Summary
noting the court in Conseco's bankruptcy case had held Regulation U could not be asserted as a defense
Summary of this case from Massey v. ConsecoOpinion
1:03-CV-1701-LJM-VSS
April 12, 2004
ORDER ON DEFENDANTS' MOTION TO TRANSFER AND TO DISMISS
This matter is before the Court on the motion of defendants, Conseco, Inc. ("Old Conseco") and New CNC, Inc. ("New Conseco"), to transfer this case to the Bankruptcy Court for the Northern District of Illinois; and the motion of defendant Conseco. Services LLC ("Conseco. Services") to dismiss the claims against it. Old Conseco. and New Conseco. argue that the declaratory action of plaintiffs, James D. Massey and Dennis E. Murray, Sr. ("Plaintiffs"), is merely an attempt to deprive the "natural plaintiffs" from choosing their forum, and that Plaintiffs' claims are better presented as affirmative defenses to claims Old Conseco. and New Conseco. have against Plaintiffs. Conseco. Services argues that the claims against it should be dismissed in favor of a state law case pending against Plaintiffs and others to resolve the same issues. For the reasons set forth herein, the motion of Old Conseco, New Conseco, and Conseco Services (collectively, "Defendants") is GRANTED.
I. BACKGROUND
Plaintiff James D. Massey ("Massey") is an Indiana resident. Compl. ¶ 3. Massey was a director of Old Conseco. from 1994 to 2000 and was a Conseco shareholder for many years. Id. Plaintiff Dennis E. Murray, Sr. ("Murray") is an Ohio resident. Id. ¶ 4. Murray was a director of Old Conseco. from 1994 to 2000, and a long-time Conseco. stock holder. Id. Old Conseco. is an Indiana corporation with its principal place of business in Hamilton County, Indiana; Conseco. Services is an Indiana limited liability company with its principal place of business in Hamilton County, Indiana; and New Conseco. is a Delaware corporation with its principal place of business in Hamilton County, Indiana. Id. ¶¶ 5-7.From 1996 to 2000, Old Conseco. maintained a stock purchase program for its directors and officers (the "DO Loan Program). See Exs. 1-5 to Pltfs' Compl. (the "DO Plans"). The DO Loan Program provided for Old Conseco's directors and officers to borrow money from a syndicate of banks to purchase large blocks of Old Conseco. stock. Memorandum in Support of Old Conseco's and New Conseco's Motion to Transfer Venue and Conseco. Services' Motion to Dismiss ("Mem. in Supp.") at 3. Old Conseco. guaranteed the loans and Conseco. Services made the interest payments. Id.
Both Plaintiffs and Defendants have failed to properly cite to evidence to support all of the facts alleged in the fact sections of their briefs to the Court on this motion. Hence, the Court will cite to the parties' briefs where no evidence has been cited by the parties.
The terms of the DO Loan Program are set forth in the DO Plans. The DO Plans specify that they are to be construed under the laws of Indiana. Pltfs' Compl. Ex. 1 ¶ 17, Ex. 2 ¶ 19, Ex. 3 ¶ 19, Ex. 4 ¶ 19, Ex. 5 ¶ 18. The DO Plans propose that in the event of a "Change of Control" of Old Conseco, participants in the DO Loan Program would be entitled to receive from Old Conseco. the price they paid for their respective shares purchased under the DO Loan Program. Pltfs' Compl. Ex. 1 ¶ 10, Ex. 2 ¶ 12, Ex. 3 ¶ 12, Ex. 4 ¶ 12. The DO Plans state that Plaintiffs are "fully obligated to repay to the Bank all principal, interest, and other amounts on the Loan when due and payable. Id. Ex. 1 ¶ 9, Ex. 2 ¶ 9, Ex. 3 ¶ 9, Ex. 4 ¶ 9, Ex. 5 ¶ 9. Old Conseco. has the right under the DO Plans to "take any action relating to the Participant and her or his assets, which the Board of Directors deems reasonable and necessary . . . to obtain full reimbursement for amounts Conseco. pays to the Bank under its guaranty." Id.
