In re Tri-State Ethanol Co. LLC, Bankruptcy No. 03-10194.

• Decision Date: 19 June 2007
• Docket Number: Bankruptcy No. 03-10194.
• Citation: 370 B.R. 222
• Parties: In re TRI-STATE ETHANOL COMPANY LLC, Debtor.
• Court: U.S. Bankruptcy Court — District of South Dakota

370 B.R. 222

In re TRI-STATE ETHANOL COMPANY LLC, Debtor.

Bankruptcy No. 03-10194.

United States Bankruptcy Court, D. South Dakota.

June 19, 2007.

COPYRIGHT MATERIAL OMITTED

A. Thomas Pokela, Sioux Falls, SD, William F. Demarest, Jr., Blackwell Sanders Peper Martin LLP, Washington, DC, for Debtor.

DECISION RE: TRUSTEE JOHN S. LOVALD'S PROPOSED SETTLEMENT WITH NORTH CENTRAL CONSTRUCTION, INC.

IRVIN N. HOYT, Bankruptcy Judge.

The matter before the Court is Trustee John S. Lovald's Motion to Approve Compromise Agreement with American Prairie Construction Co., f/k/a North Central Construction, Inc., the joinder in the motion filed by North Central Construction, Inc., and the objection to the motion filed by Tri-State Financial, L.L.C. This is a core proceeding under 28 U.S.C. § 157(b)(2). This Decision and accompanying order shall constitute the Court's findings and conclusions under Fed. Rs.Bankr.P. 7052 and 9014(c). As set forth below, the motion will be granted.

I.

The details of this bankruptcy case through early July 2006 are set forth in a decision entered September 1, 2006. Those findings are incorporated herein by reference, especially as to the roles of Chapter 7 Trustee John S. Lovald, North Central Construction, Inc. ("North Central"),¹ and Tri-State Financial, L.L.C. ("Tri-State Financial"); North Central's and Tri-State Financial's relationships with Debtor Tri-State Ethanol Company LLC, and its principals and counsel; and the unfruitful efforts of many parties and their counsel to resolve by agreement the large claims in this case.

In this decision, the Court will set forth those facts that are more particularly relevant to the claims held by North Central against the bankruptcy estate, the claims held by the bankruptcy estate against North Central, and Trustee Lovald's proposed settlement of both.

Tri-State Ethanol Company LLC constructed and operated, for a short time, an ethanol plant near Rosholt, South Dakota. The plant was its primary asset. When the plant was built, the general contractor was North Central, and the engineer was Michael J. Gaylor, doing business as Gaylor Engineering. The plant was in operation during 2002 but was shut down for maintenance in November of that year. At the time of the shutdown, the plant was running inefficiently and was faced with high propane costs. While it was shut down, an explosion occurred at the plant on December 31, 2002. During 2003, Debtor used insurance proceeds to repair the damage. The plant, however, did not resume ethanol production. Tri-State Ethanol Company LLC ("Debtor") filed a Chapter 11 petition in bankruptcy on May 23, 2003.

On July 1, 2003, North Central filed a proof of claim for $3,611,882.93. On the proof, North Central said its claim arose from goods sold and services performed from October 12, 2000, to October 1, 2002, and was fully secured.

Debtor never obtained confirmation of a Chapter 11 plan. The case was converted to Chapter 7 on July 29, 2004. The United States Trustee appointed John S. Lovald as the Chapter 7 trustee.

North Central filed a proof of claim on December 20, 2004 that amended its July 1, 2003 claim. In this amended proof of claim, North Central stated it held a fully, secured claim for $3,611,882.93, plus postpetition interest, attorneys' fees and costs, and its equity interest. North Central calculated the post-petition interest to be $542,733.35. It also said its claim included subcontractor Interstates Electric & Engineering Company, Inc.'s ("Interstates Electric") claim of $569,115.27, plus interest from December 15, 2004.² North Central's amended proof of claim did not value its claim for attorneys' fees and costs under 11 U.S.C. § 506(b) or its equity interest.

Trustee Lovald sold the ethanol plant by court-approved auction in early 2005. Tri-State Financial was ultimately the successful bidder.

On April 13, 2005, North Central filed a Motion to Authorize Payment of Claim. Therein, it said it wanted Trustee Lovald to pay its claim after crediting the amount already paid by the trustee to Interstates Electric. It noted its additional claim for attorneys' fees and costs and its equity claim would be reserved for later determination.

