American Prairie Const. Co. v. Hoich

• Decision Date: 24 March 2009
• Docket Number: No. 08-1292.,No. 08-1288.,No. 08-1394.,08-1288.,08-1292.,08-1394.
• Citation: 560 F.3d 780
• Parties: AMERICAN PRAIRIE CONSTRUCTION COMPANY, formerly known as North Central Construction, Inc., Appellee/Cross-Appellant, v. John HOICH, Appellant/Cross-Appellee, v. Tri-State Financial, LLC, Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

560 F.3d 780

AMERICAN PRAIRIE CONSTRUCTION COMPANY, formerly known as North Central Construction, Inc., Appellee/Cross-Appellant, v. John HOICH, Appellant/Cross-Appellee, v. Tri-State Financial, LLC, Appellant/Cross-Appellee.

No. 08-1288.

No. 08-1292.

No. 08-1394.

United States Court of Appeals, Eighth Circuit.

Submitted: November 12, 2008.

Filed: March 24, 2009.

David L. Nadolski, argued, Nicole Nachtigal Emerson, on the brief, Sioux Falls, SD, for appellant Tri-State.

Stuart T. Williams, argued, Minneapolis, MN, Eugene R. Robinson, on the brief, Sioux Falls, SD, Court J. Anderson, on the brief, Minneapolis, MN, for appellant Hoich.

Patrick J. Lee-O'Halloran, argued, Minneapolis, MN, Marvin T. Fabyanski, on the brief, Minneapolis, MN, Ronald J. Hall, on the brief, Aberdeeb, SD, for appellee American Prairie Construction.

Before MURPHY, RILEY, and GRUENDER, Circuit Judges.

RILEY, Circuit Judge.

Tri-State Financial, LLC (TSF) and John Hoich (Hoich) appeal the district court's finding that TSF and Hoich were parties to a binding settlement agreement formed with North Central Construction, Inc. (NCC)¹ on June 21, 2004, during bankruptcy proceedings for Tri-State Ethanol (TSE). The district court found TSF and Hoich breached the agreement and were jointly and severally liable to NCC in the amount of $2.5 million. For reasons discussed below, this opinion addresses only Hoich's claims on appeal, and we reverse the district court's judgment as to Hoich.

I. BACKGROUND

A. Tri-State Ethanol Bankruptcy Proceedings

Throughout 2001, NCC built an ethanol plant in Rosholt, South Dakota. Although TSE was the plant owner, NCC retained a $1 million equity interest in the plant. The plant began operations in 2002, but was not profitable. When TSE failed to pay NCC for construction of the plant, NCC filed a mechanic's lien against the property on December 31, 2002, and initiated foreclosure proceedings in South Dakota state court. On that same date, an explosion occurred at the plant while the plant was shut down for repairs. TSE claimed it was unable to obtain further financing for the plant due to NCC's mechanic's lien, and in May 2003, TSE filed a Chapter 11 bankruptcy petition in the Bankruptcy Court for the District of South Dakota. NCC's state foreclosure action was stayed by the bankruptcy petition filing. In the course of the bankruptcy proceedings, TSE listed NCC as an unsecured nonpriority creditor with a claim consisting of $1,712,253 for construction costs. In response, NCC filed an adversary action in the bankruptcy court on July 14, 2003, to determine the validity, priority, and extent of its liens, claiming a priority secured claim for unpaid construction fees in the amount of $3,611,883.

In June 2003, a group of investors formed TSF, a shell-corporation which was designed solely to provide funding to TSE in an effort to return the ethanol plant to operation. On September 25, 2003, TSE filed a motion in the bankruptcy action seeking court approval of post-petition financing, in which TSF would provide TSE with $2 million for plant improvements, but only if TSF's financing would be treated as a secured priority claim. On October 22, 2003, TSE's motion was heard in the bankruptcy court. In support of the post-petition financing motion, Hoich, an investor in both TSE and TSF, testified he had a net worth of $25 to $30 million and he could personally guarantee funds for the planned improvements, if his investment were given priority. Hoich clarified, however, he was only willing to guarantee funding for future improvements, and not for the payment of other creditors, adding he personally already had lost $2.5 million. The bankruptcy court denied the motion on December 12, 2003. Nevertheless, TSF provided funds to TSE for plant improvements without the bankruptcy court's knowledge.

In March 2004, TSE filed a Modified Chapter 11 Plan. NCC, along with creditor Interstate Electric and Engineering Company (Interstate), objected to their treatment under the plan. The plan provided NCC's construction claim would be treated as a Class 12 unsecured non-priority claim to be paid over 10 years, and NCC's $1 million equity claim would receive no distribution. TSF contends NCC and Interstate's opposition was the major hurdle to confirmation of the modified plan.

