East Coast Foods, Inc. v. Development Specialists, Inc. (In re: East Coast Foods, Inc.)
- Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
- 1 year 5 months ago
- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- BAP No. CC-23-1034-FLS (9th Circuit, Jul 19,2023) Not Published
- Tag(s):
-
- Ruling:
- The U.S. Bankruptcy Appellate Panel of the Ninth Circuit held a bankruptcy court did not err in denying a debtor's motion for leave to sue the Chapter 11 Trustee in state court for alleged mismanagement of its operations in bankruptcy because (1) the Barton doctrine supported the denial as (a) the debtor filed a state court complaint without first obtaining leave, and (b) the bankruptcy court had broad discretion to retain jurisdiction over claims about Trustee's fees and estate administration; (2) 28 U.S.C. § 959(a) didn't apply to the alleged wrongdoing, and (3) the debtor lacked standing.
- Procedural context:
- The BAP was asked to determine "[w]hether the bankruptcy court erred in denying [Debtor] leave to sue the Trustee in a non-bankruptcy forum." The panel evaluated the bankruptcy court's order for an abuse of discretion. The panel explained it could "affirm on any basis supported by the record."
- Facts:
- Debtor East Coast Foods, Inc., a restaurant operator, filed a chapter 11 petition in the U.S. Bankruptcy Court for the Central District of California. After an examiner criticized Debtor's financial accounting practices and internal controls, the court approved the appointment of Bradley Sharp, a senior managing director at Development Specialists, Inc. (“DSI”), as Chapter 11 Trustee. Sharp obtained the court's approval to employ The Next Idea (International), LLC (“TNI”) to provide restaurant management services and, later, marketing services. Over time, Sharp filed three fee applications related to TNI, which sought "tens of thousands of dollars in fees but did not report any reimbursable expenses." The court confirmed a plan of reorganization that provided for the appointment of a trustee of a post-confirmation plan trust. That trustee had the sole authority and responsibility to pursue the estate's claims (which were transferred to the plan trust) after the plan's effective date. Plan confirmation discharged Sharp of his duties and responsibilities as Chapter 11 Trustee. Some time later, the trustee of the plan trust determined TNI had used two companies formed by its principal to provide services to Debtor, which led to significant overcharges. The plan trustee thus objected to TNI's third and final fee application. The bankruptcy court denied that application and ordered TNI to disgorge $376,550 in previously-paid fees for management and marketing services. The court also granted Sharp's final fee application. About four years after entry of the order to TNI to disgorge fees, Debtor filed a complaint against Sharp and DSI in California state court. Debtor alleged Sharp knew TNI engaged in misconduct during the bankruptcy case and didn't notify the bankruptcy court. Debtor also alleged Sharp made knowingly false statements on his fee applications and was grossly negligent in managing Debtor's operations in bankruptcy. Shortly after it filed the state court complaint, Debtor sought leave from the bankruptcy court to sue Sharp and DSI "outside of the bankruptcy court for 'fraudulent and negligent breaches of [his] fiduciary duties, that resulted in significant financial damages to ECF’s estate.'" The bankruptcy court issued a tentative ruling denying the motion as (1) Debtor lacked standing to sue, (2) Debtor's claims were collateral attacks on bankruptcy court orders, (3) Debtor failed to object to Sharp's fee application or contend Sharp knew of TNI's misconduct during the bankruptcy case, (4) the bankruptcy court "had 'exclusive jurisdiction over the amount of compensation to be paid to the trustee in this case or whether the trustee engaged in misconduct during the course of his administration[,]'" (5) the statute of limitations barred Debtor's claims, and (6) the motion did not provide a prima facie case against Sharp and DSI, At a hearing, Debtor's counsel contended 28 U.S.C. § 959 permitted the suit, and the court disagreed. After the hearing, the court issued an order denying the motion that did not mention or incorporate its tentative ruling and instead referred only to its statements at the hearing. The order stated the bankruptcy court “has the exclusive jurisdiction to hear all claims and actions asserted against [the Trustee] and DSI, arising out of acts or omissions that are alleged to have occurred during the course of the performance of his duties as chapter 11 trustee in the Case.” Debtor then withdrew its state court complaint and timely appealed from the order denying leave.
- Judge(s):
- FARIS, LAFFERTY, and SPRAKER
ABI Membership is required to access the full summary. Please Sign In using your ABI Member credentials. Not a Member yet? Join ABI now - it is absolutely worth it!
