American Prairie, etc. v. Tri-State Financial ( 2010 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
Nos. 08-1288/1394
___________
American Prairie Construction Co., *
formerly known as North Central *
Construction, Inc., *
*
Appellee/Cross-Appellant, *
* Appeals from the United States
v. * District Court for the
* District of South Dakota.
John Hoich, *
*
Defendant, *
*
Tri-State Financial, LLC, *
*
Appellant/Cross-Appellee. *
__________
Submitted: September 16, 2009
Filed: February 16, 2010
___________
Before MURPHY, RILEY, and GRUENDER, Circuit Judges.
___________
RILEY, Circuit Judge.
Tri-State Financial, LLC (TSF) appeals the district court’s finding that TSF
formed an enforceable settlement agreement with North Central Construction, Inc.
(NCC)1 on June 21, 2004, during bankruptcy proceedings for Tri-State Ethanol
(TSE).2 NCC cross-appeals, claiming the district court abused its discretion by
denying NCC reasonable attorney fees. Because no enforceable contract was formed,
we reverse and also dismiss NCC’s cross-appeal as moot.
I. BACKGROUND
A. Tri-State Ethanol Bankruptcy Proceedings
In 2001, NCC built an ethanol plant in Rosholt, South Dakota. TSE owned the
plant, and NCC retained a $1 million equity interest in the plant. The plant began
operating in 2002, but was not profitable. TSE failed to pay NCC for construction of
the plant, and NCC filed a mechanic’s lien and initiated foreclosure proceedings in
South Dakota state court. In May 2003, TSE filed a Chapter 11 bankruptcy petition
in the United States Bankruptcy Court for the District of South Dakota, resulting in
a stay of NCC’s state foreclosure action. In June 2003, a group of investors formed
TSF, a shell corporation designed exclusively to provide funding for TSE in an effort
to return the ethanol plant to operation.
TSE filed a Modified Chapter 11 Plan in March 2004 (modified plan or plan).
NCC and creditor Interstate Electric and Engineering Company (Interstate) objected
to their treatment under the plan. On June 14, 2004, TSF representatives engaged in
settlement negotiations with NCC representatives. TSF sought an agreement under
which TSF could purchase NCC’s claims against the bankruptcy estate, thus
eliminating NCC’s objections to the modified plan. No agreement was reached on
that date, but settlement negotiations continued between TSF representative John
1
North Central Construction, Inc. was later renamed American Prairie
Construction Co., but has continued to use its former name throughout this litigation.
2
This appeal was stayed for a period during which we decided the related appeal
of Am. Prairie Constr. Co. v. Hoich, 560 F.3d 780 (8th Cir. 2009). Many of the facts
and some of the law discussed here are borrowed from our Hoich opinion.
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Hoich (Hoich) and NCC representative Peter Rudeen (Rudeen). TSF representatives
later authorized Hoich to offer Rudeen $2.5 million in exchange for NCC’s claims and
interests in TSE. Hoich made the offer on June 20, 2004, the evening before a hearing
was scheduled to discuss confirmation of the modified plan.
On the morning of June 21, 2004, shortly before the hearing commenced,
Rudeen called Hoich and accepted the offer. Representatives for TSF and Interstate
met with NCC attorney Ron Hall (Hall) to discuss how the settlement should be
structured. Hoich did not attend either the meeting or the confirmation hearing.
Several other TSF representatives attended, including David Ruback (Ruback), TSF’s
manager; James Jandrain (Jandrain), a certified public accountant; and Jerrold
Strasheim (Strasheim), TSF’s newly hired attorney. Hall took notes of the discussion
and passed the notes around for others to review.
Shortly after the meeting, the confirmation hearing commenced.
Hall read his notes into the record and indicated, with no objection, that
his notes represented the settlement agreement among TSF, Interstate,
and NCC. Several parties were present, including at least sixteen
attorneys, and a significant amount of confusion existed about the terms
of the agreement. . . .
