Opinion
Case No. 97-00126-JKC-11
April 24, 2002
MEMORANDUM OPINION ON DEBTOR'S MOTION TO INTERPRET PLAN, OR IN THE ALTERNATIVE, TO GRANT LEAVE FOR DEBTOR TO PURSUE A CAUSE OF ACTION
This matter comes before the Court on Debtor John E. Smith's Motion to Interpret Plan, or in the Alternative, to Grant Leave for Debtor to Pursue A Cause of Action (the "Motion"). The Court conducted a hearing on March 25, 2002, and took the matter under advisement. For the reasons stated herein, the Court holds that the Debtor is not entitled to pursue his action in federal district court against Defendants BNY Asset Solutions LLC, as successor to BNY Trotter Kent LLC, as successor to Trotter Kent, Inc., Louis J. Trotter, Jr., David D. Kent, Marsha Schuyler, and Marc Marino.
Factual and Procedural History
The Debtor commenced this Chapter 11 case on January 8, 1997. The Debtor had been a real estate developer for many years and was, as of the commencement of his case, the sole shareholder of four companies, John E. Smith Enterprises, Inc., John E. Smith Properties, Inc., JESCO Investment Corp., (the "Companies) and JESCO Contractors, Inc. These Companies, which own various real and personal properties, were the only assets of the Debtor with any significant value.
Under the confirmed plan in this case, discussed herein, "Companies" was a defined term, including only three of the Debtor's four companies and excluding JESCO Contractors, Inc.
As the bankruptcy case progressed, competing plans were eventually filed by the Debtor and creditor RTC Commercial Assets Trust 1995-NP-3 ("NP-3"). The plans, upon amendment, were noticed for objection and circulated to the Debtor's creditors for solicitation purposes. Both plans drew various objections, and the Debtor ultimately withdrew his plan. NP-3 further amended its plan, and all objections filed to it were withdrawn. Thereafter, on June 8, 1998, the Court found that the plan satisfied 11 U.S.C. § 1129(a) and a confirmation order was entered.
Per the terms of the first amendment to NP-3's amended plan, the effective date of the plan was not immediately upon confirmation. Rather, the plan did not go into effect-and Trotter Kent's responsibilities did not commence-until September 8, 1998. The plan further provided it would be withdrawn-in other words, confirmation of the plan would be revoked-in the event that the allowed amount of NP-3's claim was either sold (presumably by the Debtor) or paid in full by September 8, 1998. Notwithstanding several motions to either accelerate or delay the plan's effective date, it appears that it went into effect on September 8, 1998.
The confirmed plan provided, inter alia, that Trotter Kent, Inc. ("Trotter Kent"), would serve as the "Liquidating Trustee" and would be given the sole power to vote the Debtor's stock in the Companies. The disclosure statement for NP-3's amended plan states that Trotter Kent is a company "experienced in the management and sale of commercial real estate" and is "rated by both Standard and Poor's and Fitch as qualified managers and liquidators of multi-family and commercial real estate nationwide." The disclosure statement further states that Trotter Kent, "[t]hrough the use of the [Debtor's] stock powers . . . expects to be able to operate the Companies, to manage their assets and, most importantly, to sell enough of the Companies' real property to produce Dividends to pay creditors in full." Trotter Kent was also charged with reducing the administrative expenses of the bankruptcy estate "so that the Companies can stop operating at a loss." The disclosure statement and confirmed plan specifically provide that Trotter Kent's "Stock Powers" would not be limited.
Trotter Kent did, in fact, sell various properties owned by the Companies, and all of the Debtor's creditors-both secured and unsecured-were paid in full. The Court entered its final decree on November 12, 1999, and the case was closed shortly thereafter. It appears that power over the Companies, as well as their remaining assets, was then turned back over to the Debtor.
On August 31, 2001, John E. Smith and the Companies (collectively, the "Plaintiffs") filed suit in state court against BNY Asset Solutions LLC, as successor to BNY Trotter Kent LLC, as successor to Trotter Kent, Inc., Louis J. Trotter, Jr., David D. Kent, Marsha Schuyler, and Marc Marino (collectively, the "Defendants"). The complaint alleges that Trotter Kent owed a fiduciary duty to Smith and the Companies that was allegedly breached when Trotter Kent sold certain assets for less than fair value. The Complaint further alleges that Trotter Kent assessed "excessive, unnecessary, unjustified, or otherwise improper attorney fees, management fees, and monies disbursed to creditors."
