Chesapeake Trust v. Chesapeake Bay Enter., Inc. (In re Potomac Supply Corp.)

• Decision Date: 18 February 2016
• Docket Number: Case No. 12-30347-BFK,Adversary Proceeding No. 13-03073-BFK
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re: POTOMAC SUPPLY CORPORATION, Debtor. CHESAPEAKE TRUST, Plaintiff, v. CHESAPEAKE BAY ENTERPRISE, INC., Defendant.

In re: POTOMAC SUPPLY CORPORATION, Debtor.CHESAPEAKE TRUST, Plaintiff, v. CHESAPEAKE BAY ENTERPRISE, INC., Defendant.

Case No. 12-30347-BFK

Adversary Proceeding No. 13-03073-BFK

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF VIRGINIA Richmond Division

February 18, 2016

Chapter 7

MEMORANDUM OPINION

This adversary proceeding, now on remand from the District Court, is before the Court on two Motions: (a) the Defendant's Motion to Authorize Prejudgment Interest, Attorney's Fees, Costs and Expenses; and (b) the Defendant's Motion to Compel Return of the $500,000 Deposit. Dkt. Nos. 222 and 230. The Plaintiff opposes both Motions. Dkt. Nos. 227, 233 and 234. The Court heard the arguments of the parties on December 15, 2015.

For the reasons stated below, the Motion of Chesapeake Bay Enterprise, Inc. ("CBE") to Authorize Prejudgment Interest, Attorney's Fees, Costs and Expenses will be granted in part and denied in part. The Court will award pre-judgment interest from November 6, 2012, and costs. The Court will deny CBE's request for an award of attorney's fees. The Motion to Compel Return of the $500,000 Deposit will be denied as against the Chesapeake Trust, but it will be granted as against Pillsbury.

Procedural History

Familiarity with the underlying facts is presumed. See Chesapeake Bay Enters., Inc. v. Chesapeake Trust, Civ. A. No. 3:15CV35, 2015 WL 5786831, at *1 (E.D. Va. Sept. 30, 2015) (reversing this Court's decision and awarding $500,000 deposit to CBE); Chesapeake Bay Enters., Inc. v. Pillsbury Winthrop Shaw Pittman, LLP, Civ. A. No. 3:14CV00633-HEH, 2014 WL 6685494, at *1 (E.D. Va. Nov. 25, 2014), aff'd 606 Fed.Appx. 130 (4th Cir. 2015) (affirming Bankruptcy Court's dismissal of CBE's Third Party Complaint); Chesapeake Trust v. Chesapeake Bay Enters., Inc., Civ. No. 3:13CV344, 2014 WL 202028, at *1 (E.D. Va. Jan. 17, 2014) (denying CBE's motion to withdraw the reference); Chesapeake Trust v. Chesapeake Bay Enter., Inc. (In re Potomac Supply Corp.), Adv. Pro. No. 13-03073-DOT, 2013 WL 6865405, at *1 (Bankr. E.D. Va. Dec. 31, 2013) (dismissing certain counts of CBE's Third Party Complaint). The following procedural history will provide context for the current controversy.

A. The Potomac Supply Bankruptcy Case.

1. Potomac Supply Corporation ("Potomac Supply") filed a voluntary petition under Chapter 11 in this Court on January 20, 2012. Case No. 12-30347-BFK. Pillsbury Winthrop Shaw Pittman, LLP ("Pillsbury") represented the Debtor at all times.

2. During the course of the Potomac Supply bankruptcy case, Potomac Supply sought to sell substantially all of its assets. As a part of this effort, Potomac Supply entered into an Asset Purchase Agreement ("APA") with CBE. CBE posted a $500,000 deposit ("the Deposit") with Pillsbury. Although the parties contemplated theexecution of an Escrow Agreement, they never entered into a formal escrow agreement and the funds remained in Pillsbury's trust account for the entirety of the adversary proceeding before this Court.

3. Ultimately, the Potomac Supply assets were sold to a party other than CBE. CBE demanded the return of its deposit; Pillsbury refused.

4. On November 13, 2012, the Bankruptcy Court entered an Order on Agreed Motion to Settle Superpriority Administrative Claim of Regions Bank and Approve Distribution of Sales Proceeds. Id., Dkt. No. 485. Although the Order dealt with the disposition of a number of different assets, for purposes of this adversary proceeding, Paragraph 5 dealt with the disposition of the CBE Deposit. Paragraph 5 provided as follows:

5. Distribution of Proceeds of Chesapeake Deposit. Pillsbury shall be assigned all right, title and interest of the Debtor to one or more deposits tendered to the Debtor by Chesapeake, totaling $500,000.00 (the "Chesapeake Deposit"), subject to the following:

a. Pillsbury shall be entitled to any recovery to the extent of its reasonable fees and expenses incurred in prosecuting and/or defending litigation to recover and/or retain the Chesapeake Deposit (the "Pillsbury-Chesapeake Fees").

b. After recovery of the Pillsbury-Chesapeake Fees, Pillsbury shall be entitled to any recovery on account of the Chesapeake Deposit up to $240,000.00.

c. Any recovery on account of the Chesapeake Deposit in excess of the Pillsbury-Chesapeake Fees and $240,000.00 shall be paid as follows: (i) 33 and 1/3 percent to Pillsbury, (i) 33 and 1/3 percent to Regions, and (ii) 33 and 1/3 percent to the Unpaid Administrative Claims Pool (as subsequently defined) until all allowed administrative claims against theDebtor and its estate are paid in full, and thereafter, to the Unsecured Claims Pool.

