Garner v. Sherwood (In re Jones)

• Decision Date: 11 March 2019
• Docket Number: Case No. 16-41283-ELM-7,Adversary No. 18-04098
• Parties: In re: GREGORY G. JONES, Debtor. MARILYN GARNER, Chapter 7 Trustee of the Bankruptcy Estate of Gregory G. Jones, Plaintiff, v. RICHARD SHERWOOD and LESA SHERWOOD, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Texas

In re: GREGORY G. JONES, Debtor.MARILYN GARNER, Chapter 7 Trusteeof the Bankruptcy Estate of Gregory G. Jones, Plaintiff, v. RICHARD SHERWOOD and LESA SHERWOOD, Defendants.

Case No. 16-41283-ELM-7

Adversary No. 18-04098

UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION

March 11, 2019

The following constitutes the ruling of the court and has the force and effect therein described.

Chapter 7

MEMORANDUM OPINION

Before the Court is the Motion for Summary Judgment [Docket No. 17] (the "Motion") filed by Defendants Richard Sherwood ("Mr. Sherwood") and Lesa Sherwood (together with Mr. Sherwood, the "Defendants"). In support of the Motion, Defendants have filed their Brief in Support of Motion for Summary Judgment [Docket No. 19] ("Defendants' Brief") and Affidavit of Richard Sherwood [Docket No. 20] (the "Sherwood Aff."). In opposition to the Motion, Plaintiff Marilyn Garner ("Plaintiff"), in her capacity as Chapter 7 trustee of the bankruptcy estate of the Debtor Gregory G. Jones, has filed Plaintiff's Opposition to Defendants' Motion for Summary Judgment [Docket No. 21], Plaintiff's Brief in Opposition to Defendants' Motion for Summary Judgment [Docket No. 22] ("Plaintiff's Brief"), and Appendix to the Brief in Support of Opposition to Defendants' Motion for Summary Judgment [Docket No. 23] ("Plaintiff's App.").

On April 1, 2016 (the "Petition Date"), the Debtor Gregory G. Jones ("Jones") initiated the underlying bankruptcy case associated with this adversary proceeding with the filing of his voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101, et seq. (the "Bankruptcy Code"). By order entered on April 28, 2016, the bankruptcy case was converted to a proceeding under Chapter 7 of the Bankruptcy Code, whereupon the Plaintiff was appointed to serve as the Chapter 7 trustee. On March 29, 2018, Plaintiff commenced this adversary proceeding with the filing of Trustee's Original Complaint Against Richard and Lesa Sherwood [Docket No. 1] (the "Complaint"). The Complaint focuses on a $277,486.19 payment made from funds of Jones to the Defendants (the "Transfer") on August 11, 2015 - a date within one year, but prior to 90 days, of the Petition Date. Pursuant to the Complaint, Plaintiff seeks to avoid the Transfer as a fraudulent transfer pursuant to Section 548 of the Bankruptcy Code or, alternatively, as a preferential transfer pursuant to Section 547 of the Bankruptcy Code. Defendants assert that they are entitled to summary judgment on both of Plaintiff's avoidance claims.

For the reasons set forth below, the Court will grant the Defendants' Motion.

JURISDICTION

The Court has jurisdiction of this adversary proceeding pursuant to 28 U.S.C. §§ 1334 and 157 and the Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc(Miscellaneous Rule No. 33) of the United States District Court for the Northern District of Texas. Venue of the proceeding in the Northern District of Texas is proper under 28 U.S.C. § 1409. The proceeding constitutes a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(F) and (H). Pursuant to 28 U.S.C. § 157(b)(1), coupled with the Defendants' knowing and voluntary waiver of the right to adjudication of the causes of action asserted in this proceeding by an Article III court, this Court may enter a final order or judgment.¹

FACTUAL BACKGROUND

A. Establishment of the Parties' Relationship; The Sortium Engagement and Aquaphex Revenue Share Agreement

The Defendants and Jones first met as neighbors in Southlake, Texas. In the course of getting to know one another, they obtained knowledge about what each did for a living - Mr. Sherwood, for example, learning that Jones was a practicing attorney with his own firm; and Jones learning that Mr. Sherwood was the owner of a business named Sortium USA, LLC ("Sortium"). This familiarity would later serve as the catalyst for Sortium's engagement of Jones and his law firm to represent Sortium in a copyright infringement case (the "Sortium Engagement").

