VIEWS: 2 PAGES: 26 POSTED ON: 2/23/2012
Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 1 of 26 UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF INDIANA NEW ALBANY DIVISION IN RE: ) ) EASTERN LIVESTOCK CO., LLC, ) Case No. 10-93904-BHL-11 ) Debtor. ) CHAPTER 11 ) CACTUS GROWERS, INC., ) ) Plaintiff, ) ) v. ) Adversary Proceeding No. 11-59087 ) ROBERT NICHOLS, JANE NICHOLS, ) and NICHOLS LIVESTOCK, ) ) Defendants. ) DEFENDANTS’ BRIEF IN SUPPORT OF MOTION TO DISMISS To The Honorable Basil H. Lorch, III, United States Bankruptcy Judge: Defendants Robert Nichols, Jane Nichols, and Nichols Livestock (collectively, “Nichols”) and their undersigned counsel submit this brief in support of their Motion to Dismiss. The Nichols have not violated the automatic stay. Even if they had, Cactus has no standing to complain and no standing to recover fees. STATEMENT OF THE CASE This matter arises from the failure of Cactus Growers, Inc. (Cactus) to pay an invoice from the Nichols for 125 steers which the Nichols bought with their own money, sold and delivered to Cactus. Eastern Livestock Co., LLC (Eastern) never had possession of, or an ownership interest in, 1 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 2 of 26 these steers. Cactus accepted delivery of the steers and received only a “Nichols Livestock” invoice for the purchase price and trucking fees. Eastern never asked Cactus to pay Eastern for the steers. After receiving the invoice, Cactus agreed to pay the Nichols for the steers. Cactus has failed to pay the invoice and remains indebted to the Nichols in the amount of $112,600.17,1 plus interest, costs and attorney fees. These steers never belonged to the debtor. The debtor did not have a contract to purchase them. The debtor never had any financial interest in them. FACTS On either November 3 or 4, 2010, Tommy Gibson, of Eastern Livestock, told Robert Nichols that Eastern’s bank was “bouncing” Eastern’s checks. Mr. Gibson also told Robert Nichols that Eastern could not buy any more cattle from the Nichols. The relationship between Eastern Livestock and the Nichols ended, by mutual agreement, on either the 3rd or 4th of November, 2010. All contracts between them, if any, were rescinded. From that day to this, no contract has been in effect between those parties. After that, on November 8, 2010, the Nichols bought 125 steers for $109,205.40 with their own money. (See Footnote 1) (Exhibit 1) They shipped those steers to Cactus Growers, Inc. on November 8, 2010. Nichols’ invoice was sent to Cactus on November 8, 2010. (Exhibit 2) After receiving this invoice, Cactus promised to pay Nichols for the 125 steers. When payment did not come, Nichols demanded either payment or return of the steers. (Exhibit 3) Cactus, instead, filed an interpleader action and paid into Court a lesser amount of money, i.e. $104,929.84. Although they were named as defendants in the interpleader, Cactus never bothered to serve Robert Nichols, 1 The amount Cactus alleges to have interpled for the cattle transaction between Cactus and the Nichols is only $104, 929.84. 2 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 3 of 26 Jane Nichols or Nichols Livestock with a summons in that case. Robert and Jane Nichols then sued Cactus in the District Court of Kiowa County, Oklahoma, (“the Kiowa County lawsuit”) for $110,230.17 - a profit of only $1,024.75 had they been paid - plus the shipping. That case was removed to the United States District Court for the Western District of Oklahoma by Cactus. Despite being asked to either pay for the steers or return them, Cactus kept the steers and has now sold them for a profit of over $25,000.00. The Kiowa County lawsuit did not violate the automatic stay. Eastern had no interest in the 125 steers. Even if Eastern had some interest in them, the suit by the Nichols against Cactus only would not adversely effect that interest. Moreover, Cactus has no standing to bring this action. PROCEDURAL HISTORY Cactus filed an interpleader action in the United States District Court for the Northern District of Texas, Amarillo Division, Case No. 2:10-cv-00266 (“the Texas Interpleader”). The Nichols were named as defendants in the Texas Interpleader because, Cactus claims, a portion of the interpled fund was for payment of the 125 steers above-referenced. On December 6, 2010, Cactus forwarded to the undersigned a Notice of Lawsuit and Request for Waiver of Service of Summons in the Texas Interpleader. Cactus was advised that the Nichols did not belong in that lawsuit and would not voluntarily get involved. (Exhibit 4) It has always been the Nichols’ position that it was not under contract with Eastern on November 8, 2010, at the time Cactus purchased the steers from them. It has always been the position of the Nichols that the steers were bought with Nichols’ money and sold directly to Cactus and that all agreements were exclusively between the Nichols and Cactus. It was abundantly clear from the December 22, 2011 letter (Exhibit 4) that Cactus did not intend to honor its agreement with 3 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 4 of 26 the Nichols. Accordingly, on January 11, 2011, Nichols initiated the Kiowa County lawsuit against Cactus. In that Petition, Nichols demanded judgment against Cactus only in the sum of $110,230.17 for the steers that Cactus had purchased from Nichols, as well as $2,379.00 for trucking expenses. On February 8, 2011, Cactus removed the state court action to the United States District Court for the Western District of Oklahoma. On February 11, 2011, Cactus filed with the Western District of Oklahoma Cactus’ Rule 12 (b)(2) and 12 (b)(7) Motion to Dismiss and, Alternatively, Motion for Stay with Brief in Support. In its Motion to Dismiss, Cactus argued that (1) this Court’s automatic bankruptcy stay required dismissal of the action, (2) Nichols failed to join two indispensable parties: Eastern and Fifth Third Bank, (3) the First-to-File Abatement rule required dismissal of the action, and (4) the Western District of Oklahoma did not have personal jurisdiction over Cactus. On March 7, 2011, Nichols filed with the Western District of Oklahoma Nichols’ Response to Defendant’s Rule 12(b)(2) and 12(b)(7) Motion to Dismiss and, Alternatively, Motion for Stay with Brief in Support. Nichols’ Response to the Motion to Dismiss argued (1) Eastern and Fifth Third were not indispensable