Sergent v. McKinstry
7:11-cv-00129 | E.D. Ky. | Mar 21, 2012
Case: 7:11-cv-00129-ART Doc #: 32 Filed: 03/21/12 Page: 1 of 60 - Page ID#: 447
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
SOUTHERN DIVISION
PIKEVILLE
HAROLD E. SERGENT, )
)
Appellant, ) Civil No. 11-129-ART
)
v. )
)
TAFT A. MCKINSTRY, )
as Trustee of the BD Unsecured Creditors )
Trust, et al., )
)
Appellees. )
)
)
TAFT A. MCKINSTRY, )
as Trustee of the BD Unsecured Creditors )
Trust, )
)
Petitioner, ) Civil No. 11-133-ART
)
v. )
) MEMORANDUM OPINION
HAROLD E. SERGENT, et al., ) & ORDER
)
Respondents. )
)
*** *** *** ***
Location matters. When King Leonidas and the Greeks chose to make their stand at
Thermopylae, the narrow mountain pass “largely neutralize[d]” the Persians’ strong cavalry
and enabled the Greek force to inflict massive casualties on a Persian army more than twenty
times its size. See Ben Dupré, Where History Was Made: Landmarks of World History from
Thermopylae to Ground Zero 11–12 (2009). During the American Revolutionary War, the
militia fought from behind hills and trees rather than in the open field, employing guerilla
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tactics to turn the strength of the British line formations into a weakness. See generally Mark
V. Kwasny, Washington’s Partisan War, 1775–1783, chs. 4–5 (1998). By choosing their
battlefields, these armies shaped the rules of engagement.
The same is often true in litigation. Although Sergent’s appeal and the Plaintiff’s
motion to withdraw raise complex and novel issues, they distill to a single question: where
should this litigation take place? The Bankruptcy Court should not have abstained from
hearing the claims against Sergent, and the Plaintiff is entitled to a jury trial on her claims.
Yet because the motion to withdraw is premature, the parties must stay in Bankruptcy Court
until the case is trial-ready.
BACKGROUND
A. The Underlying Bankruptcy
Any coal mining case that does not mention black diamonds “would be a much duller
affair” than Hamlet without the prince. Cinkovitch v. Thistle Coal Co., 121 N.W. 1036" date_filed="1909-06-30" court="Iowa" case_name="Cinkovitch v. Thistle Coal Co.">121 N.W. 1036, 1038
(Iowa 1909). History makes clear that two factors earned coal its nickname: value and
durability. In the United States, coal spurred the building of the nation’s first railways and
helped lay the foundations for the beginning of the Industrial Revolution. Albert Sidney
Bolles, Industrial History of the United States 710 (Henry Bill Publishing 3d ed. 1878). Near
the end of the nineteenth century, the value of coal mined in the nation was “equal to that of
all the gold, silver, and iron produced.” Id. at 704. America’s “diadem of economic wealth”
continued to sparkle with black diamonds into the twentieth century, In re Hudak’s Estate,
118 A.2d 577" date_filed="1955-11-28" court="Pa." case_name="Hudak Estate">118 A.2d 577, 584 (Pa. 1955) (Musmanno, J., dissenting), and coal continued its “industrial
supremacy,” Frederick Robert Worts, Modern Industrial History 158 (1919).
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Harold Sergent was probably trying to dig up similarly auspicious prospects by
naming his coal company after the black diamond. After all, Sergent and James Campbell
founded the Black Diamond Mining Company and its seven affiliates (collectively, “Black
Diamond”) to buy promising but undeveloped coal assets in Floyd County, Kentucky, and
turn a profit. Compl., McKinstry v. Sergent, 442 B.R. 567" date_filed="2011-01-12" court="E.D. Ky." case_name="McKinstry v. Sergent">442 B.R. 567 (E.D. Ky. 2011) (Pikeville No.
10-110-ART), R. 1-1 at 10 ¶ 11. After putting up some of his own money, Sergent turned to
a consortium of lenders, led by CIT Capital USA, Inc., to finance the purchase of these
assets. Id. at 11 ¶ 12.
According to the Plaintiff’s complaint, the following events then ensued. While in
charge of Black Diamond, Sergent engaged in self-dealing and mismanaged the company.
Id. at 24 ¶ 54. In 2006, he caused Black Diamond to enter a Consulting & Sales Agreement
with another company that Sergent founded, Global Energy Holdings, LLC. Id. at 11 ¶ 13.
Under this agreement, Black Diamond appointed Sergent and Global Energy as its exclusive
agents for selling coal and paid them $0.25 per ton of coal that Black Diamond mined or
sold, with a minimum monthly payment of $30,000. Consulting & Sales Agreement,
McKinstry v. Sergent (In re Black Diamond Mining, LLC), No. 11-07010-JMS (Bankr. E.D.
Ky. 2008) [hereinafter “Adversary Proceeding”], R. 19-1 at 3 ¶¶ 6–7. Not long afterwards,
Black Diamond, under Sergent’s direction, entered a Royalty Agreement with one of its
lenders, CIT Capital. Compl., McKinstry, 442 B.R. 567" date_filed="2011-01-12" court="E.D. Ky." case_name="McKinstry v. Sergent">442 B.R. 567 (No. 10-110), R. 1-1 at 12 ¶ 15. In
exchange for financing the purchase of the Floyd County coal assets, Black Diamond agreed
to pay royalties of $0.05 per ton to CIT Capital and $0.04 per ton to Sergent and Campbell.
Royalty Fee Agreement, Adversary Proceeding, R. 19-2 at 2–3 ¶¶ 2–3. These agreements
allegedly created a conflict of interest for Sergent. He was caught between his incentive to
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maximize his personal income by selling as much coal as possible regardless of whether
Black Diamond would profit and Black Diamond’s interest to “sell only as much coal as it
could profitably mine.” Compl., McKinstry, 442 B.R. 567" date_filed="2011-01-12" court="E.D. Ky." case_name="McKinstry v. Sergent">442 B.R. 567 (Pikeville No. 10-110-ART),
R. 1-1 at 12 ¶ 16.
Succumbing to the incentive to produce or sell as much coal as possible, Sergent
committed Black Diamond to long-term Supply Contracts with coal purchasers to sell more
coal than Black Diamond could produce from its own mines. Id. at 12–13 ¶ 17. To make up
the shortfall between the amount it could produce and the amount it was obligated to sell,
Black Diamond purchased the difference on the spot market. Id. Of course, this strategy
was profitable so long as the price of purchasing coal on the spot market remained less than
the selling price under the Supply Contracts, which topped out at about $52 per ton. Id. at 13
¶ 18.
Although successful for the first two years, this strategy turned out to be a disastrous
gamble when coal prices surpassed the $52 break-even point. Id. Concerned about the
company’s continued ability to satisfy its liabilities, CIT Capital insisted that Black Diamond
hire Alvarez & Marsal North America, LLC (“A&M”) as a financial advisor. Id. at 14 ¶ 23.
But this was all for naught. The spot market price of coal continued to rise, and Black
Diamond was unable to restructure the Supply Contracts. Id. at 14 ¶ 22; see also Appellant’s
Br., Sergent v. McKinstry, Pikeville No. 11-129-ART (E.D. Ky. 2011), R. 7 at 13. By early
2008, the spot market price of coal reached $70 to $80 per ton, which meant that Black
Diamond lost $20 to $30 for each ton of coal it bought to satisfy its contractual obligations.
Compl., McKinstry, 442 B.R. 567" date_filed="2011-01-12" court="E.D. Ky." case_name="McKinstry v. Sergent">442 B.R. 567 (Pikeville No. 10-110-ART), R. 1-1 at 13–14 ¶ 21.
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With their borrower’s liabilities rapidly outstripping its assets, Black Diamond’s
lenders needed a new plan of attack. In February 2008, CIT Capital and the other lenders
turned to the Chapter 11 bankruptcy process with the hope of reorganizing Black Diamond as
a profitable company. The lenders filed involuntary petitions to drag Black Diamond and its
seven subsidiaries into bankruptcy. See, e.g., Chapter 11 Involuntary Pet., In re Black
Diamond Mining Co., No. 08-70066-JMS (Bankr. E.D. Ky. 2008) [hereinafter “Underlying
Bankruptcy”], R. 1.
Up to this point, Black Diamond had not lived up to a name suggesting value and
durability. Rather, once in bankruptcy, Black Diamond’s name was more akin to the ski
symbol indicating the need for expertise before continuing downhill. The Bankruptcy Court
had to decide what kind of experts were needed to reorganize Black Diamond and help pull it
back from the brink of financial collapse. For their part, CIT Capital and the other lenders
moved for the appointment of a bankruptcy trustee to manage Black Diamond’s estate. Mot.
Appoint Trustee, Underlying Bankruptcy, R. 2. But rather than engage in a prolonged fight
over the appointment of a trustee, the parties agreed to create a new senior management
position within Black Diamond—Chief Restructuring Officer (“CRO”)—and to appoint a
specialist in turnaround management from A&M to this position. CRO Order, id., R. 56.
Accordingly, the Bankruptcy Court authorized Black Diamond to hire an A&M employee,
Ira Genser, as its CRO. Id. at 2. Because Genser was not a court-appointed trustee under the
Bankruptcy Code, CIT Capital withdrew its motion for a trustee, but reserved the ability to
renew it in the future. Id. at 6 (ordering that CIT Capital’s motion to appoint a Chapter 11
trustee is “withdrawn, without prejudice”).
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The Bankruptcy Court gave Genser, as CRO, all of the powers necessary to run and
restructure Black Diamond, including the power to hire and fire employees. Id. at 2–4
(listing all of the CRO’s powers). So Genser hired his A&M colleague, Larry Tate, as Black
Diamond’s Chief Financial Officer (“CFO”). Engagement Letter, McKinstry, Pikeville No.
11-133-ART, R. 2 Ex. 3 ¶ 1.a(ii). Consistent with the requirements of the CRO Order, Black
Diamond and A&M entered into a court-approved Engagement Letter that described the
relationship between Black Diamond and A&M. This Engagement Letter detailed the scope
of A&M’s turnaround management services, Genser’s hiring as CRO, and Tate’s hiring as
CFO. See generally id.; see also Underlying Bankruptcy, R. 439 (order approving
Engagement Letter).
After A&M took over Black Diamond’s day-to-day management, the Bankruptcy
Court authorized Black Diamond to reject the Consulting & Sales Agreement and the
Royalty Agreement that caused Black Diamond’s financial troubles. Id., R. 407. Unhappy
that he would not receive payments promised to him under these agreements, Sergent filed
proofs of claim in Black Diamond’s bankruptcy case to recover these payments from Black
Diamond’s bankruptcy estate. He sought about $4.6 million in unpaid royalties, Claim Nos.
1259 & 1260, id., R. 2008 Ex. B, $28.8 million in unpaid commissions, Claim No. 1261, id.,
R. 2007 Ex. A, and $700,000 for unpaid loans that he made to Black Diamond, Claim Nos.
1257 & 1258, id., R. 2009 Ex. C.
Meanwhile, even restructuring specialists A&M, Genser, and Tate (collectively, the
“A&M Defendants”) could not prevent the spot market price of coal from nearly doubling
during the summer of 2008, reaching peaks not seen since World War II. Compl.,
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McKinstry, 442 B.R. 567" date_filed="2011-01-12" court="E.D. Ky." case_name="McKinstry v. Sergent">442 B.R. 567 (Pikeville No. 10-110), R. 1-1 at 17 ¶ 37. Black Diamond teetered
on the edge of financial ruin.
According to the Plaintiff, Black Diamond’s troubles were not caused by Sergent
alone: the A&M Defendants also contributed to the company’s financial problems. Id. at 25–
27 ¶¶ 60–63. For example, in August 2008, the Plaintiff claims that Genser and Tate ignored
the advice of Black Diamond’s senior management and employees and rejected an offer that
would have “lock[ed] in a $30 million profit” for the company. Id. at 21 ¶ 42. Instead of a
diversified approach, Genser and Tate put all their coal into one mine cart and attempted to
sell the company to a competitor. Despite only having the interested purchaser’s nonbinding
letter of intent, Genser and Tate rejected multiple profitable opportunities for Black
Diamond. Id. at 21–22 ¶¶ 41–47. Genser and Tate, the story goes, were committed to
following the preferences of CIT Capital and the other lenders regardless of whether those
preferences were in Black Diamond’s best interests. Id. at 22 ¶ 47.
Unlike their cousins, black diamonds are not forever. After the global economic
collapse in the fall of 2008, the spot market price of coal fell precipitously, and with it, the
value of Black Diamond itself. Appellant’s Br., Sergent v. McKinstry, Pikeville No. 11-129-
ART (E.D. Ky. 2011), R. 1 at 15. These circumstances proved too much for the company to
bear, and Black Diamond “encountered the fate which hangs like a black cloud over every
coal miner’s destiny.” In re Hudak’s Estate, 118 A.2d 577" date_filed="1955-11-28" court="Pa." case_name="Hudak Estate">118 A.2d at 584 (Musmanno, J., dissenting).
With the hope of reorganization gone, Black Diamond filed a plan of liquidation,
which the Bankruptcy Court confirmed in July 2009. See Confirmation Order, Underlying
Bankruptcy, R. 1562. The Plan created the BD Unsecured Creditors Trust to liquidate some
of the assets of Black Diamond’s bankruptcy estate, including any causes of action that
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Black Diamond might have against Sergent and the A&M Defendants. Third Am. Joint Plan
of Liquidation, id., R. 1562 Ex. A art. IV(C). Pursuant to the Plan, the Bankruptcy Court
also appointed Taft A. McKinstry (the “Plaintiff”) as the Trustee for the BD Unsecured
Creditors Trust and as the representative of Black Diamond’s estate. Confirmation Order,
id., R. 1562 at 34–35.
Anticipating litigation of Black Diamond’s causes of action, the Plaintiff and the
A&M Defendants entered a Settlement Agreement. Settlement Agreement, id., R. 1562 at
160–170 (Ex. B). Under the Settlement Agreement, the Plaintiff agreed to limit her recovery
for claims covered by various insurance policies, but not to limit her recovery for claims that
fell outside the insurance coverage. Id. at 165 ¶ 6.
B. The Plaintiff’s Lawsuit Against Sergent and A&M
This long-brewing showdown among the three parties finally came to a head.
Entrusted with liquidating the causes of action and obtaining a recovery for the unsecured
creditors, the Plaintiff sued Sergent and the A&M Defendants in state court. Compl.,
McKinstry, 442 B.R. 567" date_filed="2011-01-12" court="E.D. Ky." case_name="McKinstry v. Sergent">442 B.R. 567 (Pikeville No. 10-110-ART), R. 1-1. She asserted breach of
fiduciary duty and gross negligence/willful misconduct claims against Sergent for his pre-
petition mismanagement of Black Diamond (the “Sergent Claims”). Id. at 24–25 ¶¶ 53–59.
She also asserted gross negligence/willful misconduct claims against the A&M Defendants
for their post-petition mismanagement of Black Diamond (the “A&M Claims”). Id. at 25–27
¶¶ 60–73. The defendants then successfully removed the case to this Court. See Mem. Op.
& Order, McKinstry , 442 B.R. 56 (Pikeville No. 10-110-ART), R. 63.
Although the Court confirmed its removal jurisdiction over the case, “difficult issues”
remained, particularly whether mandatory abstention applied to the Sergent Claims and
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whether the Sergent Claims were core or non-core. Id. at 3–4. Because the “Bankruptcy
Court’s familiarity with the case” would aid the resolution of these difficult issues, the Court
referred the entire case to the Bankruptcy Court. Id. at 19.
