Valley Ridge Roofing & Constr., LLC v. Silver State Holdings, Assignee—7901 Boulevard 26 LLC (In re Silver State Holdings, Assignee—7901 Boulevard 26 LLC)

Decision Date17 December 2020
Docket NumberCASE NO. 19-41579-MXM,ADVERSARY NO. 19-4043-MXM
PartiesIN RE: SILVER STATE HOLDINGS, ASSIGNEE—7901 BOULEVARD 26 LLC, DEBTOR. VALLEY RIDGE ROOFING AND CONSTRUCTION, LLC, PLAINTIFF, v. SILVER STATE HOLDINGS, ASSIGNEE—7901 BOULEVARD 26 LLC, 7901 BLVD 26, LLC, AND RICHARD N. MORASH, DEFENDANTS.
CourtU.S. Bankruptcy Court — Northern District of Texas

IN RE: SILVER STATE HOLDINGS, ASSIGNEE—7901 BOULEVARD 26 LLC, DEBTOR.

VALLEY RIDGE ROOFING AND CONSTRUCTION, LLC, PLAINTIFF,
v.
SILVER STATE HOLDINGS, ASSIGNEE—7901 BOULEVARD 26 LLC,
7901 BLVD 26, LLC, AND RICHARD N. MORASH, DEFENDANTS.

CASE NO. 19-41579-MXM
ADVERSARY NO. 19-4043-MXM

UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION

December 17, 2020


The following constitutes the ruling of the court and has the force and effect therein described.

AMENDED FINDINGS OF FACT AND CONCLUSIONS OF LAW1

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[Relates to Adv. ECF Nos. 1-6, 47, 95, and 101]

The Court held a two-day trial to liquidate all claims asserted by Plaintiff Valley Ridge Roofing and Construction, LLC ("Valley Ridge") against Defendants Silver State Holdings, Assignee—7901 Boulevard 26 LLC ("Silver State") and Richard N. Morash ("Morash") (together, the "Defendants").

I. SUMMARY OF THE DISPUTE

Morash was the sole member, manager, and director of 7901 BLVD 26, LLC ("7901"). In 2015, 7901 purchased the real property and improvements located at 7901 Boulevard 26, North Richland Hills, Texas (the "Property") and leased the Property to a third-party tenant. The tenant converted the Property, formerly a Home Depot, into a high-end indoor shooting range. By early 2018, however, the tenant had defaulted on the lease, closed the shooting range, and abandoned the Property. In the meantime, the Property had suffered roof damage caused by a storm, so 7901 contracted with Valley Ridge to repair the roof. After a dispute arose over the roof-repair contract balance, the parties went to arbitration, which concluded with a judgment and a judgment lien in favor of Valley Ridge against 7901 and the Property. The Valley Ridge judgment lien on the Property was subordinate to ad valorem tax liens of Tarrant County of nearly $100,000, a $3.4

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million lien held by Frost Bank, and a $180,000 third-priority lien held by the City of North Richland Hills (the "City").

In late November and early December 2018, when Valley Ridge was attempting to collect on its judgment, Morash formed Silver State and caused Silver State to acquire the City's claim and lien against the Property. As the new holder of the City's third-priority lien on the Property, Silver State posted the Property for foreclosure and acquired the Property at a January 2, 2019 foreclosure sale, wiping out Valley Ridge's junior lien and leaving the Property subject only to the Tarrant County tax lien and the Frost Bank lien. Valley Ridge discovered what happened and filed an involuntary bankruptcy petition against 7901. Silver State then filed its own bankruptcy case and sold the Property to a third party under § 363 of the Bankruptcy Code. The net sale proceeds of roughly $577,000, after payment of the Frost Bank lien and other claims and closing costs, are currently being held in the Court's registry.

Through the Complaint,2 Valley Ridge seeks a judgment against Silver State and Morash through various legal claims under the Bankruptcy Code and Texas law, including preferential transfer, actual and constructive fraudulent transfer, wrongful foreclosure, breach of fiduciary duty, conspiracy, and aiding and abetting. In addition, Valley Ridge seeks recovery and turnover of the funds held in the Court's registry.

The Court has considered the pleadings and other papers filed in this adversary proceeding

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and in the bankruptcy cases of 7901 and Silver State, the testimony of witnesses, the exhibits admitted into evidence, and the arguments of counsel. The following constitutes the Court's findings of fact and conclusions of law3 in support of this ruling as required by Federal Rule of Civil Procedure 52, made applicable in this adversary proceeding by Federal Rule of Bankruptcy Procedure 7052.

As set forth below, the foreclosure is avoidable (a) as a preferential transfer under § 547 of the Bankruptcy Code; (b) as an actual fraudulent transfer under § 548(a)(1)(A) of the Bankruptcy Code; (c) as an actual fraudulent transfer under Texas Business and Commerce Code section 24.005(a)(1) and § 544 of the Bankruptcy Code; and (d) as a constructive fraudulent transfer under Texas and Business and Commerce Code section 24.006(b) and § 544 of the Bankruptcy Code. Silver State has no valid defense (whether affirmative defense or otherwise) to avoidance of the foreclosure or to Valley Ridge's recovery of the funds under Bankruptcy Code §§ 542 and 550. In addition, Morash breached his fiduciary duties to 7901, and Morash and Silver State are jointly and severally liable for damages arising from that breach of fiduciary duty because Silver State conspired with, and aided and abetted, Morash in his breaches. Finally, Valley Ridge is entitled to an $84,000 award of attorney's fees and costs. The Court denies all other relief requested by the parties.

