Sears v. Sears (In re AFY, Inc.)Sears v. Sears (In re AFY, Inc.)
Plaintiffs, Robert A. Sears, individually and as the testamentary trustee under the will of Redmond Sears, deceased, and Kor-ley B. Sears, appeal from the bankruptcy court’s
BACKGROUND
This adversary proceeding is the latest in a series of bankruptcy cases and adversary proceedings in those cases. The individuals in these cases are family members. Rhett, Ron, Robert and Dan Sears are Redmond Sears’s sons. Korley Sears is Robert’s son. Dane is Ron’s son. Redmond Sears owned and operated AFY, Inc., also known as Ainsworth Feed Yards Company, Inc. He transferred all of his interest in AFY to Rhett, Ron, Robert and Dan Sears. On approximately June 20, 2007, AFY and Korley bought back all of Rhett, Ron and Dan’s interest in the company in exchange for promissory notes in accordance with their shares. Robert and Kor-ley Seal’s then became the only two shareholders of AFY. The following are the pertinent histories of the various cases and adversary proceedings.
In re AFY, Inc. (Case No. 10-40875)
On March 25, 2010, AFY filed a Chapter 11 petition. Rhett, Ron and Dane filed proofs of claims in the case and also filed a motion to appoint a trustee. Robert and Korley Sears objected to the motion. The
The case was later converted to a chapter 7 case by the trustee. Robert and Korley objected to Rhett, Ron and Dane’s proofs of claim because they alleged: (1) the proofs of claim were unenforceable against AFY or its property, (2) AFY did not sign a promissory note and was not obligated to them under the stock sale agreement, (3) the claimants materially breached their implied duties of good faith and fair dealing, and (4) the claimants materially breached the agreement by opposing the efforts of AFY’s to effect a chapter 11 plan and by collaborating with the trustee. The bankruptcy court allowed the proofs of claim. Robert and Korley appealed and we affirmed. Sears v. Sears (In re AFY, Inc),
On January 31, 2014, the chapter 7 trustee filed a motion to approve interim payments to Rhett, Ron and Dane and other unsecured creditors, of $3 million of the $4.5 million held in AFY’s estate. The bankruptcy court granted the motion over Robert and Korley’s objection but the court delayed the payments to creditors until resolution of Robert and Korley’s petition for a writ of certiorari to the Supreme Court. The order was not appealed. The Supreme Court denied the petition for writ of certiorari and the trustee made the authorized distribution to creditors. After selling all of the estate property, the trustee made final distributions to creditors. On August 6, 2015, the trustee filled a final account and certification that the estate had been fully administered. The bankruptcy court closed the case on Aril 26, 2016,
In re Korley Sears (Case No. 10-40277)
On February 2, 2010, Korley Sears filed a Chapter 11 petition. His case is still pending. Rhett, Ron and Dane filed proof of claims. Korley objected to the claims based on the same grounds as those asserted in the AFY bankruptcy, but in addition argued that the stock sale agreement was an executory contract that has not been rejected. On August 29, 2014, the bankruptcy court allowed the claims.
Korley appealed this order to the district court (Case No. 14CV3206). On August 25, 2015, the district court affirmed the bankruptcy court’s order allowing the claims. In re Sears,
Rhett R. Sears, et al., v. Korley Sears (A.P. 12-04034)
On May 9, 2012, Rhett, Ron and Dane Sears filed an adversary proceeding against Korley Sears objecting to Korley’s discharge pursuant to 11 U.S.C. § 727(a)(2) and (a)(4). A trial was held on September 25, 2014. On September 26, 2014, the bankruptcy court entered judgment against Korley denying him a discharge. The debtor appealed this order to the district court (Case No. 14CV3219). On September 21, 2015, the district court affirmed the bankruptcy court’s order. Sears v. Sears,
On February 2, 2010, Robert Sears also filed a chapter 11 case. His case is still pending.
Robert A. Sears, et al. v. Rhett R. Sears, et al. (This Litigation)
On October 17, 2014, Robert A. Sears, Robert A. Sears as a trustee for the will of Redmond Sears and Korley B. Sears filed a complaint against Rhett R. Sears, Rhett R. Sears revocable trust, Ron H. Sears, Ronald H. Sears Trust and Dane R. Sears, in the district court of Madison County, Nebraska (Case No.l4-389J). The plaintiffs alleged the following claims in their complaint: breach of contract, breach of fiduciary duty, restitution, conspiracy and tortuous interference, and abuse of process. The facts alleged to support the causes of action in the complaint are all related to the defendants’ alleged wrongful conduct during the AFY bankruptcy case including AFY’s liability to the defendants in the stock sale agreement, the defendants’ participation in the AFY bankruptcy, the defendants receiving distribution, and the alleged effort of the defendants in making AFY’s reorganization impossible. We note that the defendant’s actions in the bankruptcy case were largely approved by the bankruptcy court and the bankruptcy court’s orders are final.