parties to the lawsuit, because neither had any type of interest in the 125 cattle Nichols sold to Cactus, (2) the First-to-File Abatement rule was inapplicable, since the Federal District Court in Amarillo, Texas did not have jurisdiction over the Nichols and the Nichols had not been served with Summons, (3) the Western District of Oklahoma had personal jurisdiction over Cactus, and (4) the automatic stay was not violated. On March 12, 2011, Cactus filed its Reply to Nichols’ Response wrongly arguing (1) this Bankruptcy Court had determined that all claims involving the 125 steers and proceeds thereof are within the jurisdiction of this Court and are subject to the bankruptcy stay, (2) it was anticipated by 4 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 5 of 26 Cactus that the Eastern Bankruptcy Trustee could potentially examine the transactions between Eastern and Nichols to determine whether they constituted a fraudulent transfer or preferential transfer, and (3) presenting its claims against Cactus in the Eastern bankruptcy would not place a hardship on Nichols. On March 31, 2011, Nichols filed its Supplemental Response to Cactus’ Motion to Dismiss. Nichols argued that (1) no Court had ordered that all claims Nichols had involving the 125 steers and proceeds therefrom are within the jurisdiction of this Court and subject to the Eastern Bankruptcy stay, (2) the Eastern Bankruptcy Trustee has become aware of the claims Nichols has regarding the proceeds of steers sold to Cactus, and the Trustee has done nothing to claim an interest in them, (3) Nichols was not subject to the Eastern Bankruptcy stay, since Eastern and Fifth Third Bank were not a party to the cattle sale between Nichols and Cactus, and Eastern and Fifth Third Bank had no interest in the 125 cattle or proceeds of the sale. At a Pre-trial Conference on May 12, 2011, this Honorable Court stayed the action pending in the United States District Court for the Western District of Oklahoma and ordered that all claims between Cactus, Nichols and Jane, LLC regarding the 125 steers must be litigated only in this Court, in adversary proceeding number 11-59093. Since May 12, 2011, no action has been taken by or on behalf of the Nichols except through this Court. Cactus seeks a permanent injunction so the Nichols cannot sue Cactus. Cactus wants an award of damages for the Nichols’ alleged failure to honor the Automatic Stay entered in favor of Eastern Livestock in the bankruptcy proceeding. However, as will be set forth more fully in the supporting brief below, (1) there is no violation; (2) Cactus does not have standing to enforce the Automatic Stay; (3) furthermore the Stay does not operate to protect Cactus Growers from being 5 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 6 of 26 sued by the Nichols, and (4) Cactus is not an “individual” and thus not entitled to fees, costs, etc. ANALYSIS OF THE INTERPLEADER ACTION FILED BY CACTUS GROWERS, INC. To understand the Nichols’ legal position, one has to understand the nature of the interpleader action filed by Cactus Growers, Inc. Cactus Growers amended that Complaint and it can be found at Docket # 34 of this Court’s Adversary Case Number: 11-59093. It is important to understand that before filing their Kiowa County, Oklahoma lawsuit, the Nichols had never been served with summons in that interpleader case and had not voluntarily entered an appearance in that case. The Nichols do not belong in the interpleader action. Turning our attention to the Amended Complaint in Intervention, paragraph 35 of that document, under the heading BACKGROUND, shows that Cactus understands the nature of Eastern’s business “In acquiring cattle, Eastern agreed to purchase the cattle, either at auctions or from individual supplies, for a given price and attempted to profit upon the resale of the cattle”. The Nichols always told Cactus that Eastern did not have a contract to purchase the subject 125 steers from the Nichols. There was no “given price”. Eastern has not “attempted to profit upon the resale of the cattle”. This description does not fit the facts of our case. Further, under paragraph 38, Cactus claims that it “withheld certain payments from Eastern because Cactus Growers received numerous conflicting claims as to the right of such payments”. No payment was due to Eastern on the 125 steers. The money being withheld for the steers has never been claimed by Eastern. There are no “conflicting claims”. Then Cactus says in that same paragraph “the amount owed by Cactus Growers for cattle delivered to Cactus Growers under the Purchase Orders makes up a portion of the interpled funds, for which there are multiple conflicting 6 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 7 of 26 claims”. There are no such cattle involved in our case. Our cattle were not subject to any Purchase Orders with Eastern. There are no “multiple conflicting claims” to these steers. Regarding paragraph 40 of Cactus’ Amended Complaint, we see the real purpose for Cactus Growers’ actions. It wants to offset $283,080.80 which it paid to Eastern. Cactus now wrongfully claims that this down payment applies to the cattle which the Nichols sold to Cactus. And Cactus evens admits the following, at ¶40: “In addition, Cactus Growers has been damaged by Eastern’s breach of the Contracts and of the Purchase Orders because Cactus Growers had to procure replacement cattle at a higher market price.” This allegation is TRUE. Cactus procured “replacement cattle” from the Nichols “at a higher market place” but now does not want to pay the Nichols. Nichols’ cattle did fulfill, in part, a need Cactus had which could not be fulfilled by Eastern. In paragraph 42, it is with interest that we learn that “on November 3, 2010, Cactus first became aware of active rumors that Eastern was in financial difficulty and on November 4, 2010 Cactus was informed by Eastern’s President, Tommy Gibson, that Fifth Third had frozen all of Eastern’s bank accounts”. These are exactly the same dates that Robert Nichols heard the exact same thing from Tommy Gibson. During that conversation, any business relationship that existed between Eastern and the Nichols was cancelled by mutual agreement on November 4, 2010. In paragraph 43, Cactus complains because that beginning on that date - November 4, 2010 “Cactus Growers received contacts and claims from numerous parties who