ALABAMA LIVESTOCK AUCTION, INC., et al v. KNAUER

Filing 50

ENTRY ON MOTION TO DISMISS - The Court finds that the Appellants lack standing for this appeal, and therefore, 30 Trustee's Motion to Dismiss is GRANTED and the Appellants' appeal is DISMISSED. See Entry for details. Signed by Judge Tanya Walton Pratt on 8/20/2013. (LBT)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
NEW ALBANY DIVISION
In Re: EASTERN LIVESTOCK CO., LLC,
ALABAMA LIVESTOCK AUCTION, INC.,
SEALY AND SONS LIVESTOCK, LLP,
ATHENS STOCKYARD, LLC,
BILLINGSLEY AUCTION SALE, INC.,
CARROLL COUNTY LIVESTOCK SALES
BARN, INC., E4 CATTLE CO., LLC,
EDWARD J. EDENS, IV,
MACON STOCKYARDS, INC.,
EDWIN A. STRICKLAND, ROBERT
RAWLS doing business as ROBERT RAWLS
LIVESTOCK,CPC LIVESTOCK, LLC,
Appellants,
v.
JAMES A. KNAUER Chapter 11 Trustee,

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Case No. 4:12-cv-00128-TWP-WGH

ENTRY ON MOTION TO DISMISS
This matter is before the Court on James A. Knauer’s (“Mr. Knauer” or “Trustee”)
Motion to Dismiss the appeals of Alabama Livestock Auction, Inc., Sealy and Son’s Livestock
LLP, Athens Stockyard, LLC, Billingsley Auction Sale, Inc., Carroll County Livestock Sales
Barn, Inc., E4 Cattle Co., LLC, Edward J. Edens, IV, Macon Stockyards, Inc., Edwin A.
Strickland, Macon Stockyard, Inc. [sic],1 and Robert Rawls d/b/a Robert Rawls Livestock (“the
Appellants”)2 (Dkt. 30). The Appellants filed this appeal of the order of the Bankruptcy Court
denying the motions to remove the Trustee filed by Alton Darnell, East Tennessee Livestock
Center, Inc., Piedmont Livestock, Inc., Southeast Livestock Exchange, LLC, Moseley Cattle
1

There does not appear to be a separate Macon Stockyard, Inc. listed as a party. CPC Livestock, LLC, another party
to this appeal, was not included in the Trustee’s Motion to Dismiss.

2

CPC Livestock, LLC, another party to this appeal, was not included in the Trustee’s Motion to Dismiss.

Auction, LLC, Bluegrass Maysville Stockyards, LLC, Bluegrass South Livestock Market, LLC,
Bluegrass Stockyards East, LLC, Bluegrass Stockyards of Campbellsville, LLC, Bluegrass
Stockyards of Richmond, LLC, Bluegrass Stockyards, LLC,3 and First Bank and Trust
Company. For the reasons set forth below, the Trustee’s motion is GRANTED.
I.

