Cline v. Heller, Draper & Horn (In re Dominion Grp.)

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IN RE: DOMINION GROUP, LLC, and CAPE QUARRY, LLC.

JOE WILLIAM CLINE, III, MARY ANNE CLINE, HARDSTOCK LLC, DOMINION GROUP, LLC, AND BARBARA RIVERA-FULTON IN HER CAPACITY AS CHAPTER 7 TRUSTEE OF THE ESTATE OF DOMINION GROUP LLC, PLAINTIFFS, v. HELLER, DRAPER & HORN LLC, DOUGLAS S. DRAPER, AND ABC INSURANCE COMPANY, DEFENDANTS.

JOE WILLIAM CLINE, III AND HARDSTOCK LLC, PLAINTIFFS, v. HELLER, DRAPER & HORN, LLC, DOUGLAS S. DRAPER, AND ABC INSURANCE COMPANY, DEFENDANTS.

Nos. 19-12366, 19-12367

ADV. NOS. 22-1002, 22-1010

United States Bankruptcy Court, E.D. Louisiana

July 24, 2023

CHAPTERs 7 & 11

SECTION A

MEMORANDUM OPINION AND ORDER

MEREDITH S. GRABILL UNITED STATES BANKRUPTCY JUDGE

Before the Court are the following:

• In Adversary No. 22-1002:

o Motion for Summary Judgment and Incorporated Brief in Support ("MSJ No. 1"), [ECF Doc. 12] filed by Heller, Draper &LLC ("Heller Draper");

o Oppositions to MSJ No. 1, [ECF Docs. 19 &24], filed by Joe William Cline, III and Hardstock LLC;

o Limited Response To Motion for Summary Judgment, Motion To Add Party, and Motion To Consolidate, [ECF Doc. 20] filed by Barbara Rivera Fulton, the chapter 7 trustee (the "Trustee"); and

o Reply filed by Heller Draper in support of MSJ No. 1, [ECF Doc. 24].

• In Adversary No. 22-1010:

o Motion for Summary Judgment and Incorporated Brief in Support ("MSJ No. 2"), [ECF Doc. 6] filed by Heller Draper;

o Opposition to MSJ No. 2, [ECF Doc. 8], filed by Joe William Cline, III and Hardstock LLC; and

o Reply filed by Heller Draper in support of MSJ No. 2, [ECF Doc. 12].

• In Case No. 19-12366:

o Motion To Abandon, [ECF Doc. 433], filed by the Trustee;

o Objections to the Motion To Abandon, [ECF Docs. 437 &441], filed by Heller Draper; and

o Reply filed by the Trustee, [ECF Doc. 438].

For the reasons below, the Court finds that there is no genuine dispute as to any material fact and that Heller Draper is entitled to judgment as a matter of law in both MSJ No. 1 and MSJ No. 2. The Court denies as moot the Motion To Abandon filed by the Trustee. The Court will issue a separate Order To Show Cause with instructions to the parties to determine appropriate sanctions, if any, for the willful violation of the automatic stay by Joe William Cline, III, Hardstock LLC, and Joshua Palmintier.

JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b). The Fifth Circuit has expressly held that state-law malpractice claims against estate professionals are "core proceedings" arising in a bankruptcy case. See Southmark Corp. v. Coopers &Lybrand (In re Southmark Corp.), 163 F.3d 925, 927 (5th Cir. 1999); 28 U.S.C. § 157(b). The venue of the Debtors' chapter 7 and chapter 11 cases are proper under 28 U.S.C. §§ 1408 and 1409(a).

BACKGROUND

A. The Debtors' Bankruptcy Filings and Retention of Heller Draper as Counsel

On September 3, 2019, Dominion Group LLC ("Dominion") and Cape Quarry LLC ("Cape Quarry") (together, the "Debtors") filed chapter 11 bankruptcy petitions. [No. 19-12366, ECF Doc. 1; No. 19-12367, ECF Doc. 1].^[1] At the time of filing, 50% of Dominion was held by Hardstock LLC and the other 50% was owned by Baranof Strategic Services, LLC. Joe "Trey" Cline, III ("Cline") wholly owned Hardstock LLC and his business partner, Wesley David Robert ("Robert"), wholly owned Baranof Strategic Services LLC. [No. 19-12366, ECF Doc. 215, Part III]. Dominion wholly owned Cape Quarry, which held all assets and operations. [No. 19-12367, ECF Doc. 1]. Cline and Robert authorized the bankruptcy filing of both Debtors. [No. 19-12366, ECF Doc. 51; No. 19-12367, ECF Doc. 1]. At all times in these cases, Cline acted as the principal of the Debtors.

On October 22, 2019, the Debtors filed substantially similar applications to employ Douglas Draper and the law firm of Heller Draper as Debtors' counsel nunc pro tunc to October 16, 2019. [No. 19-12366, ECF Doc. 98; No. 19-12367, ECF Doc. 62]. Each application attached as an exhibit the engagement letter signed by Cline on behalf of the Debtors, acknowledging that the Debtors had retained Heller Draper to represent them in their bankruptcy cases on the terms specified in the engagement letter. [No. 19-12366, ECF Doc. 98, Ex. B; No. 19-12367, ECF Doc. 62, Ex. B]. On December 11, 2019, the Court entered an Order approving the employment of Heller Draper on a final basis. [No. 19-12366, ECF Doc. 141].

