In re Fruehauf Trailer et al v. Daniel Harrow, No. 2:2010cv02312 - Document 29 (C.D. Cal. 2011)
Court Description: ORDER AFFIRMING DECISION OF THE BANKRUPTCY COURT (Bankruptcy case 96-1563-96-152, adversary number 08-1865-RN) by Judge Dean D. Pregerson (Made JS-6. Case Terminated.) (lc)
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1 2 O 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 12 IN RE FRUEHAUF TRAILER, Debtors, CHRISS STREET, 13 14 15 16 Appellant, v. DANIEL HARROW, as Successor Trustee of the End of the Road Trust and American Trailer Industries, Inc., 17 18 19 Appellees. ___________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No. CV 10-02312 DDP ORDER AFFIRMING THE DECISION OF THE BANKRUPTCY COURT re Bankruptcy Case 96-1563-96-152, adversary number 08-1865-RN. This matter comes before the court on appeal from the 20 bankruptcy court's judgment in favor of Plaintiffs-Appellees. 21 After reviewing the materials submitted by both parties and 22 considering the arguments therein, the court AFFIRMS the decision 23 of the bankruptcy court and adopts the following order. 24 25 cc: US Bankruptcy Court 26 27 28 cc: US Trustee's Office 1 I. Background 2 Appellant in this matter is Chriss Street ("Street"), who 3 formerly served as the trustee to the "End of the Road Trust." 4 (Appellant s Brief 2.) 5 Harrow ("Harrow"), the new trustee for End of the Road Trust, and 6 American Trailer Industries, Inc ("ATII"). 7 bankruptcy court's judgment against him for over $7 million 8 dollars. (Appellant's Excerpts of Record ("ER") 530-32.) 9 Appellees in this matter include Daniel Street appeals from a The chapter 11 bankruptcy of Fruehauf Trailer Corporation 10 resulted in a debtors's amended plan of joint organization (the 11 "Plan") that was confirmed on September 17, 1998, pursuant to an 12 order. (ER 536:1-4.) 13 trust, through which Street and the Debtors entered into a 14 Liquidating Trust Agreement. (Appellant s Brief 6.) 15 Liquidating Trust Agreement created the End of the Road Trust. (EOR 16 536:4-9.) The Plan called for a Delaware liquidation The 17 Notably, the Liquidating Trust Agreement prohibited the 18 Trustee, i.e. Street, from "engag[ing] in any trade or business, 19 including, without limitation, the purchase or any asset or 20 property, (other than such assets or property as are necessary to 21 preserve, conserve and protect . . . [the End of the Road Trust]). 22 (ER 538:24-26.) The Liquidating Trust Agreement also barred sizable 23 financial transactions without first obtaining the Trust Advisory 24 Committee's ("TAC") prior approval. (ER 539:3-15.) 25 Section 8.3.1 of the Trust Agreement expressly exculpated the 26 End of the Road Trust's Trustee of any liability from his acts or 27 omissions, unless those acts or omissions constituted gross 28 negligence or willful misconduct: 2 1 No provision of the Agreement shall be construed to impart any liability upon the Trustee unless it shall be proved in a court of competent jurisdiction that the Trustee s actions or omissions constituted gross negligence or willful misconduct in the exercise of any right, power or duty vested in him under this Agreement. 2 3 4 5 (Appellant s Brief 7 (emphasis added).) 6 Section 8.3.3 also concerned liability of the Trustee under 7 the Agreement: 8 Within the limitations and restrictions expressed and imposed herein, the Trustee may act freely with respect to the exercise of any or all of the rights, powers and authority conferred hereby in all matters concerning the Trust Estate after forming his best judgment based upon the circumstances without the necessity of obtaining the consent or permission or authorization of the Beneficial Interestholders or of the Court, any other court, official, or officer. . . . Further, the Trustee shall not be liable for any act or omission in connection with the administration of this Liquidating Trust, or the exercise of any right, power, or authority conferred upon him hereunder, unless it shall be proved that such Trustee was grossly negligent or acted in a manner which constituted willful misconduct. 