ferdinand and Shanoop Kothari, asked the court to extend that bankruptcy stay to the claims against them. In the alternative, they requested a discretionary stay. Plaintiffs opposed the requests. At an initial conference, the court denied both requests and set a case-management plan for fact and expert discovery and class-certification motions.
Reasons for the Ruling
The court explained that a bankruptcy stay generally applies to the debtor, not to nonbankrupt co-defendants. It may extend to non-debtors only when claims against them would cause an immediate adverse economic effect on the debtor’s bankruptcy estate. The individual defendants did not make that showing.
Defense counsel represented that the individual defendants had primary and excess insurance, including directors-and-officers policies, totaling at least $15 million. The insurers had begun advancing their legal fees. The court found that this insurance coverage meant LuxUrban’s estate would not suffer immediate economic harm from the costs of defending the claims, at least for the foreseeable future.
The court rejected the defendants’ argument that rulings against them could be attributed to LuxUrban through collateral estoppel, a rule that can prevent relitigating an issue already decided. The court stated that the United States Court of Appeals for the Second Circuit had foreclosed that argument as a basis for extending a bankruptcy stay.
The court also rejected reliance on LuxUrban’s bylaws, which required the company to indemnify the individual defendants for defense costs. Because insurance was expected to cover those costs indefinitely, and the defendants had not shown that continuing the case would otherwise impose a monetary cost on LuxUrban or interfere with its reorganization, the indemnification obligations did not justify extending the stay.
Dispositions
The court denied the individual defendants’ motion to extend the automatic bankruptcy stay to the claims against them. The court also denied their request for a discretionary stay, finding that plaintiffs had brought plausible claims, that plaintiffs’ interest in proceeding promptly outweighed the burden on the individual defendants, and that a stay would not further LuxUrban’s reorganization or its interests.
The stay against LuxUrban as a party remained in place. The court noted that this stay did not prevent plaintiffs from seeking discovery from LuxUrban as a third-party witness for use against the non-debtor defendants.
Read the full 4-page opinion on CourtListener, the free public archive maintained by the Free Law Project.