Rafool v. Evans (In re Cent. Ill. Energy, L.L.C.)

• Decision Date: 20 November 2012
• Docket Number: Adversary No. 10–8026.,Bankruptcy No. 07–82817.
• Citation: 482 B.R. 772
• Parties: In re CENTRAL ILLINOIS ENERGY, L.L.C., Debtor. Gary T. Rafool, not individually but as Trustee for the estate of Central Illinois Energy, L.L.C., Plaintiff, v. Michael E. Evans and Froehling, Weber & Schell, LLP, formerly doing business as Froehling, Weber, Evans & Schell, LLP, Defendants.
• Court: U.S. Bankruptcy Court — Central District of Illinois

482 B.R. 772

In re CENTRAL ILLINOIS ENERGY, L.L.C., Debtor.Gary T. Rafool, not individually but as Trustee for the estate of Central Illinois Energy, L.L.C., Plaintiff,

v.Michael E. Evans and Froehling, Weber & Schell, LLP, formerly doing business as Froehling, Weber, Evans & Schell, LLP, Defendants.

Bankruptcy No. 07–82817.

Adversary No. 10–8026.

United States Bankruptcy Court, C.D. Illinois.

Nov. 20, 2012.

Alan L. Fulkerson, for Plaintiff.

Charles E. Covey, Peoria, IL, for Defendants.

OPINION

THOMAS L. PERKINS, Chief Judge.

This matter is before the Court on the motion for summary judgment filed by the Defendants, Michael E. Evans and Froehling, Weber & Schell, LLP, on the complaint filed by Gary T. Rafool, as Trustee for the estate of Central Illinois Energy, L.L.C., for legal malpractice.

BACKGROUND

The Debtor, Central Illinois Energy, L.L.C. (Debtor), was formed in 2004 for the purpose of constructing, owning and operating an ethanol production facility, including a waste-coal fired co-generation facility. In 2005, the Debtor and Lurgi PSI, Inc. (Lurgi), entered into an Engineering, Procurement and Construction Agreement (EPC Agreement), pursuant to which Lurgi agreed to design and construct the ethanol facility. Later, in August of 2005, the parties entered into a second EPC Agreement for the design, engineering and construction of a combined heat and power plant to power the ethanol facility. The EPC Agreements also provided intellectual property (IP) licenses to the Debtor for the use of Lurgi's intellectual property that was used in the project. Pursuant to the EPC Agreements, the Debtor was obligated to make monthly progress payments for the work completed and equipment procured. As is customary in the construction industry, the EPC Agreements provided for a percentage of each progress payment to be withheld by the Debtor as retainage. Those EPC Agreements allowed Lurgi, at its option, to provide letters of credit for the benefit of the Debtor in lieu of that retainage. Michael Evans, along with attorneys from another law firm, represented the Debtor in the negotiations resulting in those EPC Agreements.

In April, 2006, the Debtor entered into a credit agreement with Credit Suisse, as agent for itself and a consortium of other lenders, for a construction loan of up to $87,500,000, secured by liens on substantially all of the Debtor's assets. The law firm of Sidley Austin LLP was employed by the Debtor as additional counsel to assist in the negotiation, documentation and administration of the construction loan.

On July 13, 2006, Lurgi posted an irrevocable standby letter of credit in the amount of $2,525,000 from DZ Bank AG. In January, 2007, the amount of the letter of credit was increased to $4,645,000. On August 7, 2006, Lurgi obtained an additional irrevocable standby letter of credit from Commerzbank in the amount of $3,135,000. The expiration date of both letters of credit was December 15, 2007, although the letters of credit were automatically renewable for one year periods unless the respective banks received notice from the Debtor, as beneficiary, along with the letter of credit, instructing the issuing bank to terminate the letter of credit, or unless the issuing bank had sent notice to the Debtor of at least 30 days, but no more than 45 days, that the letter of credit would not be extended. Both letters of credit provided that if the letter of credit was not extended beyond the expiration date and was not renewed or replaced by Lurgi, the Debtor could make a draw within the last fifteen days prior to the current expiration date.

