DANIEL P. COLLINS, Bankruptcy Judge.
Before this Court is the Motion ("Motion") of Defendants Jerry Moyes ("Moyes") and J. Kevin Burdette ("Burdette") ("Defendants") for Report and Recommendation for Partial Summary Judgment on Count Six and Request for Judicial Notice.
Swift Air, LLC ("Debtor") filed its voluntary chapter 11 bankruptcy on June 27, 2012 ("Petition Date"). Plaintiff, MorrisAnderson & Associates, Ltd. ("Trustee"), was appointed trustee of the creditor trust that was created by the Third Amended Plan of Reorganization ("Plan") confirmed by this Court's Plan Confirmation Order.
The Trustee filed a response ("Response")
This Court has jurisdiction over these proceedings pursuant to 28 U.S.C. §§ 157(b)(2) and 1334 and Bankruptcy Rules 7001, et seq.
Summary judgment shall be granted by this Court if there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. Bankruptcy Rule 7056 and Rule 56 of the Fed. R. Civ. P.
Defendants' Motion points to an "Inter-Company Settlement Agreement and Mutual Release" ("Settlement Agreement") dated December 21, 2011
A "condition precedent" to Buyers' purchase of SAG's ownership of Debtor was the execution of the Settlement Agreement calling for ". . . any and all of Swift's [Debtor's] debts to Seller,
Section 4 of the Settlement Agreement states:
Section 2 of the Settlement Agreement limits the otherwise broad language of the Section 4 Mutual Release. Section 2 states, in relevant part,
Defendants contend the Section 4
Page two of the Trustee's Response neatly summarizes the Trustee's 11 points in opposition to the Motion. Those points, and the Court's findings on each point, are addressed below in the order of the Trustee's presentation.
Plaintiff is correct in noting Bankruptcy Rule 7008(c)(1) identifies "release" as an affirmative defense that must be pled in an answer to a complaint. However, Defendants' Answer essentially
The fact that Defendants' Answer did not specifically mention Sections 2 or 4 of the Settlement Agreement or even generally reference the Settlement Agreement is not fatal. A defendant need provide only fair notice of an affirmative defense. Simmons v. Navajo County, Ariz., 609 F.3d 1011, 1023 (9th Cir. 2010). Defendants' Answer provided sufficient notice that Trustee's claim for breach of fiduciary duty was "waived" and that Trustee was "barred by the doctrine of estoppel" from pursuing this released claim. This Court finds that use of the magic word "release" is not required by Bankruptcy Rule 7008(c) to constitute an effectively pled affirmative defense of release. This notion is buttressed by the Rule 8(e) admonition that a "pleading must be construed so as to do justice." Fed. R. Civ. P. 8(e).
Even were this Court to find that the waiver and estoppel language used in Defendants' Answer was inadequate to raise "release" as an affirmative defense, this Court finds Plaintiff was not harmed or prejudiced by Defendants failure to use the exact word "release." A trial date for this Adversary Proceeding has been set to begin February 11, 2019, but the Motion was filed in April 2018. Since at least the date the Motion was filed, Plaintiff has become well aware of the language of the Settlement Agreement and Defendants' contentions as to the impact of the release language in the Settlement Agreement. While the discovery bar date has passed, discovery could and should have been explored by Plaintiff on the question of what facts Defendants had in support of their waiver and estoppel affirmative defenses. In discovery responses, Defendants would naturally have pointed the Trustee to the Settlement Agreement, particularly the release language of Sections 2 and 4. The Trustee is now armed with knowledge of the need at trial to introduce facts contesting Defendants' claimed release. Since the Trustee has not suffered prejudice by the affirmative defense of "release" having arguably not been pled prior to Defendants' Motion, this Court rejects Plaintiff's contention that the affirmative defense of release has been waived by Defendants. See Ledo Fin. Corp. v. Summers, 122 F.3d 825, 827 (9th Cir. 1997) (courts have discretion to allow a defendant to plead an affirmative defense for the first time in a motion for summary judgment).
Plaintiff claims the releases in the Settlement Agreement are avoidable fraudulent transfers because $12,151,240 in receivables were transferred by the Debtor to SAG and SAM for no consideration or for less than reasonably equivalent value at a time when Debtor was insolvent or rendered insolvent by the Transaction. Plaintiff cites In re Yellowstone Mountain Club, 436 B.R. 548 (Bankr. D. Mont. 2010) for the proposition that a release may be the subject of a fraudulent transfer avoidance action.
