Menu

Volume 20 Cases (2017)

Phyllis N. GREGORY, individually and as the personal representative of the estate of Richard D. Gates, deceased, Plaintiff, v. CREEKSTONE FARMS PREMIUM BEEF, LLC

United States District Court,

  1. Kansas.

Phyllis N. GREGORY, individually and as the personal representative of the estate of Richard D. Gates, deceased, Plaintiff,

v.

CREEKSTONE FARMS PREMIUM BEEF, LLC, Defendant.

Case No. 15-1207-EFM-JPO

|

Signed 07/26/2017

Attorneys and Law Firms

Christopher T. Borniger, Diane H. Sorensen, John W. Johnson, Morris, Laing, Evans, Brock & Kennedy, Chtd., Wichita, KS, for Plaintiff.

Patrick J. Murphy, Woodard, Hernandez, Roth & Day, LLC, Wichita, KS, for Defendant.

 

 

MEMORANDUM AND ORDER

ERIC F. MELGREN, UNITED STATES DISTRICT JUDGE

*1 This is a wrongful death and survival action over which the Court has diversity jurisdiction. Plaintiff Phyllis Gregory is the mother and sole heir to the decedent, Richard Gates. Gates was a cattle truck driver who was injured on Defendant Creekstone Farms Premium Beef LLC’s (“Creekstone’s”) property while delivering a load of cattle. Gates later died from his injuries. This case is now before the Court on Defendant’s Motion for Summary Judgment (Doc. 77). Defendant asserts, among other things, that it did not owe Gates a duty of care. Because the Court finds that Defendant did not owe Gates a legal duty to protect him from known and obvious dangers, the Court grants Defendant’s motion.

 

 

  1. Factual and Procedural Background

The Accident

Plaintiff Phyllis Gregory is the mother and sole heir of the decedent, Richard Gates. At the time of Gate’s death, Plaintiff was 73 years old. Gates was a cattle truck driver working as an independent contractor for Butler Trucking. In the early morning hours of July 18, 2013, Gates arrived at Defendant’s beef slaughtering and processing facility in Arkansas City, Kansas, to deliver a load of cattle.

 

The majority of cattle deliveries at Defendant’s facility occur during the evening shift, from 10 p.m. to 5 a.m. The facility has two receiving pens that truck drivers unload cattle into— an east pen and west pen. The pens run north to south and are separated by a handler alley. Truck drivers unload cattle at the north end of the receiving pen, and then the cattle exit the receiving pen through a gate at the south end and walk into a holding pen.

 

Defendant’s environmental health and safety manager is not aware of any safety protocols for the cattle receiving department at Defendant’s facility other than humane handling guidelines for cattle. However, Defendant’s supervisor for the cattle receiving department, Butch Fulton, testified that he instructs employee not to get into the receiving pens for safety reasons. Fulton has never observed one of his employees in the receiving pens. He is also not aware of any truck drivers assisting Defendant’s receivers in moving cattle through the pen. Fulton testified that he specifically instructs receivers not to allow truck drivers to help them. However, one of Defendant’s cattle receivers, Jeremy Irvin, testified that truck drivers would assist in moving cattle after they were unloaded from the trucks once or twice a week.

 

Gates was experienced at working with cattle. He had been around them since his childhood. He previously worked as the manager of a farm and ranch in Oklahoma that had a large cattle operation. He also previously owned his own herd of about 50 head with a neighbor. In the two to three years preceding his death, Gates drove his cattle truck with his friend Sheila Miller. Miller testified that Gates hauled cattle for Butler Trucking for a year or two before his death. She also testified that he was experienced in loading and unloading cattle. When they picked up cattle, she and Gates would help herd them and move them onto the truck. When Miller and Gates arrived at a destination with cattle, Miller and Gates would herd the cattle out of the truck and then help herd the cattle into a corral, building, or pen. According to Miller, it was part of their job to move cattle to a holding pen. In some facilities, such as feed lots, Miller and Gates were required to unload the cattle and move them as much as 300 to 400 yards into a holding pen. They would do this by walking behind the cattle at a far enough distance not to be kicked but there were no obstructions between them and the cattle.

 

*2 Gates and Miller arrived at Defendant’s facility sometime around 3 a.m. on July 18. Irvin, who was 5’10‘ in height and weighed 510 pounds, was the only cattle receiving employee present. Another Creekstone employee, Casey Phillips, was monitoring wastewater in a nearby area. Phillips testified that he told Irvin some time before the accident that Irvin should tell Creekstone management to get him some help receiving cattle.

 

Gates backed his truck up to the west receiving pen upon arrival, which was already full from a previously delivery. Another truck was unloading cattle into the east pen. After that truck left, Irvin moved the cattle from the west receiving pen into the holding pen. He did not ask Gates to help him. To move the cattle from the west receiving pen, Irvin walked down the center handler alley and opened the gate at the south end of the west end of the receiving pen. At that time, Gates was standing at the north end of the pens, in the walkway. Gates then stepped into the west receiving pen at the north end, behind the cattle. As the cows moved out of the west pen, Irvin got into the pen behind them at the halfway point and followed them into the holding pen. Irvin does not know what Gates did at that point because he had his back to Gates. Gates did not walk with Irvin to help him move the cows out of the west pen.

 

After the cattle from the west receiving pen were in the holding pen, Irvin returned to the south end of the receiving pens and opened the south gate of the east pen. Irvin then closed the south gate of the west pen and walked back north in the west pen, crossing into the handler alley at the middle of the receiving pens. At that time, Gates had moved to the north end of the east receiving pen. The cattle were at the south end of the east receiving pen.

 

The cattle became bunched up at the south end of the receiving pen, so Irvin walked south in the handler alley shaking his paddle to get them moving. As Irvin was doing this, he last saw Gates standing at the north end of the east pen. Irvin did not say anything to Gates about having problems moving the cattle or otherwise.

 

Irvin was able to get the cattle moving. He then saw a lone cow moving at a “quick trot” through the pen. Irvin began walking north toward the midway point of the pen and noticed Gates lying on the ground. Irvin went to check on him and found him face down with blood coming out of his nose and mouth area.

 

Irvin instructed Phillips, who had just arrived in the receiving area, to call 911. When EMS arrived, Gates “initially had a weak carotid pulse and shallow, slow respirations.” Gates stopped breathing at some point, and EMS started performing chest compressions on him. Gates was transported to the hospital, where he was pronounced dead at 4:32 a.m. The emergency room records indicate that when Gates arrived at the hospital EMS was still performing chest compressions and that he was still unresponsive.

 

 

The Alleged Blind Alley in the Creekstone Receiving Pens

Plaintiff designated John George as a liability expert witness in this case. George is an agricultural engineer, who describes his professional activities as work on renewable energy, ventilation, surveying, geotechnical work, manure waste handling, and feed lots. According to George, the path south out of Creekstone’s receiving pens leads to a 90 degree turn left (or east) toward the holding chutes. George opined that this turn is a design flaw known as a “blind alley”—“one in which the cattle’s perspective does not reveal to them that the alley leads to an exit.” According to George, the blind alley at the south end of the receiving pen and the water puddling in that area are design flaws that primarily cause the cattle to bunch up and balk at or near the exit of the pen. George testified at his deposition that when a receiver opens the gate out of the east receiving pen, the cattle closest to the gate could probably see an opening and way to leave. But, he also stated that the cattle may bunch up for other reasons.

 

*3 George further testified that in his opinion, the area at the south end of the east receiving pen constituted a blind alley because “the whole concept of blind alley is that as you’re in the alley and you look for an escape. Unless you’re looking at the south end in this case you can’t see that there is a pathway out. And that’s what makes it a blind alley. And cattle don’t want to proceed up a blind alley if they can’t perceive an exit.” George could not, however, offer an opinion that the cattle bunched up on the night of Gates’ death because of the presence of a blind alley. George testified that he has no way of knowing why the cow came back and injured Gates.

