Centrix Financial, LLC et al v. Sutton et al

Filing 130

ORDER. ORDERED that the Renewed Request for Ruling on Rule 12(b) "Motion to Dismiss" 98 is GRANTED in part and DENIED in part by Judge Philip A. Brimmer on 04/02/14.(jhawk, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge Philip A. Brimmer
Civil Action No. 09-cv-00088-PAB-CBS
In re: CENTRIX FINANCIAL, LLC, et al.,
Debtors,
CENTRIX FINANCIAL LIQUIDATING TRUST, et al.,
Plaintiffs,
v.
ROBERT E. SUTTON, et al.,
Defendants.
_____________________________________________________________________
ORDER
_____________________________________________________________________
This matter is before the Court on defendants’ Renewed Request for Ruling on
Rule 12(b) “Motion to Dismiss” [Docket No. 98].1 The Sutton defendants state that, in
June 2009, they moved to dismiss this adversary proceeding in the United States
Bankruptcy Court for the District of Colorado (the “bankruptcy court”) and that no ruling
has been entered on that motion. Docket No. 98 at 2, ¶ 3.
I. BACKGROUND
A. Chapter Eleven Bankruptcy Proceeding
In September 2006, CMGN, LLC and a number of related entities entered
1

The renewed motion to dismiss was filed by defendants Robert E. Sutton; 6762
Potomac, LLC; Centrix Consolidated, LLC; Founders Insurance Company, Ltd.;
Johnson Street Holdings, LLC; RES Capital Holdings, Inc.; Williston Holdings, Ltd.;
Grand Construction, LLC; Harrison Custom Builders, Ltd.; Katherine Sutton; Julie
Sutton; Elizabeth Sutton; David Sutton; Birdie, LLC; the Julie L. Sutton Revocable
Trust; and Potomac Aviation, LLC (collectively, the “Sutton defendants”).

bankruptcy under chapter eleven of the United States Bankruptcy Code.2 Case No. 0616403-EEB (Bankr. D. Colo. 2006); 11 U.S.C. § 1101 et seq. Plaintiffs Centrix
Financial Liquidating Trust and Jeffrey A. Weinman, as trustee, allege that, at all
relevant times, defendant Robert Sutton (“Sutton”) controlled the bankrupt entities.
Case No. 08-01593-EEB, Docket No. 129 at 9, ¶ 27.
On June 21, 2007, Sutton and defendant 6762 Potomac, LLC (“Potomac”) filed
proofs of claim for general unsecured prepetition claims totaling approximately $280
million. Case No. 06-16403-EEB, Docket Nos. 1391 at 1 and 1391-1 at 16. On
September 7, 2007, Sutton and Potomac filed motions for allowance and payment of
administrative claims totaling close to $250 million. Docket Nos. 1548 and 1550.
On April 15 and 16, 2008, Sutton and Potomac filed over seventy objections to
proofs of claims filed by other claimants. Case No. 06-16403-EEB, Docket No. 2164.
On April 16, 2008, the bankruptcy court ordered Sutton and Potomac to cease filing
claims objections pending a decision regarding their standing to file such objections.
Id., Docket No. 2164. The bankruptcy court held in abeyance the claims objections that
Sutton and Potomac had already filed and ordered Sutton and Potomac to file a brief
on the issue of standing. Id.
On May 16, 2008, the bankruptcy court confirmed the Second Amended
Liquidating Chapter 11 Plan Proposed by Debtors and Creditors’ Committee Dated
January 25, 2008. Id., Docket Nos. 1831 and 2203. Sutton and Potomac, along with