On November 24, 2014, the defendants removed the state court proceeding to the bankruptcy court in the bankruptcy cases of AFY, Inc. (Case No. 10^10875), Robert Sears (Case No. 10-40275), and Korley Sears (Case No. 10-40277) as adversary proceedings 14-4060, 14-4061, and 14-4062. On December 1, 2014, the defendants filed, in each case, (1) a motion to dismiss the complaint for failure to state claims upon which relief may be granted, (2) a motion for sanctions for liability for excessive costs of counsel, and (3) a motion to consolidate cases 14-4060, 14-4061 and 14-4062.
On December 9, 2014, the plaintiffs filed a “Statement of Intent,” asking the court to remand the case to state district court because the proceedings were not core and stating that they did not consent to the entry of final order or judgment by the bankruptcy court.
On December 11, 2014, the bánkruptcy court sua sponte, pursuant to the permissive abstention doctrine under 28 U.S.C § 1334(c)(1) and the equitable remand doctrine under 28 U.S.C. § 1452(b), ordered remand to the state court. Sears v. Sears, (In re Robert Sears), No. BRIO-40275,
On September 29, 2015, the district court held that the bankruptcy court may only reach the issue of abstention sua sponte if the parties had an advance notice that the court is considering abstention and had an opportunity to be heard. The district court ruled that the bankruptcy court abused its discretion when it remanded the case to state court because it did not afford the defendants an opportunity to be heard. Robert Sears, et al. v. Rhett Sears, et al. (In re Sears), No. 4:14CV3247,
On October 1, 2015, the plaintiffs filed (1) a motion to remand the action to state court under 28 U.S.C. § 145-2(b)(4), (2) a motion to abstain from hearing the case pursuant to 28 U.S.C. § 1334(c)(1), and (3) a motion to consolidate the proceedings. The plaintiffs argued that the case was not
On October 22, 2015, the defendants filed a motion asking the bankruptcy court to stay the proceeding because the resolution of a separate case currently on appeal in the Eighth Circuit Court. of Appeals (Case No. 15-3352)
On November 10, 2015, the court entered an order substantively consolidating adversary proceedings 14-4060, 14-4061 and 14-4062 into a single adversary proceeding under number 14-4060. The bankruptcy court set a hearing date on the motion for remand, the motion to abstain filed by the plaintiffs, the objections filed by the defendants, the motion to stay filed by the defendants and the objection filed by the plaintiffs.
On December 3, 2015, the bankruptcy court entered an order denying the plaintiffs’ motion for abstention and to remand the action to state court. The bankruptcy court made a determination that there was “arising in” jurisdiction because the causes of actions arose in a case under Title 11, The court also denied the defendants’ motion to stay the proceeding. That order was not appealed.
The parties then briefed the motion to dismiss filed by the defendants. The defendants argued that the plaintiffs’ complaint should be dismissed because: (1) all of the claims are barred by res judicata because they have all been previously litigated in AFY’s and Korley’s bankruptcy cases, (2) almost all of the claims were barred by the applicable statute of limitation, and (3) all of the claims were barred by the shareholder standing rule. The plaintiffs argued that the court should not grant the motion to dismiss as res judicata does not apply because: (1) the plaintiffs did not bring any claim for damages against the defendants in AFY or Korley’s bankruptcy cases, (2) AFY’s claim order was an in rem order which did not bind anyone, (3) AFY’s claim order doesn’t have issue preclusive effect, because there are different estates and different parties, and (4) the plaintiffs did not have a full and fair opportunity to litigate the case in bankruptcy court.
On March 7, 2016, the bankruptcy court granted the defendants’ motion to dismiss the complaint. The court held that the plaintiffs’ breach of contract claims are legal conclusions based on the assertion that AFY did not owe money to the defendants and the breach was based on the filing of “bogus” proofs of claim in the AFY case. Sears v. Sears, (In re AFY. Inc.), No. BK10-40875,
The court also held that the plaintiffs’ claim that the defendants owed fiduciary duties to AFY and to its management and should not have filed proof of claim against AFY and should have supported AFY’s effort to reorganize, were “unsupported rhetoric without any statements of fact to support a cause of action,” and was also similar to the breach of contract claim. Id, at 6 The court held that even if “there was a duty owed, it would have been to AFY and not to the plaintiffs. Under the shareholder standing rule, if harm has been directed toward a corporation, then only the corporation itself has standing to asset a claim.” Id. at 8). The court held therefore this cause of action was barred by the shareholder standing rule.