 

Defendant designated Joseph Zulovich as its expert. He works as an extension agricultural engineer and defines his responsibility as primarily educational. In his deposition, Zulovich made multiple statements regarding George’s opinions. He agreed with George’s conclusion that an agitated or fearful animal often turns around and seeks to escape in the direction from which it came. He found nothing that contradicts George’s conclusion that the animal’s attempt to escape played a role in Gates’ injury. He further testified that it was reasonable for George to presume that a cow kicked, butted, ran over, or stepped on Gates on its way north in the receiving pen. Finally, Zulovich agreed that the blind alley and water puddling at the south end of the receiving pen could possibly be design flaws that cause animals to periodically bunch up or balk at or near the exit of the receiving pen. But he later stated that he did not know this for sure because he did not know how frequently the problem occurred.

 

 

The Current Lawsuit

Plaintiff filed this wrongful death and survival action almost two years after the accident. In the Pretrial Order, Plaintiff lists 15 different ways she believes Defendant was responsible for Gates’ death. These can be summarized into three general categories as follows. First, Plaintiff contends that Defendant had no safety rules, regulations, or protocols in place regarding the safe transfer of cattle from the receiving pen to the holding pens; that Defendant had no rules prohibiting truck drivers from assisting Creekstone employees in the cattle receiving area; that Defendant provided no training or other instruction to truck drivers; and that Irvin violated Fulton’s policy of allowing truck drivers in the receiving pens to help with moving the cattle. Second, Plaintiff contends that Irvin had difficulty accessing the handler alley due to his physical stature; that his failure to use the handler alley was the reason that truck drivers assisted him in moving cattle in the receiving pens; and that Irvin’s failure to use the handler alley was a major cause of Gates’ assistance in the receiving pen. And third, Plaintiff claims that a sharp turn at the end of the receiving pens was a design flaw that created the propensity for cattle to bunch up, which resulted in a dangerous condition for anyone inside the pen trying to move cattle. Defendant has filed a motion for summary judgment on Plaintiff’s claims. The Court held a hearing on Defendant’s motion on July 6, 2017.

 

 

  1. Legal Standard

Summary judgment is appropriate if the moving party demonstrates that there is no genuine issue as to any material fact, and the movant is entitled to judgment as a matter of law.1 A fact is “material” when it is essential to the claim, and issues of fact are “genuine” if the proffered evidence permits a reasonable jury to decide the issue in either party’s favor.2 The movant bears the initial burden of proof and must show the lack of evidence on an essential element of the claim.3 If the movant carries its initial burden, the nonmovant may not simply rest on its pleading but must instead “set forth specific facts” that would be admissible in evidence in the event of trial from which a rational trier of fact could find for the nonmovant.4 These facts must be clearly identified through affidavits, deposition transcripts, or incorporated exhibits—conclusory allegations alone cannot survive a motion for summary judgment.5 The Court views all evidence and reasonable inferences in the light most favorable to the party opposing summary judgment.6

 

 

III. Analysis

*4 Defendant makes several arguments as to why it is entitled to summary judgment. First, Defendant argues that the Court should grant summary judgment on all of Plaintiff’s claims because it did not owe a duty of care to Gates. Second, Defendant argues that to the extent Plaintiff relies on the existence of a blind alley to support her claims for negligence, it is entitled to summary judgment because there is no evidence that the blind alley caused Gates’ death. Third, Defendant argues that the Court should grant summary judgment on all claims for pecuniary loss extending beyond Plaintiff’s lifespan. Finally, Defendant claims that it is entitled to judgment on Plaintiff’s claims for conscious pain and suffering because there is no evidence that Gates suffered such damages.

 

 

  1. Duty of Care

Under Kansas law, a plaintiff must establish the following elements to recover for negligence: (1) the defendant owed a duty to the plaintiff; (2) the defendant breached that duty; (3) the breach of that duty was the actual and proximate cause of the plaintiff’s injuries; and (4) the plaintiff suffered damages.7 Negligence claims generally present a question of fact for the jury to determine.8 But, the question of whether a duty of care exists is a legal determination for the court.9

 

At this point in the litigation, it is still not clear what Plaintiff’s negligence claims are. Neither the Pretrial Order nor Plaintiff’s response to Defendant’s motion for summary judgment clearly articulate what duty Defendant owed Gates, how Defendant breached that duty, and how the breach of that duty was the actual and proximate cause of Gates’ injuries. When the Court asked Plaintiff’s counsel at oral argument to explain her claims, this is the response:

Plaintiff’s Counsel:

What our claim—and, of course, in our complaint we list all the duties that we think that there was a violation of, which they deny all of them except for one. But, really, what it all boils down to, when you peel away all the layers of the onion on this thing, is the fact that Creekstone, through its supervisor, Butch Fulton, recognized it was a hazard, that this is a dangerous and hazard endeavor in processing cattle through a beef processing plant. It’s not like moving cattle out in a corral, open corral. You’re in a confined area. And when you look at that receiving area, it indicates, you know, the nature of how dangerous this can be because it has metal pipes separating an alley for the employees to walk down. And Creekstone, through its own Robert Sullivan, who is in charge of PR and HR—not PR, HR, and safety, said we never established any safety protocols for that most dangerous area that we have in our plant, and that is receiving cattle and moving cattle through the plant.

But the receiving supervisor, Butch Fulton, recognized that. And he said, “I had a policy. You don’t get in…. You don’t get in the receiving alley. I instructed Jeremy Irvin, when he was hired, and I trained him and instructed him, that you don’t get in there. You don’t get in there, and I don’t want you letting the truck drivers in there, because they don’t know our policies and procedures. We don’t want them in there either, because it’s too risky.”

 

The Court:

Do you think Creekstone’s own internal policies give rise to a legal duty to a third party?

 

Plaintiff’s Counsel:

Well, the case law says it’s not determinative but it certainly is instructive as to whether or not it creates a legal duty, and you have to look at the facts and circumstances of each case. And, certainly, it is instructive in making a determination as to whether or not there’s a legal duty.

*5 This discussion did not resolve the Court’s confusion. However, later in the hearing, Plaintiff’s counsel stated that Plaintiff was asserting a general negligence claim. The Court then asked counsel what legal duty Defendant owed Gates. Plaintiff’s counsel responded: “[Defendant’s] legal duty was to … enforce the rule, their safety rule, to keep truck drivers out of their area.” He then stated, “they also had a legal duty to adequately staff that receiving department so they could process the cattle and didn’t need … help to do that, which because Jeremy Irvin violated the rule precipitated truck drivers to get in and help him.”

 

The question before the Court is whether Defendant owed Gates the legal duties that Plaintiff claims it did above. Generally, under Kansas law, each person has the duty to act as a reasonably prudent person would in similar circumstances.10 This duty, however, does not extend to all circumstances.11 A person owes a legal duty to another if (1) the plaintiff is a foreseeable plaintiff and (2) the probability of harm is foreseeable.12 “So an individual must act like a reasonably prudent person toward another individual if there is some sort of relationship between the two individuals that justifies imposing a legal obligation on one for the benefit of the other—a relationship based on foreseeability.”13 Therefore, in this case, Defendant only owed a legal duty to Gates if it was foreseeable that he would have been harmed at Defendant’s facility.

 

Defendant argues that the probability of harm was not foreseeable and thus it did not owe Gates any legal duty. In support of this argument, Defendant relies on Kansas premise liability law. “Premises liability is simply ‘[a] landowner’s or landholder’s tort liability for conditions or activities on the premises.’ ”14 Plaintiff, on the other hand, argues that this case should not be viewed in the context of premises liability. Plaintiff claims that she is asserting a general negligence claim, and thus, Kansas premise liability law does not apply. But, Plaintiff has not cited any authority showing that the duty to keep truck drivers out of the receiving pens and the duty to sufficiently staff the receiving area could be or are legally recognizable duties under Kansas law. Moreover, both of these duties relate to or directly flow from a landowner’s obligation to create a safe place for invitees. Thus, while Plaintiff may have intended to assert a general negligence claim, the duties she asserts that Defendant owed Gates require the Court to examine this case in the context of premises liability.

