Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-05-03401/USCOURTS-ca8-05-03401-0/pdf.json

Parties Involved:
E. Rebecca Case
Appellant
Jody DeBold
Appellee
Tri-River Trading
Not Party

Document Text:

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 05-3401

___________

Jody DeBold, *

*

Appellee, *

* Appeal from the United States

 v. * Bankruptcy Appellate Panel

* for the Eighth Circuit.

E. Rebecca Case, Chapter 7 Trustee, *

*

Appellant. *

___________

Submitted: March 13, 2006

Filed: June 26, 2006

___________

Before WOLLMAN, FAGG, and RILEY, Circuit Judges.

___________

RILEY, Circuit Judge.

E. Rebecca Case, bankruptcy trustee (Trustee) for Tri-River Trading, L.L.C.

(Tri-River), appeals the decision of the Bankruptcy Appellate Panel (BAP) reversing

the bankruptcy court and granting declaratory judgment in favor of Jody DeBold

(DeBold). For the reasons that follow, we affirm the decision of the BAP.

I. BACKGROUND

This case involves the allocation of settlement proceeds from a lawsuit between

former partners of a failed joint venture. We briefly summarize the facts previously

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detailed in two published opinions. DeBold v. Case (In re Tri-River Trading, LLC),

317 B.R. 65 (E.D. Mo. 2004), rev’d, 329 B.R. 252 (8th Cir. 2005).

In March 1999, Phil Thornton (Thornton), general manager of Jersey County

Grain Company (Jersey), approached DeBold about launching a new barge freight

trading company. Thornton prepared pro formas projecting the financial success of

the proposed joint venture and assured DeBold that Jersey would use Tri-River

exclusively for all of Jersey’s freight trade. In April 1999, DeBold left her lucrative

freight trader position and joined Jersey to found Tri-River. DeBold and Jersey were

Tri-River’s only members and each invested $100,000 to capitalize Tri-River. Jersey

arranged for a $1,000,000 unsecured line of credit to enable Tri-River to trade freight

with several transportation companies. Article 4.2 of Tri-River’s operating agreement

designated DeBold as the manager of Tri-River, and Article 4.1 listed DeBold’s duties

and authority, recognizing DeBold had full responsibility and exclusive and complete

management discretion.

In Tri-River’s first months of operation, under DeBold’s management and with

Jersey using Tri-River for all its freight trade, Tri-River turned a slight profit in a less

than optimal market. During Tri-River’s first year in business, Thornton allegedly

began making sexual advances toward DeBold. DeBold rebuffed Thornton’s

advances and reported Thornton’s behavior to Hugh Moore Jr. (Moore), president of

Jersey’s board of directors. Soon after, Thornton obtained an opinion from Jersey’s

legal counsel that Jersey had no obligation to deal exclusively with Tri-River under

Tri-River’s operating agreement. Jersey then began purchasing Jersey’s freight

transportation from other freight traders. Thornton also caused the withdrawal of TriRiver’s unsecured line of credit. Jersey’s board of directors attempted to sell Jersey’s

interest and withdraw from Tri-River. Without Jersey’s trade commitment, Tri-River

was forced to surrender its future shipping contracts and unwind its market position

at an estimated loss of $800,000.

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Tri-River and DeBold incurred $271,169.62 in attorney fees and costs leaving

net settlement proceeds of $528,830.38. One-eighth of that amount is approximately

$67,000.

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DeBold and Tri-River filed a six-count complaint in Missouri state court (state

court litigation) asserting claims against Jersey, Thornton, and Moore for breach of

contract, breach of oral contract, tortious interference with business relationships, and

breach of fiduciary duty. DeBold asserted personal claims against Thornton and

Jersey for fraudulent and negligent misrepresentation. On February 12, 2003, the day

trial was set to begin, the parties settled the lawsuit for $800,000. The settlement

agreement did not specify an allocation of the settlement funds between DeBold and

Tri-River. DeBold allocated seven-eighths of the gross settlement ($700,000) to

herself and one-eighth ($100,000) to Tri-River. According to DeBold, Jersey agreed

to this allocation during settlement negotiations, but later declined to acknowledge the

allocation in the settlement agreement.

