Wells Fargo Rail Corp. v. Black Iron, LLC (In re Black Iron, LLC)

• Decision Date: 30 August 2019
• Docket Number: Bankruptcy No. 17-24816,Adv. Pro. No. 17-2094 (consolidated with Adv. Pro. No. 17-2088)
• Citation: 609 B.R. 390
• Parties: IN RE: BLACK IRON, LLC, Debtor, Wells Fargo Rail Corporation f/k/a First Union Rail Corporation and Helm-Pacific Leasing, Plaintiffs. v. Black Iron, LLC; CML Metals Corporation ; PIC Railroad, Inc. d/b/a CML Railroad, Inc.; and Gilbert Development Corporation, Defendants.
• Court: U.S. Bankruptcy Court — District of Utah

609 B.R. 390

IN RE: BLACK IRON, LLC, Debtor,Wells Fargo Rail Corporation f/k/a First Union Rail Corporation and Helm-Pacific Leasing, Plaintiffs.

v.Black Iron, LLC; CML Metals Corporation ; PIC Railroad, Inc. d/b/a CML Railroad, Inc.; and Gilbert Development Corporation, Defendants.

Bankruptcy No. 17-24816

Adv. Pro. No. 17-2094 (consolidated with Adv. Pro. No. 17-2088)

United States Bankruptcy Court, D. Utah.

Signed August 30, 2019

Troy J. Aramburu, Bret R. Evans, Douglas Farr, Matthew L. Lalli, Amy F. Sorenson, Snell & Wilmer L.L.P., Salt Lake City, UT, David E. Fox, Moore & Van Allen, Morrisville, NC, for Plaintiffs.

Ryan C. Cadwallader, Ralph R. Mabey, Kirton McConkie, R. Blake Hamilton, Penrod W. Keith, Durham Jones & Pinegar, Mark E. Hindley, David J. Jordan, Ellen E. Ostrow, Stoel Rives LLP, Brian M. Rothschild, Parsons Behle & Latimer, Salt Lake City, UT, Dana T. Farmer, Durham Jones & Pinegar, Ogden, UT, David B. Levant, Stoel Rives LLP, Boise, ID, Adelaide Maudsley, People's Intermountain Bank, Sandy, UT, for Defendants.

MEMORANDUM DECISION AFTER TRIAL

WILLIAM T. THURMAN, U.S. Bankruptcy Judge This action came before the Court for a bench trial on June 24 and concluded on July 2, 2019 (the "Trial"). At the Trial, Plaintiffs Wells Fargo Rail Corporation f/k/a First Union Rail Corporation ("Wells Fargo Rail") and Helm-Pacific Leasing ("Helm-Pacific," and together with Wells Fargo Rail, "Plaintiffs" or "WFRC") were represented by Matthew L. Lalli, Troy J. Aramburu, and Bret R. Evans of Snell & Wilmer L.L.P. Defendant Black Iron, LLC ("Black Iron") was represented by David J. Jordan, Mark E. Hindley, Ellen E. Ostrow of Stoel Rives L.L.P., and Dana R. Farmer of Durham Jones & Pinegar, P.C. Defendant Gilbert Development Corporation ("GDC") was represented by Dana R. Farmer. Defendants CML Metals Corporation ("CML Metals") and PIC Railroad, Inc. dba CML Railroad, Inc. ("CML Railroad") did not participate in the Trial.

After receiving evidence and hearing the arguments of counsel, along with considering the briefs and other court documents submitted by the parties, the Court now enters the following findings of fact and conclusions of law. The findings and conclusions set forth herein constitute the Court's findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure, which are made applicable to this proceeding under Rule 7052 of the Federal Rules of Bankruptcy Procedure (the "Decision"). To the extent any of the following findings of fact constitute conclusions of law, they are adopted as such. To the extent any of the following conclusions of law constitute findings of fact, they are adopted as such. The Court has also made determinations regarding this matter in its Memorandum Decision on Defendants/Third-Party Plaintiffs' Motion for Summary Judgment on Black Iron, LLC's Claims and Memorandum in Support [Dkt. No. 80, Case No. 17-2088] and its Memorandum Decision on Plaintiffs' Motion for Summary Judgment on Only the Plaintiffs' Conversion Claim Against Black Iron, LLC and Memorandum in Support [Dkt. No. 441], which are incorporated herein by this reference.

I. JURISDICTION AND VENUE

The jurisdiction of the Court is properly invoked under 28 U.S.C. §§ 157(b) and 1334. Plaintiffs' claims against Black Iron are core proceedings pursuant to 28 U.S.C. § 157(b), and Plaintiffs' remaining claims are proceedings that may be heard and determined by this Court pursuant to 28 U.S.C. § 157(c). The parties had filed multiple lawsuits in state court and district court. On Aug. 21, 2017, Judge Jill Parrish of the United States District Court for the District of Utah (the "District Court") referred such claims to this Court¹ and the parties have consented to the jurisdiction of the Court to determine the claims and defenses asserted in the above-captioned adversary proceeding. This referral included all contract claims and state law claims in the previously-filed lawsuits. The jurisdiction of this Court is not disputed, and is hereby determined to be present.

