Robert Sears v. Rhett Sears , 902 F.3d 884 ( 2018 )

United States Court of Appeals
For the Eighth Circuit
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No. 17-2995
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In re: AFY, Inc., also known as Ainsworth Feed Yards Company, Inc.,
lllllllllllllllllllllDebtor.
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Robert A. Sears, individually and as testamentary trustee under the will of
Redmond Sears, deceased; Korley B. Sears,
lllllllllllllllllllllAppellants,
v.
Rhett R. Sears; Rhett Sears Revocable Trust; Ronald H. Sears; Ron H. Sears Trust;
Dane Sears,
lllllllllllllllllllllAppellees.
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Appeal from the United States Bankruptcy
Appellate Panel for the Eighth Circuit
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Submitted: May 15, 2018
Filed: September 6, 2018
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Before SMITH, Chief Judge, BEAM and COLLOTON, Circuit Judges.
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COLLOTON, Circuit Judge.
Korley Sears and Robert Sears appeal a decision of the Bankruptcy Appellate
Panel affirming a bankruptcy court’s1 dismissal of their claims in a protracted family
dispute. We agree with the BAP that the claims are barred by the shareholder
standing rule, and we therefore affirm.
I.
In 2007, a group of relatives owned shares in a Nebraska corporation called
Ainsworth Feed Yards Company, Inc. (“AFY”). Several of these parties—Rhett
Sears, Ronald Sears, and Dane Sears—sold their interest to AFY and Korley Sears
through a stock sale agreement. The agreement conditioned the sale of the shares on
delivery of promissory notes from Korley to Rhett, Ronald, and Dane. Under the
agreement, Ronald and Dane remained employees of AFY but were not permitted to
“be disloyal to AFY or its management in any way.” After the agreement was
executed, Korley and his father Robert Sears were the sole shareholders of AFY.
In 2010, AFY filed for Chapter 11 bankruptcy. The bankruptcy court later
converted the proceeding to a Chapter 7 bankruptcy. Rhett, Ronald, and Dane filed
claims for the moneys owed to them under the stock sale agreement; Robert and
Korley objected to the claims. See Fed. R. Bankr. P. 3001.
The bankruptcy court ultimately concluded that AFY was liable for the
purchase price of the stock sold by Rhett, Ronald, and Dane. The court also ruled
that none of those family members had breached any duty under the agreement. In
early 2014, the bankruptcy trustee made payments from AFY to Rhett, Ronald, and
1
The Honorable Thomas L. Saladino, Chief Judge, United States Bankruptcy
Court for the District of Nebraska.
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Dane of approximately $2.6 million. In 2015, the trustee certified that AFY’s estate
had been fully administered.
In October 2014, Korley and Robert (both individually and as testamentary
trustee for his late father) filed a lawsuit in Nebraska state court. They sued Rhett,
Ronald, Dane, and also the Rhett R. Sears Revocable Trust and the Ron H. Sears
Trust (collectively, the “Sears Defendants”). The plaintiffs alleged that: (1) the Sears
Defendants breached the stock sale agreement; (2) Ronald and Dane breached their
fiduciary duty to AFY; (3) the Sears Defendants were unjustly enriched by
distributions from AFY’s bankruptcy; (4) the Sears Defendants conspired and
interfered with AFY’s business expectancies during AFY’s bankruptcy; and (5) the
Sears Defendants abused the bankruptcy process.
The Sears Defendants removed the complaint from state court to the federal
bankruptcy court. The bankruptcy court ultimately dismissed the complaint on the
ground that the shareholder standing rule and the doctrine of claim preclusion barred
the plaintiffs’ claims. The BAP affirmed. In an appeal from a decision of the BAP,
we are a second reviewing court, and we review the bankruptcy court’s decision de
novo. In re Peoples, 764 F.3d 817, 820 (8th Cir. 2014).
II.
