BMO Harris Bank N.A. v. The Truland Group, Inc. et al

Filing 97

MEMORANDUM OPINION re: Receiver Raymond A. Yancey's Emergency Motion for Direction and Enforcement of Receiver Order. Signed by District Judge James C. Cacheris on 07/05/17. (pmil, )

IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF VIRGINIA
Alexandria Division

BMO Harris Bank, N.A.,
Plaintiff,
v.
TRULAND SYSTEMS CORPORATION,
et al.,
Defendants.

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1:14CV1187 (JCC/JFA)

M E M O R A N D U M

O P I N I O N

This matter is before the Court on Receiver Raymond A.
Yancey’s (the “Receiver”) Emergency Motion for Direction and
Enforcement of Receiver Order.

[Dkt. 82.]

For the following

reasons, the Court will hold that, pursuant to the terms of the
Receivership Order, the Receiver can use the Receivership Property
to fund the Arbitration, without BMO interference.

The Court will

also hold that the Receiver can refuse, based upon his sound
business judgment, to provide an interim distribution in the
amount of $1.8 million to BMO.
I.

Background

On July 23, 2014, Truland filed for Chapter 7 bankruptcy
in the United States Bankruptcy Court for the Eastern District of
Virginia.
Trustee.

The Bankruptcy Court subsequently appointed a Chapter 7
On September 4, 2014, the Bankruptcy Court issued a
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Consent Order Granting Emergency Motion for Relief from Stay
(“Stay Lift Order”), which had been filed by BMO Harris Bank, N.A.
(“BMO”).

This Order permitted BMO to take charge of certain

property (the “Collateral”) and to seek the appointment of a
receiver.
On September 9, 2014, pursuant to BMO’s request, this
Court entered a Receivership Order.

[Dkt. 9.]

The Receivership

Order appointed Raymond A. Yancey to take charge of all
Receivership Property, which consisted of the Collateral as
defined by the Bankruptcy Court’s Stay Lift Order.

[Id.]

That

same day, the Receiver, on behalf of R.A. Yancey & Associates,
Inc., entered into a Management Agreement with BMO.
Supp., ¶ 6; see also Management Agreement, Exh. B.

Mem. in
The Management

Agreement provided that, in the event of any conflict between any
of its provisions and a court order, “the latter shall govern.”
Management Agreement, ¶ 1.02.

Among other things, the Management

Agreement provided a mechanism whereby BMO would pay for certain
expenditures of the Receiver on behalf of the Receivership Estate,
including but not limited to legal fees and expenses. 1

Id.,

¶ 2.07.
Prior to the commencement of these proceedings, in
December 2013, an arbitration demand was filed by Balfour

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The Receivership Estate has paid all of its own expenses to date, including
legal and professional fees. Mem. in Supp., ¶ 12.

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Beatty/DPR/Big-D, a Joint Venture (“BDB”), against Truland, among
other entities, as a result of Truland’s allegedly faulty
installation of electrical equipment at a project known as the
Utah Data Center (the “Project”).

In response to BDB’s claims

against it, Truland filed an arbitration demand against Cache
Valley Electric Company (“Cache Valley”) for contribution and/or
indemnification, among other claims.
then consolidated.

The two arbitrations were

Arbitration is scheduled to proceed for seven

weeks, beginning June 26, 2017.

Mem. in Supp. [Dkt. 83], ¶ 15.

Given the length and complexity of the issues involved in
Arbitration, the Receiver anticipates that the Receivership
Estate’s future legal fees will be substantial.

Id., ¶ 15.

Recently, BMO informed the Receiver that it was
concerned that it could be obligated to provide funding to the
Receivership Estate, pursuant to the terms of the Management
Agreement, if Arbitration is unsuccessful.
see also Management Agreement, ¶ 4.02.

Mem. in Supp., ¶ 18;

BMO has taken the position

that the Receiver cannot use the cash collateral in the
Receivership Property without its consent, and that it does not
consent to the use of that collateral to fund the Arbitration.
Mem. in Supp., Exh. C at 1.

BMO has also requested that the

Receiver make an interim distribution to BMO in the amount of $1.8
million, which Receiver asserts would go against his sound
business judgment, given the pending Arbitration.
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Mem. in Supp.,

¶ 21; Exh. C. at 2-4.

As the result of these disagreements, BMO

exercised its option to terminate the Management Agreement.

On

June 30, 2017, the Management Agreement between the Receiver and
BMO will end.

Mem. in Supp., ¶ 22.

After this date, both parties

agree that, other than the provisions in the Management Agreement
that survive termination (¶ 3.05), their only remaining
obligations to each other can be found in this Court’s
Receivership Order. 2

Id., ¶ 23.

On June 23, 2017, the Receiver filed an Emergency Motion
for Direction and Enforcement of Receiver Order.

[Dkt. 82.]

filed its memorandum in opposition on June 28, 2017.
The Receiver replied that same day.
held on June 29, 2017.

