New Bankruptcy Opinion: WEAVER COOKE CONSTRUCTION, LLC v. WATERPROOFING SPECIALTIES, INC. – Dist. Court, North Carolina, 2016

WEAVER COOKE CONSTRUCTION, LLC, Appellant,

v.

WATERPROOFING SPECIALTIES, INC., Appellee.

No. 5:14-CV-524-BR.

United States District Court, E.D. North Carolina, Western Division.

June 16, 2016.

ORDER

W. EARL BRITT, District Judge.

This matter is before the court on Weaver Cooke Construction, LLC’s (“Weaver Cooke”) appeal from the 27 August 2014 order of United States Bankruptcy Judge Stephani W. Humrickhouse. The issues have been fully briefed and are ripe for disposition.

The procedural and general factual background of the underlying proceeding has been set forth in prior orders of the court, see, e.g., Weaver Cooke Constr., LLC v. Curenton Concrete Works, Inc., No. 5:14-CV-515-BR, DE # 48 (E.D.N.C. June 8, 2016), and the court will not repeat them here. Appellee Waterproofing Specialties, Inc. (“WSI”) is a party with whom Weaver Cooke subcontracted to install and apply traffic coating and concealed waterproofing, among other things, at the subject construction project. On 27 August —, the bankruptcy court granted WSI’s motion for summary judgment, concluding that (1) the statute of limitations bars Weaver Cooke’s negligence and breach of express warranty claims to the extent such claims are based on sequencing defects related to WSI’s application of traffic coating to concrete balconies and (2) “WSI is entitled to judgment as a matter of law on Weaver Cooke’s negligence and breach of warranty claims to the extent that they relate to work performed by WSI on the parking and pool deck[s],” (DE # 1-2, at 17). The bankruptcy court has certified this order as final, and this court has likewise done so.

This court will review de novo the bankruptcy court’s legal conclusions and mixed questions of law and facts and will review for clear error its factual findings. See E. Carolina Masonry, Inc. v. Weaver Cooke Constr., LLC, No. 5:15-CV-252-BR, DE # 77, at 3-4 (E.D.N.C. Jan. 20, 2016). The court also reviews de novo the bankruptcy court’s order granting summary judgment. See Nader v. Blair, 549 F.3d 953, 958 (4th Cir. 2008) . Having reviewed the briefs and record in this case, [1] the court AFFIRMS the 27 August 2014 order on the grounds stated by the bankruptcy court. [2]

[1] The court has not considered the arguments that Weaver Cooke raises anew on appeal, that is, (1) the operative filing date for statute of limitations purposes is 19 April 2012 when it filed its motion for leave to file the second third-party complaint; (2) its breach of warranty claim accrued at the earliest on 30 March 2010; and (3) the statute of limitation on its breach of warranty claim was tolled while WSI undertook repairs, which was until after 14 June 2009. See Weaver Cooke Constr., LLC v. Stock Bldg. Supply, LLC, No. 5:14-CV-475-BR, DE # 58, at 3-5 (E.D.N.C. May 16, 2016).

[2] Weaver Cooke does not contest the bankruptcy court’s conclusion, based on undisputed facts, that WSI’s application of traffic coating on the parking and pool decks was not defective. (Br., DE # 44, at 21, 47.) It does, however, dispute the bankruptcy court’s order to the extent it concerns WSI’s application of concealed waterproofing on the pool deck. (Id. at 47.) Weaver Cooke defers argument on that issue and raises it in connection with the appeal of the bankruptcy court’s subsequent order on WSI’s motion for clarification, Waterproofing Specialties, Inc. v. Weaver Cooke Constr., LLC, No. 5:15-CV-145-BR (E.D.N.C.). WSI contends that Weaver Cooke’s deferral of argument results in a waiver of this issue. The court disagrees, and the issue will be addressed in Case No. 5:15-CV-145-BR.

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New Bankruptcy Opinion: WEAVER COOKE CONSTRUCTION, LLC v. CURENTON CONCRETE WORKS, INC. – Dist. Court, North Carolina, 2016

WEAVER COOKE CONSTRUCTION, LLC, Appellant,

v.

CURENTON CONCRETE WORKS, INC., Appellee.

No. 5:14-CV-515-BR.

United States District Court, E.D. North Carolina, Western Division.

June 8, 2016.

ORDER

W. EARL BRITT, District Judge.

This matter is before the court on Weaver Cooke Construction, LLC’s (“Weaver Cooke”) appeal from the 25 August 2014 order of United States Bankruptcy Judge Stephani W. Humrickhouse. The issues have been fully briefed and are ripe for disposition.

I. BACKGROUND

This dispute arises out of a real estate development project, a luxury condominium complex, in New Bern, North Carolina. Weaver Cooke served as the project’s general contractor and subcontracted with appellee Curenton Concrete Works, Inc. (“Curenton”) to pour concrete slabs at the project. At issue here is Curenton’s work on the concrete balcony slabs. That work was completed in February 2008.

In March 2009, New Bern Riverfront Development, LLC (“New Bern”), the project owner/developer, filed suit in state court against various parties, including Weaver Cooke and some subcontractors, based on the allegedly defective construction of the project. In November 2009, New Bern filed a petition for relief under Chapter 11 of the bankruptcy code, and shortly thereafter, the state court action was removed to this court and transferred to the Bankruptcy Court. New Bern later voluntarily dismissed the subcontractors from the action and filed its first amended complaint. Weaver Cooke and others remained defendants and new parties were added. In May 2010, Weaver Cooke answered New Bern’s first amended complaint and asserted third-party claims against certain parties, none of whom were subcontractors on the project.

In March 2012, New Bern served the report of its expert George Barbour (the “Barbour report”). That report identified a number of alleged construction defects, including some purportedly attributable to Curenton. With leave of court, in June 2012, Weaver Cooke filed its second third-party complaint, asserting claims against numerous subcontractors, including Curenton, for negligence, contractual indemnity, and breach of express warranty.

Curenton filed a motion for summary judgment on all Weaver Cooke’s claims. On 25 August 2014, the bankruptcy court granted the motion based on the statute of limitations defense as to the negligence and breach of express warranty claims. The court applied the three-year statute of limitations under N.C. Gen. Stat. § 1-52, with the discovery rule in N.C. Gen. Stat. § 1-50(a)(5)f, to find that the claims accrued when the defects attributable to Curenton became apparent or ought reasonably to have become apparent. The court concluded that the undisputed facts establish that Weaver Cooke knew of the defects attributable to Curenton at the latest in the spring of 2009, i.e., a time period prior to June 2009. With that date being more than three years before Weaver Cooke filed its second third-party complaint alleging claims against Curenton, the bankruptcy court concluded that the negligence and breach of warranty claims were time barred, and accordingly, the court granted summary judgment in favor of Curenton on those claims.

In September 2014, Weaver Cooke filed a motion for leave to appeal from this order, which this court denied in October 2014. In May 2015, the bankruptcy court certified the order as final pursuant to Federal Rule of Civil Procedure 54(b) and recommended that this court reconsider Weaver Cooke’s motion for leave to appeal as a motion for leave to appeal a final order. Thereafter, this court certified the 25 August 2014 order as final and directed the Clerk to reopen this action to allow the appeal to proceed.

II. DISCUSSION

The court will review de novo the bankruptcy court’s legal conclusions and mixed questions of law and facts and will review for clear error its factual findings. See E. Carolina Masonry, Inc. v. Weaver Cooke Constr., LLC., No. 5:15-CV-252-BR, DE # 77, at 3-4 (E.D.N.C. Jan. 20, 2016). “On summary judgment, in the bankruptcy court or on appeal, the same standard is employed.” Edmond v. Consumer Prot. Div. (In re Edmond), 934 F.2d 1304, 1307 (4th Cir. 1991) . “Summary judgment is appropriate only if taking the evidence and all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party, no material facts are disputed and the moving party is entitled to judgment as a matter of law.” Henry v. Purnell, 652 F.3d 524, 531 (4th Cir. 2011) (internal quotation marks and citation omitted); see also Fed. R. Bank. P. 7056 (incorporating same standard for Federal Rule of Civil Procedure 56 in adversary proceedings).

“Ordinarily, the bar of the statute of limitations is a mixed question of law and fact.” Yancey v. Watkins, 17 N.C. App. 515, 519, 195 S.E.2d 89, 92, cert. denied, 283 N.C. 394, 196 S.E.2d 277 (1973) . Only when “the law is properly pleaded and all the facts with reference thereto are admitted [does] the question of limitations become[ ] a matter of law.” Id. (citations omitted) (emphasis in the original). On the other hand, “where the facts are in doubt or in dispute and there is any evidence sufficient to justify the inference that the cause of action is not barred, the trial court may not withdraw the case from the jury.” Solon Lodge v. Ionic Lodge, 247 N.C. 310, 317, 101 S.E.2d 8, 13 (1957) (citing Garrett v. Stadiem, 220 N.C. 654, 18 S.E.2d 178 (1942), Majette v. Hood, Com’r of Banks, 208 N.C. 824, 179 S.E. 23 (1935), and Fort Worth R.R. v. Hegwood, 198 N.C. 309, 151 S.E. 641 (1930) ); see also Hatem v. Bryan, 117 N.C. App. 722, 724, 453 S.E.2d 199, 201 (1995) (stating that, “[w]hen . . . the evidence is sufficient to support an inference that the limitations period has not expired, the issue should be submitted to the jury”) (citations omitted); Yancey, 17 N.C. App. at 520, 195 S.E.2d at 93 (holding that the issue of whether the statute of limitations had expired was “properly submitted to the jury” when “all the facts with respect to the statute of limitations were not admitted and [ ] more than one inference could be drawn from the evidence”). Thus, in the event that any fact relating to the issue of whether Plaintiffs’ claims were time-barred was subject to legitimate dispute, such a factual issue is properly submitted to the jury rather than being resolved during consideration of a summary judgment motion.

Williams v. Houses of Distinction, Inc., 714 S.E.2d 438, 442-43 (N.C. Ct. App. 2011) (alterations in original).

The primary issue on appeal is when Weaver Cooke’s causes of action against Curenton accrued. [1] There is no dispute that the statute of limitations applicable to Weaver Cooke’s negligence and breach of warranty claims is three years, see N.C. Gen. Stat. § 1-52(1), (5), and that the claims accrue when Weaver Cooke knew or reasonably should have known of the defects attributable to Curenton, see id. § 1-50(a)(5)f. Weaver Cooke contends that in pouring the concrete slabs for some balconies, Curenton failed to achieve the proper slope required in the project’s plans and specifications. Such defects purportedly caused water to intrude at the balcony doors and damage the interior of condominiums.

In reaching the conclusion that Weaver Cooke had knowledge of these defects at least by the spring of 2009, the bankruptcy court relied on the testimony of several of Weaver Cooke’s management level employees involved with the project. That testimony is Weaver Cooke knew the following by the spring of 2009: balconies were improperly sloped; water standing on the balconies; water intrusion at the balcony doors; and damage to interiors resulting from such water intrusion. On appeal, Weaver Cooke does not dispute that its key employees had this knowledge. Rather, citing to the testimony of its President and another management level employee, it emphasizes that it did not know of the extent of the balcony slope issues or their contribution to water intrusion until it received the Barbour report in March 2012. Also, Weaver Cooke argues that three subcontractors, including Curenton, could have caused or contributed to the balcony issues, and even when it asserted the claims in its third-party complaint (in June 2012), it could not determine which of those subcontractors was responsible for the balcony issues. Thus, Weaver Cooke contends, there is sufficient evidence from which a jury might determine that defective conditions for which Curenton is purportedly responsible became apparent or should reasonably have become apparent within three years of its third-party complaint.

The court concludes that the bankruptcy court did not err in granting summary judgment to Curenton based on the statute of limitations defense. The knowledge that Weaver Cooke had by at the least spring of 2009 is key. It knew that some balconies were defective in that they were not properly sloped. It knew that water was standing on the balconies. It knew that water was entering condominiums through balcony doors and causing damage to the interiors. It knew that Curenton, having performed work in connection with the concrete balcony slabs, was a potentially responsible party. With this knowledge, the construction defects attributable to Curenton ought reasonably to have been apparent to Weaver Cooke by spring of 2009. See Pembee Mfg. Corp. v. Cape Fear Constr. Co., 329 S.E.2d 350, 354 (N.C. 1985) (recognizing that the many leaks in the plaintiff’s plant roof put it “on inquiry as to the nature and extent of the problem” and “[t]he fact that further damage which plaintiff did not expect was discovered does not bring about a new cause of action, it merely aggravates the original injury”). That time is more than three years prior to Weaver Cooke’s filing of the negligence and breach of warranty claims against Curenton. Accordingly, those claims are untimely.

The 25 August 2014 order of the bankruptcy court is AFFIRMED.

[1] For the reasons set forth in Weaver Cooke Constr., LLC v. Stock Bldg. Supply, LLC, No. 5:14-CV-475-BR, DE # 58, at 3-5 (E.D.N.C. May 16, 2016), the court declines to address the issues Weaver Cooke raises anew on appeal.

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New Bankruptcy Opinion: US Bank National Association v. LAKEVIEW RETAIL PROPERTY OWNER – Dist. Court, SD Mississippi, 2016

U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE, SUCCESSOR IN INTEREST TO BANK OF AMERICA, NATIONAL ASSOCIATION, AS TRUSTEE, SUCCESSOR BY MERGER TO LASALLE BANK NATIONAL ASSOCIATION, AS TRUSTEE, FOR THE REGISTERED HOLDERS OF BEAR STEARNS COMMERCIAL MORTGAGE SECURITIES INC., COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2006-PWR14, ACTING BY AND THROUGH ITS SPECIAL SERVICER, C-III ASSET MANAGEMENT LLC, Plaintiff,

v.

LAKEVIEW RETAIL PROPERTY OWNER, Defendant.

Case No. 1:15cv00404-LG-RHW.

United States District Court, S.D. Mississippi, Southern Division.

June 27, 2016.

ORDER APPOINTING RECEIVER AND GRANTING RELATED INJUNCTIVE RELIEF

LOUIS GUIROLA, Jr., Chief District Judge.

In accordance with the [33] Order Granting Motion for Appointment of Receiver and Injunctive Relief enter in this action on May 5, 2015, it is hereby ORDERED:

1. All terms not otherwise defined herein shall have the meaning given to them in the [1] Verified Complaint.

2. Pursuant to Section 11-5-151 of the Mississippi Code, The Estes Group, Inc. (the “Receiver”) is hereby appointed as receiver of the Collateral (as defined in the Verified Complaint), including all real and personal property relating to and including the “Facility” (as defined and further described in the Verified Complaint) which consists of a retail shopping center commonly known as the “Lakeview Village”, located in Harrison County, Mississippi, at 3586 Sangani Boulevard, D’Iberville Mississippi 39540. Brian Estes, President of The Estes Group, Inc., will be the point person and primary contact for the Receiver.

