In re Seaquest Diving, Lp

• Decision Date: 12 August 2009
• Docket Number: No. 08-20516.,08-20516.
• Citation: 579 F.3d 411
• Parties: In The Matter of: SEAQUEST DIVING, LP; SeaQuest General Holdings, LLC, Debtors. SeaQuest Diving, LP; SeaQuest General Holdings, LLC; Ryan Marine Services, Inc.; Emmons & Jackson, P.C., Plaintiffs-Appellees, v. S&J Diving, Inc.; Stanley Earle Jones, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

579 F.3d 411

In The Matter of: SEAQUEST DIVING, LP; SeaQuest General Holdings, LLC, Debtors.

SeaQuest Diving, LP; SeaQuest General Holdings, LLC; Ryan Marine Services, Inc.; Emmons & Jackson, P.C., Plaintiffs-Appellees, v. S&J Diving, Inc.; Stanley Earle Jones, Defendants-Appellants.

No. 08-20516.

United States Court of Appeals, Fifth Circuit.

August 12, 2009.

Steven Douglas Shurn, Hughes, Watters & Askanase, Houston, TX, Rodney Lawrence Poirot, Cavazos, Hendricks, Poirot & Dewey, Dallas, TX, for SeaQuest Diving, LP and SeaQuest Gen. Holdings, LLC.

Michael P. Ridulfo, Brown McCarroll, Houston, TX, for Ryan Marine Services, Inc.

Patrick Lamont Hughes (argued), Haynes & Boone, L.L.P., Houston, TX, for Emmons & Jackson, P.C.

Craig E. Power, Diane M. Guariglia (argued), Cokinos, Bosien & Young, Lawrence Joseph Maun, Houston, TX, for S&J Diving, Inc. and Jones.

Appeal from the United States District Court for the Southern District of Texas.

Before BARKSDALE, DeMOSS and STEWART, Circuit Judges.

DeMOSS, Circuit Judge:

In this appeal, we must address whether a $2,742,014 unsecured claim based on a state court judgment is subject to mandatory subordination under 11 U.S.C. § 510(b) because it arose from the rescission of a purchase or sale of a security of the debtor. This is an issue of first impression in this Circuit. For the reasons stated in this opinion, we affirm the decision of the bankruptcy court subordinating the claim.

I. Factual & Procedural Background

A. Facts

The following is a chronology of events that led to the Chapter 11 bankruptcy filing of SeaQuest Diving, LP (SeaQuest LP) and SeaQuest General Holdings, LLC (SeaQuest LLC) (collectively "SeaQuest" or "the debtors"). SeaQuest provided underwater oilfield services to offshore oil and gas companies.

Prior to SeaQuest's formation, Carroll LeBoeuf, James McClaugherty, and Todd Steele were employed in the underwater oilfield services industry. In late 2005, they sought to form a business of their own in which to invest their industry contacts and sweat equity. In early 2006, these three individuals were introduced to Stanley Jones, the president and owner of S&J Diving, LP (S&J). Over a period of several months, the parties negotiated the formation of a new company—SeaQuest— that would pool the assets, industry contacts, and combined expertise of all the parties. On June 1, 2006, the parties executed a series of agreements that created SeaQuest.

SeaQuest was structured as a limited partnership with a limited liability company serving as the general partner. The limited partners of SeaQuest LP were members of SeaQuest LLC, which managed the venture. S&J contributed substantially all of its corporate assets, valued at approximately $6,000,000, in exchange for all the Class A shares in SeaQuest LP. Because they were given in exchange for a significant capital contribution, the Class A shares were entitled to preferential distributions under the limited partnership agreement. In exchange for their contributions of knowledge and labor, LeBoeuf, McClaugherty, and Steele each received an equal number of Class B shares in SeaQuest LP. LeBoeuf, McClaugherty, Steele, and Jones each received a 25% membership interest in SeaQuest LLC in exchange for $250.

The parties executed the following instruments on June 1, 2006:(1) the Asset Contribution and Transition Agreement (ACTA), (2) the Company Agreement of SeaQuest General Holdings, LLC a Texas Limited Liability Company (LLC Agreement), and (3) the SeaQuest Diving, LP Agreement of Limited Partnership (LP Agreement). Pursuant to the ACTA, S&J agreed to assign its lease to SeaQuest, which would then operate its new business out of the building that formerly housed S&J's operations. S&J also agreed to contribute: (1) its fixed assets, such as furniture, fixtures, displays, equipment, leasehold improvements, signage, supplies, and all of S&J's tangible personal property; (2) its records and files; (3) its rolling stock and vessels; (4) its equipment leases agreements, contracts, and rights thereunder; (5) its intellectual property; (6) its permits, licenses, orders, registrations and certificates obtained from governmental agencies; (7) its accounts receivable, represented to be approximately $2,550,000; (8) its cash on hand; and (9) its keys, passwords, and telephone numbers.