2

Those entities are Centrix Financial, LLC; Centrix Services, LLC; Centrix
Technology Support Services, LLC; Centrix Support LLC; Centrix Resource Managers,
Inc.; and Centrix Servicing LLC. See Case No. 06-16403-EEB (Bankr. D. Colo. 2006).
2

defendants Roland Anderson and John Schreven, had objected to the plan on a
number of grounds, including that it stripped all parties in interest–other than the
liquidating trustee–of standing to file claims objections. Id., Docket No. 1943 at 3; see
also Docket No. 1831 at 11, Art. 9, ¶ A. The bankruptcy court overruled their objection
in reliance on In re Adelphia Communications Corp., 371 B.R. 660 (S.D.N.Y. 2007), and
In re Western Asbestos Co., 313 B.R. 832 (Bankr. N.D. Cal. 2003). Id., Docket No.
2188 (Oral Ruling on Plan Confirmation and Sutton’s Applications for Admin Expense)
at 11, ll.17-20 (“This Court follows the lead of these other courts in holding that a plan
may specify that the right to object to claims post-confirmation rests in the successor to
the debtors, here the liquidating trustee.”).
On May 27, 2008, Sutton and Potomac filed a brief on the issue of standing. Id.,
Docket No. 2230. The same day, Sutton, Potomac, and Centrix Consolidated, LLC
jointly appealed the following bankruptcy court rulings:
•

the bankruptcy court’s May 16, 2008 Orders confirming the liquidating
chapter eleven plan over appellants’ objections, which were related to
their inability to file claims objections under the plan;

•

the May 15, 2008 Order and Judgment disallowing Sutton’s administrative
expense claim; and

•

“all underlying orders and rulings that became final upon” confirmation of
the plan, including, “without limitation”:

•

the January 16, 2008 ruling denying Sutton and Potomac’s motion to
conduct examination pursuant to Federal Rule of Bankruptcy Procedure
2004;

•

the January 17, 2007 Order Approving Disclosure Statement and Setting
Confirmation Hearing;

•

the April 21, 2008 ruling disallowing certain of Sutton’s administrative
claims and estimating Sutton and Potomac’s remaining administrative
3

claims at zero;
•

the April 16, 2008 Order directing Sutton and Potomac to cease filing
claims objections; and

•

the April 21, 2008 ruling authorizing amendments to the Second Amended
Plan of Reorganization and announcing the bankruptcy court’s intent to
confirm the plan.

Id., Docket No. 2227 at 1-2; Case No. 08-cv-1130-PAB. Appellants argued in part that,
“[t]o the extent that Sutton and Potomac are threatened with litigation claims
seeking to subject them to liability for the Debtors’ unpaid obligations while the
Plan strips them of the right to object to the validity and amount of those claims
due process is defied.” Case No. 08-cv-1130-PAB, Docket No. 21 at 30 (emphasis in
original).
On September 11, 2008, the bankruptcy court issued an order regarding Sutton
and Potomac’s standing to file claim objections. Case No. 06-16403-EEB, Docket No.
2350. The bankruptcy court noted that “courts are sharply divided” on the question of
whether creditors have a “full and unfettered” right to object to another creditor’s proof
of claim under 11 U.S.C. §§ 502(a) and 1109(b), although the Tenth Circuit has not yet
ruled on the issue. Id. at 2-3 (listing cases). The bankruptcy court held that, regardless
of its conclusion on the legal question, Sutton and Potomac had “lost their standing due
to the confirmation of the plan,” which had a res judicata effect as to “all matters that
were or could have been raised in the confirmation process.” Id. at 3-4. The
bankruptcy court further held that, to the extent Sutton and Potomac argued that their
lack of standing deprived them of due process, they were in essence “requesting that
the Court reconsider its order of confirmation, at least as to the standing provisions in
4

