In re Am. Res. & Energy, LLC

• Decision Date: 15 July 2014
• Docket Number: BKY 14-30262
• Court: United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota
• Parties: In re: AMERICAN RESOURCE & ENERGY, LLC, Putative Debtor.

In re: AMERICAN RESOURCE & ENERGY, LLC, Putative Debtor.

BKY 14-30262

UNITED STATES BANKRUPTCY COURT DISTRICT OF MINNESOTA

July 15, 2014

ORDER DETERMINING ELIGIBILITY OF PETITIONERS IN INVOLUNTARY BANKRUPTCY CASE, AND DISMISSING CASE

At St. Paul, Minnesota

This case was commenced on January 24, 2014 by the filing of an involuntary petition for relief under Chapter 7. Three named parties asserted the status of petitioning creditors: Qingdao ARE Wind Power Equipment Co., Ltd. ("QD Trading"¹); Bestee Resources Holdings, Limited ("Bestee Resources"); and Charles Johnson. Joseph W. Dicker represents these parties. They will be identified collectively as "the Petitioners."²

The putative debtor, American Resource & Energy, LLC ("ARE"), is a St. Paul-based business concern. It filed an answer on February 21, 2014. It is represented by Marc M. Berg.

In its answer, ARE asserted, inter alia:

3. One or all of the Petitioners are ineligible to join in the Involuntary Petition against ARE.

4. None of the claims referenced in Attachment 1 to the Involuntary Petition have become due.

5. As a result of some or all of the claims referenced in Attachment 1 of the Involuntary Petition being subject to a bona fide dispute, Petitioners have not met the requirements of 11 U.S.C. § 303 (b)(1).³

This pleading posed a threshold issue: whether the Petitioners' claims were "not contingent as to liability or the subject of a bona fide dispute as to liability or amount," as 11 U.S.C. § 303(b)(1) requires of petitioning creditors in an involuntary case. ARE disputes whether the petition was even properly brought, by these Petitioners.

A status conference was ordered, to address the posture of the case. By the end of the conference, it was clear that the threshold issue of the Petitioners' status under § 303(b)(1) was best-addressed early, as a matter of law to be presented on cross-motions for partial summary judgment. The parties were directed to take specific steps for that presentation.

The motions came before the court for hearing on May 6, 2014. The Petitioners and ARE appeared by their counsel of record. The following order disposes of the cross-motions for summary judgment on the threshold issue. It also disposes of the petition and this case.⁴

BACKDROP

Certain foundational facts have not been contested. They go to the parties' structural and transactional relationships. Many of the structurally-oriented facts are established by uncontroverted statements in individuals' affidavits, particularly from ARE's side.

It is not contested that sharp disputes arose out of the parties' relationships and are still unresolved. Lawsuits on two such disputes were pending in the Minnesota state courts when the Petitioners commenced this case. The parties' positions on the substantive aspects of those lawsuits are set forth in the pleadings they filed there. The procedural status of the litigation is evidenced by the extant pleadings and (as to one of the lawsuits) the public record.⁵

This platform of uncontested fact is the starting point for the present analysis. The uncontested facts include the following.⁶

ARE is a business entity organized under Minnesota law.⁷ Dion Johnson is a principal in ARE. He had the status of its chief executive officer when this case was commenced. Affidavit of Dion Johnson [Dkt. No. 20], ¶¶ 1, 3.

ARE was formed to function in a newer sector of the energy industry, electricity generation from wind power.⁸ ARE's contemplated business was the design and sale of wind turbine towers, foundations, and raising systems. Id., ¶ 3. The manufacture of this equipment, however, was to be done overseas. ARE transacted with persons and entities in the People's Republic of China for the fabrication; ARE designed the product and later sold it in markets outside China. The China-based parties to these transactions included two of the Petitioners, plus individuals associated with them.

ARE obtained an early entree to the business sector in China from Huang, Xiaohua,⁹ a Chinese businessman. Id., ¶ 4. In connection with that, ARE alleges the following: Xiaohua¹⁰ proposed to form a corporation in China for use as a transactional intermediary in the chain of provision to ARE. He offered this as a means to obtain rebates of the Value Added Tax that the Chinese government would otherwise impose on products manufactured there for export. Id., ¶ 5. Toward that, an entity was organized in 2009 under the original name of ARE Qingdao Wind Tower & Engineering ("QD Engineering," to distinguish this entity from Petitioner QD Trading). Id., ¶ 6. Dion Johnson was "named as the sole investor" in QD Engineering. However, the entity's "listed total investment of $549,990.00 . . . came as an investment from" elsewhere. It is alleged to have come "from Xiaohua." Id., ¶ 7. Dion Johnson considers himself, "at all times, [to have] been thesole owner of QD Engineering." Id., ¶ 9.

