Opinion
Case No. 03-67484
01-21-2015
In re: NICOLE ENERGY SERVICES, INC., Debtor.
Copies to: Default List Larry J. McClatchey, Chapter 11 trustee (electronically) Rick L. Ashton, Counsel for James A. Lowe (electronically) Robert C. Sanders, Law Office of Robert C. Sanders, 12051 Old Marlboro Pike, Upper Marlboro, MD 20772 Curtland Caffey, Co-Administrator of the Estate of Freddie L. Fulson, 5078 Harbor Blvd., Columbus, OH 43232-6281 S. Brewster Randall, II, Esq., Kincaid Randall & Craine, Co-Administrator of the Estate of Freddie L. Fulson, 2201 Riverside Drive, Columbus, OH 43221
NOT INTENDED FOR PUBLICATION
Chapter 11
MEMORANDUM OPINION AND ORDER REGARDING NES OHIO RICO CLAIMS
I. Introduction
This opinion and order addresses two questions relevant to a number of motions pending before the Court in the Chapter 11 case of Nicole Energy Services, Inc. ("NES"). First, were claims asserted against Columbia Gas Transmission, LLC ("TCO") and certain of its affiliates for damages allegedly sustained by NES ("NES Ohio RICO Claims") property of NES's bankruptcy estate? Second, did the trustee of NES's estate sell the NES Ohio RICO Claims to TCO? For the reasons explained below, the Court concludes that the answer to both questions is yes.
II. Procedural History
Approximately a year before his death, the late Freddie Fulson commenced a lawsuit in the Court of Common Pleas of Franklin County, Ohio ("State Court") captioned Freddie L. Fulson v. Columbia Gas Transmission, LLC, et al., Case No. 13-CV-000972 ("2013 State Court Case"). In the 2013 State Court Case, which was filed on his behalf by attorneys Robert C. Sanders and James A. Lowe, Fulson asserted, among other causes of action, the NES Ohio RICO Claims, alleging that TCO and certain of its affiliates had violated the Ohio Corrupt Practices Act ("OCPA"). After Fulson's death, the Estate of Freddie L. Fulson was substituted as the plaintiff in the 2013 State Court Case. See Notice of Substitution of Plaintiff in State Court Litigation (Doc. 691). Curtland Caffey and S. Brewster Randall, II are the co-administrators of Fulson's estate ("Co-Administrators"). The Court has entered an agreed order ("Agreed Order") (Doc. 709) and a supplemental agreed order ("Supplemental Agreed Order") (Doc. 713) by which Sanders, Lowe, Larry McClatchey, in his capacity as the trustee of NES's bankruptcy estate, and Randall, in his capacity as one of the Co-Administrators of Fulson's estate, have stipulated that the questions set forth above "are ripe for legal determination and should be ruled upon prior to any other determinations of this Court." Agreed Order at 2; Supplemental Agreed Order at 2.
Four motions are pending before the Court: (1) McClatchey's Motion for Order Requiring Robert C. Sanders to Show Cause Why He Should Not Be Found in Contempt for Violating Rules of this Court ("Show Cause Motion") (Doc. 659); (2) McClatchey's Motion for Order Requiring Fulson to Dismiss State Court Litigation ("Injunction Motion") (Doc. 660); (3) Sanders's motion for leave to file a motion to strike the Show Cause Motion and the Injunction Motion (Doc. 674); and (4) Sanders's motion for a protective order (Doc. 682). The Show Cause Motion and the Injunction Motion seek injunctive relief that typically can be obtained only through an adversary proceeding. See Fed. R. Bankr. P. 7001(7). Nonetheless, the parties have agreed that, after the Court rules on the two questions presented, it may adjudicate the four pending motions, including the Show Cause Motion and the Injunction Motion, without the commencement of adversary proceedings. Agreed Order at 2; Supplemental Agreed Order at 2.
III. Jurisdiction and Constitutional Authority
The questions before the Court are whether the NES Ohio RICO Claims were property of NES's estate and whether McClatchey sold the NES Ohio RICO Claims to TCO in accordance with the Court's order ("Sale Order") approving the asset purchase agreement between McClatchey and TCO ("APA"). Because the Court will enter orders ruling on the pending motions based on its decision on those two questions, the Court must first determine whether it has the jurisdiction and constitutional authority to decide those threshold issues and enter final orders on them.
Before his death, Fulson argued that the Court lacks jurisdiction to order him to dismiss the NES Ohio RICO Claims, see Resp. to Inj. Mot. (Doc. 670) at 8-10, an argument adopted by the Co-Administrators pursuant to an order ("Substitution Order") (Doc. 711) the Court entered that both substituted the Co-Administrators as the respondents to the Injunction Motion and provided that McClatchey's "request for relief and all defenses and objections previously asserted on behalf of Freddie L. Fulson are deemed to have been asserted against and objected to by Co-Administrators." Substitution Order at 2.
