Osherow v. Tex. Silica Logistics Joint Venture, ZSV, LLC (In re FWLL, Inc.), Case No. 15-52071-CAG
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas |
| Writing for the Court | CRAIG A. GARGOTTA UNITED STATES BANKRUPTCY JUDGE |
| Parties | In re: FWLL, Inc. Debtor. RANDOLPH N. OSHEROW, Chapter 7 Trustee Plaintiff, v. TEXAS SILICA LOGISTICS JOINT VENTURE, ZSV, LLC, POTH ANDREW MCSTAY, AND DAVID ZEHR, M.D. Defendants. |
| Docket Number | Adv. No. 16-05023,Case No. 15-52071-CAG |
| Decision Date | 05 April 2018 |
In re: FWLL, Inc. Debtor.
RANDOLPH N. OSHEROW, Chapter 7 Trustee Plaintiff,
v.
TEXAS SILICA LOGISTICS JOINT VENTURE, ZSV, LLC, POTH ANDREW MCSTAY,
AND DAVID ZEHR, M.D. Defendants.
Case No. 15-52071-CAG
Adv. No. 16-05023
UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION
April 5, 2018
IT IS HEREBY ADJUDGED and DECREED that the below described is SO ORDERED.
Chapter 7
MEMORANDUM OPINION DENYING DR. DAVID ZEHR'S MOTION FOR JUDGMENT
Came on to be considered the above-numbered adversary proceeding and, in particular, Defendant Dr. David Zehr's Motion for Judgment ("Motion") (ECF No. 130); Plaintiff Randolph N. Osherow, Chapter 7 Trustee's ("Trustee") Response in Opposition ("Response") (ECF No.
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143), and Dr. David Zehr's Reply Brief ("Reply") (ECF No.146).1 The Court took this matter under advisement on November 9, 2017. For the reasons stated herein, the Court finds that Defendant's Motion should be DENIED and Judgment GRANTED to the Plaintiff under Counts I and II of the Amended Complaint. Further, to the extent permissible under statute or contract, Trustee may file his motion for costs and attorney's fees under Fed. R. Civ. P. 54, Fed. R. Bankr. P. 7054, and Local Rule 7054.
The Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334. The parties have consented to this Court's authority to issue a final order. (ECF Nos. 12 and 13); see also Wellness Int'l Network, Ltd. v. Sharif (In re Sharif), 135 S. Ct. 1932, 1948 (2015) (finding that where the parties consent to a bankruptcy court issuing a final order confers constitutional authority on the court). This Court has jurisdiction to enter a final order with regard to matters presently under submission pursuant to 28 U.S.C. § 1334, 28 U.S.C. § 157(a) and (b), and the Standing Order of Reference of Bankruptcy Matters entered by the United States District Court for the Western District of Texas. This Memorandum Opinion constitutes the Court's written findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.
Trustee initiated this adversary proceeding by filing his Original Complaint on March 31, 2016. (ECF No. 1). Trustee's Complaint seeks recovery under 11 U.S.C. § 547 (preferential transfers), 11 U.S.C. § 548 (fraudulent transfers), and attorney's fees and costs. Trustee amended his Complaint on November 28, 2016, and added claims for relief under 11 U.S.C. § 544 (incorporating a cause of action under Tex. Bus. & Comm. Code Ann. § 24 (West 2018))2,
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additional claims under §§ 547 and 5483, and piercing the corporate veil pursuant to Tex. Bus. Orgs. Code Ann. § 21.223 (West 2018) (ECF No. 136). All Defendants timely answered.
The above-referenced adversary proceeding came before this Court for trial on September 11 and 12, 2017, and November 8 and 9, 2017. Defendant Dr. David Zehr (Zehr) filed the Motion during the trial seeking a take nothing judgment on Trustee's Counts I, II, and VIII.4 The Court deferred ruling on the Motion until conclusion of trial. After trial, the Defendants moved for a take nothing judgment under Rule 52(c) as to whether the Trustee had proved: (a) an actual and/or constructively fraudulent transfer pursuant to § 548 (Count I); (b) an actual and/or constructively fraudulent transfer pursuant to § 544 and TUFTA (Count II); and piercing ZSV LLC's ("ZSV") corporate veil to hold the LLC members, including Zher, individually liable (Count VIII). The Court allowed further briefing and responses, which have been submitted and reviewed. After trial, the Court took the matter under advisement.
