In re Coastal Plains, Inc.

• Decision Date: 11 March 2005
• Docket Number: Bankruptcy No. 86-31299-HDH-7.,Adversary No. 04-3669.
• Citation: 326 B.R. 102
• Parties: In re COASTAL PLAINS, INC., Debtor. Industrial Clearinghouse, Inc., Coastal Plains, Inc., R. Wayne Duke, Dallas Valve and Instrument Company, and Intercontinental Bearing Company, Plaintiff, v. Jeffrey MIMS, Individually and as Trustee of Coastal Plains, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Texas

326 B.R. 102

In re COASTAL PLAINS, INC., Debtor Industrial Clearinghouse, Inc., Coastal Plains, Inc., R. Wayne Duke, Dallas Valve and Instrument Company, and Intercontinental Bearing Company, Plaintiff, v. Jeffrey MIMS, Individually and as Trustee of Coastal Plains, Inc., Defendant.

Bankruptcy No. 86-31299-HDH-7.

Adversary No. 04-3669.

United States Bankruptcy Court, N.D. Texas, Dallas Division.

March 11, 2005.

Donald R. Rector, Glast, Phillips and Murray, PC, Dallas, TX, for Plaintiff/Counter-Defendants.

Rod L. Poirot, Cavazos, Hendricks & Poirot, P.C., Dallas, TX, for Defendant/Counter-Plaintiff.

MEMORANDUM OPINION

HARLIN D. HALE, Bankruptcy Judge.

Before the Court are various related matters, including: Plaintiffs' motions to Remand, to Strike the Notice of Removal, and for Partial Summary Judgment; and Defendant's motions for Judgment on the Pleadings, to Strike Plaintiffs' Notice Under 9027(e)(3), and Cross Motion for Summary Judgment.

This memorandum opinion constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052. The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 151, and the standing order of reference in this district. This matter is a core proceeding, pursuant to 28 U.S.C. § 157(b)(2)(A).

In this adversary proceeding, the Plaintiffs sued the Trustee for intentional and negligent breach of fiduciary duty¹, as well as for a declaratory judgment that a claim against Debtor's former counsel had been abandoned. The declaratory judgment action has been dismissed.

I. BACKGROUND FACTS

The underlying bankruptcy case has a very long and somewhat tortured history. See, In re Coastal Plains, 179 F.3d 197 (5th Cir.1999). The instant adversary proceeding ultimately emanates from this litigation. The pertinent facts largely outlined by the Fifth Circuit in its opinion, are described below for background.

Coastal Plains, Inc. ("Debtor" or "Coastal") filed a bankruptcy petition under Chapter 11 of Title 11 of the United States Code (11 U.S.C. § 101, et. seq., hereinafter referred to as the "Bankruptcy Code") in April of 1986. A week after filing its Chapter 11 petition, the Debtor initiated an adversary petition against Browning Manufacturing, seeking an order both enjoining it from disposing of inventory and directing its transfer to Coastal. Coastal also asserted a conversion claim; interference with contracts and/or business relationships because of Browning's failure to return inventory; punitive damages; and violation of the automatic stay.

Shortly after the adversary proceeding was filed, the bankruptcy court found that Browning had violated the automatic stay and ordered the inventory returned to Coastal; however, the other claims were not addressed. Browning completed the inventory-return before the end of May.

The bankruptcy schedules for Coastal, which Wayne Duke, Coastal's CEO, executed, did not disclose Costal's claims of up to $10 million against Browning. And, although Coastal's $1.3 million debt to Browning was listed in the schedule of liabilities, it was not specified as contingent, disputed, or subject to setoff.

In September of 1986, Westinghouse, Coastal's secured lender, asserted that it had a secured interest in excess of the value of the assets in Coastal's estate, and that Coastal had no hope to reorganize and moved the court to lift the § 362 automatic stay, so that it could foreclose on its collateral. Coastal entered into an agreement with Westinghouse and the stay was lifted for Westinghouse to foreclose. Westinghouse purchased Coastal's assets at an auction it later conducted for $3.25 million and entered into a consignment agreement to sell the majority of the assets Westinghouse had purchased at the auction to Industrial Clearinghouse, Inc., which was formed by Coastal's CEO, Wayne Duke. Industrial Clearinghouse was headed by Mr. Duke, as CEO, and staffed by former employees of Coastal. Industrial Clearinghouse is one of the present Plaintiffs in this proceeding.

In February 1987, Industrial Clearinghouse purchased the remaining Coastal assets from Westinghouse for $1.24 million. Those assets expressly included the previously undisclosed "potential cause of action against Browning".

One year after the bankruptcy case was filed, in April of 1987, the case was converted to a case under Chapter 7 of the Bankruptcy Code, and Duke Salisbury was appointed Chapter 7 Trustee. Soon after becoming Chapter 7 Trustee, Mr. Salisbury filed a no-asset report and applied for closing the bankruptcy case. The case was closed in February 1988.