claim to have sold cattle to Eastern and had not yet been paid (the “Unpaid Claimants’), and claim that the cattle were delivered to a Cactus Feeders owned feedyard facility”. But the Nichols are not “Unpaid Claimants”. (Emphasis added). The Nichols do not claim to have sold these 125 steers to Eastern. The Nichols have not requested that Cactus make payment to them instead of to Eastern. The Nichols have never 7 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 8 of 26 made that claim to Cactus. The Nichols have always maintained that they sold their own 125 steers directly to Cactus. That makes the Nichols unique from all other defendants in that interpleader. The Nichols just do not belong in that interpleader action and are not violating any stay from this Honorable Court. Cactus does make the allegation in paragraph 50 as follows: “Based on communications from Robert Nichols and wife, Jane Nichols, d/b/a Nichols Livestock, and their attorney, they are an Unpaid Claimant”. WRONG! We attach as Exhibits communications from the Nichols where it is definitely - clearly apparent that they do not claim to be “Unpaid Claimant” as that term is used by Cactus. The Nichols are direct sellers to Cactus and nothing else. While we respect Cactus’ attorney and do not accuse him of any sort of unprofessional conduct whatsoever, we do believe that he has inadvertently lumped the Nichols in with “Unpaid Claimants” and now is reluctant to see the difference. In paragraph 89, Cactus makes some strong claims against the Nichols, and primarily the undersigned. Cactus’ claims that the Nichols “and their Oklahoma attorneys have knowingly defied the precedence and primary jurisdiction of the Amarillo Federal District Court . . .” regarding the interpleader case. The Nichols have never been accused of being disrespectful in any forum and neither have their attorneys. Neither of us would do that. Cactus has to agree that it has never served the Nichols with summons in that case. The “Amarillo Federal District Court” has not acquired jurisdiction over the Nichols on this dispute. See Central Contract Laborer’s Pension v. Griffee, 198 F.3d 642, 644 (7th Cir. 1999). It would be impossible for the Nichols or their attorneys to defy that Court until that Court had some sort of jurisdiction over them. Exelon Generations Co., v. Local 15, International Brotherhood of Electrical Workers, AFL-CIO, 540 F.3d 640 (7th Cir. 2008) 8 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 9 of 26 Cactus brought these same issues to the attention of the Federal District Court for the Western District of Oklahoma and that Court was considering Cactus’ motions when Cactus decided to abandon that forum and seek relief before this Honorable Court. There is another reason why Cactus Growers is so adamant about not trying the Nichols’ claim by itself in any court. They will, more than likely, lose that case and will have to pay the Nichols’ attorney fees. If they can force the Nichols into the interpleader action, then Cactus will claim it is entitled to attorney’s fee. See paragraph 93 of their Amended Complaint. Interpleader is a suit in equity. Indianapolis Colts v. Mayor and City of Baltimore, 741 F.2d 954, 957 (7thCir.1984). “[E]quity aids the vigilant and not those who slumber on their rights.” In re Internet Navigator, Inc., 293 B.R. 198, 208 (Bankr.N.D.Iowa.2003). Diligence is required for the successful invocation of virtually any equitable doctrine. Rodriguez v. Airborne Express, 265 F.3d 890 (9th Cir.2001)(citing Baldwin County Welcome Ctr. v. Brown, 466 U.S. 147, 151 (1984). Furthermore, the amount of money Cactus has interpled and claims to owe on the purchase of the 125 steers is less than the amount the Nichols are due. “Interpleader being a remedy solely for the stakeholder, it may not be used by the stakeholder as a weapon to defeat recovery from funds other than the one before the court.” Great American Ins. Co. v. Bank of Bellevue, 366 F.2d 289, 294 (8thCir.1966). This Honorable Court should not force the Nichols to litigate their claims in that interpleader action. The Nichols should be allowed to continue with the action they filed in Oklahoma. Really, that issue does not impact the debtor or the debtor’s estate. 9 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 10 of 26 ARGUMENTS AND AUTHORITIES I. THE KIOWA COUNTY LAWSUIT2 DOES NOT VIOLATE THE AUTOMATIC STAY IN FAVOR OF EASTERN LIVESTOCK BECAUSE IT IS NOT AN ACTION AGAINST THE DEBTOR OR PROPERTY OF THE DEBTOR. The Kiowa County lawsuit has no effect on Eastern’s right to claim it is owed money by Cactus or the Nichols. Eastern has never made the claim that it is owed money on the 125 steers, but it still could - technically. In the Kiowa County action, the Nichols did not name Eastern, nor did they seek any type of legal redress against Eastern or Eastern’s property. Eastern has not paid the Nichols any money for the steers. Eastern does not owe any money on the steers. Eastern had no interest in these steers. The only claim which was the subject of the Kiowa County lawsuit was a claim between the Nichols and Cactus. Whether Cactus may have thought it might owe money to Eastern was entirely inconsequential to the Nichols. The contract was exclusively between the Nichols and Cactus. Although Cactus filed a Complaint in Intervention in the Texas Interpleader and paid into that Court’s registry funds Cactus contended were due and owing on the 125 cattle, Cactus never attempted, much less obtained, service of process on the Nichols. As a result, that Court still has no jurisdiction over the Nichols. See Central Laborer’s Pension v. Griffee, supra. “The issuance and service of process is a prerequisite to the jurisdiction of a court”. 62B Am. Jur. 2d Process §4. Cactus would have this Court, and every other Court, believe that the Nichols are laying claim to a specific fund, i.e. the interpled fund. This is simply not the case. It is noteworthy that, in the Kiowa County lawsuit, the claim is simply an action on a contract, an account stated, unjust 2 Now removed to the United States District Court for the Western District of Oklahoma. 