Krueger v. Torres (In re Krueger)

• Decision Date: 19 January 2016
• Docket Number: No. 14–11355.,14–11355.
• Citation: 812 F.3d 365
• Parties: In the Matter of Jeffrey KRUEGER, Debtor Jeffrey Tre Krueger, Appellant v. Michael Torres, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

812 F.3d 365

In the Matter of Jeffrey KRUEGER, DebtorJeffrey Tre Krueger, Appellant

v.Michael Torres, Appellee.

No. 14–11355.

United States Court of Appeals, Fifth Circuit.

Jan. 19, 2016.

Bruce W. Akerly (argued), Cantey Hanger, L.L.P., Dallas, TX, for Appellant.

Edwin Paul Keiffer, Esq. (argued), Coats Rose, P.C., Dallas, TX, for Appellee.

Before HIGGINBOTHAM, JONES, and SMITH, Circuit Judges.

EDITH H. JONES, Circuit Judge:

This appeal of a bankruptcy court decision dismissing a chapter 7 case "for cause" can only be described as an exercise in chutzpah. The debtor flagrantly and repeatedly abused bankruptcy and court processes to retain assets for himself and defeat the legitimate claims of his business partners. The bankruptcy and district courts finally had enough of his manipulation and rightly dismissed pursuant to 11 U.S.C. § 707(a) for the debtor's bad faith conduct constituting "cause" for dismissal. We AFFIRM.

BACKGROUND

Appellant Krueger's winding road to this court began in the state district court in Travis County, Texas in 2011. Krueger and Appellee Michael Torres were embroiled in a lawsuit (filed originally by Krueger) over the ownership and control of a renewable energy company called Cru Energy, Inc. Cru Energy sought to build facilities in Texas that would process sorghum into biomethane gas. Krueger and Torres were both shareholders in Cru and accused each other of attempting to wrest control of the company and its business away through various fiduciary duty breaches, fraud, conversion, and tortious interference.

On the motion of Torres (and Cru Energy—both Torres and Krueger claimed to be litigating on behalf of Cru), the state district court entered a temporary restraining order in June 2011. Among other things, the TRO prohibited Krueger from making non-ordinary-course-of-business withdrawals from Cru Energy's bank account. This TRO was extended two weeks later and was to remain in force until the court ordered otherwise. Several weeks later, in July 2011, the state district court entered a temporary injunction prohibiting Krueger from making any withdrawals or transfers from any Cru Energy bank account, calling a shareholder meeting, or contacting any investor, potential investor, business partner, or potential business partner of Cru. Essentially, Krueger was enjoined from participating in Cru's business.

Krueger was not formally served with the injunction until October 2011. Around this time, Krueger formed a company called Kru (Krueger Renewable Utilities), which had the same business plan as Cru, as well as many of the same shareholders and investors. The bankruptcy court would later find that this was Krueger's naked attempt to avoid the injunction while continuing his efforts to shut Torres out of the company. As the bankruptcy court explained: "It would be an understatement to say that Kru's business was similar to Cru's business. In fact, they were the same." See In re Krueger, No. 12–40328, 2014 WL 911857, at *6 (Bankr.N.D.Tex. Mar. 7, 2014).

But trouble was brewing for Krueger for breaching the various court orders entered against him. During the hearing on the temporary injunction, Krueger transferred $160,000 from a Cru Energy account to his personal bank account. Just after the TRO was entered, he had previously transferred just over $3,000 from the Cru account to his personal account. The state district court ordered Krueger to show cause why he should not be held in contempt for violating the TRO and the temporary injunction. The show cause hearing was scheduled for January 19, 2012. On January 18, Krueger filed a chapter 7 bankruptcy petition in the Northern District of Texas.

After the bankruptcy filing, the state court reset the show cause hearing to mid-February. Torres sought and received relief from the automatic stay to pursue the contempt motion against Krueger. The state court held Krueger in criminal contempt for making cash withdrawals in violation of the TRO. Krueger spent three days in jail. In a later proceeding, Krueger was held in contempt and sentenced to jail for violating the temporary injunction through his $160,000 withdrawal.¹

In April 2012, a company named Green Alt² and Cru Energy (under Torres's control, but not Torres personally) filed an adversary proceeding in the bankruptcy court seeking exceptions to or denial of Krueger's discharge based on the grounds set forth in 11 U.S.C. § 523(a) (false pretenses, fraud, willful and malicious injury) and 11 U.S.C. § 727 (making false statements in connection with his bankruptcy petition). Following withdrawal of the reference, the district court had assumed responsibility for the adversary proceeding. Several months later, Green Alt settled its claims against Krueger and bowed out of both the state and bankruptcy litigation.

