Debold v. Case
| Decision Date | 26 June 2006 |
| Docket Number | No. 05-3401.,05-3401. |
| Citation | 452 F.3d 756 |
| Parties | Jody DEBOLD, Appellee, v. E. Rebecca CASE, Chapter 7 Trustee, Appellant. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Joseph R. Dulle, argued, St. Louis, MO (Howard S. Smotkin and Janice R. Valdez, St. Louis, MO, on the brief), for appellant.
David A. Warfield, argued, St. Louis, MO, fro appellee.
Before WOLLMAN, FAGG, and RILEY, Circuit Judges.
E. Rebecca Case, bankruptcy trustee (Trustee) for Tri-River Trading, L.L.C. (Tri-River), appeals the decision of the Bankruptcy Appellate Panel (BAP) reversing the bankruptcy court and granting declaratory judgment in favor of Jody DeBold (DeBold). For the reasons that follow, we affirm the decision of the BAP.
This case involves the allocation of settlement proceeds from a lawsuit between former partners of a failed joint venture. We briefly summarize the facts previously detailed in two published opinions. DeBold v. Case (In re Tri-River Trading, LLC), 317 B.R. 65 (E.D.Mo.2004), rev'd, 329 B.R. 252 (8th Cir.2005).
In March 1999, Phil Thornton (Thornton), general manager of Jersey County Grain Company (Jersey), approached DeBold about launching a new barge freight trading company. Thornton prepared pro formas projecting the financial success of the proposed joint venture and assured DeBold that Jersey would use Tri-River exclusively for all of Jersey's freight trade. In April 1999, DeBold left her lucrative freight trader position and joined Jersey to found Tri-River. DeBold and Jersey were Tri-River's only members and each invested $100,000 to capitalize Tri-River. Jersey arranged for a $1,000,000 unsecured line of credit to enable Tri-River to trade freight with several transportation companies. Article 4.2 of Tri-River's operating agreement designated DeBold as the manager of Tri-River, and Article 4.1 listed DeBold's duties and authority, recognizing DeBold had full responsibility and exclusive and complete management discretion.
In Tri-River's first months of operation, under DeBold's management and with Jersey using Tri-River for all its freight trade, Tri-River turned a slight profit in a less than optimal market. During Tri-River's first year in business, Thornton allegedly began making sexual advances toward DeBold. DeBold rebuffed Thornton's advances and reported Thornton's behavior to Hugh Moore Jr. (Moore), president of Jersey's board of directors. Soon after, Thornton obtained an opinion from Jersey's legal counsel that Jersey had no obligation to deal exclusively with Tri-River under Tri-River's operating agreement. Jersey then began purchasing Jersey's freight transportation from other freight traders. Thornton also caused the withdrawal of Tri-River's unsecured line of credit. Jersey's board of directors attempted to sell Jersey's interest and withdraw from Tri-River. Without Jersey's trade commitment, Tri-River was forced to surrender its future shipping contracts and unwind its market position at an estimated loss of $800,000.
DeBold and Tri-River filed a six-count complaint in Missouri state court (state court litigation) asserting claims against Jersey, Thornton, and Moore for breach of contract, breach of oral contract, tortious interference with business relationships, and breach of fiduciary duty. DeBold asserted personal claims against Thornton and Jersey for fraudulent and negligent misrepresentation. On February 12, 2003, the day trial was set to begin, the parties settled the lawsuit for $800,000. The settlement agreement did not specify an allocation of the settlement funds between DeBold and Tri-River. DeBold allocated seven-eighths of the gross settlement ($700,000) to herself and one-eighth ($100,000) to Tri-River. According to DeBold, Jersey agreed to this allocation during settlement negotiations, but later declined to acknowledge the allocation in the settlement agreement.