Massey and Murray purchased numerous shares of Old Conseco. stock under the DO Loan Program. Compl. ¶ 13. Plaintiffs both executed promissory notes to repay the banks for the loan amounts. Mem. in Supp. at 4. Massey and Murray also promised to repay Conseco. Services for all the interest paid in advance on their behalf. Id. In November, 2000, Massey and Murray refinanced their loans. Defs' Ex. 3 at P 053583, P 053584. The refinanced credit agreements state that Illinois law would govern any dispute relating to Plaintiffs' repayment obligations, and that any such dispute would be filed in Illinois state or federal court. Id. at Sections 13.8, 13.10. At this time, Massey and Murray also signed promissory notes to the lending banks, which provided that the notes were deemed contracts made under the state of Illinois. Defs' Ex. 4.
Plaintiffs have not paid back the money they borrowed under the DO Loan Program, nor have they repaid Conseco. Services for the interest advanced in their behalf. Mem. in Supp. at 5. Old Conseco. filed a chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the Northern District of Illinois on December 17, 2002. Id. at 7. Old Conseco's bankruptcy triggered a default of Plaintiffs' loans under the DO Loan Program. On September 9, 2003, the Bankruptcy Court approved Old Conseco's Sixth Amended Plan of Reorganization ("Plan of Reorganization"). Id. The lender banks under the DO Loan Program transferred and assigned to New Conseco. all of their rights under the promissory notes executed pursuant to the DO Loan Program. Defs' Ex. 9. New Conseco. is required to pursue claims against Plaintiffs and others to collect the amount due under the loans. Mem. in Supp. at 8. The proceeds of successful claims will be distributed to Old Conseco's creditors. Id.
The Order confirming the Plan of Reorganization ("Confirmation Order") specifically states that the "consummation of the Plan shall not constitute a change of ownership or change of control, as such terms are used in any employment, severance or termination agreement." Confirmation Order ¶ 47. The Confirmation Order specifically states that the Bankruptcy Court will retain jurisdiction "over all matters arising out of or related to the Chapter 11 Cases and the Plan," including jurisdiction over "efforts to collect loans due the Reorganizing Debtors" and to resolve any cases or controversies that arise in connection with enforcement or interpretation of the Plan. Id. ¶ 49. The Confirmation Order also enjoins all persons from "[a]sserting any right of setoff, subrogation or recoupment of any kind against any obligation due" from Old Conseco. or New Conseco. Id. ¶ 45 (iii)(c). The bankruptcy court has ruled that no private right of action exists under Regulation U, 12 C.F.R. § 221.1(b)(1). Defs' Ex. 12 at 545-46. Thus, non-government entities do not have standing to object to Old Conseco's loan guarantees under the DO Loan Program. Id.
In their Complaint, Plaintiffs allege that:
(I) A "change of control" has occurred as the phrase is used in the DO Plans. Compl. ¶ 15. Thus, Plaintiffs are entitled to receive the price they paid for their shares of Old Conseco. stock under the DO Loan Program, but New Conseco. denies Plaintiffs are entitled to that benefit. Id. ¶ 18. Plaintiffs seek a declaratory judgment that there has been a "change of control" and to the extent Plaintiffs are determined to have any financial obligation to New Conseco, that obligation should be offset by the purchase price of the stock shares. Id. at 4-5.
(II) Section 7.1 of Old Conseco's bylaws required Old Conseco. to indemnify any director from any claim arising out of his directorship, and Plaintiffs' participation in the DO Loan Program arose directly out of their directorships. Id. ¶¶ 20-21.
New Conseco. denies it is liable to indemnify Plaintiffs, and has threatened suit against them. Id. ¶¶ 22, 24. Plaintiffs seek a declaratory judgment that New Conseco. must indemnify Plaintiffs for any claims arising from their directorships and that New Conseco. is thus precluded from bringing claims against Plaintiffs arising out of their directorships. Id. at 6.
