In re Johnson
Opinion of the Court
This matter is back before the bankruptcy court after nearly two years of protracted litigation in state court. The present case falls between the interstices of state and federal court jurisdiction. This occasionally happens when, as here, an order by a bankruptcy court is entered which modifies, annuls, and outright terminates the automatic stay under
Rather than return to the bankruptcy court for clarification of the order lifting the stay as they should, the parties instead have used the automatic stay as a cudgel to defend or pursue causes of action and counterclaims in the state court litigation - all the while contending that the other side has run afoul of the stay relief order for which contempt sanctions ought to be leveled.
Before the Court is the Motion to Enforce the Automatic Stay and for Sanctions and Attorneys Fees (the "Motion") (Doc. 86) filed by the Debtor Terry R. Johnson (the "Debtor") against Jeannette Crain and Joyce Chiles (the "Creditors"), who are plaintiffs in the state court litigation and also creditors of the bankruptcy estate. See
In essence, this Court is being asked to determine the scope of its previous order terminating the automatic stay (Doc. 59)(the "Order for Relief"). The Debtor accuses the Creditors and their attorneys of committing some 59 violations of the automatic stay in state court. Much of the confusion stems from the failure by the attorneys for both sides to develop an appropriate record at the initial hearing prior to the Court entering the Order for Relief.
For the reasons that follow, the Court concludes that the Motion currently before it seeking enforcement of the automatic stay, recovery of attorneys fees and other monetary relief is not well taken, and is hereby DENIED . Moreover, the Court determines that relief from the automatic stay is granted as to all causes of action contained in the original and amended state court complaints without regard for whether the alleged debt is owed to the Partnership or to Enterprise Travel.
*591To be clear, the automatic stay in this proceeding has already been modified, annulled, and terminated. (Doc. 59). Because the record had been inadequately developed at the initial hearing on this matter two years ago, the bankruptcy court's previous Order for Relief may not have been a paragon of clarity or offered much guidance to the state court. Nevertheless, the Court concluded in the Order for Relief that the state court is permitted to fully adjudicate and reduce to judgment all claims related to "how the partnership proceeds from the sale of the real estate should be distributed pursuant to the mortgage , the E.T. Building Partnership Agreement and Ohio Partnership Act ," as the Creditors had requested. (Emphasis added). (Doc. 59). In other words, under the Order for Relief, the parties were free to obtain discovery regarding any non privileged matter relevant to either of the parties' claims or defenses: Similarly, the parties were permitted to continue prosecution of the state court litigation, with reference to the comprehensive remedies available under the Ohio Revised Partnership Act, should that court find the Debtor liable under that statute.
A. No Stay Violation was Committed in Continuation of the State Court Litigation to Dissociate the Debtor, Wind Up and Dissolve the Partnership.
The attorneys for the Debtor make much of the fact that the bankruptcy court's prior order terminating the stay directed the following: "The Motion for Relief from Stay, seeking to have the state court wind up the ET Building Partnership and rule on the proper distribution of the proceeds from the sale of the Partnership's real estate, among other items which may be adjudicated under Ohio Rev. Code § 1776 is GRANTED ." (Doc. 59).
The Debtor's counsel argues strenuously that the Creditors violated the automatic stay by pursuing collection on a claim that arose before the commencement of the bankruptcy case in contravention of
In sum, counsel would have the bankruptcy and state courts believe that all claims tied to the Debtor's alleged wrongful conduct associated with Enterprise Travel remain subject to the automatic stay. According to the Debtor's counsel, the Creditors violated the stay by continuing the portion of the litigation in state court which seeks recovery against the Debtor for his alleged misconduct while head of Enterprise Travel and that these multiple stay violations warrant a contempt citation and an order requiring payment of the Debtor's attorneys fees and punitive damages. See
The Debtor's attorneys' reliance on the quoted portion of the bankruptcy court's prior Order for Relief for the proposition that the automatic stay limits the Creditors' ability to inquire into and to seek a judgment against the Debtor based on his alleged misconduct at Enterprise Travel is misplaced. As will be explained in Part B below, relief from the automatic stay is granted as to the state-law, fraud-based claims of Enterprise Travel, and therefore all information and allegations related to such matters are directly relevant to their causes of action against the Debtor.
Even under the Debtor's counsel's strained interpretation of the previous Order for Relief, this Court fails to find any violation of the automatic stay. To understand why the automatic stay was not violated and why the bankruptcy court will not, in this case, enforce the stay in the manner sought by the Debtor's counsel, the Court must delve once more into Ohio's version of the Revised Uniform Partnership Act. During oral argument, Counsel for the Debtor argued assiduously that Ohio's version of the Revised Uniform Partnership Act does not prevail over the written terms in the parties' Partnership Agreement (Doc. 96, Ex. 1). That contention, however, is only partly accurate.