While granting a release may well constitute an avoidable actual or constructive fraudulent transfer, the Trustee has not brought an action to avoid the Settlement Agreement or any component of that agreement. The time for the Trustee to bring a cause of action for avoidance of fraudulent transfer (or to rescind the Settlement Agreement) has long been barred by the applicable statute of limitations. This Court rejects that portion of Point 2 of Plaintiff's Response.
Moyes' Motion is entirely predicated on the enforceability of the Settlement Agreement and the contention that Sections 2 and 4 have released Moyes of the breach of fiduciary duty claims contained in Count Six of the Complaint. In essence, Defendants contend the Trustee is time barred from asserting any defenses to the enforceability of the release provisions contained in the Settlement Agreement. However, Plaintiff need not file causes of action to avoid the Settlement Agreement as a fraudulent transfer or to rescind that contract as unsupported by consideration in order to dodge the impact of the claimed release. At trial, the Defendants will surely claim the Trustee's Count Six claims have been released. Defendants must carry the burden of demonstrating their affirmative defenses of release, waiver and/or estoppel. Estate of Page v. Litzenburg, 865 P.2d 128, 135 (Ariz. App. 1993). Based on the record before this Court, no proof of consideration from Moyes to the Debtor supports Moyes' implied contention that the Settlement Agreement (as it pertains to him) was based on any consideration (or at least any consideration of value) from Moyes to the Debtor. This Court is not aware of any claims Moyes personally held against the Debtor when the Settlement Agreement was executed. If this is so, Moyes' waiver or release of any claims against the Debtor may not constitute consideration. As to Burdette, he is not a signatory to the Settlement Agreement. He presumably provided no release or any other consideration (valuable or otherwise) to the Debtor. Nor is Burdette named as receiving a release from the Debtor. He may be an "officer" of a released party under the Settlement Agreement but nothing before this Court suggests consideration was given by him for a release of claims the Debtor may have against him. Genuine material of fact issues remain as to the enforceability of the release provisions of the Settlement Agreement.
In a sense, Defendants suggest their release affirmative defense cannot itself be met with the Trustee's defenses to the claimed release. However, there is a difference between asserting a time barred cause of action and asserting an affirmative defense to the enforceability of a contract. See McQueen v. First Nat. Bank of Mesa, Ariz., 36 Ariz. 74, 89 (1929) (note claims barred by statute of limitations may nevertheless be successfully pled as a defense.).
When Defendants' Reply claims the release provisions of Settlement Agreement are enforceable because the Trustee is barred by the statute of limitations to challenge its enforceability, the Defendants are using their affirmative defenses and the statute of limitations as a weapon. Statute of limitation defenses exist to serve as shields not swords. See City of Saint Paul, Alaska v. Evans, 344 F.3d 1029, 1033 (9th Cir. 2003):
City of Saint Paul at 1033-4. A simple example is in order. If a plaintiff fraudulently induced a defendant into signing a promissory note but then does not seek to enforce that note until five and a half years after the note becomes due,
The crucial question, then, is whether a plaintiff's defenses to defendants' affirmative defenses can be time barred by a given statute of limitations. This Court answers that question in the negative.
Genuine issues of fact exist concerning the consideration Defendants paid (if any) to Debtor to gain the Debtor's release of claims against them. Genuine issues of fact also exist concerning whether the Trustee can successfully defend against the enforceability of the Settlement Agreement by demonstrating the releases are avoidable fraudulent transfers. If Moyes is party to a release or waiver of claims which are unenforceable against the Debtor then Defendants cannot carry their burden of proof on their affirmative defenses. Genuine issues of material facts exist on the enforceability of Defendants' affirmative defenses of release, waiver, estoppel and in pari delicto. The Motion is denied.
The Trustee notes that the release in Section 2 of the Settlement Agreement "is limited to accounts receivable and debts . . . that were owed and unpaid by a seller party (i.e. Moyes) to the Debtor."
Among other things, the Defendants contend that the Debtor's schedules and statements do not reflect Debtor's claims against the Defendants, thereby supporting the notion that the Debtor's claims against them were released prior to the Petition Date. Whether a debtor fully discloses the existence of an asset is, of course, not determinative of whether that asset exists.