A. Proceedings Before the Bankruptcy Court

On February 27, 2003, fifteen days after the state court litigation settled,

creditors filed an involuntary bankruptcy petition against Tri-River. DeBold signed

Tri-River’s bankruptcy schedules and listed $67,0001

 in net settlement proceeds as an

asset of Tri-River’s bankruptcy estate. After the Trustee refused to agree to the

allocation, DeBold filed a declaratory judgment action in bankruptcy court, claiming

entitlement to $700,000 of the settlement proceeds. The Trustee asserts the entire

settlement amount belongs to the bankruptcy estate.

To determine the proper allocation of the settlement proceeds, the bankruptcy

court conducted a bench trial to ascertain which party would likely have prevailed in

the state court litigation had the case proceeded to trial. The Trustee, DeBold, and

David Corwin (Corwin), who represented DeBold and Tri-River in the state court

litigation, participated in the bench trial. DeBold testified she agreed to settle the case

for $800,000 to be split seven-eighths for DeBold, and one-eighth for Tri-River, based

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on information DeBold received during discovery of the state court litigation

regarding the strength of her claims, the weakness of Tri-River’s claims, and

DeBold’s damages. DeBold testified that one indication of the strength of her claims

was that Jersey’s insurer paid $200,000 of the settlement based on DeBold’s sexual

harassment allegations. DeBold further testified her damages included her (1) initial

capital investment of $100,000; (2) “compromise[] in the way of salary”; (3) “lack of

being able to get a bonus from Tri-River”; and (4) “lack of a future salary.” DeBold

presented portions of the deposition testimony of damages expert Thomas Hoops

(Hoops), taken during the state court litigation. The bankruptcy court did not allow

DeBold to testify regarding advice Corwin had given DeBold during the state court

litigation, ruling DeBold’s testimony would not constitute the best evidence as Corwin

was present in the courtroom.

After Corwin took the stand, the bankruptcy court ruled an attorney-client

privilege between Tri-River and Corwin precluded Corwin from testifying about TriRiver’s claims. Accordingly, Corwin’s testimony was limited to the advice he had

given DeBold about DeBold’s personal claims, including: (1) DeBold’s

misrepresentation claims were strong because clear evidence of Thornton’s sexual

misconduct provided jury appeal and Thornton’s letter, making promises and

representations to DeBold, offered proof Thornton induced DeBold to leave her

former employer; (2) DeBold’s contract claims probably could not be maintained

under Article 11.3 of Tri-River’s operating agreement; (3) the breach of fiduciary duty

claim was barred by Missouri law and it was Corwin’s intention not to submit the

claim to the jury; and (4) Corwin never intended to file a sexual harassment claim, but

would use the evidence of Thornton’s sexual misconduct, which “drove everything,”

including Thornton’s intent to defraud and deceive DeBold.

The Trustee offered a series of exhibits and introduced portions of the

deposition testimonies of Hoops and DeBold, but did not present any witnesses. In

closing argument, the Trustee asked the bankruptcy court to allocate $56,314.49 to

DeBold and $472,517.89 to Tri-River.

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The bankruptcy court concluded Tri-River and DeBold had proven liability on

the breach of contract, tortious interference, and breach of fiduciary duty claims. The

bankruptcy court next concluded DeBold’s misrepresentation claims failed because

DeBold had not proven Thornton’s initial proposal was made for the purpose of

engaging DeBold in a personal relationship and DeBold left her former employer to

pursue her own company.

On the issue of damages, the bankruptcy court determined Tri-River had proven

damages in excess of $800,000, while DeBold had only shown speculative damages.

