IN RE: ABBY LINES, INC., (Debtor). ABBY LINES, INC., ET AL. (Plaintiffs) v. PROGRESSIVE BANK, ET AL. (Defendants).

Case No: 02-32537, Adversary No. 03-3034.United States Bankruptcy Court, W.D. Louisiana, Monroe Division.
November 9, 2004

HENLEY HUNTER, Bankruptcy Judge

Before the Court is the removed action of the plaintiffs, asserting claims regarding lender liability against the defendants. This is a Core Proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (C). This Court has jurisdiction pursuant to 28 U.S.C. § 1334 and by virtue of the reference by the District Court pursuant to Local District Court Rule 83.4.1 incorporated into Local Bankruptcy Rule 9029.3, and the District Court’s Denial of the Defendants Motion to Withdraw the Reference. (Doc. 56.)

After considerable litigation thus far, the Court has taken under advisement the reconsideration of debtor’s release of claims pursuant to the Order of the District Court of April 30, 2004. An evidentiary hearing was held on this matter on August 30-31, 2004. Briefs were accepted from the parties on October 1 and 15, 2004. Pursuant to the evidence offered and the briefs submitted, the following reasons for decision are issued in support of this Court’s ruling hereby holding that the portion of the December 24, 2002 Order that releases defendants from any remedies under bankruptcy law was erroneous. This Court further recognizes the right of the Trustee to pursue any and all bankruptcy remedies, including a claim against the defendants for equitable subordination. All other rulings made in this matter in conflict with these reasons are rescinded. A

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separate and conforming order will be entered.

Procedural History
The underlying complaint of the plaintiffs, Eddie and Cindy Simon, and the debtor, Abby Lines, Inc., was removed to this Court on August 11, 2003. After filing an answer; a Motion to Abstain and a Motion to Dismiss, which were denied; the defendants filed a Motion to Withdraw the Reference in these proceedings to the United States District Court. Notwithstanding this pending Motion, the Court allowed the plaintiffs to file and notice for a hearing on April 7, 2004, a Motion to Vacate an Agreed Order filed on December 24, 2002.

The December 24, 2002 Order, which is the subject of this dispute, was the result of an “Emergency Motion for Authority to Consummate and Perform Accounts Receivable Purchase and Security Agreement and Consummate and Perform Fuel Line Agreement,” filed by the debtor and set for a hearing in Alexandria on December 18, 2002. At that hearing, the parties entered into the following stipulation as to the release:

Mr. Martin: We’ve agreed that the debtor will not assert any claims against Progressive Bank. We don’t agree at this point on what the dollar amount is that is owed and we’ll certainly reserve that dispute but, beyond that, no claims will be asserted in the nature of lender liability.

(Exhibit 25, Transcript of Hearing, December 18, 2002, p. 9, l. 6-10.)

Thereafter, the Court expected an Order would be submitted pursuant to the stipulations read in Court that day, and that Order was entered by another Judge in this district on December 24, 2002. A final hearing on that Order was conducted on January 15, 2003, however, due to deficiencies in the noticing of the final hearing, the Court directed the parties to notice the proposed disposition of the matter on an “if and only if basis,” meaning no further hearing would be needed if there were no objections to the entry of the proposed final Order. Shortly thereafter, on March 12, 2003, the

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case converted to one under Chapter 7. When the final Order was presented to the Court on April 1, 2003, the Court denied relief based on the circumstances of the recent conversion.

On August 11, 2003, the debtor and its principals, Eddie and Cindy Simon, removed the instant matter to this Court. Ms. Lucy Sikes, the Chapter 7 Trustee, was added to the case as an interested party. A Motion to Abstain/Remand was filed on August 29, 2003. Defendants Joe Doughty and Progressive Bank also filed separate Motions to Dismiss, which were deferred by the Court pending a disposition of the motion to Abstain/Remand. The parties were directed not to file any further pleadings until a ruling was issued on the Motion to Abstain/Remand. Nevertheless, the plaintiffs filed a Motion for leave to file an amended complaint. A Motion to Withdraw the Reference was filed on January 27, 2004. Also, a Motion to Vacate the Order of December 24, 2002 was filed by the plaintiffs on February 17, 2004.

