United States District Court, D. Nebraska
IN THE MATTER OF: KORLEY B. SEARS, (Chapter 11), Debtor. No. BK 10-40277
MEMORANDUM AND ORDER
RICHARD G. KOPF, Senior District Judge.
This is an appeal from a judgment entered by the United States Bankruptcy Court for the District of Nebraska on August 29, 2014, in a Chapter 11 proceeding ( In re Sears, Bankruptcy Case No. 10-40277, Doc. 405). The bankruptcy court granted summary judgment in favor of the appellees/claimants, Rhett R. Sears and Rhett R. Sears Revocable Trust (collectively, "Rhett"), Ronald H. Sears and Ronald H. Sears Trust (collectively, "Ron"), and Dane Sears ("Dane"), and allowed their claims over the objections of the debtor/appellant, Korley B. Sears ("Korley"). Having carefully reviewed the parties' briefs and the designated record on appeal,  I conclude that the bankruptcy court's judgment should be affirmed.
The facts of the case, as summarized by the bankruptcy court in a memorandum and order that was also entered on August 29, 2014, are as follows:
The claimants in this case, who are members of the debtor's family, sold their interests in AFY, Inc., a company that operated a cattle feedyard, to the corporation and to Korley Sears in 2007 in exchange for promissory notes from Korley and a security interest in the shares. In 2010, AFY and Korley each filed for bankruptcy protection. The claimants filed proofs of claim for more than $5.3 million in AFY's bankruptcy case for the amounts owed to them for the sale of their stock. AFY's two shareholders, Korley and Robert Sears, objected to the claims, arguing that only Korley and not AFY was liable for the debt. After a hearing on affidavit evidence, the claim objections were overruled. The court found that the contract for the sale of the claimants' interest clearly and unambiguously showed that both AFY and Korley were the purchasers. The claimants' proof of claim was entitled to prima facie validity, and no evidence was presented to challenge either AFY's liability on the debt or the amount of the claims. There also was no evidence to support Robert and Korley's theory that the claimants had breached the contract, thereby excusing AFY's performance and liability. On appeal, the Bankruptcy Appellate Panel affirmed the decision of the bankruptcy court, holding that AFY was liable for the debt under the unambiguous terms of the stock sale contract, the amount of the debt was undisputed, and Robert and Korley's defenses were unavailing. Sears v. Sears (In re AFY, Inc.), 463 B.R. 483 (B.A.P. 8th Cir. 2012). Robert and Korley then appealed to the Eighth Circuit, which dismissed the appeal without reaching the merits after finding that neither of them had standing to appeal because they held, at most, only a derivative interest and were not "persons aggrieved" as they would not be directly and adversely affected pecuniarily by the bankruptcy court's order. Sears v. Sears (In re AFY, Inc.), 733 F.3d 791 (8th Cir. 2013). The rulings left intact the substance of the underlying bankruptcy court orders.
( In re Sears, Bankruptcy Case No. 10-40277, Doc. 403, at CM/ECF p. 1). The claimants filed similar proofs of claim in Korley's bankruptcy case.
In AFY's bankruptcy case, Korley and Robert Sears ("Robert") filed the following objections to the claims of Ron, Rhett, and Dane:
1. Claims Nos. 8, 9, and 10 of Ron, Rhett, and Dane (collectively "Sears Family Claimants") are unenforceable against AFY or its property and do not state any claims for which relief can be granted.
2. By Claims Nos. 8, 9, and 10, the Sears Family Claimants seek to recover from AFY's estate based on the Resolution for Stock Redemption contained in AFY's 2008 Minutes of its annual meeting (the "Resolution") being an enforceable contract. The Resolution is not an enforceable contract.
3. The Claims of the Sears Family Claimants are based upon the Sears Family Claimants being third party beneficiaries of the Resolution. The Sears Family Claimants are at most incidental beneficiaries of the Resolution and not creditor third party beneficiaries of the Resolution.
4. Alternatively, even if the Resolution is an enforceable contract in which the Sears Family Claimants are creditor third party beneficiaries, which Robert and Korley expressly deny, the Sears Family Claimants materially breached the Sears Family Claimant's implied duties of good faith and fair dealing in the performance and enforcement of that contract, thus excusing AFY from any performance and discharging AFY from any liability. Such duties of good faith and fair dealing required the Sears Family Claimants not to do anything that injured the right of AFY to receive the benefit of such contract. The Sears Family Claimants breached such duties by opposing all the efforts of AFY to effect a Chapter 11 plan and by collaborating with the Chapter 11 Trustee that the Sears Family Claimants had caused to be appointed.