On April 18, 2005, Trustee Lovald objected, saying North Central's claim amount was disputed and he would be hiring counsel to address the matter. On April 19, 2005, Trustee Lovald filed an objection to North Central's proof of claim.³ Therein, Trustee Lovald said some of North Central's claim may represent work and materials that were not authorized by contract or change orders, and some work or materials provided by North Central may have been defective, resulting in damage to Debtor. He asked that North Central's claim be determined after an appropriate time for discovery and mediation. Tri-State Corn Processors Cooperative joined in the trustee's objection.

On April 22, 2005, Trustee Lovald filed an application seeking to employ Woods, Fuller, Shultz & Smith P.C. ("Woods Fuller") as special counsel under 11 U.S.C. § 327(e) to handle estate matters related to the ethanol plant's design, construction, and explosion, including, but not limited to, North Central's and Gaylor Engineering's claims. He disclosed Woods. Fuller had represented Debtor pre-petition and during the Chapter 11 on these and other matters and had an unsecured claim against the estate for $168,000.00, plus interest. No objections were filed, and the employment application was approved.

On April 28, 2005, Tri-State Financial filed an objection to North Central's motion for payment and to North Central's proof of claim. Therein, it highlighted terms of certain documents related to the construction of the ethanol plant, discussed change orders and their cost, stated there were production problems, and complained about the lack of invoices to support North Central's claim. Tri-State Financial also argued North Central had breached in eight ways its obligations under the construction contract and express and implied warranties and thus no further payments to North Central were appropriate. Tri-State Financial challenged North Central's liens on four grounds. In addition, Tri-State Financial made allegations of tortious interference against North. Central's principal, Kim Buchanan, and argued damages for these actions should be paid by North Central to Debtor. Tri-State Financial also blamed a welder employed by North Central for the December 31, 2002, explosion at the plant and sought additional damages for that. Tri-State Corn Processors joined Tri-State Financial's pleading.⁴

At some point, North Central commenced litigation against Tri-State Financial in federal district court over a settlement that had been reported to the Bankruptcy Court on June 21, 2004. Based on a scheduling letter on which this Court was copied, it appears that matter is set for trial in August 2007.

Adversary proceedings pending in mid-2005 were: Adversary No. 03-1032, a construction lien proceeding brought by North Central during the Chapter 11 against Debtor and several creditors that was similar to a pre-petition state court action involving many of the same parties; Adversary No. 05-1006, wherein Trustee Lovald sought a determination that Tri-State Financial's claim should be treated as equity and subordinated; and Adversary No. 05-1009, wherein Tri-State Financial sought a determination that North Central's liens should be transferred to the bankruptcy estate and North Central's claim should be treated as unsecured and equitably subordinated to all other general unsecured claims.⁵ There was limited progress in each.

Extensive and time-consuming efforts to reach a global resolution of the pending adversary proceedings and most major claims through mediation or negotiation failed. Thus, a settlement with Tri-State Financial that Trustee Lovald had originally proposed on May 17, 2005, was set for an evidentiary hearing. The only objector to this proposed settlement was North Central Construction, but it withdrew its objection just as the June 13, 2006 hearing began. After receiving evidence, the Court approved the settlement by order entered June 14, 2006. The approved settlement gave Tri-State Financial a Chapter 11 administrative expense of $793,654.42 for advances it made to Debtor between May 23, 2003, and July 28, 2004, and a general unsecured claim of $1,190,000.00 for its post-conversion advances, which is to be paid only after all other timely-filed general unsecured claims are paid in full.

On June 20, 2006, Trustee Lovald filed a motion to approve a settlement with North Central. Before the objection period on that motion expired, Tri-State Financial filed a motion asking the Court to allow it to intervene in the contested matter of Trustee Lovald's objection to North Central's proof of claim, despite the fact Tri-State Financial had its own objection to North Central's proof of claim pending and despite the fact Trustee Lovald had just noticed a settlement of North Central's claim for objections. On June 28, 2006, the Court entered an order holding Tri-State Financial's intervention motion in abeyance pending a resolution of Trustee Lovald's proposed settlement with North Central.

On June 29, 2006, Tri-State Financial filed a Motion for Recusal regarding the undersigned. All the pending matters were put on hold while the recusal motion was resolved. The recusal decision was entered September 1, 2006. Thereafter, the Court was able to return to the several pending matters, including Trustee Lovald's proposed settlement with North Central.

Tri-State Financial was the only objector to Trustee Lovald's proposed settlement with North Central. Tri-State Financial alleged the proposed settlement was "not reasonable, not in the best interests of the bankruptcy estate, and not fair and equitable." It also argued Trustee Lovald's objection to North Central's claim was inadequate, did not include several...