Case Doc 61 Filed 03/01/12 EOD 03/01/12 16:37:29 Pg 1 of 9 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF INDIANA NEW ALBANY DIVISION

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1 Case Doc 61 Filed 03/01/12 EOD 03/01/12 16:37:29 Pg 1 of 9 IN RE: UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF INDIANA NEW ALBANY DIVISION EASTERN LIVESTOCK CO., LLC CASE NO DEBTOR CHAPTER 11 JAMES A. KNAUER, CHAPTER 11 TRUSTEE OF EASTERN LIVESTOCK CO., LLC PLAINTIFF v. Adv. Proc. No WILLIE DOWNS; BLUEGRASS STOCKYARDS, LLC; BLUEGRASS STOCKYARDS EAST, LLC; BLUEGRASS STOCKYARDS OF RICHMOND, LLC; and LAUREL LIVESTOCK MARKET, INC. DEFENDANTS MOTION TO ALTER, AMEND, OR CLARIFY ORDER ON TRUSTEE S MOTION FOR PARTIAL SUMMARY JUDGMENT Come the Defendants, Bluegrass Stockyards, LLC, Bluegrass Stockyards East, LLC, and Bluegrass Stockyards of Richmond, LLC (collectively, the Bluegrass Companies ), by counsel, and pursuant to Fed. R. Civ. P. 59(e) and Fed. R. Bankr. P. 9023, respectfully request that the Court alter, amend, and/or clarify the Order on Trustee s Motion for Partial Summary Judgment [ECF No. 59] (the Order 1 ) in accordance with the arguments set forth herein (the Motion ). In support of this Motion, the Bluegrass Companies respectfully state as follows: I. STANDARD FOR RULE 59 RELIEF Fed. R. Civ. P. 59(e), made applicable to this bankruptcy proceeding by Fed. R. Bankr. P. 9023, allows a party to direct the... court s attention to newly discovered material evidence or 1 This Order incorporates the Court s findings in the Order on Trustee s Motion for Partial Summary Judgment [ECF No. 379] (the Texas AP Order ) entered in the adversary proceeding styled as Friona Industries, L.P., et al. v. Eastern Livestock Co., LLC, Case No (the Texas Interpleader AP ). Thus, all references to the Order in this Motion shall refer collectively to the Order and the Texas AP Order.

2 Case Doc 61 Filed 03/01/12 EOD 03/01/12 16:37:29 Pg 2 of 9 a manifest error of law or fact, and enables the court to correct its own errors and thus avoid unnecessary appellate procedures. Moro v. Shell Oil Co., 91 F.3d 872, 876 (7th Cir. 1996) (citing Russell v. Delco Remy Div. of General Motors Corp., 51 F.3d 746, 749 (7th Cir. 1995)). The decision whether to grant or deny a Rule 59(e) motion is entrusted to the sound judgment of the... court. Matter of Prince, 85 F.3d 314, 324 (7th Cir. 1996) (citing LB Credit Corp. v. Resolution Trust Corp., 49 F.3d 1263, 1267 (7th Cir.1995)). A Rule 59(e) motion should be granted if there exists a manifest error of law or fact. Divane v. Krull Elec. Co., Inc., 194 F.3d 845, 848 (7th Cir. 1999) (citing Moro, 91 F.3d at 876)). For the reasons set forth below, the Bluegrass Companies respectfully request that the Court alter, amend, and/or clarify the Order in accordance with the arguments set forth herein. II. ARGUMENT A. The Order should be Altered and Amended to Clarify that the Factual Assumptions made for Purposes of the Order are not Binding Findings of Fact. To reach its legal conclusions on constructive trusts in the Order, the Court outlined a number of factual assumptions in the Background section, some of which were specifically denoted as only assumptions for purposes of the Order, and others which were not so labeled. Much of what the Court states in this section are still largely contested facts. For example, the Court states that [t]hough Eastern is frequently referred to in these proceedings as a broker, it typically purchased relatively small lots of dozens or hundreds of cattle from ranchers, taking title to but often not possession of its cattle, (Texas AP Order, p. 2), but also observes that [t]he capacity in which Eastern acted in particular transactions is factually sensitive, thereby recognizing that there is much discovery that still needs to be completed before the Court can determine how Eastern acted. Id. p. 20. As most of the statements in the Background section are not supported by any evidentiary record in this case or in the Texas Interpleader AP at this point in these proceedings, the 2

