Commerce Bank, N.A. v. Malloy

Filing 27

OPINION AND ORDER by Chief Judge Gregory K Frizzell ; denying 15 Motion to Dismiss (hbo, Dpty Clk)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OKLAHOMA

COMMERCE BANK,
Appellant,
v.
PATRICK J. MALLOY, III, as Trustee
of the Estate of George David Gordon, Jr.,
Appellee.

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Case No. 13-CV-252-GKF-TLW
Adversary No. 12-01051-M

OPINION AND ORDER
Before the court is the Motion to Dismiss Appeal [Dkt. #15] filed by appellee, Patrick J.
Malloy, III (“Malloy”), the designated Bankruptcy Trustee in the matter of In re David Gordon,
Case No. 11-10045, pending in the United States Bankruptcy Court for the Northern District of
Oklahoma. Malloy seeks dismissal of the appeal by Commerce Bank (“Commerce”) of the
decision in Adversary Proceeding No. 12-01051 in the Gordon bankruptcy case.
I. Procedural Background
The convoluted history of this dispute encompasses a federal criminal securities fraud
case, a Chapter 7 bankruptcy, an adversary proceeding in the bankruptcy case, and a civil lawsuit
for alleged aiding and abetting securities fraud.
On May 3, 2010, David Gordon (“Gordon”) was convicted of 23 counts, including wire
fraud; securities fraud; money laundering; conspiracy to commit securities fraud, wire fraud and
money laundering; making a false statement to the Securities and Exchange Commission; and
obstruction of justice. United States v. George David Gordon, et al., Case No. 4:09-CR-13-001-

JHP.1 He is currently serving an 18-year sentence. As part of Gordon’s conviction, the
government obtained a joint and several criminal forfeiture money judgment against him in the
amount of $43,927,809.95 as traceable stock sale proceeds. The judgment was part of the
government’s effort to recoup losses suffered by victims of Gordon’s stock schemes.
On January 7, 2011, Gordon filed a voluntary petition for Chapter 7 bankruptcy in the
United States Bankruptcy Court for the Northern District of Oklahoma. [11-10045-M, Dkt. #1].
The United States filed a claim against Gordon for $43,609,877.44. [Record, Dkt. # 5-6 at 158].2
Commerce also filed a claim against Gordon for $470,200, based on a guaranty of indebtedness
executed by Gordon. [Id.].
Malloy, the court-appointed Trustee, entered into negotiations with the government for
assignment of the claims of investors defrauded by Gordon. Malloy also communicated with
Commerce about settlement of potential claims against the bank.
On May 25, 2012, Malloy filed an Amended Trustee’s Notice and Motion to Settle
Disputed Matter (“Motion to Settle”) pursuant to Federal Rule of Bankruptcy Procedure 9019.
[Record, Dkt. #5-3 at pp. 3-97]. In that motion, Malloy sought approval of a compromise
settlement with the United States, which included a proposed Coordination Agreement (“CA”).
The CA provided for assignments of the claims of “approximately 17,000 possible victims” of
the pump-and-dump scheme against third parties (including Commerce) to the Gordon
bankruptcy estate. [Record, Dkt. #5-2 at 61-62; Dkt. #5-3 at 1-2]. Commerce objected to the
motion, asserting, inter alia, that the proposed assignments violate Oklahoma law and that the
Trustee, with the assistance of the United States, was improperly soliciting the claims for
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Gordon was accused of orchestrating several “pump-and-dump” stock schemes that artificially inflated stock prices
of various companies. Bank South, a small Oklahoma bank, and Bruce C. Humphrey, a loan officer at the bank, are
alleged to have aided and abetted Gordon in the scheme by laundering the proceeds from sales of the artificially
inflated stock. Bank South was acquired by Commerce Bank, N.A. effective April 1, 2007.
2
Unless otherwise noted, all references pertain to the docket in this matter.

