P.K. HOLMES, III, Chief Judge.
Before the Court are two consolidated appeals from the United States Bankruptcy Court for the Western District of Arkansas.
For the reasons stated herein, the Court finds that the bankruptcy court erred in approving a settlement without requiring proof that a settlement had been reached between the Trustee Renee S. Williams and the settling parties subsequent to reversal on appeal of the original settlement agreement between the parties. The Court further finds that the bankruptcy court erred in enjoining Appellant Pinewood Enterprises, L.C. from proceeding in its state court action.
The Court restates, as supplemented, its statement of the procedural and substantive background of this case from its previous Order (Doc. 30).
Appellant Pinewood is an unsecured creditor of debtor Living Hope Southwest Medical Services, LLC ("LHSW" or "the Debtor"). In 1998 Pinewood, as landlord, and LHSW entered into a lease of certain real property located in Texarkana, Arkansas. (R. PW:001707). The lease was partially guaranteed by Living Hope Institute, Inc. ("LHI") pursuant to a Guaranty Agreement executed by Kimbro Stephens ("Kimbro") as LHI's president and ratified thereafter by LHSW. (R. PW: 001745-001751). LHSW defaulted on the terms of the lease in the amount of at least $1,300,000.00 (R. PW3:002585), and in the spring of 2006, Pinewood filed a complaint in the Circuit Court of Miller County,
Before and after LHSW filed under Chapter 11, Kimbro and his wife Alice Stephens ("Alice" or, collectively, "the Stephenses"), and in some cases other individuals, caused various entities to be created, including an entity called Living Hope Southeast ("LHSE") and conveyed LHSW's and LHI's businesses and certain business assets to LHSE, continuing business under the name Living Hope Southeast. (R. PW3: 002585, 003448-003449).
In February 2009, the Trustee filed an adversary proceeding ("AP") and incorporated by reference allegations from various other AP's against numerous defendants related to the Debtor — LHSW — including LHSE, Kimbro, Alice, and Grundy under various legal theories, including alter ego claims, seeking to recover pre-petition and post-petition transfers by LHSW. (R. PW3: 003448). The Trustee entered into a Settlement Agreement with several of the AP defendants and certain non-defendants on May 27, 2009 ("the Settlement"). (R. PW3: 000009). The Trustee then filed a Motion for Approval of Compromise and Settlement and Notice of Right to Object, stating that "Trustee seeks recovery
Pinewood filed Objections to the Trustee's Motion. (R. PW3: 000026-000046). Objections were also filed by Northern Healthcare Capital, LLC. (R. PW3: 000055-000057). The bankruptcy court granted approval of the Settlement over Pinewood's and Northern Healthcare Capital, LLC's objections. (R. PW3: 000063). Pinewood then filed a Motion to Alter and Amend Judgment and for Additional Findings of Fact and Conclusions of Law in regards to the bankruptcy court's Order approving the Settlement, requesting the court to amend its Order to find that the Settlement should not be approved on the grounds that the Settlement encompassed certain claims that the Trustee did not have standing to bring or settle — specifically, any claims to pierce the corporate veil of LHSW or claims against related entities as alter egos of LHSW. (R: PW3:000065-000069). The Trustee filed a Response (R. PW3: 000071-000072) and Brief in Support (R. PW3: 000073-000074), Pinewood filed a Reply (R. PW3: 000075-000077), and the Trustee filed a Supplemental Brief in Support (R. PW3: 000083-000085). On January 5, 2010, the bankruptcy court entered an Order denying Pinewood's Motion to Alter or Amend Judgment. (R. PW3: 00097).
