Williams v. Flying J, Inc. (In re St. Michael Motor Express)

In re ST. MICHAEL MOTOR EXPRESS, Debtor.

Marianna Williams, Trustee, Plaintiff, v. Flying J, Inc., FJ Management, Inc. d/b/a/ Flying J, Inc.,

Flying J Insurance Services, Inc., and/or its successor The Buckner Company,

Transportation Alliance Bank, Inc., TAB Bank, Inc., TAB Bank, Inc.

d/b/a Transportation Alliance Leasing, LLC, Stephen Parker,

Gresham & Associates, LLC, Gresham & Associates, Inc.,

Gresham and Associates of Indiana, Inc. Jagjit "J.J." Singh,

John Does A, B, and C and Jane Does A, B, and C Defendants.

Case No. 08-11838-E

Adv. Proc. No. 13-05148

UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF TENNESSEE EASTERN DIVISION

August 21, 2015

Chapter 7

MEMORANDUM OPINION ON MOTIONS TO DISMISS AND TRUSTEE'S RESPONSE THERETO

These matters are before the Court on various motions to dismiss (collectively "Motions to Dismiss") this adversary proceeding and the Chapter 7 Trustee's response in opposition. The motions to dismiss were filed by Transportation Alliance Bank, Inc., Transportation Alliance Leasing, LLC, and Stephen Parker (the "TAB Defendants")(Adv. Proc. No. 13-05148, ECF No. 10), Flying J, Inc., FJ Management, Inc., Flying J Insurance Services, Inc., and the Buckner Company (the "Flying J Defendants")(Adv. Proc. No. 13-0514, ECF No. 12), Jagjit Singh ("Singh")(Adv. Proc. No. 13-05148, ECF No. 27), and Gresham & Associates, LLC, Gresham & Associates, Inc., and Gresham & Associates of Indiana, Inc. ("Gresham & Associates")(Adv. Proc. No. 13-05148, ECF No. 42), (all defendants are collectively referred to herein as "Defendants"). The Flying J Defendants also moved, alternatively, for summary judgment as to The Buckner Company pursuant to Rule 7056 of the Federal Rules of Bankruptcy Procedure. The Chapter 7 Trustee, Marianna Williams, ("Trustee") filed a collective response in opposition to the four motions to dismiss (Adv. Proc. No. 13-05148, ECF No. 57).

The Court conducted a hearing on the motions and Trustee's response on June 23, 2015, after which it took the matters under advisement.¹

I. JUDICIAL BACKGROUND

In June of 2012, Hon. G. Harvey Boswell, the bankruptcy judge originally presiding over this case, retired. This case was assigned to Hon. George W. Emerson, Jr., U.S. Bankruptcy Judge for the Western District of Tennessee, Western Division, on September 12, 2012, because another Judge had not been appointed in the Eastern Division upon Judge Boswell's retirement.

Following his appointment as U.S. Bankruptcy Judge for the Western District of Tennessee, Eastern Division, Hon. Jimmy L. Croom was assigned the case. Judge Croom recused himself, havingpreviously entered an appearance as U.S. Attorney representing the Internal Revenue Service during the pendency of the case prior to taking the bench as a U.S. Bankruptcy Judge in March, 2013. Following Judge Croom's recusal, the case was reassigned, again, to Hon. George W. Emerson, Jr.

II. PROCEDURAL BACKGROUND

On May 22, 2008, St. Michael Motor Express ("Debtor"), filed its voluntary Chapter 11 petition. Louis P. Saia, III ("Saia") was Debtor's sole shareholder, president, and chief executive officer. Debtor operated the business of St. Michael Motor Express as "debtor in possession" as defined by 11 U.S.C. § 1101, and was vested with all of the rights, powers, and duties of a debtor in possession as set forth in 11 U.S.C. § 1107. On September 19, 2008, Debtor timely filed its proposed Chapter 11 plan of reorganization and disclosure statement. The Court approved Debtor's disclosure statement on October 29, 2008, and initially set a hearing on confirmation of Debtor's proposed plan of reorganization on December 17, 2008. Several creditors filed objections to Debtor's plan of reorganization. For this reason, the Court continued the confirmation hearing several times throughout 2008 and 2009.

On September 22, 2009, Transportation Alliance Bank, Inc., and Transportation Alliance Leasing, LLC (collectively "TAB") filed an emergency motion for relief from the automatic stay ("Stay Relief Motion") in which TAB alleged that the liability insurance on the trucks Debtor was leasing from TAB had lapsed. TAB further alleged that Debtor continued to operate the trucks despite this lapse in insurance and that Debtor was two months in arrears on the lease payments for the trucks. TAB attached a document styled "Notice of Nonrenewal of Insurance," to the Stay Relief Motion. This notice was on letterhead belonging to Carolina Casualty Insurance Company and indicated that the "insurance producer" was Gresham and Associates of Indiana. The Notice of Nonrenewal of Insurance stated: "We will not renew this policy when it expires. Your insurance will cease on the Expiration Date shown above," and provided that September 20, 2009, was the date of expiration. The reason for nonrenewalwas stated as "Unfavorable Underwriting Factors - Unacceptable Loss History." (Case No. 08-11838, ECF No. 330-1).