The bankruptcy court reasoned, because DeBold had no valid expectation of future

employment in the gradually downward turning barge freight trade industry, DeBold

failed to prove Thornton’s actions caused DeBold to lose her career. The bankruptcy

court further reasoned DeBold had been well compensated while working for TriRiver, so equity required payment to Tri-River’s creditors before DeBold was entitled

to a distribution of profits. Based on these findings, the bankruptcy court denied

DeBold’s declaratory judgment and awarded Tri-River all the net settlement proceeds.

B. Proceedings Before the BAP

DeBold appealed the decision to the BAP, arguing the bankruptcy court

(1) ignored the valid, prepetition allocation of settlement proceeds; (2) erred in its

conclusions regarding the viability of the state court claims; and (3) erred in holding

the attorney-client privilege barred portions of Corwin’s testimony. The BAP

reversed the bankruptcy court, holding (1) DeBold did not have the authority under

Missouri law, see Mo. Rev. Stat. § 347.088.3, or under the terms of Article 4.1 of TriRiver’s operating agreement, unilaterally to allocate the settlement proceeds between

herself and Tri-River without the consent of Tri-River’s other members; (2) the

bankruptcy court erred in holding DeBold could not recover on her misrepresentation

claims against Jersey and Thornton; (3) the bankruptcy court erred in holding

DeBold’s damages were speculative; (4) the breach of contract and fiduciary duty

claims failed because Tri-River’s members were immunized from liability against

such claims under Missouri law, see Mo. Rev. Stat. § 347.090, and under Article 11.3

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These amounts reflected reductions for attorney fees and reimbursement to TriRiver for pre-litigation expenses.

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of Tri-River’s operating agreement; (5) the bankruptcy court erred in excluding

Corwin’s testimony regarding the settlement value of the lawsuit; and (6) DeBold was

entitled to seven-eighths of the gross settlement proceeds and Tri-River was entitled

to the remainder. The BAP thus remanded the case to the bankruptcy court with

instructions to enter judgment in favor of DeBold in the amount of $443,476.58 and

in favor of Tri-River in the amount of $85,353.80.2

 This appeal followed.

II. DISCUSSION

Like the BAP, we review for clear error the bankruptcy court’s factual findings,

and we review de novo the bankruptcy court’s legal conclusions, as well as its

conclusions involving mixed questions of law and fact. Darst-Webbe Tenant Ass’n

Bd. v. St. Louis Housing Auth., 339 F.3d 702, 710-11 (8th Cir. 2003). “A finding is

clearly erroneous when although there is evidence to support it . . . the reviewing court

is left with the definite and firm conviction that a mistake has been committed.” In

re Kaelin, 308 F.3d 885, 889 (8th Cir. 2002) (quotations omitted).

The Trustee argues the BAP exceeded its scope of review by making findings

of fact not found by the bankruptcy court and erred in its conclusions of law regarding

DeBold’s entitlement to the settlement proceeds. We disagree. After conducting our

own review of the bankruptcy court’s decision, we, like the BAP, are left with the

definite and firm conviction the bankruptcy court’s conclusions were in error. Id.

The bankruptcy court began its analysis on the faulty premise the only issue to

be determined was the manner in which the net settlement proceeds should be

apportioned, thereby assuming rather than determining, two threshold legal questions.

First, the Trustee, not DeBold, had the initial burden of showing the estate had an

ownership interest in the property. See 11 U.S.C. § 541(a)(1). As the BAP reasoned,

Tri-River was a plaintiff in the state court litigation, named on the settlement checks,

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and required to endorse those checks, therefore Tri-River met its burden of showing

an ownership interest, shifting the burden to DeBold to prove seven-eighths of the

settlement proceeds belonged to her. See id. § 541(d).

