Bear Tooth Mountain Holdings Ltd. P'ship v. ML Manager LLC (In re Mortgs. Ltd.)
| Decision Date | 28 March 2013 |
| Docket Number | ADVERSARY NO. 2:12-ap-01849-RJH,CASE NO. 2:08-bk-07465-RJH |
| Parties | In re MORTGAGES LTD., Debtor. BEAR TOOTH MOUNTAIN HOLDINGS LIMITED PARTNERSHIP, an Arizona limited liability partnership; AJ CHANDLER 25 ACRES, LLC, an Arizona limited liability company, CORNERSTONE REALTY & DEVELOPMENT, INC., an Arizona corporation; CORNERSTONE REALTY & DEVELOPMENT, INC. DEFINED BENEFIT PLAN AND TRUST, an Arizona trust; EVERTSON OIL COMPANY, INC., a Utah corporation; JAMES C. SCHNECK REVOCABLE TRUST DATED OCTOBER 1, 1999, a Wisconsin trust, James C. Schneck, trustee; LONNIE JOEL KRUEGER FAMILY TRUST, an Arizona trust, Lonnie J. Krueger, trustee; BRETT MICHAEL McFADDEN an unmarried man; MICHAEL JOHNSON INVESTMENTS II, L.L.C., an Arizona limited liability company; LOUIS B. MURPHEY, an unmarried man; MORLEY ROSENFIELD, M.D. P.C. RESTATED PROFIT SHARING PLAN, an Arizona trust, Morley Rosenfield, trustee; PUEBLO SERENO MOBILE HOME PARK L.L.C., an Arizona limited liability company; QUEEN CREEK XVIII, L.L.C., an Arizona limited liability company; WILLIAM L. HAWKINS FAMILY L.L.P., an Arizona limited liability partnership; L.L.J. INVESTMENTS, LLC, an Arizona limited liability company, Plaintiffs, v. ML MANAGER LLC, an Arizona limited liability company, MARK WINKLEMAN; BRUCE EDKIN and TAYLOR EDKIN; DAVID FIELER and JANE DOE FIELER; ELLIOTT POLLACK and CATHY POLLACK; KAREN EPSTEIN and SHELDON EPSTEIN; SCOTT SUMMERS and JANE DOE SUMMERS, Defendants. |
| Court | U.S. Bankruptcy Court — District of Arizona |
SIGNED.
Randolph J. Haines, Chief Bankruptcy
The issues before the Court all relate to acts by agents of a liquidating trustee implementing a confirmed plan of reorganization. Defendants have filed a motion to dismiss the Plaintiffs' adversary complaint for many reasons, three of which are dispositive. First, most of the counts are barred by res judicata. Second, most of the Defendants' acts complained of are protected by quasi-judicial immunity. Third, those and the remaining claims violate F.R.Civ.P. Rules 8 and 9. Accordingly, the Motion to Dismiss is granted.
In 2009, this Court confirmed the plan of reorganization proposed by the Official Investors Committee. That Plan established a liquidating trust and approved the appointment of a liquidating trustee. The Plan also expressly created an entity, ML Manager, LLC, to help the liquidating trustee implement portions of the confirmed Chapter 11 Plan. The Plan empowered ML Manager to "enter into independent contracts, hire one or more professional asset managers or companies, contract with a servicing agent, employ counsel and other professionals, among other things." The management of all of the Debtor's assets, consisting primarily of real property loans, promissory notes and deeds of trust, as well as all the Debtor's claims, demands, avoidance actions, and other causes of action were delegated either to ML Manager or to the Liquidating Trust. ML Manager and the Liquidating Trustee were explicitly empowered to secure exit financing for this case and the Plan provided that such exit financing was to be used "to provide working capital for the operations of . . . ML Manager, LLC, the Loan LLCs [created under the Plan], the Reorganized Debtor, and the Liquidating Trust."
The Plan also provided that the trust board (and its members, which included ML Manager) would not be liable for acts and omissions made in connection with the Plan, the Confirmation Order, or the Liquidating Trustee Agreement.
On September 28, 2012, Plaintiffs filed a state court complaint alleging a variety of state law claims based on the implementation of the Plan. The claims included breaches of fiduciary duty, negligence, conversion, intentional misrepresentation, negligent misrepresentation, non-disclosure, conspiracy, breach of the covenant of good faith and fair dealing, and aiding and abetting. This Court recently summarized the nature of these claims and the underlying acts to which they relate and there is no need to repeat that summary here. The state court case was removed to the Bankruptcy Court as an adversary proceeding, and this Court has denied Plaintiffs motion to remand. Defendants have filed a motion to dismiss, to which Plaintiffs responded, and the Court has heard oral argument.
