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In re Pro Page Partners

July 28, 2006

IN RE: PRO PAGE PARTNERS, LLC, DEBTOR
MARY FOIL RUSSELL, TRUSTEE, APPELLEE
v.
CARLETON A. JONES, III, APPELLANT



The opinion of the court was delivered by: J. Ronnie Greer United States District Judge

(Bankruptcy Court Case No. 00-22856m /Adv. Proc. No. 03-2042)

MEMORANDUM OPINION

Before this court is the appeal of Carleton A. Jones, III ("Jones") of the March 25, 2005, denial of his motion for a judgment on the pleadings*fn1 and the grant of trustee Mary Foil Russell's ("the trustee") motion for summary judgment by United States Bankruptcy Judge Marcia Phillips Parsons. This Court has jurisdiction of this appeal pursuant to 28 U.S.C. § 158(a)(1). The complex history of the players in this case and the issues raised by the pleadings was set forth by Judge Parsons in her memorandum opinion on the parties' motions for summary judgment:

. . . Pro Page Partners, LLC was a Tennessee limited liability company engaged in the business of marketing and selling paging and cellular communication services to customers in East Tennessee. The [appellant] Carlton A. Jones, III was a member of Pro Page, holding a 30% membership interest. In connection with the restructuring and sale of the membership units of Pro Page, the [appellant] entered into a Redemption and Indemnification Agreement dated December 30, 1998 (the 'Indemnification Agreement'). The [appellant] and two individuals named Mark Halvorsen and Joe S. Potter are collectively referred to in the Indemnification Agreement as 'Guarantors' while Joseph K. Reid and Lawrence H. Reid are jointly referred to as 'Sellers.' Under the terms of the Indemnification Agreement, Pro Page and the Guarantors, jointly and severally, agreed to indemnify and hold the Sellers harmless against all claims asserted against Sellers 'as a result of the operation of [Pro Page] and/or [Pro Page's] business, including, without limitation, any liability asserted against Sellers arising from personal guaranties to Kenesaw Leasing.'

On October 23, 2000, almost two years after the execution of the Indemnification Agreement, Pro Page filed for bankruptcy relief under Chapter 11, but subsequently converted the case to chapter 7 on September 4, 2001. Mary Foil Russell was appointed chapter 7 trustee. On April 16, 2003, in the adversary proceeding Mary Foil Russell, Trustee v. Joseph K. Reid, No. 02-2027, the trustee obtained a judgment against Joseph K. Reid ('Reid') in the amount of $319,699.05. Thereafter, by an assignment agreement dated June 30, 2003, Reid assigned to the trustee his rights in the Indemnification Agreement. As a result of the assignment, the trustee commenced the instant adversary proceeding against the [appellant] on August 13, 2003.

It is alleged in the complaint that the trustee as assignee of Reid 'is entitled to enforce the Indemnification Agreement against the appellant in the place and stead of Mr. Reid,' that the judgment against Reid 'arises from the business and operations of Pro Page,' and that the appellant 'is legally bound by virtue of the Indemnification Agreement to indemnify Joseph K. Reid in full for the judgment or to pay the amount of the Judgment together with interest earned thereon to the plaintiff.' In response to the complaint, the appellant admits in his answer the trustee obtained a judgment against Reid, but denies that 'the Judgment arises from the business and operations of Pro Page' or that 'the Judgment debt is within the scope of the Redemption and Indemnification Agreement.'

In her motion for summary judgment filed December 15, 2004, the trustee asserts that there is no genuine issue of material fact and she is entitled to judgment as a matter of law, not only to recover from the defendant the amount of the judgment previously obtained by her against Reid but also reasonable attorney's fees and expenses incurred in enforcing the Indemnification Agreement. The defendant opposes the trustee's summary judgment motion for the reasons set forth in his answer. In addition, as set forth in his motion for judgment on the pleadings filed January 28, 2005, the defendant asserts that he had neither notice of the trustee's lawsuit against Reid nor an opportunity to defend against the action; that in the absence of such notice the trustee must allege in the complaint and prove that the judgment against Reid is unavoidable; and because the complaint fails to make this required allegation, it is insufficient on its face, entitling the defendant to judgment on the pleadings. . .