3 Case Doc 61 Filed 03/01/12 EOD 03/01/12 16:37:29 Pg 3 of 9 Bluegrass Companies respectfully request that the Court alter and amend the Order to clarify that the Court made factual assumptions only for purposes of considering the Trustee s Motion for Partial Summary Judgment regarding Statutory and Constructive Trust Affirmative Defenses [ECF Nos ] (the S.J. Motion ), and that the only finding of fact in the Order is the undisputed fact that there are no prepetition judgments of constructive trust. No other factual statements are necessary to the ruling, and any assumptions the Court made for considering the S.J. Motion are not findings supported by an evidentiary record. Further, if the Court does not so clarify, then the parties will constantly quote sections of these assumptions as if they are proven facts and fight over the meaning in other issues to come, problems which can be easily avoided now with a clarification. B. The Order should be Altered and Amended to Address the Issue of Conflicting State Law and its Impact on the Court s Ruling. One of the Court s stated reasons for holding that constructive trusts are inappropriate in Eastern s bankruptcy case is the concern for potential [v]astly disparate treatment of similarly situated creditors if the laws of different states are applied to determine constructive trust interests. The Order states that it would be an unwieldy process for the Court to consider the individualized inquiries of the objecting defendants and the laws of the many states where the defendants are located, and that such a process would likely cause some sellers of cattle [to] be denied relief and relegated to the pool of unsecured creditors while other defendants would be made whole. (Texas AP Order, pp ). Stating that [s]uch an outcome is precisely what bankruptcy law is intended to avoid, the Court held that, although the federal courts are bound by state courts characterizations of their states laws, and some state courts descriptions of constructive trust suggest that it is a property interest or an independent cause of action, the federal interest [of] the integrity of the Bankruptcy Code s orderly distribution scheme... 3

4 Case Doc 61 Filed 03/01/12 EOD 03/01/12 16:37:29 Pg 4 of 9 requires a different result. Id. p. 17 (citations omitted). Respectfully, the Bluegrass Companies state this is a legal error which must be corrected. The legal issue of what state s laws should apply in this Adversary Proceeding, and whether Indiana law (which the Trustee cited) should solely control, was not directly before this Court in the Trustee s Partial Summary Judgment Motion. The Trustee asserted Indiana and Seventh Circuit law, and these parties agreed. No party directly addressed the issue of which state s law or choice of law provisions should control, and no party briefed the choice of law issues. To the extent that the Court may have reached a different holding if choice of law issues had been briefed and indicated that Indiana law governs, the Court erred by not fully addressing this legal issue. The Trustee assumed that Indiana law controls, and the Bluegrass Companies agreed. Assuming that Indiana law controls, it requires the Court to reach a different result on the constructive trust issue. The Supreme Court has held that [p]roperty interests are created and defined by state law, see e.g., Butner v. United States, 440 U.S. 48, 55 (1979) (emphasis added). The Seventh Circuit, of course, agrees. See, e.g., In re Smith, 966 F.2d 1527, 1532 (7th Cir. 1992) (property interests are defined by state law rather than by bankruptcy law). As discussed in the Bluegrass Companies briefs in response to the Trustee s Motion, Indiana law provides that the beneficiary of a constructive trust has ownership of the res of the trust (a property interest), not merely the ability to request that such a trust be imposed on the property (a remedy). In the Order, the Court clearly recognized this very key distinction, but held that constructive trust is only a remedy. However, the United States District Court for the Southern District of Indiana has held that Indiana law agrees with the perhaps universally recognized principles involving constructive trusts. Mervis Industries, Inc. v. Sams, 866 F.Supp. 1143, 1146 (S.D. Ind. 1994). Chief among these principles is that, as long as the property can be traced, 4

