Lowe v. Bowers (In re Nicole Gas Prod., Ltd.)

Decision Date22 February 2019
Docket NumberNo. 18-3301,18-3301
Citation916 F.3d 566
Parties NICOLE GAS PRODUCTION, LTD., Debtor. James A. Lowe ; Curtland H. Caffey; S. Brewster Randall, II; Robert C. Sanders, Appellants, v. Brenda K. Bowers, Chapter 7 Trustee of the Bankruptcy Estate of Nicole Gas Production, Ltd., Appellee.
CourtU.S. Court of Appeals — Sixth Circuit

ARGUED: Rick L. Ashton, ALLEN, KUEHNLE, STOVALL & NEUMAN, LLP, Columbus, Ohio, for Appellant Lowe. Robert C. Sanders, Upper Marlboro, Maryland, pro se. Daniel E. Shuey, VORYS, SATER, SEYMOUR AND PEASE LLP, Columbus, Ohio, for Appellee. ON BRIEF: Rick L. Ashton, James A. Coutinho, ALLEN, KUEHNLE, STOVALL & NEUMAN, LLP, Columbus, Ohio, for Appellant Lowe. Daniel E. Shuey, Brenda K. Bowers, VORYS, SATER, SEYMOUR AND PEASE LLP, Columbus, Ohio, for Appellee. Robert C. Sanders, Upper Marlboro, Maryland, S. Brewster Randall, II, Curtland H. Caffey, Columbus, Ohio, pro se.

Before: MERRITT, COOK, and LARSEN, Circuit Judges.

MERRITT, Circuit Judge.

This is a bankruptcy contempt dispute. Normally a party’s conduct is contemptuous or it is not. But in this unusual case, whether the defendants are in contempt depends on statutory construction. The question presented is whether the Ohio RICO statute gives the sole shareholder of a bankrupt corporation standing to circumvent the automatic stay and individually sue a competitor. The issue is a complex intersection of three areas of law: the principle of the derivative suit in corporate law, the function of the automatic stay in bankruptcy, and the extent and construction of a specific state’s RICO laws. In this appeal, we must consider how these precepts work together where the RICO statute offers no explicit guidance on how the claim should operate in the corporate and bankruptcy contexts. But for all the legal overlays here, ultimately the Appellants are in contempt or they are not.

The basic facts. Appellant Freddie Fulson1 owned a company called Nicole Gas that entered bankruptcy proceedings. During the bankruptcy, Fulson became dissatisfied with the Trustee’s handling of claims that Nicole Gas held against its competitors. With the help of two lawyers, Appellants Robert Sanders, Esq. and James A. Lowe, Esq., Fulson sought relief in state court under the Ohio Corrupt Practices Act (Ohio civil RICO) against the competitors that allegedly put his business into bankruptcy. Because Fulson alleged damages incurred only by the debtor-business, the Trustee alleged that he had appropriated claims that the Trustee owned. By filing this action during the bankruptcy, the Trustee alleged that Fulson, Sanders, and Lowe violated the automatic stay. The Bankruptcy Court agreed and held the three in contempt and entered a judgment for roughly $91,000. The contempt finding and fee order are the subjects of the instant appeal.

Back to legal principles. Derivative liability is a cardinal tenet of corporate common law. When an artificial entity (a corporation) is injured, shareholders cannot necessarily redress that injury themselves. See 19 Am. Jur. 2d Corporations § 1935 (1998) ("[W]here the injury is to the corporation, and only indirectly harms the shareholder, the claim must be pursued as a derivative claim."); see also James D. Cox & Thomas Lee Hazen, 3 Treatise on the Law of Corporations § 15:2 (3d ed. 2010) ("An almost necessary consequence of a wrong to a corporation is some impairment of the value of each shareholder’s stock interest. As a general rule, however, shareholders are considered to have no direct individual right of action for corporation wrongs that impair the value of their investment.").

As to the bankruptcy gloss on this dispute, the Bankruptcy Code imposes a powerful stay on parties attempting to gain control over the property of the debtor’s estate. See 11 U.S.C. § 362(a)(3) ("[A] petition ... operates as a stay, applicable to all entities, of ... any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate"). The policy imperative behind the automatic stay is to "give[ ] the debtor a breathing spell from creditors and stop[ ] foreclosure actions, collection efforts, and creditor harassment." 2 Norton Bankr. L. & Prac. 3d § 43:4 (2019).