On February 27, 2003, fifteen days after the state court litigation settled, creditors filed an involuntary bankruptcy petition against Tri-River. DeBold signed Tri-River's bankruptcy schedules and listed $67,0001 in net settlement proceeds as an asset of Tri-River's bankruptcy estate. After the Trustee refused to agree to the allocation, DeBold filed a declaratory judgment action in bankruptcy court, claiming entitlement to $700,000 of the settlement proceeds. The Trustee asserts the entire settlement amount belongs to the bankruptcy estate.
To determine the proper allocation of the settlement proceeds, the bankruptcy court conducted a bench trial to ascertain which party would likely have prevailed in the state court litigation had the case proceeded to trial. The Trustee, DeBold, and David Corwin (Corwin), who represented DeBold and Tri-River in the state court litigation, participated in the bench trial. DeBold testified she agreed to settle the case for $800,000 to be split seven-eighths for DeBold, and one-eighth for Tri-River, based on information DeBold received during discovery of the state court litigation regarding the strength of her claims, the weakness of Tri-River's claims, and DeBold's damages. DeBold testified that one indication of the strength of her claims was that Jersey's insurer paid $200,000 of the settlement based on DeBold's sexual harassment allegations. DeBold further testified her damages included her (1) initial capital investment of $100,000; (2) "compromise[] in the way of salary"; (3) "lack of being able to get a bonus from Tri-River"; and (4) "lack of a future salary." DeBold presented portions of the deposition testimony of damages expert Thomas Hoops (Hoops), taken during the state court litigation. The bankruptcy court did not allow DeBold to testify regarding advice Corwin had given DeBold during the state court litigation, ruling DeBold's testimony would not constitute the best evidence as Corwin was present in the courtroom.
After Corwin took the stand, the bankruptcy court ruled an attorney-client privilege between Tri-River and Corwin precluded Corwin from testifying about Tri-River's claims. Accordingly, Corwin's testimony was limited to the advice he had given DeBold about DeBold's personal claims, including: (1) DeBold's misrepresentation claims were strong because clear evidence of Thornton's sexual misconduct provided jury appeal and Thornton's letter, making promises and representations to DeBold, offered proof Thornton induced DeBold to leave her former employer; (2) DeBold's contract claims probably could not be maintained under Article 11.3 of Tri-River's operating agreement; (3) the breach of fiduciary duty claim was barred by Missouri law and it was Corwin's intention not to submit the claim to the jury; and (4) Corwin never intended to file a sexual harassment claim, but would use the evidence of Thornton's sexual misconduct, which "drove everything," including Thornton's intent to defraud and deceive DeBold.
The Trustee offered a series of exhibits and introduced portions of the deposition testimonies of Hoops and DeBold, but did not present any witnesses. In closing argument, the Trustee asked the bankruptcy court to allocate $56,314.49 to DeBold and $472,517.89 to Tri-River.
The bankruptcy court concluded Tri-River and DeBold had proven liability on the breach of contract, tortious interference, and breach of fiduciary duty claims. The bankruptcy court next concluded DeBold's misrepresentation claims failed because DeBold had not proven Thornton's initial proposal was made for the purpose of engaging DeBold in a personal relationship and DeBold left her former employer to pursue her own company.
On the issue of damages, the bankruptcy court determined Tri-River had proven damages in excess of $800,000, while DeBold had only shown speculative damages. The bankruptcy court reasoned, because DeBold had no valid expectation of future employment in the gradually downward turning barge freight trade industry, DeBold failed to prove Thornton's actions caused DeBold to lose her career. The bankruptcy court further reasoned DeBold had been well compensated while working for Tri-River, so equity required payment to Tri-River's creditors before DeBold was entitled to a distribution of profits. Based on these findings, the bankruptcy court denied DeBold's declaratory judgment and awarded Tri-River all the net settlement proceeds.
DeBold appealed the decision to the BAP, arguing the bankruptcy court (1) ignored the valid, prepetition allocation of settlement proceeds; (2) erred in its conclusions regarding the viability of the state court claims; and (3) erred in holding the attorney-client privilege barred portions of Corwin's...
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