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litigation through the use of the CA and impermissibly favoring the investors over the other
creditors of the bankruptcy estate. [Record, Dkt. #5-3 at 87-99]. Malloy, in his response to
Commerce’s objection, asserted that bankruptcy law determines whether or not the assigned
claims become the property of the estate and, alternatively, that the assignment of the claims is
allowed under Oklahoma case law. [Record, Dkt. #5-5 at 21-22]. Commerce in its reply, argued
that the CA proposed by the Trustee “appears to be a means by which the United States’ latefiling of its claim might be excused and a means by which the Trustee’s alleged standing to
pursue non-bankruptcy class action claims against third parties, including Commerce Bank, may
be bolstered, and used in an attempt to avoid statutes of limitation and class action prerequisites”
and “[n]either the means used nor the result sought by the United States and the Trustee have
statutory authorization.” [Id. at 97-98]. Commerce stated: “If the Court approves the Motion to
Settle over Commerce Bank’s objection, it should only be approved subject to the following:
The order is not a determination that (i) the Investor claims being assigned to the Trustee are
valid or (ii) the United States has any claim against third parties that is valid.” [Id. at 98].
Commerce filed the Adversary Proceeding on July 5, 2012, seeking declaratory judgment
that the investors’ claims which the trustee had threatened to assert against Commerce were not
the property of the debtor or the debtor’s estate and could not be brought by the Trustee.
[Record, Dkt. #5-1, pp. 4-5].
On July 26, 2012, the Bankrutpcy Court held a hearing on Malloy’s Motion to Settle.
[TR, Record, Dkt. #5-5 at 149-174]. At the hearing, counsel for Commerce stated his client was
concerned “that what the Trustee is or was trying to accomplish through this Coordination
Agreement is essentially a bootstrap in its simplest terms,” and that he hoped “the end result that
we get is whatever order [the court] approves or denies, this motion to approve the settlement

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compromise clearly does not rule on ultimate merits of any defense that—any defense or any
issue that might be out there in those other claims.” [Id. at 162-163]. Additionally, counsel
advised the court his client wanted to conduct discovery “as to what claims the United States has
against Commerce Bank that it is assigning.” [Id. at 163]. Finally, he stated: “The Trustee says
today that in the course of asking to approve a dispute between the U.S. and the Trustee, I will no
longer be able to assert that an assignment between a nonparty to this bankruptcy and the postpetition estate was invalid,” and “[t]hat’s completely outside the scope of 9019. That should not
be an issue in any way, shape, or form. And that’s exactly why we were worried. It appears
that’s exactly what they are trying to do. So we absolutely urge the court not to rule on that
issue. We believe these assignments are invalid. We’ve briefed it. We put the issue before the
Court so that the Court understands the nature of the issue. And—but we don’t believe that’s
proper for a Rule 9019 motion.” [Id. at 169].
On August 8, 2012, the Bankruptcy Court held a telephonic hearing on the Amended
Notice and Motion to Settle. [Record, 5-6 at 34-48]. During the hearing, the court noted that
Malloy had argued “that as a linchpin of the agreement any order approving the agreement must
also approve and assignments and render them valid as a matter of law.” [Id. at 38]. The court
stated:
With respect to the requirement that the assignments’ validity be approved with
the agreement: Why? Isn’t the validity of the assignments a matter to be dealt
with in any litigation of an assigned cause of action? Moreover, if this is
necessary, can I issue an order unconditionally and finally approving these
assignments and declaring their validity as part of a compromise under the motion
practice employed under the Federal rules of Bankruptcy Procedure?
Isn’t what the trustee [is] really seeking more in the nature of a declaratory
judgment as to the validity of the assignments, which we all know requires an
adversary proceeding?
And, moreover, isn’t this issue directly raised by
Commerce Bank in the adversary proceeding currently pending as a declaratory
judgment action, namely, adversary proceeding 12-1051[?]
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[Id. at 38-39].
On August 13, 2012, Malloy moved to dismiss the Adversary Proceeding. [Id., Dkt. #5-1,
pp. 8-23]. Among other arguments, Malloy asserted that the Adversary Proceeding would be
mooted by the court’s consideration of the Motion to Settle because “[i]f the Court determines
that the assignments are valid consideration for the Trustee’s settlement with the government, it
impliedly will have found that the assignments themselves are valid.” [Id. at 22].
On August 29, 2012, Commerce filed its Brief in Opposition to Malloy’s Motion to
Dismiss the Adversary Proceeding. [Id., Dkt. #5-1 at 24-29]. In that brief, Commerce argued
that “the Court should determine the ‘validity’ of the assignments in the context of the Adversary
Proceeding—either alone or consolidated with the Rule 9019 disputed matter pending in the
Chapter 7 case—after providing the parties a full opportunity to take discovery on the multiple
issues that go into the validity of an assignment, file dispositive motions to narrow the issues for
trial and hearing the evidence at trial.” [Id. at 27].
[Record, Dkt. #5-6 at 2-3].
On September 4, 2012, Malloy filed his Supplemental Brief in Support of Coordination
Agreement and Proposed Assignments. [Record, Dkt. #5-6 at 49-54]. In the brief, Malloy
argued Federal Rule of Bankruptcy Procedure 9014 authorized, and perhaps even required, the
Bankruptcy Court to decide the issue of the validity of the assignments in the Rule 9019 hearing.
[Id.].
On September 5, 2012, Commerce filed a Supplemental Brief in Opposition to the
Motion to Settle, in which it reiterated its position that the validity of the assignments should not
be decided in summary fashion in the Rule 9019 hearing, but rather in the Adversary Proceeding

