Mantle v. N. Star Energy & Constr. LLC

• Citation: 437 P.3d 758
• Decision Date: 12 March 2019
• Docket Number: S-18-0101,S-18-0103,S-18-0102
• Parties: Alexander Reed MANTLE and Marjorie M. Mantle, Appellants (Plaintiffs), v. NORTH STAR ENERGY & CONSTRUCTION LLC ; Gary W. Garland; Raymond W. Garland; Matt R. Garland; Three Way, Inc.; Hot Iron, Inc.; MGM Enterprises, Inc.; GT Investments, Inc.; and WyoDak Energy Services, LLC, Appellees (Defendants). Raymond W. Garland and Three Way, Inc., Appellants (Defendants), v. Alexander Reed Mantle and Marjorie M. Mantle, Appellees (Plaintiffs). Gary W. Garland, Appellant (Defendant), v. Alexander Reed Mantle and Marjorie M. Mantle, Appellees (Plaintiffs).
• Court: United States State Supreme Court of Wyoming

437 P.3d 758

Alexander Reed MANTLE and Marjorie M. Mantle, Appellants (Plaintiffs),

v.NORTH STAR ENERGY & CONSTRUCTION LLC ; Gary W. Garland; Raymond W. Garland; Matt R. Garland; Three Way, Inc.; Hot Iron, Inc.; MGM Enterprises, Inc.; GT Investments, Inc.; and WyoDak Energy Services, LLC, Appellees (Defendants).

Raymond W. Garland and Three Way, Inc., Appellants (Defendants),

v.Alexander Reed Mantle and Marjorie M. Mantle, Appellees (Plaintiffs).

Gary W. Garland, Appellant (Defendant),

v.Alexander Reed Mantle and Marjorie M. Mantle, Appellees (Plaintiffs).

S-18-0101

S-18-0102

S-18-0103

Supreme Court of Wyoming.

March 12, 2019

Representing Alexander Reed Mantle and Marjorie M. Mantle: Stephen R. Winship, Winship & Winship, PC, Casper, Wyoming. Argument by Mr. Winship.

Representing Gary W. Garland, Hot Iron, Inc., and GT Investments, Inc.: Kim D. Cannon & Codie D. Henderson, Davis & Cannon, LLP, Sheridan, Wyoming. Argument by Mr. Cannon.

Representing WyoDak Energy Services, LLC: Greg L. Goddard, Goddard and Vogel, P.C., Buffalo, Wyoming. Argument by Mr. Goddard.

Representing Raymond W. Garland, Matt R. Garland, Three Way, Inc., and MGM Enterprises, Inc.: Judith A. W. Studer, Schwartz, Bon, Walker & Studer, LLC, Casper, Wyoming. Argument by Ms. Studer.

Representing North Star Energy & Construction LLC: No Appearance.

Before DAVIS, C.J., and FOX, KAUTZ, BOOMGAARDEN, and GRAY, JJ.

FOX, Justice.

[¶1] This case arose when the parties entered into an ill-conceived business conveyance plan during a downturn in the oil market. The three Garland brothers, Ray, Gary, and Matt,¹ each had separate entities which provided specialized services directly to, or related to, the oil industry in Northeast Wyoming and North Dakota. Upon the advice of their accountant, Karl Killmer, the Garlands formed a new entity in 2011, North Star Energy & Construction, LLC (North Star), with the Garlands’ companies as members and the Garlands individually as managers. Alex Mantle, who had previously worked for Ray’s company and was Mr. Killmer’s friend, was named President of North Star. North Star made a profit at first but struggled with cash flow and took out substantial loans.

[¶2] In 2014, Mr. Killmer and Mr. Mantle proposed to buy North Star. In conjunction with obtaining the necessary financing, Mr. Killmer, Mr. Mantle, and the Garlands entered into a Memorandum of Understanding (MOU). Among other things, the MOU provided that Mr. Mantle and his wife, Marjorie Mantle, would personally guarantee payment of $6,110,000, part of the purchase price. As part of the buyout, North Star obtained a $3-million loan from First Northern Bank (FNB), secured by securities held by Mr. Mantle, Mrs. Mantle, and their trusts.

[¶3] Later in 2014, after the price of oil had dropped further, and after North Star had suffered significant losses as a result of some poor business practices, Mr. Mantle backed out of the deal. The Garlands took over management of North Star to complete pending jobs, auction equipment, and, by the spring of 2015, liquidate the company. While the wheels were falling off, the Mantles negotiated a new $3-million loan from FNB, and acquired the original North Star loan, stepping into FNB’s shoes with regard to its loan to North Star. The scenario gave rise to an assortment of claims and counterclaims, some of which the district court disposed of on summary judgment, with the remainder resolved after a bench trial.

ISSUES

[¶4] The parties raise numerous procedural and substantive issues on appeal, which we rephrase:

1. Did the Garlands and their associated entities abandon their counterclaims when they did not refile them after the amended complaint?

2. Was the Memorandum of Understanding an enforceable contract?

3. Did the district court err when it concluded that the Garlands’ negligent misrepresentation claim against Mr. Mantle would entitle them to no additional damages?

4. Did the district court err when it found no disputed issues of material fact to support Mantles’ claim of actual fraud?