 

Kansas premise liability law states that the duty owed by an owner or occupier of land is one of reasonable care under the circumstances.15 A landowner, however, “is under no duty to remove known and obvious dangers.”16 The Kansas courts have adopted the Second Restatement of Torts in applying this rule.17 Specifically, § 343A states: “A possessor of land is not liable to his invitees for physical harm caused to them by any activity or condition on the land whose danger is known or obvious to them, unless the possessor should anticipate the harm despite such knowledge or obviousness.”18 Comment e to this section further explains the landowner’s duty with regard to known and obvious dangers as follows:

*6 In the ordinary case, an invitee who enters land is entitled to nothing more than knowledge of the conditions and dangers he will encounter if he comes. If he knows the actual condition, and the activities carried on, and the dangers involved in either, he is free to make an intelligent choice as to whether the advantage to be gained is sufficient to justify him incurring the risk by entering or remaining on the land. The possessor of the land may reasonably assume that he will protect himself by the exercise of ordinary care, or that he will voluntarily assume the risk of harm if he does not succeed in doing so. Reasonable care on the part of the possessor therefore does not ordinarily require precautions or even warning, against dangers which are known to the visitor, or so obvious to him that he may be expected to discover them.19

 

Defendant argues that there is no evidence that any of the cattle, which may or may not have injured Gates, had a propensity to be vicious or that Defendant had superior knowledge of such propensity. Defendant further claims that the hazards Gates faced from the cattle at its facility are present any time a person works cattle and that based on Gates’ past experience, he was fully aware of these dangers. Thus, Defendant contends that it did not owe any duty to Gates.

 

In response, Plaintiff argues that to the extent the Court applies the Second Restatement in this case, Plaintiff owed a duty to Gates even though the dangers were known and obvious. Plaintiff cites the exception to the “known and obvious rule,” which is found in the last clause of § 343A. Under this clause, a possessor is not liable for open and obvious dangers “unless the possessor should anticipate the harm despite such knowledge or obviousness. ”20 This exception is further explained in comment f, which states:

There are, however, cases in which the possessor of land can and should anticipate that the dangerous condition will cause physical harm to the invitee notwithstanding its known or obvious danger. In such cases the possessor is not relieved of the duty of reasonable care which he owes to the invitee for his protection. This duty may require him to warn the invitee, or to take other reasonable steps to protect him, against the known or obvious condition or activity, if the possessor has reason to expect that the invitee will nevertheless suffer physical harm.

Such reason to expect harm to the visitor from known or obvious dangers may arise, for example, where the possessor has reason to expect that the invitee’s attention may be distracted, so that he will not discover what is obvious, or will forget what he has discovered, or fail to protect himself against it. Such reason may also arise where the possessor has reason to expect that the invitee will proceed to encounter the known or obvious danger because to a reasonable man in his position the advantages of doing so would outweigh the apparent risk.21

 

According to Plaintiff, the situation described in comment f is nearly identical to the situation Fulton anticipated at Creekstone. Plaintiff claims that Fulton’s instruction to his employees not to allow truck drivers in the receiving pens reflects an understanding that he knew truck drivers could be injured regardless of their experience or knowledge with cattle. She also claims that Irvin’s failure to follow Fulton’s instruction resulted in Gates’ death. Accordingly, Plaintiff argues that as a result of Fulton’s policy, Defendant was required to warn Gates of the risks associated with the risks of being in the receiving pen.

 

*7 The Court does not agree with Plaintiff that the exception to the known and obvious rule applies in this case. Comment f provides two scenarios in which a landowner is required to protect an invitee from a known or obvious danger. The first scenario is when the landowner has reason to expect that the invitee’s attention may be distracted so that he will not discover what is obvious or will forget what he has discovered. This scenario is clearly not applicable here.

 

The second scenario, which is more pertinent to this case, is when the landowner has reason to expect the invitee will proceed to encounter the known or obvious danger, because to a reasonable person in his position, the advantages of doing so would outweigh the apparent risk. The Restatement provides the following illustration with regard to this exception.

A owns an office building, in which he rents an office for business purposes to B. The only approach to the office is over a slippery waxed stairway, whose condition is visible and quite obvious. C, employed by B in the office, uses the stairway on her way to work, slips on it, and is injured. Her only alternative to taking the risk was to forgo her employment. A is subject to liability to C.22

Based on this illustration, the second scenario appears to apply when the invitee has no other option but to encounter the hazard.

 

Another judge in this district recently applied the second scenario in Cardenas v. Kanco Hay.23 The plaintiff in that case was a self-employed trucker who was seriously injured on the defendant’s premises after falling while tarping a partial load of hay on his semi-trailer truck.24 The defendant argued that it was entitled to summary judgment because it did not owe a duty of care to the plaintiff for a known and obvious danger.25 The court, however, disagreed finding that the defendant had reason to believe that the plaintiff would attempt to tarp the load without reasonably protecting himself from the danger.26 In finding for the plaintiff, the court specifically noted that the plaintiff presented evidence that there would be significant adverse economic consequences if he declined to perform the contract.27 This appears to support the Court’s conclusion that the second scenario only applies when the invitee has no other option but to encounter the hazard.

 

The parties discuss two additional cases in their briefs that apply the second scenario found in comment f, although both of these cases apply Oklahoma law.28 In the first case, Wood v. Mercedes-Benz,29 the defendant car dealership’s sprinklers activated during freezing temperatures resulting in a layer of ice surrounding the dealership.30 The plaintiff, who was employed by a catering company, was at the dealership to assist with a catered event.31 She slipped and fell on the ice, injuring her back.32 The plaintiff brought a negligence action asserting that the dealership failed to maintain its premises in a reasonably safe condition.33 The defendant sought summary judgment on the basis that it did not owe the plaintiff a duty of care because the ice was a known and obvious condition.34 The district court granted summary judgment and the court of appeals affirmed.35 But the Oklahoma Supreme Court overturned the lower courts’ rulings finding that the known and obvious rule did not apply.36 The Oklahoma Supreme Court explained that this was not a typical case in which the invitee could protect herself by leaving the premises when a known and obvious hazard is encountered.37 The plaintiff was not a customer of the dealership but was present to fulfill her contractual duty to provide service for an event sponsored by the dealership.38 The court found that the dealership owed the plaintiff a duty to take measures to protect her from the icy conditions surrounding the facility.39 In this case, it was impossible for the plaintiff to provide catering services in furtherance of her employment if she protected herself by avoiding the ice.

 

*8 The second case cited by the parties, Martinez v. Angel Exploration,40 presents circumstances that are analogous to Wood. The plaintiff in that case was injured while working on a pump jack (equipment for an underground oil well) that was not protected by safety guards.41 The defendant moved for summary judgment on the basis that it did not owe a duty to the plaintiff under the known and obvious rule, and the district court granted the defendant’s motion.42 The Tenth Circuit reversed and remanded on appeal.43 Applying Wood, the Circuit found that the exception may apply because (1) the plaintiff was required to encounter the belt as part of his responsibilities; (2) the defendant knew there would be contractors working on the well; and (3) the evidence suggested that by the exercise of ordinary care, the defendant would have had actual knowledge of the dangerous condition.44 The Circuit, however, ultimately declined to decide whether the defendant owed the plaintiff a duty of care, stating that it was better on remand for the parties to brief and argue the scope of Wood with regard to whether the defendant knew of the dangerous condition.45

 

Here, the undisputed facts do not support the application of comment f to this case. Gates was not required to be in the receiving pen to perform his job as an independent contractor with Butler Trucking. Irvin did not ask for Gates help in the pen, and the two men did not speak to each other when Gates was in there. Furthermore, the cattle Gates were helping Irvin move were not the ones he delivered. They were cattle that were already in the pen when he arrived. Although Plaintiff argues that Gates was required to be in the receiving pen because Irvin could not adequately move the cattle because of his size, there is no evidence that this was the case. In fact, the evidence shows that Irvin was able to get the cattle that were bunched up in the east pen moving on his own. Thus, Gates was not required to be in the receiving pen to fulfill any employment or other obligation, and the second scenario described in comment f does not apply.

