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The Branham Corp. v. Boone County Utilities, LLC

United States District Court, S.D. Indiana, Indianapolis Division

January 22, 2018

BOONE COUNTY UTILITIES, LLC, Defendant. Adversary Proceeding Nos. 12-50128, 14-50168


          RICHARD L. YOUNG, JUDGE United States District Court Southern District of Indiana

         The Branham Corporation (“Branham”) appeals from several orders of the bankruptcy court. These appeals involve separate proceedings and issues spanning several years in both federal and state courts. However, the issues, though numerous, are not complex. The court therefore finds oral argument unnecessary and denies Branham's request for oral argument. For the reasons that follow, the bankruptcy court's decisions will be affirmed in part and remanded for further proceedings with respect to sanctions.

         I. BACKGROUND[1]

         A development firm, Newland Resources, LLC (“Newland”), hired Branham to assist in obtaining water and sewer utility service for a project in Boone County, Indiana. Newland formed Boone County Utilities, LLC (“BCU”) to operate the project. Newland is the sole owner and member of BCU. In late 1995, Newland and Branham entered into a contract under which Branham was to be paid fees and expenses for securing the utility services, including a success fee. Newland has not paid Branham its success fee.

         BCU was a private utility company regulated by the Indiana Utilities Regulatory Commission (“IURC”). In late 2001, the Board of Commissioners of Boone County petitioned the IURC to revoke BCU's certificates of territorial authority. The IURC issued an interim order, directing Newland to pay BCU a cash equity infusion. The IURC set a compliance hearing to be held within 90 days.

         On September 8, 2003, BCU filed a petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court, Bankruptcy Court Case No. 03-16707-AJM-11. Branham filed several proofs of claims against the bankruptcy estate based on the contract between Branham and Newland. BCU is not a party to that contract. The first three claims were filed on May 11, 2004 and September 9 and 10, 2004; the fourth claim was filed on May 17');">17, 2005.

         BCU moved to sell its assets. A month later, the IURC made certain orders requiring BCU to do certain things. A jurisdictional skirmish ensued between the IURC and bankruptcy court. However, in its February 5, 2004 entry, the IURC noted that the Bankruptcy Court “will direct the sale of the utility [BCU] and the distribution of proceeds thereof[.]” [Filing No. 18-3, Branham App. 2594]. Then on February 25, 2004, the IURC, “recogniz[ing] that the United States Bankruptcy Court has the full power and exclusive jurisdiction to conduct the sale of [BCU's] assets, ” stayed all proceedings before the IURC involving BCU. [Filing No. 7-2 at ECF p. 65-66]. The court will refer to this order as the “stand down” order. The stand down order stated it “shall be effective on and after the date of its approval, ” which was on February 25, 2004. [Id.]

         BCU obtained authority to sell its assets to the Town of Whitestown for $4, 200, 000. The bankruptcy court approved the sale, and the sale closed on July 20, 2004. BCU received $3, 891, 645 in net sale proceeds. After the closing on the sale, BCU ceased its operations as a regulated entity.

         The bankruptcy court held a confirmation hearing on September 14, 2004, and entered an Order Confirming Debtor's Amended Liquidating Plan of Reorganization (“Confirmation Order”), over Branham's conditional objection. [Filing No. 9-1, Branham App. 17');">17-20]. The bankruptcy court disallowed three of Branham's claims because they were based on a contract to which the debtor BCU was not a party; it disallowed the fourth claim, filed months after the claims bar dates and the day before the hearing on claims, as untimely. The Confirmed Amended Plan (“Plan”) provided for the balance of the sale proceeds to be paid to Newland for its equity interest after payment of all other allowed claims. Branham was not listed as a secured creditor because Branham was not a creditor of BCU. The Confirmation Order stated that “the Plan and its provisions shall bind the Reorganized Debtor, any entity acquiring estate property under the terms of the Plan, [and] all creditors of and claimants against Debtor ….” [Filing No. 9-1, Branham App. 20]. The order also said that the bankruptcy court “shall retain jurisdiction over the Chapter 11 case for the purposes set forth in the Plan.” [Id.]