Pinewood appealed the bankruptcy court's Order approving the Settlement to the federal district court in this same district,
On March 18, 2011, Judge Hendren reversed the Order approving the Settlement and remanded the matter to the bankruptcy court, finding that the Trustee had no standing to bring or settle alter ego or veil piercing claims, which belonged to the
Upon remand, the bankruptcy court held a hearing on May 24, 2011 at which the Trustee was present represented by counsel; the Trustee for the Estate of David Kimbro Stephens was present; and Pinewood's authorized representative, Dr. James Naples, was present and represented by counsel. (R. PW3: 001042-001043). Both Dr. Naples and Trustee Williams gave testimony, counsel made arguments, and various exhibits were offered and admitted into evidence for consideration by the court. At the end of the hearing, Judge Mixon stated his opinion that he agreed with the Trustee's interpretation of Judge Hendren's Order, which was that Judge Hendren had approved the Settlement such that there was no need for a new settlement. (R. PW3:001231). Rather, Judge Mixon's intention was to do an order clarifying what was not being, or had not been, settled. Id. The bankruptcy court issued a Supplemental Order Approving Settlement stating that "the settlement is not approved as to any alleged cause of action under any alter ego theory to pierce the corporate veil of the Debtor corporation or any third party corporation or LLC which may only be prosecuted by the creditors of the Debtor," but again approving the Trustee's Settlement in all other respects. (R. PW3: 001027-001028).
Pinewood then filed a Motion to Alter and Amend Judgment requesting that the bankruptcy court make "specific findings of fact and conclusions of law ... regarding whether the Trustee met her burden of proof that she had reached a new agreement with the Settling Defendants" and requesting that the bankruptcy court clarify its Order by incorporating the oral findings made at the conclusion of the May 24, 2011 hearing. (R. PW3: 001029-001034). Pinewood also requested that the bankruptcy court reconsider its finding that there was currently a settlement between the Trustee and the "Settling Defendants." Id.
The bankruptcy court held a hearing on Pinewood's Motion to Alter and Amend Judgment on August 23, 2011 with both counsel for the Trustee and counsel for Pinewood appearing and advancing argument. (R. PW3: 002898). Judge Mixon declined to alter or amend his previous Order, but took under advisement the issue of incorporating his oral findings from the May 24, 2011 hearing. (R. PW3: 002915). The bankruptcy court subsequently entered an Amended Supplemental Order Approving Settlement, adding that "for the reasons stated in open Court on May 24, 2011," the Trustee's Settlement was again approved in all respects except for carving out "any cause of action under any alter ego theory to pierce the corporate veil ..." (R. PW3: 002890).
Meanwhile, in the State Court Case in Miller County, Pinewood filed their First Amended Complaint on January 12, 2010. (R. PW3: 002540). While Pinewood's first appeal was pending before Judge Hendren,
On May 23, 2011, Pinewood filed a Second Amended Complaint (Doc. 3-6) in its State Court Case, which was introduced to the bankruptcy court and received for consideration during the May 24, 2011 hearing regarding approval of the Settlement after remand. (R. PW3: 001128). On June 8, 2011, the bankruptcy court entered an Order enjoining Pinewood "from pursuing LHSE and Grundy in state or federal court because Pinewood is pursuing the Trustee's settled causes of action." (R. PW3: 003462-003463).
Pinewood did not name the Debtor as a party, nor does it appear to seek relief specifically from the Debtor, in its Second Amended Complaint in state court.
To further complicate matters, Kimbro Stephens also filed for Chapter 7 bankruptcy in the Western District of Arkansas, Hot Springs Division on November 30, 2010.
Essentially, as this Court understands the state of affairs, both Pinewood and the Trustee are interested in pursuing the assets of LHSE
A federal district court has jurisdiction, pursuant to 28 U.S.C. § 158, to hear appeals from the rulings of a bankruptcy court. The Court examines the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. In re Food Barn Stores, Inc., 107 F.3d 558, 561-62 (8th Cir.1997). Where, as in this case, there are mixed questions of law and fact, the district court conducts a de novo review. Freeland v. Enodis Corp., 540 F.3d 721, 729 (7th Cir.2008).
As stated above, on March 18, 2011, Judge Hendren reversed the bankruptcy
As an initial matter, the Court finds that the Trustee's interpretation of Judge Hendren's Order, as adopted by the bankruptcy court, was erroneous. As the Court stated in its previous Order (Doc. 30), Judge Hendren's Order may only be read as finding that the Settlement was flawed due to the inclusion of both alter-ego and veil-piercing claims "personal to the creditors which the Trustee had no standing to assert." (R. PW3: 000925). As was reasoned in Judge Hendren's Order, since the Trustee never had standing to assert such claims, she likewise did not have standing to settle them. The error of the bankruptcy court was not simply or solely in failing to "carve out" such claims. The error was in approving a settlement which should never have included such claims to begin with.
