C.F. Trust, Inc. v. Tyler

• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Writing for the Court: Ellis
• Citation: C.F. Trust, Inc. v. Tyler, 318 B.R. 795 (Bankr. E.D. Va. 2004)
• Decision Date: 16 December 2004
• Docket Number: No. 1:04CV759.,1:04CV759.
• Parties: C.F. TRUST, INC., Appellant, v. Robert O. TYLER, Trustee, Appellee.

318 B.R. 795

C.F. TRUST, INC., Appellant, v. Robert O. TYLER, Trustee, Appellee.

No. 1:04CV759.

United States Bankruptcy Court, E.D. Virginia, Alexandria Division.

December 16, 2004.

COPYRIGHT MATERIAL OMITTED

Harvey A. Levin, Birch, Horton, Bittner & Cherot, Washington, DC, for Appellant.

Steven B. Ramsdell, Tyler, Bartl, Gorman & Ramsdell PLC, Alexandria, VA, for Appellee.

MEMORANDUM OPINION

ELLIS, District Judge.

At issue in this bankruptcy appeal is the bankruptcy judge's conclusion that a general release of claims executed in connection with the formation of a Chapter 11 plan was ambiguous, such that parol evidence was necessary to determine the parties' intent with respect to the scope of the release.

I.

For the past decade, appellant C.F. Trust, Inc. has been seeking with little success to collect from Barrie Peterson more than $6 million owed on two commercial notes.¹ The latest chapter in this debt-collection saga began in November 1999 when C.F. Trust filed a diversity action in this district against Peterson, appellee First Flight Limited Partnership ("First Flight"), and other business entities seeking a declaratory judgment that First Flight and the other entities were Peterson's alter egos, and therefore that their assets could be used to satisfy his debts.² In addition to declaratory relief, C.F. Trust's complaint requested an award of attorneys' fees and costs.³ After a four-day bench trial, C.F. Trust prevailed against First Flight on a "reverse veil-piercing" theory and obtained its requested declaratory relief. C.F. Trust, Inc. v. First Flight Ltd. P'ship, 140 F.Supp.2d 628, 645 (E.D.Va.2001) [hereinafter "First Flight"]. A final ruling on C.F. Trust's claim for attorneys' fees and costs, however, was deferred pending resolution of any appeal. Id. at 645-46; C.F. Trust, Inc. v. First Flight Ltd. P'ship, 140 F.Supp.2d 628 (E.D.Va.2001) (Order).

In early 2001, shortly after the entry of judgment, First Flight appealed the First Flight decision to the Court of Appeals for the Fourth Circuit, which in turn certified to the Supreme Court of Virginia the question whether Virginia law recognizes a cause of action for reverse piercing of the corporate veil. C.F. Trust, Inc. v. First Flight Ltd. P'ship, 306 F.3d 126, 128 (4th Cir.2002). In June 2003, the Supreme Court of Virginia answered the certified question in the affirmative, holding that reverse veil-piercing was indeed cognizable under Virginia law. C.F. Trust, Inc. v. First Flight Ltd. P'ship, 266 Va. 3, 11, 580 S.E.2d 806, 810 (2003). As a result, the Fourth Circuit promptly affirmed the judgment against First Flight on this theory. C.F. Trust, Inc. v. First Flight Ltd. P'ship, 338 F.3d 316, 317 (4th Cir.2003).

While First Flight was winding its way through the appellate process, the parties were busy in another forum. In April 2001, Peterson filed for Chapter 11 bankruptcy in the Eastern District of Virginia, and C.F. Trust filed four proofs of claim against the bankruptcy estate shortly thereafter, including one for $885,836 for costs and attorneys' fees incurred in collecting on the commercial notes, and one for $9,808 for a contempt sanction obtained against Peterson in other litigation. The following year, in March 2002, C.F. Trust filed a fifth proof of claim, this one for $179,000 for costs and attorneys' fees incurred in connection with the First Flight litigation.

On or about that time, Peterson filed his first Chapter 11 reorganization plan with the bankruptcy court. The bankruptcy court found that Peterson's proposed plan was filed in bad faith and accordingly declined to approve it. As a consequence of this bad-faith plan, Peterson's bankruptcy petition was converted to Chapter 7 in May 2002, and appellee Robert O. Tyler was appointed trustee of the bankruptcy estate.

In the summer of 2002, more than a year after Peterson's initial bankruptcy filing, the trustee, creditors of the bankruptcy estate, and various related parties began extensive negotiations concerning Peterson's repayment obligations and the means by which those obligations might be fulfilled. Both C.F. Trust and First Flight participated in these negotiations. By the end of the summer, C.F. Trust had agreed to reduce the combined amount of its $885,836 and $9,808 claims by $350,000 in exchange for the prompt sale of and distribution of proceeds from a parcel of real property in Nantucket, Massachusetts belonging to Peterson. Accordingly, in September 2002, with the consent of the parties to the bankruptcy, the bankruptcy court issued an order noting, "As a condition of the sale, and its receipt of no less than $2.5 million from the proceeds, C.F. Trust, Inc. has agreed to reduce its currently allowed unsecured claim of $895,644 by $350,000 to $545,644, provided that C.F. Trust did not agree to reduce any other sum (should its allowed unsecured claim be otherwise disallowed or reduced for any reason)." In re Peterson, Case No. 01-11529-RGM (Bankr.E.D.Va. Sept. 24, 2002) (Order).