A. Parties Summary Judgment Motions
Prior to this matter going to trial, both parties filed motions for summary judgment. Trustee filed his Motion for Partial Summary Judgment on Count I: Avoidance of a Fraudulent Transfer to Defendant David Zehr, M.D. Pursuant to 11 U.S.C. § 548. (ECF No. 42). Trustee requested that the Court find that FWLL, by and through its attorneys Pulman, Cappuccio, Pullen, Benson & Jones ("PCPBJ"), fraudulently transferred $2,518,394.09 to Dr. David Zehr ("Zehr"), because Zehr had no claim to the money transferred, had no claims against FWLL, and did not provide anything of value to FWLL in exchange for the transfer. Defendant Zehr filed his Response in opposition on April 17, 2017. (ECF No. 51). Zehr argued that Trustee waived his fraudulent
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transfer claim because Trustee had failed to plead constructive fraud under § 548. Further, Zehr argued that Debtor received reasonably equivalent value under the settlement between Debtor and TSL, ZSV, Zehr, Andrew McStay ("McStay") and Butch Leatherman ("Leatherman"). Also, Zehr argued that Trustee could not rely on a presumption of insolvency for purposes of proving a constructive fraudulent transfer. Defendants TSL, ZSV, and McStay filed their Response in opposition on April 17, 2017, alleging that the transfer was not voidable because the Trustee did not seek to avoid the settlement between the Debtor and TSL, ZSV, Zehr, McStay and Leatherman. (ECF No. 48). Additionally, all Defendants asserted that the settlement could not be avoided because Zehr took it in good faith and for value pursuant to § 548(c)5 and cannot be recovered under §550(a)6. Trustee filed his reply on April 24, 2017. (ECF No. 61).
The Court denied Plaintiff's Motion for Partial Summary Judgment, reading its ruling into the record on June 5, 2017.7 The Court did, however, make two determinations under § 548(a)(1)8 that apply to the Trustee's claims for relief. The Court determined
[t]he Trustee's summary judgment evidence shows the $2,518,394.09 transferred to Zehr was FWLL's property. Specifically, the $2,518,394.09 was FWLL's proceeds from the Buffalo Proppants Settlement Agreement. Further, the Trustee's summary judgment evidence shows that FWLL was the only plaintiff in the Buffalo Proppants Litigation. Thus, FWLL was the only party that settled any claims against Buffalo Proppants and/or INVX Global pursuant to the Buffalo Proppants Settlement Agreement, and under the terms of that agreement, FWLL was the only party entitled to receive payment of the $2,518,394.09. The Trustee's
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summary evidence shows that the $2,518,394.09 was placed in the IOLTA trust account of FWLL's attorneys PCPBJ, which represented FWLL and only FWLL, in connection with the Buffalo Proppants Litigation, the Buffalo Proppants Settlement Agreement, and made the transfer to Zehr by check in Zehr's name only.
* * *
FWLL filed its bankruptcy petition on August 27, 2015 ("Petition Date"), and the transfer of the $2,518,394.09 to Zehr was made on or about July 8, 2015, fifty-one (51) days (and less than two years) before the Petition Date. See 11 U.S.C. § 548(a)(1). As such, the transfer occurred within two years of the petition date.
Defendant Zehr filed his Motion for Summary Judgment arguing that Trustee cannot avoid the settlement sum because he never sought to avoid the underlying settlement; that Zehr took the settlement funds in good faith and for value under § 548(c); that Trustee cannot avoid the Settlement Sum pursuant to § 544 and TUFTA because Zehr took it in good faith and for value; and that Zehr had defenses under § 550 because he was not the initial transferee as to the settlement funds.
Trustee filed his Response in opposition to the Zehr Motion for Summary Judgment. (ECF No. 49). The Court denied Zehr's Motion for Summary Judgment and read its ruling into the record on June 5, 2017. See ECF No. 96 (transcript of the ruling). Although the Court denied Zehr's Motion for Summary Judgment, the Court held that the Trustee's summary judgment evidence shows that Zehr is the initial transferee, and therefore, he is strictly liable for the $2,518,394.09 transfer should the Court find that the transfer was fraudulent.
Trustee filed his Uncontested Facts Previously Established by the Court's June 15th Rulings and the Bankruptcy Case Record (ECF No. 113). Defendants argue that Trustee's statement of uncontested facts is incorrect. As such, the Court will restate those facts the Court found were not in dispute when the Court ruled on Trustee's Motion for Partial Summary Judgment and Zehr's Motion for Summary Judgment.
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A. The formation of FWLL and TSL.
FWLL's business was to buy, sell, transload, and store frac sand from the mine to the rig site, for drilling oil and gas wells. FWLL's primary customers were drilling companies, including Halliburton, Lewis Energy, C&J, and others. FWLL's financial problems began at its inception. FWLL opened its doors on May 5, 2014, and by June 2014, it had forty-seven (47) customers and about $45-50 million in open purchase orders, which it could not fill. FWLL's Manager and "CEO," Stan Bates ("Bates") testified that FWLL needed $48 million/month of revenue or cash-flow to fulfill those orders, so he hired Gary Cain, through Trinity Global Funding Group, Inc., ("Cain") to "generate $794 million in cash-flow." Cain was paid $30,000/month as a consultant, and worked for FWLL from September 2014 to May 22, 2015.
After Cain was hired, FWLL started looking for private investors on a bigger scale. FWLL also started seeking money from additional individual investors who—through seven joint ventures or partnerships with FWLL—invested millions of dollars. The joint ventures had no operational control over FWLL's frac sand business, nor did the joint ventures own the sand until it was sold. On or about April 29, 2014—about six days before FWLL opened it doors—FWLL and ZSV entered into a joint venture called Texas Silica Logistics Joint Venture ("TSL"), which was the first joint venture FWLL formed.
FWLL was the Manager of TSL and owned 45%, and ZSV owned 55%. ZSV is a Texas limited liability company, created to form TSL with FWLL. ZSV provided the money for TSL, and TSL used the money to purchase sand. At all relevant times, Zehr—a...
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