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“with its requirements for full discovery, motion practice, and trial of evidentiary issues.”
[Record, Dkt. #5-6 at 55-62].
In its Response to Trustee’s Motion for Pre-Hearing Conference, filed October 18, 2012,
Commerce again stated its opposition to the Trustee’s request for a determination, in the Rule
9019 hearing, that the court find the assignments “valid.” [Record, Dkt. #5-6 at 64-70]. It also
suggested if the Bankruptcy Court approved the CA, it include the following language in its
order:
Nothing in this Order shall be deemed to be a ruling on the validity of any
assigned claim or the validity of any proposed assignment. Nothing in this Order
shall preclude any party from asserting any defense to or argument against any
claim which may be asserted against such party by the Trustee, and nothing in this
Order shall be deemed to be a ruling upon the validity of any such defense or
argument.
[Id. at 65].
On October 25, 2012, the Bankruptcy Court conducted an evidentiary hearing on the
Motion to Settle. [Record, Dkt. #5-6 at 73-156]. During the hearing, the court asked counsel for
Commerce whether he would be happy if the court used the language suggested in Commerce’s
October 18, 2012, brief. [Id., at 76-77]. Counsel responded, “We would be happy with that
language. If you’re telling us are we happy with anything else you might do with that order,
that’s hard to say not knowing exactly what else you would do with that order.” [Id. at 77].
On January 4, 2013, while Malloy’s motion to dismiss the Adversary Proceeding was still
pending, the Bankruptcy Court entered a Memorandum Opinion approving a settlement in the
form of a Coordination Agreement (“CA”) between Malloy and the United States. [Id., #5-6, pp.
157-178]. In the Memorandum Order, the court found that the record before it was insufficient
to determine whether Oklahoma law would prohibit assignment of the claims. [Id. at 174].
Further, it stated:
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Even if the record were complete regarding the claims that Malloy intends to
bring against Commerce (or any other party for that matter), this Court would
leave the issue to the court where the matter will be tried. The time for the issue
of Malloy’s standing to be determined is when he files his complaint, and the
place to determine the issue is in the court where litigation is commenced. This
decision is consistent with the authority cited by Malloy. In each of those cases,
standing was determined within the context of litigation of the assigned claims,
and not by another court. Once Malloy files his cause of action, the court where
the action is filed should have a full understanding of the nature of the claims
asserted. That court will be in the best position to determine whether the claims
asserted are assignable.
* * *
Malloy is authorized to enter into the CA. The Court makes no finding
regarding the validity of the assignments authorized under the CA, leaving that
issue to the court or courts ultimately responsible for any such litigation.
[Id. at 174].3
The same day, Malloy filed suit against Commerce and Humphrey in Tulsa County
District Court. [Dkt. # 5-1 at 22-48, Petition]. Defendants removed the case to federal court on
January 30, 2013. [Case No. 4:13-CV-59-JHP-FHM, Dkt. #2]. On February 6, 2013, they filed
a Motion to Dismiss [Id., Dkt. #18]. Malloy filed a Motion to Remand on February 12, 2013.
[Id., Dkt. #18].
On March 27, 2013, the Bankruptcy Court entered a minute order granting the Trustee’s
motion to dismiss the Adversary Proceeding. [Record, Dkt. #5-1, p. 3]. In its order, the court
stated:
Commerce Bank seeks a declaratory judgment regarding the standing of Patrick J.
Malloy III to bring certain causes of action against Commerce Bank. There is no
need for this Court to issue a declaratory judgment, as each of those causes of
action is presently pending before the United States District Court for the
Northern District of Oklahoma in Case No. 12-CV-0059-JHP-FHM. As this
Court stated in its January 4, 2013, Memorandum Opinion regarding approval of a
compromise between Patrick J. Malloy III and the United States of America, [t]he
3

The deadline for Commerce to appeal the ruling of the Bankruptcy Court on the Motion to Settle was January 18,
2013, 14 days after the entry of the order. 28 U.S.C. § 158(a)(1), (2); Fed.R.Bankr.P. 8002). Commerce did not
appeal the ruling.