 

Because the exception to the known and obvious rule is inapplicable to this case, the duty issue remains guided by the principles in § 343A of the Restatement. Under that section, “[r]easonable care on the part of the possessor … does not ordinarily require precautions or even warning against dangers which are known to the visitor, or so obvious to him that he may be expected to discover them.”46 Based on Gates background and experience, he was fully aware of the dangers of working with cattle. Therefore, Defendant did not owe Gates any legal duty to protect him from this known and obvious danger. Defendant is entitled to summary judgment on all of Plaintiff’s negligence claims.

 

Plaintiff’s final argument regarding duty of care is that the Court should deny summary judgment because Defendant admitted in its Answer that it had a duty to sufficiently staff its facility for the safe unloading and moving of cattle. The Court has already ruled that this alleged duty is encompassed by premise liability law, and that under such law, Defendant did not owe this duty to Plaintiff. Regardless, even if the Court recognized this duty, the Court would still grant summary judgment in Defendant’s favor because Plaintiff has not come forward with any evidence that Defendant breached this duty. Plaintiff claims that the fact that cattle truck drivers were in the receiving pens shows that Irvin could not move the cattle by himself. This inference, however, is very weak and not supported by the record. Irvin testified that cattle truck drivers would get into the receiving pens only once or twice a week, which means that Irvin often did move the cattle by himself. Furthermore, on the night of the accident, Irvin did not ask for Gates’ help in the receiving pen, and he was able to get the cattle moving when they bunched up in the east pen without Gates’ help. Therefore, even if the Court recognized that Defendant had a duty to Gates to sufficiently staff its plant, Plaintiff has not come forward with any evidence that Defendant breached this duty. Summary judgment in favor of Defendant is appropriate for this claim.

 

 

  1. Causation and Damages

*9 Defendant seeks summary judgment on three additional bases. The first basis relates to causation while the second and third bases relate to damages. The Court, however, has concluded that Defendant did not owe a duty of care to Gates and granted summary judgment to Defendant on all of Plaintiff’s negligence claims. Accordingly, the Court need not address these issues at this time.

 

The Court also notes that Defendant has filed a Motion to Exclude Expert Testimony Pursuant to Rule 702 (Doc. 79) and a Motion for Hearing Regarding its Motion to Exclude Expert Testimony (Doc. 92). In light of the Court’s ruling on Defendant’s summary judgment motion, the Court denies these motions as moot.

 

IT IS THEREFORE ORDERED that Defendant’s Motion for Summary Judgment (Doc. 77) is GRANTED.

 

IT IS FURTHER ORDERED that Defendant’s Motion to Exclude Expert Testimony Pursuant to Rule 702 (Doc. 79) is DENIED AS MOOT.

 

IT IS FURTHER ORDERED that Defendant’s Motion for Hearing Regarding its Motion to Exclude Expert Testimony (Doc. 92) is DENIED AS MOOT.

 

IT IS SO ORDERED.

 

All Citations

Slip Copy, 2017 WL 3168825

 

 

Footnotes

1

Fed. R. Civ. P. 56(a).

2

Haynes v. Level 3 Commc’ns, LLC, 456 F.3d 1215, 1219 (10th Cir. 2006).

3

Thom v. Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir. 2003) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 325 (1986)).

4

Id. (citing Fed. R. Civ. P. 56(e)).

5

Mitchell v. City of Moore, 218 F.3d 1190, 1197 (10th Cir. 2000) (citing Adler v. Wal-Mart Stores, Inc., 144 F.3d 664, 671 (10th Cir. 1998)).

6

LifeWise Master Funding v. Telebank, 374 F.3d 917, 927 (10th Cir. 2004).

7

Hall v. Kan. Farm Bureau, 274 Kan. 263, 279, 50 P.3d 495, 506 (2002) (citation omitted).

8

Eltsun v. Spangles, Inc., 289 Kan. 754, 757, 217 P.3d 450, 453 (2009) (citation omitted).

9

Id.

10

Manley v. Hallbauer, ––– Kan. Ct. App. ––––, 387 P.3d 185, 188 (2016).

11

Id.

12

Id. (quoting Berry v. Nat’l Med. Servs., 292 Kan. 917, 920, 257 P.3d 287, 290 (2011)).

13

Id. (citing Prosser and Keeton, Law of Torts, § 53 (5th ed. 1984)).

14

Didde v. City of Chapman, 283 P.3d 840, 2012 WL 3822735, at *3 (Kan. Ct. App. 2012) (quoting Black’s Law Dictionary 1300 (9th ed. 2009)).

15

Jones v. Hansen, 254 Kan. 499, 509, 867 P.2d 303, 310 (1994).

16

Miller v. Zep Mfg. Co., 249 Kan. 34, 43, 815 P.2d 506, 514 (1991) (citation omitted).

17

See Scales v. St. Louis-San Francisco Ry. Co., 2 Kan. App. 2d 491, 497, 582 P.2d 300, 306 (quoting Restatement [Second] of Torts § 343).

18

Restatement (Second) of Torts § 343A (1965).

19

Id. comment e.

20

Restatement Second of Torts § 343A (emphasis added).

21

Id. comment f.

22

Id.

23

2016 WL 3881345 (D. Kan. 2016).

24

Id. at *2.

25

Id. at *3.

26

Id. at *4.

27

Id.

28

Oklahoma law and Kansas law are similar in that they recognize an exception to the open and obvious rule. The Kansas courts have long recognized this exception, but they have not addressed the second scenario found in comment f, which is applicable to this case. See Scales, 582 P.2d at 306.

29

336 P.3d 457 (Okla. 2014).

30

Id. at 458.

31

Id.

32

 

Id.

33

Id. at 459.

34

Id.

35

Id.

36

Id.

37

Id. at 460.

38

Id.

39

Id.

40

798 F.3d 968 (10th Cir. 2015).

41

Id. at 971.

42

Id.

43

Id. at 972.

44

Id. at 980.

45

Id.

46

Restatement (Second) of Torts, § 343A (1965).

In re: RAYTRANS HOLDING, INC., Debtor. DAVID M. KLAUDER, in his capacity as Chapter 7 Trustee of the bankruptcy estate of RAYTRANS HOLDINGS, INC., Plaintiff, v. ECHO/RT HOLDINGS, LLC, a Delaware limited liability company ECHO GLOBAL LOGISTICS, INC.

United States Bankruptcy Court,

  1. Delaware.

In re: RAYTRANS HOLDING, INC., Debtor.

DAVID M. KLAUDER, in his capacity as Chapter 7 Trustee of the bankruptcy estate of RAYTRANS HOLDINGS, INC., Plaintiff,

v.

ECHO/RT HOLDINGS, LLC, a Delaware limited liability company ECHO GLOBAL LOGISTICS, INC., a Delaware corporation, Defendants.

Case No. 13-11084 (CSS)

|

Adv. Proc. No. 15-50273 (CSS)

|

Related Docket No.: 82

|

Dated: August 10, 2017

Attorneys and Law Firms

WILKS, LUKOFF & BRACEGIRDLE, LLC, Scott B. Czerwonka, 4250 Lancaster Pike, Suite 200, Wilmington, DE 19805, Counsel to Echo/RT Holdings, LLC and Echo Global Logistics, Inc.

