Maier v. Chatz (In re Foods, Inc.)

1

In the Matter of: Foods, Inc., Debtor

John Michael Maier, as Trustee for the Dahl's Employee Stock Ownership Plan and Trust, Plaintiff v. Barry A. Chatz, Defendant

No. 14-02689-als11

Adv. Pro. 21-30022-als

United States Bankruptcy Court, S.D. Iowa

August 23, 2022

MEMORANDUM OF DECISION (DATE ENTERED ON DOCKET AUGUST 23, 2022)

Anita L. Shodeen, U.S. Bankruptcy Judge.

Before the Court is the Defendant's Motion to Dismiss and Plaintiff's Objections. The Court has jurisdiction of this matter pursuant to 28 U.S.C. §§157(b)(1) and 1334. For the reasons stated the objections are sustained and the Motion to Dismiss is denied.

BACKGROUND FACTS

Foods Inc. owned and operated a chain of grocery stores. Due to diminishing profits and inability to compete in the marketplace it filed a chapter 11 petition on November 9 2014. The schedules identified the Dahl's Employee Stock Option Plan (ESOP) as both a creditor (ECF No. 20) and an equity holder (ECF No. 1). Among the proofs of claim filed in the case was number 176 filed by John Maier as the ESOP's Trustee. The claim was finally allowed as a priority claim in the amount of $191,543 and as an unsecured claim in the amount of $904,119 for a total claim of $1,095,662. (ECF No 842, Exhibit A).

Throughout the administration of the bankruptcy case there were allegations that some officers and directors had engaged in conduct which affected the business operations and its stock. The Debtor proposed a liquidating plan using a liquidating trust as the vehicle to administer available assets and pay creditor claims. Creditors in Class 3 (unsecured creditors), Class 4 (subordinated general unsecured ESOP Contribution Claims), and Class 5 (equity interest holders) were named as beneficiaries of the Liquidating Trust. A Liquidating Trust Agreement (LTA) was attached to the proposed modified plan (ECF No. 592) naming Barry Chatz as Liquidating Trustee. "Claims against the Debtor's Directors & Officers, and Insurance Policies" were specifically identified as assets to be transferred to the Liquidating Trust.

On November 8, 2016, Chatz, as Liquidating Trustee, filed an adversary proceeding against ten individual defendants that had acted as officers or directors of Foods, Inc. (Case No. 16-30128). In summary, that complaint alleged that the defendants breached their respective fiduciary duties by misrepresenting and overvaluing the company's stock which resulted in transfers of over-valued stock to the ESOP therefore deepening Foods, Inc.'s insolvency, as well as causing job and retirement fund losses for hundreds of employees. Actual damages of $7,947,730 and $10,000,000 in punitive damages were requested. Over time, each of the named defendants either reached a settlement with the Liquidating Trustee or filed individual bankruptcy cases, or both.

On December 14, 2020, the Court entered a Final Decree in the bankruptcy case.

On September 1, 2021, after reopening the case, Maier filed this pending adversary proceeding. In summary, the complaint alleges that Chatz, despite having knowledge of the Directors and Officer's insurance policy (D&O Policy), failed to keep the insurance policy in force and did not file the adversary proceeding against the former officers and directors before the policy lapsed which deprived the Liquidating Trust the benefit of making a claim for coverage. Maier maintains these actions rise to the level of gross negligence or willful misconduct, and a breach of fiduciary duty by Chatz as the Liquidating Trustee.

Chatz requests that the case be dismissed based upon a lack of subject-matter jurisdiction and failure to state a claim upon which relief may be granted. Fed.R.Civ.P. 12(b)(1); Fed.R.Civ.P. 12(b)(6); Fed. R. Bank. Pro. 7012(b).

DISCUSSION

1. Subject Matter Jurisdiction

"[S]tanding is the threshold question in every federal case, determining the power of the court to entertain the suit." Leibovitz v. N.Y.C. Transit Auth., 252 F.3d 179, 184 (2d Cir. 2001) (cleaned up). The party seeking relief in federal court bears the burden to establish subject matter jurisdiction. Lujan v. Defs. of Wildlife, 504 U.S. 555, 561 (1992). Federal Rule of Civil Procedure 12(b)(1) allows a party to raise this issue prior to filing a responsive pleading. Standing, 1 Bankruptcy Law Manual §2:46 (5th ed.). "In evaluating a Rule 12(b)(1) motion, a court must first determine whether the movant presents a facial or factual attack." Gavin/Solmonese LLC v. Citadel Energy Partners, LLC (In re Citadel Watford City Disposal Partners, L.P.), 603 B.R. 897, 902 (Bankr. D. Del. 2019). A facial challenge focuses on the sufficiency of the pleadings and a court is confined to the allegations of the complaint, accepts them as true and considers the allegations in the light most favorable to the plaintiff. Id. "In a factual attack, the court may consider extraneous information to resolve factual issues concerning jurisdiction" and can also evaluate the merits of the disputed allegations bearing on jurisdiction. Id.; Target Training Int'l, Ltd. v. Lee, 1 F.Supp.3d 927, 935 n.5 (N.D. Iowa 2014) citing Osborn v. United States, 918 F.2d 724, 730 (8th Cir. 1990). Here, Chatz raises a factual attack on the Maier's standing.