         On the Confirmation Date, BCU made a distribution to Newland of approximately $2.5 million, leaving a balance of over $1 million in its account. A second distribution was made to Newland in May 2005; Newland received approximately $3 million in distributions under the Plan.

         Branham appealed to the district court, which affirmed. See In re Boone Cty. Utils, LLC, Case No. 1:05-cv-0117');">173-LJM-WTL. Branham appealed to the Seventh Circuit Court of Appeals, which also affirmed. See In re Boone Cty. Utils., LLC, 506 F.3d 541 (7th Cir. 2007) (holding claims based on contract to which debtor was not a party were properly disallowed and bankruptcy court did not abuse its discretion in disallowing untimely unjust enrichment claim). Branham sought rehearing and rehearing en banc, which requests were denied. Branham did not move the bankruptcy or district court to stay payment of the distributions due to Newland under the Plan.

         On July 1, 2011, BCU's bankruptcy case was closed.

         Meanwhile, in October 2005, Branham sued Newland in Boone Circuit Court to collect its success fee. In November 2007, Branham obtained a judgment against Newland in the amount of $397, 853.92. Newland appealed, but did not seek a stay of the judgment. Thus, the judgment was enforceable, notwithstanding the appeal. The Indiana Court of Appeals affirmed. Newland Resources, LLC v. Branham Corp., 918 N.E.2d 763 (Ind.Ct.App. 2009). Before Branham obtained the judgment against Newland, it knew that Newland had insufficient assets to satisfy the judgment.[2]

         On December 29, 2011, Branham filed a Verified Motion for Proceedings Supplemental to Execution and Garnishment in Boone Circuit Court in Cause No. 06C01-0409-PL-517');">17 (the “517');">17 Case”), naming BCU and Newland, as party garnishee-defendants, among others. [Filing No. 9-6, Branham App. 842-912].[3] Branham alleged that the distributions made by BCU to Newland were unauthorized under the plan and that the transfer of property was void ab initio and in violation of IURC orders and state business law. Branham sought to recover all monies paid out under the Plan to allowed claimants and professionals.

         The next day, December 30, 2011, Branham filed a complaint for damages against Newland and numerous others in Boone Circuit Court, Cause No. 06C01-1201-CT-0001 (the “001 Case”). The complaint alleged that Newland's distributions of the BCU sale proceeds were unauthorized under the Plan and were void ab initio in violation of IURC orders, operating agreements, and Indiana law. Branham asserted that Newland purposely depleted its assets, rendering it unable to satisfy Branham's judgment. Branham claimed fraud, deception, conversion, theft, and receiving stolen property and asserted claims under the Indiana Crime Victim Relief Act and Indiana Corrupt Business Influence Act. BCU was not named a party defendant, but BCU's principals, employees, and attorneys were named as defendants.

         On April 12, 2012, in response to Branham's state court complaint and proceedings supplemental, BCU filed a Motion to Reopen its Bankruptcy Case. [Filing No. 9-7, Branham App. 1061-70]. The bankruptcy court granted the motion on April 23, 2012, and BCU filed a complaint under Adversary Proceeding No. 12-50128 (“AP-128”), naming Branham and its attorneys in the state court cases, Stewart & Irwin, P.C., as defendants. [Filing No. 9-1, Branham App. 22-33].

         BCU amended its complaint in 2013. Count I sought a declaratory judgment, asking the court to affirm and give preclusive effect to various orders entered in the Chapter 11 case, including a declaration that all distributions under the Plan were authorized and lawful. BCU also sought a declaration of whether BCU has undistributed assets in which Newland has an interest. Count II sought sanctions against Branham, its principals, and its counsel for their willful, intentional, and malicious actions in prosecuting matters filed in the Boone Circuit Court against BCU.

