Kelley et al v. Tipton

IN THE UNITED STATES BANKRUPTCY COURT FOR THE
WESTERN DISTRICT OF MISSOURI
IN RE: )
)
EDWIN MITCHELL KELLEY and ) Case No. 03-62125-ABF
DIXIE RAE KELLEY, )
)
Debtors. )
)
MARVIN TIPTON ) Case No. 3:01-cv-5027-JCE
)
Plaintiff, )
)
v. )
)
MILL CREEK GRAVEL, INC., )
EDWIN MITCHELL KELLEY, and )
DIXIE RAE KELLEY, )
)
Defendants. )
)
MARVIN TIPTON, ) Case No. 3:03-cv-5076-RED
)
Plaintiff, )
v. )
)
EDWIN MITCHELL KELLEY and )
DIXIE RAE KELLEY, )
)
Defendants. )
)
EDWIN MITCHELL KELLEY and ) Adv. No. 04-6039-ABF
DIXIE RAE KELLEY, )
)
Plaintiffs, )
v. )
)
MARVIN TIPTON )
)
Defendant. )
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 1 of 14

2
MEMORANDUM OPINION
FACTUAL SUMMARY
There is ongoing litigation before three different judges involving these debtors and
Marvin Tipton. In April of 1999 Tipton approached the Kelleys about the prospect of
mining rock and gravel on their property. They entered into a preincorporation agreement
to form Mill Creek Gravel, Inc. (Mill Creek) to mine gravel on 135 acres of real estate
owned by Kelley. Under the preincorporation agreement, Tipton was to operate the mine
and obtain the appropriate licenses and permits. Mill Creek borrowed $530,052 from the
Community Bank of Arkansas to purchase the necessary equipment, which secured the note.
Both Tipton and Kelley also guaranteed the note and pledged their stock in Mill Creek as
additional collateral. In addition, the Kelleys apparently granted the bank a Deed of Trust
on all or a portion of their real estate. Mill Creek agreed to pay the Kelleys $.50 per cubic
yard of gravel or rock mined from their land (the Excavation Royalty Agreement).
In December of 1999 Mill Creek was incorporated by the State of Missouri with
Tipton registered as a 49 percent shareholder and Kelley as a 51 percent shareholder.
During 2000, Tipton oversaw the construction of an access road to the mine, prepared the
mining area, and set up the equipment. In January of 2001, however, Kelley denied Tipton
access to the property.
On March 15, 2001, Tipton filed a suit, on behalf of himself and Mill Creek, in the
United States District Court for the Western District of Missouri, seeking damages for
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 2 of 14

3
breach of contract, breach of fiduciary duty, fraudulent misrepresentation, quantum meruit,
and services performed. That suit was assigned to Magistrate Judge James C. England. The
Kelleys filed a counterclaim alleging, in part, that Tipton represented himself to be
knowledgeable and experienced in mining, when he was not. The Kelleys claim that by
November of 2000, Tipton had spent all of the proceeds of the operating loan and only
mined 80 tons of gravel. Moreover, the Kelleys alleged that Tipton was unwilling to
contribute any equipment to the operation, and that Tipton had not accomplished the transfer
of mining permits.
In June of 2001, while the lawsuit was pending, Tipton contends that the Kelleys
purchased and took assignment of the note with the Community Bank of Arkansas, including
his guaranty and stock pledge. The Kelleys purchased the position of the bank, and released
the Deed of Trust as to their real estate. In August of 2002, the Kelleys sold almost all of
the equipment owned by Mill Creek, allegedly without notice to Tipton. The proceeds of
that sale were apparently used to reduce Mill Creek’s obligation to the Kelleys.
On May 15, 2003, the jury found that the Kelleys breached the Excavation Royalty
Agreement and rendered a verdict in favor of Mill Creek in the amount of $1.5 million. The
jury also found in favor of Tipton on the Kelleys’ counterclaim for fraudulent
misrepresentation.
On May 16, 2003, the Kelleys made demand on Tipton for repayment of the Mill
Creek loan obligation. On June 4, 2003, the Kelleys notified Tipton that they were preparing
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 3 of 14