10 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 11 of 26 enrichment or implied contract against Cactus only. In that lawsuit, the Nichols are not looking to a particular fund to settle the claim. Rather, the Nichols simply claim that Cactus owes them money for the cattle which the Nichols sold and delivered to Cactus. Cactus was perfectly free to raise as a defense in the Kiowa County Lawsuit that it did not owe the money to Nichols, but rather owed the money to Eastern. A decision one way or the other would not have any effect on Eastern’s rights since Eastern is not a party to that case. See General Electric Company Corp., v. Lease Resolution Corp., 128 F.3d 1074, 1083. (7th Cir. 1997). It was not necessary for Cactus to join Eastern as a party to the litigation in order to defend on that basis. Indeed, Cactus moved the Court to dismiss the case because Eastern was a necessary party. Had the judge so ruled, we would not be having this discussion. It is again noteworthy that Cactus never bothered to obtain service of process on the Nichols in the Texas Interpleader, but rather repeatedly “invited” them to join the Texas Interpleader.3 The Nichols do not agree that they are a competing, adverse claimant or that Cactus is subject to double exposure. Accordingly, they did not agree to consent to the jurisdiction of the Amarillo Court, and Cactus never undertook the appropriate steps to subject them to that Court’s jurisdiction. Cactus should not now be heard to complain about the fact that the Nichols affirmatively seek payment of the monies owed to them by Cactus in a separate lawsuit. More importantly, Cactus is not the debtor in Bankruptcy. The Nichols seek payment for the 125 steers from any resources with which Cactus may have to pay. The Nichols certainly do not view their recovery as limited to the interpled fund simply because Cactus has decided to name them 3 Actual notice of a suit is insufficient to give a court jurisdiction absent service of process or a voluntarily appearance. 62B Am Jr. 2d Process, §5. 11 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 12 of 26 as a defendant in the Texas Interpleader. Because Eastern was never a party to the Kiowa County Lawsuit and because the Nichols have not sought to get at property of the bankrupt estate, the automatic stay simply never applied to the Kiowa County Lawsuit and Cactus is not entitled to damages, an injunction, sanctions or any other form of recovery against the Nichols. A judgment in favor of the Nichols and against Cactus in the Kiowa County lawsuit would not invade or violate any right of Eastern. Since Eastern is not a party to the Kiowa County lawsuit, the judgment would be of no consequence to Eastern or Eastern’s property. See General Electric v. Lease, supra. If Eastern ever claimed - or later claims - an interest in the steers or the proceeds, that interest would remain intact. So, the automatic stay did not preclude the Kiowa County lawsuit. 11 U.S.C §362(a)(1) precludes a broad range of “action[s] or proceeding[s] against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under title.” Nevertheless, “[t]his provision has traditionally been interpreted to include only formal legal proceedings against the debtor, and not litigation that collaterally affects the debtor.” Collier on Bankruptcy ¶362.03 (16th Ed.2010); Groner v. Miller (In re Miller), 262 B.R. 499, 503-504 (9th Cir.BAP.2001); In re Carlson, 265 B.R. 346, 348 (Bankr.D.R.I. 2001). “The automatic stay of §362(a) protects only the debtor, property of the debtor or property of the estate...it does not protect non-debtor parties or their property.” Advanced Ribbons and Office Products, Inc. v. U.S. Interstate Distributing, Inc., (In re Advanced Ribbon and Office Products, Inc.), 125 B.R. 259,263 (9th Cir.BAP 1991). “The automatic stay typically does not apply to a non- debtor (or non-creditor) third-party unless special circumstances exist. In re Prairie Trunk Railway,112 B.R. 924, 930 (Bankr.N.D.IL 1990). As a general proposition, “the automatic stay does 12 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 13 of 26 not apply to actions against third-parties or property of third-parties.” Douglas C. Baird, The Elements of Bankruptcy (1992); Bank Russells Lambert v. Credit Lyonnaise, 192 B.R. 73, 75-76 (S.D.N.Y.1996). For example actions against third party such as guarantors are not stayed by §362(a). Credit Alliance Corp. Williams, (In re Penbrook Cole Co.), 851 F.2d 119, 121 (4th Cir.1998); Otoe County National Bank v. W & P Trucking, Inc., 754 F.2d 881, 883 (10th Cir.1985). Courts may, however, enjoin an action if it would substantially interfere with a debtor’s reorganization, which this does not. Credit Alliance Corp., supra; In re Eagle-Picher Industries, 963 F.2d 855, 860 (6th Cir.1992). It seems highly unlikely that Eastern will reorganize. Nevertheless, a judgment against Cactus in the Kiowa County Lawsuit will not prohibit Eastern from claiming an interest in the cattle or the proceeds. A judgment between Cactus and the Nichols settles only issues between these two parties. Eastern remains free to bring an action against Cactus and/or the Nichols. Furthermore, actions against third-parties may be stayed under §362(a) only in “unusual circumstances,” i.e., when the debtor is essentially the real party in interest. A.H. Robins Co., Inc. v. Piccinin, 788 F.2d 994, 999 (4th Cir.1986); McCartney v. Integra National Bank North, 106 F.3d 506, 510 (3rd Cir.1997). Since the Nichols make no claim against Eastern, Eastern owes the Nichols nothing on these 125 steers, Eastern is not “the real party in interest”. Supra. The Nichols claim that Cactus - only Cactus - owes them money for the cattle. Cactus apparently claims that it might owe the Debtor for the cattle, though notably Eastern’s Trustee has not made any such claim in the 11 months the Eastern bankruptcy has been pending. Cactus’ alleged concern is that it may be subject to double liability. The Nichols question the legitimacy of this concern given the fact, again, that the Trustee has made no claim that the 125 steers were Eastern’s property for which Eastern should have been paid. And frankly Cactus’ “double liability” is not a 13 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 14 of 26 concern of this Honorable Court, so long as the Debtor is not adversely impacted. One court facing this issue specifically rejected a non-debtor invocation of the automatic stay on the basis that “the risk that the non-bankruptcy action would pose to the defendant of incurring liability to both the Debtor and to the Plaintiff creditor.” Bank Russells Lambert, supra, at 77. In rejecting application of the automatic stay, the Court stated the following which is likewise applicable to the present case: ...