In re Tri-River Trading LLC

• Decision Date: 18 October 2004
• Docket Number: Bankruptcy No. 03-42322-659.,Adversary No. 03-4703-659.
• Citation: 317 B.R. 65
• Parties: In re TRI-RIVER TRADING LLC, Debtor. Jody DeBold, Plaintiff, v. E. Rebecca Case, Chapter 7 Trustee, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Missouri

317 B.R. 65

In re TRI-RIVER TRADING LLC, Debtor Jody DeBold, Plaintiff, v. E. Rebecca Case, Chapter 7 Trustee, Defendant.

Bankruptcy No. 03-42322-659. Adversary No. 03-4703-659.

United States Bankruptcy Court, E.D. Missouri, Eastern Division.

October 18, 2004.

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Robert E. Eggmann, St. Louis, MO, for Debtor.

Howard S. Smotkin, St. Louis, MO, for Chapter 7 Trustee.

E. Rebecca Case, Saint Louis, MO, Chapter 7 Trustee.

Peter D. Kerth, St. Louis, MO, for Plaintiff.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

KATHY ANN SURRATT-STATES, Bankruptcy Judge.

The matter before the Court is Plaintiffs Complaint for Declaratory Judgment against Defendant Trustee to declare that settlement proceeds are not property of the Debtor's Bankruptcy Estate. Defendant Trustee filed an Answer to Complaint for Declaratory Judgment denying Plaintiffs entitlement to any of the settlement proceeds. Upon consideration of the record as a whole, the Court makes the following FINDINGS OF FACT:

In March of 1999, Plaintiff Jody DeBold ("DeBold") was approached by Phil Thornton ("Thornton") who expressed an interest in forming a barge freight trading company. At that time, DeBold was employed by Ceres Consulting, Inc. ("Ceres") and Thornton was an employee of Jersey Grain, Inc. ("Jersey"). Thornton represented to DeBold that he managed and controlled Jersey's freight trading operations. The parties agreed to form a new company, to be managed by DeBold, that would manage the grain shipping needs of Jersey and three other grain shippers. Thornton told DeBold that four companies, including Jersey, were interested in allowing the new venture to manage their grain shipping needs. Thornton also prepared pro forma financial projections based on the shipping needs of two of the four companies to demonstrate the lucrative profits the new venture could generate.

There is no evidence in the record that DeBold verified or investigated Thornton's representations with regard to the viability of the company. DeBold thereafter resigned from Ceres to fulfill her dream of owning a company.¹ Soon after DeBold resigned from Ceres, three of the four companies pulled out of the proposed venture leaving only Jersey. DeBold was concerned about the financial viability of the new venture given the departure of three of the four companies. Nevertheless, De-Bold and Jersey negotiated and signed an operating agreement ("Operating Agreement") to form Tri-River Trading, LLC ("Tri-River" or "Debtor"). There was an oral agreement between Jersey and Thornton to use Tri-River for all of Jersey's shipping needs (the "Agreement"). DeBold invested $100,000 of her own funds to launch Tri-River.

Tri-River was in operation trading freight on behalf of Jersey by August of 1999. Jersey placed all of its freight through Tri-River for the first eight to ten months of operation. Tri-River generated a slight profit although there were difficult market conditions at the time. DeBold thereafter established positions months in advance in an effort to take advantage of future changes in market conditions based on Jersey's past and projected shipping needs.

Soon after Tri-River was formed, Jersey arranged for a $1,000,000.00 unsecured line of credit for Tri-River with Co-Bank, a financial institution with its principal place of business located in the City of St. Louis, Missouri. Tri-River was able to trade freight with a number of transportation companies with the Co-Bank line of credit and Jersey's backing.

Thornton allegedly thereafter began to make sexual advances toward DeBold. Thornton often scheduled business meetings with DeBold; however, Thornton allegedly discussed his desire to engage De-Bold in a personal relationship at these meetings. There were two specific instances of alleged misconduct where Thornton inappropriately touched DeBold in a sexually offensive manner.² DeBold objected to each of Thornton's advances, and in September of 2000, made Hugh Moore, Jr.³ ("Moore") and Jersey aware of Thornton's offensive behavior towards her.

Thornton later began to purchase barge transportation with other companies in St. Louis, Missouri without utilizing Tri-River as the parties originally contracted pursuant to the Agreement. Thornton also caused Co-Bank to withdraw its line of credit from Tri-River. DeBold learned that Jersey decided to no longer place freight with Tri-River. Thereafter, De-Bold informed Jersey that it was required to deal exclusively with Tri-River. Thornton orally confirmed that Jersey was obligated to purchase all of its freight transportation needs with Tri-River pursuant to the Agreement. Nevertheless, Jersey continued to place freight with other transportation companies. Consequently, many transportation companies that dealt with Tri-River pulled out, demanded immediate payment, and placed extreme minimums on the number of barges in which they would allow Tri-River to trade. Once it became reasonably certain to DeBold that Jersey would not honor the Agreement by utilizing Tri-River for its transportation needs, Tri-River was forced to unwind market positions for future shipping contracts at an estimated loss of $800,000.