Venue is determined by the Court to be proper pursuant to the provisions of 28 U.S.C. § 1409. Venue is laid in the United States Bankruptcy Court for the District of Utah.

II. CONSOLIDATION

On October 13, 2017, this Court entered in this adversary proceeding its Order Memorializing Status and Scheduling Conference Dates and Deadlines in Consolidated Adversary Proceedings (the "First Scheduling Order"). Pursuant to the First Scheduling Order, the Court has consolidated for purposes of discovery and trial this adversary proceeding (Case No. 17-2094) with another proceeding pending before the Court involving similar parties (Case No. 17-2088).

III. SUMMARY

Beginning in June 2010, Helm Financial Corporation, WFRC's predecessor-in-interest, and Helm-Pacific, as lessors, entered into four leases and related guarantees (the "Leases") with CML Metals and CML Railroad for the use of 540 railcars and 4 locomotives (the "Railroad Equipment"). CML Metals owned an iron ore mine near Cedar City, Utah (the "Mine"), which included the water rights, mineral rights, and a short line railroad. CML Metals used the Railroad Equipment in its mining operations on the real property then-owned by CML Metals (the "Property"). In 2012, CML Metals constructed a concentrate plant, or mill (the "Mill"), that included various other pieces of equipment including separators and filters. The Mill was situated on the Mine property. GDC operated the Mine pursuant to a contract with CML Metals.

The Railroad Equipment was used to transport iron ore from the Mine to California, which was then shipped to China. In October 2014, CML Metals suspended mining operations and stopped making payments to WFRC under the Leases. WFRC declared a default under the Leases. CML Metals requested that WFRC forbear from exercising its remedies under the Leases, and the parties began forbearance negotiations at that time.

Before the Mine ceased operations, CML Metals began looking for a buyer for the Mine. After months of marketing did not result in a sale, CML Metals negotiated an Asset Purchase Agreement (the "APA") with GDC, which was signed on April 2, 2015. Shortly before closing on the sale, GDC assigned most of its interest in the APA to a newly created entity, Black Iron. Black Iron is a debtor and debtor-in-possession in the above-captioned chapter 11 bankruptcy case. Black Iron is a Utah limited liability company, with a principal place of business in Iron County, Utah. The transaction closed on May 5, 2015 (the "Closing"). The Railroad Equipment remained on CML Metals' Property at the Closing. WFRC made efforts to retrieve its Railroad Equipment, but was unable to do so. Three years later, after petitioning this Court for a writ of replevin, WFRC was able to sell the Railroad Equipment to a third party.

WFRC claims that CML Metals owes damages for failing to make payments under the Leases, and for other amounts owed to WFRC under the Leases. WFRC also alleges that the transfer in which CML Metals transferred substantially all of its assets to GDC, and thence to Black Iron, is a transfer that is voidable under the Uniform Fraudulent Transfer Act ("UFTA").²

WFRC further alleges that Black Iron converted the Railroad Equipment when it prevented WFRC from retrieving the Railroad Equipment. The Court found on summary judgment that Black Iron converted the Railroad Equipment [Dkt. No. 441] and reserved determination of damages for trial. Black Iron asserted claims and damages against WFRC for storage fees and trespass. The Court dismissed those claims on summary judgment [Dkt. No. 80, Case No. 17-2088].

The trial thus focused on the fraudulent transfer claims under the UFTA, the damages under the Leases, the amount of the claim WFRC may have under the UFTA, and the damages that WFRC incurred as a result of the conversion of its Railroad Equipment. The Court finds that the transaction was done with the intent to hinder or delay the creditor, WFRC, and determines the amount of the claim that WFRC may recover under the UFTA. The Court also determines the amount of conversion damages to be imposed against Black Iron.

The issues in this proceeding are state law issues. In a typical fraudulent transfer proceeding brought under the Bankruptcy Code, a debtor or trustee would be asserting that the debtor fraudulently transferred property to a creditor, and the action would attempt to bring the transferred property or its equivalent value back into the bankruptcy estate. In this proceeding, the debtor is the alleged recipient of a fraudulent transfer. The creditor, WFRC, has not made a claim to take any property out of the bankruptcy estate, but rather seeks to establish a claim that will be paid by Black Iron through either a chapter 11 plan or a liquidation. No plan has yet been filed by Black Iron. No party has made any motions or claims that a plan should be filed or that Black Iron should be liquidated by a trustee in a chapter 11 or 7, nor has any party made any motion to lift the automatic stay.

IV. FACTS

A. Corporate Structure and Mine Ownership

A detailed analysis of the corporate structure, various leases involved, the mining operations and transactions among the parties is needed to put this ruling in context. The Court believes that detailing this in narrative form will assist in understanding the entire Decision.

In 2005, Palladon Iron Corporation ("Palladon"), the predecessor in interest to CML Metals, purchased an iron ore mine known as the Comstock Mountain Lion Mine, which is the Mine already referred to, out of the case commonly referred to as the Geneva Steel Bankruptcy Case for $10 million. Michael Conboy ("Conboy") was involved with the transaction through Palladon when it purchased an ownership interest in the Mine in 2005, and then he became Chairman of the Board of CML Metals after it was formed in 2010. CML Metals was a corporation existing under the laws of the State of Utah,...