On May 21, 2013, fresh from the Texas Court of Appeals's favorable habeas ruling, Krueger called for a meeting of Cru Energy's shareholders. Torres did not attend. Although ownership of the shares had passed to the bankruptcy trustee, Krueger disregarded this legal nicety and voted his shares as well as proxy shares. Torres was removed from the board and Krueger was reelected along with three members he supported. In the board meeting that immediately followed, the board removed Torres as president and CEO; elected Krueger as chairman of the board, president, CEO, and treasurer of Cru Energy; fired the attorneys who represented Cru Energy in the suit against Krueger; voted to sue Torres and at least one of the attorneys; and importantly, dismissed all of Cru Energy's claims against Krueger.

Two months later, the district court noted that Cru no longer had an attorney of record in that proceeding (because Krueger had fired the attorneys). As the bankruptcy court tells it: "Krueger's actions placed Torres in a dilemma. In the adversary proceeding in the District Court, Torres had asserted no personal claims against Krueger. Instead, acting on behalf of Cru, Torres had asserted only claims by Cru against Krueger." Krueger, 2014 WL 911857, at *3. Torres sought to be substituted personally for Cru or to proceed derivatively on behalf of Cru, but the district court denied both motions. The district court subsequently dismissed all of Cru's claims against Krueger. Torres pursued an unsuccessful, interlocutory appeal of those rulings. See Torres v. Krueger, 596 Fed.Appx. 319 (5th Cir.2015).

The adversary discharge/dischargeability proceeding was then referred back to the bankruptcy court to consider only the claims that Krueger had asserted against Torres. Torres responded with a motion to dismiss the bankruptcy case with prejudice for cause under 11 U.S.C. § 707(a).

The bankruptcy court allowed discovery, including the taking of depositions, heard live testimony in three days of hearings and admitted numerous exhibits into evidence. Based on this record, the bankruptcy court granted the motion to dismiss for cause with a detailed memorandum opinion and imposed a two-year refiling bar on Krueger. Having unsuccessfully sought reconsideration and appeal to the district court, Krueger appealed to this court, which has jurisdiction under 28 U.S.C. § 158(d)(1).

DISCUSSION

This court applies "the same standard of review to the bankruptcy court decision that the district court applied." Galaz v. Galaz (In re Galaz), 765 F.3d 426, 429 (5th Cir.2014). The bankruptcy court's factual findings are reviewed for clear error and its legal conclusions are reviewed de novo. Id. The bankruptcy court's ultimate decision to dismiss under § 707(a) is reviewed for an abuse of discretion. Peterson v. Atlas Supply Corp. (In re Atlas Supply Corp.), 857 F.2d 1061, 1063 (5th Cir.1988).

Krueger appeals on a number of grounds, including some which center, rather ironically, on whether he received due process.³ These we discuss before turning to the question whether the court correctly applied § 707(a).

I. Procedural Objections.

A. Contested Motion versus Adversary Proceeding

Krueger contends that the grounds on which this case was dismissed must be asserted in an adversary proceeding objecting to discharge under 11 U.S.C. § 727(a).

Under Federal Rule of Bankruptcy Procedure 7001, proceedings classified as adversary proceedings must be litigated as lawsuits under rules that essentially track the Federal Rules of Civil Procedure. Objecting to a discharge under § 727, with narrow exceptions not applicable here, must be conducted as an adversary proceeding. Fed. R. Bankr.P. 7001(4). In all matters not listed in Rule 7001, relief can be had through motion after notice and a hearing. Fed. R. Bankr.P. 9014. Dismissal under § 707(a) is not listed in Rule 7001.

Krueger's argument fails for the simple reason that this proceeding was adjudicated as a motion to dismiss the bankruptcy case. The remedy imposed by the court was a dismissal with a temporary filing bar, not the denial of discharge or dischargeability. The bankruptcy rules permitted this matter to be pursued as a contested motion, and the bankruptcy court conducted the proceeding appropriately.

In any event, any error by the bankruptcy court in hearing this matter as a contested motion was harmless. See Fed. R. Bank. P. 9005 (incorporating harmless error rule); Barner v. Saxon Mortg. Servs., Inc. (In re Barner), 597 F.3d 651, 654 (5th Cir.2010) (per curiam) ("[Debtor's] substantial rights were unaffected by [creditor] seeking relief by motion rather than by adversary proceeding. The parties had a full hearing on the merits before the bankruptcy court and the ability to litigate all questions of law there and before the district court. If there was error in proceeding by motion, it was harmless.") (citation omitted).

B. Due Process

Relatedly, Krueger asserts he was denied procedural due process because the bankruptcy court considered issues beyond the scope of the motion to dismiss.

Among those he considers beyond the scope were: 1) "that [Krueger] was the de facto owner of KRU" 2) that...