4
to dispose of his 49 percent share in Mill Creek in partial satisfaction of his guaranty on the
note. On June 20, 2003, Tipton filed a Complaint in the United States District Court for the
Western District of Missouri, which was assigned to the Honorable Richard E. Dorr. In his
Complaint Tipton sought a determination that he was released from his guaranty and that
the threat to dispose of his stock caused him monetary damage. He also sought a temporary
restraining order (the TRO) to prevent the Kelleys from disposing of his 49 percent interest
in Mill Creek. On June 25, 2003, Judge Dorr granted the TRO and ordered Tipton to post
a bond in the amount of $15,000. On July 1, 2003, Tipton posted the bond and on August
15, 2003, the Kelleys filed this Chapter 11 bankruptcy proceeding. The TRO is still in
effect. No further action has been taken in this lawsuit due to the automatic stay imposed
by the bankruptcy filing.
On May 23, 2003, Tipton asked Judge England to assess attorney’s fees against the
Kelleys. The court denied that request, but did order attorneys fees in the amount of
$91,192.46 to be assessed against Mill Creek. The court also awarded Tipton his Bill of
Costs in the amount of $14,239.11. That award was assessed against the Kelleys.
The Kelleys appealed the judgment to the Eighth Circuit Court of Appeals. On June
28, 2004, the Eighth Circuit affirmed in part, vacated in part and remanded the case. The
Eighth Circuit found that “the evidence was insufficient for a reasonable jury to find that
Mill Creek–a corporation that was $700,000 in debt, had sold almost none of its product,
and had a product that many purchasers were not interested in buying– was ‘reasonably
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 4 of 14

1Tipton v. Mill Creek Gravel, Inc., 373 F.3d 913, 921 (8th Cir. June 28, 2004).
2Id.
3Id. at 920.
4Id. at 923.
5Id.
5
certain’ to make a profit.”1 Thus, the court vacated the damages portion of the judgment.
The court did, however, find that the evidence suggested “some smaller amount of actual
damage to the corporation, such as the Kelley’s sale of corporation equipment for their own
personal benefit, sale of land that the corporation intended to mine, and the small sales of
gravel from the eighty-ton pile that were not remitted to the corporation.” In addition, the
court found that Mill Creek “may be entitled to recover the loss it incurred to get its gravel
operation up and running in reliance on the preincorporation agreement.”2 As a result of its
findings, the Eighth Circuit remanded the case for a “ new trial on damages to calculate the
amount due to the corporation without consideration of lost profits.”3
As to the attorney’s fees and costs, the Eighth Circuit affirmed the District Court’s
finding that attorney’s fees can be assessed against the corporation in a shareholder’s
derivative suit, but concluded that “no attorney fees or costs should be awarded for the time
and expenses spent on Tipton’s lost profit claim.”4 Thus, the Eighth Circuit vacated the
District Court’s decision in regard to lost profits, attorney’s fees, and costs, and remanded
for a new trial.5 Tipton petitioned for a rehearing, and on August 18, 2004, that request was
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 5 of 14

