Yukon Energy Corp. v. Brandon Investments ( 1998 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 96-3967
___________
In re: Yukon Energy Corporation, *
*
Debtor. *
________________________ *
*
Yukon Energy Corporation, *
*
Appellee, *
* Appeal from the United
States
v. * District Court for the
* District of Minnesota.
Brandon Investments, Inc., *
*
Appellant, *
*
Charles Clayton, *
*
Defendant, *
*
Kent Knudson, *
*
Appellant, *
*
John Doe; Jane Roe, *
*
Defendants. *
___________
Submitted: December 8, 1997
Filed: March 17,
1998
___________
Before McMILLIAN, MAGILL, and MURPHY, Circuit Judges.
___________
MAGILL, Circuit Judge.
Brandon Investments, Inc. (Brandon) and its
president, Kent Knudson, appeal the district court's1
adoption of the bankruptcy court's2 decision that held
Knudson liable for fraudulently reviving an extinguished
lien against the bankruptcy estate of Yukon Energy
Corporation (Yukon) but absolved Brandon from respondeat
superior liability. In an earlier order that was not
appealed to this Court, the bankruptcy court had
determined that the lien was without value. Because
Brandon's interests were not adversely affected by the
district court's ruling presently before us, we dismiss
Brandon's appeal. Appealing pro se, Knudson claims that
the bankruptcy court erred when it exercised jurisdiction
over the fraud claim, denied his request for a jury
trial, and excluded Knudson from a proceeding because of
Knudson's repeated disruptions in court. Knudson also
claims that the district court erred in adopting the
bankruptcy court's report and recommendation. We affirm.
I.
Yukon engaged in the wholesale heating and air
conditioning business. In 1991, Yukon entered into a
contract with L.A.W. Machining and Manufacturing, Inc.
(LAW), in which LAW agreed to manufacture a large number
of furnaces for Yukon. The sale price was calculated by
1
The Honorable Michael J. Davis, United States District Judge for the District
of Minnesota.
2
The Honorable Nancy C. Dreher, United States Bankruptcy Judge for the
District of Minnesota.
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a certain formula, subject to an agreed-upon maximum
amount. Almost immediately LAW began charging Yukon in
excess of the maximum price. Yukon responded by paying
LAW only in part and withholding the remainder.
-3-
Determined to continue their relationship despite their
price disagreement, in February 1992 Yukon granted LAW a
security interest on Yukon's inventory and equipment "to
secure payment to LAW . . . of all indebtedness of Yukon
to LAW for completed furnaces delivered to Yukon and
invoiced to Yukon." Yukon Energy Corp. v. Brandon Invs.,
Inc. (In re Yukon Energy Corp.), Case No. 4-93-7221, Adv.
No. 4-94-33, slip op. at 3 (Bankr. Minn. Mar. 15, 1995)
(quotations and emphasis omitted) (Yukon I).
In September 1992, LAW's creditors initiated
involuntary bankruptcy proceedings against LAW. The
amount of Yukon's indebtedness to LAW remained in
dispute; the trustee alleged that the debt was $250,000,
while Yukon claimed it owed no more than $33,000. Also
in the fall of 1992, Knudson, an investor in Yukon,
helped instigate a power struggle for control of Yukon.
Using proxy statements that a state court later found
deceptive, Knudson was elected to Yukon's board of
directors. With Yukon under the control of Knudson and
his associates, Yukon and LAW agreed to settle Yukon's
debt to LAW for $56,657.07 in return for a release and
discharge of the security interest held by LAW. Both
Knudson and Charles Clayton, Yukon's attorney at the
time, were involved in the negotiations leading to the
settlement.
