In re Inc.

• Decision Date: 27 September 2011
• Docket Number: Bankruptcy No. 06–26608–svk.,Adversary No. 07–2110.
• Citation: 456 B.R. 894,55 Bankr.Ct.Dec. 152
• Parties: In re PRO–PAC, INC., Debtor.Pro–Pac, Inc., et al., Plaintiffs,v.George Chapes, III, et al., Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

456 B.R. 894
55 Bankr.Ct.Dec. 152

In re PRO–PAC, INC., Debtor.Pro–Pac, Inc., et al., Plaintiffs,
v.
George Chapes, III, et al., Defendants.

Bankruptcy No. 06–26608–svk.

Adversary No. 07–2110.

United States Bankruptcy Court, E.D. Wisconsin.

Sept. 27, 2011.

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Evan Schmit, Jerome R. Kerkman, Joseph R. Cincotta, Kerkman & Dunn, Milwaukee, WI, for Plaintiffs.William P. Dineen, Crivello Carlson, S.C., Brett B. Larsen, David J. Hanus, Kristofor L. Hanson, Noah D. Fiedler, Hinshaw & Culbertson, LLP, Milwaukee, WI, for Defendants.MEMORANDUM DECISION SUSAN V. KELLEY, Bankruptcy Judge.Introduction

This is a case where a sweet deal went sour for one of the parties. David and Linda Sarna wanted to expand and diversify their packaging business, Pro–Pac, Inc., and decided that warehousing and transportation were compatible business lines. The Sarnas turned to a family friend, George Chapes, a well-connected veteran of the industry with a stable of valuable contacts. Chapes signed a confidentiality agreement in May 2005, and soon began work as Pro–Pac's vice president for sales. But rather than boost Pro–Pac's business as the Sarnas envisioned, Chapes steered sales, including a lucrative sugar storage contract, to Pro–Pac's competitor, WOW Logistics Company (“WOW”).

Pro–Pac filed a Chapter 11 petition on November 20, 2006; the case culminated in confirmation of a liquidating Chapter 11 plan on August 31, 2007. Meanwhile, on May 19, 2007, Pro–Pac and the Sarnas filed this adversary proceeding against Chapes and WOW.¹ The Complaint alleges that Chapes, aided and abetted by WOW, breached his duty of loyalty to Pro–Pac by diverting certain accounts to WOW. On March 19, 2010, the Court granted partial summary judgment, limiting the scope of the suit. The Sarnas' personal claims were dismissed, and Pro–Pac's claims against WOW and Chapes were reduced to the diversion of two accounts: Vangard and Pets International. With the narrowing of the issues for trial, the parties unsuccessfully attempted mediation.

On June 7 and 8, 2011, the Court conducted the trial, and considered various exhibits and the testimony of David Sarna, Gerald Krug, Jamie Wally, Tom Pelafas, and George Chapes. WOW had filed a pre-trial Motion to exclude certain testimony related to Pro–Pac's damages; the Court held that Motion in abeyance. At the conclusion of the second day of trial, the parties agreed that the remaining evidence

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and arguments could be presented through deposition transcripts and post-trial briefs. At that time, Pro–Pac also abandoned the claims regarding Pets International. The sole remaining issue is whether Pro–Pac is entitled to damages based on Chapes' and WOW's alleged scheme to commandeer what is known as the “Vangard deal” for their own benefit. Specifically, this Court must decide whether Pro–Pac proved that (1) Chapes breached his fiduciary duty to Pro–Pac by steering the Vangard deal to WOW; and (2) WOW intentionally aided and abetted Chapes' breach of his fiduciary duty for its own profit. Pro–Pac claims that it is entitled to a judgment against WOW and Chapes for $467,220 in actual damages, plus punitive damages of three times the amount of actual damages. Alternatively, Pro–Pac asserts it is entitled to unjust enrichment damages against WOW in the amount of $385,000.Jurisdiction

This adversary proceeding involves state law claims that a former employee breached his fiduciary duty to the Chapter 11 debtor prior to the filing of the bankruptcy petition; the confirmed plan in this case dedicates the proceeds of the claim to the unsecured creditors. While this proceeding does not arise under Title 11 of the United States Code nor arise in a case under Title 11, the adversary proceeding is “related to” a case under Title 11. See 28 U.S.C. § 157(a). Accordingly, this Court has jurisdiction over this proceeding via referral from the district court under 28 U.S.C. § 157(a).