3. The Receiver will immediately assume all of its rights, powers, duties, liabilities, and responsibilities as receiver, and shall undertake any actions necessary of any kind as receiver, effective immediately upon entry of this Order (the “Effective Date”). On the Effective Date, the Receiver shall begin to exercise such duties, responsibilities, power, and authority with respect to the Collateral and the Facility as allowed by law and set forth herein.

4. The Receiver shall post a bond in the amount of $50,000.00 within five (5) business days after the Effective Date.

5. The Receiver shall immediately open and maintain a separate account with a federally insured banking institution or a savings association with offices in the State of Mississippi in the Receiver’s own name, as the Court-appointed receiver, from which the Receiver shall disburse all payments authorized by this Court. The Receiver shall also, as soon as possible, take all necessary steps to insure continuation of all necessary utility services to the Facility, such as those relating to the provision of sewer, water, electrical, and sanitation services, including establishing or transferring such accounts into the Receiver’s name as the Court-appointed receiver.

6. The Defendant is ordered to immediately surrender complete control of the Collateral and the Facility to the Receiver, and to provide the Receiver and its agents, employees and contractors with uninterrupted access to and control over all books, records, accounts and documents relating to the Collateral, the Facility and the operations thereon.

7. The Defendant is further ordered to immediately remit to the Receiver all funds which are rents, leases, royalties, issues, profits, proceeds, security deposits, revenue, income, or other benefits of any kind whatsoever, including insurance proceeds, insurance premium refunds and/or condemnation proceeds, that are derived, generated, or related to or from the Facility or other Collateral (collectively, the “Rents and Profits”) that are within its possession, custody or control as of the entry of this Order.

8. Within one (1) business day after receipt, the Defendant shall pay to the Receiver (or any agent identified by the Receiver) all Rents and Profits that come into the possession, custody or control of the Defendant subsequent to entry of this Order.

9. The Defendant shall immediately turn over to the Receiver on the Effective Date all books, records (including all current monthly and year-to-date operating statements, monthly rent rolls, balance sheets, and all information supporting said documents as reasonably requested by the Receiver), security deposits, escrows, leases, contracts, computers and access to all financial and other information relating to the Collateral, the Facility and the operations thereon, as maintained in any form including electronically, including information regarding computers and software programs utilized by the Defendant and all administrator access codes, passwords or keys thereto in order to give the Receiver full access to all such information relating to the Collateral, Facility and the operations thereon, including the Rents and Profits. To the extent that such material or information is held by third-parties, the Defendant shall take all reasonable and necessary measures to ensure access of the Receiver to the same.

10. Any and all other persons and entities in possession of or having custody or control over any documents, books, or accounting records relating to the Collateral and/or the operation of the Facility, including, but not limited to, the Defendant, shall deliver such materials to the Receiver forthwith, and shall account for and pay over to the Receiver any Rents and Profits in his/her/its possession. Included within such records are copies of all customer lists, service contracts, management contracts, utility bills, and any and all current or past operating statements for the Facility (including all current monthly and year to date operating statements, monthly rent rolls, balance sheets, and all information supporting said documents as may be reasonably requested by the Receiver), as well as any other documents maintained by the Defendant or its agents pertinent to the Collateral or the management or operation of the Facility.

11. Until further order of this Court, the Defendant and those acting in concert with the Defendant who are on notice of this Order, are hereby restrained and enjoined from interfering in any way with the Receiver’s access to the Collateral or the Facility, or with the Receiver’s management of the Collateral or the Facility or the operations thereon during the pendency of this action.

12. The Defendant is enjoined from removing any property from the Facility without the express written permission of the Receiver.

13. The Plaintiff shall post a bond in the amount of $10,000.00 within five (5) business days after the Effective Date, pursuant to Rule 65(c) of the Federal Rules of Civil Procedure.

14. The Defendant will reasonably cooperate with the Receiver in connection with obtaining any and all approvals, forms, and other documentation reasonably requested by the Receiver as maybe necessary for the Receiver to execute its duties and powers as set forth by this Order.

15. The Receiver shall have all of the usual powers and duties of receivers in similar cases, as set forth in the Verified Complaint, including, without limitation, the full power to hold, develop, rent, lease, manage, maintain, operate, market for sale, and enter into contracts to sell all or portions of the Facility and/or the Collateral (subject to the Plaintiff’s approval, and with final authority to sell any portion of the Facility and/or the Collateral requiring Court approval upon motion with notice to the Parties and all lienholders), and to otherwise use or permit the use of the Facility and the Collateral, subject to the Plaintiff’s approval (collectively, the “Receiver’s Powers”), including, without limitation:

(a) Enter upon and take possession and control of the Facility and all other Collateral, and to perform all acts necessary and appropriate for the operation and maintenance thereof;

(b) Take and maintain possession of all documents, books, records, papers and accounts relating to the Facility;

(c) Exclude the Defendant and its agents, servants and employees wholly from the Facility, including changing any and all locks, keys and/or passcodes to the Facility;

(d) Allow the Plaintiff, its counsel, appraisers, and other independent third-party consultants engaged by the Plaintiff or its counsel access to the Facility at all reasonable times to inspect the Facility and all books and records, and to cooperate with the Plaintiff, its counsel, appraisers and other independent third-party consultants to evaluate the Facility;

(e) Manage and operate the Facility under any existing name or trade name (or new name) if the Receiver deems appropriate to do so, subject to the consent of the Plaintiff;

(f) Exercise any and all rights of the Defendant and/or the Plaintiff (in any event, subject to the Plaintiff’s consent) in and to any and all license and/or franchise agreements related to the Facility or the Collateral;

(g) Retain, hire or discharge any on-site employees at the Facility (none of whom are or shall be deemed to be employees of the Plaintiff) without any liability to the Receiver or the Plaintiff;

(h) Establish pay rates for on-site employees at the Facility;

(i) Preserve, maintain, and make repairs and/or alterations to the Facility;

(j) Conduct a marketing or leasing program with respect to the Facility, or employ a marketing or leasing agent or agents to do so, directed to the leasing and/or sale of all or portions of the Facility, subject to the Plaintiff’s approval and under such terms and conditions as the Plaintiff may in its sole discretion deem appropriate or desirable (and with final authority to sell any portion of the Facility requiring Court approval upon motion with notice to the Parties and all lienholders);

(k) Employ such contractors, subcontractors, materialmen, architects, engineers, consultants, managers, brokers, marketing agents, or other employees, agents, independent contractors or professionals, as Plaintiff may in its sole discretion deem appropriate or desirable to implement and effectuate the rights and powers granted therein;

(l) Execute and deliver, as attorney-in-fact and agent of the Defendant or in the Defendant’s own name, such documents and instruments as are necessary or appropriate to consummate transactions authorized by this Order and/or any other order of this Court;

(m) Enter into such leases, whether of real or personal property, or tenancy agreements, under such terms and conditions as the Plaintiff may in its sole discretion deem appropriate or desirable;

(n) Collect and receive all Rents and Profits generated by the Facility;

(o) Eject tenants or repossess personal property, as provided by law, for breaches of the conditions of their leases or other agreements;

(p) Pursue legal remedies for unpaid Rents and Profits, payments, income, proceeds or any other claim, right or cause of action arising out of and/or related to the Collateral or the Facility, in the name of the Defendant and/or the Receiver;

(q) Maintain actions in forcible entry and detainer, ejectment for possession and actions in distress for rent;

(r) Compromise or give acquittance for Rents and Profits, payments, income or proceeds that may become due;

(s) Determine and report to the Court and the Plaintiff whether any Rents and Profits previously received by the Defendant have been used for purposes other than for the reasonably necessary maintenance, management and operating expenses of the Facility;

(t) Require any and all officers, directors, managers, agents, representatives, independent contractors, partners, affiliates, attorneys, accountants, shareholders and employees of the Defendant to turnover and deliver to the Receiver any and all Rents and Profits in their possession;

(u) To open and review mail directed to the Defendant and its representatives pertaining to the Facility or the Collateral;

(v) To analyze, determine, and implement the best approach to maximize value from the Collateral and the Facility for the benefit of the Defendant’s creditors and interest holders, including, without limitation, marketing the Facility for sale as a going concern and, subject to the Plaintiff’s approval, entering into contracts to sell all or portions of the Collateral and/or the Facility (with final authority to sell any portion of the Collateral and/or the Facility requiring Court approval, upon motion with notice the Parties and all lienholders); provided, however, that in no event shall the Receiver’s power to market the property for sale, or any other power granted hereunder, in any way impair the Plaintiff’s ability to exercise its rights and remedies under the Loan Documents, including, without limitation, the Plaintiff’s right to foreclose the Deed of Trust and/or to otherwise proceed with enforcement of the Plaintiff’s liens and security interests in and to the Collateral and/or the Facility;

(w) Facilitate the assumption of the Loan by a third party, subject to the Plaintiff’s prior written approval;

(x) Enter into contracts and agreements necessary to continue normal operations of the Facility in the name of the Defendant and/or the Receiver;

(y) Amend, modify or terminate any existing contracts affecting Collateral and/or the operations of the Facility, including but not limited to property management agreement, but only upon terms and conditions as are approved by the Plaintiff;

(z) Pay all appropriate real estate taxes, personal property taxes, or other taxes or assessments against the Facility, utilizing funds in property reserves, funds generated by the Facility, or funds that may be advanced by the Plaintiff (in the Plaintiff’s sole discretion, and with no obligation for the Plaintiff to make any such advances);

(aa) Exercise all rights of the Defendant in and to all government-issued permits, certificates, licenses or other grants of authority, to take all steps necessary to ensure the continued validity of such permits, certificates and licenses, and to take all steps necessary to comply with all requirements, regulations and laws applicable to the Facility;

(bb) Maintain a separate account with a federally insured banking institution or a savings association with offices in the State of Mississippi in the Receiver’s own name, as receiver, from which the Receiver shall disburse all payments authorized pursuant to this Order and/or any other order of the Court;

(cc) Receive and endorse checks, negotiable instruments and/or other transfers or tenders of funds pertaining to the Collateral and/or the Facility, either in Receiver’s name or in the Defendant’s name;

(dd) Do any acts which the Plaintiff (in its sole discretion) deems appropriate or desirable to protect the Facility and the Collateral, and to use such measures, legal or equitable (as the Plaintiff, in its sole discretion, deems appropriate or desirable) to implement and effectuate the provisions of the Loan Documents.

16. The Receiver shall maintain accurate accounting and other records of its activities in connection herewith, and shall file with the Court and serve on the parties monthly reports detailing the results from operations of the Facility.

17. The obligations of the Defendant as described in this Order are on-going, specifically including, without limitation, the obligation to turn over information, documents, funds, Rents and Profits, and all else to which the Receiver is entitled.

18. The receipts received from the operation of the Facility shall be applied to reimburse the Receiver for all reasonable costs and expenses that it (or its delegates) incurs as a result of serving as receiver, for payment of insurance premiums and other fees authorized hereunder, to compensate Receiver for its services as receiver, and for payment of all Obligations (as defined in the Verified Complaint).

19. Nothing in this Order shall impair or in any manner prejudice the rights of Plaintiff to receive payment of the Rents and Profits pursuant to the terms and provisions of the Loan Documents, or to exercise its other rights, liens and/or remedies in and to the Collateral including, without limitation, to foreclose the Deed of Trust.

20. The Receiver is hereby authorized and directed to remit to the Plaintiff all funds, proceeds and rents, including the Rents and Profits, that constitute Collateral of the Plaintiff, for application by the Plaintiff to reduce the indebtedness and/or other obligations owed by the Defendant pursuant to the Loan Documents, to the extent such funds, proceeds and rents not expended for any of the purposes herein authorized.

21. If the Receiver receives notice that a petition for relief under the Bankruptcy Code, Title 11, United States Code, has been filed, and part of the bankruptcy estate includes property that is the subject of this order (for purposes of this paragraph, the “Bankruptcy Estate Property”), the Receiver shall have the following duties:

(a) Turn over Bankruptcy Estate Property if no relief from stay is sought. The Receiver shall immediately contact Plaintiff and determine whether Plaintiff intends to move in the bankruptcy court for an order for (1) relief from the automatic stay, and (2) relief from the Receiver’s obligation to turn over the Bankruptcy Estate Property (11 U.S.C. § 543). If Plaintiff has no intention to make such a motion, the Receiver shall immediately turn over the Bankruptcy Estate Property to the appropriate entity, either to the bankruptcy trustee, if one has been appointed, or, if not, to the debtor in possession, and otherwise comply with 11 U.S.C. § 543.

(b) Remain in possession pending resolution. If Plaintiff intends to seek relief immediately from both the automatic stay and the Receiver’s obligation to turn over the Bankruptcy Estate Property, the Receiver may remain in possession and preserve the Bankruptcy Estate Property pending the ruling on those motions (11 U.S.C. § 543(a)). The Receiver’s authority to preserve the Bankruptcy Estate Property shall include the right to do the following:

(1) The Receiver may continue to collect Rents and Profits and other income;

(2) The Receiver may make disbursements necessary to preserve and protect the Bankruptcy Estate Property;

(3) The Receiver may execute any new leases or other long-term contracts as necessary to maintain the Property; and

(4) The Receiver shall do nothing that would effect a material change in the circumstances of the Bankruptcy Estate Property.

(c) Turn over property if no motion for relief is filed within ten (10) days after notice of the bankruptcy. If Plaintiff fails to file a motion within ten (10) court days after its receipt of notice of the bankruptcy filing, the Receiver shall immediately turn over the Bankruptcy Estate Property to the appropriate entity, either to the bankruptcy trustee, if one has been appointed, or, if not, to the debtor in possession, and otherwise comply with 11 U.S.C. § 543.

(d) Retain bankruptcy counsel. The Receiver may petition this Court to retain legal counsel to assist the Receiver with issues arising out of the bankruptcy proceedings that effect the receivership or the Receiver’s ability to perform its duties.

22. The Receiver shall be named as an additional insured party on existing liability and property damage insurance policies on the Collateral and if needed, is authorized to obtain customary insurance coverage for the Collateral in such types and amounts as Plaintiff may approve (in its sole discretion), as an expense of the Receiver payable out of revenues generated from the operations of the Collateral or funds as may be advanced by Plaintiff (in its sole discretion).

23. The Defendant shall not cancel any existing liability or property damage insurance policies on the Collateral, nor shall the Defendant cancel or alter any utility contracts, such as those relating to the provision of sewer, water, electrical, and sanitation services.

