Yaquinto v. Krage & Janvey, LLP (In re Tex. E&P Operating)

• Decision Date: 19 April 2023
• Docket Number: 17-34386-SGJ-7,Adversary 19-03231-sgj
• Parties: In re: Texas E&P Operating, Inc. Debtor. v. KRAGE & JANVEY, L.L.P., Defendant. ROBERT YAQUINTO, JR., Plaintiff, Total Transfers
• Court: U.S. Bankruptcy Court — Northern District of Texas

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In re: Texas E&P Operating, Inc. Debtor.

ROBERT YAQUINTO, JR., Plaintiff,
v.
KRAGE & JANVEY, L.L.P., Defendant.

No. 17-34386-SGJ-7

Adversary No. 19-03231-sgj

United States Bankruptcy Court, N.D. Texas, Dallas Division

April 19, 2023

Chapter 7

MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT KRAGE & JANVEY, L.L.P.'S RULE 12(b)(6) MOTION TO DISMISS

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I. Introduction

The above-referenced adversary proceeding ("Adversary Proceeding") was filed by a Chapter 7 bankruptcy trustee, Robert Yaquinto, Jr. ("Plaintiff" or "Trustee"), against a law firm, Krage & Janvey, L.L.P. (the "Defendant" or sometimes "K&J") that provided prepetition legal services to the defunct Debtor and its former affiliates. The Adversary Proceeding has-until recently-been about pursuing "chapter 5" avoidance actions-i.e., the Trustee had merely been pursuing avoidance and recovery of 21 payments made by the Debtor to the Defendant for legal services provided to the Debtor and to its non-debtor affiliates in the approximately 34 months leading up to the bankruptcy petition date. See Original Complaint [Doc 1] (the "Original Complaint"), Exhibit A.^[1] The Adversary Proceeding was filed two days before the deadline for pursuing avoidance actions that is set forth in section 546(a) of the Bankruptcy Code. However, things morphed substantially recently, when this court granted a motion for leave of the Trustee to amend his Original Complaint, pursuant to Fed. R. Civ. Proc. 15. The First Amended Complaint [Doc 41], recently filed by the Trustee, is a dense 60 pages in length (not counting attachments), in comparison to the lean 10-page Original Complaint, and not only seeks to avoid and recover many additional transfers/payments not listed in the Original Complaint-some being within the two-years prior to the petition date and some going back four years before the petition date (set

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forth in a much lengthier exhibit)-but also adds four new state law causes of action for the first time (i.e., "money had and received/unjust enrichment"; professional negligence/malpractice; participation in or aiding and abetting breach of fiduciary duty; and negligent retention/supervision). Due to: (a) the alleged impact of the COVID pandemic on pursuing discovery in this litigation, (b) a mid-case tolling agreement, and (c) an agreed abatement period, the filing of the First Amended Complaint did not occur until more than three years after the filing of the Original Complaint (as well as more than three years after the deadline set forth in section 546(a) of the Bankruptcy Code).^[2] Because of this rather late and quite voluminous amendment of the Original Complaint, the Adversary Proceeding now presents a panoply of timeliness and procedural conundrums such as: (a) how does Fed. R. Civ. Proc. 15(c)(1)'s "relation back" concept work,^[3] with regard to pleading amendments, when new transfers are sought to be avoided well after the section 546(a) statute of limitations and/or after the expiration of a statute of repose under state fraudulent transfer law; (b) how much specificity is required to begin with, with regard to pleading avoidable transfers-i.e., can a trustee/plaintiff add on several new, allegedly avoidable transfers after the section 546(a) deadline and/or after a statute of repose deadline if he reserved the right to supplement his pleading with other transfers he might later discover; and (c) as for the newly added state law causes of action, does Rule 15(c)(1)'s "relation back" concept save them from a timeliness problem under section 108(a) and state law, and what relevance does the "discovery rule" play in all of this-can the "discovery rule" help a bankruptcy trustee with a timeliness problem, and does it matter at all if the litigation target (here, a law firm) was in a fiduciary relationship with the debtor? These issues arise in the context of the law

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firm's/Defendant's pending Rule 12(b) motion to dismiss.^[4] The court is ultimately granting in part and denying in part the Defendant's motion to dismiss.

II. Undisputed Facts

By way of background, for many years an individual named Mr. Mark Plummer ("Plummer") sold unregistered, private placement interests in various oil and gas drilling joint ventures ("Ventures"). Texas E & P Operating, Inc. (the "Debtor")-which changed names several times during its existence-was the purported operator-entity for his Ventures. The Debtor purportedly conducted and had full control of drilling operations for each of the Ventures and paid upfront expenses in such development and operations. Under operating agreements, the joint Ventures (i.e., the investors therein) agreed to reimburse the Debtor for their respective share of the operating expenses.