This opinion refers to BNY and Trotter Kent interchangeably.
The Defendants timely removed the action to the District Court for the Northern District of Indiana, Lafayette Division, where it was assigned to the Honorable Allen Sharp. The Defendants then filed a motion to dismiss under Rule 12(b)(1) of the Federal Rules of Civil Procedure, arguing that the district court lacked subject matter jurisdiction over the Plaintiffs' complaint. Specifically, the Defendants argued that under the "Barton Doctrine," the Plaintiffs were not entitled to bring their action without the express permission of the bankruptcy court, as the court that appointed Trotter Kent. After being briefed on this issue and hearing oral argument, Judge Sharp issued a Memorandum and Order, which states in relevant part:
The issue has been fully briefed and ably argued before the court in Lafayette, Indiana on December 10, 2001. The issues here relate to a bankruptcy case which was pending in the United States Bankruptcy Court in Indianapolis but was closed approximately two years ago. The princip[al] argument relates to the applicability of the doctrine that flowed from the decision of Barton v. Barbour, 104 U.S. 126, 128-29, 26 L.Ed. 672 (1881). Now commonly called the "Barton Doctrine." The best exposition of that doctrine in this circuit is by then Chief Judge Posner, In re Linton, 136 F.3d 544 (7th Cir. 1998). Of particular interest is the manner in which Judge Posner deals with the interrelationship between the so called "Barton Doctrine" and 28 U.S.C. § 959(a). The composite effect of Barton, Linton and 959(a) under the circumstances of this case is to require that the United States Bankruptcy Court for the Southern District in Indianapolis give permission for the filing of this case. That permission has not been given. Particularly given the analysis, reasoning and result in Linton it is mandatory.
However, when one examines all of these authorities the timing of such permission is not clearly established. In fairness the Plaintiffs should be given an opportunity, with all deliberate speed, to secure the necessary permission from the United States Bankruptcy Court for the Southern District in Indianapolis. Unless that permission is secured and proof of the same filed in this Court by March 1, 2002, this case will be dismissed under authority of Barton/Linton/ 28 U.S.C. § 959(a) as well as Rule 12 of the Federal Rules of Civil Procedure.
Following the entry of this order, the Plaintiffs apparently filed a notice of appeal with the Seventh Circuit, which was eventually dismissed due to concerns that Judge Sharp's order was not yet appealable.
On February 15, 2002, the Debtor filed a Motion to Reopen, along with a Motion to Interpret Plan, or In the Alternative, to Grant Leave for Debtor to Pursue A Cause of Action (the "Motion"). The Court informed counsel for Debtor that it would be unable to address the matter by the March 1, 2002 deadline set by Judge Sharp. Thereafter, the Plaintiffs obtained an extension from Judge Sharp to April 1, 2002, to comply with his order. On March 15, 2002, BNY Asset Solutions LLC ("BNY") filed its Opposition to Debtor's Motion to Interpret Plan or to Grant Leave for Debtor to Pursue A Cause of Action (the "Objection"). The Court then conducted a hearing on March 25, 2002, at which the parties appeared by counsel and the Debtor in person. At the conclusion of the hearing, the Court suggested that the parties attempt to obtain another extension from Judge Sharp so that the Court would have a fair opportunity to issue its ruling. The Debtor complied with this request, and Judge Sharp graciously granted an additional thirty days, to and including May 1, 2002, for the Debtor to obtain the required permission or, in effect, for this Court to issue its decision.
The Court notes that only the Debtor sought leave to maintain the district court lawsuit. The Companies did not join in the Motion. From this Court's perspective, the Companies did not comply with Judge Sharp's order in that they failed to obtain timely permission from this Court to pursue the lawsuit.
