Lowe v. Bowers (In Re Nicole Gas Prod., Ltd.)Lowe v. Bowers (In Re Nicole Gas Prod., Ltd.)
COUNSEL
ARGUED: Rick L. Ashton, ALLEN, KUEHNLE, STOVALL & NEUMAN, LLP, Columbus, Ohio, for Appellant Lowe. Robert C. Sanders, Upper Marlboro, Maryland, pro se. Daniel E. Shuey, VORYS, SATER, SEYMOUR AND PEASE LLP, Columbus, Ohio, for Appellee. ON BRIEF: Rick L. Ashton, James A. Coutinho, ALLEN, KUEHNLE, STOVALL & NEUMAN, LLP, Columbus, Ohio, for Appellant Lowe. Daniel E. Shuey, Brenda K. Bowers, VORYS, SATER, SEYMOUR AND PEASE LLP, Columbus, Ohio, for Appellee. Robert C. Sanders, Upper Marlboro, Maryland, S. Brewster Randall, II, Curtland H. Caffey, Columbus, Ohio, pro se.
MERRITT, Circuit Judge. This is a bankruptcy contempt dispute. Normally a party‘s conduct is contemptuous or it is not. But in this unusual case, whether the defendants are in contempt depends on statutory construction. The question presented is whether the Ohio RICO statute gives the sole shareholder of a bankrupt corporation standing to circumvent the automatic stay and individually sue a competitor. The issue is a complex intersection of three areas of law: the principle of the derivative suit in corporate law, the function of the automatic stay in bankruptcy, and the extent and construction of a specific state‘s RICO laws. In this appeal, we must consider how these precepts work together where the RICO statute offers no explicit guidance on how the claim should operate in the corporate and bankruptcy contexts. But for all the legal overlays here, ultimately the Appellants are in contempt or they are not.
The basic facts. Appellant Freddie Fulson1 owned a company called Nicole Gas that entered bankruptcy proceedings. During the bankruptcy, Fulson became dissatisfied with the Trustee‘s handling of claims that Nicole Gas held against its competitors. With the help of two lawyers, Appellants Robert Sanders, Esq. and James A. Lowe, Esq., Fulson sought relief in state court under the Ohio Corrupt Practices Act (Ohio civil RICO) against the competitors that allegedly put his business into bankruptcy. Because Fulson alleged damages incurred only by the debtor-business, the Trustee alleged that he had appropriated claims that the Trustee owned. By filing this action during the bankruptcy, the Trustee alleged that Fulson, Sanders, and Lowe violated the automatic stay. The Bankruptcy Court agreed and held the three in contempt and entered a judgment for roughly $91,000. The contempt finding and fee order are the subjects of the instant appeal.
Back to legal principles. Derivative liability is a cardinal tenet of corporate common law. When an artificial entity (a corporation) is injured, shareholders cannot necessarily redress that injury themselves. See
As to the bankruptcy gloss on this dispute, the Bankruptcy Code imposes a powerful stay on parties attempting to gain control over the property of the debtor‘s estate. See
The precise language of the Ohio Corrupt Practices Act is the complicating factor here. The Appellants claim that the wording of the statute converts a derivative shareholder action to an individual claim because it provides a private right of action for “any person directly or indirectly injured by conduct” violating the Act.
I. FACTUAL AND PROCEDURAL BACKGROUND
In the late 1990s, Freddie Fulson formed several corporate entities to produce and market natural gas in the Midwest. One of these entities is the debtor in the bankruptcy case, Nicole Gas Production, Ltd. The bottom line is that Fulson was the indirect equity owner of Nicole Gas and was calling the shots. To market and move the gas, Fulson‘s entities contracted with a larger company, Columbia Gas Transmission, and its affiliates. Eventually, relations between Columbia Gas and Fulson‘s entities soured and in the early 2000s a decade of litigation in state and federal court began. For his part, Fulson believed that Columbia Gas had conspired with other entities, including Nicole Gas‘s creditors, to put him out of business. Columbia Gas did this, he alleged, by mismeasuring the amount of natural gas produced by Fulson‘s wells, misappropriating gas that the entities delivered into Columbia Gas‘s transmission system, and improperly soliciting his creditors to force Nicole Gas into bankruptcy proceedings. This bankruptcy proceeding began in 2009 and has continued since then, but it is only the tip of the iceberg of the disputes between these entities.