The matter was set for a hearing on the Motion to Abstain/Remand on February 5, 2004, at which time, in open Court, the Motion was denied with prejudice. While the Motion to Withdraw the Reference was pending with the District Court, this Court offered the following Recommendation in a Report and Recommendation to the District Court, in an effort to identify all outstanding motions and issues pending before the Court, dated April 5, 2004:

IT IS RECOMMENDED that the Motions to Dismiss the adversary proceeding as to the debtor and the Chapter 7 Trustee against all named defendants be granted, as debtor is bound by its agreement made on December 18, 2002 to refrain from filing any future lender liability claims against the defendants.
However, the principals, the Simons, having alleged personal claims against the defendants, and not being bound by same said stipulation, should be allowed to proceed in state court with those claims. Reconsidering the Court’s disposition of the Motion to Abstain, it is evident that the Motion to Abstain should have been granted as to the Simons only, and the claims of the Simons should have been remanded to the state court, and as stated, it is SO RECOMMENDED.
Insofar as the adversary proceeding is before the District Court, the above proposed disposition is couched in terms of a Recommendation. Should the District

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Court, however, deny the Motion to Withdraw the Reference, this Court will sua sponte, reconsider its ruling on the Motion to Abstain/Remand, rule on the pending Motions to Dismiss, and issue a separate Order conforming to the Recommendation set forth herein.
Further, this Court is mindful that yet another Motion is pending, despite this Court’s strong admonition against such filings, that being the Motion for Sanctions Under Bankruptcy Rule 9011, filed on March 5, 2004, by Progressive Bank, Progressive Bancorp, Inc., and George Cummings, III. A hearing was requested on the Motion, and that request was denied. Part of the motion seeks sanctions related to the original petition in the state court. Other portions seek relief regarding the filing of the First Amending and Supplemental Petition for Damages and Relief of Judgment under Rule 60, filed December 23, 2003.
To the extent that this pleading seeks damages under F.R.B.P. 9011, as to the Debtor and the Chapter 7 Trustee, it is questionable at best under the automatic stay, no leave having been granted to assert such an action. However, the alleged failures to investigate and ascertain evidentiary support for the allegations also address the Simons’ claims, which this Court suggests should not be addressed in the federal court. Accordingly, this Court RECOMMENDS that the Motion for Sanctions under F.R.B.P. 9011 be dismissed with prejudice.

Thereafter, the District Court denied the Motion to Withdraw the Reference on April 15, 2004, and therein, adopted the reasoning of this Court as stated in the above cited Report and Recommendation. (Order, U.S. District Court, Doc. No. 56.) On April 16, 2004, this Court issued an Order in accordance with the recommendations made. (Doc. 56.) However, in ruling on a subsequent Motion for Reconsideration, the District Court issued an Order to this Court directing same to “conduct an evidentiary hearing concerning all issues pertaining to debtor’s release of claims and the December 24, 2002 Order. If the Bankruptcy Court changes its ruling concerning the release of claims, the Bankruptcy Court is further instructed to reconsider its ruling on any related matters in the case.” (Memorandum Order from District Court, Doc. 58).

Findings of Fact and Legal Analysis

The First Step

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The first and limited issue before this Court is the extent to which the debtor released its lender liability claims against the defendants, and whether such release included any and all bankruptcy claims as stated in the December 24, 2002 Order. In other words, did this Court properly conclude that the stipulation of December 18, 2002, effectively barred both the debtor and the trustee from pursuing actions against the defendants in the nature of bankruptcy claims? These conclusions culminated in an Order dated April 16, 2004.[1]

As for the stipulation itself, as quoted above, being more limited than the language contained in the order dated December 24, 2002, it is evident that the release language was broadened between the hearing an the filing of the Order. The initial effort at generating the order by Mr. DeCelle contained a “bare bones” release reading as follows: “Debtor shall file no lender liability lawsuits against Bank.” (Exhibit no. 11, Paragraph B.) Dissatisfied with Mr. DeCelle’s version, additional changes were made by Mr. Martin, counsel for Progressive Bank. Those changes included an expansion of the definition of “lender liability” to include a waiver of any and all bankruptcy remedies: “G) Debtor, for itself and its successors and assigns, including any subsequently appointed Trustee, agrees that it will assert no claims against Bank or Bank’s employees or directors relating to the actions or omissions of the Bank and Bank’s employees and directors prior to the petition date, and Debtor specifically relinquishes, releases and discharges any such claims.” (Exhibit 12,

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Paragraph G.)

