Foster v. First Interstate Bank (In re Shoot the Moon, LLC)
| Decision Date | 18 January 2022 |
| Docket Number | Adv. Proc. No. 2:21-ap-02005-WLH,Case No. 2:15-bk-60979-WLH11 |
| Citation | 635 B.R. 568 |
| Parties | IN RE: SHOOT THE MOON, LLC, Debtor. Jeremiah Foster, Plaintiff, v. First Interstate Bank ; American Bank Center ; John Does 1-10, Defendants. |
| Court | U.S. Bankruptcy Court — District of Montana |
David B. Cotner, Kyle Ryan, Cotner Law PLLC, Missoula, MT, for Plaintiff.
Bryce A. Burke, Moulton Bellingham PC, Doug James, Billings, MT, for Defendant American Bank Center.
Evan Coren, Boone Karlberg P.C., Charles Edward Hansberry, Jenny M. Jourdonnais, Hansberry & Jourdonnais, PLLC, Missoula, MT, Sheila R. Schwager, Hawley Troxell Ennis & Hawley, LLP, Boise, ID, for Defendant First Interstate Bank.
Chapter 11 bankruptcy cases often move quickly. This need for speed derives from some debtors being the proverbial "melting ice cube" (though fewer than are framed that way by bankruptcy lawyers) and more generally from the reality that delay rarely increases stakeholder recoveries. Expedition has some downsides, however; case participants and bankruptcy judges commonly make case-determinative decisions in the context of imperfect information and uncertainty. With the benefit of hindsight, some decisions prove regrettable.
In this adversary proceeding, the bankruptcy trustee sued two of the debtor's secured lenders for various alleged wrongdoing despite having agreed to a broad release of those lenders during the underlying chapter 11 case. The lenders move to dismiss on various grounds, including that the release bars the claims and that the complaint contains no allegations potentially invalidating the release. For the reasons set forth below, the court agrees with the lenders.
In the early 2000s, Kenneth Hatzenbeller and two other principal investors created a business generally known as Shoot the Moon. Over time this enterprise grew to consist of nineteen LLCs formed pursuant to Idaho, Montana, and Washington law that, among other things, owned and operated restaurants located throughout the three states. Mr. Hatzenbeller and the Shoot the Moon entities had debtor-creditor relationships with a variety of counterparties, including defendants First Interstate Bank ("FIB") and Prairie Mountain Bank n/k/a American Bank Center ("ABC").
On October 20, 2015, all nineteen Shoot the Moon entities merged into Shoot the Moon, LLC. The following day, this entity filed the underlying chapter 11 bankruptcy petition here.
During the bankruptcy case, Jeremiah J. Foster (the "Trustee") was appointed as the chapter 11 trustee and then as trustee of the STM Liquidating Trust pursuant to the confirmed chapter 11 plan.
In July 2016 the Trustee moved to sell substantially all property of the bankruptcy estate free and clear of liens, claims, rights, encumbrances, and other interests.1 Because the proposed purchase price totaled less than the aggregate value of all liens on the property, the Trustee sought the consent of various secured creditors – including defendants – to the sale.2 The creditors provisionally agreed to the Trustee's proposal "and to provide certain related accommodations requested by Trustee ..., but only under the terms and conditions stated in" a stipulation submitted for the bankruptcy court's approval.3 Absent approval, the stipulation provides that the creditors "have not consented to any sale, and fully reserves [sic] all of their rights to object to any proposed sale."4
One key feature of the stipulation is a broad, mutual release of claims. As it relates to the Trustee's side of the bargain, the release provision states that:
Trustee, on behalf of the Estate, hereby fully, finally, absolutely, and forever releases and discharges Creditors ... and their present and former directors, shareholders, officers, employees, agents, representatives, attorneys, consultants, fiduciaries, predecessors, successors, assigns, and affiliates, related corporate divisions, and their separate and respective heirs, personal representatives, attorneys, successors, assigns, and affiliates (collectively, "Released Parties") from any and all actions (including, without limitation, avoidance actions under Chapter 5 of the Bankruptcy Code), causes of action, claims, debts, damages, demands, liabilities, obligations, suits, judgments, executions, and expenses and any and all other claims, counterclaims, defenses, rights of set-off, demands and liabilities whatsoever of any and every character, now known or unknown, direct and/or indirect, contingent or matured, of whatever kind or nature , for or because of any matter or things done, omitted or permitted to be done by any of the Released Parties, at law or in equity arising from events occurring prior to and including the date that Approval Order(s) is entered .5
Among other entities, the stipulation includes defendants in the definition of "Creditors."6 It also includes an integration clause providing that the stipulation "constitutes the full and entire understanding and agreement between the parties with regard to the subject matter addressed herein and supersedes all prior written or oral agreements, understandings, representations and warranties made with respect thereto."7 The stipulation further makes clear that it binds the bankruptcy estate and "any successor trustee or other fiduciary hereafter appointed in the Bankruptcy Case as a representative of the Debtor or its Estate,"8 which includes the Trustee in his present capacity as liquidating trustee under the chapter 11 plan.