In 2013, while Nicole Gas was in bankruptcy proceedings, the corporation‘s bankruptcy Trustee, Frederick Ransier,
The state court complaint recited the history between the companies and alleged that Columbia Gas had violated the Ohio Corrupt Practices Act,
There was one big problem with the complaint: Fulson couched his damages as directly resulting from his status as the sole shareholder of Nicole Gas’ parent corporation. He alleged no damages that related to him personally; he only pled that he had been harmed because of his indirect ownership of Nicole Gas. In multiple paragraphs of the complaint, Fulson‘s attorneys recited the damages to Fulson as sustained by the corporation he owned.2 Usually, when a corporation is damaged, shareholders seek relief through a derivative suit. Fulson, Sanders, and Lowe, however, believed that the language of the Corrupt Practices Act would allow them to circumvent both the automatic stay and the principle that the bankruptcy trustee has the sole right to assert a debtor‘s causes of actions. See Stevenson v. J.C. Bradford & Co. (In re Cannon), 277 F.3d 838, 853 (6th Cir. 2002); Bauer v. Commerce Union Bank, 859 F.2d 438, 441 (6th Cir. 1988).
Because Nicole Gas was in bankruptcy proceedings, filing a derivative suit (based on the Corrupt Practices Act or some other statute) would have meant
App‘x 462, 468 (6th Cir. 2011). Keep in mind that in a Chapter 7 bankruptcy, the role of the Trustee is to close the estate as expeditiously as possible. See
The Bankruptcy Court held a hearing and heard testimony from Fulson‘s two attorneys and Ransier. In a 56-page order (the “Contempt Order“), reported as In re Nicole Gas Prod., Ltd., 519 B.R. 723 (Bankr. S.D. Ohio 2014), the Court found that Fulson, Lowe, and Sanders (collectively, “the Fulson Parties“) had willfully violated the automatic stay,
The Bankruptcy Appellate Panel proceeded in two stages. In August 2016, the Panel certified a question of law to the Ohio Supreme Court. The Panel asked the Ohio Supreme Court whether an injured shareholder was entitled to individual standing under the Ohio Corrupt Practices Act. In October 2016, the Ohio Supreme Court declined to answer the certified question and dismissed the cause. In March of 2018, the Bankruptcy Appellate Panel issued a decision addressing the merits of the Fulson Parties’ claims. The Panel affirmed the Bankruptcy Court in all respects (the “Bankruptcy Appellate Panel Opinion“), reported as In re Nicole Gas Prod., Ltd., 581 B.R. 843 (B.A.P. 6th Cir. 2018), and concluded that an individual shareholder could not use the Ohio Corrupt Practices Act to convert a corporate law claim into an individual one. Thus, the claim was the property of the bankruptcy estate, and the Fulson Parties had violated the automatic stay by misappropriating that claim. The Fulson Parties appealed again to the Sixth Circuit. Ransier was eventually replaced by Brenda K. Bowers, the Successor Trustee of the bankruptcy estate of Nicole Gas Production, Ltd.
