Gulfport Appalachia, LLC v. Am. Consol. Nat. Res. (In re Murray Energy Holdings Co.)

John E. Hoffman, Jr. United States Bankruptcy Judge

Chapter 11

Nicholas M. Miller, Attorney for Gulfport Appalachia, LLC

David A. Lockshaw, Jr., Attorney for American Consolidated Natural Resources, Inc.

ORDER GRANTING MOTION OF GULFPORT APPALACHIA, LLC FOR LEAVE TO FILE SURREPLY (Doc. 117)

John E. Hoffman, Jr. United States Bankruptcy Judge

I. Factual and Procedural Background

This matter involves the Chapter 11 cases of Murray Energy Holdings Co. and its 97 affiliated debtors and debtors in possession ("Debtors"). Gulfport Appalachia, LLC ("Gulfport") commenced an adversary proceeding to recover slightly less than $2.5 million in royalty payments mistakenly sent to three of the Debtors-American Energy Corporation, Pleasant Farms, Inc. and the Ohio Valley Coal Company-by checks issued August 31, 2020. Roughly ten days later, realizing its mistake, Gulfport requested a stop payment on the checks, but by then the funds had been deposited into the Debtors' bank accounts. On September 16, 2020, the Debtors' Chapter 11 plan became effective and the sale of substantially all the Debtors' assets to American Consolidated Natural Resources, Inc. ("American Consolidated") was consummated. Despite repeated requests from Gulfport, neither the Debtors nor American Consolidated returned the funds. Gulfport, which along with several affiliated entities is now a debtor in its own bankruptcy proceeding, seeks an order requiring turnover of the funds, an order avoiding the transfer of the funds, and recovery of all costs, expenses, fees and interest, including actual, exemplary and punitive damages and attorney fees. See Am. Compl. at 11-12. (Doc. 73).

This action was originally filed in the Bankruptcy Court for the Southern District of Texas. See Compl. (Doc. 1). American Consolidated moved to dismiss the adversary proceeding. See Motion of American Consolidated Natural Resources, Inc. Pursuant to Fed.R.Bankr.P. 7012 for Dismissal of Gulfport Appalachia, LLC's Adversary Complaint (Doc. 8). But the Texas bankruptcy judge denied the dismissal motion and transferred the adversary proceeding to this Court. See Order Denying Motion to Dismiss and Transfering Adversary Proceeding to the Southern District of Ohio (Doc. 39). After the transfer of the adversary proceeding, Gulfport filed an amended complaint (Doc. 73) and American Consolidated filed an answer (Doc. 74). The answer included a two-count counterclaim seeking an order that the Debtors' Chapter 11 plan confirmation order permanently enjoined Gulfport from pursuing any recovery or damages from American Consolidated. Gulfport responded by moving to strike the counterclaim (Doc. 88), and American Consolidated replied to Gulfport's motion (Doc. 89). This Court entered an Opinion and Order denying Gulfport's motion to dismiss or strike the counterclaim (Doc. 98), and Gulfport answered the counterclaim (Doc. 102).

American Consolidated then filed a motion for summary judgment ("Summary Judgment Motion") (Doc. 112), asking the Court to (1) declare that American Consolidated acquired Murray's assets free and clear of Gulfport's claim, (2) enjoin Gulfport from suing American Consolidated, and (3) dismiss the amended complaint. Gulfport filed a response ("Response") (Doc. 114), and American Consolidated replied to the Response ("Reply") (Doc. 115). Before the Court is Gulfport's motion seeking leave to file a surreply ("Surreply Motion") (Doc. 117), in which Gulfport argues that it should be allowed to respond to certain arguments raised for the first time in American Consolidated's Reply. In its response in opposition to the Surreply Motion ("Surreply Response") (Doc. 122) American Consolidated denies that it made any new arguments in its Reply.

