BARBARA J. HOUSE R, Bankruptcy Judge.
I. JURISDICTION, VENUE, AND STATUTORY AND
CONSTITUTIONAL AUTHORITY ................................................797
A. Subject Matter Jurisdiction and Venue.....................................798
B. Statutory Authority ......................................................798
C. Constitutional Authority .................................................800
II. LEGAL ANALYSIS ............................................................800
A. Count 1: Breach of the DIP Agreement (Brickley v. Scattered) ............801
1. Scattered's Failure to Fund the Disputed DIP Requests Was Not a
Breach of the DIP Agreement ........................................801
a) The Disputed DIP Requests Were Not Made in Compliance
with the DIP Agreement ..........................................801
b) At the Time the Disputed DIP Requests Were Made, H & M
Was in Default Under the Terms of the DIP Agreement,
Thus Excusing Scattered from Funding ............................804
2. Even if Scattered's Failure to Fund the Disputed DIP Requests
was a Breach of the DIP Agreement, the Trustee Failed to Prove
Any Resulting Actual or Consequential Damages ......................807
B. Count 4: Breach of Fiduciary Duty (Brickley v. Greenblatt) ..............814
1. As its Manager, Greenblatt Owed Fiduciary Duties to H & M ............814
2. Greenblatt Did Not Breach the Fiduciary Duties He Owed to H &
M ..................................................................815
a) Failure to Timely Pay AFEs Related to Drilling Costs, With No
Resulting Harm, Does Not Constitute a Breach of Fiduciary
Duty ............................................................816
b) Greenblatt's Decision Not to Request Funds Under the DIP
Agreement to Prepay Completion Costs, Based upon His
Interpretation of the JOA, Was Not a Breach of Fiduciary
Duty ............................................................817
c) Greenblatt's Failure to Take Further Action Against Scattered
for Its Alleged Breach of the DIP Agreement Was Not a
Breach of Fiduciary Duty.........................................821
3. Had Greenblatt Breached the Fiduciary Duties He Owed to H &
M, Prospect's Actions Were an Intervening and Superseding
Cause of H & M's Alleged Injuries ..................................821
C. Count 6: Objection to Administrative Wage Claims (Brickley v.
Greenblatt) ...........................................................824
D. Count 5: Equitable Subordination (Brickley v. Greenblatt) ...............826
E. Counterclaim: Indemnification Under the LLC Regulations and the
DIP Agreement (Greenblatt v. H & M) ...................................827
1. Greenblatt Is Entitled to Indemnification Under the LLC
Regulations ........................................................827
2. Greenblatt Is Entitled to Indemnification Under the DIP
Agreement ..........................................................828
a) Greenblatt, in His Capacity as H & M's Manager, Qualifies as
an "Indemnitee" Under the Terms of the DIP Agreement ............829
b) The Indemnification Provision Covers the Activities that are the
Subject of the Complaint ........................................831
c) The Indemnification Provision of the DIP Agreement is
Enforceable Under Applicable Law ................................832
3. Determination of the Amount and Priority of Greenblatt's Claims for Indemnification Under the LLC Regulations and the DIP Agreement...........................................................835 III. CONCLUSION.................................................................837
The Court held a trial in this adversary proceeding on June 9-11, 2014. At the conclusion of the trial, the Court directed briefing on several issues raised at trial. The last of the post-trial briefs was submitted on June 17, 2014, following which the Court took the matter under advisement. This Memorandum Opinion contains the Court's findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014.