24. This Order is without prejudice to the right of the Receiver to make future application to this Court, by motion and upon notice to all parties, for further or other authority as may be necessary in its performance of its duties including, without limitation, expanded powers.

25. The Receiver shall be paid an initial transition/set up fee of $1,200.00 and shall be compensated on a monthly basis by payment of (i) for management services, the greater of $2,500.00 or 4% of the Facility’s gross income; (ii) for receiver services, $190.00 per hour spent on receivership duties, plus reimbursement for all reasonable travel, out of pocket expenses, and legal expenses; and (iii) such reasonable leasing commissions as agreed to by the Receiver and the Plaintiff (collectively, the “Receivership Fee”). The Receivership Fee shall be paid to the Receiver from either the Rents and Profits received from the operation of the Property, or from any funds that may be advanced by the Plaintiff (in its sole discretion).

26. In the event the Receiver is no longer willing or able to perform its duties hereunder, the Receiver may petition this Court by motion with notice to all parties for an order discharging it as receiver.

27. The Receiver shall not be liable for any obligation of the Defendant relating to the Collateral or the Facility that occurred, accrued, arose and/or pertains to matters occurring or arising prior to the Effective Date of this Order, including, without limitation, any contingent or unliquidated obligations or potential liability, taxes of any kind, assessments, utility charges, claims of premises liability or other negligence, or for goods or services provided to the Defendant or the Facility by third-parties (including claimed liability for alleged materialman’s liens or claims), nor shall the Plaintiff or the Receiver be obligated to advance any funds to pay any expense of maintenance or other liability of the Facility. Notwithstanding the foregoing, should the Plaintiff decide, in its sole discretion, to advance funds to maintain or preserve the Facility or the Collateral, the repayment of all such funds advanced shall be secured by the Loan Documents.

28. The Receiver shall have no liability to any party for any claims, actions, or causes of action arising out or relating to events or circumstances occurring prior to the Effective Date of this Order. This protection of the Receiver from liability shall include, but is not limited to, any liability from the performance of services or the delivery of goods rendered by third-parties to or on behalf of the Defendant, and any liability to which the Defendant is currently or may ultimately be exposed to under any applicable laws pertaining to the ownership and/or use of the Facility, the Collateral, or the operations of Defendant’s business.

29. Following the Receiver’s appointment, the Receiver shall not be deemed in any way to be an owner of the Facility.

30. Notwithstanding any other provision of this order, the Receiver, and any of its officers, directors, employees, agents, etc., shall have no liability as to any claim, liability, actions, cost or expense of the Defendant or its affiliates to any person or entity (including, without limitation, any environmental claims, liabilities, obligations, or liens, and any amounts owed to any of the Defendant’s creditors because of the duties imposed upon the Receiver hereunder), or causes of action of any third parties who have or would have claims against the owner of the Facility or the Collateral, or any officer, director, or partner thereof, including, without limitation, any claims under any federal or state environmental laws, whether arising out of or related to events occurring prior to or after the Effective Date of this Order or otherwise; unless from the Receiver’s gross negligence or intentional misconduct.

31. The Receiver shall have no personal liability in connection with the performance of its obligations hereunder, unless from the Receiver’s gross negligence or intentional misconduct. Any party asserting a claim against the Receiver must first obtain leave of this Court to do so. The provisions of this Paragraph 31 shall survive the termination of the receivership and discharge of the Receiver.

32. The Court retains jurisdiction for such other orders as shall be deemed just and necessary. Further, the Court reserves judgment on all matters raised in the Verified Complaint that are not expressly adjudicated by this Order, and will address those issues at the trial of this matter or upon motion of either party.

SO ORDERED AND ADJUDGED.

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New Bankruptcy Opinion: UNSECURED CREDITORS COMMITTEE OF SPARRER SAUSAGE COMPANY, INC. v. JASON’S FOODS, INC. – Court of Appeals, 7th Circuit, 2016

THE UNSECURED CREDITORS COMMITTEE OF SPARRER SAUSAGE COMPANY, INC., Plaintiff-Appellee,

v.

JASON’S FOODS, INC., Defendant-Appellant.

No. 15-2356.

United States Court of Appeals, Seventh Circuit.

Argued December 7, 2015.
Decided June 10, 2016.

Before FLAUM, WILLIAMS, and SYKES, Circuit Judges.

SYKES, Circuit Judge.

During the 90-day preference period preceding its Chapter 11 bankruptcy filing, Sparrer Sausage Company paid invoices it received from Jason’s Foods, Inc., one of its suppliers, totaling roughly $587,000. The Unsecured Creditors Committee asked that these payments be returned to the bankruptcy estate as avoidable preferences under § 547(b) of the Bankruptcy Code. Jason’s Foods agreed that the payments were avoidable preferences but claimed an exception under 11 U.S.C. § 547(c)(2)(A) for otherwise preferential transfers made in the ordinary course of business.

The bankruptcy judge allowed Jason’s Foods to keep a significant share of the challenged payments but held that the timing of certain payments departed too drastically from the companies’ past practice to be considered ordinary. The judge imposed preference liability on Jason’s Foods for 11 invoices that he determined were paid either too early or too late to be treated as ordinary—specifically, invoices Sparrer Sausage paid within 14, 29, 31, 37, and 38 days of issuance. The district court affirmed and Jason’s Foods appealed.

We reverse. Nothing in the record suggests that it was unusual for Sparrer Sausage to pay invoices from Jason’s Foods within 14, 29, and 31 days of issuance given its payment history before the preference period. The only payments that can fairly be deemed out of the ordinary are those made 37 and 38 days after receipt of invoice. Jason’s Foods’ preference liability is limited to those invoices and is entirely offset by invoices Sparrer Sausage failed to pay.

I. Background.

Jason’s Foods, a wholesale meat supplier, provided unprocessed meat products to Chapter 11 debtor Sparrer Sausage, a sausage manufacturing company. Their relationship stretched back as far as February 2, 2010, and continued until Sparrer Sausage filed its petition for Chapter 11 bankruptcy on February 7, 2012. During the 90-day preference period preceding this filing, Sparrer Sausage paid 23 invoices from Jason’s Foods totaling $586,658.10.

In September 2013 the Unsecured Creditors Committee filed a complaint to recover those payments from Jason’s Foods. The Committee argued that the payments were avoidable preferences—payments that Jason’s Foods was required to return to the bankruptcy estate for the benefit of Sparrer Sausage’s unsecured creditors. See 11 U.S.C. § 547(b). Jason’s Foods conceded that the payments met the statutory definition of an avoidable preference but asserted two affirmative defenses under § 547(c). First, Jason’s Foods argued that the otherwise preferential transfers were made in the ordinary course of business and thus were nonavoidable under § 547(c)(2). Alternatively, Jason’s Foods argued that it had provided meat products to Sparrer Sausage in January and February of 2012 without receiving payment and that this new value offset its preference liability under § 547(c)(4).

The bankruptcy judge first considered Jason’s Foods’ ordinary-course defense and determined that before the preference period, Sparrer Sausage generally paid invoices from Jason’s Foods within 16 to 28 days. Of the 23 invoices that Sparrer Sausage paid during the preference period, 12 fell within this range, so the judge concluded that these 12 payments were ordinary and thus nonavoidable. The remaining 11 invoices were paid within 14, 29, 31, 37, and 38 days of the invoice date. The judge concluded that these payments, which totaled $306,110.23, were not ordinary and must be returned to the bankruptcy estate for the benefit of Sparrer Sausage’s unsecured creditors.

Turning next to the new-value defense, the judge found that Sparrer Sausage had not paid for $63,514.91 worth of meat products it received from Jason’s Foods in January and February of 2012. The judge credited that amount to Jason’s Foods as an offset against its preference liability and entered judgment in favor of the Unsecured Creditors Committee in the amount of $242,595.32. The judgment was affirmed on appeal to the district court, and this appeal followed.

II. Discussion.

We review the bankruptcy court’s conclusions of law de novo and its findings of fact for clear error. Kovacs v. United States, 614 F.3d 666, 672 (7th Cir. 2010) . A factual finding is clearly erroneous if “although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” Id. (quotation marks omitted).

As a general rule, payments made to a creditor during the 90-day period before a debtor files for bankruptcy are avoidable preferences. See 11 U.S.C. § 547(b). The rule prevents inequitable distribution of the debtor’s assets to favored creditors and protects the struggling debtor against the predatory behavior of nervous creditors. In re Tolona Pizza Prods. Corp., 3 F.3d 1029, 1032 (7th Cir. 1993) . But the rule contains an exception, codified in § 547(c)(2), aimed at “leav[ing] undisturbed normal commercial and financial relationships and protect[ing] recurring, customary credit transactions.” Kleven v. Household Bank F.S.B., 334 F.3d 638, 642 (7th Cir. 2003) (quotation marks omitted).

To that end, § 547(c)(2) provides that an otherwise preferential transfer is nonavoidable

to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was—

(A) made in the ordinary course of business or financial affairs of the debtor and transferee; or

(B) made according to ordinary business terms[.]

The creditor asserting this defense to preference liability bears “the burden of proving the nonavoidability of a transfer under subsection (c).” 11 U.S.C. § 547(g).

Jason’s Foods and the Unsecured Creditors Committee stipulated that Sparrer Sausage incurred all debts owed to Jason’s Foods in the ordinary course of business, so we’re concerned only with Sparrer Sausage’s payment of those debts. In this regard Jason’s Foods proceeds under § 547(c)(2)(A), commonly referred to as the subjective ordinary-course defense. [1]

The subjective ordinary-course defense asks whether the payments the debtor made to the creditor during the preference period are consistent with the parties’ practice before the preference period. Tolona Pizza, 3 F.3d at 1032 . The inquiry is not governed by any “`precise legal test,'” Lovett v. St. Johnsbury Trucking, 931 F.2d 494, 497 (8th Cir. 1991) (quoting In re Fulghum Constr. Corp., 872 F.2d 739, 743 (6th Cir. 1989) ), but generally entails using the debtor’s payment history to calculate a baseline for the companies’ dealings and then comparing preference-period payments to that baseline, cf. Kleven, 334 F.3d at 642-43 . While “substantial deviations from established practices” are not protected, the ordinary-course defense “allow[s] suppliers and other furnishers of credit to receive payment within the course that has developed in the commercial relationship between the parties.” In re Tenn. Chem. Co., 112 F.3d 234, 238 (6th Cir. 1997) .

Jason’s Foods challenges the bankruptcy judge’s determination that Sparrer Sausage typically paid invoices within 16 to 28 days, arguing that this calculation does not accurately reflect the companies’ payment practices before the preference period. This is really two arguments in one. Jason’s Foods challenges the judge’s use of an abbreviated historical period rather than the companies’ entire payment history and also argues that the baseline comprises a too-narrow range of days surrounding the average invoice age during the historical period.

A. Historical Period

Calculating the baseline payment practice between two companies requires identifying a historical period that reflects the companies’ typical payment practices. See, e.g., In re Quebecor World (USA), Inc., 491 B.R. 379, 387 (Bankr. S.D.N.Y. 2013) (“The Court must first determine the appropriate pre-preference time period to use in establishing a baseline of dealings between the parties.”). In Tolona Pizza we directed courts to look to “the norm established by the debtor and the creditor in the period before, preferably well before, the preference period.” 3 F.3d at 1032 . That directive doesn’t require truncating the historical period “well before” the beginning of the preference period but simply underscores that the baseline should reflect payment practices that the companies established before the onset of any financial distress associated with the debtor’s impending bankruptcy. See In re Affiliated Foods Sw. Inc., 750 F.3d 714, 720 (8th Cir. 2014) (“To make a sound comparison, `[n]umerous decisions support the view that the historical baseline should be based on a time frame when the debtor was financially healthy.'” (quoting Quebecor World, 491 B.R. at 387 )).

In some cases this may require truncating the historical period before the start of the preference period if the debtor’s financial difficulties have already substantially altered its dealings with the creditor. See, e.g., In re Circuit City Stores, Inc., 479 B.R. 703, 710 (Bankr. E.D. Va. 2012) ; In re H.L. Hansen Lumber Co. of Galesburg, Inc., 270 B.R. 273, 279 (Bankr. C.D. Ill. 2001) . In other cases it will be necessary to consider the entire pre-preference period. See, e.g., Affiliated Foods, 750 F.3d at 720 ; Quebecor World, 491 B.R. at 387 . In all cases the contours of the historical period should be grounded in the companies’ payment history rather than dictated by a fixed or arbitrary cutoff date. Accord Affiliated Foods, 750 F.3d at 720 (“Obviously, when considering this type of factintensive issue, what is appropriate in one case is not necessarily appropriate in the next case.”).

Here, Jason’s Foods and the Unsecured Creditors Committee stipulated to a historical period spanning February 2, 2010, to November 7, 2011, which encompassed all 235 invoices that Sparrer Sausage paid before the preference period. Sparrer Sausage paid these invoices within 8 to 49 days, with an average invoice age of almost 25 days at the time of payment. The bankruptcy judge disregarded this stipulation. Citing the increasing lateness of payments after April 15, 2011, the judge considered only the 168 invoices that Sparrer Sausage paid prior to that date. Sparrer Sausage paid these invoices within 8 to 38 days, with an average invoice age of 22 days.

Jason’s Foods argues that the bankruptcy judge’s decision to truncate the historical period approximately seven months before the start of the preference period was clearly erroneous. We disagree. The judge determined that April 15, 2011, “mark[ed] the beginning of the debtor’s financial difficulties” and that invoices paid after that date did not accurately reflect the norm when Sparrer Sausage was financially healthy. That finding is not without support in the record. Prior to April 15, 2011, Sparrer Sausage made its latest payments 38 days after the invoice date; after April 15, 2011, Sparrer Sausage paid numerous invoices 40 or more days after the invoice date, with some as late as 45 days. Moreover, the percentage of invoices that Sparrer Sausage paid 30 or more days after issuance increased from 5.95% between February 2, 2010, and April 15, 2011, to 46.3% between April 16, 2011, and November 7, 2011.

We acknowledge that the evidence of Sparrer Sausage’s financial distress after April 15, 2011, is hardly overwhelming, and we question the judge’s decision to disregard the parties’ stipulation. Sparrer Sausage did not experience a marked “liquidity crisis” or other stark change in its payment practices after April 15, 2011. Circuit City, 479 B.R. at 710 ; see also Hansen Lumber, 270 B.R. at 278-79 . But the bankruptcy judge offered a reasoned explanation for his decision, and his reasons were grounded in Sparrer Sausage’s payment history and supported by the record. Accordingly, we cannot say that the judge’s decision to truncate the historical period after April 15, 2011, was clear error.

