Lowe v. Bowers (In Re Nicole Gas Prod., Ltd.)
Opinion
*569 This is a bankruptcy contempt dispute. Normally a party's conduct is contemptuous or it is not. But in this unusual case, whether the defendants are in contempt depends on statutory construction. The question presented is whether the Ohio RICO statute gives the sole shareholder of a bankrupt corporation standing to circumvent the automatic stay and individually sue a competitor. The issue is a complex intersection of three areas of law: the principle of the derivative suit in corporate law, the function of the automatic stay in bankruptcy, and the extent and construction of a specific state's RICO laws. In this appeal, we must consider how these precepts work together where the RICO statute offers no explicit guidance on how the claim should operate in the corporate and bankruptcy contexts. But for all the legal overlays here, ultimately the Appellants are in contempt or they are not.
The basic facts. Appellant Freddie Fulson 1 owned a company called Nicole Gas that entered bankruptcy proceedings. During the bankruptcy, Fulson became dissatisfied with the Trustee's handling of claims that Nicole Gas held against its competitors. With the help of two lawyers, Appellants Robert Sanders, Esq. and James A. Lowe, Esq., Fulson sought relief in state court under the Ohio Corrupt Practices Act (Ohio civil RICO) against the competitors that allegedly put his business into bankruptcy. Because Fulson alleged damages incurred only by the debtor-business, the Trustee alleged that he had appropriated claims that the Trustee owned. By filing this action during the bankruptcy, the Trustee alleged that Fulson, Sanders, and Lowe violated the automatic stay. The Bankruptcy Court agreed and held the three in contempt and entered a judgment for roughly $91,000. The contempt finding and fee order are the subjects of the instant appeal.
Back to legal principles. Derivative liability is a cardinal tenet of corporate common law. When an artificial entity (a corporation) is injured, shareholders cannot necessarily redress that injury themselves. See 19 Am. Jur. 2d Corporations § 1935 (1998) ("[W]here the injury is to the corporation, and only indirectly harms the shareholder, the claim must be pursued *570 as a derivative claim."); see also James D. Cox & Thomas Lee Hazen, 3 Treatise on the Law of Corporations § 15:2 (3d ed. 2010) ("An almost necessary consequence of a wrong to a corporation is some impairment of the value of each shareholder's stock interest. As a general rule, however, shareholders are considered to have no direct individual right of action for corporation wrongs that impair the value of their investment.").
As to the bankruptcy gloss on this dispute, the Bankruptcy Code imposes a powerful stay on parties attempting to gain control over the property of the debtor's estate.
See
The precise language of the Ohio Corrupt Practices Act is the complicating factor here. The Appellants claim that the wording of the statute converts a derivative shareholder action to an individual claim because it provides a private right of action for "any person directly or indirectly injured by conduct" violating the Act. Ohio Rev. Code § 2923.34. As the sole shareholder of Nicole Gas, normally Fulson would have to seek relief from Nicole Gas's competitors via the traditional route of derivative liability. But, his successors argue, the Corrupt Practices Act means both (a) that he did not have to pursue a derivative claim at all, and (b) that thus, the bankruptcy Trustee did not have the right to exercise control over the claim. If Fulson's successors are right, and the claim against Nicole Gas's competitors can be alleged outside of corporate law and via the Corrupt Practices Act, then they did not violate the automatic stay. Thus, the basis for the Contempt and Fee Orders would disappear. We shall see in due course that they are wrong. In agreement with the persuasively reasoned decisions below, both in the Bankruptcy Court and the Bankruptcy Appellate Panel, we AFFIRM .