TAB moved to set the hearing on the Stay Relief Motion on an expedited basis due to the potential of irreparable harm to TAB as a result of the nonrenewal of liability insurance. The Court granted TAB's motion to set the expedited hearing and scheduled a hearing on the Stay Relief Motion for the next day. At the hearing on September 23, 2009, counsel for TAB stated:

I'm happy to report that we've reached agreement with the debtor under which TAB will provide funding under the accounts receivable agreement to temporarily bind liability insurance to get the trucks back to Jackson to be surrendered and to complete delivery of current freight loads. And also, we're going to provide the fuel to get the trucks back here and at which time they're going to be surrendered.

(Tr. of September 23, 2009, Hr'g at 4). The Court asked who would prepare the order and counsel for TAB stated that he would.

Counsel for Debtor then asked, "If your Honor, may I make a brief statement on the recording regarding that?" He then went on to state, "We have reached agreement. We will upload an order. It is important on Mr. [Saia]'s behalf for me to note that the debtor denied the allegations with respect to insurance, doesn't believe that they were appropriate or well taken but does agree with the relief under all the circumstances of the case." Id.²

Despite Saia's objections to the allegations regarding insurance, the consent order was signed by counsel for Debtor and entered with the Court. Saia did not appear in court for the hearing on theStay Relief Motion because he was allegedly in Louisiana to borrow money from family members to use for payment of the insurance premium. (Compl. ¶ 68, Adv. Proc. No. 13-05148, ECF No.1).

The parties entered the consent order (hereinafter "Consent Order") with the Court on September 24, 2009. The terms of the order provided for terminating the automatic stay as to TAB, abandoning the leased trucks from the bankruptcy estate, and allowing TAB to advance the necessary funds to purchase insurance for the limited purpose of completing delivery of current freight loads and returning the trucks to Debtor's location in Jackson, Tennessee. The Consent Order further provided that Debtor would not resume operating the leased trucks until "such time as notice is provided by TAB that liability insurance coverage is secured and in effect." (Consent Order Terminating Automatic Stay and For Abandonment at 2, Bankr. Case No. 08-11838, ECF No. 334).

On September 30, 2009, the parties entered a consent order on the United State Trustee's motion to dismiss for failure to pay quarterly fees and/or file monthly operating reports. Pursuant to the terms of the order, Debtor had until October 6, 2009, to voluntarily convert the case to a case under Chapter 7. If Debtor failed to convert by the stated date, the consent order provided that the United States Trustee would enter an order converting the case. Debtor did not timely convert the case and, as a result, the United States Trustee entered an order converting the case on October 13, 2009. The parties subsequently amended the conversion order on October 16, 2009, to provide that Debtor's Chapter 11 schedules and other statements would be deemed their equivalent in the Chapter 7 case.

Confirmation of Debtor's Chapter 11 plan of reorganization was set for hearing on October 7, 2009. However, because the September 30, 2009, consent order provided for conversion of Debtor's case, the confirmation hearing became moot. On October 14, 2009, Marianna Williams was appointed as the Chapter 7 Trustee in the case. Debtor's Chapter 7 meeting of creditors was held on December 8, 2009, and on March 17, 2010, Trustee issued her report of no distribution. On April 6, 2010, the Court issued a final decree discharging Trustee and closing the case.

On September 11, 2012, the United States Trustee filed a motion to reopen the case to administer assets. The motion was granted without opposition and on October 18, 2012, Marianna Williams was reappointed as Chapter 7 Trustee. On October 18, 2013, Trustee filed an adversary complaint against the Defendants in which she alleged that these multiple Defendants committed several bad acts in their course of dealings with Debtor. These alleged bad acts include fraud on the debtor, fraud on the bankruptcy court, fraudulent transfers and/or conveyances, conversion, tortious conspiracy, and violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). Trustee is seeking various injunctions, compensatory and punitive damages, imposition of a resulting and/or constructive trust, avoidance of alleged fraudulent transfers and an accounting.³

During the hearing on the Motions to Dismiss currently pending before the Court, the parties clarified that the "transfer" which is the cornerstone of Trustee's complaint and which Trustee seeks to avoid, is the "transfer" by repossession of the leased trucks and trailers which took place following the entry of the Consent Order on September 24, 2009. The Consent Order provided...