If "a party lacks standing to bring a claim, the court lacks subject matter jurisdiction over that claim and must dismiss it." Fiore v. Univ. of Tampa, 568 F.Supp.3d 350, 358 (S.D.N.Y. 2021). Chatz asserts that the complaint necessarily seeks relief on behalf of all the Liquidation Trust's beneficiaries, which is prohibited unless derivative standing has been obtained. Maier disagrees stating that Chatz is creating a non-existent requirement of derivative standing. In re Mailman Steam Carpet Cleaning Corp., 196 F.3d 1, 5 (1st Cir. 1999); In re Kashani, 190 B.R. 875, 888-89 (B.A.P. 9th Cir. 1995); In re J & S Properties, LLC, 545 B.R. 91, 99 (Bankr. W.D. Pa. 2015).

In this Circuit it is well settled that a creditor must obtain court approval to exercise derivative standing to bring a claim belonging to the bankruptcy estate. See PW Enters., Inc. v. North Dakota Racing Comm'n (In re Racing Servs., Inc.), 540 F.3d 892, 898 (8th Cir. 2008). Upon such a request, a court must "carefully scrutinize the request to satisfy itself that derivative standing is proper under the circumstances." Id. at 903. This statement makes clear that the facts presented in a specific case can determine the outcome of whether standing exists.

Since Chatz is not a trustee appointed under Chapter 7 or Chapter 11 of the Bankruptcy Code, his powers and duties are not those of a bankruptcy trustee. Rather, they are the powers and duties unique to a post-confirmation liquidating trustee. See In re Health Diagnostic Lab., Inc., 584 B.R. 525, 532 (Bankr. E.D. Va. 2018). Chatz's position related to the need for derivative standing in this adversary proceeding ignores the purpose of that concept as detailed in the relevant case law.

Derivative standing is required for a private individual or entity seeking to pursue a cause of action on behalf of a chapter 11 estate. In re Fin. Oversight & Mgmt. Bd. for Puerto Rico, 478 F.Supp.3d 190, 194 (D.P.R. 2020) (emphasis added).^[1] Upon plan confirmation the bankruptcy estate ceases to exist. "All estate property is vested in the debtor at confirmation, except as the plan specifically provides otherwise." In re Ernst, 45 B.R. 700, 702 (Bankr. D. Minn. 1985). In this case the plan called for Debtor's assets to be transferred (and vested) in the Liquidating Trust. In an apparent effort to overcome this point, Chatz states that he was "appointed" to his role as liquidating trustee and is therefore the "functional equivalent of a bankruptcy trustee" and operates as a "representative of the bankruptcy estate." Thus, derivative standing is required. See In re Health Diagnostic Lab., Inc., 584 B.R. at 532. This approach has not been applied as broadly as Chatz suggests.

A court may order the appointment of a trustee under specific circumstances in a chapter 11 case, but it is the United States Trustee that makes the appointment. 9 Am. Jur. 2d Bankruptcy § 495. This process is not intended to be applicable or operative post-confirmation. Only the LTA utilizes the term "appointment", and that document was executed by Chatz and the Official Unsecured Creditors Committee. It does not operate as a court order. There is no language in the confirmation order or the modified plan that indicates that Chatz was appointed the liquidating trustee, or as a trustee for the bankruptcy estate under a specific bankruptcy code provision.

Distinctions have been made between the governance of the role of a liquidating trustee and that of a bankruptcy trustee or estate representative. The court in Health Diagnostic stated: "The powers and duties of a 'representative of the estate,' such as a liquidating trustee, are dictated by such operative documents as the confirmation order, chapter 11 plan, and any applicable trust instruments." See In re Health Diagnostic Lab., Inc., 584 B.R. at 532, citing to Grede v. Bank of N.Y. Mellon, 598 F.3d 899, 901-02 (7th Cir. 2010) ("Although the terms of the Bankruptcy Code govern the permissible duties of a trustee in bankruptcy, the terms of the plan of reorganization (and of the trust instrument) govern the permissible duties of a trustee after bankruptcy.") (emphasis omitted); See generally Liquidation Estate of DeLaurentiis Entm't Grp. v. Technicolor, Inc. (In re DeLaurentiis Entm't Grp.), 87 F.3d 1061, 1064 (9th Cir. 1996) (an estate representative is not a trustee for purposes of 11 U.SC. §546(a)). The language contained in the LTA supports this same outcome:

This Liquidating Trust Agreement is intended to supplement and complement the Plan and the

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