Construction began in May, 2005. By early 2007, the Debtor encountered financial difficulties as a result of a series of delays and cost overruns. Disputes arose between the Debtor and Lurgi. The Debtor's troubles came to a head in the late fall of 2007. Considering the Debtor to be in default, Lurgi filed mechanics lien claims and commenced arbitration proceedings against the Debtor. Other subcontractors followed suit and construction was halted. Evans met with Barry Barash, a bankruptcy attorney, to discuss the Debtor's deteriorating financial condition. During that final week of November, Evans maintained close contacts with Sidley Austin, Barash, Mike Smith, the Debtor's General Manager, and the members of the Debtor's board of directors. On November 28, 2007, Lurgi purportedly delivered termination notices on each of the EPC Agreements.¹

On November 30, 2007, the Debtor notified Lurgi of its intent to draw on the letters of credit issued by DZ Bank and Commerzbank, based upon Lurgi's wrongful termination of the EPC Agreements. By separate letters on that same date, the Debtor notified Lurgi of its intent to draw upon both letters of credit for the alternative reason that neither had been extended beyond the original expiration date of December 15, 2007. On that same date, November 30, 2007, Lurgi caused two new irrevocable standby letters of credit to be issued by Calyon Credit Agricole CIB (Calyon) in the amounts of $4,465,000 and $4,238,000.² The new letters of credit contained an expiration date of December 15, 2008.

On December 8, 2007, the Debtor's board of directors terminated Sidley Austin's representation and authorized the hiring of Barry Barash for the purpose of representing the Debtor in a chapter 11 bankruptcy proceeding. On that same day, Mike Smith resigned as the Debtor's General Manager. The Debtor filed a chapter 7 petition on December 13, 2007. On January 7, 2008, the Debtor, through Barash, filed an expedited motion for secured postpetition financing that refers to the Calyon letters of credit and proposes to correct the bank account information included on those letters of credit, which motion was subsequently denied for reasons unrelated to the letters of credit. After efforts to find a private buyer for the facilities proved fruitless, the Debtor filed on February 5, 2008, a motion to sell its assets at auction, to establish procedures for the sale and for the assumption and assignment to the purchaser of certain executorycontracts and leases. The Debtor negotiated an agreement with a consortium of its prepetition secured lenders for the purchase of its assets through a credit bid, with the assets to remain subject to perfected mechanics lien claims. Lurgi, among others, objected to the sale on several grounds, including that the EPC Agreements had been terminated prior to the filing of the petition. After a hearing, an order was entered finding that the sale was in the best interests of the Debtor and its creditors and approving procedures for the sale, assumption of executory contracts and leases, and resolution of mechanics lien claims.

The order directed the Debtor to identify the executory contracts which it intended to assume and to notify the counterparties to those contracts by March 20, 2008. On that date, the Debtor filed a list of executory contracts which it intended to assume, specifically reserving the right to seek to assume or reject additional contracts in the future. Neither the EPC Agreements nor the letters of credit were on that list or on an amended list filed by the Debtor on April 8, 2008. One day earlier, Credit Suisse filed an unsigned, but “near final” Asset Purchase Agreement (APA) between the Debtor and New CIE Energy, LLC (New CIE), the limited liability company formed by the prepetition secured lenders. The APA defined the assets which were being sold to New CIE as essentially all of the Debtor's rights in property of every kind, except for assets which were specifically identified as being excluded. The APA further defined “assumed executory contracts” to mean all of the Debtor's executory contracts with the exception of those listed on the schedule of excluded executory contracts. The Benchmark & Tech Support Consulting Services Agreement was the only Lurgi contract which was listed on the schedule of contracts which were not to be assumed by the Debtor. No letter of credit was included on the list of excluded executory contracts.

Lurgi, clarifying its objection to the sale, contended that although the Debtor had not formally sought to assume the letters of credit, approval of the proposed APA and the order approving the sale would effect an assumption and assignment of the letters of credit to the purchaser. In response to Lurgi's objection to the impending sale, the Debtor asserted that the Debtor and the purchaser would comply with the license assignment provisions of the EPC Agreements in order that the EPC Agreements could be transferred to New CIE. Lurgi argued that the letters of credit were independent from the EPC Agreements and were executory contracts to make a financial accommodation that could not be assumed and assigned by the Debtor. On April 24, 2008, the Court entered an order approving the sale, which provided as follows with regard to the EPC Agreements and the letters of credit:

17. Any rights granted to the Debtor pursuant to any letters of credit granted under any contract or agreement including, but not limited to, the EPC Agreements, shall continue to be governed by the terms and conditions of any such contract or agreement, or other applicable law, and, in the event any such assignment to Purchaser pursuant to further order of this Court or agreement amongst the parties, the Purchaser hereby agrees to comply with the applicable terms and conditions of any such contract or agreement.

18. Until entry of a further order of this Court, after a hearing on the merits, or stipulation of the parties, the EPC Agreements shall not be Assumed Executory Contracts, Assumed Executory Leases, or Acquired Assets. All rights, claims, arguments or defenses of the Debtor, Purchaser, or Lurgi, Inc. related to (a) the assumption or assignment of such EPC Agreements as Executory Contracts pursuant to section 365 of the Bankruptcy Code, or (b) the transfer of the EPC Agreements as...