Knauer v. Kitchens (In re E. Livestock Co.)

• Decision Date: 18 March 2016
• Docket Number: Case No. 10–93904–BHL–11,Adv. Proc. No. 13–59021
• Citation: 547 B.R. 277
• Parties: In re: Eastern Livestock Co., LLC, Debtor. James A. Knauer, Chapter 11 Trustee of Eastern Livestock Co., LLC, Plaintiff and Counter–Defendant, v. Stephen N. Kitchens a/k/a/ Steve Kitchensd/b/a/ Buckhorn Cattle, Defendant and Counter–Plaintiff.
• Court: U.S. Bankruptcy Court — Southern District of Indiana

547 B.R. 277

In re: Eastern Livestock Co., LLC, Debtor.

James A. Knauer, Chapter 11 Trustee of Eastern Livestock Co., LLC, Plaintiff and Counter–Defendant,

v.Stephen N. Kitchens a/k/a/ Steve Kitchensd/b/a/ Buckhorn Cattle, Defendant and Counter–Plaintiff.

Case No. 10–93904–BHL–11

Adv. Proc. No. 13–59021

United States Bankruptcy Court, S.D. Indiana, New Albany Division.

Signed March 18, 2016

Eastern Livestock Co., LLC, pro se.

Jay P. Kennedy, Amanda Dalton Stafford, Kroger, Gardis & Regas, LLP, Indianapolis, IN, for Plaintiff and Counter-Defendant.

Natalie Donahue Montell, Ivana B. Shallcross, April A. Wimberg, Bingham Greenebaum Doll LLP, Louisville, KY, for Defendant and Counter-Plaintiff.

ORDER DENYING DEFENDANT'S MOTION TO DISMISS

Basil H. Lorch III, United States Bankruptcy Judge

The Trustee, James A. Knauer (the "Trustee") initiated this adversary proceeding on May 1, 2013, by filing the original complaint (the "Original Complaint") which was later amended (the "Amended Complaint") on July 10, 2014. It now comes before the Court on a Motion to Dismiss (Doc. 57) which was filed by Defendant, Stephen N. Kitchens ("Kitchens") on August 4, 2014. The matter was fully briefed by October 13, 2014, and was taken under advisement at that time. After considering the foregoing, and for the reasons stated hereinbelow, the Court finds that Kitchens' Motion to Dismiss should be DENIED.

BACKGROUND

Eastern Livestock Co, LLC ("ELC" or the "Debtor") is a company organized under the laws of Indiana with its principal place of business in New Albany, Indiana. It ceased operations in November of 2010 when its banking accounts were frozen and involuntary bankruptcy proceedings were initiated against it. Prior to that time, ELC was doing business as a livestock dealer. This adversary proceeding stems from the loss of ELC cattle which were in Kitchens' custody and care in Bowling Green, Kentucky. The Trustee, in his Original Complaint, asserted claims for (1) breach of promissory note, (2) recovery on loans and advances, and (3) unjust enrichment, all of which were based on monies owed to ELC for the death of cattle in Kitchens' custody around January 15, 2008. In discovery, the Trustee learned that the indebtedness which he sought to recover from Kicthens was owed not pursuant to a promissory note but was instead owed pursuant to an alleged unwritten agreement between ELC and Kitchens for the feed and care of ELC cattle (the "Pasture Agreement"). The Trustee then moved the Court for leave to amend the complaint based on this new information. The Court granted the Trustee's motion and ordered that the Amended Complaint relate back to the filing of the Original Complaint under Fed. R. Civ. Pro. 15(c)(2).

The Amended Complaint asserts two claims arising out of the Pasture Agreement. Under the terms of that Agreement, Kitchens was obligated to provide feed, water, medicine, and veterinarian care for ELC cattle on his pasture land in Bowling Green, Kentucky. In exchange for such "background" services, ELC would pay Kitchens a yardage fee of $0.35 per day per head of cattle, additional compensation, and reimbursement for hay and medicine costs. Kitchens would also be responsible for compensating ELC for any death loss above 6% of ELC cattle.

According to the Amended Complaint, ELC learned of the death of 37.68% (404 of 1,072) of its cattle under Kitchens' care in January 2008. Kitchens was to return a certain number of cattle to ELC during that month but instead Kitchens informed ELC that cattle had been stolen. Based on Kitchens' representation, ELC reported the theft of about 100 head of cattle to Kentucky State Police on January 22, 2008, and then sent an agent to Kitchens' property to investigate the theft. ELC discovered that 100 head of cattle had not been stolen, but in actuality, 404 head of its cattle had died while under Kitchens' care. On or about January 15, 2008, Kitchens and ELC allegedly reached an unwritten settlement agreement whereby Kitchens promised to pay ELC a principal sum of $116,004.24 to compensate ELC for the death loss over 6% (the "Settlement Agreement"). As ELC has never been paid by Kitchens for the lost cattle, the Trustee's Amended Complaint asserts claims for breach of the Pasture Agreement (Count II) and breach of the subsequent Settlement Agreement between the parties (Count I). Kitchens now moves to dismiss the Amended Complaint pursuant to Fed. R. Civ. P. 12(b)(6).¹

