New Prods. Corp. v. Tibble (In re Modern Plastics Corp.), Case No. DK 09–00651

• Citation: 543 B.R. 819
• Decision Date: 21 January 2016
• Docket Number: Case No. DK 09–00651,Adversary Proceedings No. 13–80252
• Parties: In re: Modern Plastics Corporation, Debtor. New Products Corporation and United States of America, Plaintiffs, v. Thomas R. Tibble, individually and in his capacity as Chapter 7 Trustee, and Federal Insurance Company, Defendants.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Michigan

543 B.R. 819

In re: Modern Plastics Corporation, Debtor.New Products Corporation and United States of America, Plaintiffs,

v.Thomas R. Tibble, individually and in his capacity as Chapter 7 Trustee, and Federal Insurance Company, Defendants.

Case No. DK 09–00651

Adversary Proceedings No. 13–80252

United States Bankruptcy Court, W.D. Michigan.

Signed January 21, 2016

Melissa L. Demorest LeDuc, Demorest Law Firm PLLC, Royal Oak, MI, for New Products Corporation.

United States of America, pro se.

John Chester Fish, James, Dark & Brill, Cody H. Knight, Rayman & Knight, Kalamazoo, MI, Timothy Hillegonds, Elisabeth M. Von Eitzen, Warner Norcross & Judd, LLP, Grand Rapids, MI, for Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW AFTER TRIAL

Scott W. Dales, United States Bankruptcy Judge.

I. BACKGROUND

At the center of this dispute between an unhappy creditor and a bankruptcy trustee lies a now-defunct manufacturing facility in Benton Harbor, Michigan (the "Property"). The Property, commonly known as 489 North Shore Drive, Benton Harbor, Michigan, served as the factory, warehouse, and offices of Modern Plastics Corporation (the "Debtor"), as well as the collateral for a prepetition commercial loan that Bank of America ("BOA") made to finance the Debtor's manufacturing business.

The plaintiff in this case, New Products Corporation ("New Products" or the "Plaintiff"), is a "Tier 1" automotive supplier with its headquarters and manufacturing facility across the street from the Property. New Products, founded by the same man who established the Debtor and still managed by the founder's granddaughter, originally held a general unsecured claim against the Debtor in the amount of $19,113.82, but later acquired BOA's rights against the Debtor and the Property under a post-petition assignment of the bank's loan documents.

The principal defendant in this case is the former chapter 7 trustee, Thomas R. Tibble (the "Trustee" or "Mr. Tibble"). Mr. Tibble served as the trustee of the Debtor's bankruptcy estate from his appointment on January 26, 2009 until the charges of negligence (or worse) that New Products leveled against him prompted his resignation on January 9, 2015.¹ The Trustee's surety, Federal Insurance Company ("FIC"), is also a defendant. For convenience, the court will refer to the Trustee, the estate, and FIC collectively as the "Defendants."

Evidently frustrated with the Trustee's handling of the case, and seeing an opportunity to acquire the Property as a buffer against future development and possibly for future expansion of its own business, New Products succeeded to BOA's claims against the Debtor and its mortgage against the Property through a post-petition assignment, effective March 4, 2013 (the "Assignment Date").

New Products came to believe that, while the Property was within the bankruptcy estate and under the Trustee's aegis, scrappers freely entered the premises, removing copper wires, steel beams, piping, "bus ducts," lighting fixtures, plumbing fixtures, furnaces, even support beams—"everything that wasn't nailed down" and much of what was. The Plaintiff blames the Trustee for not taking steps to preserve the Property it eventually acquired an interest in, against the scrapping or looting.

A. This Adversary Proceeding

A few months after the Assignment Date, after successfully opposing the Trustee's request to approve his final report of distribution, New Products sued the Trustee and FIC to recover from them the post-petition diminution in value of the Property that they attributed to the Trustee's alleged breaches of fiduciary duty to the estate, BOA and to New Products.

More specifically, and as set forth in its First Amended Complaint (the "Complaint," AP ECF No. 15),² New Products alleges that the Trustee breached his fiduciary duty:

(1) by failing to protect the Property against vandalism or looting (Complaint at ¶¶ 23, 42, 46, 47);

(2) by failing to insure the Property after BOA said it would no longer do so (id. ¶¶ 23, 62, 65);

(3) by failing to object to property tax assessments (id. ¶¶ 23 and 68);

(4) by failing to determine environmental contamination on the premises (id. ¶¶ 23, 51);

(5) by failing to maximize the value of the Property through sale (id. ¶ 20) or jumping to the conclusion that only the developers of the nearby "Harbor Shores" golf course would be interested in buying it (id. ¶ 28); and

(6) by leasing the Property as a parking lot to Harbor Shores for too little income (id. ¶¶ 37–40).