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time for the issue of Malloys standing to be determined is when he files his
complaint, and the place to determine the issue is in the court where litigation is
commenced . . . There is no reason for this Court to address issues of standing
with respect to litigation commenced in another court. To the extent Commerce
Bank has suggested that it is beneficial to allow this adversary proceeding to
remain in place in case Commerce Bank wishes to have this Court visit certain
issues regarding Malloys standing, the Court rejects the argument. The dispute
between Commerce Bank and Malloy should be resolved in a single forum, and
not on a piecemeal basis. The best course of action is for this adversary
proceeding to be dismissed without prejudice to the ability of Commerce Bank to
raise issues of standing in the court where the action brought by Malloy is
pending.
Accordingly, IT IS HEREBY ORDERED that this adversary
proceeding be, and the same hereby is, dismissed without prejudice.
[Id.]. Commerce appealed the dismissal of the Adversary Proceeding on April 29, 2013. [Dkt.
#1].
On May 6, 2013, United States District Judge James H. Payne granted Malloy’s Motion
to Remand Case No. 13-CV-59 to Tulsa County District Court. [Case No. 13-CV-59, Dkt. #58].
II. Analysis
Malloy argues the appeal should be dismissed on the following grounds: (1) the
Bankruptcy Court’s January 4, 2013 order granting the Motion to Settle rendered Commerce’s
adversary action moot; and (2) Commerce is judicially estopped from arguing in this appeal that
Malloy does not have standing to assert claims against it.
A. Mootness
“A case becomes moot only when it is impossible for a court to grant any effectual relief
whatever to the prevailing party.” Knox v. SEIU Local 100, ___ U.S. ___, 132 S.Ct. 2277
(2012). Malloy asserts that “[w]hen the Bankruptcy Court’s ruling of January 4, 2013, became
final and non-appealable 14 days later on January 18, the issues then pending in the Adversary
were rendered moot” and “[b]y virtue of the earlier ruling, the Bankruptcy Court had already

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decided not to rule on the issue presented by the Adversary of whether Malloy has standing.”
[Dkt. #15 at 5].
The court rejects Malloy’s argument. Although, as a practical matter, the Bankruptcy
Court’s ruling on the Motion to Settle made it unlikely that Commerce would prevail in the
Adversary Proceeding, it was not “impossible for a court to grant any effectual relief whatever”
to Commerce until the Bankruptcy Court granted the trustee’s motion to dismiss the adversary
proceeding on March 27, 2013. See Knox, 123 S.Ct. at 2287. Before that time, there was a
chance—however slight—that Commerce could persuade the Bankruptcy Court to change its
mind about whether it should rule on the assignability/standing issue.
B. Judicial Estoppel
The Tenth Circuit has described the doctrine of judicial estoppel as follows:
Where a party assumes a certain position in a legal proceeding, and succeeds in
maintaining that position, he may not thereafter, simply because his interests have
changed, assume a contrary position, especially if it be to the prejudice of the
party who has acquiesced in the position formerly taken by him.
Johnson v. Lindon City Corp., 405 F.3d 1065 (10th Cir. 2005) (quotation and citation omitted).
The court in Johnson noted that while judicial estoppel is “probably not reducible to any general
formulation of principle,” the following factors are relevant:
First, a party’s later position must be clearly inconsistent with its earlier position.
Moreover, the position to be estopped must generally be one of fact rather than of
law or legal theory. Second, whether the party has succeeded in persuading a
court to accept that party’s earlier position, so that judicial acceptance of an
inconsistent position in a later proceeding would create the perception that either
the first or second court was misled. The requirement that a previous court has
accepted the prior inconsistent factual position ensures that judicial estoppel is
applied to the narrowest of circumstances. Third, whether the party seeking to
assert an inconsistent position would derive an unfair advantage or impose an
unfair detriment on the opposing party if not estopped.

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Id. (quotations and citations omitted). Commerce’s conduct does not meet the requirements to
invoke judicial estoppel. Commerce’s position was one of law rather than fact, and it
consistently urged both that the claims were not assignable as a matter of law, and that
assignability could not be resolved in a Rule 9019 hearing but instead, must be addressed in the
adversary proceeding. Even in its brief suggesting language for any order approving the Motion
to Settle, Commerce did not abandon its argument that the issue of assignability should be
resolved in the Adversary Proceeding rather than the Rule 9019 proceeding.
III. Conclusion
For the reasons set forth above, the Trustee’s Motion to Dismiss Appeal [Dkt. #15] is
denied.
ENTERED this 30th day of July, 2013.

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