II. JURISDICTION AND VENUE

The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(a) and the standing order of reference in this district. This adversary proceeding is a core

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proceeding over which the Court has both statutory and constitutional authority to enter a final judgment. To the extent this proceeding is a non-core proceeding, the parties have consented to this Court's entry of a final judgment.4

Venue for this adversary proceeding is proper pursuant to 28 U.S.C. § 1409(a).

III. PROCEDURAL HISTORY5

On October 29, 2018, Valley Ridge initiated Case Number 048-303979-18 (the "State Court Proceeding") by filing an original petition (the "Valley Ridge Original Petition")6 against 7901 in the 48th Judicial District Court for Tarrant County, Texas (the "State Court"), seeking to foreclose on its previously obtained mechanic's lien and judicial lien against the Property.

On December 21, 2018, 7901 filed a general denial answer in the State Court Proceeding.7

On February 26, 2019, Valley Ridge filed an amended petition (the "Valley Ridge Amended Petition")8 in the State Court Proceeding, adding Silver State as a defendant and asserting claims for (a) judicial foreclosure of its mechanics' lien and judicial lien, and (b) fraudulent transfer under Chapter 24 of the Texas Business and Commerce Code based on a January 2, 2019 state law foreclosure on the Property by Silver State.

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On April 8, 2019, Silver State filed a general denial answer in the State Court Proceeding.9

On March 6, 2019, Valley Ridge filed an involuntary petition against 7901 pursuant to 11 U.S.C. § 303, initiating Bankruptcy Case No. 19-40989.10 The Court later entered an order for relief against 7901 after a contested trial.11

On April 18, 2019, Silver State filed its voluntary petition for relief under Chapter 11 of the Bankruptcy Code, initiating Bankruptcy Case No. 19-41579.12

On April 22, 2019, Silver State removed the State Court Proceeding to this Court pursuant to Federal Rule of Bankruptcy Procedure 9027(a) and 28 U.S.C. § 1452, initiating this Adversary Proceeding No. 19-4043.13 Silver State later filed an amended answer and counterclaim (the "Amended Answer and Counterclaims Against Valley Ridge"), asserting affirmative defenses and seeking (a) declaratory relief that Valley Ridge has no claim, lien, or right against Silver State or against the Property or its proceeds; (b) quiet title to the Property; and (c) attorney's fees and costs.14

On May 22, 2019, the Court entered an order (the "Sale Order")15 in the Silver State bankruptcy case (a) permitting Silver State to sell the Property to a third-party purchaser, with all disputed liens, claims, interests, and encumbrances against the Property attaching to the sale

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proceeds; (b) ordering the net sale proceeds (the "Registry Funds") to be placed into the registry of the Court; and (c) providing that nothing in the Sale Order prejudices Valley Ridge's claims against Silver State and 7901 in this Adversary Proceeding. After the closing of the sale, Registry Funds of $627,050.37 were deposited into the Court's registry.16

On October 28, 2019, pursuant to an agreed order in this Adversary Proceeding,17 the 7901 Chapter 7 Trustee was substituted for Valley Ridge with respect to Valley Ridge's fraudulent-transfer claim.

On October 31, 2019, the 7901 Chapter 7 Trustee filed her Plaintiff's Second Amended Complaint,18 adding Morash as a defendant and asserting claims against Silver State and Morash for (a) fraudulent transfer under Chapter 24 of the Texas Business and Commerce Code and § 544 of the Bankruptcy Code; (b) actual and constructive fraudulent transfer under § 548 of the Bankruptcy Code; (c) preferential transfer under § 547 of the Bankruptcy Code; (d) wrongful foreclosure; (e) breach of fiduciary duty; (f) conspiracy and aiding and abetting/concert of action; and (g) turnover of property of the estate under § 542 of the Bankruptcy Code. The 7901 Chapter 7 Trustee also sought recovery of the Property or its value pursuant to § 550 of the Bankruptcy Code, as well as interest, attorney's fees, and costs.

The Defendants answered the Second Amended Complaint,19 with Morash asking for attorney's fees, interest, and expenses (the "Morash Counterclaim"), and Silver State also

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asserting counterclaims for (a) disallowance of the claims asserted by the 7901 Chapter 7 Trustee in a proof of claim filed in the Silver State bankruptcy case (the "7901 Chapter 7 Trustee Proof of Claim")20; (b) a surcharge against the proceeds from the sale of the Property under § 506(c) of the Bankruptcy Code; and (c) attorney's fees, interest, and expenses (the "Answer and Counterclaims against 7901 Chapter 7 Trustee").

On January 8, 2020, the Court entered an order (the "Settlement Order")21 wherein the 7901 Chapter 7 Trustee, Silver State, and Valley Ridge agreed that, among other things, (a) $50,000 of the Registry Funds would be transferred to the 7901 Chapter 7 Trustee for the benefit of 7901's bankruptcy estate, to the exclusion of Silver State and Valley Ridge; (b)...

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