By February 1993, Yukon was facing tough financial
times of its own. Unable to pay for the LAW settlement
from its own funds but desiring to clear the lien on its
assets, Yukon (through Knudson) solicited funds from
Yukon shareholders and outside investors. In return for
their loans, the investors were told they would receive
a new secured position. However, hoping to lure new
creditors with lien-free assets, Knudson did not secure
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the position of the new investors. Yukon used the new
funds to pay off the LAW lien, which was released by the
bankruptcy court on February 11, 1993. See Yukon Energy
Corp. v. Brandon Invs., Inc. (In re Yukon Energy Corp.),
Case No. 4-93-7221, Adv. No. 4-94-33, slip op. at 7-8
(Bankr. Minn. Sept. 19, 1995) (Yukon II).
In March 1993, a Minnesota state court invalidated
the shareholders election which had placed Knudson on
Yukon's board of directors, partly because of false and
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misleading information in the proxies concerning
3
Knudson's professional background. The state court also
invalidated all actions taken by the illegally-
constituted board, subject to ratification by the court.
Undeterred in his effort to control Yukon's fate,4 Knudson
devised a plan to revive the extinguished lien by
treating the lien's release as an assignment to a dummy
corporation controlled by Knudson. This would enable the
dummy corporation to hold the priority lien on Yukon's
assets. Knudson enlisted Clayton's help in activating a
corporate shell entitled Brandon Investments, Inc., with
Knudson as president and sole director. Knudson and
Clayton then issued shares of Brandon stock to the
investors in proportion to their original investments
used to finance the LAW settlement. The Brandon shares
were backdated to the date on which the investors had
advanced the funds, a date prior to the creation of the
Brandon corporate entity.
Acting in concert with Knudson, Clayton--still
attorney of record for Yukon--petitioned the bankruptcy
court for an amendment to the February 11, 1993 approval
of the settlement of the LAW lien. Knudson and Clayton,
purportedly acting on Yukon's behalf, requested that the
order be modified to state that the lien had been
assigned to Brandon. Clayton did not inform Yukon's new
directors of the pending change, and as a result Yukon
3
According to the bankruptcy court, "[t]he proxy statement represented that
Knudson was a 'securities investment broker'; in fact, he has never been such and rather
has been employed by at least 16 different employers since 1969." Yukon II, slip op.
at 6.
4
The bankruptcy court found that Knudson's actions were "fueled solely by
personal animosity and self-serving motivations aimed at destroying [rival directors in
Yukon], and perhaps Yukon, in the process." Yukon II, slip op. at 16.
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failed to object to the motion. On May 11, 1993, the
bankruptcy court entered an order as requested.
On December 30, 1993, Yukon filed for bankruptcy
protection under Chapter 11 of the Bankruptcy Code. On
February 15, 1994, Yukon commenced an adversarial
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proceeding against Knudson, Clayton, and Brandon,
alleging under several different theories of recovery
that Brandon's revived lien was valueless and that
Knudson and Clayton had fraudulently revived the
extinguished lien.5 The proceedings were converted to
Chapter 7 proceedings on May 12, 1994. In August 1994,
Alpha American Company (Alpha) paid $29,500 for virtually
all of Yukon's assets, on condition that Alpha bear the
expenses of the adversarial proceeding against Brandon.
Alpha and Yukon agreed to split the proceeds of any
recovery. Because the purported lien "diminished the
price at which Yukon's trustee could sell the assets of
the bankruptcy estate," Yukon II, slip op. at 20, $1500
of the purchase price was specifically allocated for
machinery, equipment, and inventory, the fair market
value of which totaled in excess of $275,000.
The bankruptcy judge severed the claim pertaining to
the valuation of the lien from the fraud claim and tried
the lien valuation issue first.6 On March 15, 1995, the
bankruptcy court entered an order in favor of Yukon
declaring that the lien against Yukon's estate was
without value. See Yukon I, slip op. at 11. Taking core
jurisdiction over the claim as a proceeding to determine
5
Yukon also alleged that Clayton had committed malpractice and breached his
fiduciary duty to Yukon. In finding for Yukon, the bankruptcy court determined that,
"[i]n seeking the amended order, Clayton was acting in the interests of and at the
direction of Knudson, not Yukon, whose best interests were unquestionably divergent
from that of Yukon." Yukon II, slip op. at 16. These claims have been subsequently
settled, and Clayton does not present an appeal for our consideration.