C. The Bankruptcy Court’s Abstention Order
Back before Bankruptcy Court, the Plaintiff asked the Bankruptcy Court to abstain
from hearing the case and remand both sets of claims to state court. Adversary Proceeding,
R. 17. The Bankruptcy Court granted this motion with respect to the Sergent Claims, but
denied this motion with respect the A&M Claims. Mem. Op., id., R. 26 at 18 (“Abstention
Order”). According to the Bankruptcy Court, abstention from the Sergent Claims was
mandatory under 28 U.S.C. § 1334(c)(2) in part because the Sergent Claims are non-core
proceedings under the Bankruptcy Code. Id. at 12. Consequently, the Bankruptcy Court
remanded the Sergent Claims back to state court. Id. at 16. For the A&M Claims, however,
the court held that both mandatory abstention under § 1334(c)(2) and permissive abstention
under § 1334(c)(1) were inappropriate largely because the A&M claims were core
proceedings. Id. at 12 (discussing mandatory abstention), 17 (discussing permissive
abstention). This decision severed the case in two, with the state court to adjudicate the
Sergent Claims and the Bankruptcy Court to decide the A&M Claims. The Bankruptcy
Court also held all further proceedings on Sergent’s proofs of claims in abeyance until the
state court resolved the Sergent claims. Abeyance Order, Underlying Bankruptcy, R. 2052.
Like most split decisions, no one was entirely happy. Sergent appealed. Sergent,
Pikeville No. 11-129-ART, R. 1. Meanwhile, the Plaintiff moved to withdraw this Court’s
reference of the case to the Bankruptcy Court so that this Court could adjudicate it.
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McKinstry, Pikeville No. 11-133-ART, R. 1. Both the appeal and the motion to withdraw are
now before this Court.
DISCUSSION
I. Whether the A&M Claims and Sergent Claims Are Core or Non-Core
Proceedings
Because both the appeal and the motion to withdraw partly turn on whether the
Sergent and A&M Claims are core or non-core proceedings, the Court addresses this issue at
the outset. Accord Comm. of Unsecured Creditors v. Motorola, Inc. (In re Iridium Operating
LLC), 285 B.R. 822" date_filed="2002-09-23" court="S.D.N.Y." case_name="Statutory Committee of Unsecured Creditors Ex Rel. Iridium Operating LLC v. Motorola, Inc. (In Re Iridium Operating LLC)">285 B.R. 822, 829 (S.D.N.Y. 2002) (quoting Orion Pictures Corp. v. Showtime
Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095" date_filed="1993-09-17" court="2d Cir." case_name="In Re Orion Pictures Corporation, Debtor, Orion Pictures Corporation v. Showtime Networks, Inc., Formerly Known as Showtime/the Movie Channel, Inc.">4 F.3d 1095, 1101 (2d Cir. 1993)) (“A district
court considering whether to withdraw the reference should first evaluate whether the claim
is core or non-core, since it is upon this issue that questions of efficiency and uniformity will
turn.”). District courts have subject-matter jurisdiction over proceedings that arise under
Title 11, that arise in a case under Title 11, and that are “otherwise related to a case under
Title 11.” See Stern v. Marshall, 564 U.S. ___, 131 S. Ct. 2594" date_filed="2011-06-23" court="SCOTUS" case_name="Stern v. Marshall">131 S. Ct. 2594, 2605 (2011). The first two
types are “core proceedings,” while those that are otherwise related to a Title 11 case are
“non-core proceedings.” Id. District courts may choose to refer any of these types of
proceedings to the bankruptcy court, 28 U.S.C. § 157(a), but a bankruptcy court’s authority
varies depending on the type of proceeding involved, Stern, 131 S. Ct. 2594" date_filed="2011-06-23" court="SCOTUS" case_name="Stern v. Marshall">131 S. Ct. at 2604. In core
proceedings, bankruptcy courts are empowered to enter final judgments, which are subject to
conventional appellate review. 28 U.S.C. §§ 157(b)(1), 158; Fed. R. Bankr. P. 8013. By
contrast, in non-core proceedings, bankruptcy courts may only “submit proposed findings of
fact and conclusions of law to the district court.” 28 U.S.C. § 157(c)(1). In this case, the
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A&M Claims are core proceedings. The Sergent Claims are also core proceedings under the
statute, but it would be unconstitutional for the Bankruptcy Court to enter final judgment on
them.
A. The A&M Claims are core.
Because the Plaintiff did not cross-appeal, she is bound by the Bankruptcy Court’s
classification of the A&M Claims as core proceedings. A bankruptcy court’s classification
of a proceeding as core or non-core is “itself a core proceeding.” 1 William L. Norton, Jr.,
Bankruptcy Law & Practice § 4:69 (3d ed. 2011); see also Maurer v. Maurer (In re Maurer),
271 B.R. 207" date_filed="2002-01-02" court="Bankr. M.D. Fla." case_name="Maurer v. Maurer (In Re Maurer)">271 B.R. 207, 209 (Bankr. M.D. Fla. 2002); Lesser v. A-Z Assocs. (In re Lion Capital
Group), 63 B.R. 199" date_filed="1985-04-11" court="S.D.N.Y." case_name="Lesser v. A-Z Associates (In Re Lion Capital Group)">63 B.R. 199, 209 (S.D.N.Y. 1985). Consequently, such a classification is “subject
only to conventional appellate review.” 1 Norton, Bankruptcy Law & Practice § 4:69. If the
bankruptcy court’s classification occurs in an interlocutory fashion, then the party wishing to
challenge it must seek permission from the district court for an interlocutory appeal under 28
U.S.C. § 158(a). Id. Otherwise, the party challenging the classification must wait to appeal a
final order that brings up the core/non-core classification. Id.
Here, deciding whether to abstain from the A&M Claims required the Bankruptcy
Court to determine whether the A&M Claims are core. The Plaintiff did not cross-appeal.
“Absent a formal appeal,” this Court cannot revisit the Bankruptcy Court’s classification of
the A&M Claims as core proceedings. Big Rivers Elec. Corp. v. Green River Coal Co., Inc.,
182 B.R. 751" date_filed="1995-05-24" court="W.D. Ky." case_name="Big Rivers Elec. Corp. v. Green River Coal Co., Inc.">182 B.R. 751, 755 n.4 (W.D. Ky. 1995).
Eager to avoid the procedural bar to her challenge, the Plaintiff claims that the
Bankruptcy Court’s classification is non-binding because it is part of the court’s reasoning.
Pl.’s Reply, R. 5 at 18. Relying on the maxim that “courts do not bind parties to their
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reasoning” but “only to their results,” the Plaintiff says that the Bankruptcy Court’s core
classification of the A&M Claims is non-binding. Id. (citing United States v. Schilling (In re
Big Rivers Elec. Corp.), 355 F.3d 415" date_filed="2004-01-08" court="6th Cir." case_name="In Re Big Rivers Electric Corporation v. J. Baxter Schilling">355 F.3d 415, 442 (6th Cir. 2004)).
The Plaintiff’s application of this maxim makes a mountain out of a molehill. Of
course, the reasoning of a decision, on its own, is not binding on an appellate court. See, e.g.,
Spierer v. Federated Dep’t Stores, Inc. (In re Federated Dep’t Stores, Inc.), 328 F.3d 829" date_filed="2003-05-14" court="6th Cir." case_name="United States v. Kenneth Jackson, Jr.">328 F.3d 829,
833 (6th Cir. 2003). This maxim only means that an appellate court can affirm the lower
court’s judgment on any ground fairly presented by the record, even if the reviewing court
disagrees with the lower court’s reasoning for that judgment. See, e.g., United States v.
Buckingham, 433 F.3d 508" date_filed="2006-01-11" court="6th Cir." case_name="United States v. James Anderson Buckingham">433 F.3d 508, 514 (6th Cir. 2006); City Mgmt. Corp. v. U.S. Chem. Co, Inc., 43
F.3d 244, 251 (6th Cir. 1994). Here, the Bankruptcy Court’s classification of the A&M
Claims as core was not merely reasoning, but also a holding necessary to its ultimate
conclusion that both mandatory and permissive abstention did not apply to the A&M Claims.
See infra Part II (explaining that one of the requirements for mandatory abstention is that the
claim at issue is non-core).
To avoid the binding effect of the Bankruptcy Court’s determination, the Plaintiff
should have cross-appealed the Abstention Order’s refusal to mandatorily or permissively
abstain from hearing the A&M Claims. As part of the basis for that cross-appeal, the
Plaintiff should have challenged the Bankruptcy Court’s determination of the A&M Claims
as core. Indeed, Sergent used this precise procedural route to challenge the Bankruptcy
Court’s non-core determination and resulting abstention.
As a last-ditch effort, the Plaintiff argues that she is not bound because the Abstention
Order “did not purport to be a final order as to whether the [b]ankruptcy [c]ourt has ‘core’
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jurisdiction for all purposes.” Pl.’s Reply, McKinstry, Pikeville No. 11-133-ART, R. 5 at 18.
This contention is wrong. The Bankruptcy Court did not place any limits on its core/non-
core determinations. More importantly, the Plaintiff offers no support for the proposition
that whether a proceeding is core varies depending on the issue before the Court. And
neither does the statute. Therefore, by failing to appeal the Abstention Order, the Plaintiff is
bound by the Bankruptcy Court’s determination that the A&M Claims are core.
Consequently, this Court is powerless to reach the Plaintiff’s contentions on the merits of this
question. See, e.g., After Six, Inc. v. Abraham Zion Corp. (In re After Six, Inc.), 167 B.R. 35" date_filed="1994-04-11" court="E.D. Pa." case_name="After Six, Inc. v. Abraham Zion Corp. (In Re After Six, Inc.)">167 B.R. 35,
40 (E.D. Pa. 1994) (“[T]he bankruptcy rules for filing a notice of appeal are mandatory and
jurisdictional, and thus failure to file a timely notice of appeal deprives the district court of
jurisdiction to review a bankruptcy court’s final order or judgment.”)
B. It is unconstitutional to treat the Sergent Claims as core proceedings for
purpose of adjudicating them.
A big-picture point before deciding whether the Sergent Claims are core: the Plaintiff
wants the Sergent and A&M claims tried together. Although her first preference is state
court, she prefers to have the entirety of the case in one place rather than split between state
and federal court. See, e.g., Mots. Hr’g Tr., Sergent, Pikeville No. 11-129-ART, R. 31 at 20
(Mr. Goroff: “Since we don’t . . . at this point, although it depends on the ruling of the appeal
of the abstention, know that they can be together in state court, which I think is our optimal
preference, if they’re going to be in federal court, we certainly prefer them to be before
you.”); id. at 36 (Mr. Goroff: “[O]ur optimal choice is to have these tried together. And
while we believe that that’s appropriate in Kentucky court, we are absolutely fine with Your
Honor trying them together.”); id. (Mr. Goroff: “But if you ask what our druthers are, Your
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Honor, now that A&M is before you, we would like everything done together before you.
And we believe it is possible because Your Honor, unlike [Bankruptcy] Judge Scott, does
have supplemental jurisdiction.”). Sergent likewise does not want the claims against him
severed from the A&M Claims. See, e.g., id. at 36 (Mr. Geller: “I completely agree; these
[two sets of claims] need to be kept together.”). Because the A&M Claims are core, the
parties’ unusual position almost renders the Court’s ruling on whether the Sergent Claims are
core as well as Sergent’s appeal an academic exercise. See infra Part III (concluding that the
Plaintiff’s case against both defendants must eventually be withdrawn because the Plaintiff
has a jury trial right on all of her causes of action). Almost, but not quite, because parties
generally cannot undo the Bankruptcy Court’s rulings merely by their agreement after the
fact. And so the Court must forge onward.
Although the Sergent Claims are statutorily core, allowing the Bankruptcy Court to
enter final judgment on them would be unconstitutional. As first-year law students learn in
Civil Procedure, a litigant has to punch two tickets to keep her claim in the federal
courthouse: statutory and constitutional.
(1) The Sergent Claims are core proceedings under the Bankruptcy
Code.
The Sergent Claims come within the statutory ambit of “core.” Congress has not
defined “core proceedings.” Instead, in 28 U.S.C. § 157(b)(2), Congress provides a non-
exhaustive list of examples of core proceedings. One of the examples—“counterclaims by
the estate against persons filing claims against the estate,” § 157(b)(2)(C)—describes the
Sergent Claims. Sergent filed proofs of claim against the estate in the Bankruptcy Court. In
turn, the Plaintiff filed the Sergent Claims against Sergent in state court. See Stern, 131
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S. Ct. at 2605 (holding that a debtor’s claim against a creditor, who had filed a proof of claim
against the debtor’s estate, was a “counterclaim” within § 157(b)(2)(C)).
The Plaintiff quarrels with this conclusion on two grounds. First, she asserts that the
Sergent Claims are not “counterclaims” because the opposing parties in the Sergent Claims
are not the same as those in the Proofs of Claim. Appellee’s Br., Sergent, Pikeville No. 11-
129-ART, R. 8 at 13–14. With respect to the Sergent Claims, the Plaintiff argues that Black
Diamond’s director & officer insurance providers (“D&O Insurers”) are the real parties in
interest because the Plaintiff and Sergent have agreed to limit the Plaintiff’s recovery to the
amount of these policies. Id. at 13. And with respect to the Proofs of Claim, the Plaintiff
argues that the real party in interest is Sergent’s personal bankruptcy trustee Phaedra
Spradlin—and not Sergent himself—because the Proofs of Claim are assets of Sergent’s
personal bankruptcy estate. Id.
The Plaintiff is correct that § 157(b)(2)(C) requires mutuality of parties. The
Bankruptcy Code does not define the term “counterclaim.” But in all other settings, a
counterclaim requires the same opposing parties as those on each side of the “v.” in the
underlying claim. Cf. 6 Charles Alan Wright & Arthur R. Miller, Federal Practice
& Procedure § 1404 (3d ed. 2011) (citing Fed. R. Civ. P. 13) (“The general rule appears to be
that in an action brought in a representative capacity, a defendant cannot assert a
counterclaim against plaintiff in plaintiff’s individual capacity because it would not be a
counterclaim against an ‘opposing party.’”). Indeed, Federal Rule of Civil Procedure 13(h)
expressly governs how to bring nonparties into a lawsuit for the purpose of adding them to a
counterclaim. This rule would be unnecessary if counterclaims could be brought against
parties not present in the original claim. This understanding of “counterclaim” comports
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with how the term “counterclaim” is normally used in litigation. See Black’s Law Dictionary
(9th ed. 2009), available at Westlaw BLACKS (defining “counterclaim” as a “claim for
relief asserted against an opposing party after an original claim has been made) (emphasis
added). Section 157(b)(2)(C) therefore requires mutuality of parties.
Although the Plaintiff is correct that counterclaims require mutuality of parties, she is
incorrect about whether the Sergent Claims meet that requirement because she misidentifies
the real parties in interest. The D&O Insurers do not replace Sergent as the real party in
interest in the Sergent Claims just because the Plaintiff has limited her recovery to the
amount of the D&O insurance. An insurer only replaces its insured as the real party in
interest to the extent that the insurer has activated its subrogation rights—in other words, if
the insurer actually paid part or all of the claim or otherwise made an enforceable promise to
pay the claim. See United States v. Aetna Cas. & Sur. Co., 338 U.S. 366" date_filed="1950-01-16" court="SCOTUS" case_name="United States v. Aetna Casualty & Surety Co.">338 U.S. 366, 382 (1949); see
also 6A Wright & Miller, Federal Practice & Procedure § 1546 (“If no money or enforceable
promise to pay money has been advanced, then there has not been any subrogation and the
insured remains the real party in interest.”). The record does not indicate that Sergent’s
insurer has agreed to pay any of the losses alleged in the Sergent Claims, so the D&O
Insurers are not the real party in interest.
So who is? In fact, the real party in interest for the Sergent Claims is the same as the
real party in interest for the Proofs of Claim: the trustee for Sergent’s personal bankruptcy
estate, Phaedra Spradlin. The Proofs of Claim are assets of his personal bankruptcy estate.
