Gran Sabana Corporation N.V. v. Kossoff

Background

Gran Sabana Corporation N.V. brought claims against Mitchell H. Kossoff for breach of contract, breach of fiduciary duty, conversion, unjust enrichment, and legal malpractice. According to the complaint, Gran Sabana retained Kossoff to assist with New York City real-estate transactions and transferred more than $8 million to him for escrow. The parties’ written agreement required the funds to be held in an IOLA trust account and generally allowed withdrawals only after Gran Sabana provided signed instructions.

Gran Sabana alleged that it learned on April 7, 2021, that no escrow funds were available for several planned transactions and that Kossoff’s whereabouts were unknown. It alleged that more than $4 million of its funds remained in escrow at that time and that Kossoff had siphoned off the money for personal use. On April 19, 2021, the court issued a preliminary injunction restricting Kossoff’s use of certain bank accounts and transfer of assets, and it authorized expedited discovery.

Gran Sabana and other petitioners also initiated an involuntary Chapter 7 bankruptcy proceeding against Kossoff PLLC. Kossoff was designated the firm’s Responsible Officer in that proceeding. Kossoff asserted that the Manhattan District Attorney’s Office was investigating allegations involving the same general events. A search warrant concerning grand-larceny allegations had been issued, but Kossoff had not been indicted as of the order.

Motion to Stay Based on the Criminal Investigation

Kossoff sought a stay, meaning a pause, of the civil case while the criminal investigation continued. The court explained that a stay during related criminal proceedings is an extraordinary remedy. It considered the overlap between the civil and criminal matters, the status of the criminal case, the parties’ interests and burdens, the interests of the courts, and the public interest.

The court concluded that the absence of an indictment weighed heavily against a stay. Without an indictment, the investigation could continue for an uncertain period or never result in criminal charges. The court accepted that the matters might overlap, but it could not determine the extent of that overlap precisely without knowing what criminal charges, if any, might be brought.

The court found that Gran Sabana would face significant prejudice from delay because it had acted quickly after learning that its funds allegedly had disappeared and had asserted continuing harm to its development plans, goodwill, and reputation. By contrast, Kossoff’s claimed burden remained speculative. The court recognized his concern that participating in the civil case could affect his potential criminal exposure and could require him to invoke the constitutional protection against self-incrimination. But it found that these concerns did not outweigh Gran Sabana’s interest in proceeding, particularly because no criminal prosecution was inevitable.

The court also concluded that the interests of the court and the public favored resolving the civil case efficiently and pursuing the possible recovery of allegedly misappropriated funds. It therefore held that the criminal investigation did not warrant a blanket stay.

Motion to Stay Based on Bankruptcy

Kossoff separately argued that Section 362 of the Bankruptcy Code required a stay because of the involuntary bankruptcy proceeding against Kossoff PLLC. Section 362 generally stays actions against a bankruptcy debtor and certain efforts to control property of the bankruptcy estate.

The court rejected this argument because Kossoff PLLC—not Kossoff personally—was the bankruptcy debtor. The court explained that an automatic bankruptcy stay generally protects the debtor but does not extend automatically to the debtor’s officers, principals, or individual partners. It also rejected Kossoff’s argument based on Bankruptcy Rule 9001(5), explaining that the rule identifies who must act for or appear on behalf of a non-natural-person debtor; it does not extend the automatic stay to those individuals.

The court therefore concluded that Kossoff was not entitled to a stay because of his status as a partner or as the designated Responsible Officer of Kossoff PLLC.

Disposition

The court denied Kossoff’s motion to stay without prejudice. It separately referred the action to Magistrate Judge Robert Lehrburger for general pretrial supervision and authorized him to tailor discovery or adopt other measures to protect Kossoff’s rights while considering Gran Sabana’s interest in proceeding promptly. The court also extended Kossoff’s deadline to answer or otherwise respond to the complaint by an additional 30 days from the date of the order.