[Dkt. 95.]

BMO

[Dkt. 90.]

Oral argument was

This motion is now ripe for disposition.
II.

Analysis

In order to resolve the present dispute between the
parties, the Receiver has requested further direction from this
Court regarding the enforceability of the Receivership Order as it
relates to two issues: (1) the ability of the Receiver to use
Receivership Property to fund the pending Arbitration, without
interference from BMO; and (2) the ability of the Receiver to use

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In its brief in opposition, BMO devotes significant time to a possible breach
of contract claim involving its Management Agreement with the Receiver. Opp.
[Dkt. 90] at 10-14. Because the Receiver’s emergency motion asked for
clarification regarding this Court’s Receivership Order only, that claim is not
properly before the Court. Accordingly, the Court declines to decide the issue
today. The Court likewise declines to order the Receiver to distribute $1.8
million to BMO, pursuant to the Management Agreement’s terms.

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his independent business judgment to refuse to provide any interim
distributions to BMO at this time.

Mem. in Supp. at 13.

The

Receiver alleges that, without this Court’s intervention, his
dispute with BMO threatens to interfere with his ability to
fulfill his obligations under the Receivership Order.

Id. at 12.

As noted by the Receiver, he has, at a minimum, all of
the powers and duties set forth in the Receivership Order.

See,

e.g., Liberte Capital Grp., LLC v. Capwill, 99 F. App’x 627, 633
(6th Cir. 2004) (“A receiver has the powers and duties directly
stated within a court’s order.

He also has any implied powers

clearly and reasonably necessary to meet his duties.”); First
United Bank & Trust v. Square at Falling Run, 2011 WL 1563108, at
*8 (E.D. W. Va. Mar. 31, 2011) (citations omitted) (“As an officer
of the court, the receiver’s powers are coextensive with his order
of appointment.”).

Thus, the Court will begin its analysis with a

discussion of the various powers and duties set forth in its
Receivership Order.
First, the Receivership Order provides broad
discretionary powers to the Receiver to “preserve, operate, manage
and maximize the value of the Receivership Property.”
Receivership Order [Dkt. 9], ¶ 1.

For example, as relevant here,

Paragraph 4 of the Receivership Order vests the Receiver with
“full power in his discretion to employ and discharge and to
compensate such attorneys, accountants, appraisers, auctioneers,
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managers and employees as he may deem appropriate.”
(emphasis added).

Id., ¶ 4

In addition, Paragraph 7 of the Order

specifically provides that:
[T]he Receiver is hereby fully authorized and empowered
to institute and prosecute all such claims, actions,
suits, insurance matters and the like (except with
respect to those claims [not relevant here]) as may be
necessary in his judgment for the proper protection of
the Receivership Property, and likewise, to defend all
claims, actions or suits as may be or may have been
instituted against the Receivership Property or against
him as Receiver of the Receivership Property, and to
settle any of the said claims, actions, lawsuits,
insurance matters and the like.
Id., ¶ 7 (emphasis added).

Other than his discretion, nothing in

these provisions, or any other provisions contained in the
Receivership Order, qualifies these broad powers.

There is no

language in the Receivership Order to suggest, for example, that
the Receiver must first seek BMO’s consent before discharging his
duties.

Rather, the Receivership Order makes clear that the

Receiver has the power to defend Truland, including in actions
such as the pending Arbitration, and to employ and compensate
“such attorneys . . . as he may deem appropriate” in order to
effectively do so.

Id., ¶¶ 4, 7.

Second, the Receivership Order places great emphasis on
the Receiver’s ability to operate independently, so that he can
pursue the best interests of the Receivership Property.

For

example, the Receivership Order states that the Receiver should
exercise “his own . . . sound business judgment” and prevents
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Truland’s creditors—a group that necessarily includes BMO—from
“interfering in any way with the possession, management or control
of any part of the Receivership Property, or from interfering in
any way to prevent the discharge of [the Receiver’s] duties.”
Receivership Order, ¶¶ 1, 3.

The Receivership Order also provides

for the Receivership to be self-sustaining, stating that “the
Receivership is to be conducted solely from the funds arising from
the Receivership Estate.”
broad and unqualified.

Id., ¶ 7.

Again, this language is

It explicitly prohibits BMO from dictating

how the Receiver carries out his duties, id., ¶ 3, including his
decision to defend Truland in the pending Arbitration, id., ¶ 7.
Furthermore, the cash collateral that the Receiver currently has
on hand arose from the Receivership Estate.

By the express terms

of the Receivership Order, then, he is permitted to use those
funds to discharge his duties.

There is nothing in the

Receivership Order to suggest otherwise.
Third, the Receivership Order is replete with examples
of language that instruct the Receiver to use “his own independent
sound business judgment” when carrying out his duties.
Receivership Order, ¶ 1.

