Eastern Minerals & Chemicals v. Mahan

• Citation: 225 F.3d 330
• Decision Date: 23 August 2000
• Docket Number: No. 99-3320,99-3320
• Parties: (3rd Cir. 2000) EASTERN MINERALS & CHEMICALS CO.; CARY W. AHL, SR., Appellants v. GARY H. MAHAN
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 330

225 F.3d 330 (3rd Cir. 2000)

EASTERN MINERALS & CHEMICALS CO.; CARY W. AHL, SR., Appellants v. GARY H. MAHAN

No. 99-3320

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued February 3, 2000

Filed August 23, 2000

On Appeal from the United States District Court for the Middle District of Pennsylvania D.C. Civil No. 97-cv-01941, District Judge: Hon. William W. Caldwell

Counsel for Appellants: Dale E. Lapp, Esq. [ARGUED] 244 Butler Avenue Lancaster, PA 17601

Counsel for Appellees: James J. Kutz, Esq. [ARGUED] Kathleen Misturak-Gingrich, Esq. Eckert, Seamans, Cherin & Mellott 213 Market Street, 8th Floor Harrisburg, PA 17101

Before: MANSMANN, NYGAARD and RENDELL, Circuit Judges

OPINION FOR THE COURT

RENDELL, Circuit Judge.

Eastern Minerals & Chemicals Co., a creditor of Delta Carbonate Inc., appeals an order of the District Court precluding it from seeking recovery from Delta's sole shareholder, Gary Mahan, on an alter ego theory because Eastern should have pursued this claim in the context of Delta's bankruptcy case. We conclude that the District Court misapplied claim preclusion in this bankruptcy setting. Therefore, we will reverse the District Court's order granting Mahan's motion for summary judgment.

Eastern also appeals the District Court's denial of its motion to amend its complaint to add a RICO count against Mahan and to join other defendants believed to be jointly and severally liable. The District Court did not abuse its discretion in denying Eastern's motion, and therefore we will affirm as to that order.

We have jurisdiction to hear this appeal under 28 U.S.C. S 1291. We exercise plenary review over a district court's order granting summary judgment. See New Jersey Turnpike Authority v. PPG Indus., Inc., 197 F.3d 96, 104 (3d Cir. 1999).

Facts and Procedural History

Eastern was party to a sales agency contract with Bestone, Inc., a business in York, Pennsylvania that mined a quarry and produced calcium carbonate. In 1989, Delta acquired Bestone's assets and assumed Bestone's contracts, including the Eastern contract. Delta, which is solely owned by Mahan, was one of a group of companies owned or partially owed by Mahan, including Millington Quarry, Inc. and PenRoc, Inc. In January 1994, Delta and PenRoc both filed petitions for relief under chapter 11 of the Bankruptcy Code,¹ and Delta liquidated its assets in the context of its chapter 11 case.

Eastern actively participated in Delta's bankruptcy case by challenging various actions and decisions of Delta, consulting with other creditors, and exploring alternatives for maximizing its return. Eastern opposed Delta's proposed rejection of its sales agency contract with Eastern pursuant to 11 U.S.C. S 365 and sought reconsideration of the Bankruptcy Court's approval of the rejection, which also included a request for acknowledgment of an equitable lien on certain contracts. App. 437a-439a. Based on the rejection of its contract, Eastern filed a proof of claim for over $2.2 million in Delta's bankruptcy case, to which Delta objected. As discussed below, Eastern ultimately agreed by consent order to reduce its claim to $900,000. App. 674a.

Eastern was quite aggressive in challenging Delta and its dealings with affiliated entities at every turn of the bankruptcy case and repeatedly asserted that Delta had been used for the benefit of the affiliated companies, primarily Millington, to the detriment of Delta's creditors. Eastern circulated a draft application to disqualify Delta's counsel, asserting that he could not properly represent Delta in light of his representation of PenRoc, had not disclosed facts relevant to his representation as debtor's counsel, actively concealed facts, and arranged for employment of special counsel that was not disinterested by virtue of its prepetition claim against Delta. App. 405a. It also attempted to disqualify Delta's special counsel, asserting that counsel was a prepetition creditor of Delta and thus was not disinterested, and that counsel had an actual conflict of interest based on its representation of Millington. App. 452a-454a. Not only did Eastern object to Delta's request for appointment of appraisers and consultants in connection with the valuation and sale of Delta's assets, alleging that they were not disinterested because they previously had performed services for Millington, App. 27a, but it also objected to a proposed sale of Delta's assets, alleging that the sale was not proposed in good faith and that such a sale should go forward only in the context of a confirmed plan of reorganization. App. 254a-255a.