Discussion and Decision Law of the Case
As an initial matter, the Court notes that BNY has argued that "law of the case" principles preclude this Court from "revisiting" whether the Barton Doctrine applies because Judge Sharp has already concluded that it does. In response, the Debtor insists that Judge Sharp's December 10th order merely "remanded" this issue to the bankruptcy court for a determination of whether the doctrine applies and, if so, whether it has been satisfied. Given the Court's conclusion, discussed below, that Trotter Kent is protected by the Barton Doctrine, the Court does not necessarily have to address this issue. Nevertheless, it concludes that "law of the case" principles do not apply here.
"`[T]he law of the case doctrine posits that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.'" McIlravy v. Kerr-McGee Coal Corp., 204 F.3d 1031, 1034 (10th Cir. 2000) (quoting United States v. Monsisvais, 946 F.2d 114, 115 (10th Cir. 1991). "Law of the case rules have developed to maintain consistency and avoid reconsideration of matters once decided during the course of a single continuing lawsuit." 18 WRIGHT, MILLER COOPER, FEDERAL PRACTICE PROCEDURE Jurisdiction § 4478 at 788 (1981). Such rules are commonly applied to prevent an appellate court from revisiting or reconsidering "matters resolved on a prior appeal." Id.
Based on the foregoing, the Court disagrees with BNY's assertion that law of the case principles apply here. While the cases now pending with Judge Sharp and this Court are related by virtue of the Barton Doctrine, they are not one and the same; one is not an appeal of the other. As such, assuming that Judge Sharp's December 10th order actually concluded that the Barton Doctrine applies to Trotter Kent, this Court is not precluded from "revisiting" that issue.
The Barton Doctrine
Under the Barton Doctrine, a trustee cannot be sued in a non-appointing court for acts done in his or her official capacity and within the trustee's authority as an officer of the court, unless leave is first obtained from the bankruptcy court. See In re Linton, 136 F.3d 544, 545 (7th Cir. 1998); In re Kids Creek Partners, L.P., 248 B.R. 554 (Bankr.N.D.Ill. 2000), aff'd, 2000 WL 1761020 (N.D.Ill. 2000); In re Ross, 231 B.R. 74 (Bankr.W.D.Mo. 1999). The Barton Doctrine further provides that before leave to sue will be granted, the claimant must plead a prima facie case against the trustee. See In re Berry Publ'g Serv's, Inc., 231 B.R. 676 (Bankr.N.D.Ill. 1999) (citing In re Kashani, 190 B.R. 875 (9th Cir. BAP 1995)). The only exception to the Barton Doctrine arises when the trustee is carrying on the business of the debtor. This exception is contained in 28 U.S.C. § 959(a), which provides in relevant part:
The doctrine, originally set forth in Barton v. Barbour, 104 U.S. 126, 26 L.Ed. 672 (1881), required a party to obtain permission of the appointing court before bringing suit against a receiver.
Trustees, receivers or managers of property, including debtors in possession, may be sued, without leave of the court appointing them, with respect to any of their acts or transactions in carrying on business connected with such property. Such actions shall be subject to the general equity power of such court so far as the same may be necessary to the ends of justice, but this shall not deprive a litigant of his right to trial by jury.
Although the applicability of this exception was argued before Judge Sharp, the Debtor has not raised that argument here and, thus, this Court does not address it.
Is Trotter Kent Protected by the Barton Doctrine?
Under the confirmed plan, Trotter Kent was named "Liquidating Trustee" of the Debtor's estate. Notwithstanding this title, the Debtor insists that Trotter Kent is not a "trustee" for purposes of the Barton Doctrine. While the Court agrees that Trotter Kent is not a trustee, as that term is used in Chapter 11 of the Bankruptcy Code, the Court must nevertheless conclude that the Barton Doctrine applies.
The doctrine, while traditionally employed to protect a trustee, has been extended to other court-appointed officers, including counsel for the trustee, the United States Trustee and the United States Marshal. See Allard v. Weitzman (In re DeLorean Motor Co.), 991 F.2d 1236, 1241 (6th Cir. 1993); Stone v. White (In re Stone), 1998 WL 1819081 (Bankr.D.Dist.Col. 1998). Thus, it appears that a person's (or in this case, entity's) title is not determinative. Rather, the person's status as an appointed or approved officer of the court and his or her duties, vis-à-vis the bankruptcy estate, are the proper focus for the bankruptcy court's inquiry.
