Opinion
Case No. 8:00CV3284
August 19, 2002
MEMORANDUM AND ORDER
This matter is before the Court upon a Motion for Partial Summary Judgment (Filing No. 23) filed by Defendants, The American Shorthorn Association ("ASA") and Dr. Roger E. Hunsley (collectively the "Defendants"). Plaintiff is Jan S. Ostrovsky, the trustee in the Chapter 7 bankruptcy cases of In re W.J. Hoyt Sons Management Co., Ltd., Case No. 397-31374-elp7 (Bankr. Ore. 1997) and In re W.J. Hoyt Sons Ranches, MLP, Case No. 397-3175-elp7 (Bankr. Ore. 1997). Defendants seek summary judgment on the basis that Ostrovsky is not the real party in interest and does not have standing to pursue these claims against them.
Background
In the Complaint, Ostrovsky alleges that Walter J. Hoyt III and other members of the Hoyt family built a cattle empire, in part by engaging in fraudulent investment schemes. Between 1986 and 1998, the Hoyts allegedly solicited and received more than $100 million in investor funds through various investment partnerships, including cattle investment partnerships. Ostrovsky alleges that the cattle were kept on ten to twelve separate ranches, and that at its height, the Hoyt operation employed more than 200 people and was composed of more than 100 partnerships.
On February 24, 1997, Involuntary Petitions in Bankruptcy were filed against the Debtors. In connection with those proceedings, Ostrovsky was appointed as Trustee in Bankruptcy for the jointly administered bankruptcy estates of W.J. Hoyt Sons Management Co., Ltd., and W.J. Hoyt Sons Ranches, MLP (hereafter referred to collectively as the "Debtors"). As part of his trustee responsibilities, Ostrovsky filed in the bankruptcy court a Motion for Summary Judgment seeking Substantive Consolidation of the Debtors' estates and of several non-debtor entities in which the Debtors had a controlling interest. In support of that Motion, Ostrovsky also filed a Notice of the Trustee's Complaint for Substantive Consolidation which identifies the non-debtor entities that were also subject to the request for substantive consolidation. All of these have been offered by Ostrovsky in opposition to the Defendants' Motion for Partial Summary Judgment (Filing No. 25, Exs. H, I, J, K, and L). The bankruptcy court granted the trustee's motion and entered a Judgment of Substantive Consolidation on November 13, 1998 (Filing No. 25 at Ex. M). By that Judgment, the non-debtor entities were substantively consolidated into the original bankruptcy estate. The non-debtor entities that were substantively consolidated into the Debtors' estates have been referred to in this action, and will continue to be referred to herein, as the "Investment Partnerships." (Filing No. 25, Ex. L at exhibit A lists the entities).
In this action, Ostrovsky, as trustee for the bankruptcy estates, seeks to recover damages from Defendants based on their alleged negligence in allowing the Hoyts to fraudulently register cattle as shorthorns, thereby falsely inflating their value, and contributing to the fraud perpetrated on the bankruptcy estates' creditors. Ostrovsky seeks to recover damages from the ASA and Hunsley under the theory that the Defendants' negligence enabled Hoyt family members to defraud the Debtors' creditors. Defendants have filed a motion for partial summary judgment on the basis that Ostrovsky lacks standing to recover money damages from them. Defendants contend that the damages that Ostrovsky seeks to recover from them represent the same money that the Investment Partnerships seek to recover as creditors of the Debtors, as evidenced by the Proofs of Claim that the Investment Partnerships filed in the bankruptcy proceedings. Consequently, Defendants maintain that Ostrovsky has no standing to pursue a claim that should be prosecuted by the Investment Partnerships.
Summary Judgment Standard
With respect to summary judgment, the Court must examine the record in the light most favorable to the nonmoving party, in this case Ostrovsky. U.S. ex rel. Quirk v. Madonna Towers, Inc., 278 F.3d 765, 767(8th Cir. 2001). The proponent of a motion for summary judgment "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of `the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Id. at 322 (quoting Fed.R.Civ.P. 56(c)). The proponent need not, however, negate the opponent's claims or defenses. Id. at 324-25.
In response to the proponent's showing, the opponent's burden is to "come forward with `specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986) (quoting Fed.R.Civ.P. 56(e)). A "genuine" issue of material fact is more than "some metaphysical doubt as to the material facts." Id.
