In re Heritage Organization, L.L.C.
| Decision Date | 27 November 2006 |
| Docket Number | Adversary No. 05-3671-BJH.,Bankruptcy No. 04-35574-BJH-11. |
| Citation | 354 B.R. 407 |
| Parties | In re the HERITAGE ORGANIZATION, L.L.C., Debtor. Dennis Faulkner, Trustee, Plaintiff, v. Mikron Industries, Inc., Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
Cynthia Williams Cole, Godwin Pappas Langley Ronquillo LLP, Dallas, TX, David William Parham, Laurie Dahl Babich, Baker & McKenzie LLP, Dallas, TX, john D. Volney, Lynn Tillotson and Pinker, L.L.P., Dallas, TX, for Debtor.
Davor Rukavina, Deborah M. Perry, Lee E. Morris, Munsch, Hardt, Kopf & Harr, P.C., Dallas, TX, for Plaintiff.
Frances Anne Smith, Scott W. Everett, Haynes & Boone, LLP, Dallas, TX, for Defendant.
Before the Court are two motions for summary judgment. Plaintiff Dennis S. Faulkner, the Chapter 11 trustee of the estate of The Heritage Organization, L.L.C. ("Heritage"), has filed his motion for partial summary judgment (the "Trustee's Motion") and Defendant Mikron Industries, Inc. ("Mikron") has filed its cross-motion for summary judgment ("Mikron's Motion") (the Trustee's Motion and Mikron's Motion shall be collectively referred to as the "Motions"). The Court heard oral argument on the Motions on August 28, 2006. At the conclusion of the hearing, the Court asked both parties to file supplemental briefs addressing certain issues that arose during the hearing. The last of those briefs was filed on September 15, 2006, at which time the Court took the Motions under advisement.1
The Court has core jurisdiction over this action and the Motions in accordance with 28 U.S.C. §§. 1334 and 157(b). This Memorandum Opinion and Order contains the Court's findings of fact and conclusions of law in accordance with Bankruptcy Rule 7052.
Heritage is a Delaware limited liability company that was formed on or about December 28, 1994. Prior to Heritage's bankruptcy filing, Heritage provided various wealth, estate, and tax planning strategies to extremely high net-worth individuals for a fee.2
Mikron is a Washington corporation that manufactures vinyl window components.3 Mikron was founded by W. Ronald Sandwith ("Ron Sandwith") and, as of November 2002, was a closely-held family company.4
Ron Sandwith was a successful businessman who amassed wealth during his lifetime.5 In 2002, Ron Sandwith desired to engage in estate planning activities.6 On November 7, 2032, Ron Sandwith entered into an agreement with Heritage to obtain access to Heritage's estate planning strategies (the "Agreement").7 A true and correct copy of the Agreement is Exhibit C to the Appendix to the Trustee's Motion for Partial Summary Judgment ("Trustee's Appendix").8 On the same date, the adult children of Ron Sandwith (Jeffrey Sandwith, David Sandwith, Mark Sandwith and Susan Grader, collectively referred to herein as the "Sandwith, Children") entered into virtually identical agreements, true and correct copies of which are collectively assembled as Exhibit D to the Trustee's Appendix (the "Children's Agreements" and, together with the Agreement, are collectively referred to as the "Agreements").9
Pursuant to the Agreements, Heritage agreed to communicate certain estate planning strategies to Ron Sandwith and the Sandwith Children (the "Strategies").10 Neither Ron Sandwith nor the Sandwith Children (collectively, the "Sandwiths") had an obligation to use any of the Strategies presented.11 if the Sandwiths decided to utilize the Strategies, however, they were obligated to pay a fee to Heritage under the Agreements (the "Utilization Fee").12
Heritage communicated the Strategies to the Sandwiths.13 Under the terms of the Agreements, one-half of the Utilization Fee was due and payable within five (5) days after the Sandwiths informed Heritage that they wished to utilize the Strategies.14 In December 2002, the Sandwiths elected to utilize the Strategies.15 And, on January 15, 2333, $6 million of the Utilization Fee was paid by the Sandwiths through Mikron.16
The balance of the Utilization Fee, per the Agreements, was due and payable by no later than ten (10) days after utilization of the Strategies.17 The Sandwiths retained the law firm of Lewis, Rice & Fingersh to prepare the legal documents required to implement the Strategies and to provide a legal opinion as to the effectiveness of the Strategies.18 The implementation process commenced in December 2002.19 Accordingly, the balance of the Utilization Fee was due shortly thereafter.