I. FACTUAL AND PROCEDURAL BACKGROUND
In the late 1990s, Freddie Fulson formed several corporate entities to produce and market natural gas in the Midwest. One of these entities is the debtor in the bankruptcy case, Nicole Gas Production, Ltd. The bottom line is that Fulson was the indirect equity owner of Nicole Gas and was calling the shots. To market and move the gas, Fulson's entities contracted with a larger company, Columbia Gas Transmission, and its affiliates. Eventually, relations between Columbia Gas and Fulson's entities soured and in the early 2000s a decade of litigation in state and federal court began. For his part, Fulson believed that Columbia Gas had conspired with other entities, including Nicole Gas's creditors, to put him out of business. Columbia Gas did this, he alleged, by mismeasuring the amount of natural gas produced by Fulson's wells, misappropriating gas that the entities delivered into Columbia Gas's transmission system, and improperly soliciting his creditors to force Nicole Gas into bankruptcy proceedings. This bankruptcy proceeding began in 2009 and has continued since then, but it is only the tip of the iceberg of the disputes between these entities.
In 2013, while Nicole Gas was in bankruptcy proceedings, the corporation's bankruptcy Trustee, Frederick Ransier, *571 proposed settling all of Nicole Gas's claims against Columbia Gas for $250,000. Back in 2001, one of Nicole Gas's affiliates, Nicole Energy Services, Inc., had asserted claims against Columbia Gas for $36 million. Likely miffed that the Trustee was trying to settle similar claims for less than a million dollars, Fulson objected to that settlement in October of 2012. But objecting in the proper and usual course was not enough for him. Sometime after objecting to the settlement, Fulson began working with Robert C. Sanders, Esq., a Maryland attorney who had represented one of Fulson's other gas companies in state court. Fulson filed a new complaint in Ohio state court against Columbia Gas seeking roughly $34 million in damages. Fulson, Sanders, and Lowe wanted to try the claims to a jury in state court because, according to Sanders, jurors "don't like utility companies." 519 B.R. at 740 n.18.
The state court complaint recited the history between the companies and alleged that Columbia Gas had violated the Ohio Corrupt Practices Act, Ohio Rev. Code § 2923.31 et seq ., which provides that no person shall engage in a pattern of corrupt activity, defined as engaging in racketeering, theft, telecommunications fraud, and the like. Id. § 2923.32. This is Ohio's Racketeer Influenced and Corrupt Organizations ("RICO") statute. The Act includes a private right of action in § 2923.34 which allows for treble damages for " any person directly or indirectly injured by conduct" violating the Act (emphasis added). The Act presented an attractive avenue for relief because it carries treble damages and confers broad standing on litigants. Fulson and Sanders then hired James A. Lowe, Esq., of Cleveland as local counsel, and the three of them together filed the complaint (with Fulson as the sole plaintiff) in the Court of Common Pleas for Franklin County, Ohio, in January 2013. Because Nicole Gas was a domestic limited liability company, it counted as a "person" in Ohio and could have asserted these claims against Columbia Gas.
There was one big problem with the complaint: Fulson couched his damages as directly resulting from his status as the sole shareholder of Nicole Gas' parent corporation. He alleged no damages that related to him personally; he only pled that he had been harmed
because of
his indirect ownership of Nicole Gas. In multiple paragraphs of the complaint, Fulson's attorneys recited the damages to Fulson
as sustained by
the corporation he owned.
2
Usually, when a corporation is damaged, shareholders seek relief through a derivative suit. Fulson, Sanders, and Lowe, however, believed that the language of the Corrupt Practices Act would allow them to circumvent both the automatic stay and the principle that the bankruptcy trustee has the sole right to assert a debtor's causes of actions.
See
Stevenson v. J.C. Bradford & Co. (In re Cannon)
,
Because Nicole Gas was in bankruptcy proceedings, filing a derivative suit (based on the Corrupt Practices Act or some other statute) would have meant
*572
seeking relief from the automatic stay,
see
The Bankruptcy Court held a hearing and heard testimony from Fulson's two attorneys and Ransier. In a 56-page order (the "Contempt Order"), reported as
In re Nicole Gas Prod., Ltd.
