In re McKenzie

• Decision Date: 05 August 2011
• Docket Number: No. 08-16378,08-16378
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee
• Parties: In re: STEVE A. McKENZIE a/k/a TOBY McKENZIE, Debtor.

In re: STEVE A. McKENZIE a/k/a TOBY McKENZIE, Debtor.

No. 08-16378

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF TENNESSEE SOUTHERN DIVISION

SIGNED: August 5,2011

Shelley D. Rucker

UNITED STATES BANKRUPTCY JUDGE

MEMORANDUM

Grant, Konvalinka & Harrison, P.C. ("GKH") has filed a motion seeking leave of this court to file a state court action in Bradley County against the trustee in this case, C. Kenneth Still ("Trustee"), and the Trustee's attorneys, Richard L. Banks, and Richard L. Banks & Associates, P.C.("Defendants").¹ [Doc. No. 1200]. This court held a hearing on this motion on May 18, 2011.

The motion states that the "actions of the Trustee and his attorneys in filing andattempting to prosecute the Bradley County Complaint give[ ] rise to causes of action which would best be brought in the Circuit Court of Bradley County, Tennessee." See [Doc. No. 1200 at 2]. At the hearing GKH described the nature of the claims it seeks to bring as claims for malicious prosecution and abuse of process. This lawsuit would pursue claims that arise from the filing of a lawsuit by Steve A. "Toby" McKenzie (the "Debtor"), and the Trustee against Nelson Bowers, II, Exit 20 Auto Mall, LLC, John Anderson and GKH in the Chancery Court of Bradley County, Tennessee on August 6, 2010 ("Malpractice Lawsuit"). [Doc. No. 1200-1] .

The court makes the following findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052 as made applicable to contested matters by Fed. R. Bankr. P. 9014.

I. Background

A. Related Litigation

The Malpractice Lawsuit stated, with respect to jurisdiction, "[c]ontemporaneously with this State Court action, the Plaintiffs have filed in the United States Bankruptcy Court for the Eastern District of Tennessee Southern Division at Chattanooga, a related case dealing exclusively with claims that are core to the bankruptcy proceedings in that Court. . . . The action filed in this Court is exclusively for non-core matters and causes of action(s) that may only be properly heard in this Court." [Doc. No. 1200-1, ¶ 1].

The "related case" to which the debtor and the Trustee referred is an adversary proceeding which was filed on August 5, 2010, in this court, styled Still v. Nelson E. Bowers II, Exit 20 Auto Mall, LLC, John Anderson, GKH, and CapitalMark Bank & Trust, Adv. Proc. No. 10-1407, in which the the Trustee sought to set aside, among other things, a transfer of 50 acres of real estate in Bradley County conveyed by a limited liability company in which the Debtor was a 50% member ("50 Acre Lawsuit"). The details of this suit are discussed in more detail in the recitation of this court's previous findings set forth below. On December 16, 2010, this court dismissed the 50 Acre Lawsuit in which the Trustee had alleged claims of violation of theautomatic stay, avoidance of preferences, avoidance of fraudulent transfers, equitable subordination and claims against insiders. See [Adv. Proc. No. 10-1407, Doc. Nos. 1, 67]. Following that dismissal, GKH filed an adversary proceeding against Richard Banks, Andrew B. Morgan, Richard Banks & Assoc., P.C., F. Scott LeRoy d/b/a LeRoy & Bickerstaff, F. Scott LeRoy, LeRoy & Bickerstaff PLLC, LeRoy, Hurst & Bickerstaff, PLLC, and C. Kenneth Still alleging malicious prosecution and abuse of process ("50 Acre Malicious Prosecution Case"). See [Adv. Proc. No. 11-1016, Doc. No. 1].

A review of the Malpractice Lawsuit and the 50 Acre Lawsuit reveals that the factual allegations of each, while not completely identical in every respect, are substantially similar. See [Adv. Case No. 10-ap-1407, Doc. No. 1, Complaint] and [Doc. No. 1200-1, Ex. A]. GKH admits that the 50 Acre Lawsuit is an "admittedly related case" having the "'same operative facts'" as the Malpractice Lawsuit. [Doc. No. 1307, p. 2]. GKH has already filed the 50 Acre Malicious Prosecution Case, and it now seeks to pursue the same causes of action in Bradley County based on the Malpractice Lawsuit, a case with the "same operative facts." The court will refer to the action which GKH seeks to bring in Bradley County as the "Bradley County Malicious Prosecution Case."

The 50 Acre Malicious Prosecution Case is still pending in this court, and the defendants have filed motions to dismiss. This court has yet to rule on the motions to dismiss, but the parties have briefed the issue of the applicability of immunity for the Trustee and his counsel in that proceeding. The court seeks to resolve the pending motions for leave prior to issuing its opinion on the motions to dismiss in Adversary Proceeding No. 11-1016.

