Spradlin v. Williams (In re Alma Energy, LLC)

• Court: U.S. Bankruptcy Court — Eastern District of Kentucky
• Writing for the Court: JOE LEE, Bankruptcy Judge.
• Citation: Spradlin v. Williams (In re Alma Energy, LLC), 521 B.R. 1 (Bankr. E.D. Ky. 2014)
• Decision Date: 22 October 2014
• Docket Number: Bankruptcy No. 07–70370.,Adversary No. 09–7005.
• Parties: In re ALMA ENERGY, LLC, Debtor. Phaedra Spradlin, solely in her capacity as the Chapter 7 Trustee of Alma Energy, LLC, and THC Kentucky Coal Venture I LLC, Plaintiffs v. Darrell K. Williams, et al., Defendants.

521 B.R. 1

In re ALMA ENERGY, LLC, Debtor.

Phaedra Spradlin, solely in her capacity as the Chapter 7 Trustee of Alma Energy, LLC, and THC Kentucky Coal Venture I LLC, Plaintiffs

v.Darrell K. Williams, et al., Defendants.

Bankruptcy No. 07–70370.

Adversary No. 09–7005.

United States Bankruptcy Court, E.D. Kentucky, Pikeville Division.

Signed Oct. 22, 2014.

Paul Stewart Snyder, Ashland, KY, for Debtor.

J. Wesley Harned, DelCotto Law Group PLLC, Gregory R. Schaaf, Lexington, KY, John Lucian, Philadelphia, PA, Jodi Lynn Foss, Gordon & Simmons, Frederick, MD, for Plaintiffs.

T. Kent Barber, Barber Law PLLC, John Thomas Hamilton, Gess Mattingly & Atchison, Lexington, KY, Matthew S. Johnston, Brian M. Maul, Roger C. Simmons, Gordon & Simmons LLC, Frederick, MD, Dennis E. Kelley, Huntington, WV, Christopher G. O'Brien, Ft. Myers, FL, for Defendants.

Allison F. Arbuckle, Norfolk, VA, Michael J. Gartland, DelCotto Law Group PLLC, Lexington, KY, for Plaintiffs/Defendants.

MEMORANDUM OPINION

JOE LEE, Bankruptcy Judge.

This case presents what appears to be a question of first impression in this or any other court. This Court entered two merits judgments in this action. One was appealed; the other wasn't. On appeal, the District Court held this Court lacked jurisdiction over this action and vacated the appealed judgment; the Sixth Circuit, in an unpublished opinion, affirmed. Now, the judgment losers in the unappealed judgment have moved to set it aside as void for lack of subject-matter jurisdiction. Must this Court grant their motion? The answer to this question, the Court concludes, is surprisingly no. Rather, the Court may only grant their motion if, at the time it entered the judgment, it lacked even an arguable basis to assert jurisdiction.

Applying this standard, the Court is confronted with another novel question: can a claim implicate a bankruptcy court's core jurisdiction even though it fails to implicate the court's non-core jurisdiction? The District Court and Sixth Circuit thought not, and this Court respects that holding as law of the case. But the Court finds that at the time it entered the judgment movants seek to set aside, whether claims could “arise under” the Code or “arise in” in a bankruptcy case in spite of not being “related to” a bankruptcy case was unsettled. Specifically, it finds that at the time it entered its judgment, there was an arguable basis to assert arising-under or arising-in jurisdiction over all but four of the claims decided therein, even though there was no arguable basis for related-to jurisdiction over any of the claims the judgment adjudicated. Therefore, the Court will only set aside its judgment in part.

I. Facts and Procedural History

As every court to consider this case has successively observed, “ ‘[t]his case has a ‘tortured history’ that winds through a ‘scrambled maze of facts and allegations.’ ' ” Spradlin v. Richard (“Spradlin III”), 572 Fed.Appx. 420, 422 (6th Cir.2014) (quoting Spradlin v. Pikeville Energy Grp., LLC (“Spradlin II”), No. 12–111–ART, 2012 WL 6706188, at *1 (E.D.Ky. Dec. 26, 2012) ) (quoting Spradlin v. Williams (“Spradlin I”), Case No. 07–70370, Adv. No. 09–7005, 2012 WL 243746, at *2 (Bankr.E.D.Ky. Jan. 24, 2012) ). For purposes of this opinion, only a general, albeit detailed, overview of the history of the adversary proceeding and the consent judgment entered against Nathan and Darrell Williams therein, along with the history of their efforts to set aside that judgment, are required.

A. The Adversary Proceeding

1. The Original Complaint

The story of this adversary proceeding begins with two adversary proceedings that preceded it. Alma Energy, LLC (“Alma”), a coal company, filed a Chapter 11 bankruptcy petition in this Court on August 13, 2007. In the following weeks, Alma filed two adversary proceedings against Warren Halle and several entities he controlled (the “Halle Entities”), one of which was THC Kentucky Coal Venture I LLC (“THC”). Those adversary proceedings were settled on December 14, 2007, in an agreement (the “2007 Settlement Agreement”) approved by this Court on February 8, 2008.