6
denied.
In the meantime, the Kelleys’ Chapter 11 bankruptcy case was proceeding. The
Court established January 29, 2004, as the last date to file a proof of claim. On January 21,
2004, Tipton filed a proof of claim, allegedly secured by a judgment lien, in the amount of
$812,915.86. Counsel for Mill Creek filed a proof of claim on that same date for a
judgment debt in the amount of $1,642,275.50. These amounts are based on the judgment
in the case before Judge England. The Kelleys objected to both of these claims, and that
issue is still pending before the Bankruptcy Court. On February 16, 2004, the Kelleys
proposed a Plan for confirmation. Tipton objected to the Plan, and filed a motion to dismiss.
On June 9, 2004, the Kelleys filed an adversary proceeding to clarify both the amount and
the treatment of any claim either Tipton or Mill Creek has against them personally. The
Kelleys allege that Tipton misrepresented to the sheriff of McDonald County that he held
a judgment against the Kelleys when, in fact, the judgment was in favor of Mill Creek. As
a result of this alleged misrepresentation, the sheriff executed on personal property of the
Kelleys including $8,348.85 in checking accounts, a John Deere road grader and a John
Deere tractor. The Kelleys also object to the proofs of claim filed by Tipton and Mill
Creek, contending that Tipton is not a judgment creditor and not entitled to any interest, and
that Mill Creek is only entitled to interest at the rate of 1.18 percent per annum. The
Kelleys ask that any claim Tipton might have as a shareholder of Mill Creek be equitably
subordinated to the claims of other unsecured creditors in this case because his
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 6 of 14

6The alleged wrongful execution occurred post judgment, therefore, it was not an issue
raised in the jury trial. The lawsuit that was tried before Judge England did not contain a count for
judicial dissolution.
7Given that the guaranty, if valid, would be owed by Tipton to the Kelleys, and not Mill
Creek, it would appear that the value of such guaranty, if any, should be deducted after the amounts
due to Tipton and the Kelleys from Mill Creek have been determined.
8I note that Tipton contends this Court does not have authority to dissolve Mill Creek since
it is not in bankruptcy. Assuming, as it appears, that the only remaining assets of Mill Creek consist
of the potential claims against the Kelleys and Tipton, resolution of the amounts due Kelley,
Tipton, and Mill Creek will resolve the issues that would be determined in a state court
dissolution.
7
representation to the sheriff precipitated the allegedly wrongful execution and this
bankruptcy proceeding. They also seek a judicial dissolution of Mill Creek.6 The Kelleys
argue that the claim of Mill Creek be calculated as follows: (a) the balance owed to Mill
Creek for damages pursuant to the remand decision; plus (b) interest at the rate of 1.18
percent, pursuant to 28 U.S.C. § 1961; minus (c) the sum of $248,465.90, which the Kelleys
loaned to Mill Creek; minus (d) any sum for which Tipton is liable on his personal
guaranty;7 minus (e) the allowed attorney’s fees Tipton expended in bringing the suit; plus
(f) the costs assessed against the Kelleys in favor of Mill Creek. The Kelleys, thus, ask this
Court to judicially dissolve Mill Creek and liquidate it in accordance with the respective
shareholder percentages once the respective amounts due among the Kelleys, Mill Creek,
and Tipton have been determined.8
On August 20, 2004, the Kelleys filed a motion in the District Court asking Judge
Dorr to refer the issues before him, as well as those before Judge England, to this Court.
DISCUSSION
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 7 of 14

928 U.S.C. § 157(a).
10Order Regarding Reference of Bankruptcy Matters to United States Bankruptcy Judges,
dated August 15, 1984.
8
Where a debtor has matters pending before the district court at the time he files for
bankruptcy relief, those matters are automatically referred to the bankruptcy court for
disposition:
(a) Each district court may provide that any or all cases under title 11 and any
or all proceedings arising under title 11 or arising in or related to a case under
title 11 shall be referred to the bankruptcy judges for the district.9
By order dated August 15, 1984, the United States District Court for the Western District
of Missouri (en banc) directed that “all cases under Title 11 and all proceedings arising
under Title 11 or arising in or related to cases under Title 11 are referred to the bankruptcy
judges of this district.”10 Thus, as to the lawsuit before Judge Dorr, that suit was referred
to this Court, by operation of law, on August 15, 2003, when the bankruptcy case was filed.
As to the case before Judge England, which was pending in the Eighth Circuit when the
Kelleys filed this bankruptcy case, the reference occurred once the Eighth Circuit had ruled,
and the case was remanded to Judge England.
Once the district court refers a nonbankruptcy proceeding to the bankruptcy court,
that court must determine whether it is authorized to hear and determine all issues raised
in the proceeding. That hinges, in the first instance, on whether the proceeding is core or
noncore.
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 8 of 14