9 10 11 12 13 14 15 16 17 18 (Appellant s Brief 8 (emphasis added).) 19 Additionally, Section 8.5.1 provided the Plan's trustee with 20 indemnification for any legal expenses incurred in connection with 21 the End of the Road Trust, subject to the same exception for gross 22 negligence or willful misconduct. (Appellant s Brief 9.) 23 Street served as trustee of the End of the Road Trust between 24 November 19, 1999 and August 1, 2005. (ER 5:3-5.) During that 25 time, Street acted as sole director and chief executive of Frudemex 26 the most valuable asset of the End of the Road Trust. (ER 537:1427 18.) After a series of name changes, Frudemex became known as 28 3 1 American Trailer Industries, Inc ("ATII"). (ER 537:25-28.) In 2 November 1999, Street, acting as trustee, purchased American 3 Trailer Manufacturing ("ATM"), a bankrupt trailer manufacturer, for 4 over $2 million. (ER 539:17-19, 540:5-7.) 5 approved by the TAC. (ER 540:5-8.) 6 ATM's expenses. (ER 540:17-19.) These business transactions were 7 not authorized by the TAC or any court. (ER 540:14-16.) 8 series of similar unauthorized transactions, Street acquired Dorsey 9 Trailer Corporation, (ER 540:20-541:1), before eventually incurring 10 further loss to the End of the Road Trust of over $3.3 million. (ER 11 542:3-5.) 12 This purchase was not ATII paid over $1.1 million of In a In February 2007, Appellees filed suit in the U.S. Bankruptcy 13 Court for the District of Delaware. 14 was transferred to the U.S. Bankruptcy Court for the Central 15 District of California. 16 former Comptroller of the End of the Road Trust and former 17 President and CFO of Dorsey, testified in Street s defense. 18 testified that all of these transactions were geared towards 19 building a much larger company, with the intent to tender a public 20 offering. (ER 201:10-202:12.) In October 2008, the matter During a two-day bench trial, Tasha Dolan, Dolan 21 The bankruptcy court found Street was liable for over $3 22 million in damages to the trust for his acquisition of and business 23 with ATM. 24 to repay monies received from "excess salary compensation," as well 25 as from reimbursement of personal expenses totaling almost 26 $500,000. 27 loses to the End of the Road Trust due to Street s actions to 28 amount to over $7 million. (ER 531 n.2.) (Id.) The bankruptcy court also ordered Street In total, the bankruptcy court calculated the (ER 532.) 4 The court further found that 1 Street "willfully engaged in various acts of self-dealing and 2 breach of duty . . . amount[ing] to gross negligence and willful 3 misconduct." 4 bankruptcy court found that the Liquidation Trust Agreement barred 5 indemnification. (ER 560:14-27.) 6 (ER 560:25-561:1.) As a result of this conduct, the Street appealed the portions of that judgement stemming from 7 liability from (1) ATM, (2) Dorsey Trailer Corporation, (3) excess 8 salary payments, and (4) reimbursement of personal expenses. 9 (Appellant s Brief 16.) 10 On appeal, Street argues that the bankruptcy court's finding 11 that Street s actions as trustee amounted to gross negligence or 12 willful misconduct is clearly erroneous. 13 argues that the Liquidation Trust Agreement exculpated (or 14 indemnified) his actions. 15 II. Legal Standard 16 Accordingly, Street Federal district courts have jurisdiction to review appeals 17 from final orders and judgments of bankruptcy courts. 18 158(a). 19 findings of fact are reviewed under the clearly erroneous standard, 20 and conclusions of law are reviewed de novo. 21 F.3d 992, 994 (9th Cir. 2005); In re Tucson Estates, Inc., 912 F.2d 22 1162, 1166 (9th Cir. 1990). 23 "generally recognized as a mixed question of law and fact." 24 States v. Babbs, 483 F.2d 308, 311 (9th Cir. 1973). 25 upon McAllister v. United States, 348 U.S. 19, 20-21 (1954), the 26 appellate review of a negligence finding is "governed by the 27 clearly erroneous standard." 28 991, 994 (9th Cir. 1978); Armstrong v. United States, 756 F.2d 28 U.S.C. § In determining an appeal from the bankruptcy court, In re Salazar, 430 A determination of negligence is United Yet, based Miller v. United States, 587 F.2d 5 1 1407, 1409 (9th Cir. 1985). 