the plan.” Id. at 4. The bankruptcy court held that it lacked jurisdiction to reconsider its
order confirming the plan because Sutton, Potomac, and Centrix Consolidated, LLC
had already appealed the confirmation order. Id. at 4.
On February 13, 2009, appellees (debtors in the underlying bankruptcy case, the
Official Committee of Unsecured Creditors, and Mr. Weinman in his capacity as trustee)
moved to dismiss the appeal. Case No. 08-cv-1130-PAB, Docket No. 46. The Court
granted their motion to dismiss on February 12, 2010 pursuant to the doctrine of
equitable mootness.3 Id., Docket No. 92. Appellants appealed this dismissal to the
Tenth Circuit. In re Centrix Financial LLC, 394 F. App’x 485 (10th Cir. 2010). On
September 8, 2010, the Tenth Circuit held that the Court had not abused its discretion
in dismissing the appeal as equitably moot. Id.
In addressing the sixth factor relevant to a determination of equitable mootness,
namely, a “quick look at the merits” of the appeal to determine if it is “legally meritorious
or equitably compelling,” the Tenth Circuit stated:
Appellants maintain that one of their claims implicates the abrogation of
serious and fundamental rights. They argue the bankruptcy court violated
their due process rights by precluding them from filing claims objections. As
a result, they assert they are “confronted with an adversary proceeding
seeking damages exceeding $100 million without ever being permitted to
challenge the damage component of the claims asserted against them.”
Appellants also point to the district court’s conclusion that one of their other
claims appeared to have some merit.
Appellants do not explain how they are prevented from defending against the
claims filed against them, including the extent of the damages alleged, in the
adversary proceedings. Nor have they shown that the district court abused
3

The Court initially dismissed the appeal on June 10, 2009, Docket No. 63, but
the Tenth Circuit remanded the matter with instructions to apply the equitable mootness
factors set forth in In re Paige, 584 F.3d 1327 (10th Cir. 2009). Docket No. 75.
5

its discretion in concluding that, unlike the claims at issue in [In re Paige, 584
F.3d 1327 (10th Cir. 2009)], Appellants’ appeal issues do not raise “serious
conflicts of interest” or other issues that “go to the very integrity of the
bankruptcy process.”
394 F. App’x at 494 (internal citations omitted).
B. Adversary Proceeding
In September 2008, plaintiffs commenced an adversary proceeding against the
Sutton defendants. Case No. 08-01593-EEB. In the adversary proceeding, plaintiffs
allege that Sutton and certain other defendants engaged in extensive financial
malfeasance in breach of their duties to the debtor entities, including making fraudulent
transfers. Id., Docket No. 129.
On November 17, 2008, the Sutton defendants filed a motion to dismiss the
adversary proceeding. Id., Docket No. 58. The motion to dismiss argued that the
“combined effect of confirmation of the Plan and the pursuit of this adversary
proceeding is an insidious attempt to hold Sutton, Potomac and the other Defendants
liable for ‘damages’ (the claims against the consolidated reorganized estates) that they
are now powerless to protest.” Id. at 5.
On March 6, 2009, the bankruptcy court denied the motion to dismiss, finding
that the “arguments presented in the [motion to dismiss] do not address sufficiency of
Plaintiffs’ claims. Instead, the Motion asserts defenses to the claims which are more
appropriately addressed at trial.” Id., Docket No. 108 at 2.
On June 1, 2009, the Sutton defendants filed a document entitled Renewed
Motions to Withdraw Reference and to Dismiss, Separate Motions to Dismiss for
Failure to Join Parties Necessary to a Just Adjudication and Failure to Plead Fraud with
6

Particularity, and Answer and Jury Demand to Second Amended Complaint; this
document was filed both in the bankruptcy court and before this Court. Case No. 0801593-EEB, Docket No. 135; Case No. 09-cv-00088-PAB-CBS, Docket Nos. 15 and 19.
In this motion, defendants renewed and incorporated the arguments advanced in the
November 17, 2008 motion to dismiss. Id. at 2. In addition, the motion included the
following:
III. Motion to Dismiss Under Fed. R. Civ. P. 12(b)(7) and 19(a)
The Complaint and all claims alleged therein against the Defendants
must be dismissed under Fed.R.Civ.P. 12(b)(7) and 19(a) for failure to join
and maintain claims against parties (e.g. Howard Klemmer, Phoenix Capital
Management and Centrix Funds, LLC) necessary for a just adjudication.
IV. Motion to Dismiss Under Fed. R. Civ. P. 9(b)
Those claims in the Complaint that sound in fraud, including the Fifth,
Sixth, Seventh and Thirteenth Claims for Relief, must be dismissed under
Fed.R.Civ.P. 9(b) for failure to plead such fraud with particularity.
Id. The motion does not include any further factual allegations or legal argument
regarding Rules 12(b)(7), 19(a), or 9(b). The motion also includes an answer to the
second amended complaint, asserts a number of affirmative defenses, and contains a
demand for a jury trial. Id. at 3-10.
On June 8, 2009, the Court granted in part and denied in part the initial motion
[Docket No. 1] to withdraw the reference to the bankruptcy court. Case No. 09-cv00088-PAB-CBS, Docket No. 20 at 8. The Court granted the motion to the extent it
sought to withdraw the reference when the case was ready for trial and denied it to the
extent it sought immediate withdrawal of the reference. Id. at 8-9. The Court granted in
part and denied in part the renewed motions to withdraw the reference [Docket Nos. 15
7

