Court Opinion

ID: 3040624
Source: CourtListenerOpinion
Date Created: 2015-10-13 23:03:30.857216+00
Date Added: 2024-06-11T12:05:53.370920
License: Public Domain

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
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 Tri-
River’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.

                                            -2-
        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

      1
        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.
                                        -3-
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 Tri-
River’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.
                                       -4-
       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 Tri-
River, 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 Tri-
River’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
                                          -5-
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,

      2
       These amounts reflected reductions for attorney fees and reimbursement to Tri-
River for pre-litigation expenses.
                                        -6-
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 Tri-
River, (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).
                                          -7-
       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 Tri-
River’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.
                                           -8-
      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.
                       ______________________________

                                         -9-