Voluntary Pet., In re Harold Edwin Sergent, No. 10-50763-JL (Bankr. E.D. Ky. 2010), R. 1
at 32. The Sergent Claims are liabilities of his personal bankruptcy estate. Id. at 37. And
the Bankruptcy Court has not exempted these sets of claims from the property of Sergent’s
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personal estate, nor does the Plaintiff offer a valid basis on which the Bankruptcy Court
could do so. 11 U.S.C. § 541(a)(1) (defining the bankruptcy estate as including “all legal or
equitable interests of the debtor in property as of the commencement of the case”); see also
Wieburg v. GTE Sw., Inc., 272 F.3d 302" date_filed="2001-11-20" court="5th Cir." case_name="Morton v. GTE Southwest Inc. (Wieburg)">272 F.3d 302, 306 (5th Cir. 2001) (holding that the trustee of a
bankruptcy estate is the real party in interest for legal claims that are assets of a bankruptcy
estate). Consequently, the Sergent Claims are “counterclaims” because there is mutuality of
parties.
The Plaintiff offers a second reason why the Sergent Claims do not fit within the
statute: the Sergent Claims are not brought by Black Diamond’s estate because the “estate
ceases to exist” once the bankruptcy plan is confirmed. Appellee’s Br., Sergent, Pikeville
No. 11-129-ART, R. 8 at 14 n.8. This generalization is normally true in Chapter 11
reorganization bankruptcies because “the confirmation of a plan vests all of the property of
the estate in the debtor” unless the plan says otherwise. 11 U.S.C. § 1141(b). The empty
estate then “ceases to exist,” Binder v. Price Waterhouse & Co. (In re Resorts Int’l, Inc.),
372 F.3d 154" date_filed="2004-06-22" court="3rd Cir." case_name="Binder Ex Rel. Resorts International, Inc. v. Price Waterhouse & Co.">372 F.3d 154, 165 (3d Cir. 2004), and the reorganized debtor returns to the “cold cruel
business world,” Dyer v. First Nat’l Bank at Orlando (In re Seminole Park & Fairgrounds,
Inc.), 502 F.2d 1011" date_filed="1974-10-17" court="1st Cir." case_name="In The Matter of Seminole Park v. First National Bank At Orlando">502 F.2d 1011, 1014 (5th Cir. 1974).
But things are not always so simple when a plan says otherwise in the liquidation
context. The Bankruptcy Code permits “the debtor, by the trustee, or by a representative of
the estate” to prosecute the claims that are part of the debtor’s estate. 11 U.S.C.
§ 1123(b)(3)(B) (“A plan may . . . provide for . . . the retention and enforcement by the
debtor, by the trustee or by a representative of the estate appointed for such purpose, of [any
claim or interest belonging to the debtor or to the estate].”). Often, like here, the
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“representative of the estate” is a liquidating trustee. 6 Norton, Bankruptcy Law and Practice
§ 109:16. In this case, the Bankruptcy Court assigned the Sergent and A&M Claims to the
BD Unsecured Creditors Trust, appointed the Plaintiff as a “representative of the estate,” and
charged her with liquidating those causes of action. Third Am. Joint Plan of Liquidation,
Underlying Bankruptcy, R. 1562 Ex. A, art. IV.C ¶ 2 (“The BD Unsecured Creditors Trust
shall be deemed not to be the same legal entity as any of the Debtors, but only [a] . . .
representative of their Estates for the pursuit of the Causes of Action assigned to the BD
Unsecured Creditors Trust within the meaning of section 1123(b)(3) of the Bankruptcy
Code.”) (emphasis added); see also id. art. IV.B ¶ 3(a) (“To the extent necessary or
appropriate, the BD Unsecured Creditors Plaintiff may be designated as a representative of
one or more of the Estates pursuant to section 1123(b)(3)(B) . . . to enforce or pursue any
rights, claims or Causes of Action that remain property of the Estates after the Effective
Date.”). For the representative of an estate to bring claims post-confirmation, the estate must
also still exist post-confirmation. Otherwise, the Plaintiff would represent nothing.
There is a second reason why Black Diamond’s estate must continue to exist: Sergent
still has Proofs of Claim pending against Black Diamond’s estate. Sergent has filed Proofs
of Claim to recover money from the estate. Nearly two years after confirmation, see
Confirmation Order, Underlying Bankruptcy, R. 1562, the Bankruptcy Court held these
Proofs of Claim in abeyance until the Sergent Claims and the A&M Claims are resolved,
Abeyance Order, id., R. 2052. Suppose that a court resolves the Sergent Claims and the
A&M Claims, and after the Bankruptcy Court terminates the abeyance, the Bankruptcy Court
rules in favor of Sergent on his Proofs of Claim. From whom will Sergent recover? From
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Black Diamond’s estate. Yet if Black Diamond’s estate no longer exists, the Bankruptcy
Court would have denied Sergent’s Proofs of Claim as moot, not held them in abeyance.
The scope of post-confirmation bankruptcy jurisdiction also compels the continued
existence of Black Diamond’s estate. If a bankruptcy estate always ceased to exist once
confirmation occurred, then there could be no related-to jurisdiction over post-confirmation
litigation because there would be no estate to which the litigation can “relate.” 6 Norton,
Bankruptcy Law and Practice § 114:10; cf. Boston Reg’l Med. Ctr. v. Reynolds (In re Boston
Reg’l Med. Ctr.), 410 F.3d 100" date_filed="2005-06-14" court="1st Cir." case_name="Boston Regional Medical Center, Inc. v. Reynolds (In Re Boston Regional Medical Center, Inc.)">410 F.3d 100, 105 (1st Cir. 2005) (citing Pacor, Inc. v. Higgins, 743 F.2d
984, 994 (3d Cir. 1984)) (holding that related-to jurisdiction empowers courts to “deal
efficiently and effectively with the entire universe of matters connected with bankruptcy
estates”) (emphasis added). Yet “no court” has followed this logic to “its illogical
conclusion.” Id. Indeed, as the Court noted when this case was removed, the Bankruptcy
Code specifically authorizes bankruptcy courts to “issue post-confirmation orders to help
consummate the plan or administer the estate.” Sergent, 442 B.R. 567" date_filed="2011-01-12" court="E.D. Ky." case_name="McKinstry v. Sergent">442 B.R. at 574 (citing In re Resorts
Int’l, Inc., 372 F.3d 154" date_filed="2004-06-22" court="3rd Cir." case_name="Binder Ex Rel. Resorts International, Inc. v. Price Waterhouse & Co.">372 F.3d at 164). And when a liquidating trustee is charged with administering
the estate, the trustee “represents the estate by assuming the obligations to prosecute the
instant claims for the benefit of unsecured creditors.” Id. at 575 (citing Guttman v. Martin
(In re Railworks Corp.), 325 B.R. 709" date_filed="2005-05-05" court="Bankr. D. Md." case_name="Guttman v. Martin (In Re Railworks Corp.)">325 B.R. 709, 719 (Bankr. D. Md. 2005)). Therefore, the estate in
this case has not yet reached its expiration date. See also Andrew M. Thau et al.,
Postconfirmation Liquidation Vehicles (Including Liquidating Trusts and Postconfirmation
Estates): An Overview, 16 J. Bankr. L. & Prac. 2 art. 4, § III.B (2007) (discussing competing
views of the relationship between the status of a Chapter 11 estate and post-confirmation
liquidating trusts). The Sergent Claims thus pass statutory muster. See Stern, 131 S. Ct. at
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2604 (holding that a claim was core within the meaning of the statute because it fell within
the “plain text” of the illustrative list in § 157(b)(2)).
(2) It is unconstitutional under Stern for the Bankruptcy Court to enter
final judgment on the Sergent Claims.
Although the Sergent Claims are core for purposes of the statute, they cannot
constitutionally be treated as core. In Stern v. Marshall, 131 S. Ct. 2594" date_filed="2011-06-23" court="SCOTUS" case_name="Stern v. Marshall">131 S. Ct. 2594, the Supreme Court
held that the Constitution limits Congress’s ability to designate all counterclaims as core.
There, a creditor filed a proof of claim against the debtor’s estate alleging that the debtor had
defamed the creditor. Id. at 2601. In response, the debtor filed a counterclaim in the
bankruptcy court for the creditor’s tortious interference with a gift that the debtor expected
from her husband. Id. The bankruptcy court held that the debtor’s counterclaim for tortious
interference was a core proceeding because it was a “counterclaim by the estate against
persons filing claims against the estate,” and entered final judgment. See id. at 2602.
The Supreme Court disagreed. The counterclaim for tortious interference fit within
the statutory examples of core proceedings in § 157(b)(2), but the Constitution prohibits a
non-Article III court from entering final judgment on the counterclaim. Id. at 2608. Why?
The Constitution prohibits a non-Article III court, such as a bankruptcy court, from
exercising the “judicial Power of the United States.” U.S. Const. art. III, § 1, cl. 1.
Exercising that power includes entering final judgment on a counterclaim that is a “state law
action independent of the federal bankruptcy law and not necessarily resolvable by a ruling
on the creditor’s proof of claim in bankruptcy.” Stern, 131 S. Ct. 2594" date_filed="2011-06-23" court="SCOTUS" case_name="Stern v. Marshall">131 S.Ct. at 2611. In Stern, even if
the bankruptcy court ruled in the creditor’s favor on the proof of claim for defamation, that
court would have needed to decide additional questions to rule on the debtor’s counterclaim
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for tortious interference. See id. at 2617–18. Thus, the Court concluded that only an Article
III court could enter final judgment on the counterclaim.
Will ruling on Sergent’s Proofs of Claims necessarily resolve the Plaintiff’s
counterclaims for gross negligence and breach of fiduciary duty? For both counterclaims,
the answer is no. Sergent’s Proofs of Claim seek expectation damages for the commissions
and royalties that he would have earned in the future had Black Diamond not entered
bankruptcy and rejected the Consulting & Sales Agreement and Royalty Agreement.
Underlying Bankrutpcy, R. 2008 Ex. B; id., R. 2007 Ex. A.1 To decide whether to allow the
Proofs of Claim, a court must determine whether Sergent is entitled to expectation damages
under the state law governing the rejected agreements and whether the Bankruptcy Code
otherwise disallows the claim. See Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co,
549 U.S. 443" date_filed="2007-03-20" court="SCOTUS" case_name="Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co.">549 U.S. 443, 452 (2007) (holding that proofs of claim enforceable under applicable state
law are presumed to be allowed in bankruptcy “unless expressly disallowed by [11 U.S.C.] §
502(b)”). The Plaintiff gives three reasons for disallowing Sergent’s Claims: (1) as claims
for the “services of an insider of the debtor,” Sergent’s Proofs of Claim “exceed[] the
reasonable value” of his services, see 11 U.S.C. § 502(b)(4); (2) Sergent’s Proofs of Claim
are subordinated to the claims of Black Diamond’s more senior lenders, who have not yet
been fully compensated, see id. § 510(a); and (3) that the Consulting & Sales Agreement and
Royalty Agreement contain termination clauses that ended Sergent’s rights to the
commissions and royalties because Black Diamond’s assets were transferred to another
1
Sergent has also filed proofs of claim for loans he allegedly made to Black Diamond that were not repaid, see
Claim Nos. 1257 & 1258, Underlying Bankruptcy, R. 2009 Ex. C, but Sergent does not argue that these proofs of
claim are relevant to the constitutional question under Stern.
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entity, see id. § 502(b)(1) (disallowing a proof of claim if it is otherwise unenforceable under
applicable law).
Even assuming that the proofs of claim are disallowable on one of these three bases, a
court could not enter judgment on either of the two Sergent Claims without deciding
additional issues. On the Plaintiff’s gross negligence claim, a court must determine if
Sergent actually mismanaged Black Diamond, whether his mismanagement exhibited
“malice or willfulness” beyond mere negligence, and the amount of any consequent losses to
Black Diamond. See, e.g., City of Middlesboro v. Brown, 63 S.W.3d 179" date_filed="2001-10-25" court="Ky." case_name="City of Middlesboro v. Brown">63 S.W.3d 179, 181 (Ky. 2001)
(quoting Cooper v. Barth, 464 S.W.2d 233" date_filed="1971-03-05" court="Ky. Ct. App." case_name="Cooper v. Barth">464 S.W.2d 233, 234 (Ky. 1971)). Because the Plaintiff seeks
punitive damages for her gross negligence claim, a court also has to determine whether
Sergent’s mismanagement rises to the level of “wanton and reckless disregard for the lives,
safety or property of others.” Peoples Bank of No. Ky., Inc. v. Crowe Chizek and Co. LLC,
277 S.W.3d 255" date_filed="2008-06-06" court="Ky. Ct. App." case_name="Peoples Bank of Northern Kentucky, Inc. v. CROWE CHIZEK AND CO.">277 S.W.3d 255, 267–68 (Ky. App. 2008) (citing Phelps v. Louisville Water Co., 103
S.W.3d 46, 51–52 (Ky. 2003)). Thus, ruling on the Proofs of Claim alone will not dispose of
the gross negligence claim. Accord Stern, 131 S. Ct. 2594" date_filed="2011-06-23" court="SCOTUS" case_name="Stern v. Marshall">131 S. Ct. at 2617–18 (concluding that ruling on a
proof of claim would not necessarily resolve a counterclaim because ruling on the
counterclaim required deciding the additional issue of punitive damages).
Nor does ruling on the Proofs of Claim necessarily resolve the breach of fiduciary
duty claim. The Plaintiff alleges that Sergent self-dealt by appearing on both sides of a
transaction. Compl., McKinstry, Pikeville No. 10-110-ART, R. 1-1 ¶ 54. To rule on this
allegation, a court must determine: (1) whether Sergent was a fiduciary of Black Diamond;
(2) whether he had personal financial interests in the Consulting & Sales Agreement and the
Royalty Agreement; (3) whether the value of the commissions and royalties was reasonable
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or otherwise fair; and (4) if liable, the amount of money Sergent self-dealt. See, e.g., In re
PNB Holding Co. Shareholders Litig., 2006 WL 2403999, at *12 (Del. Ch. Aug. 18, 2006);
see generally White v. Lunsford, 2006 WL 2787469 (Ky. App. 2006) (borrowing Kentucky’s
law of officer and director liability from Delaware). Even then, Sergent is not liable unless
his self-dealing “constitutes willful misconduct or wanton or reckless disregard for the best
interests of the corporation and its shareholders”—more than mere negligence. Ky. Rev.
Stat. § 271B.8-300(5)(b); see also New Lexington Clinic, P.S.C. v. Cooper, 2011 WL
6260442, at *4 (Ky. App. Dec. 16, 2011) (holding that Ky. Rev. Stat. § 271B.8-300 “applies
in all circumstances where money damages are sought in a claim of breach of fiduciary duty
against a corporate director”).
Ruling on Sergent’s Proofs of Claim and breach of fiduciary duty counterclaim, may,
of course, involve some overlap in a court’s decisionmaking. Sergent’s Supp. Br., Sergent,
Pikeville No. 11-129-ART, R. 26 at 8–10. But some overlap is not enough. Stern, 131 S. Ct.
at 2617 (acknowledging that there was “some overlap” between the debtor’s counterclaim
and the creditor’s proof of claim, but nonetheless holding that “there was never any reason to
believe that the process of adjudicating [the creditor’s] proof of claim would necessarily
resolve [the debtor’s] counterclaim”). The Bankruptcy Court does not have to decide
whether Proofs of Claim exceed the reasonable value of Sergent’s services as an insider
because there are two other grounds on which the Proofs of Claim could be disallowed.
Even if a court were to disallow the Proofs of Claim because Sergent is an insider
whose commissions and royalties were unreasonably valued, the Bankruptcy Court would
still have to decide at least two additional issues to rule on the breach of fiduciary duty claim.