MORRIS JAMES LLP, Eric J. Monzo, Douglas N. Candeub, 500 Delaware Avenue, Suite 1500, Wilmington, DE 19899-2306, Special Counsel for David M. Klauder, Chapter 7 Trustee

 

 

Chapter 7

OPINION1

 

Sontchi, J.

 

INTRODUCTION

Before the Court is a motion to dismiss the Second Amended Complaint (the “Complaint”) brought by the Chapter 7 Trustee of the above-captioned estate. The Complaint alleges preferential transfers, breach of contract, and breach of guaranty and an accounting across eight different claims. For the foregoing reasons, the Complaint is dismissed, in its entirety, as the claims are barred by either collateral estoppel or under the doctrine of res judicata.

 

 

FACTUAL & PROCEDURAL BACKGROUND

  1. The Parties

In 2004, James A. Ray formed RayTrans Distribution, Inc. (“RayTrans Distribution”) as a corporation under Illinois law. RayTrans Distribution operated as a trucking services broker, serving as an intermediary between truckers and entities seeking trucking services. Additionally, RayTrans Distribution provided freight brokerage and logistical services through a series of network transportation professionals.2

 

RayTrans Distribution was affiliated with two other entities: RayTrans Trucking, LLC (“RayTrans Trucking”) and Universal Trans, LLC (“UniTrans”). Specifically, RayTrans Trucking and UniTrans provided various third-party owner-operators that specialized in flatbed, over-dimensional, van, and automobile shipments.3 James A. Ray formed and was the sole owner of the aforementioned entities until January 1, 2008.

 

In an attempt to expand the companies’ geographic presence, various acquisitions were made in 2007. First, on April 30, 2007, RayTrans Distribution acquired certain assets of H&J Services and Joe Carter Trucking, Inc. with the aim of expanding into the southern United States.4 On October 26, 2007, RayTrans Trucking acquired certain assets of Bricker Companies, Inc., the assets of which were transferred to RayTrans Distribution.5

 

In 2007, business and assets of Unitrans and RayTrans Trucking were intermingled with the business of RayTrans Distribution. For the financial statements for RayTrans Distribution for the year ending December 31, 2007, assets and business of Unitrans and RayTrans Trucking were consolidated into RayTrans Distribution.6 Financial statements for RayTrans Distribution continued to include the assets of Unitrans and RayTrans Trucking until its business was sold to the Echo Parties in 2009.7

 

On or about January 1, 2008, James A. Ray formed Holdings to serve as a holding company, and thereafter transferred the stock of RayTrans Distribution, RayTrans Trucking, and UniTrans from himself to Holdings. Specifically, Holdings was formed to provide corporate and administrative support for its subsidiaries, and in doing so, “charged” its subsidiaries, including that of RayTrans Distribution. As a result of this arrangement, RayTrans Distribution accrued a “considerable” amount of intercompany debt, resulting in Holdings becoming a substantial creditor of RayTrans Distribution.8

 

 

  1. The Sale of the RayTrans Distribution Business

On June 2, 2009, an Asset Purchase Agreement (the “APA”) was entered into between and among Echo/RT Holdings, LLC (“Echo/RT” and the “Purchaser”), RayTrans Distribution (the “Seller”), Holdings, James A. Ray, and Echo Global Logistics, Inc. (“Echo,” and collectively with Echo/RT, the “Defendants,” or the “Echo Parties”).9 Illinois law applies to the APA. The APA provided for the sale and transfer of substantially all of the assets and business of RayTrans Distribution, including those assets of Unitrans and RayTrans Trucking treated as part of RayTrans Distribution.10 At the time of the APA, and as evidenced in the APA, Holdings owned 100% of the outstanding stock of RayTrans Distribution.

 

Pursuant to the APA, to ensure the continuity of business, immediately after Closing, Echo/RT agreed to offer employment to substantially all of RayTrans Distribution’s employees. Additionally, the APA provided for a Consulting Agreement between Echo/RT and James A. Ray, whereby Ray would continue as a General Manager of the RayTrans Division of Echo Global Logistics.11

 

Under the APA, the purchase price was up to $12,550,000.00, with the additional inclusion of assumption of current liabilities. Defendants, however, paid $5,384,069 at the time of Closing.12 The $6.5 million balance of the APA purchase price was to be paid over the following three years, at one year intervals, dependent upon the meeting of certain minimal revenue benchmarks.13 Certain sections of the APA addressed Echo/RT’s obligation to pay the balance of the purchase price, including certain guarantees.14

 

The Trustee alleges that defendants failed to make any of the additional payments provided for under the APA after paying the $5,384,069 at closing.15 Specifically, given the additional payments were to be paid only upon the achievement of certain revenue benchmarks, the Trustee notes that the Echo Parties did not comply with their obligation to provide monthly EBITDA statements at any time in 2010 or thereafter.16 In light of the fact that revenue increased in the period from June 1, 2009 to May 31, 2010, the Trustee argues that the obligation to pay the first $1,333,333 installment of additional consideration was triggered.17

 

However, in late 2009, Illinois’s Secretary of State commenced the procedures for administratively dissolving RayTrans Distribution; the dissolution went into effect on May 14, 2010.18 As told by the Trustee, Echo’s awareness of RayTrans Distribution’s status as a dissolved company served as the basis for Echo’s withholding the financial reporting and the balance of the consideration owed under the APA. Notably, the first additional payment of the purchase price for the RayTrans Distribution business was due on June 20, 2010, twenty days after the May 31 close of the EBITDA Measurement Period.19 Additionally, Echo’s filings with the SEC in and after 2010 ceased to provide any segregated business information regarding the performance or acquisition of the RayTrans Distribution business, including a failure to mention any obligation to pay additional consideration under the APA.20

 

 

  1. The Powersource Lawsuit

In 2006, Powersource Transportation, Inc. commenced a lawsuit against UniTrans and RayTrans Trucking in Indiana state court, seeking damages of over $4 million for certain alleged business torts and contract breaches (the “Powersource Lawsuit”).21 Notably, both the consolidation of the assets of UniTrans and RayTrans Trucking into RayTrans Distribution in 2007, and their subsequent transfer to the Echo Parties in 2009 occurred without either knowledge of or disclosure to Powersource.22

 

In November 2011, a judgment was rendered in favor of Powersource and against RayTrans Trucking and UniTrans for $1,688,072.00.23 After the judgment was entered, Powersource continued its attempts to collect, including a garnishment proceeding in 2012 against certain garnishee defendants in aid of execution, including Holdings, RayTrans Distribution, James A. Ray, and Echo. At this time, the Powersource judgment remains outstanding.24

 

 

  1. Debtor’s $50,000 Transfer to Echo

Notwithstanding the alleged outstanding payments owed by Echo under the APA, Holdings made one or more payments to Echo subsequent to the transfer of the RayTrans Distribution and prior to its bankruptcy filing.25 Specifically, in December 2012, Holdings, by wire transfer, paid $50,000 to Defendant Echo, as previously set forth in Holdings’ Statement of Financial Affairs filed in connection with the bankruptcy.

 

The Trustee alleges that 1) Holdings was not indebted to Echo when the aforementioned transfer occurred, and, 2) nor did Echo furnish reasonably equivalent value, or any value, to Holdings in exchange for the wire transfer of $50,000.26

 

 

  1. Holdings’ Chapter 7 Bankruptcy

On April 25, 2013, Holdings filed for chapter 7 bankruptcy protection. On Holdings’ Schedule F, James A. Ray listed Echo as a creditor of Holdings in connection with unspecified obligations under the APA.27 The defendants were served notice of the December 12, 2013 deadline for filing proofs of claimed, but failed to file a proof of claim. However, Powersource was listed as a creditor, specifically, a garnishee defendant, in Holdings’ schedules. Powersource subsequently filed a proof of claim in the main bankruptcy proceeding for $1,958,163.52 (“Claim Number 3”).28

 

As of the Petition Date, Holdings had approximately $3,126,000.00 in liabilities, all of which were unsecured. Assets were listed as $0.00. Holdings also listed stock interests in its two subsidiary companies, RayTrans Trucking and Unitrans. It is argued that Holdings’ stock interest in RayTrans Distribution was omitted because that company was administratively dissolved by the State of Illinois prior to the Petition Date.29

 

 

  1. Chancery Court Litigation

The procedural background of the instant adversary proceeding began prior to the Petition Date, when Spring Capital Real Estate, LLC (“Spring Capital”), a creditor of Holdings, commenced a lawsuit in the Court of Chancery against the Echo Defendants and RayTrans Distribution on October 31, 2012, seeking to void as fraudulent conveyances the transfers made to defendants by Holdings and RayTrans Distribution.30 On April 2, 2013, Spring Capital filed an Amended Complaint, naming Holdings, James A. Ray, and the now-defunct RayTrans Distribution as nominal defendants.

