AMUL R. THAPAR, District Judge.
Location matters. When King Leonidas and the Greeks chose to make their stand at Thermopylae, the narrow mountain pass "largely neutralize[d]" the Persians' strong cavalry and enabled the Greek force to inflict massive casualties on a Persian army more than twenty times its size. See Ben Dupré, Where History Was Made: Landmarks of World History from Thermopylae to Ground Zero 11-12 (2009). During the American Revolutionary War, the militia fought from behind hills and trees rather than in the open field, employing guerilla tactics to turn the strength of the British line formations into a weakness. See generally Mark V. Kwasny, Washington's Partisan War, 1775-1783, chs. 4-5 (1998). By choosing their battlefields, these armies shaped the rules of engagement.
Any coal mining case that does not mention black diamonds "would be a much duller affair" than Hamlet without the prince. Cinkovitch v. Thistle Coal Co., 143 Iowa 595, 121 N.W. 1036, 1038 (Iowa 1909). History makes clear that two factors earned coal its nickname: value and durability. In the United States, coal spurred the building of the nation's first railways and helped lay the foundations for the beginning of the Industrial Revolution. Albert Sidney Bolles, Industrial History of the United States 710 (Henry Bill Publishing 3d ed. 1878). Near the end of the nineteenth century, the value of coal mined in the nation was "equal to that of all the gold, silver, and iron produced." Id. at 704. America's "diadem of economic wealth" continued to sparkle with black diamonds into the twentieth century, In re Hudak's Estate, 383 Pa. 278, 118 A.2d 577, 584 (1955) (Musmanno, J., dissenting), and coal continued its "industrial supremacy," Frederick Robert Worts, Modern Industrial History 158 (1919).
Harold Sergent was probably trying to dig up similarly auspicious prospects by naming his coal company after the black diamond. After all, Sergent and James Campbell founded the Black Diamond Mining Company and its seven affiliates (collectively, "Black Diamond") to buy promising but undeveloped coal assets in Floyd County, Kentucky, and turn a profit. Compl., McKinstry v. Sergent, 442 B.R. 567 (E.D.Ky.2011) (Pikeville No. 10-110-ART), R. 1-1 at 10 ¶ 11. After putting up some of his own money, Sergent turned to a consortium of lenders, led by CIT Capital USA, Inc., to finance the purchase of these assets. Id. at 11 ¶ 12.
According to the Plaintiff's complaint, the following events then ensued. While in charge of Black Diamond, Sergent engaged in self-dealing and mismanaged the company. Id. at 24 ¶ 54. In 2006, he caused Black Diamond to enter a Consulting & Sales Agreement with another company that Sergent founded, Global Energy Holdings, LLC. Id. at 11 ¶ 13. Under this agreement, Black Diamond appointed Sergent and Global Energy as its exclusive agents for selling coal and paid them $0.25 per ton of coal that Black Diamond mined or sold, with a minimum monthly payment of $30,000. Consulting & Sales Agreement, McKinstry v. Sergent (In re Black Diamond Mining, LLC), No. 11-07010-JMS (Bankr. E.D. Ky. 2008) [hereinafter "Adversary Proceeding"], R. 19-1 at 3 ¶¶ 6-7. Not long afterwards, Black Diamond, under Sergent's direction, entered a Royalty Agreement with one of its lenders, CIT Capital. Compl., McKinstry, 442 B.R. 567 (No. 10-110), R. 1-1 at 12 ¶ 15. In exchange for financing the purchase of the Floyd County coal assets, Black Diamond agreed to pay royalties of $0.05 per ton to CIT Capital and $0.04 per ton to Sergent and Campbell. Royalty Fee Agreement, Adversary Proceeding, R. 19-2 at 2-3 ¶¶ 2-3. These agreements allegedly created a conflict of interest for Sergent. He was caught between his incentive to maximize his personal income by selling as much coal as possible regardless of whether Black Diamond would profit
Succumbing to the incentive to produce or sell as much coal as possible, Sergent committed Black Diamond to long-term Supply Contracts with coal purchasers to sell more coal than Black Diamond could produce from its own mines. Id. at 12-13 ¶ 17. To make up the shortfall between the amount it could produce and the amount it was obligated to sell, Black Diamond purchased the difference on the spot market. Id. Of course, this strategy was profitable so long as the price of purchasing coal on the spot market remained less than the selling price under the Supply Contracts, which topped out at about $52 per ton. Id. at 13 ¶ 18.
Although successful for the first two years, this strategy turned out to be a disastrous gamble when coal prices surpassed the $52 break-even point. Id. Concerned about the company's continued ability to satisfy its liabilities, CIT Capital insisted that Black Diamond hire Alvarez & Marsal North America, LLC ("A & M") as a financial advisor. Id. at 14 ¶ 23. But this was all for naught. The spot market price of coal continued to rise, and Black Diamond was unable to restructure the Supply Contracts. Id. at 14 ¶ 22; see also Appellant's Br., Sergent v. McKinstry, Pikeville No. 11-129-ART (E.D. Ky. 2011), R. 7 at 13. By early 2008, the spot market price of coal reached $70 to $80 per ton, which meant that Black Diamond lost $20 to $30 for each ton of coal it bought to satisfy its contractual obligations. Compl., McKinstry, 442 B.R. 567 (Pikeville No. 10-110-ART), R. 1-1 at 13-14 ¶ 21.
With their borrower's liabilities rapidly outstripping its assets, Black Diamond's lenders needed a new plan of attack. In February 2008, CIT Capital and the other lenders turned to the Chapter 11 bankruptcy process with the hope of reorganizing Black Diamond as a profitable company. The lenders filed involuntary petitions to drag Black Diamond and its seven subsidiaries into bankruptcy. See, e.g., Chapter 11 Involuntary Pet., In re Black Diamond Mining Co., No. 08-70066-JMS (Bankr. E.D. Ky. 2008) [hereinafter "Underlying Bankruptcy"], R. 1.
Up to this point, Black Diamond had not lived up to a name suggesting value and durability. Rather, once in bankruptcy, Black Diamond's name was more akin to the ski symbol indicating the need for expertise before continuing downhill. The Bankruptcy Court had to decide what kind of experts were needed to reorganize Black Diamond and help pull it back from the brink of financial collapse. For their part, CIT Capital and the other lenders moved for the appointment of a bankruptcy trustee to manage Black Diamond's estate. Mot. Appoint Trustee, Underlying Bankruptcy, R. 2. But rather than engage in a prolonged fight over the appointment of a trustee, the parties agreed to create a new senior management position within Black Diamond — Chief Restructuring Officer ("CRO") — and to appoint a specialist in turnaround management from A & M to this position. CRO Order, id., R. 56. Accordingly, the Bankruptcy Court authorized Black Diamond to hire an A & M employee, Ira Genser, as its CRO. Id. at 2. Because Genser was not a court-appointed trustee under the Bankruptcy Code, CIT Capital withdrew its motion for a trustee, but reserved the ability to renew it in the future. Id. at 6 (ordering that CIT Capital's motion to appoint a Chapter 11 trustee is "withdrawn, without prejudice").
The Bankruptcy Court gave Genser, as CRO, all of the powers necessary to run and restructure Black Diamond, including the power to hire and fire employees. Id.
After A & M took over Black Diamond's day-to-day management, the Bankruptcy Court authorized Black Diamond to reject the Consulting & Sales Agreement and the Royalty Agreement that caused Black Diamond's financial troubles. Id., R. 407. Unhappy that he would not receive payments promised to him under these agreements, Sergent filed proofs of claim in Black Diamond's bankruptcy case to recover these payments from Black Diamond's bankruptcy estate. He sought about $4.6 million in unpaid royalties, Claim Nos. 1259 & 1260, id., R. 2008 Ex. B, $28.8 million in unpaid commissions, Claim No. 1261, id., R. 2007 Ex. A, and $700,000 for unpaid loans that he made to Black Diamond, Claim Nos. 1257 & 1258, id., R. 2009 Ex. C.
Meanwhile, even restructuring specialists A & M, Genser, and Tate (collectively, the "A & M Defendants") could not prevent the spot market price of coal from nearly doubling during the summer of 2008, reaching peaks not seen since World War II. Compl., McKinstry, 442 B.R. 567 (Pikeville No. 10-110), R. 1-1 at 17 ¶ 37. Black Diamond teetered on the edge of financial ruin.
According to the Plaintiff, Black Diamond's troubles were not caused by Sergent alone: the A & M Defendants also contributed to the company's financial problems. Id. at 25-27 ¶¶ 60-63. For example, in August 2008, the Plaintiff claims that Genser and Tate ignored the advice of Black Diamond's senior management and employees and rejected an offer that would have "lock[ed] in a $30 million profit" for the company. Id. at 21 ¶ 42. Instead of a diversified approach, Genser and Tate put all their coal into one mine cart and attempted to sell the company to a competitor. Despite only having the interested purchaser's nonbinding letter of intent, Genser and Tate rejected multiple profitable opportunities for Black Diamond. Id. at 21-22 ¶¶ 41-47. Genser and Tate, the story goes, were committed to following the preferences of CIT Capital and the other lenders regardless of whether those preferences were in Black Diamond's best interests. Id. at 22 ¶ 47.