This Court agrees that, in the context of the Transaction, Debtor's breach of fiduciary duty claims against Defendants are not "amounts, accounts receivables, debts or obligations . . . owed and unpaid by any Seller Party to [Debtor]."
This Court's reading of the Settlement Agreement gives weight to the notion that, for the price of $100, the Transaction was designed to give Buyers the Part 121 Business while transferring the Part 135 Business to Moyes and his entities. Granting mutual releases so that the Part 135 Business and Part 121 Business are segregated makes sense. Granting releases which would not further that goal does not appear to be intended or agreed upon. Paragraph 2.4(c) of the Purchase Agreement does not bolster Defendants' contention that the Debtor released Defendants of claims it may have for Defendants' breaches of fiduciary duties. Nothing this Court has been provided by the parties confirms that Moyes or Burdette bargained for an exoneration of claims the Debtor had or might have against them based on alleged breach of fiduciary duties they may have owed to the Debtor.
The record compels the Court to read the Settlement Agreement as not releasing Debtor's breach of fiduciary duty claims against Defendants. This alone constitutes grounds to deny Defendants' Motion. If the Court is mistaken in its reading of the Settlement Agreement, the Court then finds the language of the Settlement Agreement is ambiguous and evidence is needed to ascertain the intent of the parties in the language contained in Sections 2 and 4 of the Settlement Agreement. The Motion is, therefore, denied.
The Trustee claims Debtor was insolvent at the time of the Transaction and, therefore, it's insiders owed fiduciary duties to Debtor's creditors. The Trustee cites Southwest Supermarkets, LLC, 325 B.R. 417, 425 (Bankr. D. Ariz. 2005)
Defendants question the Trustee's assertion that members or officers of an LLC have a fiduciary duty to an LLC's creditors when the LLC becomes insolvent.
The Trustee contends the Seller Parties failed to pay Debtor's debts to Balkan (and perhaps others), debts which they agreed to assume in taking over the Debtor's Part 135 Business. The Trustee suggests a fact issue exists as to whether the Settlement Agreement's release provisions are, therefore, unenforceable due to the Seller Parties' material breaches of contract.
Defendants counter this argument by noting the Complaint contains no count for breach of contract and suggest the applicable statute of limitations would bar such claims. Defendants also suggest there may not be a failure to pay Balkan or other claims of the Part 135 Business.
As with Point 2 above, if Defendants' affirmative defenses of release, waiver, estoppel and in pari delicto are to stand, Defendants carry the burden of proving the enforceability of the Settlement Agreement.
Genuine material factual issues exist as to breaches by the Seller Parties of the Purchase Agreement and as to the enforceability of the releases contained in the Settlement Agreement. For these reasons, the Motion is denied.
The Trustee claims the Settlement Agreement was entered into when the Debtor was insolvent and Defendants caused it to be executed so they could strip out of the Debtor the Part 135 receivables totaling $12,151,240 and to simultaneously gain from the Debtor releases for their breaches of fiduciary duties to the Debtor. The Trustee says Defendants caused this to occur at a time when Debtor did not have the benefit of independent counsel and where Defendants stood on both sides of the Settlement Agreement.
This point draws a particularly vehement reply from Defendants.
It is true that the Transaction not only transferred over $12 million in receivables to SAG and SAM, but it also called for significant assumption of Debtor's obligations. Whether the payables assumed were of equal or greater value is an open question. What is not open to question is that the Trustee is time barred from asserting a cause of action against the Defendants for breaching their fiduciary duties by entering into the Settlement Agreement. As to the Ehrlich Firm's representation of the Debtor and SAG, the Court has already ruled on that matter.
Whether Defendants are entitled to enforce the release provisions of the Settlement Agreement is hotly contested in the Trustee's defenses against that agreement. The Motion is denied as genuine issues of material facts remain concerning the enforceability of these releases.