The Defendants, in contrast, contend that the Property was "underwater," not necessarily because of the leaking roof and standing water within the building (which largely predated the bankruptcy filing) but because the unavoidable liens against the Property greatly exceeded its value. Without any equity for the estate, and because BOA had no interest in going out-of-pocket to protect or insure its own collateral, the Defendants contend that the Trustee acted appropriately by, in effect, holding onto the Property and generating income from it, such as a carve-out, option payments, and parking lot license fees, without expending any resources or effort to preserve it. They contend, without contradiction, that BOA acquiesced in this approach for more than four years, never objecting, nor requesting adequate protection, nor moving for relief from stay, nor to compel abandonment.

After six motions for summary judgment,³ the court narrowed the issues by (1) precluding New Products from recovering damages caused by the Trustee's decision to cancel the casualty insurance (see Memorandum of Decision and Order, AP ECF No. 88); (2) limiting the Trustee's personal liability to any willful breach of duty (id. ); and (3) holding that New Products purchased only BOA's contract rights against the Debtor but not any of the tort claims BOA may have had against the Trustee (including claims that BOA may have been able to assert for pre-assignment breaches of fiduciary duty). See Memorandum of Decision and Order, AP ECF No. 139 p. 5. This last point means that New Products could assert only the direct claims it might hold against the Trustee for the diminution of the Property's value that occurred between the March 4, 2013 Assignment Date, and January 6, 2014 (the date the Trustee technically abandoned the property). Id. at p. 8.

In a prior ruling, the court also concluded that the Trustee's duty to use estate resources to preserve or improve the Property would depend almost entirely upon whether there was equity in the Property that would inure to the bankruptcy estate. See Order Denying Parties' Summary Judgment Motions and Bifurcating Issues for Trial, AP ECF No. 188. In other words, bankruptcy trustees must not use estate resources if doing so will benefit only secured creditors. Id.; cf. 11 U.S.C. § 506(c) (authorizing trustee to surcharge collateral).⁴

Given this view of a trustee's duty and the allegations seemingly premised on the notion that the Trustee ought to have used estate resources to protect and enhance the value of the Property, the court bifurcated the issues for trial, focusing first on the Property's value and whether there was any equity in it. Given the central role that the Property's value played in the pre-trial motion practice, the court hoped that an early decision on this issue would assist it in determining whether the Trustee violated his duty to preserve the Property before reaching other issues regarding the Trustee's breach of fiduciary duty, whether the breach caused any damages, and if so, the amount of those damages. See Order Denying Parties' Summary Judgment Motions and Bifurcating Issues for Trial, AP ECF No. 188, at p. 4. Thus, the first phase of trial, which began on January 14, 2016, was limited to establishing the value of the Property as of March 4, 2013, as well as the extent of the encumbrances against it.

In response to a motion in limine, which the Defendants filed mainly to exclude the testimony of New Products's expert witness, New Products conceded that it was taking an unconventional approach to valuation in that, instead of appraisers and real estate professionals, it would depend upon the vice president of a commercial construction firm to testify about the scrap value of the components of the building. New Products argued that the value of these parts exceeded the "market value" of the Property, as would be determined by the more traditional valuation methodologies, used by appraisers, such as the sales comparison approach. In other words, New Products's theory rested on proving that the value of the damaged and purloined parts of the building exceeded the amount of the encumbrances, which would result in the equity necessary to trigger the Trustee's fiduciary duty to protect and insure the Property (against damage)⁵ for the benefit of the estate and thus, the unsecured creditors.

B. The First Phase of Trial

The first phase of the trial commenced with New Products's calling Michael Frederick to the stand. Mr. Frederick is the vice president of Frederick Construction, and is the expert witness that New Products retained under Rule 26(a)(2)(B). New Products also presented the live testimony of two men associated with Randy's Metal Recycling (Nicholas Schlipp and his grandfather, Delbert Schlipp), before concluding its presentation of live testimony with Cheryl Miller, the chief executive officer of New Products.

With the agreement of the parties, the court also admitted the transcripts of deposition testimony from Steven Siravo and Ronald Miller pursuant to Rule 32(a)(4). The court has reviewed the deposition transcripts, paying particular attention to the Plaintiff's bench-filed designations of "key portions" to which the Plaintiff has called the court's attention. See Plaintiff's Designations of Key Portions of Deposition Transcripts (AP ECF Nos. 270 and 271).

During New Products's presentation of its case, the court admitted numerous documents into evidence, including the Stipulation...