Paragraph 1.1 of the parties' Partnership Agreement states that "the partners constitute a General Partnership formed pursuant to the Uniform Partnership Act of the State of Ohio ." (Emphasis added)(Doc. 96, Ex. 1). Moreover, the Ohio law on this subject, Ohio Rev. Code § 1776.03, in relevant part, further provides:
(A) Except as otherwise provided in division (B) of this section , the partnership agreement governs relations among the partners and between the partners and the partnership. To the extent the partnership agreement does not otherwise provide, this chapter governs relations among the partners and between the partners and the partnership.
(B) The partnership agreement may not do any of the following:
...
(3) Eliminate the duty of loyalty under division (B) of section 1776.44 of the Revised Code or division (B)(3) of section 1776.53 of the Revised Code...
(4) Unreasonably reduce the duty of care under division (C) of section 1776.44 of the Revised Code or division (B)(3) of section 1776.53 of the Revised Code...
(5) Eliminate the obligation of good faith and fair dealing under division (D) of section 1776.44 of the Revised Code...
*593(6) Vary the power to dissociate as a partner under division (A) of section 1776.52 of the Revised Code except to require the notice under division (A) of section 1776.51 of the Revised Code to be in writing ...
(7) Vary the right of a tribunal to expel a partner in the events specified in division (E) of section 1776.51 of the Revised Code.
* * *
Thus, under Ohio law, any partner in a partnership formed in this state is mandated to adhere to the elevated standards of conduct set forth in the foregoing statute. In other words, all partners in an Ohio partnership are required to observe and maintain the duty of loyalty to the partnership and the other partners, the duty of care in the conduct of the partnership business, and all partners must exercise any rights that they possess consistent with the obligation of good faith and fair dealing, irregardless of any contrary language that may be contained in any written partnership agreement. See Ohio Rev. Code § 1776.44(B)(C) and (D).
Here, despite the presence of an arbitration clause contained in the written Partnership Agreement, litigation seeking to dissociate the Debtor has been commenced in state court.
In an action filed in state court to dissociate a partner who is alleged to have violated the duty of care or loyalty, or of good faith and fair dealing under Ohio Rev. Code § 1776.44(B)(C) and (D), the partnership or partners pursuing that relief have many arrows in the quiver from which to choose. For example, Ohio Rev. Code § 1776.45, in relevant part, provides:
(A) A partnership may maintain an action against a partner for a breach of the partnership agreement or for the violation of a duty to the partnership, causing harm to the partnership .
*594(B) A partner may maintain an action against the partnership or another partner for legal or equitable relief ... to enforce any of the following:
...
(2) The partner's rights under this chapter, including ...
(a) The partner's rights under ... 1776.44 of the Revised Code ;
...
(c) The partner's right to compel a dissolution and winding up of the partnership business or enforcement of any other right under sections 1776.61 to 1776.67 ...
(3) The rights and otherwise protect the interests of the partner, including rights and interests arising independently of the partnership relationship .
* * *
Given the breadth of the causes of action available to the Creditors in the state court litigation under the Ohio Revised Uniform Partnership Act, discovery regarding any non privileged matter relevant to the parties' claims and defenses must necessarily be very broad. The Creditors in the state court litigation are seeking to dissociate the Debtor, wind up and dissolve the Partnership premised upon a host of misconduct he is alleged to have committed as the managing partner of the Partnership and as president of Enterprise Travel- a separate but closely related entity with overlapping ownership. Indeed, Paragraph 12.1 of the Partnership Agreement clearly demonstrates the symbiotic relationship that, at one time, existed between the two companies. It states that "In the event any of the partners, but not all of the partners, cease to be a shareholder of ENTERPRISE TRAVEL, INC., such partner shall be obligated to offer for sale to the partnership, and the partnership shall be obligated to purchase, his or her entire interest in the partnership." (Doc. 96, Ex. 1).
Although the Partnership and Enterprise Travel had been formed as separate entities at separate times under Ohio law, the reality of how the businesses operated seems to paint a far different picture. By all appearances the businesses were fully integrated and the Debtor managed them as one single entity without regard to the separate corporate identity for each business. The Creditors contend that funds generated from Enterprise Travel earmarked for payment to the Partnership or to cover the legitimate expenses of both businesses were instead used for personal expenses and other unlawful and fraudulent purposes by Debtor without the knowledge or consent of his partners.
Indeed, the Debtor is alleged to have wilfully and persistently committed wrongful acts which constituted material breaches of the Partnership Agreement and the duty of care owed to the Partnership and the other partners under Ohio Rev. Code § 1776.44. Under the circumstances, any alleged wrongful conduct that the Debtor, as partner, may have engaged in while serving in dual roles as manager of both entities leads one logically to the conclusion that the facts and information sought in discovery about the operation of both businesses are relevant in the context of the violations asserted under the Ohio Revised Partnership Act in the state court litigation.
