MLN Co. v. Clear the Air, LLC (In re Clear the Air, LLC)

• Decision Date: 22 June 2021
• Docket Number: ADVERSARY NO. 19-3508,CASE NO: 19-32939
• Parties: IN RE: CLEAR THE AIR, LLC, Debtor. MLN Company, Plaintiff, v. Clear the Air, LLC and CTA HVAC, LLC and Dawn Stom, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Texas

631 B.R. 286

IN RE: CLEAR THE AIR, LLC, Debtor.

MLN Company, Plaintiff,

v.Clear the Air, LLC and CTA HVAC, LLC and Dawn Stom, Defendants.

CASE NO: 19-32939

ADVERSARY NO. 19-3508

United States Bankruptcy Court, S.D. Texas, Houston Division.

Signed June 22, 2021

John Akard, Jr., Coplen & Banks, PC, Cypress, TX, for Defendant CTA HVAC, LLC.

Gary F. Cerasuolo, Smith Cerasuolo LLP, Houston, TX, for Defendant Clear the Air, LLC.

Patrick Andrew Kelly, Lisa M. Norman, Andrews Myers PC, Houston, TX, for Plaintiff.

MEMORANDUM OPINION

Eduardo Rodriguez, United States Bankruptcy Judge

Defendants Clear The Air, LLC, CTA HVAC, LLC, and Dawn Stom seek summary judgment against MLN Company on two grounds: (1) MLN Company's fraudulent transfer claims belong exclusively to Clear The Air, LLC's bankruptcy estate and thus only Clear The Air, LLC can prosecute such derivative claims; and (2) MLN Company's trust fund violation claim should be delt with in the claims allowance process. On June 3, 2021, the Court held a hearing and for the reasons stated herein, Defendants' motion for summary judgment is denied.

I. Procedural History

1. On May 29, 2019, Clear The Air, LLC ("Debtor " or "Clear The Air "). filed a chapter 11 petition.¹

2. On May 29, 2019, Clear The Air, CTA HVAC, LLC ("CTA "), and Dawn Stom, ("Ms. Stom ") (collectively "Defendants ") removed to this Court the following cause of action: MLN Company vs. Clear the Air, LLC, CTA HVAC, LLC and Dawn Stom , Cause No. 2019-32227 in the 127th Judicial District Court of Harris County, Texas ("State Court Action ").²

3. On September 29, 2019, Debtor filed a chapter 11 plan ("Plan ") that includes an agreement whereby CTA proposes to fund the Plan, paying Debtor's creditors at least $72,000.³

4. On October 13, 2019, MLN Company ("MLN " or "Plaintiff ") filed its first amended complaint.⁴

5. On October 19, 2019, MLN filed its general unsecured proof of claim in the amount of $60,775.69.⁵

6. On December 2, 2019, Defendants filed a motion to dismiss the instant adversary proceeding based, inter alia, on standing. That motion was heard and denied on February 11, 2020 but required Plaintiff to amend its complaint no later than February 25, 2020.⁶

7. On February 25, 2020, in its second amended complaint ("Second Amended Complaint "),⁷ Plaintiff asserted the following causes of action, to wit:

a. Cause I – Actual Fraudulent Transfer under § 548(a)(1)(A) as to all Defendants;

b. Cause II – Constructive Fraudulent Transfer under § 548(a)(1)(B) as to all Defendants;

c. Cause III – Violation of the Texas Uniform Fraudulent Transfer Act as to all Defendants;

d. Cause IV – Conspiracy as to all Defendants;

e. Cause V – Piercing the Corporate Veil as to CTA only; f. Cause VI – Trust Fund Violation as to Clear The Air only.

8. On March 27, 2020, Defendants filed their respective answers to the Second Amended Complaint.⁸

9. On May 28, 2020, the Court issued its Scheduling Order.⁹

10. On July 1, 2020, Clear The Air filed its Notice of Consent to the entry of final orders on all non-core matters by this Court.¹⁰

11. On July 10, 2020, CTA and Stom filed their Notices of Consent to the entry of final orders on all non-core matters by this Court.¹¹

12. On July 14, 2020, MLN filed its Notice of Consent to the entry of final orders on all non-core matters by this Court.¹²

13. On January 15, 2021, Defendants timely filed their Motion for Summary Judgment ("Motion ").¹³

14. On February 15, 2021, Plaintiff timely filed its response to the Motion ("Response ").¹⁴

15. On June 3, 2021, the Court held a hearing ("Hearing ").

II. Jurisdiction & Venue

This Court holds jurisdiction pursuant to 28 U.S.C. § 1334 and now exercises its jurisdiction in accordance with Southern District of Texas General Order 2012–6.¹⁵ While bankruptcy judges can issue final orders and judgments for core proceedings, absent consent, they can only issue reports and recommendations for non-core proceedings.¹⁶ Here, all parties have filed their notices of consent to the entry of final orders by this Court. Nevertheless, this Court may issue interlocutory orders, even in proceedings in which the Court does not have authority to issue a final judgment.¹⁷ The Court's order does not end the action as to any of the claims or parties, and is thus interlocutory. Finally, venue is governed by 28 U.S.C. §§ 1408, 1409. Venue is proper because the Court is currently presiding over Clear The Air's bankruptcy.¹⁸