and 19] “on the same terms as set forth above.” Id. at 9. In addition, with respect to the
renewed motions to withdraw the reference, the Court stated:
Since filing their original motion for withdrawal of reference, the Sutton
defendants have twice filed papers purporting to contain “Renewed and
Restated” motions to withdraw reference [Docket Nos. 15, 19]. While such
filings are unnecessary, and improper under the Federal Rules of Civil
Procedure, the Local Rules of this District, and my Practice Standards, to the
extent these “motions” raise identical issues to the motion for withdrawal of
reference, they are encompassed by the discussion and rulings contained
in this Order.
Id. at 2 n.2.
On July 28, 2009, the bankruptcy court entered a scheduling order setting a
deadline for filing dispositive motions of August 1, 2010. Case No. 08-01593-EEB,
Docket No. 156 at 2, ¶ 6.
On January 6, 2011, the Court administratively closed the case pending a motion
to reopen in the event that the claims on which the parties had a right to a jury trial were
not resolved during pretrial proceedings. Case No. 09-cv-00088-PAB-CBS, Docket No.
21. On December 22, 2011, plaintiffs filed a motion to reopen the case and set dates
for trial. Docket No. 22. On February 9, 2012, the Court granted the motion in part and
reopened the case. Docket No. 23. On January 29, 2013, plaintiffs moved the Court to
set the case for trial. Docket No. 28. The Sutton defendants did not file an objection to
plaintiffs’ motions to reopen the case and set a trial date. On September 19, 2013, the
parties submitted a proposed final pretrial order in which the Sutton defendants first
raised before the Court the issue of the purportedly pending motions. Docket No. 70 at
12-13. On September 26, 2013, the Court set this matter for trial starting April 15,
2014. Docket No. 72. On September 27, 2013, the Sutton defendants filed a status
8

report explaining in greater detail their position regarding the pending motions. Docket
No. 73.
On March 19, 2014, the Sutton defendants moved the Court to rule on the June
1, 2009 motions to dismiss. Docket No. 98 at 3, ¶¶ 9-10 (“In light of the fastapproaching commencement of a jury trial (commencing April 15, 2004) which may be
affected by the rulings, the Sutton Defendants are constrained respectfully to raise
these arguments again and to request prompt rulings thereon.”).
II. ANALYSIS
Plaintiffs contend that the Court ruled on the June 1, 2009 motions to dismiss in
its June 8, 2009 Order, in which it found that the motions were “improper under the
Federal Rules of Civil Procedure, the Local Rules of this District, and my Practice
Standards.” Docket No. 109 (citing Docket No. 20 at 2 n.2).
The June 8, 2009 Order did not state that the motions to dismiss were denied.
Docket No. 20. At the time that the Court considered these motions, the case was
referred to the bankruptcy court, depriving the Court of jurisdiction to rule on any issues
other than withdrawal of the reference. See In re Kashani, 190 B.R. 875, 885 (9th Cir.
BAP 1995) (“Once the district court refers the case to the bankruptcy court, unless the
district court withdraws that reference, in whole or in part pursuant to 28 U.S.C.
§ 157(d), the case is within the subject matter jurisdiction of the bankruptcy court.”).
Thus, even if the Court had denied the motions to dismiss in June 2009, such a denial
would have been without prejudice. See Brereton v. Bountiful City Corp., 434 F.3d
1213, 1218 (10th Cir. 2006).
Accordingly, the Court turns to the question of whether it is appropriate to
9