6
We note that the resolution of the fraud claim was not dependent on a ruling on
the lien issue, because the fraudulent conduct pertained to whether the lien continued
to exist, while the lien issue involved a calculation of the value of the goods that LAW
had sold to Yukon.
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"the validity, extent, or priority of liens" under 28
U.S.C. § 157(b)(2)(K), the bankruptcy court calculated
that Yukon owed less to LAW than the amount by which LAW
had overcharged Yukon under the contract. Yukon thus
owed nothing to LAW and the LAW lien had no value.
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Knudson and Brandon moved the district court for
"leave to appeal from the final and interlocutory Order
of the bankruptcy court dated March 15, 1995." Defs.'
Second Combined Mot. for Leave to Appeal Final and
Interlocutory Order (Apr. 24, 1995) at 1, reprinted in
Brandon's App. at Tab 18. The district court denied this
motion, noting that "[i]f the Defendants seek to appeal
from the Bankruptcy Court's final Order in this case,
they may file an appeal pursuant to [Bankruptcy] Rule
8001 and this District's local rules. The present Motion
is not the proper vehicle for initiating such an appeal."
Brandon Invs. v. Yukon Energy Corp. (In re Yukon Energy
Corp.), Civ. No. 3-95-580, slip op. at 3 (D. Minn. Dec.
5, 1995). Neither Knudson nor Brandon appealed the
bankruptcy court's ruling on the lien issue as a final
order.
The bankruptcy court then heard the remaining claim
of fraud against Knudson and Brandon, taking jurisdiction
over the claim as a noncore proceeding under 28 U.S.C. §
157(c)(1). In regard to Knudson's efforts to revive the
extinguished lien, the bankruptcy court held that Knudson
committed fraud under Minnesota law, finding that he
"purposefully omitted to tell Yukon a material fact and
intentionally misrepresented this information with the
intention of preventing Yukon from opposing the motion to
amend and the concomitant assignment to Brandon." Yukon
II, slip op. at 16-17. However, because Knudson was not
acting within the scope of his employment at Brandon but
rather acted with the intent of serving his own
interests, the bankruptcy court held that Brandon was not
liable for fraud under the doctrine of respondeat
superior. Id., slip op. at 27. The district court,
after conducting a de novo review of the record, adopted
the bankruptcy judge's report and recommendation. Yukon
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Energy Corp. v. Brandon Invs., Inc. (In re Yukon Energy
Corp.), Civ. No. 3-95-993, slip op. at 3 (D. Minn. Sept.
19, 1996).
Presently before this Court are appeals by Brandon
and Knudson of the district court's adoption of the
bankruptcy court's report and recommendation disposing of
the fraud claim. On appeal, however, Brandon contends
that the bankruptcy court lacked jurisdiction over the
lien valuation claim as well as the fraud claim and that
Brandon
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was entitled to a jury trial. Appealing pro se, Knudson
incorporates the same issues plus a due process claim
arising from his ejection from the proceedings because of
his unruly conduct and a claim that the district court
improperly conducted a de novo review of the bankruptcy
record.
II.
We first address whether the bankruptcy court's
ruling that the LAW lien had no value was a final order
sufficient to trigger this Court's jurisdiction. Courts
of appeals have jurisdiction over appeals "from all final
decisions, judgments, orders, and decrees" in bankruptcy
proceedings. 28 U.S.C. § 158(d). Unlike district
courts, which may in their discretion hear appeals from
interlocutory bankruptcy court orders, the jurisdiction
of this Court is limited to final orders. See In re
Woods Farmers Coop. Elevator Co., 983 F.2d 125, 127 (8th
Cir. 1993). Even if jurisdiction is not properly raised
by the parties, "this court is obligated to address
jurisdictional problems on its own if it perceives any."