Unlike their cousins, black diamonds are not forever. After the global economic collapse in the fall of 2008, the spot market price of coal fell precipitously, and with it, the value of Black Diamond itself. Appellant's Br., Sergent v. McKinstry, Pikeville No. 11-129-ART (E.D. Ky. 2011), R. 1 at 15. These circumstances proved too much for the company to bear, and Black Diamond "encountered the fate which hangs like a black cloud over every coal miner's destiny." In re Hudak's Estate, 118 A.2d at 584 (Musmanno, J., dissenting).
With the hope of reorganization gone, Black Diamond filed a plan of liquidation, which the Bankruptcy Court confirmed in July 2009. See Confirmation Order, Underlying Bankruptcy, R. 1562. The Plan created the BD Unsecured Creditors Trust to liquidate some of the assets of Black Diamond's bankruptcy estate, including any causes of action that Black
Anticipating litigation of Black Diamond's causes of action, the Plaintiff and the A & M Defendants entered a Settlement Agreement. Settlement Agreement, id., R. 1562 at 160-170 (Ex. B). Under the Settlement Agreement, the Plaintiff agreed to limit her recovery for claims covered by various insurance policies, but not to limit her recovery for claims that fell outside the insurance coverage. Id. at 165 ¶ 6.
This long-brewing showdown among the three parties finally came to a head. Entrusted with liquidating the causes of action and obtaining a recovery for the unsecured creditors, the Plaintiff sued Sergent and the A & M Defendants in state court. Compl., McKinstry, 442 B.R. 567 (Pikeville No. 10-110-ART), R. 1-1. She asserted breach of fiduciary duty and gross negligence/willful misconduct claims against Sergent for his pre-petition mismanagement of Black Diamond (the "Sergent Claims"). Id. at 24-25 ¶¶ 53-59. She also asserted gross negligence/willful misconduct claims against the A & M Defendants for their post-petition mismanagement of Black Diamond (the "A & M Claims"). Id. at 25-27 ¶¶ 60-73. The defendants then successfully removed the case to this Court. See Mem. Op. & Order, McKinstry, 442 B.R. 56 (Pikeville No. 10-110-ART), R. 63.
Although the Court confirmed its removal jurisdiction over the case, "difficult issues" remained, particularly whether mandatory abstention applied to the Sergent Claims and whether the Sergent Claims were core or non-core. Id. at 3-4. Because the "Bankruptcy Court's familiarity with the case" would aid the resolution of these difficult issues, the Court referred the entire case to the Bankruptcy Court. Id. at 19.
Back before Bankruptcy Court, the Plaintiff asked the Bankruptcy Court to abstain from hearing the case and remand both sets of claims to state court. Adversary Proceeding, R. 17. The Bankruptcy Court granted this motion with respect to the Sergent Claims, but denied this motion with respect the A & M Claims. Mem. Op., id., R. 26 at 18 ("Abstention Order"). According to the Bankruptcy Court, abstention from the Sergent Claims was mandatory under 28 U.S.C. § 1334(c)(2) in part because the Sergent Claims are non-core proceedings under the Bankruptcy Code. Id. at 12. Consequently, the Bankruptcy Court remanded the Sergent Claims back to state court. Id. at 16. For the A & M Claims, however, the court held that both mandatory abstention under § 1334(c)(2) and permissive abstention under § 1334(c)(1) were inappropriate largely because the A & M claims were core proceedings. Id. at 12 (discussing mandatory abstention), 17 (discussing permissive abstention). This decision severed the case in two, with the state court to adjudicate the Sergent Claims and the Bankruptcy Court to decide the A & M Claims. The Bankruptcy Court also held all further proceedings on Sergent's proofs of claims in abeyance until the state court resolved
Like most split decisions, no one was entirely happy. Sergent appealed. Sergent, Pikeville No. 11-129-ART, R. 1. Meanwhile, the Plaintiff moved to withdraw this Court's reference of the case to the Bankruptcy Court so that this Court could adjudicate it. McKinstry, Pikeville No. 11-133-ART, R. 1. Both the appeal and the motion to withdraw are now before this Court.
Because both the appeal and the motion to withdraw partly turn on whether the Sergent and A & M Claims are core or non-core proceedings, the Court addresses this issue at the outset. Accord Comm. of Unsecured Creditors v. Motorola, Inc. (In re Iridium Operating LLC), 285 B.R. 822, 829 (S.D.N.Y.2002) (quoting Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1101 (2d Cir.1993)) ("A district court considering whether to withdraw the reference should first evaluate whether the claim is core or non-core, since it is upon this issue that questions of efficiency and uniformity will turn."). District courts have subject-matter jurisdiction over proceedings that arise under Title 11, that arise in a case under Title 11, and that are "otherwise related to a case under Title 11." See Stern v. Marshall, 564 U.S. ___, 131 S.Ct. 2594, 2605, 180 L.Ed.2d 475 (2011). The first two types are "core proceedings," while those that are otherwise related to a Title 11 case are "non-core proceedings." Id. District courts may choose to refer any of these types of proceedings to the bankruptcy court, 28 U.S.C. § 157(a), but a bankruptcy court's authority varies depending on the type of proceeding involved, Stern, 131 S.Ct. at 2604. In core proceedings, bankruptcy courts are empowered to enter final judgments, which are subject to conventional appellate review. 28 U.S.C. §§ 157(b)(1), 158; Fed. R. Bankr.P. 8013. By contrast, in non-core proceedings, bankruptcy courts may only "submit proposed findings of fact and conclusions of law to the district court." 28 U.S.C. § 157(c)(1). In this case, the A & M Claims are core proceedings. The Sergent Claims are also core proceedings under the statute, but it would be unconstitutional for the Bankruptcy Court to enter final judgment on them.
Because the Plaintiff did not cross-appeal, she is bound by the Bankruptcy Court's classification of the A & M Claims as core proceedings. A bankruptcy court's classification of a proceeding as core or non-core is "itself a core proceeding." 1 William L. Norton, Jr., Bankruptcy Law & Practice § 4:69 (3d ed. 2011); see also Maurer v. Maurer (In re Maurer), 271 B.R. 207, 209 (Bankr.M.D.Fla. 2002); Lesser v. A-Z Assocs. (In re Lion Capital Group), 63 B.R. 199, 209 (S.D.N.Y.1985). Consequently, such a classification is "subject only to conventional appellate review." 1 Norton, Bankruptcy Law & Practice § 4:69. If the bankruptcy court's classification occurs in an interlocutory fashion, then the party wishing to challenge it must seek permission from the district court for an interlocutory appeal under 28 U.S.C. § 158(a). Id. Otherwise, the party challenging the classification must wait to appeal a final order that brings up the core/non-core classification. Id.
Here, deciding whether to abstain from the A & M Claims required the Bankruptcy Court to determine whether the A & M
Eager to avoid the procedural bar to her challenge, the Plaintiff claims that the Bankruptcy Court's classification is non-binding because it is part of the court's reasoning. Pl.'s Reply, R. 5 at 18. Relying on the maxim that "courts do not bind parties to their reasoning" but "only to their results," the Plaintiff says that the Bankruptcy Court's core classification of the A & M Claims is non-binding. Id. (citing United States v. Schilling (In re Big Rivers Elec. Corp.), 355 F.3d 415, 442 (6th Cir.2004)).
The Plaintiff's application of this maxim makes a mountain out of a molehill. Of course, the reasoning of a decision, on its own, is not binding on an appellate court. See, e.g., Spierer v. Federated Dep't Stores, Inc. (In re Federated Dep't Stores, Inc.), 328 F.3d 829, 833 (6th Cir.2003). This maxim only means that an appellate court can affirm the lower court's judgment on any ground fairly presented by the record, even if the reviewing court disagrees with the lower court's reasoning for that judgment. See, e.g., United States v. Buckingham, 433 F.3d 508, 514 (6th Cir.2006); City Mgmt. Corp. v. U.S. Chem. Co., Inc., 43 F.3d 244, 251 (6th Cir.1994). Here, the Bankruptcy Court's classification of the A & M Claims as core was not merely reasoning, but also a holding necessary to its ultimate conclusion that both mandatory and permissive abstention did not apply to the A & M Claims. See infra Part II (explaining that one of the requirements for mandatory abstention is that the claim at issue is non-core).
To avoid the binding effect of the Bankruptcy Court's determination, the Plaintiff should have cross-appealed the Abstention Order's refusal to mandatorily or permissively abstain from hearing the A & M Claims. As part of the basis for that cross-appeal, the Plaintiff should have challenged the Bankruptcy Court's determination of the A & M Claims as core. Indeed, Sergent used this precise procedural route to challenge the Bankruptcy Court's non-core determination and resulting abstention.