The Trustee reasons that Judge Hendren specifically found that the Settlement was in the best interest of the creditors in arguing that the Settlement itself was upheld, and not overturned. Judge Hendren did not make any finding that the Settlement was in the best interest of the creditors. Rather, Judge Hendren simply stated that he could not say that the bankruptcy court abused its discretion in determining that the Settlement was in the best interest of the creditors. (R. PW3: 000925). This is a meaningful distinction and one that should be carefully regarded. In making that statement, Judge Hendren was not approving the Settlement, but rather rejecting one of Pinewood's three arguments for reversal. Rather, the basis for reversal was the fact that the Trustee purported to settle claims she had no standing to bring. Regardless, once Judge Hendren found that the bankruptcy court's Order was to be reversed — on any grounds — it was then for the bankruptcy court to determine, upon remand, whether any future settlement reached by the parties was in the best interest of the creditors.
In the same way, the fact that Judge Hendren rejected Pinewood's second basis for reversal (that the bankruptcy court made inadequate findings of fact regarding the settlement) does not mean that the Settlement was upheld as a result of the Order. Rather, Judge Hendren simply made it clear on what grounds he was reversing the Settlement in addressing each of Pinewood's arguments. As stated by Judge Hendren, "[i]t is not the failure to make findings of fact and conclusions of law that constitutes error here but, rather, the approval of the erroneous Settlement in the first place." (R. PW3: 000922).
Judge Hendren clearly stated that the bankruptcy court's error "requires reversal of the Bankruptcy Court's Order approving the Settlement. Accordingly, that Order will be reversed ... IT IS, THEREFORE, ORDERED that ... the Order of
The Court finds that the bankruptcy court therefore erred in again approving the Settlement by simply "carving out" those claims belonging to the creditors. "A compromise or settlement is, by definition, a negotiated, consensual agreement. A bankruptcy court cannot rewrite the agreement and, by doing so, approve terms that differ from those to which the parties agreed." In re Central Illinois Energy, LLC, 406 B.R. 371, 374 (Bankr. C.D.Ill.2008). A bankruptcy court "must accept or reject the settlement as presented." Id. (citing In re Trism, Inc., 282 B.R. 662, 668 (8th Cir. BAP 2002)). A district cannot order the bankruptcy court to do something — unilaterally modify a settlement agreement — that the bankruptcy court is without the authority to do, and Judge Hendren's Order should not be interpreted as doing just that.
Based on the record before the Court, and before the bankruptcy court at the time the Amended Supplemental Order Approving Settlement, the Court finds that no new settlement was reached, considered by the bankruptcy court, and approved before the Order approving the Settlement was entered. The Court must look to state law to determine whether a settlement agreement was formed in this case subsequent to remand. Am. Prairie Constr. Co. v. Hoich, 594 F.3d 1015, 1023 (8th Cir.2010). On the subject of contract formation, the Arkansas Supreme Court has stated,
Alltel Corp. v. Sumner, 360 Ark. 573, 576-77, 203 S.W.3d 77 (2005) (internal citations omitted).
The Trustee argued, in her Response to Pinewood's Motion to Alter and Amend the bankruptcy court's Supplemental Order Approving Settlement, that the entry of a Consent Judgment
The Consent Judgment clearly states that it is "based on the Settlement Agreement that the parties entered into on May 27, 2009," which was voided by Judge Hendren's Order. (R. PW3: 002882). Furthermore, only the undated, electronic signatures of counsel for the Trustee, counsel for Kimbro, and counsel for LHSE appear at the bottom of the Consent Judgment. (R. PW3: 002884). The original Settlement included many more signatories that do not appear as ratifying the Consent Judgment. The Consent Judgment also does not include any clarification of what actions the Trustee is settling after removing any actions belonging exclusively to the creditors, and instead simply refers back to the original Settlement which purported to settle actions the Trustee had no standing to bring. The Consent Judgment does not satisfy the elements required for finding formation of a contract under Arkansas law. Even if the Court were to accept the Consent Judgment as a new settlement or as ratification of the original Settlement, it would appear that the agreement would remain flawed as inclusive of claims the Trustee had no standing to bring.