In re Bank Bldg. & Equip. Corp., 23 F.3d 1390, 1392 (8th
Cir. 1994).
"[F]inality for bankruptcy purposes is a complex
subject and courts deciding appealability questions must
take into account the peculiar needs of the bankruptcy
process." In re Koch, 109 F.3d 1285, 1287 (8th Cir.
1997) (quotations and alterations omitted). To determine
the finality of an order in a bankruptcy proceeding, we
consider "the extent to which (1) the order leaves the
bankruptcy court nothing to do but execute the order; (2)
delay in obtaining review would prevent the aggrieved
party from obtaining effective relief; and (3) a later
reversal on that issue would require recommencement of
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the entire proceeding." In re Apex Oil Co., 884 F.2d
343, 347 (8th Cir. 1989). This is a more liberal
standard of finality than is generally applied to
nonbankruptcy proceedings. See Currell v. Taylor, 963
F.2d 166, 167 (8th Cir. 1992) (per curiam).
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We conclude that the bankruptcy court's valuation of
the lien was a final order. Once the lien was held to be
worthless, no further action was needed to determine
Brandon's status as a creditor of Yukon. See Woods, 983
F.2d at 127 ("[A]n order entered before the conclusion of
a complex bankruptcy proceeding is not appealable under
§ 158(d) unless it finally resolves a discrete segment of
that proceeding." (emphasis added)). Because all other
liens against Yukon had been satisfied by funds raised
from the investors, see Yukon II, slip op. at 10, the
rights of all the creditors with regard to the estate
were "on the verge of being completed . . . [and] a delay
in review . . . would serve no purpose." First Nat'l
Bank v. Allen, 118 F.3d 1289, 1294 (8th Cir. 1997).
Furthermore, lien valuation orders have typically been
considered final. See, e.g., In re Morse Elec. Co., 805 F.2d
262, 264 (7th Cir. 1986) ("A disposition of a creditor's
claim in a bankruptcy is 'final' for purposes of § 158(d)
when the claim has been accepted and valued, even though
the court has not yet established how much of the claim
can be paid given other, unresolved claims."); In re Saco
Local Dev. Corp., 711 F.2d 441, 448 (1st Cir. 1983)
("[A]s long as an order allowing a claim or priority
effectively settles the amount due the creditor, the
order is 'final' even if the claim or priority may be
reduced by other claims or priorities."). Accordingly,
we hold that the lien valuation was a final order.
By failing to timely appeal the lien order as a final
order, Brandon has waived any objection to the
determination that the lien was valueless. In this
appeal, we therefore review only the district court's
approval of the bankruptcy court's resolution of the
fraud claim--which held Brandon not liable under
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respondeat superior. Because the fraud order did not
cause injury to Brandon, Brandon's appeal will not be
heard by this Court. Cf. Deposit Guar. Nat'l Bank v.
Roper, 445 U.S. 326, 335 (1980) ("A party may not appeal
from a judgment or decree in his favor . . . ."
(quotations omitted)); Spencer v. Casavilla, 44 F.3d 74,
78 (2d Cir. 1994) ("Ordinarily, a party to a lawsuit has
no standing to appeal an order unless he can show some
basis for arguing that the challenged action causes him
a cognizable injury, i.e., that he is 'aggrieved' by the
order."). Accordingly, Brandon's appeal is dismissed,
and the remainder of this appeal
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concerns only the district court's approval of the
bankruptcy court's recommendation on the fraud claim.
III.