The court held that the rest of the causes of actions for restitution, conspiracy and tortious interference and abuse of process were all similarly barred because they are all based on the same set of facts and incorrect premise that AFY is not indebted to the defendants. On March 18, 2016, the plaintiffs timely filed a notice of appeal.
Standard of Review
We review the bankruptcy court’s grant of a motion to dismiss de novo. In re Farmland Indus., Inc.,
Jurisdiction and Authority
The plaintiffs concede that the bankruptcy court had jurisdiction over the proceeding but challenge its authority to dismiss their complaint.
In determining whether a bankruptcy court has the authority to enter a final order, the first question is whether Congress has granted the court the statutory authority to do so by designating the matter a core proceeding or a non-core proceeding. Badami v. Sears (In re AFY, Inc.),
Proceedings in a bankruptcy case are divided into two categories, core proceedings and non-core, related proceedings. Specialty Mills, Inc. v. Citizens State Bank,
Non-core, related proceedings are those which do not invoke a substantive right created by bankruptcy law and could exist outside of a bankruptcy case, although they may be related to a bankruptcy case. Id. If a case is not a core proceeding, the bankruptcy judge may still hear the proceeding, but may not deter
a. Jurisdiction Over Proceedings Arising in a Case Under Title 11
Congress granted district courts original but not exclusive jurisdiction of all civil proceedings arising in a case under title 11. 28 U.S.C. § 1334(b). Section 1334(b) refers to proceedings “generally intended to cover issue that would have no existence outside of a bankruptcy, but nonetheless are not based on any right expressly created by Title 11.” In re Williams,
The plaintiffs’ complaint listed alleged wrongful conducts by the defendants during the AFY bankruptcy case including the filing and validity of the defendants’ AFY proofs of claims, the appointment of the Chapter 11 trustee, the defendants’ request for conversion of the AFY bankruptcy to Chapter 7, and requesting and receiving distributions from the AFY estate. Though the claims appear to be state causes of action and not based on any right expressly created by Title 11, these are all claims that would have no existence outside of a bankruptcy case. All of the purported actions by the defendants occurred during and as part of the bankruptcy case and resulted in orders by the bankruptcy court. The plaintiffs’ complaint seeks to revisit those orders. Therefore, the bankruptcy court was correct in concluding it had “arising in” jurisdiction.
b. Jurisdiction Over Proceedings Related To a Case Under Title 11
Congress also granted district courts original but not exclusive jurisdiction of all civil proceedings related to cases under title 11. 28 U.S.C. § 1334(b). “Related to” proceedings are “civil proceedings which do not invoke a substantive right created by bankruptcy but nonetheless fall within the jurisdiction of the bankruptcy court because they share a nexus with the bankruptcy case and will have some “conceivable effect” on the administration of the debtor’s estate.” In re Williams,
Even if the bankruptcy court did not have “arising in” jurisdiction, it clearly had “related to” jurisdiction. Although the plaintiffs argue that this case does not
Additionally, the plaintiffs’ claims are collateral attack on federal court orders entered in the AFY bankruptcy. The plaintiffs’ complaint asked the state court to undo the administration of the AFY bankruptcy case and effectively redistribute the AFY estate. The outcome of the plaintiffs’ case would have an adverse effect on the AFY estate already administered. The bankruptcy court had, at minimum, “related to” jurisdiction over the plaintiffs’ complaint.
c.Consent of the Parties
In a “related to” proceeding, when “the bankruptcy court hears such a proceeding, the court is to submit proposed findings of fact and conclusions of law to the district court.” Id., 28 U.S.C. § 157(c)(1). “[A]ny final order or judgment shall be entered by the district judge after considering the bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected.” Id.
