In re Tri-River Trading, LLC

Decision Date17 August 2005
Docket NumberNo. 04-6075EM.,04-6075EM.
Citation329 B.R. 252
PartiesIn re TRI-RIVER TRADING, LLC, Debtor. Jody DeBold, Plaintiff-Appellant, v. E. Rebecca Case, Defendant-Appellee.
CourtU.S. Bankruptcy Appellate Panel, Eighth Circuit

Appeal from the United States Bankruptcy Court for the Eastern District of Missouri, Kathy Ann Surratt-States, J.




Davie A. Warfield, St. Louis, Missouri, for appellant.

Joseph R. Dulle, St. Louis, Missouri,Howard S. Smotkin, Janice R. Valdez, St. Louis, Missouri, appeared on the brief, for appellee.

Before DREHER, FEDERMAN, and VENTERS, Bankruptcy Judges.

DREHER, Bankruptcy Judge.

This is an appeal from the bankruptcy court's grant of judgment in favor of Appellee, the chapter 7 Trustee for Debtor. Appellant commenced this declaratory judgment action seeking to have the bankruptcy court determine that she, not Debtor, owned $700,000 of the gross proceeds of an $800,000 settlement sum which had been paid, but not distributed, prior to the date creditors commenced an involuntary bankruptcy proceeding against Debtor. For the reasons stated below we reverse with instructions to enter judgment for the parties in the amounts determined by this decision.

A. The Formation of Debtor, Tri-River Trading, LLC

In 1999, Appellant, Jody DeBold (DeBold) and Jersey County Grain Company (Jersey Grain) formed Debtor, Tri-River Trading, LLC (Tri-River), a Missouri limited liability company. The company was to engage in the business of trading river barge traffic. DeBold, who was in her late 30s, agreed to leave her position at another company and devote full time to serving as the managing member of the LLC. For several years prior, DeBold had been successfully engaged in river barge trading and had been averaging about $100,000 per year in income.

DeBold was encouraged to enter into this transaction by Phil Thornton, the general manager of Jersey Grain. Thornton provided DeBold with pro formas which projected financial success and promised that Jersey Grain would use Tri-River for all its barge needs. His projections were based on this assumption. DeBold asserted that, based on these projections and representations, she invested $100,000 of her own money in Tri-River and spent nearly four years trying to make it successful. Jersey Grain also made a $100,000 capital contribution.

DeBold and Jersey Grain signed an Operating Agreement as the only two members of the LLC. Each was to own 50% of the company. Article 4.1 of the agreement provided that DeBold, as manager, would have exclusive control of the company's day-to-day operations and that the manager need not seek the consent of the other members prior to making any decisions affecting the company which were made in the ordinary course of business. Article 4.5 covered decisions outside the ordinary course of business, including the sale, lease, mortgage or pledge of all or substantially all of the assets of the company. These decisions needed to be approved by both DeBold and Jersey Grain.

The agreement provided that DeBold would receive a salary of $70,000 in Year 1, $75,000 in Year 2, $75,000 in Year 3, and $80,000 in Year 4 of the company's operations, plus a bonus in the amount of 10% of its net profit each year. The Operating Agreement, Article 11.3, further provided that no member or manager would be liable to the company or to the other members for actions taken in good faith, in the absence of some proof of gross negligence or misconduct. This Article went on to state that:

Any act or omission of any Member or Manager, the effect of which may cause or result in loss or damage to the Company or to the other Members or Manager, if done pursuant to the advise [sic] of legal or accounting counsel, shall be conclusively presumed not to constitute misconduct or gross negligence.

Article 15.1 of the Operating Agreement also provided that "[n]o Member, Manager or Assignee shall be liable to the Company or to any other Member, Manager or Assignee by reason of its actions in connection with the Company, unless otherwise provided in this Agreement, except in the case of actual fraud, gross negligence or willful misconduct."

The company commenced business but did not do well. Even though the market was not optimal, under DeBold's management Tri-River made a small profit in its early months of operation. Within a year after the company was formed, Thornton made sexual advances towards DeBold which she rebuffed. Thereafter, Jersey Grain ceased doing business with Tri-River. Before it took this action, Jersey Grain obtained a legal opinion in which its counsel advised Jersey Grain that it had no obligation to deal exclusively with Tri-River. Thornton also was able to persuade Tri-River's bank to stop lending operating capital to the LLC.

