E. Rеbecca Case, bankruptcy trustee (Trustee) for Tri-River Trading, L.L.C. (Tri-River), appeals the decision of the Bankruptcy Appellate Panel (BAP) reversing the bankruptcy court and granting declaratory judgment in favor of Jody De-Bold (DeBold). For the reasons that follow, we affirm the decision of the BAP.
I. BACKGROUND
This case involves the allocation of settlement proceeds from a lawsuit between former partners of a failed joint venture. We briefly summarize the facts previously detailed in two published opinions.
De-Bold v. Case (In re Tri-River Trading, LLC),
In March 1999, Phil Thornton (Thornton), general manager of Jersey County Grain Company (Jersey), approаched De-Bold about launching a new barge freight trading company. Thornton prepared pro formas projecting the financial success of the proposed joint venture and assured DeBold that Jersey would use Tri-River exclusively for all of Jersey’s freight trade. In April 1999, DeBold left her lucrative freight trader position and joined Jersey to found Tri-River. DeBold and Jersey were Tri-River’s only members and each invested $100,000 to capitalize Tri-River. Jersey arranged for a $1,000,000 unsecured line of credit to enable Tri-River to trade freight with several transportation companies. Article 4.2 of Tri-River’s operаting agreement designated DeBold as the manager of Tri-River, and Article 4.1 listed DeBold’s duties and authority, recognizing DeBold had full responsibility and exclusive and complete management discretion.
In Tri-River’s first months of operation, under DeBold’s management and with Jersey using Tri-River for all its freight trade, Tri-River turned a slight prоfit in a less than optimal market. During TriRiver’s first year in business, Thornton allegedly began making sexual advances toward DeBold. DeBold rebuffed Thornton’s advances and reported Thornton’s behavior to Hugh Moore Jr. (Moore), president of Jersey’s board of directors. Soon
DeBold and Tri-River filed a six-count complaint in Missouri state court (state court litigation) asserting claims agаinst Jersey, Thornton, and Moore for breach of contract, breach of oral contract, tortious interference with business relationships, and breach of fiduciary duty. DeBold asserted personal claims against Thornton and Jersey for fraudulent and negligent misrepresentation. On February 12, 2003, the day triаl was set to begin, the parties settled the lawsuit for $800,000. The settlement agreement did not specify an allocation of the settlement funds between DeBold and Tri-River. DeBold allocated seven-eighths of the gross settlement ($700,000) to herself and one-eighth ($100,-000) to Tri-River. According to DeBold, Jersey agreed to this аllocation during settlement negotiations, but later declined to acknowledge the allocation in the settlement agreement.
A. Proceedings Before the Bankruptcy Court
On February 27, 2003, fifteen days after the state court litigation settled, creditors filed an involuntary bankruptcy petition against Tri-River. DeBold signed TriRiver’s bankruptcy schedules and listed $67,000 1 in net settlement proceeds as an asset of Tri-River’s bankruptcy estate. After the Trustee refused to agree to the allocation, DeBold filed a declaratory judgment action in bankruptcy court, claiming entitlement to $700,000 of the settlement proceeds. The Trustee asserts the entire settlеment amount belongs to the bankruptcy estate.
