S-Tek 1, LLC v. Surv-Tek, Inc. (In re S-Tek 1, LLC)

• Decision Date: 13 June 2022
• Docket Number: Adv. Proc. 20-01074-j,20-12241-j11
• Parties: In re: S-Tek 1, LLC, Debtor. v. SURV-TEK, INC. et al., Defendants and Counterclaimants, S-Tek 1, LLC Plaintiff and Counter-Defendant, and SURV-TEK, INC. et al., Third Party Plaintiffs, v. CHRISTOPHER CASTILLO et al., Third Party Defendants.
• Court: U.S. Bankruptcy Court — District of New Mexico

In re: S-Tek 1, LLC, Debtor.

S-Tek 1, LLC Plaintiff and Counter-Defendant,
v.
SURV-TEK, INC. et al., Defendants and Counterclaimants,

and

SURV-TEK, INC. et al., Third Party Plaintiffs,
v.
CHRISTOPHER CASTILLO et al., Third Party Defendants.

No. 20-12241-j11

Adv. Proc. No. 20-01074-j

United States Bankruptcy Court, D. New Mexico

June 13, 2022

Nephi Hardman Attorney for S-Tek Parties Nephi D. Hardman Attorney at Law, LLC

Christopher M Gatton Attorney for Surv-Tek Parties Giddens & Gatton Law, P.C.

MEMORANDUM OPINION REGARDING ADVERSARY PROCEEDING AND DEBTOR'S MOTION TO SUBORDINATE PURSUANT TO § 510(c)^[1]

ROBERT H. JACOBVITZ UNITED STATES BANKRUPTCY JUDGE

THIS MATTER is before the Court on all claims, counterclaims, and third-party claims in adversary proceeding number 20-01074-j (the "Adversary Proceeding") and on the Motion to Subordinate Claims of Surv-Tek, Inc. Pursuant to 11 U.S.C. § 510(c) (the "Motion to Subordinate" - Doc. 258)^[2] filed by debtor S-Tek 1, LLC ("S-Tek"). Objection to proofs of claim filed by Surv-Tek LLC ("Surv-Tek") and STIF LLC ("STIF") are at issue in the Adversary Proceeding, so

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matters before the Court include the claims objections. On one side of the disputes are the "S-Tek Parties," consisting of S-Tek, its principals Randy Asselin and Christopher Castillo, and Mr. Castillo's wife, Kymberlee Castillo. On the other side of the disputes are the "Surv-Tek Parties," consisting of Surv-Tek, Inc., STIF, and the principals of Surv-Tek and STIF, Russ P. Hugg and Robbie T. Hugg. The Court held a combined trial and final hearing in the Adversary Proceeding and on the Motion to Subordinate on January 25 through February 7, 2022.

After consideration of the relevant filings, the evidence, and applicable law, the Court will (a) deny all of the S-Tek Parties' claims; (b) deny the Motion to Subordinate; (c) allow Surv-Tek's claim against the bankruptcy estate in the amount of (i) $1, 552, 454.77 (which is the principal balance owing under the Note (defined below) as of the bankruptcy petition date with interest accruing at the non-default rate, (ii) plus attorneys' fees in an amount to be determined, and (iii) $14, 000.00 of unpaid State Court ordered sanctions; (d) disallow STIF's claim as an secured claim but allow the claim as an unsecured claim in the amount of unpaid prepetition rent specified on the face of STIF's proof of claim in the amount of $82, 998.30, subject to a $5, 800 security deposit setoff, (e) find liability on certain of the Surv-Tek Parties' other claims but award no damages on those claims, and (f) deny other of the Surv-Tek Parties' claims. The Court will award no punitive damages. The Court will issue a separate opinion and order addressing the claims of Surv-Tek and/or STIF against Mr. Asselin and Mr. and Mrs. Castillo as guarantors.^[3]

INTRODUCTION

In December 2018, Robbie Hugg and Russ Hugg (together, sometimes the "Huggs") sold

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their surveying business to S-Tek, and entity formed by Randy Asselin and Christopher Castillo to purchase the business. All the parties had a stake in the success of the business after the sale. The sale was seller-financed by the Huggs, and the parties contemplated a training period during which the Huggs would train Mr. Asselin and Mr. Castillo to manage the business and facilitate a smooth transition of the business to S-Tek. When Mr. Asselin and Mr. Castillo took over operation of what had been Surv-Tek's business, they quickly concluded that what they purchased was quite different from what they expected. Mr. Asselin and Mr. Castillo believe that the Huggs perpetrated a fraud that infected the entire sale and is the reason S-Tek has not been financially successful. The Huggs, on the other hand, believe they are the victims of fraud and that Mr. Asselin and Mr. Castillo are not competent to manage the business.

The Court's decision goes into great detail about what went wrong. The Court ultimately finds that neither the S-Tek Parties nor the Surv-Tek Parties perpetrated fraud but finds S-Tek liable under contracts it signed. The Court's award of damages is limited by the nature of the evidence and the proofs of claim that Surv-Tek and STIF filed.

PROCEDURAL HISTORY

I.State Court Action

S-Tek filed the complaint (AP Doc. 13-2) that initiated this lawsuit in state court on July 9, 2019, as S-Tek 1, LLC v. Surv-Tek, Inc., Case No. D-202-CV-2019-05359, in the Second Judicial District Court for the State of New Mexico (the "State Court Action").