The Sandwiths did not make the additional payment. Instead, in February 2003, Ron Sandwith and Mikron executed that certain Promissory Note dated as of January 2, 2003 in the principal amount of $5,386,919.00 (the "Note"). A true and correct copy of the Note is Exhibit F to the Trustee's Appendix.20 Mikron's board of directors authorized its execution of the Note.21
Ron Sandwith died on May 27, 2003.22 In accordance with its terms, the Note matured 30 days after Ron Sandwith's death. Accordingly, on June 26, 2003, the Note matured.23 Notwithstanding the Note's maturity and a demand for payment, Mikron failed to pay the Note.24
On October 6, 2005, the Trustee brought this suit against Mikron to collect the Note. On November 7, 2005, Mikron answered the Trustee's complaint, asserting numerous defenses to the collection of the Note. As of December 5, 2005, unpaid principal and interest under the Note totaled $7,979,707.30, with interest continuing to accrue at the rate of approximately $2,732.98 per day.25 Thereafter, the Motions were filed.
Rule 56 of the Federal Rules of Civil Procedure, as incorporated into Rule 7056 of the Federal Rules of Bankruptcy Procedure, controls the disposition of the Motions. Pursuant to Rule 56, "[s]ummary judgment is proper when the pleadings and evidence demonstrate that no genuine issue of material fact exists and the movant is entitled to judgment as a matter of law." DIRECTV, Inc. v. Budden, 420 F.3d 521, 529 (5th Cir.2005) (quoting Pluet v. Frasier, 355 F.3d 381, 383 (5th Cir. 2004)); see Fed.R.Civ.P. 56(c) ().
The moving party has the initial burden of showing that there is no genuine issue of material fact. Once that burden is met, then the nonmoving party must produce evidence or designate specific facts showing the existence of a genuine issue for trial. Gowesky v. Singing River Hosp. Sys., 321 F.3d 503, 507 (5th Cir.2003); Allen v. Rapides Parish Sch, Bd., 204 F.3d 619, 621 (5th Cir.2000). To defeat a summary judgment motion, the non-movant must "adduce evidence which creates a material fact issue concerning each of the essential elements of its case for which it will bear the burden of proof at trial." Abbott v. Equity Group, Inc., 2 F.3d 318, 619 (5th Cir.1993). The non-moving party must "`do more than simply show some metaphysical doubt as to the material facts." Epps v. NCNB Texas Nat'l Bank, 838 F.Supp. 296, 299 (N.D.Tex.), aff'd 7 F.3d 44 (5th Cir.1993) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)). "`[O]n summary judgment the inferences to be drawn from the underlying facts contained in (the moving party's) materials must be viewed in the light most favorable to the party opposing the motion.'" Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1973) (citing United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962)).
The Court will address Mikron's Motion first, because if it is granted, the Court will have concluded that the Note is unenforceable and that Mikron is entitled to a judgment in its favor, thereby mooting the Trustee's Motion and any further action in connection with this suit. For the reasons explained more fully below, the Court concludes: (i) the Note's "waiver of defenses" clause does not prelude the Court from considering whether the Note itself is unenforceable; (ii) Mikron has not waived its ability to assert this "defense" by its failure to plead it in its answer; (iii) to the extent the "defense" should have been pled in Mikron's answer, there is no substantial reason to deny Mikron leave to amend; (iv) there is a disputed fact question as to whether Mikron has standing to assert this "defense" as an accommodation party; and (v) the disputed fact question is not material, however, because even if Mikron has standing to assert the "defense," it fails on the merits.
In its motion, Mikron contends that the parties' contract consists of the Note that Ron Sandwith and Mikron signed, together with the five Agreements Heritage signed with Ron Sandwith and the Sandwith Children. In short, Mikron contends that the Note is legally unenforceable against it because the Note is an unenforceable attempt to amend the Agreements. For the reasons explained more fully below, the Court disagrees.
The premise of Mikron's argument is that Ron Sandwith could not amend his Agreement with Heritage without the consent of each of his four adult children, who also signed service agreements with Heritage — i.e., the Children's Agreements. According to Mikron, "Ron Sandwith, on his own, could not agree with Heritage to ignore the pending appraisal of his Mikron shares and liquidate the amount of the fee that all of the Sandwith Claimants together owed." Mikron's Corrected Mem. of Law in Supp. of ...
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