Giese v. Community Trust Bank (In re HNRC Dissolution Co.), 549 B.R. 469

Background

Leslie Resources, Inc. (LRI) was a debtor in the multi-debtor Horizon chapter 11 case; LRI listed $316,358 as “restricted cash.”
The Horizon debtors sold substantially all assets via § 363 sales in 2004 to ICG and Lexington Coal; sale and confirmation orders vested purchasers with assets free and clear and enjoined claims against purchasers.
In 2006 Community Trust Bank (CTB) filed an interpleader for $334,054.11 in a CTB account; after publication and defaults, ICG and Lexington Coal split the fund (67%/33%) by agreed order and funds were disbursed.
In 2015 plaintiff (successor to certain Begley heirs) sued in state court claiming title to the CTB funds and asserting conversion, fiduciary duty, negligence, misrepresentation, breach of contract, and unjust enrichment against CTB, ICG, and Lexington Coal.
Defendants removed under 28 U.S.C. § 1452; district court found related-to bankruptcy jurisdiction and referred the case to the bankruptcy court. Bankruptcy court finds the sale was in rem and denies mandatory abstention.
The bankruptcy court dismissed plaintiff’s claims, holding they are barred by res judicata/collateral estoppel and, alternatively, fail to state viable claims because plaintiff has no title to the funds. ICG’s separate bankruptcy stayed the action as to ICG.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the § 363 sale was in rem and binding on plaintiff	Plaintiff contended the CTB funds were not estate property and thus not transferred by the sale	Defendants argued the sale transferred all cash/cash equivalents and the Sale/Confirmation Orders bind the world	Held: Sale was in rem; sale/confirmation orders transferred the funds and are binding on plaintiff
Whether plaintiff’s suit is precluded by res judicata	Plaintiff argued Begley heirs lacked notice and opportunity to be heard, so res judicata should not apply	Defendants argued final sale/confirmation orders and the interpleader disposition constituted final adjudications and the claims could/should have been raised then	Held: Res judicata applies; claims were or could have been litigated in the bankruptcy sale/confirmation and interpleader; adequate notice was provided
Whether tort/contract claims based on the interpleader disposition state viable claims	Plaintiff asserted conversion, breach of fiduciary duty, negligence, misrepresentation, unjust enrichment arising from defendants’ conduct in the interpleader	Defendants argued these claims depend on plaintiff’s title to the funds (which is barred) and are collateral attacks on final orders	Held: Because plaintiff has no legal title (claims barred), conversion, fiduciary, negligence, misrepresentation, and unjust enrichment claims fail to state a claim; collateral attack improper (Rule 60(b) remedy instead)
Proper remedy and procedural posture (remand/abstention/discovery)	Plaintiff sought remand and mandatory abstention	Defendants opposed remand; sought dismissal and stay of discovery	Held: District court already denied remand; bankruptcy court denied mandatory abstention; dismissal granted as to CTB and Lexington Coal; protective order moot; ICG stay remains due to its bankruptcy

Key Cases Cited

Gekas v. Pipin (In re Met-L-Wood Corp.), 861 F.2d 1012 (7th Cir. 1988) (bankruptcy § 363 sales are in rem and transfer property rights good against the world)
Regions Bank v. J.R. Oil Co., LLC, 387 F.3d 721 (8th Cir. 2004) (bankruptcy sales confer rights effective against all)
Browning v. Levy, 283 F.3d 761 (6th Cir. 2002) (confirmation orders have preclusive effect; privity/successor-in-interest treated as barred)
Winget v. JP Morgan Chase Bank, N.A., 537 F.3d 565 (6th Cir. 2008) (sale orders signal end to litigation over sold assets; res judicata bars relitigation)
Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard: factual matter to state a plausible claim)
Bell Atlantic v. Twombly, 550 U.S. 544 (2007) (plausibility standard for complaints)
Mullane v. Hanover Bank & Trust Co., 339 U.S. 306 (1950) (due process requires notice reasonably calculated to apprise interested parties)
Bullard v. Blue Hills Bank, 135 S.Ct. 1686 (2015) (confirmation orders foreclose relitigation of issues necessarily determined)
United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010) (judgment void for deprivation of due process; Rule 60(b)(4) governs challenges to void judgments)
Sallee v. Fort Knox Nat’l Bank, N.A. (In re Sallee), 286 F.3d 878 (6th Cir. 2002) (definition of fiduciary relationship under Kentucky law)