B. Baseline of Dealings During the Historical Period

Using the truncated historical period of February 2, 2010, to April 15, 2011, the judge determined that Sparrer Sausage typically paid invoices from Jason’s Foods within 16 to 28 days. He arrived at this baseline by calculating the average invoice age during the historical period (22 days) and adding 6 days on both sides of that average. Jason’s Foods argues that the judge should have used the total range of invoice ages during the historical period—8 to 38 days—as the baseline. We agree that the judge erred in this step of the analysis, but only in part. The judge’s choice of methodology was sound, but the application was flawed.

Bankruptcy courts typically calculate the baseline payment practice between a creditor and debtor in one of two ways: the average-lateness method or the total-range method. The average-lateness method uses the average invoice age during the historical period to determine which payments are ordinary, while the total-range method uses the minimum and maximum invoice ages during the historical period to define an acceptable range of payments. See Quebecor World, 491 B.R. at 387-88 .

Each of these methodologies has strengths and weaknesses, and the decision to apply one or the other rests within the bankruptcy judge’s discretion. While the averagelateness method better compensates for outlier payments during the historical period, the total-range method often provides a more complete picture of the relationship between the creditor and debtor. Compare id. (rejecting the total-range method because “that proposed methodology captures outlying payments that skew the analysis of what is ordinary”), with In re Am. Home Mortg. Holdings, Inc., 476 B.R. 124, 138 (Bankr. D. Del. 2012) (applying the totalrange method because the average invoice age did not “`portray the complete picture’ of the payment history” between the creditor and debtor).

We see no reason to disturb the bankruptcy judge’s decision to use the average-lateness method rather than the totalrange method here. Admittedly none of the invoices that Sparrer Sausage paid during the historical period appear to be such extreme outliers that they would skew the baseline calculation. See In re Moltech Power Sys., Inc., 327 B.R. 675, 681 (Bankr. N.D. Fla. 2005) (“[C]ommon sense would seem to indicate that the court should be hesitant to embrace analysis by range when so doing would incorporate aberrations that artificially widen the range, thus presenting an inaccurate portrait of the actual ordinary course of business between the parties.”). But that’s not enough, standing alone, to upset the judge’s determination that the average-lateness method would better capture Jason’s Foods and Sparrer Sausage’s payment relationship.

The judge’s application of the average-lateness method is more problematic. He began by observing that the average invoice age rose from 22 days during the historical period to 27 days during the preference period. We’re skeptical that a five-day difference in the average invoice age is substantial enough to take any of the preference-period payments outside the ordinary course. Bankruptcy courts have deemed comparable deviations immaterial and held that all preference-period payments were ordinary on this basis. In re Archway Cookies, 435 B.R. 234, 244 (Bankr. D. Del. 2010) (4.9-day difference); In re Am. Camshaft Specialties, Inc., 444 B.R. 347, 356 (Bankr. E.D. Mich. 2011) (4-day difference). That said, a discrepancy that is immaterial in the context of one business relationship might well be aberrational in the context of another. Accord In re Jeffrey Bigelow Design Grp., Inc., 956 F.2d 479, 486 (4th Cir. 1992) (recognizing that the “`focus of [the] inquiry must be directed to an analysis of the business practices which were unique to the particular parties under consideration'” (quoting In re Fulghum Constr. Corp., 872 F.2d at 743 )). Given the fact-intensive, contextspecific nature of the ordinary-course defense, we are unwilling to upset the judge’s decision on this basis.

But the judge’s subsequent finding—that invoices paid more than 6 days on either side of the 22-day average were outside the ordinary course—was clear error. The judge applied Quebecor World and its so-called “bucketing” analysis to support this conclusion, but neither the facts nor the bankruptcy court’s analysis in that case bear any resemblance to this case. In Quebecor World the average invoice age during the historical period was 27.56 days, while the average invoice age during the preference period was 57.16 days—a difference of nearly 30 days. 491 B.R. at 388 . Given such a stark disparity, the bankruptcy court grouped historical-period invoices “in buckets by age.” Id. That analysis revealed that the debtor paid 88% of invoices during the historical period within 11 to 40 days after the invoice date. Expanding this range by five days on the high end, the court determined that any invoices paid more than 45 days after the invoice date were outside the ordinary course. Id.

Here a 16-to-28-day baseline range encompasses just 64% of the invoices that Sparrer Sausage paid during the historical period. Even more problematically, the judge offered no explanation for the narrowness of this range. Why exclude invoices that Sparrer Sausage paid within 14 days when these payments were among the most common during the historical period? The same goes for invoices that Sparrer Sausage paid within 29 days. Indeed by adding just two days to either end of the range, the analysis would have captured 88% of the invoices that Sparrer Sausage paid during the historical period, a percentage much more in line with the Quebecor World analysis. Thus, a 16-to-28-day baseline appears not only excessively narrow but also arbitrary.

Sparrer Sausage paid 9 of the 11 contested invoices within 14, 29, and 31 days of issuance. These payments fall either squarely within or just outside the 14-to-30-day range in which Sparrer Sausage paid the vast majority of invoices during the historical period. As such they are precisely the type of payments that the ordinary-course defense protects: recurrent transactions that generally adhere to the terms of a well-established commercial relationship. Sparrer Sausage paid the other 2 invoices 37 and 38 days after they were issued, which is substantially outside the 14-to-30-day baseline. We conclude that Jason’s Foods’ preference liability is limited to these payments, which total $60,679.00.

C. New-Value Defense

Finally, we turn briefly to Jason’s Foods’ new-value defense. Under § 547(c)(4), a preferential transfer is offset “to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor.” A creditor may avail itself of this defense if, after receiving a preferential transfer from the debtor, it advanced additional, unsecured credit that remains unpaid. In re Prescott, 805 F.2d 719, 727 (7th Cir. 1986) . The premise underlying the new-value defense is that by extending new value to the debtor without receiving payment, the creditor has effectively replenished the bankruptcy estate in the same way that returning a preferential transfer would. In re Globe Bldg. Materials, Inc., 484 F.3d 946, 950 (7th Cir. 2007) .

It’s undisputed that Jason’s Foods supplied $63,514.00 worth of meat products to Sparrer Sausage between January 18, 2012, and February 6, 2012, well after Sparrer Sausage paid at least some invoices during the preference period. The parties also agree that Sparrer Sausage never paid Jason’s Foods for these products. Jason’s Foods is therefore entitled to a reduction of its preference liability in this amount. See 5 COLLIER ON BANKRUPTCY ¶ 547.04[4][e] at 565-69 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2015) (noting that § 547(c) defenses may be used cumulatively). Because the new value that Jason’s Foods extended to Sparrer Sausage ($63,514.00) exceeds its remaining preference liability ($60,679.00), that liability is entirely offset.

REVERSED AND REMANDED.

[1] Prior to its amendment by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, § 547(c)(2) required a creditor to prove both that the transfer was made in the ordinary course of business between the debtor and the creditor and that the transfer was made according to ordinary business terms. 11 U.S.C. § 547(c)(2) (2003); Kleven v. Household Bank F.S.B., 334 F.3d 638, 641-42 (7th Cir. 2003) . These requirements are commonly referred to as the subjective and objective components of the ordinary-course defense. The 2005 amendments made these components disjunctive. Pub. L. No. 109-8, § 409, 119 Stat. 23, 106 (2005).

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New Bankruptcy Opinion: UNITED MINE WORKERS OF AMERICA 1974 PENSION PLAN AND TRUST v. ALPHA NATURAL RESOURCES, INC. – Dist. Court, ED Virginia, 2016

UNITED MINE WORKERS OF AMERICA 1974 PENSION PLAN AND TRUST, et al., Appellants,

v.

ALPHA NATURAL RESOURCES, INC., et al., Appellees.

No. Civil Action No. 3:16-CV-75-HEH.

United States District Court, E.D. Virginia, Richmond Division.

July 7, 2016.

United Mine Workers of America 1974 Pension Plan & Trust, Appellant, represented by Karen M. Crowley, Crowley Liberatore Ryan & Brogan, P. C..

United Mine Workers of America 1992 Benefit Plan, Appellant, represented by Karen M. Crowley, Crowley Liberatore Ryan & Brogan, P. C..

United Mine Workers of America 1993 Benefit Plan & Trust, Appellant, represented by Karen M. Crowley, Crowley Liberatore Ryan & Brogan, P. C..

United Mine Workers of America 2012 Retiree Bonus Account Plan, Appellant, represented by Karen M. Crowley, Crowley Liberatore Ryan & Brogan, P. C..

United Mine Workers of America Cash Deferred Savings Plan of 1988, Appellant, represented by Karen M. Crowley, Crowley Liberatore Ryan & Brogan, P. C..

United Mine Workers of America Combined Benefit Fund, Appellant, represented by Karen M. Crowley, Crowley Liberatore Ryan & Brogan, P. C., Matthew Colin Robert Ziegler, Morgan Lewis & Bockius LLP, pro hac vice & Peter Sabin Willett, Morgan Lewis & Bockius LLP, pro hac vice.

United Mine Workers of America, Appellant, represented by Troy Savenko, Kaplan Voekler Cunningham & Frank PLC, Paul Kizel, Lowenstein Sandler LLP, Philip Gross, Lowenstein Sandler LLP, pro hac vice & Sharon Levine, Lowenstein Sandler LLP, pro hac vice.

Alpha Natural Resources, Inc., Appellee, represented by Tyler Perry Brown, Hunton & Williams LLP, Henry Pollard Long, III, Hunton & Williams LLP, Justin Fielder Paget, Hunton & Williams LLP, Robert W. Gaffey, Jones Day, pro hac vice & William J. Hine, Jones Day, pro hac vice.

MEMORANDUM OPINION

(Affirming the Decision of the United States Bankruptcy Court)

HENRY E. HUDSON, District Judge.

THIS MATTER is before the Court on appeal from the United States Bankruptcy Court for the Eastern District of Virginia (“Bankruptcy Court”). It evolves from a disputeover a proposed revised Key Employee Incentive Plan (“KEIP”). On December 3, 2015, the Debtors moved for entry of an order (1) authorizing payments to executive insiders under the Debtors’ 2015 Annual Incentive Bonus Plan and (2) approving the Debtors’ Key Employee Incentive Plan. (App. 1.) Only the second request was contested. On January 27, 2016, Judge Huennekens of the Bankruptcy Court entered an Order granting the Debtors’ motion to approve the KEIP in its entirety. (App. 76.) Judge Huennekens followed that Order with a Memorandum Opinion on February 24, 2016, setting forth his reasoning. (App, 464.) For the reasons that follow, this Court will affirm the decision of the Bankruptcy Court in its entirety, articulated in its Order of January 27, 2016 and Memorandum Opinion of February 24, 2016.

I. BACKGROUND

The Appellants (“Appellants” or “Objectors” or “Creditors”) in this case are creditors that also represent many of the Appellees’ employees. (App. 466; Appellants’ Br. 3.) The Appellees (“Appellees” or “Debtors”) are debtors who own and operate coal mines. (App. 466.)

The central dispute before this Court focuses on a ruling by the Bankruptcy Court pertaining to the approval of the KEIP. The Bankruptcy Court concluded that the Debtors’ proposed KEIP was primarily an incentive program, not a retentive program, and met the required conditions under 11 U.S.C. § 503(c)(3), thereby granting Debtors’ motion. This appeal followed.

In essence, the Appellants claim that the Bankruptcy Court erred in analyzing the KEIP under § 503(c)(3), arguing that it should have been analyzed under § 503(c)(1), because it is not truly an incentive plan, but primarily an effort to retain certain employees. (Appellants’ Br. 20.) Secondly, Appellants argue that even if the KEIP was an incentive plan, the Bankruptcy Court erred in concluding that it met the requirements of §§ 503(b)(1)(A) and 503(c)(3), because the payments to Debtors’ managers and officers did not constitute the actual and necessary costs of preserving the estate and were not justified by the facts and circumstances of the case. (Id. at 21.)

Both Appellants and Appellees have filed memoranda supporting their respective positions. The facts and legal contentions are adequately presented in the materials before this Court. Since the findings of the Bankruptcy Court stand on sound footing, oral argument would not aid in the decisional process.

The central question in this appeal is whether the Bankruptcy Court erred in holding that the Debtors met their burden under 11 U.S.C. §§ 503(b) and 503(c), showing adequate grounds to approve the KEIP. Informing the analysis of that central question are several underlying inquiries, examining the Bankruptcy Court’s judgment as to whether the KEIP is designed primarily for retentive effect or incentive effect, whether the KEIP is an actual and necessary cost of preserving Debtors’ estates, and whether the KEIP was justified by the facts and circumstances.

II. LEGAL STANDARDS AND FRAMEWORK

The standard of review applied by this Court is well-settled. The Bankruptcy Court’s legal conclusions are reviewed de novo and its factual findings for clear error. In re Harford Sands. Inc., 372 F.3d 637, 639 (4th Cir. 2004) .

Section 503 of the Bankruptcy Code authorizes a bankruptcy court to allow certain administrative expenses, which are defined as the “actual, necessary costs and expenses of preserving the estate” of the debtor. 11 U.S.C. § 503(b)(1)(A). This Section imposes restrictions on the compensation that a debtor can pay its executives and other employees in bankruptcy, which include a general prohibition on retention payments unless certain strict conditions are met. 11 U.S.C. § 503(c)(1). Section 503(c)(1) limits any “transfer made to, or [any] obligation incurred for the benefit of, an insider of the debtor for the purpose of inducing such person to remain with the debtor’s business.” 11 U.S.C. § 503(c)(1).

However, this does not mean that because a KEIP contains some retentive effect, it is then primarily a retentive plan. See In re Borders Grp., Inc., 453 B.R. 459, 471 (Bankr. S.D.N.Y. 2011) (internal citations omitted). A legitimate incentive plan may still have some retentive effect. Incentive payments under a KEIP are governed by the more general provisions of 11 U.S.C. § 363(b)(1) and § 503(c)(3). Section 363(b)(1) allows a debtor in possession to transact business outside the ordinary course with court approval. 11 U.S.C. § 363(b)(1). Section 503(c)(3)prohibits transfers to officers “that are outside the ordinary course of business and not justified by the facts and circumstances of the case.” A debtor can make payments to officers and insiders that are not retentive in nature if they are justified by the facts and circumstances of the case.

While the Court of Appeals for the Fourth Circuit has not elaborated on the “facts and circumstances” standard under § 503(c)(3), other courts outside the Fourth Circuit have noted that this standard equates to the business judgment test under § 363(b)(1). See, e.g. In re Patriot Coal Corp., 492 B.R. 518, 530-31 (Bankr. E.D. Mo. 2013) . Other courts, however, have held that § 503(c)(3) imposes a higher, stricter test. The elevated test requires a court to undertake its own independent analysis, apart from a debtor’s sound business reason, to determine if the particular proposal will serve the best interests of the creditors and the debtors’ estate. See In re Pilgrim’s Pride Corp., 401 B.R. 229, 236-37 (Bankr. N.D. Tex. 2009) .

