In re Sears

536 B.R. 286

In the Matter of Korley B. SEARS, Debtor.

No. 4:14CV3206.

Bankruptcy No. 10–40277.

United States District Court, D. Nebraska.

Signed Aug. 25, 2015.

Brian J. Koenig, Koley, Jessen Law Firm, Jerrold L. Strasheim, Strasheim Law Firm, Omaha, NE, for Debtor.

MEMORANDUM AND ORDER

RICHARD G. KOPF, Senior District Judge.

This is an appeal from a judgment entered by the United States Bankruptcy Court for the District of Nebraska on August 29, 2014, in a Chapter 11 proceeding (In re Sears, Bankruptcy Case No. 10–40277, Doc. 405). The bankruptcy court granted summary judgment in favor of the appellees/claimants, Rhett R. Sears and Rhett R. Sears Revocable Trust (collectively, “Rhett”), Ronald H. Sears and Ronald H. Sears Trust (collectively, “Ron”), and Dane Sears (“Dane”), and allowed their claims over the objections of the debtor/appellant, Korley B. Sears (“Korley”). Having carefully reviewed the parties' briefs and the designated record on appeal,¹ I conclude that the bankruptcy court's judgment should be affirmed.

I. Background

The facts of the case, as summarized by the bankruptcy court in a memorandum and order that was also entered on August 29, 2014, are as follows:

The claimants in this case, who are members of the debtor's family, sold their interests in AFY, Inc., a company that operated a cattle feedyard, to the corporation and to Korley Sears in 2007 in exchange for promissory notes from Korley and a security interest in the shares. In 2010, AFY and Korley each filed for bankruptcy protection. The claimants filed proofs of claim for more than $5.3 million in AFY's bankruptcy case for the amounts owed to them for the sale of their stock. AFY's two shareholders, Korley and Robert Sears, objected to the claims, arguing that only Korley and not AFY was liable for the debt. After a hearing on affidavit evidence, the claim objections were overruled. The court found that the contract for the sale of the claimants' interest clearly and unambiguously showed that both AFY and Korley were the purchasers. The claimants' proof of claim was entitled to prima facie validity, and no evidence was presented to challenge either AFY's liability on the debt or the amount of the claims. There also was no evidence to support Robert and Korley's theory that the claimants had breached the contract, thereby excusing AFY's performance and liability. On appeal, the Bankruptcy Appellate Panel affirmed the decision of the bankruptcy court, holding that AFY was liable for the debt under the unambiguous terms of the stock sale contract, the amount of the debt was undisputed, and Robert and Korley's defenses were unavailing. Sears v. Sears (In re AFY, Inc.), 463 B.R. 483 (8th Cir. BAP 2012). Robert and Korley then appealed to the Eighth Circuit, which dismissed the appeal without reaching the merits after finding that neither of them had standing to appeal because they held, at most, only a derivative interest and were not “persons aggrieved” as they would not be directly and adversely affected pecuniarily by the bankruptcy court's order. Sears v. Sears (In re AFY, Inc.), 733 F.3d 791 (8th Cir.2013). The rulings left intact the substance of the underlying bankruptcy court orders.

(In re Sears, Bankruptcy Case No. 10–40277, Doc. 403, at CM/ECF p. 1). The claimants filed similar proofs of claim in Korley's bankruptcy case.

In AFY's bankruptcy case, Korley and Robert Sears (“Robert”) filed the following objections to the claims of Ron, Rhett, and Dane:

1. Claims Nos. 8, 9, and 10 of Ron, Rhett, and Dane (collectively “Sears Family Claimants”) are unenforceable against AFY or its property and do not state any claims for which relief can be granted.

2. By Claims Nos. 8, 9, and 10, the Sears Family Claimants seek to recover from AFY's estate based on the Resolution for Stock Redemption contained in AFY's 2008 Minutes of its annual meeting (the “Resolution”) being an enforceable contract. The Resolution is not an enforceable contract.

3. The Claims of the Sears Family Claimants are based upon the Sears Family Claimants being third party beneficiaries of the Resolution. The Sears Family Claimants are at most incidental beneficiaries of the Resolution and not creditor third party beneficiaries of the Resolution.

4. Alternatively, even if the Resolution is an enforceable contract in which the Sears Family Claimants are creditor third party beneficiaries, which Robert and Korley expressly deny, the Sears Family Claimants materially breached the Sears Family Claimant's implied duties of good faith and fair dealing in the performance and enforcement of that contract, thus excusing AFY from any performance and discharging AFY from any liability. Such duties of good faith and fair dealing required the Sears Family Claimants not to do anything that injured the right of AFY to receive the benefit of such contract. The Sears Family Claimants breached such duties by opposing all the efforts of AFY to effect a Chapter 11 plan and by collaborating with the Chapter 11 Trustee that the Sears Family Claimants had caused to be appointed.