As a last-ditch effort, the Plaintiff argues that she is not bound because the Abstention Order "did not purport to be a final order as to whether the [b]ankruptcy [c]ourt has `core' jurisdiction for all purposes." Pl.'s Reply, McKinstry, Pikeville No. 11-133-ART, R. 5 at 18. This contention is wrong. The Bankruptcy Court did not place any limits on its core/non-core determinations. More importantly, the Plaintiff offers no support for the proposition that whether a proceeding is core varies depending on the issue before the Court. And neither does the statute. Therefore, by failing to appeal the Abstention Order, the Plaintiff is bound by the Bankruptcy Court's determination that the A & M Claims are core. Consequently, this Court is powerless to reach the Plaintiff's contentions on the merits of this question. See, e.g., After Six, Inc. v. Abraham Zion Corp. (In re After Six, Inc.), 167 B.R. 35, 40 (E.D.Pa.1994) ("[T]he bankruptcy rules for filing a notice of appeal are mandatory and jurisdictional, and thus failure to file a timely notice of appeal deprives the district court of jurisdiction to review a bankruptcy court's final order or judgment.")
A big-picture point before deciding whether the Sergent Claims are core: the
Although the Sergent Claims are statutorily core, allowing the Bankruptcy Court to enter final judgment on them would be unconstitutional. As first-year law students learn in Civil Procedure, a litigant has to punch two tickets to keep her claim in the federal courthouse: statutory and constitutional.
The Sergent Claims come within the statutory ambit of "core." Congress has not defined "core proceedings." Instead, in 28 U.S.C. § 157(b)(2), Congress provides a non-exhaustive list of examples of core proceedings. One of the examples — "counterclaims by the estate against persons filing claims against the estate," § 157(b)(2)(C) — describes the Sergent Claims. Sergent filed proofs of claim against the estate in the Bankruptcy Court. In turn, the Plaintiff filed the Sergent Claims against Sergent in state court. See Stern, 131 S.Ct. at 2605 (holding that a debtor's claim against a creditor, who had filed a proof of claim against the debtor's estate, was a "counterclaim" within § 157(b)(2)(C)).
The Plaintiff quarrels with this conclusion on two grounds. First, she asserts that the Sergent Claims are not "counterclaims" because the opposing parties in the Sergent Claims are not the same as those in the Proofs of Claim. Appellee's Br., Sergent, Pikeville No. 11-129-ART, R. 8 at 13-14. With respect to the Sergent Claims, the Plaintiff argues that Black Diamond's director & officer insurance providers ("D & O Insurers") are the real parties in interest because the Plaintiff and Sergent have agreed to limit the Plaintiff's recovery to the amount of these policies. Id. at 13. And with respect to the Proofs of Claim, the Plaintiff argues that the real party in interest is Sergent's personal bankruptcy trustee Phaedra Spradlin — and not Sergent himself — because
The Plaintiff is correct that § 157(b)(2)(C) requires mutuality of parties. The Bankruptcy Code does not define the term "counterclaim." But in all other settings, a counterclaim requires the same opposing parties as those on each side of the "v." in the underlying claim. Cf. 6 Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure § 1404 (3d ed. 2011) (citing Fed.R.Civ.P. 13) ("The general rule appears to be that in an action brought in a representative capacity, a defendant cannot assert a counterclaim against plaintiff in plaintiff's individual capacity because it would not be a counterclaim against an `opposing party.'"). Indeed, Federal Rule of Civil Procedure 13(h) expressly governs how to bring nonparties into a lawsuit for the purpose of adding them to a counterclaim. This rule would be unnecessary if counterclaims could be brought against parties not present in the original claim. This understanding of "counterclaim" comports with how the term "counterclaim" is normally used in litigation. See Black's Law Dictionary (9th ed. 2009), available at Westlaw BLACKS (defining "counterclaim" as a "claim for relief asserted against an opposing party after an original claim has been made)" (emphasis added). Section 157(b)(2)(C) therefore requires mutuality of parties.
Although the Plaintiff is correct that counterclaims require mutuality of parties, she is incorrect about whether the Sergent Claims meet that requirement because she misidentifies the real parties in interest. The D & O Insurers do not replace Sergent as the real party in interest in the Sergent Claims just because the Plaintiff has limited her recovery to the amount of the D & O insurance. An insurer only replaces its insured as the real party in interest to the extent that the insurer has activated its subrogation rights — in other words, if the insurer actually paid part or all of the claim or otherwise made an enforceable promise to pay the claim. See United States v. Aetna Cas. & Sur. Co., 338 U.S. 366, 382, 70 S.Ct. 207, 94 L.Ed. 171 (1949); see also 6A Wright & Miller, Federal Practice & Procedure § 1546 ("If no money or enforceable promise to pay money has been advanced, then there has not been any subrogation and the insured remains the real party in interest."). The record does not indicate that Sergent's insurer has agreed to pay any of the losses alleged in the Sergent Claims, so the D & O Insurers are not the real party in interest.
So who is? In fact, the real party in interest for the Sergent Claims is the same as the real party in interest for the Proofs of Claim: the trustee for Sergent's personal bankruptcy estate, Phaedra Spradlin. The Proofs of Claim are assets of his personal bankruptcy estate. Voluntary Pet., In re Harold Edwin Sergent, No. 10-50763-JL (Bankr. E.D. Ky. 2010), R. 1 at 32. The Sergent Claims are liabilities of his personal bankruptcy estate. Id. at 37. And the Bankruptcy Court has not exempted these sets of claims from the property of Sergent's personal estate, nor does the Plaintiff offer a valid basis on which the Bankruptcy Court could do so. 11 U.S.C. § 541(a)(1) (defining the bankruptcy estate as including "all legal or equitable interests of the debtor in property as of the commencement of the case"); see also Wieburg v. GTE Sw., Inc., 272 F.3d 302, 306 (5th Cir.2001) (holding that the trustee of a bankruptcy estate is the real party in interest for legal claims that are assets of a bankruptcy estate). Consequently, the Sergent Claims are "counterclaims" because there is mutuality of parties.
But things are not always so simple when a plan says otherwise in the liquidation context. The Bankruptcy Code permits "the debtor, by the trustee, or by a representative of the estate" to prosecute the claims that are part of the debtor's estate. 11 U.S.C. § 1123(b)(3)(B) ("A plan may ... provide for ... the retention and enforcement by the debtor, by the trustee or by a representative of the estate appointed for such purpose, of [any claim or interest belonging to the debtor or to the estate]."). Often, like here, the "representative of the estate" is a liquidating trustee. 6 Norton, Bankruptcy Law and Practice § 109:16. In this case, the Bankruptcy Court assigned the Sergent and A & M Claims to the BD Unsecured Creditors Trust, appointed the Plaintiff as a "representative of the estate," and charged her with liquidating those causes of action. Third Am. Joint Plan of Liquidation, Underlying Bankruptcy, R. 1562 Ex. A, art. IV.C ¶ 2 ("The BD Unsecured Creditors Trust shall be deemed not to be the same legal entity as any of the Debtors, but only [a] ... representative of their Estates for the pursuit of the Causes of Action assigned to the BD Unsecured Creditors Trust within the meaning of section 1123(b)(3) of the Bankruptcy Code.") (emphasis added); see also id. art. IV.B ¶ 3(a) ("To the extent necessary or appropriate, the BD Unsecured Creditors Plaintiff may be designated as a representative of one or more of the Estates pursuant to section 1123(b)(3)(B) ... to enforce or pursue any rights, claims or Causes of Action that remain property of the Estates after the Effective Date."). For the representative of an estate to bring claims post-confirmation, the estate must also still exist post-confirmation. Otherwise, the Plaintiff would represent nothing.
There is a second reason why Black Diamond's estate must continue to exist: Sergent still has Proofs of Claim pending against Black Diamond's estate. Sergent has filed Proofs of Claim to recover money from the estate. Nearly two years after confirmation, see Confirmation Order, Underlying Bankruptcy, R. 1562, the Bankruptcy Court held these Proofs of Claim in abeyance until the Sergent Claims and the A & M Claims are resolved, Abeyance Order, id., R. 2052. Suppose that a court resolves the Sergent Claims and the A & M Claims, and after the Bankruptcy Court terminates the abeyance, the Bankruptcy Court rules in favor of Sergent on his Proofs of Claim. From whom will Sergent recover? From Black Diamond's estate. Yet if Black Diamond's estate no longer exists, the Bankruptcy Court would have denied Sergent's Proofs of Claim as moot, not held them in abeyance.
The scope of post-confirmation bankruptcy jurisdiction also compels the continued existence of Black Diamond's estate. If a bankruptcy estate always ceased to exist once confirmation occurred, then there could be no related-to jurisdiction over post-confirmation litigation because
Although the Sergent Claims are core for purposes of the statute, they cannot constitutionally be treated as core. In Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, the Supreme Court held that the Constitution limits Congress's ability to designate all counterclaims as core. There, a creditor filed a proof of claim against the debtor's estate alleging that the debtor had defamed the creditor. Id. at 2601. In response, the debtor filed a counterclaim in the bankruptcy court for the creditor's tortious interference with a gift that the debtor expected from her husband. Id. The bankruptcy court held that the debtor's counterclaim for tortious interference was a core proceeding because it was a "counterclaim by the estate against persons filing claims against the estate," and entered final judgment. See id. at 2602.