5 Case Doc 61 Filed 03/01/12 EOD 03/01/12 16:37:29 Pg 5 of 9 Indiana law has recognized for a century that equity will always attribute the ownership of the property to the beneficiary of a constructive trust, such that there is no need to prioritize his interest as against other creditors of the constructive trustee. Id. at 1148, n.2 (emphasis added); see also Zygulski v. Daugherty, 236 B.R. 646 (N.D. Ind. 1999) (district court upheld the bankruptcy court s determination of a constructive trust in an 11 U.S.C. 523 action, when no such trust had been adjudicated prior to filing). Citing a number of Indiana decisions, the Zygulski court held that a real owner s rights would trump those of a judgment creditor, and under the Bankruptcy Code would therefore also defeat the claims of all of the debtor s creditors. Zygulski at 652 (citing, inter alia, Butner v. United States, 440 U.S. 48 (1979); Fall v. Miller, 462 N.E.2d 1059 (Ind. App. 1984) ( The true owner of property has the right to have his restored to him, not as a debt due and owing, but because it is his property wrongfully withheld ) (emphasis added)). Indiana law provides that beneficiaries of a constructive trust have ownership of the property of the trust, not just some remedial claim. Giving access to the estate and to general creditors to someone else s property rights creates a windfall that those creditors would not get outside of bankruptcy, and bankruptcy is not intended to create such a windfall. A debtor may not increase its rights to property through the filing of a bankruptcy petition. In re Bake-Line Group, LLC, 359 B.R. 566, 570 (Bankr. D. Del 2007) (citing 5 COLLIER ON BANKRUPTCY (15th ed. 2006) ( [541(a)(1)] is not intended to expand the debtor s rights against others beyond what rights existed at the commencement of the case.... The trustee can assert no greater rights than the debtor had on the date the case was commenced. )). Assuming Indiana law controls in Eastern s bankruptcy case for purposes of constructive trust, no disparate treatment of similarly situated creditors would occur because each defrauded seller would have the same ability to prove its ownership rights to the res of its constructive trust and its proceeds, and no one would be subject to the 5

6 Case Doc 61 Filed 03/01/12 EOD 03/01/12 16:37:29 Pg 6 of 9 variances among their home states laws. Along similar lines, the Estate would not be harmed by the Bluegrass Companies receipt of the funds at issue in this proceeding because, to the extent that the Companies prove under Indiana law that the funds were impressed with a constructive trust in their favor, no other party would be entitled to those proceeds in Eastern s bankruptcy case or otherwise. Since the Trustee asserted Indiana law governed, for purposes of consideration of the S.J. Motion, Indiana law should have been deemed by this Court to govern. Indiana law unequivocally treats constructive trusts as a property interest, not a remedy. Even the Foos case (Illinois law), cited by the Trustee and the Court, held that while the court would not allow a constructive trust under the facts of that case involving an alleged fraud and unjust enrichment, it would have reached a different result in a situation where a party was seeking constructive trust asserting a prior ownership and theft of the property, as opposed to just a general fraud and unjust enrichment. Berger, Shapiro & Davis, P.A. v. Haeling (In re Foos), 183 B.R. 149, 158 n.8 (Bankr. N.D. Ill 1995) (as cited in Bake-Line, supra). To the extent that the Court s ruling on the constructive trust issue was based upon possible unfairness due to differences in state laws, the Court reached this ruling in error. Against this background, the Bluegrass Companies respectfully request that the Court alter and amend the Order to consider temporarily withdrawing the Order entirely to consider additional briefing on the choice of law issue, and issue a new ruling if the briefs require a different holding than the Order. C. The Court s Decision Violates the Mandates of Butner. The Order states that the Court considers the constructive trust... to be a remedy, and not the sort of [p]roperty interest[] created and defined by state law contemplated by Butner v. United States, 440 U.S. 48, 55 (1979). (Texas AP Order, p. 15). Thus, the Court went on to conclude that, because it decided that constructive trust is a remedy and not a property interest, 6

7 Case Doc 61 Filed 03/01/12 EOD 03/01/12 16:37:29 Pg 7 of 9 the Bankruptcy Code s remedial scheme preempts all equitable state law remedies. Id., pp The error in this holding is that under state law in Indiana as discussed above, the rights of the Bluegrass Companies and other unpaid producers are clearly property interests and not mere remedies similar to an equitable lien or some other kind of after-the-fact remedial measure. The Supreme Court held in Butner as follows: Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in the bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a State serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving a windfall merely by reason of the happenstance of bankruptcy. Butner, 440 U.S. at 55 (citations omitted). The Butner court rejected arguments that there was any kind of overriding federal interest that required any different result than enforcing property interests as they are defined by state law; rejected creating property rights in bankruptcy which would be different than rights if the bankruptcy had not intervened; and rejected arguments that some sort of overly broad equitable administration of a bankruptcy proceeding requires a different result than what state law would grant. What does follow is that the federal bankruptcy court should take whatever steps are necessary to ensure that the mortgagee is afforded in federal bankruptcy court the same protection he would have under state law if no bankruptcy had ensued. Id. at 56. In re Omegas Group, Inc., 16 F.3d 1443, 1452 (6th Cir. 1994) and its limited favorable progeny require no different result. Even Omegas states correctly, that property rights in bankruptcy are determined only by reference to the state law of the jurisdiction. Id. at The Sixth Circuit noted that the lower court did not err in looking to Kentucky law, since the existence of parties property rights in bankruptcy depends on state law. Id. at 1451 (citing Butner, 440 U.S. at 54) (Omegas dealt with a joint venture relationship, and under Kentucky law, 7