(III) During the time Plaintiffs were purchasing stock pursuant to the DO Loan Program, Old Conseco. falsely represented its cash flow as positive, when it really was negative, and misrepresented the value of certain securities Old Conseco. had obtained. Id. ¶¶ 26, 31. Plaintiffs seek a declaratory judgment that Old Conseco's misrepresentations violate Indiana Code § 23-3-1-12, and that to the extent Plaintiffs are found to have any financial obligations to New Conseco, they should be offset by the damages Plaintiffs have incurred due to Old Conseco's misrepresentations. Id. at 8-9.
(IV) Conseco's misrepresentations about its cash flow constitute common law fraud. Id. ¶ 43. Plaintiffs seek a declaratory judgment that to the extent Plaintiffs are found to have any financial obligations to New Conseco, they should be offset by the damages Plaintiffs have incurred due to Old Conseco's misrepresentations. Id. at 9.
(V) Conseco's misrepresentations about its cash flow violate federal securities laws, specifically 15 U.S.C. § 78(j)(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5. Id. ¶ 45. Plaintiffs seek a declaratory judgment that Old Conseco's misrepresentations violate federal securities laws and that to the extent Plaintiffs are found financially liable to New Conseco, that amount should be offset by damages Plaintiffs incurred due to Old Conseco's misrepresentations. Id. at 11.
(VI) The DO Plans allow Old Conseco. to pursue reimbursement from Plaintiffs for the amounts Old Conseco. paid to lender banks under the guarantees only if "reasonable and necessary." Id. ¶¶ 51-52. New Conseco. has a fiduciary duty to Plaintiffs to pursue adequate remedies against third parties before seeking reimbursement from Plaintiffs. Id. ¶ 54. New Conseco should pursue its remedies against Old Conseco's accountants and investment bank for negligence. Id. ¶ 70. New Conseco. denies it must exhaust those remedies. Id. ¶¶ 72, 73. Plaintiffs seek a declaratory judgment that New Conseco. is required by the DO Plans and by its fiduciary duty to Plaintiffs to pursue its remedies against Old Conseco's accountants and investment bank. Id. at 15.
(VII) The lending banks under the DO Loan Program violated Regulation U, 12 C.F.R. ¶ 221.1(b)(1), by lending Plaintiffs and other directors 100% of the market price for the purchase of Conseco's securities. Id. ¶ 77. The loan are thus void, under Section 29(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78cc (b) and are subject to rescission. Id. ¶ 79. Plaintiffs seek rescission of all loan obligations arising under the DO Plans and to be released from any obligation to pay principal or interest on any loans made in violation of Regulation U. Id. at 16.
(VIII) The loans Bank of America and Chase Bank made to Plaintiffs under the DO Loan Program were part of an illegal tying arrangement. Id. ¶ 81. Plaintiffs seek rescission of all loan obligations arising under the DO Plans and to be released from any obligation to pay principal or interest on any loans made in violation of 12 U.S.C. § 1972. Id. at 17.
(IX) Murray signed several settlement agreements and releases on the express condition that Old Conseco. would indemnify and hold him harmless from any liability under any of the DO common stock purchase plans. Id. ¶¶ 88, 89. Old Conseco. used Murray's signature on the agreements and releases to secure other settlement agreements. Id. ¶ 90. Yet, Conseco has threatened to sue Murray for claims arising out of the DO Plans. Id. ¶ 92. Murray seeks a declaratory judgment that New Conseco. must indemnify Murray and hold him harmless from any obligations under the DO Plans. Id. at 18-19.
On December 5, 2003, New Conseco. filed complaints in the Bankruptcy Court for the Northern District of Illinois against former officers and directors of Old Conseco, including Plaintiffs, to recover amounts owed for the principal funds borrowed under the DO Loan Program. Defs' Ex. 1. Pursuant to a stipulation signed by the parties, New Conseco agreed to dismiss its claims against some of those defendants. See Defendants' Supplemental Memorandum in Support at 3 and Ex. 2. The dismissed defendants agreed not to pursue the claims against New Conseco. that Plaintiffs in this case have asserted. Id. Ex. 2.