DeBold and Tri-River thereafter filed a civil action in the Circuit Court of the City of St. Louis, Missouri on July 9, 2002, against Defendants Thornton, Moore, and Jersey (collectively "Defendants") and in the First Amended Petition ("State Court Petition") alleged specific counts of (i) Breach of Contract and Specific Performance; (ii) Breach of Oral Contract; (iii) Fraud in the Inducement; (iv) Negligent Misrepresentation; (v) Tortious Interference with Business Relationships; and (vi) Breach of Fiduciary Duties. The Law Offices of Gretchen Myers, P.C. ("Myers") represented both Debtor and DeBold as Joint Plaintiffs in the State Court cause of action. Although there are a few paragraphs in the allegations common to all counts of the State Court Petition, DeBold failed to plead a specific count of a sexual harassment claim against the Defendants. The case settled for a sum of $800,000 (the "Settlement") and each Defendant was granted a release on February 12, 2003, when the Release of All Claims and Settlement Agreement ("Settlement Agreement") was signed. DeBold alleges that $200,000 of the Settlement was provided through insurance coverage that was available only with respect to her separate claims for sexual harassment. DeBold presented no evidence to support this allegation. The Settlement Agreement, although quite extensive, failed to make an allocation of the proceeds between DeBold and Tri-River.

PROCEDURAL POSTURE

This matter arises under and is related to an involuntary bankruptcy petition filed against Tri-River on February 27, 2003. An Order for relief was entered under Chapter 7 of the Bankruptcy Code on April 11, 2003.

DeBold filed a Complaint on July 14, 2003, for a Declaratory Judgment naming E. Rebecca Case, the duly appointed Chapter 7 Trustee ("Trustee"), as Defendant. DeBold seeks a declaratory judgment, pursuant to 28 U.S.C. § 2201(a), to determine the respective rights of DeBold and Trustee regarding the Settlement Proceeds arising from the State Court cause of action where DeBold and Debtor were Joint Plaintiffs. DeBold claims that she incurred actual losses of $520,000 based on her investment, her lost investment, and her lost salary. DeBold avers that out of the Settlement, $700,000 belongs to De-Bold individually and Trustee is entitled to only $100,000 on behalf of the Estate of Debtor. DeBold further avers that attorney's fees and costs incurred during the process of securing the Settlement should be shared proportionately between herself and Trustee. The total fees and expenses paid to Myers from the Settlement for representation was $271,169.62, which left $528,830.38 in net settlement proceeds ("Net Settlement Proceeds"). Therefore, DeBold avers that she is entitled to seveneighths (7/8s) of the Net Settlement Proceeds with the remainder to be paid to Trustee for the benefit of the Estate of Debtor.

Trustee filed an Answer to the Complaint for Declaratory Judgment (the "Answer") denying DeBold's entitlement to any portion of the Net Settlement Proceeds. Trustee raises the following arguments in her Answer. First, DeBold paid no portion of Myers' legal fees and expenses. There was an initial $2,000 check issued by Debtor to Myers at the time Myers was retained. Myers was later paid $20,000 by Debtor for litigation expenses. Myers was therefore paid a total of $22,000 for its retainer and expenses prior to the Settlement. Myers was paid an additional $266,640.00 in fees out of the Settlement. Myers was then reimbursed for expenses over and above the retainer out of the Settlement, which amounts to an additional $4,529.62 in expenses for a total of $271,169.62. Therefore, Debtor paid Myers a total amount of $293,169.62 in attorney's fees and expenses.

Second, DeBold was only entitled to receive a bonus based upon net profits incurred after all expenses were paid. However, Debtor failed to generate a net profit during its three and a half years of operation. Yet, DeBold received her full salary during the time that Debtor was in operation pursuant to the Operating Agreement. Furthermore, DeBold worked approximately seven (7) years as a barge freight trader and thirteen (13) years in the barge industry. DeBold did not actively seek out maritime job positions at the time of trial. DeBold did inquire about jobs in the industry and became aware that: (1) there was a gradual downturn in the barge freight trading industry for the last ten (10) to twelve (12) years and no jobs were currently available; (2) the downturn became extensive in late 2001; and (3) DeBold's chances for obtaining a job in the barge trading industry was slim. Ceres, De-Bold's former employer owns and operates barges at a loss. Therefore, DeBold's employment opportunities are...