Mesabi Metallics Co. v. B. Riley FBR, Inc. (In re Essar Steel Minn. LLC)
| Decision Date | 01 July 2020 |
| Docket Number | Case No. 16-11626 (BLS),Civ. No. 19-397 (LPS),Adv. No. 18-50833 (BLS) |
| Parties | IN RE ESSAR STEEL MINNESOTA LLC, et al., Debtors. MESABI METALLICS COMPANY LLC (f/k/a ESSAR STEEL MINNESOTA LLC) and CHIPPEWA CAPITAL PARTNERS, LLC, Appellants-Plaintiffs, v. B. RILEY FBR, INC. f/k/a B. RILEY & CO., LLC, Appellee-Defendant. |
| Court | U.S. District Court — District of Delaware |
Jointly Administered
This appeal arises in the Chapter 11 cases of Mesabi Metallics Company LLC and its then-parent holding company, ESML Holdings, Inc. (together, "Mesabi" or "Reorganized Debtor"). Together with its Plan sponsor, Chippewa Capital Partners, LLC ("Chippewa," and together with Reorganized Debtor, the "Appellants"), Appellants have appealed from the Bankruptcy Court's February 14, 2019 Order (Adv. D.I. 28) ("Order")1 granting dismissal of an adversary proceeding brought by Appellants against appellee B. Riley FBR, Inc. ("B. Riley" or "Appellee"), seeking to enforce the plan confirmation order and automatic stay. The Order dismissed the adversary proceeding for the reasons stated by the Bankruptcy Court on the record at a February 12, 2019 hearing. Specifically, the Bankruptcy Court sua sponte ruled that theadversary proceeding lacked "a sufficiently close nexus to implementation of the plan to support this court's exercise of jurisdiction to consider and dispose of this matter." (Adv. D.I. 26, 2/12/19 Hr'g Tr. at 4:23-5:8)
Pending before the Court is Appellants' Motion Requesting Certification of a Direct Appeal to the U.S. Court of Appeals for the Third Circuit (D.I. 10) ("Certification Motion"), which seeks certification under 28 U.S.C. § 158(d)(2)(A)(i) and (ii). According to B. Riley, neither § 158(d)(2)(A)(i) nor (ii) presents a proper basis for certification. However, B. Riley agrees that the appeal should be certified, but only under § 158(d)(2)(A)(iii). (D.I. 15) Appellants agree that § 158(d)(2)(A)(iii) presents an adequate basis for certification of the appeal, although one which Appellants contend is weaker than their proffered bases. (D.I. 17)
The Court believes that certification of a direct appeal is warranted under all of the provisions cited by the parties. Thus, the Court will certify the appeal under § 158(d)(2)(A)(i), (ii), and (iii).
On July 8, 2016, the Debtor filed voluntary petitions under Chapter 11. On February 22, 2017, third-party ERP Iron Ore ("ERPI") entered into an agreement with B. Riley ("Original Agreement"), pursuant to which B. Riley was retained as exclusive financial advisor to the "Company" (defined as ERPI and its affiliates) to assist ERPI in acquiring the Debtor. B. Riley would receive a "Restructuring Transaction Fee" if ERPI was successful in the acquisition. On March 9, 2017, the parties entered into an amendment ("First Amendment"), which contemplated that B. Riley would "provide additional financial services to the Company" on an exclusive basis relating to a certain financing transaction and that B. Riley would receive a success fee equal to 3% of any debt financing transaction. The definition of "Company"remained unchanged from the Original Agreement to the First Amendment, referring only to "[ERPI] and its affiliates."
On June 8, 2017, Mesabi filed its plan of reorganization (B.D.I. 990) ("Plan"), with Chippewa as plan sponsor. Thomas Clarke is CEO of Chippewa as well as CEO and controlling owner of ERPI. While Clarke is a former executive of Mesabi, Clarke was not an executive of Mesabi on the Petition Date or at any time during the course of the Chapter 11 cases.
On June 13, 2017, the Bankruptcy Court confirmed the Plan (B.D.I. 1025) ("Confirmation Order"). The Plan and Confirmation Order included typical provisions (i) discharging all claims against Mesabi arising prior to the Plan's effective date (Plan § 14.7; Confirmation Order ¶ 52) ("Discharge Injunction"), and (ii) enjoining all holders of such claims from pursuing either Mesabi as Reorganized Debtor or Chippewa as Plan sponsor (Plan § 14.22; Confirmation Order ¶ 56) ("Injunction"). Both the Plan and Confirmation Order also retained jurisdiction in the Bankruptcy Court over any matter related to the Plan or Chapter 11 cases. (Plan Art. XIII; Confirmation Order ¶ 51)
On December 21, 2017 - one day prior to the Plan's effective date - a Second Amendment to the Engagement Agreement was executed. B. Riley claims that the Reorganized Debtor, though not yet in existence, became a party to the Engagement Agreement by virtue of the Second Amendment. The Second Amendment, executed by ERPI, B. Riley, and Chippewa, changed the definition of "Company," purportedly "for the avoidance of doubt," to include, in addition to ERPI, "Chippewa Capital Partners, LLC, and its subsidiary post-effective date, Mesabi Metallics Company, LLC." Clarke signed the Second Amendment on behalf of Chippewa and ERPI. B. Riley has alleged that "Mr. Clarke, in his capacity as CEO of Chippewa (the parent company of Mesabi) executed [the Second Amendment] on behalf of both Chippewaand Mesabi." (See Adv. D.I. 13 at 9-10 (citing statements) (emphasis added)) Appellants contend that Clarke was not CEO of Mesabi when he signed the Second Amendment.