For example, as noted above, the

Receivership Order provides the Receiver with “full power in his
discretion” to hire, fire, and pay various professionals whose
work will help to preserve the Receivership Property.

Id., ¶ 4.

The Receiver also has the power to retain prior employees of the
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Defendants “as he deems appropriate in his judgment.”
(emphasis added).

Id., ¶ 5

In addition, the Receivership Order directs him

to “continue, conduct, manage and operate the Receivership
Property . . . in such manner as will, in his judgment, best
preserve the Receivership Property,” including, inter alia, the
power to make and perform contracts; purchase and sell
merchandise, material, supplies, and equipment; and market and
sell the Receivership Property itself, “if the Receiver deems such
sale to be advantageous or prudent.”

Id., ¶ 7 (emphasis added).

Furthermore, the Receivership Order specifically points out that
the Receiver will not be held liable for actions taken or
decisions made that are based upon “the exercise of reasonably
prudent business judgment.”

Id.

Taken together, this language

demonstrates that the Receiver is entitled to rely upon his own
sound decision-making skills.
Although BMO acknowledges that the Receivership Order
provides the Receiver with “broad discretionary authority,” BMO
nevertheless maintains that its consent is required before the
Receiver may use its cash collateral.

Opp. at 3-10.

In support

of this argument, BMO points out that the Receivership Order “is
silent as to the use of cash,” other than to acknowledge that the
Receivership should be conducted solely with funds arising from
the Receivership Estate.
analysis so far.

Id. at 4.

The Court agrees with BMO’s

BMO then goes on to argue that the Receivership
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Order’s failure to address the use of cash collateral—and BMO’s
consent to that use—is by design.

Id.

The parties’ negotiations,

according to BMO, led to the decision to negotiate a Management
Agreement, which “clearly set[s] forth the terms and conditions on
which the Bank would consent to the Receiver’s use of [cash
collateral.]”

Id.

At its essence, then, BMO’s argument is that

this Court should interpret and enforce the terms of the
Management Agreement.
the Court. 3

But that Agreement is not properly before

The Receivership Order is.

That Order’s broad

language makes clear, as explained at length above, that the
Receiver has the power to use the Receivership Estate’s funds to
carry out his duties.
collateral.

Those funds necessarily include BMO’s cash

No consent is required.

In addition, even absent an agreement or order, BMO
still contends that its consent should be required.

Opp. at 6-10.

BMO argues that its first priority security interest in the
Receivership Property is a property right protected by the Fifth
Amendment.

Id. at 6-7.

Drawing analogies to bankruptcy law, BMO

contends that this type of property right must be protected by its
consent, a bankruptcy court determination that authorizes the
specific transaction, or a cash collateral order negotiated by the
parties.

Id.

BMO has not cited, and the Court has been unable to

3

The instant emergency motion seeks clarification on the Receiver’s powers and
duties under the Receivership Order only. That Order does not mention or
incorporate in any way the Management Agreement’s terms.

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locate, any cases that stand for the proposition that these
principals should be imported into the receivership context.
Moreover, BMO has already negotiated a private agreement with the
Receiver regarding how to obtain its consent for the use of cash
collateral.

Now that BMO has exercised its option to terminate

that agreement, the parties are left with the language of the
Receivership Order only.

As noted above, however, that Order

simply does not require BMO’s consent.
Accordingly, the Court finds that the terms of the
Receivership Order bestow broad, discretionary powers on the
Receiver to use “his own . . . sound business judgment” to
“maximize the value of the Receivership Property.”
Order, ¶ 1.

Receivership

He is well within his powers and duties under the

Order to continue with the pending Arbitration. 4

He is likewise

within his powers and duties to use Receivership Property to fund
that Arbitration.

Finally, the Receivership Order permits the

Receiver to conclude, as he apparently has, that he should decline
BMO’s request to pay it $1.8 million as an interim distribution.

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The Receiver expresses concern in a footnote about whether it would be in his
best interests to seek a discharge of his duties under the Receivership Order.
The Receiver appears worried that, as of June 30, 2017, BMO will no longer be
obligated to pay for any of the Receivership Estate’s expenses, should
Arbitration go poorly. Based on this limited information, the Court is in no
position to advise the Receiver regarding his next steps. Rather, it can only
remind the Receiver of the terms of the Receivership Order itself, which protect
the Receiver from personal liability, so long as his actions or decisions are
based upon “the exercise of reasonably prudent business judgment.” Receivership
Order, ¶ 7.

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IV. Conclusion
For the reasons set forth above, the Court will hold
that, pursuant to the terms of the Receivership Order, the
Receiver can use the Receivership Property to fund the
Arbitration, without BMO interference.

The Court will also hold

that the Receiver can refuse, based upon his sound business
judgment, to provide an interim distribution to BMO.
An appropriate order will follow.

July 5, 2017
Alexandria, Virginia

/s/
James C. Cacheris
UNITED STATES DISTRICT COURT JUDGE

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