Loveridge v. Hall (In re Renewable Energy Dev. Corp.)

• Citation: 500 B.R. 77
• Decision Date: 23 September 2013
• Docket Number: No. 2:12–cv–771.,2:12–cv–771.
• Parties: In re RENEWABLE ENERGY DEVELOPMENT CORPORATION, Debtor. Elizabeth R. Loveridge, Plaintiff, v. Tony Hall, et al., Defendants.
• Court: U.S. District Court — District of Utah

500 B.R. 77

In re RENEWABLE ENERGY DEVELOPMENT CORPORATION, Debtor.Elizabeth R. Loveridge,¹ Plaintiff,

v.Tony Hall, et al., Defendants.

No. 2:12–cv–771.

United States District Court,

D. Utah,

Central Division.

Sept. 23, 2013.

Mary Anne Q. Wood, Stephen Q. Wood, Wood Balmforth LLC, Salt Lake City, UT, for Defendants.

MEMORANDUM DECISION AND ORDER

ROBERT J. SHELBY, District Judge.

The Defendants have filed a Joint Motion to Withdraw the Reference for AdversaryProceeding 12–2225. (Dkt. No. 2.) This adversary proceeding is currently pending in the United States Bankruptcy Court for the District of Utah and involves allegations that the Defendants violated the automatic stay in the underlying bankruptcy proceeding, Case No. 11–38145. For the reasons discussed below, the court denies the Defendants' Motion without prejudice to refile when the claims in the adversary proceeding are ready for trial.

BACKGROUND

The debtor in the underlying bankruptcy action, Renewable Energy Development Corporation (REDCO), filed for relief under Chapter 7 of the United States Bankruptcy Code on December 30, 2011. George B. Hofmann was then appointed as the Chapter 7 Trustee. REDCO's general business model was to negotiate packages of contract and leasehold rights to develop solar and wind energy projects. REDCO also hired contractors to implement these projects. On January 30, 2012, Mr. Hofmann received an Order from the bankruptcy court authorizing the sale of substantially all of REDCO's assets to Sustainable Power, LLC. But this sale did not include twelve Lease Option Agreements that REDCO had previously negotiated with various landowners in San Juan County, Utah. These option contracts were included in a group of assets called the Blue Mountain assets.

The legal status of the Lease Option Agreements was somewhat unclear. The contracts granted REDCO an exclusive option that could be exercised over a period of three years to lease and obtain easements on property owned by the San Juan County landowners for the development of renewable energy projects. In exchange for the grant of the option, REDCO agreed to pay $1,000 to each of the landowners within thirty days after the Lease Option Agreements were executed. It appears that REDCO never gave the landowners the $1,000 payments. But the Lease Option Agreements also stated that the landowners had to provide REDCO with notice and an opportunity to cure before the landowners could exercise any of their rights or remedies under the Agreements, including any right to terminate. The Trustee alleges that none of the landowners provided REDCO with notice or an opportunity to cure any alleged deficiencies under the Agreements.

According to Defendants Tony Hall, Ellis–Hall Consultants, LLC (Ellis–Hall) and Summit Wind Power, LLC (Summit Wind) ² (collectively, the Hall Parties), Mr. Hofmann contacted them around January 5, 2012, seeking their expertise to evaluate REDCO's assets. Mr. Hofmann allegedly asked the Hall Parties to travel to southern Utah to conduct due diligence on the Lease Option Agreements and to report back to him. The Hall Parties contend that Mr. Hofmann ultimately encouraged them to submit bids to purchase the Blue Mountain assets. Because Mr. Hall and Ellis–Hall believed that the Lease Option Agreements failed for lack of consideration, they submitted to Mr. Hoffman a low bid of $3,000 for REDCO's remaining assets. The Hall Parties believe that Mr. Hofmann then used this bid to generate interest in the project and obtain a higher bid from another company, Cedar City Wind Holdings, LLC (CCW).

On February 28, 2012, Mr. Hofmann filed a motion to approve the sale of the Blue Mountain assets to CCW. Mr. Hofmann claims that the Hall Parties never objected to this sale and that they did not appear at the auction that was held on March 21, 2012. The prevailing bidder at the auction was CCW, who submitted a winning bid of $210,000. The bankruptcy court approved this sale at a hearing held on March 22, 2012.

Mr. Hofmann alleges that, at some point in either February or March 2012, the Hall Parties contacted the landowners who had signed the Lease Option Agreements with REDCO and advised them that the Agreements were void because REDCO never paid the agreed fee of $1,000. Mr. Hofmann believes that the Hall Parties then entered into new agreements with some of the landowners. As a result of these actions, Mr. Hofmann contends that CCW refused to close on the sale of the Blue Mountain assets that the bankruptcy court had approved. On March 23, 2012, Mr. Hofmann sent a cease and desist letter to Mr. Hall and Kimberly Ceruti asserting that they were violating the automatic stay. Mr. Hofmann then filed a Motion for Order to Show Cause why Tony Hall, Ellis–Hall, and certain landowners should not be held in contempt of the automatic stay provisions of the Bankruptcy Code. On April 12, 2012, the bankruptcy court held a hearing in which it withdrew and struck the Trustee's Motion.