         Branham answered and filed a counterclaim. Its answer admitted that the bankruptcy court “has jurisdiction to render a declaratory judgment in this adversary proceeding relating to the interpretation and enforcement of its orders, rulings, judgment and decrees made with respect to the petition filed by BCU [.]” [Filing No. 18-1, Branham App. 1838]. Similarly, the counterclaim asserted that the bankruptcy court has “concurrent and ancillary jurisdiction to decide whether distributions from BCU to Newland are in breach of the Amended Plan and Confirmation Order, were made prior to allowance by the Court[, ] and were made without the express authorization of this Court.” [Filing No. 18-1, Branham App. 1895 (citations omitted); see also Id. at 1896 (asserting that “this [Bankruptcy] Court has jurisdiction over the assets of BCU's estate”)]. The counterclaim sought a determination of whether the distributions by BCU to Newland were lawful and requested an order allowing discovery of BCU as to its assets and garnishment of Newland's property in BCU's possession.

         At an August 22, 2012 hearing on the motion to dismiss for lack of subject matter jurisdiction and failure to state a claim filed by Stewart & Irwin, the parties (including Branham) stipulated that the U.S. Bankruptcy Court has concurrent and ancillary jurisdiction to construe and enforce its orders. [See Filing No. 23-3, Branham App. 5624, 5680]. Branham's counsel acknowledged Branham's argument was the following: the distributions to Newland under the Plan were improper and illegal because they did not comply with state law, BCU's operating agreement, the Plan itself (specifically Section 6.1), and the IURC orders, and therefore the transfer was void, and BCU still had a right to the property. [Filing No. 23-3, Branham App. 5517');">17, 5524-26, 5534 (“I'm challenging distributions that were made that we argue, pursuant to a construction of your plan and confirmation, were not permitted to be made in the fashion that they were made.”), and 5540].

         On October 4, 2012, the bankruptcy court issued an Order, acknowledging the parties' stipulation that the court “has … jurisdiction to construe and enforce its orders.” [Filing No. 7-8 at ECF page no. 21]. The court determined:

[I]t shall exercise its jurisdiction to interpret and enforce all of its orders and rulings with respect to the [BCU] Chapter 11 Bankruptcy Case from the petition date of September 8, 2003, up to and including all distributions and transfers made by [BCU] to Newland … and all matters respecting the [IURC]'s involvement in the BCU bankruptcy ….

[Filing No. 9-8, Branham App. 1209, AP-128, 10/4/2012 Order at 3; see also Filing No. 7-8 at ECF page no. 21]. The court granted the motion to dismiss with respect to Stewart & Irwin only, without prejudice to BCU's right to seek contempt sanctions against the attorneys if the court were to determine that its orders were “willfully disregarded in this matter.” [Filing No. 7-8 at 21-22]. The court further ordered that “[a]ny issues involving [Newland's] actions upon or after receipt of the distribution from [BCU] pursuant to the amended Plan are to be decided in the Boone County Circuit Court.” [Filing No. 7-8 at ECF page no. 22].

         Thereafter, Branham moved to withdraw the proceedings supplemental as to BCU in the 517');">17 Case. The trial court granted Branham leave to dismiss the proceedings without prejudice, conditioned on the payment of the garnishee defendants' attorney fees. The court of appeals affirmed. See Branham Corp. v. Newland Resources, LLC, 44 N.E.2d 1263 (Ind.Ct.App. 2015).

         BCU moved to dismiss Branham's counterclaim in AP-128, and the bankruptcy court directed the parties to file proposed findings and conclusions. The parties did so, and they filed additional pleadings and other matters. The motion to dismiss, responses, proposed findings, and other papers referred to matters outside the pleadings. Since the motion required the bankruptcy court to consider provisions of the confirmed plan and matters outside the pleadings, the court treated BCU's motion to dismiss as a motion for partial summary judgment.[4]

         On April 1, 2014, the bankruptcy court made its Proposed Findings of Fact and Conclusions of Law on Plaintiff's Motion to Dismiss Treated as a Motion Under Rule 56 and found that “all of [BCU]'s scheduled property was sold to Whitestown.” [Filing No. 18-3, Branham App. 2377].[5] The court made “short work” of any alleged claims of Newland against BCU, finding: “Branham is a judgment creditor of Newland and at best has only the rights of an assignee of Newland's interest in the Debtor.” [Id. at 2381].