The terms of the “settlement agreement” read into the record
cannot easily be summarized. TSF agreed to purchase the various claims
of NCC and Interstate for $2.5 million, with $475,000 payable to
Interstate. The alleged agreement also contained provisions stating NCC
and Interstate would not object to TSE’s plan confirmation. The reading
detailed which claims were being purchased and from which class the
claims could be found in TSE’s Chapter 11 bankruptcy plan. There was
also a provision allowing Interstate to retain one of its claims which was
to be paid by TSE’s bankruptcy estate over a period of three years.
At the conclusion of the June 21, 2004 hearing, the bankruptcy
court requested an amended plan be filed by June 25, 2004, in an effort
to expedite the process. The court scheduled a confirmation hearing for
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the amended plan on July 28, 2004. Before the confirmation hearing
took place, the parties began to discuss the settlement agreement, and to
exchange drafts of proposed documents, in an effort to memorialize the
settlement discussed during the June 21, 2004 hearing. Conflicts arose
when TSF claimed the agreement was subject to confirmation of the
amended plan. NCC vehemently denied the existence of such a
condition. In the meantime, TSF raised $2.5 million from investors and
deposited the money into a trust account with Strasheim’s law firm. . . .
When NCC and TSF failed to agree on the written terms for the
formal agreement, NCC filed a motion on July 14, 2004, asking the
bankruptcy court to enforce the June 21, 2004 agreement. NCC and
Interstate also filed new objections to plan confirmation and ballots
rejecting the modified plan in the event TSF failed to perform under the
agreement. The motion to approve the settlement agreement and the
motion to confirm the modified plan were heard on July 27, 2004.
Shortly before the hearing, NCC attempted to perform its
obligations under the “settlement agreement” by tendering to TSF an
assignment of its claims against, and its interests in, TSE.
TSF . . . declined to accept the tendered assignment and refused to pay
NCC. When the hearing convened, TSE and TSF did not pursue
confirmation of TSE’s modified plan, but instead, joined in a pending
motion by the [United States Bankruptcy Trustee (Trustee)] asking the
court to dismiss the Chapter 11 proceedings. The bankruptcy court
denied the motion to dismiss and instead converted TSE’s Chapter 11
reorganization to a Chapter 7 liquidation.
The bankruptcy court also denied NCC’s motion to approve the
settlement agreement, finding the settlement agreement was not
conditional in any manner. The court noted the parties disagreed as to
whether a meeting of the minds occurred, but the court concluded it did
not have jurisdiction to force TSF, a third party not directly involved in
the bankruptcy, to consummate a deal. TSF returned the $2.5 million,
which had been placed in a trust account, to the contributors.
Am. Prairie Constr. Co. v. Hoich, 560 F.3d 780, 787-88 (8th Cir. 2009).
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B. Present Contract Action
After the bankruptcy court denied NCC’s motion, NCC filed this lawsuit in
district court seeking to enforce the alleged settlement agreement against TSF and
Hoich. The parties also continued attempts to negotiate a new settlement in the
bankruptcy court. The district court repeatedly stayed the contract action to allow
negotiations to continue in bankruptcy. During this time, many of TSE’s assets were
sold, and several secured creditors and priority administrative expenses were paid
from the bankruptcy estate.
On June 12, 2006, NCC and the Trustee reached a settlement agreement as to
NCC’s claim for construction costs. The bankruptcy court granted the Trustee’s
motion to approve the settlement agreement, but by that time, the district court had
lifted the stay in the present action. As a result, the bankruptcy court was unable to
enforce the settlement agreement formed by NCC and the Trustee.
On August 1, 2007, this contract action proceeded to trial. The district court
issued an opinion and order on December 27, 2007, holding the original settlement
agreement, read into the bankruptcy court record on June 21, 2004, was a binding and
enforceable agreement. The district court further found both TSF and Hoich were
bound by the agreement, and both TSF and Hoich breached the agreement when they
failed to perform, making them jointly and severally liable in the amount of $2.5
million, plus prejudgment interest. The award was later reduced to $2,025,000, plus
interest, pursuant to a stipulation NCC previously had made. The district court denied
NCC’s request for attorney fees.
