Hagan v. Baird (In re B&P Baird Holdings, Inc.), Case No. 14-1060
| Decision Date | 02 January 2015 |
| Docket Number | Case No. 14-1060 |
| Parties | IN RE: B & P BAIRD HOLDINGS, INC., Debtor. KELLY M. HAGAN, Appellant, v. PAMELA BAIRD, Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
HELENE N. WHITE, Circuit Judge. Chapter 7 Bankruptcy Trustee Kelly M. Hagan1 appeals from the district court's affirmance of the bankruptcy court's denial of leave to amend Trustee's complaint in the adversary proceeding Trustee brought on behalf of the debtor, B & P Baird Holdings (Debtor), against William (Bill) and Pamela (Pam) Baird (collectively the Bairds)2 to recover funds appropriated by them from the sale of Debtor's assets. Hagan and King Par, LLC, Case No. 11-80397 (Bankr. W.D. Mich.). The question on appeal is whether the bankruptcy court properly concluded that the doctrine of in pari delicto bars Trustee's claim ofconversion against Pam, thus rendering Trustee's proposed amendment futile.3 Because Trustee's proposed allegations are consistent with a scenario to which in pari delicto would not apply, we REVERSE the denial of Trustee's motion for leave to amend and REMAND to the bankruptcy court for further proceedings.
On January 8, 2002, Izzo Golf, Inc. (Izzo), brought a patent-infringement action against Debtor, a golfing equipment company that was then known as King Par Corporation (Old King Par (OKP)), alleging that OKP's golf bags infringed on Izzo's patents. Izzo's motion for summary judgment was granted in part on July 5, 2007, resulting in OKP's liability to Izzo as well as continuing litigation. See Izzo Golf, Inc. v. King Par Golf Inc., No. 02-CV-6012 CJS, 2010 WL 86653 (W.D.N.Y. Jan. 6, 2010) (summarizing the proceedings).
On June 4, 2009, after lengthy negotiations and while Izzo's suit was still pending, OKP, Baird Family LLC and Bill entered into an Asset Purchase Agreement (APA) with KP Acquisition Company, LLC ("New King Par" or "NKP")4 for the sale of all OKP inventory and substantial portions of OKP's land to NKP for $3,400,000, subject to certain adjustments.5 The APA further provided that NKP would, for a fee, collect all OKP receivables outstanding as of March 31, 2009, as fiduciary, and use the funds to pay OKP debts accrued as of that date. Anyfunds remaining after OKP's debts were paid and NKP took its fees were to be paid to OKP regularly. OKP retained only what the APA identified as "Excluded Assets" and "Excluded Liabilities." Among the liabilities designated as excluded was liability related to the Izzo litigation. Thus, under the APA, OKP retained essentially only liabilities and the potential for receivables collected on its behalf by NKP.
At the closing of the sale, NKP wired $4,010,242 to one of the Bairds' joint personal accounts (the "Arvest account") at Bill's direction. On or about June 9, 2009, OKP changed its name to B & P Baird Holdings, Inc. Bill remained the president, director, and shareholder of the new entity. The July, August, and September 2009 excess receivables owed to Debtor were used to pay $384,334 on the Bairds' personal tax obligations. All subsequent monthly receivable collections owed to Debtor were wired to the Bairds' Arvest account.6
At the time the APA closed, OKP had liabilities in excess of one million dollars, including a $350,000 obligation to Izzo for the claim for which Izzo was granted summary judgment. The Bairds made payments totaling at least $263,269.67 to a number of OKP's creditors, not including Izzo, from their personal bank accounts while continuing to incur costs and fees associated with the ongoing patent-infringement litigation. Izzo obtained a judgment against Debtor for $3,286,476.65, and later successfully petitioned for post-verdict enhanced damages.
On September 9, 2010, Debtor filed a voluntary Chapter 7 bankruptcy petition, listing Izzo among six unsecured creditors and stating that Debtor's total liability was $3,676,741.95.7
On August 23, 2011, Trustee initiated this adversary proceeding against the Bairds and NKP8 based on the Bairds' designation of the Arvest account for receipt of funds generated by the sale of Debtor's assets. On January 6, 2012, Trustee requested leave to amend the complaint, which the court granted on January 25, 2012. The first four counts of Trustee's first amended complaint sought the avoidance and recovery of allegedly fraudulent transfers to the Bairds; Count V alleged that the Bairds violated the Michigan Business Corporation Act; and Counts VI and VII alleged Michigan common-law and statutory conversion. The conversion claims alleged that the proceeds of sale were diverted to the Bairds as part of a scheme developed and carried out by Pam and Bill, who were in control of Debtor's management and direction, or, alternatively, carried out only by either Pam or Bill.
On March 13, 2012, the bankruptcy court granted Pam's motion to dismiss the conversion counts (Counts VI and VII) for failure to state a claim based on the court's determination that Trustee had not alleged that the Bairds had actually diverted the funds for their personal use. Trustee then moved to file a second amended complaint, again asserting the two conversion counts, but with added factual detail to support a finding that the Bairds used the funds generated from the sale of Debtor's assets for their own personal use and benefit. Among Trustee's allegations were that Bill and Pam used money from the proceeds of the sale to buy ahouse in Hawaii and made a number of transfers from the proceeds into various personal bank accounts. The Bairds objected to the amendment and both sides briefed the issue.
At the hearing on Trustee's request for leave, the bankruptcy court raised sua sponte the in pari delicto issue, positing that it might vitiate Trustee's conversion claims and render Trustee's proposed amendments futile. The bankruptcy court requested that the parties file post-hearing briefs. In Trustee's brief, Trustee argued that the Bairds were corporate insiders whose wrongful acts should not be protected, and that the Bairds and their actions were distinct from Debtor, and thus in pari delicto would not apply.
In its June 11, 2012 bench opinion, the bankruptcy court found that "the scales of justice still weigh in favor of trustee being given the opportunity to plead any and all viable claims that can be made against the Bairds with respect to the New King Par proceeds they received and deposited in the Arvest account," and that Trustee's second amended complaint properly alleged conversion. However, the bankruptcy court also found that embezzlement, to which Michigan law applies the doctrine of in pari delicto, is a more accurate description of "the unlawful conduct of which the Bairds stand accused," and that the doctrine applies to Trustee's embezzlement/conversion claims. The bankruptcy court rejected Trustee's arguments and reasoned that because Debtor and the Bairds were effectively one and the same, and the doctrine of in pari delicto provides a complete defense, the Bairds could not be liable for injuring Debtor. Thus, the bankruptcy court denied as futile Trustee's motion to file the second amended complaint.
Trustee moved to alter or amend the order denying leave to amend, arguing that because Pam alleged she had no active role in the conversion of Debtor's assets, the in pari delictodoctrine did not apply to her. In an affidavit attached to her response to Trustee's motion for summary judgment, Pam claimed that she had not been a shareholder of Debtor at any time relevant to the dispute. She further swore that she had not signed many of the corporate documents bearing her signature and indicating her role in the company.
However, the court recognized that in pari delicto might not apply to Trustee's second proposed scenario, yet found the allegation too conjectural to support leave to amend.
Trustee posits a hypothetical that has not in fact been alleged. If at some point he wishes to make this allegation, then the Court will at that time consider once again his conversion count. Or alternatively if Ms. Baird prevails at trial concerning her innocence, then trustee can ask at that time to amend his complaint to add the conversion so as to have his complaint conform with the proofs. However at this point in time, trustee is alleging that Ms. Baird was part of the decision process and as such, this exercise is pure speculation at this time.
Trustee reached settlements...
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