Goodman v. H.I.G. Capital, LLC (In re Gulf Fleet Holdings, Inc.), CASE NO. 10-50713
| Decision Date | 01 April 2013 |
| Docket Number | ADVERSARY NO. 11-05006,CASE NO. 10-50713 |
| Parties | In re: GULF FLEET HOLDINGS, INC., ET AL, Debtors ALAN H. GOODMAN, TRUSTEE Plaintiffs-in-Intervention v. H.I.G. CAPITAL, LLC, ET AL, Defendants-in-Intervention |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Louisiana |
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ROBERT SUMMERHAYS
This is an action brought by Alan H. Goodman, the trustee of the Gulf Fleet Liquidating Trust (with respect to Mr. Goodman, the "Trustee" and with respect to the Gulf Fleet Liquidating Trust, the"Trust") against H.I.G. Capital, LLC and other defendants. The Trustee's claims arise out of H.I.G.'s leveraged buyout and subsequent management of Gulf Fleet Holdings, Inc. and its affiliates ("Gulf Fleet" or "Debtors"). H.I.G. and the other defendants filed a motion to dismiss the Trustee's complaint under Rules 12(b)(6) and 12(e) of the Federal Rules of Civil Procedure. The court took the motions under advisement and, after considering the parties' arguments, the Trustee's complaint, and the relevant authorities, the court GRANTS the defendants' motions to dismiss IN PART, and DENIES the motions IN PART as set forth herein.
Prior to bankruptcy, Gulf Fleet owned and operated a fleet of supply vessels used to support oil and gas exploration and production companies in the Gulf of Mexico and other locations. (Trustee's Complaint-in-Intervention ("Complaint") at ¶ 17). Gulf Fleet was formed in 1999 by Michael and Darlene Hillman. (Id.). H.I.G. Capital, LLC is a private investment firm with its principle place of business in Miami, Florida. (Id. at ¶ 9). H.I.G. Capital operates through various subsidiaries and affiliates, including defendants H.I.G. Gulf Fleet Acquisition, LLC, H.I.G. GP-II, H.I.G. Capital Partners IV, L.P., H.I.G. Advisors IV, L.L.C., Gulf Fleet Tiger Holdings, Inc., Gulf Fleet Tiger Acquisition, LLC, and Gulf Fleet Financing, LLC (collectively, the "H.I.G. Defendants").(Complaint at ¶¶ 10-14, 20-22). In May 2007, the Hillmans and H.I.G. entered into a leveraged buyout transaction (the "LBO"). The Hillmans sold all of their ownership interest in Gulf Fleet to H.I.G. in exchange for $23.5 million in cash and a 35% equity interest in the new Gulf Fleet entity created as a result of the buyout. (Id. at ¶ 19). As a result of the LBO, H.I.G. held a 65% controlling interest in Gulf Fleet. (Id.). According to the Trustee, H.I.G. Gulf Fleet Acquisition, LLC, ("Gulf Fleet Acquisition") was a "shell" Delaware LLC and "indirectly wholly-owned subsidiary of H.I.G. Capital" that was formed in connection with the LBO to hold the stock of Gulf Fleet Holdings. (Complaint ¶¶ 10-11). The Trustee alleges that H.I.G. Capital controlled Gulf Fleet through Gulf Fleet Acquisition and H.I.G. GP-II. (Complaint at ¶¶ 10-12). After the LBO, Gulf Fleet Holdings, Inc. had three direct subsidiaries: Gulf Fleet Offshore, LLC ("GFO"), Gulf Ocean Marine Services, LLC ("GOMS"), and Gulf Fleet Management, LLC. GOMS, in turn, was the parent company for seven subsidiaries, including Gulf Fleet, LLC, Hercules Marine, LLC, Gulf Worker, LLC, Gulf Service, LLC, Gulf Wind, LLC, Star Marine, LLC, and Gulf Fleet Marine, Inc. (all of these entities referred to collectively as "Gulf Fleet").
The LBO was funded by a loan underwritten by a syndicate of banks led by Comerica Bank. This senior loan was secured by GulfFleet's property and certain accounts receivable. The senior loan included a term loan of $42 million and a revolving credit commitment of $10 million. (Complaint at ¶ 20). The Trustee alleges that Gulf Fleet received the full $42 million term debt and drew approximately $4 million under the revolving credit commitment at the time the LBO was closed on May 1, 2007. The Trustee further alleges that Brightpoint Capital Partners Master Fund, L.P. ("Brightpoint") extended Gulf Fleet an additional $6 million subordinated loan with a maturity date of May 1, 2012. According to the Trustee, the proceeds of these loans were used to pay Gulf Fleet's pre-LBO debt and to fund the $23.5 million cash paid to the Hillmans. (Complaint at ¶ 23). The Trustee further alleges that, out of the loan proceeds, Gulf Fleet ultimately retained $500,000 cash.
The Trustee contends that, after the LBO, H.I.G. "dominated and controlled" Gulf Fleet. Specifically, H.I.G. employees - including defendants Jeff Zanarini, Jonathon Fox, and Anthony Tamer - were appointed to the board of directors of the various Gulf Fleet entities. (Complaint at ¶ 24). The Trustee contends that these H.I.G. employees prevented Michael Hillman from attending board meetings and withheld information from Mr. Hillman. (Complaint at ¶ 24). The Trustee also alleges that H.I.G. and its employees managed Gulf Fleet so as to benefit H.I.G. at the expense of Gulf Fleet, its minority shareholders, and its creditors.