The second threshold question ignored by the bankruptcy court was whether,

under Missouri law and Tri-River’s operating agreement, DeBold had unilateral

authority to allocate the settlement proceeds. The BAP correctly concluded DeBold

did not have such authority. See Mo. Rev. Stat. § 347.088.3 (“Except as otherwise

provided in the operating agreement, every member or manager, if any, shall account

to the limited liability company and hold as trustee for it any profit or benefit derived

by such person without the informed consent of more than one-half by number of

disinterested managers or members.”). Article 4.1 of Tri-River’s operating agreement

did not give DeBold such authority, therefore DeBold’s prepetition allocation was

invalid. 

We also find the bankruptcy court erred regarding the viability of Tri-River’s

and DeBold’s claims. The bankruptcy court came to the erroneous conclusion

DeBold’s misrepresentation claims failed because DeBold had not proven that

Thornton’s true intention in forming Tri-River was to establish a personal relationship

with DeBold. As the BAP correctly noted, DeBold’s misrepresentation claims were

not based on sexual harassment. DeBold claimed Thornton intentionally and

negligently made false representations to induce DeBold to join Tri-River. The

alleged misrepresentations included (1) providing DeBold with false sales projections

and telling DeBold three other shippers were interested in doing business with TriRiver, (2) Jersey intended to use Tri-River for all its freight trade needs, and (3) Jersey

would be instrumental in building Tri-River. Although DeBold and Corwin felt the

evidence of Thornton’s sexual advances gave these claims jury appeal, DeBold would

not have been required to prove Thornton’s sexual harassment to prove a claim of

misrepresentation. See generally City of St. Joseph, Mo. v. Sw. Bell Tel., 439 F.3d

468, 478 (8th Cir. 2006) (listing the elements of a negligent misrepresentation claim

under Missouri law).

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Next, regarding DeBold’s damages, the bankruptcy court erred in misconstruing

DeBold’s claimed damages. Not only did DeBold claim loss of future wages, but she

also claimed loss of her initial $100,000 investment, and loss of income differential

for the years she managed Tri-River. As the BAP noted, the bankruptcy court made

the erroneous legal conjecture DeBold had been well compensated while working for

Tri-River, and therefore equity demanded creditors be paid before DeBold received

damages. Under Missouri law, neither managers nor members of a limited liability

company are liable for the company’s debts simply by virtue of their membership.

See Mo. Rev. Stat. § 347.057. The bankruptcy court erred in its legal conclusions

regarding the allocation of the settlement proceeds, erroneously focusing instead on

the rights of Tri-River’s creditors.

Finally, the bankruptcy court erred regarding the viability of Tri-River’s breach

of contract and fiduciary duty claims. The bankruptcy court concluded that although

DeBold had proven liability on the contract claims, she had not proven damages.

However, DeBold was not a party to the contracts, and therefore had no contractual

claims against Jersey. The bankruptcy court further failed to consider defenses to TriRiver’s breach of contract and fiduciary duty claims, and accordingly failed to

recognize Tri-River could not have prevailed on those claims, because Jersey, as a

member of Tri-River, was immunized from liability against such claims under

Missouri’s business judgment rule, see Mo. Rev. Stat. § 347.090.1, .2 (stating an

authorized person is entitled to rely on the opinion of legal counsel in discharging his

duties and is not liable (without contrary knowledge) for action taken in reliance on

such opinion), and under Article 11.3 of Tri-River’s operating agreement.

Although the Trustee argues the BAP should have afforded deference to the

factual findings of the bankruptcy court, see Anderson v. City of Bessemer City, N.C.,

470 U.S. 564, 575 (1985), the BAP questioned the bankruptcy court’s legal

conclusions, not its factual findings. Any other incidental factual findings relied upon

by the BAP in reaching its own legal conclusions do not exceed the BAP’s

permissible scope of review.

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The BAP analyzed the legal issues and properly applied the law. The BAP

authored a comprehensive, well reasoned opinion, and thoroughly set out the facts and

applicable legal standards. We find further elaboration unnecessary.

III. CONCLUSION

We affirm the judgment of the BAP.

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