Wte-S&S AG Enters., LLC v. GHD, Inc. (In re Wte-S&S AG Enters., LLC)

• Decision Date: 18 August 2017
• Docket Number: Adversary No. 16 A 00400,Bankruptcy No. 16 B 09913
• Citation: 575 B.R. 397
• Court: U.S. Bankruptcy Court — Northern District of Illinois
• Parties: IN RE: WTE–S & S AG ENTERPRISES, LLC, Debtor. WTE–S & S Ag Enterprises, LLC, Plaintiff, v. GHD, Inc. n/k/a DVO, Inc., Defendant.

575 B.R. 397

IN RE: WTE–S & S AG ENTERPRISES, LLC, Debtor.WTE–S & S Ag Enterprises, LLC, Plaintiff,

v.GHD, Inc. n/k/a DVO, Inc., Defendant.

Bankruptcy No. 16 B 09913

Adversary No. 16 A 00400

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed August 18, 2017

George P. Apostolides, Kellie Y. Chen, William A. Williams, Arnstein & Lehr LLP, Chicago, IL, for Plaintiff.

Patrick W. Brennan, Sara C. Mills, Crivello Carlson, S.C., Milwaukee, WI, Jordan Corning, Daniel J. McGarry, Jeffrey A. McIntyre, Husch Blackwell LLP, Madison, WI, David L. Kane, Meltzer Purtill & Stelle, Chicago, IL, for Defendant.

MEMORANDUM OPINION

Donald R. Cassling, United States Bankruptcy Judge

Debtor has sued defendant for breach of a contract to design and construct a "cow-manure digester." A cow-manure digester is a "green-energy" technology used on dairy farms to convert cattle waste into four economically valuable products: (1) methane and other biogases used to fuel an electricity generating machine, otherwise known as a "gen-set"; (2) the electricity generated thereby, which can either be used by the digester owner in helping to operate the digester or sold to the local power company; (3) liquid waste, which can be used as fertilizer by the fanner for the crops that he uses to feed his cattle; and (4) dried and biologically "clean" solids that can be used as sanitary and comfortable bedding for the farmer's cattle, thereby improving milk production and minimizing certain types of sores and other physical ailments that afflict dairy cows when using other types of bedding. Because the government wishes to encourage the use of green technologies, a fifth economic benefit of the digester is the generous subsidy that the government provides to companies using approved green technologies.

Anaerobic bacteria are the agents that break down cow manure into its constituent parts of biogas, liquid waste, and clean solids. Those bacteria require precise control of temperatures, pressures, and waste circulation in order to do their job. Those precise parameters can only be maintained if the digester has been properly designed and constructed.

Plaintiff, the Debtor herein, is the owner of the digester, a concrete vessel as large as a football field, together with related buildings and machinery located on a dairy farm in rural Wisconsin. Debtor has sued the designer and builder of the digester, claiming that the digester was improperly designed and constructed, depriving the plaintiff of the expected economic benefits of the digester and ultimately driving it into bankruptcy. Debtor therefore sued defendant, DVO, Inc.,¹ for breach of contract in Wisconsin state court, later removing that lawsuit to Bankruptcy Court.

The Court held an eight-day trial on the complaint, which concluded on March 2, 2017. The parties submitted proposed findings of fact and conclusions of law on April 7, 2017. For the reasons stated below, the Court rules partially in favor of Debtor, awarding damages in the sum of $65,961.86.

I. JURISDICTION

The federal district courts have "original and exclusive jurisdiction" of all cases under title 11 of the United States Code. 28 U.S.C. § 1334(a). The federal district courts also have "original but not exclusive jurisdiction" of all civil proceedings arising under title 11 of the United States Code, or arising in or related to cases under title 11. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with 28 U.S.C. § 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).

A bankruptcy judge to whom a case has been referred may enter final judgment on any proceeding arising under the Bankruptcy Code or arising in a case under title 11. 28 U.S.C. § 157(b)(1). Section 157(b)(2) contains a non-exhaustive list of "core proceedings" in which the bankruptcy court may enter a final order or judgment. 28 U.S.C. § 157(b)(2). By contrast, when the bankruptcy court has jurisdiction over a matter only because it is in some way "related to" the bankruptcy case, the court may not enter final judgment, but may only enter proposed findings of fact and conclusions of law. 28 U.S.C. § 157(c)(1). The proceedings in this latter category are known as "non-core" proceedings. Notwithstanding the provisions of § 157(c)(1), the Court can enter a final order in non-core proceedings with the consent of the parties. 28 U.S.C. § 157(c)(2) ; Wellness Int'l Network, Ltd. v. Sharif, ––– U.S. ––––, 135 S.Ct. 1932, 1939, 191 L.Ed.2d 911 (2015).

