Date: 03-19-2018

Case Style:

Case Number: 16-3923

Judge: Kelly

Court: United States Court of Appeals for the Eight Circuit on appeal from the District of Nebraska (Douglas County)

Plaintiff's Attorney:

Robert J. Becker, John D. Stalnakerand David J. Skalka for Thomas D. Stalnaker - Chapter 7 Trustee

Glenn J. Boomsma and Courtney Claybvorne - Special Counsel

Jerry L. Jensen - Acting Assistant UST

Defendant's Attorney: David C. Barrett, Jr. for Farmers Cooperative Elevator Co. - Creditor

James B. Cavanagh for Linda L. Klaasmeyer - Creditor

Rogert W. Damgaard for John S. Lovald - Interested Party

Donald P. Dworak for Otter Tail Power Company - Interested Party

Robert V. Ginn for CIT Group/Equipment Financing, Inc. - Interested Party

John M. Guthery for Union Bank and Trust Company - Creditor

Ronald J. Hall for American Prairie Construction Company - Creditor

C. Jan Headley for James G. Jandrain

Larry A. Jobeun for Charles Clatterbuck - Interested party

Brittney J. Krause for Linda L. Klaasmeyer

Mark James LaPuzza for Red River Energy, LLC - Creditor

James S. Mitchell for O'Connor, Kiln & Dryer, Inc. - Creditor

Stephen H. Nelsen for James G. Jandrain

Stephen J. Olson for Joseph & Cynthia Vacanti Trust - Credito

James Overcash for Tri-State Financial, LLC

Martin P. Pelster for Centris Federal Credit Union

John D. Rouse for Integrity Steel Supply, LLC., et al. - Creditors

James A. Rubenstein for Hiway Federal Credit Union

Michael L. Schein for The CIT Group/Equipment Financing, Inc.

Glen E. Schumann for Hiway Federal Credit Union
R. J. Shortridge for Union Bank and Trust Company - Creditor