5. Did the district court correctly decide that certain North Star conveyances were fraudulent?

6. Are the Garlands entitled to equitable affirmative defenses?

7. Did the district court correctly conclude that the elements necessary for LLC veil-piercing were absent?

8. Did North Star’s members have a fiduciary duty to its creditors?

9. Did the Garlands owe the Mantles a duty of good faith?

10. Should the Garlands’ breach of fiduciary duty claim have been brought as a derivative action?

11. Did the district court abuse its discretion when it denied Mantles’ attorney fees?

FACTS²

[¶5] The Garland brothers, Gary, Ray, and Matt, were born and raised in Buffalo, Wyoming. In 1990, Gary formed Hot Iron, Inc., a company that specializes in "underground work, water and sewer, street rehabs." Ray Garland formed a separate entity, Three Way, Inc., which specialized in reclamation work for highways and pipelines. Matt Garland’s company, MGM, Inc., specialized in trucking, heavy hauling, laying gravel, and building construction. Each of these businesses was operated independently until 2011, when North Star Energy & Construction, LLC was formed.

[¶6] Karl Killmer, a Casper CPA, started doing the accounting for Matt in 2004; for Gary and Hot Iron in 2006; and for Ray and Three Way in 2008. Beginning in 2000, Alex Mantle was employed by Three Way. Over time, Mr. Killmer and Mr. Mantle developed a close friendship. In the summer of 2010, the two began to discuss the formation of a company called North Star. When it became operational November 1, 2011, Mr. Mantle was appointed its President; he remained President until December 2014.

[¶7] North Star offered pipeline construction, roustabout, trucking, material hauling, road building, and underground utility services. Its members were Hot Iron, Three Way, and MGM. Ray and Gary were the initial managers, with Matt added as manager on December 31, 2011. Mr. Killmer was North Star’s accountant. He calculated each member’s capital contribution and determined each member’s equity in North Star: 50% owned by Three Way, 30% by Hot Iron, and 20% by MGM. Mr. Killmer testified North Star had an initial capitalization of $11 million, and he did not consider this to be undercapitalized.

[¶8] North Star did not immediately generate money. However, North Star’s operations in 2012 and 2013 were profitable, with a net income of $2,063,086 and $1,082,017, respectively. North Star had more than 300 employees during its three years of operations. Up until early 2014, Mr. Killmer prepared monthly financial statements based on the numbers Mr. Mantle supplied, which were provided to the members and reviewed at the company’s regular monthly meetings.

[¶9] The North Star Operating Agreement expressly allowed members and managers to make loans to North Star if revenues were insufficient to pay the company’s operating expenses. It also stated that loans would be "repayable by the Company to such Member ... at such date or dates as the Managers shall determine in his discretion[.]" Mr. Mantle and North Star’s managers and members provided occasional short-term loans, and North Star obtained a line of credit from American National Bank (ANB). ANB dealt primarily with Mr. Mantle in its transactions with North Star. ANB and North Star entered into a Commercial Loan Agreement, signed by Mr. Mantle as North Star’s managing member, on December 24, 2012. The loan agreement contained several covenants that would become significant: North Star would maintain a Debt/Worth Ratio not to exceed 1.25/1; any ownership changes must be pre-approved by ANB; and no additional debt could be incurred without prior approval by ANB. The 2013 amended agreement contained the same covenants and was also signed and initialed on each page by Alex Mantle.

[¶10] In January 2014, Mr. Mantle requested greater control of North Star, pronouncing, "the days of the ‘round table’ are over and we will move forward with the ‘oblong table’ that has a President at the head." He also wanted "to know that I don’t have to seek approval for decisions before I make them." He promised to make $5,000,000 in profit on $77,000,000 of gross revenue in 2014. The Garland brothers agreed to Mr. Mantle’s offer "to step back and let him run the company."

[¶11] North Star operations were "catastrophically unprofitable in 2014." The company began to feel the financial effects of the "Middle Loop" job, a large pipeline installation job for a CO₂ recovery project that North Star had significantly underbid. In the last half of 2014, the price of oil declined more than 50%. Mr. Mantle testified that "North Star’s future was based on the price of oil[.]" The Garlands received no North Star balance sheets or profit and loss statements after the first quarter of 2014 until late November 2014. Mr. Killmer testified that was "because I wasn’t completing it."

[¶12] In May or June 2014, Mr. Mantle and Mr. Killmer proposed a buyout to the member entities of North Star. Mr. Mantle testified that he only became interested in acquiring North Star because he "believed in Karl Killmer’s fairy tale, drank too much of his Kool-Aid." He explained that Mr. Killmer took the lead in proposing the plan, and in the buyout discussions with the Garland brothers. While those discussions continued, Mr. Mantle loaned North Star a total of $1.2 million in several payments between May 1, 2014, and September 2, 2014, even though his authority to incur indebtedness on behalf of North Star was limited to $100,000. In initial discussions, Mr. Mantle and Mr. Killmer proposed to pay $6.9 million for the members’ equity and $7-million "blue sky,"³ with the first secured and the second unsecured, and a $3-million down payment.

[¶13] Mr. Mantle and Mr. Killmer applied for a $3-million loan from First Northern Bank (FNB), which would be secured by securities held by Mr. Mantle and Mrs. Mantle. Gary believed that the FNB loan would be made to Mr. Mantle and Mr. Killmer....