Conseco. Services also filed a complaint against Plaintiffs and others on December 5, 2003. Mem. in Supp. at 18. Conseco. Services filed its complaint in Indiana state court seeking reimbursement for interest payments Conseco. Services made on behalf of individuals who borrowed money under the DO Loan Program. Id.
II. STANDARDS
Venue may be moved to another district court where the action may have been brought, "[f]or the convenience of parties and witnesses, in the interest of justice." 28 U.S.C. ¶ 1404(a). The burden is on the party moving for a change of venue to demonstrate the transfer is appropriate. Boone v. Sulphur Creek Resort, Inc., 749 F. Supp. 195, 201 (S.D. Ind. 1990).Where a defendant has moved for dismissal pursuant to Rule 12(b)(3), the plaintiff bears the burden of proving the current venue is proper. Beller v. MacDermid, Inc., No. EV 01-210-C H/H, 2002 WL 31045377, *1 (S.D. Ind. Sept. 9, 2002). The Court may consider evidence outside the complaint. Id. The Court will take as true all of the plaintiff's allegations that are not disputed by the defendants' evidence, and will resolve all factual disputes in favor of the plaintiff. Id.
III. DISCUSSION
In the interests of justice, New Conseco's motion to transfer the claims against it to the Bankruptcy Court for the Northern District of Illinois must be granted. Plaintiffs' requests for declaratory judgments are better suited as affirmative defenses to New Conseco's claims against them. The bankruptcy court has retained jurisdiction over these disputes and is much better acquainted with the facts and history of this case, as well as the meaning and intended effect of its own Confirmation Order.A. NEW CONSECO IS THE NATURAL PLAINTIFF
It is clear from the Complaint that New Conseco. claims to have rights against Plaintiffs for reimbursement of the principal amount of the loans Plaintiffs took pursuant to the DO Loan Program. On the other hand, Plaintiffs seek declaratory judgments and rescission of their obligations under the DO Loan Program. Plaintiffs do not seek any monetary damages. As Plaintiffs admit in their Complaint, New Conseco. had threatened to sue Plaintiffs for the amounts owed under the DO Loan Program loans. See, e.g., Compl. ¶ 22. Plaintiffs also were aware of the Plan of Reorganization and Confirmation Order, which would require New Conseco. to pursue claims for reimbursement to aid in the distribution to creditors. Plaintiffs' declaratory judgment action appears to be filed in anticipation of New Conseco. bringing suit against them in the bankruptcy court.
The Seventh Circuit does not follow a strict "first to file rule." See Tempco. Elec. Heater Corp. v. Omega Eng'g, 819 F.2d 746, 750 (7th Cir. 1987). The purposes of declaratory judgments are to settle the legal relationship at issue and to provide relief from ongoing uncertainty. See id. at 749; NUCOR Corp. v. Aceros Y Maquilas De Occidente, S.A., 28 F.3d 572, 577 (7th Cir. 1994) (explaining that the purpose of the Declaratory Judgment Act is to give the parties an early adjudication and prevent a party from accruing damages while waiting for his adversary to bring suit (internal citations omitted)). Those purposes would not be served by allowing parties to bring declaratory judgments in order to chose a forum. Id. at 750. "[A] suit for declaratory judgment aimed solely at wresting the choice of forum from the `natural' plaintiff will normally be dismissed and the case allowed to proceed in the usual way." Allendale Mut. Ins. Co. v. Bull Data Sys. Inc., 10 F.3d 425, 431 (7th Cir. 1993) (citing Tempco. Elec. Heater Corp., 819 F.2d at 747).
New Conseco. strikes the Court as the "natural" plaintiff, as demonstrated by it's alleged right to collect large amounts of money owed on the loan made under the DO Loan Program, which rights were assigned to New Conseco. as part of the bankruptcy proceedings. See Defs' Ex. 9. New Conseco. must pursue those rights as part of the Plan of Reorganization. Mem. in Supp. at 8. Plaintiffs' claims are much better suited as affirmative defenses to New Conseco's claims for reimbursement.