Warren R. Whitted, Jr. for Linda L. Klaasmeyer - Creditor

Russell A. Westerhold for Russell A. Westerhold - Creditor

Jeffrey T. Wegner for The Funding Farm, LLC - Creditor

Description: A group of investors appeals after the district court1 affirmed the bankruptcy
court’s finding that funds the investors transferred to Tri-State Financial, LLC (TSF)
are part of TSF’s Chapter 7 bankruptcy estate. We affirm.
I. Background
After Tri-State Ethanol (TSE) filed for Chapter 11 bankruptcy protection, a
group of investors (Omaha Group) formed TSF, a shell corporation designed solely
to finance TSE’s continued operations until a Chapter 11 plan could be approved.
Omaha Group transferred $2 million to TSF; TSF then transferred nearly $800,000
of those funds to TSE and $1.19 million to one of TSE’s vendors. TSE subsequently
converted its bankruptcy case into one under Chapter 7, and TSF filed claims seeking
to recover the $2 million from TSE. TSF’s claim to the nearly $800,000 was treated
as a first-priority administrative claim, and its claim to the remaining $1.19 million
was treated as a general unsecured claim subordinated to all other unsecured claims.
The administrative claim was approved, and TSE’s trustee paid the nearly $800,000
to TSF.
TSF later filed for Chapter 11 bankruptcy protection, and its trustee was able
to recover the $1.19 million from TSE. Omaha Group informed TSF’s trustee the
funds were not part of TSF’s bankruptcy estate, and demanded their return. TSF’s
trustee initiated this adversarial proceeding to determine whether the $1.19 million
is part of TSF’s bankruptcy estate. Omaha Group argues the funds are not estate
property because TSF was merely holding them in trust. TSF’s trustee and Centris
1The Honorable Judge Robert F. Rossiter, Jr., United States District Judge for
the District of Nebraska.
2The Honorable Shon Hastings, United States Bankruptcy Judge for the District
of North Dakota, sitting by designation.
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Federal Credit Union (Centris) assert the funds are part 3 of the bankruptcy estate.
They also contend that various Omaha Group investors have released any claims they
may have had to the funds, and that Omaha Group should be judicially estopped from
claiming any interest in them.
United States Bankruptcy Judge Timothy J. Mahoney held a hearing at which
various TSF business records were introduced. James Jandrain, who is Chairman of
TSF’s Board of Managers and an Omaha Group investor, testified that Omaha Group
transferred the funds to TSF with the understanding they would be held in trust. Two
TSF bookkeepers testified that TSF was formed for the sole purpose of funding TSE
while it was in bankruptcy. A forensic accountant opined that the funds should have
been treated as equity. Judge Mahoney found that TSF held the $1.19 million in trust,
and thus, that the funds were not part of its bankruptcy estate.
Centris and TSF’s trustee appealed to the Bankruptcy Appellate Panel (BAP),
which reversed and remanded the case for further proceedings. In re Tri-State Fin.,
LLC, 512 B.R. 209, 210–12 (8th Cir. B.A.P. 2014). The BAP observed that Judge
Mahoney had not resolved the judicial estoppel and release issues. Id. at 211–12.
The BAP declined to “interpret [Judge Mahoney’s] silence as an implicit rejection”
of Centris and TSF’s arguments on those issues. Id. at 212. It instead decided to give
“the bankruptcy court an opportunity to consider those arguments” in the first
instance and “to explain its reason for accepting or rejecting them.” Id. In light of
this decision, the BAP also declined to reach the issue of whether the funds were
estate property, as “any consideration of [that] issue [was] premature.” Id. at 211.
On remand, the case was reassigned to United States Bankruptcy Judge Shon
Hastings because Judge Mahoney had since retired. Judge Hastings entered an order
finding that the $1.19 million was part of TSF’s bankruptcy estate. Specifically,
3Centris has a security interest in all TSF assets.
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Judge Hastings concluded that Omaha Group had not shown by clear and convincing
evidence that the funds were held by TSF in a trust. Instead, she concluded that, more
likely than not, Omaha Group initially intended the $2 million to be a capital
contribution and assumed—but did not take necessary steps to guarantee—they
would receive equity shares in exchange. Judge Hastings found that the funds were
later treated as a loan after TSE’s Chapter 11 plan was not approved and TSF
shareholders opposed treating the $2 million as capital. Relying primarily on the
documentary evidence and discounting the lay witnesses’ testimony as “self-serving,”
Judge Hastings found that the $1.19 million was loan proceeds and thus part of the
bankruptcy estate.
Omaha Group appealed to the BAP, arguing that Judge Hastings had erred by
