Weiss v. Arabella Expl. (In re Arabella Petroleum Co.)

• Decision Date: 22 December 2022
• Docket Number: 15-70098-tmd-11,ADVERSARY 16-07002-tmd
• Parties: IN RE: ARABELLA PETROLEUM COMPANY, LLC, Debtor. v. ARABELLA EXPLORATION INC., ARABELLA EXPLORATION LLC, ARABELLA OPERATING LLC, TRANS-TEXAS LAND & TITLE, LLC, PLATINUM PARTNERS CREDIT OPPORTUNITIES MASTER FUND LP, PLATINUM LONG TERM GRWOTH VIII, LLC, AND JASON HOISAGER, Individually, Defendants. MORRIS D. WEISS, CHAPTER 11 TRUSTEE FOR ARABELLA PETROLEUM COMPANY, LLC, Plaintiff,
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Western District of Texas

IN RE: ARABELLA PETROLEUM COMPANY, LLC, Debtor.

MORRIS D. WEISS, CHAPTER 11 TRUSTEE FOR ARABELLA PETROLEUM COMPANY, LLC, Plaintiff,
v.
ARABELLA EXPLORATION INC., ARABELLA EXPLORATION LLC, ARABELLA OPERATING LLC, TRANS-TEXAS LAND & TITLE, LLC, PLATINUM PARTNERS CREDIT OPPORTUNITIES MASTER FUND LP, PLATINUM LONG TERM GRWOTH VIII, LLC, AND JASON HOISAGER, Individually, Defendants.

ADVERSARY NO. 16-07002-tmd

No. 15-70098-tmd-11

United States Bankruptcy Court, W.D. Texas, Midland Division

December 22, 2022

CHAPTER 11

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MEMORANDUM OPINION

TONY M. DAVIS UNITED STATES BANKRUPTCY JUDGE

Contents

I. FACTS ............................................................................................................................................... 3

A. Formation of the Debtor and Related Companies ............................................................................. 3

B. Alleged Fraudulent Transfers ............................................................................................................ 4

1. Transfers of Properties from the Debtor to AEX 5

2. Transfers of Cash from the Debtor to AEX 8

3. Transfers of Cash from the Debtor to Arabella Operating 9

4. Transfers of Cash from the Debtor to Jason and Molly Hoisager ............................................... 11

C. Breach of Fiduciary Duty to the Debtor .......................................................................................... 16

D. Mr. Hoisager Verses the Debtor's Books and Records ................................................................... 18

II. ANALYSIS ..................................................................................................................................... 20

A. Primer on Fraudulent Transfers ....................................................................................................... 20

B. The Trustee Cannot Recover the Properties Transferred by the Debtor to AEX as Constructive Fraudulent Transfers Because the Transfers were for an Antecedent Debt And He Cannot Recover them as Actual Intent Fraudulent Transfers Because he Failed to Show the Value of the Property to be Recovered ................................................................................................................................... 22

C. The Trustee Cannot Recover Transfers Made by the Debtor to AEX and Arabella Operating Because He Failed to Show that the Transfers were "to or for the Benefit of" Mr. Hoisager ......... 23

D. The Financial Condition of the Debtor and the Reasons for the Debtor's Insolvency are Relevant to both the Fraudulent Transfer and Breach of Fiduciary Duty Claims .......................................... 28

E. The Trustee Can Recover the Cash that the Debtor Transferred to Mr. Hoisager As Fraudulent Transfers .......................................................................................................................................... 30

1.The Trustee Can Recover the Cash that the Debtor Transferred to Mr. Hoisager after December 13, 2013 as Constructively Fraudulent Transfers .................................................................................. 30

2.The Trustee Can Recover the Cash that the Debtor Transferred to Mr. Hoisager after July 1, 2013 as Actual Intent Fraudulent Transfers ............................................................................................. 31

F. Because the Cash Transfers Made to Mr. Hoisager were Made for No Consideration, those Transfers Cannot be Preferential Transfers ..................................................................................... 35

G. Under the One Satisfaction Rule, the Trustee's Fraudulent Transfer Judgment Must be Reduced by the Payments Mr. Hoisager Made Back to the Debtor .................................................................... 35

H. Mr. Hoisager Breached his Fiduciary Duty to the Debtor ............................................................... 36

I. The Trustee's Request for Exemplary Damages Must be Denied as the Trustee Did Not Prove Common Law Fraud by Clear and Convincing Evidence ............................................................... 40

J. The Trustee's Request for Attorney's Fees Awaits More Proof and Briefing ................................ 41

III. CONCLUSION ............................................................................................................................... 43

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It is common for the owner of a sole proprietorship to use the company's cash as the owner's personal checking account, taking out money when and as available and using that money for personal expenses. And there is nothing wrong with this as long as the company's creditors are being paid. But if the company becomes insolvent, meaning creditors will not be paid, the owner can face liability for those owner distributions under both fraudulent transfer and fiduciary duty law.