Jurisdiction over bankruptcy cases derives from the combined effect of: (1) two provisions of the Judicial Code—28 U.S.C. § 1334(a) (stating that "the district courts shall have original and exclusive jurisdiction of all cases under title 11 [i.e., the Bankruptcy Code,])" and 28 U.S.C. § 157(a) (stating that "[e]ach district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district [,]")—and (2) the general order of reference that has been entered in the Southern District of Ohio pursuant to 28 U.S.C. § 157(a). In turn, § 1334(b) of the Judicial Code sets forth three categories of civil proceedings over which the district courts (and the bankruptcy courts by reference) have original, but not exclusive, jurisdiction: (1) those "arising under title 11," (2) those "arising in" bankruptcy cases and (3) those "related to" such cases. 28 U.S.C. § 1334(b). "The phrase 'arising under title 11' describes those proceedings that involve a cause of action created or determined by a statutory provision of title 11[.]" Michigan Emp't Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1144 (6th Cir.1991). Under the statutory framework set forth in § 1334(b), bankruptcy courts clearly have jurisdiction to decide whether property is property of the estate. See Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396, 401 (4th Cir. 1992). At least one court has stated that bankruptcy courts have jurisdiction to determine whether property is property of the estate because "[a] bankruptcy estate is a construct of Section 541, and thus a proceeding to determine the bounds of the estate 'arises under' Title 11[.]" Kraken Invs. Ltd. v. Jacobs (In re Salander-O'Reilly Galleries, LLC), 475 B.R. 9, 29 (S.D.N.Y. 2012). At the very least, because there can be no property of a bankruptcy estate until the bankruptcy case is filed, the issue of whether property is property of the estate "has no existence outside bankruptcy," id., and therefore presents a matter "'[a]rising in' [bankruptcy] proceedings[,] [i.e.] those that, by their very nature, could arise only in bankruptcy cases." Wolverine Radio, 930 F.2d at 1144.
Similarly, matters requiring bankruptcy courts to interpret their own orders "arise in" the bankruptcy case, and bankruptcy courts therefore have jurisdiction to interpret their own orders on that basis. See Bavelis v. Doukas (In re Bavelis), 453 B.R. 832, 853 (Bankr. S.D. Ohio 2011) ("An example of a proceeding arising in a bankruptcy case is a motion requesting that a bankruptcy court interpret or enforce its own order."); NWL Holdings, Inc. v. Eden Ctr., Inc. (In re Ames Dep't Stores, Inc.), 317 B.R. 260, 269 (Bankr. S.D.N.Y. 2004) ("[C]ases in this district have stated that a claim 'arises in' bankruptcy if, by its very nature, the claim can only be brought in a bankruptcy case because it has no existence outside of bankruptcy. Other decisions (including two at the court of appeals level) have stated it more broadly—that a proceeding 'arises in' a bankruptcy case when it would have no practical existence but for the bankruptcy. Efforts to implement, gain the fruits of, and to enforce orders of the bankruptcy court are all in this category. Discussions of 'related to' jurisdiction, a wholly separate jurisdictional basis, are irrelevant to an 'arising in' jurisdiction inquiry.") (footnotes omitted).
The Court therefore has jurisdiction to decide the two issues presented under 28 U.S.C. §§ 157(b) and 1334 and the general order of reference entered in this district. Furthermore, because both issues presented either arise under the Bankruptcy Code or arise in NES's bankruptcy case, these are core proceedings under 28 U.S.C. § 157(b). See Stern v. Marshall, —U.S.—, 131 S. Ct. 2594, 2603, 2605 (2011) ("Bankruptcy judges may hear and enter final judgments in 'all core proceedings arising under title 11, or arising in a case under title 11.' § 157(b)(1). . . . Under our reading of the statute, core proceedings are those that arise in a bankruptcy case or under Title 11.").