In his Original Complaint [Dkt. No. 1] (the
The majority of these claims were resolved prior to trial through either orders on dispositive motions or by voluntary
The U.S. District Court for the Northern District of Texas has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. § 1334. Although bankruptcy courts do not have independent subject matter jurisdiction over bankruptcy cases and proceedings, 28 U.S.C. § 151 grants bankruptcy courts the power to exercise certain "authority conferred" upon the district courts by title 28. Under 28 U.S.C. § 157, the district courts may refer bankruptcy cases and proceedings to the bankruptcy courts for either entry of a final judgment (core proceedings) or proposed findings and conclusions (noncore, related-to proceedings). So, as relevant here, this Court exercises jurisdiction over the debtor's underlying Chapter 7 bankruptcy case and this adversary proceeding pursuant to the Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc adopted in this district on August 3, 1984 (the
Section 1334(b) lists three types of proceedings over which the district court has jurisdiction — those "arising under title 11," those "arising in" a case under title 11, and those "related to" a case under title 11. 28 U.S.C. § 1334(b). The classification of a proceeding under § 1334 depends on the connection of the proceeding to the bankruptcy case. "Arising under" jurisdiction involves "causes of action created or determined by a statutory provision of title 11." Faulkner v. Eagle View Capital Mgt. (In re The Heritage Org., L.L.C.), 454 B.R. 353, 360 (Bankr. N.D.Tex.2011) (citing Wood v. Wood (In re Wood), 825 F.2d 90, 96 (5th Cir.1987)). "Arising in" jurisdiction is "not based on a right expressly created by title 11, but is based on claims that have no existence
In comparison, "related to" jurisdiction exists if "the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." Celotex Corp. v. Edwards, 514 U.S. 300, 308 n. 6, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984)); U.S. Brass, 301 F.3d at 304. "That state law may affect a proceeding's resolution cannot be the sole basis by which a proceeding is excluded from the otherwise large net cast by `related to' jurisdiction." Hartley v. Wells Fargo Bank, N.A. (In re Talsma), 509 B.R. 535, 542 (Bankr. N.D.Tex.2014) (citing 28 U.S.C. § 157(b)(3)). Proceedings that involve merely "related to" jurisdiction and do not otherwise arise under the Bankruptcy Code or arise in a bankruptcy case are "non-core." Faulkner, 454 B.R. at 360.
A bankruptcy judge's authority in cases and proceedings differs depending on whether the subject matter is "core" or "non-core." 28 U.S.C. § 157(b)-(c). A bankruptcy court may hear and determine (i.e., enter a final order in) all cases filed under title 11 and all proceedings within a bankruptcy court's "core" authority. Id. § 157(b)(1). Section 157(b)(2) provides a nonexclusive list of such core proceedings. Id. § 157(b)(2). In non-core proceedings, the statute limits the bankruptcy court to issuing proposed findings of fact and conclusions of law to the district court, id. § 157(c)(1), unless the parties consent to the bankruptcy court's issuance of a final judgment, id. § 157(c)(2).
With this framework in mind, the Court now returns to the claims and counterclaim at issue in this adversary proceeding. First, the Court concludes that the claims by and among the Trustee and Greenblatt are each core. Specifically, the Trustee's objection to the administrative claim filed by Greenblatt (Count 6) is core under 28 U.S.C. § 157(b)(2)(B), and his request for equitable subordination of such claim (Count 5) is a matter arising under 11 U.S.C. § 510(c). Similarly, the Trustee's allegations regarding Greenblatt's actions (or inactions) as H & M's postpetition Manager, as well as Greenblatt's related claim for indemnification, are core because they arise in and are inextricably linked to the Court-approved DIP Agreement, which was an integral part of H & M's Chapter 11 bankruptcy case. As such, the Court has statutory authority to hear and finally determine Counts 4-6 of the Complaint, as well as Greenblatt's counterclaim for indemnification against the estate.
Second, Count 1 of the Complaint, alleging that Scattered breached the Court-approved DIP Agreement, is core under 28 U.S.C. § 157(b)(2)(O). Further, this claim arises under the Bankruptcy Code and the statutory framework governing a debtor-in-possession's ability to obtain postpetition financing. Alternatively, the claim arises in a case under title 11 because, although breach of contract claims exist outside of bankruptcy, a breach of the DIP Agreement would not exist independent of H & M's bankruptcy case and this Court's entry of the DIP Order.