On February 5, 2008, TSF and Hoich filed this consolidated appeal challenging
the district court’s judgment in favor of NCC. NCC filed a cross-appeal challenging
the denial of attorney fees. On November 12, 2008, counsel for TSF, Hoich, and NCC
appeared for oral argument before our court. TSF later filed bankruptcy and all
proceedings were stayed as to the issues raised by TSF in its appeal and by NCC in
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its cross-appeal. The stay did not extend to Hoich’s appeal. On March 24, 2009, this
court issued an opinion resolving all issues raised by Hoich in his appeal. See Hoich,
560 F.3d at 780. We held, among other things, that the district court erred in finding
Hoich had personally guaranteed, or Hoich was a party to, the alleged June 21, 2004
settlement agreement. Id. at 793, 796.
TSF’s Trustee filed a motion with the bankruptcy court seeking to lift the stay
as to the litigation pending between TSF and NCC. On September 11, 2009, the
bankruptcy court granted the motion, and our court was notified the stay was lifted on
September 15, 2009. On September 30, 2009, this court severed Hoich’s appeal from
the remaining consolidated cases. On that same date, we dismissed, as moot, the
claims against Hoich in NCC’s cross-appeal.
The remaining matters for our court to consider are TSF’s claims against NCC
in case number 08-1288, and NCC’s claim against TSF in case number 08-1394. TSF
argues the district court erred when the court (1) denied TSF’s motion for recusal and
disqualification, (2) denied TSF’s motion to dismiss on the basis of issue preclusion,
(3) concluded a binding agreement had been formed between TSF and NCC, (4) found
the agreement was enforceable, and (5) improperly calculated damages. NCC cross-
appeals, contending the district court abused its discretion by denying NCC reasonable
attorney fees.
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II. ANALYSIS
A. Motion for Recusal and Disqualification
Before the district court set a trial date in the present case, the district court
heard various appeals arising out of the underlying bankruptcy proceeding. TSF
maintains two of the district court’s opinions in the bankruptcy appeals demonstrate
the court pre-determined whether a binding agreement was formed on June 21, 2004.
In one bankruptcy appellate opinion filed on May 17, 2007, the district court stated,
We know that TSF and [NCC ] . . . reached a settlement in the presence
of the bankruptcy judge which was on the record in June of 2004. This
was followed by TSF reneging on the settlement by adding terms not
previously stated. The bankruptcy judge did not enforce the settlement
and allowed TSF to escape from it. Of course, this would be frustrating
to any judge.
In another appellate opinion filed January 3, 2007, the district court declared,
It is obvious from the record that, despite the protestations of the
attorneys for TSF, [the bankruptcy judge] believes that . . . TSF twice
agreed to settlements, once before [the bankruptcy judge] and then in a
mediation session before a United States Magistrate Judge, and then
refused to honor them by adding additional stipulations and conditions.
TSF claims the district court’s statements in these two appellate opinions
demonstrate “the [d]istrict [c]ourt already decided that NCC and TSF reached an
agreement and that TSF breached that agreement.” TSF asserts, “the [d]istrict [c]ourt
already ruled in favor of NCC on the merits before the evidence was presented at
trial.” Based upon these statements, TSF proposes the district court had an
“unfavorable predisposition against TSF” and should have granted TSF’s motion to
recuse.
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“‘We review a denial of a motion to recuse for an abuse of discretion.’” Hoich,
560 F.3d at 789 (quoting Trammel v. Simmons First Bank of Searcy, 345 F.3d 611,
612 (8th Cir. 2003)). “Pursuant to 28 U.S.C. § 455(a), ‘[a]ny justice, judge, or
magistrate judge of the United States shall disqualify himself in any proceeding in
which his impartiality might reasonably be questioned.’” Id. “A judge is also
required to recuse himself when ‘he has a personal bias or prejudice concerning a
party, or personal knowledge of disputed evidentiary facts concerning the
proceeding.’” Id. (quoting 28 U.S.C. § 455(b)(1)). “‘We apply an objective standard
of reasonableness in determining whether recusal is required.’” Id. (quoting Fletcher
v. Conoco Pipe Line Co., 323 F.3d 661, 664 (8th Cir. 2003)). “‘Under § 455(a),
“disqualification is required if a reasonable person who knew the circumstances would
question the judge’s impartiality, even though no actual bias or prejudice has been
shown.”’” Id. (quoting Fletcher, 323 F.3d at 664).