III. FACTUAL FINDINGS AND LEGAL CONCLUSIONS OF THE BANKRUPTCY JUDGE

The following narrative represents the underlying facts, as found and described in Judge Huenneken’s Memorandum Opinion. Alpha Natural Resources and 149 of its direct and indirect subsidiaries initiated bankruptcy proceedings under Chapter 11 of the Bankruptcy Code in August of 2015. (App. 464; Mem. Op., Judge Huennekens, Feb. 24, 2016 at 1.) The Debtors moved for entry of an order (1) authorizing payments to executive insiders under the Debtors’ 2015 Annual Incentive Bonus Plan and (2) approving the Debtors’ Key Employee Incentive Plan. (Mem Op. at 1.) While the first part of this motion was uncontested, the second part was contested. (Id. at 2.)

The KEIP sought to incentivize the Debtor’s senior management team to meet and exceed certain performance goals. (Id. at 7.) Eight Executive Insiders and seven Non-Executive Insiders constitute the fifteen KEIP participants. (Id. at 5.) The KEIP was designed and approved by the Debtors’ Compensation Committee, who retained Meridian Compensation Partners (“Meridian”) to provide independent advice. (Id. at 5-6.) In developing the KEIP, Meridian looked for companies with a similar profile to that of the Debtors. (Id. at 6.) Meridian focused on other KEIPs that had been approved by bankruptcy courts, then identified and suggested four key metrics/categories of performance goals: (1) cost savings; (2) EBITDA/liquidity; (3) safety; and (4) environmental compliance. (Id.) McKinsey Services (“McKinsey”) then operationalized the savings and EBITDA/liquidity benchmarks to determine key targets the company would need to achieve in order to earn an incentive award. (Id. at 6-7.) Each metric was assigned a particular weight under the KEIP: 30%, 55%, 7.5%, and 7.5%, respectively. (Id. at 7.) The KEIP is designed to encourage participants to devise an effective exit strategy to successfully emerge from the Chapter 11 proceeding. (Id. at 8.)

The primary claim of those objecting to the KEIP was that the KEIP is actually a retention plan, disguised as an incentive plan. (Id. at 9.) They asserted that the KEIP’s performance goals were too low and easily achieved, thereby encouraging retention, not incentivizing performance. (Id.) Further, the Objectors contended that even if the KEIP was not primarily retentive, it was still not justified by the facts and circumstances of this Chapter 11 proceeding under § 503(c)(3). (Id.) Lastly, they insisted that the Debtors did not use their business judgment under § 363(b)(1) in formulating the KEIP. (Id.) The objections are primarily related to the cost saving and liquidity performance metrics, along with the overall size of the KEIP payout. (Id.)

Judge Huennekens found that the proposed KEIP is not a retention plan, but an incentive plan, designed to incentivize KEIP participants to maintain liquidity and maximize the value of the Debtor’s business. (Id. at 14-15.) He found that the KEIP contains challenging goals, which will be difficult to achieve in the current economic environment. (Id.) The Bankruptcy Judge relied on the testimony of Kevin Carmody (“Mr. Carmody”), the Debtor’s restructuring advisor and a well-recognized restructuring expert. Mr. Carmody emphasized the difficulty of reaching the KEIP’s goals, especially in light of the pressures on the coal industry. (Id.) Judge Huennekens noted that with this KEIP, the Debtors have a realistic chance of successfully emerging from bankruptcy, but prospects will be bleak if the goals set forth in the KEIP are not met. (Id. at 15.)

In his Memorandum Opinion, Judge Huennekens fully acknowledged the objections from other parties. (Id.) He also distinguished this KEIP from others that were found to be primarily retentive in nature, noting that this KEIP more closely resembles those that have been approved by other courts. (Id. at 16-17.) In the end, he found that the KEIP is not a retentive plan in disguise because the goals pose a significant challenge and the sale of substantially all of the Debtors’ assets is not certain to occur by particular deadlines. (Id., at 17.)

If a KEIP is truly meant to incentivize results, the court can approve it under § 503(c)(3) as long as it is justified by the facts and circumstances. (Id.) Judge Huennekens found that whether the simple business judgment test or the higher scrutiny of Pilgrim’s Pride is applied, the KEIP is justified. (Id. at 18.) He noted that each of the fifteen KEIP participants is instrumental to the restructuring efforts and achieving the set goals. (Id.) The KEIP was approved by the independent Compensation Committee, with input and development by Meridian and McKinsey. (Id. at 18-19.) No member of the independent Compensation Committee is a KEIP participant. (Id.)

In sum, Judge Huennekens found that “(i) the scope of the KEIP is reasonable, (ii) suitable due diligence was undertaken for adoption of the KEIP by the independent compensation committee, (iii) the targeted management team of the KEIP is appropriate, (iv) the cost of the KEIP is reasonable in the context of the Debtors’ assets, liabilities, and earnings potential, (v) the plan is properly designed to achieve the performance desired, and (vi) the KEIP is consistent with industry standards.” (Id. at 21.) KEIP participants are incentivized “to preserve the value of Debtors’ estates and thereby maximize the return to creditors[,]” and are “not merely being rewarded for closing a sale.” (Id.) The Judge pointed out that if the KEIP goals are met, the financial benefits will far exceed the costs of the program. (Id. at 22.) Determining from its own independent analysis that the KEIP will serve the best interests of the creditors and the bankruptcy estates, the Bankruptcy Court found that the KEIP satisfied the business judgment rule, and the heightened-scrutiny standard set forth in Pilgrim’s Pride, and is justified by the relevant facts and circumstances. (Id.)

IV. SUMMARY OF ARGUMENTS

a. Argument of Appellants

In short, Appellants wage a two-tiered argument in opposition. First, they claim that the Bankruptcy Court wrongly decided that the KEIP was an incentive plan, rather than a retention plan, and erred by evaluating the KEIP under 11 U.S.C. § 503(c)(3), instead of § 503(c)(1). (Appellants’ Br. 20.) Second, they claim that even if the KEIP was an incentive plan, the Bankruptcy Court failed to apply the “entire fairness” standard, which they assert is more appropriate. (Id. at 21.) Along with that assertion, they claim that even under a lower standard, the Bankruptcy Court erred in finding that the KEIP was justified by the facts and circumstances, the costs were actual and necessary, and the KEIP was properly considered under the business judgment rule. (Jd.)

To bolster the first line of argument. Appellants question the Bankruptcy Court’s findings with respect to the development of the plan, asserting that McKinsey actually crafted the plan under the influence of management. (Id. at 27-28.) They also claim that the metrics were designed to be easily achieved. (Id. at 29-30.) They further argue that under the plan, performance can be manipulated to achieve the desired metrics, and therefore the metrics do not truly incentivize, but simply encourage retention. (Id. at 31-33.) Finally, the Appellants insist that the factual findings were flawed as related to the EBITDA/liquidity distinction and the KEIP’s similarity to other comparable KEIPs. {Id at 34-37.)

In support of their second line of argument, Appellants insist that the KEIP “should have been reviewed under the `entire fairness’ standard, or at least subjected to some form of scrutiny more stringent than the business judgment standard, such as that articulated in Pilgrim’s Pride.” (Id. at 38.) Distilled, Appellants argue that because management allegedly rejected Meridian’s draft plan and worked to revise the KEIP with McKinsey, a conflicted decision was made. (Id. at 40.)

Additionally, Appellants argue that the facts and circumstances of this case do not justify the KEIP, because it lacks a coherent business rationale and will actually impede performance, not reward it. (Id. at 42.) They also dispute the necessity of the cash savings benefits. (Id. at 44-45.) Finally, Appellants state that the market of comparable KEIPs is actually illusory, and Debtors’ attempt to Justify the KEIP by comparing it to other plans is vacuous. (Id. at 45-47.)

b. Argument of Appellees

Appellees appear to dispute Appellants’ argument in its entirety. Appellees believe the KEIP is an incentive plan, offering as evidence the KEIP’s metrics, the performance goals, and the potential effect of success. (Appellees’ Br. 31.) Appellees cite the testimony of Robert Romanchek (“Mr. Romanchek”) and Mr. Carmody to demonstrate that the KEIP’s targets would be difficult to achieve and are directly related to the prospects of a successful outcome in the bankruptcy proceedings. (Id. at 31-32.)

Appellees recount the developmental process of the KEIP, stating that the independent Compensation Committee was the ultimate decision maker. (Id. at 34.) They claim that Appellants rely only on innuendo, not facts, in their insistence that management orchestrated the process and pushed for metrics that were primarily retentive. (Id. at 35.) In short, Appellees contend that Meridian first gathered pertinent data and metrics, then McKinsey took that information and crafted the KEIP using generally accepted methodology, and it was ultimately approved by the independent Compensation Committee. (Id. at 12-14.)

Appellees maintain that Judge Huennekens directly addressed the issue of cash balance, costs savings, and EBITDA metrics, and that Appellants are unable to identify any flaw in the Court’s logic. (Id. at 36-40.) Appellees argue that it is neither true nor relevant that Judge Huennekens conflated the EBITDA metric and liquidity. (Id. at 41.) As to the point of whether the KEIP was consistent with other previously approved KEIPs, they say Appellants’ argument lacks merit because: (1) the only dispute is whether other KEIPs employed a cash balance metric; and (2) it was never demonstrated how using such a metric would be inappropriate. (Id. at 41-42.)

Appellees contend that the KEIP should be analyzed using the business judgment rule and that it easily passes muster under that standard. (Id. at 44-45.) They claim that the entire fairness standard does not apply, and indeed, that Appellants have not cited a single case where it has been applied to a proposed KEIP under 11 U.S.C. § 503(c). (Id. at 49.) They note that the entire fairness standard typically applies only when a plan is shown to be a product of a corporate conflict of interest. (Id.) Appellees emphasize that the Bankruptcy Court rejected this argument and concluded that there was no “conflicted corporate decision” made in this case. (Id. at 50.) Furthermore, they contend that even if the Pilgrim’s Pride standard applied, it is irrelevant, since Judge Huennekens explicitly decided that the Pilgrim’s Pride standard was satisfied in this instance. (Id. at 51-52.)

The Debtors refute the assertion that the KEIP was not justified under the facts and circumstances, claiming that the Bankruptcy Court performed the necessary analysis and concluded that it was justified. (Id. at 53-54.) Next, Appellees state that the Bankruptcy Court’s consideration of market factors and peer companies was entirely appropriate. (Id. at 55.) Lastly, Appellees dispute the contention that the Bankruptcy Court was wrong to find that the KEIP was an actual and necessary expense of preserving the Debtors’ estates, noting the following: (1) all fifteen KEIP participants are necessary for reorganization; and (2) the Debtors were not required to disprove every possible contingency in order to demonstrate necessity. (Id. at 56-58.)

V. ANALYSIS

a. Factual Findings

Looking first to Appellant’s contention that Judge Huennekens erred in his factual findings, the Court reviews the Bankruptcy Court’s factual determinations for clear error. In re Harford Sands, Inc. at 639 . Hearing the evidence first hand. Judge Huennekens was in the best position to critically examine the weight to be assigned to the facts of this matter. The factual findings centered on the true primary purpose of the KEIP, the development of the KEIP, and whether or not the KEIP was justified by the facts and circumstances when considering cost, industry standards, and a variety of other factors. While there is room for debate, this Court cannot find on the record at hand that any of the Bankruptcy Judge’s factual conclusions were clearly erroneous,

1. Primary Purpose of the KEIP

Whether the KEIP is an incentive plan or a retentive plan primarily depends on the difficulty of the goals and whether they relate to a successful outcome in bankruptcy. The Judge had no serious reason to doubt the testimony of Mr. Carmody and Mr. Romanchek, who both emphasized the difficulty of reaching the KEIP’s goals. Mr. Carmody even described achieving the goals as a “stretch” and explained that the Debtors are constantly “playing catch-up” in a falling market. (See App. 419-20, 431.) The objectives set forth in the KEIP are challenging, yet achievable, and incentives are linked to the goals being reached. (See App. 54, 60, 74, 423-441, 477-78, 483-84, 796-98.)

The KEIP has three levels for each metric: threshold, target, and maximum. (See App. 60.) The amount of the payout is proportionate to achievement of assigned goods, showing that it’s meant to incentivize performance. (See App. 60, 84-86.) Further, a quarter of any bonus will be withheld pending confirmation of a Chapter 11 plan by the end of 2016. (App. 471, Mem. Op. at 8.)

The KEIP’s targets are far-reaching. The cost-saving goals represent “specific performance improvement initiatives,” and the liquidity targets, described as “aggressive but achievable,” are based on cash flow forecasts. (See App. 74.) With regard to the safety and environmental metrics, the KEIP targets represent an improvement from the 2015 performance. (See App. 15-16, 58, 74-75.) The goals incentivize critical levels of cost savings, specified levels of adjusted ending book cash, along with high safety and environmental goals. (See App. 48, 60.) And again, the amounts of incentive payments are directly correlated with the levels of achievement. (See App. 48, 60.)

The fact that Appellants can identify some obvious steps that the Debtors could take to save costs is not enough to render the entire KEIP retentive. Judge Huennekens rightly noted that this KEIP differs from others that were rejected as retentive, because in those situations, the goals were almost certain to be met regardless of the KEIP participants’ actions, a vast distinction from this case. (App. 479, Mem. Op. at 16.) Here, much needs to be accomplished by the Debtors in order to succeed: selling assets, confirming a Chapter 11 plan, saving costs, and improving safety and environmental performance, among other things. (See App. 56-61.)

Also, there are no grounds to support Appellant’s contention that Judge Huennekens conflated the distinction between the liquidity and EBITDA metrics, especially given that he specifically distinguished them. (See App. 424-25, 471, 478, 479 n.18, 482 n.23.) All of the preceding facts point to the inference that the KEIP is primarily an incentive program. The Bankruptcy Court’s conclusion concerning the KEIP’s primary purpose is not in error. To the contrary, it is well-supported by the record.

2. Formation of the KEIP

Though Appellants seek to question the integrity of the KEIP’s formation, the facts show that it was substantially developed by Meridian and McKinsey, and ultimately approved by the independent Compensation Committee. Meridian was retained to conduct research and analysis on the possible components and structure of the KEIP that may be appropriate, given the state of the Debtors and the coal industry. (See App. 40-41, 53.) To maintain independence from management. Meridian only provided services to the Compensation Committee on executive and director compensation issues, nothing else. (See App. 40, 53.) Further, the Compensation Committee itself has found Meridian to be independent of management. (See App. 40, 53.)

