Submitted: November 16, 2017
from United States District Court for the District of
Nebraska - Omaha
BENTON, SHEPHERD, and KELLY, Circuit Judges.
group of investors appeals after the district
court affirmed the bankruptcy
court's finding that funds the investors
transferred to Tri-State Financial, LLC (TSF) are part of
TSF's Chapter 7 bankruptcy estate. We affirm.
Tri-State Ethanol (TSE) filed for Chapter 11 bankruptcy
protection, a group of investors (Omaha Group) formed TSF, a
shell corporation designed solely to finance TSE's
continued operations until a Chapter 11 plan could be
approved. Omaha Group transferred $2 million to TSF; TSF then
transferred nearly $800, 000 of those funds to TSE and $1.19
million to one of TSE's vendors. TSE subsequently
converted its bankruptcy case into one under Chapter 7, and
TSF filed claims seeking to recover the $2 million from TSE.
TSF's claim to the nearly $800, 000 was treated as a
first-priority administrative claim, and its claim to the
remaining $1.19 million was treated as a general unsecured
claim subordinated to all other unsecured claims. The
administrative claim was approved, and TSE's trustee paid
the nearly $800, 000 to TSF.
later filed for Chapter 11 bankruptcy protection, and its
trustee was able to recover the $1.19 million from TSE. Omaha
Group informed TSF's trustee the funds were not part of
TSF's bankruptcy estate, and demanded their return.
TSF's trustee initiated this adversarial proceeding to
determine whether the $1.19 million is part of TSF's
bankruptcy estate. Omaha Group argues the funds are not
estate property because TSF was merely holding them in trust.
TSF's trustee and Centris Federal Credit Union
(Centris) assert the funds are part of the
bankruptcy estate. They also contend that various Omaha Group
investors have released any claims they may have had to the
funds, and that Omaha Group should be judicially estopped
from claiming any interest in them.
States Bankruptcy Judge Timothy J. Mahoney held a hearing at
which various TSF business records were introduced. James
Jandrain, who is Chairman of TSF's Board of Managers and
an Omaha Group investor, testified that Omaha Group
transferred the funds to TSF with the understanding they
would be held in trust. Two TSF bookkeepers testified that
TSF was formed for the sole purpose of funding TSE while it
was in bankruptcy. A forensic accountant opined that the
funds should have been treated as equity. Judge Mahoney found
that TSF held the $1.19 million in trust, and thus, that the
funds were not part of its bankruptcy estate.
and TSF's trustee appealed to the Bankruptcy Appellate
Panel (BAP), which reversed and remanded the case for further
proceedings. In re Tri-State Fin., LLC, 512 B.R.
209, 210-12 (8th Cir. B.A.P. 2014). The BAP observed that
Judge Mahoney had not resolved the judicial estoppel and
release issues. Id. at 211-12. The BAP declined to
"interpret [Judge Mahoney's] silence as an implicit
rejection" of Centris and TSF's arguments on those
issues. Id. at 212. It instead decided to give
"the bankruptcy court an opportunity to consider those
arguments" in the first instance and "to explain
its reason for accepting or rejecting them."
Id. In light of this decision, the BAP also declined
to reach the issue of whether the funds were estate property,
as "any consideration of [that] issue [was]
premature." Id. at 211.
remand, the case was reassigned to United States Bankruptcy
Judge Shon Hastings because Judge Mahoney had since retired.
Judge Hastings entered an order finding that the $1.19
million was part of TSF's bankruptcy estate.
Specifically, Judge Hastings concluded that Omaha Group had
not shown by clear and convincing evidence that the funds
were held by TSF in a trust. Instead, she concluded that,
more likely than not, Omaha Group initially intended the $2
million to be a capital contribution and assumed-but did not
take necessary steps to guarantee-they would receive equity
shares in exchange. Judge Hastings found that the funds were
later treated as a loan after TSE's Chapter 11 plan was
not approved and TSF shareholders opposed treating the $2
million as capital. Relying primarily on the documentary
evidence and discounting the lay witnesses' testimony as
"self-serving, " Judge Hastings found that the
$1.19 million was loan proceeds and thus part of the
Group appealed to the BAP, arguing that Judge Hastings had
erred by revisiting Judge Mahoney's factual findings, and
had thereby exceeded the scope of the BAP's mandate and
violated the law-of-the-case doctrine. Omaha Group also took
issue with the fact that Judge Hastings had made factual
findings without first certifying her familiarity with the
record and giving the parties an opportunity to recall
witnesses whose testimony was both material and disputed, a
procedure required of successor judges under Fed.R.Civ.P. 63
and Fed.R.Bankr.P. 9028. The BAP agreed that Judge Hastings
had not complied with Rules 63 and 9028, and remanded the
case with instructions to comply with those rules on remand.
In re Tri-State Fin., LLC, 519 B.R. 759, 765-67 (8th
Cir. B.A.P. 2014). The BAP noted, however, that Judge
Hastings had not exceeded the scope of its first mandate, as
it had not explicitly or implicitly adopted any of Judge
Mahoney's findings when it remanded the case to the
bankruptcy court the first time. Id. at 765.
remand, Judge Hastings entered an order certifying her
familiarity with the record and directing the parties to
identify any witnesses they sought to recall. No one took
advantage of that opportunity. Judge Hastings then entered an
order in which she again concluded that Omaha Group had not
shown that the funds were held in a trust, and that the $1.9
million was thus part of TSF's bankruptcy estate. In
reTri-State Fin., LLC, 526 B.R. 311, 315-29
(Bankr. D. Neb. 2015). ...