On May 1, 2020, S-Tek filed its first amended complaint (the "Amended Complaint" -AP Doc. 13-15), which added STIF, LLC; Russ Hugg; Robbie Hugg; and Dennis Smigiel as defendants to the litigation. The Amended Complaint asserted claims for fraud (Count I), negligent misrepresentation (Count II), material breach of contract (Count III), breach of contract

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(Count IV), breach of the covenant of good faith and fair dealing (Count V), equitable recovery under the principles of restitution and unjust enrichment (Count VI), recission (Count VII), violation of the Uniform Commercial Code ("UCC") (Count VIII), and violation of the New Mexico Unfair Trade Practices Act (Count IX).

On May 5, 2020, Surv-Tek and STIF filed counterclaims against S-Tek and third-party claims against Mr. Asselin, Mr. Castillo, and Kymberlee Castillo (AP Doc. 31-1). The claims were for breach of promissory note and security agreement (Count I), breach of lease (Count II), breach of commercial and personal guarantees (Count III), post-judgment write of replevin (Count IV), breach of non-compete agreement (Count V), declaratory relief (Count VI), conversion (Count VII), injunctive relief (Count VIII), and appointment of receiver (Count IX).

On June 8, 2020, Mr. Asselin and Mr. Castillo filed third-party counterclaims against Surv-Tek and STIF for fraud (Count I) and violation of the Unfair Practices Act (Count II).

On November 11, 2020, S-Tek and Mr. Smigiel executed a settlement agreement (the "Settlement Agreement"), under which S-Tek released Mr. Smigiel from all liability and agreed to dismiss all claims against Mr. Smigiel with prejudice. Doc. 11 at pp. 7-14.^[4] The claims against Mr. Smigiel were dismissed on November 30, 2021. Doc. 97.

II. S-Tek's Bankruptcy Filing and Assertion of Additional Claims in this Adversary Proceeding

S-Tek commenced its voluntary chapter 11 case on December 2, 2020. The State Court Action was removed to bankruptcy court on December 10, 2020, as adversary proceeding number 20-01074 (the "Adversary Proceeding").

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On January 11, 2021, the Court stayed a portion of an earlier interlocutory order entered in the State Court Action that had ordered S-Tek, Mr. Asselin, and Mr. Castillo to "cease and desist" from engaging in any competition with Surv-Tek. See AP Doc. 13-127. The Court stayed the earlier order with respect to S-Tek and with respect to Mr. Asselin and Mr. Castillo to the extent they compete with Surv-Tek solely through their operation of S-Tek. AP Doc. 17.

On February 16, 2021, S-Tek filed a supplement to the first amended complaint (the "Supplement to Amended Complaint" - AP Doc. 29), adding claims against Surv-Tek and the Huggs. The Supplement to Amended Complaint asserts claims for tortious interference with business relationships (Count X), conversion (Count XI), intentional violations of the automatic stay (Count XII), fraudulent inducement (Count XIII), prima facie tort (Count XIV), objection to Surv-Tek's first proof of claim, Claim 6-2 (Count XV), subordination of Surv-Tek's first proof of claim under § 510(b) (Count XVI), and objection to Surv-Tek's second proof of claim, Claim 7-1 (Count XVII).

On March 9, 2021, Surv-Tek and STIF filed supplemental counterclaims against S-Tek, Randy Asselin, Christopher Castillo, and Kymberlee Castillo (AP Doc. 31). The supplemental counterclaims were for malicious abuse of process (Count X) and fraud (Count XI).

On September 22, 2021, the Surv-Tek Parties filed a motion for summary judgment (the "Summary Judgment Motion" - Doc. 72). The Surv-Tek Parties sought partial summary judgment: (i) holding that S-Tek is liable for breaches of a promissory note, security agreement, and commercial lease and that Randy Asselin, Christopher Castillo, and Kymberlee (together, the "Guarantors") are liable for breaches of guarantees thereof and (ii) determining the amounts owed as a result of those breaches, pending resolution of defenses and offsetting claims at trial.

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The Surv-Tek Parties also sought full summary judgment on six of S-Tek's claims, asking the Court to deny the requested relief.

On October 11, 2021, S-Tek filed a motion to strike Amended Claim 7-2 (the "Motion to Strike" - Doc. 245), asserting that the proof of claim could not be amended to change the creditor on the proof of claim from Surv-Tek to STIF. The Court permitted the filing of the amended proof of claim, ruled that the amended claim related back to the date of the original filing was therefore timely, and denied the Motion to Strike. Doc. 310.

On October 26, 2021, S-Tek filed its Motion to Subordinate Claims of Surv-Tek, Inc. Pursuant to 11 U.S.C. § 510(c) (the "Motion to Subordinate" - Doc. 258). Surv-Tek filed an objection to the Motion to Subordinate. The Court decided to hold a final hearing on the Motion to Subordinate concurrently with the trial of the Adversary Proceeding. See Doc. 246.

On December 10, 2021, the Court issued a memorandum opinion regarding the Summary Judgment Motion. The Court granted in part and denied in part the Summary Judgment Motion. The Court denied the Surv-Tek Parties' requests for partial summary judgment because there can be no determination that parties are liable when there are defenses to liability that have not been determined. With respect to the Surv-Tek Parties' request for full summary judgment denying certain of S-Tek's claims, the Court...