Approximately two years into the Sortium Engagement, Jones began to tell Mr. Sherwood more about his own business venture - AquapheX^TM Total Water Solutions, LLC ("Aquaphex"), a company that Jones claimed would use molecular filtration technology to remove contaminants from used fracking water in the oil and gas industry. Claiming to have personally invested $2million of his own money in the business, Jones offered the Defendants the opportunity to also invest in the business through the acquisition of a revenue-sharing interest in Aquaphex's first six plants for $250,000. The Defendants agreed, and in November 2013 entered into a written agreement with Aquaphex and Jones (the "Revenue Share Agreement"). See Complaint, Exh. A. The $250,000 payment required of the Defendants under the Revenue Share Agreement was funded out of loan and/or sales proceeds generated from real property that the Defendants owned in Seven Points, Texas.²

Under the terms of the Revenue Share Agreement, in exchange for the $250,000 payment the Defendants acquired the right to receive 1% of the net income of Aquaphex's first six plants over a maximum period of 10 years, with an overall guaranteed minimum return on investment of at least the initial $250,000 investment plus an additional $250,000,³ such guaranteed return on investment to be equally allocated among the six plants with each plant's allocated share to be paid by the end of the 5^th year of the plant's operations. See Revenue Share Agreement, at pp.1-2. Then, upon the earlier of (a) the end of the 10^th year of operations of each particular plant, or (b) the sale of the plant, the Defendants' revenue sharing interest in relation to such plant's operationswould be subject to buyout. See id., at p.2. While not expressly provided for in the Revenue Share Agreement, Jones claims that the Defendants were also made part of the "advisory board" or "executive team" of Aquaphex upon funding the investment. See Plaintiff's App. 35, at p.57 (Jones Affidavit, ¶ 7).

B. The Jones Agreement

By May 2014, seeing no progress in the construction of any of the Aquaphex plants, sensing no ability of Aquaphex to attract the level of additional capital required to achieve the stated goals of the company, and having received no return on the $250,000 investment, Mr. Sherwood began to make demands for information about the company and its operations and funding. In response, Jones presented the Defendants with a new proposal - one that Jones claimed would enable them to both "recover [their] initial investment asap and be in the heart of AquapheX and on the AquapheX™ Board of Directors (not just the Advisory Board)." Plaintiff's App. 16, at p.20 (May 20, 2014 email from Jones to the Defendants). To obtain these benefits, however, the proposal would require the Defendants to invest an additional $240,000. The Defendants agreed (the resulting agreement referred to herein as the "Jones Agreement").

To memorialize the new, agreed-upon investment obligation, the Defendants entered into a Share Purchase Agreement, dated June 2, 2014 (the "Share Purchase Agreement" or "SPA"). See Sherwood Aff., Exh. F. Per the agreement's introductory paragraph, the parties to the agreement were "Gregory G. Jones, CEO and President of AquapheX™ Total Water Solutions, LLC" (defined in the SPA as the "Seller"); "Gregory G. Jones, an individual" (defined in the SPA as the "Beneficiary"); and the Sherwoods (defined in the SPA as the "Purchaser"). See SPA, at p.1. Pursuant to the Share Purchase Agreement, the parties agreed to the following:

• The Seller's sale, and Purchaser's purchase, of four Aquaphex shares, representing 4% of the equity interests in Aquaphex (as of June 2, 2014) for $240,000. SPA, ¶ 1.

• The Purchaser's payment of the $240,000 purchase price directly to Beneficiary. SPA, ¶¶ 2-3.

• The assurance that Jones, having a majority of the Aquaphex shares, would appoint Mr. Sherwood as a member of the Board of Directors of Aquaphex for a minimum of one term. SPA, ¶ 6.x.

• The confirmation and acknowledgment that, following the closing, Jones would pay $250,000 to the Defendants to be "considered as re-payment of the [Defendants'] original investment in AquapheX™," thereby "allow[ing] for Rick and Lesa Sherwood to have a full recovery of all of their initially invested funds prior to the opening of any of the AquapheX™ plants or other operations" - such payment to be made over a nine-month period in monthly payments commencing on June 30, 2014, and to be credited towards amounts payable by Aquaphex to the Defendants under the Revenue Share Agreement. SPA, ¶¶ 6.y.-6.z.

• Aquaphex's agreement to reimburse Jones for the $250,000 that he pays to the Defendants, such reimbursement to come from net income that otherwise would have been payable to the Defendants under the Revenue Share Agreement. SPA, ¶ 6.y.

In June 2004, the Defendants paid the required $240,000 to Jones. Sherwood Aff., ¶ 19.

Thereafter, in September 2014, following Jones' failure to make the promised June, July and August 2014 installment payments to the Defendants under the Jones Agreement, as described in the Share Purchase Agreement, the Defendants obtained Jones' execution of a promissory note, dated as of June 2, 2014 (the date of the Share Purchase Agreement), in the principal amount of $250,000 (the "Initial Investment Note"), to document his payment obligation. See Sherwood Aff., ¶ 20; see also Complaint, ¶ 18. It was during this time frame that Jones also provided the Defendants with greater visibility into, and involvement in, Aquaphex's capital raising efforts, as contemplated by the Jones Agreement and Share Purchase Agreement. Among other things, Jones regularly copied Mr. Sherwood on email communications with prospective investors, sources of additional capital and potential customers, and Jones included Mr. Sherwood on internal emailcommunications among other advisory...