         The court continued:

[E]ven if Newland had any additional claims against Debtor, those were expressly waived by Newland and Branham (as Newland's judgment creditor) is enjoined from bringing them under the express terms of paragraph 11.2 [of the Plan] which provides, in part, that “All holders of Claims and Equity Interests, and their successors and assigns, shall be permanently enjoined after the Confirmation Date from asserting against the Debtor, or any of the Debtor's Property, any Claims or interests based upon any act or omission, transaction or other activity of any kind or nature that occurred prior to the Confirmation Date.”

[Id. (quoting Plan, p. 19)].

         Turning to whether BCU retained any claims against Newland and whether those claims were undistributed property, the bankruptcy court determined that Branham was a “party in interest” in the bankruptcy case, had a pecuniary interest in the bankruptcy, was aware of the facts underlying its alleged claims against Newland no later than September 2004, and could have moved for appointment of a bankruptcy trustee. [Filing No. 18-3, Branham App. at 2382]. Nonetheless, Branham did not object that the Plan failed to provide for prosecution of claims against Newland, failed to move for the appointment of a trustee, and did not seek pre-judgment attachment in state court to protect its interests against Newland. [Filing No. 18-3, Branham App. 2382]. The bankruptcy court concluded that “[a]ll of the [BCU]'s property was dealt with by the Plan” and even “[a]ssuming that causes of action were preserved under the Plan and that they revested in [BCU] upon confirmation, the order confirming the … plan is res judicata as to all issues which were decided and which could have been decided before confirmation.” [Id. at 2383]. The blanket reservation of rights, the court concluded, was “insufficient to preserve … [any] state law claims against Newland.” [Id.] Along with its findings of fact and conclusions of law, the bankruptcy court entered on April 1, 2014, a Partial Summary Judgment in AP-128, concluding:

[T]here are no genuine issues of material fact in that the distributions made to Newland by [BCU] under [BCU]'s confirmed plan were not unauthorized, [BCU] has no assets of any kind or nature available for attachment or garnishment and that [BCU] is entitled to partial summary judgment as a matter of law on Branham's counterclaim.

[Filing No. 18-3, Branham App. 2385-86; see also id. at 2372-2384].

         Subsequently, Branham moved to take a Rule 30(b)(6) deposition of a BCU representative in an effort to collect on its judgment against Newland. The bankruptcy court determined that Newland's interest in BCU, a limited liability company, was personal property and thus subject to execution. However, the interest was limited by state law to “the economic rights and nothing more.” [Filing No. 18-4, Branham App. 2899]. The bankruptcy court's order of September 17');">17, 2014, reiterated its earlier determination “that all of BCU's assets were distributed under the confirmed plan, as stated in the plan, and that there were no other BCU assets to pursue or distribute as of the date of distribution to Newland.” [Filing No. 18-4, Branham App. 2901]. Because “the Plan unequivocally stated that all property of [BCU] was dealt with by the Plan, there was no property left to re-vest in [BCU].” [Id.]

         Furthermore, the court decided that even if BCU was holding claims of third parties that pre-dated the distributions to Newland, Newland had no claim or right to them because Newland released claim to any assets of BCU or interest in BCU, including equity interests, under the Plan. [Branham App. 2901-02; see also Filing No. 9-5, Branham App. 632]. The order reiterated that “the provisions of the confirmed plan were res judicata as to all issues which were decided and which could have been decided before confirmation, including whether BCU held causes [of] actions against Newland or other persons or entities.” [Filing No. 18-4, Branham App. 2905]. However, the bankruptcy court concluded if BCU held claims that arose after the Confirmation Order and asset distribution, it appeared that Newland could pursue them; but Branham had no right to directly pursue such claims or to direct Newland to do so. [Id. at 2902].