II. The Surreply Motion

Gulfport seeks leave of the Court to file the surreply "because [American Consolidated] has advanced a new argument for the first time in its Reply Brief-i.e., that Gulfport cannot trace certain funds to [American Consolidated] because such funds were deposited into a comingled account and that, as a result, [American Consolidated] is entitled to judgment as a matter of law." Surreply Mot. at 3. Gulfport is correct that American Consolidated effectively made this tracing argument for the first time in its Reply. Indeed, the summary judgment motion mentions tracing in only the briefest fashion. It does so by quoting the following language from a decision of the First Circuit: "[W]here the trust fund has been commingled with general property of the bankrupt [a claimant must] sufficiently trace the property or funds[.]" Summ. J. Mot. at 12 (quoting Conn. Gen. Life Ins. Co. v. Universal Ins. Co.), 838 F.2d 612, 618 (1st Cir. 1988)). This quotation is the only reference to tracing found in the twenty-page summary judgment motion and is insufficient to properly raise the issue. See Cement Kiln Recycling Coal. v. E.P.A., 255 F.3d 855, 869 (D.C. Cir. 2001) ("A litigant does not properly raise an issue by addressing it in a cursory fashion with only bare-bones arguments.") (cleaned up); cf. United States v. Caparotta, 676 F.3d 213, 218 (1st Cir. 2012) (holding that argument "consist[ing] of just two sentences and two cursory citations in [a] brief" raised for the first time on appeal is waived).

By contrast, the Reply contains the following detailed references to tracing:

Ohio law recognizes two forms of trust: express and implied. . . . Implied trust include[s] (1) constructive trusts and (2) resulting trusts. To establish the existence of either trust if funds have been commingled, the party seeking the imposition of the trust must trace its funds. In re Suburban Motor Freight, Inc., 124 B.R. 984, 995 (Bankr. S.D. Ohio 1990).

Importantly, under Sixth Circuit law, funds are not automatically impressed with a constructive trust. See, e.g., First Fed. of Michigan v. Barrow, 878 F.2d 912 (6th Cir. 1989). The burden rests upon the claimant-here Gulfport-to establish the original trust relationship between the parties. In re Suburban Motor Freight, Inc., 124 B.R. at 995. To establish a constructive trust, Gulfport must: (1) establish title; (2) identify the trust fund or property; and (3) trace the property in the event that the trust fund or property [was] commingled with general property of the debtor.

(emphasis added) (citing First Fed. of Michigan, 878 F.2d at 915) ("It is beyond peradventure that, as a general rule, any party seeking to impress a trust upon funds for purposes of exemption from a bankruptcy estate must identify the trust funds in its original or substituted form.")); see also Estate of Cowling v. Estate of Cowling, 847 N.E.2d 405, 412 (Ohio 2006) ("We [] hold that before a constructive trust can be imposed there must be adequate tracing from the time of the wrongful deprivation of the relevant assets to the specific property over which the constructive trust should be placed").

Given that there is no dispute that Gulfport's funds were commingled with the estate, the burden shifted to Gulfport-as the party seeking to impress a constructive trust-to trace its funds.

Critically, as of the Effective Date, tens of millions of dollars of the Murray Debtors' funds were earmarked for winding down the Murray Debtors' estates and did not transfer to [American Consolidated]. See Sources and Uses Statement, Ex. 4. But Gulfport has made no attempt to trace its funds, and, in fact, the evidence developed in discovery demonstrates that tracing the funds would be impossible.

The absence of any evidence that [American Consolidated] received the disputed funds is notable. This adversary proceeding has been pending before this bankruptcy court for over a year and Gulfport has been afforded adequate time and opportunity to conduct discovery. But Gulfport, which ultimately bears the burden of establishing its avoidance claim (and every other claim, which again are all based on [American Consolidated's] purported possession of Gulfport's property), has submitted no tracing analysis, has disclosed no expert and has produced no opinion regarding the traceability of its funds, and has submitted no other factual evidence in support of its claim that [American Consolidated] received any of the disputed funds.