After that was reviewed by other attorneys, Mr. Martin then faxed to them additional language, Paragraph G, by handwriting the bolded portion: “Debtor, for itself and its successors and assigns, including any subsequently appointed Trustee, agrees that it will assert no claims against Bank or Bank’s employees or directors, pursuant to the bankruptcy laws or other applicablelaw, relating to the actions or omissions of the Bank and Bank’s employees and directors prior to the petition date, and Debtor specifically relinquishes, releases and discharges any such claims.” (Exhibit 15, Paragraph G.) The final Order contains this provision.

Two changes seem to have evolved in the process of putting the stipulation to print. First, the term “lender liability” was expanded to include not just lender liability claims, but also, to preclude remedies under “bankruptcy laws or other applicable laws.” Second, the agreement to forbear lender liability claims against the bank was expanded to include claims against employees and directors.[2]

Progressive Bank has quite an expansive definition of “lender liability” which includes remedies under bankruptcy laws and a “vast array of potential causes of action which can be brought against lenders,” including “any kind of liability or exposure to litigation.” (Doc. 77, p. 6) Although the Trustee narrowly interprets the term “lender liability” as exclusive of claims for fraud, accounting, reporting violations, intentional tort, conversion, and professional liability” (Doc. 63, p. 10), the ultimate issue is whether the Trustee, who stands in the shoes of the debtor, is barred from

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filing a separate adversary proceeding seeking equitable subordination or other remedies under bankruptcy law.[3]
While the Trustee here may be bound by the waiver of certain bankruptcy remedies, if the stipulation is enforced by its terms, others not contemplated by the stipulation of the parties on December 18, 2002, may not be binding on her.

Counsel to the Trustee maintains that the entire waiver at issue was not properly noticed as a settlement as required by the Fifth Circuit in In re: Jackson Brewing, 624 F.2d 599 (5th Cir. 1980), which requires the following factors be addressed by a Court in the approval of a settlement: a) the probability of success in the litigation, with due consideration for the uncertainty in fact and law; b) the complexity and likely duration of the litigation and any attendant expense, inconvenience and delay; and c) all other factors bearing on the wisdom of the compromise. Jackson Brewing, 624 F.2d at 602. This Court is not aware of binding authority that applies the test to Court approval of a waiver of lender liability claims in the context of a preliminary hearing on the use of cash collateral, nor do the parties provide such citation.[4]
However, this Court finds persuasive a case from the Eastern District of Pennsylvania, which finds that such a release did not preclude the debtor’s claim of equitable subordination, notice being required since the beneficiaries of equitable subordination are creditors with the lower distributed priority and the creditors were not party to the release. In

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Re: American Sweeteners, 248 B.R. 271, 277 (Bankr. E.D.Pa. 2000).

While counsel to the trustee continues to allude to the emergency nature of the order in question, orders approving the use of cash collateral are scarcely unusual in Chapter 11 reorganization cases. This is because such orders are extremely urgent to the debtor in possession, whose hopes of remaining in business are dependant in large part on obtaining interim financing, and to the creditors of such debtors, who are anxious to preserve their own interests in such cash collateral.[5]
What makes this situation different from the norm is Progressive’s insistence on a waiver of at least some lender liability claims on those creditors who were not present at the hearing, and a subsequent trustee. Also, this preliminary hearing had an unusual twist, in that the debtor in possession sought to substitute an entirely new lender, namely Transportation Alliance Bank, Inc., for Progressive under a purchase or factoring agreement.

As for the expansion of what parties were included in the release of claims, it is possible that this provision can be characterized by the term “over reaching.” Black’s Law Dictionary, Seventh Edition, provides an apropos definition of over reaching in this context: “1. the act or an instance of taking unfair commercial advantage if another, esp. by fraudulent means. 2. The act or an instance of defeating one’s own purposeby going too far.” (Emphasis supplied.) Prior to the December 18, 2002 hearing, unbeknownst to the Court, Mr. DeCelle and the Simons, two former employees with whom the debtor and its principals had dealt, virtually exclusively, during the lending relationship were abruptly terminated from employment with Progressive Bank for derelictions in

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duties, or “exceeding their authority” relating to the Abby Lines account.[6] (Transcript, August 30-31, 2004, Docs. 72-73, p. 183.) The bank’s representatives and counsel were not forthcoming in communicating this important fact to the Court.[7] (Transcript, August 30-31, 2004, Docs. 72-73, p. 184.) When questioned as to why the information was withheld from the Court, counsel to the bank, Mr. Martin, testified that it never occurred to him to do so since the employees had been terminated for over funding the debtor rather than harming the debtor. (Transcript, August 30-31, 2004, Docs. 72-73, p. 280.) In brief, the bank maintains that the Simons were aware of the terminations at the time of the hearing. (Progressive’s Post-Hearing Brief, Doc. 77, p. 4, fn.1, citing Transcript, August 30-31, 2004, Docs. 72-73, p. 46-47.)