1128 U.S.C. § 157(b)(1).
1228 U.S.C. § 157(b)(2)(B), (C), (E), and (K).
9
Bankruptcy judges have jurisdiction over bankruptcy cases (such as the Chapter 11 case
filed by the Kelleys), as well as all core proceedings that arise in or are related to the
bankruptcy case:
(b)(1) Bankruptcy judges may hear and determine all cases under title 11 and
all core proceedings arising under title 11, or arising in a case under title 11,
referred under subsection (a) of this section, and may enter appropriate
judgments, subject to review under section 158 of this title.11
The statute goes on to define core proceedings as relevant to the issues here as follows:
(2) Core proceedings include, but are not limited to–
. . .
(B) allowance or disallowance of claims against the estate or
exemptions from property of the estate, and estimation of
claims or interests for the purposes of confirming a plan under
chapter 11, 12, or 13 of title 11 . . . .
(C) counterclaims by the estate against persons filing claims
against the estate;
. . .
(E) orders to turn over property of the estate;
. . .
(K) determinations of the validity, extent, and priority of liens.12
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 9 of 14

13Official Committee of Unsecured Creditors v. Blease (Envisionet Computer Serv.,
Inc.), 276 B.R. 7, 11 (D. Me. 2002).
10
The bankruptcy court is obligated to determine whether a proceeding is a core proceeding.13
Tipton filed a lawsuit in District Court asking Judge Dorr to find that he has been
released from his guaranty of a promissory note now held by the Kelleys, and also to award
him damages for the harm he sustained when the Kelleys threatened to sell his stock in Mill
Creek. These issues are core as they will have an impact on the Kelleys’ bankruptcy estate.
As to the proceeding before Judge England, the jury has already found that the
Kelleys are liable for harm done to Mill Creek. The Eighth Circuit remanded, however, for
a new trial on the issue of damages. That trial would determine the amount of the claim Mill
Creek and Tipton have against the Kelleys’ bankruptcy estate. The Kelleys have proposed
a Plan, which this Court is confirming by separate order, that proposes to pay the claims of
Mill Creek and Tipton, once the amount of their claims is determined. Thus, the issue
before Judge England is also a core proceeding over which this Court has jurisdiction.
The issue before Judge England, however, is complicated by the fact that the first
proceeding was tried to a jury, and Tipton has reasserted his jury trial right in the remanded
proceeding. Moreover, counsel for Tipton represented at the hearing that Tipton does not
consent to this Court conducting a jury trial.
The Kelleys argue that Tipton and Mill Creek waived their jury trial right when they
filed a proof of claim in this Court. Many courts have held that once a party makes a claim
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 10 of 14

14Envisionet Computer Serv., Inc., 276 B.R. at 10 (citing Langenkamp v. Culp, 498 U.S.
42, 43-45, 111 S. Ct. 330, 331, 112 L. Ed. 2d 343 (1990); Granfinanciera, S.A. v. Norberg, 492
U.S. 33, 109 S. Ct. 2782, 106 L. Ed. 2d 26 (1989)).
15539 F.2d 606 (6th Cir. 1976).
11
on the estate, said party “has submitted to the process of allowance or disallowance of
claims adjudicable by the bankruptcy court.”14 In other words, a party waives his right to
a jury trial when he files a proof of claim. This case is unusual, however, because at the
time the proofs of claim were filed, there was a live jury verdict, the enforceability of
which had not been stayed pursuant to Rule 8 of the Federal Rules of Appellate Procedure.
The proofs of claim were based on that jury verdict. While I found no cases that
specifically addressed the Seventh Amendment jury trial right of a claimant in a bankruptcy
case when the original judgment was vacated and the case remanded for a new trial on
damages, I did find cases that dealt with waiver of a jury trial right in general. In United
States v. Lee,15 a defendant was convicted before a United States Magistrate after waiving
his right to a jury trial. The conviction was reversed on appeal and on remand the defendant
sought to rescind the waiver. The magistrate denied defendant’s motion to withdraw his
waiver of jury trial. On appeal from his second conviction, the Sixth Circuit held that the
defendant’s waiver of jury trial was not effective as to the second trial. The Court stated
as follows:
The stipulation to waive a jury, and to try the case before the court, only had
relation to the first trial. There could be no presumption then that there would
ever be a second trial; and therefore it should not be presumed that the
parties, in making the stipulation, had in mind any possible subsequent trial
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 11 of 14