"[T]here is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). "If the evidence is merely colorable . . . or is not significantly probative . . . summary judgment may be granted." Id. (citations omitted). In addition, "the mere existence of some alleged factual dispute between the parties is not sufficient by itself to deny summary judgment. . . . Instead, `the dispute must be outcome determinative under prevailing law.'" Get Away Club, Inc. v. Coleman, 969 F.2d 664, 666 (8th Cir. 1992) (citation omitted) (quoting Holloway v. Pigman, 884 F.2d 365, 366 (8th Cir. 1989)).
Analysis
Defendants seek summary judgment on the basis that Ostrovsky does not have standing to pursue the action against them. They contend that Ostrovsky's claims should be brought against them, if at all, by the Investment Partnerships as creditors of the bankruptcy estate. Defendants argue that a trustee in bankruptcy does not have standing to proffer and pursue claims of creditors of the bankruptcy estate against third parties, citing Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 (1972); and In re Ozark Restaurant Equip. Co., 816 F.2d 1222 (8th Cir.) cert. denied 484 U.S. 848 (1987).
This Court agrees that the Eighth Circuit Court of Appeals has held that the Bankruptcy Code does not provide authority to a bankruptcy trustee to maintain an action on behalf of creditors to pierce the corporate veil. In re Ozark Restaurant Equipment Co., 816 F.2d 1222, 1230-31 (8th Cir. 1987). However, that rule does not apply if the creditor's status is altered because of a judgment of substantive consolidation. The key issue relative to this motion is whether the bankruptcy court's Judgment of Substantive Consolidation (Filing No. 25, Exhibit M) affected the status of the Investment Partnerships as creditors to the bankruptcy estate. Given the facts presented here, the Court concludes that after the bankruptcy court's entry of Judgment of Substantive Consolidation, the causes of action accruing to the Investment Partnerships became assets of the consolidated bankruptcy estate.
Because the bankruptcy proceeding at issue in this case was commenced in the District of Oregon, the Ninth Circuit Court's analysis and holding in In re Boham, 229 F.3d 750 (9th Cir. 2000) is particularly instructive. A summary of the basic principles of substantive consolidation was presented in Boham:
The theory of substantive consolidation emanates from the core of bankruptcy jurisprudence. . . . Orders of substantive consolidation combine the assets and liabilities of separate and distinct — but related — legal entities into a single pool and treat them as though they belong to a single entity. Substantive consolidation "enabl[es] a bankruptcy court to disregard separate corporate entities, to pierce their corporate veils in the usual metaphor, in order to reach assets for the satisfaction of debts of a related corporation."Id. at 764 quoting James Talcott, Inc. v. Wharton (In re Continental Vending Machine Corp.), 517 F.2d 997, 1000 (2nd Cir. 1975) (other citations omitted). Based in part on these legal principles, the Boham Court affirmed the bankruptcy court's decision to order substantive consolidation. In a previous case, the Ninth Circuit Court also acknowledged that the bankruptcy trustee, as the representative of the bankruptcy estate, was "the only party with standing" to prosecute causes of action belonging to the estate. Moneymaker v. CoBen (In re Eisen), 31 F.3d 1447, 1451 n. 2 (9th Cir. 1994).
Based on the powers expressly and inherently provided to trustees in the Bankruptcy Code, and based on the Ninth Circuit Court's interpretation of the doctrine of substantive consolidation, this Court concludes that the Investment Partnerships' assets and liabilities were commingled with those of the Debtors as a result of the Judgment of Substantive Consolidation. As a result, any causes of action accruing to the Investment Partnerships as of the commencement of the Debtors' bankruptcy became assets of the bankruptcy estate, and Ostrovsky had the authority and the responsibility, as trustee for the bankruptcy estate, to pursue the Investment Partnerships' claims and the Debtors' claims against third-parties.
This Court holds that Ostrovsky, as the trustee of the bankruptcy estate, has standing to pursue this action against Defendants. For these reasons, Defendants' motion for partial summary judgment is denied.
IT IS ORDERED:
The Motion for Partial Summary Judgment filed by The American Shorthorn Association and Dr. Roger E. Hunsley (Filing No. 28) is denied.