Sears v. Sears (In re AFY, Inc.)

• Decision Date: 09 August 2017
• Docket Number: No. 16–6014,16–6014
• Citation: 571 B.R. 825
• Parties: IN RE: AFY, INC., also known as Ainsworth Feed Yards Company, Inc., Debtor Robert A. Sears, individually and as testamentary trustee under the will of Redmond Sears, deceased; Korley B. Sears, Plaintiffs–Appellants v. Rhett R. Sears; Rhett Sears Revocable Trust; Ronald H. Sears; Ronald H. Sears Trust; Dane Sears, Defendants–Appellees
• Court: U.S. Bankruptcy Appellate Panel, Eighth Circuit

571 B.R. 825

IN RE: AFY, INC., also known as Ainsworth Feed Yards Company, Inc., Debtor

Robert A. Sears, individually and as testamentary trustee under the will of Redmond Sears, deceased; Korley B. Sears, Plaintiffs–Appellants

v.Rhett R. Sears; Rhett Sears Revocable Trust; Ronald H. Sears; Ronald H. Sears Trust; Dane Sears, Defendants–Appellees

No. 16–6014

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: July 27, 2017

Filed: August 9, 2017

Jerry L. Strasheim, Omaha, NE, for Plaintiffs–Appellants.

Brian Joseph Koenig, Kristin Mae Victoria Krueger, Donald L. Swanson, Koley & Jessen Omaha, NE, for Defendants–Appellees.

Before KRESSEL, FEDERMAN and SHODEEN, Bankruptcy Judges.

KRESSEL, Bankruptcy Judge.

Plaintiffs, Robert A. Sears, individually and as the testamentary trustee under the will of Redmond Sears, deceased, and Korley B. Sears, appeal from the bankruptcy court's¹ order granting defendants', Rhett R. Sears, Rhett Sears Revocable Trust, Ronald H. Sears, Ronald H. Sears Trust, and Dane Sears, motion to dismiss the plaintiffs' complaint. For the reasons below, we affirm.

BACKGROUND

This adversary proceeding is the latest in a series of bankruptcy cases and adversary proceedings in those cases. The individuals in these cases are family members. Rhett, Ron, Robert and Dan Sears are Redmond Sears's sons. Korley Sears is Robert's son. Dane is Ron's son. Redmond Sears owned and operated AFY, Inc., also known as Ainsworth Feed Yards Company, Inc. He transferred all of his interest in AFY to Rhett, Ron, Robert and Dan Sears. On approximately June 20, 2007, AFY and Korley bought back all of Rhett, Ron and Dan's interest in the company in exchange for promissory notes in accordance with their shares. Robert and Korley Sears then became the only two shareholders of AFY. The following are the pertinent histories of the various cases and adversary proceedings.

In re AFY, Inc. (Case No. 10–40875)

On March 25, 2010, AFY filed a Chapter 11 petition. Rhett, Ron and Dane filed proofs of claims in the case and also filed a motion to appoint a trustee. Robert and Korley Sears objected to the motion. The bankruptcy court granted the motion and that order was not appealed.

The case was later converted to a chapter 7 case by the trustee. Robert and Korley objected to Rhett, Ron and Dane's proofs of claim because they alleged: (1) the proofs of claim were unenforceable against AFY or its property, (2) AFY did not sign a promissory note and was not obligated to them under the stock sale agreement, (3) the claimants materially breached their implied duties of good faith and fair dealing, and (4) the claimants materially breached the agreement by opposing the efforts of AFY's to effect a chapter 11 plan and by collaborating with the trustee. The bankruptcy court allowed the proofs of claim. Robert and Korley appealed and we affirmed. Sears v. Sears (In re AFY, Inc ), 463 B.R. 483 (8th Cir. BAP 2012). Robert and Korley appealed our decision to the Eighth Circuit Court of Appeals. The Eighth Circuit dismissed the appeal, holding that Robert and Korley lacked standing to appeal the bankruptcy court's order against AFY. Sears v. Sears (In re AFY, Inc ), 733 F.3d 791 (8th Cir. 2013).

On January 31, 2014, the chapter 7 trustee filed a motion to approve interim payments to Rhett, Ron and Dane and other unsecured creditors, of $3 million of the $4.5 million held in AFY's estate. The bankruptcy court granted the motion over Robert and Korley's objection but the court delayed the payments to creditors until resolution of Robert and Korley's petition for a writ of certiorari to the Supreme Court. The order was not appealed. The Supreme Court denied the petition for writ of certiorari and the trustee made the authorized distribution to creditors. After selling all of the estate property, the trustee made final distributions to creditors. On August 6, 2015, the trustee filled a final account and certification that the estate had been fully administered. The bankruptcy court closed the case on Aril 26, 2016.

In re Korley Sears (Case No. 10–40277)

On February 2, 2010, Korley Sears filed a Chapter 11 petition. His case is still pending. Rhett, Ron and Dane filed proof of claims. Korley objected to the claims based on the same grounds as those asserted in the AFY bankruptcy, but in addition argued that the stock sale agreement was an executory contract that has not been rejected. On August 29, 2014, the bankruptcy court allowed the claims.