2 a bankruptcy court s findings were clearly erroneous, it must be 3 left with a definite and firm conviction that a mistake has been 4 committed. 5 364, 395 (1948). 6 Laws v. Sony Music Entertainment, Inc., 448 F.3d 1134, 1137 (9th 7 Cir. 2006). 8 III. Discussion 9 For a district court to conclude that United States v. United States Gypsum Co., 333 U.S. This court reviews questions of law de novo. See The parties argue over whether the Delaware Statutory Trust 10 Act or Delaware common law controls. 11 to the Delaware Statutory Trust Act, DEL. CODE 12 § 3801, et seq., 12 the Liquidation Trust Agreement properly exculpated (or 13 indemnified) him for any actions he took as trustee of the End of 14 the Road Trust. Appellees contend that the Delaware Statutory Act 15 is inapplicable. Instead, Appellees maintain that Delaware common 16 law applies because a certificate of trust, as required under § 17 3801 for the Delaware Statutory Trust Act to apply, was never 18 filed. 19 of law governs. 20 Street argues that pursuant The court, however, need not reach the issue of which body Under either the Delaware Statutory Trust Act or Delaware 21 common law a trust agreement cannot exculpate a trustee s gross 22 negligence or willful misconduct. 23 503, 509 (Del. 2002); RESTATEMENT (SECOND) 24 bankruptcy court, in examination of Street's acts and omissions, 25 found gross negligence and willful misconduct in violation of his 26 duties delineated in the End of the Road Trust and his duty of 27 loyalty as trustee. (ER 551:14-17, 560:27-561:2.) Because the court 28 affirms the Bankruptcy court s finding of willful misconduct and See McNeil v. McNeil, 798 A.2d 6 OF TRUSTS § 222. Here, the 1 gross negligence, the court need not reach the issue of whether 2 Delaware common law or the Delaware Statutory Trust Act governs. 3 Street concedes that he is liable for any acts of gross 4 negligence or willful misconduct during his tenure as the End of 5 the Road Trust's trustee. (Appellant s Brief 24.) 6 however, that at most his behavior constituted business conduct 7 that unfortunately didn t produce the results that [he] hoped for. 8 (Appellant s Brief 27.) 9 He contends, This court reviews the Bankruptcy court s determination that 10 Street was grossly negligent and engaged in willful misconduct for 11 clear error. 12 ( Memorandum ), the bankruptcy court first explained the express 13 limitations of the Liquidation Trust Agreement, which included a 14 restriction prohibiting the Trustee from enter[ing] into or 15 engag[ing] in any trade or business, including, without limitation, 16 the purchase or any asset or property, (other than such assets or 17 property as are necessary to preserve, conserve and protect [the 18 Trust]. . . . (ER 538:24-26.) 19 the Liquidation Trust Agreement barred certain financial 20 transactions without first obtaining the TAC s prior approval. (ER 21 539:3-15.) In its Memorandum of Decision After Trial The court further acknowledged that 22 The court went on to review in detail what it described 23 broadly as a case in which a fiduciary lost sight of his mandate 24 to liquidate trust assets. (ER 536:12-15.) 25 court set forth in detail the monetary losses that the End of the 26 Road Trust sustained as a result of Street s activities relating 27 to: (1) ATM, (2) Dorsey Trailer Corporation, (3) excess salary 28 payments, and (4) reimbursement of personal expenses. (ER 539:177 In particular, the 1 551:9.) 2 negligent when he acted in direct violation of his stated mandate, 3 namely to liquidate the trust s assets. 4 Liquidation Trust Agreement's express prohibitions by purchasing 5 and attempting to operate a large business for seven years instead 6 of, as the End of the Road Trust stipulated, liquidating assets. 7 Street s actions as Trustee resulted in losses of significant sums 8 of money otherwise available for its beneficiaries. 9 18.) Ultimately, the court found Street had been grossly Indeed, Street ignored the (ER 536:16- The bankruptcy court s findings are reasoned and supported. 