The Supreme Court disagreed. The counterclaim for tortious interference fit within the statutory examples of core proceedings in § 157(b)(2), but the Constitution prohibits a non-Article III court from entering final judgment on the counterclaim. Id. at 2608. Why? The Constitution prohibits a non-Article III court, such as a bankruptcy court, from exercising the "judicial Power of the United States." U.S. Const. art. III, § 1, cl. 1. Exercising that power includes entering final judgment on a counterclaim that is a "state law action independent of the federal bankruptcy law and not necessarily resolvable by a ruling on the creditor's proof of claim in bankruptcy." Stern, 131 S.Ct. at 2611. In Stern, even if the bankruptcy court ruled in the creditor's favor on the proof of claim for defamation, that court would have needed to decide additional questions to rule on the debtor's counterclaim for tortious interference. See id. at 2617-18. Thus, the Court concluded that only an Article III court could enter final judgment on the counterclaim.
Even assuming that the proofs of claim are disallowable on one of these three bases, a court could not enter judgment on either of the two Sergent Claims without deciding additional issues. On the Plaintiff's gross negligence claim, a court must determine if Sergent actually mismanaged Black Diamond, whether his mismanagement exhibited "malice or willfulness" beyond mere negligence, and the amount of any consequent losses to Black Diamond. See, e.g., City of Middlesboro v. Brown, 63 S.W.3d 179, 181 (Ky.2001) (quoting Cooper v. Barth, 464 S.W.2d 233, 234 (Ky.1971)). Because the Plaintiff seeks punitive damages for her gross negligence claim, a court also has to determine whether Sergent's mismanagement rises to the level of "wanton and reckless disregard for the lives, safety or property of others." Peoples Bank of No. Ky., Inc. v. Crowe Chizek and Co. LLC, 277 S.W.3d 255, 267-68 (Ky. App.2008) (citing Phelps v. Louisville Water Co., 103 S.W.3d 46, 51-52 (Ky.2003)). Thus, ruling on the Proofs of Claim alone will not dispose of the gross negligence claim. Accord Stern, 131 S.Ct. at 2617-18 (concluding that ruling on a proof of claim would not necessarily resolve a counterclaim because ruling on the counterclaim required deciding the additional issue of punitive damages).
Nor does ruling on the Proofs of Claim necessarily resolve the breach of fiduciary duty claim. The Plaintiff alleges that Sergent self-dealt by appearing on both sides of a transaction. Compl., McKinstry, Pikeville No. 10-110-ART, R. 1-1 ¶ 54. To rule on this allegation, a court must determine: (1) whether Sergent was a fiduciary of Black Diamond; (2) whether he
Ruling on Sergent's Proofs of Claim and breach of fiduciary duty counterclaim, may, of course, involve some overlap in a court's decisionmaking. Sergent's Supp. Br., Sergent, Pikeville No. 11-129-ART, R. 26 at 8-10. But some overlap is not enough. Stern, 131 S.Ct. at 2617 (acknowledging that there was "some overlap" between the debtor's counterclaim and the creditor's proof of claim, but nonetheless holding that "there was never any reason to believe that the process of adjudicating [the creditor's] proof of claim would necessarily resolve [the debtor's] counterclaim"). The Bankruptcy Court does not have to decide whether Proofs of Claim exceed the reasonable value of Sergent's services as an insider because there are two other grounds on which the Proofs of Claim could be disallowed.
Even if a court were to disallow the Proofs of Claim because Sergent is an insider whose commissions and royalties were unreasonably valued, the Bankruptcy Court would still have to decide at least two additional issues to rule on the breach of fiduciary duty claim. First, the reasonableness inquiry is different. For the Proofs of Claim, the question is whether the commissions and royalties that Sergent expected to receive in the future were reasonable in light of his services. See, e.g., In re Delta Air Lines, Inc., 2010 WL 423279, at *8 (Bankr.S.D.N.Y. Feb. 3, 2010) (No. 05-17923) (holding that the "reasonable value" of future services under a rejected consulting agreement is "zero" because no future services could be provided and thus disallowing any claim for their value under § 502(b)(4)). The breach of fiduciary duty claim, by contrast, requires considering whether the commissions and royalties that Sergent allegedly diverted to himself in the past were reasonable.
A court would also have to decide a second issue to rule on the breach of fiduciary duty claim: whether Sergent acted with "willful misconduct" in entering the Consulting & Sales Agreement and the Royalty Agreement. This culpability determination plays no role in a court's allowance or disallowance of Sergent's Proofs of Claim. For example, a court could conceivably disallow Sergent's Proofs of Claim because the value of his services was unreasonable and simultaneously find Sergent not liable for breach of fiduciary duty because his conduct was not willful or grossly negligent. Consequently, ruling on Sergent's Proofs of Claim will not necessarily resolve either of the Sergent Claims for gross negligence and breach of fiduciary duty. Therefore, it is unconstitutional to treat the Sergent Claims as core proceedings for the purpose of final adjudication.
The Court must reverse the Bankruptcy Court's decision to abstain from hearing the Sergent Claims. Section 1334(c)(2) of Title 28 requires federal courts to abstain from hearing non-core bankruptcy proceedings under certain conditions.
Because the Court can exercise supplemental jurisdiction over the Sergent Claims, the five-part test for mandatory abstention is not satisfied. The Plaintiff's complaint involves two sets of claims. One — the core A & M Claims — is within this Court's original jurisdiction over core bankruptcy matters. See 28 U.S.C. § 1334(a). The other — the Sergent Claims — relates to the bankruptcy case.
All of the parties agree that, if the A & M Claims are core, then the Court can exercise supplemental jurisdiction over the Sergent Claims. Mots. Hr'g Tr., Sergent,
The Plaintiff may be correct that bankruptcy courts cannot exercise supplemental jurisdiction. See, e.g., Enron Corp. v. Citigroup, Inc. (In re Enron Corp.), 353 B.R. 51, 59 (Bankr.S.D.N.Y.2006). But she is answering the wrong question. Whether the Bankruptcy Court had an independent federal jurisdictional basis over the Sergent Claims is irrelevant to mandatory abstention because Section 1334(c) addresses when district courts should abstain. The proper question, then, is whether the district court would have another source of federal jurisdiction over the Sergent Claims besides "related-to" bankruptcy jurisdiction under § 1334. See, e.g., In re TXNB Internal Case, 483 F.3d at 300 (holding that bankruptcy courts may not exercise supplemental jurisdiction and upholding a denial of mandatory abstention because the district court could have exercised supplemental jurisdiction over the non-core proceeding). Unsurprisingly, the Plaintiff has not identified any case that frames the question as whether the bankruptcy court had another basis for federal jurisdiction over the claims. Because this Court can exercise supplemental jurisdiction over the Sergent Claims, the Court does not need to wade into the parties' tempest over whether the state court can adjudicate the Sergent Claims in a timely fashion. The Bankruptcy Court was not required to abstain from hearing the Sergent Claims.
Because mandatory abstention does not apply, the Sergent Claims remain in Bankruptcy Court. Consequently, the Court must evaluate the Plaintiff's motion to withdraw with respect to both the A & M Claims and the Sergent Claims.
District courts have discretion to withdraw "in whole or in part, any case or proceeding" referred to the bankruptcy court "for cause shown." 28 U.S.C. § 157(d); Steed v. Knox Forex Group, LLC (In re Rivas), 2009 WL 2929424, at *1 (E.D.Tenn. Sept. 8, 2009). The Bankruptcy Code does not define "cause." Courts determine whether cause exists by balancing the following factors: (1) whether the right to a jury trial exists; (2) whether the matter is core or non-core; (3) promoting judicial economy; (4) promoting uniformity in bankruptcy administration; (5) reducing forum shopping and confusion; (6) conserving the creditor's and debtor's resources; and (7) expediting the bankruptcy process. See, e.g., In re Rivas, 2009 WL 2929424, at *2; In re Orion Pictures Corp., 4 F.3d at 1101; Holland Am. Ins. Co. v. Succession of Roy, 777 F.2d 992, 999 (5th Cir.1985); CIT Grp./Commercial Servs., Inc. v. Constellation Energy Commodities Grp., Inc. (In re Black Diamond Mining Co.), 2010 WL
Here, the Plaintiff has met that burden, but her timing is premature. Because the Plaintiff has a jury trial right on all of her causes of action, cause to withdraw the reference "automatically exists" regardless of the remaining factors. E.g., Caudill v. Burrows (In re Oasis Corp.), 2008 WL 2473496, at *2 (S.D.Ohio June 18, 2008) (No. C2-08-00288). Significant pretrial matters, however, remain unfinished. Therefore, the Court denies the Plaintiff's motion to withdraw the reference without prejudice until the case is trial-ready.