 

The Trustee, pursuant to authority granted under the Bankruptcy Code, joined the fraudulent transfer action previously commenced by Spring Capital in the Chancery Court. On November 3, 2014, the Trustee, by amended cross-claims, asserted cross-claims against the defendants in the Chancery Court action, pursuant to De. Ch. R. 13(g), “seeking to assert the estate’s interest in, and to void as fraudulent conveyances, the transfers made to defendants by Holdings under Delaware and Illinois state law that were being challenged by Spring Capital. As recoverable by a creditor holding an unsecured claim.”31

 

On December 31, 2013, the Court of Chancery dismissed Spring Capital’s claims with prejudice.32 Following the dismissal of Spring Capital’s claims, the Trustee filed a Notice of Removal on April 10, 2014, seeking to remove his claims to this Court.33 The Echo Defendants then filed a motion to remand the Trustee’s claims back to the Court of Chancery, where they were originally filed.34 On June 18, 2014, this Court remanded the matter back to the Court of Chancery (the “Remand Order”).35 Notably, in the Remand Order, this Court characterized the Trustee’s attempt to remove the Chancery Claims to federal court as “a clear case of forum shopping.”36

 

On November 3, 2014, the Trustee filed Amended Cross-Claims against the Echo Defendants.37 In the Trustee’s Amended Cross-Claims, the same successor liability claims that Spring Capital had raised and that the Court of Chancery had dismissed were eliminated, but kept, albeit slightly modified, the same fraudulent transfer claims brought by Spring Capital, under both Delaware and Illinois law, that had also been dismissed by the Court of Chancery.

 

On January 20, 2015, the Echo Defendants filed a Motion to Dismiss the Amended Cross-Claims and Opening Brief in Support Thereof (“Motion to Dismiss”). The Echo Defendants’ Motion to Dismiss was granted on February 18, 2016, and the Court of Chancery both dismissed the Trustee’s entire Amended Cross-Claim with prejudice and denied the Trustee’s request for leave to amend (the “Dismissal Order”).38 Notably, the Court of Chancery found that the APA was not only supported by adequate consideration, but that the assets transferred by RayTrans did not lack reasonably equivalent value:

First, the APA provided reasonably equivalent value for the assets transferred. Although Echo/RT paid only $6,050,000, the APA provided for a purchase price of up to $12,550,000, provided certain earn-outs were accomplished. Further, the $11,148,009 valuation of RayTrans Distribution’s assets took place on December 31, 2007, eighteen months before entering into the APA. Finally, whether RayTrans Distribution properly allocated the proceeds of the transfer to its creditors is of no consequence to whether the payment received in consideration for its assets was reasonably equivalent in value.39

The Court of Chancery also found that the Trustee failed to allege adequately that RayTrans possessed any intent to defraud its creditors when it entered into the APA and subsequently transferred its assets to the Echo Defendants.40

 

On December 12, 2016, the Delaware Supreme Court rejected the appeals filed by the Trustee and Spring Capital and affirmed the Dismissal Order.41

 

While the Echo Defendants’ Motion to Dismiss was pending, and before the Court of Chancery granted the Motion to Dismiss, the Trustee filed the instant adversary proceeding against the Echo Defendants on April 24, 2015. Specifically, the Complaint asserted (i) three counts for avoidance of fraudulent transfers pursuant to 11 U.S.C. §§ 548 and 550, (ii) a count for avoidance of preferential transfer pursuant to 11 U.S.C. § 547, (iii) one count for recovery of an avoided transfer pursuant to 11 U.S.C. § 550, and (iv) disallowance of all claims pursuant to 11 U.S.C. § 502(d) and (j).

 

Following the Court of Chancery’s Dismissal Order, and subsequent affirmation by the Delaware Supreme Court, on November 7, 2016, the Trustee sought leave to amend his complaint.42 On December 28, 2016, the Court granted the Motion to Amend and denied, without prejudice, the Echo Dismissal Motion.43

 

On January 4, 2017, the Trustee filed his Second Amended Complaint.44 The Second Amended Complaint now asserts two counts for avoidance of fraudulent transfers under Sections 544, 548, and 550 and added a new breach of contract claim (Count V) and a claim for attorneys’ fees (Count VIII). The original breach of contract claim (Count VI) and accounting claim (Count VII) remain in the Second Amended Complaint.

 

 

STANDARD OF REVIEW

  1. Rule 12(b)(6)

The defendants seek dismissal of various Claims brought by the Trustee in the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable here by Federal Rule of Bankruptcy Procedure 7012, for “failure to state a claim upon which relief can be granted.” Fundamentally, a motion under Rule 12(b)(6) of the Federal Rules of Civil Procedure serves to test the sufficiency of the factual allegations in the plaintiff’s complaint.45 As such, “[t]he issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.”46

 

With the Supreme Court’s decisions in Bell Atlantic Corp v. Twombly47 and Ashcroft v. Iqbal,48 “pleading standards have seemingly shifted from simple notice pleading to a more heightened form of pleading, requiring a plaintiff to plead more than the possibility of relief to survive a motion to dismiss.”49 Thus, “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim [for] relief that is plausible on its face.’ ”50 Given this heightened standard, it is insufficient to simply provide “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements. …”51 Accordingly, a complaint “must contain either direct or indirect allegations respecting all the material elements necessary to sustain recovery under some viable legal theory.”52

 

Following Twombly and Iqbal, in Fowler, the Third Circuit articulated a two-part analysis to be applied in evaluating a complaint.53 First, the court “must accept all of the complaint’s well-pleaded facts as true, but may disregard any legal conclusions.”54 Second, the court must determine “whether the facts alleged in the complaint are sufficient to show that the plaintiff has a ‘plausible claim for relief.’ ”55 Additionally, the Third Circuit has instructed that “[s]ome claims will demand relatively more factual detail to satisfy this standard, while others require less.”56

 

 

  1. Res Judicata

This Court has previously held that, fundamentally, “[t]he essence of res judicata, or claim preclusion, is ‘that a party who once has had a chance to litigate a claim before an appropriate tribunal usually ought not to have another chance to do so.’ ”57 In the Third Circuit, “a party seeking to invoke res judicata must establish three elements: (1) a final judgment on the merits in a prior suit involving (2) the same parties or their privies, and (3) a subsequent suit based on the same cause of action.”58 Additionally, courts in the Third Circuit “may take judicial notice of another court’s opinion—not for the truth of the matter asserted, but for the existence of the opinion.”59 Furthermore, where res judicata is based on a state court judgment, federal courts must “give the same preclusive effect to state court judgments that those judgments would be given in the courts of the State from which the judgments emerged.”60

 

 

  1. Collateral Estoppel

Collateral estoppel, derived from the constitutional protection against double jeopardy,61 provides “once a court has decided an issue of fact or law necessary to its judgment, that decision may preclude relitigation of the issue in a suit on a different cause of action involving a party to the first case.”62 Specifically, “where a party seeks to rely on a state court judgment to preclude relitigation of the same issues in federal court, a federal court must look to the state law and its assessment of the collateral estoppel doctrine to determine the extent to which the state would give its own judgment collateral estoppel effect.”63

 

The relevant state court judgments relied upon by the defendants were rendered in Delaware, therefore, this Court will apply Delaware law to determine whether or not collateral estoppel bars relitigation in the instant adversary proceeding.

