In re Tri-State Fin., LLC

• Decision Date: 06 September 2016
• Docket Number: BANKRUPTCY NO. BK08-83016,8:15-CV-33,ADV. PROC. NO. 10-8052,8:15-CV-38,8:15-CV-39
• Parties: IN THE MATTER OF: TRI-STATE FINANCIAL, LLC, Debtor. GEORGE ALLISON, et al., Appellants. IN THE MATTER OF: TRI-STATE FINANCIAL, LLC, Debtor. RADIO ENGINEERING INDUSTRIES, INC., Appellant. IN THE MATTER OF: TRI-STATE FINANCIAL, LLC, Debtor. JOHN HOICH AND DENISE HOICH, Appellants.
• Court: U.S. District Court — District of Nebraska

IN THE MATTER OF: TRI-STATE FINANCIAL, LLC, Debtor.
GEORGE ALLISON, et al., Appellants.

IN THE MATTER OF: TRI-STATE FINANCIAL, LLC, Debtor.
RADIO ENGINEERING INDUSTRIES, INC., Appellant.

IN THE MATTER OF: TRI-STATE FINANCIAL, LLC, Debtor.
JOHN HOICH AND DENISE HOICH, Appellants.

8:15-CV-33
BANKRUPTCY NO. BK08-83016
ADV. PROC. NO. 10-8052
8:15-CV-38
8:15-CV-39

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEBRASKA

September 6, 2016

MEMORANDUM AND ORDER

George Allison, Jr., Frank and Phyllis Cernik, Chris and Amy Daniel, Distefano Family Ltd. Partnership, Timothy Jackes, George Kramer, and Bernie Marquardt (collectively, "Allison"), John and Denise Hoich (the "Hoiches"), and Radio Engineering Industries, Inc. ("REI") (all collectively, "investors") appeal the January 13, 2015, order

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and judgment of the bankruptcy court¹ determining $1,190,000² in contested funds were property of the Tri-State Financial, LLC ("Tri-State Financial") bankruptcy estate and awarding Trustee Thomas D. Stalnaker ("Stalnaker") certain fees and expenses from the estate. With jurisdiction under 28 U.S.C. § 158(a)(1), this Court affirms.

I. BACKGROUND

On May 23, 2003, Tri-State Ethanol, LLC ("Tri-State Ethanol"), a South Dakota company that owned and operated an ethanol plant in Rosholt, South Dakota, filed a petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of South Dakota. On June 20, 2003, a group of investors known as "the Omaha Group"—many of whom who are appellants here—formed Tri-State Financial reportedly as a means to support Tri-State Ethanol and fund its bankruptcy case.

James Jandrain ("Jandrain") and Penny Thelen ("Thelen") were primarily responsible for keeping Tri-State Financial's financial records. Beginning in June 2003, members of the Omaha Group transferred $2,000,000 to a Tri-State Financial account held at First National Bank of Omaha ("First National"). The transfers were recorded as a "2M call" and treated as capital contributions in Tri-State Financial's general ledger. Tri-State Financial then transferred $793,654.42 from the First National account to Tri-State Ethanol and $1,190,000 to one of Tri-State Ethanol's vendors.

In July 2004, Tri-State Ethanol's bankruptcy case was converted from Chapter 11 to Chapter 7 and John S. Lovald ("Lovald") was named trustee. On January 24, 2005, Tri-State Financial filed a request for allowance of administrative expenses and a proof of claim in Tri-State Ethanol's bankruptcy case seeking to recover the $1,983,654.42 Tri-

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State Financial transferred for Tri-State Ethanol's benefit. In making the claim, Tri-State Financial indicated the money was an unsecured post-petition loan to a debtor-in-possession. None of the individual members of the Omaha Group filed a proof of claim in the Tri-State Ethanol bankruptcy related to those funds or objected to Tri-State Financial's claim. Lovald opposed Tri-State Financial's request, objected to its claim, and initiated an adversary proceeding.

In February 2005, Lovald sold Tri-State Ethanol's Rosholt ethanol plant at auction. Tri-State Financial purchased the plant and began operating it. Tri-State Financial funded the purchase with additional capital from the Omaha Group and new Tri-State Financial members. Tri-State Financial issued membership units to those contributing capital at that time. After the plant was profitable, Tri-State Financial made an interest payment to the Omaha Group but not the new members.

At a Tri-State Financial investor meeting in April 2005 attended by the Omaha Group and others, members of the Omaha Group "asked why the $2.0M that Omaha loaned to [Tri-State Ethanol] in 2003-2004 was not listed on the investor roster . . . distributed before the meeting." They were told the funds were originally included on the roster because the funds were going to be converted to equity when Tri-State Ethanol's reorganization plan was confirmed. When the plan failed, "the money remained as a loan to [Tri-State Ethanol] and Omaha filed an administrative claim against the [Tri-State Ethanol] estate for $2.0M." Another investor also "reiterated that it should not be on the roster because it" would dilute that investor's interest. After that meeting, Jandrain and Thelen regularly referred to the $2,000,000 as a loan.