II. ANALYSIS
We have jurisdiction to review orders of the Bankruptcy Appellate Panel under
Filing a bankruptcy petition creates a bankruptcy estate, which includes “all legal or equitable interests of the debtor in property as of the commencement of the case,”
If a shareholder has sole right to assert a cause of action, the cause of action is not part of the bankruptcy estate. Whether a shareholder “has sole right to a cause of action is determined in accordance with state law.” Honigman v. Comerica Bank (In re Van Dresser Corp.), 128 F.3d 945, 947 (6th Cir. 1997) (citing Oakland Gin Co. v. Marlow (In re The Julien Co.), 44 F.3d 426, 429 (6th Cir. 1995). Under Van Dresser, whether “shared” causes of action belong to the bankruptcy estate comes down to two questions: (1) whether both the shareholder and the corporation-debtor could state claims for the damages; and, if so, (2) whether both the shareholder and corporation-debtor could both recover full damages. Van Dresser, 128 F.3d at 947–48. If either‘s recovery can “preclude[] the other from a subsequent recovery, then the claims are not truly independent.” Id. Absent being “truly independent,” the claims belong to the bankruptcy estate in toto.
A. The Ohio Corrupt Practices Act
The most important question raised by the Fulson Parties is substantively a question of Ohio state law. There is no case or statute explicitly suggesting that the Ohio Corrupt Practices Act does or does not confer standing upon an individual shareholder to seek redress for damages visited upon a corporation. But applying principles of construction announced by the Ohio Supreme Court, we can triangulate a clear answer. The relevant section of the Corrupt Practices Act reads:
(E) In a civil proceeding under division (A) of this section, any person directly or indirectly injured by conduct in violation of section 2923.32 of the Revised Code or a conspiracy to violate that section, other than a violator of that section or a conspirator to violate that section, in addition to relief under division (B) of this section, shall have a cause of action for triple the actual damages the person sustained. To recover triple damages, the plaintiff shall prove the violation or conspiracy to violate that section and actual damages by clear and convincing evidence. Damages under this division may include, but are not limited to, competitive injury and injury distinct from the injury inflicted by corrupt activity.
No. 17 Ins. Fund v. Philip Morris Inc., 23 F. Supp. 2d 771, 788 (N.D. Ohio 1998) (hereinafter Iron Workers I) (“In choosing to broaden standing to bring RICO actions under state law, the Ohio General Assembly decided to widen the right to bring an action.“). But it is not clear in this context that by using “indirectly injured” the statute allows shareholders to seek recovery under the Corrupt Practice Act for an entity‘s injury. Indeed, the conclusion that “indirect” injuries under the Corrupt Practices Act do include a shareholder‘s derivative injuries is as plausible as the conclusion that they do not. The statutory language is thus ambiguous. See Jacobson v. Kaforey, 75 N.E.3d 203 (Ohio 2016) (“Ambiguity, in the sense used in our opinions on statutory interpretation, means that a statutory opinion is capable of bearing more than one meaning.” (quotation marks omitted)); Hughes v. White, 388 F.Supp.2d 805, 818 (S.D. Ohio 2005) (“A statute is ambiguous ‘if the language is susceptible [to] more than one reasonable interpretation.‘” (quoting State v. Jordan, 733 N.E.2d 601, 605 (Ohio 2000))).
Because the language is ambiguous, we therefore look to additional principles of statutory interpretation. State v. Thomas, 70 N.E.3d 496, 498 (Ohio 2016). We must, for example, presume that the Ohio General Assembly passed the Corrupt Practices Act with knowledge of the existing common law of derivative suits. In Ohio, shareholders may not pursue claims based on injuries to a corporation in which the shareholder holds an interest; the proper path for remedy is the derivative suit. See generally
Where the defendant‘s wrongdoing has caused direct damage to corporate worth, the cause of action accrues to the corporation, not to the shareholders, even though in an economic sense real harm may well be sustained by the shareholders as a result of reduced earnings, diminution in the value of ownership, or accumulation of personal debt and liabilities from the company‘s financial decline. The personal loss and liability sustained by the shareholder is both duplicative and indirect to the corporation‘s right of action.... Although this is a case of first impression, we accept and follow the widely recognized rule that a plaintiff-shareholder does not have an independent cause of action
where there is
no showing that he has been injured in any capacity other than in common with all other shareholders as a consequence of the wrongful actions of a third party directed towards the corporation.