[The Defendant] does not explain how allowing plaintiffs to pursue their conversion claims in this Court, notwithstanding the Trustee’s pending adversary proceeding, will expose it to potential double liability. Should the Trustee’s claim be adjudicated first, the problem does not appear to arise; either the Trustee will succeed, in which case, ...a judgment in his favor in the adversary proceeding will, presumably, be binding on plaintiffs here and defeat their claims in the present case; or the Trustee would not succeed, in which case plaintiff’s success in the present case would not result in double liability on the part of [the Defendant] to both plaintiff and the trustee. BankRussells, at 79. In this case, the problem – if indeed there is one – of double exposure is Cactus’ problem and not a problem for Eastern’s bankruptcy estate. After it is determined that Cactus owes Nichols, payment to Nichols would not diminish or otherwise affect the Debtor estate. Eastern is still free to sue Cactus and/or the Nichols to recovery any interest it may later claim it has, however doubtful that may be. II. PLAINTIFF DOES NOT HAVE STANDING TO RECOVER DAMAGES, COSTS AND ATTORNEYS’ FEES FOR SUCH VIOLATION UNDER SECTION 3629K). Contrary to its assertion, the later and greater weight of authority holds that Cactus does not, in fact, have standing to assert a claim for damages due to an alleged violation of the automatic stay. 14 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 15 of 26 As Cactus concedes in its Trial Brief, any claim for damages, costs and attorney fees would be based upon 11 U.S.C. §362(k)(1) which provides as follows: Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorney’s fees, and, in appropriate circumstances, may recover punitive damages. (Emphasis added). Section 362(k) is a redraft under the Bankruptcy Reform Act and Consumer Protection Act of 2005 (“BAPCPA”) of §362(h). The case law interpreting §362(h) holds that because the statute refers only to individuals, a corporate debtor is not entitled to damages under §362(h) (or, by implication, §362(k)). In Rafter Seven Ranches, L.P. v. WNL Investments, et al. (In re Rafter Seven Ranches, L.P.), 414 B.R. 722 (10thCir.BAP.2009), the debtor appealed the district court’s refusal to award damages for alleged violations of the automatic stay by WNL. There, the Tenth Circuit BAP affirmed the district court’s finding that the Debtor was not entitled to damages under §362(h) because it was not an individual, stating: As noted by the bankruptcy court, there is a split of authority on whether the term “individual” includes only natural persons and not business entities. Five circuits have held that the term “individual” means a natural person and does not include corporations or other business entities. Two circuits have held that “individual” includes corporate debtors. The Tenth Circuit has not ruled on the issue, but at least two bankruptcy courts within this circuit have sided with the majority view. We agree with the reasoning of the majority position, which generally focuses on the “plain meaning” of §362(h). As noted by courts adopting the majority view, the Bankruptcy Code uses the term “individual” in a manner distinct from a “person” or a “corporation.” For example, the Code defines “person” to include “individual[s], partnership[s], and corporation[s].” In addition, “corporation” is defined to include an “association having a power or privilege that a 15 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 16 of 26 private corporation, but not an individual or a partnership, possesses.” Thus, “in defining ‘person,’ Congress used the word ‘individual’ to distinguish natural persons from corporations and partnerships. Other sections of the Bankruptcy Code either make the same distinction or use the word ‘individual’ in such a way that its only intended meaning could be a natural person.” Id. at 732-33. See also., Spookyworld. v. Town of Berlin (In re Spookyworld, Inc.), 346 F.3d 1 (1stCir.2003); Sosne v. Reinert & Duree, P.C. (In re Just Brakes Corporate Systems, Inc.), 108 F.3d 881 (8thCir.1997); Jove Eng’g, Inc. v. IRS, 92 F.3d 1539, 1549-53 (11thCir.1996); United States v. Arkison, (In re Cascade Roads, Inc.), 34 F.3d 756, 766 (9thCir.1994); Maritime Asbestosis Legal Clinic v. LTV Steel Co., Inc., (In re Chateaugay Corp.), 920 F.2d 183, 186-187 (2nd Cir.1990). It is acknowledged that there is a split among the circuits as to the issue of whether a corporate debtor had a right of action under §362(h); however, the majority of the bankruptcy courts have held that only a “natural person” could recover damages under §362(h), and that a corporation is not an “individual” as contemplated by §362. Although we have not found that the Seventh Circuit Court of Appeals has addressed this precise issue, other precedent from Courts within the Seventh Circuit is in accord with the Court’s view of statutory interpretation in Rafter Seven Ranches, supra. In Paloian v. Grupo Seria S.A. de C.V., 433 B.R.19, 40 (N.D.Ill.2010), the Court analyzed the split of authority and came down clearly against a corporation being entitled to relief under §362(k)(1), stating: [Section] 362 (h) provides that [a]n individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages. 11 U.S.C. § 362(h) (emphasis added). The term “individual” is not explicitly defined in the Bankruptcy Code. Consolidated Rail Corp. v. Gallatin State 16 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 17 of 26 Bank, 173 B.R. 146, 147 (N.D.Ill.1992). The Seventh Circuit has not yet addressed whether a corporation or trustee is an individual for purposes of § 362(h). The circuits to have addressed the issue are split. Five circuits have held that “individual” includes only natural persons and not corporations, trustees, or other entities. Spookyworld Inc. v. Town of Berlin (In re Spookyworld, Inc.), 346 F.3d 1, 78 (1st Cir.2003); Sosne v. Reinert & Duree, P.C. ( In re Just Brakes Corp. Sys., Inc.), 108 F.3d 881, 884-85 (8th Cir.1997); Jove Eng'g, Inc. v. IRS, 92 F.3d 1539, 1549-53 (11th Cir.1996); Havelock v. Taxel (In re Pace ), 67 F.3d 187, 192–93 (9th Cir.1995); Johnston Envtl. Corp. v. Knight (In re Goodman), 991 F.2d 613, 619-20 (9th Cir.1993); Mar. Asbestosis