United States ex rel. Yelverton v. Webster (In re Yelverton)

• Decision Date: 24 September 2014
• Docket Number: Case No. 09-00414,Adversary Proceeding No. 14-10014
• Parties: In re STEPHEN THOMAS YELVERTON, Debtor. UNITED STATES EX REL. STEPHEN THOMAS YELVERTON, Plaintiff, v. WENDELL W. WEBSTER, et al., Defendants.
• Court: United States Bankruptcy Courts – District of Columbia Circuit

In re STEPHEN THOMAS YELVERTON, Debtor.

UNITED STATES EX REL.STEPHEN THOMAS YELVERTON, Plaintiff, v. WENDELL W. WEBSTER, et al., Defendants.

Case No. 09-00414

Adversary Proceeding No. 14-10014

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLUMBIA

Entered: September 25, 2014

September 24, 2014

(Chapter 7)

Not for publication in West's Bankruptcy Reporter.

MEMORANDUM DECISION RE MOTION TO DISMISS

The plaintiff, Stephen Thomas Yelverton, is the debtor in the bankruptcy case, pending under chapter 7 of the Bankruptcy Code (11 U.S.C.), within which he pursues this adversary proceeding against the chapter 7 trustee, Wendell W. Webster, and Webster's surety, Federal Insurance Company. Yelverton is vexed because Webster entered into a global settlement agreement withYelverton's sisters in the main bankruptcy case under terms which Yelverton finds wanting. In return for the sum of $110,000 paid to the estate, the settlement extinguished litigation claims brought by Yelverton against his sisters and eliminated Yelverton's ownership interest in the family's pig farm. Yelverton filed an objection to Webster's motion for court approval of the settlement and, after the court approved the settlement over his objection, sought to overturn that approval through various motions and appeals. Unsuccessful in those attacks, he initiated this adversary proceeding to collaterally attack the settlement by alleging in his corrected amended complaint that Webster breached his fiduciary duties by negotiating and agreeing to the settlement terms. However, the corrected amended complaint must be dismissed because (1) it fails to state a claim upon which relief can be granted under Rule 12(b)(6) of the Federal Rules of Civil Procedure for it fails to include well-pled facts supporting the claims asserted, and it is not plausible on its face; and (2) Yelverton is barred from re-litigating his objections to the settlement by the doctrines of res judicata (claim preclusion) and collateral estoppel (issue preclusion).

I

The following facts are a matter of record in the bankruptcy court or are gleaned from the corrected amended complaint (whosewell-pled facts must be treated as true in addressing a motion under Federal Rule of Civil Procedure 12(b)(6)).

Yelverton commenced his bankruptcy case by filing a voluntary petition under Chapter 11 of the Bankruptcy Code on May 14, 2009. During the time the case was pending as a chapter 11 case, Yelverton was a debtor in possession under 11 U.S.C. § 1101(1). As such, 11 U.S.C. § 1107(a) authorized him to exercise certain powers of a trustee, including the power under 11 U.S.C. § 323(b) to sue on behalf of the estate.

On July 29, 2009, Yelverton exercised that power by commencing a civil action against his sisters, Deborah Marm and Phyllis Edmundson, in Case No. 5:09-cv-331, before the U.S. District Court for the Eastern District of North Carolina, wherein he "asserted monetary claims against them for damages of up to $3 Million for misappropriating for their own personal use his lawfully owned stock and equity in Yelverton Farms, Ltd., which is a North Carolina closely-held corporation" and included "a demand to place Yelverton Farms, Ltd., into Receivership under N.C.G.S., Sections 55-14-30 (ii), 55-14-31, and 55-14-32, in order to Dissolve and Liquidate the corporation." Corr. Am. Compl. ¶¶ 37, 44. Marm and Edmunson were represented by attorney Jeffery L. Tarkenton, who is also their counsel in Yelverton'sbankruptcy case.¹

On August 20, 2010, pursuant to a motion filed by the United States Trustee, the bankruptcy court converted Yelverton's bankruptcy case to one under chapter 7 of the Bankruptcy Code. Webster became the trustee of the bankruptcy estate, and Yelverton ceased to serve as a debtor in possession.² Webster is a "close personal friend" of Tarkenton. Id. at ¶ 80. In a motion filed on July 14, 2013 (Dkt. No. 666, at 9),³ Yelverton acknowledged that he has long been aware of this friendship, reciting that in September 2010 (the month that Webster became the trustee) Webster told Yelverton that Webster is a "close personal friend" of Tarkenton but that this close personal friendship would have no bearing on Webster's fiduciary duty toprotect the estate and its creditors and to zealously pursue their interests. Webster did not disclose to the bankruptcy court or creditors that he is a "close personal friend" of Tarkenton. Corr. Am. Compl. ¶ 83.