BACKGROUND

The underlying Chapter 11 bankruptcy case arises from an involuntary petition filed in
December 2010 against Eastern Livestock Co., LLC (“Eastern Livestock”). Eastern Livestock
was a cattle dealer headquartered in New Albany, Indiana. The petition was filed after Eastern
Livestock’s principal owner and CEO, as well as other officers, pled guilty and were convicted
of crimes, including theft, in connection with a check-kiting scheme and other actions.
The Bankruptcy Court appointed James A. Knauer as trustee shortly after the involuntary
petition was filed. Mr. Knauer is a lawyer and partner in the Indianapolis law firm Kroger,
Gardis & Regas, LLP (“KGR”), and has previously served as a bankruptcy trustee in prior
proceedings in the Southern District of Indiana.
Eastern Livestock’s principal lender was Fifth Third Bank (“Fifth Third”), which
provided a revolving line of credit evidenced by a promissory note and secured pursuant to a
security agreement and other loan documents, giving Fifth Third a security interest in generally
all of Eastern Livestock’s assets. Wells Fargo Business Credit, Inc. (“Wells Fargo BC”) entered
into a participation agreement with Fifth Third by which Wells Fargo BC obtained an undivided
fractional participation interest in Fifth Third’s loan to Eastern Livestock, capped at $10 million.
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Alton Darnell, East Tennessee Livestock Center, Inc., Piedmont Livestock, Inc., Southeast Livestock Exchange,
LLC, Moseley Cattle Auction, LLC, Bluegrass Maysville Stockyards, LLC, Bluegrass South Livestock Market,
LLC, Bluegrass Stockyards East, LLC, Bluegrass Stockyards of Campbellsville, LLC, Bluegrass Stockyards of
Richmond, LLC, and Bluegrass Stockyards, LLC separately filed an appeal with this Court. No. 4:12-cv-00126TWP-WGH. Bluegrass Maysville Stockyards, LLC, Bluegrass South Livestock Market, LLC, Bluegrass Stockyards
East, LLC, Bluegrass Stockyards of Campbellsville, LLC, Bluegrass Stockyards of Richmond, LLC, Bluegrass
Stockyards, LLC, and the Trustee filed a stipulated motion for dismissal which was granted by the Court on June 24,
2013. No. 4:12-cv-00126-TWP-WGH, Dkt. 47.

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As outlined in the loan documents, the participant has no direct claim against Eastern Livestock,
no interest in the collateral, and no authority over administering or managing the loan. The
participation agreement explicitly states that the participant has no standing in any bankruptcy
proceeding in which Eastern Livestock is the debtor, nor does it have the right to assert any claim
against Eastern Livestock or enforce any lien rights against the collateral.
In his application to be appointed trustee, Mr. Knauer disclosed that his law firm then
represented Fifth Third in five open matters, but that none related to Eastern Livestock or the
Chapter 11 case.

Mr. Knauer obtained consent and a conflict waiver from Fifth Third

authorizing him to serve as trustee, notwithstanding the past and existing representation of Fifth
Third by KGR. The conflict waiver permitted Mr. Knauer to be adverse to Fifth Third and to
commence actions against Fifth Third on behalf of the bankruptcy estate.
Mr. Knauer submitted an Affidavit of Disinterest with his trustee application, stating he
had no connections with any debtors, creditors, or other parties in interest other than those
disclosed on the affidavit. On December 27, 2010, the day the Bankruptcy Court approved the
appointment of Mr. Knauer as trustee, he became aware that Wells Fargo BC or another affiliate
of Wells Fargo & Company was a participant in the Fifth Third loan (the “Wells Participant).4
Mr. Knauer and his law firm were representing Wells Fargo Bank NA in a Chapter 11 case then
pending in the Bankruptcy Court, and in related litigation pending in the District Court. Other
than that representation, Mr. Knauer has not represented any Wells Fargo entity for the previous
three years. Mr. Knauer did not believe that there was any conflict between the Wells Participant
in the Fifth Third loan and KGR’s representation of Wells Fargo because he concluded that the

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Wells Fargo BC is identified as the owner of the participation in the participation agreement. At some point, Wells
Fargo BC was either merged into another Wells Fargo entity or the participation was assigned or sold to another
Wells Fargo affiliate.

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participant in the loan was not a party in interest or creditor in the Eastern Livestock Chapter 11
case based upon the terms of the participation agreement. Nevertheless, Mr. Knauer obtained a
conflict waiver through Wells Fargo’s conflict counsel allowing him to become directly adverse
to any Wells Participant in the Fifth Third loan.5 Mr. Knauer did advise the Bankruptcy Court of
KGR’s relationship with Wells Fargo, but the Affidavit of Disinterest does not mention Wells
Fargo or the Wells Participant. No Wells Fargo entity has asserted any proof of claim, nor does
the Fifth Third proof of claim purport to assert any claim on behalf of the Wells Participant. No
lawyer has filed a formal appearance in the Chapter 11 case on behalf of the Wells Participant or
any Wells Fargo entity.
On July 10, 2012, Alton Darnell, East Tennessee Livestock Center, Inc., Piedmont
Livestock, Inc., Southeast Livestock Exchange, LLC, Moseley Cattle Auction, LLC, Bluegrass
Maysville Stockyards, LLC, Bluegrass South Livestock Market, LLC, Bluegrass Stockyards
East, LLC, Bluegrass Stockyards of Campbellsville, LLC, Bluegrass Stockyards of Richmond,
LLC, and Bluegrass Stockyards, LLC moved to remove the Trustee pursuant to 11 U.S.C. § 324
(the “Bluegrass motion”). First Bank and Trust Company filed a similar motion the same day
(the “First Bank motion”).