“‘A judge is presumed to be impartial, and “the party seeking disqualification
bears the substantial burden of proving otherwise.”’” Id. at 790 (quoting United
States v. Denton, 434 F.3d 1104, 1111 (8th Cir. 2006)). “In order to ‘establish bias
or prejudice from in court conduct,’ a party must show ‘the judge had a disposition
so extreme as to display a clear inability to render a fair judgment.’” Id. (quoting
Denton, 434 F.3d at 1111) (internal marks omitted). “‘[O]pinions formed by the judge
on the basis of facts introduced or events occurring in the course of the current
proceedings, or of prior proceedings, do not constitute a basis for a bias or partiality
motion unless they display a deep-seated favoritism or antagonism that would make
fair judgment impossible.’” Id. (quoting Denton, 434 F.3d at 1111).
TSF admits the comments made by the district court “were made in a judicial
context.” TSF does not dispute that the opinions formed by the district judge were
based upon facts introduced during, and events occurring in, the course of the related
bankruptcy proceeding. As a consequence, in order to establish bias or prejudice from
the district court’s statements, TSF is required to demonstrate the district court “‘judge
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had a disposition “so extreme as to display a clear inability to render a fair
judgment.”’” Id. (quoting Denton, 434 F.3d at 1111). Under the facts of this case,
TSF is unable to meet this burden.
In the district court’s order denying TSF’s recusal motion, the district judge
admitted he “erred in stating that settlements had been reached.” The district judge
continued by resolving, “[settlements] may or may not have been reached and the trial
of this action will answer that question.” The statements in the district court’s
opinions and in the transcripts manifestly do not demonstrate a deep-seated favoritism
or antagonism, nor do they display a disposition so extreme as to render fair judgment
impossible. See Liteky v. United States, 510 U.S. 540, 551 (1994). On the contrary,
the district judge admitted his error, and resolved to consider all the evidence
presented at trial before deciding whether a contract had been formed. The district
court did not abuse its discretion in denying TSF’s motion for recusal and
disqualification.
B. Motion to Dismiss
TSF argues the district court erred in denying TSF’s motion to dismiss on the
basis of issue preclusion. TSF maintains that on July 27, 2004, at an evidentiary
hearing, the bankruptcy court determined that no agreement had been formed at the
earlier June 21, 2004 hearing. Therefore, TSF insists the bankruptcy court already
resolved the issue, and collateral estoppel should bar further litigation of whether
NCC and TSF entered into a binding settlement agreement.
On July 27, 2004, the bankruptcy court held a hearing on NCC’s motion to
approve a compromise and settlement release. During the hearing, NCC attorney
Patrick J. Lee O’Halloran (O’Halloran) stated it was NCC’s position an agreement had
been reached between TSF and NCC at the June 21, 2004 hearing. O’Halloran
continued by proclaiming TSF’s refusal to tender the $2.5 million in exchange for
NCC’s interests in TSE constituted a failure to perform and a breach of the settlement
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agreement. The bankruptcy judge answered O’Holloran’s complaints, responding, “I
don’t disagree with you.” However, the bankruptcy court declined to enforce the
alleged agreement, deciding the court did not have authority to force TSF, a third-
party not directly involved in the bankruptcy, to consummate a deal. At no time
during the hearing did the bankruptcy court determine whether or not a contract
actually existed as of June 21, 2004, between NCC and TSF. TSF’s claim relies on
a mischaracterization of the record. The district court did not err.