As a threshold matter, the plaintiffs argue that the bankruptcy court lacked
jurisdiction over the case. A bankruptcy court, on referral from a district court, has
jurisdiction in cases “arising under title 11, or arising in or related to cases under title
11.” 28 U.S.C. § 1334(b); see id. § 157(a); Neb. D. Ct. Gen. R. 1.5. A case is
“related to” Title 11 when “the outcome of that proceeding could conceivably have
any effect on the estate being administered in the bankruptcy.” Specialty Mills, Inc.
v. Citizens State Bank, 51 F.3d 770, 774 (8th Cir. 1995) (quoting In re Dogpatch
U.S.A., Inc., 810 F.2d 782, 786 (8th Cir. 1987)). There is such an effect if the
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outcome of the case “could alter the debtor’s rights, liabilities, options, or freedom
of action,” and could “in any way impact[] upon the handling and administration of
the bankruptcy estate.” Id. (quoting Dogpatch, 810 F.2d at 786).
This case, at a minimum, is “related to” a case under Title 11. In their
complaint, the plaintiffs claimed that the Sears Defendants breached the stock sale
agreement by obtaining the appointment of a trustee in AFY’s bankruptcy case and
by filing “bogus” claims in AFY’s bankruptcy. They asserted that Ronald and Dane
breached a fiduciary duty to AFY and its management, and that the Sears Defendants
were unjustly enriched by receiving distributions from the AFY bankruptcy estate.
They further alleged that the Sears Defendants tortiously interfered with the business
expectancies of AFY by interfering with AFY’s bankruptcy proceeding. Finally, they
claimed that the Sears Defendants abused the bankruptcy process by representing
themselves as creditors of AFY. The outcome sought by the plaintiffs, by requiring
redistribution of AFY’s bankruptcy estate, could alter AFY’s liabilities and impact
the handling and administration of AFY’s bankruptcy. The action is therefore
“related to” a case under Title 11, and the bankruptcy court had subject matter
jurisdiction on that basis.
The plaintiffs argue alternatively that removal from state court was improper
under “the well-pleaded complaint rule” of Rivet v. Regions Bank of Louisiana, 522
U.S. 470 (1998). Rivet held that when a defendant removes a case based on a federal
district court’s original federal-question jurisdiction under 28 U.S.C. § 1331, there
is federal jurisdiction only if a federal question is presented on the face of the
properly pleaded complaint. Id. at 475. The “well-pleaded complaint rule,” however,
applies only to jurisdiction based on § 1331. It does not govern when a defendant
cites an independent jurisdictional grant as the basis for removal. See Am. Nat’l Red
Cross v. S.G., 505 U.S. 247, 258 (1992). The bankruptcy court here invoked
jurisdiction based on § 1334 and civil proceedings related to cases under Title 11. As
such, the well-pleaded complaint rule is inapplicable. In re KSRP, Ltd., 809 F.3d 263,
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268 n.3 (5th Cir. 2015). In any event, the state court complaint in this action on its
face shows that the claims are related to the AFY bankruptcy, because the claims
involve whether the Sears Defendants were proper claimants against AFY’s
bankruptcy estate, so the well-pleaded complaint rule would be satisfied even if it
were considered in this context.
The plaintiffs next assert that the bankruptcy court lacked authority to enter a
final order, because only a district court was authorized to do so. The bankruptcy
court’s authority turns on consent of the parties. In a case proceeding under “related
to” jurisdiction, there are two procedural avenues that a case may follow. In one
course, the bankruptcy court submits proposed findings of fact and conclusions of law
to the district court, and the district court enters a final order after conducting de novo
review of the proposals. 28 U.S.C. § 157(c)(1). Under a second approach, however,
the parties may consent to the bankruptcy court entering appropriate final orders, and
the district court is not involved. Id. § 157(c)(2). For the latter, express consent is
not necessary; implied consent may suffice. Abramowitz v. Palmer, 999 F.2d 1274,
1280 (8th Cir. 1993).
We conclude that the plaintiffs impliedly consented to the bankruptcy court’s
entry of the dismissal order. The rules of procedure provide that after a case is
removed from state court and referred to a bankruptcy court, a party “shall file a
statement” within fourteen days that declares whether the party does or does not
consent to entry of final orders by the bankruptcy court. Fed. R. Bankr. P. 9027(e)(3).