First, the reasonableness inquiry is different. For the Proofs of Claim, the question is
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whether the commissions and royalties that Sergent expected to receive in the future were
reasonable in light of his services. See, e.g., In re Delta Air Lines, Inc., 2010 WL 423279, at
*8 (Banrk. S.D.N.Y. Feb. 3, 2010) (No. 05-17923) (holding that the “reasonable value” of
future services under a rejected consulting agreement is “zero” because no future services
could be provided and thus disallowing any claim for their value under § 502(b)(4)). The
breach of fiduciary duty claim, by contrast, requires considering whether the commissions
and royalties that Sergent allegedly diverted to himself in the past were reasonable.
A court would also have to decide a second issue to rule on the breach of fiduciary
duty claim: whether Sergent acted with “willful misconduct” in entering the Consulting &
Sales Agreement and the Royalty Agreement. This culpability determination plays no role in
a court’s allowance or disallowance of Sergent’s Proofs of Claim. For example, a court
could conceivably disallow Sergent’s Proofs of Claim because the value of his services was
unreasonable and simultaneously find Sergent not liable for breach of fiduciary duty because
his conduct was not willful or grossly negligent. Consequently, ruling on Sergent’s Proofs of
Claim will not necessarily resolve either of the Sergent Claims for gross negligence and
breach of fiduciary duty. Therefore, it is unconstitutional to treat the Sergent Claims as core
proceedings for the purpose of final adjudication.
II. Sergent’s Appeal: The Bankruptcy Court Erred By Mandatorily Abstaining
from the Sergent Claims.
The Court must reverse the Bankruptcy Court’s decision to abstain from hearing the
Sergent Claims. Section 1334(c)(2) of Title 28 requires federal courts to abstain from
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hearing non-core bankruptcy proceedings under certain conditions.2 Under the Sixth
Circuit’s test, a court must abstain from a claim that: (1) is based on a state law claim or
cause or action; (2) has no federal jurisdictional basis other than the bankruptcy itself; (3) is
commenced in a state forum of appropriate adjudication; (4) can be timely adjudicated in that
state forum; and (5) is non-core. Lindsey v. Dow Chem. Corp., (In re Dow Corning Corp.),
113 F.3d 565" date_filed="1997-05-08" court="6th Cir." case_name="In Re Dow Corning Corporation v. The Dow Chemical Company (96-2005/2139) Corning Incorporated (96-2008/2139) Dow Corning Corporation (96-2009) Minnesota Mining">113 F.3d 565, 570 (6th Cir. 1997) (citing Lindsey v. O’Brien, Tanski, Tanzer & Young
Health Care Providers of Conn. (In re Dow Corning), 86 F.3d 482" date_filed="1996-06-03" court="6th Cir." case_name="Bankr. Rep. P 76 v. O'Brien">86 F.3d 482, 497 (6th Cir. 1996)).
The first and third requirements are indisputably satisfied. The Sergent Claims are based on
state-law causes of action and began in an appropriate state forum. Appellant’s Br., Sergent,
Pikeville No. 11-129-ART, R. 7 at 24; Appellee’s Br., id., R. 8 at 10. The parties dispute the
rest of the requirements.
Because the Court can exercise supplemental jurisdiction over the Sergent Claims, the
five-part test for mandatory abstention is not satisfied. The Plaintiff’s complaint involves
two sets of claims. One—the core A&M Claims—is within this Court’s original jurisdiction
over core bankruptcy matters. See 28 U.S.C. § 1334(a). The other—the Sergent Claims—
relates to the bankruptcy case.3 See McKinstry, 442 B.R. at 573. The Sergent Claims are
2
Section 1334(c)(1) also provides for permissive abstention under certain circumstances. In bankruptcy court, the
Trustee argued for both mandatory and permissive abstention from both the Sergent Claims and A&M Claims.
Because the Bankruptcy Court mandatorily abstained from hearing the Sergent Claims, it did not decide whether it
should permissively abstain from those claims. Abstention Op., Adversary Proceeding, R. 26 at 16. The Trustee
has indicated that she does not renew her argument for permissive abstention if the Court withdraws the reference.
Because the Court holds that withdrawal is eventually necessary, see infra Part III.B, this Court does not address
permissive abstention of the Sergent Claims. The Trustee is free to renew her argument for permissive abstention
before the Bankruptcy Court.
3
It is not clear whether the Sergent Claims are core or non-core under the mandatory abstention analysis. Does the
unconstitutionality of allowing the Bankruptcy Court to enter final judgment on the Sergent Claims under 28 U.S.C.
§ 157(b)(1) render them non-core for mandatory abstention under 28 U.S.C. § 1334(c)(2)? This first question
invites another: would Congress, had it anticipated Stern, have wanted to apply mandatory abstention to
“unconstitutionally core” claims like the Sergent Claims? Compare In re Heller Ehrman LLP, 2011 WL 4542512,
at *3 (Bankr. N.D. Cal. Sept. 28, 2011) (equating “unconstitutionally core” claims with non-core claims) with In re
Blixseth, 2011 WL 3274042, at *12 (Bankr. D. Mont. Aug. 1, 2011) (holding that “unconstitutionally core” claims
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therefore part of the same case or controversy as “any civil action over which the district
courts have original jurisdiction,” 28 U.S.C. § 1367(a), which includes bankruptcy
jurisdiction. Edge Petroleum Operating Co. v. GPR Holdings, LLC (In re TXNB Internal
Case), 483 F.3d 292" date_filed="2007-03-28" court="5th Cir." case_name="Edge Petroleum Operating Co. v. GPR Holdings, L.L.C.">483 F.3d 292, 300 (5th Cir. 2007).
All of the parties agree that, if the A&M Claims are core, then the Court can exercise
supplemental jurisdiction over the Sergent Claims. Mots. Hr’g Tr., Sergent, Pikeville No.
11-129-ART, R. 31 at 14 (Mr. Goodchild: “I think you—yes, I think you can exercise
supplemental jurisdiction.”); id. at 21 (The Court: “You agree, clearly from your briefs, that I
have the ability to exercise supplemental jurisdiction?” Mr. Goroff: “Yes, Your Honor. The
District Court plainly does.”); id. at 25 (Mr. Goroff: “[The Sergent Claims] could be brought
under supplemental jurisdiction in District Court, correct.”); id. at 44 (Mr. Geller: “We
believe the Bankruptcy Court erred by applying mandatory abstention in light of this Court’s
clear ability to exercise supplemental jurisdiction under [§] 1334(c)(2).”). Instead, the
Plaintiff argues that mandatory abstention is proper because bankruptcy courts cannot
exercise supplemental jurisdiction. Appellee’s Br., Sergent, Pikeville No. 11-129-ART, R. 8
at 11–12.
The Plaintiff may be correct that bankruptcy courts cannot exercise supplemental
jurisdiction. See, e.g., Enron Corp. v. Citigroup, Inc. (In re Enron Corp.), 353 B.R. 51" date_filed="2006-10-11" court="Bankr. S.D.N.Y." case_name="Enron Corp. v. Citigroup, Inc. (In Re Enron Corp.)">353 B.R. 51, 59
(Bankr. S.D.N.Y. 2006). But she is answering the wrong question. Whether the Bankruptcy
Court had an independent federal jurisdictional basis over the Sergent Claims is irrelevant to
mandatory abstention because Section 1334(c) addresses when district courts should abstain.
are neither core nor non-core). The Court does not need to answer these difficult questions because as discussed
below there is supplemental jurisdiction over the Sergent Claims. Therefore, even if they were “non-core”
mandatory abstention does not apply.
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The proper question, then, is whether the district court would have another source of federal
jurisdiction over the Sergent Claims besides “related-to” bankruptcy jurisdiction under
§ 1334. See, e.g., In re TXNB Internal Case, 483 F.3d 292" date_filed="2007-03-28" court="5th Cir." case_name="Edge Petroleum Operating Co. v. GPR Holdings, L.L.C.">483 F.3d at 300 (holding that bankruptcy courts
may not exercise supplemental jurisdiction and upholding a denial of mandatory abstention
because the district court could have exercised supplemental jurisdiction over the non-core
proceeding). Unsurprisingly, the Plaintiff has not identified any case that frames the
question as whether the bankruptcy court had another basis for federal jurisdiction over the
claims. Because this Court can exercise supplemental jurisdiction over the Sergent Claims,
the Court does not need to wade into the parties’ tempest over whether the state court can
adjudicate the Sergent Claims in a timely fashion. The Bankruptcy Court was not required to
abstain from hearing the Sergent Claims.
III. The Plaintiff’s Motion to Withdraw: There Is Cause To Withdraw the
Reference, But Doing So Is Premature.
Because mandatory abstention does not apply, the Sergent Claims remain in
Bankruptcy Court. Consequently, the Court must evaluate the Plaintiff’s motion to withdraw
with respect to both the A&M Claims and the Sergent Claims.
District courts have discretion to withdraw “in whole or in part, any case or
proceeding” referred to the bankruptcy court “for cause shown.” 28 U.S.C. § 157(d); Steed
v. Knox Forex Group, LLC (In re Rivas), 2009 WL 2929424, at *1 (E.D. Tenn. Sept. 8,
2009). The Bankruptcy Code does not define “cause.” Courts determine whether cause
exists by balancing the following factors: (1) whether the right to a jury trial exists; (2)
whether the matter is core or non-core; (3) promoting judicial economy; (4) promoting
uniformity in bankruptcy administration; (5) reducing forum shopping and confusion; (6)
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conserving the creditor’s and debtor’s resources; and (7) expediting the bankruptcy process.
See, e.g., In re Rivas, 2009 WL 2929424, at *2; In re Orion Pictures Corp., 4 F.3d 1095" date_filed="1993-09-17" court="2d Cir." case_name="In Re Orion Pictures Corporation, Debtor, Orion Pictures Corporation v. Showtime Networks, Inc., Formerly Known as Showtime/the Movie Channel, Inc.">4 F.3d at 1101;
Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992" date_filed="1985-12-04" court="5th Cir." case_name="Holland America Insurance Company v. Succession of Shepherd J. Roy, the Union Bank and Central Pecan Shelling Company, Inc.">777 F.2d 992, 999 (5th Cir. 1985); CIT
Grp./Commercial Servs., Inc. v. Constellation Energy Commodities Grp., Inc. (In re Black
Diamond Mining Co.), 2010 WL 5173271, at *1 (E.D. Ky. Dec. 14, 2010) (listing these as
six factors instead of seven, but separately emphasizing the importance of a determining
whether the claim is core) (citing Big Rivers Elec. Corp. 182 B.R. 751" date_filed="1995-05-24" court="W.D. Ky." case_name="Big Rivers Elec. Corp. v. Green River Coal Co., Inc.">182 B.R. at 754). As the party
seeking withdrawal, the Plaintiff has the burden of proving that the Court should withdraw
the reference. In re Black Diamond Mining Co., 2010 WL 5173271, at *1 (citing Holland v.
LTV Steel Co., Inc., 288 B.R. 770" date_filed="2002-05-29" court="N.D. Ohio" case_name="Holland v. LTV Steel Company, Inc.">288 B.R. 770, 773 (N.D. Ohio 2002)).
Here, the Plaintiff has met that burden, but her timing is premature. Because the
Plaintiff has a jury trial right on all of her causes of action, cause to withdraw the reference
“automatically exists” regardless of the remaining factors. E.g., Caudill v. Burrows (In re
Oasis Corp.), 2008 WL 2473496, at *2 (S.D. Ohio June 18, 2008) (No. C2-08-00288).
Significant pretrial matters, however, remain unfinished. Therefore, the Court denies the
Plaintiff’s motion to withdraw the reference without prejudice until the case is trial-ready.
A. The Plaintiff has a right to a jury trial on all of her causes of action.
The plaintiff is entitled to a jury trial on both the Sergent Claims and the A&M
Claims. Under the Seventh Amendment of the United States Constitution, the right to a jury
trial “shall be preserved” in “Suits at common law.” A litigant is entitled to a jury trial only
on issues that resolve legal rights rather than equitable ones. Bledsoe v. Emery Worldwide
Airlines, Inc., 635 F.3d 836" date_filed="2011-02-16" court="6th Cir." case_name="David Bledsoe v. Emery Worldwide Airlines">635 F.3d 836, 841 (6th Cir. 2011) (citing Wooddell v. Int’l Bhd. Of Elec.
Wkrs., Local 71, 502 U.S. 93" date_filed="1991-12-04" court="SCOTUS" case_name="Wooddell v. International Brotherhood of Electrical Workers, Local 71">502 U.S. 93, 97 (1991)). Whether an action involves legal or equitable
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rights, in turn, depends upon a two-part inquiry into the nature of the cause of action and the
nature of the remedy sought (the “Granfinanciera test”). See generally Granfinanciera, S.A.
v. Nordberg, 492 U.S. 33" date_filed="1989-06-23" court="SCOTUS" case_name="Granfinanciera, S.A. v. Nordberg">492 U.S. 33 (1989). The Court must (1) compare the nature of the claim to
“18th-century actions brought in the courts of England prior to the merger of the courts of
law and equity,” and (2) evaluate the remedy that the Plaintiff seeks to “determine whether it
is legal or equitable in nature.” Id. (quoting Chauffeurs, Local No. 391 v. Terry, 494 U.S.
558, 565 (1990)). The second inquiry is “more important” in this analysis. Id. (quoting
Terry, 494 U.S. at 565).
(1) The Plaintiff has the right to a jury trial on the Sergent Claims.
The Plaintiff alleges two theories of liability against Sergent: First, Sergent engaged
in unlawful self-dealing by causing Black Diamond to pay him commissions and royalties on
the coal it sold, and this alleged breach of fiduciary duty led to the company’s losses and
eventual downfall. Compl., McKinstry, Pikeville No. 10-110-ART, R. 1-1 at 24 ¶¶ 53–55
(Count I). Second, Sergent mismanaged Black Diamond by causing the company to rely on
the spot market to satisfy its long-term Supply Contracts, and these grossly negligent
decisions led to the company’s losses and eventual downfall. Id. at 25 ¶¶ 56–59 (Count II).
The Plaintiff is entitled to a jury trial on both claims.
Getting to this conclusion, however, requires “rattling through dusty attics of ancient
writs.” Terry, 494 U.S. at 575 (1990) (Brennan, J., concurring in part and concurring in the
judgment). Historically, a corporation could hold its officers and directors liable for
mismanaging its affairs by suing them in courts of equity for breach of fiduciary duty. See,
e.g., The Charitable Corp. v. Sutton, (1742) 26 Eng. Rep. 642 (Ch.) 644–45 (the first
reported case in which a court of equity held “committee-men,” or directors of a corporation,
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liable for breach of trust); Overend, Gurney & Co. v. Gurney (1869) 4 L.R. 701 (Ch.App.) (a
seminal English court of equity case involving claims against directors of a corporation, for
breach of trust, fraud, and mismanagement); P.D. Finn, Fiduciary Obligations 1 (1977)
(noting that fiduciary duties developed in courts of equity); L.S. Sealy, Fiduciary
Relationships, 1962 Cambridge L.J. 69, 69–72 (summarizing the historical development of
“breach of confidence” claims against trustees, corporate directors, and other fiduciaries in
English courts of equity).
But this oft-repeated story does not tell the whole tale of officer and director liability.
While courts of equity were busy enforcing directors’ fiduciary duties as quasi-trustees,
courts of law treated directors as quasi-agents of the corporation. 3 John Norton Pomeroy,
Equity Jurisprudence and Equitable Remedies § 1089 (1905) (discussing the “rights, duties,
and liabilities” that resulted from the directors’ simultaneous status as quasi-agents and
quasi-trustees). Corporations thus had two options for pursuing claims of director liability:
an “action on the case at law to recover damages” or a “suit in equity to compel them to
account.” William L. Clark, Jr., Handbook on the Law of Private Corporations ch. XIII
§ 204 (1916). This concurrent jurisdiction over officer and director liability is unsurprising.
There was a “continual process of borrowing by one jurisdiction from the other,” which was
“not accompanied by an equivalent sloughing off of functions.” Fleming James, Jr., Right to
a Jury Trial in Civil Actions, 72 Yale L.J. 655, 658–59 (1963); see also id. at 692 (“[I]ssues
are not inherently legal or equitable. They are like chameleons which take their color from
surrounding circumstances.”).