Admittedly, Trotter Kent was not named pursuant to § 1104 of the Bankruptcy Code, which section authorizes the appointment of a trustee in a Chapter 11 case at any time prior to confirmation of a plan. Rather, Trotter Kent was named as the "Liquidating Trustee" by virtue of NP-3's plan, which was approved by the Debtor's creditors as a whole and confirmed by order of the Court. Under the terms of the plan, Trotter Kent was charged with liquidating certain assets for the benefit of the Debtor's creditors and with operating the Companies, by taking over the Debtor's voting rights and appointing a new board of directors. These duties, regardless of the manner in which they arose, are similar to those duties exercised by a "panel trustee" in a Chapter 7 case or a § 1104 trustee in a Chapter 11 case. See 11 U.S.C. § 704 and 1106.
In determining whether the similarities between the duties of a trustee and those delegated to Trotter Kent warrant application of the Barton Doctrine, the Court looks to the rationale given for the doctrine. The Seventh Circuit, in extending the Barton Doctrine to bankruptcy trustees, explained the rationale for the doctrine:
Just like an equity receiver, a trustee in bankruptcy is working in effect for the court that appointed or approved him, administering property that has come under the court's control by virtue of the Bankruptcy Code. If he is burdened with having to defend against suits by litigants disappointed by his actions on the court's behalf, his work for the court will be impeded. . . . Without the requirement, trusteeship will become a more irksome duty, and so it will be harder for courts to find competent people to appoint as trustees. Trustees will have to pay higher malpractice premiums, and this makes the administration of the bankruptcy laws more expensive (and the expense of bankruptcy is already a source of considerable concern). Furthermore, requiring that leave to sue be sought enables bankruptcy judges to monitor the work of the trustees more effectively. It does this by compelling suits growing out of that work to be as it were prefiled before the bankruptcy judge that made the appointment; this helps to decide whether to approve this trustee in a subsequent case.
Linton, 136 F.3d at 545. The court also stated this additional concern:
If debtors, creditors, defendants in adversary proceedings could sue the trustee in state court for damages arising out of the conduct of the proceeding, that court would have the practical power to turn bankruptcy losers into bankruptcy winners, and vice versa. A creditor who had gotten nothing in the bankruptcy proceeding might sue the trustee for negligence in failing to maximize the assets available to creditors or the particular creditor. A debtor who had failed to obtain a discharge might through a suit against the trustee obtain the funds necessary to pay the debt that had not been discharged.
Id. at 546.
The same concerns addressed by the Seventh Circuit in Linton are presented here. Trotter Kent, in exercising duties approved by the Court upon confirmation of the plan, should not be subjected to the cost and aggravation of the Debtor's lawsuit, without a prior determination by the Court that the lawsuit has sufficient merit. Otherwise, the court's fear in Linton that disgruntled parties will use a non-bankruptcy forum to achieve a more favorable result to turn "losers" into "winners" may be realized.
Furthermore, the Court has an interest in monitoring Trotter Kent's activities and performance. Indeed, the Court has a vested interest in monitoring the performance of any individual or entity responsible for the management or disposition of estate property, regardless of how that responsibility arises. Application of the Barton Doctrine in this case will give the Court some guidance as to whether to approve BNY's employment in future cases. More importantly, the manner in which Trotter Kent was named, its duties and the lack of bankruptcy court oversight, may ultimately impact how and when this court will approve of or appoint a "liquidating trustee" in the future. In this sense, the Court's application of the Barton Doctrine in this case will provide meaningful guidance in the future and serve the concerns addressed in Linton.
Much to this Court's dismay, under the terms of the plan, Trotter Kent was not required to obtain judicial approval for the asset sales. In fact, it appears that no accounting or information regarding the sales was ever filed with the Court or noticed for objection to parties in interest. It is unclear whether or how this information was provided to the Debtor, creditors, or United States Trustee.
Should the Debtor Be Granted Leave to Pursue its Litigation against BNY, as Successor to Trotter Kent?
