Opinion
19-56885 Adv. Pro. 21-2033
03-15-2022
In re: MURRAY ENERGY HOLDINGS CO., et al., Debtors. v. American Consolidated Natural Resources, Inc. Defendant and Gulfport Appalachia, LLC, Plaintiff and Counter-Defendant,
Matthew D. Cavenaugh, Counsel for the Plaintiff and the Counter-Defendant Nicholas Miller, Counsel for the Plaintiff and the Counter-Defendant Joseph M. Muska, Counsel for the Plaintiff and the Counter-Defendant Maggie B. Burrus, Counsel for the Defendant and the Counter-Claimant Manuel Cardona, Counsel for the Defendant and the Counter-Claimant Sharon Hemphill, Counsel for the Defendant and the Counter-Claimant David A. Lockshaw, Jr. Counsel for the Defendant and the Counter-Claimant John G. Turner, III, Counsel for the Defendant and the Counter-Claimant
Matthew D. Cavenaugh, Counsel for the Plaintiff and the Counter-Defendant
Nicholas Miller, Counsel for the Plaintiff and the Counter-Defendant
Joseph M. Muska, Counsel for the Plaintiff and the Counter-Defendant
Maggie B. Burrus, Counsel for the Defendant and the Counter-Claimant
Manuel Cardona, Counsel for the Defendant and the Counter-Claimant
Sharon Hemphill, Counsel for the Defendant and the Counter-Claimant
David A. Lockshaw, Jr. Counsel for the Defendant and the Counter-Claimant
John G. Turner, III, Counsel for the Defendant and the Counter-Claimant
OPINION AND ORDER ON GULFPORT APPALACHIA, LLC'S MOTION TO DISMISS OR STRIKE AMERICAN CONSOLIDATED NATURAL RESOURCES, INC.'S COUNTERCLAIMS (DOC. 84)
John E. Hoffman, United States Bankruptcy Judge
I. Introduction
In responding to a complaint, a defendant may assert both affirmative defenses and counterclaims, including counterclaims for a declaratory judgment. Counterclaims for a declaratory judgment sometimes duplicate affirmative defenses. The question here is whether counterclaims that duplicate affirmative defenses should be stricken or dismissed as duplicative. Because the factors courts consider in making this decision support hearing the defendant's counterclaims, they will not be stricken or dismissed.
II. Jurisdiction and Constitutional Authority
The Court has jurisdiction to hear and determine this matter under 28 U.S.C. § 1334(b) and the general order of reference entered in this district in accordance with 28 U.S.C. § 157(a). The counterclaims seek a declaration that the complaint violates the sale-free-and-clear and injunctive provisions of the Court's confirmation order, making this a core proceeding. 28 U.S.C. § 157(b)(2)(A) & (O). And there is no constitutional impediment to the entry of this order. The Court has the constitutional authority to enter a final judgment because the counterclaims, which rely on the Court's confirmation order, "stem[] from the bankruptcy itself." Stern v. Marshall, 564 U.S. 462, 499 (2011).
III. Procedural History
Gulfport Appalachia, LLC commenced this adversary proceeding in the United States Bankruptcy Court for the Southern District of Texas, where it and ten affiliated companies are debtors in possession in jointly administered Chapter 11 cases. See Gulfport's original complaint, Adv. Doc. 1. By the adversary proceeding, Gulfport seeks the return of cash that it allegedly paid to three entities that are debtors in the bankruptcy cases of Murray Energy Holdings Co. and its affiliated debtors and debtors in possession ("Debtors"), which cases are pending in this Court. The defendant, American Consolidated Natural Resources, Inc. allegedly acquired this cash as part of its purchase of substantially all the assets of the Debtors. The acquisition of the Debtors' assets was provided for in this Court's order ("Confirmation Order") (Doc. 2135) confirming the Debtors' Chapter 11 plan ("Plan") (Doc. 2135, Ex. A). In response to Gulfport's complaint seeking the return of the cash, American Consolidated relies on the terms of the Confirmation Order. And, citing comity concerns, the Texas bankruptcy court transferred the adversary proceeding to the Southern District of Ohio based on its view that this Court is the proper court to interpret the Confirmation Order. See Transcript of hearing in the Texas bankruptcy court (Adv. Doc. 36) at 14-16; Order transferring adversary proceeding (Adv. Doc. 39).
References to "Adv. Doc.-" are to docket entries in this adversary proceeding, and references to "Doc.-" are to docket entries in the main bankruptcy case, Case No. 19-56885.
After the adversary proceeding was transferred, Gulfport filed an amended complaint ("Am. Compl.") (Adv. Doc. 73), American Consolidated filed an answer with affirmative defenses and counterclaims ("Answer") (Adv. Doc. 74), and Gulfport moved to strike or dismiss the counterclaims (Adv. Doc. 84).
