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In re Essar Steel Minnesota LLC

United States District Court, D. Delaware

June 4, 2019

IN RE ESSAR STEEL MINNESOTA LLC, et al., Debtors.
v.
B. RILEY FBR, INC. f/k/a B. RILEY & CO., LLC, Appellee-Defendant. MESABI METALLICS COMPANY LLC f/k/a ESSAR STEEL MINNESOTA LLC and CHIPPEWA CAPITAL PARTNERS, LLC, Appellants-Plaintiffs, Adv. No. 18-50833 (BLS)

          MEMORANDUM ORDER

          HONORABLE LEONARD P. STARK UNITED STATES DISTRICT JUDGE.

         This appeal having arisen in the Chapter 11 cases of Mesabi Metallics Company LLC and its then-parent holding company ESML Holdings, Inc. (together, “Mesabi” or “Reorganized Debtor”); and having reviewed the papers submitted in connection with the motion of appellants, Reorganized Debtor and Chippewa Capital Partners, LLC (“Chippewa”), seeking a stay pending their appeal (D.I. 12) (“Stay Motion”) of the Bankruptcy Court's February 14, 2019 Order (Adv. D.I. 28) (“Order”)[1] granting dismissal of an adversary proceeding against appellee B. Riley FBR, Inc. (“B. Riley”) for the reasons stated by the Bankruptcy Court on the record at the February 12, 2019 hearing (Adv. D.I. 26); and having considered B. Riley's opposition to the Stay Motion (D.I. 16) and Appellants' reply (D.I. 17); and the Court having determined that oral argument is not necessary because the facts and legal arguments are adequately presented in the briefs and record and the decisional process would not be significantly aided by oral argument;

         IT IS HEREBY ORDERED that the Stay Motion (D.I. 12) is GRANTED for the reasons that follow:

         1. Background.

         On July 8, 2016 (“Petition Date”), the Debtor filed voluntary petitions under Chapter 11. On February 22, 2017, third-party ERP Iron Ore (“ERPI”) entered into an agreement with B. Riley (“Original Agreement”), pursuant to which B. Riley was retained as exclusive financial advisor to the “Company” (defined as ERPI and its affiliates) to assist ERPI in acquiring the Debtor. B. Riley would receive a “Restructuring Transaction Fee” if ERPI was successful in the acquisition. On March 9, 2017, the parties entered into an amendment (“First Amendment”), which contemplated that B. Riley would “provide additional financial services to the Company” on an exclusive basis relating to a certain financing transaction and that B. Riley would receive a success fee equal to 3% of any debt financing transaction. The definition of “Company” remained unchanged from the Original Agreement to the First Amendment and referred only to “[ERPI] and its affiliates.”

         2. On June 8, 2017, Mesabi filed its plan of reorganization (B.D.I. 990) (“Plan”) with Chippewa as plan sponsor. Thomas Clarke is CEO of Chippewa as well as CEO and controlling owner of ERPI. While Clarke is a former executive of Mesabi, Clarke was not an executive of Mesabi on the Petition Date or at any time during the course of the Chapter 11 cases.

         3. On June 13, 2017, the Bankruptcy Court confirmed the Plan. (B.D.I. 1025) (“Confirmation Order”) The Plan and Confirmation Order included typical provisions (i) discharging all claims against Mesabi arising prior to the Plan's effective date (Plan § 14.7; Confirmation Order ¶ 52) (“Discharge”), and (ii) enjoining all holders of such claims from pursuing either Mesabi as Reorganized Debtor or Chippewa as Plan sponsor (Plan § 14.22; Confirmation Order ¶ 56) (“Injunction”). Both the Plan and Confirmation Order also retained jurisdiction over any matter related to the Plan or Chapter 11 cases. (Plan Art. XIII; Confirmation Order ¶ 51)