DISCUSSION

The purpose of a motion to dismiss under Rule 12(b)(6)is to test the sufficiency of the complaint, not to decide the merits. Triad Assocs., Inc. v. Chicago Hous. Authority, 892 F.2d 583, 586 (7th Cir.1989). In considering a Rule 12(b)(6)motion to dismiss, the Court accepts as true all well-pleaded facts in the plaintiff's complaint and draws all reasonable inferences from those facts in the plaintiff's favor. AnchorBank, FSB v. Hofer, 649 F.3d 610, 614 (7th Cir.2011). To survive a motion to dismiss, the complaint "must contain sufficient factual matter, accepted as true, to 'state a claim for relief that is plausible on its face.' " Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009)(quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.

Kitchens has moved to dismiss under Rule 12(b)(6)on the ground that the Trustee's claims for breach of contract are time-barred. In his Motion to Dismiss, Kitchens asserts that (i) the Trustee's claims are time-barred by the five-year Kentucky statute of limitations on oral contracts, which applies pursuant to Indiana's "most significant contacts" test; or, (ii) if not, then the Trustee's claims are time-barred by the five-year Kentucky statute of limitations by way of the Indiana "borrowing" statute; and, (iii) even if the longer six-year statute of limitations of Indiana or Tennessee applies, the Trustee's claims are time-barred because the Amended Complaint does not relate back to the filing of the Original Complaint. The Trustee, in addition to disputing Kitchens' arguments in support of dismissal, suggests that Kitchens' motion should be denied as improper because it is based on an affirmative defense.

While dismissal under Rule 12(b)(6)for noncompliance with the statute of limitations is irregular, a motion to dismiss based on failure to comply with the statute of limitations may be granted where "the allegations of the complaint itself set forth everything necessary to satisfy the affirmative defense." Chicago Bldg. Design, P.C. v. Mongolian House, Inc., 770 F.3d 610, 613 (7th Cir.2014)(quoting United States v. Lewis, 411 F.3d 838, 842 (7th Cir.2005)). In other words, the plaintiff must affirmatively plead himself out of court; the complaint must "plainly reveal that [the] action is untimely under the governing statute of limitations." Id. The Court does not find Kitchens' motion to be improper.

A. The Applicable Statute of Limitations

Although both parties argue that this Motion to Dismiss turns on which statute of limitations applies, neither party raises the unsettled and potentially determinative choice-of-law issue presented here. Both parties assert that the choice-of-law rules of the forum state of Indiana apply in this case, and then they disagree on the proper Indiana choice-of-law test and outcome. The key question, though, is not which Indiana choice-of-law rule applies but whether a bankruptcy court should apply the choice-of-law rules of the forum state in which it sits or the choice-of-law rules of federal common law. The two approaches also appear to result in the application of different statutes of limitation. As such, the resolution of the question may determine whether this cause of action, brought more than five years after it arose, should properly proceed.

As a general matter, a federal court sitting in diversity jurisdiction applies the choice-of-law rules of the state in which it sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1022, 85 L.Ed. 1477 (1941). But the broad and complex jurisdiction exercised by federal bankruptcy courts arises not from diversity but from federal bankruptcy law and the Supreme Court has never extended it's holding in Klaxon to cases involving bankruptcy courts. Still, in Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 67 S.Ct. 237, 91 L.Ed. 162 (1946), the Court seemingly endorsed an independent federal choice of law in bankruptcy where claims and disputes often have significant contacts in many states, when it observed in dicta:

"Obligations ... often have significant contacts in many states, so that the question of which particular state's law should measure the obligation seldom lends itself to simple solution. In determining which contact is the most significant in a particular transaction, courts can seldom find a complete solution in mechanical formulae of the conflicts of law. Determination requires the exercise of an informed judgment in the balancing of all the interests of the states with the most significant contacts in order best to accommodate the equities among the parties to the policies of those states."

Id. 329 U.S. 156, 67 S.Ct. 237, 91 L.Ed. at 167.

Since then, courts have diverged on the issue of whether bankruptcy courts should apply the choice-of-law rules of the forum state or those of federal common law. The Ninth Circuit has held that federal common law choice-of-law rules apply in bankruptcy ² and several bankruptcy courts have also applied federal common law choice-of-law rules specifically where an action arises directly under the bankruptcy code.³ On the other hand, the Third and Eighth Circuits have held that the choice-of-law rules of the forum state apply outright in bankruptcy,⁴ while the Second and Fourth Circuits...