Eastern attached to its objection to the sale of Delta's assets a draft complaint seeking equitable subordination of certain claims of Millington and its primary lender Chemical Bank to the claims of Eastern and other unsecured creditors under section 510 of the Bankruptcy Code. App. 272a.² The committee of unsecured creditors ("Committee") also sought leave of court to file a complaint on behalf of the estate requesting, inter alia, equitable subordination of the claims of Millington and Chemical Bank.³ Both complaints allege that Millington and Chemical Bank obtained liens on Delta's assets without any lawful basis and improperly received $4.3 million in postpetition payments from Delta. App. 380a.⁴ Eastern did not seek to subordinate any claim held by Mahan himself,⁵ although the complaint included a description of how Mahan allegedly engaged in conduct causing Delta to prefer Millington over Delta's other creditors. App. 289a. These complaints were never filed, and there was never a final judgment on the merits of the putative equitable subordination dispute.

Eastern ultimately agreed to reduce its $2.2 million claim to $900,000 and withdrew its opposition to the sale of Delta's assets, and consented to the amendment of Delta's liquidating chapter 11 plan to provide a fund to pay unsecured creditors a portion of their claims. Eastern's pro rata distribution was slightly more than $380,000, approximately 42% of its $900,000 claim.

In October 1997, after Delta's bankruptcy case was closed, Eastern filed a complaint in the York County Court of Common Pleas naming Mahan as defendant. Eastern sought to recover $580,783.13, the remaining 58% of the $900,000 claim that Eastern did not receive from Delta by piercing the corporate veil on an alter ego theory. App. 649a.⁶ Eastern alleged that Mahan caused Delta to be undercapitalized, "pilfered" corporate opportunity, and acted to further his own personal ends, thereby abusing corporate privilege and breaching his fiduciary duty and his duty of loyalty.⁷ App. 650a, 668a. The complaint provides the following summary of the factual basis for Eastern's action:

By way of conclusory overview . . . Eastern contends that Mahan invested heavily in Delta in the late '80s, realized his investment was in trouble by the end of 1991, and spent the next several years designing and implementing a course of conduct calculated to shift the risk of loss from himself and other affiliated alter egos of Delta, to Eastern and other trade creditors. Mahan's manipulation began with garden variety pilfering of corporate opportunity and breach of fiduciary obligation, continued with highly inappropriate conversion of his equity investment to secured indebtedness at a time when the company was both undercapitalized and insolvent, and culminated in his use and abuse of the federal bankruptcy system to assure for himself and other alter egos, the benefit of the unconscionable advantage he had taken. Along the way he routinely ignored verbal commitments and acted in knowing and intentional violation of written agreements. Self dealing, misrepresentation, and deceit were the order of the day. Mahan continuously and unabashedly used Delta and other affiliated entities as the means for the achievement of personal ends. Especially as pertains to Eastern, an involuntary creditor of Delta, giving regard and effect to the corporate form of organization would result in perpetration of fraud, illegality, or injustice, would defeat public policy, and would render the entire theory of corporate existence useless.

App. 650a-651a. Specifically, Eastern's complaint contends that Delta was severely undercapitalized and that Mahan engaged in a pattern of improper conduct:

Among other things, prior to the filing of the Bankruptcy Case, Mahan (i) set up a competing company, violating the corporate opportunity doctrine, (ii) caused Delta to prefer Millington over other creditors, in violation of fiduciary responsibility, when he granted a blanket security interest in unencumbered assets in 1992, (iii) caused Delta to pay Millington, Rockcrest and other Affiliated Entities management, development, and administrative fees that were not bona fide fees; (iv) caused Delta to violate along with Penroc [sic.], the restrictive covenant assumed by Delta in connection with the Bestone transaction, and (v) caused Delta to mislead creditors with conflicting UCC filings and descriptions subject to Millington's security interest. During the pendency of the Bankruptcy Case, through his company's attorney, Mahan (i) treated the Affiliated Entities as though they were alter egos of each other and himself, (ii) misled gullible Committee counsel and the Bankruptcy Court to believe that Millington held a secured position justifying a post-petition payment (before plan confirmation) in the amount of $4.7 million, when in fact it did not, and (iii) made every decision entrusted to Delta as debtor-in-possession with a view toward promoting his own self interest, not the interest of the estate generally.

App. 669a-670a. In December 1997, the action was removed to the United States District Court for the Middle District of Pennsylvania.

Mahan filed a motion to dismiss Eastern's complaint on several grounds, including the affirmative defense of claim preclusion. App. 12a. The District Court...