The Trustee alleges that H.I.G. required Gulf Fleet to enter into a Professional Services Agreement ("PSA") and Consulting Services Agreement ("CSA"). (Complaint at ¶ 33). These agreements provided that H.I.G. would provide professional advice and assist in evaluating potential acquisitions in exchange for an annual management fee of $500,000 as well as other fees set forth in the agreements. (Id.). According to the Trustee, H.I.G. "provided no value to Gulf Fleet for these arrangements." (Id. at ¶ 34). The Trustee alleges that the agreements "were an artifice used to funnel money from Gulf Fleet to other arms of the H.I.G. enterprise." (Id.).
The Complaint also addresses the sale of Gulf Fleet's interests in the construction contract for the M/V Gulf Tiger. Gulf Fleet contracted with Thoma-Sea Shipbuilders, LLC to construct the M/V Gulf Tiger in July 2007. The cost of the contract was approximately $17.975 million, and Gulf Fleet paid $4 million as a deposit for the vessel. (Id. at ¶ 50). Gulf Fleet assigned its rights to the M/V Gulf Tiger construction contract to an H.I.G. subsidiary, GF Tiger Acquisition, in July 2008. According to the Trustee, GF Tiger Acquisition paid Gulf Fleet $8 million for the contract. (Id. at ¶ 51). After the assignment, H.I.G.'s representatives at Gulf Fleet required Gulf Fleet to continue supporting the construction of the M/V Gulf Tiger even though GulfFleet no longer had an interest in the contract. (Id. at ¶ 52). According to the Trustee, defendant Jeff Zanarini assured the Chief Financial Officer of Gulf Fleet that H.I.G. would reimburse Gulf Fleet for the expenditures, but no reimbursements were ever made. (Id.). According to the Trustee, Gulf Fleet provided over $1 million in equipment, materials, and labor in connection with the construction of the M/V Gulf Tiger solely for the benefit of GF Tiger Acquisition and H.I.G. (Id. at ¶ 53). The Trustee contends that H.I.G. refused to reimburse these expenses even after Gulf Fleet made a demand for payment. (Id. at ¶ 54).
After the LBO, Gulf Fleet entered into a factoring agreement with GF Financing (the "Factoring Agreement"), an H.I.G. subsidiary. (Id. at ¶ 58). According to the Trustee, Michael Hillman objected to this Factoring Agreement. Under the terms of the agreement, GF Financing could purchase up to $4 million in accounts receivable from Gulf Fleet. (Id. at ¶ 59). The Trustee alleges that Gulf Fleet assigned $2,897,400 in accounts receivable to GF Financing in November 2009. The Trustee further alleges that this agreement and assignment of accounts receivable violated the covenants of the senior loan with Comerica Bank, and that Comerica Bank demanded the return of the collateral when it learned of the assignment. (Id. at ¶ 61). As a result, Gulf Fleet and GF Financing restructured the Factoring Agreement to cover only"ineligible accounts" as defined in the documents governing the senior loan by Comerica. The Trustee contends that the purpose of the Factoring Agreement was to provide liquidity for Gulf Fleet without requiring H.I.G. to risk a capital contribution. (Id. at ¶ 62).
The Trustee alleges that H.I.G. undercapitalized Gulf Fleet by refusing to inject new capital into the company and its affiliates. Instead, H.I.G. attempted to fund Gulf Fleet's short-term cash needs through the Factoring Agreement and short-term promissory notes issued by H.I.G.'s affiliates. For example, in January 2010, Gulf Fleet issued two promissory notes to GF Financing for $5.5 million and approximately $2.9 million. (Id. at ¶ 63). According to the Trustee, the $2.9 million note was intended to replace Gulf Fleet's obligations under the amended Factoring Agreement for the accounts receivable that had to be returned to cure the breach of the covenants in the senior loan documents. (Id.). According to the Trustee, Gulf Fleet had no obligation to enter into the promissory note because the assignment of the accounts receivable was without recourse. (Id.). The Trustee further alleges that both promissory notes were essentially a "de facto equity contribution" disguised as a loan. (Id. at ¶ 66). In this regard, the Trustee points to the terms of the promissory notes, which gave GF Financing the right to convert the balance of the notes intostock for $10 per share at any time before maturity. (Id. at ¶ 64). The Trustee characterizes these notes as "the perfect investment vehicle" because if Gulf Fleet succeeded "the notes would become an equity contribution and H.I.G. would own nearly all of Gulf Fleet," but if Gulf Fleet failed "H.I.G. would claim the notes were debt." (Id. at ¶ 67). The Trustee also alleges that H.I.G. intended to undercapitalize Gulf Fleet and to take actions that solely benefitted H.I.G.'s interests at the expense of Gulf Fleet and its creditors. Specifically, the Trustee alleges:
• H.I.G. and its representatives on Gulf Fleet's board of directors effectively excluded Michael Hillman from key board meetings; (Complaint at ¶ 70).
• H.I.G. directed Gulf Fleet to provide false financial reports to...
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