Id. at 429 (internal citations omitted) (emphasis added). In short: a shareholder cannot “enter the fray” for injuries sustained by a corporation that have lowered the value of his or her interest in that corporation. Interpreting Adair, the Bankruptcy Court below wrote that the Corrupt Practices Act may have removed “indirectness” as a bar to recovery but could not remove the bar erected by corporate law. 519 B.R. at 746. We agree.
The Fulson Parties, however, seize upon the language in Adair, and argue that the Ohio Supreme Court‘s use of the word “indirect” in the above-quoted passage means that the claim for indirect damages under the Act is viable. Because Adair says that a shareholder is “indirectly” injured when the corporation is injured, they contend, the Corrupt Practices Act‘s use of the word “indirect” affords an injured shareholder standing for civil RICO. The argument is that the Corrupt Practices Act gives the Fulson Parties an “out” with regard to complying with the rules of derivative shareholder suits.
This reading is strained to say the least. Why? Because the two documents are not talking about the same thing. Adair employed the word “indirect” to characterize shareholder claims against a corporate antagonist as secondary and duplicative in a pejorative sense. If shareholders of Apple could pursue claims against Samsung and bypass the derivative suit, it would render the corporate form superfluous. The very holding of Adair is that shareholders cannot strike out on their own to right wrongs visited on the corporation. Allowing indirectly injured parties to sue does not mean that the Act allows anyone to sue in all situations. The use of the word “indirect” in both Adair and the Act is a coincidence, not a confluence. The Fulson Parties’ attempts to cast the occurrence of the word “indirect” in two places as somehow deliberate or instructive cannot overcome the presumption that the Act did not intend to restructure corporate law absent a clear statement of the intent to do so. See, e.g., Mann v. Northgate Invs., L.L.C., 5 N.E.3d 594, 598–99 (Ohio 2014). The Bankruptcy Court correctly deemed the Fulson Parties’ argument “the sophist‘s game.” 519 B.R. at 746.
Ohio corporate law supplies further support for our conclusion. The analogous right to sue for injuries to Nicole Gas never belonged to Fulson in the first place. See Boedeker v. Rogers, 746 N.E.2d 625, 632–33 (Ohio Ct. App. 2000) (citing Adair for the proposition that “[w]here the basis of the action is a wrong to the corporation, redress must be sought in a derivative action“). As the Bankruptcy Appellate Panel noted, the state court complaint did not allege any injuries specific to Fulson outside of his role as owner. 581 B.R. at 851 (“Appellants have conceded at least three times – in the state court complaint, before the Bankruptcy Court, and in their initial appellate brief – that Fulson sought recovery which would make the Debtor whole.“) (emphasis in original). If, for instance, a shareholder of Corporation A slipped and fell on the floor of the premises of Corporation B (Corporation A‘s rival), then that shareholder would have an independent basis to pursue a claim against Corporation B. 519 B.R. at 739 (citing Honigman v. Comerica Bank (In re Van Dresser Corp.), 128 F.3d 945, 947 (6th Cir. 1997)). That is not the case here; there is no independent basis for liability.
Corporate law cabins the claims that a shareholder may raise when the
The Corrupt Practices Act says nothing about this process; allowing indirectly injured plaintiffs to sue is not the same as constructing an explicit statutory mechanism to bypass corporate law. Although the text of the Ohio RICO statute indicates that it grants broader standing than federal RICO, we see no clear indication that, by using the term “indirect,” the Ohio General Assembly supplanted an entire area of the common law. Instructively, shareholders cannot pursue claims individually against competitors under the federal RICO
statutes. See Warren v. Mfrs. Nat‘l Bank of Detroit, 759 F.2d 542 (6th Cir. 1985) (holding that a sole shareholder could not individually allege federal RICO claims that a bank put his steel company out of business); State v. Franklin, Nos. 24011 & 24012, 2011 WL 6920727, at *16 (Ohio Ct. App. Dec. 30, 2011) (noting that Ohio courts still look to federal RICO case law for guidance in applying Ohio RICO). There is no basis for expanding Ohio RICO to the extent the Fulson Parties assert.