B. BANKRUPTCY COURT'S JURISDICTION
Whether Plaintiffs owe New Conseco. money under the DO Loan Program, and how much they may owe, are questions that directly effect the Plan of Reorganization. Whatever New Conseco. collects on its claims against Plaintiffs will be distributed to creditors under the bankruptcy plan. Because the bankruptcy court oversees New Conseco's efforts to carry out the Plan of Reorganization, the bankruptcy court is a more appropriate jurisdiction for this dispute. See In re Rusty Jones, Inc., 124 B.R. 774, 778 (Bankr. N.D. Ill. 1991). Bankruptcy courts have jurisdiction over matters that affect the "`adjustment of the debtor-creditor . . . relationship' made by the Plan." In re Forty-Eight Insulations, Inc., 212 B.R. 938, 941 (Bankr. N.D. Ill. 1997) (quoting 28 U.S.C. § 157(b)(2)(0)).
In In re Chicago, Milwaukee, St. Paul Pac. R.R. Co., 974 F.2d 775 (7th Cir. 1992), the Railroad had been through a reorganization in the Northern District of Illinois. In re Chicago R.R., 974 F.2d at 777. Later, the Washington State Department of Transportation ("WDOT") incurred environmental cleanup costs on property it purchased from the Railroad's trustee. Id. at 778. WSDOT brought a claim against the Railroad's successor, CMC, for cost recovery and damages under CERCLA, in the District Court for the Western District of Washington. Id. CMC filed a petition for injunctive relief in the reorganizing district court, asking that court to enforce its earlier consummation order enjoining late-filed claims. Id. The reorganizing district court refused WDOT's request to transfer the petition for injunction to the Western District of Washington, and the Seventh Circuit agreed. Id. at 789. The Seventh Circuit explained that the reorganizing court was in the best position to enforce and interpret its own consummation order. Id. Further, the reorganizing district court was already familiar with the bankruptcy proceedings and "was well equipped to deal with issues relating to these bankruptcy proceedings." Id.
Here, the bankruptcy court is infinitely more familiar with the facts and background of Old and New Conseco's financial history and the loans made under the DO Loan Program, and is in a better position than this Court to monitor the progress of the Plan of Reorganization. Further, the bankruptcy court already has a related case before it, brought by former Old Conseco. CEO Stephen Hilbert, involving claims similar or identical to Plaintiffs' claims. See Mem. in Supp. citing Hilbert v. Conseco, Case No. 02 B 49672, Adv. No. 03 A. 04283, Bankr. N.D. Ill. Consolidation with other related cases may be feasible in the bankruptcy court in Illinois, which would serve the interests of justice. See Coffey v. Van Dorn Iron Works, 796 F.2d 217, 221 (7th Cir. 1986).
It is unclear whether New Conseco's suit against other former officers and directors, pending in the bankruptcy court, has been completely resolved in light of the stipulation and dismissal. See Defs' Ex. 1 and Defendants' Supplemental Memorandum in Support at 3 and Ex.
Additionally, the Confirmation Order specifically states that the Bankruptcy Court will retain jurisdiction "over all matters arising out of or related to the Chapter 11 Cases and the Plan," including jurisdiction over "efforts to collect loans due the Reorganizing Debtors" and to resolve any cases or controversies that arise in connection with enforcement or interpretation of the Plan. Id. ¶ 49. It is logical for the bankruptcy court to retain jurisdiction over New Conseco's efforts to collect on loans because the collection will have a direct effect on the distribution of funds to creditors.
The parties argue over whether the bankruptcy court has core jurisdiction or "related-to" jurisdiction. However, regardless of how the bankruptcy court's jurisdiction arises, the bankruptcy court should preside over the litigation that will effect New Conseco's distribution of funds to creditors. The bankruptcy court can make the determination of whether its jurisdiction is core or non-core. See 28 U.S.C. § 157(b)(3).