The case was reopened in March 1988 for reasons unrelated to the litigation with Browning. However, that April Industrial Clearinghouse urged the Trustee, Mr. Salisbury, to pursue the litigation against Browning. Salisbury refused, because the litigation would only have benefitted Industrial Clearinghouse.

In October 1988, Industrial Clearinghouse was substituted for Coastal in the long dormant (since May 1986) adversary proceeding against Browning. Industrial Clearinghouse filed its first amended complaint in March 1989, alleging that Browning's breach of the return-inventory agreements and return-delay caused Coastal's bankruptcy; and asserting claims for breach of contract, conversion, interference with contracts and/or business relationships, fraud, and violation of the automatic stay. A second amended complaint was filed in late 1989; a third, in early 1992. In September 1992, the Trustee again moved to close the bankruptcy case and for his discharge. Industrial Clearinghouse filed its fourth amended complaint that December.

The adversary proceeding was set for trial in May 1993 in the district court, which had withdrawn the reference from the bankruptcy court. But, on the eve of trial, the Trustee moved to intervene, claiming that Coastal's bankruptcy estate owned the claims being pursued against Browning. The district court referred the case to the bankruptcy court for the ownership determination.

In bankruptcy court, Browning asserted, inter alia, that, based on Coastal's nondisclosure in its bankruptcy schedules and the lift-stay stipulation, Industrial Clearinghouse and the Trustee were equitably and judicially estopped. Regarding judicial estoppel, Industrial Clearinghouse responded that the claims had been omitted through Debtor's counsel's oversight. This Court (the Honorable Robert C. McGuire, C.J.) ruled that the estate owned the tort claims and Industrial Clearinghouse owned the contract claims.

Industrial Clearinghouse and the Trustee entered into an agreement to pursue the claims jointly and share any recovery against Browning, with Industrial Clearinghouse to receive 85 percent, and the estate to receive 15 percent. In May 1994, following a hearing that January, Judge McGuire approved the Trustee/Industrial Clearinghouse sharing agreement and, inter alia, rejected Browning's judicial estoppel argument. Browning appealed to the district court, which affirmed; and to the Fifth Circuit, which affirmed approval of the sharing agreement, but dismissed Browning's appeal as to judicial estoppel, holding that the ruling was interlocutory.

Duke Salisbury resigned as Chapter 7 Trustee in 1995 and was replaced with Mr. Mims, defendant herein, by the Office of the United States Trustee. Industrial Clearinghouse and Mr. Mims continued to pursue the litigation against Browning, and were successful in receiving a jury verdict for over $18 million that was later reduced by the U.S. District Court for the Northern District of Texas to a judgment of $4 million, and allowing Browning to set-off its $1.3 million claim.

However, in a rather strong opinion, the Fifth Circuit reversed on judicial estoppel grounds. See In re Coastal Plains, 179 F.3d 197 (5th Cir.1999). Thereafter, Mr. Wayne Duke (CEO for both Industrial Clearinghouse and Coastal), amended the Coastal bankruptcy schedules to include a claim against the original Debtor's counsel in this bankruptcy case, Jackson Walker, LLP, for failure to properly schedule the claims against Browning, the action which gave rise to the winning defense at the appeals court level.

After the Fifth Circuit ruled against the Trustee, Mr. Duke and counsel for Industrial Clearinghouse consulted with the Trustee in an attempt to persuade him to adjust his sights and sue Jackson Walker. After considering the proposal for some time, the Trustee declined.

Thereafter, in March of 2000, the Trustee filed his final report, application for compensation, and report of proposed distribution to creditors in this bankruptcy case, and sought and obtained orders allowing his fees and also allowing the case to be closed. The order approving Mims' application for fees and proposed distribution was entered by the Court on June 2, 2000, and the order discharging the trustee and closing this bankruptcy case was entered on December 12, 2000. The Plaintiffs, Industrial Clearinghouse, Mr. Wayne Duke (CEO of the Debtor and Industrial Clearinghouse), Coastal Plains, Inc. (an entity that claims to have merged with the bankrupt corporate shell of the Debtor), and two of the creditors in the Debtor's bankruptcy case, at all times were parties in interest to this bankruptcy case and had notice of all of the proceedings, including the orders allowing Mr. Mims' fees and allowing the case to be closed. Both orders became final without an objection being filed.

In May of 2003, the Plaintiffs filed a motion to reopen this case, which was granted by order entered on June 3, 2003. Thereafter, this Court considered the Plaintiffs' motion to appoint a trustee and abandon the Debtor's claim against Jackson Walker to them. This motion was denied and a subsequent motion for clarification was also denied, because any claim that the bankruptcy estate may have had against Jackson Walker, LLP for its alleged malpractice in not scheduling the Debtor's...