The comprehensive provisions of the Ohio Revised Partnership Act give the state court broad authority to enter a judgment that includes legal and equitable relief based upon all evidence tied to the alleged wrongful conduct of a partner. To hold that the automatic stay now allows the Debtor to escape giving an account and to hide behind the formalities of the separateness *595of the two businesses, when it is alleged that he himself did not observe those same formalities historically while syphoning funds from them, does not serve the ends of justice. We see no principled reason why the bankruptcy court should tie the hands of the state court, by applying the automatic stay in such a restrictive manner so as to prevent that court from hearing all the evidence that can potentially be used in the Partnership dissociation, wind up and an ultimate dissolution.
If the state court finds cause to dissociate the Debtor, rightfully-or in this case, wrongfully, and orders the wind up and dissolution of the Partnership, the judge is given broad statutory and equitable authority to fashion an appropriate remedy and enter judgment on the same in favor of the aggrieved partners or partnership. See , e.g. , Ohio Rev. Code § 1776.51(E) (expulsion); Ohio Rev. Code § 1776.52(A) (dissociation); Ohio Rev. Code § 1776.61(D), (E) and (F) (wind up the partnership business); and, in severe cases, Ohio Rev. Code § 1776.50 (imposition of a charging order)
Once the state court has adjudicated the various claims, counterclaims
Whether the debt or claim associated with the Debtor's alleged misconduct at Enterprise Travel is deemed discharged or ultimately survives bankruptcy is an entirely separate matter. Given that the adversary proceeding attached to that potential debt has already been dismissed, the likelihood of the potential debt receiving treatment as anything other than a general unsecured claim is remote, at the very best. In all probability, if the state court finds liability, the Enterprise Travel debt will ultimately become discharged under § 1328 if the Debtor makes all of the payments and otherwise fully complies with the terms of the confirmed Chapter 13 plan (Doc. 22).
B. The Stay is Terminated in Continuation of State Court Litigation Related to Enterprise Travel.
The attorneys for the Debtor also rely on the following language for the proposition that Enterprise Travel's state-law, fraud-based causes of action against the Debtor remain stayed: "This Court shall retain jurisdiction over the related adversary proceeding and the Court will enter an order setting a pre-trial and trial date at a later date. The Movants are DIRECTED to file with this Court a status report within thirty (30) days after the conclusion of the State Court winding up proceedings for the partnership." (Doc. 59).
At best, this is a strained reading of the Order for Relief. The Bankruptcy *597Court specifically retained jurisdiction over the adversary proceeding and not the underlying causes of action.
The state court litigation, however, was otherwise unaffected by the dismissal of the adversary case. Under the Order for Relief entered, that case was permitted to proceed to resolution, even on the fraud claims, so that a determination either by the judge or jury could be rendered with regard to whether potential liability, or a debt, arose from the Debtor's alleged misconduct while at the helm of the Partnership or Enterprise Travel. That the Creditors' attorneys, intentionally or negligently, allowed the adversary proceeding, which presented claims identical to those contained in the state court complaint they had lodged against the Debtor, to be dismissed because the attorneys perhaps mistakenly believed that the state court determination of those issues would be given preclusive effect in the bankruptcy court, is of no moment. See Grogan v. Garner ,
Under the circumstances, no stay violations occurred and the Creditors were well within their rights to continue pursuing fraud claims against the Debtor related to the Partnership and Enterprise Travel in the state court litigation without running afoul of the automatic stay.
C. The Stay is Continued Regarding Enforcement or Set-Off of any Judgment as to Liability.
The automatic stay, however, shall remain in effect with regard to any attempts *598by the Creditors to execute or collect upon any judgment that the state court may order pursuant to Ohio Rev. Code § 1776.01, et seq. , or the other causes of action asserted against the Debtor involving Enterprise Travel.
D. Conclusion.
Based on the intricate interplay between state and federal law and the totality of circumstances presented in this case, we find that the state court should and will be given first crack at liquidating all of the parties' state law causes of action, counterclaims and defenses.
Finally, given that the state court litigation is at an advanced stage and the potential exists that a jury trial may be demanded, that court unquestionably presents itself as the preferred tribunal for adjudication of the state law claims. If a debt arises after the state court's entry of final judgment on all the state law related claims and there are proceeds from the Galbraith Road building leftover from the dissolution of the Partnership (and not distributed to Creditor Crain on the mortgage), the bankruptcy court will then decide what treatment the Creditors' predetermined debt, or in the bankruptcy context, their proof of claim, will receive under the Debtor's confirmed Chapter 13 plan. (See Proof of Claim 3-1, filed by Enterprise Travel and Jeannette Crain and Joyce Childs, signifying "other names the creditors used with the debtor").