C. Settlement Agreement
1. Formation
On appeal, TSF contends the district court erred in finding a binding agreement
was formed during the June 21, 2004 bankruptcy hearing because the alleged
agreement failed to include an essential term, plan confirmation, which had been
anticipated by the parties. TSF’s claim that the settlement agreement was contingent
upon confirmation of TSE’s modified plan is unsupported by the record. Regardless,
TSF is precluded from relying on such a condition precedent because TSF’s conduct
in joining the Trustee’s motion to dismiss instead of pursuing confirmation of the
modified plan prevented the alleged condition precedent from occurring. See 17A
Am. Jur. 2d Contracts § 687 (2009) (“One who prevents or makes impossible the
performance or occurrence of a condition precedent, upon which that person’s liability
depends under the contract, cannot insist or rely on the condition.”); see also Johnson
v. Coss, 667 N.W.2d 701, 706 (S.D. 2003) (“‘An individual who prevents the
occurrence of a condition may be said to be estopped from benefiting from the fact
that the condition precedent to his or her obligation failed to occur.’” (quoting 13
Richard A. Lord, Williston on Contracts § 39:7)). Nonetheless, the record makes clear
that no agreement was reached for entirely different reasons.
We apply South Dakota law to determine whether a settlement agreement was
formed. See, e.g., State Auto Prop. & Cas. Ins. Co. v. Boardwalk Apts., L.C., 572
F.3d 511, 514 (8th Cir. 2009) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78
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(1938) for the proposition that federal courts sitting in diversity apply the law of the
forum state). “The district court’s finding that a settlement offer was made and
accepted is a factual one.” Enter. Rent-A-Car Co. v. Rent-A-Wreck of Am., Inc., 181
F.3d 906, 909 (8th Cir. 1999) (citation omitted). “We review the district court’s
factual findings for clear error.” Id. (citations omitted). On the other hand, the
“[e]xistence of a valid contract is a question of law,” subject to de novo review. In re
Estate of Neiswender, 616 N.W.2d 83, 86 (S.D. 2000) (citation omitted). We review
de novo a district court’s interpretation and construction of a contract, as well as a
district court’s interpretation of state law. See, e.g., Cardinal Health 110, Inc. v. Cyrus
Pharm., LLC, 560 F.3d 894, 898 (8th Cir. 2009); Read v. McKennan Hosp., 610
N.W.2d 782, 786 (S.D. 2000).
Under South Dakota law, the elements necessary for formation of a contract are:
“(1) [p]arties capable of contracting; (2) [t]heir consent; (3) [a] lawful object; and (4)
[s]ufficient cause or consideration.” S.D. Codified Laws § 53-1-2. “To form a
contract, there must be a meeting of the minds or mutual assent on all essential terms.”
Jacobson v. Gulbransen, 623 N.W.2d 84, 90 (S.D. 2001) (citation omitted). “Consent
of the parties to a contract must be: (1) [f]ree; (2) [m]utual; and (3) [c]ommunicated
by each to the other.” S.D. Codified Laws § 53-3-1. “Consent is not mutual unless
the parties all agree upon the same thing in the same sense.” S.D. Codified Laws
§ 53-3-3. “The existence of mutual consent is determined by considering the parties’
words and actions.” Vander Heide v. Boke Ranch, Inc., 736 N.W.2d 824, 832 (S.D.
2007) (citation omitted).
During the June 21, 2004 bankruptcy hearing, the terms of the “settlement
agreement” were read into the record. Hall, an attorney representing NCC, reported
an agreement had been reached between the creditors (NCC and Interstate), the debtor
(TSE), and two additional parties (TSF and Hoich). Hall further explained his
“understanding” Hoich had “personally committed to this deal.” When Hall read the
terms of the “agreement” into the record, he repeatedly referred to Hoich as a co-
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purchaser of NCC’s claims. TSF’s attorney, Strasheim, also indicated his belief Hoich
was “committed” to the agreement. Thus, representatives for both TSF and NCC
indicated their belief that Hoich was a party to the contract.
In Hoich, 540 F.3d at 791-96, we held Hoich was never a party to the settlement
agreement allegedly formed on June 21, 2004, because Hoich never consented to be
bound personally to an agreement with NCC and TSF, and none of the parties present
at the June 21, 2004 hearing had the authority to consent on Hoich’s behalf. Such
consent is a prerequisite to the formation of a contract under South Dakota law. See
S.D. Codified Laws § 53-1-2(2).
