IN RE ACM-TEX., INC.

• Decision Date: 29 April 2010
• Docket Number: Bankruptcy No. 08-70200-CAG,Adversary No. 08-07012-CAG.
• Citation: 430 B.R. 371
• Parties: In re ACM-TEXAS, INC., Debtor. Texas Architectural Aggregate, Inc., Plaintiff, v. ACM-Texas, LLC and Applied Chemical Magnesias Corp., Defendants.
• Court: U.S. Bankruptcy Court — Western District of Texas

430 B.R. 371

In re ACM-TEXAS, INC., Debtor Texas Architectural Aggregate, Inc., Plaintiff, v. ACM-Texas, LLC and Applied Chemical Magnesias Corp., Defendants.

Bankruptcy No. 08-70200-CAG, Adversary No. 08-07012-CAG.

United States Bankruptcy Court, W.D. Texas, Midland Division.

April 29, 2010.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

ACM-Texas, Inc., pro se.

MEMORANDUM OPINION

CRAIG A. GARGOTTA, Bankruptcy Judge.

On June 29 through July 2, 2009, came on for trial the above-styled and numbered adversary proceeding.¹ After the trial the Court took the matter under advisement. After review of the evidence and arguments, the Court now issues this Memorandum Opinion, as its written findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052, in support of its Judgment entered contemporaneously herewith.

This proceeding includes both core and related claims. This Court has jurisdiction to enter a final order with regard to all matters presently under submission in light of the parties' consent and pursuant to 28 U.S.C. § 1334(a), (b) and (d), 28 U.S.C. § 157(a) and (b), 28 U.S.C. § 151 and the Standing Order of Reference of Bankruptcy Matters entered by the United States District Court for the Western District of Texas. See Amended Notice of Removal (docket entry #8) and Defendants' Statement Regarding Core Proceedings Following Removal (docket entry #12).

I. PRE-PETITION HISTORICAL BACKGROUND

The Plaintiff, Texas Architectural Aggregate, Inc. ("TAA") began doing business in 1959, mining for building materials such as limestone in Llano, San Saba and Comanche Counties, Texas. Its primary business is mining and crushing limestone that has metamorphosed into hard limestone or marble. It markets the material as terrazzo, which is used in mosaic flooring, especially in public buildings. The company also mines quartz for use as exposed aggregate exterior wall panels on buildings. Joe Royce Williams, Sr. was the founder and, until his death in 2005, the president and chairman of the board of the company. (Pl.'s Exh. 194, p. TAA-013082.)

In 1963 or 1964, TAA bought the property near the city of Van Horn in Culberson County that is the subject of this suit. (Pl.'s Exh. 194, p. TAA 013085.) TAA originally bought 40 acres in fee simple. In 1982, it was discovered that, because of a surveying error, TAA was actually mining on the State of Texas' land to the east of TAA's 40 acres. (D. Williams Test. 6/29.) After the discovery, TAA and the Texas General Land Office ("GLO") reached a resolution of the problem and the State leased the mineral rights on its property to TAA. That lease, which is not in evidence, prohibited subleasing or partial assignments. TAA later acquired a lease to the mineral rights on 175 acres to the east of its 40 acres from the State of Texas. The mineral rights lease, together with the 40 acres TAA owned in fee and the 180 acres it held under mining patents are hereinafter referred to as "Marble Canyon" or the "Property."

TAA built and operated a coal mine on the Property, thirty to sixty feet below the surface. The coal had a significant amount of ash in it, which TAA sold to Kaiser Cement. TAA also built a plant to remove the sulfur and ash to make limestone.

When Marble Canyon was bought, both the seller and TAA believed it contained a deposit of just white marble. (D. Williams Test. 6/29.) TAA intended to, and did, use that marble in its own business. (Pl.'s Exh. 194, p. TAA 013085; Pl.'s Exh. 194, p. TAA-013086.) In 1964, however, it was determined that the mineral deposit was in fact brucitic marble. (D. Williams Test. 6/29.) Reserves were later estimated at more than 10 million tons of ore. (Pl.'s Exh. 12.)

TAA became interested in developing the brucitic marble deposit for the production of magnesium oxide/magnesium hydroxide as early as 1969. (D. Williams Test. 6/29; Pl.'s Exh. 194, p. TAA-013087.)

Robert C. McCreless ("McCreless"), principal of both of the defendants in this suit, approached TAA and proposed that he and TAA come to an arrangement that took advantage of the chemical component of the brucitic marble at the Property. (Pl.'s Exh. 194, p. TAA-013025.)