Meridian analyzed KEIPs from twenty companies in detail. (See App. 61, 217-21.) Even after others worked to build and operationalize the KEIP, Meridian reviewed all aspects of the plan, determining them to be comparable with peer companies. (See App. 61-63.) Finally, the independent Compensation Committee, which included no KEIP participants, ultimately approved the KEIP, which is a testament to its independent nature. (See App. 47-49, 61-63, 657-58, 766-67.) The Judge’s findings regarding the development of the KEIP were well-founded.

3. Justified by the Facts and Circumstances

The Judge’s ultimate conclusion that the KEIP was justified by the facts and circumstances was also well-supported. At a time when they are highly needed, the KEIP promotes critical costs savings to maximize the value of the Debtors’ estates. (See App. 14, 56-57.) The liquidity metric incentivizes particular cash levels, while the safety and environmental metrics encourage high standards. (See App. 14-16,57-59.) No one has disputed the need to cut expenses, nor the need to stabilize cash flows. In fact, the Appellants offered no expert testimony of their own in support of their positions, they simply argued that Debtors failed to meet their burden.

Patrick Hassey, the chairman of the Compensation Committee, made clear that the employees included in the KEIP were all integral to the Debtors’ operations and efforts to complete restructuring, particularly due to their experience with comprehensive restructuring and creditors. (See App. 41, 48.) Further, given the regulatory burdens, industry uncertainty, and diminished equity that management is dealing with, these incentives are critical to improve the Debtors’ station. (See App. 41-42.)

Another factor demonstrating that the KEIP is justifiable is its similarity to the KEIPs of peer companies. When Meridian analyzed twenty peer companies, they took note of the number of participants, number and duration of performance periods, types of metrics, target payout as a percentage of participants’ base salaries, payout timing, and cost of the program as a percentage of prepetition assets. (See App. 48, 61-62.) This KEIP used metrics shared by many other peer companies; 55% of peer companies used EBITDA (or a variant), 10% used liquidity, 25% used a safety or environmental metrics, and 15% used a cost reduction metric. (App. 482, Mem. Op. at 19.) The total cost of the KEIP is also comparable to other peer companies.

Depending on what the KEIP participants achieve, they could earn 60% to 175% of their base salary. (App. 483, Mem. Op. at 20.) Meridian found that the payout level for other KEIPs at the target level was between 81% and 129% of the base salary, with the CEO excluded. (Id.) At the target level, the KEIP payout would be roughly $6.8 million, representing 0.073% of the book value of Debtors’ assets, which is akin to other KEIPs. (See App. 13, 56, 470, 483.) Increased pay as an incentive makes sense in this context, when considering that historically, 46% of the KEIP participants’ compensation has been equity awards, which are now basically worthless. (App. 483, Mem. Op. at 20; see App. 47.) While the KEIP’s fairly short performance periods are less common among peer companies, they are appropriate here because the Debtors need to quickly improve their declining financial situation. (See App. 62.) Mr. Hassey agreed that the key terms and overall cost of the KEIP are consistent with industry standards. (See App. 48.) All in all, the cost of the KEIP is reasonable and justifiable, given the huge potential benefit. (See App. 15-16, 58, 62-63, 74-75.)

b. Legal Conclusions

Turning next to Appellant’s argument that the Bankruptcy Court applied the wrong legal standards, the Court reviews those determinations de novo. In re Harford Sands, Inc. at 639 . Judge Huennekens properly articulated the legal framework under which he was analyzing this matter. He decided that the KEIP should be analyzed under 11 U.S.C. § 503(c)(3) and § 363(b)(1), not § 503(c)(1). This was proper, given his justifiable factual finding that the KEIP was not primarily retentive.

The Judge then discussed different approaches courts have taken in evaluating whether a plan is justified by the facts and circumstances. He noted that many courts view this test as essentially the same as the business judgment test, citing a variety of cases. He also acknowledged that other courts have adopted an elevated standard, which includes a court undertaking its own independent analysis to determine whether a particular proposal will serve the best interests of the creditors and debtor’s estate. See, e.g. Pilgrim’s Pride at 229. The parties disagree about which is appropriate. Instead of deciding between these approaches, Judge Huennekens evaluated this KEIP under both standards, and found that it satisfied each. (App. 481, Mem. Op. at 18.) Given that the Bankruptcy Court did undertake its own independent analysis, and did not err in finding the KEIP in the best interests of the creditors and the Debtors’ estate, it properly satisfied both standards.

Additionally, finding that there had been no “conflicted corporate decision” in this case, the Judge declined to apply the “entire fairness” standard. Given that Meridian was independent, the Compensation Committee was independent, and no member of that Committee was a KEIP participant with a direct financial interest, it is clear that there was no conflicted corporate decision. (See App. 39-41,47-49, 53, 61-63, 115, 205-06.) Therefore, the Judge’s decision to not apply the entire fairness standard was proper.

VI. CONCLUSION

While the Court is mindful that disagreement over characterizations will always exist, it is also mindful of the limited role it has in this appeal. As discussed above, there is an abundance of evidence justifying the decision of the Bankruptcy Court. This Court finds no clear error in any of the Bankruptcy Court’s factual findings. Further, this Court finds all legal conclusions of the Bankruptcy Court to be based on sound reasoning.

For the reasons stated herein, this Court will affirm the judgment of the Bankruptcy Court in its entirety. An appropriate Order will accompany this Memorandum Opinion.

The Clerk is directed to send a copy of this Memorandum Opinion to all counsel of record.

It is so ORDERED.

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New Bankruptcy Opinion: TRUSTEES OF THE BRICKLAYERS & ALLIED CRAFTWORKERS LOCAL 13 DEFINED CONTRIBUTION PENSION TRUST v. GG CONSTRUCTION, INC. – Dist. Court, D. Nevada, 2016

TRUSTEES OF THE BRICKLAYERS & ALLIED CRAFTWORKERS LOCAL 13 DEFINED CONTRIBUTION PENSION TRUST FOR SOUTHERN NEVADA, et al., Plaintiffs,

v.

G.G. CONSTRUCTION, INC., et al., Defendants.

Case No. 2:14-cv-01448-RFB-NJK.

United States District Court, D. Nevada.

July 13, 2016.

Trustees of the Bricklayers & Allied Craftworkers Local 13 Defined Contribution Pension Trust For Southern Nevada, Plaintiff, represented by Michael A. Urban, Laquer, Urban, Clifford & Hodge LLP & Nathan R. Ring, The Urban Law Firm.

Trustees of the Bricklayers & Allied Craftworkers Local 13 Health Benefits Fund, Plaintiff, represented by Michael A. Urban, Laquer, Urban, Clifford & Hodge LLP & Nathan R. Ring, The Urban Law Firm.

Trustees of the Bricklayers & Allied Craftworkers Local 13 Vacation Fund, Plaintiff, represented by Michael A. Urban, Laquer, Urban, Clifford & Hodge LLP & Nathan R. Ring, The Urban Law Firm.

Trustees of the Bricklayers & Trowel Trades International Pension Fund, Plaintiff, represented by Michael A. Urban, Laquer, Urban, Clifford & Hodge LLP & Nathan R. Ring, The Urban Law Firm.

Trustees of the Bricklayers & Trowel Trades International Health Fund, Plaintiff, represented by Michael A. Urban, Laquer, Urban, Clifford & Hodge LLP & Nathan R. Ring, The Urban Law Firm.

Trustees of the International Masonry Institute, Plaintiff, represented by Michael A. Urban, Laquer, Urban, Clifford & Hodge LLP & Nathan R. Ring, The Urban Law Firm.

G. G. Construction, Inc., Defendant, represented by David Melvin Crosby, Crosby & Associates.

Christine S. Green, Defendant, represented by David Melvin Crosby, Crosby & Associates.

Kevin V. Green, Defendant, represented by David Melvin Crosby, Crosby & Associates.

ORDER

RICHARD F. BOULWARE, II, District Judge.

I. INTRODUCTION

This is an action brought under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq. Plaintiffs are various trusts seeking to collect unpaid contributions allegedly owed to them under a collective bargaining agreement and related trust agreements under which Defendant G.G. Construction is obligated to make regular payments for the benefit of its employees. Plaintiffs now move for summary judgment. For the reasons stated below, the Court grants summary judgment in favor of Plaintiffs.

II. BACKGROUND

A. Procedural History

Plaintiffs filed their Complaint on September 8, 2014. ECF No. 1. Plaintiffs assert three causes of action in their Complaint: (1) Breach of Written Collective Bargaining Agreements and Related Trust Agreements, (2) Breach of Fiduciary Duty, and (3) Misappropriation of Trust Assets.

Defendants G.G. Construction, Inc., Kevin V. Green, and Chris S. Green filed an Answer on October 15, 2014. ECF No. 6. On November 6 and November 17, 2014, the Court issued two separate Orders to Show Cause why Defendants should not be sanctioned and/or have default judgment entered against them for failure to file a certificate of interested parties. ECF No. 8, 9. On December 5, 2014, following Defendants’ filing of a certificate of interested parties, the Court discharged its Order to Show Cause, but cautioned Defendants and their counsel that future noncompliance with Court orders or rules of court will result in significant monetary sanctions and/or case-dispositive sanctions. ECF No. 13.

On December 23, 2014, Defendants filed a Notice of Bankruptcy on the Record as to Defendants Kevin V. Green and Christine S. Green. ECF No. 14. On June 19, 2015, Plaintiffs filed a Notice of Voluntary Dismissal against Kevin and Christine Green. ECF No. 15. The docket does not reflect that these Defendants were ever dismissed from the case. The Court finds that dismissal is appropriate under Fed. R. Civ. P. 41(a)(1)(A), and Kevin V. Green and Chris S. Green are therefore dismissed from this action. Accordingly, G.G. Construction is the only remaining Defendant in this action.

On September 15, 2015, Plaintiffs filed a Motion for Summary Judgment against G.G. Construction. ECF No. 16. G.G. Construction failed to respond to the motion. On October 16, 2015, Plaintiffs filed a Notice of Non-Opposition and a Proposed Findings of Fact and Order. ECF No. 17. The Court held a hearing on the motion on July 7, 2016, at which G.G. Construction failed to appear.

B. Effect of G.G. Construction’s Failure to Respond

In its Notice of Non-Opposition, Plaintiffs request that the Court grant summary judgment in their favor based on G.G. Construction’s failure to respond to Plaintiffs’ Motion for Summary Judgment. Plaintiffs cite Local Rule of Practice 7-2(d), which at the time of the filing of the motion stated that “[t]he failure of an opposing party to file points and authorities in response to any motion shall constitute a consent to the granting of the motion.” [1]

The Court finds, however, that the local rules in this district do not permit the automatic granting of an unopposed motion for summary judgment. “[A] nonmoving party’s failure to comply with local rules does not excuse the moving party’s affirmative duty under Rule 56 to demonstrate its entitlement to judgment as a matter of law. Short of that, we turn the summary judgment rule into a mere sanction for noncompliance with local rules.” Martinez v. Stanford, 323 F.3d 1178, 1182 (9th Cir. 2003) (citing Fed. R. Civ. P. 56); see also Henry v. Gill Indus., Inc., 983 F.2d 943, 950 (9th Cir. 1993) (“A local rule that requires the entry of summary judgment simply because no papers opposing the motion are filed or served, and without regard to whether genuine issues of material fact exist, would be inconsistent with Rule 56, hence impermissible under Rule 83.”).

Nevertheless, an opposing party’s failure to respond does permit the Court to consider the moving party’s assertions of fact as undisputed for purposes of the motion, and to “grant summary judgment if the motion and supporting materials—including the facts considered undisputed— show that the movant is entitled to it.” Fed. R. Civ. P. 56(e)(2)-(3); see also Heineman v. Satterberg, 731 F.3d 914, 916-17 (9th Cir. 2013) (discussing the consequences of failing to respond to facts presented in a motion for summary judgment). The Court will therefore treat the facts presented by Plaintiffs, provided they are properly supported with admissible evidence, as undisputed for purposes of this motion.

C. Undisputed Facts

After reviewing the admissible evidence in the record, the Court finds the following facts to be undisputed. Plaintiffs are trustees of numerous express trusts and one union. The trustees are the Trustees of the Bricklayers & Allied Craftworkers Local 13 Defined Contribution Pension Trust for Southern Nevada, the Trustees of the Bricklayers & Allied Craftworkers Local 134 Health Benefits Fund, the Trustees of the Bricklayers & Allied Craftworkers Local 13 Vacation Fund, the Trustees of the Bricklayers & Trowel Trades International Pension Fund, the Trustees of the Bricklayers & Trowel Trades International Health Fund, and the Trustees of the International Masonry Institute (collectively, the “Trust Plaintiffs”). The remaining Plaintiff is the Bricklayers & Allied Craftworks Local 13 Nevada (“Local 13”). The Trust Plaintiffs are trustees of express trusts created pursuant to formal written Trust Agreements between Local 13 and the Nevada Masonry Employers and the Nevada Tile, Marble, Stone, and Terrazzo Contractors Association.

G.G. Construction entered into a collective bargaining agreement (the “Labor Agreement”) with Local 13 on approximately June 15, 2006 as a signatory employer. The trust agreements establishing the trusts represented by the Trust Plaintiffs (the “Trust Agreements”) are incorporated into the Labor Agreement. By signing the Labor Agreement, G.G. Construction also accepted the Trust Agreements and became obligated to the terms and provisions of both sets of agreements. Under the Labor Agreement, G.G. Construction is required to submit regular contribution reports and make monthly fringe benefit contributions to Plaintiffs. The Labor Agreement allows Plaintiffs to conduct an audit of G.G. Construction’s payroll and other records to ensure compliance with the Labor Agreement and ERISA. The Trust Agreements require payment of interest at a rate of 14% on all unpaid contributions until paid, liquidated damages of 20% of the unpaid contribution amount, and payment of the Trust Plaintiffs’ attorney’s fees and costs incurred in enforcing payment.

In January 2014, Plaintiffs’ auditor completed an audit of G.G. Construction’s records from May 1, 2010 through September 30, 2013. The audit report stated that G.G. Construction failed to make all required fringe benefit payments to Plaintiffs during this period. G.G. Construction disputed the initial audit results and provided supporting documentation to refute certain amounts claimed as being owed. After reviewing these documents, the auditor revised the audit claim. Plaintiffs’ counsel sent a final demand letter to G.G. Construction on August 18, 2014, requesting payment of amounts due as stated in the revised audit. To date, G.G. Construction has not paid the amounts due as stated in the revised audit, although two third parties (the Whiting-Turner Contracting Company and CNA Surety) have paid their portions of the audit claim. The total amount of unpaid contributions owed by G.G. Construction is $7,845.25.