Because of these parallel theories of director and officer liability, a corporation like
Black Diamond would have been able to sue Sergent for his alleged mismanagement in
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either law under negligence or equity under breach of fiduciary duty. Therefore, the first
step of the Granfinanciera test shows that Black Diamond’s gross negligence action against
Sergent was historically an action at law, while its breach of fiduciary duty claim was
equitable.
This preliminary conclusion invites the second, more important step of the
Granfinanciera test: when is money a legal remedy and when it is equitable? After all,
money is the “traditional form of relief offered in the courts of law,” but it is not always a
legal remedy. Terry, 494 U.S. at 570 (quoting Curtis v. Loether, 415 U.S. 189" date_filed="1974-02-20" court="SCOTUS" case_name="Curtis v. Loether">415 U.S. 189, 196 (1974)).
A monetary remedy is equitable only when it is a form of equitable restitution or it is
“incidental to or intertwined with injunctive relief.” Id. at 571 (quoting Tull v. United States,
481 U.S. 412" date_filed="1987-04-28" court="SCOTUS" case_name="Tull v. United States">481 U.S. 412, 424 (1987)). Because the Plaintiff has not asked for injunctive relief, the only
question is whether the monetary remedy she seeks for the Sergent Claims is a form of
equitable restitution. It is not. For both claims, the Plaintiff seeks compensatory damages
for the losses that Black Diamond sustained—the quintessential form of legal relief. Leary v.
Daeschner, 349 F.3d 888" date_filed="2003-11-19" court="6th Cir." case_name="Mary Elizabeth Leary and Glenda H. Williams v. Stephen Daeschner">349 F.3d 888, 910 (6th Cir. 2003) (quoting Hildebrand v. Bd. of Tr. of Mich.
State Univ., 607 F.2d 705" date_filed="1979-09-17" court="6th Cir." case_name="John Hildebrand v. Board of Trustees of Michigan State University">607 F.2d 705, 708 (6th Cir. 1979) (“In the ordinary case, if the relief sought
includes compensatory and/or punitive damages, then there does exist a right to trial by
jury.”); accord Pereira v. Farace, 413 F.3d 330" date_filed="2005-06-30" court="2d Cir." case_name="Pereira v. Farace - concurrence">413 F.3d 330, 340–41 (2d Cir. 2005) (holding that a
breach of fiduciary duty claim for compensatory damages entitled the plaintiff to a jury trial).
Moreover, the money Plaintiff seeks is not from specific funds or property in Sergent’s
possession. Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204" date_filed="2002-01-08" court="SCOTUS" case_name="Great-West Life & Annuity Insurance v. Knudson">534 U.S. 204, at 213 (2002)
(holding that a monetary remedy is equitable either when the money sought by the plaintiff is
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clearly traceable to funds in the defendant’s possession or when it is awarded incidentally to
injunctive relief).
To sum up: Both steps of the Granfinanciera test support the right to a jury trial for
the gross negligence claim (Count II). With respect to the breach of fiduciary duty claim
(Count I), the first and second steps of the Granfinanciera test point in opposite directions,
but the legal nature of the remedy—the second step—breaks the tie.
At least one other court in this circuit disagrees with this latter conclusion, holding
that a breach of fiduciary duty claim is historically equitable and thus never carries a jury
trial right. See Official Comm. of Unsecured Creditors v. Hendricks, No. 04-066-MRM,
2008 WL 5428012, at *3–4 (S.D. Ohio Oct. 2, 2008). This analysis, however, is only the
first step of the Granfinanciera inquiry. The remainder of the Hendricks analysis suffers
from two fatal defects. First, it “conflates the two parts” of the Granfinanciera inquiry by
assuming that an equitable cause of action for breach of fiduciary duty necessarily entails an
equitable remedy. Terry, 494 U.S. at 571 n.8 (“The second part of the analysis, therefore,
should not replicate the ‘abstruse historical’ inquiry of the first part, but requires
consideration of the general types of relief provided by courts of law and equity.” (emphasis
added) (quoting Ross, 396 U.S. 531" date_filed="1969-11-10" court="SCOTUS" case_name="Ross v. Bernhard">396 U.S. at 538 n.10 (1970)). Second, the Hendricks court failed to
explain why the monetary relief sought in that case was not a legal remedy entitling the
plaintiff to a jury trial. Instead, the court concluded that there was no jury trial right because
“other kinds of [equitable] relief”—which the plaintiff did not seek—would have been
available to rectify the breach of fiduciary duty. Id. But the rule cannot be that the
availability of equitable relief not sought by a litigant eviscerates a litigant’s jury trial right
for the legal relief he actually seeks. If this were the rule—and the Hendricks court cites no
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authority to suggest that it is, see id. at *4—then a litigant would only have the right to a jury
trial on claims for which legal relief is the only relief available. In fact, the Supreme Court
has said the exact opposite. E.g., Tull, 481 U.S. 412" date_filed="1987-04-28" court="SCOTUS" case_name="Tull v. United States">481 U.S. at 417 (“[T]he Court must examine both the
nature of the action and the remedy sought.”) (emphasis added); accord Parsons v. Bedford,
28 U.S. (3 Pet.) 433, 446–47 (1830) (Story, J.) (holding that the Seventh Amendment
preserves the right to a jury trial in “not merely suits, which the common law recognized
among its old and settled proceedings, but suits in which legal rights were to be ascertained
and determined, in contradistinction to those where equitable rights alone were recognized,
and equitable remedies were administered”); see also Curtis, 415 U.S. 189" date_filed="1974-02-20" court="SCOTUS" case_name="Curtis v. Loether">415 U.S. at 190–91 (holding
that a statutory damages for actions carried the right to a jury trial, even though the plaintiff
had been previously awarded injunctive relief under the same statute).
Consider the following scenario: A corporation sues its officer for mismanagement
back in the days of the divided bench. If the corporation was trying to recover profits that
the officer gained through his misconduct and that were still in his possession, then the
corporation had to bring a bill in equity for breach of fiduciary duty and seek an accounting
of the profits. If the corporation was successful, the court of equity would determine the
amount of the unjustly gained profits and hand title of the defendant’s profits over to their
true owner, the corporation. By contrast, if the corporation sought to recover losses caused
by the officer’s misconduct that were not traceable to any particular funds in his possession,
then the corporation had to bring a negligence action in a court of law.4 A jury would
4
In addition to awarding the amount of the defendant’s unjust enrichment, courts of equity sometimes awarded
incidental damages for breaches of fiduciary duty. See Joyce, Actions By and Against Corporations at Law and in
Equity § 262. Courts of equity engaged in this practice, however, as part of the equitable clean-up doctrine, not
because incidental damages were a form of equitable relief. The equitable clean-up doctrine was a doctrine of
procedural efficiency. It gave courts of equity discretion to award legal relief that was incidental to any equitable
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determine the amount of damages, and the court would grant the plaintiff a judgment as a
creditor. Great-West Life, 534 U.S. 204" date_filed="2002-01-08" court="SCOTUS" case_name="Great-West Life & Annuity Insurance v. Knudson">534 U.S. at 213; see also Joseph Asbury Joyce, Actions By and
Against Corporations at Law and in Equity § 262 (1910) (“But a corporation may sue one or
more of its directors in equity for an accounting with respect to property of the corporation
which has actually come into his or their hands, or for fraudulent breach of trust in the
management of the corporation or its property and for the recovery of the value of the
property lost . . . . So, too, it has an action at law against one or more directors for damages
sustained by the corporation in consequence of his or their wrongful, negligent official acts
of misfeasance or nonfeasance.”); People v. Equitable Life Assur. Soc’y, 109 N.Y.S. 453" date_filed="1908-03-06" court="N.Y. App. Div." case_name="People v. Equitable Life Assurance Society of United States">109 N.Y.S. 453,
468 (N.Y. App. Div. 1908) (“A corporation may have a cause of action in equity against one
or more directors for an accounting with respect to property of the corporation that has
actually come into his or their hands, or for a fraudulent breach of trust with respect to the
management of the corporation or its property, and for the recovery of the value of property
lost . . . . It may also have one or more causes of action at law against one or more directors
for damages sustained by the corporation in consequence of his or their wrongful or
negligent official acts falling within the terms ‘misfeasance’ or ‘nonfeasance.’”) (emphasis
added) (internal citations omitted); 4 William Meade Fletcher, Cyclopedia of the Law of
Private Corporations § 2670 (1918) (similar). The Seventh Amendment preserves this divide
today, and consequently, the Plaintiff is entitled to have a jury hear the Sergent Claims
because both claims seek legal remedies.
relief to avoid forcing the plaintiff to bring separate actions in law and in equity to recover his full losses. See, e.g.,
1 John Norton Pomeroy A Treatise on Equity Jurisprudence § 236–41 (1881); see also Wright v. Scotton, 121 A. 69" date_filed="1923-01-16" court="Del." case_name="Wright v. Scotton">121 A. 69,
74 (Del. Ch. 1923) (internal citations omitted) (explaining the purpose behind the equitable clean-up doctrine);
Medtronic, Inc. v. Intermedics, Inc., 725 F.2d 440" date_filed="1984-02-10" court="7th Cir." case_name="Medtronic, Inc., a Minnesota Corporation v. Intermedics, Inc., a Texas Corporation, and Intermedics Illinois, Inc., a Texas Corporation">725 F.2d 440, 442–43 (7th Cir. 1984) (discussing limitations on the equitable
clean-up doctrine). Therefore, this practice of awarding incidental damages does not change the fact that
compensatory money damages were generally a form of legal relief.
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(2) The Plaintiff has the right to a jury trial on the claims against Genser
and Tate.
The Plaintiff also has a right to a jury trial on all of the A&M Claims. Before
reaching the first step of the Granfinanciera inquiry, however, a threshold question lingers:
what cause of action does the Plaintiff allege against Genser and Tate? The complaint calls it
“willful misconduct and gross negligence”—the same title as one of the allegations against
Sergent. Compl., McKinstry, Pikeville No. 10-110-ART, R. 1-1 at 26–27 ¶¶ 66–73 (Counts
IV and V). But the “constitutional right to trial by jury cannot be made to depend on the
choice of words used in the pleadings.” Dairy Queen, Inc. v. Wood, 369 U.S. 469" date_filed="1962-04-30" court="SCOTUS" case_name="Dairy Queen, Inc. v. Wood">369 U.S. 469, 477–78
(1962).
The Plaintiff describes her cause of action as gross negligence against officers of a
company for the lost value of Black Diamond’s estate and correspondingly claims the right
to a jury trial. See generally Pl.’s Supp. Br. on Jury Trial Issue, McKinstry, Pikeville No. 11-
133-ART, R. 22. The A&M Defendants describe the action as breach of fiduciary duty
against the functional equivalent of a trustee for a surcharge, to which they claim that there is
no jury trial right. See generally A&M’s Supp. Br. Jury Trial Issue, id., R. 19.
Neither party is quite right. Under the first step of Granfinanciera, the nature of the
action—breach of the officers’ fiduciary duty to maximize the value of the estate—is
historically equitable. To understand why, a quick bankruptcy primer is necessary. When a
bankruptcy case commences, the Bankruptcy Code creates an estate to hold broad swaths of
the debtor’s property. 11 U.S.C. § 541(a). To ensure that the property in the estate is
optimally used to reorganize or liquidate the debtor (depending on the aim of the
bankruptcy), someone has to represent the interests of the estate. The Bankruptcy Code
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provides two possible representatives: either a disinterested, court-supervised trustee, id.
§ 323(a), or the debtor in possession itself, id. § 1107(a). If a trustee is appointed, then the
trustee owes a fiduciary duty to “maximize the value of the estate” for all of its creditors.
Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343" date_filed="1985-04-29" court="SCOTUS" case_name="Commodity Futures Trading Commission v. Weintraub">471 U.S. 343, 352 (1985). But when no
trustee is appointed—like here—the debtor corporation “bears essentially the same fiduciary
obligation” to maximize value for the creditors. Naturally, these fiduciary duties fall upon
the debtor’s officers, like Genser and Tate. Wolf v. Weinstein, 372 U.S. 633" date_filed="1963-04-15" court="SCOTUS" case_name="Wolf v. Weinstein">372 U.S. 633, 649–50 (1963).
In short, a bankruptcy court’s “willingness to leave the Debtor in possession is premised
upon an assurance” that the debtor’s officers will carry out the trustee’s fiduciary duties. Id.
at 651.
Here, the Plaintiff alleges that Genser and Tate failed to capitalize on various
opportunities to lock in profitable, long-term contracts and did not sell any coal while
running Black Diamond. Compl., McKinstry, 442 B.R. 567" date_filed="2011-01-12" court="E.D. Ky." case_name="McKinstry v. Sergent">442 B.R. 567 (Pikeville No. 10-110-ART),
R. 1-1 at 16–22 ¶¶ 32–47. Instead, Genser and Tate supposedly followed the preference of
CIT Capital and the other lenders for a “quick sale” of Black Diamond to the detriment of the
estate’s other creditors. Id. at 23–24 ¶ 52. In other words, the Plaintiff alleges that Genser
and Tate only tried to benefit one constituency of creditors—the lenders—and therefore did
not maximize the value of the estate for all of the creditors. These allegations amount to a
breach of fiduciary duty. See id. at 16 ¶ 33 (alleging that the A&M Defendants had “a
fiduciary duty to maximize the value of [Black Diamond] for all creditors and equity holders,
not just for the Lenders”).
The Plaintiff may be correct that individual instances of Genser and Tate’s
mismanagement could be described in terms of gross negligence or willful misconduct. Pl.’s
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Supp. Br., McKinstry, Pikeville No. 11-133-ART, R. 23 at 8–9. But there are two reasons
why the Plaintiff’s allegations nonetheless constitute equitable claims for breach of fiduciary
duty rather than legal claims for gross negligence. First, the complaint itself alleges that
Genser and Tate breached their fiduciary duty to maximize the recovery to all of the estate’s
creditors. See, e.g., Compl., 442 B.R. 567" date_filed="2011-01-12" court="E.D. Ky." case_name="McKinstry v. Sergent">442 B.R. 567 (Pikeville No. 10-110-ART), R. 1-1 at 16 ¶ 32
(“Because of CIT’s close relationship with A&M and the fact that A&M owed its position in
the case to CIT, A&M, Genser and Tate became locked on CIT’s goal of a quick sale of the
Company to the exclusion of all other alternatives . . . .”); id. at 16 ¶ 33 (“A&M, Genser and
Tate had no right to follow only the instructions and preferences of the Lenders, which had
directed that A&M be retained for Black Diamond’s bankruptcy.”); id. at 16–17 ¶ 34 (“[The
A&M Defendants’] stubborn adherence to the preference of the Lenders for a quick sale of
the Company resulted in a willful disregard and reckless indifference to carrying out the most
basic of tasks that would have produced a significantly higher recovery to all creditors and
other stakeholders.”). Second, the Plaintiff’s approach would convert nearly all equitable
breach of fiduciary duty claims into legal actions for gross negligence. This approach is not
consistent with how courts have historically drawn the line between law and equity. Courts
of equity did not lose jurisdiction over breach of fiduciary duty claims merely because a
plaintiff alleged that a fiduciary was grossly negligent in some respect. Some grossly
negligent act or other willful misconduct formed the basis for the breach of fiduciary duty
claim in the first place. See supra Part III.A(1) (discussing history of officer and director
liability). Therefore, under the first step of the Granfinanciera inquiry, the complaint alleges
an equitable breach of fiduciary duty claim against two officers of a debtor corporation for
money damages.
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But the A&M Defendants’ victory on the first step is short-lived because the second
step of the inquiry reveals that the Plaintiff seeks a legal remedy: compensatory damages.