The complaint asserts a breach of contract claim against DVO under Wisconsin law. This claim neither arises under the Bankruptcy Code nor in a case under the Bankruptcy Code. Nonetheless, it "affects the amount of property available for distribution or the allocation of property among creditors" and is therefore sufficient to establish "related to" jurisdiction. Elscint, Inc. v. First Wis. Fin. Corp. (In re Xonics, Inc. ), 813 F.2d 127, 131 (7th Cir. 1987) ; see Chapman v. Charles Schwab & Co. (In re Chapman ), 269 B.R. 201, 206 (Bankr. N.D. Ill. 2001) ("[S]tate law claims that merely impact the distribution to creditors are ‘related’ noncore proceedings.") Therefore, the Court will treat the breach of contract claim as non-core.

Following the trial, the Court asked the parties to declare whether they would consent to this Court adjudicating the non-core claim in this adversary proceeding. Both parties gave their consent. (Tr. Vol. 7, 187:6–190:14.) As a result, the Court's findings of facts and conclusions of law constitute a final judgment on the merits.

II. PROCEDURAL HISTORY

On June 15, 2016, Debtor filed a notice to remove the litigation between it and DVO from the Circuit Court of Door County, Wisconsin to the United States Bankruptcy Court for the Eastern District of Wisconsin. (Dkt. No. 2, pp. 1–6.) On July 5, 2016, Debtor and DVO filed a stipulation to transfer the litigation to the United States Bankruptcy Court for the Northern District of Illinois. (Id. at pp. 95–98.) That same day, the Wisconsin Bankruptcy Court approved the transfer. (Id. at p. 99.)

III. BACKGROUND

A. Parties

1. Debtor and Related Parties

Debtor is a Wisconsin limited liability company formed in October of 2010. (Debtor Ex. No. 3 ). It owns the anaerobic digester system (the "Digester") located at S & S Ag Farm, 7900 Old Elm Road in Sturgeon Bay, Wisconsin (the "Farm").² (Trial Tr. Vol. 1, 71:9–15.)³ The sole member of Debtor is Sustainable Venture Partners, Energy Partners I, LLC ("SVP"), a limited liability company formed for the express purpose of investing in the Digester. (Id. at 72:1–14.) Jamie Philip is the managing partner of SVP, while Stephen Philip and Greg Crowther are the other partners. (Id. at 72:15–18; 74:9–21.)

2. Defendant and Related Parties

Defendant, DVO, Inc., designs and installs anaerobic digesters and has constructed more than one hundred digesters throughout the world. (Tr. Vol. 4, 115:9–14.) Steve Dvorak and his wife Melanie are the owners of DVO. (Id. at 51:7–l9; 52:4.)

Corey Brickl is the general manager of DVO. (Tr. Vol. 3, 191:19–22.) He provides initial engineering estimates for the projects designed and built by DVO. (Tr. Vol. 5, 34:24–35:6.) He also works with other DVO employees to help ensure that actual construction is implemented in accordance with the design. (Id. ) Adam Nackers is the project manager for DVO. (Tr. Vol. 3, 191:15–16; Tr. Vol. 4, 268:5–6.) As project manager, he oversees the installation of DVO's anaerobic digester systems, serves as the customer's primary point of contact during the construction process, interacts with contractors, and performs site inspections. (Tr. Vol. 4, 268:14–24.) Bradd Seegers is a project administrator for DVO. (Tr. Vol. 6, 197:5–7.) He prepares all of the grant applications to receive federal subsidies and manages the grant process. (Id. at 129:4–10.)

3. How Does the Digester Operate?

Chad Olsen,⁴ one of Debtor's expert witnesses, testified that an agricultural anaerobic digester system is designed to take manure produced at a dairy farm, and run it through a digester, where it is broken down into biogases, solid wastes and liquid wastes. (Tr. Vol. 3, 42:20–43:2.)

Farm workers collect the manure and funnel it into a reception pit, from which it flows into the Digester. (Id. at 61:24–62:11.) Once inside the Digester vessel, a combination of heat and bacteria break down the waste over a 20–30 day period, in the process producing methane and other biogases. (Id. at 47:6–23.) Steve Dvorak testified that the fermentation process in the Digester vessel heats the waste to 101–103 degrees Fahrenheit. (Tr. Vol. 4, 84:3–19.)

The biogas produced during fermentation rises into the headspace of the Digester, which is the space between the liquid waste in the digester and the roof of the Digester. (Tr. Vol. 3, 65:6–12.) From there, the biogas flows into pipes set into the Digester, where it is then directed to the gen-set to produce electricity.⁵ (Id. at 65:13–15.) The biogas produced from this process is sixty-sixty-five percent methane, the primary fuel used by the gen-set. (Id. at 62:12–24.)

There are different types of design for a digester. The Digester here is a two-stage plug-flow anaerobic digester system.⁶ (Id. at 46:14–47:2.) It consists of a rectangular vessel containing five separate chambers or zones to control the heat, pressure and mixing of the manure. (Id. at 114:9–19.) If the Digester produces excess biogas or the gen-set is not running, a flare bums the excess biogas, preventing it from escaping into the atmosphere. (Id. at 65:18–66:1.)

The waste mixture which remains at the end of the digestion process flows into the final chambers. These are dewatering units where the fermented manure is separated into solids...