III. LEGAL STANDARD

Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show “that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) . In considering whether to grant summary judgment, the court views all facts and draws all inferences in the light most favorable to the nonmoving party. Johnson v. Poway Unified Sch. Dist., 658 F.3d 954, 960 (9th Cir. 2011) . “When the moving party also bears the burden of persuasion at trial, to prevail on summary judgment it must show that the evidence is so powerful that no reasonable jury would be free to disbelieve it.” Shakur v. Schriro, 514 F.3d 878, 890 (9th Cir. 2008) .

IV. DISCUSSION

In its motion, Plaintiffs contend that G.G. Construction was bound by a collective bargaining agreement it entered into with Local 13 that obligated it to make monthly fringe benefit contributions to Plaintiffs and that G.G. Construction failed to make these contributions. Plaintiffs attached evidence supporting the amount of unpaid contributions owed, the interest that has accrued on those unpaid contributions, the costs incurred by the auditor, and the attorney’s fees and costs Plaintiffs accrued in litigating this action.

Based upon its review of the evidence submitted, the Court concludes G.G. Construction was required to make fringe benefit contributions to Plaintiffs, that it failed to do so, and that Plaintiffs are entitled to recover those unpaid contributions as well as interest, attorney’s fees and costs, and audit costs. The Court finds this amount to be $38,893.31, plus the interest that continues to accrue from September 14, 2015 onward.

A. Applicable Law

“ERISA was enacted to protect, inter alia, the interests of participants in employee benefit plans and their beneficiaries. ERISA applies to any employee benefit plan if it is established or maintained . . . by any employer . . . or . . . by any employee organization . . . or by both.” Daniels-Hall v. Nat’l Educ. Ass’n, 629 F.3d 992, 999 (9th Cir. 2010) (quoting 29 U.S.C. §§ 1001(b), 1003(a)(1)-(3)). Under ERISA, eligible “employee benefit plans” are classified into two types: employee welfare benefit plans and employee pension benefit plans. 29 U.S.C. § 1002(3). A plan qualifies as an employee welfare benefit plan under ERISA if it provides medical, disability, or vacation benefits, or any benefits “other than pensions on retirement or death, and insurance to provide such pensions.” Id. § 1002(1). Employee pension benefit plans provide retirement income to employees or defer income until retirement. Id. § 1002(2).

ERISA provides that “[e]very employer who is obligated to make contributions to a multiemployer plan under the terms of the plan or under the terms of a collectively bargained agreement shall, to the extent not inconsistent with law, make such contributions in accordance with the terms and conditions of such plan or such agreement.” Id. § 1145. A fiduciary of an ERISA plan is authorized to bring a civil action to obtain equitable relief to redress violations of the Act or “to enforce any provisions of this subchapter or the terms of the plan.” Id. § 1132(a)(3). If successful in a Section 1145 enforcement action, the fiduciary may recover damages as follows:

In any action under this subchapter by a fiduciary for or on behalf of a plan to enforce section 1145 of this title in which a judgment in favor of the plan is awarded, the court shall award the plan—

(A) the unpaid contributions,

(B) interest on the unpaid contributions,

(C) an amount equal to the greater of—

(i) interest on the unpaid contributions, or

(ii) liquidated damages provided for under the plan in an amount not in excess of 20 percent (or such higher percentage as may be permitted under Federal or State law) of the amount determined by the court under subparagraph (A),

(D) reasonable attorney’s fees and costs of the action, to be paid by the defendant, and

(E) such other legal or equitable relief as the court deems appropriate.

29 U.S.C. § 1132(g)(2); see also Idaho Plumbers & Pipefitters Health & Welfare Fund v. United Mech. Contractors, Inc., 875 F.2d 212, 215 (9th Cir. 1989) (ERISA, as amended after 1980, “provide[s] a statutory remedy for a trust fund fiduciary suing to collect unpaid plan contributions.”).

B. Summary Judgment Is Granted in Favor of Plaintiffs for Their First Cause of Action

Based on the evidence presented, the Court finds that the Labor Agreement, which incorporates the Trust Agreements establishing the trusts represented by the Trust Plaintiffs, is a qualifying plan under ERISA. The Court further finds that G.G. Construction was obligated to make contributions under the terms of the Labor Agreement and related Trust Agreements and that it failed to make such contributions. The Court therefore grants summary judgment in favor of Plaintiffs on their first cause of action for breach of the collective bargaining agreement and related trust agreements. The Court will now assess the damages owed to Plaintiffs.

1. Unpaid Contributions

The first category of damages recoverable by Plaintiffs is unpaid contributions. The declaration and audit report from Plaintiffs’ auditor demonstrate that G.G. Construction owes $7,845.25 in unpaid contributions to Plaintiffs.

2. Interest on Unpaid Contributions

In addition to unpaid contributions, Plaintiffs are entitled to recover “interest on the unpaid contributions.” 29 U.S.C. § 1132(g)(2)(B). Plaintiffs have submitted copies of the applicable agreements demonstrating that interest accrued at a rate of 14% per annum for G.G. Construction’s delinquent contributions. Plaintiffs’ evidence shows that G.G. Construction owed $2,939.25 in interest as of September 14, 2015 and that this interest continues to accrue.

3. The Greater of Interest or Liquidated Damages

Plaintiffs are also entitled to recover an amount equal to the greater of the interest on unpaid contributions or the “liquidated damages provided for under the plan in an amount not in excess of 20 percent . . . of the [unpaid contributions] determined by the court.” 29 U.S.C. § 1132(g)(2)(C). The liquidated damages provision applies “when (1) the fiduciary obtains a judgment in favor of the plan, (2) unpaid contributions exist at the time of suit, and (3) the plan provides for liquidated damages.” Idaho Plumbers, 875 F.2d at 215 . Once the liquidated damages provision applies, “liquidated damages are mandatory.” Id.

Here, Plaintiffs’ evidence shows that G.G. Construction was subject to a plan that provided for liquidated damages of 20% of unpaid contributions. Given that the Court has determined that the unpaid contributions total $7,845.25, the amount of liquidated damages is 20% of that amount, or $1,569.05. Where the interest on the unpaid contributions exceeds any liquidated damages award, however, ERISA requires that the court award an amount equal to the interest on the unpaid contributions. 29 U.S.C. § 1132(g)(2)(C). The Court thus awards an amount equal to the interest on the unpaid contributions as of September 14, 2015, or $2,939.25—an amount that will continue to rise as additional interest accrues.

4. Attorney’s Fees and Costs

In addition, Plaintiffs are entitled to recover reasonable attorney’s fees and costs of the action against G.G. Construction. 29 U.S.C. § 1132(g)(2)(D). After reviewing Plaintiffs’ counsel’s declaration and supporting documentation, the Court finds the claimed amount of attorney’s fees and costs to be reasonable. Attorney’s fees and costs are awarded in the amount of $12,229.36 ($11,528.50 in fees and $700.86 in costs).

5. Audit Costs

Finally, Plaintiffs seek to recover the costs of performing audits of G.G. Construction’s financial records. Audit costs are recoverable under ERISA as a type of “other legal or equitable relief.” Operating Eng’rs Pension Trust v. A-C Co., 859 F.2d 1336, 1343 (9th Cir. 1988) ; 29 U.S.C. § 1132(g)(2)(E) (where a judgment in favor of the plan is awarded, the court shall award “such other legal or equitable relief as the court deems appropriate” to the plan). Plaintiffs’ evidence shows that they incurred audit costs of $12,940.20 in connection with this action. The Court therefore awards this amount under subsection (g)(2)(E).

V. CONCLUSION

For the reasons stated on the record at this hearing,

IT IS ORDERED that [16] Motion for Summary Judgment is GRANTED. Summary judgment is granted in favor of Plaintiffs in the amount of $38,893.31, which is comprised of the following amounts:

• $7,845.25 in unpaid contributions;

• $2,939.25 in interest on unpaid contributions as of September 14, 2015, on which additional interest will continue to accrue until paid;

• $2,939.25 as an amount equal to the greater of the interest on unpaid contributions or liquidated damages provided for under the plan, on which additional interest will continue to accrue until paid;

• $12,229.36 in reasonable attorney’s fees and costs of the action, consisting of $11,528.50 in fees and $700.86 in costs; and

• $12,940.20 in audit costs.

The Clerk of Court is instructed to enter judgment in favor of Plaintiffs for the above amount and close this case.

[1] The Local Rules of Practice for the District of Nevada were revised effective May 1, 2016. The new version of Local Rule 7-2(d) excludes motions under Fed. R. Civ. P. 56 and motions for attorney’s fees, which is consistent with the Court’s analysis here.

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New Bankruptcy Opinion: TEMI HOLDINGS, LLC v. UNITED STATES BANKRUPTCY ADMINISTRATOR – Dist. Court, WD North Carolina, 2016

TEMI HOLDINGS, LLC, Plaintiff,

v.

UNITED STATES BANKRUPTCY ADMINISTRATOR; FIRST-CITIZENS BANK & TRUST COMPANY, Defendants.

No. 3:16-CV-00022-FDW.

United States District Court, W.D. North Carolina, Charlotte Division.

July 13, 2016.

Temi Holdings LLC, Appellant, represented by James H. Henderson.

United States Bankruptcy Administrator, Appellee, represented by Linda Wright Simpson, U.S. Bankruptcy Administrator.

First-Citizens Bank & Trust Company, Appellee, represented by Diane P. Furr, Poyner & Spruill, LLP.

ORDER

FRANK D. WHITNEY, Chief District Judge.

THIS MATTER is before the Court sua sponte for Appellant’s failure to prosecute the appeal. On January 12, 2016, Appellant filed a Notice of Appeal after the case was transferred to the United States Bankruptcy Court for the District of South Carolina (Spartanburg), No. 16-00075-hb, and that case appears to be proceeding as of the date of this order. Under Bankruptcy Rule 8009(a)(1)(B) Appellant has 14 days after filing a notice of appeal to file the designation of the record on appeal and statement of issues on appeal. Appellant has yet to file or serve the designation and statement of issues.

Accordingly, Appellant is hereby ORDERED to show cause within seven (7) calendar days.

IT IS SO ORDERED.

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New Bankruptcy Opinion: Securities and Exchange Commission v. JAMMIN’JAVA CORP. – Dist. Court, CD California, 2016

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.

JAMMIN’ JAVA CORP., dba MARLEY COFFEE, SHANE G. WHITTLE, WAYNE S. P. WEAVER, MICHAEL K. SUN, RENE BERLINGER, STEPHEN B. WHEATLEY, KEVIN P. MILLER, MOHAMMED A. ALBARWANI, ALEXANDER J. HUNTER, and THOMAS E. HUNTER, Defendants.

Case No. 2:15-cv-08921 SVW (MRWx).

United States District Court, C.D. California, Western Division.

July 6, 2016.

Securities and Exchange Commission, Plaintiff, represented by Peter Senechalle, US Securities and Exchange Commission, Paul M. G. Helms, US Securities and Exchange Commission, pro hac vice, Timothy S. Leiman, US Securities and Exchange Commission, pro hac vice & Lynn M. Dean, US Securities and Exchange Commission.

Shane G. Whittle, Defendant, represented by Nathan J. Hochman, Morgan Lewis and Bockius LLP.

Wayne S. P. Weaver, Defendant, represented by Marc S. Harris, Scheper Kim and Harris LLP.

Michael K. Sun, Defendant, represented by Edward Joseph Loya, Jr., Venable LLP, Jessie F. Beeber, Venable LLP, pro hac vice & Patrick J. Boyle, Venable LLP, pro hac vice.

Rene Berlinger, Defendant, represented by Michael L. Lavetter, Lamb and Kawakami LLP, Andrew M. Friedman, Butzel Long PC, pro hac vice, David S. Saltzman, Saltzman and Evinch PC, pro hac vice, Shane W. Tseng, Lamb and Kawakami LLP & Thomas Earl Patton, Butzel Long PC, pro hac vice.

Stephen B. Wheatley, Defendant, represented by Jeffrey Lawrence Maller, Law Office of Jeffrey Maller & Roger L. Fidler, Law Offices of Roger L Fidler, pro hac vice.

Kevin P. Miller, Defendant, represented by Michael J. Proctor, Caldwell Leslie and Proctor PC & Andrew A. Esbenshade, Caldwell Leslie and Proctor PC.

Mohammed A. Al-Barwani, Defendant, represented by Edward Joseph Loya, Jr., Venable LLP.

Alexander J. Hunter, Defendant, represented by Michael K. Ng, Kobre and Kim LLP.

Thomas E. Hunter, Defendant, represented by Michael K. Ng, Kobre and Kim LLP.

FINAL JUDGMENT AS TO DEFENDANT STEPHEN B. WHEATLEY

STEPHEN V. WILSON, District Judge.

The Securities and Exchange Commission having filed a Complaint and Defendant Stephen B. Wheatley (“Defendant”) having entered a general appearance; consented to the Court’s jurisdiction over Defendant and the subject matter of this action; consented to entry of this Final Judgment without admitting or denying the allegations of the Complaint (except as to jurisdiction and except as otherwise provided herein in Paragraph VI); waived findings of fact and conclusions of law; and waived any right to appeal from this Final Judgment:

I.

IT IS HEREBY Ordered, Adjudged, And Decreed that Defendant is permanently restrained and enjoined from violating Section 5 of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77e] by, directly or indirectly, in the absence of any applicable exemption:

(a) unless a registration statement is in effect as to a security, making use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise;

(b) unless a registration statement is in effect as to a security, carrying or causing to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale; or

(c) making use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed with the Commission as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under Section 8 of the Securities Act [15 U.S.C. § 77h].

IT IS FURTHER Ordered, Adjudged, And Decreed that, as provided in Federal Rule of Civil Procedure 65(d)(2), the foregoing paragraph also binds the following who receive actual notice of this Final Judgment by personal service or otherwise: (a) Defendant’s officers, agents, servants, employees, and attorneys; and (b) other persons in active concert or participation with Defendant or with anyone described in (a).

II.

IT IS HEREBY FURTHER Ordered, Adjudged, And Decreed that Defendant is permanently barred from participating in an offering of penny stock, including engaging in activities with a broker, dealer, or issuer for purposes of issuing, trading, or inducing or attempting to induce the purchase or sale of any penny stock. A penny stock is any equity security that has a price of less than five dollars, except as provided in Rule 3a51-1 under the Securities Exchange Act of 1934 [17 C.F.R. § 240.3a51-1]

III.

IT IS FURTHER Ordered, Adjudged, and Decreed that Defendant is liable for disgorgement of $2,364,124.86, representing funds received as a result of the conduct alleged in the Complaint, together with prejudgment interest thereon in the amount of $385,875.14. Defendant shall satisfy this obligation by paying $2,750,000 to the Securities and Exchange Commission pursuant to the terms of the payment schedule set forth in paragraph IV below.