Legal Clinic v. LTV Steel Co. (In re Chateaugay Corp.), 920 F.2d 183, 184-86 (2d Cir.1990). Two circuits have held that “individual” is not narrowly limited but instead also includes corporate debtors. Cuffee v. Atl. Bus. & Cmty. Dev. Corp. (In re Atl. Bus. & Cmty. Corp.), 901 F.2d 325, 329 (3d Cir.1990); Budget Serv. Co. v. Better Homes of Va., Inc., 804 F.2d 289, 292 (4th Cir.1986). Courts within this circuit are similarly split, although the majority have held that a corporation is not an “individual” for purposes of § 362(h). Compare In re Midway Indus. Contractors, Inc., 178 B.R. 734, 737–38 (N.D.Ill.1995); Consolidated Rail Corp., 173 B.R. at 147; In re Glenn, 379 B.R. 760, 762–64 (Bankr.N.D.Ill.2007); In re Fashions USA Inc., 301 B.R. 528, 529 (Bankr.C.D.Ill.2003); and In re Bequette, 184 B.R. 327, 335 (Bankr.S.D.Ill.1995) (corporation cannot recover damages under § 362(h)), with Martino v. First Nat'l Bank of Harvey ( In re Garofalo's Finer Foods, Inc.), 186 B.R. 414, 437–39 (N.D.Ill.1995), and In re A & C Elec. Co., 188 B.R. 975, 979 (Bankr.N.D.Ill.1995) (corporation can recover damages under § 362(h)). This court finds persuasive the reasoning of the cited cases holding that a corporation, or a trustee for a corporate debtor's estate, cannot recover damages pursuant to § 362(h) for willful violation of the automatic stay. The Bankruptcy Code is to be construed in accordance with the plain meaning doctrine, where the plain language of the statute is conclusive “except in the rare cases in which the literal application of a statute will produce a result demonstrably at odds with the intention of its drafters.” United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (citation omitted) (internal quotation marks omitted). Although “individual” is not explicitly defined in the Bankruptcy Code, to find that the term “individual” includes “corporation” requires a tortured reading. Other definitions in the Bankruptcy Code 17 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 18 of 26 demonstrate that “individual” refers to a natural person, and not a corporation or a trustee acting in his representative capacity on behalf of the bankruptcy estate. For example, “person” is defined to include an “individual, partnership, and corporation.” 11 U.S.C. § 101(41). “Corporation” includes an “association having a power or privilege that a private corporation, but not an individual or a partnership, possesses.” Id. § 101(9)(A)(I). In defining “insider,” the Bankruptcy Code differentiates between an individual and a corporate debtor. Id. § 101(31)(A)–(B). Were the term “individual” to include “corporation” within its definition, there would be no reason to differentiate between the two throughout the Bankruptcy Code. See Consolidated Rail Corp., 173 B.R. at 147 (“If a corporation was an individual under the Bankruptcy Code, it would have been unnecessary for Congress to include the word ‘corporation’ when defining ‘person’ because the word ‘individual’ would have included corporations.”). Paloian, at 40-41. In short, the overwhelming case authority, and clearly the later and better reasoned authorities, hold that business entities are not entitled to recover damages under Section 362(k)(1). Thus, even assuming the automatic stay might be applicable to the Kiowa County Lawsuit, and assuming Cactus has standing to complain, Cactus – as a business entity rather than a natural person – would not be entitled to damages under Section 362(k). III. PLAINTIFFS ARE NOT ENTITLED TO SANCTIONS, DAMAGES, ATTORNEYS’ FEES COSTS OR ANY OTHER REMEDY WHICH MAY BE AVAILABLE UNDER SECTION 105(a) OR THE COURT’S INHERENT CONTEMPT POWER. As set forth in Proposition I, supra, Defendants and their counsel did not violate the automatic stay in favor Eastern by filing and continuing to pursue the Kiowa County Lawsuit against Cactus, because the Kiowa County lawsuit did not seek legal redress against Eastern, Eastern’s property or property of the bankruptcy estate. Even so, once this Court stayed the Kiowa County lawsuit (which was removed to the Western District of Oklahoma), the Nichols have ceased to 18 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 19 of 26 litigate against Cactus, though the Nichols continue to steadfastly maintain that the automatic stay should not apply to that matter. The precise issue presented for this Court’s resolution was also presented to the United States Court of Appeals for the Eighth Circuit in Sosne v. Reinert & Duree, P.C. (In re Just Brakes Corporate Systems, Inc.), 108 F.3d 881 (8thCir.1997). There, a Chapter 7 Trustee filed an adversary proceeding seeking to avoid a debtor’s prior assignment of a trademark as a fraudulent conveyance and to recover damages for a willful violation of the automatic stay. The Court of Appeals held that Section 362(h) authorizing an award of actual damages to “individuals” injured by an automatic stay violation does not apply to corporate debtors. The Trustee, in the alternative, sought to recover compensatory damages under the broad powers of Section 105(a) which grants courts the power to “issue any order, process or judgment that is necessary or appropriate to carry out the provisions of this title.” In rejecting the availability of Section 105(a) as a basis for compensatory damages, the Court stated as follows: [T]he power to punish for a statutory violation is a criminal law power. It must be expressly conferred by Congress, and its exercise is often subject to the procedural safeguards that protect the criminally accused. Even the judicial power to punish for criminal contempt of a court order is carefully distinguished from the power to remedy a violation of that order through civil contempt. See, e.g. Shillitani v. United States, 384 U.S. 364, 368-372, 86 S.Ct. 1531, 1534-36, 16 L.Ed.2d 622 (1966); Combs v. Ryan’s Coal Co., 785 f.2d 970, 981 (11th Cir.), cert. denied, 479 U.S. 853, 107 S.Ct. 187, 93 L.Ed.2d 120 (1986). We conclude that Congress has conferred no power to punish for a violation of § 362(a), other than the punitive damage authority in § 362(h). On the other hand, we agree that bankruptcy courts have broad equitable powers to remedy violations of the automatic stay that injure a corporate debtor’s estate. Many courts have said that those who violate the automatic stay “may be held in contempt.” In re 19 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 