While the Progressive defendants assert that the termination was precipitated by the over funding of the line of credit based on duplicate invoices supplied by the principals, the Simons insisted as recently as the August evidentiary hearing that the bank continues to owe the debtor money, despite the fact that the debtor’s own pleadings note that “duplicate invoices” had been funded. (Doc. 63, p. 6.) Although the bank assigned the task of reconciling the Abby Lines account to another employee, by the date of the evidentiary hearings in August, there is as yet no conclusion as to just what balance(s) if any is due Progressive by the debtor, or vice-versa. Although Progressive has filed a claim, which is deemed “allowed,” the trustee may yet object to the claim, and any claim that is ultimately allowed may be impacted by any successful recovery and/or defense

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to a lender liability claim.

Referring back to the definition of over reaching, it is beyond peradventure that the various changes to the order between the December 18, 2002 hearing and the December 24, 2002 submission ultimately went “too far.” The testimony of the bank’s President, Mr, George Cummings is most telling here:

Q. Mr. Cummings, were you aware, sir, or do you recall being in court when it was read into the record what the agreement of the parties was?

A. Yes.

Q. And you heard that?

A. Yes.

Q. And in that recitation, . . . there is no mention of any release of director, officers or employees of the Bank, was there, sir?

A. No.

. . .

Q. And at the time the on-the-record settlement was placed on the record, you had in full force and effect at the Bank a policy of D and O insurance that covered your officers and directors, did you not?

A. Yes.

(Transcript, August 30-31, 2004, Docs. 72-73, p. 190.)

Although counsel for the bank objected on the basis of relevancy, the Court overruled the objection, finding the information entirely relevant to the issue of the expansion of the release language. In fact, it is the finding of the Court herein that the bank “held all the cards,” so to speak, in leveraging an expansion of both the definition of lender liability and to whom the release would apply.

This Court concludes that the portion of the December 24, 2002 Order releasing defendants from any remedies under bankruptcy law should be STRICKEN, and the Court further RECOGNIZES the right of the Trustee to pursue any and all bankruptcy remedies, including a claim against the defendants for equitable subordination.

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The Second Step

Pursuant to the directive of the District Court, if this Court changes its ruling as to the first issue as stated in the Report and Recommendation, it must then determine to what extent, if any, its original report and recommendation and its concomitant orders should be revisited and changed.

The original recommendation concluded: “[T]he Simons, having alleged personal claims against the defendants, and not being bound by same said stipulation, should be allowed to proceed in state court with those claims. . . . it is evident that the Motion to Abstain should have been granted as to the Simons only, and the claims of the Simons should have been remanded to the state court.” The Simons are non-debtors, and there is no contention that any claims personal to them are property of the bankruptcy estate. Nevertheless, the Court now believes, based on the evidence, that they were present during the negotiation of the waiver and indeed intended to waive at least some of their claims, despite their testimony that they were unaware of the waiver of the lender liability claims at the December 18, 2002, hearing.

Both the testimony of Malcolm DeCelle, their own attorney, and of Frank Martin, counsel to Progressive Bank, indicate that both Eddie and Cindy Simon were present during the discussions which culminated in the waiver. (Transcript, August 30-31, 2004, Docs. 72-73, p. 239-241; Plaintiff Exhibit A, Deposition of Malcolm DeCelle, p. 35.)

However, that issue, being one of a personal claim of the Simons, and not presently before this Court in any way, should not be decided in this Court. As was noted in the footnote to that recommendation, the Simons seek a jury trial, evidenced by a Jury Demand filed in this adversary on their behalf alone (Doc. 9). Pursuant to a ruling by the Honorable John M. Shaw, United States District Judge for the Western District of Louisiana, in Civil Action No. 89-2781 “O”, C. Creig

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Brignac v. Roppollo Petroleum, withdrawal of the reference to the bankruptcy court of an adversary proceeding is required when a party requests a jury trial, based upon the holding i Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S. Ct. 2782, (1989). This Court need not speculate on the effect of its conclusion as to the Simons knowledge of the waiver, for that matter can be addressed in another forum. Therefore, this Court concludes its original recommendation related to the disposition of the Motion to Abstain vís a vís the Simons’ personal claims should be upheld, and the personal claims of the Simons against the defendants are hereby Remanded to State Court by separate and conforming Order.

