American Prairie Const. Co. v. Tri-State Financial

• Court: U.S. District Court — District of South Dakota
• Writing for the Court: Kornmann
• Citation: American Prairie Const. Co. v. Tri-State Financial, 529 F.Supp.2d 1061, 2007 DSD 29 (D. S.D. 2007)
• Decision Date: 27 December 2007
• Docket Number: No. CIV. 04-1016.,CIV. 04-1016.
• Parties: AMERICAN PRAIRIE CONSTRUCTION CO., formerly known as North Central Construction, Inc., Plaintiff, v. TRI-STATE FINANCIAL, LLC, and John Hoich, Defendants.

529 F.Supp.2d 1061

2007 DSD 29

AMERICAN PRAIRIE CONSTRUCTION CO., formerly known as North Central Construction, Inc., Plaintiff, v. TRI-STATE FINANCIAL, LLC, and John Hoich, Defendants.

No. CIV. 04-1016.

United States District Court, D. South Dakota, Northern Division.

December 27, 2007.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Patrick J. O'Halloran, Marvin T. Fabyanske, Fabyanske, Westra & Hart, PA, Minneapolis, MN, Ronald J. Hall, Hall Law Firm, Aberdeen, SD, for Plaintiff.

Eugene R. Robinson, Sioux Falls, SD, Court Anderson, Jane E. Rydholm, Stuart T. Williams, Henson & Efron, Minneapolis, MN, for Defendant John Hoich.

David L. Nadolski, Nicole Nachtigal Emerson, Thomas J. Hart, Lynn, Jackson, Schulz & LeBrun, Sioux Falls, SD, for Defendant Tri-State Financial, LLC.

OPINION AND ORDER

KORNMANN, District Judge.

[¶ 1] Plaintiff instituted this action for the alleged breach of a contract negotiated during the course of bankruptcy proceedings involving Tri-State Ethanol Company of Rosholt, South Dakota ("TSE"). The matter came on for trial to the court on August 1, 2007. The following constitutes the court's findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52.

[¶ 2] North Central Construction Co. ("NCC") entered into a contract with TSE to build an ethanol plant in Rosholt, South Dakota. NCC is now known as American Prairie Construction Co. by virtue of a sale and acquisition of stock. The plaintiff will nevertheless be referred to as NCC.

[¶ 3] NCC was also an equity investor in the plant, having contributed $1 million.

[¶ 4] Additional investors in the plant included a group known as the "Omaha group." Defendant John Hoich ("Hoich") was a member of the "Omaha group" who personally provided at least $200,000 of equity funds to build the plant.

[¶ 5] Radio Engineering Industries ("REI"), also a member of the "Omaha group," invested at least $200,000 in TSE. David Ruback ("Ruback"), the president of REI, was responsible for that investment. Ruback was on the board of directors of TSE.

[¶ 6] The ethanol plant began operations in 2002 but was not profitable. A decision was made to retrofit the plant to make it profitable.

[¶ 7] NCC had not been paid and filed mechanic's liens against the property. On December 31, 2002, NCC filed an action in Roberts County, South Dakota, to foreclose the mechanic's liens. NCC moved to compel arbitration pursuant to the construction contract. TSE resisted and filed a motion to stay arbitration which was granted. NCC appealed and its appeal and lien foreclosure actions were stayed by the subsequent filing of a bankruptcy petition by TSE.

[¶ 8] On December 31, 2002, while the plant was shut down for repairs and scheduled revisions, an explosion occurred at the plant.

[¶ 9] TSE, filed a Chapter 11 bankruptcy petition on May 23, 2003, No. 03-10194. TSE did not list NCC as a secured creditor on its schedules but instead listed NCC as an unsecured nonpriority claim in the amount of $1,712,253 for construction costs.

[¶ 10] In June of 2003, the "Omaha group" assigned their pre-petition equity interests in TSE to a company known as Tri-State Financial, LLC ("TSF"). The members of the LLC include Hoich who owned 8% of the LLC. REI also invested $200,000 in TSF. Between 2004 and 2006, REI had invested between $800,000 and $ 1 million in TSF. Ruback was one of the five managers of TSF.

[¶ 11] TSF was formed to provide a vehicle to loan funds to TSE for use in re-engineering and reconstruction of the plant. This information was communicated to the creditors, including NCC, by virtue of a disclosure statement filed along with a plan of reorganization on December 31, 2003.

[¶ 12] On July 14, 2003, NCC filed an adversary action in the bankruptcy court to determine the validity, priority, and extent of its liens (Adversary No. 03-1032). NCC claimed unpaid construction fees in the amount of $3,611,883 against the bankruptcy estate, which claim NCC contends is a priority secured claim by virtue of a statutory mechanic's lien which attached as of October 12, 2000, such being the date the first item of labor or materials was furnished by NCC. It is a well known principle of law that a mechanic's lien, even though filed later, attaches as of the date the contractor furnishes the first item of labor or materials. TSE included NCC's $1,000,000 equity interest in its list of equity holders filed August 13, 2003.

[¶ 13] On September 25, 2003, TSE filed a motion in the bankruptcy action, seeking approval of an agreement for post-petition financing whereby TSF would provide $2 million to make the plant a "20 million gallon" plant in exchange for its post-petition financing being considered a secured priority claim.