To determine the proper allocation of the settlement proceeds, the bankruptcy court conducted a bench trial to ascertain which party would likely have prevailed in the state court litigation had the case proceeded to trial. The Trustee, DeBold, and David Corwin (Corwin), who represented DeBold and Tri-River in the state court litigation, participated in the bench trial. DeBold testified she agreed to settle the case for $800,000 to be split seven-eighths for DeBold, and one-eighth for Tri-River, based on information DeBold received during discovery of the state court litigation regarding the strength of her claims, the weakness of Tri-River’s claims, and De-Bold’s damages. DeBold testified that one indication of the strength of her claims was that Jersey’s insurer paid $200,000 of the settlement based on DeBold’s sexual harassment allegations. DeBold further testified her damages included her (1) initial capital investment of $100,000; (2) “compromise[ ] in the way of salary”; (3) “lack of being able to get a bonus from Tri-River”; and (4) “lack of a future salary.” DeBold presented portions of the deposition testimony of damages expert Thomas Hoops (Hooрs), taken during the state court litigation. The bankruptcy court did not allow DeBold to testify regarding advice Corwin had given DeBold during the state court litigation, ruling De-Bold’s testimony would not constitute the
After Corwin took the stand, the bankruptcy court ruled an attorney-client privilege between Tri-River and Corwin precluded Corwin from testifying about TriRiver’s claims. Accordingly, Corwin’s testimony was limited to the advice he had given DeBold about DeBold’s personal claims, including: (1) DeBold’s misrepresentation claims were strong because clear evidence of Thornton’s sexual misconduct provided jury appeal and Thornton’s letter, making promises and representations to DeBold, offered proof Thornton induced DeBold to leave her former employer; (2) DeBold’s contract claims probably could not be maintained under Article 11.3 of Tri-River’s operating agreement; (3) the breach of fiduciary duty claim was barrеd by Missouri law and it was Corwin’s intention not to submit the claim to the jury; and (4) Corwin never intended to file a sexual harassment claim, but would use the evidence of Thornton’s sexual misconduct, which “drove everything,” including Thornton’s intent to defraud and deceive DeBold.
The Trustee offered a series of exhibits and introduced portions of the deposition testimonies of Hoops and DeBold, but did not present any witnesses. In closing argument, the Trustee asked the bankruptcy court to allocate $56,314.49 to DeBold and $472,517.89 to Tri-River.
The bankruptcy court concluded TriRiver and DeBold had proven liability on the breach of contract, tortious interference, and breach of fiduciary duty claims. The bankruptcy court next concluded De-Bold’s misrepresentation claims failed because DeBold had not proven Thornton’s initial proposal was made for the purpose of engaging DeBold in a personal relationship and DeBold left her former employer to pursue her own company.
On the issue of damages, the bankruptcy court determined Tri-River had proven damages in excess of $800,000, while De-Bold had only shown speculative damages. The bankruptcy court reasoned, because DeBold had no valid expectation of future employment in the gradually downward turning barge freight trade industry, De-Bold failed to prove Thornton’s actions caused DeBold to lose her career. The bankruptcy court further reasoned DeBold had been well compensated while working for Tri-River, so equity required payment tо Tri-River’s creditors before DeBold was entitled to a distribution of profits. Based on these findings, the bankruptcy court denied DeBold’s declaratory judgment and awarded Tri-River all the net settlement proceeds.
B. Proceedings Before the BAP
DeBold appealed the decision to the BAP, arguing the bankruptcy court (1) ignored the valid, рrepetition allocation of settlement proceeds; (2) erred in its conclusions regarding the viability of the state court claims; and (3) erred in holding the attorney-client privilege barred portions of Corwin’s testimony. The BAP reversed the bankruptcy court, holding (1) DeBold did not have the authority under Missouri law,
see
Mo.Rev.Stat. § 347.088.3, or under the terms of Article 4.1 of Tri-River’s operating agreement, unilaterally to allocate the settlement proceeds between herself and Tri-River without the consent of TriRiver’s other members; (2) the bankruptcy court erred in holding DeBold could not recover on her misrepresentatiоn claims against Jersey and Thornton; (3) the bankruptcy court erred in holding De-Bold’s damages were speculative; (4) the breach of contract and fiduciary duty claims failed because Tri-River’s members were immunized from liability against such claims under Missouri law,
see
Mo.Rev.
II. DISCUSSION
Like the BAP, we review for clear error the bankruptcy court’s factual findings, and we review de novo the bankruptcy court’s legal conclusions, as well as its conclusions involving mixed questions of law and fact.
Darst-Webbe Tenant Ass’n Bd. v. St. Louis Housing Auth.,
The Trustee argues the BAP exceeded its scope of review by making findings of fact not found by the bankruptcy court and erred in its conclusions of law regarding DeBold’s entitlement to the settlеment proceeds. We disagree. After conducting our own review of the bankruptcy court’s decision, we, like the BAP, are left with the definite and firm conviction the bankruptcy court’s conclusions were in error. Id.