The precise language of the Ohio Corrupt Practices Act is the complicating factor here. The Appellants claim that the wording of the statute converts a derivative shareholder action to an individual claim because it provides a private right of action for "any person directly or indirectly injured by conduct" violating the Act. Ohio Rev. Code § 2923.34. As the sole shareholder of Nicole Gas, normally Fulson would have to seek relief from Nicole Gas’s competitors via the traditional route of derivative liability. But, his successors argue, the Corrupt Practices Act means both (a) that he did not have to pursue a derivative claim at all, and (b) that thus, the bankruptcy Trustee did not have the right to exercise control over the claim. If Fulson’s successors are right, and the claim against Nicole Gas’s competitors can be alleged outside of corporate law and via the Corrupt Practices Act, then they did not violate the automatic stay. Thus, the basis for the Contempt and Fee Orders would disappear. We shall see in due course that they are wrong. In agreement with the persuasively reasoned decisions below, both in the Bankruptcy Court and the Bankruptcy Appellate Panel, we AFFIRM .

I. FACTUAL AND PROCEDURAL BACKGROUND

In the late 1990s, Freddie Fulson formed several corporate entities to produce and market natural gas in the Midwest. One of these entities is the debtor in the bankruptcy case, Nicole Gas Production, Ltd. The bottom line is that Fulson was the indirect equity owner of Nicole Gas and was calling the shots. To market and move the gas, Fulson’s entities contracted with a larger company, Columbia Gas Transmission, and its affiliates. Eventually, relations between Columbia Gas and Fulson’s entities soured and in the early 2000s a decade of litigation in state and federal court began. For his part, Fulson believed that Columbia Gas had conspired with other entities, including Nicole Gas’s creditors, to put him out of business. Columbia Gas did this, he alleged, by mismeasuring the amount of natural gas produced by Fulson’s wells, misappropriating gas that the entities delivered into Columbia Gas’s transmission system, and improperly soliciting his creditors to force Nicole Gas into bankruptcy proceedings. This bankruptcy proceeding began in 2009 and has continued since then, but it is only the tip of the iceberg of the disputes between these entities.

In 2013, while Nicole Gas was in bankruptcy proceedings, the corporation’s bankruptcy Trustee, Frederick Ransier, proposed settling all of Nicole Gas’s claims against Columbia Gas for $250,000. Back in 2001, one of Nicole Gas’s affiliates, Nicole Energy Services, Inc., had asserted claims against Columbia Gas for $36 million. Likely miffed that the Trustee was trying to settle similar claims for less than a million dollars, Fulson objected to that settlement in October of 2012. But objecting in the proper and usual course was not enough for him. Sometime after objecting to the settlement, Fulson began working with Robert C. Sanders, Esq., a Maryland attorney who had represented one of Fulson’s other gas companies in state court. Fulson filed a new complaint in Ohio state court against Columbia Gas seeking roughly $34 million in damages. Fulson, Sanders, and Lowe wanted to try the claims to a jury in state court because, according to Sanders, jurors "don’t like utility companies." 519 B.R. at 740 n.18.

The state court complaint recited the history between the companies and alleged that Columbia Gas had violated the Ohio Corrupt Practices Act, Ohio Rev. Code § 2923.31 et seq ., which provides that no person shall engage in a pattern of corrupt activity, defined as engaging in racketeering, theft, telecommunications fraud, and the like. Id. § 2923.32. This is Ohio’s Racketeer Influenced and Corrupt Organizations ("RICO") statute. The Act includes a private right of action in § 2923.34 which allows for treble damages for "any person directly or indirectly injured by conduct" violating the Act (emphasis added). The Act presented an attractive avenue for relief because it carries treble damages and confers broad standing on litigants. Fulson and Sanders then hired James A. Lowe, Esq., of Cleveland as local counsel, and the three of them together filed the complaint (with Fulson as the sole plaintiff) in the Court of Common Pleas for Franklin County, Ohio, in January 2013. Because Nicole Gas was a domestic limited liability company, it counted as a "person" in Ohio and could have asserted these claims against Columbia Gas.

There was one big problem with the complaint: Fulson couched his damages as directly resulting from his status as the sole shareholder of Nicole Gas’ parent corporation. He alleged no damages that related to him personally; he only pled that he had been harmed because of his indirect ownership of Nicole Gas. In multiple paragraphs of the complaint, Fulson’s attorneys recited the damages to Fulson as sustained by the corporation he owned.2 Usually, when a corporation is damaged, shareholders seek relief through a derivative suit. Fulson, Sanders, and Lowe, however, believed that the language of the Corrupt Practices Act would allow them to circumvent both the automatic stay and the principle that the bankruptcy trustee has the sole right to assert a debtor’s causes of actions. See Stevenson v. J.C. Bradford & Co. (In re Cannon) , 277 F.3d 838, 853 (6th Cir. 2002) ; Bauer v. Commerce Union Bank , 859 F.2d 438, 441 (6th Cir. 1988).

Because Nicole Gas was in bankruptcy proceedings, filing a derivative suit (based on the Corrupt Practices Act or some other statute) would have meant seeking relief from the automatic stay, see 11 U.S.C. § 362(d) ; ...

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