As with the affirmative defense of release (see Point 1, above), Defendants did not use the magic Latin phrase "in pari delicto" in their Answer. Rather, they stated:
The above quoted affirmative defense captures the essence of the affirmative defenses of in pari delicto, contributory negligence or comparative negligence. Defendants have not waived these affirmative defenses. See Point 1, above. However, even if in pari delicto was not properly raised in their Answer, Defendants' Motion does so explicitly. As with Point 1, above, Plaintiff has not demonstrated that it has been harmed or prejudiced by Defendants' delay in explicitly stating the in pari delicto affirmative defense. Plaintiff's discovery to date could or should have fully explored the basis for this affirmative defense. Discovery would have explicitly revealed Defendants' intended use of the in pari delicto defense.
The Court rejects Trustee's Point 7.
The Trustee cites several cases for the proposition that "the in pari delicto defense does not apply to self-dealing and breach of fiduciary duty claims brought by a trustee against corporate fiduciaries."
Defendants counter by noting the cases cited by the Trustee on this issue involved corporate insiders who controlled both sides of a debtor's transactions, whereas the Transaction at issue involved unrelated arms-length third parties. Defendants also cite cases that are not binding on this Court.
Defendants' Motion cites this Court's Kohner decision where the court applied the doctrine of in pari delicto to bar a Trustee's claim for conspiracy to make fraudulent transfers.
On the face of things, it appears the Buyers and Sellers in the subject Transaction negotiated at arms length to effectuate a mutually beneficial deal. That, however, presumes the Debtor was fully controlled in the Transaction by the Buyers.
The Trustee claims the Debtor was controlled by the Seller Parties (including the Defendants) and that Defendants breached their fiduciary duties to Debtor in directing the stripping of valuable receivables out of the Debtor and for the Defendants' benefit. If the Transaction is viewed as a whole series of independent steps memorialized by a number of separate documents one might come to the Defendants' perspective. However, if the Transaction and all its component documents are viewed as a unified whole it is possible to see the Trustee's perspective that the Defendants caused the Debtor to be stripped of its economic future as a result of the Transaction. The Court need not presently decide whether in pari delicto applies to the Defendants in this case as there remain material and genuine factual issues on the question of whether and to what degree Debtor's transfers and the Transaction (or parts of the Transaction) were compelled by Defendants and constitute their self-dealing and/or a breach of fiduciary duties.
The Motion is denied as it pertains to the Defendants' in pari delicto affirmative defense.
The Trustee correctly translates the Latin phrase "in pari delicto" as "at equal fault." The Trustee then questions where the Defendants have cited to facts suggesting the Debtor committed an intentional tort. If the Debtor has committed no wrongdoing, in pari delicto should not apply, says the Trustee.
The Defendants Reply to this argument is that the parties to the Transaction were unrelated, they stood on equal footing and if there is any fault it is equal.
For the reasons stated in Point 8 above, the Court denies the Motion.
The Trustee claims Moyes' conduct (i.e., claimed breach of fiduciary duty) did not benefit the Debtor but, rather, Moyes' gain (i.e., the receivables acquired) caused Debtor's loss. The Trustee also discredits cases cited by the Defendants as inapposite cases involving Ponzi schemes and non-insiders.
The Defendants claim the releases from and debt assumption by the Seller Parties benefited the Debtor to the same degree the Debtor was burdened. Twelve million in receivables went to the Seller Parties but they also took over $13 million of the Debtor's liabilities.
The issue is discussed above in Point 8. For the same reasons stated above, the Motion is denied.
In the Response and at oral argument, the Trustee hammered home the notion that the in pari delicto defense starts with relative equality of fault. Here, the Trustee claims any fault of the Debtor is greatly outweighed by Defendants' wrongs so in pari delicto is inapplicable. At best, the Trustee suggests contributing negligence or comparative negligence would apply.
Defendants claim there is no fault of the Defendants but if there was fault it was no greater than the Debtor's and that the Debtor independently and at arms-length agreed to the Settlement Agreement and the Purchase Agreement.
For the reasons stated in Point 8 above, the Court denies the Motion.
The Court finds the Settlement Agreement does not release the Debtor's breach of fiduciary duty claims against the Defendants. Even if the Settlement Agreement does release such claims, the foundation for Defendants' Motion is their claimed enforceability of the Settlement Agreement and the releases set forth in that agreement. If the releases are not enforceable, the affirmative defenses of release, waiver, estoppel and in pari delicto fail. Genuine issues of material fact exist as to the Trustee's defenses to the enforceability of the Settlement Agreement.