The plaintiffs did not file a timely objection. They did file a motion for leave to
submit an untimely objection in connection with an early remand order by the
bankruptcy court, but the motion was deemed moot after the district court reversed
the remand order, and the plaintiffs never renewed efforts to file an objection. In their
opposition to the motion to dismiss, the plaintiffs asserted that the claims were “not
core matters,” and that the bankruptcy court did not have the authority to enter a final
order, but did not address the lack of objection or otherwise develop the argument.
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Then, after the bankruptcy court entered a final order of dismissal, the plaintiffs chose
to appeal to the BAP rather than to the district court. This election reinforces the
implication, arising from the lack of a proper objection under the rules, that the
plaintiffs were content to resolve the matter without participation by the district court.
Although there are some conflicting signals in the record, we think the better view is
that the plaintiffs impliedly consented to entry of a final order by the bankruptcy
court.
The plaintiffs next argue that the bankruptcy court lacked authority to enter the
dismissal order, because the rights at issue here are private rights that an Article I
court cannot adjudicate. See Stern v. Marshall, 564 U.S. 462 (2011). But a party may
impliedly consent to a bankruptcy court’s authority to consider private rights. See
Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1944-45 (2015). The
plaintiffs impliedly consented to adjudication of their rights in the bankruptcy court,
because they did not raise a constitutional challenge to the court’s authority despite
numerous opportunities. See Matter of Delta Produce, L.P., 845 F.3d 609, 617 (5th
Cir. 2016).
On the merits, we agree with the BAP that the shareholder standing rule bars
the plaintiffs’ claims. This rule “is a longstanding equitable restriction that generally
prohibits shareholders from initiating actions to enforce the rights of the corporation
unless the corporation’s management has refused to pursue the same action for
reasons other than good-faith business judgment.” Franchise Tax Bd. of Cal. v. Alcan
Aluminium Ltd., 493 U.S. 331, 336 (1990). The requirement serves to ensure that
plaintiffs assert only their own legal rights and not those of a third party. Id. Because
a corporation is an entity separate and distinct from its shareholders, a shareholder
does not have standing to assert a claim for harm suffered by the corporation. See In
re AFY, 734 F.3d 810, 820 (8th Cir. 2013); Taha v. Engstrand, 987 F.2d 505, 507
(8th Cir. 1993). A shareholder must allege that he has personally “suffered a direct,
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nonderivative injury” to proceed independent of the corporation. Potthoff v. Morin,
245 F.3d 710, 717 (8th Cir. 2001).
The plaintiffs in this case allege only injuries that are derivative of AFY. The
breach of contract and restitution claims allege that if the Sears Defendants had not
received funds from AFY’s bankruptcy estate, then the money eventually would have
been received by the plaintiffs as shareholders of AFY. But the plaintiffs would have
benefited only derivatively if AFY as a corporate entity received the funds. The
tortious interference claim alleges that the Sears Defendants interfered with the
business expectancies of AFY, so it is a claim of the corporation not the shareholders.
Similarly, the claim asserting abuse of the bankruptcy process alleges that AFY was
harmed; the plaintiffs were harmed only derivatively as shareholders. In their breach
of fiduciary duty claim, the plaintiffs complain that Ronald and Dane violated a duty
to put the interests of AFY ahead of their own interests. But the alleged duty was to
the corporation, and the shareholder standing rule bars the shareholders from bringing
a claim based on a breach of that duty.
The plaintiffs invoke exceptions to the shareholder standing rule that permit
recovery if a specific shareholder is owed a special duty or suffers an injury “separate
and distinct from that suffered by other shareholders.” Taha, 987 F.2d at 507. The
injuries alleged by the plaintiffs here are no different from what any other shareholder
of AFY might have suffered when AFY’s bankruptcy estate was diminished. The
plaintiffs claim that Ronald and Dane owed them a special duty of loyalty as the
“management” of AFY, but loyalty to management is loyalty to the corporation, and
the defendants owed no special duty to the plaintiffs as individual shareholders.
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The judgment of the bankruptcy court is affirmed.
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