C. PLAINTIFFS' CLAIMS CHALLENGE THE CONFIRMATION ORDER
The bankruptcy court also retains jurisdiction to enforce and interpret its own orders. In re Kewanee Boiler Corp., 270 B.R. 912, 917 (Bankr. N.D. Ill. 2002). Plaintiffs challenge the Confirmation Order foremost in that they seek a right of setoff against money they might owe New Conseco. The Confirmation Order specifically enjoins parties from bringing claims for rights of setoff. Confirmation Order ¶ 45 (iii)(c). Plaintiffs argue that their rights were not discharged under the Confirmation Order because their objections to the Confirmation Plan were resolved by a stipulation between Old Conseco. and Plaintiffs, which preserves Plaintiffs' rights to assert rights of defenses and setoff. Plaintiffs' Response to Defendants' Motion ("Pltfs' Resp.") at 17. This Court has not seen those stipulations, but the bankruptcy court presumably is more familiar with Plaintiffs' objections to the Plan of Reorganization and the resolution of those objections. The bankruptcy court is best equipped to address this direct challenge to its own order.
Plaintiffs also assert that their loan obligations should be rescinded because the loans under the DO Loan Program violated Regulation U, 12 C.F.R. § 221.1(b)(1). However, the bankruptcy court already has ruled in the course of Old Conseco's bankruptcy proceedings that private parties do not have a right of action under Regulation U, and would not permit non-government entities to object to the lenders' claims for repayment. Defs' Ex. 12 at 545-46. Because the bankruptcy court already has addressed the issue with respect to these same loans, the bankruptcy court should address Plaintiff's challenge to that ruling.
D. CONVENIENCE AS A FACTOR
While the convenience of the parties and witnesses is a factor in considering whether to transfer a case, that convenience does not weigh so far against the bankruptcy court as to prevent transfer. Plaintiffs were active in the bankruptcy proceedings in the Northern District of Illinois, having filed objections to the proposed plans of reorganization. See Pltfs' Resp. at 17. The bankruptcy proceedings having taken place in the Northern District of Illinois so none of the parties involved in this suit really should claim Illinois is an inconvenient forum. Documentary evidence can just as easily be brought to the bankruptcy court in Illinois as to this Court. See Kalamazoo Realty Venture Ltd. P'ship v. Blockbuster Entm't Corp., 249 B.R. 879, 889 (N.D. Ill. 2000). Moreover, some documents necessary to resolve the dispute between these parties may already be part of the bankruptcy case. See id. at 890.
The interests of justice in having this case litigated in the bankruptcy court are strong, as detailed above. The "interest of justice" factor can be determinative, even where the convenience of the parties might have called for a different result. Coffey v. Van Dorn Iron Works, 796 F.2d 217, 220 (7th Cir. 1986). In this case, where the parties will not be unfairly inconvenienced and the bankruptcy court is better equipped to address the disputes between the parties, the efficient administration of justice requires that this case be transferred to the Bankruptcy Court for the Northern District of Illinois.
E. CLAIMS AGAINST CONSECO SERVICES
Finally, Plaintiffs assert rights of set off against any amount they may owe Conseco. Services for interest paid on Plaintiffs' behalf on their loans under the DO Loan Program, or request that their obligations to repay the interest be rescinded altogether. Conseco. Services has brought a suit against former directors and officers, including Plaintiffs, for the repayment of interest owed. That suit currently is pending in Indiana state court. Conseco. Services seeks dismissal of this action in favor of the state court litigation. Plaintiffs argue that this Court should keep the case, so that all of Plaintiffs' claims against the Conseco. entities related to the DO Loan Program can be determined together, and because this case was filed first.Much like Plaintiffs' claims against Old Conseco. and New Conseco, their claims against Conseco. Services are really defenses to the claim Conseco Services has against Plaintiffs. It is logical for Conseco. Services to pursue the money allegedly owed to it from all parties in a single action. Especially in light of this Court's decision to transfer the remainder of the case to the bankruptcy court, the dispute with Conseco Services regarding interest payments should be dismissed.
IV. CONCLUSION
For all of the reasons discussed, Old and New Conseco's motion to transfer is GRANTED and Conseco. Services' motion to dismiss is GRANTED.
IT IS SO ORDERED.