10 The court points out, for example, that Street purchased and 11 operated bankrupt companies with trust funds that, ultimately, 12 yielded no investment return. 13 reasoned and detailed analysis, this court is not left with a 14 definite and firm conviction that a mistake has been committed. 15 U.S. Gypsum Co., 333 U.S. at 395. 16 court s finding that Street was grossly negligent in his management 17 of the End of the Road Trust is not clearly erroneous, and this 18 court affirms that finding. 19 Based on the bankruptcy court s Therefore, the bankruptcy Turning to the trustee s duty of loyalty, the bankruptcy court 20 again examined Street s actions in connection with (1) ATM, (2) 21 Dorsey, (3) excess salary payments, and (4) reimbursement of 22 personal expenses. (ER 551:23-559:10.) 23 conclusion that Street breached his common law duty of loyalty 24 under DEL. CODE 12 § 3581, the court found it significant that 25 Street acquired assets that ultimately lost money, while also 26 enriching himself at the expense of the trust. (ER 555:5-15). 27 court also considered Street s failure to seek the requisite 28 permission for his business decisions, as well as his failure to 8 In support of the court s The 1 preserve records and potential legal claims. (ER 557:9-18; 558:19- 2 23.) 3 Street contends that the bankruptcy court "scrutinized" his 4 decisions and actions solely based upon their outcomes, which 5 cannot "justify millions of dollars in liability against him." 6 (Appellant s Brief 27-28). 7 evidence providing a factual foundation for the court s conclusions 8 rests on a brief comment during the testimony of Tasha Dolan, 9 former Comptroller of End of the Road Trust and former President Moreover, he argues that the only 10 and CFO of Dorsey. 11 argues, is mere[] speculation. (Id.) 12 that the bankruptcy court erred in so far as the court found no 13 motive for Street s actions to support its finding of misconduct. 14 (Id.) 15 (Appellant s Brief 26.) This evidence, Street Street further contends The court is not persuaded. Clear error is a high bar. To support a determination of 16 gross negligence or willful misconduct, the bankruptcy court had to 17 find that Street was reckless[ly] indifferen[t] or [that he] 18 deliberate[ly] disregard[ed]. . . [a] trustee's fiduciary duty. 19 In re Continental Coin Corp., 380 B.R. 1, 4 (Bankr. C.D. Cal 2007). 20 Likewise, Black's Law Dictionary defines gross negligence as [a] 21 conscious, voluntary act or omission in reckless disregard of a 22 legal duty [which imposes] consequences [upon] another party. 23 Black's Law Dictionary 1134 (9th ed. 2009). 24 failure to offer a motive for Street s actions is irrelevant, so 25 long as he intentionally or recklessly disregarded his duties as a 26 trustee. 27 28 The bankruptcy court s As discussed above, the bankruptcy court supported its finding with careful consideration of the record and detailed findings. 9 1 Nothing Street has presented demonstrates that the bankruptcy 2 courts findings of gross negligence and willful misconduct in 3 relation to Street s unauthorized business transactions, 4 overpayment of salary, and reimbursement of personal expenses 5 were clearly erroneous. 6 bankruptcy court. The court, therefore, affirms the 7 Because the court concludes that the bankruptcy court s 8 findings were not clearly erroneous, it does not address as moot 9 Street s argument that the Liquidation Trust Agreement's 10 exculpatory clause shields him from liability for negligence, or 11 that the Trust Agreement's indemnification clause obligates 12 reimbursement for his legal fees or payment of other monies. 13 Street s actions were not merely negligent, but rather, grossly 14 negligent and, therefore, the exculpatory clause and the 15 indemnification clause which relate only to mere negligence do 16 not apply. 17 IV. Conclusion 18 19 For the foregoing reasons, the court AFFIRMS the decision of the bankruptcy court. 20 21 IT IS SO ORDERED. 22 23 Dated: May 23, 2011 DEAN D. PREGERSON United States District Judge 24 25 26 27 28 10
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