8 Case Doc 61 Filed 03/01/12 EOD 03/01/12 16:37:29 Pg 8 of 9 that kind of relationship did not create a recognized property interest). Only state law can determine who holds the legal and equitable interests in property. Under both U.C.C. Article 2 and constructive trust law in Indiana, the property interests in unpaid cash sellers cattle and all proceeds are ownership interests of the unpaid cash sellers as against Eastern, the Trustee and the Estate. Similarly, the Bluegrass Companies interests in the funds at issue in this action were ownership interests in those funds at the time they received payment, and continue to be ownership interests in this action. With due respect to the Court s thorough and reasoned analysis, the Bluegrass Companies assert that this Court has erred in its conclusion that constructive trust is only a remedy and not a property interest created and defined by state law. Under 11 U.S.C. 541(d) and state law, Eastern and the Estate continue to have, at best, only voidable property interests as against unpaid sellers, which means that the equitable ownership interests in the property continue to reside in the unpaid sellers in relation to the Estate. The Bluegrass Companies also continue to maintain their equitable ownership interests in the funds at issue in this action as against Eastern and the Estate. No court in the country has found that the nature and extent of parties property rights in bankruptcy depends on anything other than state law, and the Court should not so hold now. WHEREFORE, the Bluegrass Companies respectfully request that the Court enter an Order: (a) granting this Motion, and altering and amending the Order consistent with the arguments set forth herein; and (b) granting the Bluegrass Companies such other and further relief as the Court deems just and proper. 8

9 Case Doc 61 Filed 03/01/12 EOD 03/01/12 16:37:29 Pg 9 of 9 Respectfully submitted, DELCOTTO LAW GROUP PLLC /s/ Laura Day DelCotto, Esq. Amelia Martin Adams, Esq. 200 North Upper Street Lexington, KY Telephone: (859) Facsimile: (859) ldelcotto@dlgfirm.com aadams@dlgfirm.com COUNSEL FOR THE BLUEGRASS COMPANIES CERTIFICATE OF SERVICE The undersigned hereby certifies that on March 1, 2012, the foregoing Motion was filed electronically. Notice of this filing will be sent to the following parties through the Court s Electronic Case Filing System. Parties may access this filing through the Court s system. James M. Carr, Esq. Faegre Baker Daniels LLP james.carr@faegrebd.com COUNSEL FOR JAMES A. KNAUER, CHAPTER 11 TRUSTEE Peter M. Gannott, Esq. Gannott Law Group, PLLC pgannott@gannottlaw.com COUNSEL FOR LAUREL LIVESTOCK MARKET, INC. James A. Knauer, Chapter 11 Trustee jak@kgrlaw.com Harmony A. Mappes, Esq. Faegre Baker Daniels LLP harmony.mappes@faegrebd.com COUNSEL FOR JAMES A. KNAUER, CHAPTER 11 TRUSTEE Robert K. Stanley, Esq. Faegre Baker Daniels LLP robert.stanley@faegrebd.com COUNSEL FOR JAMES A. KNAUER, CHAPTER 11 TRUSTEE Andrew D. Stosberg, Esq. Lloyd & McDaniel, PLC astosberg@lloydmc.com COUNSEL FOR WILLIE DOWNS Kevin M. Toner, Esq. Faegre Baker Daniels LLP kevin.toner@faegrebd.com COUNSEL FOR JAMES A. KNAUER, CHAPTER 11 TRUSTEE U.S. Trustee ustpregion10.in.ecf@usdoj.gov /s/ Laura Day DelCotto, Esq. COUNSEL FOR THE BLUEGRASS COMPANIES Z:\Clients\ELC-Gibson\AP Knauer v Willie Downs\Pleadings\Rule 59 Mot doc 9