The last Recommendation dealt with the pending Motion for Sanctions, and the recommendation to Dismiss that Motion with prejudice will be enforced by the separate and conforming Order hereto for all the reasons stated therein and reiterated above.[8]

Pursuant to the reasons cited above, the Motion to Reconsider is GRANTED in Part, allowing the release of Claims only as to the lender liability claims of the debtor against the defendants, but that portion of the December 24, 2002 Order that releases defendants from any and all bankruptcy remedies is STRICKEN fromthe ORDER, and the Court RECOGNIZES the right of the Trustee to pursue any and all bankruptcy remedies, including a claim against the defendants

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for equitable subordination. Additionally, the Court AFFIRMS
all other rulings made in the Order dated April 16, 2004, including the REMAND of the personal claims of the Simons against the defendants and the disposition of the Motion for Sanctions. To the extent any prior Order of this Court is inconsistent with these Reasons, such prior Order is annulled and vacated. A separate and conforming Order will enter.

In the event of an appeal, should the District Court determine that any action of this Court herein amending its prior Orders should be addressed in a Report and Recommendation, these reasons should stand as an Amended Report and Recommendation.

[1] The Trustee asserts that her position is somehow improved by this Court’s actions of April 1, 2003, when this Court did not enter a final order approving the use of cash collateral. The inescapable fact is that the case had converted to a case under Chapter 7. There was no need for cash collateral, inasmuch as the business of the Chapter 11 debtor in possession had ceased as a matter of both fact and law. Although a Chapter 7 Trustee could have sought to continue the operations of the debtor under 11 U.S.C. § 721, no such application was filed and the evidence at the evidentiary hearings established that the business activities of the former debtors-in-possession effectively ended when the financial package contemplated by the December 2002 Order did not materialize.
[2] In brief, Progressive now seeks to broaden the effect of the release to include its former employees, citing a case from the Florida Supreme Court, Sheen v. Lyon, 482 So.2d 422, 424
(Fl. 1986), on the basis that a such a release including former employees is “only logical.” (Progressive’s Post-Hearing Brief, Doc. 77, p. 7.)
[3] The burden of proof in an action for equitable subordination is a difficult one. In re: Mobile Steel Co. 563 F.2d 692 (5th Cir. 1977) (Three conditions must be satisfied before exercise of the power of equitable subordination is appropriate: i) the claimant must have engaged in some type of inequitable conduct; ii) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and iii) equitable subordination of the claim must not be inconsistent with the provisions of the bankruptcy act.). Whether or not the Trustee may prevail on such a complaint is not presently poised for determination.
[4] See In re: Jore Corporation, 298 B.R. 703 (D.Montana 7/28/2003) (discussing similar waiver, but permitting the unsecured creditors committee to pursue claims notwithstanding the waiver, and noting a local rule in another court prohibiting such a waiver).
[5] The evidence adduced at the August evidentiary hearing demonstrated there was an urgent need for funding to make the payroll and to overcome the adverse affect of news of the problems at Abby Lines, which were being reported on television and in the area newspapers. (Plaintiff Exhibit A, Deposition of Malcolm DeCelle, p. 10, l. 7-14.)
[6] Progressive also claims the release of the “employees” should include these former employees. (Progressive’s Post-Hearing Brief, Doc. 77, p. 5.)
[7] Although on a different note, the Court must point out that, the principals, not to be outdone, also withheld important information, namely, the undisputed fact that on June 26, 2002, the IRS filed a federal withholding tax lien of more than three million dollars against the debtor for failure to pay withholding taxes beginning in 1999. (Pre-Hearing Stipulation, Doc. 67, p. 4.)
[8] This Court is not unmindful that there is yet another Order in this record which deserves some mention. There is a second Order dated December 24, 2002, which changes the time of the Final Hearing. That “Order” was doctored by Mr. DeCelle after discovering he put the wrong time for the hearing in the original, already “signed” Order. It was then entered in the record as an Amended Order. All that Mr. DeCelle needed to do here was to re-notice the hearing. The Court reserves the right to sanction Mr. DeCelle for his role in the so-called “Amended Order” fiasco, or to refer the matter to the Judge whose facsimile stamp appears on the first order dated December 24, 2002.

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