consider the merits of the June 1, 2009 motions to dismiss at this time.
A. Motion to Dismiss Pursuant to Rule 12(b)(6)
In their Rule 12(b)(6) motion, the Sutton defendants argue that this case must be
dismissed because it “seeks to hold Defendants liable for claims to which they cannot
object.” Docket No. 98-1 at 6. Their argument proceeds in three parts. First, they
argue that they have a right under the Bankruptcy Code to file claims objections. Id. at
6-9. Second, they argue that, in light of their statutory right, the denial of standing to file
such objections deprives them of due process. Id. at 9-12. Finally, they argue that this
due process violation renders the bankruptcy court’s confirmation of the plan void and,
since the adversary proceeding is predicated on the plan, requires dismissal of the
entire case. Id. at 12-13.
Under the doctrine of equitable mootness,
a court should decline to hear an appeal of a bankruptcy court’s decision
where the answers to the following six questions indicate that reaching the
merits would be unfair or impracticable: (1) Has the appellant sought and/or
obtained a stay pending appeal? (2) Has the appealed plan been
substantially consummated? (3) Will the rights of innocent third parties be
adversely affected by reversal of the confirmed plan? (4) Will the
public-policy need for reliance on the confirmed bankruptcy plan–and the
need for creditors generally to be able to rely on bankruptcy court
decisions–be undermined by reversal of the plan? (5) If appellant’s challenge
were upheld, what would be the likely impact upon a successful
reorganization of the debtor? And (6) based upon a quick look at the merits
of appellant’s challenge to the plan, is appellant’s challenge legally
meritorious or equitably compelling?
In re Paige, 584 F.3d at 1339.
The doctrine of issue preclusion bars relitigation of specific issues when (1) there
has been a final adjudication on the merits of (2) an issue identical to one in the current

10

proceeding, and (3) the party against whom the doctrine is invoked was a party, or in
privity with a party, to the previous adjudication in which he or she had (4) a full and fair
opportunity to litigate the issue. Moss v. Kopp, 559 F.3d 1155, 1161 (10th Cir. 2009).
The Rule 12(b)(6) motion is premised on the contention that the chapter eleven
plan violates the Sutton defendants’ right to due process because it denies them
standing to object to claims filed by other creditors. See Docket No. 98-1 at 12-13.
Thus, as the bankruptcy court found in its September 11, 2008 Order, “[i]n essence,
[the Sutton defendants] are requesting that the Court reconsider its order of
confirmation, at least as to the standing provisions in the plan.” Case No. 06-16403EEB, Docket No. 2350 at 4.
The Court ruled in February 2010 that the appeal filed by Sutton, Potomac, and
Centrix Consolidated, LLC–which was based on the same legal argument as the Rule
12(b)(6) motion–was equitably moot. Case No. 08-cv-01130-PAB, Docket No. 92. The
Tenth Circuit affirmed this ruling. See In re Centrix Financial LLC, 394 F. App’x 485.
With respect to the merits of the constitutional challenge, the Tenth Circuit found that
defendants failed to “explain how they are prevented from defending against the claims
filed against them, including the extent of the damages alleged in the adversary
proceedings” and failed to show “that the district court abused its discretion in
concluding that” defendants “do not raise ‘serious conflicts of interest’ or other issues
that ‘go to the very integrity of the bankruptcy process.’” Id. at 494 (internal citations
omitted).
The elements of issue preclusion are satisfied with respect to Sutton, Potomac,
and Centrix Consolidated, LLC. First, the Tenth Circuit’s decision constitutes a final
11

adjudication on the merits. Second, the issue raised on appeal–whether the chapter
eleven plan deprives the Sutton defendants of due process–is identical to the issue
raised in the Rule 12(b)(6) motion. Compare In re Centrix Financial, 394 F. App’x at
494 (Appellants “argue the bankruptcy court violated their due process rights by
precluding them from filing claims objections. As a result, they assert they are
‘confronted with an adversary proceeding seeking damages exceeding $100 million
without ever being permitted to challenge the damage component of the claims
asserted against them.’”) with Docket No. 98-1 at 5 (“The combined effect of
confirmation of the Plan and the pursuit of this adversary proceeding is an insidious
attempt to hold Sutton, Potomac and the other Defendants liable for ‘damages’ (the
claims against the consolidated reorganized estates) that they are now powerless to
protest.”). Third, Sutton, Potomac, and Centrix Consolidated, LLC were parties to the
appeal. Fourth, Sutton, Potomac, and Centrix Consolidated, LLC had a full and fair
opportunity to litigate this issue on appeal from the bankruptcy court.
Any Sutton defendants who are in privity with Sutton, Potomac, or Centrix
Consolidated, LLC are likewise precluded from re-litigating this issue. See Pelt v. Utah,
539 F.3d 1271, 1281-82 (10th Cir. 2008). However, even if the remaining Sutton
defendants are not in privity with the parties who appealed the plan confirmation order,
the conclusion that the current challenge to the plan is equitably moot would apply to
them as well because the Sutton defendants have not set forth any factual or legal
basis for arriving at a different conclusion. The Sutton defendants do not address the
doctrine of equitable mootness or challenge the Court’s previous findings supporting
application of the doctrine in this case. The fact that nearly five years have passed
12

since the bankruptcy court confirmed the plan would only strengthen the basis upon
which the Court’s earlier decision rests. See In re Paige, 584 F.3d at 1347 (“[a]s a
practical matter, completed acts in accordance with an unstayed order of the
bankruptcy court must not thereafter be routinely vulnerable to nullification if a plan of
reorganization is to succeed.”) (citation omitted). Thus, there is no reason for the Court
to arrive at a different conclusion if it were to address the merits of the Rule 12(b)(6)
motion with respect to the other Sutton defendants.
In sum, the issues raised by the Rule 12(b)(6) motion have already been decided
and there is no basis for the Court to consider them anew.
B. Motions to Dismiss Pursuant to Rules 12(b)(7) and 9(b)
The motions to dismiss pursuant to Rules 12(b)(7) and 9(b) each consist of a
single sentence setting forth the relief requested without any factual or legal basis.
Docket No. 98-3 at 2. This is insufficient. Nat’l Union Fire Ins. Co. of Pittsburgh, PA v.
Intrawest ULC, No. 13-cv-00079-PAB-KMT, 2014 WL 1016072, at *2 (D. Colo. Mar. 14,
2014) (“The proponent of a motion to dismiss under 12(b)(7) has the burden of
producing evidence showing the nature of the interest possessed by an absent party
and that the protection of that interest will be impaired by the absence.”) (internal
citation omitted). The Court has no obligation to conjure reasons and legal support for
the motions.
Since these motions do not provide any basis for relief, the Court will grant the
renewed motion for a ruling in order to deny these motions on their merits.

13

III. CONCLUSION
For the foregoing reasons, it is
ORDERED that the Renewed Request for Ruling on Rule 12(b) “Motion to
Dismiss” [Docket No. 98] is GRANTED in part and DENIED in part. It is granted with
respect to the Motion to Dismiss Under Fed. R. Civ. P. 12(b)(7) and 19(a) and the
Motion to Dismiss Under Fed. R. Civ. P. 9(b) [Docket No. 98-3 at 2, ¶¶ III-IV]. These
motions are denied. The renewed request for a ruling is denied with respect to the
Renewed Motion to Dismiss Under Fed. R. Civ. P. 12(b)(6) [Docket No. 98-3 at 2, ¶ II].

DATED April 2, 2014.
BY THE COURT:

s/Philip A. Brimmer
PHILIP A. BRIMMER
United States District Judge

14