Finally, on cross-examination at the May 24, 2011 hearing the Trustee herself testified that she had met with some of the settling defendants, but that she would not characterize the meeting as a settlement conference, could not affirm who was present or in what capacity, and could not say that any agreements were reached. (R. PW3: 001198-001202). Rather, the meeting was held to discuss Judge Hendren's opinion. (R. PW3: 001202). The Trustee then stated that another meeting had been scheduled, but she was not present at that meeting, did not know who attended, and did not know the purposes of any second meeting. (R. PW3: 001202-111203). It does not appear that, at least prior to the bankruptcy court entering its Amended Supplemental Order Approving Settlement, any meeting of the minds occurred or any new settlement agreement was reached between the settling parties in line with Judge Hendren's Order, using objective indicators as to what claims the Trustee was settling, and what value the settling defendants agreed to assign to those remaining claims.
For all of the reasons set forth above, THE COURT FINDS that the bankruptcy court erred in entering its Supplemental Order Approving Settlement and Amended Supplemental Order Approving Settlement without the parties having formed a new settlement agreement subsequent to reversal and following proper procedures to get any new settlement noticed and approved. The bankruptcy court's approval of the Settlement is, therefore, REVERSED and remanded for further proceedings. Any future settlement that may be reached between the parties should conform with Arkansas law as to formation of a contract and should be approved pursuant to Federal Rule of Bankruptcy Procedure 9019.
The result of this Order is that the parties currently have no valid, approved
As previously stated, on June 8, 2011, the bankruptcy court entered an Order enjoining Pinewood "from pursuing LHSE and Grundy in state or federal court because Pinewood is pursuing the Trustee's settled causes of action." (R. PW3: 003462-003463). In accordance with Federal Rule of Bankruptcy Procedure 8005, Pinewood filed a notice of appeal from that Order (R. PW3: 003464) and moved the bankruptcy court to stay its Order pending the appeal. (R. PW3: 003468). The bankruptcy court denied that motion on June 27, 2011, after a hearing. (R. PW3: 003538).
On July 1, 2011, the Court entered an Order temporarily staying the bankruptcy court's injunction "to preserve the status quo while giving the Court sufficient opportunity to consider the merits of the motion for stay pending appeal ..." (Doc. 11). The Court held an in-court hearing in the lead case, which included consideration of the then-pending Motion to Consolidate, on September 26, 2011. The consolidated cases were ripe for consideration and ruling by this Court by November 21, 2011. On January 11, 2012, the Court entered a Memorandum Opinion and Order granting the Motion to Consolidate, denying Motions to Strike by the Trustee, and granting Pinewood's Motion to Stay the bankruptcy court's injunction pending a final decision on the merits. (Doc. 30). The Court also held a telephonic status conference in the consolidated cases on July 24, 2012. Pinewood presented certain exhibits to the Court after that status conference, which have not been considered by the Court when making its findings herein. For the reasons set forth below, the Court finds that the bankruptcy court erred in entering its Order enjoining Pinewood from proceeding in its State Court Case.
First, the Trustee filed her AP Complaint for Injunctive Relief against Pinewood alleging that Pinewood's state court allegations were substantially similar to the allegations of the Trustee in her various adversary proceedings and that Pinewood's State Court Case would adversely impact the Trustee's Settlement. Because Judge Hendren found that the bankruptcy court approved the Settlement in error, there was no settlement in existence at the time that the Trustee filed her AP Complaint which could be adversely impacted. Furthermore, LHSE was not specifically obligated to pay under the Settlement, and the "inchoate judgment lien" against its
Second, even had the Settlement still been in force at that time, the evidence before the Court indicated that Pinewood's State Court Case was not the root cause of any inability on the part of LHSE to fund the Settlement. In fact, Grundy testified at the January 19, 2011 AP hearing that LHSE was not obligated to pay anything under the Settlement. (R. PW3: 002355). Furthermore, LHSE's counsel had sent the Trustee a letter indicating an inability to pay months before Pinewood even revived its State Court Case by filing its First Amended Complaint. (R. PW3: 002365). And, further, LHSE was making equity distributions totaling in the tens of thousands of dollars, generally at the direction of Alice's father, and presumably for the ultimate benefit of Kimbro and Alice, despite the fact that it was claiming it could not fund the Settlement and despite the fact that an order had been entered in the State Court Case restraining LHSE from making any payments outside the ordinary course of business. (R. PW3: 002351-002372). Although Grundy initially asserted that he stopped making payments (on behalf of LHSE) to the Settlement escrow account "because the cash flow didn't allow us to continue making contributions," when pressed by Judge Mixon, Grundy admitted he simply made the choice to fund equity distributions instead of funding the Settlement. (R. PW3: 002371). During the relevant time period after the Settlement was entered into (and after the restraining order was entered in state court), LHSE also chose to pay various obligations for which it was not liable, including payment of utilities of a house not owned by LHSE (to the tune of $500 a month funneled through the AK Trust, at the direction of Robert Williams and presumably for the benefit of the Stephenses) and attorneys' fees for counsel representing individuals and entities other than LHSE. In essence, it appears as though Kimbro and Alice — along with their various related entities and individuals — were using LHSE, which was in turn using the assets fleeced from LHSW and LHI, as their primary source of money.