Before the ink on the paper was dry, serious conflicts arose between Jones and his three new partners regarding the operation of SeaQuest. On August 1, 2006, LeBoeuf, McClaugherty, and Steele, on behalf of SeaQuest, filed their first state court lawsuit against Jones and S&J. In this first lawsuit, SeaQuest alleged that Jones (1) failed to transfer S&J's assets pursuant to the ACTA; (2) refused access to S&J's books and records; (3) refused SeaQuest employees access to the business premises; (4) continued to use S&J letterhead on SeaQuest paperwork, including checks, financials, and invoices; (5) padded the payroll with unproductive family members; (6) materially overstated the amount and collectability of S&J's accounts receivable; and (7) materially overstated the value of S&J's contributed assets by roughly $2,000,000. The following day, on August 2, 2006, the parties entered into a handwritten agreement pursuant to Rule 11 of the Texas Rules of Civil Procedure (August 2 Settlement Agreement). The first lawsuit was dismissed on August 3, 2006.

The August 2 Settlement Agreement provided, in relevant part, that (1) S&J would provide the limited partners access to S&J's premises and its records; (2) the debtors "are exercising their right to buy out S&J (3) the parties would have sixty days from August 3, 2006 to consummate the buyout transaction; (4) S&J's receivables would be used to cover SeaQuest's monthly overhead until the buyout transaction closed; and (5) SeaQuest would be jointly managed by both the debtors and S&J until the buyout transaction closed.

The parties were unable to complete the buyout contemplated by the August 2 Settlement Agreement. LeBoeuf, McClaugherty, and Steele blamed this failure on Jones's intransigence. On September 28, 2006, the debtors filed a second state court lawsuit against Jones and S&J. In this second lawsuit, the debtors alleged that Jones (1) refused to cooperate with the debtors and diverted money from SeaQuest's bank accounts; (2) unilaterally cancelled the health insurance of SeaQuest's employees; (3) sent dive teams on unapproved jobs; (4) violated the confidentiality provision of the August 2 Settlement Agreement; (5) denied SeaQuest access to S&J's books and records, thus preventing completion of the buyout transaction; (6) refused to transfer the cash necessary to pay SeaQuest's monthly overhead, and instead paid some, but not all, of SeaQuest's expenses directly from S&J's operating account; (7) converted $484,000 from SeaQuest's bank account; (8) secretly transferred $250,000 to Jones's father; (9) overestimated the value of a piece of equipment by $350,000; and (10) unreasonably demanded that SeaQuest pay $300,000 to S&J's financial advisor to complete the buyout transaction.

On October 3, 2006, the parties dictated a second Rule 11 agreement into the trial court record (October 3 Settlement Agreement). The October 3 Settlement Agreement provided, in relevant part, that (1) S&J would no longer be a member of SeaQuest LLC, and S&J would no longer be a limited partner of SeaQuest LP; (2) "the asset contribution and transaction agreement [ACTA] will be rescinded such that Sea[Q]uest and S&J Diving will retain all of its [contributed] assets"; (3) the parties would enter into an "asset sales agreement" where S&J would sell some of its formerly contributed assets to SeaQuest for $3,100,000; (4) SeaQuest would reimburse S&J for overhead expenditures made on behalf of SeaQuest since June 1, 2006 in the amount of $2,300,000;¹ and (5) SeaQuest would pay S&J "an amount that is the equivalent of what would have been called priority return under the partnership agreement had S&J not rescinded its partnership interest in that entity."² The parties agreed that if there was any dispute regarding the October 3 Settlement Agreement, the state district court judge presiding over the second lawsuit would be the sole and final arbiter, thereby effectively waiving jury trial and appeal.

The transaction contemplated by the October 3 Settlement Agreement never occurred. On January 5, 2007, S&J filed a counterclaim against SeaQuest seeking enforcement of the October 3 Settlement Agreement. S&J alleged that SeaQuest was in breach of contract by failing to (1) close the transaction, (2) purchase S&J's assets for $3,100,000, (3) reimburse expenses in the amount of $2,300,000, and (4) pay S&J a priority return in the amount of $399,845. In its prayer, S&J sought appointment of a receiver, return of its contributed assets, enforcement of the one-year non-compete agreement in the October 3 Settlement Agreement, actual damages, and attorney's fees.

The state court entered judgment on March 23, 2007 in favor of S&J. The state court awarded S&J $2,604,000 in actual damages, $128,014 in attorney's fees, and $10,000 in "organizational fees." These damage awards totaled $2,742,014. The state court appointed a receiver and ordered SeaQuest to return S&J's contributed assets, but it declined to enforce the one-year non-compete agreement. Six days later, SeaQuest filed for bankruptcy on March 29, 2007.

B. The Bankruptcy Court's Decision

Schedule F listed S&J as an unsecured creditor of the bankruptcy estate in the amount of $2,742,014 (S&J claim). The S&J claim was based on the state court judgment. On June 28, 2007, the debtors and two of their creditors, Emmons & Jackson, PC (E&J) and Ryan Marine Services (Ryan Marine), filed an adversary proceeding seeking to subordinate the S&J claim pursuant to 11 U.S.C. § 510(b). On January 23, 2008, the bankruptcy court agreed that the S&J claim should be subordinated...