Master v. Spradlin

CAMOFI MASTER LDC and CAMHZN MASTER LDC, APPELLANTS, v. PHAEDRA SPRADLIN, as Chapter 7 Trusteeand EAST COAST MINER LLC, APPELLEES.

Civil Action No. 16-64-HRW

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF KENTUCKY NORTHERN DIVISION ASHLAND

October 6, 2017

MEMORANDUM OPINION AND ORDER

This matter is before the Court upon CAMOFI Master LDC and CAMHZN Master LDC ("CAM Funds") Appeal from Bankruptcy Court, Judge Tracey Wise's Order sustaining the Trustee's Motion to Dismiss CAM's Complaint [Docket No. 1-1]. This matter has been fully briefed by the parties. The Court, having reviewed the record and being otherwise sufficiently advised, hereby affirms the decision of the Bankruptcy Court.

I.

This cases arises from a lawsuit filed by CAM Funds in the New York Supreme Court against U.S. Coal, J.A.D. Coal Company, East Coast Miner ("ECM"), and two of ECM's members, Keith Goggin and Michael Goodwin.¹ [Docket No. 7-2]. In its original Complaint, CAM asserted claims against U.S. Coal and J.A.D. Coal for breach of contract, against U.S. Coal's officers for breach of fiduciary duty and against U.S. Coal's officers and ECM for tortiousinterference with contractual relations.² ECM sought dismissal of the Complaint. The NEW York Court dismissed the claims against the individual Defendants but allowed the other claims to proceed, ordering CAM to file an Amended Complaint reflecting its ruling.

That Complaint is the pleading at issue in this appeal and concerns three agreements entered into among the CAM Funds, U.S. Coal and/or J.A.D.: (I) an April 2008 letter agreement whereby U.S. Coal granted the CAM Funds certain consent rights with respect to the management of U.S. Coal, including borrowing money, hiring or firing officers, or entering in affiliate transactions ("Management Agreement"³); (ii) an agreement requiring U.S. Coal to repurchase its stock from the CAM Funds if U.S. Coal failed to meet certain conditions ("Put Agreement"⁴); and (iii) an equipment note executed by U.S. Coal and J.A.D. in the amount of$4.8 million to be paid to the CAM Funds ("Equipment Note"⁵). [Docket No. 7-26].

In the summer of 2014, creditors filed involuntary bankruptcy petitions against U.S. Coal, J.A.D. Coal and several of their affiliates ("Debtors"). The cases were jointly administered and proceeded under Chapter 11 but were eventually converted to Chapter 7.

Prior to conversion, the Official Committee of Unsecured Creditors investigated the Debtors' prepetition transactions and on March 24, 2015, filed a an adversary proceeding against ECM, Goggin, Goodwin, and ECM's affiliate, East Coast Miner II ,("Trustee Complaint"). [Docket No. 7-22]. After conversion, the Trustee was substituted as the plaintiff therein.

The Trustee's Complaint asserts claims against ECM, its principals, Goggin and Goodwin, and ECM II. These claims include fraudulent transfer claims against ECM based upon the Bankruptcy Code and state law pursuant to 11 U.S.C. §§ 544(b), 548(a)(1)(B), 550(a) and 551 and Kentucky Revised Statutes § 378.020. In addition, breach of fiduciary duty claims were asserted against Goggin and Goodwin. The Trustee contends that Goggin and Goodwin orchestrated events so that all of U.S. Coal's board members had an equity interest, directly or indirectly, in ECM. With ECM investors in control of U.S. Coal's board, the Trustee asserts that ECM's interests were placed above those of U.S. Coal, its affiliated debtors, and their creditors in that (I) obligations to ECM were paid ahead of and to the detriment of other creditors; (ii)ECM charged excessive interest, default interest and fees to the Debtors; (iii) U.S. Coal's funds were inappropriately used to pay ECM's attorneys' fees, costs and expenses of organization and litigation brought by third parties; and (iv) ECM refused to agree to a standard subordination agreement to which it had routinely agreed resulting in reduction of Debtors' cash flow and increasing payables to the detriment of the Debtors and their creditors. The Trustee further asserted that Goggin and Goodwin threatened Robert Gabbard, U.S. Coal's then Chief Executive Officer, to resign with a $1.2 million severance package rather than have his employment terminated. As a result, the Trustee asserts, U.S. Coal incurred an unnecessary expense of $1.2 million; i.e., had he been terminated for cause, Mr. Gabbard would not have been entitled to severance pay. In its prayer for relief, the Trustee seeks to avoid allegedly fraudulent transfers, subordinate and/or avoid liens and preserve them for the benefit of the bankruptcy estates, and to disallow claims. With regard to is claims against Goodwin and Goggin for breach of fiduciary duty, the Trustee seeks compensatory, exemplary and/or punitive damages on behalf of the estates and their creditors.

The adversary proceeding was ultimately transferred to the United States Bankruptcy Court for the Eastern District of Kentucky. [Docket No. 7-19].

