Brickley v. Scattered Corp. (In re H&M Oil & Gas, LLC)

• Decision Date: 21 July 2014
• Docket Number: Adversary No. 13–3066–BJH.,Bankruptcy No. 12–32785–BJH.
• Citation: 514 B.R. 790
• Court: U.S. Bankruptcy Court — Northern District of Texas
• Parties: In re H & M OIL & GAS, LLC, Debtor. Douglas J. Brickley, Chapter 11 Trustee, Plaintiff, v. Scattered Corporation and Leon A. Greenblatt, III, Defendants.

514 B.R. 790

In re H & M OIL & GAS, LLC, Debtor.
Douglas J. Brickley, Chapter 11 Trustee, Plaintiff,
v.
Scattered Corporation and Leon A. Greenblatt, III, Defendants.

Bankruptcy No. 12–32785–BJH.
Adversary No. 13–3066–BJH.

United States Bankruptcy Court,
N.D. Texas,
Dallas Division.

Signed July 21, 2014.

[514 B.R. 795]

Brian A. Kilmer, Brian D. Roman, Chamberlain, Hrdlicka, White, et al., Houston, TX, for Plaintiff.

[514 B.R. 796]

Gregory James Jordan, Jordan Kowal and Apostol, LLC, Chicago, IL, Kenneth C. Johnston, Michael L. Scanlon, Kane, Russell, Coleman & Logan PC, Nathan M. Nichols, Rosa R. Orenstein, Orenstein Law Group, P.C., Dallas, TX, Carol Lynn Wolfram, Law Office of Carol Lynn Wolfram, Denton, TX, for Defendants.

MEMORANDUM OPINION
BARBARA J. HOUSER, Bankruptcy Judge.

I.
JURISDICTION, VENUE, AND STATUTORY AND CONSTITUTIONAL AUTHORITY
797

A.	Subject Matter Jurisdiction and Venue	798
B.	Statutory Authority	798
C.	Constitutional Authority	800

II. LEGAL ANALYSIS
800

A.
Count 1: Breach of the DIP Agreement (Brickley v. Scattered)
801

1.
Scattered's Failure to Fund the Disputed DIP Requests Was Not a Breach of the DIP Agreement
801

a)	The Disputed DIP Requests Were Not Made in Compliance with the DIP Agreement	801
b)	At the Time the Disputed DIP Requests Were Made, H & M Was in Default Under the Terms of the DIP Agreement, Thus Excusing Scattered from Funding	804

2.
Even if Scattered's Failure to Fund the Disputed DIP Requests was a Breach of the DIP Agreement, the Trustee Failed to Prove Any Resulting Actual or Consequential Damages
807

B.
Count 4: Breach of Fiduciary Duty (Brickley v. Greenblatt)
814

1.	As its Manager, Greenblatt Owed Fiduciary Duties to H & M	814
2.	Greenblatt Did Not Breach the Fiduciary Duties He Owed to H & M	815

a)	Failure to Timely Pay AFEs Related to Drilling Costs, With No Resulting Harm, Does Not Constitute a Breach of Fiduciary Duty	816
b)	Greenblatt's Decision Not to Request Funds Under the DIP Agreement to Prepay Completion Costs, Based upon His Interpretation of the JOA, Was Not a Breach of Fiduciary Duty	817
c)	Greenblatt's Failure to Take Further Action Against Scattered for Its Alleged Breach of the DIP Agreement Was Not a Breach of Fiduciary Duty	821

3.
Had Greenblatt Breached the Fiduciary Duties He Owed to H & M, Prospect's Actions Were an Intervening and Superseding Cause of H & M's Alleged Injuries
821

C.	Count 6: Objection to Administrative Wage Claims (Brickley v. Greenblatt)	824
D.	Count 5: Equitable Subordination (Brickley v. Greenblatt)	826
E.	Counterclaim: Indemnification Under the LLC Regulations and the DIP Agreement (Greenblatt v. H & M)	827

1.	Greenblatt Is Entitled to Indemnification Under th e LLC Regulations	827
2.	Greenblatt Is Entitled to Indemnification Under th e DIP Agreement	828

a)	Greenblatt, in His Capacity as H & M's Manager, Qualifies a s an “Indemnitee” Under the Terms of the DIP Agreement	829
b)	The Indemnification Provision Covers the Activities that are the Subject of the Complaint	831
c)	The Indemnification Provision of the DIP Agreement is Enforceable Under Applicable Law	832

3.
Determination of the Amount and Priority of Greenblatt's Claims for Indemnification Under the LLC Regulations and the DIP Agreement
835

III. CONCLUSION
837

[514 B.R. 797]

The Court held a trial in this adversary proceeding on June 9–11, 2014. At the conclusion of the trial, the Court directed briefing on several issues raised at trial. The last of the post-trial briefs was submitted on June 17, 2014, following which the Court took the matter under advisement. This Memorandum Opinion contains the Court's findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014.