Because the requisite consent was not provided by one of the necessary parties
to the contract, the remaining parties could not have come to a meeting of the minds
as to all the essential terms. Cf. S.D. Codified Laws §§ 53-1-2 and 53-3-3; Jacobson,
623 N.W.2d at 90. The statements made by NCC and TSF representatives during the
June 21, 2004 hearing demonstrate both NCC and TSF were operating under the
mistaken belief that Hoich was a party to the contract. It is hard to imagine a contract
term more essential than the identity of the parties. Cf. Chambers v. Roseland, 112
N.W. 148, 149 (S.D. 1907). Because TSF and NCC did not come to a meeting of the
minds with respect to this essential term, no contract was ever formed.
2. Enforceability
a. Bankruptcy Court Approval
Even if TSF and NCC had reached an agreement during TSE’s bankruptcy
proceedings, such agreement would be unenforceable. It is a recognized principle of
bankruptcy law that a bankruptcy court is required to approve any compromise or
settlement proposed in the course of a Chapter 11 reorganization before such
compromise or settlement can be deemed effective. See, e.g., Fed. R. Bank. P.
9019(a) (“On motion by the trustee and after notice and a hearing, the court may
approve a compromise or settlement.”); Protective Comm. for Indep. Stockholders of
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TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968) (citation omitted)
(“The fact that courts do not ordinarily scrutinize the merits of compromises involved
in suits between individual litigants cannot affect the duty of a bankruptcy court to
determine that a proposed compromise forming part of a reorganization plan is fair
and equitable.”); Reynolds v. Comm’r of Internal Revenue, 861 F.2d 469, 473 (6th
Cir. 1988) (citation omitted) (“In bankruptcy proceedings, as distinguished from
ordinary civil cases, any compromise between the debtor and his creditors must be
approved by the court as fair and equitable.”). That is, a settlement or compromise in
bankruptcy is not enforceable in advance of bankruptcy court approval. See, e.g.,
Levey v. Sys. Div., Inc., (In re Teknek, LLC), 563 F.3d 639, 651 (7th Cir. 2009)
(recognizing a settlement agreement was null and void when the bankruptcy court
lacked jurisdiction to approve the agreement, “because the trustee is required to get
the bankruptcy court’s approval before settling claims”); In re Tarrant, 349 B.R. 870,
893 (Bankr. N.D. Ala. 2006); In re Degenaars, 261 B.R. 316, 319 (Bankr. M.D. Fla.
2001).
Likewise, a settlement agreement made in bankruptcy has no effect when the
parties to the agreement fail to comply with Fed. R. Bank. P. 9019, which requires
notice to creditors and court approval.3 See, e.g., Travelers Ins. Co. v. Am. AgCredit
Corp. (In re Blehm Land & Cattle Co.), 859 F.2d 137, 141 (10th Cir. 1988); Wheeling
Structural Steel Co. v. Moss, 62 F.2d 37, 39-40 (4th Cir. 1932); Billingham v. Wynn
& Wynn, P.C. (In re Rothwell), 159 B.R. 374, 379 (Bankr. D. Mass. 1993) (finding
a settlement agreement unenforceable with no effect where the parties failed to
comply with Rule 9019); In re Masters, Inc., 149 B.R. at 292; Bramham v. Nev. First
Thrift (In re Bramham), 38 B.R. 459, 465 (Bankr. D. Nev. 1984) (citation omitted)
3
We do not address the issue of whether a party to a settlement agreement may
unilaterally repudiate the agreement after approval has been sought under Rule 9019,
but before the bankruptcy court has had the opportunity to approve the settlement.
See, e.g., Musselman v. Stanonik (In re Seminole Walls & Ceilings Corp.), 388 B.R.
386, 392-96 (M.D. Fla. 2008).
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(“Absent compliance with the[] requirements of notice, hearing, and court approval,
a purported settlement or compromise is unenforceable.”).
In this case, no effective agreement was achieved because the bankruptcy court
declined to approve the settlement proposed by the parties. At the hearing on July 27,
2004, on NCC’s motion to approve the settlement agreement, the bankruptcy court
noted the parties disagreed as to whether a meeting of the minds occurred on June 21,
2004. The bankruptcy court then denied approval of the settlement agreement, finding
the court did not have jurisdiction to force TSF, a third party not directly involved in
the bankruptcy, to consummate a deal.