Korley appealed this order to the district court (Case No. 14CV3206). On August 25, 2015, the district court affirmed the bankruptcy court's order allowing the claims. In re Sears , 536 B.R. 286 (D. Neb. 2015). The debtor appealed this decision to the Eighth Circuit Court of Appeals and on July 18, 2017, the Court of Appeals affirmed the district court. In re Sears , 863 F.3d 973 (8th Cir. 2017).

Rhett R. Sears, et al., v. Korley Sears (A.P. 12–04034)

On May 9, 2012, Rhett, Ron and Dane Sears filed an adversary proceeding against Korley Sears objecting to Korley's discharge pursuant to 11 U.S.C. § 727(a)(2) and (a)(4). A trial was held on September 25, 2014. On September 26, 2014, the bankruptcy court entered judgment against Korley denying him a discharge. The debtor appealed this order to the district court (Case No. 14CV3219). On September 21, 2015, the district court affirmed the bankruptcy court's order. Sears v. Sears , 542 B.R. 463 (D. Neb. 2015). On October 20, 2015, Korley appealed the district court's order to the Eighth Circuit Court of Appeals and on July 18, 2017, the Court of Appeals affirmed the district court. Sears v. Sears , 863 F.3d 980 (8th Cir. 2017).

In re Robert Sears (Case No. 10–40275)

On February 2, 2010, Robert Sears also filed a chapter 11 case. His case is still pending.

Robert A. Sears, et al. v. Rhett R. Sears, et al.(This Litigation)

On October 17, 2014, Robert A. Sears, Robert A. Sears as a trustee for the will of Redmond Sears and Korley B. Sears filed a complaint against Rhett R. Sears, Rhett R. Sears revocable trust, Ron H. Sears, Ronald H. Sears Trust and Dane R. Sears, in the district court of Madison County, Nebraska (Case No.14–389J). The plaintiffs alleged the following claims in their complaint: breach of contract, breach of fiduciary duty, restitution, conspiracy and tortuous interference, and abuse of process. The facts alleged to support the causes of action in the complaint are all related to the defendants' alleged wrongful conduct during the AFY bankruptcy case including AFY's liability to the defendants in the stock sale agreement, the defendants' participation in the AFY bankruptcy, the defendants receiving distribution, and the alleged effort of the defendants in making AFY's reorganization impossible. We note that the defendant's actions in the bankruptcy case were largely approved by the bankruptcy court and the bankruptcy court's orders are final.

On November 24, 2014, the defendants removed the state court proceeding to the bankruptcy court in the bankruptcy cases of AFY, Inc. (Case No. 10–40875), Robert Sears (Case No. 10–40275), and Korley Sears (Case No. 10–40277) as adversary proceedings 14–4060, 14–4061, and 14–4062. On December 1, 2014, the defendants filed, in each case, (1) a motion to dismiss the complaint for failure to state claims upon which relief may be granted, (2) a motion for sanctions for liability for excessive costs of counsel, and (3) a motion to consolidate cases 14–4060, 14–4061 and 14–4062.

On December 9, 2014, the plaintiffs filed a "Statement of Intent," asking the court to remand the case to state district court because the proceedings were not core and stating that they did not consent to the entry of final order or judgment by the bankruptcy court.

On December 11, 2014, the bankruptcy court sua sponte , pursuant to the permissive abstention doctrine under 28 U.S.C § 1334(c)(1) and the equitable remand doctrine under 28 U.S.C. § 1452(b), ordered remand to the state court. Sears v. Sears , (In re Robert Sears ), No. BR10-40275, 2014 WL 7014593 (D. Neb. Dec. 11, 2014). In its order the bankruptcy court held that the adversary proceeding was a related proceeding under 28 U.S.C. § 1334(b). On the same day, the defendants appealed to the district court.

On September 29, 2015, the district court held that the bankruptcy court may only reach the issue of abstention sua sponte if the parties had an advance notice that the court is considering abstention and had an opportunity to be heard. The district court ruled that the bankruptcy court abused its discretion when it remanded the case to state court because it did not afford the defendants an opportunity to be heard. Robert Sears, et al. v. Rhett Sears, et al. (In re Sears ), No. 4:14CV3247, 2015 WL 5793456 at *4 (D. Neb. Sep. 28, 2015). The district court did not reach the merits of the order but said that the defendants "presented convincing argument...as to why [Plaintiffs'] action does not belong in state court." Id. at *4. This order was not appealed.

On October 1, 2015, the plaintiffs filed (1) a motion to remand the action to state court under 28 U.S.C. § 145–2(b)(4), (2) a motion to abstain from hearing the case pursuant to 28 U.S.C. § 1334(c)(1), and (3) a motion to consolidate the proceedings. The plaintiffs argued that the case was not a "core" case because it was a state law issue and required a trial by jury to which the plaintiffs did not consent to the bankruptcy judge hearing the case.

On October 22, 2015, the defendants filed a motion asking the bankruptcy court to stay the proceeding because the resolution of a separate case currently on appeal in the Eighth Circuit Court of Appeals (Case No. 15–3352)² involving the merits of the defendants' proof of claims that will have an effect on the rights of the parties and defenses in the current case. The defendants also filed an objection to the plaintiffs' motion to remand the case to state court. The defendants argued that ...