Id., Dkt. No. 485, ¶ 5 (hereinafter, the "Settlement Order") (emphasis in original).

5. On January 24, 2013, the Court converted the Potomac Supply case to Chapter 7. The Consent Order on Motion to Convert provided in relevant part as follows:

To ensure that the provisions of the Settlement Order are honored, all right, title and interest in and to any cause of action, claim or defense relating to funds held and owned by Pillsbury (as provided in the Settlement Order) against Chesapeake Bay Enterprise, Inc. or any person claiming ownership of or an interest in such funds shall be placed in a trust over which Pillsbury shall be trustee and subject to the trust agreement attached at Exhibit A. To avoid any misunderstanding, all such causes of action, claims or defenses are not and shall not be deemed property of the estate (and shall be deemed contributed to the Trust upon entry of this Order and signing of the Trust Agreement by Pillsbury), but shall remain subject to the Court's jurisdiction pursuant to the Settlement Order and this Order.

Id., Dkt. No. 538, ¶ 8 (hereinafter, the "Conversion Order").

6. The Liquidating Trust Agreement assigned to the Chesapeake Trust "any and all interests of the Debtor in any and all litigation rights, including without limitation, causes of action, claims or defenses relating to the Funds [i.e., the $500,000 Deposit] against Chesapeake Bay Enterprise, Inc. or any person claiming ownership of or an interest in the Funds (the 'Funds Rights')." Id., Ex. A (Liquidating Trust Agreement), p. 1 (emphasis in original).

7. The Liquidating Trust Agreement essentially followed the terms of the Settlement Order, in terms of the parties' respective rights (other than CBE's rights) to the Deposit in the event that it was determined that CBE was not entitled to a returnthereof. CBE was not a party to the Liquidating Trust Agreement. The parties to the Trust recognized that CBE had a disputed claim to the Deposit. The Liquidating Trust Agreement made Pillsbury the Trustee and further provided that "[a]ll decisions regarding the Funds Rights (including but not limited to the pursuit and continuation or settlement of any litigation) shall be made solely by Pillsbury, as Trustee." Id., Dkt. No. 538, ¶ 7.

B. This Adversary Proceeding and the Dismissal of CBE's Third Party Complaint Against Pillsbury.

8. The Chesapeake Trust filed this adversary proceeding against CBE on April 9, 2013. Dkt. No. 1.

9. CBE filed an Answer and a Third Party Complaint against Pillsbury and two of its attorneys, Mr. Potter and Mr. Hall. Dkt. Nos. 6, 7. CBE amended its Third Party Complaint on August 14, 2013. Dkt. No. 87.

10. On December 31, 2013, the Court dismissed certain of the Counts against Pillsbury and its attorneys. Dkt. Nos. 127, 128.

11. On April 24, 2014, the Court dismissed the remaining Counts against Pillsbury. Dkt. No. 166, 168. In its Memorandum Opinion, the Court noted: "there just isn't any evidence in this case that the Deposit has been lost. It hasn't been wired anywhere. Pillsbury is still holding on to it [.]" Dkt. No. 166, p. 22.

12. CBE appealed the Court's dismissal of its claims against Pillsbury to the District Court. The District Court affirmed this Court's decision to dismiss all counts against Pillsbury. Chesapeake Bay Enters., Inc. v. Pillsbury Winthrop Shaw Pittman,LLP, Civ. A. No. 3:14CV00633-HEH, 2014 WL 6685494, at *1 (E.D. Va. Nov. 25, 2014), aff'd 606 Fed.Appx. 130 (4th Cir. 2015). In affirming this Court's decision, the District Court held:

Here, CBE and the Chesapeake Trust have competing claims to the $500,000 held in escrow by Pillsbury. As the Bankruptcy Court noted, entitlement to the deposit is highly contested with both claimants contending the other was the first to commit a material breach of the APA. Any right of possession CBE may have must abide resolution of this issue. Consequently, as the Bankruptcy Court concluded, Pillsbury acted providently in holding the funds in its trust account until otherwise directed by the court. Such action is consistent with Pillsbury's obligation under Rule 1.15(b)(5) of the Virginia Rules of Professional Conduct. After having concluded that CBE was unable to show an immediate right of possession, the Bankruptcy Court properly granted Pillsbury's Motion for Summary Judgment on Count Two (conversion).

CBE's claim of breach of fiduciary duty flows from equally tenuous logic. Positing the existence of a fiduciary duty to CBE, there is no plausible evidence in the record of any arguable breach. As discussed above, Pillsbury continues to hold the deposit in its trust account awaiting direction from the Bankruptcy Court. In the interim, Pillsbury has no legal obligation to bypass the Bankruptcy Court and disburse the funds as it sees appropriate. Moreover, CBE advances no legal authority to support such contention. This Court finds no error in the Bankruptcy Court's dismissal of the breach of fiduciary duty claim (Count Four).

Id., at *4.

13. CBE appealed the District Court's decision to the Fourth Circuit, which affirmed the District Court's decision. Chesapeake Bay Enter., Inc. v. Pillsbury Winthrop Shaw Pittman, LLP, 606 Fed.Appx. 130 (4th Cir. 2015).

C. The District Court's Reversal of the Bankruptcy Court's Decision.

14. The Court held a trial in this adversary proceeding on...