IT IS SO ORDERED .
In re Martin ,
See , for example, In re Wardrobe ,
The Order for Relief noted, "both attorneys' efforts fell short of the mark ... the Court had to piece together, from the briefs, the admissions of the parties through statements of counsel, and the Partnership Agreement, the facts upon which to predicate its decision." (Doc. 59).
The original state court complaint included the following counts:
Count One-Misappropriation of Funds (Terry Johnson)
Count Two-Breach of Fiduciary Duty (Terry Johnson)
Count Three-Breach of Contract (Terry Johnson)
Count Four-Fraud (Terry Johnson)
Count Five-Negligent Misrepresentation (Terry Johnson)
Count Six-Conversion (Greg Johnson)
Count Seven-Punitive Damages
Count Eight-Dissociation of Partner Terry Johnson
The amended complaint adds one count for dissolution of the Partnership (Doc. 96, Exh. 12). When presented with a request to lift the automatic stay to commence or continue litigation in a non-bankruptcy forum, the bankruptcy court must weigh a variety of non-exclusive factors to determine "cause": "(1) judicial economy; (2) trial readiness; (3) the resolution of preliminary bankruptcy issues; (4) the creditor's chance of success on the merits; (5) the cost of the defense or other potential burden to the bankruptcy estate; and (6) the impact of litigation on other creditors." In re Mason ,
Ohio Rev. Code § 1776.44 provides as follows:
(B) A partner's duty of loyalty to the partnership and the other partners is limited to the following:
(1) To account to the partnership and hold as trustee for it any property, profit , or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partnership property , including the appropriation of a partnership opportunity;
(2) To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership:
(3) To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.
(C) A partner's duty of care to the partnership and the other partners in the conduct ... of the partnership business ... intentional misconduct , or a knowing violation of law .
(D) A partner shall discharge duties to the partnership ... and shall exercise any rights consistent with the obligation of good faith and fair dealing .
The parties' written Partnership Agreement, at Paragraph 13.1, contains an arbitration clause which reads as follows: "All claims, disputes and other matters and questions arising out of or relating to this Agreement or the breach thereof shall be decided by arbitration by a single arbitrator mutually selected by the partners."
A charging order is "a remedy by which a judgment creditor of a [partner] can seek satisfaction by petitioning a court to charge the [partner's] interest with the amount of the judgment." Weddell v. H2O, Inc. ,
As acknowledged in this Court's prior Order for Relief, Creditor, Crain's mortgage which was authorized by the partners at a meeting of the Partnership that took place on April 27, 2016 is at the crux of parties' ongoing dispute. If deemed valid in the dissociation, wind up and dissolution proceedings in state court, the proceeds from the sale of the Galbraith Road building, which is unquestionably Partnership property, may potentially leave nothing for the bankruptcy estate to administer after all the Partnership debts have been finally paid. See Ohio Rev. Code § 1776.61 -67. In its earlier order terminating and annulling the automatic stay, this Court did not finally decide whether the Crain mortgage was valid or not. We were only asked in the prior motion to determine whether the Creditor's actions taken as partners, at the April 27, 2016, meeting on behalf of the Partnership, violated the automatic stay. We held that the April 27 meeting did not violate the automatic stay under the Court's annulment authority, pursuant to § 362(d). (Doc. 59). The law is well established that joint eligibility of the Debtor and the Partnership is untenable: The Debtor cannot "[seek] to gain the benefits of the a partnership liquidation without the necessity of either filing a bankruptcy petition on behalf of the partnership or going [through] a state partnership winding up procedure." In re Olszewski ,
This Court could have estimated the Creditors' unliquidated claim, pursuant to
This is not a controversial provision. Bankruptcy courts have exclusive jurisdiction to determine dischargeability issues. See In re Martin ,
"Although bankruptcy courts have exclusive jurisdiction to determine dischargeability issues, this 'does not require the bankruptcy court to redetermine all the underlying facts' of the case if they were previously determined in an earlier lawsuit." In re Martin , at 203 (quoting Spilman v. Harley ,
Ohio Rev. Code § 2329.66 provides in relevant part:
(A) Every person who is domiciled in this state may hold property exempt from execution, garnishment, attachment, or sale to satisfy a judgment or order, as follows:
...
(14) The person's right in specific partnership property, as exempted by the person's rights in a partnership pursuant to section 1776.50 of the Revised Code, except as otherwise set forth in section 1776.50 of the Revised Code.
As noted in the bankruptcy court's prior order, the partnership is not terminated immediately upon dissolution. See Ohio Rev. Code § 1776.63. The partnership continues to operate until completion of the wind up of its affairs.
Reference
- Full Case Name
- IN RE Terry Roscoe JOHNSON, Debtor
- Status
- Published