B. The State Court Lawsuit and Settlement

When it became clear that Tri-River could not survive without Jersey Grain's business, DeBold tried to unwind the company's future commitments for barge traffic and then closed its doors. This cost the company about $877,000. DeBold and Tri-River then commenced an action in state court against Jersey Grain and Thornton, its General Manager, and Hugh Moore, Jr., its President.1 Their joint complaint contained six counts. In Counts I and II, plaintiffs asserted a cause of action for breach of a written contract and a cause of action for breach of an oral contract. In Counts III and IV, plaintiffs asserted that DeBold had been induced to enter into the agreement based on the intentional and negligent misrepresentations of Thornton and Jersey Grain regarding future business and profits. In Count V plaintiffs claimed that defendants had tortiously interfered with Tri-River's futures contracts and its banking relationship. And, in Count VI plaintiffs claimed that defendants had breached fiduciary duties to them.

Plaintiffs were represented by Philip Corwin. DeBold and Tri-River both signed a contingency fee agreement with Corwin's firm promising to pay him a guaranteed contingency fee, plus expenses. Tri-River paid Corwin's firm an initial retainer of $2,000 and over time paid an additional $20,000 in costs as the matter progressed towards trial.2

During the pre-trial preparations, plaintiffs' damage expert, Thomas Hoops, issued a written report in which he concluded that both DeBold and Tri-River had incurred damages as a result of the defendants' actions. He set DeBold's damages at $734,000, made up of the difference between the salary she would have received and her salary while at Tri-River; her $100,000 investment; and, the present value of her future lost earnings following Tri-River's collapse. The same report set the company's damages at $2.682 million, including the loss incurred in unwinding its futures contracts ($877,238), the $200,000 investors' lost capital contributions, and over $1.6 million in future lost profits. Hoops made no independent analysis of Tri-River's lost future profits. Instead, he relied solely on the figures Thornton had projected in the pro formas.

On the day of trial, before the trial commenced, defendants paid $800,000 to plaintiffs to settle the case. The settlement agreement provided for dismissal of the case and the exchange of mutual general releases. It did not apportion the settlement proceeds between plaintiffs. Mutual Services Casualty Insurance Company issued its check for $200,000 on behalf of its insured, Jersey Grain. Jersey Grain issued its check for the remaining $600,000. Both checks were made payable to DeBold, Tri-River and Corwin's firm, as joint payees. The checks were deposited in Corwin's trust account. Shortly thereafter, disgruntled creditors of Tri-River filed an involuntary bankruptcy case and an order for relief issued. DeBold signed Tri-River's bankruptcy schedules, which listed $67,000 in net settlement proceeds as an asset of the bankruptcy estate.

C. The Declaratory Judgment Action in Bankruptcy Court

When the Trustee refused to agree with DeBold's contention as to her share of the settlement proceeds, DeBold commenced this declaratory judgment action in bankruptcy court. She asserted that she had agreed to the settlement on her own behalf and on behalf of the company based on the assumption that $700,000 would be paid to her and $100,000 to Tri-River, each minus their respective attorney's fees and costs. The Trustee answered, asserting that the full settlement belonged to the estate. The Trustee also commenced a third party complaint against Corwin's law firm and, by agreement of the parties and the petitioning creditors, the law firm deposited in the court registry $528,830.38. This amount was arrived at by deducting $266,640.00 in attorney's fees and an additional $4,529.62 in unpaid expenses from the $800,000 settlement proceeds.

Prior to trial the Trustee made a motion in limine seeking to exclude Corwin from testifying as an expert on the law. The bankruptcy court granted that motion.

In her opening statement, the Trustee changed direction slightly. She asked that the settlement be allocated 1/9th to DeBold based on her $100,000 investment and 8/9 to Tri-River based on its $800,000 loss in unwinding the barge trading contracts. The parties also stipulated to certain facts. DeBold called two witnesses, DeBold and Corwin. She also offered portions of the deposition testimony of the damages expert, Hoops. The Trustee offered no witnesses of her own. Instead, she relied on a series of exhibits she introduced as well as portions of Hoops's deposition testimony and limited excerpts of DeBold's deposition testimony.

DeBold testified that she had agreed to settle for $800,000 based on a split of 1/8 to Tri-River and 7/8 to her because, based on what she had learned during discovery, she had come to believe that the company's claims were weak and that her claims were, in contrast,...

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