I. JURISDICTION, VENUE, AND STATUTORY AND CONSTITUTIONAL AUTHORITY¹

In his Original Complaint [Dkt. No. 1] (the “Complaint”), Douglas Brickley, Chapter 7 trustee (the “Trustee”) of the bankruptcy estate of H & M Oil & Gas, LLC (“H & M”), alleged various claims and causes of action against H & M's former Manager, Leon Greenblatt, III (“Greenblatt”) and H & M's postpetition lender, Scattered Corporation (“Scattered”), including: (Count 1) breach of the Court-approved debtor-in-possession financing agreement (the “DIP Agreement”) [Gr. Ex. H.1] against Scattered; ² (Count 2) negligence and gross negligence against Scattered; (Count 3) alter ego/control theory against Scattered; (Count 4) breach of fiduciary duty against Greenblatt; (Count 5) equitable subordination of claims against Scattered and Greenblatt; (Count 6) objection to the administrative claim filed by Greenblatt; (Count 7) alter ego against Greenblatt; (Count 8) fraudulent conveyances under 11 U.S.C. § 548 against Scattered and Greenblatt; (Count 9) fraudulent conveyance under 11 U.S.C. § 544 and Texas law against Scattered and Greenblatt; (Count 10) recovery of avoided transfers under 11 U.S.C. § 550 against Scattered and Greenblatt; (Count 11) disallowance of claims under 11 U.S.C. § 502(d) against Scattered and Greenblatt; and (Count 12) recovery of attorneys' fees against Scattered. In his Second Amended Answer to Original Complaint and Counterclaim [Dkt. No. 63] (the “Answer and Counterclaim”), Greenblatt alleged a counterclaim against the H & M estate for indemnification under the DIP Agreement and H & M's Amended Regulations of Limited Liability Company (the “LLC Regulations”) [Sc. Ex. B]. Scattered has alleged no counterclaims against the estate.

The majority of these claims were resolved prior to trial through either orders on dispositive motions or by voluntary

[514 B.R. 798]

withdrawal by the Trustee.³ As such, the only counts tried by the Court were: (1) as against Scattered, (Count 1) breach of the DIP Agreement and (Count 12) attorneys' fees; ⁴ (2) as against Greenblatt, (Count 4) breach of fiduciary duty, (Count 5) equitable subordination, and (Count 6) objection to administrative claim; and (3) as against the estate, Greenblatt's counterclaim for indemnification.

A. Subject Matter Jurisdiction and Venue

The U.S. District Court for the Northern District of Texas has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. § 1334. Although bankruptcy courts do not have independent subject matter jurisdiction over bankruptcy cases and proceedings, 28 U.S.C. § 151 grants bankruptcy courts the power to exercise certain “authority conferred” upon the district courts by title 28. Under 28 U.S.C. § 157, the district courts may refer bankruptcy cases and proceedings to the bankruptcy courts for either entry of a final judgment (core proceedings) or proposed findings and conclusions (noncore, related-to proceedings). So, as relevant here, this Court exercises jurisdiction over the debtor's underlying Chapter 7 bankruptcy case and this adversary proceeding pursuant to the Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc adopted in this district on August 3, 1984 (the “Standing Order of Reference”). Venue is proper here under 28 U.S.C. § 1409.

B. Statutory Authority

Section 1334(b) lists three types of proceedings over which the district court has jurisdiction—those “arising under title 11,” those “arising in” a case under title 11, and those “related to” a case under title 11. 28 U.S.C. § 1334(b). The classification of a proceeding under § 1334 depends on the connection of the proceeding to the bankruptcy case. “Arising under” jurisdiction involves “causes of action created or determined by a statutory provision of title 11.” Faulkner v. Eagle View Capital Mgt. (In re The Heritage Org., L.L.C.), 454 B.R. 353, 360 (Bankr.N.D.Tex.2011) (citing Wood v. Wood (In re Wood), 825 F.2d 90, 96 (5th Cir.1987)). “Arising in” jurisdiction is “not based on a right expressly created by title 11, but is based on claims that have no existence

[514 B.R. 799]

outside of bankruptcy.” Faulkner, 454 B.R. at 360 (citing Wood, 825 F.2d at 97). “Arising under” and “arising in” proceedings are “core” proceedings. 28 U.S.C. § 157(b)(1); Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 2605, 180 L.Ed.2d 475 (2011); U.S. Brass Corp. v. Travelers Ins. Grp., Inc. (In re U.S. Brass Corp.), 301 F.3d 296, 304 (5th Cir.2002).

In comparison, “related to” jurisdiction exists if “the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Celotex Corp. v. Edwards, 514 U.S. 300, 308 n. 6, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984)); U.S. Brass, 301 F.3d at 304. “That state law may affect a proceeding's resolution cannot be the sole basis by which a proceeding is excluded from the otherwise large net cast by ‘related to’ jurisdiction.” Hartley v. Wells Fargo Bank, N.A. (In re Talsma), 509 B.R. 535, 542 (Bankr.N.D.Tex.2014) (citing 28 U.S.C. § 157(b)(3)). Proceedings that involve merely “related to” jurisdiction and do not otherwise arise under the Bankruptcy Code or arise in a bankruptcy case are “non-core.” Faulkner, 454 B.R. at 360.

A bankruptcy judge's authority in cases and proceedings differs depending on whether the subject matter is “core” or “non-core.” 28 U.S.C. § 157(b)–(c). A bankruptcy court may hear and determine ( i.e., enter a final order in) all cases filed under title 11 and all proceedings within a bankruptcy court's “core” authority. Id. § 157(b)(1). Section 157(b)(2) provides a nonexclusive list of such core proceedings. Id. § 157(b)(2). In non-core proceedings, the statute limits the bankruptcy court to issuing proposed findings of fact and conclusions of law to the district court, id. § 157(c)(1), unless the parties consent to the bankruptcy court's issuance of a final judgment, id. § 157(c)(2).

With this framework in mind, the Court now returns to the claims and counterclaim at issue in this adversary proceeding. First, the Court concludes that the claims by and among the Trustee and Greenblatt are each core. Specifically, the Trustee's objection to the administrative claim filed by Greenblatt (Count 6) is core...