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No Direct Claims Asserted By Oklahoma Plaintiffs In SemCrude Bankruptcy, Third Circuit Reinstates Permanent Injunction
In re SemCrude L.P., 2015 WL 4635798, — F.3d —- (3d Cir. Aug. 5, 2015)
In a recent precedential Opinion, the Third Circuit reversed a Delaware District Court Opinion and reinstated the Bankruptcy Court’s original Opinion, holding that certain claims brought by a group of SemCrude’s former limited partners (the “Oklahoma Plaintiffs”) against Thomas L. Kivisto, co-founder and former President and CEO of SemCrude L.P. (together with its affiliates, the “Debtors”) were derivative of other claims already brought and settled. As such, the Third Circuit directed the Bankruptcy Court to enter a permanent injunction against the Oklahoma Plaintiffs’ claims.
After the Debtors’ bankruptcy filing, a litigation trust was established to pursue certain claims on behalf of the Debtors’ estate (the “Litigation Trust”). The Litigation Trust asserted, among others, breach of fiduciary duty, breach of contract, fraudulent transfer, and unjust enrichment claims against Kivisto, other former officers of the Debtors, and a company—Westback Purchasing Company, LLC—owned by Kivisto, which was allegedly used as Kivisto’s personal trading company. These claims stemmed from Kivisto’s alleged self-dealing and speculative trading for his personal benefit, which led to the Debtors’ bankruptcy. The Litigation Trust settled the claims for $30 million, and Kivisto (among others) was fully released from liability.
After the Bankruptcy Court approved the settlement, the Oklahoma Plaintiffs filed suit against Kivisto, among others, in Oklahoma state court, asserting injuries allegedly separate and distinct from the injuries sustained by the Debtors. These alleged direct claims constituted personal interactions whereby Kivisto made misrepresentations at shareholders’ meetings, which caused the Oklahoma Plaintiffs to invest additional capital in the Debtors. Kivisto filed a motion to enjoin the state court action and enforce the settlement agreement in the Bankruptcy Court. Judge Shannon granted the motion to enjoin on all counts, explaining that the Oklahoma Plaintiffs’ claims were derivative causes of action from the Litigation Trust’s claims because the injury suffered was the same, Kivisto did not owe the Oklahoma Plaintiffs any duty distinct from other equity holders, and any recovery would be deemed equity such that the Oklahoma Plaintiffs would not be entitled to a recovery outside of the terms of the plan. In what the Delaware Bankruptcy Insider understands was Judge Shannon’s first reversal of His Honor’s distinguished career on the bench, the Delaware District Court held that the Oklahoma Plaintiffs’ claims were direct, not derivative, of the claims already settled by the Litigation Trust and that the Oklahoma Plaintiffs sufficiently alleged distinct duties from other shareholders and may be entitled to a separate recovery. The case made its way to the Third Circuit on appeal.
Analyzing Oklahoma law, the Third Circuit concluded that the Oklahoma Plaintiffs failed to show “any loss in addition to” the Debtors’ loss, that is, no direct claim, and therefore, their claims derived from the claims already settled and released by the Litigation Trust. Op. at 11. The Court stated that it is well settled law that injury done to the stock and capital of a corporation by negligence or malfeasance of its directors is injury done to the whole body of stockholders in common. Op. at 14. Although the Oklahoma Plaintiffs claimed a distinct loss attributed through face-to-face misrepresentations, the Court determined that “closer scrutiny reveals that the gravamen of the Oklahoma Plaintiffs’ injury is the demise of the Debtors as a result of Kivisto’s alleged misconduct.” Op. at 15. The Court went on to hold that the same conduct underlies the Oklahoma Plaintiffs’ and Litigation Trust’s claims of failure to disclose, self-dealing, and misrepresentations. Op. at 15-16. As such, “the Oklahoma Plaintiffs’ losses differ only in amount, not in kind.” Op. at 17. To be sure, the Court stated that even if some “special duty” was owed to the Oklahoma Plaintiffs, they failed to show how they were injured separately from the Debtors (or other equity holders) and would not be entitled to recover any amounts, a right held by the Litigation Trust.