In May 2005, Tri-State Financial and Lovald reached a Compromise Agreement ("Compromise Agreement") to treat $793,654.42 of the $1,983,654.42 Tri-State Financial claimed as a first-priority administrative expense and to treat the remaining

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$1,190,000 as a subordinated general unsecured claim. They submitted the agreement to the Tri-State Ethanol bankruptcy court for approval.

On June 7, 2006, Tri-State Financial obtained an $18,000,000 loan from Centris Federal Credit Union ("Centris"), part of which was used to redeem REI's interest in Tri-State Financial. As a part of the loan, Centris obtained a security interest in all of Tri-State Financial's assets, including Tri-State Financial's right to the payment of money and general intangibles. In agreeing to redeem its interest, REI reserved its rights to receive ten percent of any payments made to Tri-State Financial with respect to Tri-State Financial's administrative claim in the Tri-State Ethanol bankruptcy. In 2008, John Hoich similarly retained his right to receive part of any distribution derived from Tri-State Financial's claim when he sold his equity interest.

On June 14, 2006, the Tri-State Ethanol bankruptcy court approved the Compromise Agreement. Two weeks later, Lovald paid the $793,654.42 administrative expense to Tri-State Financial, which then distributed the funds pro rata to the Omaha Group, including REI. On August 28, 2006, the investors, with the exception of REI and Denise Hoich, entered into a release of all claims they may have had against Tri-State Financial. The parties dispute the scope of that release.

On November 21, 2008, Tri-State Financial filed its own petition for Chapter 11 relief in the United States Bankruptcy Court for the District of Nebraska. After his appointment as trustee in January 2009, Stalnaker negotiated a settlement with Lovald and obtained the remaining $1,190,000 Tri-State Financial claimed. On December 31, 2009, the Omaha Group, for the first time, notified Stalnaker that the Omaha Group owned the funds and demanded payment. In 2010, Stalnaker filed an adversary proceeding, seeking a declaration that the funds were property of Tri-State Financial's bankruptcy estate. Centris agreed the bankruptcy estate owned the funds but asserted they were subject to Centris's superior security interest in Tri-State Financial's assets. In

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contrast, the investors claimed the funds were not Tri-State Financial assets, but that Tri-State Financial held them in trust for the Omaha Group.

A two-day trial began October 30, 2012. On February 13, 2013, the bankruptcy court³ determined the $1,190,000 was not property of the Tri-State Financial bankruptcy estate. Relying on witness testimony and Tri-State Financial's written records, the bankruptcy court found Tri-State Financial held only legal title to the funds in either a resulting trust or a constructive trust for the Omaha Group. The bankruptcy court determined, however, that the Tri-State Financial bankruptcy estate was entitled to be reimbursed from those funds for the attorney fees, costs, and expenses it incurred (1) obtaining the funds from Lovald and (2) prosecuting the adversary proceeding against the investors. Noting the investors had supported Stalnaker's position that Tri-State Financial had a right to the funds, the bankruptcy court determined the investors should not profit at the expense of the creditors of the estate. After a hearing to determine the appropriate amount of those fees, costs, and expenses, the bankruptcy court entered judgment awarding the $1,190,000 less the fee award to the investors.

Stalnaker and Centris (collectively, "appellees") appealed to the United States Bankruptcy Appellate Panel for the Eighth Circuit ("BAP"). The investors cross appealed part of the fee award. Concluding that a decision on the merits would be premature, the BAP remanded the case to allow the bankruptcy court to address the estoppel and release arguments the appellees had made but that the bankruptcy court had not specifically mentioned. The BAP noted it could interpret the bankruptcy court's silence as an implicit rejection of those arguments but decided to remand the case to let the bankruptcy court consider those issues in the first instance or explain its reasons for rejecting them.

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While the appeal was pending, Judge Mahoney retired and the Tri-State Financial bankruptcy case was assigned to Judge Hastings. On remand, the bankruptcy court, without further evidence, hearing, or argument, reconsidered its initial ruling and changed course. The bankruptcy court reasoned "it was free to reconsider its original ruling" because the BAP "did not consider or resolve any issues on appeal." On May 22, 2014, the bankruptcy court decided the $1,190,000 was, in fact, property of the bankruptcy estate and was subject to Centris's security interest.⁴ The bankruptcy court rejected the investors' argument that they had established an express, resulting, or constructive trust. The bankruptcy court alternatively decided some—but not all—of the investors had executed releases barring their claims. The bankruptcy court did not alter the fee award.

The investors each appealed to the BAP, primarily arguing the bankruptcy court exceeded its authority on remand and failed to follow the law of the case in reconsidering its earlier ruling regarding ownership of the $1,190,000. The BAP rejected those arguments but again remanded the case because the bankruptcy court did not certify its familiarity with the record or give the parties an opportunity to recall witnesses as required by Federal Rule of...