The plaintiff is entitled to a jury trial on both the Sergent Claims and the A & M Claims. Under the Seventh Amendment of the United States Constitution, the right to a jury trial "shall be preserved" in "Suits at common law." A litigant is entitled to a jury trial only on issues that resolve legal rights rather than equitable ones. Bledsoe v. Emery Worldwide Airlines, Inc., 635 F.3d 836, 841 (6th Cir.2011) (citing Wooddell v. Int'l Bhd. Of Elec. Wkrs., Local 71, 502 U.S. 93, 97, 112 S.Ct. 494, 116 L.Ed.2d 419 (1991)). Whether an action involves legal or equitable rights, in turn, depends upon a two-part inquiry into the nature of the cause of action and the nature of the remedy sought (the "Granfinanciera test"). See generally Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989). The Court must (1) compare the nature of the claim to "18th-century actions brought in the courts of England prior to the merger of the courts of law and equity," and (2) evaluate the remedy that the Plaintiff seeks to "determine whether it is legal or equitable in nature." Id. (quoting Chauffeurs, Local No. 391 v. Terry, 494 U.S. 558, 565, 110 S.Ct. 1339, 108 L.Ed.2d 519 (1990)). The second inquiry is "more important" in this analysis. Id. (quoting Terry, 494 U.S. at 565, 110 S.Ct. 1339).
The Plaintiff alleges two theories of liability against Sergent: First, Sergent engaged in unlawful self-dealing by causing Black Diamond to pay him commissions and royalties on the coal it sold, and this alleged breach of fiduciary duty led to the company's losses and eventual downfall. Compl., McKinstry, Pikeville No. 10-110-ART, R. 1-1 at 24 ¶¶ 53-55 (Count I). Second, Sergent mismanaged Black Diamond by causing the company to rely on the spot market to satisfy its long-term Supply Contracts, and these grossly negligent decisions led to the company's losses and eventual downfall. Id. at 25 ¶¶ 56-59 (Count II). The Plaintiff is entitled to a jury trial on both claims.
Getting to this conclusion, however, requires "rattling through dusty attics of ancient writs." Terry, 494 U.S. at 575, 110 S.Ct. 1339 (1990) (Brennan, J., concurring in part and concurring in the judgment). Historically, a corporation could hold its officers and directors liable for mismanaging its affairs by suing them in courts of equity for breach of fiduciary duty. See,
But this oft-repeated story does not tell the whole tale of officer and director liability. While courts of equity were busy enforcing directors' fiduciary duties as quasi-trustees, courts of law treated directors as quasi-agents of the corporation. 3 John Norton Pomeroy, Equity Jurisprudence and Equitable Remedies § 1089 (1905) (discussing the "rights, duties, and liabilities" that resulted from the directors' simultaneous status as quasi-agents and quasi-trustees). Corporations thus had two options for pursuing claims of director liability: an "action on the case at law to recover damages" or a "suit in equity to compel them to account." William L. Clark, Jr., Handbook on the Law of Private Corporations ch. XIII § 204 (1916). This concurrent jurisdiction over officer and director liability is unsurprising. There was a "continual process of borrowing by one jurisdiction from the other," which was "not accompanied by an equivalent sloughing off of functions." Fleming James, Jr., Right to a Jury Trial in Civil Actions, 72 Yale L.J. 655, 658-59 (1963); see also id. at 692 ("[I]ssues are not inherently legal or equitable. They are like chameleons which take their color from surrounding circumstances.").
Because of these parallel theories of director and officer liability, a corporation like Black Diamond would have been able to sue Sergent for his alleged mismanagement in either law under negligence or equity under breach of fiduciary duty. Therefore, the first step of the Granfinanciera test shows that Black Diamond's gross negligence action against Sergent was historically an action at law, while its breach of fiduciary duty claim was equitable.
This preliminary conclusion invites the second, more important step of the Granfinanciera test: when is money a legal remedy and when it is equitable? After all, money is the "traditional form of relief offered in the courts of law," but it is not always a legal remedy. Terry, 494 U.S. at 570, 110 S.Ct. 1339 (quoting Curtis v. Loether, 415 U.S. 189, 196, 94 S.Ct. 1005, 39 L.Ed.2d 260 (1974)). A monetary remedy is equitable only when it is a form of equitable restitution or it is "incidental to or intertwined with injunctive relief." Id. at 571, 110 S.Ct. 1339 (quoting Tull v. United States, 481 U.S. 412, 424, 107 S.Ct. 1831, 95 L.Ed.2d 365 (1987)). Because the Plaintiff has not asked for injunctive relief, the only question is whether the monetary remedy she seeks for the Sergent Claims is a form of equitable restitution. It is not. For both claims, the Plaintiff seeks compensatory damages for the losses that Black Diamond sustained — the quintessential form of legal relief. Leary v. Daeschner, 349 F.3d 888, 910 (6th Cir.2003) (quoting Hildebrand v. Bd. of Tr. of Mich. State Univ., 607 F.2d 705, 708 (6th Cir. 1979) ("In the ordinary case, if the relief sought includes compensatory and/or punitive damages, then there does exist a right to trial by jury."); accord Pereira v. Farace, 413 F.3d 330, 340-41 (2d Cir.2005)
To sum up: Both steps of the Granfinanciera test support the right to a jury trial for the gross negligence claim (Count II). With respect to the breach of fiduciary duty claim (Count I), the first and second steps of the Granfinanciera test point in opposite directions, but the legal nature of the remedy — the second step — breaks the tie.
At least one other court in this circuit disagrees with this latter conclusion, holding that a breach of fiduciary duty claim is historically equitable and thus never carries a jury trial right. See Official Comm. of Unsecured Creditors v. Hendricks, No. 04-066-MRM, 2008 WL 5428012, at *3-4 (S.D.Ohio Oct. 2, 2008). This analysis, however, is only the first step of the Granfinanciera inquiry. The remainder of the Hendricks analysis suffers from two fatal defects. First, it "conflates the two parts" of the Granfinanciera inquiry by assuming that an equitable cause of action for breach of fiduciary duty necessarily entails an equitable remedy. Terry, 494 U.S. at 571 n. 8, 110 S.Ct. 1339 ("The second part of the analysis, therefore, should not replicate the `abstruse historical' inquiry of the first part, but requires consideration of the general types of relief provided by courts of law and equity.") (emphasis added) (quoting Ross, 396 U.S. at 538 n. 10, 90 S.Ct. 733 (1970)). Second, the Hendricks court failed to explain why the monetary relief sought in that case was not a legal remedy entitling the plaintiff to a jury trial. Instead, the court concluded that there was no jury trial right because "other kinds of [equitable] relief" — which the plaintiff did not seek — would have been available to rectify the breach of fiduciary duty. Id. But the rule cannot be that the availability of equitable relief not sought by a litigant eviscerates a litigant's jury trial right for the legal relief he actually seeks. If this were the rule — and the Hendricks court cites no authority to suggest that it is, see id. at *4 — then a litigant would only have the right to a jury trial on claims for which legal relief is the only relief available. In fact, the Supreme Court has said the exact opposite. E.g., Tull, 481 U.S. at 417, 107 S.Ct. 1831 ("[T]he Court must examine both the nature of the action and the remedy sought.") (emphasis added); accord Parsons v. Bedford, 28 U.S. (3 Pet.) 433, 446-47, 7 L.Ed. 732 (1830) (Story, J.) (holding that the Seventh Amendment preserves the right to a jury trial in "not merely suits, which the common law recognized among its old and settled proceedings, but suits in which legal rights were to be ascertained and determined, in contradistinction to those where equitable rights alone were recognized, and equitable remedies were administered"); see also Curtis, 415 U.S. at 190-91, 94 S.Ct. 1005 (holding that a statutory damages for actions carried the right to a jury trial, even though the plaintiff had been previously awarded injunctive relief under the same statute).
Consider the following scenario: A corporation sues its officer for mismanagement back in the days of the divided bench. If the corporation was trying to recover profits that the officer gained through his misconduct and that were still in his possession, then the corporation had to bring a bill in equity for breach of
The Plaintiff also has a right to a jury trial on all of the A & M Claims. Before reaching the first step of the Granfinanciera inquiry, however, a threshold question lingers: what cause of action does the Plaintiff allege against Genser and Tate? The complaint calls it "willful misconduct and gross negligence" — the same title as one of the allegations against Sergent. Compl., McKinstry, Pikeville No.
The Plaintiff describes her cause of action as gross negligence against officers of a company for the lost value of Black Diamond's estate and correspondingly claims the right to a jury trial. See generally Pl.'s Supp. Br. on Jury Trial Issue, McKinstry, Pikeville No. 11-133-ART, R. 22. The A & M Defendants describe the action as breach of fiduciary duty against the functional equivalent of a trustee for a surcharge, to which they claim that there is no jury trial right. See generally A & M's Supp. Br. Jury Trial Issue, id., R. 19.