The Trustee filed the Motion to Dismiss the CAM Complaint contending the claims asserted by the CAM Funds belong exclusively to the Trustee. Although the CAM Funds conceded that only the Trustee may pursue breach of fiduciary duty and fraudulent conveyance claims, they argued that their claims against ECM for tortious interference are personal claims for injuries specific to them, and, as such, are not subject to dismissal.

United States Bankruptcy Court Judge Tracey Wise disagreed with the CAM Funds. Applying the factors set forth in Honigman v. Comerica Bank (In re Van Dresser Corp.), 128 F.3d 945, 947 (6^th Cir. 1997), Judge Wise determined that the CAF Funds' claim for tortious interference against ECM belong exclusively to the Trustee on behalf of the Debtors. Accordingly, she sustained the Trustee's Motion to Dismiss. [Docket No; 1-1].

The CAM Funds ask this Court to reverse the decision of the Bankruptcy Court. Specifically, they present the following issues on appeal:

1. Did the Bankruptcy Court err in finding that a trustee appointed under Chapter 7 of the Bankruptcy Code has the exclusive right to bring a creditor's state law claims for tortious interference with contract against a non-debtor third party?

2. Did the Bankruptcy Court err by stripping the CAM Funds of their standing to bring tortious interference claims against a non-debtor that they had litigated for two years pre-petition on the grounds that their claims would "interfere" with the right of the Trustee to bring claims for breach of fiduciary duty or avoidance?

3. Did the Bankruptcy Court err in finding that the injury suffered by the CAM Funds as a result of tortious interference was "common" with, and not independent from, the injuries allegedly suffered by the Debtors as a result of breaches of fiduciary duty and avoidable preference payments?

4. Did the Bankruptcy Court err in its analysis of the relief sought by, and remedies available to, the CAM Funds and the Trustee?

[Appellants' Brief, Docket No. 6, p. 1-2].

II.

"The standard of review on appeal is determined by the nature of the action taken below by the bankruptcy court." In re Telex Corp., 984 F.2d 170, 172 (6th Cir. 1993); see also In re Dow Corning, Corp., 456 F.3d 668, 674-75 (6th Cir. 2006). Where a bankruptcy court decides a question of law, the decision is subject to de novo review. Dow Corning, Corp., 456 F.3d 668,674-75. Where a bankruptcy court "applies" the Bankruptcy Code, its determinations are also subject to de novo review. Id. Where a bankruptcy court interprets its own prior orders and acts, it is subject only to review for a clear abuse of discretion." In re Special Metals Corp., 360 B.R. 244, 247 (E.D. Ky. 2006)( citing Enodis Corp. v. Employers Ins. Of Wausau (In re Consolidated Industries Corp.), 360 F.3d 712, 716 (7^th Cir. 2004).

In this case, the parties agree that this Court should review this matter de novo. "De novo review requires the [Court] to review questions of law independent of the bankruptcy court's determination." First Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468, 469 (B.A.P. 6^th Cir. 1998).

III.

Appellants' statement of issue on appeal are essentially whether the Bankruptcy Court correctly determined under controlling and applicable bankruptcy law that the CAM Funds' "tortious interference" claims against East Coast Miner LLC ("ECM") belong exclusively to the Trustee on behalf of the Debtors' estates because such claims: (1) share the same underlying focus as the Trustee's claims against ECM; (2) assert injuries that are the same as those suffered by U.S. Coal itself and other creditors; (3) create the possibility of duplicate recoveries for the CAM Funds; and (4) if allowed to proceed, would interfere with the Trustee's litigation of her claims against ECM.

The trustee in bankruptcy acts as the representative of the estate. It is the trustee who "has the capacity to sue and be sued." 11 U.S.C. § 323(b). The right to purse causes of action formerly belonging to the debtor is regarded as a form of property and vests in the trustee. Bauer v. Commerce Union Bank, 859 F.2d 438, 441 (6^th Cir. 1988). A trustee has the exclusive right tobring causes of action created by the Bankruptcy Code, including avoidance actions set forth in chapter 5 of the Code for fraudulent conveyance, preference and lien avoidance, for example. See 11 U.S.C. §§ 541(a)(4), 541(a)(6), 544, 548, 550 & 551. Providing broad and exclusive standing to a trustee promotes the Bankruptcy Code's core policy objectives "to promote the orderly resolution of all claims and prevent creditors from racing to the courthouse to achieve preferential treatment." Sec. Inv'r. Prot. Corp. v. Bernard L. Madoff Inv. Sec. L.L.C., 429 B.R. 423, 430 (Bankr. S.D.N.Y. 2010), aff'd, 848 F. Supp. 2d 469 (S.D.N.Y. 2012), aff'd, 740 F.3d 81 (2d Cir. 2014). In other words:

The bankruptcy trustee's role is to manage the estate and gather up all available property, including causes of action, for an eventual pro rata, monetary

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