Knudson's appeal of the adverse determination on the
fraud claim raises several issues. Knudson argues that
the bankruptcy court lacked jurisdiction to hear the
fraud claim, erred in denying his request for a jury
trial, and denied Knudson due process by ejecting Knudson
from the proceedings for his unruly conduct. Knudson
also argues that the district court erred in conducting
its de novo review. We hold that the bankruptcy court
properly exercised jurisdiction over the fraud claim as
a noncore proceeding and that Knudson waived any right to
a jury trial by failing to make a timely demand. We also
find no error in the ejection of Knudson or in the
district court's review of the bankruptcy court's report
and recommendation.
Knudson first contends that the bankruptcy court
lacked subject matter jurisdiction over this proceeding.
The Bankruptcy Code authorizes bankruptcy courts to hear
and determine core proceedings, which include
"determinations of the validity, extent, or priority of
liens" and "other proceedings affecting the liquidation
of the assets of the estate or the adjustment of the
debtor-creditor or the equity security holder
relationship, except personal injury tort or wrongful
death claims." 28 U.S.C. § 157(b)(2)(K), (O). For
proceedings that are not core proceedings but are
"otherwise related to" a bankruptcy case, the bankruptcy
court submits proposed findings of fact and conclusions
of law to the district court for de novo review. 28
U.S.C. § 157(c)(1). In its analysis of its jurisdiction
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over the fraud claim in the present case, the bankruptcy
court noted "indices of both core and/or non-core
proceedings," and "in an abundance of caution" issued a
report and recommendation for the district court's
consideration. Yukon II, slip op. at 22.
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We therefore must address whether the fraud claim was
properly within the bankruptcy court's noncore
jurisdiction. For a bankruptcy court to exercise noncore
jurisdiction, "the proceeding at issue must have some
effect on the administration of the debtor's estate."
Abramowitz v. Palmer, 999 F.2d 1274, 1277 (8th Cir. 1993)
(quotations omitted). As we have stated:
The test for determining whether a civil
proceeding is related to bankruptcy is whether
the outcome of that proceeding could conceivably
have any effect on the estate being administered
in bankruptcy. An action is related to
bankruptcy if the outcome could alter the
debtor's rights, liabilities, options, or
freedom of action and which in any way impacts
upon the handling and administration of the
bankrupt estate.
In re Dogpatch U.S.A., Inc., 810 F.2d 782, 786 (8th Cir.
1987) (quotations and alterations omitted). Designed to
streamline the disposition of a debtor's entire
bankruptcy estate, see Abramowitz, 999 F.2d at 1278, the
statutory grant of noncore jurisdiction should be read to
"promote judicial economy by aiding in the efficient and
expeditious resolution of all matters connected to the
debtor's estate." In re Lemco Gypsum, Inc., 910 F.2d
784, 787 (11th Cir. 1990).
We conclude that the bankruptcy court properly
exercised noncore jurisdiction over the fraud claim in
this case because the resolution of that claim impacted
the administration of Yukon's bankruptcy estate.
Although Alpha purchased Yukon's assets subject to the
lien, Yukon retained a one-half interest in any recovery
for fraud against Knudson or Brandon. See Order
Approving Sale at ¶ 2 (Bankr. Minn. Aug. 23, 1994),
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reprinted in Brandon's App. at Tab 4. Furthermore, the
underlying misconduct clearly affected Yukon, as the
bankruptcy court determined that the fraudulent revival
of the lien "impaired Yukon's ability to reorganize" and
"necessarily diminished the price at which Yukon's
trustee could sell the assets of the bankruptcy estate."
Yukon II, slip op. at 19, 20. The presence of the
fraudulently revived lien reduced to $29,500 the amount
received for the sale of over $250,000 of Yukon's assets.
While we have
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held that "even a proceeding which portends a mere
contingent or tangential effect on a debtor's estate
meets the broad jurisdictional test," In re Titan Energy,
Inc., 837 F.2d 325, 330 (8th Cir. 1988), Yukon's
continuing stake in the outcome of the fraud claim
combined with the lien's effect on the asset sale price
rendered the fraud's effect far more direct.
Accordingly, the bankruptcy court properly exercised
noncore jurisdiction over the fraud claim.