,
The Bankruptcy Appellate Panel proceeded in two stages. In August 2016, the Panel certified a question of law to the Ohio Supreme Court. The Panel asked the Ohio Supreme Court whether an injured shareholder was entitled to individual standing under the Ohio Corrupt Practices Act. In October 2016, the Ohio Supreme Court declined to answer the certified question and dismissed the cause. In March of 2018, the Bankruptcy Appellate Panel issued a decision addressing the merits of the Fulson Parties' claims. The Panel affirmed the Bankruptcy Court in all respects (the "Bankruptcy Appellate Panel Opinion"), reported as
In re Nicole GasProd., Ltd.
,
II. ANALYSIS
We have jurisdiction to review orders of the Bankruptcy Appellate Panel under
Filing a bankruptcy petition creates a bankruptcy estate, which includes "all legal or equitable interests of the debtor in property as of the commencement of the case,"
If a shareholder has sole right to assert a cause of action, the cause of action is not part of the bankruptcy estate. Whether a shareholder "has sole right to a cause of action is determined in accordance with state law."
Honigman v. Comerica Bank (In re Van Dresser Corp.)
,
A. The Ohio Corrupt Practices Act
The most important question raised by the Fulson Parties is substantively a question of Ohio state law. There is no case or statute explicitly suggesting that the Ohio Corrupt Practices Act does or does not confer standing upon an individual shareholder to seek redress for damages visited upon a corporation. But applying principles of construction announced by the Ohio Supreme Court, we can triangulate a clear answer. The relevant section of the Corrupt Practices Act reads:
(E) In a civil proceeding under division (A) of this section, any person directly or indirectly injured by conduct in violation of section 2923.32 of the Revised Code or a conspiracy to violate that section, other than a violator of that section or a conspirator to violate that section, in addition to relief under division (B) of this section, shall have a cause of action for triple the actual damages the person sustained. To recover triple damages, the plaintiff shall prove the violation or conspiracy to violate that section and actual damages by clear and convincing evidence. Damages under this division may include, but are not limited to, competitive injury and injury distinct from the injury inflicted by corrupt activity.
*574
Ohio Rev. Code § 2923.34(E) (emphasis added).
3
On its face, this is a broadly written statute allowing for a wide set of claims. It employs the words "any" and "indirectly" to expand the scope of civil RICO claims contemplated in the federal case law.
See
Iron Workers Local UnionNo. 17 Ins. Fund v. Philip Morris Inc.
,
Because the language is ambiguous, we therefore look to additional principles of statutory interpretation.
State v. Thomas
,
Where the defendant's wrongdoing has caused direct damage to corporate worth, the cause of action accrues to the corporation, not to the shareholders, even though in an economic sense real harm may well be sustained by the shareholders as a result of reduced earnings, diminution in the value of ownership, or accumulation of personal debt and liabilities from the company's financial decline. The personal loss and liability sustained by the shareholder is both duplicative and indirect to the corporation's right of action .... Although this is a case of first impression, we accept and follow the widely recognized rule that a plaintiff-shareholder does not have an independent cause of action *575 where there is no showing that he has been injured in any capacity other than in common with all other shareholders as a consequence of the wrongful actions of a third party directed towards the corporation.
The Fulson Parties, however, seize upon the language in Adair , and argue that the Ohio Supreme Court's use of the word "indirect" in the above-quoted passage means that the claim for indirect damages under the Act is viable. Because Adair says that a shareholder is "indirectly" injured when the corporation is injured, they contend, the Corrupt Practices Act's use of the word "indirect" affords an injured shareholder standing for civil RICO. The argument is that the Corrupt Practices Act gives the Fulson Parties an "out" with regard to complying with the rules of derivative shareholder suits.
This reading is strained to say the least. Why? Because the two documents are not talking about the same thing.