The Court's analysis of its authority, however, does not end here. Now that the Court has determined that it has statutory authority to finally adjudicate the claims and counterclaim, it must determine
In Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), the U.S. Supreme Court held that, notwithstanding the bankruptcy court's statutory authority under 28 U.S.C. § 157(b)(2)(C) to adjudicate an estate's counterclaim against a creditor, the bankruptcy court lacked constitutional authority to enter a final judgment on the state-law counterclaim because such claim would "not [be] resolved in the process of ruling on a creditor's proof of claim." Id. at 2620; see also BP RE, L.P. v. RML Waxahachie Dodge, L.L.C., 735 F.3d 279, 286 (5th Cir. 2013) ("Thus, `Congress may not bypass Article III simply because a proceeding may have some bearing on a bankruptcy case; the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.'") (citing Stern, 131 S.Ct. at 2618); Frazin v. Haynes & Boone, LLP (In re Frazin), 732 F.3d 313, 317-20 (5th Cir.2013) (concluding that two of three counterclaims would necessarily be resolved in the bankruptcy court's award of attorneys' fees and were therefore within the bankruptcy court's constitutional authority under Stern).
Here, the Trustee's claims against Greenblatt, as well as Greenblatt's counterclaim for indemnification, each center around Greenblatt's actions allegedly taken (or not taken) in his postpetition role as H & M's Manager. Greenblatt's actions as postpetition Manager of H & M are also the subject of the $42,000 administrative claim Greenblatt filed against the H & M estate. See Administrative Priority Expense Proof of Claim [Gr. Ex. X.1] at ¶¶ 2, 4 (the
The Trustee's claims against Scattered (although based on state law) relate to the conduct of the parties under the DIP Agreement during the pendency of H & M's Chapter 11 bankruptcy case. If not for the bankruptcy and this Court's entry of the DIP Order, the Trustee's claim for Scattered's alleged breach of the DIP Agreement would not exist. Therefore, the Court concludes that it has constitutional authority to enter a final judgment on Count 1 of the Complaint (breach of the DIP Agreement) because the claim "stems from the bankruptcy itself," Stern, 131 S.Ct. at 2618, and "relate[s] entirely to matters integral to the bankruptcy case." See Miller v. Greenwich Capital Fin. Prods., Inc. (In re Am. Bus. Fin. Servs., Inc.), 471 B.R. 354, 362 (Bankr.D.Del.2012) (finding constitutional authority to enter a final order on, among other claims, breach by a lender of a debtor-in-possession financing agreement).
As noted previously, the claims and counterclaim remaining for trial were: (1) as against Scattered, Count 1 (breach of
"To prevail on a claim for breach of contract, the plaintiff must establish the following elements: (1) the existence of a valid contract; (2) performance or tendered performance by the plaintiff; (3) breach of the contract by the defendant; and (4) damages sustained by the plaintiff as a result of the breach." S. Elec. Servs., Inc. v. City of Houston, 355 S.W.3d 319, 323-24 (Tex.App.-Houston [1st Dist.] 2011, pet. denied).
Here, the parties do not dispute that the DIP Agreement was an existing and valid contract, so the Court will focus its analysis on the remaining elements. For the reasons set forth below, the Court finds that the Trustee failed to carry his burden of proof and, as such, his breach of contract claim against Scattered fails.
The Trustee alleges that H & M performed all of its obligation under the DIP Agreement, including being in compliance with all material terms of the agreement and making proper borrowing requests. According to the Trustee, Scattered then breached the DIP Agreement by failing to fund two borrowing requests: (1) a request in the amount of $925,000 made on October 4, 2012 (Gr. Ex. V.2), and (2) a request in the amount of $350,000 made on October 18, 2012 (Gr. Ex. V.3) (together, the "
As explained in more detail below, the Court finds that neither of the Disputed DIP Requests was made in compliance with the DIP Agreement. Specifically, § 2.2 of the DIP Agreement states that:
DIP Agreement [Gr. Ex. H.1] at § 2.2. Thus, to be proper, a draw request must (1) be made by H & M, (2) state the principal amount of the requested advance, and (3) state the proposed funding date.