16Id. at 608 (emphasis added).
17838 F. Supp. 1420 (D. Colo. 1993).
18Id. at 1421.
12
after the first, to which the stipulation could refer. The right of trial by jury
in cases at law, whether in a civil or criminal case, is a high and sacred
constitutional right in Anglo-Saxon jurisprudence, and is expressly guarantied
by the United States Constitution. 16
Likewise, in this case, at the time Tipton and Mill Creek filed their proofs of claim, and
arguably waived any jury trial right to adjudicate that claim, they had no idea that the
judgment would be vacated and the matter remanded for a second trial on the issue of
damages. Since the amount sought in the proofs of claim was based on that jury verdict, the
mere filing of those claims should not serve as a basis for waiving the jury trial right in a
retrial after remand.
In Oiness v. Walgreen Company,17 the determination of damages in a patent
infringement suit was vacated and the matter was remanded. The magistrate judge held that
this matter could not be determined on a motion for summary judgment, as the defendants
had a guaranteed right to a jury trial on the issue of damages. The district court affirmed,
holding that the plaintiffs were attempting to circumvent a jury retrial on damages when the
law is this area directs that a court may not unilaterally determine the damage issue.18
It is a very close call as to whether this Court has jurisdiction to litigate the issue of
damages in this remanded proceeding. Given that Tipton and Mill Creek asserted their jury
trial right initially, and given that the courts hold there is a jury trial right for a determination
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 12 of 14

1928 U.S.C. § 1334(c)(1).
13
of damages on remand, I am reluctant to find that they waived their jury trial right when they
filed proofs of claim based upon a jury verdict that was later reversed.
Bankruptcy courts may abstain from hearing a matter that is related to a bankruptcy
case in the interest of justice:
(c)(1) Nothing in this section prevents a district court in the interest of justice,
or in the interest of comity with State courts or respect for State law, from
abstaining from hearing a particular proceeding arising under title 11 or
arising in or related to a case under title 11.19
The result of abstention is that the referred proceeding is sent bact to the court before which
it was pending. I find that the interest of justice is best served by allowing Tipton and Mill
Creek to assert their jury trial right as to the issue remanded by the Eighth Circuit, namely
the calculation of the amount due to the corporation from the Kelleys for breach of contract
without consideration of lost profits. I further find that the interest of justice is best served
by having Judge England determine the remanded issues related to attorney’s fees and
costs. I will, therefore, enter an order abstaining as to the matter pending before Judge
England only.
Separate orders will be issued confirming the Chapter 11 Plan in Case Number 03
62125-ABF, determining that Case Number Case 3:03-cv-5076-RED is a core proceeding,
and abstaining in Case Number 3:01-cv-5027 JCE.
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 13 of 14

14
/s/ Arthur B. Federman
Bankruptcy Judge
Date: September 17, 2004
RAYMOND PLASTER TO SERVE PARTIES NOT RECEIVING ELECTRONIC
NOTICE
Case 04-06039-abf Doc 17 Filed 09/17/04 Entered 09/17/04 11:24:57 Desc Main
Document Page 14 of 14