The legislature is perfectly capable of adding a tool (broad civil RICO) to potential plaintiffs’ toolboxes without simultaneously throwing a different toolbox (corporate derivative suits) out the window. The Fulson Parties argue otherwise, and point to Clark v. Scarpelli, 744 N.E.2d 719, 726 (Ohio 2001), which held that “[i]t is presumed that the General Assembly is fully aware of any prior judicial interpretation of an existing statute when enacting an amendment.” In other words, the Fulson Parties say, the Ohio legislature is presumed to have known about derivative liability and the key words of that corpus; so its choice of words in expanding civil RICO is the final say. But the legislature‘s presumed omniscience does not mean that the enactors of the Corrupt Practices Act intended to destroy a whole area of corporate law without so much as mentioning it. As the Bankruptcy Appellate Panel correctly noted, “the Legislature can ‘mean what it said’ when it granted standing to those who suffer indirect injury without intending to turn on its head a century of law governing shareholder litigation. Shareholder derivative suits involve one discreet corner of corporate jurisprudence.” 581 B.R. at 850.
What little Ohio case law addresses these issues supports our conclusions.4 And although Ohio has not seen a case directly considering derivative civil RICO
trustee.5 The Michigan case also teaches that the Fulson Parties should have petitioned the Bankruptcy Court for guidance about their planned suit. Id. at *3 (“[T]he shareholder must make a demand on the trustee.“). Courts outside of our Circuit have held similarly when these problems have arisen.6
In sum: Fulson and his lawyers may have believed that the claims against Columbia Gas were worth more than the Trustee was settling them for. If they thought that Fulson had a shot at suing Columbia Gas via the Corrupt Practices Act, the proper course would have been to seek the Trustee‘s cooperation or abandonment, or to seek relief from the automatic stay. But, as the Bankruptcy Court noted, “filing the Complaint without providing Ransier notice and without requesting the Court grant relief from the automatic stay appears to have been a calculated risk by one who believed it more expedient to ask for forgiveness rather than for permission.” 519 B.R. at 736. It is clear that the Fulson Parties, by filing and continuing the state court lawsuit, “act[ed] to obtain possession of the property of the estate . . . or to exercise control over property of the estate.”
B. The Automatic Stay and The Fee Award
Because Nicole Gas was in bankruptcy, the Trustee was in charge of any claims the debtor-business might hold. Cf. Griffin v. Bonapfel (In re All Am. of Ashburn, Inc.), 805 F.2d 1515 (11th Cir. 1986) (similar dispute with shareholder suit). If Fulson was considering pursuing claims belonging to the corporation he owned, then upon the moment of the bankruptcy filing, those claims belonged to the corporation‘s bankruptcy estate. In re Van Dresser Corp.,
128 F.3d at 947 (“[I]f the debtor could have raised a state claim at the commencement of the bankruptcy case, then that claim is the exclusive property of the bankruptcy estate...“). The Fulson Parties argue that Fulson‘s individual Corrupt Practices Act claims were not the property of the bankruptcy estate because the claims had not accrued at the time of the petition. They further assert that it was only when the claims were valued at $250,000 by the Trustee that those claims accrued. This is nonsense. Fulson never had any independent claims
The automatic stay is one of the most important and powerful features of the bankruptcy system. Cf. Easley v. Pettibone Mich. Corp., 990 F.2d 905, 911 (6th Cir. 1993) (“[A]ctions taken in violation of the stay are invalid and voidable and shall be voided absent limited equitable circumstances.“). Violating the automatic stay constitutes civil contempt. See In re Crabtree, 767 F.2d 919, 1985 WL 13441 (6th Cir. 1985) (table). The Bankruptcy Court below did not simply conclude that the Fulson Parties had fumbled their way into violating the automatic stay — it deemed their actions willful and called their credibility into question. 519 B.R. at 736. Further, as highlighted by the Bankruptcy Appellate Panel, if Fulson had secured a judgment on his Corrupt Practices Act claims in state court, the bankruptcy estate would have been prejudiced. 581 B.R. at 853. The Bankruptcy Court made detailed findings in this regard, and it acted diligently and thoughtfully to protect its own procedures and the Bankruptcy Code.