B. Settlement Discussions

After TSE filed its modified plan, the United States Bankruptcy Trustee (Trustee) filed a motion to dismiss the Chapter 11 bankruptcy, or in the alternative, to convert the Chapter 11 to a Chapter 7 bankruptcy. A hearing was scheduled for June 21, 2004, to address plan confirmation and the motion to dismiss. The scheduled hearing prompted a meeting on June 14, 2004, between TSF representatives Hoich, David Ruback (Ruback), Joe Vacanti, and others, and NCC representatives Peter Rudeen (Rudeen), NCC's CEO, and Ace Brant, NCC's owner. Hoich represented TSF in the settlement discussions. TSF's goal was to negotiate an agreement in which TSF could purchase NCC's claims against the bankruptcy estate, eliminating objections to the modified plan and allowing the plan to be approved at the June 21, 2004 hearing. No agreement was reached on June 14, 2004.

Hoich and Rudeen continued settlement negotiations in a series of telephone conversations between Friday, June 18, through Sunday, June 20, 2004. Hoich was in close contact with other TSF representatives during this time, including Ruback, TSF's manager at the time, and James Jandrain (Jandrain), a certified public accountant who performed many services for TSF throughout the bankruptcy proceedings. After Hoich spoke with Ruback and Jandrain, they decided Hoich would offer NCC $2.5 million in exchange for NCC's claims and interests in TSE. Hoich offered Rudeen this deal on the evening before the confirmation hearing, but it was not made clear who would provide the funds. The following morning, June 21, 2004, shortly before the hearing commenced, Rudeen called Hoich and accepted the offer.

Hoich did not attend the June 21 hearing. Several other TSF representatives traveled from Omaha, Nebraska, to Sioux Falls, South Dakota, for the hearing, including Ruback, Jandrain, and TSF's newly hired attorney, Jerrold Strasheim (Strasheim). Before the hearing, TSF representatives met with NCC attorney Ron Hall (Hall) and others to discuss how the settlement should be structured. Interstate representatives were also present for the discussions. Throughout the meeting, Hall took notes on a legal pad and passed the notes around for others to review.

Shortly after the meeting, the confirmation hearing commenced. Hall read his notes into the record and indicated, with no objection, that his notes represented the settlement agreement among TSF, Interstate, and NCC. Several parties were present, including at least sixteen attorneys, and a significant amount of confusion existed about the terms of the agreement. Strasheim, newly representing TSF, seemed confused about who he was representing in the course of the hearing, stating, "Your Honor, on behalf of Interstate, I would say that that is the deal." Strasheim was then interrupted and reminded he was representing TSF, not Interstate. At another point in the proceeding, Hall stated Strasheim did not represent Hoich, "but it [was his] understanding that Mr. Hoych [sic] personally committed to this deal," and added, "Jandrain is here to confirm that." Jandrain, who was in the gallery, was never asked to confirm whether Hoich had agreed to be bound personally under the settlement agreement.

The terms of the "settlement agreement" read into the record cannot easily be summarized. TSF agreed to purchase the various claims of NCC and Interstate for $2.5 million, with $475,000 payable to Interstate. The alleged agreement also contained provisions stating NCC and Interstate would not object to TSE's plan confirmation. The reading detailed which claims were being purchased and from which class the claims could be found in TSE's Chapter 11 bankruptcy plan. There was also a provision allowing Interstate to retain one of its claims which was to be paid by TSE's bankruptcy estate over a period of three years.

At the conclusion of the June 21, 2004 hearing, the bankruptcy court requested an amended plan be filed by June 25, 2004, in an effort to expedite the process. The court scheduled a confirmation hearing for the amended plan on July 28, 2004. Before the confirmation hearing took place the parties began to discuss the settlement agreement, and to exchange drafts of proposed documents, in an effort to memorialize the settlement discussed during the June 21, 2004 hearing. Conflicts arose when TSF claimed the agreement was subject to confirmation of the amended plan. NCC vehemently denied the existence of such a condition. In the meantime, TSF raised $2.5 million from investors and deposited the money into a trust account with Strasheim's law firm. Hoich did not contribute to these funds.

When NCC and TSF failed to agree on the written terms for the formal agreement, NCC filed a motion on July 14, 2004, asking the bankruptcy court to enforce the June 21, 2004 agreement. NCC and Interstate also filed new objections to plan confirmation and ballots rejecting the modified plan in the event TSF failed to perform under the agreement. The motion to approve the settlement agreement and the motion to confirm the modified plan were heard on July 27, 2004.

Shortly before the hearing, NCC attempted to perform its obligations under the "settlement agreement" by tendering to TSF an assignment of its claims against, and its interests in, TSE. TSF and Hoich declined to accept the tendered assignment and refused to pay NCC. When the hearing convened, TSE and TSF did not pursue confirmation of TSE's modified plan, but instead, joined in a pending motion by the Trustee asking the court to dismiss the Chapter 11 proceedings. The bankruptcy court denied the motion to dismiss...