At issue in the adversary proceeding, therefore, was: 1) whether the trustee as the assignee of Mr. Reid ("Reid") was entitled to enforce the Indemnification Agreement against Jones; 2) whether the judgment against Reid arose from the business and operation of Pro Page; and, 3) whether Jones was legally bound by the Indemnification Agreement to indemnify Reid. As set forth in the Bankruptcy Judge's memorandum opinion, Jones contends that the judgment against Reid did not arise from the business and operations of Pro Page and argues that the judgment debt was not within the scope of the Indemnification Agreement. Jones also argues that he never received notice of the trustee's lawsuit against Reid and never had the chance to defend himself. And, considering that he did not receive notice, Jones contends that the trustee had to allege in her complaint that the judgment against Reid was unavoidable. Because she did not, Jones alleges that the trustee's complaint failed to state a claim for relief.

The bankruptcy court ruled in its March 25, 2005, order that the judgment against Reid arose from the business and operations of Pro Page, that the trustee's judgment against Reid fell within the scope of the Indemnification Agreement, that Jones was not entitled to notice of the trustee's lawsuit, and that the trustee did not have to allege in her complaint that the judgment against Reid was unavoidable. The bankruptcy court then granted the trustee's motion for summary judgment and denied Jones' motion.

In Jones' appeal of the bankruptcy court's decision, he identifies the same three issues to be decided as were at issue in the adversary proceeding. When reviewing the decision of the bankruptcy court on these issues, this court cannot set aside findings of fact unless they are clearly erroneous. Fed. R. Bankr. P. Rule 8013. Conclusions of law are reviewed de novo. In re Morehead, 249 F.3d 445, 447 (6th Cir. 2001).

Jones first argues that the trustee's judgment against Reid in the adversary proceeding did not arise as a result of the operation and/or business of Pro Page. Instead, he claims Reid's liability arose from a preferential transfer action the trustee brought against Message Express. In the opinion of the bankruptcy court, "unquestionably, Pro Page's agreement with Message Express arose 'as a result of the operation of [Pro Page] and/or [Pro Page's] business' ". Pro Page, the bankruptcy court explained, contracted with Message Express to buy paging units, computers, and equipment. And, "because Reid's liability under the judgment arose entirely from his guaranty of Pro Page's business obligation to Message Express and Pro Page's failure to perform that obligation, it falls within the scope of the Indemnification Agreement, notwithstanding that the judgment is held by the trustee rather than Message Express." (See Memorandum, Bankruptcy Court Docket No. 45, pp. 7-8) (hereinafter "Memorandum, p. __").

The first step in analyzing whether the operation and/or business of Pro Page was involved in the agreement with Message Express is to look at the agreement itself. The language of the indemnification clause in the Indemnification Agreement is as follows:

[Pro Page] and [Jones], jointly and severally, agree to defend and indemnify and hold [Reid] harmless from and against any and all liability, claims, demands, damages, obligations or debts asserted against [Reid] as a result of the operation of [Pro Page] and/or [Pro Page's] business, including, without limitation, any liability asserted against [Reid] arising from personal guaranties to Kenesaw Leasing.

Under Tennessee law, contracts that are clear and unambiguous should have their terms "taken and understood in their plain, ordinary and popular sense." Munford Union Bank v. American Ambassador Casualty. Co., 15 S.W.3d 448, 451 (1999). A plain reading of the indemnification clause of the Indemnification Agreement shows that Jones had to indemnify the trustee (who stands in the place of Reid) for any debt Reid incurred as a result of the operation and/or business of Pro Page. As set forth above, the bankruptcy court's finding of fact that Pro Page's agreement with Message ...


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