The $350,000 Disputed DIP Request was submitted by David Jones ("
The $925,000 Disputed DIP Request was also submitted by Jones, but with the signature block of "H & M Resources, LLC," not H & M. DIP Draw Request [Gr. Ex. V.2] at 001833. Although this request does give the principal amount of the requested advance ($925,000) and the proposed funding date (October 5, 2012), it was not submitted by H & M and, thus, does not comply with the express requirements of § 2.2 of the DIP Agreement. Because Jones was in charge of drilling operations for H & M Resources, which is H & M's wholly-owned subsidiary, the Court recognizes the technicality of this finding. However, the DIP Agreement clearly dictates what is required to make a proper funding request, including that a request may only be made by H & M, which did not occur here. Thus, Scattered was not required to fund the request pursuant to the plain language of the DIP Agreement and its failure to fund was not a breach of that agreement.
Moreover, even if Jones's use of H & M Resources' signature block was an oversight, there is also a dispute regarding whether Jones had authority to request advances under the DIP Agreement on H & M's behalf, to which the Court will now turn. To determine whether Jones had authority to request funds under the DIP Agreement on H & M's behalf, the Court will first consider the LLC Regulations. Section 8.01 of the LLC Regulations states that "the Manager (hereinafter designated)
The issue surrounding Jones's authority to request funds under the DIP Agreement appears to arise from the fact that Greenblatt concurrently served as both H & M's Manager and an officer of Scattered. As such, at trial, the parties propounded their respective positions regarding whether "official" draw requests went directly from Jones to Greenblatt, as an officer of Scattered, or from Jones to Greenblatt, as H & M's Manager, who then determined when/if to forward the request to Scattered. If the former, the Trustee has a better argument that the $925,000 Disputed Draw Request was valid.
At trial, Greenblatt testified that, as H & M's Manager, he was the only party with authority to request funds under the DIP Agreement and that he did not delegate that authority to Jones, nor would he delegate the authority to borrow money on behalf of H & M to any employee or agent. According to Greenblatt, Jones would send requests for advances under the DIP Agreement to him, in his capacity as H & M's Manager, and he would then determine whether to forward the requests to Scattered.
The Trustee's counsel, however, argued that Jones had authority to request funds under the DIP Agreement and would send requests to Greenblatt in his capacity as an officer of Scattered. Indeed, the Trustee somewhat impeached Greenblatt's testimony on this point with prior deposition testimony in which Greenblatt stated that Jones was authorized to make funding requests to Scattered under the DIP Agreement. Scattered, however, rehabilitated Greenblatt's testimony by reference to multiple other instances within the same deposition where Greenblatt stated his belief that Jones was forwarding the requests to him in his capacity as H & M's Manager, not as Scattered's officer.