Recall the reasoning applied to the Sergent Claims. Money is the “traditional form of relief
offered in the courts of law.” Terry, 494 U.S. at 570 (quoting Loether, 415 U.S. 189" date_filed="1974-02-20" court="SCOTUS" case_name="Curtis v. Loether">415 U.S. at 196). It is
only an equitable remedy in two circumstances: when the plaintiff seeks equitable restitution
of property or funds in the defendant’s possession or when the money is “incidental to or
intertwined with injunctive relief.” Id. at 570–71 (quoting Tull, 481 U.S at 424).
In response, the A&M Defendants propose a third circumstance in which money is an
exclusively equitable remedy: an action for “surcharge” against a breaching fiduciary, which
requires him to “make the estate whole” by paying money. A&M’s Supp. Br. on Jury Trial
Issue, McKinstry, Pikeville No. 11-133-ART, R. 22 at 5 (citing Robbins v. Schuyler (In re
United Equip. Sales Co.), 47 B.R. 818" date_filed="1985-03-27" court="Bankr. W.D. Mich." case_name="Robbins v. Schuyler (In Re United Equipment Sales Co.)">47 B.R. 818, 821 (Bankr. W.D. Mich. 1985), and Ellis v. Rycenga
Homes, Inc., 2007 WL 1032367, at *2–3 (W.D. Mich. 2007)). A surcharge is not an
equitable action itself, but instead is a remedy “only available as part of an accounting.”
Susan Harthill, A Square Peg in a Round Hole: Whether Traditional Trust Law “Make-
Whole” Relief Is Available Under ERISA Section 502(A)(3), 61 Okla. L. Rev. 721, 751
(2009); E. Daniel Robinson, Embracing Equity: A New Remedy for Wrongful Health
Insurance Denials, 90 Minn. L. Rev. 1447, 1469–70 (2006). An accounting, in turn, is an
equitable mechanism requiring a trustee to account for “receipts, disbursements, and property
on hand.” Harthill, supra, at 751 (quoting George G. Bogert & George T. Bogert, Law of
Trusts & Trustees § 963 (2d ed. 1982)). The A&M Defendants argue that the exclusively
equitable remedy of surcharge was available against not just trustees, but all fiduciaries,
including corporate officers like themselves.
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But history, logic, and law do not support this argument. First, it is not clear that a
surcharge is the equivalent of compensatory damages. The authorities are split on this issue.
See Harthill, supra, at 771 (describing how “none of [the relevant treatises] address whether
equity attached any particular conditions” to make-whole relief and the surcharge remedy).
At least some authorities, however, indicate that the measure of a surcharge was limited to
the defendant’s unjust gain—not any consequent losses to the plaintiff. Compare, e.g.,
1 Dan B. Dobbs, Law of Remedies § 4.3(5) (2d ed. 1993) (describing an accounting and
surcharge as being limited to the defendant’s unjust profits) and Joel Eichengrun, Remedying
the Remedy of Accounting, 60 Ind. L.J. 463, 485 (1985) (similar) with Harthill, A Square Peg
in a Round Hole, 61 Okla. L. Rev. at 769 (quoting 1 Pomeroy, Equity Jurisprudence and
Equitable Remedies § 158) (explaining that whether monetary relief for breach of trust was
available in law or equity depended on “the nature and object of the trust” and the type of
breach). But see Bogert & Bogert, The Law of Trusts and Trustees § 971 (indicating that a
surcharge could include both the defendant’s unjust profits and any consequent losses to the
plaintiff). These same authorities also indicate that an award of monetary relief for a
plaintiff’s losses sometimes accompanied a surcharge under the equitable clean-up doctrine,
which permitted courts of equity to award incidental legal relief for reasons of procedural
efficiency. See supra p. 33 note 3 (explaining the equitable clean-up doctrine). Even if
compensatory relief for losses accompanied a restitutionary surcharge, this practice simply
reflects the equitable clean-up doctrine at work and does not necessarily indicate that the
compensatory aspect was equitable.
Second, even if a surcharge against a fiduciary is compensatory just like money
damages, history makes clear that compensatory relief in the form of money was also
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available in courts of law against corporate officers and directors for their mismanagement of
a corporation. See supra Part III.A(1). Because historically there was concurrent equitable
and legal jurisdiction over compensatory money damages against a corporate director, see
id., the Plaintiff retains her right to have a jury determine the amount of damages.
Third, the A&M Defendants assume that if the Trustee’s cause of action is an
equitable one for breach of fiduciary duty, then the remedy she seeks must be an equitable
accounting. A&M’s Br. in Resp., McKinstry, Pikeville No. 11-133-ART, R. 4 at 28–29. But
the Supreme Court has expressly foreclosed this argument because it “conflates the two
parts” of the Granfinanciera inquiry and would render moot the “more important” analysis
of the remedy sought. Terry, 494 U.S. at 571 n.8 (“The second part of the analysis,
therefore, should not replicate the ‘abstruse historical’ inquiry of the first part, but requires
consideration of the general types of relief provided by courts of law and equity.” (emphasis
added) (quoting Ross v. Bernhard, 396 U.S. 531" date_filed="1969-11-10" court="SCOTUS" case_name="Ross v. Bernhard">396 U.S. 531, 538 n.10 (1970))). Here, the Plaintiff has
not asked for anything resembling an accounting of the estate’s property, and so a surcharge
would not be available on the facts of this case.
Even if a surcharge against corporate officers was an equitable form of compensatory
relief, accepting this argument would blur the categorical distinctions that the Supreme Court
has imposed on the law-equity divide. In the Seventh Amendment context, the Supreme
Court has held monetary relief to be equitable in only two circumstances: equitable
restitution or a money awarded “incidental to or intertwined with injunctive relief.” Id. at
570–71 (quoting Tull, 481 U.S. 412" date_filed="1987-04-28" court="SCOTUS" case_name="Tull v. United States">481 U.S. at 424). In the context of determining what constitutes
“equitable relief” in the Employee Retirement Income Security Act, the Supreme Court has
also hewed to these rule-like categories. There, the only forms of compensatory damages it
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recognizes as equitable are equitable restitution and an accounting for profits—neither of
which is compensatory. Great-West, 534 U.S. 204" date_filed="2002-01-08" court="SCOTUS" case_name="Great-West Life & Annuity Insurance v. Knudson">534 U.S. at 234.
To be sure, Great-West is “not a Seventh Amendment case.” Reese v. CNH America
LLC, 574 F.3d 315" date_filed="2009-07-27" court="6th Cir." case_name="Reese v. CNH AMERICA LLC">574 F.3d 315, 328 (6th Cir. 2009). But its discussion of when money is an equitable
remedy for ERISA extends to the Seventh Amendment context because both rely on the
same two-step inquiry. Great-West, 534 U.S. 204" date_filed="2002-01-08" court="SCOTUS" case_name="Great-West Life & Annuity Insurance v. Knudson">534 U.S. at 716 (“[The law-equity inquiry] is an inquiry,
moreover, that we are accustomed to pursuing, and will always have to pursue in other
contexts,” such as determining the “scope of the Seventh Amendment right to jury trial.”).
Indeed, the Supreme Court has relied on its Seventh Amendment discussions of law and
equity when deciding the scope of “equitable relief” under ERISA. See, e.g., Mertens v.
Hewitt Assocs., 508 U.S. 248" date_filed="1993-06-01" court="SCOTUS" case_name="Mertens v. Hewitt Associates">508 U.S. 248, 255 (1993) (relying on two Seventh Amendment cases, Curtis,
415 U.S. 189" date_filed="1974-02-20" court="SCOTUS" case_name="Curtis v. Loether">415 U.S. at 196, and Terry, 494 U.S. at 570)). And other courts have recognized that the
Supreme Court’s discussion of equitable remedies in the ERISA context extends to the
Seventh Amendment context. See, e.g., Dexis Credit Local v. Rogan, 629 F.3d 612" date_filed="2010-11-24" court="7th Cir." case_name="Dexia Credit Local v. Rogan">629 F.3d 612, 626 (7th
Cir. 2010); Braunstein v. McCabe, 571 F.3d 108" date_filed="2009-06-26" court="1st Cir." case_name="Braunstein v. McCabe">571 F.3d 108, 120 (1st Cir. 2009); Pereira v. Farace, 413
F.3d 330, 340–41 (2d Cir. 2005); Chao v. Meixner, No. 1:07-cv-0595-WSD, 2007 WL
4225069, at *5 (N.D. Ga. Nov. 27, 2007); see also Pereira, 413 F.3d 330" date_filed="2005-06-30" court="2d Cir." case_name="Pereira v. Farace - concurrence">413 F.3d at 346 (Newman, J.,
concurring). Compensatory damages against corporate officers must thus remain a form of
legal relief.
Genser and Tate try to avoid this conclusion by shoehorning themselves into the
trustee box, claiming that they are the “functional equivalent[s]” of trustees. Before the
merger of law and equity, they argue, courts of equity had exclusive jurisdiction over trusts.
Accordingly, any remedy sought against a trustee or its functional equivalent is exclusively
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equitable. They therefore contend that the monetary relief sought against them must be
exclusively equitable, and no jury trial right attaches.
Genser and Tate may be right about the history, but they are wrong about the analogy.
They are correct that only a court of equity could grant compensatory relief against a trustee
in the form of a surcharge. Cigna Corp. v. Amara, 563 U.S. ___, 131 S. Ct. 1866" date_filed="2011-05-16" court="SCOTUS" case_name="CIGNA Corp. v. Amara">131 S. Ct. 1866, 1880
(2011) (citing Princess Lida of Thurn & Taxis v. Thompson, 305 U.S. 456, 464 (1939)) (in
dicta); id. at 1884 (Scalia, J., concurring) (recognizing that the majority’s discussion of
surcharge was “purely dicta”); see also Terry, 494 U.S. at 571 n.8 (noting that damages
awarded to beneficiaries for a trustee’s breach of trust “were available only in courts of
equity because those courts had exclusive jurisdiction over actions involving a trustee’s
breach of his fiduciary duties”); Third Restatement of Trusts § 95 cmt. b (“If a breach of trust
causes a loss, including any failure to realize income, capital gain, or appreciation that would
have resulted from proper administration, the beneficiaries are entitled to restitution and may
have the trustee surcharged for the amount necessary to compensate fully for the
consequences of the breach.”); Bogert & Bogert, The Law of Trusts and Trustees § 862 (“For
a breach of trust the trustee may be directed by the court to pay damages to the beneficiary
out of the trustee’s own funds, either in a suit brought for that purpose or on an accounting
where the trustee is surcharged beyond the amount of his admitted liability.”). But this
observation should come as no surprise. Trusts were within the exclusive province of the
courts of equity because courts of law refused to recognize them at all. SEC v. Cavanagh,
445 F.3d 105" date_filed="2006-04-10" court="2d Cir." case_name="Securities v. Thomas Edward Cavanagh">445 F.3d 105, 118–19 (2d Cir. 2006) (citing 3 William Blackstone, Commentaries on the
Laws of England 431 (photo. reprint 1992) (1768)); id. at 119 n.31 (citing Stewart E. Sterk,
Asset Protection Trusts: Trust Law’s Race to the Bottom?, 85 Cornell L. Rev. 1035, 1040–42
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(2000)); see also Blackstone, Commentaries, 431–32 (“[A] technical trust indeed, created by
the limitation of a second use, was forced into a court of equity . . . [and] ha[s] ever since
remained as a kind of peculium in those courts.”). Therefore, all remedies against a
breaching trustee could be classified as equitable.
But Genser and Tate are not sufficiently analogous to trustees. The question is this:
do Genser and Tate trace their authority, and thus the basis for their liability, to the equitable
powers of the Bankruptcy Court to appoint and oversee trustees and other court officers?
Accord Yadkin Valley Bank & Trust Co. v. McGee (In re Hutchinson), 5 F.3d 750" date_filed="1993-09-16" court="4th Cir." case_name="In Re John Everett Hutchinson v. Linda Mcgee Trustee">5 F.3d 750, 757–58
(4th Cir. 1993) (reasoning that bankruptcy trustees trace their authority to the powers of
courts of equity that supervised their actions, thus concluding that claims against them are
akin to equitable claims for breach of trust).
They do not. Genser and Tate are correct that the Bankruptcy Court authorized Black
Diamond to hire Genser as CRO, who then hired Tate as CFO. See CRO Order, Underlying
Bankruptcy, R. 56 at 2–3. But they derive their powers primarily from their employment as
corporate officers and not from the Bankruptcy Court’s power to supervise over Chapter 11
trustees and other court officers:
The scope of their services and compensation was explicitly defined in the
Engagement Letter, much like any officer hired by a corporation.
Engagement Letter, McKinstry, Pikeville No. 11-133-ART, R. 2 Ex. 3 at 1
(setting forth the relationship between A&M and Black Diamond,
“including the scope of the services to be performed and the basis of
compensation for those services”).
A Chapter 11 trustee must be “one disinterested person,” 11 U.S.C.
§ 1104(b)(1), but Genser could hire other individuals to help run Black
Diamond. Engagement Letter, McKinstry, Pikeville No. 11-133-ART, R. 2
Ex. 3 ¶ 1.a(iii). He could do so without the Bankruptcy Court’s further
approval. Cf. 11 U.S.C. § 1104(a) (requiring the Bankruptcy Court to give
notice and conduct a hearing before appointing a trustee).
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Unlike a trustee, the Bankruptcy Court did not require Genser, Tate, and
any additional management to be “disinterested.” Mem. Op., Adversary
Proceeding, R. 144 at 5 (“The Court agrees with the A&M Parties that
their retention as officers of the Debtors did not implicate the principles of
disinterestedness.”) (emphasis added); cf. 11 U.S.C. § 1104(b)(1)
(requiring the trustee to be disinterested); id. § 101(14) (defining
“disinterested person”). If the Bankruptcy Court had required them to
satisfy the disinterested requirement, they could not have done so. See In
re Palm Coast, Matanza Shores Ltd., 101 F.3d 253" date_filed="1996-11-27" court="2d Cir." case_name="In Re Palm Coast, Matanza Shores Limited Partnership, a Connecticut Limited Partnership, Debtor. United States Trustee v. Marvin J. Bloom, Trustee">101 F.3d 253, 258 (2d Cir. 1996) (“A
trustee who hires his own professional firm to assist him cannot be a
‘disinterested person’ who has no interest adverse to the estate.”); Pl.’s
Supp. Br. on Jury Trial Issue, Pikeville No. 11-133-ART, R. 22 at 3
(noting that the A&M Defendants would not have been disinterested
because “A&M received a preferential payment of more than $272,000 on
the eve of [Black Diamond’s] bankruptcy”).
Genser and Tate did not have to apply to the Bankruptcy Court to have
their compensation approved, and their fees were not subject to the
Bankruptcy Court’s detailed review and approval after notice and a
hearing. Cf. 11 U.S.C. § 330 (requiring the Bankruptcy Court to determine
the “amount of reasonable compensation to be awarded to an examiner,
trustee under Chapter 11, or professional person” based on an enumerated
list of factors).
A&M could substitute Steven Cohn, another A&M employee, for Genser
as CRO at A&M’s discretion and without the Bankruptcy Court’s
approval. CRO Order, Underlying Bankruptcy, R. 56 at 2; cf. 11 U.S.C.
§ 1104(d) (requiring the Bankruptcy Court to approve a trustee’s
replacement if the original trustee fails to qualify, dies, resigns, or is
removed).
Genser and Tate could terminate their employment for any reason and
without the Bankruptcy Court’s approval by giving thirty days’ notice to
Black Diamond. Engagement Letter, McKinstry, Pikeville No. 11-133-
ART, R. 2 Ex. 3 ¶ 3. They did not derive this thirty-day termination right
from any part of the Bankruptcy Code or any order of the Bankruptcy
Court, but from their Engagement Letter with Black Diamond. Id.