NCC did not appeal the bankruptcy court’s decision—a decision which would
have been reviewed for an abuse of discretion. See New Concept Hous., Inc. v.
Poindexter (In re New Concept Housing, Inc.), 951 F.2d 932, 939 (8th Cir. 1991)
(citation omitted) (“A bankruptcy court’s approval [or denial] of a settlement will not
be set aside unless there is plain error or abuse of discretion.”). Instead, NCC filed an
independent lawsuit in district court, attempting to enforce the terms of the settlement
agreement. NCC effectively attempted to circumvent the requirement of bankruptcy
court approval. “A bankruptcy court is ordinarily in the best position, as the trial court
and as the ongoing supervisory court for the bankruptcy proceeding, to determine
whether a compromise is in the best interest of the estate and ‘fair and equitable.’”
Sandoz v. Bennett (In re Emerald Oil Co.), 807 F.2d 1234, 1239 (5th Cir. 1987)
(quoting Anderson, 390 U.S. at 424). We are not in such a favored position here to
decide the best interests of the estate or any of the other parties.
The agreement at issue here involved a debtor in bankruptcy and two creditors.
The alleged agreement impacted various aspects of the bankruptcy, as it involved TSF
purchasing NCC’s and Interstate’s claims against the estate, and the agreement
discussed various classes from which the claims would be purchased. Under the
circumstances presented here, the district court could not enforce an independent
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agreement, because the agreement was not independent—it was inherently intertwined
with the bankruptcy proceeding. Quite simply, a settlement reached between a debtor
in bankruptcy and a creditor is not effective under Fed. R. Bank. P. 9019 absent
bankruptcy court approval. See, e.g., In re Cincinnati Microwave, Inc., 210 B.R. 130,
133 (Bankr. S.D. Ohio 1997). The district court erred in treating the alleged
settlement agreement as independent from the bankruptcy, and in holding the
agreement was an enforceable, binding contract.
b. Frustration of Purpose and Commercial Impracticability
Even if bankruptcy court approval were not required for settlement agreements
made between debtors in bankruptcy and their creditors, this purported agreement
would still be unenforceable. At the time the agreement was made, TSE was a debtor-
in-possession involved in a Chapter 11 reorganization, and the terms of the proposed
agreement directly reflected the state of affairs in the bankruptcy proceeding. Under
the terms of the agreement, TSF was to purchase NCC’s and Interstate’s creditor
claims against TSE, and in exchange, NCC and Interstate would remove their
objections to confirmation of TSE’s modified bankruptcy plan so confirmation could
proceed.
The terms of the agreement provided: (1) TSF would purchase NCC’s claim in
class 12 and NCC’s equity interest in class 18 of TSE’s modified plan; (2) TSF would
purchase a portion of Interstate’s class 13 claim, and TSF would ensure Interstate
received the balance of Interstate’s claim over a three-year period at 9% interest; (3)
the total purchase price to be divided among NCC and Interstate would be $2.5
million, and of that amount, $475,000 was to be allocated to Interstate’s class 13
claim; (4) after the purchase and transfer of NCC’s and Interstate’s claims, NCC and
Interstate would withdraw all objections to confirmation of TSE’s modified plan; and
(5) the settlement would be a final settlement of all of NCC’s and Interstate’s claims
and NCC’s state court foreclosure action would be dismissed with prejudice.
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After NCC filed suit in the district court seeking enforcement of the agreement,
NCC and TSF agreed to stay litigation on the contract dispute so settlement
negotiations could continue in the bankruptcy court. In the meantime, the bankruptcy
case was converted from a Chapter 11 reorganization to a Chapter 7 liquidation. The
estate’s primary asset, the ethanol plant, was sold, and substantial interim distributions
were made to various creditors and administrative expense claimants. Both NCC and
TSF were well aware the administration of the bankruptcy case was continuing while
the contract dispute was litigated. Yet, neither party sought a delay or alteration in the
administration of the bankruptcy case during that time. During that same time, NCC
successfully negotiated a settlement agreement with the Trustee. However, the
bankruptcy court could not enforce the new settlement because the bankruptcy
proceeding was stayed due to the contract litigation in the district court.