Neither party is quite right. Under the first step of Granfinanciera, the nature of the action — breach of the officers' fiduciary duty to maximize the value of the estate — is historically equitable. To understand why, a quick bankruptcy primer is necessary. When a bankruptcy case commences, the Bankruptcy Code creates an estate to hold broad swaths of the debtor's property. 11 U.S.C. § 541(a). To ensure that the property in the estate is optimally used to reorganize or liquidate the debtor (depending on the aim of the bankruptcy), someone has to represent the interests of the estate. The Bankruptcy Code provides two possible representatives: either a disinterested, court-supervised trustee, id. § 323(a), or the debtor in possession itself, id. § 1107(a). If a trustee is appointed, then the trustee owes a fiduciary duty to "maximize the value of the estate" for all of its creditors. Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 352, 105 S.Ct. 1986, 85 L.Ed.2d 372 (1985). But when no trustee is appointed — like here — the debtor corporation "bears essentially the same fiduciary obligation" to maximize value for the creditors. Naturally, these fiduciary duties fall upon the debtor's officers, like Genser and Tate. Wolf v. Weinstein, 372 U.S. 633, 649-50, 83 S.Ct. 969, 10 L.Ed.2d 33 (1963). In short, a bankruptcy court's "willingness to leave the Debtor in possession is premised upon an assurance" that the debtor's officers will carry out the trustee's fiduciary duties. Id. at 651, 83 S.Ct. 969.
Here, the Plaintiff alleges that Genser and Tate failed to capitalize on various opportunities to lock in profitable, long-term contracts and did not sell any coal while running Black Diamond. Compl., McKinstry, 442 B.R. 567 (Pikeville No. 10-110-ART), R. 1-1 at 16-22 ¶¶ 32-47. Instead, Genser and Tate supposedly followed the preference of CIT Capital and the other lenders for a "quick sale" of Black Diamond to the detriment of the estate's other creditors. Id. at 23-24 ¶ 52. In other words, the Plaintiff alleges that Genser and Tate only tried to benefit one constituency of creditors — the lenders — and therefore did not maximize the value of the estate for all of the creditors. These allegations amount to a breach of fiduciary duty. See id. at 16 ¶ 33 (alleging that the A & M Defendants had "a fiduciary duty to maximize the value of [Black Diamond] for all creditors and equity holders, not just for the Lenders").
The Plaintiff may be correct that individual instances of Genser and Tate's mismanagement could be described in terms of gross negligence or willful misconduct. Pl.'s Supp. Br., McKinstry, Pikeville No. 11-133-ART, R. 23 at 8-9. But there are two reasons why the Plaintiff's allegations nonetheless constitute equitable claims for breach of fiduciary duty rather than legal claims for gross negligence. First, the complaint itself alleges that Genser and Tate breached their fiduciary duty to maximize
But the A & M Defendants' victory on the first step is short-lived because the second step of the inquiry reveals that the Plaintiff seeks a legal remedy: compensatory damages. Recall the reasoning applied to the Sergent Claims. Money is the "traditional form of relief offered in the courts of law." Terry, 494 U.S. at 570, 110 S.Ct. 1339 (quoting Loether, 415 U.S. at 196, 94 S.Ct. 1005). It is only an equitable remedy in two circumstances: when the plaintiff seeks equitable restitution of property or funds in the defendant's possession or when the money is "incidental to or intertwined with injunctive relief." Id. at 570-71, 110 S.Ct. 1339 (quoting Tull, 481 U.S at 424, 107 S.Ct. 1831).
In response, the A & M Defendants propose a third circumstance in which money is an exclusively equitable remedy: an action for "surcharge" against a breaching fiduciary, which requires him to "make the estate whole" by paying money. A & M's Supp. Br. on Jury Trial Issue, McKinstry, Pikeville No. 11-133-ART, R. 22 at 5 (citing Robbins v. Schuyler (In re United Equip. Sales Co.), 47 B.R. 818, 821 (Bankr. W.D.Mich.1985), and Ellis v. Rycenga Homes, Inc., 2007 WL 1032367, at *2-3 (W.D.Mich.2007)). A surcharge is not an equitable action itself, but instead is a remedy "only available as part of an accounting." Susan Harthill, A Square Peg in a Round Hole: Whether Traditional Trust Law "Make-Whole" Relief Is Available Under ERISA Section 502(A)(3), 61 Okla. L.Rev. 721, 751 (2009); E. Daniel Robinson, Embracing Equity: A New Remedy for Wrongful Health Insurance Denials, 90 Minn. L.Rev. 1447, 1469-70 (2006). An accounting, in turn, is an equitable mechanism requiring a trustee to account for "receipts, disbursements, and property on hand." Harthill, supra, at 751 (quoting George G. Bogert & George T. Bogert, Law of Trusts & Trustees § 963 (2d ed. 1982)). The A & M Defendants argue that the exclusively equitable remedy of surcharge was available against not just trustees, but all fiduciaries, including corporate officers like themselves.
Second, even if a surcharge against a fiduciary is compensatory just like money damages, history makes clear that compensatory relief in the form of money was also available in courts of law against corporate officers and directors for their mismanagement of a corporation. See supra Part III.A(1). Because historically there was concurrent equitable and legal jurisdiction over compensatory money damages against a corporate director, see id., the Plaintiff retains her right to have a jury determine the amount of damages.
Third, the A & M Defendants assume that if the Trustee's cause of action is an equitable one for breach of fiduciary duty, then the remedy she seeks must be an equitable accounting. A & M's Br. in Resp., McKinstry, Pikeville No. 11-133-ART, R. 4 at 28-29. But the Supreme Court has expressly foreclosed this argument because it "conflates the two parts" of the Granfinanciera inquiry and would render moot the "more important" analysis of the remedy sought. Terry, 494 U.S. at 571 n. 8, 110 S.Ct. 1339 ("The second part of the analysis, therefore, should not replicate the `abstruse historical' inquiry of the first part, but requires consideration of the general types of relief provided by courts of law and equity." (emphasis added) (quoting Ross v. Bernhard, 396 U.S. 531, 538 n. 10, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970))). Here, the Plaintiff has not asked for anything resembling an accounting of the estate's property, and so a surcharge would not be available on the facts of this case.
Even if a surcharge against corporate officers was an equitable form of compensatory relief, accepting this argument would blur the categorical distinctions that the Supreme Court has imposed on the law-equity divide. In the Seventh Amendment context, the Supreme Court has held monetary relief to be equitable in only two circumstances: equitable restitution or a money awarded "incidental to or intertwined
To be sure, Great-West is "not a Seventh Amendment case." Reese v. CNH America LLC, 574 F.3d 315, 328 (6th Cir. 2009). But its discussion of when money is an equitable remedy for ERISA extends to the Seventh Amendment context because both rely on the same two-step inquiry. Great-West, 534 U.S. at 217, 122 S.Ct. 708 ("[The law-equity inquiry] is an inquiry, moreover, that we are accustomed to pursuing, and will always have to pursue in other contexts," such as determining the "scope of the Seventh Amendment right to jury trial."). Indeed, the Supreme Court has relied on its Seventh Amendment discussions of law and equity when deciding the scope of "equitable relief" under ERISA. See, e.g., Mertens v. Hewitt Assocs., 508 U.S. 248, 255, 113 S.Ct. 2063, 124 L.Ed.2d 161 (1993) (relying on two Seventh Amendment cases, Curtis, 415 U.S. at 196, 94 S.Ct. 1005, and Terry, 494 U.S. at 570, 110 S.Ct. 1339). And other courts have recognized that the Supreme Court's discussion of equitable remedies in the ERISA context extends to the Seventh Amendment context. See, e.g., Dexia Credit Local v. Rogan, 629 F.3d 612, 626 (7th Cir.2010); Braunstein v. McCabe, 571 F.3d 108, 120 (1st Cir.2009); Pereira v. Farace, 413 F.3d 330, 340-41 (2d Cir.2005); Chao v. Meixner, No. 1:07-cv-0595-WSD, 2007 WL 4225069, at *5 (N.D.Ga. Nov. 27, 2007); see also Pereira, 413 F.3d at 346 (Newman, J., concurring). Compensatory damages against corporate officers must thus remain a form of legal relief.
Genser and Tate try to avoid this conclusion by shoehorning themselves into the trustee box, claiming that they are the "functional equivalent[s]" of trustees. Before the merger of law and equity, they argue, courts of equity had exclusive jurisdiction over trusts. Accordingly, any remedy sought against a trustee or its functional equivalent is exclusively equitable. They therefore contend that the monetary relief sought against them must be exclusively equitable, and no jury trial right attaches.