The motions asserted three bases for removal of the Trustee,

including 1) failure to disclose KGR’s representation of Wells Fargo; 2) the Trustee is not
disinterested because of KGR’s representation of Wells Fargo; and 3) the Trustee has done
something wrong or has wrongly engendered animosity or “discord” among Eastern Livestock’s
creditors which will interfere with the appropriate resolution of the Chapter 11 case. Dkt. 8-18 at
9. Appellants did not file a separate motion, nor did they join the Bluegrass motion or the First
Bank motion.
5

The conflict waiver is not specific to any particular Wells Fargo entity or affiliate. Wells Fargo’s company policy
requires such ambiguity in conflict waivers executed for the benefit of its outside counsel, as there are dozens, if not
hundreds, of subsidiaries and affiliates of Wells Fargo & Company. Dkt. 8-18 at 5 n.4.

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The Bankruptcy Court held a hearing on August 20, 2012, and denied the Bluegrass and
First Bank motions in a ruling issued on August 31, 2012. (Dkt. 8-18). The Bankruptcy Court
found that relief was not warranted based upon the record of the case because the Trustee’s
representation of Fifth Third was fully disclosed, the Trustee is disinterested as defined in 11
U.S.C. §101(14), and the Trustee has no connection with Eastern Livestock and holds no interest
adverse to the estate or any class of creditor or security holders. The Bankruptcy Court also
concluded that the Trustee was not constrained from bringing any action against Fifth Third or
the Wells Participant if he deemed it proper to do so. The Bankruptcy Court indicated its view
that a secondary participant in a loan, such as Wells Fargo BC or its assignee, is neither a
creditor nor a party in interest in a bankruptcy case, so the Trustee had no duty to disclose his
past representation of an affiliated Wells Fargo entity. The Bankruptcy Court also noted the
advanced posture of the case, including a potentially impending distribution to unsecured
creditors, and noted that granting the motion to remove the Trustee would delay the opportunity
for creditors to consider and vote on a Chapter 11 plan, and ultimately the distribution of the
assets to the creditors.
II.

LEGAL STANDARD

“The district courts of the United States shall have jurisdiction to hear appeals from final
judgments, orders, and decrees; . . . and . . . with leave of the court, from other interlocutory
orders and decrees . . . of bankruptcy judges entered in cases.” 28 U.S.C. § 158(a). Final orders
subject to 28 U.S.C. § 158(a)(1) are immediately appealable as a matter of right, while
interlocutory orders subject to 28 U.S.C. § 158(a)(3) may only be appealed with leave of the
district court. “The distinction between appeals from final orders and interlocutory orders is
important, as interlocutory appeals are granted at the discretion of the district court and are not a