Negotiations continued through the remainder of 2002, and by January 2003 — with the First Flight appeal still pending — the parties had reached a series of agreements, memorialized in a "Term Sheet," that permitted Peterson's bankruptcy petition to be reconverted to Chapter 11. In one of the agreements, First Flight agreed to commit a substantial portion of its cash flow⁴ to Peterson's bankruptcy estate, thus providing a means of paying Peterson's debts, including the debts to C.F. Trust, and avoiding the risk that First Flight might need to be liquidated. Under another of the agreements, the parties to the bankruptcy — including C.F. Trust and First Flight — agreed to waive certain of their claims against one another to facilitate resolution of the bankruptcy process. From these Term Sheet agreements came a new Chapter 11 reorganization plan ("the Plan"), which the trustee⁵ submitted to creditors of the estate in February 2003, and shortly thereafter to the bankruptcy court. Notably, neither the Plan itself nor the disclosure statement that accompanied it mentioned C.F. Trust's claim for $179,000 in costs and attorneys' fees from the First Flight litigation.

Then, on March 18, 2003, two important events occurred. First, the bankruptcy court approved the Plan. In re Peterson, Case No. 01-11529-RGM (Bankr.E.D.Va. March 18, 2003) (Order). Second, the parties executed the Settlement Agreement and Release ("the Release"), which formalized and made specific the waiver of claims to which the parties, in principle, had agreed when compiling the Term Sheet. The Release arranges the parties to the bankruptcy into three groups: (i) "the C.F. Trust Parties"; (ii) the trustee and (iii) "the Scott Peterson Parties," including First Flight.⁶ The Release then proceeds to provide for two reciprocal releases of claims, the first between the Scott Peterson Parties and the bankruptcy estate, and the second between the Scott Peterson Parties and the C.F. Trust Parties.⁷ Importantly, however, the latter release is subject to exceptions that are the focus of the present controversy. Specifically, Paragraph 8, "Exceptions to Release" provides that:

Notwithstanding any other provisions of this Settlement Agreement and Release:

(a) the C.F. Trust Parties and the Trustee do not release First Flight Limited Partnership from any lien, charging orders or execution arising out of judgments held by the C.F. Trust Parties against Barrie M. Peterson, such lien rights to be expressly preserved;

(b) the C.F. Trust Parties and the Trustee do not release First Flight Limited Partnership from any obligation incurred by First Flight pursuant to the terms of the Chapter 11 Plan of Reorganization, as confirmed by the Bankruptcy Court, or any other instruments executed to implement the Plan of Reorganization; and

(c) the judgment in C.F. Trust, Inc., et al. v. First Flight Limited Partnership, et al., 140 F.Supp.2d 628 (E.D.Va.2001), questions certified, 306 F.3d 126 (4th Cir.2002), appeal pending, Record No. 022212 (Va.Sup.Ct.), shall not be released, the pending litigation shall not be dismissed, and the rights of the parties with respect thereto shall be preserved; provided, however, that any judicial decisions in this litigation shall not diminish or otherwise adversely alter the parties' obligations, including obligations with respect to the availability and use of First Flight's cash from operations, under the terms of the Chapter 11 Plan of Reorganization, as confirmed by the Bankruptcy Court, or any other instruments executed to implement the Plan of Reorganization.

In July 2003, approximately four months after the execution of the Release and confirmation of the Plan, the Fourth Circuit upheld C.F. Trust's reverse veil-piercing claim and affirmed the First Flight judgment. See C.F. Trust, Inc. v. First Flight Ltd. P'ship, 338 F.3d 316, 317 (4th Cir.2003). In light of this result, C.F. Trust renewed here the claim for attorneys' fees and costs incurred in the First Flight litigation that had been deferred pending disposition of the appeal. The trustee responded by filing a motion in the bankruptcy court for an order requiring C.F. Trust to show cause why it should not be held in contempt for attempting to enlarge its claims against Peterson and First Flight in violation of § 1141(a) of the Bankruptcy Code, which states that the provisions of a confirmed plan bind all creditors. See 11 U.S.C. § 1141(a) (2004). Consequently, judgment on C.F. Trust's claim for attorneys' fees and costs from the First Flight litigation was again deferred here, this time pending a determination by the bankruptcy court whether the Plan or any related agreement precluded a separate award of attorneys' fees and costs against First Flight. C.F. Trust, Inc. v. First Flight Ltd. P'ship, Case No. 1:99cv1742 (E.D.Va. Nov. 7, 2003) (Order).

In briefs and argument presented to the bankruptcy judge in January 2004, C.F. Trust...