 

 

DISCUSSION

  1. Counts I and II Are Barred by the Doctrine of Collateral Estoppel

Count I of the Trustee’s Second Amended Complaint, alleged against all defendants, seeks avoidance of fraudulent transfers pursuant to 11 U.S.C. §§ 548 and 550. At issue is the December 2012 $50,000 wire transfer made from the Debtor to Echo Global. Count II, alleged against all defendants, seeks avoidance of fraudulent transfers pursuant to 11 U.S.C. §§ 544 and 550.

 

This Court finds that Counts I and II are barred by the doctrine of collateral estoppel. As previously mentioned, this Court will use Delaware law in the instant collateral estoppel analysis. When determining the appropriateness of applying collateral estoppel, Delaware state courts must determine whether:

  1. the issue previously decided is identical with the one presented in the action in question;
  2. the prior action has been finally adjudicated on the merits;
  3. the party against whom the doctrine is invoked was a party or in privity with a party to the prior adjudication; and
  4. the party against whom the doctrine is raised had a full and fair opportunity to litigate the issue in the prior action.64

 

With respect to Count I, under 11 U.S.C. § 548(a), the Trustee must sufficiently allege that payments made to the Echo Defendants were not made in exchange for reasonably equivalent value.65 The Court of Chancery explicitly determined that the APA was supported by reasonably equivalent value.66 Furthermore, the Court of Chancery also explicitly found that the APA did not amount to a fraudulent transfer:

Second, the Cross–Claims are insufficient to support a reasonable inference that RayTrans Distribution intended to defraud its creditors. Such intent can be inferred from certain factors listed in Delaware’s and Illinois’s fraudulent transfer statutes. The Cross–Claims allege that the facts summarized above support the Trustee’s argument that the transfer was intentionally fraudulent. These facts, however, do not provide a sufficient basis from which the Court may infer that the APA was entered into with the intent to fraudulently transfer RayTrans Distribution’s assets. While post-transaction insolvency may suggest that a transfer is fraudulent, the transfer here was for reasonably equivalent value, and as stated, what the debtor does with the money it receives has no bearing on the adequacy of the consideration. Further, that Holdings’ or RayTrans Distribution’s creditors may not have known of the APA is not itself sufficient to infer that the APA was intended to defraud RayTrans Distribution’s creditors, especially where the value received was reasonably equivalent to the value of the assets sold. Therefore, because RayTrans Distribution had no intent to defraud its creditors and received reasonably equivalent value in return for its assets, the APA did not amount to a fraudulent transfer.67

 

The transfer in question was made to satisfy a debt and occurred under the APA.68 Furthermore, Count II, under 11 U.S.C. § 544, requires the litigation of the same state law issues already addressed by the Court of Chancery, namely, (a) that the Debtor acted with an intent to defraud, or (b) that the Debtor transferred assets for less than reasonably equivalent value. All elements necessary for a finding that collateral estoppel bars Counts I and II have been met by the defendants. As such, Counts I and II are dismissed on the grounds that they are barred by the doctrine of collateral estoppel.

 

 

  1. Counts III and IV are Dismissed for Failure to State a Claim

Count III seeks avoidance of preferential transfer pursuant to 11 U.S.C. § 547 and Count IV seeks recovery of avoided transfers pursuant to 11 U.S.C. § 550. With respect to Count III, Section 547 of the Bankruptcy Code allows a trustee to recover a preteition transfer of an interest of the debtor in property:

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made—

(A) on or within 90 days before the date of the filing of the petition; or

(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and

(5) that enables such creditor to receive more than such creditor would receive if—

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.69

Furthermore, the trustee must prove each element by a preponderance of the evidence.70

 

The Trustee’s Complaint alleged – without any factual support – that at the time of the transfer, the defendants were “insiders” of Holdings.71 The Trustee also alleged that the defendants were creditors of Holdings at the time of the transfer within the meaning of 11 U.S.C. § 101(10)(A).72 Specifically, Section 547(b)(4)(B) provides for an extended window – between ninety days and one year before the date of the filing of the petition – if such creditor at the time of such transfer was in insider.

 

The Code defines an “insider” of a corporate debtor as including “(i) director of the debtor; (ii) officer of the debtor; (iii) person in control of the debtor; (iv) partnership in which the debtor is a general partner; (v) general partner of the debtor; or (vi) relative of a general partner, director, officer, or person in control of the debtor.73 However, “[a] party may also be considered a ‘nonstatutory insider,’ even without actual control of the debtor, when there is a close relationship between debtor and creditor and when transactions between them were not conducted at arm’s length.”74

 

The Trustee did no more than recite the word “insider” – no evidence has been given, nor facts provided, that would establish that the defendants were insiders, whether statutory or otherwise, within the meaning of the Code. Control, as enumerated in section 101(31)(B)(iii), is the only potentially applicable part of the definition of insider that would render the defendants statutory insiders. Delaware courts have held that “activities such as monitoring the Company’s business and attending board meetings are not sufficient to show control over the day-to-day operations.”75 The Trustee has not argued, with specificity, any action on the part of the defendants that would result in a finding of statutory insider status. This Court finds that the defendants are not statutory insiders, as they do not fall within any of the enumerated examples defining “insider” under the Code.

 

With respect to non-statutory insider status, in In re Winstar Communications, Inc.,76 the Third Circuit affirmed the proposition that control is unnecessary for a finding of nonstatutory insider status.77 Rather, the Third Circuit held, “the question ‘is whether there is a close relationship [between the debtor and creditor] and … anything other than closeness to suggest that any transactions were not conducted at arm’s length.’ “78 The transaction in question – the transfer of $50,000 –was decidedly conducted at arm’s length, as it was derivative of the APA, which was not found to be deficient in any way by the Court of Chancery that would rise to the level of suggesting anything other than agreement made at arm’s length. The Trustee has not alleged facts with specificity in order to meet the standard to survive a 12(b)(6) motion to dismiss. Accordingly, Count III is dismissed for failure to state a claim.

 

Given Counts I and II are barred by the doctrine of collateral estoppel, and Count III is dismissed for failure to state a claim, Count IV for recovery of avoided transfers cannot survive, and is dismissed by this Court as well.

 

 

  1. Counts V, VI, VII, and VIII Are Dismissed Under Res Judicata

The Counts discussed herein are:

  • Count V: Breach of Contract and Judicial Estoppel
  • Count VI: Breach of Contract
  • Count VII: Accounting
  • Count VIII: Breach of Guaranty and Attorney’s Fees (Against Defendant Echo)

As previously discussed, “[r]es judicata, also known as claim preclusion, applies when there has been (1) a final judgment on the merits in a prior lawsuit involving (2) the same parties or their privies and (3) a subsequent suit based on the same cause of action.”79

 

As the judgment of a state court must have the same preclusive effect in federal court as it would have within that state’s courts under the law of the state, it is necessary to look to Delaware law on res judicata. In LaPoint v. AmerisourceBergen Corp., the Delaware Supreme Court reiterated the relevant elements of res judicata:

Res judicata operates to bar a claim where the following five-part test is satisfied: (1) the original court had jurisdiction over the subject matter and the parties; (2) the parties to the original action were the same as those parties, or in privity, in the case at bar; (3) the original cause of action or the issues decided was the same as the case at bar; (4) the issues in the prior action must have been decided adversely to the appellants in the case at bar; and (5) the decree in the prior action was a final decree.80

Each of the elements of res judicata have been satisfied in the instant case, as has been more than evident through the facts and extensive Court of Chancery and Delaware Supreme Court litigation.