Under the facts of this case, with such a drastic change in circumstances from
the time of the original agreement to the time the district court attempted to enforce
the agreement, the purpose of the agreement had been frustrated and was no longer
enforceable. “Where, after a contract is made, a party’s principal purpose is
substantially frustrated without his fault by the occurrence of an event the non-
occurrence of which was a basic assumption on which the contract was made, his
remaining duties to render performance are discharged, unless the language or the
circumstances indicate the contrary.” Restatement (Second) of Contracts § 265
(1981). See also Groseth Int’l., Inc., v. Tenneco, Inc., 410 N.W.2d 159, 165-68 (S.D.
1987) (providing a detailed discussion of the doctrines of commercial frustration and
commercial impracticability). Likewise, “there may be excuse from performance
where very greatly increased difficulty is caused by facts not only unanticipated, but
inconsistent with the facts that the parties very obviously assumed would likely
continue to exist.” Id. at 167 (citations omitted). “The most important question is
whether an unanticipated circumstance has made performance of the promise vitally
different from what the parties contemplated when they entered the contract.” Id.
(citation omitted).
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The facts that exist today are inconsistent with the facts the parties “obviously
assumed would likely continue to exist” at the time the purported settlement was
made. Id. This is clear from the context of the agreement. The proposed agreement
was made during bankruptcy proceedings for TSE. TSF was created for the sole
purpose of providing funding to TSE in an effort to return the ethanol plant to
operation. When TSF negotiated with NCC, TSF’s primary purpose in agreeing to
purchase NCC’s claims against TSE’s bankruptcy estate was to remove NCC’s
objections to confirmation of TSE’s modified plan. Once those objections were
removed, TSE would have been more likely to obtain bankruptcy court approval of
its modified plan and succeed in reorganization. The parties later disagreed as to
whether a meeting of the minds had occurred, TSF refused to perform, and NCC
refused to remove its objections to TSE’s modified plan. The bankruptcy court’s
conversion of the bankruptcy estate to a Chapter 7 liquidation was not contemplated
by the parties, and because the ethanol plant then would necessarily be sold, the
conversion defeated TSF’s entire purpose in negotiating with NCC.
Neither TSF nor NCC contemplated the liquidation of the bankruptcy estate.
When NCC read the terms of the purported agreement on the record, NCC stated TSF
would purchase NCC’s class 12 claim and class 18 equity interest in TSE’s estate.
TSF can no longer purchase those class claims because, after the conversion, such
classes ceased to exist. Similarly, TSF cannot purchase Interstate’s class 13 claim as
contemplated because that class claim also does not exist. Further, NCC and Interstate
agreed to remove all objections to the modified bankruptcy plan after TSF purchased
NCC’s and Interstate’s claims against TSE’s estate. NCC and Interstate can no longer
carry out their end of the bargain because no plan exists today, partially as a
consequence of NCC’s and Interstate’s continued objections to the plan.
The circumstances in the bankruptcy case changed dramatically from the time
the proposed agreement was read into the record at the June 21, 2004 hearing to the
time the district court attempted to enforce the agreement on December 27, 2007. The
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agreement is no longer enforceable in its original form. The district court erred in
finding the agreement was enforceable.4
III. CONCLUSION
We affirm the district court’s denial of TSF’s motion for recusal and
disqualification and TSF’s motion to dismiss. We reverse the district court’s
judgment finding a binding, enforceable contract was established between TSF and
NCC on June 21, 2004.
______________________________
4
We need not discuss TSF’s final issue on appeal, that the district court erred
in its calculation of damages, because under our holding, NCC is not entitled to
damages on the breach of contract theory. We issue no opinion as to whether NCC
has other claims against TSF which were not addressed in this appeal. The claim
presented by NCC in its cross-appeal, that the district court abused its discretion in
denying NCC reasonable attorney fees, is now moot. See, e.g., Sunder v. U.S.
Bancorp Pension Plan, 586 F.3d 593, 603 (8th Cir. 2009) (declining to address a moot
issue in a cross-appeal).
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