In December 2010, Webster (on behalf of the estate) and Tarkenton (on behalf of Marm and Edmundson and their spouses) started negotiating the settlement. Id. at ¶ 98. The negotiations continued to March 2012, with the agreement being signed on March 25, 2012. Id.

On May 4, 2012, Webster filed a motion for approval of the settlement pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure. On June 18, 2012, the bankruptcy court held a full-day⁴ evidentiary hearing on Webster's motion, and Webster testified under direct and cross examination. Yelverton alone cross examined Webster for more than two hours and gave lengthy opening and closing statements. He closely questioned Webster regarding Webster's assessment of the parties' claims and defenses, his actions in investigating and negotiating the settlement, and the aggressiveness of his settlement posture. See generally June 18, 2012, Hearing Transcript (Dkt. No. 546 in Case No. 09-00414) (hereinafter "Hearing Tr.") at 53-179. He specifically questioned Webster about his fiduciary duties.Hearing Tr. at 77, 86, 89. The bankruptcy court rendered findings of fact and conclusions of law from the bench in a 42-minute-long decision, ruling that the settlement should be approved. The court summarized the standard for approving a settlement:

A bankruptcy court's decision to approve a settlement must be an informed one based upon an objective evaluation of developed facts. Indeed, a bankruptcy judge cannot accept the proponent's word that the settlement is reasonable, nor may the judge merely rubber stamp a proposal. . . . Rather, a bankruptcy judge must determine that a proposed compromise . . . is fair and equitable. In determining whether a settlement is fair and equitable, the bankruptcy court should consider: (1) probability of success in the litigation; (2) difficulties, if any, with collection, (3) the complexity of the litigation, including the expense, inconvenience and delay attendant to the litigation; and (4) the interest of creditors. The experience and knowledge of the bankruptcy court judge is of significance in assessing the propriety of the settlement. In determining the reasonableness of a settlement, a bankruptcy judge must decide only whether the settlement falls between the lowest and highest points in the range of reasonableness.

Hearing Tr. at 214-16 (internal quotation marks omitted) (citing In re Andre Chreky, Inc., 448 B.R. 596, 609 (D.D.C. 2011); Advantage Healthplan, Inc. v. Potter, 391 B.R. 521, 554 (D.D.C. 2008); Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968); In re W.D. Grant Co., 699 F.2d 599, 608 (2d Cir. 1983)).

At the hearing, the court stated:

So I think that not approving the settlement would add to the expense and the delay attendant to the litigation, and it would be inconvenient to proceed to actuallitigation instead of proceeding to a settlement that I think is well-grounded and [a result of] sound business judgment.

The trustee testified at length and discussed his inquiries of Mr. Yelverton regarding the contentions in the litigation, the defenses that were being raised, and showed, I thought, an extensive knowledge of what the issues were. And showed a substantial diligence on his part in digging into the various pleadings that were filed, various motions that were filed. He reviewed the case law that was submitted by Mr. Yelverton to him incident to reviewing the litigation. Also the statutory provisions that Mr. Yelverton provided. And I'm convince[d] that the trustee did give very careful thought to the likely outcome of a litigation and its expense and reasonably relied upon the advice of his counsel that other than the ownership interest in Yelverton Farms, these other claims were not nearly as valuable in terms of trying to negotiate a settlement.

The motion is approved. The settlement is in the interest of creditors. And when I include creditors, I include the debtor as a residuary entity entitled to whatever could be obtained if enough were received to pay creditors in full and something left over for the debtor. I think he recognizes that that never would happen and that the reason that he's objecting to the settlement is because he wants to minimize how much he has left over to pay nondischargeable debts. This settlement falls readily between the lowest and highest points in the range of reasonableness. I am convinced the trustee has used sound business judgment in trying to arrive at this settlement and avoid the expenses of litigation and bring this matter to a close so that creditors can receive some distribution. The motion is approved.

Hearing Tr. at 218, 227-28, 230-31. On June 19, 2012, the clerk entered the bankruptcy court's order approving the settlement agreement (Dkt. No. 477).

Yelverton pursued appeals of that order and of orders rejecting Yelverton's plethora of efforts seeking, directly or indirectly, to undo the order approving the settlement.Specifically, Yelverton took appeals to the district court from the following:

• Order Granting Motion to Approve Settlement Agreement (Dkt. No. 477);

• Order Denying Amended Motion to Compel Trustee to Abandon Litigation Claims (Dkt. No. 505);

• Order Denying Motion to Vacate Order Approving Settlement (Dkt. No. 507);

• Memorandum Decision and Order Denying Motion to Alter or Amend Decision (Dkt. No. 597) (rejecting Yelverton's attempt to claim that the litigation claims were exempted from the estate under 11 U.S.C. § 522);

• Order Denying Second...