Yelverton v. Marm (In re Yelverton)

• Decision Date: 11 December 2014
• Docket Number: Case No. 09-00414,Adversary Proceeding No. 14-10024
• Parties: In re STEPHEN THOMAS YELVERTON, Debtor. STEPHEN THOMAS YELVERTON, Plaintiff, v. DEBORAH MARM and PHYLLIS EDMUNDSON, Defendants.
• Court: United States Bankruptcy Courts – District of Columbia Circuit

In re STEPHEN THOMAS YELVERTON, Debtor.

STEPHEN THOMAS YELVERTON, Plaintiff, v. DEBORAH MARM and PHYLLIS EDMUNDSON, Defendants.

Case No. 09-00414

Adversary Proceeding No. 14-10024

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLUMBIA

December 11, 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Not for publication in West's Bankruptcy Reporter.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 main bankruptcy case within which he pursues this adversary proceeding against his sisters, Deborah Marm and Phyllis Edmundson. Yelverton commenced his bankruptcy case under Chapter 11 of the Bankruptcy Code (11 U.S.C.) in 2009. Later in 2009,Yelverton brought a lawsuit in North Carolina against Marm and Edmundson, asserting various business law and tort causes of action. In 2010, the court converted Yelverton's case from chapter 11 to chapter 7, and Wendell W. Webster became the chapter 7 trustee and, as such, the representative of the estate and the substituted plaintiff in the North Carolina law suit. Marm and Edmundson negotiated with Webster, and settled the litigation in 2012 by agreeing to pay the estate $110,000. In return, the trustee agreed to a global release of the estate's claims against them and to a release of any ownership interest of Yelverton in the closely-held family business. The settlement was approved by the court after a full-day evidentiary hearing.

Since then, in numerous and frivolous ways, both direct and indirect, Yelverton has unsuccessfully attacked the approval of the settlement. Notably, in a related adversary proceeding (already dismissed), Yelverton collaterally attacked the settlement by suing Webster and making unsupported allegations that Webster colluded with Marm and Edmundson's counsel during settlement negotiations in order to devalue the estate's assets for the benefit of Marm and Edmundson. In this proceeding, Yelverton again collaterally attacks the settlement process, this time by claiming that Marm and Edmundson violated the automatic stay of 11 U.S.C. § 362(a) and the Racketeer Influenced and Corrupt Organizations Act (RICO) by conspiring with Webster todevalue the estate's assets for their own benefit and to facilitate their control of estate property. In fact, they merely defended against his North Carolina lawsuit, filing an answer and a motion to dismiss, and engaged in settlement negotiations with the chapter 7 trustee.

In short, the amended complaint must be dismissed because (1) Yelverton does not have standing to seek the monetary damages he claims; (2) the amended complaint 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; (3) it fails to plead special matters with the requisite particularity under Rule 9(b) of the Federal Rules of Civil Procedure; and (4) Yelverton is barred from litigating his claims against his sisters by the doctrines of release, 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 amended complaint (whose well-pled facts must be treated as true in addressing a motion under Rule 12(b)(6)).

In 2008, prior to the filing of the petition commencing the bankruptcy case, a dispute arose between Yelverton and hissisters, Marm and Edmundson, about the management of the family "pig finishing" business, Yelverton Farms, Ltd. (a North Carolina closely-held corporation). Am. Compl. ¶¶ 34, 41, 44, 46-48. The business is located on land owned by Edmundson. Am. Compl. ¶¶ 149, 166. Marm and Edmundson, as controlling directors of the business, removed Yelverton as an officer and director, disputed his ownership of certain 1,333.3 shares of stock, and have refused to relinquish physical possession of the certificates for the disputed stock shares. Am. Compl. ¶¶ 44, 47.

On May 14, 2009, Yelverton commenced his bankruptcy case by filing a voluntary petition under Chapter 11 of the Bankruptcy Code. 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.

Yelverton exercised that power on July 29, 2009, by commencing a civil action against Marm and Edmundson in Case No. 5:09-cv-331, before the U.S. District Court for the Eastern District of North Carolina, wherein he "alleged state law claims for the refusal of Marm and Edmundson to allow him to be paid profits from the corporation and to be paid land rents, which totaled at least $75,000," and "alleged Tort claims against them for misappropriating his property [namely, his interest in thefamily pig farm] and for malicious interference with his business relations, and demanded damages of up to $3 Million" and included claims "where Marm and Edmundson would be required to buy Yelverton's stock interest" under state receivership statutes. Am. Compl. ¶¶ 52-55.

A few months later, Yelverton filed adversary proceeding 10-10003 against his sisters seeking the turnover of his shares of stock and an accounting. Am. Compl., p. 4. Because of the overlap with the North Carolina litigation, the bankruptcy court stayed the proceeding pending the outcome in North Carolina. Am. Compl., p. 5.

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. Am. Compl. ¶ 74. Webster became the trustee of the bankruptcy estate, and Yelverton ceased to serve as a debtor in possession.¹ Webster was substituted as the plaintiff in the North Carolinalitigation.

After Webster's appointment and by May 2011, Webster (on behalf of the estate) and Jeffery L. Tarkenton (counsel for Marm and Edmundson and their spouses) started negotiating a global settlement of the estate's claims against Marm and Edmundson. Am. Compl. ¶¶ 78, 149. The negotiations continued until an agreement was signed on March 25, 2012. Am. Compl. ¶ 80. On May 4, 2012, Webster filed in the main bankruptcy case 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-day 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 the parties' claims and defenses, the parties' actions in negotiating the settlement, and the valuation of the business and his shares. See generally June 18, 2012, Hearing Transcript (Dkt. No. 546 in Case No. 09-00414) (hereinafter "Hearing Tr.") at 53-179. 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 objectiveevaluation 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.T. 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 actual litigation 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 himincident 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

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