The official committee of unsecured creditors objected to the stipulation, specifically including its concerns about the "general release on behalf of the Estate."9 The committee's counsel pressed these concerns at a hearing, asserting that the committee believes "there are some substantial claims against the parties being released" and that unsecured creditors are treated unfairly in the distributional waterfall.10 The bankruptcy court eventually took a recess to allow the parties to discuss a possible resolution.11 The parties’ rapid negotiations proved successful and they reached a further agreement – later documented in a separate stipulation12 – whereby the secured creditors provided additional concessions regarding distributions of value and the creditors’ committee withdrew its objection to the overall transaction, including the proposed general release.13 The Trustee's counsel explained to the bankruptcy court that the combined transaction aligned the interests of various stakeholders, "made everyone happy except the U.S. Trustee's Office," and was a "good deal" generally beneficial for the bankruptcy estate, in the process noting that "[n]o one's questioning the releases, which are a condition of the secured lenders to do this transaction," and that "in return for that big concession [by the secured creditors], we are giving them a general release of claims that would otherwise be filed against them."14
The bankruptcy court ultimately entered an order approving the asset sale and related stipulations, which order expressly states that "[t]he Secured Creditors’ Stipulation and all of the terms and conditions thereof are hereby approved, with such terms and conditions incorporated into this Order by this reference."15 The Trustee does not challenge this order and cannot as it is a final, unappealable order.
The Trustee commenced this adversary proceeding in August 2021, just short of five years after the sale hearing discussed above. The operative complaint alleges that Mr. Hatzenbeller for several years engaged in a check-kiting scheme using the Shoot the Moon entities, that defendants knew of and participated in the scheme, and that the Shoot the Moon entities suffered injury as a result.16
The complaint acknowledges the prior stipulation and release, but seeks as its Count I a declaratory judgment that the release is null and void because the Trustee's consent to release defendants from the claims at issue here "was obtained through fraud."17 To support the alleged fraud, the complaint repeatedly asserts that defendants did not disclose their knowledge and alleged participation in the check-kiting scheme to the Trustee when negotiating the settlement.18 The complaint goes a step further by generally stating that the lenders "concealed their respective involvement and assistance in facilitating the check-kiting scheme," but offers no details about specific acts of concealment beyond generalized nondisclosure.19
Defendants separately move to dismiss the complaint on numerous grounds, including that the release bars the asserted claims.20 The court has received the benefit of comprehensive briefing and oral argument regarding the dismissal motions and the matter is now ready for decision.
The court has subject matter jurisdiction regarding this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b) & 157(a) and Standing Order No. DLC-43 (D. Mont. Jan. 16, 2019). This court is a proper venue for this litigation as a result of the pendency of the underlying Shoot the Moon bankruptcy case in this district.21 The Trustee's complaint states that "the Trustee consents to entry of a final order or judgment by this Court."22 Accordingly, the court may properly exercise the judicial power necessary to decide the pending dismissal motions.23
Federal Rule of Civil Procedure 12(b)(6) allows a party to move to dismiss based on the "failure to state a claim upon which relief can be granted."24 To survive a Rule 12(b)(6) motion, a complaint must contain "sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ "25
When assessing the facial plausibility of alleged facts courts generally treat the allegations as...
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