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right of the appellant.” Dempsey v. McCarthy, No. 09 C 7949, 2010 WL 918083, at *1 (N.D. Ill.
Mar. 10, 2010) (citing In re Huff, 61 B.R. 678, 682 (N.D. Ill. 1986)). Certification by the
bankruptcy court is not required for the district court to have jurisdiction over the bankruptcy
court’s rulings under 28 U.S.C. § 158(a)(3). In re Jartran, Inc., 886 F.2d 859, 866 (7th Cir.
1989). “Interlocutory appeals are to be granted sparingly for exceptional circumstances where a
review can materially advance the litigation.” Dempsey, 2010 WL 918083, at *3 (citations
omitted).
III. DISCUSSION
The Trustee argues that the Appellants lack standing to appeal the order denying the
motion to remove the Trustee, asserting that the Appellants are not “persons aggrieved” because
they did not join in the motions to remove the Trustee filed in the Bankruptcy Court. “Only a
‘person aggrieved’ has standing to appeal an order of the bankruptcy court.” In re Ray, 597 F.3d
871, 874 (7th Cir. 2010) (quoting In re Schultz Mfg. & Fabricating Co., 956 F.2d 686, 690 (7th
Cir. 1992)) (additional citations omitted). Prerequisites for being a “person aggrieved” are
attendance and objection at a bankruptcy court proceeding. Id. If a party fails to appear at a
hearing or object to a motion or proceeding, it cannot expect the issue raised by the motion or
proceeding to be addressed for a second time. Id. This requirement is excused only if the now
objecting party did not receive proper notice of the proceedings below and of his opportunity to
object to the action proposed to be taken. Id.
Appellants were not parties to the original motions to remove the Trustee, nor did they
file a request to join the motions before the hearing or make an oral request at the hearing. The
Appellants argue that the failure to file a written objection is not fatal to the issue of standing, as
counsel for the Appellants participated in the hearing in support of counsel for First Bank and

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Trust Co., and assert that this is sufficient to satisfy the aggrieved party standard under Schultz.
However, Schultz does not support the Appellants’ argument, as the Seventh Circuit found in that
case that the appellants lacked standing to appeal a sale order because they failed to attend the
hearing set for the matter by the bankruptcy court, and thus did not satisfy the requirements for
being “persons aggrieved.” 956 F.2d at 691.
Likewise, in this case, there is no indication in the Bankruptcy Court record that the
Appellants specifically joined in either the Bluegrass motion (Dkt. 7-16) or First Bank motion
(Dkt. 7-18), nor does the Bankruptcy Court order denying the motions to remove the Trustee
(Dkt. 8-18) refer to any of the Appellants as parties to the motions. Appellants themselves do
not even argue that they joined either motion or filed their own motion to remove the Trustee,
nor do they argue that they did not receive notice of the proceedings. The fact that counsel for
Appellants may have participated in the omnibus hearing at which the motions to remove the
Trustee was but one of 28 motions heard at the hearing is not sufficient to confer standing as
“persons aggrieved” due to the Appellants’ failure to specifically join in the motions to remove
the Trustee. Appearance and objection are both required for an appellant to be considered a
“person aggrieved” in order to have standing to appeal a Bankruptcy Court order, not just a
general appearance at the hearing.

Therefore, the Court finds that the Appellants are not

“persons aggrieved” by the order denying the motions to remove the Trustee, and therefore lack
standing for this appeal.
IV. CONCLUSION
For the reasons set forth above, the Court finds that the Appellants lack standing for this
appeal, and therefore the Trustee’s Motion to Dismiss (Dkt. 30) is GRANTED and the
Appellants’ appeal is DISMISSED.

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SO ORDERED.
08/20/2013
Date: _____________

________________________
Hon. Tanya Walton Pratt, Judge
United States District Court
Southern District of Indiana

DISTRIBUTION:
Kevin Morris Toner
FAEGRE BAKER DANIELS LLP Indianapolis
[e-mail]

Wendy Wright Ponader
FAEGRE BAKER DANIELS LLP
[e-mail]
Dustin R. DeNeal
FAEGRE BAKER DANIELS LLP Indianapolis
[e-mail]

Terry Elizabeth Hall
FAEGRE BAKER DANIELS LLP Indianapolis
[e-mail]

Harmony A. Mappes
FAEGRE BAKER DANIELS LLP Indianapolis
[e-mail]

John David Hoover
HOOVER HULL LLP
[e-mail]

Jon Laramore
FAEGRE BAKER DANIELS LLP Indianapolis
[e-mail]

Sean T. White
HOOVER HULL LLP
[e-mail]
W. Scott Newbern, III
W. SCOTT NEWBERN, PL
[e-mail]

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