Moreover, this termination right was a two-way street: Black Diamond
could also terminate Genser and Tate’s employment upon thirty days’
notice. The Bankruptcy Code neither permits a debtor in possession to fire
its appointed trustee without court approval nor permits a trustee to
terminate his appointment without court approval. Cf. 11 U.S.C. § 1105
(requiring bankruptcy courts to give notice and hold a hearing before
approving the termination of a trustee’s appointment).
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Bankruptcy trustees and court-appointed officers who represent the estate
are entitled to absolute quasi-judicial immunity for actions “within the
scope of the authority conferred upon [them] by statute or the court.”
Harris v. Wittman (In re Harris), 590 F.3d 730" date_filed="2009-12-21" court="9th Cir." case_name="Harris v. Wittman">590 F.3d 730, 742 (9th Cir. 2009)
(quoting Read v. Duck (In re Jacksen), 105 B.R. 542" date_filed="1989-09-27" court="9th Cir. BAP" case_name="Read v. Duck (In Re Jacksen)">105 B.R. 542, 545 (9th Cir. B.A.P.
1989)). Here, however, the Bankruptcy Court determined that the A&M
Defendants are not entitled to quasi-judicial immunity for any of the A&M
Claims. Mem. Op., Adversary Proceeding, R. 144 at 4–5.
Genser did have many of the powers necessary to run Black Diamond during its
bankruptcy. But the hybrid nature of Genser’s CRO position actually undermines any
analogy to a trustee. His powers, although coincident with a trustee’s powers, were the same
as those of any corporate officer to run his company. Indeed, the Bankruptcy Code does not
include any provision for the position of CRO. Other than the parties’ consent, the
Bankruptcy Court did not expressly rely upon any part of the Bankruptcy Code—the only
source of its judicial powers—to create the CRO position. Because Genser’s CRO position
lacks any of the Code’s limitations on trustees or professional persons, this judicial
reprogramming of the Bankruptcy Code is hardly an invocation of the Code’s specifically
enumerated equitable powers. See, e.g., In re SunCruz Casinos, LLC, 298 B.R. 821" date_filed="2003-09-05" court="Bankr. S.D. Florida" case_name="In Re SunCruz Casinos, LLC">298 B.R. 821, 832
(Bankr. S.D. Fla. 2003) (holding that if a debtor’s management needs to be replaced, the
Bankruptcy Code provides for the appointment of a trustee but does not contemplate the
appointment of a restructuring officer to perform the duties of a trustee); In re Kobra Props.,
406 B.R. 396" date_filed="2009-06-01" court="Bankr. E.D. Cal." case_name="In Re Kobra Properties">406 B.R. 396, 400–01 (Bankr. E.D. Cal. 2009) (noting that a motion to appoint a CRO
elicited the court’s “skepticism because of the vagueness of the CRO concept in the context
of chapter 11 . . . and the inability to articulate whether and how those duties would contrast
with the duties of a chapter 11 trustee”); In re Tamarack Resort, LLC, 2010 WL 4117459, at
*14 (Bankr. D. Idaho 2010) (holding that the Bankruptcy Code does not tolerate the
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appointment of a CRO with less than the full duties and accountability of a trustee or debtor
in possession).
In short, the Bankruptcy Court could not have used its limited equitable power to craft
and oversee Genser’s position as CRO and Tate’s position as CFO. See generally Michael P.
Cooley, Two Round Holes and One Square Peg: The Employment of Turnaround
Consultants under §§ 327 and 363, Am. Bankr. Inst. J., Sept. 24, 2005, at 42 (explaining
how the employment of CROs “subsist[s] in the twilight” between various Bankruptcy Code
provisions). Instead, the Bankruptcy Court turned Genser and Tate loose to orchestrate the
rebirth of Black Diamond by running the company. Thus, any liability to the Plaintiff for
causing the estate to lose value stems from their employment as corporate officers. And as
the Court has already explained, compensatory damages against a corporate officer are a
legal remedy. See supra Part III.A(1). Like the Sergent Claims, the fact that the Plaintiff
seeks a legal remedy—compensatory damages—carries the day and entitles her to a jury
trial. Accord Amschwand v. Spherion Corp., 505 F.3d 342" date_filed="2007-10-18" court="5th Cir." case_name="Amschwand v. Spherion Corp.">505 F.3d 342, 348 (5th Cir. 2007) (“Obtaining
the lost policy proceeds [from a fiduciary], as [the plaintiff] requests, is simply a form of
make-whole damages. This demand is not equitable in derivation, but is akin to the legal
remedies of extracontractual or compensatory damages.”) (citations omitted), cert. denied by
12 S. Ct. 2995 (June 27, 2008); Pereira, 413 F.3d 330" date_filed="2005-06-30" court="2d Cir." case_name="Pereira v. Farace - concurrence">413 F.3d at 340–41 (holding that a breach of
fiduciary duty claim for compensatory money damages entitles the plaintiff to a jury trial);
Chao, 2007 WL 4225069, at *5–6 (rejecting this surcharge argument).
(3) The Plaintiff has the right to a jury trial on the claims against A&M.
Finally, the Seventh Amendment gives the Plaintiff the right to a jury trial against
A&M. The Plaintiff alleges that, as Genser’s and Tate’s employer, A&M is vicariously
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liable for their mismanagement of Black Diamond during its bankruptcy. Compl.,
McKinstry, 442 B.R. 567" date_filed="2011-01-12" court="E.D. Ky." case_name="McKinstry v. Sergent">442 B.R. 567 (Pikeville No. 10-110-ART), R. 1-1 at 25–26 ¶¶ 61–62; see also
Pl.’s Supp. Br., Pikeville No. 11-133-ART, R. 28 at 10. The A&M Defendants concede that
the Plaintiff has a jury trial right against A&M if she has such a right against both Genser and
Tate. Mots. Hr’g Tr., McKinstry, Pikeville No. 11-129-ART, R. 31 at 72–73 (Mr.
Goodchild: “If the complaint is read as claiming respondeat superior against A&M, then the
claim against A&M ought to follow what’s done with respect to the claim against the two
individuals.”). Because the Plaintiff has a jury trial right against Genser and Tate, she also
has such a right against A&M.
(4) Black Diamond’s bankruptcy does not waive the Plaintiff’s jury trial
rights.
Black Diamond’s use of the Chapter 11 process has not waived the Plaintiff’s jury
trial rights on either the Sergent Claims or the A&M Claims. As the assignee of Black
Diamond’s A&M Claims, the Plaintiff has no greater right to a jury trial than Black Diamond
possessed. See, e.g., Nat’l City Bank Nw. v. Columbian Mut. Life Ins. Co., 282 F.3d 407" date_filed="2002-02-27" court="6th Cir." case_name="National City Bank, Northwest v. Columbian Mutual Life Insurance Company">282 F.3d 407, 409
(6th Cir. 2002); Young v. Kenneth Jackson Elec., Inc., 2006 WL 2787077, at *3 (Ky. Ct.
App. 2006). In the Sixth Circuit, a debtor that “voluntarily files for bankruptcy and is a
defendant in an adversary proceeding” loses any right to a jury trial that it may have had on
certain claims. Longo v. McLaren (In re McLaren), 3 F.3d 958" date_filed="1993-08-30" court="6th Cir." case_name="Bankr. L. Rep. P 75,430 in Re William J. McLaren Debtor. William Longo, Sr. v. William J. McLaren">3 F.3d 958, 961 (6th Cir. 1993). In
McLaren, first-time investor William Longo turned to stockbroker William McLaren for
financial advice. Id. at 959. McLaren convinced Longo to invest in business ventures in
which McLaren had a personal financial interest—investments that eventually proved
disastrous for Longo. Id. Meanwhile, because McLaren owed more than $10,000,000 to
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various creditors, he voluntarily filed for bankruptcy. Id. Longo wanted to sue McLaren for
the investment losses, but the Bankruptcy Code’s automatic stay prevents a party from
“commencing or continuing any litigation outside of the bankruptcy case to recover his
claim.” Id. at 961. To pursue his claim against McLaren, Longo had to initiate an adversary
proceeding as a creditor in the bankruptcy court, which stripped him of any jury trial right he
might have had on the claim. Id. at 959. McLaren then tried to invoke his jury trial right in
the adversary proceeding. Id. But the Sixth Circuit held that McLaren had lost any such
right by voluntarily filing for bankruptcy. Id. at 961. To hold otherwise, the court reasoned,
would unjustly permit debtors to run into bankruptcy court to “block their creditors’ access to
a jury trial without compromising their own ability to demand a jury in their preferred
forum.” Id. (quoting N.I.S. Corp. v. Hallahan (In re Hallahan), 936 F.2d 1496" date_filed="1991-07-10" court="7th Cir." case_name="In The Matter of Nelson Grant Hallahan v. Nelson Grant Hallahan">936 F.2d 1496, 1506 (7th
Cir. 1991)).
Sergent and the A&M Defendants contend that Black Diamond’s bankruptcy has
similarly extinguished its right to a jury trial on the Sergent Claims and the A&M Claims.
McLaren is not directly on point. Black Diamond neither entered bankruptcy voluntarily nor
was sued as a defendant in the Sergent Claims and the A&M claims. And three reasons
counsel against extending McLaren to this case.
First, unlike the debtor in McLaren, Black Diamond started as an involuntary debtor.
Black Diamond’s lenders dragged Black Diamond and its seven subsidiaries into bankruptcy
court involuntarily. When the parent corporation, Black Diamond Resources LLC, realized
that it could not escape Chapter 11, it consented to an agreed order for relief, submitted to the
bankruptcy process, and even took advantage of the automatic bankruptcy stay. See
Underlying Bankruptcy, R. 59; id., R. 69. Being dragged kicking and screaming into an
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involuntary bankruptcy hardly indicates Black Diamond’s “knowing and voluntary waiver”
of its jury trial rights. Hergenreder v. Bickford Senior Living Group, LLC, 656 F.3d 411" date_filed="2011-08-30" court="6th Cir." case_name="Hergenreder v. Bickford Senior Living Group, LLC">656 F.3d 411,
420 (6th Cir. 2011) (quoting K.M.C. Co. v. Irving Trust Co., 757 F.2d 752" date_filed="1985-03-04" court="6th Cir." case_name="K.M.C. Co., Inc. v. Irving Trust Company">757 F.2d 752, 755–56 (6th Cir.
1985)).
In response, the defendants attempt to reject the importance of a distinction between
voluntary and involuntary debtors. They argue that once Black Diamond was in bankruptcy,
the company fully availed itself of the bankruptcy process—for example, by obtaining the
court’s permission to reject the Consulting & Sales Agreement and the Royalty Agreement.
This cooperation with the bankruptcy process, the defendants contend, is sufficiently
voluntary to count as a waiver. But the concern underlying McLaren—the inequity of
permitting a defendant to wrap itself in the protection of the bankruptcy court and thereby
eliminate a plaintiff’s jury trial rights while keeping its own—does not logically extend to a
bankruptcy that began involuntarily. A waiver of constitutional rights in any context must be
clear, and Black Diamond’s cooperation with the bankruptcy process does not meet that
standard. See, e.g., College Sav. Banks v. Fla. Prepaid Postsecondary Educ. Expense Bd.,
527 U.S. 666" date_filed="1999-06-23" court="SCOTUS" case_name="College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board">527 U.S. 666, 682 (1999); Edelman v. Jordan, 415 U.S. 651" date_filed="1974-05-13" court="SCOTUS" case_name="Edelman v. Jordan">415 U.S. 651, 673 (1974); Fuentes v. Shevin,
407 U.S. 67" date_filed="1972-10-10" court="SCOTUS" case_name="Fuentes v. Shevin">407 U.S. 67, 95 (1972); Johnson v. Zerbst, 304 U.S. 458" date_filed="1938-05-31" court="SCOTUS" case_name="Johnson v. Zerbst">304 U.S. 458, 464 (1938); see also NDEP Corp.
v. Handl-It, Inc. (In re NDEP Corp.), 203 B.R. 905" date_filed="1996-12-30" court="D. Del." case_name="NDEP Corp. v. Handl-It, Inc. (In Re NDEP Corp.)">203 B.R. 905, 912–13 (D. Del. 1996) (“[C]ourts should
not be eager to embrace an implied waiver of constitutional rights where there is an
affirmative and timely assertion of such rights”). Under defendants’ standard, an involuntary
debtor can preserve its constitutional right to a jury only by not cooperating with the
bankruptcy proceeding. For this proposition, the defendants cite no case law and for good
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reason. Once dragged into court, the standard cannot be remain uncooperative and your
rights are preserved.
The voluntary-involuntary distinction also provides a bright-line rule that
unmistakably demarcates when a waiver has been knowing and intelligently given. It would
be difficult for a party—never mind a court retrospectively evaluating bankruptcy filings—to
pinpoint when a party’s conduct crossed the threshold into a knowing and voluntary waiver.
Consider the unpredictability of the defendants’ proposal in light of the facts of this case. Is
one voluntary bankruptcy out of eight enough? Does it matter that the parent company was
the sole voluntary debtor? Or that the parent company was just an empty holding company
for the subsidiaries? Or that the involuntary debtors cooperated with the bankruptcy
process? What kinds of cooperation matter and how much do they matter? Is it enough to
consent to an order of relief proposed by another party? And so on. Judicial modesty
counsels against any attempt to draw a constitutionally significant line based on a judge’s
“intuitive sense of how far is too far.” Blakeley v. Washington, 542 U.S. 296" date_filed="2004-06-24" court="SCOTUS" case_name="Blakely v. Washington">542 U.S. 296, 308 (2004)
(rejecting a case-by-case approach for the Sixth Amendment’s right to a jury trial because
“the very reason the Framers put a jury-trial guarantee in the Constitution is that they were
unwilling to trust government to mark out the role of the jury”).
Second, the potential for inequity in McLaren is not present here. In McLaren, the
debtor was a potential defendant in a lawsuit, and the debtor voluntarily sought the protective
shield of the bankruptcy court. The debtor’s bankruptcy triggered the automatic stay, which
required the would-be plaintiff to submit his claim to the equitable jurisdiction of the
bankruptcy court and thereby surrender any right to a jury trial he may have otherwise had.
Of course, the automatic stay forced Sergent to submit his Proofs of Claim to the equitable
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jurisdiction of the Bankruptcy Court and thereby surrender his rights to a jury trial on those
claims. McLaren prevents Black Diamond from inequitably invoking any right to a jury trial
on the Proofs of Claim. But the Defendants argue that McLaren also compels the
extinguishing of Black Diamond’s right to a jury trial on the Sergent Claims. Unlike
McLaren, however, Black Diamond was a potential plaintiff in a lawsuit against Sergent.
Yet only claims against a debtor—not by a debtor—trigger the automatic stay and are
required to proceed in bankruptcy court. See 11 U.S.C. § 362(a)(1)–(8). Consequently,
Black Diamond’s bankruptcy did not force Sergent to give up any jury trial right he may
have had on the Sergent Claims. There is thus no McLaren-like concern that Black Diamond
could have inequitably used the bankruptcy process as both a sword to strike down Sergent’s
right to a jury trial on the Sergent claims and a shield to protect its own right to a jury trial on
the Sergent Claims. Accord WSC, Inc. v. The Home Depot, Inc. (In re WSC, Inc.), 286 B.R.
321, 326 (Bankr. M.D. Tenn. 2002) (rejecting an extension of McLaren to claims in which
the debtor is the plaintiff).
Third and finally, a debtor submitting to the equitable jurisdiction of the bankruptcy
court does not do so for all possible claims. By voluntarily filing for bankruptcy, a debtor
only waives a jury trial right on those claims whose resolution “is necessarily part of the
process of the disallowance and allowance of claims.” Billing v. Ravin, Greenberg &
Zackin, P.A., 22 F.3d 1242" date_filed="1994-05-23" court="3rd Cir." case_name="Anders Billing Diann Billing v. Ravin">22 F.3d 1242, 1252 n.14 (3d Cir. 1994); see also Ross, 396 U.S. 531" date_filed="1969-11-10" court="SCOTUS" case_name="Ross v. Bernhard">396 U.S. at 538
(holding that “legal claims are not magically converted into equitable issues by their
presentation to a court of equity”). As the Court has already held, the Sergent Claims are not
“equivalent to an objection” to Sergent’s Proofs of Claim such that the Sergent Claims
become part of the equitable claims allowance and disallowance process. Citicorp N. Am. v.