5. Alternatively, even if the Resolution resulted in the Sears Family Claimants being creditor third party beneficiaries under an enforceable contract, which Robert and Korley expressly deny, the Sears Family Claimants materially breached the contract by unjustifiably preventing, hindering, making impossible the performance by AFY of its obligations under the contract by opposing all efforts of AFY to effect a Chapter 11 plan, and by collaborating with the Chapter 11 Trustee that the Sears Family Claimants had caused to be appointed.
6. By Claims Nos. 8, 9, and 10, the Sears Family Claimants seek to recover from AFY's estate based upon a Stock Sales Agreement under which the Sears Family Claimants sold their shares of stock in AFY to Korley. AFY purchased no shares of stock in AFY under the Stock Sales Agreement and received none from the Sears Family Claimants. Moreover, after the closing of the Stock Sales Agreement, the Stock Sales Agreement was no longer an enforceable agreement either because it was merged into the promissory notes described below in Paragraph 7, or otherwise.
7. By Claims Nos. 8, 9, and 10, the Sears Family Claimants seek to recover from AFY's estate based on Promissory Note(s) dated June 22, 2007 in the original principal amounts of their respective Claims. AFY was not a party to any of those Promissory Notes and did not sign on any of those Promissory Notes. The Nebraska Uniform Commercial Code in § 3-401 provides that a person is not liable on notes such person did not sign, nor was AFY obligated under the Stock Sales Agreement to sign any of those notes.
8. The parol evidence rule, which is a rule of substantive law, not evidence, bars any claim that AFY is liable on any of the Promissory Notes.
9. The Statute of Frauds in Neb. Rev. Stat. 36[-]202(2), bars proof that AFY is liable on any of the Promissory Notes.
10. The Sears Family Claimants hold no security interest or liens on any right of Korley to enforce the Resolution.
11. Allowance of Claims Nos. 8, 9, and 10, which are for stock in AFY and not for goods or services furnished to AFY, but are for sales of equity in AFY, would pay equity ahead of debt, or would pay some equity ahead of other equity. That is contrary to bankruptcy law.
12. As of the time of the Resolution in 2008, the directors and shareholders of AFY intended to redeem from Korley the shares Korley owned and retire shares Korley had purchased in 2007 from the Sears Family Claimants. The directors and members of AFY had no intention to confer any enforceable rights or benefits on the Sears Family Claimants.
13. The principal purpose of any contract that resulted from the Resolution was frustrated by the acts and omissions of the Sears Family Claimants, and when any contract resulting from the Resolution was made, neither AFY, Robert, Korley, nor Ron, Rhett, or Dane contemplated the subsequent events, including without limitation, withdrawal of AFY's operating line of credit, a bankruptcy case, conversion of AFY's Chapter 11 case to Chapter 7, or liquidation of AFY's bankruptcy estate.
( In re AFY, Inc., Bankruptcy Case No. 10-40875, Doc. 366, at CM/ECF pp. 2-4).
In overruling these objections, the bankruptcy court stated:
The Sears Family Members filed their claims for sums due pursuant to a June 20, 2007, Stock Sale Agreement. The claim is made as both a direct obligation under the agreement and related documentation, and as third-party beneficiaries of an agreement between AFY and Korley Sears.
Robert and Korley's objection to the Sears Family Members' claims was filed "on Behalf of AFY's Estate, Themselves, and Their Estates." They believe that the Sears Family Members' claims should be disallowed in their entirety because, according to Robert and Korley, AFY is not liable for any sums due under the Stock Sale Agreement. Specifically, only Korley signed the promissory notes resulting from the Stock Sale Agreement. Robert and Korley feel that the Stock Sale Agreement should be interpreted on its face and that parol evidence should not be used. As an alternative theory, Robert and Korley argue that even if AFY had some liability to the Sears Family Members under the agreement, they breached their implied duties of good faith and fair dealing in the performance and enforcement of that contract, thus excusing AFY from performance and liability. The asserted breach was by opposing the early efforts of AFY in this Chapter 11 case and collaborating with the Chapter 11 trustee.
The trustee has not joined in Robert and Korley's objection.