Jones's own testimony regarding his actions did nothing to clarify the issue. While on the witness stand, Jones testified that he believed that he had authority to request funds directly from Scattered on H & M's behalf because Greenblatt never told him that he could not. Jones, however, could not recall any conversion with Greenblatt in which Greenblatt expressly authorized him to request funds on H & M's behalf. Further, when questioned regarding his belief as to Greenblatt's capacity in receiving the Disputed DIP Requests, Jones testified that he gave no consideration to which capacity Greenblatt served when he sent emails requesting funds under the DIP Agreement. And, although Jones cc'ed Scattered's counsel on the Disputed DIP Requests, Jones further testified that he cc'ed attorneys on the emails without considering whether the
Jones's personal belief in his authority, without more, is insufficient to prove he had authority to request funds directly from Scattered under the DIP Agreement. Indeed, under Texas law, agency or the scope of authority cannot be proven by the statements of the purported agent alone. Valley Ranch Dev. Co., Ltd. v. F.D.I.C., 960 F.2d 550, 553 (5th Cir. 1992) (citing Claus v. Gyorkey, 674 F.2d 427, 434 n. 7 (5th Cir.1982)). As such, Jones could not create authority via his personal beliefs; instead, the operative acts are those attributable to Greenblatt. And, as both Jones and Greenblatt testified, Greenblatt did not expressly confer on Jones the authority to request funds under the DIP Agreement. Moreover, Greenblatt did more than just blindly forward Jones's funding requests to Scattered. In fact, the record shows that the second request for funds under the DIP Agreement initiated by Jones and sent to Greenblatt was for $500,000. DIP Request Email [Gr. Ex. R.2] at 001835. As Greenblatt testified, however, he reduced the request to $400,000 to reflect the correct amount, as discussed between Jones and Greenblatt, prior to forwarding the request to Scattered, who ultimately funded the $400,000.
After carefully considering the evidence, the Court finds that Jones did not have authority to request funds under the DIP Agreement on H & M's behalf. As such, the Disputed DIP Requests did not comply with the terms of § 2.2 of the DIP Agreement, and Scattered was not obligated to fund.
The Court finds that, even if the Disputed DIP Requests were made in accordance with the DIP Agreement, an "Event of Default" had occurred under the DIP Agreement, thus excusing Scattered from funding the requests, as the Court will now explain. Article VII of the DIP Agreement defines what constitutes an "Event of Default" under the agreement. Particularly, § 7.1 states:
DIP Agreement [Gr. Ex. H.1] at § 7.1(m) (emphasis added).
Scattered relies upon § 7.1(m)(iv) to argue that H & M's called default under the Second Interim Agreed Order Granting (I) Debtor's Motion for Order Authorizing Use of Cash Collateral, (II) Granting Adequate Protection to the Prepetition Secured Lender, (III) Scheduling a Subsequent
Under the Second Interim Cash Collateral Order, upon an event of default, H & M's right to use cash collateral would terminate automatically three business days after receiving a notice of default from its prepetition secured lender, Prospect Capital Corporation ("
Under § 4.2 of the DIP Agreement, a condition precedent to each advance was that "at the time of and immediately after giving effect to such Advance, no Default or Event of Default shall have occurred and be continuing...." DIP Agreement [Gr. Ex. H.1] at § 4.2(d). Scattered argues that H & M's called default under the Second Interim Cash Collateral Order triggered §§ 7.2(m)(iv) and 4.2 of the DIP Agreement and, thus, Scattered's obligation to fund the Disputed DIP Requests never arose.
In response, the Trustee argues that § 7.2(m)(iv) of the DIP Agreement was not triggered because it specifically requires "the bringing of a motion, taking of any action or the filing of any plan of reorganization or liquidation or disclosure statement attendant thereto," none of which occurred here. Further, according to the Trustee, H & M's called default under the Second Interim Cash Collateral Order, and corresponding alleged default under the DIP Agreement, arose not from an action but from inaction, i.e., H & M's failure to pay Hibernia Resources for completion costs.
Under the plain language of the DIP Agreement, to trigger a default under § 7.1(m)(iv) H & M must have taken an "action" and such action must have been "adverse" to Scattered or its rights and remedies under the DIP Agreement or its interest in its collateral. The Court will address these two requirements in turn.