Furthermore, the Court remains unconvinced that this case is one in which Pinewood may be enjoined from pursuing non-debtors based on the fact that such litigation may adversely affect the Trustee's estate or the Settlement. While the Eighth Circuit has "recognized the possibility of expanding the automatic stay when presented with `unusual,' `rare,' or `limited' circumstances," it has "found these restrictive terms to have real meaning, and [has] not lightly extended the stay." In re Panther Mountain Land Development, LLC, 686 F.3d 916, 924 (8th Cir.2012) (citing C.H. Robinson Co. v. Paris & Sons, Inc., 180 F.Supp.2d 1002, 1015 (N.D.Iowa 2001) ("Eighth Circuit caselaw... is illustrative of a generalized reluctancy to expand the scope of the automatic stay provision of the Bankruptcy Code and to limit and expansion to truly extraordinary cases.")).
Third, as noted by the Court in its previous Memorandum Opinion and Order (Doc. 30), the fact that Pinewood's state court claims involve substantially similar underlying factual allegations as the Trustee's AP claims does not convert Pinewood's claims into the Trustee's, when the same underlying facts may give rise to more than one legal theory of recovery. Here, while the Trustee and Pinewood may be seeking to recover from the same source, Pinewood is entitled to bring claims reserved to it as a creditor — including alter-ego and veil-piercing claims — while the Trustee is entitled to bring any claims she
Based on the reasons set forth above — that no settlement existed at the time the injunction was entered with which Pinewood could interfere, and that the bankruptcy court erred in finding that Pinewood was pursuing the Trustee's causes of action without further explanation or delineation — the Court must find that the bankruptcy court erred in enjoining Pinewood from proceeding in its State Court Case. The COURT FINDS THEREFORE that the bankruptcy court's Memorandum Opinion enjoining Pinewood from pursuing LHSE and Grundy in state or federal court is REVERSED, and the case is REMANDED for further proceedings in accordance with this Order.
Because the Court finds the bankruptcy court's injunction should be reversed on the grounds set forth above, it declines to address, herein, Pinewood's other asserted grounds for reversal.
For all the reasons stated above IT IS ORDERED that the Order of the bankruptcy court approving the Settlement upon remand is reversed.
IT IS FURTHER ORDERED that the Order of the bankruptcy court enjoining Pinewood from proceeding against LHSE or Grundy in state or federal court is also reversed.
IT IS SO ORDERED.
The Trustee also made much of the fact that Pinewood alleged, on an alternative theory of successor liability (of LHSE to LHSW's liabilities), in the First Amended Complaint that "[a]lternatively, the shifting of LHSW's operations constituted a de facto merger of LHSW" rendering LHSE liable as a successor in liability to LHSW. (R. PW3: 002550). While the wisdom of Pinewood styling its pleadings in such a fashion might be questionable, it does not appear that, as characterized by the Trustee, Pinewood was seeking a merger of the Debtor with LHSE. (R. PW3: 003404). Rather, it appears that Pinewood was stating a basis for which it might be able to seek equitable relief, in that the court might find that a de facto merger had already happened and LHSE had succeeded to the liabilities of LHSW.
The Court is also aware that a separate appeal from the LHSW bankruptcy case was heard by the Honorable Susan O. Hickey, United States District Judge for the Western District of Arkansas. Although these facts were not considered in the pending appeals, the Court does note that the total number of federal and state judges who have now had a hand in this litigation (that the Court is aware of) is seven, inclusive of the undersigned.