Adair
employed the word "indirect" to characterize shareholder claims against a corporate antagonist as secondary and duplicative in a pejorative sense. If shareholders of Apple could pursue claims against Samsung and bypass the derivative suit, it would render the corporate form superfluous. The very holding of
Adair
is that shareholders cannot strike out on their own to right wrongs visited on the corporation. Allowing indirectly injured parties to sue does not mean that the Act allows
anyone
to sue in all situations. The use of the word "indirect" in both
Adair
and the Act is a coincidence, not a confluence. The Fulson Parties' attempts to cast the occurrence of the word "indirect" in two places as somehow deliberate or instructive cannot overcome the presumption that the Act did not intend to restructure corporate law absent a clear statement of the intent to do so.
See, e.g.
,
Mann v. Northgate Invs., L.L.C.
,
Ohio corporate law supplies further support for our conclusion. The analogous right to sue for injuries to Nicole Gas never belonged to Fulson in the first place.
See
Boedeker v. Rogers
,
Corporate law cabins the claims that a shareholder may raise
when the
*576
entity in which she owns stock is injured
, and the value of her shares had decreased accordingly. "Stated another way, a shareholder brings a derivative action on behalf of the corporation for injuries sustained by or wrongs done to the corporation, and a shareholder brings a direct action where the shareholder is injured in a way that is separate and distinct from the injury to the corporation."
HER, Inc. v. Parenteau
,
The Corrupt Practices Act says nothing about this process; allowing indirectly injured plaintiffs to sue is not the same as constructing an explicit statutory mechanism to bypass corporate law. Although the text of the Ohio RICO statute indicates that it grants broader standing than federal RICO, we see no clear indication that, by using the term "indirect," the Ohio General Assembly supplanted an entire area of the common law. Instructively, shareholders cannot pursue claims individually against competitors under the federal RICO statutes.
See
Warren v. Mfrs. Nat'l Bank of Detroit
,
The legislature is perfectly capable of adding a
tool
(broad civil RICO) to potential plaintiffs' toolboxes without simultaneously throwing a different tool
box
(corporate derivative suits) out the window. The Fulson Parties argue otherwise, and point to
Clark v. Scarpelli
,
What little Ohio case law addresses these issues supports our conclusions. 4 And although Ohio has not seen a case directly considering derivative civil RICO
*577
in the bankruptcy context, another state in our Circuit, Michigan, has.
See
Kelley v. Thompson-McCully Co., LLC
, No. 236229,
In sum: Fulson and his lawyers may have believed that the claims against Columbia Gas were worth more than the Trustee was settling them for. If they thought that Fulson had a shot at suing Columbia Gas via the Corrupt Practices Act, the proper course would have been to seek the Trustee's cooperation or abandonment, or to seek relief from the automatic stay. But, as the Bankruptcy Court noted, "filing the Complaint without providing Ransier notice and without requesting the Court grant relief from the automatic stay appears to have been a calculated risk by one who believed it more expedient to ask for forgiveness rather than for permission."
B. The Automatic Stay and The Fee Award
Because Nicole Gas was in bankruptcy, the Trustee was in charge of any claims the debtor-business might hold.
Cf.
Griffin v. Bonapfel (In re All Am. of Ashburn, Inc.)
,
The automatic stay is one of the most important and powerful features of the bankruptcy system.
Cf.
Easley v. Pettibone Mich. Corp.
,
With regard to the Fee Order, the Fulson Parties argue that
Baker Botts, L.L.P. v. ASARCO, L.L.C.
, --- U.S. ----,
Whatever limits apply to the Bankruptcy Court's contempt powers,
see generally
In re John Richards Homes Bldg. Co.