On May 28, 2012, Mr. Hofmann commenced an adversary proceeding against the Hall Parties and several landowners ³ who had allegedly executed new agreements with the Hall Parties in violation of the automatic stay. Mr. Hofmann included four causes of action in his Complaint: 1) declaratory judgment that the Lease Option Agreements were valid and part of the bankruptcy estate; 2) declaratory judgment that any agreements entered into between the landowners and the Hall Parties violated the automatic stay and were void; 3) damages for violating the automatic stay; and 4) damages for tortious interference with economic relations. Summit Wind and Ms. Ceruti filed a Counterclaim and Third–Party Complaint asserting a number of claims against Mr. Hofmann and his law firm: breach of fiduciary duty, malpractice, breach of contract, tortious interference with contract and prospective economic advantage, unjust enrichment, conversion, and declaratory relief stating that the Lease Option Agreements were void and disqualifying Mr. Hofmann and his law firm from acting as Trustee in the underlying bankruptcy.

Around the same time, Mr. Hofmann filed a second motion to sell the Blue Mountain assets after he had negotiated a new agreement with CCW to sell the assets for $105,000, or half of CCW's original bid. The Hall Parties and several landowners, the Christiansens and Mr. Francom, filed objections to the Trustee's motion. These parties argued that the Lease Option Agreements automatically terminated when REDCO failed to pay the $1,000 option payment.

The bankruptcy court heard the Trustee's Second Sale Motion and the Honorable Judge William T. Thurman issued his ruling from the bench on June 20, 2012. ( See Dkt. No. 25 in Case No. 12–2225.) Judge Thurman considered the question of whether the Lease Option Agreements were still valid even though REDCO had failed to pay the consideration for the options. He found that, considering the contract as a whole, and because none of the landowners gave REDCO any written notice of default, the Lease Option Agreements did not automatically terminate. As a result, Judge Thurman ruled that the Trustee could sell the Blue Mountain assets to CCW “free and clear of all liens, claims, interests and any other encumbrances of any nature.” (Hr'g Tr. 17, June 20, 2012, Dkt. No. 148 in Case No. 11–38145.) But Judge Thurman also made clear that it was “not incumbent upon the Court to make detailed findings that the trustee [had] absolute clear and unequivocal title to the Blue Mountain assets” since the court only needed to consider whether the estate had “sufficient interest in the property to convey it.” ( Id. at 25.) He emphasized that he was not quieting title to the lease options, but simply authorizing the Trustee to sell whatever interest the estate had in those assets: “I'm only authorizing the trustee to sell whatever he's got as-is, where-is, if-is.” ( Id.)

On July 20, 2012, Mr. Hall and Ellis–Hall moved to withdraw the reference of the adversary proceeding from the bankruptcy court. Ms. Ceruti and Summit Wind later joined this motion. These four parties also submitted requests for a jury trial of the claims in the adversary proceeding.

ANALYSIS

Ms. Ceruti and the Hall Parties argue that withdrawal of the bankruptcy reference is mandated for two reasons. First, they contend that there is cause for withdrawal under 28 U.S.C. § 157(d) because they have made a demand for a jury trial. Second, the Defendants assert that the bankruptcy court does not have the constitutional authority to issue a final ruling on the claims and counterclaims in the adversary proceeding because these claims must be decided by a tribunal created under Article III of the United States Constitution. The court agrees that the Defendants may insist on a jury trial for some of their claims, but finds that there is no reason to withdraw the bankruptcy reference until these claims are ready for trial. The court disagrees with the Defendants' Article III argument and holds that the bankruptcy court has authority to issue a final ruling on the causes of action that are the subject of the Defendants' motion.

To give some context to the claims at issue in this suit, the court first reviews a brief history of the relationship between bankruptcy courts and Article III courts.

I. Legal Background on the Authority of the Bankruptcy Courts

The Bankruptcy Reform Act of 1978 created bankruptcy courts as adjuncts to the district court for each judicial district. Pub.L. No. 95–598, 92 Stat. 2549 (1978). The Act provided that the new bankruptcy courts would be presided over by bankruptcy judges appointed by the President and confirmed by the Senate for fourteen-year terms. In 1982, the Supreme Court held that this grant of bankruptcy jurisdiction to independent courts composed of judges who did not have life tenure or other Article III protections was unconstitutional. Northern Pipeline Constr. Co. v. Marathon Pipe Line Co....