Genser and Tate may be right about the history, but they are wrong about the analogy. They are correct that only a court of equity could grant compensatory relief against a trustee in the form of a surcharge. CIGNA Corp. v. Amara, 563 U.S. ___, 131 S.Ct. 1866, 1880, 179 L.Ed.2d 843 (2011) (citing Princess Lida of Thurn & Taxis v. Thompson, 305 U.S. 456, 464, 59 S.Ct. 275, 83 L.Ed. 285 (1939)) (in dicta); id. at 1884 (Scalia, J., concurring) (recognizing that the majority's discussion of surcharge was "purely dicta"); see also Terry, 494 U.S. at 571 n. 8, 110 S.Ct. 1339 (noting that damages awarded to beneficiaries for a trustee's breach of trust "were available only in courts of equity because those courts had exclusive jurisdiction over actions involving a trustee's breach of his fiduciary duties"); Third Restatement of Trusts § 95 cmt. b ("If a breach of trust causes a loss, including any failure to realize income, capital gain, or appreciation that would have resulted from proper administration, the beneficiaries are entitled to restitution and may have the trustee surcharged for the amount necessary to compensate fully for the consequences of the breach."); Bogert & Bogert, The Law of Trusts and Trustees § 862 ("For a breach of trust the trustee may be directed
But Genser and Tate are not sufficiently analogous to trustees. The question is this: do Genser and Tate trace their authority, and thus the basis for their liability, to the equitable powers of the Bankruptcy Court to appoint and oversee trustees and other court officers? Accord Yadkin Valley Bank & Trust Co. v. McGee (In re Hutchinson), 5 F.3d 750, 757-58 (4th Cir.1993) (reasoning that bankruptcy trustees trace their authority to the powers of courts of equity that supervised their actions, thus concluding that claims against them are akin to equitable claims for breach of trust).
They do not. Genser and Tate are correct that the Bankruptcy Court authorized Black Diamond to hire Genser as CRO, who then hired Tate as CFO. See CRO Order, Underlying Bankruptcy, R. 56 at 2-3. But they derive their powers primarily from their employment as corporate officers and not from the Bankruptcy Court's power to supervise over Chapter 11 trustees and other court officers:
Genser did have many of the powers necessary to run Black Diamond during its bankruptcy. But the hybrid nature of Genser's CRO position actually undermines any analogy to a trustee. His powers, although coincident with a trustee's powers, were the same as those of any corporate officer to run his company. Indeed, the Bankruptcy Code does not include any provision for the position of CRO. Other than the parties' consent, the Bankruptcy Court did not expressly rely upon any part of the Bankruptcy Code — the only source of its judicial powers — to create the CRO position. Because Genser's CRO position lacks any of the Code's limitations on trustees or professional persons, this judicial reprogramming of the Bankruptcy Code is hardly an invocation
In short, the Bankruptcy Court could not have used its limited equitable power to craft and oversee Genser's position as CRO and Tate's position as CFO. See generally Michael P. Cooley, Two Round Holes and One Square Peg: The Employment of Turnaround Consultants under §§ 327 and 363, Am. Bankr.Inst. J., Sept. 24, 2005, at 42 (explaining how the employment of CROs "subsist[s] in the twilight" between various Bankruptcy Code provisions). Instead, the Bankruptcy Court turned Genser and Tate loose to orchestrate the rebirth of Black Diamond by running the company. Thus, any liability to the Plaintiff for causing the estate to lose value stems from their employment as corporate officers. And as the Court has already explained, compensatory damages against a corporate officer are a legal remedy. See supra Part III.A(1). Like the Sergent Claims, the fact that the Plaintiff seeks a legal remedy — compensatory damages — carries the day and entitles her to a jury trial. Accord Amschwand v. Spherion Corp., 505 F.3d 342, 348 (5th Cir.2007) ("Obtaining the lost policy proceeds [from a fiduciary], as [the plaintiff] requests, is simply a form of make-whole damages. This demand is not equitable in derivation, but is akin to the legal remedies of extracontractual or compensatory damages.") (citations omitted), cert. denied by ___ U.S. ___, 128 S.Ct. 2995, 171 L.Ed.2d 911 (2008); Pereira, 413 F.3d at 340-41 (holding that a breach of fiduciary duty claim for compensatory money damages entitles the plaintiff to a jury trial); Chao, 2007 WL 4225069, at *5-6 (rejecting this surcharge argument).
Finally, the Seventh Amendment gives the Plaintiff the right to a jury trial against A & M. The Plaintiff alleges that, as Genser's and Tate's employer, A & M is vicariously liable for their mismanagement of Black Diamond during its bankruptcy. Compl., McKinstry, 442 B.R. 567 (Pikeville No. 10-110-ART), R. 1-1 at 25-26 ¶¶ 61-62; see also Pl.'s Supp. Br., Pikeville No. 11-133-ART, R. 28 at 10. The A & M Defendants concede that the Plaintiff has a jury trial right against A & M if she has such a right against both Genser and Tate. Mots. Hr'g Tr., McKinstry, Pikeville No. 11-129-ART, R. 31 at 72-73 (Mr. Goodchild: "If the complaint is read as claiming respondeat superior against A & M, then the claim against A & M ought to follow what's done with respect to the claim against the two individuals."). Because the Plaintiff has a jury trial right against Genser and Tate, she also has such a right against A & M.
Black Diamond's use of the Chapter 11 process has not waived the
Sergent and the A & M Defendants contend that Black Diamond's bankruptcy has similarly extinguished its right to a jury trial on the Sergent Claims and the A & M Claims. McLaren is not directly on point. Black Diamond neither entered bankruptcy voluntarily nor was sued as a defendant in the Sergent Claims and the A & M claims. And three reasons counsel against extending McLaren to this case.
First, unlike the debtor in McLaren, Black Diamond started as an involuntary debtor. Black Diamond's lenders dragged Black Diamond and its seven subsidiaries into bankruptcy court involuntarily. When the parent corporation, Black Diamond Resources LLC, realized that it could not escape Chapter 11, it consented to an agreed order for relief, submitted to the bankruptcy process, and even took advantage of the automatic bankruptcy stay. See Underlying Bankruptcy, R. 59; id., R. 69. Being dragged kicking and screaming into an involuntary bankruptcy hardly indicates Black Diamond's "knowing and voluntary waiver" of its jury trial rights. Hergenreder v. Bickford Senior Living Group, LLC, 656 F.3d 411, 420 (6th Cir. 2011) (quoting K.M.C. Co. v. Irving Trust Co., 757 F.2d 752, 755-56 (6th Cir.1985)).
In response, the defendants attempt to reject the importance of a distinction between voluntary and involuntary debtors. They argue that once Black Diamond was in bankruptcy, the company fully availed itself of the bankruptcy process — for example, by obtaining the court's permission to reject the Consulting & Sales Agreement and the Royalty Agreement. This cooperation with the bankruptcy process, the defendants contend, is sufficiently voluntary to count as a waiver. But the concern underlying McLaren — the inequity
The voluntary-involuntary distinction also provides a bright-line rule that unmistakably demarcates when a waiver has been knowing and intelligently given. It would be difficult for a party — never mind a court retrospectively evaluating bankruptcy filings — to pinpoint when a party's conduct crossed the threshold into a knowing and voluntary waiver. Consider the unpredictability of the defendants' proposal in light of the facts of this case. Is one voluntary bankruptcy out of eight enough? Does it matter that the parent company was the sole voluntary debtor? Or that the parent company was just an empty holding company for the subsidiaries? Or that the involuntary debtors cooperated with the bankruptcy process? What kinds of cooperation matter and how much do they matter? Is it enough to consent to an order of relief proposed by another party? And so on. Judicial modesty counsels against any attempt to draw a constitutionally significant line based on a judge's "intuitive sense of how far is too far." Blakely v. Washington, 542 U.S. 296, 308, 124 S.Ct. 2531, 159 L.Ed.2d 403 (2004) (rejecting a case-by-case approach for the Sixth Amendment's right to a jury trial because "the very reason the Framers put a jury-trial guarantee in the Constitution is that they were unwilling to trust government to mark out the role of the jury").