By mid-2017, these Ventures and various affiliated businesses, including the Debtor (collectively, the "Plummer Entities') were suffering from, among other things, losses from two expensive and unsuccessful oil wells in Anderson County, Texas; the weight of dozens of lawsuits by creditors and investors; and the 2016 expulsion of Plummer from the Financial Industry Regulatory Authority ("FINRA"). Facing increasing financial stress and rapidly accumulating litigation, the Debtor (but not affiliated Plummer Entities) filed for bankruptcy under chapter 11 of the Bankruptcy Code (the "Bankruptcy Case") on November 29, 2017 (the "Petition Date"). Less than two months later-on January 18, 2018-the late Jason Searcy ("Searcy") was appointed chapter 11 trustee of the Debtor, at the request of the Official Committee of Unsecured Creditors ("UCC") that was appointed in the case (the UCC had expressed concern that Plummer had conflicts of interest). A few months later, Searcy moved to convert the Bankruptcy Case to a

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chapter 7 (citing no prospects for a reorganization), and Searcy, thereafter, served as the chapter 7 trustee following conversion on July 27, 2018. Unfortunately, Searcy died during the Bankruptcy Case (on January 16, 2018), and Robert Yaquinto, Jr. was thereafter appointed the successor trustee on January 23, 2019.

For many years in the past, including the four-year period before the Petition Date (i.e., from November 29, 2013 until November 28, 2017), the Defendant, K&J, provided legal services for the Plummer Entities.

A. The Original Complaint

On the eve of the expiration of the Bankruptcy Code's statute of limitations for bringing avoidance actions (i.e., the applicable section 546(a) deadline)-on November 27, 2019-the Trustee filed this Adversary Proceeding, originally seeking to avoid and recover 21 payments totaling $472,158.42 which were made by the Debtor to the Defendant in the roughly 34 months leading up to the Debtor's Petition Date. These payments were defined in the Original Complaint as "Transfers," for purposes of one or more of the following statutes: 11 U.S.C. §§ 544, 547, 548 and 550, and TEX. BUS. & COMM. CODE §§ 24.005(a)(1) and (a)(2).^[5] The following Transfers (the "Original Transfers") were identified on an Exhibit A attached to the Original Complaint:

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Date	Transfer Amount
1/19/2015	$ 23,96107
1/29/2015	$ 12,674.31
2/26/2015	$ 12.473.12
3/10/2015	$ 50,000.00
3/26/201 5	$ 23,335.95
7/27/2015	$ 44,000.00
8/17/2015	$ 16,034.47
11/11/2015	$ 49,679.50
12/30/2015	$ 10,000.00
4/15/2016	$ 50.00000
6/1/2016	$ 25,000.00
11/9/2016	$ 25.000.00
12/9/2016	$ 25,000.00
3/17/2017	$ 5,000.00
4/27/2017	$ 20,000.00
5/31/2017	$ 10,000.00
7/7/2017	$ 10,000.00
9/1/2017	$ 20.000.00
9/262017	$ 20.00000
11/6/2017	$ 10,000.00
11/6/2017	$ 10.000.00
Total	$ 472,158.42

The Trustee sought to avoid and recover these Transfers under any and all of the following statutes that might be applicable:

Count 1: Actual Fraudulent Transfer - TEX. BUS. & COMM. CODE 24.005(a)(1) through 11 U.S.C. § 544

Count 2: Constructive Fraudulent Transfer - TEX. BUS. & COMM. CODE § 24.005(a)(2) through 11 U.S.C. § 544

Count 3: Actual Fraudulent Transfer - 11 U.S.C. § 548(a)(1)(A) Count 4: Constructive Fraudulent Transfer - 11 U.S.C. § 548(a)(1)(B)

Count 5: Preferences - 11 U.S.C. § 547

The Trustee reserved "the right to (i) supplement the information regarding the Transfers and any additional transfers, and (ii) seek recovery of such additional Transfers."^[6]

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B. The First Amended Complaint

Almost three years later, on October 12, 2022, the Trustee filed a motion for leave to amend the Original Complaint, pursuant to Fed. R. Civ. Proc. 15(a). Among other things, the Trustee represented that he had not been able to obtain certain hard copy records from the Defendant until June of 2021 (allegedly due to the COVID pandemic) and now, based on his investigations, he had certain new claims to add. The Trustee noted that he had obtained a tolling agreement in January 2022 with regard to any limitations that had not yet expired as of that date. The Trustee also noted that in February 2022, the parties had entered into a series of agreed motions to abate the Adversary Proceeding as they explored settlement. The court notes also that, on June 9, 2022, Plummer was indicted by a grand jury in Collin County, Texas for theft, money laundering, and securities fraud in connection with three drilling Ventures-due to evidence suggesting that, from May 1, 2015 through September 18, 2020, Plummer engaged in a "scheme and continuing course of conduct" to defraud more...