However, the parties may knowingly and voluntarily consent to adjudication by a bankruptcy court. 28 U.S.C. § 157(c)(2); Wellness Int’l Network, Ltd. V. Sharif, — U.S. -,
The plaintiffs have consented to the authority of the bankruptcy court because the plaintiffs have waived the challenge by failing to object. Even now the plaintiffs had the opportunity to obtain a de novo review of the bankruptcy court’s decision by the district court by appealing to the district court. Instead, the plaintiffs appealed to this court.
d. Jury Trial
Plaintiffs argue that the bankruptcy court could not enter an order dismissing their complaint because they have asserted a right to jury trial and they did not consent to the bankruptcy court conducting the jury trial pursuant to 28 U.S.C. § 157(e). The defendant’s right to á jury trial has no bearing on the bankruptcy court’s authority to enter a final order on a motion to dismiss. It is the very nature of dismissal that results in the loss of any plaintiffs’ right to a jury trial, in any court.
e. The Bankruptcy Court’s Continu-iny Jurisdiction
Plaintiffs argue that the bankruptcy court does not have jurisdiction in this case after the AFY’s estate has been administered and the case closed. Closing a case is mainly an administrative function with some substantive consequences. In and of itself, it does not deprive the bankruptcy court of jurisdiction over the case. It is well established that bankruptcy courts retain jurisdiction after a case has been dismissed or closed to interpret or enforce previously entered orders. In re Williams,
Motion to Dismiss
The bankruptcy court granted the defendants’ motion to dismiss the plaintiffs’ complaint pursuant Federal Rule of Civil Procedure 12(b)(6), made applicable in a bankruptcy case by Federal Rule of Bankruptcy Procedure 7012(b). The court held the claims were barred by res judicata because the claims were already resolved in the AFY bankruptcy and in any event were barred by the shareholder standing rule.
A. Res Judicata under Rule 12
Plaintiffs argue that claim preclusion is not a proper basis for dismissal under Rule 12(b)(6). We disagree. This circuit has recognized that a defense of res judicata may be raised in a motion to dismiss when the identity of the two ac-tioris can be determined from the face of the petition. See Potamitis v. Pittsburgh Plate Glass Co.,
B. Res Judicata
The binding effect of a former adjudication is often generically referred to as res judicata. W.A. Lang Co. v. Anderberg-Lund Printing Co. (In re Anderberg-Lund Printing Co.)
While the bankruptcy court relied on claim preclusion in dismissing the plaintiffs’ complaint, we believe issue preclusion is the more appropriate doctrine. The federal common law of issue preclusion applies because the bankruptcy court considered the preclusive effect of its previous orders. Covert v. LVNV Funding, LLC,
The plaintiffs are seeking to reliti-gate issues that the bankruptcy court had already determined, explicitly or implicitly, in the AFY bankruptcy case including AFY’s liability to the defendants in the stock sale agreement, the defendants’ participation in the AFY bankruptcy case, its distribution, and the alleged effort of defendants in making AFY’s reorganization impossible. Plaintiffs are barred from challenging the AFY bankruptcy orders. See Katchen v. Landy,
The plaintiffs argue that they didn’t have a full and fair opportunity to litigate the case in the AFY bankruptcy case because the Eighth Circuit held they did not have a standing to appeal the AFY order. The bankruptcy court was correct in finding that the only reason plaintiffs did not have a standing was because they did not hire an attorney to represent AFY to appeal that decision. In fact, the plaintiffs had numerous opportunities and took advantage of those opportunities to object to these issues and appeal those orders in the AFY and in Korley’s bankruptcy.
The plaintiffs’ argument that the parties in the AFY case and this action are different is unpersuasive. First of all, this is not entirely true. Much of the litigation in the bankruptcy court resulted from motions made by the defendants and objected to by the plaintiffs. In addition, there is a privity among the parties. A privy is “a person so identified in interest with another that he represents the same legal right.” Mid-City Bank v. Skyline Woods HOA, et al., (In re Skyline Woods Country Club, LLC),
C. Shareholder Standing Rule
Plaintiffs argue that the shareholder standing rule is inapplicable in this case because they are asserting injury to current shareholders by former shareholders and that no claim or right of AFY is
“A corporation is an entity separate and distinct from its stockholders and its separate entity will generally be recognized.” Bankers Life & Cas. Co. v. Kirtley,
The shareholder rule does not apply when the alleged injury by the shareholder is distinct from that suffered by the corporation or other shareholders. Audio Odyseey, Ltd. v. Brenton First Nat. Bank,
Conclusion
We find no error in the bankruptcy court’s legal conclusions or its decision. Accordingly, we affirm.
Notes
. The Honorable Thomas L. Saladino, United States Bankruptcy Judge for the District of Nebraska.
. The Eighth Circuit ultimately affirmed the bankruptcy court's allowance of these claims, Supra.