Cap Call, LLC v. Foster (In re Shoot the Moon, LLC)
Decision Date | 10 September 2021 |
Docket Number | Adv. Proc. No. 2:17-ap-00028-WLH,Case No. 2:15-bk-60979-WLH |
Citation | 635 B.R. 797 |
Parties | IN RE: SHOOT THE MOON, LLC, Debtor. Cap Call, LLC, Plaintiff and Counterclaim-defendant, v. Jeremiah J. Foster, Defendant and Counterclaim-plaintiff. |
Court | U.S. Bankruptcy Court — District of Montana |
Martin S. King, Worden Thane, P. C., Missoula, MT, Alissa a Brice Castaneda, W. Scott Jenkins, Jr., Quarles & Brady LLP, Phoenix, AZ, for Counter-Claimant.
David B. Cotner, Missoula, MT, for Defendant.
Michael H. Hekman, Robert C. Lukes, Garlington, Lohn & Robinson, PLLP, Missoula, MT, Roland Gary Jones, New York, NT, Steven M. Johnson, Great Falls, MT, for Plaintiff.
Legal relationships between private parties are largely defined by contract. When these contracts are implicated in litigation, courts must assess the terms and other relevant evidence to classify and determine the parties’ rights and liabilities, often months or years after the original deal. In some instances, this after-the-fact analysis reveals legally significant aspects of the contractual relationship that the parties might not have appreciated when contracting.
In this adversary proceeding, a bankruptcy trustee and CapCall, LLC disagree about the legal classification and ramifications of prepetition transactions. After fully considering the evidence presented at trial, as well as briefing and oral argument offered by both sides, the court has determined that the trustee is entitled to entry of a judgment against CapCall. The details follow below.1
In the early 2000s, Kenneth Hatzenbeller and two other principal investors created a business generally known as Shoot the Moon. Over time this enterprise grew to consist of nineteen LLCs formed pursuant to Idaho, Montana, and Washington law that owned and operated sixteen restaurants located throughout the three states.2 Among other forms of customer payment, the restaurants accepted credit cards, which generated a revenue stream for the Shoot the Moon entities through a processing company called Heartland Payment Systems, Inc.3 Until shortly before the underlying Shoot the Moon bankruptcy case discussed later, Mr. Hatzenbeller exercised day-to-day management and control of all Shoot the Moon entities from his office in Great Falls, Montana.
The Shoot the Moon restaurants eventually encountered various financial pressures, including due to the 2007-2009 Great Recession and improvements demanded by some of the restaurants’ franchisors. Hoping to combat these pressures, Mr. Hatzenbeller sought additional financing from various sources. Initial sources included himself and the original investors, family and friends, additional third-party investors, traditional bank lenders, and trade creditors. Some creditors obtained and perfected security interests regarding all assets of various of the entities (including accounts receivable) via UCC-1 financing statements that predate the CapCall transactions.4
Once the Shoot the Moon entities exhausted the sources of capital mentioned above, several sought additional financing from merchant cash advance companies such as CapCall. Between October 2014 and September 2015, the Shoot the Moon entities and CapCall consummated eighteen transactions. The parties detailed the terms in written Merchant Agreements and associated documents (including confessions of judgment, personal guaranties by Shoot the Moon's principals, and UCC-1 financing statements).5 The Merchant Agreements are generally similar but contain minor variations.
The economic core of these transactions was that CapCall provided the Shoot the Moon entities with immediate cash (and hence liquidity to operate) upon closing. In exchange, CapCall received a portion of future receivables generated through the restaurant operations. The amounts promised to CapCall substantially exceeded the amount of cash CapCall paid, which created possible profit for CapCall and represented the cost to the Shoot the Moon entities of obtaining financing in this fashion.
Return transfers to CapCall were effected via fixed daily ACH debits (in the "Specified Daily Amount" per each agreement) against bank accounts Mr. Hatzenbeller specified. The debits continued regarding a given agreement until CapCall received a total "Receipts Purchased Amount" set forth in that agreement. A significant majority of the transfers were made using the bank account of an entity – Shoot the Moon Grizzly, LLC – that was not party to any of the agreements and did not operate any restaurants generating receivables.6 Jason Leak, the primary representative of CapCall, knew about this mismatch between the contractual counterparty entities and the entity used to fund payments. Mr. Leak expressed no concern other than to request that there was "an account that will clear all the time."7
Mr. Hatzenbeller and Mr. Leak arranged each transaction via email.8 In these emails, the two primarily addressed the amount CapCall would advance to a particular Shoot the Moon entity. Before funding, Mr. Leak emailed Mr. Hatzenbeller legal documents for signature – CapCall apparently never countersigned any of the agreements. CapCall and each specific entity documented each transaction via a separate, standalone Merchant Agreement. CapCall selected the terms and conditions of these agreements by using its form documents; Mr. Hatzenbeller testified that the two negotiated no specific terms beyond the basic economics and that he in fact did not read the documents before signing them. Although Mr. Leak occasionally suggested to Mr. Hatzenbeller that he could obtain regular financing, there was no binding commitment to lend or make future advances and each new transaction was subject to separate investor approval and documentation.9 Emails between Mr. Hatzenbeller and Mr. Leak often referred to the transactions as "loans" or "notes" and on at least one occasion, there was specific negotiation regarding the temporal "term" of a transaction.10
On October 20, 2015, all nineteen Shoot the Moon entities merged into Shoot the Moon, LLC.11 The following day, this entity filed the underlying chapter 11 bankruptcy petition here.12
During the bankruptcy case, Jeremiah J. Foster (the "Trustee") was appointed as the chapter 11 trustee and then as trustee of the STM Liquidating Trust pursuant to the confirmed chapter 11 plan.13
For purposes of this dispute, material events during the course of the bankruptcy case include:
In August 2017, CapCall commenced this adversary proceeding. CapCall seeks declaratory relief that it owns the remaining balance deposited in the segregated account, a judgment against the Trustee for converting postpetition receipts, and other miscellaneous fees, costs, and interest components. The Trustee counterclaimed seeking declaratory relief about which state's law applies to the transactions and that the transactions are disguised loans rather than sales. The Trustee also seeks unencumbered title to the segregated account, avoidance and recovery of allegedly preferential transfers, and remedies stemming from CapCall's alleged usurious interest rates.
The court conducted a trial commencing June 29, 2021, and concluding the following day. At trial, the court admitted numerous exhibits and deposition excerpts.18 The parties presented the following testimony:
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...Plaintiff can be held to a pre-filing standard that was not yet in existence. See also, e.g., Cap Call, LLC v. Foster (In re Shoot the Moon, LLC.), 635 B.R. 797, 827 n.104 (Bankr. D. Mont. 2021) (stating that the due diligence requirement added to Section 547(b) by the 2019 Act was not retr......
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