On December 22, 2017, the Plan went effective. Post-Plan effective date, Clarke was designated as CEO of Reorganized Mesabi. Thereafter, B. Riley demanded a fee of approximately $17 million, based on the Engagement Agreement, and initiated two actions against Reorganized Debtor and Chippewa, though without permission from the Bankruptcy Court: (i) an arbitration action before FINRA ("FINRA Action"), initiated on July 25, 2018; and (ii) a complaint and motion for temporary restraining order ("Motion") in the United States District Court for the District of Minnesota, Case No. 18-cv-2575-JRT/BRT (D. Minn.) ("Minnesota District Court Action"), initiated on September 4, 2018, against Clarke, Mesabi, and Chippewa, seeking to enjoin them from using, reducing, diminishing, transferring, disposing of, and/or in any respect dissipating, the amount of $17 million. The Minnesota Motion was heard on November 2, 2018 and denied on November 21, 2018. On March 11, 2019, the Minnesota District Court dismissed the Minnesota District Court Action in its entirety, with prejudice, leaving the FINRA Action.2 (Id. at D.I. 56)
Believing that B. Riley violated the Confirmation Order by prosecuting the FINRA Arbitration and Minnesota District Court Action, Appellants filed a complaint for civil contempt, declaratory judgment, and breach of the Plan. (Adv. D.I. 1) B. Riley moved to dismiss thisadversary proceeding (Adv. D.I. 10) ("Motion to Dismiss"), arguing, inter alia, that its claim cannot be a pre-effective date claim enjoined by the Plan. Appellants opposed the Motion to Dismiss (Adv. D.I. 13), arguing, inter alia, that (i) Clarke had no authority to bind Reorganized Mesabi prior to the Plan's effective date, and (ii) even if he did, any contract-based claim B. Riley may have against the Debtor arose on December 21, 2017, when the Second Amendment was executed, and was, thus, discharged upon the Plan's effective date on December 22, 2017. According to Debtors, the fact that Clarke and Chippewa did not have authority to execute the Second Amendment on behalf of Mesabi prior to the Plan effective date merely shows that the contract upon which B. Riley's claim is based is unenforceable against Mesabi, not that (as B. Riley argues) B. Riley somehow has a post-effective date claim against the Reorganized Debtor. Appellants continue that a claim based on an unenforceable contract is subject to disallowance under § 502(b)(1) of the Bankruptcy Code, but pursuit of such a claim that arose pre-effective date is still a violation of the Plan and Confirmation Order.
On November 15, 2018, B. Riley filed its reply in further support of the Motion to Dismiss. Neither party briefed the issue of the Bankruptcy Court's subject matter jurisdiction.
On February 11, 2019, the Bankruptcy Court held oral argument on the Motion to Dismiss and took the matter under advisement. (Adv. D.I. 25) On February 12, 2019, the Bankruptcy Court issued a bench ruling, which included the following:
(Adv. D.I. 26, 2/12/19 Hr'g Tr. at 4:23-5:8) On February 14, 2019, the Bankruptcy Court issued the Order dismissing the adversary proceeding. (Adv. D.I. 28)
On February 26, 2019, Appellants appealed the Order and moved for a stay pending appeal so they could request that FINRA allow Appellants to fully litigate their appeal. (Adv. D.I. 30 & 33) On March 7, 2019, the Bankruptcy Court granted a 45-day stay of the Order "to give the District Court an opportunity to deal with what I presume will be a further request from the movant." (Adv. D.I. 43, 3/7/19 Hr'g Tr. at 26:12-22) On June 4, 2019, this Court granted a stay pending appeal. (D.I. 21)
The Certification Motion is fully briefed. (D.I. 10, 15, 17, 23, 27) The Court did not hear oral argument because the facts and legal arguments are adequately presented in the briefs and record, and the decisional process would not be significantly aided by oral argument.
Pursuant to 28 U.S.C. § 158(a), district courts have mandatory jurisdiction to hear appeals "from final judgments, orders and decrees" and discretionary jurisdiction over appeals "from other interlocutory orders and decrees." 28 U.S.C. § 158(a)(1), (3). Motions for direct...
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