         The bankruptcy court rejected Branham's efforts to hold BCU in contempt for making $2.5 million in distributions to Newland before the expiration of the then-twenty-day stay under Bankruptcy Rule 3020(e). [Filing No. 18-4, Branham App. 2904-05]. The court gave several reasons for this, including that any argument about compliance with Rule 3020(e) was not an argument for Branham to make since it was not a creditor of Newland's at the time of confirmation and distribution. [Id. at 2905]. In conclusion, the court wrote that the Plan's provisions “are binding on Newland, and, as Newland's judgment creditor, Branham.” [Filing No. 18-4, Branham App. 2908].

         Meanwhile, on September 12, 2014, Branham had filed its Protective Action to Renew and Refresh the Confirmation Order And Stay Thereof Under Bankruptcy Rule 3020(e) (a complaint) in Adversary Proceeding No. 14-50168 (AP-168), seeking to renew and refresh the Confirmation Order and enforcement of the Bankruptcy Rule 3020(e) injunction. [Filing No. 9-1, Branham App. 14-16; Filing No. 23-1, Branham App. 5493-95]. The bankruptcy court directed the parties to brief the issue of Branham's standing to seek renewal. The parties did so, and BCU filed a motion to dismiss the complaint for failure to state a claim based, in part, on Branham's lack of standing.

         On April 1, 2015, in granting the motion to dismiss, the bankruptcy court explained that bankruptcy standing is “more exacting” than Article III standing as it requires a party “to have a pecuniary interest in the outcome of the bankruptcy proceeding.” [Filing No. 9-1, Branham App. 4]. In addition, a party must be “directly and adversely affected pecuniarily by a bankruptcy court order.” [Id.] The court decided that Branham was “not entitled to make an issue of any of the Confirmation Order's provisions” because Branham was not “among the group of entities for which the protections of § 1141 were intended” such as creditors, equity security holders, etc. [Filing No. 9-1, Branham App. 5-6]. The court also found that, as of confirmation of the plan, Branham “had no legally protected interest that it could assert directly against BCU, as proven by the disallowance of its claims and subsequent affirmance by the Seventh Circuit[.]” [Id. at 5]. The bankruptcy court further determined that the Confirmation Order “did not adversely and directly affect any pecuniary interest of Branham's.” [Id.]. Therefore, the court concluded that even taking every factual allegation in Branham's complaint as true, “there is no legal theory upon which Branham may recover and ‘renew' the Confirmation Order.” [Filing No. 9-1, Branham App. 6]. The court granted BCU's motion to dismiss for failure to state a claim and dismissed Branham's complaint in AP-168.

         On May 8, 2015, after hearing oral argument on the cross-motions for summary judgment, the bankruptcy court issued its Findings of Fact and Conclusions of Law on Cross Motions for Partial Summary Judgment in AP-128. [Filing No. 18-6, Branham App. 3518-48].[6] Both parties had moved for summary judgment on Count I of BCU's complaint-seeking an interpretation of court orders and a declaratory judgment based on that interpretation. Although BCU did not expressly seek summary judgment on Count II for sanctions, its prayer for relief asked for a finding that Branham willfully and intentionally violated the bankruptcy court's orders. Based on that, the bankruptcy court understood BCU as seeking partial summary judgment on Count II as to sanctions liability. [Filing No. 18-6, Branham App. 3525].

         The bankruptcy court again ruled it “had exclusive jurisdiction over BCU's assets, sale proceeds and distributions made under the confirmed plan.” [Id. at 3529]. It determined that the sale order of March 25, 2004, the Confirmation Order, the order disallowing Branham's claims, and the order on BCU's amended application to allow Newland's claim in the amount of approximately $4.1 million were final and non-appealable orders. [Filing No. 18-6, Branham App. 3529-33, 3544]. The bankruptcy court declared that “[a]ll of BCU's pre-petition property was dealt with under the plan and there were no additional pre-confirmation BCU assets to pursue or distribute as of the date of distribution to Newland, ” [id. at 3544], and reiterated that “[a]ll distributions under the plan were authorized.” [Id. at 3535].