The Court also must evaluate whether it has the constitutional authority to determine these two issues post-Stern. It does, because both issues "stem[] from the bankruptcy itself[,]" and the Court is not ruling on these issues in the context of an adjudication of a common law claim brought to augment the bankruptcy estate. Stern, 131 S. Ct. at 2618. The Court accordingly has the constitutional authority to determine whether the NES Ohio RICO Claims were property of NES's estate. See Murphy v. Felice (In re Felice), 480 B.R. 401, 418 (Bankr. D. Mass. 2012) (holding that an action under § 541 to determine whether an interest of the debtor is property of the estate stems from the bankruptcy itself and "does not augment the estate"). Likewise, the Court has the constitutional authority to decide whether McClatchey sold the claims to TCO in accordance with the Sale Order and the APA approved by that order. See Trusky v. Gen. Motors Co. (In re Motors Liquidation Co.), No. 12-09803, 2013 WL 620281, at *12 (Bankr. S.D.N.Y. Feb. 19, 2013) ("I plainly have the constitutional power, even after Stern v. Marshall . . . to interpret and enforce my [§ 363] Sale Order, and the underlying agreements which I authorized in connection with that order . . . . "). Vested with the jurisdiction and constitutional authority to adjudicate this dispute, the Court turns to the questions presented.
IV. Legal Analysis
The Court previously issued an opinion addressing whether claims Fulson asserted in the 2013 State Court Case based on damages allegedly sustained by NES's affiliate, Nicole Gas Production, Ltd ("NGP"), were property of NGP's Chapter 7 bankruptcy estate. See In re Nicole Gas Prod., Ltd., 519 B.R. 723 (Bankr. S.D. Ohio 2014) ("NGP"). Defining those claims as the "NGP Ohio RICO Claims," the Court held in NGP that the claims were property of NGP's estate under § 541(a)(1) of the Bankruptcy Code, which makes "all legal or equitable interests of the debtor in property as of the commencement of the case"—including prepetition causes of action—property of a debtor's estate. 11 U.S.C. § 541(a)(1).
The Court's analysis in NGP, see NGP, 519 B.R. at 736-55, applies with equal force here. As explained in NGP, beginning in 2001, TCO and three of its affiliates (together with TCO, the "Columbia Gas Entities") were involved in litigation in the State Court in which the Columbia Gas Entities and the Fulson-affiliated entities asserted claims against one another ("2001 State Court Case"). Before the trial in the 2001 State Court Case began, the Columbia Gas Entities filed an involuntary petition for relief under Chapter 7 of the Bankruptcy Code against NES on November 14, 2003 ("Petition Date"). Following the Petition Date, NES filed a voluntary Chapter 11 petition and became a Chapter 11 debtor. The Columbia Gas Entities then sought—and NES agreed to—the appointment of a Chapter 11 trustee. The Court ordered the appointment of a trustee, the United States Trustee appointed McClatchey as the trustee, and the Court approved McClatchey's appointment. See id. at 728. At that point, only McClatchey in his capacity as the Chapter 11 trustee had the right to assert causes of action belonging to NES's estate, including the NES Ohio RICO Claims, to the extent they were property of the estate. See id. at 737-38, 743.
NGP's findings of fact and conclusions of law are incorporated by reference into this opinion and order.
Those claims were property of NES's estate. The NES Ohio RICO Claims are predicated on a purported "illegal scheme"' that allegedly began in December 1999 and was still ongoing when—before the Petition Date—NES ceased operations in September 2002. See id. at 730-31. Because the NES Ohio RICO Claims sought damages solely in Fulson's capacity as the indirect equity owner of NES on account of injuries allegedly sustained by NES, under Ohio law it was NES alone—not Fulson—that had the right to assert those claims before the Petition Date, just as only NGP had the right to assert the NGP Ohio RICO Claims prior to NGP's bankruptcy. See id. at 737. And because the NES Ohio RICO Claims belonged to NES on the Petition Date, they became property of NES's Chapter 11 estate under § 541(a)(1). See id. at 736-55.
See id. at 730, 732, 734. Fulson was the owner of another company that owned the equity in NES. See id. at 728. --------
True, Fulson alleged in the 2013 State Court Case that the scheme purportedly perpetrated by the Columbia Gas Entities encompassed events that by definition could have occurred only after the Petition Date—the Columbia Gas Entities' alleged postpetition solicitation of third parties to join as involuntary bankruptcy petitioners, their request to appoint a Chapter 11 trustee, and TCO's efforts to settle with McClatchey the claims NES had against the Columbia Gas Entities for less than the amount Fulson believed they were worth. See id. at 731. But this does not mean, as Fulson and his attorneys have suggested, that the NES Ohio RICO Claims accrued only when McClatchey settled NES's claims against the Columbia Gas Entities and sold them to TCO. The gravamen of the NES Ohio RICO Claims is that, prior to the Petition Date, the Columbia Gas Entities violated the OCPA when they used interstate mail and wire communications in order to credit NES with less natural gas than it injected into the Columbia Gas Entities' system and to misappropriate and fail to transport NES's natural gas. See id. at 730-33. Assuming for the sake of argument only that the Columbia Gas Entities engaged in such violations and that injury occurred to NES as a result, the injury occurred before the Petition Date when the Columbia Gas Entities engaged in the violations, not at the time McClatchey sold NES's claims to TCO. This fact is sufficient to "root" the NES Ohio RICO Claims in NES's pre-bankruptcy past and thereby make them property of NES's estate under § 541(a)(1). See Tyler v. DH Capital Mgmt., Inc., 736 F.3d 455, 462 (6th Cir. 2013). And where injury to a debtor occurs before the commencement of its bankruptcy case, the "entire cause of action [based on that injury] is property of the estate, even if further post-petition damages were incurred." Id. Thus, assuming again for the sake of argument only that additional injury occurred to NES after the Petition Date, the NES Ohio RICO Claims would nonetheless be property of the estate in their entirety.