revisiting Judge Mahoney’s factual findings, and had thereby exceeded the scope of
the BAP’s mandate and violated the law-of-the-case doctrine. Omaha Group also
took issue with the fact that Judge Hastings had made factual findings without first
certifying her familiarity with the record and giving the parties an opportunity to
recall witnesses whose testimony was both material and disputed, a procedure
required of successor judges under Fed. R. Civ. P. 63 and Fed. R. Bankr. P. 9028.
The BAP agreed that Judge Hastings had not complied with Rules 63 and 9028, and
remanded the case with instructions to comply with those rules on remand. In re Tri-
State Fin., LLC, 519 B.R. 759, 765–67 (8th Cir. B.A.P. 2014). The BAP noted,
however, that Judge Hastings had not exceeded the scope of its first mandate, as it
had not explicitly or implicitly adopted any of Judge Mahoney’s findings when it
remanded the case to the bankruptcy court the first time. Id. at 765.
On remand, Judge Hastings entered an order certifying her familiarity with the
record and directing the parties to identify any witnesses they sought to recall. No
one took advantage of that opportunity. Judge Hastings then entered an order in
which she again concluded that Omaha Group had not shown that the funds were held
in a trust, and that the $1.9 million was thus part of TSF’s bankruptcy estate. In re
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Tri-State Fin., LLC, 526 B.R. 311, 315–29 (Bankr. D. Neb. 2015). Omaha Group
then appealed to the district court, which affirmed; several Omaha Group investors
(Appellants) now appeal to this court.
II. Discussion
First, Judge Hastings did not exceed the scope of the BAP’s mandate by
revisiting Judge Mahoney’s factual findings. “The issue of whether the bankruptcy
court exceeded the mandate . . . on remand is a question of law subject to de novo
review.” In re Usery, 242 B.R. 450, 456 (8th Cir. B.A.P. 1999), aff’d, 242 F.3d 378
(8th Cir. 2000) (unpublished table opinion); see Grass v. Reitz, 749 F.3d 738, 741
(8th Cir. 2014). “When a case has been decided . . . on appeal and remanded, every
question decided by the appellate court, whether expressly or by necessary
implication, is finally settled and determined, thus creating a mandate for the lower
court.” Usery, 242 B.R. at 457 (emphasis omitted). “The mandate of the appellate
court is completely controlling as to all matters within its compass, but on remand the
trial court is free to pass upon any issue that was not expressly or impliedly disposed
of on appeal.” Id. The BAP’s mandate did not expressly or impliedly resolve the
issue of whether the $1.19 million was property of TSF’s bankruptcy estate. To the
contrary, the BAP stated that “any consideration of [that] issue [was] premature.”
Judge Hastings also did not abuse her discretion by declining to apply the lawof-
the-case doctrine. “Law of the case is a doctrine of discretion, and thus, we review
for an abuse of discretion a lower tribunal’s decision not to defer to previous rulings
in the same case.” Estrada-Rodriguez v. Lynch, 825 F.3d 397, 402 (8th Cir. 2016)
(citation omitted). Under the law-of-the-case doctrine, “when a court decides upon
a rule of law, that decision should continue to govern the same issues in subsequent
stages in the same case.” Alexander v. Jensen-Carter, 711 F.3d 905, 909 (8th Cir.
2013) (quoting Arizona v. California, 460 U.S. 605, 618 (1983)). “This principle
applies to both appellate decisions and [trial] court decisions that have not been
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appealed.” Id. However, on remand from an appellate court, a trial court is bound
by its own prior rulings only to the extent the appellate court explicitly or implicitly
adopted those findings in resolving the appeal. Usery, 242 B.R. at 457. “A successor
judge steps into the shoes of his or her predecessor, and is thus bound by the same
rulings and given the same freedom, as the first judge. To the extent that a trial judge
can alter a previous ruling, so too can a successor judge . . . .” Exxon Corp. v. United
States, 931 F.2d 874, 878 (Fed. Cir. 1991). The BAP did not—explicitly or
implicitly—adopt Judge Mahoney’s findings as to whether TSF held the funds in
trust; quite the opposite, it clearly declined to resolve any issues. Therefore, Judge
Hastings was free to revisit Judge Mahoney’s factual findings on remand from the
BAP.
Finally, Judge Hastings did not clearly err in finding that Appellants failed to
show, by clear and convincing evidence, that TSF held the funds in trust. We review
the bankruptcy court’s findings of fact for clear error and its legal determinations de
novo. In re Vote, 276 F.3d 1024, 1026 (8th Cir. 2002). Appellants urge us to forego
our well-established clear-error standard of review for bankruptcy courts’ factual
findings because Judge Hastings did not observe the witnesses’ hearing testimony.
