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In re Tri-State Financial, LLC

United States Court of Appeals, Eighth Circuit

March 16, 2018

In re: Tri-State Financial, LLC Debtor
v.
Centris Federal Credit Union; Thomas D. Stalnaker, Trustee Appellees George Allison; Frank Cernik; Phyllis Cernik; Chris Daniel; Amy Daniel; Distefano Family LTD Partnership; Timothy Jackes; George Kramer; Bernie Marquardt; John Hoich; Denise Hoich;Appellants

          Submitted: November 16, 2017

          Appeal from United States District Court for the District of Nebraska - Omaha

          Before BENTON, SHEPHERD, and KELLY, Circuit Judges.

          KELLY, Circuit Judge.

          A group of investors appeals after the district court[1] affirmed the bankruptcy court's[2] finding that funds the investors transferred to Tri-State Financial, LLC (TSF) are part of TSF's Chapter 7 bankruptcy estate. We affirm.

         I. Background

         After 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.

         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)[3] 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.

         United 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.

         Centris 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.

         On 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 bankruptcy estate.

         Omaha 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.

         On 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). ...


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