[¶ 14] On October 22, 2003, the motion came on for hearing in Pierre, S.D. Hoich testified at that hearing that TSF was only a "shell" corporation — it had no source of funds other than from its investors. Hoich testified that he was worth between $25 and $30 million and he could guarantee that funds would be available for TSF to invest in the plant. He stated that there was no written agreement requiring him to make funds available to TSF other than his "swear oath."

[¶ 15] Bankruptcy Judge Hoyt denied the motion on December 12, 2008. Nonetheless, TSF did extend funds to TSE for the purposes proposed to Judge Hoyt and for day to day expenses. This was done without Judge Hoyt's knowledge.

[¶ 16] TSE filed a proposed plan for reorganization on December 31, 2003. A modified plan was filed on March 2, 2004. The modified plan provided for the payment of NCC's construction claim as a Class 12 unsecured non-priority claim to be paid over 10 years. Its $1 million equity claim was classified by TSE as a Class 18 claim, which claims were to receive no distribution under the plan. NCC filed an objection to the amended plan. Murphy Brothers and Interstates Electric, a sub-contractor of NCC, also filed objections.

[¶ 17] The United States Trustee filed a motion to dismiss the Chapter 11 case or convert it to a Chapter 7 case.

[¶ 18] The motion to dismiss or convert and the plan confirmation hearing were scheduled for hearing by Judge Hoyt on June 21, 2004.

[¶ 19] James Jandrain ("Jandrain") is a certified public accountant from Omaha who was an investor in TSE and was, in 2004, a manager of the plant. The plant was not at that time operating. He performed services for TSE although he was not the plant's accountant. He helped prepare documents in conjunction with the bankruptcy, including some of the schedules as well as the financial information contained in the plan and amended plan. He was also the treasurer of TSE and the personal CPA of Hoich.

[¶ 20] On June 14, 2004, the Monday before the confirmation hearing, some members of the "Omaha group" met at NCC's offices in Fargo to discuss a settlement. Hoich, Ruback, Joe Vacanti and Ralph Brown, all on behalf of the "Omaha group," met with Peter Rudeen ("Rudeen"), the CEO of NCC, and Ace Brandt, the "owner" of NCC. This meeting was at "their" request, i.e., the "Omaha group." Jandrain, another of the investors in TSF, asked Hoich to negotiate with Rudeen for a settlement of NCC's claims against the bankruptcy estate and NCC's and Interstates Electric's objections to the Chapter 11 plan. Thomas Pokela, the then attorney for TSE, suggested to Jandrain that they negotiate to get NCC "out" so the plan could be approved. Hoich represented the "Omaha group" in the discussion of settlement dollars and terms. No agreement was reached that day.

[¶ 21] TSF was the largest single equity owner of the equity in TSE. Jandrain was a member of that entity. He is presently on the board of managers for TSF but was not in 2004.

[¶ 22] Jandrain, Randy Kramer, and "the farmer group" had originally guaranteed $600,000 of First Dakota Bank of Yankton's $9 million loan to TSE.

[¶ 23] Jandrain filed a proof of claim which was a general unsecured claim for pre-petition services. His claim was denied by Judge Hoyt and by me on appeal.

[¶ 24] Jandrain was one of the primary contacts between attorney Pokela and the debtor, TSE.

[¶ 25] On June 18, 2004, attorney Jerrold Strasheim was admitted pro hac vice in the bankruptcy matter representing TSF. He had been retained as counsel for TSF approximately two weeks earlier. Strasheim's contact was Jandrain, although Jandrain was not a manager of TSF at that time.

[¶ 26] On the Friday before the scheduled hearing, discussions again continued telephonically between Rudeen and Hoich.

[¶ 27] Rudeen had a number of telephone conversations with Hoich on Friday, Saturday, and Sunday before the June 21, 2004, "Judge Hoyt settlement." Hoich also had conversations during such weekend with Jandrain and Ruback as to the amount of the offer. Jandrain and Hoich agreed to offer NCC $2.5 Million. The $2.5 million figure was proposed by Hoich on Sunday night. Hoich told Rudeen he would raise $2.5 million to purchase NCC's position. Rudeen did not know whether the money was coming from TSF, from Hoich, or from. Hoich and his friends. Hoich told Rudeen he was attempting to raise the funds through a group of investors in Omaha, including himself, to pay the proposed settlement. Based on Hoich's previous testimony as to what he would do, Rudeen assumed Hoich was guaranteeing the payment of the money.

[¶ 28] Rudeen talked to Hoich on the telephone on Monday morning, June 21, 2004, and accepted the $2.5 million offer.

[¶ 29] Rudeen understood that Hoich was going to be present in bankruptcy court on June 21, 2004. Rudeen spoke with Hoich that morning and Hoich stated that Jandrain and Ruback would be there to communicate to the other parties the agreement that Hoich and Rudeen had reached. Ruback was on the board of TSF and was "the decision maker" for TSF.

[¶ 30] Present in Sioux Falls, South. Dakota, at the settlement discussions which took place on the morning of June 21, 2004, prior to the...