McCreless' connection with TAA was his father, Robert H. McCreless ("RHM"). RHM had been elected as an alternate director on TAA's board in February of 1976 and four years later he was elected as a regular director. (Pl.'s Exh. 194, pp. TAA-013092, 013094.) In September 1986, McCreless drove RHM and two other directors from Fort Worth, Texas to an emergency board meeting in San Saba, Texas.² With permission from the officers of the board, Robert McCreless attended the meeting. After the meeting, McCreless introduced himself to Joe Williams, Sr. and offered to do some market research on brucite for TAA. Joe Williams, Sr., accepted the offer.

The first business entity through which McCreless tried to work with the deposit at Marble Canyon was W & M Mining Interest, Inc. ("W & M"), which was incorporated in the 1980s. W & M entered into letter agreements with TAA, and the board unanimously wanted W & M to pursue a market for the chemical aspect of brucite. To that end, W & M received leases, subleases, and partial assignments from TAA. McCreless pursued W & M for some years.

In 1988, however, the arrangement under the agreement fell apart. The GLO reviewed the 175-acre partial assignment, with respect to the 175 acres TAA leased from the state, and determined that that TAA could not convey a partial lease assignment to W & M. Efforts were made to draft around the dilemma. (Pl.'s Exh. 194, pp. TAA 013074-75 (describing David Williams' meeting with W & M and its attorneys "for the purpose of attempting to gain a clearer understanding of TAA's contractual requirement for conveyance of mineral interests in view of the GLO's demand to review any assignment, including any re-assignment to TAA by W & M" and describing discussions regarding TAA giving W & M an "operating contract on the state lease with option to obtain assignment if production were obtained.")) Ultimately, however, the 1987 agreement between TAA and W & M was abandoned, but not until 1996. (Pl.'s Exh. 194, p. TAA 013079 (showing the board resolving that "the option of W & M Mining Interests, Inc. with the corporation has terminated and is hereby declared to be null and void and that an affidavit to that effect should be placed of record in Culberson County, Texas."))

After the failure of W & M, McCreless continued to develop market applications for brucitic marble. He also began to sell crushed and milled brucitic marble powder to the carpet industry as a fire retardant and filler. For these sales, McCreless purchased the materials from TAA. He also had TAA crush the materials.

At some point, McCreless began looking at acid neutralization in wastewater treatment because the carpet industry needed fewer mineral fillers as fire retardants, due to the Environmental Protection Agency's ("EPA") changing regulations.³ In late 1997 or early 1998, the Sanitation Districts of Los Angeles County told McCreless they were interested in a second source of magnesium product for their sewer system. This conversation spurred McCreless to form Applied Chemical Magnesias Corporation ("ACM") in July 1998 as an S-corporation in Colorado.

In 1998, McCreless flew to Texas and told David Williams that he would be getting significant, long-term contracts in the wastewater industry. The two men discussed structuring another agreement, this time between TAA and the newly-formed ACM. Phone calls, emails, and other negotiations between McCreless and TAA, primarily through David Williams, culminated in an April 2, 1999 letter agreement ("Letter Agreement"). (Pl.'s Exh. 120.)

The Letter Agreement provides that it is an agreement "for the granting of an exclusive mineral lease to ACM of brucite/calcite/dolomite ("brucitic marble") and the construction of a brucitic marble separation/milling facility at or near the entrance to the referenced Marble Canyon mine owned and operated by TAA on lands ("Subject Lands") described in Exhibit A..." (Pl.'s Exh. 120 at 1.) The agreement grants ACM a period of six months to conduct a feasibility study to determine whether "the construction of a facility to beneficiate the brucitic marble which would produce a high-purity magnesium hydroxide power for a variety of markets."

After the completion of the feasibility study, the Letter Agreement provides that ACM could elect to give TAA written notice of its intent to "begin construction of a separation/milling facility capable of producing 30,000 tons per year of high-purity Mg(OH)2 powder on the Subject Lands." Once ACM elected to begin building the facility and paid TAA $5,000, the agreement states that "TAA shall cause recordable leases of mineral and surface rights in the Subject Lands, appropriate to the project contemplated herein, to be delivered to ACM." (Pl.'s Exh. 120 at 1-2.) Once the leases were obtained, ACM would have six months to construct the facility. (Pl.'s Exh. 120 at 2.)

To incentivize production, the Letter Agreement requires ACM to pay TAA $200,000 annually "in advance as royalty beginning twelve (12) months from the date of delivery of its notice to construct a separation/milling facility...." The advance would then be credited to any royalties due to TAA during the following twelve month period. The Letter Agreement also requires ACM to pay royalties "in an amount equal to ten percent (10%) of the gross revenues (excluding sales, use, or excise taxes) paid to ACM for all of the products sold by it from the Marble Canyon properties." (Pl.'s Exh. 120 at 3.)

...