 

The parties are adversaries for purposes of res judicata. “Parties are adversaries if they have ‘opposing interests, … interests for the preservation of which opposition is essential.’ ”81 Parties are considered adverse when, “… by the pleadings, [they] are arrayed on opposite sides. Opposite sides in this sense is not restricted to the plaintiffs against the defendants, since codefendants having a controversy inter se may come within such a classification.”82 For the past three years, the Trustee and the defendants have been the only parties litigating – to find they were not adverse would belie the true nature of years’ worth of litigation. Given that the parties are adversaries, the claims in question should be viewed in the same light as compulsory counterclaims for purposes of res judicata.

 

Furthermore, the basis of the entire adversary proceeding, and the prior Court of Chancery litigation, was the APA. Even if claims were not raised until after the state court litigation had commenced,

[i]f the pleadings framing the issues in the first action would have permitted the raising of the issue sought to be raised in the second action, and if the facts were known, or could have been known to the plaintiff in the second action at the time of the first action, then the claims in the second action are precluded.83

Most information relied upon by the Trustee derives from public filings by the defendants. That the Trustee might have been unaware of their public nature, due to a failure to realize that the Echo Parties were, in fact, public companies, neither renders the information any less public, nor any less accessible to the Trustee for purposes of asserting causes of action.84 Thus, Counts V, VI, VII, and VIII are dismissed as they are barred under res judicata.

 

 

CONCLUSION

This Court, in its previous Remand Order, observed that the Trustee’s attempt to remove the Chancery Claims to federal court was “a clear case of forum shopping.”85 Such a characterization is still appropriate in the instant Adversary Proceeding. Given that these claims, whether in their exact or slightly altered forms, have been fully litigated in the Court of Chancery, and further affirmed by the Delaware Supreme Court, the Complaint will be dismissed with prejudice in its entirety for the aforementioned reasons. An order will be issued.

 

All Citations

— B.R. —-, 2017 WL 3432362

 

 

Footnotes

1

“The court is not required to state findings or conclusions when ruling on a motion under Rule 12…” Fed. R. Bankr. P. 7052(a)(3). Accordingly, the Court herein makes no findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.

2

Adv. Pro. No. 15-50273, D.I. 81, ¶ 12.

3

Id. at ¶ 14.

4

Id. at ¶ 16.

5

Id. at ¶ 17.

6

Id. at ¶ 20.

7

Id. at ¶ 21.

8

Id. at ¶ 26.

9

Id. at ¶ 37.

10

Id. at ¶ 19, 38.

11

Id. at ¶ 42.

12

Id. at ¶ 45.

13

Id. at ¶ 46.

14

Id. at ¶ 48-54.

15

Id. at ¶ 55.

16

Id. at ¶ 56-59.

17

Id. at ¶ 60-61.

18

Id. at ¶ 63.

19

Id. at ¶ 64-65.

20

Id. at ¶ 70.

21

Id. at ¶ 19.

22

Id. at ¶ 38.

23

Id. at ¶ 78.

24

Id. at ¶ 80.

25

Id. at ¶ 81.

26

Id. at ¶ 83-84.

27

Id. at ¶ 86.

28

Id. at ¶ 91.

29

Id. at ¶ 90.

30

Id. at ¶ 92.

31

Id. at ¶ 94.

32

Spring Real Estate, LLC v. Echo/RT Holdings, LLC, 2013 WL 6916277 (Del. Ch. Dec. 31, 2013).

33

See Adv. Pro. No. 14-50249, D.I. 1.

34

Adv. Pro. No. 14-50249, D.I. 4.

35

Adv. Pro. No. 14-50249, D.I. 14.

36

Id. at ¶ 6.

37

D.I. 82-5, Exhibit D.

38

Spring Real Estate, LLC v. Echo/RT Holdings, 2016 WL 769586 (Del. Ch. Feb. 18. 2016).

39

Id. at *5 (footnotes omitted).

40

Id.

41

Klauder v. Echo/RT Holdings, LLC, 2016 WL 7189917, at *1 (Del. Dec. 12, 2016).

42

D.I. 63, 64.

43

D.I. 80.

44

D.I. 81.

45

Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir.1993).

46

Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974), abrogated on other grounds by Harlow v. Fitzgerald, 457 U.S. 800, 814–15, 102 S.Ct. 2727, 73 L.Ed.2d 396 (1982).

47

550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

48

556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

49

Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir.2009).

50

Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).

51

Iqbal,129 S.Ct. at 1949 (citing Bell Atlantic v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).

52

Twombly, 550 U.S. at 562, 127 S.Ct. 1955.

53

Fowler, 578 F.3d at 210-11.

54

Id.

55

Id.

56

In re Ins. Brokerage Antitrust Litig., 618 F.3d 300 (3d Cir.2010).

57

In re AMC Investors, LLC, 524 B.R. 62, 71 (Bankr. D.Del. 2015) (quoting 47 Am.Jur.2d Judgments § 464).

58

McLaughlin v. Bd. Of Trustees of Nat’l Elevator Indus. Health Benefit Plan, No. 16-4108, 2017 WL 1325687, at *2 (3d Cir. Apr. 11, 2017) (citing In re Mullarkey, 536 F.3d 215, 225 (3d Cir. 2008).

59

Southern Cross Overseas Agencies, Inc. v. Way Kwong Shipping Group Ltd., 181 F.3d 410, 426 (3d Cir. 1999); see also Buck v. Hampton Tp. School Dist., 452 F.3d 256, 260 (3d Cir. 2006).

60

Kremer v. Chem. Constr. Corp., 456 U.S. 461, 466, 102 S.Ct. 1883, 72 L.Ed.2d 262 (1982).

61

In re Moran, 413 B.R. 168, 180 (Bankr. D. Del. 2009) (citing Green v. U.S., 355 U.S. 184, 78 S.Ct. 221, 223, 2 L.Ed.2d 199 (1957)).

62

Id.

63

Id. at 181.

64

Betts v. Townsends, Inc., 765 A.2d 531, 535 (Del. 2000) (quoting State v. Machin, 642 A.2d 1235, 1239 (Del.Super.Ct.1993)).

65

11 U.S.C. § 548(a)(1)(B), [t]he trustee may avoid any transfer … of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—

(B)

(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

(ii)

(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;

(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;

(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

66

See Spring Real Estate, LLC v. Echo/RT Holdings, 2016 WL 769586, at *5 (Del. Ch. Feb. 18, 2016).

67

Id. (emphasis added).

68

See D.I. 96 at p. 17 (“Indeed, the APA itself, attached to the Second Amended Complaint, makes it clear that Holdings/Debtor was a guarantor under the APA.”) (footnotes omitted).

69

11 U.S.C. § 547(b).

70

See In re Opus East, LLC, 528 B.R. 30, 90 (Bankr. D. Del. 2015).

71

D.I. 81, ¶ 131.

72

Id. at § 132.

73

11 U.S.C. § 101(31)(B).

74

State Street Bank and Trust Co., 520 B.R. at 81 (citations omitted).

75

Id. (citing In re Radnor Holdings Corp., 353 B.R. 820, 841 (Bankr.D.Del.2006)

76

554 F.3d 382 (3d Cir.2009).

77

Id. at 396.

78

Id. at 397 (quoting In re U.S. Med., 531 F.3d at 1277).

79

Brooks-McCollum v. Emerald Ridge Serv. Corp., 563 F. App’x 144, 145 (3d Cir. 2014).

80

970 A.2d 185, 192 (Del. 2009) (citation omitted).

81

CoreStates Bank, N.A. v. Huls America, Inc., 173 F.3d 187, 201 (3d Cir. 1999).

82

Executive Arts Studio, Inc. v. City of Grand Rapids, 391 F.3d 783, 795 (6th Cir. 2004) (internal citations omitted).

83

Id. at 193 (emphasis added and citations omitted).

84

D.I. 82 at 28.

85

Id. at ¶ 6.

 

 

© 2024 Fusable™