         4. On December 21, 2017 - one day prior to the Plan's effective date - a Second Amendment to the Original Agreement (as amended by the First Amendment and the Second Amendment, the “Engagement Agreement”) was executed. B. Riley claims that Reorganized Debtor, though not yet in existence, became a party to the Engagement Agreement by virtue of the Second Amendment. The Second Amendment, executed by ERPI, B. Riley, and Chippewa, changed the definition of “Company, ” purportedly “for the avoidance of doubt, ” to include, in addition to ERPI, “Chippewa Capital Partners, LLC, and its subsidiary post-effective date, Mesabi Metallics Company, LLC.” Clarke signed the Second Amendment on behalf of Chippewa and ERPI. B. Riley has alleged that “Mr. Clarke, in his capacity as CEO of Chippewa (the parent company of Mesabi) executed [the Second Amendment] on behalf of both Chippewa and Mesabi.” (Adv. D.I. 13 at 9-10 (emphasis added) (citing statements)) Appellants contend, instead, that Clarke was not CEO of Mesabi when he signed the Second Amendment.

         5. On December 22, 2017, the Plan went effective. Post-Plan effective date, Clarke was designated as CEO of Reorganized Mesabi. Thereafter, B. Riley demanded a fee of approximately $17 million based on the Engagement Agreement and initiated two actions against Reorganized Debtor and Chippewa without permission from the Bankruptcy Court: (i) an arbitration action (“FINRA Action”) before the Financial Industry Regulatory Authority (“FINRA”), initiated on July 25, 2018; and (ii) an action in the United States District Court for the District of Minnesota, No. 18-cv-2575-JRT/BRT (D. Minn.) (“Minnesota District Court Action”), initiated on September 4, 2018. On March 11, 2019, the Minnesota District Court dismissed the Minnesota District Court Action in its entirety, with prejudice, leaving only the FINRA Action. (Id. at D.I. 56).

         6. Believing that B. Riley violated the Confirmation Order by prosecuting the FINRA Action and Minnesota District Court Action, Appellants filed a complaint for civil contempt, declaratory judgment, and breach of the Plan. (Adv. D.I. 1) B. Riley moved to dismiss the adversary proceeding. (Adv. D.I. 10) (“Motion to Dismiss”) Appellants opposed the Motion to Dismiss (Adv. D.I. 13), arguing, inter alia, that (i) Clarke had no authority to bind Reorganized Mesabi prior to the Plan's effective date, and (ii) even if he did, any contract-based claim B. Riley may have against the Debtor arose on December 21, 2017, when the Second Amendment was executed, and was, thus, discharged upon the Plan's effective date on December 22, 2017. According to Reorganized Debtor, the fact that Clarke and Chippewa did not have authority to execute the Second Amendment on behalf of Mesabi prior to the Plan effective date merely shows that the contract upon which B. Riley's claim is based is unenforceable against Mesabi, not that (as B. Riley argues) B. Riley somehow has a post-effective date claim against the Reorganized Debtor. Neither party briefed the issue of the Bankruptcy Court's subject matter jurisdiction.

         7. On February 11, 2019, the Bankruptcy Court held oral argument on the Motion to Dismiss and took the matter under advisement. (Adv. D.I. 25) On February 12, 2019, the Bankruptcy Court issued a bench ruling, which included the following:

Case law teaches that a bankruptcy court's jurisdiction narrows significantly following confirmation. And I am not satisfied that this dispute presents a sufficiently close nexus to implementation of the plan to support this court's exercise of jurisdiction to consider and dispose of this matter.
The record reflects that the parties are in proceedings in Minnesota Federal Court and in a FINRA proceeding. It appears the parties can move forward to be heard and to present their claims and defenses in those proceedings.

(Adv. D.I. 26, 2/12/19 Hr'g Tr. at 4-5) On February 14, 2019, the Bankruptcy Court issued the Order dismissing the adversary proceeding. (Adv. D.I. 28) On February 26, 2019, Appellants appealed the Order and moved for a stay pending appeal so Appellants could request that FINRA allow Appellants to fully litigate their appeal. (Adv. D.I. 30 & 33) The day after the Order was entered, B. Riley requested that FINRA lift the stay and allow the FINRA Action to proceed. FINRA granted B. Riley's request and set April 5, 2019 as Appellants' answer deadline. On March 7, 2019, the Bankruptcy Court granted a 45-day stay of the Order ...


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