In order to survive a motion to dismiss, a complaint must contain more than a "formulaic recitation of the elements of a cause of action;" it must contain factual allegations sufficient to "raise a right to relief above the speculative level."1 In considering a motion to dismiss, the court must accept as true the allegations of the complaint in question2, and construe the pleading in the light most favorable to the party opposing the motion and resolve all doubts in the pleader's favor.3 The court will "presume that general allegations embrace those specific facts that are necessary to support the claim."4 However, the court need not accept legalconclusions "cast in the form of factual allegations."5 Unlike factual allegations, no deference is owed to the non-moving party's legal claims or interpretations.6
Res Judicata, or claim preclusion, bars litigation in a subsequent action of any claims that were raised or could have been raised in the prior action. Claim preclusion requires three elements: (1) identity of claims; (2) final judgment on the merits; and (3) privity between parties.7
Claim preclusion is defined by the Restatement (Second) of Judgments §§ 18-26. It includes the separate principles of "merger," "bar," and "splitting." Merger prevents a plaintiff from asserting a new action on a "claim or any part thereof" when a "final personal judgment" had previously been rendered in plaintiff's favor on that claim. Restatement § 18(1). Bar prevents a plaintiff from bringing another action on the same claim that the plaintiff had previously lost. Restatement § 19. Splitting is the rule that a claim may not be separated from the "series of connected transactions, out of which the action arose." Restatement § 24. There are a number of exceptions to the rule against splitting, but none are relevant here. See Restatement § 26.
To apply claim preclusion, one must first define what the claim is, and it is the identity of claims element that is contested by Plaintiffs here. The "claim" for these purposes is not the Bankruptcy Code's definition of creditors' claims but rather the Restatement's definition.8 According to the Restatement, a claim "consists of all rights to remedies that arise out of the same 'transaction,' determined 'pragmatically' based on the interrelation of the facts, whether they form a convenient trial unit, and whether treatment as a unit conforms to the parties' expectations. . . ."
The Ninth Circuit has adopted the principles of the Restatement in defining what constitutes the same "claims" for res judicata purposes: (1) whether rights or interests established in the prior judgment would be destroyed or impaired by prosecution of the second action; (2) whether substantially the same evidence is presented in the two actions; (3) whether the two suits involve infringement of the same rights; and (4) whether the two suits arise out of the same transactional nucleus of facts.9 These tests are merely reformulations of the Restatement definition of claims as "rights and remedies that arise out of the same transaction" and that "form a convenient trial unit."
This definition of "claim" thus hinges on what constitutes a "transaction." The Restatement states that while the definition of "transaction" is imprecise, it means "a natural grouping or common nucleus of operative facts." Restatement § 24 cmt. b. One of the determinants of this natural grouping or common nucleus is whether the issues constitute a "convenient unit for trial purposes." Id.
Under the "same transactional nucleus of facts" factor, the Court inquires whether, given the factual objections alleged in the current action, the Plaintiff could have raised those objections in the prior action. In short, the Court asks, given the facts in the Complaint, could the Plaintiff have raised the legal objections to the Bankruptcy Court?
Defendants' res judicata argument focuses on four issues raised by the Complaint, which they contend were or should have been addressed in the referenced prior litigation:
1. ML Manager's authority to act on behalf of Plaintiffs - confirmation of the Plan, the Confirmation Order, and the Plaintiff's prior Declaratory Judgment Action;
2. ML Manager's cost-shifting to the Plaintiffs costs of loan service - Plaintiff's prior Motion for Clarification;
3. ML Manager's authority to sell the property - Plaintiff's previous objections to individual sale orders; and 4. ML Manager's allocation of expenses - Plaintiff's prior objection to the Allocation Model and Distribution Orders.
Plaintiffs' primary argument that claim preclusion does not apply to these issues is that they do not seek to overturn any prior Court order or adjudication. In short, they claim to be litigating the implementation of the Plan, not the Plan itself. They claim to have had no evidence (or notice of facts) of misconduct until after the Plan was confirmed because the key facts occurred after confirmation. In addition, the Plaintiffs argue that even if some issues were addressed by prior Bankruptcy orders, those orders were in contested matters, and thus were subject to less procedural safeguards than if raised in an adversary proceeding (as the Complaint currently is), and thus, should be re-litigated.
While the implementation/confirmation distinction superficially sounds good in theory, it quickly breaks down on examination of the underlying facts pled in the Complaint. What is important is not the sameness of the legal conclusions, but the sameness of the underlying facts. All the Court has to do is determine...
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