Because American Consolidated raised tracing-in other than a cursory manner-for the first time in its Reply, the Court could find that it waived the argument. See Island Creek Coal Co. v. Wilkerson, 910 F.3d 254, 256 (6th Cir. 2018) ("Only in its reply brief did it raise the [] issue. That was one brief too late. Time, time, and time again, we have reminded litigants that we will treat an argument as forfeited when it was not raised in the opening brief.") (cleaned up); Sanborn v. Parker, 629 F.3d 554, 579 (6th Cir. 2010) ("We have consistently held . . . that arguments made to us for the first time in a reply brief are waived."). The alternative to holding that American Consolidated waived the tracing argument is to afford Gulfport the opportunity to address it in a surreply. See Glob. Tubing, LLC v. Tenaris Coiled Tubes, LLC, No. 4:17-CV-3299, 2022 WL 3349316, at *1 n.2 (S.D. Tex. Aug. 14, 2022) ("While [a]rguments raised for the first time in a reply brief are generally waived, . . . granting leave to file a sur-reply in extraordinary circumstances on a showing of good cause is a viable alternative to the general practice to summarily deny or exclude all arguments and issues first raised in reply briefs.") (cleaned up).

Gulfport also argues that American Consolidated cited facts in its Reply that were not set forth in the statement of material facts accompanying the summary judgment motion. Gulfport points to statements made by American Consolidated in its Reply about the Debtors' concentration accounts, its cash management system, and the movement of cash among various accounts. Gulfport is correct; American Consolidated did not include those account-related facts in its statement of material facts. And, inexplicably, after arguing that it did not raise new issues in its Reply, American Consolidated then set forth in the Surreply Response additional new factual allegations about account balances and transfers. Surreply Resp. at 5-7. American Consolidated did not mention these new facts in either its Summary Judgment Motion or the Reply.

III. Legal Analysis

Whether to permit a party to file a surreply "is a matter left to the trial court's discretion." Rose v. Liberty Life Assurance Co. of Boston, No. 3:15-CV-28-DJH-CHL, 2015 WL 10002923, at *1 (W.D. Ky., Oct. 19, 2015). In exercising this discretion, the Court is guided by case law and the Local Bankruptcy Rules. Under Sixth Circuit law, surreplies "may be allowed in the appropriate circumstances, especially when new submissions and/or arguments are included in a reply brief, and a nonmovant's ability to respond to the new evidence has been vitiated." Key v. Shelby Cty., 551 Fed.Appx. 262, 265 (6th Cir. 2014) (cleaned up). Similarly, the Local Bankruptcy Rules permit the filing of a surreply "upon leave of court for good cause shown," LBR 9013-1(c), and a showing of "good cause exists where the reply brief raises new grounds that were not included in [the] movant's original motion[.]" Canter v. Alkermes Blue Care Elect Preferred Provider Plan, 593 F.Supp.3d 737, 744 (S.D. Ohio 2022) (cleaned up).

Based on the new tracing arguments and factual allegations made by American Consolidated in its Reply and Surreply Response, the Court finds that there is good cause to allow the filing of a surreply. While the mere fact that a surreply might be helpful is not enough to justify its filing, White v. Honda of Am. Mfg., Inc., 191 F.Supp.2d 933, 944 (S.D. Ohio 2002), permitting the additional filing here will not only assist the Court in its consideration of the issues but will allow Gulfport to respond to substantive issues raised for the first time in the Reply. In fact, under the circumstances, if it did not grant the Surreply Motion the Court would be committing an abuse of discretion. See Eng'g & Mfg. Servs., LLC v. Ashton, 387 F. App'x. 575, 583 (6th Cir. 2010) (holding that the district court abused its discretion in denying leave to file a surreply given defendants' presentation of new arguments and new evidence in their reply brief).

IV. Conclusion

For these reasons, the Surreply Motion is GRANTED. Gulfport shall file its surreply as a separate document on the docket of this adversary proceeding by no later than April 11, 2023. No further briefing will be permitted.

IT IS SO ORDERED.