With regard to the Fee Order, the Fulson Parties argue that Baker Botts, L.L.P. v. ASARCO, L.L.C., 135 S. Ct. 2158 (2015), precludes the Bankruptcy Court from awarding fees to the trustee. The Baker Botts case simply held that, “Because § 330(a)(1) does not explicitly override the American Rule with respect to fee-defense litigation, it does not permit bankruptcy courts to award compensation for such litigation.” Id. at 2169. But, as recited by the Bankruptcy Appellate Panel, Section 330, which governs compensation for certain professionals, is irrelevant here. 581 B.R. at 854–55. The Bankruptcy Court here relied on
Whatever limits apply to the Bankruptcy Court‘s contempt powers, see generally In re John Richards Homes Bldg. Co., 552 F. App‘x 401, 414 (6th Cir. 2013) (“Those powers are circumscribed and have most often been limited to compensatory punitive awards of attorney‘s fees after findings of bad faith or contempt.“), they do not apply on these facts. See Liberis v. Craig, 845 F.2d 326, 1988 WL 37450 at *8 (6th Cir. 1988) (table) (“In the instant case, there is no question that the bankruptcy court had the authority to award attorneys’ fees against the plaintiffs to compensate the trustee for bringing plaintiffs’ contempt to the court‘s attention.“). In an opinion written with “painstaking detail,” 581 B.R. at 855, the Bankruptcy Court found that Fulson, Sanders, and Lowe were aware of the automatic stay, and had intentionally taken actions that violated it, regardless of their good faith or lack thereof. 519 B.R. at 729–30, 754–55. A contempt finding and accompanying sanctions were appropriate.
III. CONCLUSION
Assuming best intentions, Fulson may have believed he personally had a viable claim to assert against Columbia Gas. But by the time he filed the Corrupt Practices Act complaint, it was far too late to make such claims without seeking relief from the stay or the trustee‘s cooperation. Fulson, Sanders, and Lowe were all aware of the automatic stay, and took action that, we agree, violated it. One of the unfortunate results in this case is that it is unclear precisely how much Fulson‘s claims against Columbia Gas were worth. The Trustee tried to settle them for $250,000, but Fulson obviously believed them to be worth millions more. If Fulson or his attorneys had communicated their theory to the Trustee, perhaps the Ohio courts could have confronted head-on the question of indirect pursuit of civil RICO claims under Ohio law. And as a policy matter, there may be situations in which shareholders possess viable civil RICO claims against a company that destroyed the shareholder‘s business. But instead, we are left to assess the question collaterally in the contempt context, with sanctions against the Fulson Parties riding on our interpretation. These legal ambiguities could have been addressed with a simple collaborative phone call. Instead, the Bankruptcy Court was forced to expend valuable judicial resources assessing whether the conduct was in fact contemptuous.
This is a case where the Bankruptcy Court did its job and did it well. These issues have been extensively briefed thrice, once at the Bankruptcy Court, once at the Bankruptcy Appellate Panel, and again here in the Circuit. The one complex issue in this case — whether the Ohio Corrupt Practices Act allows shareholders to pursue claims individually — was convincingly handled by the Bankruptcy Court; the Bankruptcy Appellate Panel agreed and so do we. We conclude that the Corrupt Practices Act did not grant Fulson any independent cause of action to pursue his derivative damages without violating the automatic stay. And Baker Botts does not apply to the Bankruptcy Court‘s fee award here, which was a contempt sanction. Fulson and his attorneys should have sought either the trustee‘s cooperation or relief from the automatic stay in order to file the complaint. For all of the foregoing reasons, and for the reasons articulated by the Bankruptcy Court and the Bankruptcy Appellate Panel below, we AFFIRM.