Defendant may transmit payment electronically to the Commission, which will provide detailed ACH transfer/Fedwire instructions upon request. Payment may also be made directly from a bank account via Pay.gov through the SEC website at http://www.sec.gov/about/offices/ofm.htm. Defendant may also pay by certified check, bank cashier’s check, or United States postal money order payable to the Securities and Exchange Commission, which shall be delivered or mailed to

Enterprise Services Center
Accounts Receivable Branch
6500 South MacArthur Boulevard
Oklahoma City, OK 73169

and shall be accompanied by a letter identifying the case title, civil action number, and name of this Court; Stephen B. Wheatley as a defendant in this action; and specifying that payment is made pursuant to this Final Judgment.

Defendant shall simultaneously transmit photocopies of evidence of payment and case identifying information to the Commission’s counsel in this action. By making this payment, Defendant relinquishes all legal and equitable right, title, and interest in such funds and no part of the funds shall be returned to Defendant. The Commission shall send the funds paid pursuant to this Final Judgment to the United States Treasury.

The Commission may enforce the Court’s judgment for disgorgement and prejudgment interest by moving for civil contempt (and/or through other collection procedures authorized by law) at any time after 14 days following entry of this Final Judgment, subject to the terms of the payment schedule set forth in Section IV below. Defendant shall pay post judgment interest on any delinquent amounts pursuant to 28 U.S.C. § 1961.

IV.

Defendant shall pay the total of disgorgement and prejudgment interest due of $2,750,000 in three installments to the Commission according to the following schedule: (1) $1,300,000 within 14 days of entry of this Final Judgment; (2) $725,000 to be paid within six months of entry of this Final Judgment; and (3) $725,000 to be paid within 364 days of entry of this Final Judgment. Payments shall be deemed made on the date they are received by the Commission and shall be applied first to post judgment interest, which accrues pursuant to 28 U.S.C. § 1961 on any unpaid amounts due after 90 days following the entry of Final Judgment. Prior to making the final payment set forth herein, Defendant shall contact the staff of the Commission for the amount due for the final payment.

If Defendant fails to make any payment by the date agreed and/or in the amount agreed according to the schedule set forth above, all outstanding payments under this Final Judgment, including post-judgment interest, minus any payments made, shall become due and payable immediately at the discretion of the staff of the Commission without further application to the Court.

V.

IT IS HEREBY FURTHER Ordered, Adjudged, and Decreed that based on Defendant’s cooperation and agreement to cooperate in a Commission investigation and related enforcement action, the Court is not ordering Defendant to pay additional monetary relief. If at any time following the entry of the Final Judgment the Commission obtains information indicating that Defendant knowingly provided materially false or misleading information or materials to the Commission or in a related proceeding, the Commission may, at its sole discretion and without prior notice to the Defendant, petition the Court for an order requiring Defendant to pay additional monetary relief. In connection with any such petition and at any hearing held on such a motion: (a) Defendant will be precluded from arguing that he did not violate the federal securities laws as alleged in the Complaint; (b) Defendant may not challenge the validity of the Judgment, this Consent, or any related Undertakings; (c) the allegations of the Complaint, solely for the purposes of such motion, shall be accepted as and deemed true by the Court; and (d) the Court may determine the issues raised in the motion on the basis of affidavits, declarations, excerpts of sworn deposition or investigative testimony, and documentary evidence without regard to the standards for summary judgment contained in Rule 56(c) of the Federal Rules of Civil Procedure. Under these circumstances, the parties may take discovery, including discovery from appropriate non-parties.

VI.

IT IS FURTHER Ordered, Adjudged, and Decreed that the Consent is incorporated herein with the same force and effect as if fully set forth herein, and that Defendant shall comply with all of the undertakings and agreements set forth therein.

VII.

IT IS FURTHER Ordered, Adjudged, and Decreed that, solely for purposes of exceptions to discharge set forth in Section 523 of the Bankruptcy Code, 11 U.S.C. § 523, the allegations in the complaint are true and admitted by Defendant, and further, any debt for disgorgement, prejudgment interest, civil penalty or other amounts due by Defendant under this Final Judgment or any other judgment, order, consent order, decree or settlement agreement entered in connection with this proceeding, is a debt for the violation by Defendant of the federal securities laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19).

VIII.

IT IS FURTHER Ordered, Adjudged, and Decreed that this Court shall retain jurisdiction of this matter for the purposes of enforcing the terms of this Final Judgment.

IX.

There being no just reason for delay, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, the Clerk is ordered to enter this Final Judgment forthwith and without further notice.

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New Bankruptcy Opinion: Securities and Exchange Commission v. ASCENERGY LLC – Dist. Court, 2016

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.

ASCENERGY LLC and JOSEPH (a/k/a JOEY) GABALDON, Defendants,

PYCKL LLC and ALANAH ENERGY, LLC, Relief Defendants.

Case No. 2:15-cv-01974-GMN-PAL.

United States District Court, D. Neveda.

June 21, 2016.

JUDGMENT AS TO DEFENDANT ASCENERGY LLC, DEFENDANT JOSEPH (a/k/a Joey) GABALDON, AND RELIEF DEFENDANT ALANAH ENERGY, LLC

GLORIA M. NAVARRO, District Judge.

The Securities and Exchange Commission having filed a Complaint and Defendant Ascenergy LLC (“Ascenergy”), Defendant Joseph (a/k/a Joey) Gabaldon (“Gabaldon”), and Relief Defendant Alanah Energy, LLC (“Alanah”) having entered a general appearance; consented to the Court’s jurisdiction over them and the subject matter of this action; consented to entry of this Judgment without admitting or denying the allegations of the Complaint (except as to jurisdiction and except as otherwise provided herein in paragraph V); waived findings of fact and conclusions of law; and waived any right to appeal from this Judgment:

I.

IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendant Ascenergy and Defendant Gabaldon are permanently restrained and enjoined from violating, directly or indirectly, Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) [15 U.S.C. § 78j(b)] and Rule 10b-5 promulgated thereunder [17 C.F.R. § 240.10b-5], by using any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of any security:

(a) to employ any device, scheme, or artifice to defraud;

(b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or

(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that, as provided in Federal Rule of Civil Procedure 65(d)(2), the foregoing paragraph also binds the following who receive actual notice of this Judgment by personal service or otherwise: (a) Defendant Ascenergy’s and/or Defendant Gabaldon’s officers, agents, servants, employees, and attorneys; and (b) other persons in active concert or participation with Defendant Ascenergy and/or Defendant Gabaldon or with anyone described in (a).

II.

IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that Defendant Ascenergy and Defendant Gabaldon are permanently restrained and enjoined from violating Section 17(a) of the Securities Act of 1933 (the “Securities Act”) [15 U.S.C. § 77q(a)] in the offer or sale of any security by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly:

(a) to employ any device, scheme, or artifice to defraud;

(b) to obtain money or property by means of any untrue statement of a material fact or any omission of a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or

(c) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that, as provided in Federal Rule of Civil Procedure 65(d)(2), the foregoing paragraph also binds the following who receive actual notice of this Judgment by personal service or otherwise: (a) Defendant Ascenergy’s and/or Defendant Gabaldon’s officers, agents, servants, employees, and attorneys; and (b) other persons in active concert or participation with Defendant Ascenergy and/or Defendant Gabaldon or with anyone described in (a).

III.

IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that Defendant Ascenergy, Defendant Gabaldon, and Relief Defendant Alanah shall pay disgorgement of ill-gotten gains and prejudgment interest thereon and that Defendant Ascenergy and Defendant Gabaldon shall pay a civil penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]. The Court shall determine the amounts of the disgorgement and civil penalty upon motion of the Commission. Prejudgment interest shall be calculated from August 17, 2015, based on the rate of interest used by the Internal Revenue Service for the underpayment of federal income tax as set forth in 26 U.S.C. § 6621(a)(2). In connection with the Commission’s motion for disgorgement and/or civil penalties, and at any hearing held on such a motion: (a) Defendant Ascenergy, Defendant Gabaldon, and Relief Defendant Alanah will be precluded from arguing that Defendant Ascenergy and/or Defendant Gabaldon did not violate the federal securities laws as alleged in the Complaint; (b) Defendant Ascenergy, Defendant Gabaldon, and Relief Defendant Alanah may not challenge the validity of the Consents or this Judgment; (c) solely for the purposes of such motion, the allegations of the Complaint shall be accepted as and deemed true by the Court and Relief Defendant Alanah may not deny that it received or possess funds, or benefited from the use of funds, which are the proceeds of the unlawful activity of Defendant Ascenergy and Defendant Gabaldon; and (d) the Court may determine the issues raised in the motion on the basis of affidavits, declarations, excerpts of sworn deposition or investigative testimony, and documentary evidence, without regard to the standards for summary judgment contained in Rule 56(c) of the Federal Rules of Civil Procedure. In connection with the Commission’s motion for disgorgement and/or civil penalties, the parties may take discovery, including discovery from appropriate non-parties.

IV.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that the Consents are incorporated herein with the same force and effect as if fully set forth herein, and that Defendant Ascenergy, Defendant Gabaldon, and Relief Defendant Alanah shall comply with all of the undertakings and agreements set forth therein.

V.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that, solely for purposes of exceptions to discharge set forth in Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the allegations in the complaint are true and admitted by Defendant Gabaldon, and further, any debt for disgorgement, prejudgment interest, civil penalty or other amounts due by Defendant Gabaldon under this Judgment or any other judgment, order, consent order, decree or settlement agreement entered in connection with this proceeding, is a debt for the violation by Defendant Gabaldon of the federal securities laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19).

VI.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that this Court shall retain jurisdiction of this matter for the purposes of enforcing the terms of this Judgment.

VII.

There being no just reason for delay, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, the Clerk is ordered to enter this Judgment forthwith and without further notice.

IT IS SO ORDERED.

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New Bankruptcy Opinion: SCHWAB INDUSTRIES, INC. v. Huntington National Bank – Dist. Court, ND Ohio, 2016

SCHWAB INDUSTRIES, INC., Appellant,

v.

HUNTINGTON NATIONAL BANK, et al., Appellees.

Case No. 5:15-cv-2098, Adv. No. 14-6024.

United States District Court, N.D. Ohio, Eastern Division.

June 24, 2016.

MEMORANDUM OPINION

SARA LIOI, District Judge.

Before the Court are motions to dismiss filed separately by appellees Hahn, Loeser & Parks, LLP, Lawrence E. Oscar, and Andrew Krause (Doc. No. 5) and by appellee Huntington National Bank (Doc. No. 7.) Appellant filed a combined brief in opposition. (Doc. No. 11.) The appellees filed their separate reply briefs. (Doc. Nos. 12 and 13, respectively.) For the reasons discussed herein, the motions to dismiss are granted.

I. DISCUSSION

The parties here have set forth some of the underlying factual and procedural background, and appellant has briefed the underlying legal issues. [1] However, little, if any, of that is relevant to the sole dispositive argument raised in both motions to dismiss: that this Court lacks jurisdiction to review the appealed orders of the bankruptcy court because the notice of appeal was not timely filed. This Court need only discuss that single issue.

On October 7, 2015, appellant Schwab Industries, Inc. (who was the debtor in a Chapter 11 proceeding and the plaintiff in the adversary proceeding from which this appeal arises), filed its notice of appeal to this Court from two orders of the bankruptcy court, the first dated October 27, 2014 and the second dated September 21, 2015. For purposes of a timeliness analysis, only the second order is relevant. [2]

Fed. R. Bankr. P. 8002(a) provides: “Except as provided in subdivisions (b) and (c), a notice of appeal must be filed with the bankruptcy clerk within 14 days after entry of the judgment, order, or decree being appealed.” Subdivision (b) deals with the effect on this 14-day period of the filing of certain motions in the bankruptcy court: to amend or make additional findings, to alter or amend a judgment, for a new trial, or for relief from a judgment or order. [3] A review of the bankruptcy court docket reveals that no such motion was filed. Therefore, to be timely under the rule, and applying Fed. R. Bankr. P. 9006(a) for computing time, [4] the notice of appeal was due on October 5, 2015. It was filed on October 7, 2015.

With some exceptions, “the bankruptcy court may extend the time to file a notice of appeal upon a party’s motion[.]” Fed. R. Bankr. P. 8002(d)(1). Here, appellant filed no motion with the bankruptcy court (or with this Court) seeking an extension of time.

Even if the Court were to construe this as an interlocutory appeal, which appellant appears to advocate, [5] this Court would still be without jurisdiction to consider the appeal because Fed. R. Bankr. P. 8004(a)(1) requires that a notice of appeal of an interlocutory order must be filed within the same 14-day period prescribed for the notice of appeal of a final order.

“Cases interpreting Rule 8002 hold that the rule shall be strictly construed and that timely filing [of a notice of appeal] is a jurisdictional requirement.” In re HML II, Inc., 234 B.R. 67, 73 (6th Cir. BAP 1999) (internal quotation marks and citations omitted), aff’d 215 F.3d 1326, 2000 WL 659140 (6th Cir. May 11, 2000) (Table, text in WESTLAW); see also Suhar v. Burns (In re Burns), 322 F.3d 421, 429-30 (6th Cir. 2003) (failure to comply with the time requirement, or to timely seek an extension, deprives the appellate court of jurisdiction).

II. CONCLUSION

Because the notice of appeal was not timely filed, this Court lacks jurisdiction. Therefore, the two motions to dismiss (Doc. Nos. 5 and 7) are granted.

IT IS SO ORDERED.

[1] Interestingly, appellant ignores defendants’ arguments relating to the timeliness of the appeal and, instead, goes straight to the merits, arguing that the bankruptcy court was constitutionally and statutorily prohibited from entering a final judgment. Even if that were so (and the Court has no opinion on that) the arguments cannot be addressed unless this Court has jurisdiction.

[2] Appellant previously attempted to appeal from the October 27, 2014 order. (See Case Nos. 5:14-cv-2578 and 5:14-cv-2586.) This attempt was turned away by U.S. District Judge John R. Adams, who concluded that the order was interlocutory and not ripe for appeal, and that there was no basis for permitting an interlocutory appeal.

[3] Subdivision (c) addresses the so-called “mailbox rule” that applies to cases and appeals filed by incarcerated persons. It is inapplicable here.

[4] Rule 9006(a) requires exclusion of the day of the triggering event, counting every calendar day, and including the last day of the period unless it is a Saturday, Sunday, or legal holiday, in which event the period runs to the next day. Fed. R. Civ. P. 6(a) provides the very same.

[5] A motion for leave to file an interlocutory appeal accompanies appellant’s notice of appeal. (Doc. No. 1-3.)

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