The bankruptcy court began its analysis on the faulty premise the only issue to be determined wаs the manner in which the net settlement proceeds should be apportioned, thereby assuming rather than determining, two threshold legal questions. First, the Trustee, not DeBold, had the initial burden of showing the estate had an ownership interest in the property. See 11 U.S.C. § 541(a)(1). As the BAP reasoned, Tri-River was a plaintiff in the state cоurt litigation, named on the settlement checks, and required to endorse those checks, therefore Tri-River met its burden of showing an ownership interest, shifting the burden to DeBold to prove seven-eighths of the settlement proceeds belonged to her. See id. § 541(d).
The second threshold question ignored by the bankruptcy сourt was whether, under Missouri law and Tri-River’s operating agreement, DeBold had unilateral authority to allocate the settlement proceeds. The BAP correctly concluded DeBold did not have such authority. See Mo.Rev.Stat. § 347.088.3 (“Except as otherwise provided in the operating agreement, evеry member or manager, if any, shall account to the limited liability company and hold as trustee for it any profit or benefit derived by such person without the informed consent of more than one-half by number of disinterested managers or members.”). Article 4.1 of Tri-River’s operating agreement did not give DeBold such аuthority, therefore DeBold’s prepetition allocation was invalid.
We also find the bankruptcy court erred regarding the viability of Tri-River’s and DeBold’s claims. The bankruptcy court came to the erroneous conclusion DeBold’s misrepresentation claims failed because DeBold had not proven that Thornton’s true intention in forming TriRiver was to establish a personal relationship with DeBold. As the BAP correctly
Next, regarding DeBold’s damages, the bankruptcy court erred in misconstruing DeBold’s claimed damages. Not only did DeBold claim loss of future wages, but she also claimed loss of her initial $100,000 investment, and loss of income differential for the years she managed Tri-River. As the BAP noted, the bankruptcy court made the erroneous legal conjeсture DeBold had been well compensated while working for Tri-River, and therefore equity demanded creditors be paid before DeBold received damages. Under Missouri law, neither managers nor members of a limited liability company are liable for the company’s debts simply by virtue of their membership. See Mo.Rev. Stat. § 347.057. The bankruptcy court erred in its legal conclusions regarding the allocation of the settlement proceeds, erroneously focusing instead on the rights of Tri-River’s creditors.
Finally, the bankruptcy court erred regarding the viability of Tri-River’s breach of contract and fiduciary duty claims. The bankruptcy court concluded that although DeBold had proven liability on the contract claims, she had not proven damages. However, DeBold was not a party to the contracts, and therefore had no contractual claims against Jersey. The bankruptcy court further failed to consider defenses to Tri-River’s breach of contract and fiduciary duty claims, and accordingly failed to recognize Tri-River could not have prevailed on those claims, because Jersey, as a member of Tri-River, was immunized from liability against such claims under Missouri’s business judgment rule, see Mo.Rev.Stat. § 347.090.1, .2 (stating an authorized person is entitled to rely on the opinion of legal counsel in discharging his duties and is not liable (without contrary knowledge) for action taken in reliance on such opinion), and under Article 11.3 of Tri-River’s operating agreement.
Although the Trustee argues the BAP should have afforded deference to the factual findings of the bankruptcy court,
see Anderson v. City of Bessemer City. N.C.,
The BAP analyzed the legal issues and propеrly applied the law. The BAP authored a comprehensive, well reasoned opinion, and thoroughly set out the facts and applicable legal standards. We find further elaboration unnecessary.
III. CONCLUSION
We affirm the judgment of the BAP.
Notes
. Tri-River and DeBold incurred $271,169.62 in attorney fees and costs leaving net settlement proceeds of $528,830.38. One-eighth of that amount is approximately $67,000.
. These amounts reflected reductions for attorney fees and reimbursement to Tri-River for pre-litigation expenses.