As stated earlier, before leave to sue Trotter Kent will be granted, the Debtor must plead a prima facie case. In this context, the term "prima facie" has been interpreted to require something more than notice pleading. The district court, in affirming the bankruptcy court's conclusion in Kids Creek that the plaintiff had not established a prima facie case against the trustee, stated the following:
In order to obtain leave from the appointing court, the claimant must demonstrate that it has a prima facie case against the trustee. This requirement makes sense given the underlying purpose behind the leave requirement. Otherwise, if the appointing court relied on mere notice-pleading standards rather than evaluating the merits of the allegations, the leave requirement would become meaningless. To apply a less stringent standard would eviscerate the protections extended to the [t]rustee. Accordingly, we reject Appellants' claim that the bankruptcy court erred by "ignor[ing] the liberal notice-pleading standard of Rule 8 of the Federal Rules of Civil Procedure." We conclude that the Bankruptcy Court applied the proper standard in analyzing the "merits of the claims alleged" in the Complaint.
In re Kids Creek Partners, L.P., 2000 WL 1761020 (N.D.Ill. 2000) (emphasis added). The Court agrees with the conclusion in Kids Creek that "prima facie" in this context requires something more than mere notice pleading. How much "more," however, is subject to debate. In this Court's opinion, the heightened standard should not be interpreted or applied so as to require a claimant to prove an "airtight" case. Rather, some middle ground must be found that meets the concerns underlying the Barton Doctrine but does not unfairly prevent a claimant, who has not been given a full and fair opportunity to develop its case, from going forward. With that in mind, a claimant should only be required to plead facts with a reasonable degree of particularity which support, either directly or inferentially, the elements of the claims asserted.
In the Seventh Circuit, a trustee's personal liability extends only to "a willful and deliberate violation of his fiduciary duties." In re Chicago Pac. Corp., 773 F.2d 909, 915 (7th Cir. 1985) (citations omitted). However, Trotter Kent waived any argument that this stringent standard applies when it agreed to participate as "Liquidating Trustee" per the terms of the confirmed plan, Paragraph 5.8 of which states that "[n]either the Liquidating Trustee, its agents, officers, directors, and/or employees, shall have any liability to any person or entity with respect to its actions or inactions taken by it in connection with the Case or the Plan, including, without limitation, acting as a Director of the Companies, except for its own gross negligence or intentional wrongdoing." (emphasis added). See Rexnord Corp. v. DeWolff Boberg Assoc., Inc., ___ F.3d ___, (7th Cir. 2002) (parties can contractually alter standard of care). Thus, under the level of care required under the plan, the Debtor must set forth sufficient facts which support a conclusion that Trotter Kent committed, in the very least, gross negligence in the performance of its duties to the Debtor.
The necessary elements of proof in a negligence action are duty, breach, injury and causation, or more precisely, the existence of a duty owed by the defendant to the plaintiff, a breach of that duty, and an injury proximately resulting from that breach. See Stratmeyer v. U.S., 67 F.3d 1340, 1345 (7th Cir. 1995) (citations omitted). There appears to be no issue regarding whether Trotter Kent owed a duty of care to the Debtor or that, if such duty was breached, it proximately caused injury to the Debtor. Therefore, the determinative question appears to be whether the Debtor has sufficiently shown whether Trotter Kent failed to meet the requisite level of care in the performance of its duty to the Debtor.
Neither party has proposed a definition of "gross negligence" to be used in this case. However, Indiana courts have defined "gross negligence" as the "intentional failure" to perform a duty "in reckless disregard of the consequences as affecting the life or property of another." See Stump v. Commercial Union, 601 N.E.2d 327, 332 n. 5 (Ind. 1992) (quoting BLACK'S LAW DICTIONARY at 931 (5th ed. 1979)); N. Ind. Pub. Serv. Co. v. Sharp, 732 N.E.2d 848, 856 (Ind.Ct.App. 2000).
In relevant part, the Plaintiffs' complaint alleges that "Trotter Kent, as a bankruptcy or reorganization trustee, had a fiduciary obligation to [the Debtor] to conserve the assets of the bankruptcy estate and to maximize distribution to creditors throughout the administration of the estate." In alleging that this duty was breached, the complaint asserts that "Trotter Kent . . . damaged [the Debtor's] interest in various assets by negligently, recklessly, willfully, and intentionally conveying assets to third parties for sums of money substantially below fair or reasonable market value for the particular assets transferred." The complaint further alleges that Trotter Kent "negligently, recklessly, willfully, and intentionally assess[ed] against the Creditor Fund excessive, unnecessary, unjustified, or otherwise improper attorney fees, management fees, and monies disbursed to creditors."