B. Exhibits Presented at the Hearing

In support of its motion, GKH attached a copy of the complaint and the accompanying exhibits filed in the Malpractice Lawsuit, which were admitted at the hearing. In the Malpractice Lawsuit, the Debtor and the Trustee had brought claims of breach of fiduciary duty and conflictof interest, assisting a fiduciary on committing a breach of duty, and civil conspiracy against the various defendants. See id. Also in support of its motion for leave, GKH provided the court with an Agreed Order Clarifying [Bradley County Chancery] Court's Order Entered January 26, 2011 and Resolving Two Pending Motions ("Bradley County Order"). [Doc. No. 1200-2].

At the May 18th hearing the court admitted several additional exhibits filed by GKH in support of its motions for leave to file suit against the Defendants. See [Doc. Nos. 1248 through 1248-6]. These exhibits include the motions for dismissal pursuant to Tennessee Rule of Civil Procedure 12 filed by defendants named in the Malpractice Lawsuit. [Doc. Nos. 1248-1, 1248-2, 1248-3]. The exhibits also include the order filed in this court dismissing the 50 Acre Lawsuit, Adv. Proc. No. 10-ap-1407, entered on December 16, 2010, as well as the transcript of the hearing on the motion to dismiss held on December 16, 2010. [Doc. No. 1248-3]. GKH also provided the court with its response to the Trustee's and Debtor's memorandum of authority relating to the motion to dismiss the Malpractice Lawsuit. [Doc. No. 1248-4]. The record also includes the Bradley County Chancery Court's order dismissing the Trustee's and Debtor's claims of breach of fiduciary duty and conflict of interest on statute of limitations grounds. [Doc. No. 1248-5]. GKH's final hearing exhibit consists of a letter from Richard Banks dated February of 2011 to counsel for the defendants in the Malpractice Lawsuit regarding the settlement of that lawsuit. [Doc. No. 1248-6].

In its "closing argument" briefing filed on June 10, 2011, GKH added additional exhibits which were admitted upon motion without objection on July 21, 2011. They included additional pleadings filed in the Bradley County Chancery Court.

II. Facts

This court has already summarized some of the underlying factual allegations of the Malpractice Lawsuit in its opinion relating to GKH's motion to clarify. See [Doc. No. 1199]. For ease of reference, the court will quote its factual findings from its opinion that summarized theTrustee's and the Debtor's allegations relating to the Malpractice Lawsuit, as well as the 50 Acre Lawsuit. The court has already found the following:

This case began as an involuntary petition filed against Steve A. McKenzie on November 20, 2008. The involuntary case was followed by a voluntary Chapter 11 petition, Case No. 08-16987, filed on December 20, 2008. The voluntary case was consolidated with the involuntary case on January 16, 2009, and proceeded as a Chapter 11. Mr. Kenneth Still was appointed trustee for the Chapter 11 case on February 20, 2009. [Doc. No. 140]. The case was converted to a Chapter 7 proceeding on June 14, 2010 [Doc. No. 789], and Mr. Still was reappointed as the Chapter 7 Trustee. See Bankr. Case No. 08-16378, Docket Entry dated 6/14/10. In the Chapter 11 and the Chapter 7, Mr. Scott LeRoy and Mr. Richard Banks were employed as counsel to the Trustee under 11 U.S.C. § 327(e). Mr. LeRoy was hired to assist the Trustee with a wide variety of matters. [Doc. No. 1069]. Mr. Banks was employed as special litigation counsel. [Doc. No. 806, entered July 1, 2010]. Mr. Banks had previously represented the debtor in the Chapter 11 and was retained to pursue causes of action against certain individuals and law firms listed in Schedule B. Those causes of action are described in an "Exhibit A as Amended in Schedule B" filed with the court on May 24, 2010. [Doc. No 721]. They include "Pre & Post Petition legal claims against Grant, Konvalinka & Harrison" estimated at $2,500,000. Id. No objection was filed to Mr. Banks' employment.

On August 5, 2010, the Trustee brought an action against Nelson E. Bowers II, Exit 20 Auto Mall, LLC, John Anderson, Grant, Konvalinka and Harrison, PC, and CapitalMark Bank & Trust. [Adv. No. 10-1407, ("Trustee's Complaint")].² The Trustee's Complaint was signed by Mr. Banks and Mr. LeRoy as counsel for Mr. Still. See [Adv. No. 10-1407, Doc. No. 1].

The enumerated causes of action in the Trustee's Complaint were violation of the automatic stay, avoidance of post petition transfers, avoidance of preferences, avoidance of fraudulent transfers, an action to determine the validity of a lien, equitable subordination, and preference claims against insiders. The Trustee's Complaint sought to avoid a post petition transfer of approximately sixty acres³ of real estate located in Bradley County, Tennessee. Based on filings with the Tennessee Secretary of State and the Register's Office of Bradley County which were attached to the Trustee's Complaint and on which Judge John C. Cook relied in his dismissal, [Adv. No. 10-1407, Doc. No. 1]; [Transcript,Adv. No. 10-1407 at pp. 8-9], the transferor was Cleveland Auto Mall, LLC whose members were the debtor and Mr. Nelson E. Bowers, II. The transferee company was Exit 20 Auto Mall, LLC, formed December 10, 2008, organized by Wayne Grant, who also served as registered agent with an address at 633 Chestnut Street, Chattanooga, TN.

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