The referral does not end the jurisdictional inquiry. Under 28 U.S.C. § 157(b), the bankruptcy court has authority to enter final judgments in proceedings related to bankruptcy cases only if the proceedings are “core proceedings.” If a proceeding is not a core proceeding, unless the parties consent, the bankruptcy court can hear the matter, but cannot enter a final judgment. Instead, the bankruptcy court must make proposed findings of fact and conclusions of law for consideration by the district court. See 28 U.S.C. § 157(c). In the Complaint, Pro–Pac alleged that this is a core proceeding under § 157(b)(2)(O) as a matter affecting the liquidation of the assets of the bankruptcy estate. (Compl. ¶ 9.) WOW admitted this allegation in its Answer, indicating its consent to this Court's entry of a final judgment. (WOW Answer ¶ 5.) Chapes stated that he lacked knowledge and information sufficient to form a belief as to the allegation that this is a core proceeding, and denied the allegation. (Chapes Answer ¶ 8.) However, Chapes subsequently entered into a Stipulation pursuant to 28 U.S.C. § 157(e) consenting to this Court's conduct of a jury trial in this adversary proceeding.² That Stipulation effectively demonstrates Chapes' consent to the trial of this matter as a core proceeding. See In re K & R Express Sys., 382 B.R. 443, 448 (N.D.Ill.2007) (consent to jury trial equates with consent to final judgment being entered by bankruptcy court, because proposed findings and conclusions could not be entered in jury trial).

The Supreme Court's recent decision in Stern v. Marshall, –––U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), limited the authority of the bankruptcy court to enter final judgments on certain state law counterclaims even though counterclaims to proofs of claim are denominated as core proceedings in 28 U.S.C. § 157(b)(2)(C). However, Stern confirms that the bankruptcy court has the authority

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to render final judgments even in non-core proceedings with the consent of the parties. The Supreme Court stated: “Section 157 allocates the authority to enter final judgment between the bankruptcy court and the district court. See § 157(b)(1), (c)(1). That allocation does not implicate questions of subject matter jurisdiction. See § 157(c)(2) (parties may consent to entry of final judgment by bankruptcy judge in non-core case).” Id. at 2607. Since WOW and Chapes clearly consented to this Court's entry of a final judgment on Pro–Pac's Complaint, even if this action is a non-core proceeding, this Court has both the subject matter jurisdiction and authority to proceed.Facts³

The Sarnas incorporated Pro–Pac in 1999, with Linda Sarna as president and David Sarna as secretary/treasurer. The Sarnas were the sole officers, shareholders and directors of Pro–Pac. In June 2005, Pro–Pac hired Chapes as the vice president of sales, with a salary of $84,000, a company vehicle, an expense account, and health insurance.⁴ (Trial Tr. Vol. 1, 31, 32; Pro–Pac Ex. 5.)

In August 2005, Pro–Pac subleased a 148,250–square foot warehouse facility in East Troy, Wisconsin from WOW. WOW is a third party logistics (or “3PL”) service provider, operating public warehouses in Wisconsin, Illinois, and Idaho and brokering transportation services for customers around the country. (Stip. of Facts ¶¶ 6, 7.) Around the time that Pro–Pac subleased the East Troy warehouse, WOW was looking to exit some southeast Wisconsin markets, but to expand its operations in Illinois. (Stip. of Facts ¶ 18.)

In early 2006, WOW asked Pro–Pac if it would be interested in leasing another warehouse in Grafton, Wisconsin. (Stip. of Facts ¶ 19.) As in East Troy, WOW hoped that Pro–Pac could take over the business in Grafton and remain WOW's tenant. (Stip. of Facts ¶ 20.) David Sarna traveled to Grafton on April 6, 2006 to discuss the deal with WOW. (Stip. of Facts ¶ 2 1.) Jamie Wally, WOW's senior vice president of sales and marketing, attended the meeting and raised WOW's use of Chapes as a consultant to develop business for WOW in Illinois. (Stip. of Facts ¶¶ 22, 23.) Sarna testified that he was taken aback when Wally “made a comment ... about us not minding if they were using [Chapes] to fill some warehouse space.” (Trial Tr. Vol. 1, 64, 65.) Sarna said the comment threw him for a loop because Chapes never revealed that he was sharing information and contacts with WOW. (Trial Tr. Vol. 1, 65.) After the tour, Sarna, Wally, and Chapes met in the facility's conference room. Wally again stated, “Are you sure you don't mind us using [Chapes] to fill some warehouse space?” (Trial Tr. Vol. 1, 65.) Sarna replied that he would need to speak further with Chapes. (Trial Tr. Vol. 1, 66.) Sarna confronted Chapes on the way home from Grafton. “I asked [Chapes] what the heck was going on? You know ... why is [Wally] coming to me blindly about ... using you?” ( Id.) After

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a long pause, Chapes explained that Wally had approached him about filling warehouse space for WOW in Madison and that he was just appeasing Wally until Pro–Pac made a decision regarding the Grafton facility. ( Id.) Sarna was upset and told Chapes, “from this point forward ... if you are working with WOW or there's something going on, I need to know what's happening. They're our landlord. This is too close to home.” ( Id.) Sarna said Chapes agreed and apologized. (Trial Tr. Vol. 1, 67.) The Grafton warehouse sublease that was the subject of the meeting never materialized, but Wally's comments regarding Chapes' assistance in filling warehouse space for WOW sparked months of negotiations. (Stip. of Facts ¶ 24.) Sarna and Wally conducted the negotiations via telephone and email.Negotiations for rent concessions

The emails reveal that Sarna sought lease concessions from WOW at the East Troy facility in exchange for permitting Chapes to consult with WOW. On July 17, 2006, Sarna sent an email to Wally detailing his demands for a workable agreement. (WOW Ex. 1002.) According to this opening email, Sarna's objective...