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Finley (In re Wash. Mfg. Co.), 133 B.R. 113" date_filed="1991-10-04" court="M.D. Tenn." case_name="Citicorp North America, Inc. v. Finley (In Re Washington Manufacturing Co.)">133 B.R. 113, 117 (M.D. Tenn. 1991); see also supra Part I.A
(describing the nature of the Sergent Claims). And post-petition A&M Claims have nothing
to do with the allowance and disallowance of claims in the Bankruptcy Court. Accord
Germain v. Conn. Nat’l Bank, 988 F.2d 1323" date_filed="1993-03-24" court="2d Cir." case_name="Thomas M. Germain, Trustee for the Estate of O'sullivan's Fuel Oil Co., Inc. v. The Connecticut National Bank">988 F.2d 1323, 1329–31 (2d Cir. 1993) (refusing to hold that
filing bankruptcy automatically forfeits a trustee’s right to a jury trial in a lawsuit that sought
“compensation for damage done” and had “nothing to do with the essence of the bankruptcy
regulatory scheme of allowing or reordering claims”); see also supra Part III.A(2)
(describing the nature of the A&M Claims). The Bankruptcy Court’s allowance and
disallowance of claims against the estate would not resolve either of these sets of
counterclaims. In short, the constitutional right to a trial by jury is “not so ephemeral” that it
dissipates because of Black Diamond’s cooperation with the bankruptcy process. In re
NDEP Corp., 203 B.R. 905" date_filed="1996-12-30" court="D. Del." case_name="NDEP Corp. v. Handl-It, Inc. (In Re NDEP Corp.)">203 B.R. at 912.
(5) The Plaintiff’s jury trial rights have not been contractually waived.
Nor does the Engagement Letter between Black Diamond and A&M waive the
Plaintiff’s jury trial rights on the A&M Claims. Near the beginning of the bankruptcy, Black
Diamond hired Genser, Tate, and A&M by entering into an Engagement Letter with A&M.
This Engagement Letter waived Black Diamond’s and A&M’s jury trial rights “in any
action, proceeding or counterclaim brought by or on behalf of the parties hereto with respect
to any matter relating to or arising out of the performance or non-performance of [Black
Diamond] or A&M hereunder.” Engagement Letter, McKinstry, Pikeville No. 11-133-ART,
R. 2 Ex. 3 ¶ 9. Once the hope of a successful reorganization vanished and the Bankruptcy
Court assigned the A&M Claims to the Trust, the Plaintiff and A&M entered into a
Settlement Agreement, which does not contain a jury trial waiver. The Settlement
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Agreement includes an integration clause, which indicates that the Settlement Agreement
“supersedes any and all prior agreements between the parties concerning the matters set forth
herein.” Settlement Agreement, id., R. 2 Ex. 1 ¶ 17.
The Settlement Agreement’s absence of a jury trial waiver supersedes the
Engagement Letter’s jury trial waiver. An integrated agreement, such as the Settlement
Agreement, supersedes all prior agreements to the extent that the prior agreements are
inconsistent with the integrated agreement on the same subject matter. Bluegrass Ctr., LLC
v. U.S. Intec, Inc., 49 F. App’x 25" date_filed="2002-10-09" court="6th Cir." case_name="Bluegrass Center, LLC v. U.S. Intec, Inc.">49 F. App’x 25, 33–34 (6th Cir. 2002); see also KFC Corp. v. Darsam
Corp., 543 F. Supp. 222" date_filed="1982-06-07" court="W.D. Ky." case_name="KFC Corp. v. Darsam Corp.">543 F. Supp. 222, 225 (W.D. Ky. 1982); Second Restatement of Contracts § 213(2)
(“A binding completely integrated agreement discharges prior agreements to the extent that
they are within its scope.”).
The Settlement Agreement governs the scope of the Plaintiff’s rights to bring claims
against the A&M Defendants for mismanaging Black Diamond during the bankruptcy. The
Settlement Agreement set up a comprehensive framework for recovering against the A&M
Defendants by:
Assigning the A&M Claims to the Trust for prosecution instead of
releasing the A&M Defendants from any liability to Black Diamond.
Compare Settlement Agreement, McKinstry, Pikeville No. 11-133-ART,
R. 2 Ex. 3 ¶ 1 with id. at 2 (twelfth “whereas” clause).
Requiring the Trust to “post adequate security” for the A&M Defendants’
defense costs before filing any suit against them and establishing detailed
procedures for how the Trust can set up the security as well as how A&M
can draw from it. Id. ¶¶ 2–3.
Laying out timing and procedural requirements for the Plaintiff’s
commencement of any action against the A&M Defendants. Id. ¶ 4.
Specifying the limits of the Trust’s recovery on the A&M Claims
depending on whether the claims were subject to indemnity under the
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Engagement Agreement. Id. ¶ 6. Specifically, the parties agreed to limit
the Trust’s recovery for claims covered by various insurance policies, but
not to limit the Trust’s recovery for claims that fell outside the insurance
coverage. Id.
Obtaining the Committee’s (the predecessor to the Trust) promise not to
object to the release of other claims against A&M. Id. ¶ 8.
Requiring each party to bear its own attorney’s fees and costs for any
claims against the A&M Defendants described in the Settlement
Agreement. Id. ¶ 15.
If the parties had wanted to require the Plaintiff to resolve her claims without a jury, they
would have incorporated this waiver from the Engagement Letter into the Settlement
Agreement. They did not.
In response, the A&M Defendants contend that the subject matter of the Settlement
Agreement was much narrower. The Settlement Agreement, they argue, only “resolved the
Trust’s objections to the proposed [Plan of Liquidation] regarding the terms of the Debtors’
indemnification” of the A&M Defendants. A&M’s Br. in Resp., McKinstry, Pikeville No.
11-133-ART, R. 4 at 22. There is no doubt that the Settlement Agreement smoothed the way
to confirming the plan of liquidation. But as the foregoing sample of its terms indicates, the
Settlement Agreement addresses a much broader subject matter than just Black Diamond’s
indemnification of the A&M Defendants.
The A&M Defendants also argue that the Settlement Agreement does not negate the
Engagement Letter’s jury trial waiver because the Settlement Agreement does not mention
the right to a jury trial at all. This logic turns contractual interpretation on its head. For
example, the parties expressly chose to incorporate the indemnification provisions of the
Engagement Letter into the Settlement Agreement. See Settlement Agreement, McKinstry,
Pikeville No. 11-133-ART, R. 2 Ex. 3 ¶ 9. If all of the terms of the Engagement Letter not
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mentioned in the Settlement Agreement continue in full force, as the A&M Defendants
contend, then this incorporation of the indemnification provisions is completely superfluous.
Indeed, the A&M Defendants’ method of interpretation would almost completely erase the
need for incorporation by reference at all.
And contrary to the A&M Defendants’ fears, the Settlement Agreement does not
abrogate the entirety of the Engagement Letter. The Settlement Agreement only supersedes
the Engagement Letter to the extent that that the Engagement Letter sets forth conditions and
limitations on suits against the A&M Defendants. All other aspects of the Engagement
Letter remain in force.
The A&M Defendants also argue that the Settlement Agreement cannot revoke Black
Diamond’s waiver of its jury trial rights because Black Diamond was not a party to the
Settlement Agreement. A&M’s Supp. Br., McKinstry, Pikeville No. 11-133-ART, R. 21
at 7. But by waiting until the second round of supplemental briefing to raise this argument,
they have waived it. Cf. Scottsdale Ins. Co. v. Flowers, 513 F.3d 546" date_filed="2008-01-16" court="6th Cir." case_name="Scottsdale Insurance v. Flowers">513 F.3d 546, 553 (6th Cir. 2008)
(holding that a party waived an argument before the district court by first raising it in her
reply brief and the other side was “not afforded a response to this reply”).
Even if doubt remains about the scope of the Settlement Agreement, this Court must
“indulge every reasonable presumption against waiver.” Sambo’s Rests., Inc. v. City of Ann
Arbor, 663 F.2d 686" date_filed="1981-11-04" court="6th Cir." case_name="Sambo's Restaurants, Inc., and Sambar Properties, Inc. v. The City of Ann Arbor George W. Gardner and G. M. Scofield">663 F.2d 686, 690 (6th Cir. 1981) (quoting Aetna Ins. Co. v. Kennedy, 301 U.S. 389" date_filed="1937-05-17" court="SCOTUS" case_name="Aetna Insurance v. Kennedy Ex Rel. Bogash">301 U.S. 389,
393 (1937); see also Winter v. Minn. Mut. Life Ins. Co., 199 F.3d 399" date_filed="1999-12-03" court="7th Cir." case_name="Douglas S. Winter v. Minnesota Mutual Life Insurance Company">199 F.3d 399, 407 n.11 (7th Cir.
1999) (“There is a presumption against waiver of the constitutional right to trial by jury.”).
The A&M Defendants have not rebutted this presumption.
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B. Even though there is cause to withdraw the reference, doing so would be
premature.
When a party is entitled to a jury trial, cause to withdraw the reference “automatically
exists” without regard to the remaining factors. E.g., Caudill v. Burrows (In re Oasis Corp.),
2008 WL 2473496, at *2 (S.D. Ohio June 18, 2008) (No. C2-08-00288). After all, the
Bankruptcy Code prohibits a bankruptcy court from conducting jury trials unless it is
“specially designated to exercise such jurisdiction by the district court” and has “the express
consent of all the parties.” 28 U.S.C. § 157(e). Because neither of these requirements is met,
the only question is when to withdraw the reference. And it is too soon to do so because
there are still unfinished pretrial matters with which the Bankruptcy Court has greater
familiarity.
Only half of this case appears ready for trial: the Plaintiff’s claims against the A&M
Defendants. Factual discovery between these parties closed on September 6, 2011.
Adversary Proceeding, R. 28 at 1 (July 27, 2011). Before the dispositive motions deadline
expired one week later, A&M filed a motion for summary judgment, id., R. 82, which the
Bankruptcy Court later denied, see Mem. Op., id., R. 144. And before the Court stayed the
Adversary Proceeding on October 21, 2011, the parties had partially briefed two motions in
limine, id., R. 115 & R. 116, and were scheduled to proceed to trial by affidavit on January
25, 2012, id., R. 132. Accord Mots. Hr’g Tr., Sergent, Pikeville No. 11-129-ART, R. 31 at
65 (Mr. Goodchild: “Your Honor, the case was ready to go. Discovery’s done. The experts
are picked. The trial exhibits are disclosed. All we had to do was submit the briefs and call
our first witness.”). But see id. at 65–66 (Mr. Goroff: “Discovery is not closed, Your
Honor.”).
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The Bankruptcy Court, however, remanded the Sergent Claims to state court on June
23, 2011. See Abstention Order, Adversary Proceeding, R. 58. Sergent has not responded to
the claims against him or had a chance to take any discovery on the claims in federal court.
He also has not had a chance to take discovery with respect to any theory of contribution he
may wish to pursue against the A&M Defendants. And he has not had a chance to file any
dispositive motions in the case. See A&M’s Notice of Filing, McKinstry, Pikeville No. 11-
133-ART, R. 17 at 5 (“[T]he claims against Sergent have not even been answered, no
discovery has occurred, and essentially that case has had no substantive proceedings.”);
Mots. Hr’g Tr., Sergent, Pikeville No. 11-129-ART, R. 31 at 41 (Mr. Geller: “So what about
the discovery, the redundant discovery we’re going to be doing of many of the same parties
to try to figure out who was at fault, if anyone was at fault?”); id. at 77 (Mr. Goodchild: “Mr.
Sergent hasn’t elected to take any kind of discovery or do anything like that.”); id. at 79 (The
Court: “Are you saying the case is ready for trial?” Mr. Goroff: “No. Absolutely not.”); id.
(Mr. Goroff: “[T]here is discovery that remains to be done. There is preparatory work that
remains to be done. It’s not that old of a case.”).
Therefore, the Court denies the Plaintiff’s motion to withdraw without prejudice. The
Bankruptcy Court shall handle all remaining pretrial matters in this case, including
determining and managing the scope of any remaining discovery by the parties. See, e.g., In
re Lost Peninsula Marina Dev. Co., LLC, 2010 WL 3070134, at *4 (E.D. Mich. Aug. 4,
2010); Doucet v. Drydock Coal Co. (In re Oakley), 2007 WL 710244, at *3 (S.D. Ohio Mar.
6, 2007). On the A&M Claims, the Bankruptcy Court may issue final decisions on all
dispositive motions, which it appears to have already done. In an abundance of caution,
however, the Bankruptcy Court will issue proposed findings of fact and conclusions of law
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on any dispositive motion involving the Sergent Claims. When the Bankruptcy Court
certifies in a written order that both the Sergent Claims and the A&M Claims are trial-ready,
then the Court will grant any party’s motion to withdraw the reference. At that time, the
Court will set a trial schedule and handle any motions in limine that may arise.
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CONCLUSION
Accordingly, it is ORDERED that:
1) With respect to Sergent’s appeal, Pikeville No. 11-129-ART, the Bankruptcy
Court’s Abstention and Remand Order, McKinstry v. Sergent, No. 11-07010-
JMS (Bankr. E.D. Ky. 2008), R. 27, is VACATED AND REVERSED IN
PART. The Bankruptcy Court’s order to abstain from and remand the
Plaintiff’s state-law claims against Sergent is VACATED AND REVERSED.
The Bankruptcy Court’s order refusing to abstain from the Plaintiff’s state-law
claims against the A&M Parties has not been appealed to this Court, and so the
Court does not address the merits of that decision. Sergent’s appeal, Pikeville
No. 11-129-ART, is STRICKEN from this Court’s active docket.
2) The Plaintiff’s amended motion to withdraw the reference of its state-law
claims against Sergent and the A&M Parties, Pikeville No. 11-133-ART, R. 2,
is DENIED WITHOUT PREJUDICE. The Bankruptcy Court shall
CONDUCT all remaining pretrial matters, including any discovery on the
Sergent Claims. If further dispositive motions arise, the Bankruptcy Court
must SUBMIT proposed findings of fact and conclusions of law on any issues
involving the Sergent Claims and must ENTER final orders on any issues
involving the A&M Claims. The Bankruptcy Court shall CERTIFY in a
WRITTEN ORDER when (a) all fact and expert discovery has closed; (b) the
dispositive motions deadline has expired and the Bankruptcy Court has ruled
on all dispositive motions; and (c) the case is trial-ready. At this time, any
party may file a motion to withdraw the reference in this Court. Upon
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withdrawal, the Court will schedule a date for trial and set a briefing timeline
for any motions in limine and other trial matters. This action for withdrawal,
Pikeville No. 11-133-ART, is STRICKEN from this Court’s active docket.
3) The Court previously stayed the Bankruptcy Court’s Abstention Order,
McKinstry v. Sergent, No. 11-07010-JMS (Bankr. E.D. Ky. 2011), R. 27, until
the Court resolved Sergent’s appeal. Minute Entry Order, Pikeville No. 11-
129-ART, R. 20 at 2; Pikeville No. 11-133-ART, R. 12 at 2. Therefore, the
STAY, Pikeville No. 11-129-ART, R. 20 at 2; Pikeville No. 11-133-ART,
R. 12 at 2, IS LIFTED.
4) The Clerk shall SEND a copy of this Memorandum Opinion and Order to the
Clerk of the United States Bankruptcy Court for the Eastern District of
Kentucky.
5) The Plaintiff’s jury demand for Counts I, II, III, IV, and V is SUSTAINED.
This the 21st day of March, 2012.
60