IV. Background
The Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in October 2019. Gulfport alleges that before filing its own bankruptcy case a little over a year later, it inadvertently mailed royalty checks of nearly $2.5 million ("Funds") to three of the Debtors on the same day that the Court entered the Confirmation Order. Am. Compl. at 2, 6. The Confirmation Order provided for the sale of substantially all the Debtors' assets to American Consolidated. Id. at 2. Gulfport alleges that, after entry of the Confirmation Order, it realized the mistake it had made in sending the royalty checks to the Debtors, which had allegedly conveyed away their mineral interests and were no longer entitled to the royalty payments. Id. at 2, 6. Gulfport requested that the Debtors or American Consolidated return the Funds. Id. at 2-3. The Debtors and American Consolidated both refused to return any money to Gulfport, leading to the filing of this adversary proceeding. Id. at 3. Gulfport seeks, among other things, turnover of the Funds, damages for American Consolidated's violation of the automatic stay in its bankruptcy case, avoidance of fraudulent transfers, and recovery of the transfer of the Funds under § 550 of the Bankruptcy Code. Id. at 7-12.
American Consolidated contends that it does not have Gulfport's property. Answer at 2, 5, 12. In doing so, it relies on the Confirmation Order, which provides that American Consolidated was acquiring the Debtors' assets "free and clear of any and all liens, encumbrances, and other interests to the fullest extent permitted by section 363(f) and section 1141(c) of the Bankruptcy Code[.]" Confirmation Order ¶ 72. American Consolidated asserts this free-and-clear provision as the basis for its Affirmative Defense No. 4 and, in Count 1 of the Counterclaim, seeks a declaratory judgment that Gulfport's claims against American Consolidated violate this provision of the Confirmation Order. Answer at 11-12, 25-26.
The Confirmation Order also contains an injunction providing that "all persons or entities are hereby forever prohibited and permanently enjoined from asserting against the Stalking Horse Bidder, its successor and assigns, or the Acquired Assets, any liabilities, liens, claims, encumbrances, or other interests, or successor or transferee liabilities[.]" Confirmation Order ¶ 76. American Consolidated asserts this injunction as the basis for its Affirmative Defense No. 3 and, in Count 2 of its Counterclaim, seeks a declaratory judgment that Gulfport's claims violate this injunctive provision of the Confirmation Order. Answer at 11, 26-27.
In particular, the relevant counterclaims and affirmative defenses state as follows:
| Counterclaim seeks a declaration that: | Affirmative Defense |
| Count 1: “[American Consolidated] took substantially all of Murray's cash and cash equivalents free and clear of any interest or claim Gulfport purportedly had in Murray's cash and cash equivalents prior to the Effective Date, and that, therefore, Gulfport's lawsuit (and the asserted claims therein) contravene the ‘free and clear' provisions of this Court's Confirmation Order.” | Affirmative Defense No. 4: “[American Consolidated] acquired substantially all of the Murray Debtors' assets pursuant to a confirmed chapter 11 plan in good faith and free and clear of liens, claims, encumbrances, and other interests to the fullest extent permitted by section 363(f) and section 1141(c) of the Bankruptcy Code and, therefore, Gulfport's claims are completely barred as against [American Consolidated].” |
| Count 2: “The Confirmation Order forever enjoined Gulfport from pursuing any claim for the recovery of property from, or damages against, [American Consolidated], and that, therefore, Gulfport's lawsuit (and the asserted claims therein) violate the injunction provisions of this Court's Confirmation Order.” | Affirmative Defense No. 3: “Gulfport is enjoined from commencing an action against [American Consolidated] to recover a claim against or property interest in the Murray Debtors by the express provisions of the Confirmation Order.” |
Because the counterclaims for a declaratory judgment are substantially the same as Affirmative Defenses No. 3 and 4, Gulfport argues that the counterclaims must be stricken as duplicative under Rule 12(f) or dismissed for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Civil Rule(s)"). Civil Rule 12(f) provides for the striking of "any redundant" matter, and Civil Rule 12(b)(6) provides for the dismissal of claims for failure to state a claim upon which relief can be granted. Because the factors that courts consider in deciding whether to hear declaratory judgment actions support the exercise of jurisdiction over the counterclaims, they will not be stricken under Civil Rule 12(f) or dismissed under Civil Rule 12(b)(6).
V. Legal Analysis
Courts have "substantial discretion" in deciding whether to hear declaratory judgment actions. U.S. Fire Ins. Co. v. Albex Aluminum, Inc., 161 Fed.Appx. 562, 563 (6th Cir. 2006) (quoting Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995)). In exercising this discretion, trial courts in the Sixth Circuit must apply five factors:
(1) whether the judgment would settle the controversy; (2) whether the declaratory judgment action would serve a useful purpose in clarifying the legal relations at issue; (3) whether the declaratory remedy is being used merely for the purpose of "procedural fencing" or "to provide an arena for a race for res judicata"; (4) whether the use of a declaratory action would increase the friction between our federal and state courts and improperly encroach on state jurisdiction; and (5) whether there is an alternative remedy that is better or more effective.Id. at 564 (quoting Grand Trunk W. R.R. Co. v. Consol. Rail Corp., 746 F.2d 326 (6th Cir. 1984)).
Although the parties did not discuss these factors, the Court will apply them here because failure to do so constitutes reversible error. Id.