I. FACTS

A. Formation of the Debtor and Related Companies

Jason Hoisager formed Arabella Petroleum Company, LLC ("the Debtor") in February 2007 to buy and sell oil and gas properties in West Texas.^[1] The Debtor also served as the original operator for the wells on these properties under the governing joint operating agreements.^[2] Mr. Hoisager was the Debtor's sole owner and manager.^[3]

Mr. Hoisager later formed other companies.^[4] He formed Arabella Exploration, LLC ("Arabella Exploration") in December 2008,^[5] which began operating in 2011 with the acquisition of properties in the Permian Basin.^[6] Arabella Exploration, Inc ("AEX") was formed on December 24, 2013, by the reverse merger of Arabella Exploration and Lone Oak, a Cayman Islands corporation.^[7] According to Mr. Hoisager, he formed AEX to raise capital to develop oil and gas properties in the Permian Basin.^[8] In January 2014, AEX formed Arabella Operating LLC ("Arabella Operating") to take over operating wells previously operated by the Debtor under the

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joint operating agreements.^[9]

Mr. Hoisager owned 100% of Arabella Exploration until the December 2013 merger, when it became a wholly owned subsidiary of AEX.^[10] Mr. Hoisager was the manager of Arabella Exploration and the chief executive officer of AEX following the merger.^[11] Arabella Operating was also a wholly owned subsidiary of AEX, and Mr. Hoisager was its sole manager.^[12] Mr. Hoisager owned 30.4% of the shares of AEX at the time of the merger, with the remainder owned by public shareholders.^[13] The parties stipulated that the Debtor became insolvent no earlier than December 31, 2013, a few days after AEX was formed.^[14]

B. Alleged Fraudulent Transfers

The Trustee alleges that from 2011 to 2015, Mr. Hoisager made many fraudulent transfers from the Debtor to himself, his wife, and other entities that he owned or controlled.^[15]These alleged fraudulent transfers fall into four broad categories: (1) transfers of properties from the Debtor to AEX;^[16] (2) transfers of cash from the Debtor to AEX; (3) transfers of cash from the Debtor to Arabella Operating; and (4) transfers of cash from the Debtor to Mr. Hoisager and his wife, Molly Hoisager.^[17] The Trustee also contends that the fraudulent transfers and self-dealing collectively are a breach of fiduciary duty.^[18] Mr. Hoisager disputes that he made fraudulent transfers from the Debtor or breached fiduciary duties to the Debtor.^[19] He contends that he acted

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in good faith at all times and did what he believed to be in the Debtor's best economic interests under the circumstances.^[20]

1. Transfers of Properties from the Debtor to AEX

In 2012, the Debtor assembled the "Wolfbone I Prospect," which consisted of several Delaware Basin leases.^[21] The Debtor entered into the "Wolfbone I PSA" with the purchasers on August 5, 2012.^[22] Outside investors unrelated to the Debtor or Mr. Hoisager purchased 93.35% of the working interest in the Wolfbone I Prospect; AEX purchased the remaining 6.65% of the working interest.^[23] The assignments of the Wolfbone I leases were executed on October 15, 2012, and were recorded in Reeves County, Texas, on varying dates from 2013 to 2015.^[24]

Next, the Debtor assembled the "Wolfbone II Prospect," a second package of Delaware Basin mineral leases.^[25] The Debtor and the purchasers of the Wolfbone II Prospect signed the Wolfbone II PSA on March 1, 2013.^[26] Outside investors unrelated to the Debtor or Mr. Hoisager purchased 53.54% of the working interests, while AEX purchased the remaining 46.46% of the working interest.^[27] The assignments of the Wolfbone II leases were executed on March 1, 2013, and March 15, 2013, and were recorded in Reeves County, Texas, from 2013 to 2015.^[28]

Mr. Hoisager asserts that the Debtor transferred the working interests in the Wolfbone Prospects to AEX for rational business purposes. First, the Debtor could not sell the interests to outside investors for a sufficient price, so AEX acted as a buyer of last resort.^[29] Second, Mr.

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Hoisager claims that AEX was in a better position than the Debtor to develop the properties, create value, and pay lease-operating expenses.^[30] And finally, according to Mr. Hoisager, AEX had "greater access to capital" than did the Debtor,^[31] and there was a need to drill before the leases expired.^[32] The "access to capital" claim was decisively refuted (1) on cross-examination,^[33](2) by AEX's 10-K dated December 31, 2014,^[34] and (3) because the Debtor expended all its capital, and more, drilling the Wolfbone wells anyway.^[35]

The Debtor assigned working interests in the Wolfbone I and II Prospects to AEX on the same terms as it made assignments to outside...