Then, in 2010, QD Trading was established to be the contemplated intermediary, on the advice that QD Engineering would not qualify to receive VAT rebates. QD Trading was formed as a joint venture. Id., ¶ 10. QD Engineering was still to be involved as an entity-participant in the enterprise, by serving as the "foreign investment partner" in the newly-formed QD Trading. Id., ¶ 10. A Chinese individual, Pan, Wei-Wei, was named as the Chinese "domestic joint venture partner" and major investor in QD Trading. Id. After that, Dion Johnson considered himself to have the "capacity as a shareholder of QD Trading (through [his] ownership of QD Engineering) . . . ." Id., ¶ 13. At all times, he "understood that ARE . . . , QD Engineering, and QD Trading were operating as one entity." Id., ¶ 12.

After that, ARE was provided with wind-power equipment manufactured by third parties in China, through the QD-associated entity-structure created in China. Affidavit of Dion Johnson [Dkt. No. 20], ¶ 11. QD Engineering played some active role in these operations. Id., ¶ 12. An entity called Valmont Industries (China) Ltd. prominently featured among ARE's "significant suppliers," i.e., manufacturers. It is alleged that Huang, Xiao Yong, Xiaohua's brother, was the president and general manager of Valmont China. Affidavit of Dion Johnson [Dkt. No. 20], ¶ 5.¹¹

Between late 2010 and mid-2012, the interactions among the various business entities (American and Chinese) and these and other individuals (American and Chinese) got very complicated. Soon things got highly confrontational. The historical details are quite involved. There is at least some controversy among the participants as to whether particular events occurred as respectively alleged.

The underlying phenomenon is utterly clear, though: a struggle arose and quickly mounted, for dominance over the entire ARE-related enterprise. The subjects of dispute and the objects of this contest went across the board: the facial and actual capitalization for QD Engineering and QD Trading; the nominal structure and the contrary understandings for the operational and de jure control of both of those entities; and ultimately the ownership and control of ARE as the U.S.-sited end-node of the enterprise.¹²

This turmoil led to the commencement of two actions at law against ARE in the Minnesota State District Court for the Second Judicial District, Ramsey County. A third lawsuit was brought against Dion Johnson individually. Two of the Petitioners in this bankruptcy case are ARE's opponents in the first two lawsuits. Their actions were pending when the Petitioners filed an involuntary bankruptcy petition against their opponent in litigation.

In very broad-brush, the nature of the actions against ARE and their procedural posture as of January 24, 2014 is as follows:

1. Qingdao ARE Wind Power Equipment Co., LTD v. American Resource & Energy, LLC and Dion Johnson:

• This lawsuit was commenced by the service of a complaint dated November 11, 2013. The complaint was subscribed by Joseph W. Dicker as counsel for the named plaintiff, QD Trading. In its complaint, QD Trading sought separate awards of damages against ARE and Dion Johnson on different substantive theories. Against ARE, the theory was breach of contract (on allegations of failure to pay for invoiced shipments of goods). Against Dion Johnson, the theory was breach of fiduciary duty (on allegations that he was using ARE's revenues to preferentially payother creditors to which he had personally guaranteed payment from ARE, to the detriment of QD Trading on its unpaid invoices).

• In their answer, ARE and Dion Johnson denied that ARE was in actionable breach of any contract with QD Trading. They asserted affirmative defenses sounding in equity and law, in conclusory fashion. In a counterclaim, ARE and Dion Johnson sued QD Trading for damages under the theory of unjust enrichment. The counterclaim was based on joint allegations that QD Trading had reneged on various covenants and commitments for the ownership, control, and economic value of QD Engineering¹³ and QD Trading.¹⁴ They complained that Valmont China, as a manufacturer for ARE, had revoked a $500,000.00 line of credit previously given directly to ARE, rendering ARE "unable to operate," and had transferred the line to QD Trading. The theory for damages was that QD Trading had usurped the value of VAT rebates actually paid, despite having no defensible claim to them--because ARE and Dion Johnson had funded all of the expenses of product and business development in the ARE enterprise and QD Trading "made no contribution to product and business development."

• In another key feature of the counterclaim, ARE and Dion Johnson asserted that Xiaohua, through the instrumentality of his company QD Bestee Industrial Company and the agency of his wife Liu Yu, was wrongfully claiming that Liu Yu had become the majority shareholder-owner of ARE through the wrongful exercise of stock warrants ARE had issued in 2010. In connection with that, ARE and Dion Johnson noted that litigation...