The first factor supports exercising jurisdiction. A decision on American Consolidated's request for a declaratory judgment would settle the controversy between it and Gulfport over the issues of whether the free-and-clear provision of the Plan and the Plan's injunction bar Gulfport's claim for a return of the Funds. The second factor also weighs against dismissal of the declaratory judgment action because adjudicating the counterclaims would serve a useful purpose in clarifying the legal relations at issue-again, whether the free-and-clear provision of the Plan and the Plan's injunction bar Gulfport's claim for a return of the Funds. See Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 557 (6th Cir. 2008) ("[I]t is almost always the case that if a declaratory judgment will settle the controversy, then it will clarify the legal relations in issue.").
As for the third factor, there is no reason to believe that the declaratory remedy sought by way of the counterclaims asserted in this adversary proceeding is being used merely for the purpose of procedural fencing or to provide an arena for res judicata. Indeed, Gulfport's action was already pending in this Court at the time American Consolidated asserted its counterclaims. The fourth factor also supports exercising jurisdiction here: Because there is no pending state court action, the use of the declaratory judgment action would not increase the friction between federal and state courts or improperly encroach upon state jurisdiction. Finally, under the circumstances, there is no alternative remedy which is better or more effective. There is no other remedy American Consolidated could seek that would determine whether the terms of the Confirmation Order entitle it to keep the Funds. It bears noting, however, that American Consolidated would obtain the same relief-a judicial determination that, based on the Plan's sale-free-and-clear and/or injunctive provisions, American Consolidation has no legal obligation to return funds to Gulfport-if it were to prevail on its affirmative defenses. Still, all in all, the factors support the Court's exercise of jurisdiction over this declaratory judgment action.
The lack of prejudice to Gulfport also counsels against dismissal of the counterclaims. Courts regularly focus on this factor in deciding whether to hear counterclaims that duplicate affirmative defenses. See Clark v. Rockhill Ins. Co., No. 6:18-cv-780-Orl-37KRS, 2018 WL 4926487, at *7 (M.D. Fla. Sept. 21, 2018) ("[I]f Rockhill's counterclaim turns out to be completely duplicative of its affirmative defenses, as the Clarks argue, then the Clarks will suffer no prejudice and there is no harm in allowing the counterclaim to proceed alongside the Clarks' breach of contract claim."); Bank of Am., N.A. v. Chicago Title Ins. Co., No. 17 C 0407, 2017 WL 2215012, at *3 (N.D. Ill. May 18, 2017) ("[E]ven if the counterclaim and affirmative defenses are entirely duplicative, plaintiff will suffer no prejudice by having to respond to the counterclaim. . . . Striking the counterclaim as redundant would not remove the [key] issue, and would not save plaintiff any time or money."); Regions Bank v. Commonwealth Land Title Ins. Co., No. 11-23257-CIV, 2012 WL 5410609, at *5 (S.D. Fla. Nov. 6, 2012) ("[I]f Count II of the Counterclaim really is just a mirror image of Commonwealth's sixth affirmative defense, the Court fails to see how Regions is left any worse off by Count II remaining in the case. Either way, the issues underlying the affirmative defense and declaratory count will be the subject of discovery and adjudication."); Balmoral Racing Club, Inc. v. Churchill Downs, Inc., No. 11 C 1028, 2011 WL 6009610, at *2 (N.D. Ill. Nov. 29, 2011) (declining to dismiss counterclaim because "plaintiffs will not suffer any prejudice if the counterclaim remains pending"); U.S. Bank N.A. v. Alliant Energy Res. Inc., No. 09-cv-078-bbc, 2009 WL 1850813, *3 (W.D. Wis. June 26, 2009) ("If, as plaintiff argues, the counterclaims are truly repetitious, then plaintiff will not have to expend much time on any additional discovery or briefing."). Gulfport will not be prejudiced by the Court's adjudication of the counterclaims. As American Consolidated points out, because affirmative defenses No. 3 and 4 raise the same legal issues as the counterclaims, the amount of additional time and money Gulfport will be required to expend to defend them will be minimal.
Besides seeking to strike the counterclaims under Civil Rule 12(f), Gulfport also asks the Court to dismiss them under Civil Rule 12(b)(6). In so doing, Gulfport relies on the same arguments it makes under Civil Rule 12(f)-that the counterclaims are duplicative of the affirmative defenses. As the Regions Bank court held, however, "mere redundancy is not grounds for dismissal under Rule 12(b) (6) for failure to state a claim." Regions Bank, 2012 WL 5410609, at *4; see also Kenneth F. Hackett & Assocs., Inc. v. GE Capital Info. Tech. Sols., Inc., 744 F.Supp.2d 1305, 1309 (S.D. Fla. 2010) ("[B]eing redundant . . . is [not] grounds for dismissal under Rule 12(b)(6) for failing to state a claim.") (quoting In re RCK Modular Homes Sys., Inc., 363 B.R. 29, 31 (D.N.H. 2007)). The counterclaims therefore are not subject to dismissal under Civil Rule 12(b)(6).
VI. Conclusion
For the reasons set forth above, Count 1 and Count 2 of American Consolidated's counterclaim will not be dismissed. Gulfport's motion to dismiss or strike the counterclaims is DENIED.
IT IS SO ORDERED.