III. Summary Judgment Standard

Federal Rule of Civil Procedure 56 permits a party to move for summary judgment, "identifying each claim or defense—or the part of each claim or defense—on which summary judgment is sought."¹⁹ Federal Rule of Bankruptcy Procedure 7056 incorporates Rule 56 in adversary proceedings. Rule 56 states that the Court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."²⁰ Defendants who do not, at trial, bear the ultimate burden of proof on the issues raised in their Motion may satisfy their burden of showing their entitlement to summary judgment by pointing out to the Court the absence of evidence sufficient to sustain Plaintiff's evidentiary burden as to a required element of Plaintiff's claims.²¹ This does not require Defendants to negate the elements of the Plaintiff's case—demonstrating the absence of evidence suffices.²² Defendants, therefore, are entitled to summary judgment if they show "that there is no genuine dispute as to any material fact and [Defendants are] entitled to judgment as a matter of law."²³ A material fact is one "that might affect the outcome of the suit under the governing law."²⁴ A factual dispute is genuine if the evidence is such that a reasonable jury could return a verdict for Plaintiff.²⁵

In determining whether summary judgment is appropriate, a court is not to weigh evidence, assess its probative value, or resolve factual disputes,²⁶ but the facts must be reviewed with all "justifiable inferences" drawn in Plaintiff's favor.²⁷ Nevertheless, factual controversies will be resolved in Plaintiff's favor "only when there is an actual controversy—that is, when both parties have submitted evidence of contradictory facts."²⁸ If, however, the record could not lead a rational trier of fact to find for Plaintiff, summary judgment is appropriate.²⁹ While the Court may consider other materials in the record, it need only consider those actually cited.³⁰ Where the facts are undisputed and only questions of law exist, a court must apply the appropriate law to the facts to determine whether the movant is entitled to judgment as a matter of law.³¹

Plaintiff bears the burden of proof on its claims at trial. Accordingly, Defendants must show the absence of a genuine issue of disputed fact that entitles them to judgment as a matter of law.³² If Defendants fail to meet this burden, the summary-judgment motion must be denied.³³ If successful, the burden shifts to Plaintiff to "identify specific evidence in the summary judgment record demonstrating that there is a genuine dispute as to a material fact concerning the essential elements of its case for which it will bear the burden of proof at trial,"³⁴ and articulate precisely how that evidence supports Plaintiff's claim, to defeat summary judgment.³⁵ The burden to show that there is a genuine dispute of material fact is on the party who seeks to avoid summary judgment.³⁶ Therefore, if Plaintiff fails to meet this burden, summary judgment in Defendants' favor is appropriate.³⁷

IV. Analysis

Defendants, in their Motion, assert that: (i) Plaintiff lacks standing to prosecute Causes I–V against Defendants because they are derivative claims which belong to Debtor; (ii) CTA assumed obligations well in excess of assets received, resulting in the failure of Plaintiff's fraudulent transfer claims Causes I–III; and (iii) Cause VI is moot because Plaintiff has already asserted a trust fund violation in its proof of claim filed in Debtor's main bankruptcy case.³⁸ The Court will address each in turn.

A. Undisputed Facts

The undisputed facts are as follows:

1. MLN Company is a Texas-based mechanical contractor. MLN Company provided labor and materials to Clear The Air pursuant to written agreements entered into on November 28, 2016, and February 2, 2017, and in connection with the construction of the Jackson Electric Cooperative project located at Highway 35 & Showboat Road, Bay City, Texas 77414 ("Project "). Clear The Air had a contract with Paric Corporation ("Paric ") for the Project.³⁹

2. In 2018, Clear The Air encountered significant financial challenges that largely stemmed from expanding too quickly, purchasing another air conditioning business that was of little value, and suffering from commercial customers slow paying or refusing to pay for work and equipment provided. As a result, it explored various reorganization approaches. In connection with exploring those options, it sought and obtained a valuation opinion from Calvin Martin, CPA ("Martin ").⁴⁰ Martin determined that the value of Clear the Air as of April 2018 was $20,400. As stated in his expert report:

After reviewing all requested information and documents and applying the appropriate valuation analysis, it became readily apparent that commonly accepted valuation methodologies would result in a zero value for Clear The Air, LLC. Given the fact that the company could not be considered a "going concern", the most suitable method was to express a value after liquidation. If all tangible assets of the company were liquidated and used to pay secured and non-secured creditors, the only remaining value would likely be the customer base names and contact information. After discussion with the client as to their recommendation of the value of the customers names and contact information, I determined the value as stated in our valuation report.⁴¹

3. Confronted with the choice of simply closing its doors or the

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