20 of 26 Computer Commun., Inc., 824 F.2d 725, 731 (9thCir.1987). Calling this remedial power contempt overlooks a serious question whether bankruptcy courts have contempt powers after the 1984 Amendments. Compare In re Sequoia Auto Brokers, Ltd., 827 F.2d 1281, 1290 (9th Cir.1987), with In re Skinner, 917 F.2d 444, 448-50 (10thCir.1990). More narrowly, it overlooks the fact that contempt is a remedy for violating court orders, not statutes. In re Calstar, 159 B.R. at 257-58. Finally, even if civil contempt power exists, we see little if any need to resort to it in this context because § 362(a), buttressed by § 105(a), confers broad equitable power to remedy adverse effects of automatic stay violations. See Celotex, 514 U.S. at & n. 6, 115 S.Ct. at 1498-99 & n. 6; In re Taco Ed’s, Inc., 63 B.R. 913, 931-32 (Bankr.N.D.Ohio.1986). Just Brakes, at 885. The Court concluded: Damages are not an equitable remedy. Because Congress in § 362(h) did not grant authority to award damages to corporate debtors, only compensatory equitable remedies are appropriate. Just Brakes, at 885, n. 5. Cf. In re Pace, 67 F.3d 187, 193(9thCir.1995)(Damages in the form of costs and attorneys fees that are not available to non-individuals under § 362(h) are available under § 105(a) as a sanction for ordinary civil contempt); In re Chateaugay Corp., supra, at 186-87 (“For other debtors who are not natural persons, contempt proceedings are the proper means of compensation and punishment for willful violations of the automatic stay”); Jove Engineering, supra, (“We conclude § 105(a) grants courts independent statutory powers to aware monetary and other forms of relief for automatic stay violations to the extent such awards are ‘necessary or appropriate’ to carry out the provisions of the Bankruptcy Code.”). As set forth ad nauseam herein, the Kiowa County Lawsuit was not brought against Eastern, Eastern’s property or property of the bankruptcy estate. Even as of this late date, the Trustee has made no claim that the proceeds of the sale of the 125 steers belong to the Estate. Cactus never 20 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 21 of 26 served the Nichols with legal process in the Texas Interpleader, and accordingly, the Nichols were never subject to the jurisdiction of the court in Amarillo. Even if this Court were to ultimately conclude that the automatic stay in place for the protection of Eastern will protect Cactus in the Kiowa County Lawsuit, it simply cannot be said that the Nichols or their counsel engaged in a “willful” violation of the stay in view of the clear weight of authority holding that the automatic stay does not apply to litigation which does not involve a non-debtor, property of the non-debtor or property the bankruptcy estate. As the Court said in Just Brakes, supra, this Court does have broad equitable powers to remedy violations of the automatic stay that injure a debtor’s estate. Nothing that the Nichols or their counsel have done have injured Eastern’s estate, nor could it have ultimately injured Eastern’s estate. Assuming the Kiowa County Lawsuit had been permitted to proceed, if Cactus is right and owes Eastern for the 125 steers, they would have won the Kiowa County Lawsuit because they owed the Nichols nothing and owed it all to Eastern. This was (and apparently is) its defense. If the Nichols had won, then Eastern could later make a claim against Cactus (or from Nichols), if Eastern had any interest in the money. In other words, Eastern would not have been bound by a judgment in the Kiowa County Lawsuit. That lawsuit simply never affected Eastern’s rights, and whether it subjects Cactus to “double” liability is simply of no consequence to this Honorable Court. The Court in Bank Brussels Lambert, supra, managed a similar – albeit not identical – situation, rejecting as a reason for applying the automatic stay to bar prosecution of the plaintiff’s conversion claims, the risk which a non-bankruptcy action would pose to the defendant of incurring liability both to the debtor and to the plaintiff creditor. There, the plaintiffs and Chase Manhattan Bank (“Chase”) entered into a revolving credit agreement with AroChem (AroChem or debtor). As 21 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 22 of 26 security for the agreement, the plaintiffs and Chase perfected a security interest in the assets of AroChem, including accounts receivable and the proceeds thereof. Credit Lyonnais entered into a lending relationship with AroChem, Ltd., a company related to AroChem. Accounts receivable of AroChem, it was alleged, were diverted to AroChem, Ltd. and Credit Lyonnais. The plaintiff filed a lawsuit against Credit Lyonnais, for conversion of AroChem’s accounts receivable and seeking damages in the amount of about $123 million, the amount of the accounts receivable alleged to have been diverted. Following the institution of the lawsuit, AroChem filed a Chapter 11 bankruptcy proceeding, which was subsequently converted to a Chapter 7 proceeding. The debtors’ trustee commenced an adversary proceeding against Chase, the plaintiffs and others, seeking to avoid the security interest in the debtor’s accounts receivable granted to the plaintiffs and Chase, and to have it “preserved for the benefit of the bankruptcy estate....” Id., at 75. The plaintiffs did not obtain or seek an order lifting the stay prior to commencing the damage suit. Credit Lyonnais moved to dismiss the complaint because, it claimed, it was barred by the automatic stay provisions of the Bankruptcy Code. The plaintiffs argued that Credit Lyonnais did not have standing to raise the automatic stay provision of the Code. Though disagreeing with the plaintiffs in a general sense, the court acknowledged that usually “the automatic stay does not apply to actions against third parties or property of third parties,” Id., at 76 (citing Douglas G. Baird, The Elements of Bankruptcy 190 (1992)), as was the case against Credit Lyonnias in which the plaintiffs sought damages only from third parties and no relief against the debtor’s estate. Credit Lyonnais argued, however, that the case was not subject to the general rule because it arose out of the alleged appropriation of the debtor’s accounts receivable, so that the plaintiff’s claims should be characterized as an “act to obtain possession of property of the estate.” Though 22 