As a threshold matter, it is clear that Robert and Korley do not have standing as purported shareholders of AFY to make objections on behalf of AFY's estate. The trustee has been appointed to administer the bankruptcy estate and is the only person authorized to take action on behalf of the estate. On the other hand, Robert and Korley may act in their individual capacities. A party in interest, including a creditor and an equity security holder "may raise and may appear and be heard on any issue in a case under this chapter." 11 U.S.C. § 1109(b). Accordingly, Robert and Korley have standing to object to the Sears Family Members' claims on their own behalf.
Addressing the merits of the objection, the proof of claim attaches a June 20, 2007, Stock Sale Agreement, which agreement is signed by, among others, the Sears Family Members as sellers and AFY, Inc. (by Robert A. Sears as president and Korley B. Sears as vice president), and Korley B. Sears, as buyers. The first paragraph of the agreement identifies each of the sellers and the number of shares of AFY that each seller is selling. Paragraph 2 states in its entirety:
2. Buyers. The Buyers purchasing all interests described in paragraph 1 from the Sellers are AFY, Inc., a Nebraska corporation formerly known as Ainsworth Feed Yards Company, Inc., and Korley B. Sears.
Paragraph 4 describes the sale price "to be paid by Buyers to Sellers..." and the manner in which the payment will be made.
Paragraph 7.1 provides in pertinent part that "the Buyer(s) shall execute, for each Seller, a Promissory Note, and a Pledge and Security Agreement."
As it turned out, the promissory notes executed pursuant to paragraph 7.1 of the agreement were executed only by Korley, and not by AFY.
Interestingly, all parties assert that the Stock Sale Agreement is clear and unambiguous on its face. The Sears Family Members point out the foregoing provisions which identify AFY, Inc. as a buyer along with Korley. Mr. Strasheim [the attorney representing Korley Robert] argues that the agreement requires the "Buyer(s)" to execute a promissory note, and only Korley executed a note. Therefore, he believes the agreement is clear that AFY is not a buyer since it did not execute a note.
I agree with the claimants that the contract is clear and unambiguous, and that AFY is a "Buyer" under the Stock Sale Agreement. In fact, it is hard to imagine a contract being more clear and unambiguous than this one which, in paragraph 2, defines "Buyers" as "AFY, Inc., a Nebraska corporation formerly known as Ainsworth Feedyards Company, Inc., and Korley B. Sears." It is not necessary to look to extrinsic documents, such as the promissory notes and corporate resolutions, to determine that AFY is a buyer under the contract having liability for the purchase price. Also attached to the proof of claim were certain minutes of a 2008 annual meeting of the shareholders of AFY. Those shareholder minutes clearly establish a subsequent agreement to redeem the shares involved in the transaction, but do not alter who is contractually liable to pay to the sellers the purchase price for the shares under the Stock Sale Agreement.
Accordingly, the proof of claim filed by the Sears Family Members is entitled to prima facie validity. Dove-Nation v. eCast Settlement Corp. (In re Dove-Nation), 318 B.R. 147, 152 (B.A.P. 8th Cir. 2004); Fed.R.Bankr.P. 3001(f). Robert and Korley's objection fails to overcome the presumption of validity. Absolutely no evidence was presented to support the theory that AFY is not liable for the purchase price. Further, absolutely no evidence was presented to dispute the balance due to each of the claimants. Finally, no evidence was presented to support the assertion that the Sears Family Members had or breached any duty in failing to support Robert and Korley's efforts and in supporting the efforts of the trustee. McDaniel v. Riverside Cnty. Dep't of Child Support Servs. (In re McDaniel), 246 B.R. 531, 533 (B.A.P. 8th Cir. 2001) ("substantial evidence" is required to rebut proof of claim's presumptive validity); Vomhof v. United States, 20 B.R. 191, 192 (D. Minn. 1997) ("Substantial evidence to support an objection requires financial information and factual arguments, not legal rhetoric.")
( In re AFY, Inc., Bankruptcy Case No. 10-40875, Doc. 493, at 4-5) (emphasis in original; footnote omitted).
On appeal, the Bankruptcy Appellate Panel "agree[d] with the bankruptcy court's determination that Robert and Korley failed to overcome the presumptive validity of the proofs of claim filed by the Sears Family Members, " In re AFY, Inc., 463 B.R. 483, 489 (B.A.P. 8th Cir. 2012), and concluded that "[t]he plain language of the Stock Sales Agreement imposes liability on the Debtor for the deferred purchase price and the Debtor's liability was not discharged under any of the defenses submitted by Robert and Korley, " id. Regarding AFY's liability, the panel stated:
The parties agree that the Stock Sale Agreement is the controlling document, that it is unambiguous and that Nebraska law governs. The parties disagree, however, regarding whether the Debtor is liable under the agreement. According to Robert and Korley, the "the unambiguous Stock [Sale] Agreement on which [the Sears Family Members] base their claim[s] does not provide that [the Debtor] has any... liability." The Sears Family Members maintain, however, that the Stock Sale Agreement plainly provides that the Debtor is liable for the deferred purchase price.