On May 4, 2009, Alma, believing the Halle Entities had breached the 2007 Settlement Agreement, filed this adversary proceeding against the Halle Entities. Though the Williamses were named as defendants (along with a host of others), no relief was sought from either of the Williamses or any other defendants besides Halle and the Halle Entities; they were named strictly as putatively necessary parties. See Doc. 1 at 7, ¶ 18; Spradlin II, 2012 WL 6706188, at *2. In fact, the complaint alleged that Halle and the Halle Entities defrauded Alma and the Williamses, that the Halle Entities tortiously interfered with contracts between Alma and the Williamses by slandering the Williamses, that the Halle Entities breached a duty of good faith and fair dealing owed to Alma and the Williamses, and that the Halle Entities breached a contract with Alma and the Williamses, “entitling Alma, Nathan Williams [and] Darrell Williams ... to compensatory damages.” Doc. 1. at 62, ¶ 195.

2. The 2009 Settlement Agreement and the First Amended Complaint.

Just sixteen days after Alma filed the adversary proceeding, this Court converted Alma's bankruptcy case from a Chapter 11 case to a case under Chapter 7. Phaedra Spradlin was appointed as the Chapter 7 trustee. Several months later, on September 15, 2009, Spradlin entered into a settlement with Halle and the Halle Entities (the “2009 Settlement Agreement”), which this Court approved on October 30, 2009. The 2009 Settlement Agreement settled Alma's claims against the Halle Entities. Critically for purposes of this opinion, it also sold any claims Alma might have against Darrell and Nathan Williams and the other non-Halle defendants named in the complaint to THC, and transferred all proceeds of those claims to THC. In return, THC agreed to indemnify Alma's estate against any counterclaims that might be brought against Alma in connection with the transferred claims.

On April 12, 2010, THC and Spradlin, “with Spradlin along for the ride in name only,” Spradlin II, 2012 WL 6706188, at *3, filed an amended complaint (the “First Amended Complaint”). The First Amended Complaint, for the first time in this action, made claims against the non-Halle defendants named in the original complaint, including Darrell and Nathan Williams. The claims against the Williamses were as follows. Counts I, II, V and VI were federal-law fraudulent transfer claims under 11 U.S.C. § 548. Counts III, IV, VII and VIII were state-law fraudulent conveyance claims, brought pursuant to Spradlin's avoidance power under 11 U.S.C. § 544. Count XI was a claim for conversion against Nathan Williams. Counts IX, X and XII were claims for breach of fiduciary duty, arising out of the Williamses' alleged fraudulent transfers and conversion. Count XIV was a civil conspiracy claim against multiple defendants, including the Williamses, for stripping the Debtor's assets by way of a post-petition mining agreement (the “Mining Order”) that this Court approved.

A flurry of crossclaims, filed both by the Williamses and their codefendants, followed in the First Amended Complaint's wake. The only crossclaims of note here are Pikeville Energy Group, LLC's cross-claims (because they would later become the subject of an appeal that bears on this opinion). Pikeville's cross-claims were dismissed on the merits on August 9, 2010.

3. The Consent Judgment

On November 1, 2010, this Court entered a consent judgment (the “Consent Judgment”) against the Williamses, Nathan's Welding, LLC, and Blackberry Energy, LLC (two entities controlled by Nathan Williams). The Williamses, in their individual capacities, admitted to all allegations against themselves, and to their liability under all claims against themselves. Nathan Williams, in his capacity as the sole member and representative of Nathan's Welding and Blackberry, admitted to all allegations against those companies and to their liability under all claims against those companies. The Consent Judgment awarded damages to THC in the amount of $1,575,000.00—an amount unapportioned amongst the multiple claims as to which the Williamses admitted liability—for which the Williamses, Nathan's Welding and Blackberry Energy were jointly and severally liable. It awarded judgment against the Williamses, Nathan's Welding and Blackberry for all counterclaims and crossclaims they had asserted. And, it provided that the judgment was a final judgment under Fed.R.Civ.P. 54(b).

4. The Second Amended Complaint

Having obtained a consent judgment against the lead defendants of the First Amended Complaint, THC filed a second amended complaint on November 11, 2010 (the “Second Amended Complaint”) against the non-Williams defendants of the First Amended Complaint, along with several new defendants. The Second Amended Complaint, like the conspiracy count in the First Amended Complaint, alleged that a number of individuals and entities used the Mining Order to strip assets from and exploit the Debtor, thereby committing a variety of state-law torts.

On January 7, 2011, several defendants moved to dismiss the Second Amended Complaint for lack of subject-matter jurisdiction. They argued that because the 2009 Settlement Agreement deprived the Debtor's estate of any financial interest in the adversary proceeding, this Court lacked jurisdiction under 28 U.S.C. § 1334(b). THC and Spradlin argued in opposition that the Court's jurisdiction should be determined at the time of filing of the adversary proceeding, and that at that point, the Court had jurisdiction because the proceeding would have benefited the Debtor's estate. Alternatively, they argued their claims fell within this Court's arising-in jurisdiction because the Second Amended Complaint's claims arose from this Court's Mining Order.

On January 24, 2012, after an abeyance to conduct an unsuccessful mediation that lasted from February 11, 2011 to ...