Knudson next argues that he was improperly denied the
right to a trial by jury. Yukon originally filed its
adversarial complaint against Knudson on February 14,
1994. Knudson demanded a jury trial on January 31, 1995.
Yukon amended its complaint several times during this
period, including an amended complaint dated January 31,
1995. The bankruptcy court denied the motion for a jury
trial, noting that the "[d]efendants have fought a war of
attrition for one year" and that "[t]his is simply
another tactic employed to delay this trial." Yukon I,
slip op. at 10.
We do not decide whether Knudson was in fact entitled
to a jury trial, because any right has long since been
waived. Under the local bankruptcy court rules, the
failure of a party to demand a jury trial on a given
issue within ten days of service of the last pleading on
that issue constitutes a waiver of the right to a jury
trial. U.S. Bankr. Ct. Minn. Local R. 203(a), (e). Even
if Knudson requested a jury trial within ten days of
Yukon's final amended complaint, the essence of Yukon's
allegation against Knudson was not changed by this
amendment and remained unchanged throughout the course of
the litigation. See Williams v. Farmers and Merchants
Ins. Co., 457 F.2d 37, 38 (8th Cir. 1972) ("Once waived,
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the right [to a jury trial] is revived by amendments to
the pleadings only if new issues are raised in such
amendments and in such event the right is revived only as
to the new issues." (citations omitted)). Because the
amended complaints did not raise new issues concerning
Knudson, his failure to timely demand a jury trial
following the filing of the initial complaint resulted in
a waiver of this right.
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The remainder of Knudson's claims can be addressed
briefly. Knudson argues that the bankruptcy court
violated due process by ejecting him from the courtroom
after Knudson had asked a witness a question concerning
Santa Claus and the Easter Bunny and despite the court's
repeated urging throughout the entire proceeding that
Knudson behave with civility. The bankruptcy court has
authority to "issue any order, process, or judgment that
is necessary or appropriate to carry out the provisions"
of the Bankruptcy Code, see 11 U.S.C. § 105(a), which
includes the power to maintain decorum within the
courtroom. We find no abuse of discretion in the
bankruptcy court's action. Cf. Chambers v. NASCO, Inc.,
501 U.S. 32, 43 (1991) ("Courts of justice are
universally acknowledged to be vested, by their very
creation, with power to impose silence, respect, and
decorum, in their presence, and submission to their
lawful mandates." (quotations omitted)).
Knudson also claims that the district court--which
explicitly stated that it had reviewed the record de
novo--failed to apply the proper standard of review of
the bankruptcy court's decision. Knudson argues that the
district court improperly adopted the bankruptcy court's
recommendation in its entirety because the district court
noted that neither the bankruptcy court's findings of
fact nor its conclusions of law were "contrary to law."
Knudson's hypertechnical reading of the district court's
word choice fails to demonstrate that the district
court's review was not de novo. See In re Dillon Constr.
Co., 922 F.2d 495, 497 (8th Cir. 1991) (burden of proof
rests on party claiming district court failed to review
bankruptcy court's report and recommendation de novo).
Accordingly, this claim is without merit.
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Finally, Knudson claims that the adverse
determination on the fraud claim was not adequately
supported by the evidence. To the contrary, we find the
evidence of Knudson's fraudulent conduct overwhelming.
See Specialized Tours, Inc. v. Hagen, 392 N.W.2d 520, 532
(Minn. 1986) (stating prima facie case for fraud under
Minnesota law). Accordingly, we affirm on this claim as
well.
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IV.
Because the only final judgment adverse to Brandon's
interests was not properly appealed, we dismiss Brandon's
appeal. Finding jurisdiction proper and no error in
denying Knudson's request for a jury trial, we affirm the
district court's approval of the bankruptcy court's
decision holding Knudson liable for the fraudulent
revival of the LAW lien. We also hold that Knudson's due
process claim and improper review claim are without
merit.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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