But Judge Hastings gave Appellants an opportunity to recall witnesses to supplement
their testimony, and they declined to do so. Appellants thereby forfeited any
argument as to our standard of review based on this reasoning.
“Under 11 U.S.C. § 541(a)(1), the bankruptcy estate is comprised of ‘all of the
debtor’s legal and equitable property interests that existed as of the time that the
bankruptcy petition is filed.’” In re Webb, 742 F.3d 824, 828 (8th Cir. 2014) (quoting
In re Mahendra, 131 F.3d 750, 755 (8th Cir. 1997)). “Bankruptcy courts look to state
law to determine the nature and extent of a debtor’s interest in particular property
because property interests are created and defined by state law.” Id. (cleaned up). In
the absence of written trust documents, Nebraska courts require that the creation of
a trust and its terms be shown by clear and convincing evidence. Neb. Rev. Stat.
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§ 30-3833; Brtek v. Cihal, 515 N.W.2d 628, 640 (Neb. 1994); Holbein v. Holbein, 30
N.W.2d 899, 906 (Neb. 1948). “Clear and convincing evidence means and is that
amount of evidence which produces in the trier of fact a firm belief or conviction
about the existence of a fact to be proved.” Brtek, 515 N.W.2d 640.
The record contains some evidence that TSF held the funds in a trust. Jandrain
testified that the Omaha Group investors intended that TSF hold the funds in trust.
The bookkeepers testified that TSF was created solely to operate as a conduit to fund
TSE during its Chapter 11 bankruptcy. And TSF’s general ledger shows that it
treated the $2 million from Omaha Group differently than it treated capital
contributions it received from other investors. Thus, the record contains some
support for Judge Mahoney’s conclusion that the funds fell outside of TSF’s
bankruptcy estate.
However, Judge Hastings’s conclusion that the funds were not held in trust also
finds support in the record. None of the documentary evidence specifically refers to
a trust, defines the duties of a trustee, or identifies TSF as a trustee. Judge Hastings
correctly recognized that Jandrain’s testimony was self-serving, as he was both the
Chairman of TSF’s Board and an Omaha Group investor. There is also substantial
evidence that Omaha Group initially intended the funds to be a capital contribution,
and that Omaha Group and TSF later treated them as a loan. Initially, TSF’s general
ledger reflects that it treated the $2 million as equity. And the forensic accountant
testified that the $2 million should have been treated as equity. Other facts tend to
show a creditor–debtor relationship: TSF agreed to pay Omaha Group interest on the
$2 million, TSF paid Omaha Group investors more than $450,000 in loan interest
expenses they incurred in the transfer, and TSF retained $10,000 in interest the funds
earned while deposited in its account.
Moreover, TSF filed its claim to the $2 million in TSE’s bankruptcy case in its
own name—as opposed to Omaha Group’s name or on behalf of its investors—and
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emails between Jandrain and TSF’s attorney reveal that this decision was deliberate.
In fact, in an email to TSF’s attorney, Jandrain wrote, “Omaha Group loaned $2.0M
(not a capital contribution) [to TSF] during [TSE’s] bankruptcy.” Omaha Group was
notified of—and did not object to—TSF’s claim to the $2 million in the TSE case.
None of its investors filed individual claims. Several Omaha Group investors then
participated in a meeting at which they were told the $2 million “was going to be
converted to equity upon confirmation of [TSE’s] reorganization plan” but “[w]hen
the plan was not approved, the money remained as a loan.” When its administrative
claim was approved, TSF deposited the nearly $800,000 into its own account and
later disbursed it to Omaha Group investors only. A letter accompanying those
disbursements stated: “Any unpaid portion of our $2,000,000 loan that is not paid
from [TSE’s] trustee will eventually be paid to us by [TSF].” For these reasons,
among others, substantial evidence supports Judge Hastings’s conclusion that the
funds were most likely intended to be a capital contribution, but were ultimately loan
proceeds. “A factual finding supported by substantial evidence, as well as a [trial]
court’s choice between two permissible views of the evidence, are not clearly
erroneous.” Richardon v. Sugg, 448 F.3d 1046, 1052 (8th Cir. 2006). Therefore,
Judge Hastings’s factual findings are not clearly erroneous.4

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4We thus need not reach the release or estoppel issues.
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Outcome: Accordingly, the judgment of the district court is affirmed.

Plaintiff's Experts:

Defendant's Experts:

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