Second, the potential for inequity in McLaren is not present here. In McLaren, the debtor was a potential defendant in a lawsuit, and the debtor voluntarily sought the protective shield of the bankruptcy court. The debtor's bankruptcy triggered the automatic stay, which required the would-be plaintiff to submit his claim to the equitable jurisdiction of the bankruptcy court and thereby surrender any right to a jury trial he may have otherwise had. Of course, the automatic stay forced Sergent to submit his Proofs of Claim to the equitable jurisdiction of the Bankruptcy Court and thereby surrender his rights to a jury trial on those claims. McLaren prevents Black Diamond from inequitably invoking any right to a jury trial on the Proofs of Claim. But the Defendants argue that McLaren also compels the extinguishing of Black Diamond's right to a jury trial on the Sergent Claims. Unlike McLaren, however, Black Diamond was a potential plaintiff in a lawsuit against Sergent. Yet only claims against a debtor — not by a debtor — trigger the automatic stay and are required to proceed
Third and finally, a debtor submitting to the equitable jurisdiction of the bankruptcy court does not do so for all possible claims. By voluntarily filing for bankruptcy, a debtor only waives a jury trial right on those claims whose resolution "is necessarily part of the process of the disallowance and allowance of claims." Billing v. Ravin, Greenberg & Zackin, P.A., 22 F.3d 1242, 1252 n. 14 (3d Cir. 1994); see also Ross, 396 U.S. at 538, 90 S.Ct. 733 (holding that "legal claims are not magically converted into equitable issues by their presentation to a court of equity"). As the Court has already held, the Sergent Claims are not "equivalent to an objection" to Sergent's Proofs of Claim such that the Sergent Claims become part of the equitable claims allowance and disallowance process. Citicorp N. Am. v. Finley (In re Wash. Mfg. Co.), 133 B.R. 113, 117 (M.D.Tenn.1991); see also supra Part I.A (describing the nature of the Sergent Claims). And post-petition A & M Claims have nothing to do with the allowance and disallowance of claims in the Bankruptcy Court. Accord Germain v. Conn. Nat'l Bank, 988 F.2d 1323, 1329-31 (2d Cir.1993) (refusing to hold that filing bankruptcy automatically forfeits a trustee's right to a jury trial in a lawsuit that sought "compensation for damage done" and had "nothing to do with the essence of the bankruptcy regulatory scheme of allowing or reordering claims"); see also supra Part III.A(2) (describing the nature of the A & M Claims). The Bankruptcy Court's allowance and disallowance of claims against the estate would not resolve either of these sets of counterclaims. In short, the constitutional right to a trial by jury is "not so ephemeral" that it dissipates because of Black Diamond's cooperation with the bankruptcy process. In re NDEP Corp., 203 B.R. at 912.
Nor does the Engagement Letter between Black Diamond and A & M waive the Plaintiff's jury trial rights on the A & M Claims. Near the beginning of the bankruptcy, Black Diamond hired Genser, Tate, and A & M by entering into an Engagement Letter with A & M. This Engagement Letter waived Black Diamond's and A & M's jury trial rights "in any action, proceeding or counterclaim brought by or on behalf of the parties hereto with respect to any matter relating to or arising out of the performance or non-performance of [Black Diamond] or A & M hereunder." Engagement Letter, McKinstry, Pikeville No. 11-133-ART, R. 2 Ex. 3 ¶ 9. Once the hope of a successful reorganization vanished and the Bankruptcy Court assigned the A & M Claims to the Trust, the Plaintiff and A & M entered into a Settlement Agreement, which does not contain a jury trial waiver. The Settlement Agreement includes an integration clause, which indicates that the Settlement Agreement "supersedes any and all prior agreements between the parties concerning the matters set forth herein." Settlement Agreement, id., R. 2 Ex. 1 ¶ 17.
The Settlement Agreement governs the scope of the Plaintiff's rights to bring claims against the A & M Defendants for mismanaging Black Diamond during the bankruptcy. The Settlement Agreement set up a comprehensive framework for recovering against the A & M Defendants by:
If the parties had wanted to require the Plaintiff to resolve her claims without a jury, they would have incorporated this waiver from the Engagement Letter into the Settlement Agreement. They did not.
In response, the A & M Defendants contend that the subject matter of the Settlement Agreement was much narrower. The Settlement Agreement, they argue, only "resolved the Trust's objections to the proposed [Plan of Liquidation] regarding the terms of the Debtors' indemnification" of the A & M Defendants. A & M's Br. in Resp., McKinstry, Pikeville No. 11-133-ART, R. 4 at 22. There is no doubt that the Settlement Agreement smoothed the way to confirming the plan of liquidation. But as the foregoing sample of its terms indicates, the Settlement Agreement addresses a much broader subject matter than just Black Diamond's indemnification of the A & M Defendants.
The A & M Defendants also argue that the Settlement Agreement does not negate the Engagement Letter's jury trial waiver because the Settlement Agreement does not mention the right to a jury trial at all. This logic turns contractual interpretation on its head. For example, the parties
And contrary to the A & M Defendants' fears, the Settlement Agreement does not abrogate the entirety of the Engagement Letter. The Settlement Agreement only supersedes the Engagement Letter to the extent that that the Engagement Letter sets forth conditions and limitations on suits against the A & M Defendants. All other aspects of the Engagement Letter remain in force.
The A & M Defendants also argue that the Settlement Agreement cannot revoke Black Diamond's waiver of its jury trial rights because Black Diamond was not a party to the Settlement Agreement. A & M's Supp. Br., McKinstry, Pikeville No. 11-133-ART, R. 21 at 7. But by waiting until the second round of supplemental briefing to raise this argument, they have waived it. Cf. Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 553 (6th Cir.2008) (holding that a party waived an argument before the district court by first raising it in her reply brief and the other side was "not afforded a response to this reply").
Even if doubt remains about the scope of the Settlement Agreement, this Court must "indulge every reasonable presumption against waiver." Sambo's Rests., Inc. v. City of Ann Arbor, 663 F.2d 686, 690 (6th Cir.1981) (quoting Aetna Ins. Co. v. Kennedy, 301 U.S. 389, 393, 57 S.Ct. 809, 81 L.Ed. 1177 (1937)); see also Winter v. Minn. Mut. Life Ins. Co., 199 F.3d 399, 407 n. 11 (7th Cir.1999) ("There is a presumption against waiver of the constitutional right to trial by jury."). The A & M Defendants have not rebutted this presumption.
When a party is entitled to a jury trial, cause to withdraw the reference "automatically exists" without regard to the remaining factors. E.g., Caudill v. Burrows (In re Oasis Corp.), 2008 WL 2473496, at *2 (S.D.Ohio June 18, 2008) (No. C2-08-00288). After all, the Bankruptcy Code prohibits a bankruptcy court from conducting jury trials unless it is "specially designated to exercise such jurisdiction by the district court" and has "the express consent of all the parties." 28 U.S.C. § 157(e). Because neither of these requirements is met, the only question is when to withdraw the reference. And it is too soon to do so because there are still unfinished pretrial matters with which the Bankruptcy Court has greater familiarity.
Only half of this case appears ready for trial: the Plaintiff's claims against the A & M Defendants. Factual discovery between these parties closed on September 6, 2011. Adversary Proceeding, R. 28 at 1 (July 27, 2011). Before the dispositive motions deadline expired one week later, A & M filed a motion for summary judgment, id., R. 82, which the Bankruptcy Court later denied, see Mem. Op., id., R. 144. And before the Court stayed the Adversary Proceeding on October 21, 2011, the parties had partially briefed two motions in limine, id., R. 115 & R. 116, and were scheduled to proceed to trial by affidavit on January 25, 2012, id., R. 132. Accord Mots. Hr'g Tr., Sergent, Pikeville No. 11-129-ART,
The Bankruptcy Court, however, remanded the Sergent Claims to state court on June 23, 2011. See Abstention Order, Adversary Proceeding, R. 58. Sergent has not responded to the claims against him or had a chance to take any discovery on the claims in federal court. He also has not had a chance to take discovery with respect to any theory of contribution he may wish to pursue against the A & M Defendants. And he has not had a chance to file any dispositive motions in the case. See A & M's Notice of Filing, McKinstry, Pikeville No. 11-133-ART, R. 17 at 5 ("[T]he claims against Sergent have not even been answered, no discovery has occurred, and essentially that case has had no substantive proceedings."); Mots. Hr'g Tr., Sergent, Pikeville No. 11-129-ART, R. 31 at 41 (Mr. Geller: "So what about the discovery, the redundant discovery we're going to be doing of many of the same parties to try to figure out who was at fault, if anyone was at fault?"); id. at 77 (Mr. Goodchild: "Mr. Sergent hasn't elected to take any kind of discovery or do anything like that."); id. at 79 (The Court: "Are you saying the case is ready for trial?" Mr. Goroff: "No. Absolutely not."); id. (Mr. Goroff: "[T]here is discovery that remains to be done. There is preparatory work that remains to be done. It's not that old of a case.").
Therefore, the Court denies the Plaintiff's motion to withdraw without prejudice. The Bankruptcy Court shall handle all remaining pretrial matters in this case, including determining and managing the scope of any remaining discovery by the parties. See, e.g., In re Lost Peninsula Marina Dev. Co., LLC, 2010 WL 3070134, at *4 (E.D.Mich. Aug. 4, 2010); Doucet v. Drydock Coal Co. (In re Oakley), 2007 WL 710244, at *3 (S.D.Ohio Mar. 6, 2007). On the A & M Claims, the Bankruptcy Court may issue final decisions on all dispositive motions, which it appears to have already done. In an abundance of caution, however, the Bankruptcy Court will issue proposed findings of fact and conclusions of law on any dispositive motion involving the Sergent Claims. When the Bankruptcy Court certifies in a written order that both the Sergent Claims and the A & M Claims are trial-ready, then the Court will grant any party's motion to withdraw the reference. At that time, the Court will set a trial schedule and handle any motions in limine that may arise.
Accordingly, it is