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 23 of 26 recognizing that a claim for conversion focuses on the appropriation of specific funds (unlike the present situation), the Court nevertheless rejected Credit Lyonnais’ argument. The Court decided against Credit Lyonnais because the receivables were not in the possession of the obligors or the debtor’s trustee. The court noted that available case law suggested that the automatic stay did not bar prosecution of the plaintiff’s conversion claims because the bankruptcy estate included any interest in property that the trustee recovers, but that such property was not to be considered property of the estate until it was recovered. Accordingly, since the accounts receivable had not been recovered, they could not be considered property of the debtor’s estate; hence, the automatic stay did not apply to it. Credit Lyonnais also suggested, as a reason for applying the automatic stay to bar prosecution of the plaintiff’s conversion claims, the risk which a non-bankruptcy action would pose to the defendant of incurring liability both to the debtor and to the plaintiff creditor. The court found the argument non-persuasive, stating: Further, Credit Lyonnais does not explain how allowing plaintiffs to pursue their conversion claims in this Court, notwithstanding the Trustee’s pending adversary proceeding, will expose it to potential double liability. Should the Trustee’s claim be adjudicated first, the problem does not appear to arise: either the Trustee will succeed, in which case, since plaintiffs (and Chase) are parties to the Trustee’s adversary proceeding, a judgment in his favor in the adversary proceeding will, presumably, be binding on plaintiff’s here and defeat their conversion claims in the present case; or the Trustee will not succeed, in which case plaintiffs success in the present case will not result in double liability on the part of Credit Lyonnais to both plaintiffs and the Trustee. Should the present action be adjudicated first, and should the plaintiffs fail on their conversion claims, then, once more, the double liability problem does not arise. That problem could arguably arise, however, in the event that, prior to adjudication of the Trustee’s 23 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 24 of 26 adversary proceeding, plaintiffs succeed in their conversion claims in the present case. Such a situation, however, is not new to claims for conversion, which are often premised on a right to possession, rather than ownership, of the thing converted (so that, as here, the potentially conflicting claims may turn on different sets fo facts occurring at different times). Internal citation omitted. Should the situation arise in which plaintiffs claims are found to have established their conversion claims while the Trustee’s claim that plaintiffs’ (and Chase’s) claimed security interest is to be preserved for the benefit of the Debtors’ estates remains undetermined, this Court could, among other things, stay proceedings before it pending resolution of the Trustee’s claim in this Court (should the Trustee intervene), or in the Trustee’s adversary proceeding. Internal cite omitted. Any recovered proceeds under this Court’s judgment might possibly be retained by this Court pending such a resolution. The present situation, in short, does not pose unmanageable risk of Credit Lyonnais having to satisfy two judgments relating to the same accounts receivable. Id., at 79. Accordingly, the court held that the automatic stay did not operate to bar prosecution of the plaintiff’s claim against Credit Lyonnais. The facts in this case are even more compelling because the Nichols were not seeking recovery from a specific fund in the possession of a non-debtor, as in the Bank Brussels case. Even there, where the trustee had filed an adversary proceeding attempting to get at the specific fund at issue, the court found that the plaintiff’s claim could proceed, since the property at issue was not subject to the automatic stay. Furthermore, it appears that virtually every – if not every – case cited by Plaintiff in support of its quest for sanctions and/or damages is inapposite. In most of those cases, it was actually the debtor or the trustee seeking damages for violation or the automatic stay because action had been taken against the debtor or property or the estate, unlike the situation before this Court. Where, as here, there is abundant authority to support the Nichols’ decision to proceed 24 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 25 of 26 directly against Cactus for money which they are owed by Cactus, it simply cannot be said that a “willful violation” occurred. There has been no violation, willful or otherwise, of the automatic stay. Without a willful violation, Plaintiffs are not entitled to recover damages, sanctions, costs, attorney fees or any other form of relief. CONCLUSION For the reasons set forth above, Plaintiffs are not entitled to any relief under 11 U.S.C. § 362(k), 11 U.S.C. §105(a) or the inherent authority of this honorable court, and their Complaint must be DISMISSED. Respectfully submitted, /s/Jack S. Dawson Jack S. Dawson, OBA #2235 100 Park Avenue, 2nd Floor Oklahoma City, OK 73102 Telephone: (405) 236-8541 Facsimile: (405) 235-8130 firstname.lastname@example.org Attorney for Defendant CERTIFICATE OF SERVICE I hereby certify that on November 15, 2011, I caused a true and correct copy of the foregoing document to be electronically submitted with the clerk of the U.S. District Court, Bankruptcy Court, Southern District of Indiana, using the electronic case filing system of the court and electronically mailed to the parties registered or otherwise entitled to receive electronic notices in this case pursuant to the Electronic Filing Procedures in this District, and via electronic mail directly to: John H. Lovell, Esq. LOVELL, LOVELL, NEWSOME & ISERN, L.L.P. 112 West 8th Ave., Ste. 1000 Amarillo, TX 79101-2314 email@example.com Attorney for Cactus Growers, Inc. 25 Case 11-59087 Doc 41 Filed 11/15/11 EOD 11/15/11 16:36:56 Pg 26 of 26 Terry Hall, Esq. Kevin Toner, Esq. BAKER & DANIELS, L.L.P. 300 N. Meridian Street, Ste. 2700 Indianapolis, IN 46204 firstname.lastname@example.org email@example.com Attorneys for James Knauer Trustee of Eastern Livestock, Co., LLC. /s/ Jack S. Dawson 26
"1 UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN "