In Re: SemCrude LP et al

Filing 20

MEMORANDUM ORDER granting the appeal in part and denying the appeal in part. (CASE CLOSED) Signed by Judge Sue L. Robinson on 11/15/2012. (nmfn)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

In re:
SEMCRUDE L.P., ET AL.

) Chapter 11
) Bk. No. 08-11525 (BLS)
)
)

Debtors.
________________________ )

)
COTTONWOOD PARTNERSHIP, LLP, )
ET AL.,
)
)
Appellants,
)
)
v.
) Civ. No. 11-1174-SLR
)
THOMAS L. KIVISTO, ET AL.,
)
)
Appellees.
)

MEMORANDUM ORDER

At Wilmington this 15th day of November, 2012, having reviewed the appeal
taken by Cottonwood Partnership, L.L.P.; Dunbar Family Parnership, L.P.; Rosen
Family, L.L.C.; Warren F. Kruger; Katherine A. Kruger; David S. Kruger; and Kathryn E.
Shelley from the opinion and order of the Bankruptcy Court dated October 7, 2011 (D.I.
1-1; D.l. 1-2), and the papers filed in connection with the appeal therefrom;
IT IS ORDERED that said appeal is granted in part and denied in part, for the
reasons that follow:
1. Background. On July 22, 2008, SemGroup L.P. 1 and its affiliated debtors
(collectively, "debtors" or "SemGroup") filed a chapter 11 petition in the United States
1

SemGroup L.P. is the parent company of SemCrude, L.P., the entity that the
bankruptcy court refers to in its opinion. (D.I. 10 at CW 24)

Bankruptcy Court for the District of Delaware ("bankruptcy court"). (B.D. 2 1) On
October 28, 2009, the bankruptcy court entered an order ("confirmation order")
confirming debtors' fourth amended joint plan ("confirmed plan") of affiliated debtors
pursuant to chapter 11 of the Bankruptcy Code, which established a litigation trust ("the
Trust") to pursue and settle claims of SemGroup. (D.I. 10 at CW 64 ~ 40, CW 1272 ~
11.1,

cw

1293~20.7)

2. The Trust/Kivisto litigation. On February 17, 2009, an appointed committee
of the debtors' unsecured creditors ("the Committee") 3 filed suit in bankruptcy court ("the
Trust/Kivisto litigation") against Thomas L. Kivisto, former CEO of SemGroup L.P., and
certain former SemGroup officers, as well as Westback Purchasing Co., LLC
("Westback"). (/d. at CW 776-838) The Committee asserted thirty claims related to
fraudulent transfer, breach of fiduciary duty, breach of contract, and unjust enrichment.
(/d.) The parties reached the terms of a settlement agreement, which the bankruptcy
court approved on November 19, 2010. (!d. at 771-75).
3. The Trust/PWC litigation. On June 25, 2010, the Trust filed suit in the Tulsa
County District Court in Oklahoma ("the Trust/PWC litigation") against
PricewaterhouseCoopers LLP ("PWC"), SemGroup's pre-bankruptcy auditor, alleging
professional negligence, breach of fiduciary duty, and violation of the Oklahoma
Accountancy Act in connection with PWC's audit of SemGroup's 2006 and 2007
consolidated financial statements. (D.I. 13 at 4) The claim for violation of the
2

References the bankruptcy court docket.
On December 16, 2009, after the confirmed plan became effective, the
bankruptcy court entered an order approving the substitution of the Trust for the
Committee as plaintiff. (D. I. 1-1 at 2; D. I. 18 at TKA 96)
3

2

Oklahoma Accountacy Act has been dismissed, but the Trust has continued to
prosecute the professional negligence and breach of fiduciary claims in Oklahoma state
court. (/d. at 5)
4. Appellants' Oklahoma litigation. On December 22, 2010, Cottonwood
Partnership, L.L.P.; Dunbar Family Parnership, L.P.; Rosen Family, L.L.C.; Warren F.
Kruger; Katherine A. Kruger; DavidS. Kruger; and Kathryn E. Shelley (collectively,
"appellants" or "plaintiffs") filed suit against Kivisto, PWC, and John Does 1-25
(collectively, "Oklahoma defendants") in the Tulsa County District Court in Oklahoma
(the "appellants' Oklahoma litigation"). (D.I. 10 at CW 430-60) Each appellant formerly
held limited partnership units in SemGroup. On the theory that the Oklahoma
defendants owed duties to appellants individually, appellants seek monetary damages
from PWC for professional negligence and violation of the Oklahoma Accountancy Act,
and from Kivisto for negligent misrepresentation, fraud, and breach of fiduciary duty.

(ld.)
5. On January 26, 2011, PWC removed appellants' Oklahoma litigation to the
U.S. District Court for the Northern District of Oklahoma. (ld. at CW 418-28) Appellants
filed a motion to remand the case to the Oklahoma state court, which the federal court
granted on August 26, 2011. (ld. at CW 1205-07)
6. On May 4, 2011, Kivisto filed an emergency motion ("motion to enjoin") in the
bankruptcy court to enforce the provisions of the order confirming the debtors' fourth
amended joint plan and to enforce the provisions of the confirmed plan and other relief.

(!d. at CW 1-363)

3

7. The Trust and SemGroup joined Kivisto in the motion to enjoin. (!d. at CW
364-66, CW 367-68) The Trust averred that the claims asserted by appellants are
derivative claims that belong to the Trust and, pursuant to the confirmed plan and
confirmation order, cannot be brought by any other party. (!d.)
8. After briefing and oral argument, the bankruptcy court entered an opinion and
order on October 7, 2011, granting the motion to enjoin. (0.1. 1-1; 0.1. 1-2) The
bankruptcy court found that it has subject matter jurisdiction, the matter is a core
proceeding, and the claims in appellants' Oklahoma litigation are derivative causes of
action alleging injury to SemGroup in its corporate capacity. (0.1. 1-1)
9. On October 21, 2011, appellants timely filed their notice of appeal from the
bankruptcy court's opinion and order. (0.1. 1)
10. Standard of Review. This court has jurisdiction to hear an appeal from the
bankruptcy court pursuant to 28 U.S.C. § 158(a). In undertaking a review of the issues
on appeal, the court applies a clearly erroneous standard to the bankruptcy court's
findings of fact and a plenary standard to that court's legal conclusions. See Am. Flint
Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir. 1999). With

mixed questions of law and fact, the court must accept the bankruptcy court's "finding of
historical or narrative facts unless clearly erroneous, but exercise[s] 'plenary review of
the [bankruptcy] court's choice and interpretation of legal precepts and its application of
those precepts to the historical facts."' Mellon Bank, N.A. v. Metro Communications,
Inc., 945 F.2d 635,642 (3d Cir. 1991) (citing Universal Minerals, Inc. v. C.A. Hughes &

Co., 669 F.2d 98, 101-02 (3d Cir. 1981)). The district court's appellate responsibilities

4

are further informed by the directive of the United States Court of Appeals for the Third
Circuit, which effectively reviews on a de novo basis bankruptcy court opinions. In re
Hechinger, 298 F.3d 219, 224 (3d Cir. 2002); In re Telegroup, 281 F.3d 133, 136 (3d

Cir. 2002).
11. Appellants assert that the bankruptcy court lacked jurisdiction over the
subject matter of the motion to enjoin. (0.1. 9 at 15-17) With respect to PWC, they also
aver that the bankruptcy court should have deferred to the Oklahoma District Court's
decision remanding appellants' Oklahoma litigation to state court for lack of federal
jurisdiction. (/d. at 11-12) Furthermore, appellants aver that the bankruptcy court erred
in finding that their claims against Kivisto and PWC are derivative claims alleging injury
to SemGroup in its corporate capacity. (/d. at 6-1 0, 13-15)
12. Jurisdiction of bankruptcy court. Bankruptcy courts have limited subject
matter jurisdiction, governed by 28 U.S.C. §§ 1334 and 157. Binder v. Price
Waterhouse & Co. (In re Resorts lnt'l, Inc.), 372 F.3d 154 (3d Cir. 2004). Pursuant to

§ 1334, that jurisdiction may extend to four types of title 11 matters: "( 1) cases under
title 11, (2) proceeding[s] arising under title 11, (3) proceedings arising in a case under
title 11, and (4) proceedings related to a case under title 11." /d. at 372 F.2d at 162
(internal quotation marks omitted). Under§ 157, the first three categories of cases are
considered "core proceedings." /d. (citing 28 U.S.C. §§ 157(b)(1 )). The fourth category
of cases -- "related to" proceedings -- are regarded as "non-core" proceedings. /d.
(citing 28 U.S.C. § 157(c)(1 )).

5

13. The distinction between a core proceeding and a non-core proceeding
determines the manner in which a bankruptcy court may act. A bankruptcy court has
full adjudicative power to "hear and decide" core proceedings, subject to appellate
review by the district court. See In re Resorts lnt'l, 372 F.2d at 162 (citing 28 U.S.C.

§ 158(a), (c)). However, for non-core proceedings, a bankruptcy court does not have
full adjudicative power; it must submit findings of fact and conclusions of law to the
district court, subject to de novo review. See 28 U.S.C. § 157(c).
14. By statute, core proceedings include "orders to turn over the property of the
estate." 28 U.S.C. § 157(b)(2)(E). Courts in this district have interpreted the statute
such that "matters requiring a declaration of whether certain property comes within the
definition of 'property of the estate' as set forth in Bankruptcy Code § 541 are core
proceedings." Williams v. McGreevey (In re Touch Am. Holdings, Inc.), 401 B.R. 107,
117 (Bank. Del. 2009). The court in In re Touch America Holdings was faced with
motions that required it to determine whether certain claims brought by the debtor
against the defendants belonged to the debtor or were transferred to the trustee upon
plan confirmation. The court found that the motions required a declaration of whether
the legal claims were "property of the estate," so it held that the motions were core
issues. /d.
15. In the instant case, whether or not the motion to enjoin is a core issue
requires the court to look into the subject matter of the motion, not the subject matter
underlying the appellants' Oklahoma litigation. The bankruptcy court followed the
reasoning in In re Touch America Holdings, which found that a dispute over which entity

6

-- the corporation or the shareholders -- could assert claims against former officers and
directors of the debtor corporations was a core proceeding. /d. Similarly, in the instant
case, Kivisto and the parties that joined the motion to enjoin seek a determination that
the claims in appellants' Oklahoma litigation were once property of SemGroup's estate
and now belong to the Trust under the confirmation order and confirmed plan; the
dispute is over which party -- the Trust or appellants -- can assert claims against Kivisto
and PWC. (D.I. 10 at CW 2) Therefore, the motion to enjoin presents a core
proceeding. 4
16. Because the motion to enjoin presents a core issue, the court does not need
to determine whether there was related-to jurisdiction. 5 See In re Touch Am. Holdings,

4

The court does not find persuasive appellants' assertion that finding the motion
to enjoin to be a core proceeding would be an overly expansive view of what constitutes
"proceedings to determine property of the estate." See D.l. 19 at 2-3 (citing dicta in
Beard v. Braunstein, 914 F.2d 434 (3d Cir. 1990)). The court in Braunstein was faced
with a different type of matter-- a claim by a trustee in bankruptcy seeking to recover
money under a pre-petition "garden variety contract" from a third party. Braunstein, 914
F.2d at 444-45. The matter in Braunstein would be analogous to the Trust bringing a
claim to recover money from PWC, which it has done in the Trust/PWC litigation. In the
instant case, the motion to enjoin does not seek monetary damages from a third party
but a determination of the Trust's property rights to bring legal claims under a plan
approved by the bankruptcy court.
5
Appellants assert that there is no close nexus to the bankruptcy proceeding
sufficient to warrant subject matter jurisdiction because the confirmed plan took effect a
few years ago, and Kivisto has settled the Trust/Kivisto litigation with the Trust.
However, as the Third Circuit has pointed out, "the 'close nexus' standard only applies
for the purposes of determining whether a federal court has jurisdiction over a non-core
'related to' proceeding in the post-confirmation context." Geruschat v. Ernst Young LLP
(In re Seven Fields Dev. Corp.), 505 F.3d 237, 260 (3d Cir. 2007). It is not invoked
when a court has subject matter jurisdiction over a core proceeding, as the bankruptcy
court has in this case. /d.

7

Inc., 401 B.R. at 118 (noting that the court is not required to address the "close nexus"
test when the issues before it are core bankruptcy issues).
17. Furthermore, the court finds that the bankruptcy court acted within its
discretion when it declined to give deference to the Oklahoma District Court's decision
and considered the motion to enjoin with respect to PWC. Under 28 U.S.C. § 1334(c), a
court may abstain "in the interest of justice, or in the interest of comity with State courts
or respect for State law," or must abstain "[u]pon a timely motion of a party in a
proceeding based upon State law or a State law cause of action, related to a case
under title 11 but not arising under title 11 or arising in a case under title 11, with
respect to which an action could not have been commenced in a court of the United
States absent jurisdiction under this section .... "6 Because the bankruptcy court
correctly concluded it had core jurisdiction over the motion to enjoin, there was no basis
for mandatory abstention. As for permissive abstention, appellants make no showing as
to why the bankruptcy court erred by not abstaining from considering a motion seeking
to protect the Trust's assets. The appellants only cite to In re Victory Markets, Inc., 196
B.R. 6 (Bank. N.D. N.Y. 1996), in which a bankruptcy court in a district without any
precedential guidance gave deference to another district court's interpretation of a
Bankruptcy Code provision. Here, the issue that the Oklahoma District Court addressed
was different from the issue before the bankruptcy court regarding what claims
constitute property of the SemGroup estate. The Oklahoma District Court, in a minute
6

The court reviews putative errors with respect to permissive abstention under
the abuse of discretion standard. See Luan lnv. S.E. v. Franklin 145 Corp. (In re Petrie
Retail, Inc.), 304 F.3d 223, 232 (2d Cir. 2002). It reviews putative errors with respect to
mandatory abstention de novo. See Stow v. Flaherty, 436 F.3d 209, 212 (3d Cir. 2006).

8

order, addressed the separate issue of whether it had jurisdiction over the merits of the
claims in appellants' Oklahoma litigation; the Trust was not a party in that case. (D. I. 10
at CW 1205-07). Therefore, this court does not find that the bankruptcy court abused its
discretion in declining to exercise permissive abstention.
18. Standard for derivative or direct claims. The court will next turn to
whether appellants' claims are derivative causes of action or direct, individual causes of
action. The parties do not dispute that Oklahoma state law governs this analysis. The
Oklahoma Supreme Court has adopted "the universal rule that the remedial rights of
minority stockholders with respect to wrongs committed against the corporation by the
directors in the management of corporate affairs are derivative rights and any action
taken by the stockholders to redress such wrongs must be for the benefit of the
corporation." Dobry v. Yukon E/ec. Co., 290 P.2d 135, 137 (Okla. 1955). The court
reasoned:
[l]t is a well-established general rule that a stockholder of a corporation
has no personal or individual right of action against third persons,
including officers and directors of the corporation, for a wrong or injury to
the corporation which results in the destruction or depreciation of the value
of his stock, since the wrong thus suffered by the stockholder is merely
incidental to the wrong suffered by the corporation and affects all stockholders alike.

/d. at 137. Therefore, under Oklahoma law, a plaintiff must assert a loss "in addition to
the loss sustained by the corporation" in order to properly plead a direct claim against
third parties. /d. Determining whether a stockholder's claim is derivative or direct turns
"solely on the following questions: (1) who suffered the alleged harm (the corporation or
the suing stockholders, individually); and (2) who would receive the benefit of any

9

recovery or other remedy (the corporation or the stockholders, individually)?" 7 Tooley v.

Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1033 (Del. 2004 ). "The
stockholder's claimed direct injury must be independent of any alleged injury to the
corporation. The stockholder must demonstrate that the duty breached was owed to the
stockholder and that he or she can prevail without showing an injury to the corporation."

/d. at 1039.
19. Appellants challenge the bankruptcy court's application of law to the facts to
find that their injuries are "no different from the injury suffered by SemCrude" and
therefore derivative. (D.I. 1-1 at 13) As this issue presents a mixed question of law and
fact, the court applies plenary review of the bankruptcy court's interpretation of legal
precepts and its application of those precepts to the facts. 8 See Mellon Bank, N.A., 945
F.2d at 642.
20. Claims against PWC. Appellants assert that their claims of professional
negligence and violation of the Oklahoma Accountancy Act against PWC are not
derivative because the injuries PWC caused them are distinct from those experienced
by SemGroup; therefore, appellants are entitled to receive any recovery on their claims.
(D.I. 9 at 11-15) Appellants assert that PWC, as an auditor, owed duties to them for

7

Oklahoma courts consider the analyses undertaken in other jurisdictions to be
persuasive. See Phillips v. Estate of Greenfield, 859 P.2d 1101, 1104 (Okla. 1993).
The parties agree that the two-prong Tooley test applies.
8
Appellants assert that the bankruptcy court erred by not individually examining
the claims against Kivisto and PWC. However, the court does not find this argument
persuasive for reversible error. The bankruptcy court identified the specific allegations
with respect to each claim and the related allegations in the complaint ("complaint") filed
in appellants' Oklahoma litigation. The bankruptcy court organized its opinion with
respect to claims asserted against Kivisto and claims asserted against PWC.
10

purposes of the professional negligence claim. 9 (/d. at 14) Appellants also argue that
they "fall within the class of persons protected by the Oklahoma Accountancy Act"
because PWC issued its opinion letters directly to them. (/d.) However, appellants
have not made any factual allegations under either claim that any duty PWC owed to
appellants was distinct from that owed to SemGroup or other limited partners. For
example, appellants allege in their complaint that "Plaintiffs fall within the group of
individuals and entities for whose guidance PWC intended to supply the audit data;"

PWC failed to disclose harmful facts "to SemGroup's limited partners, like the
Plaintiffs, who might have intervened to save the company;" "Plaintiffs and other
limited partners were denied the opportunity to put an end to Kivisto's activities and

save SemGroup" due to PWC's failure to fully disclose Kivisto's inappropriate conduct
and speculative trading strategy; and "Plaintiffs and other limited Partners were left in
the dark as SemGroup hurtled toward insolvency" due to PWC's conduct. (D.I. 10 at
CW 336-371f4, CW 342 1J36, CW3531J59, CW3551J64) (emphasis added)
Therefore, the court agrees with the bankruptcy court's finding that, with respect to
PWC, the harm appellants suffered was in fact the same harm suffered by SemGroup
and that any recovery in appellants' Oklahoma litigation would belong to SemGroup's
estate. (D. I. 18 at TKA 204-06) The court affirms the bankruptcy court's determination
9

The court recognizes that, under Oklahoma law, "an auditor would be liable to a
limited group of people embracing (1) those for whose guidance the auditor intended to
supply the audit data and (2) those to whom the auditor knows his client intended to
supply the audited financial statements." Stroud v. Arthur Anderson & Co., 37 P.3d 783,
794 (Okla. 2001 ). Under this standard, appellants have asserted that "PWC owed
Plaintiffs the highest duty of care, as Plaintiffs were known and foreseeable users of the
financial statements and other information that PWC examined, audited, and validated."
(D.I. 10 at CW 3551J64)
11

that both of appellants' claims against PWC are derivative of the Trust's claims against
PWC.
21. Fraud and negligent misrepresentation claims against Kivisto. 10 With
respect to Kivisto, the bankruptcy court considered specific allegations in appellants'
complaint, which alleged that "Kivisto's self-dealing and speculative trading strategy
caused SemCrude to file for bankruptcy;" "Kivisto improperly used SemCrude's funds to
finance his personal trading activity;" and "Kivisto engaged in high-risk trades on behalf
of SemCrude, which exposed the company to significant risk." (D.I. 10 at CW 340 1f 19,
CW 343-451f1f 33-39, CW 350-531f1f 52-58) However, appellants also alleged in their
complaint that Kivisto made fraudulent and negligent misrepresentations to them
personally to induce them to make capital contributions. The bankruptcy court's
opinion mentions this allegation but does not properly consider it in its analysis. (D. I.
1-1 at 13-14) For example, appellants allege that
Kivisto was particularly aggressive in his efforts to induce Plaintiffs to
make their 2006 capital contributions .... On or about May 25, 2006,
during a lunch meeting at Southern Hills Country Club, Kivisto approached
certain of the Plaintiffs and made several statements clearly intended to
induce them to make these capital contributions .... Kivisto repeatedly
emphasized to Plaintiffs that failing to make the capital contribution would
cause Plaintiffs substantial financial loss due to his view that the value of
their SemGroup shares would increase substantially in the near term. Of
course, Kivisto neglected to disclose the nature of the Company's and
Westback's trading programs or the ever-increasing Westback receivable.

10

Because the elements for fraud and negligent misrepresentation are
substantially similar under Oklahoma law, the court addresses these claims together to
determine whether the claims are derivative of the Trust's claims. See Roberson v.
Paine Webber, 998 P.2d 193, 197 (Okla. App. 1999) (providing the elements for fraud);
Ragland v. Shattuck Nat'/ Bank, 36 F.3d 983, 991 (W.O. Okla. 1994) (providing the
elements for negligent misrepresentation).
12

(D.I. 10 at CW 348-49

~

48) There is case law applying Tooley that suggests that

claims for non-disclosure may constitute direct claims in circumstances where a
shareholder can '"demonstrate that the duty breached was owed to [him or her] and that
he or she can prevail without showing an injury to the [partnership].'" See Albert v. Alex.
Brown Mgmt. Servs., Inc., Civ. No. 762-N, 763-N, 2005 WL 2130607, at *12 (Del. Ch.

Aug. 26, 2005) (quoting Tooley, 845 A.2d at 1039); see also Dieterich v. Harrer, 857
A.2d 1017, 1027-28 (Del. Ch. 2004) (declining to dismiss as derivative an entire fairness
claim for non-disclosures relating to a merger). If, as appellants have sufficiently
alleged, Kivisto owed them a duty distinct from that owed to all shareholders, appellants
may be able to demonstrate entitlement to a recovery separate form SemGroup. 11
Therefore, the court reverses and remands the bankruptcy court's finding that
appellants' fraud and negligent misrepresentation claims against Kivisto are derivative.
22. Breach of fiduciary duty claim against Kivisto. Appellants' complaint
furthers alleges that Kivisto owed fiduciary duties to appellants that "arose due to the
relationship between Kivisto and Plaintiffs, due to the trust and confidence reasonably
placed by Plaintiffs in the integrity and loyalty of Kivisto." (D.I. 10 at CW 360-61

~

91)

This fiduciary relationship allegedly arose, at least in part, due to "the length and nature
of Kivisto's relationship with Plaintiffs." (!d.) In light of these allegations, as well as the
11

Neither the settlement in the TrusUKivisto litigation nor the confirmed plan bars
appellants from asserting direct claims against Kivisto. Appellants' equity interest and
standing to bring claims on behalf of SemGroup were extinguished by the confirmed
plan and confirmation order. (D.I. 10 at CW 64 ~ 40, CW 254 ~~ 20.1, 20.7) The
settlement in the TrusUKivisto litigation released the Trust's claims against Kivisto and
represented that the Trust "is the holder by assignment and owns 100% of all claims,
demands, causes of action, or suits of the Debtors and Reorganized Debtors against
[Kivisto]." (D. I. 18 at TKA 119-21 ~~ 6, 8)
13

allegations discussed above regarding the fraud and negligent misrepresentation claims
against Kivisto, appellants have sufficiently alleged that Kivisto owed a direct fiduciary
duty to them, a duty distinct from that owed to other shareholders. If appellants
demonstrate both the duty and injury, they would be entitled to recover separately from
SemGroup. Thus, the court reverses and remands the bankruptcy court's finding that
the fiduciary duty claim against Kivisto is derivative.
23. Conclusion. With respect to the bankruptcy court's decision granting
Kivisto's motion to enforce the provisions of the order confirming debtors' fourth
amended joint plan and to enforce the provisions of the confirmed plan and for other
relief, the court affirms the subject matter jurisdiction of the bankruptcy court and the
classification of the matter as a core proceeding. For the reasons stated above, the
court affirms the bankruptcy court's finding that appellants' claims against PWC are
derivative and reverses and remands the bankruptcy court's finding that appellants'
claims against Kivisto are derivative.

14