,
III. CONCLUSION
Assuming best intentions, Fulson may have believed he personally had a viable claim to assert against Columbia Gas. But by the time he filed the Corrupt Practices Act complaint, it was far too late to make such claims without seeking relief from the stay or the trustee's cooperation. Fulson, Sanders, and Lowe were all aware of the automatic stay, and took action that, we agree, violated it. One of the unfortunate results in this case is that it is unclear precisely how much Fulson's claims against Columbia Gas were worth. The Trustee tried to settle them for $250,000, but Fulson obviously believed them to be worth millions more. If Fulson or his attorneys had communicated their theory to the Trustee, perhaps the Ohio courts could have confronted head-on the question of indirect pursuit of civil RICO claims under Ohio law. And as a policy matter, there may be situations in which shareholders possess viable civil RICO claims against a company that destroyed the shareholder's business. But instead, we are left to assess the question collaterally in the contempt context, with sanctions against the Fulson Parties riding on our interpretation. These legal ambiguities could have been addressed with a simple collaborative phone call. Instead, the Bankruptcy Court was forced to expend valuable judicial resources assessing whether the conduct was in fact contemptuous.
This is a case where the Bankruptcy Court did its job and did it well. These issues have been extensively briefed thrice, once at the Bankruptcy Court, once at the Bankruptcy Appellate Panel, and again here in the Circuit. The one complex issue in this case-whether the Ohio Corrupt Practices Act allows shareholders to pursue claims individually-was convincingly handled by the Bankruptcy Court; the Bankruptcy Appellate Panel agreed and so do we. We conclude that the Corrupt Practices Act did not grant Fulson any independent cause of action to pursue his derivative damages without violating the automatic stay. And Baker Botts does not apply to the Bankruptcy Court's fee award here, which was a contempt sanction. Fulson and his attorneys should have sought either the trustee's cooperation or relief from the automatic stay in order to file the complaint. For all of the foregoing reasons, and for the reasons articulated by the Bankruptcy Court and the Bankruptcy Appellate Panel below, we AFFIRM .
Fulson died during the pendency of the bankruptcy, and his estate was substituted in the proceedings below and here.
For instance, Paragraph 120 of the state court complaint reads, "The Plaintiff has standing to bring a civil action against the Defendants under Section 2923.34(E) of the Act because, as the owner of NES, he is a person who was 'directly or indirectly injured' by the Defendants' violations ..." (emphasis added). Paragraph 126 continues this grammatical pattern: "The amount of the damages caused to the Plaintiff by the Defendant's violations of the Act are (1) the net damages of $36,654,305.94 sustained by NES ... and (2) the damages sustained by NGP ..." (emphasis added). By its very terms, then, the state court complaint pled damages that were incurred by the corporation.
The rest of the Ohio Corrupt Practices Act contains few explicit references to corporate law. First, Ohio Rev. Code § 2923.34(B)(5) allows a court to dissolve a corporation on a finding that the corporation violated the Act. Second, the Act's Definitions section, § 2923.31(A)(3), excludes stockholders from the definition of "beneficial interest." But as the Act currently stands, "beneficial interests" are only referenced in § 2923.36, which discusses the filing of corrupt activity liens. In other words, one may not file a corrupt activity lien against the interest of a stockholder. Aside from these passing references, corporate law and rights thereunder go unmentioned in the Act. The statute is simply not written as specifically addressing claims relating to the corporate form.
Ohio's civil RICO jurisprudence contains several examples of "derivative" or "indirect" claims, although none in the corporate context.
See
Iron Workers I
,
In
Kelley
, the plaintiff was a shareholder and corporate officer in a company called West Shore Construction that entered bankruptcy proceedings. The suit concerned a failed corporate buyout, and the plaintiff alleged that the defendants had conspired to ruin West Shore.
Kelley
,
The Oregon Court of Appeals has concluded that shareholders may not assert derivative claims under the Oregon RICO statutes.
See
Loewen v. Galligan
,
Reference
- Full Case Name
- NICOLE GAS PRODUCTION, LTD., Debtor. James A. Lowe ; Curtland H. Caffey; S. Brewster Randall, II; Robert C. Sanders, Appellants, v. Brenda K. Bowers, Chapter 7 Trustee of the Bankruptcy Estate of Nicole Gas Production, Ltd., Appellee.
- Cited By
- 48 cases
- Status
- Published