5. Alternatively, even if the Resolution resulted in the Sears Family Claimants being creditor third party beneficiaries under an enforceable contract, which Robert and Korley expressly deny, the Sears Family Claimants materially breached the contract by unjustifiably preventing, hindering, making impossible the performance by AFY of its obligations under the contract by opposing all efforts of AFY to effect a Chapter 11 plan, and by collaborating with the Chapter 11 Trustee that the Sears Family Claimants had caused to be appointed.

6. By Claims Nos. 8, 9, and 10, the Sears Family Claimants seek to recover from AFY's estate based upon a Stock Sales Agreement under which the Sears Family Claimants sold their shares of stock in AFY to Korley. AFY purchased no shares of stock in AFY under the Stock Sales Agreement and received none from the Sears Family Claimants. Moreover, after the closing of the Stock Sales Agreement, the Stock Sales Agreement was no longer an enforceable agreement either because it was merged into the promissory notes described below in Paragraph 7, or otherwise.

7. By Claims Nos. 8, 9, and 10, the Sears Family Claimants seek to recover from AFY's estate based on Promissory Note(s) dated June 22, 2007 in the original principal amounts of their respective Claims. AFY was not a party to any of those Promissory Notes and did not sign on any of those Promissory Notes. The Nebraska Uniform Commercial Code in § 3–401 provides that a person is not liable on notes such person did not sign, nor was AFY obligated under the Stock Sales Agreement to sign any of those notes.

8. The parol evidence rule, which is a rule of substantive law, not evidence, bars any claim that AFY is liable on any of the Promissory Notes.

9. The Statute of Frauds in Neb.Rev.Stat. 36[–]202(2), bars proof that AFY is liable on any of the Promissory Notes.

10. The Sears Family Claimants hold no security interest or liens on any right of Korley to enforce the Resolution.

11. Allowance of Claims Nos. 8, 9, and 10, which are for stock in AFY and not for goods or services furnished to AFY, but are for sales of equity in AFY, would pay equity ahead of debt, or would pay some equity ahead of other equity. That is contrary to bankruptcy law.

12. As of the time of the Resolution in 2008, the directors and shareholders of AFY intended to redeem from Korley the shares Korley owned and retire shares Korley had purchased in 2007 from the Sears Family Claimants. The directors and members of AFY had no intention to confer any enforceable rights or benefits on the Sears Family Claimants.

13. The principal purpose of any contract that resulted from the Resolution was frustrated by the acts and omissions of the Sears Family Claimants, and when any contract resulting from the Resolution was made, neither AFY, Robert, Korley, nor Ron, Rhett, or Dane contemplated the subsequent events, including without limitation, withdrawal of AFY's operating line of credit, a bankruptcy case, conversion of AFY's Chapter 11 case to Chapter 7, or liquidation of AFY's bankruptcy estate.

(In re AFY, Inc., Bankruptcy Case No. 10–40875, Doc. 366, at CM/ECF pp. 2–4).

In overruling these objections, the bankruptcy court stated:

The Sears Family Members filed their claims for sums due pursuant to a June 20, 2007, Stock Sale Agreement. The claim is made as both a direct obligation under the agreement and related documentation, and as third-party beneficiaries of an agreement between AFY and Korley Sears.

Robert and Korley's objection to the Sears Family Members' claims was filed “on Behalf of AFY's Estate, Themselves, and Their Estates.” They believe that the Sears Family Members' claims should be disallowed in their entirety because, according to Robert and Korley, AFY is not liable for any sums due under the Stock Sale Agreement. Specifically, only Korley signed the promissory notes resulting from the Stock Sale Agreement. Robert and Korley feel that the Stock Sale Agreement should be interpreted on its face and that parol evidence should not be used. As an alternative theory, Robert and Korley argue that even if AFY had some liability to the Sears Family Members under the agreement, they breached their implied duties of good faith and fair dealing in the performance and enforcement of that contract, thus excusing AFY from performance and liability. The asserted breach was by opposing the early efforts of AFY in this Chapter 11 case and collaborating with the Chapter 11 trustee.

The trustee has not joined in Robert and Korley's objection.

As a threshold matter, it is clear that Robert and Korley do not have standing as purported shareholders of AFY to make objections on behalf of AFY's estate. The trustee has been appointed to administer the bankruptcy estate and is the only person authorized to take action on behalf of the estate. On the other hand, Robert and Korley may act in their individual

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