We review the bankruptcy court's interpretation of the unambiguous contract de novo and we do not consider extrinsic evidence of intent. See ABC Elec., Inc. v. Neb. Beef Ltd., 249 F.3d 762, 766-67 (8th Cir. 2001); Davenport Ltd. P'ship v. 75th & Dodge I, L.P., 279 Neb. 615, 780 N.W.2d 416, 422 (2010) ("A contract written in clear and unambiguous language is not subject to interpretation or construction and must be enforced according to its terms."). The fact that each party claims the Stock Sale Agreement unambiguously supports its position does not preclude us from finding unambiguity. Neb. Pub. Power Dist. v. MidAmerican Energy Co., 234 F.3d 1032, 1041 (8th Cir. 2000) (citation omitted); Davenport, 780 N.W.2d at 422 ("A court interpreting a contract must first determine as a matter of law whether the contract is ambiguous.").
The bankruptcy court agreed with the parties that the Stock Sale Agreement is unambiguous. It also agreed with the Sears Family Members that the Debtor was liable as the "Buyer" under the agreement. We agree with the bankruptcy court. In the plainest of language, Paragraph 2 defines the Debtor as one of the buyers. In Paragraph 4, it explains that the purchase price is "to be paid by Buyers to Sellers...." Likewise, the Debtor signed the Stock Sale Agreement as a buyer.
Among other arguments, Robert and Korley maintain that by using the term "Buyer(s), " the Stock Sale Agreement did not require both Korley and the Debtor to sign promissory notes and it only imposes liability for the purchase price on the person or entity who does sign a promissory note. [FN3. One of the other arguments made by Robert and Korley is that the reading of the Stock Sale Agreement requested by the Sears Family Members requires this Court to look at Paragraphs 2 and 4 in isolation and would change the meaning of the agreement as a whole. We disagree. Paragraphs 2 and 4, imposing liability on the Debtor, are consistent with the agreement in its entirety.] Paragraph 7 of the Stock Sale Agreement explains that "Buyer(s) shall execute, for each Seller, a Promissory Note and a Pledge and Security Agreement." According to Robert and Korley, the Debtor is not liable to the Sears Family Members because only Korley, and not the Debtor, executed promissory notes.
We disagree. The four corners of the Stock Sale Agreement unambiguously provide that the Debtor is liable thereunder. Nowhere does the agreement state that a party will be released from liability if it fails to sign a promissory note. The arguments by Robert and Korley amount to an attempt to create an ambiguity in a document that they have already admitted to be unambiguous, which we will not allow. Moreover, it is curious that Robert and Korley asked the bankruptcy court and this Court to refer to extrinsic evidence, the promissory notes, to interpret an unambiguous contract.
We note further that Robert and Korley did not provide evidence to dispute the balance owed to each of the Sears Family Members. The bankruptcy court properly allowed the claims in the amount for which they were filed.
Id. at 489-90.
The Bankruptcy Appellate Panel also discussed two defenses that were asserted by Korley and Robert. It first discussed certain post-petition breaches that allegedly were committed by the claimants:
Robert and Korley maintain that any liability of the Debtor under the Stock Sale Agreement was discharged as a matter of law based on the Sears Family Members' alleged breach of their implied duties of good faith and fair dealing and Ron Sears's and Rhett Sears's alleged express duties of loyalty to the Debtor set forth in the Stock Sale Agreement. As grounds for such breaches, Robert and Korley cite to post-bankruptcy support by the Sears Family Members of the Trustee's efforts in assuming executory contracts and closing purchase agreements that were commenced pre-petition. They also refer to the Sears Family Members' "opposition to the Chapter 11 case of AFY, " their sponsorship of the Debtor's liquidation and their support for other efforts of the Trustee. Assuming, for the sake of argument, that these duties existed in the first instance, Robert and Korley have failed to show how they were breached in a way that would merit disallowance of the claims. They cite to only post-petition actions of the Sears Family Members as breaches of their duties. But claims in bankruptcy, such as the claims of the Sears Family Members that are at issue here, are determined as of the bankruptcy petition date. See 11 ...