B. Confirmation of a Plan in Cape Quarry and Dominion's Conversion to Chapter 7

On January 15, 2020, the Court granted without objection an extension of the exclusive period within which the Debtors could file a plan and obtain acceptances of that plan. [No. 1912366, ECF Doc. 170]. On February 28, 2020, the Debtors proposed a joint plan of reorganization and an accompanying disclosure statement, which contemplated that an unidentified third-party lender would lend $1.5 million to the Debtors or to the Debtors' equity holders; that loan would be combined with proceeds from the Debtors' ongoing operations to pay off the Debtors' secured lenders over time and allow Dominion's equity holders (Hardstock LLC (Cline) and Baranof Strategic Services LLC (Robert)) to retain their interests. [No. 19-12366, ECF Docs. 214 &215]. But the Debtors had difficulty getting the disclosure statement approved. [No. 19-12366, ECF Docs. 226, 227, 235, 236, 247, 248, 253, 254, 258, 259, 265, 266, 277 &289]. On April 29, 2020, the Debtors filed another request to extend the time to obtain acceptances of the plan; however, on May 14, 2020, the Debtors withdrew that request. [No. 19-12366, ECF Doc. 234].

On August 18, 2020, after the Debtors' exclusive period to obtain acceptances of their plan expired, a group of prepetition secured creditors and post-petition financers (the "Secured Creditors") filed a proposed plan of reorganization for Cape Quarry only (the "Secured Creditor Plan"). [No. 19-12367, ECF Doc. 91]. Weeks later, Cline formed Quarry Aggregates, LLC ("Quarry Aggregates"), and through counsel, Matthew Pepper ("Pepper"), filed a joint plan of reorganization for both Debtors (the "Quarry Aggregates Plan"). [No. 19-12366, ECF Doc. 292; No. 19-12367, ECF Doc. 99]. On September 15, 2020, following the filing of the Quarry Aggregates Plan, Heller Draper filed an expedited Motion To Withdraw as Counsel of Record (the "Motion To Withdraw"). [No. 19-12366, ECF Docs. 294 &295]. Heller Draper explained:

On September 15, 2020, Heller Draper was notified by Trey Cline, Manager of Cape Quarry, LLC and Dominion Group, LCC, that Heller Draper was being terminated. Heller Draper has requested information as to whether the Debtors have replacement counsel and was advised that "replacement counsel would seek to enroll when the Heller Draper Motion to Withdraw was filed". Trey Cline has been advised of the need for replacement counsel and the fact that a Corporation under applicable law cannot appear in proper person.

[No. 19-12366, ECF Doc. 294]. At the hearing on the Motion To Withdraw on September 23, 2020, Draper conveyed to the Court his belief that Cline desired to "weaponize" the operations of the Debtors to favor the Quarry Aggregates Plan over the Secured Creditor Plan. [No. 19-12366, Hr'g Tr. Min. 1:16:05-1:49:36 (Sept. 23, 2020)]. Charles Milner ("Milner"), one of the Debtors' Secured Creditors, as well as the Official Committee of Unsecured Creditors of Cape Quarry, LLC, objected to the withdrawal of Heller Draper absent replacement counsel. [No. 19-12366, ECF Docs. 301 &303].

On the morning of the hearing to consider the Motion To Withdraw, Pepper filed a motion to employ himself as counsel for Cape Quarry. [No. 19-12367, ECF Doc. 117]. Although Pepper stated in his application that his firm "obtained a waiver of conflicts from Quarry Aggregates waiving any conflict between [Quarry Aggregates and the Debtor] that might arise," the Court denied Pepper's application to substitute Heller Draper as Cape Quarry's counsel, finding that Pepper did not meet the "disinterestedness" standard for estate professionals under 11 U.S.C. § 327(a). [No. 19-12366, Hr'g Tr. Min. 1:16:05-1:49:36 (Sept. 23, 2020)].

As to the Motion To Withdraw, Draper explained that, in light of the competing non-debtor plans, the role for Debtors' counsel had been reduced to counting the ballots cast for each of the competing plans. [No. 19-12366, Hr'g Tr. Min. 1:16:05-1:49:36 (Sept. 23, 2020)]. Because the Court had been provided with no viable alternatives for Debtors' counsel and the fact that the Debtors as juridical entities could not represent themselves, the Court denied Heller Draper's Motion To Withdraw. [No. 19-12366, ECF Doc. 307; No. 19-12367, ECF Doc. 121; No. 1912366, Hr'g Tr. Min. 1:16:05-1:49:36 (Sept. 23, 2020)]. But given the tension between Cline and Heller Draper regarding representation of the Debtors as well as Cline's emerging conflict rooted in Quarry Aggregates' position as a plan proponent, the Court appointed an independent examiner under 11 U.S.C. § 1104(c) to (i) review, approve, and sign the joint disclosure statement for the Secured Creditor Plan and the Quarry Aggregates Plan; (ii) oversee the solicitation of acceptances and rejection of those plans; and (iii) tabulate ballots. [No. 19-12366, ECF Docs. 308 &310; No. 19-12367, ECF Docs. 123 &125; No. 19-12366, Hr'g Tr. Min. 1:16:05-1:49:36 (Sept. 23, 2020)].

On October 13, 2020, Milner filed a Motion To Expand the Powers of the Examiner (the "Motion To Expand Powers"), asking that the Examiner be given sole authority to maintain operations of the Debtor Cape Quarry pending resolution of the competing plans. [No. 19-12367, ECF Doc. 141]. Through the motion with sworn exhibits, Milner reported that Cline, "representing himself to be the owner of the [Cape]...