Moreover, even if Fulson and his attorneys were correct that the NES Ohio RICO Claims accrued after the Petition Date, the claims would have been acquired by NES's Chapter 11 estate and therefore would be property of the estate under § 541(a)(7), which makes "[a]ny interest in property that the estate acquires after the commencement of the case" property of a debtor's estate. 11 U.S.C. § 541(a)(7). See Richman v. Garza (In re Richman), No. 96-2156, 1997 WL 360644, at *2 (4th Cir. July 1, 1997) ("[The debtor] conten[ds] . . . that . . . she did not suffer an injury until after the Chapter 11 petition was filed[,] [arguing] that she suffered no recognizable injury until the bankruptcy proceeding exceeded the appellees' prediction of a quick and simple experience. Thus, [the debtor] argues that at least a portion of her malpractice claim did not accrue at a time which would place it within the bankruptcy estate. . . . [A]ssuming that [her] allegations give rise to a possible malpractice claim, and further assuming the injury did occur post petition, such a cause of action is still characterized as property of the estate under section 541(a)(7) (estate includes 'any interest in property that the estate acquires after the commencement of the case')."). For all the reasons stated above, the Court answers the first question presented to it in the affirmative: the NES Ohio RICO Claims were property of NES's bankruptcy estate.
As to the second question presented, the Court concludes that McClatchey did in fact sell the NES Ohio RICO Claims to TCO. In his capacity as the Chapter 11 trustee of NES's estate, McClatchey filed a motion ("Sale Motion") (Doc. 286) seeking approval of the APA both as a sale of NES's claims against the Columbia Gas Entities to TCO under § 363(b) of the Bankruptcy Code and as a settlement of those claims under Rule 9019 of the Federal Rules of Bankruptcy Procedure.
The APA, which is attached as Exhibit A to the Sale Motion, defined the assets to be sold ("Assets") as including:
any and all claims, demands, and causes of action of NES against [the Columbia Gas Entities] arising from the beginning of time to the date hereof, including, but not limited to, any claims of NES that are or could have been asserted by NES in the [2001] State Court Case . . . .APA § 1.01.
Following notice to parties in interest and after a lengthy evidentiary hearing, the Court approved the Sale Motion and the APA, including McClatchey's sale of the Assets to TCO. See In re Nicole Energy Servs., Inc., 385 B.R. 201, 236 (Bankr. S.D. Ohio 2008). After the Sale Order became a final, nonappealable order, McClatchey filed a report (Doc. 480) stating that the transactions contemplated by the APA had closed. Because the APA's definition of "Assets" included "any and all claims, demands, and causes of action of NES against [the Columbia Gas Entities] arising from the beginning of time to the date" of the APA (including claims that were or "could have been asserted by NES in the [2001] State Court Case"), and because, as explained above, the NES Ohio RICO Claims arose before the date of the APA, the APA's definition of Assets encompassed the NES Ohio RICO Claims. Accordingly, the Court concludes that McClatchey sold the NES Ohio RICO Claims to TCO.
V. Conclusion
For the foregoing reasons, the Court determines that the NES Ohio RICO Claims were property of NES's bankruptcy estate and that, in his capacity as the trustee of NES's estate, McClatchey sold the NES Ohio RICO Claims to TCO.
IT IS SO ORDERED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
John E. Hoffman, Jr.
United States Bankruptcy Judge Dated: January 21, 2015 Copies to: Default List
Larry J. McClatchey, Chapter 11 trustee (electronically)
Rick L. Ashton, Counsel for James A. Lowe (electronically)
Robert C. Sanders, Law Office of Robert C. Sanders,
12051 Old Marlboro Pike, Upper Marlboro, MD 20772
Curtland Caffey, Co-Administrator of the Estate of Freddie L. Fulson, 5078 Harbor Blvd.,
Columbus, OH 43232-6281
S. Brewster Randall, II, Esq., Kincaid Randall & Craine, Co-Administrator of the Estate of
Freddie L. Fulson, 2201 Riverside Drive, Columbus, OH 43221