         Furthermore, the court declared that “Branham was not and is not a creditor of BCU, ” Section 6.1 of the Plan did not require BCU to obtain a separate order directing payment to Newland, and the distribution to Newland shortly after confirmation of the plan was not a basis on which to hold BCU and Newland in contempt. [Filing No. 18-6, Branham App. 3545]. The court determined that Newland had waived any argument with respect to Rule 3020(e) and, if Newland could not raise Rule 3020(e), then Branham as Newland's judgment creditor, could not raise it either. [Id.] The court declared that the distributions made to Newland under the plan “were in full and final satisfaction, settlement and release and discharge as against BCU of any and all claims or interests in BCU; Newland expressly waived any pre confirmation claims against BCU and is permanently enjoined under Section 11.2 of the plan from asserting those claims;” “[t]he provisions of the confirmed plan were res judicata as to all issues which were decided and which could have been decided before the Confirmation Date, including whether BCU held causes of action against Newland or other persons or entities.” [Filing No. 18-6, Branham App. 3546]. Also, the court decided that Branham had knowledge of the factual allegations underpinning its claims and the claims BCU might have had against Newland or other persons as of the Confirmation Date….” [Filing No. 18-6, Branham App. 3546].

         Moreover, the bankruptcy court ruled that after BCU sold its assets to Whitestown on July 20, 2004, the IURC no longer had jurisdiction over BCU regarding issues related to management, capital structure or operation of the utility. [Filing No. 18-6, Branham App. 3532, 3536, 3546]. In addition, the court determined that the IURC interim orders were no longer viable because BCU was no longer operating a utility after July 20, 2004, and the IURC's “stand down” order stayed all proceedings involving BCU that were before the IURC. [Id. at 3536, 3546]. The bankruptcy court stated the Plan expressly preempted any otherwise applicable nonbankruptcy law that interfered with the Plan's implementation, such as Indiana law governing limited liability companies. [Filing No. 18-6, Branham App. 3537]. The court stated that the allegations in the 001 and 517');">17 cases “directly implicated the very essence of the confirmed plan-distribution[s] ….” [Id. at 3547]. The court found that Branham's “unreasonable and vexatious” conduct in both state court cases and in the bankruptcy court had been an abuse of the bankruptcy process and set a hearing on sanctions. [Id. at 3544].

         On August 14, 2015, after holding an evidentiary hearing, the bankruptcy court issued its Order on Sanctions in AP-128. [Filing No. 18-6, Branham App. 3640-48]. The court began by stating that “Branham has repeatedly attempted to circumvent the orders of this Court, including the confirmation order, to obtain access to funds distributed many years earlier.” [Filing No. 18-6, Branham App. 3641]. Although the bankruptcy court found the Plan to be “explicit” regarding preemption of the IURC orders, and despite Branham's participation in the bankruptcy and the IURC's “stand down” order, the court concluded that “Branham has repeatedly pressed [a] baseless position [that the Plan did not preempt enforcement of the IURC's interim orders] in both state and bankruptcy court.” [Id.]. The bankruptcy court found it “difficult to draw any conclusion other than Branham's repetitive attempts to argue baseless claims are the result of bad faith.” [Id. at 3642].

         The bankruptcy court found that Branham failed to disclose certain facts to the state court in the 001 Case, for example, the IURC had issued a “stand down” order. The court also found that Branham misrepresented the record in the 517');">17 Case, for example, by omitting mention of the IURC's “stand down” order and the disallowance of Branham's claims in the bankruptcy case. [Id. at 3642-43]. Branham, the court concluded, “crossed the line from exploring novel theories to harassment of BCU and manipulation of these proceedings to badger BCU.” [Id. at 3645]. Upon finding the evidence insufficient to show Branham disregarded the corporate form, the court declined BCU's request to hold Branham's sole shareholder, officer, and director George Pendygraft personally liable for sanctions. [Id. at 3646-48]. The court found a sanction of $38, 924 appropriate and ordered Branham to pay that sum to BCU's counsel. [Id. at 3648].

         These appeals of AP-168 and AP-128 followed and have been consolidated for a decision by this court.

         II. ...

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