These allegations, taken alone, fail to satisfy the prima facie standard in that they do not allege any particular facts as support. At the hearing on the Debtor's Motion, however, the Court allowed the Debtor to present evidence that would support additional allegations that could be included in an amended complaint. That evidence suggests that some of the properties were sold by Trotter Kent at prices lower than their appraised value or lower than the sale price obtained by the Debtor prior to the effective date of the plan. For instance, the "Briars 1" office complex had an appraised value, as of January 1997, of $1.2 million; Trotter Kent sold the property in November of 1998 for $500,000. Lots in "Twychenham Estates" were sold by the Debtor, prior to the effective date for the plan, for $21,900 each; Trotter Kent later sold 30 of the lots for $18,000 each and 8 lots for $19,000 each. "Lafayette Square" in Tippecanoe County had an appraised value, as of November 5, 1997, of $8.1 million; the property was sold by Trotter Kent in August of 1999 for $6.3 million. In 1999, Trotter Kent sold the "Hickory Hills" development for $800,000; two years later, the Debtor repurchased this land for $2.5 million. The Debtor also presented evidence which suggests that Trotter Kent failed to collect, by $100,000, the full amount due the Debtor under a certain promissory note.
At the hearing on the Motion, the Debtor was prepared to offer additional testimony and documentary evidence to support allegations against the Defendants not contained in the complaint on the assumption that they could be set forth in an amended complaint. However, because it appeared, as of the hearing, that the Debtor would not have enough time to prepare an amended complaint, the Court allowed this evidence and testimony to be presented. BNY raised repeated objections to the evidence, arguing that the evidence was either inadmissible hearsay or lacking in a proper foundation. Given the odd procedural posture of the case, the Court indicated that it was attempting to analyze the evidence, not as it would at trial, but as support for allegations contained in a complaint. Because no evidentiary support is generally needed for such allegations, the Court admitted the evidence over BNY's objections.
The Debtor's evidence regarding the sale of Lafayette Square also included a letter from Paula Jacobi, who apparently served as a real estate agent for Trotter Kent, to counsel for the Debtor. This letter indicates that the buyer for Lafayette Square had reduced its offer for the property by $1 million due to "roof repairs, structural repairs, parking lot replacement and non-collection of CAM and real estate taxes from the tenants as well as recent vacations. . . ." Additional evidence suggests that at least two offers negotiated by the Debtor before the effective date of the plan had fallen through because the buyers could not get financing and because the real estate market, in the Debtor's words, took a "nose dive" around 1998.
The evidence also included a letter from the Debtor to Ms. Jacobi, refuting the reasons given for the reduced sale price and suggesting that a higher price could be obtained.
Based on the complaint and evidence, the Court cannot conclude that the Debtor has pled or presented any facts that either directly or inferentially establish that Trotter Kent committed gross negligence in the performance of its duties. The differences between the sale prices for the subject properties and those either offered to or obtained by the Debtor, without more, do not support a conclusion that Trotter Kent intentionally failed to perform its duty in reckless disregard of the consequences to the Debtor. Significantly, the Debtor has failed to allege or present any facts indicating that Trotter Kent intentionally failed to properly market or negotiate for the sale of the properties. As such, the Court can only speculate that the reduced sale prices are the product of gross negligence. The Court concludes that even under the less burdensome prima facie standard advocated herein, speculation alone is insufficient.
The Debtor's allegation that Trotter Kent paid out "excessive, unnecessary, unjustified, or otherwise improper attorney fees, management fees, and monies disbursed to creditors" also does not satisfy the prima facie standard. The Debtor has provided no specific facts regarding this allegation other than bare assertions that the professional costs incurred by Trotter Kent were "expensive."
Conclusion
Based on the foregoing, the Court concludes that the Barton Doctrine applies to Trotter Kent. However, given the allegations and evidence presented, the Court must conclude that the Debtor, in failing to satisfy the prima facie standard, is not entitled to bring its action in district court.