First, Greenblatt, on H & M's behalf and as its Manager, interpreted the payment terms of the Joint Operating Agreement (the "
Second, H & M's actions in this regard were adverse to Scattered. As stated in the DIP Order:
DIP Order [Gr. Ex. I.1] at ¶ F. Further, as reflected in H & M's budget associated with the DIP Order, H & M's predominant sources of cash were Prospect's cash collateral, which was the subject of the Second Interim Cash Collateral Order, and advances under the DIP Agreement. See H & M Oil & Gas, LLC Operating Budget [Tr. Ex. 7] (the "
As such, (1) without access to cash collateral, H & M had insufficient funds to pay its day-to-day operating expenses and continue its drilling programs; (2) use of cash collateral and advances under the DIP Agreement were intertwined and both were necessary to keep H & M afloat and permit it to continue its drilling operations, including maintaining its interests in the wells and the underlying property that served as Scattered's collateral; and (3) H & M's conscious decision to not pay Authority for Expenditures ("
Even though the Court finds that Scattered did not breach the DIP Agreement, it will nonetheless analyze the Trustee's alleged damages. In this regard, Scattered argues that (1) the Trustee failed to prove any actual or consequential damages arising from the alleged breach, and (2) H & M waived its ability to seek consequential damages under § 8.4(c) of DIP Agreement. The Court will address these arguments in turn.
The Court finds Scattered's initial argument regarding damages persuasive. Even if this Court were to find that Scattered's failure to fund the Disputed DIP Requests was a breach of the DIP Agreement, the Trustee failed to prove any resulting damages.
In a breach of contract action, damages may be broken into one of two categories: actual (direct) damages or consequential damages. The Texas Supreme Court has held that "[i]n an action for breach of contract, actual damages may be recovered when the loss is the natural, probable, and foreseeable consequence of the defendant's conduct." Mead v. Johnson Group, Inc., 615 S.W.2d 685, 687 (Tex. 1981). "Direct damages are the necessary and usual result of the defendant's wrongful act; they flow naturally and necessarily from the wrong." Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 816 (Tex.1997). On the other hand, consequential damages are damages that occur naturally, but do not necessarily stem from the breach. Id.; RAJ Partners, Ltd. v. Darco Const. Corp., 217 S.W.3d 638, 647 (Tex.App.-Amarillo 2006, no pet.). Moreover, consequential damages are not recoverable unless the damages were foreseeable. Arthur Andersen, 945 S.W.2d at 816; Mead, 615 S.W.2d at 687. Accordingly, in order to recover consequential damages, the damages must have been foreseeable by the parties, directly traced to the breach, and result from the breach. See Mead, 615 S.W.2d at 687.
More specifically, "the basic common law measure of damage for breach of a loan agreement is the difference between the contractual rate of interest and the rate of interest that the borrower is required to pay to obtain the money from another source; however, special or consequential damages reasonably within the contemplation of the parties at the time of the agreement may also be recovered." Tex. Commerce Bank Reagan v. Lebco Constr., Inc., 865 S.W.2d 68, 74 n. 2 (Tex.App.-Corpus Christi 1993, writ denied), overruled on other grounds, John & Higgins of Tex., Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507 (Tex.1998) (citations
Here, however, the Trustee argues that, due to the unique nature of this transaction, the general rules governing damages in failure-to-lend cases should not govern because: (1) the contract at issue is not a standard loan agreement, but rather is a debtor-in-possession loan agreement that was approved by this Court and is an integral part of H & M's bankruptcy proceeding; (2) the terms of the loan — i.e., a second lien position — cannot be replicated in the marketplace, so there is no "replacement" loan against which to measure direct damages; (3) H & M is an oil and gas company and, as such, calculating consequential damages is not as straight forward as it would be in other industries; and (4) there is "significant" evidence of lost value. Plaintiff Douglas J. Brickley's Post-Trial Brief [Dkt. No. 172] ("
From the Court's perspective, the Trustee has alleged multiple, alternative measures of damages
As an initial matter, it is undisputed that, once Scattered's alleged breach of the DIP Agreement occurred, H & M did not obtain an alternative loan. Although the Court appreciates the unique nature of Scattered's agreement to lend on a fully subordinated basis to Prospect's first lien position, and the arguable unavailability of a loan on substantially similar terms from a third party,
With respect to the proper measure for calculating lost profits, the Supreme Court of Texas has explained that:
Holt Atherton Indus., Inc. v. Heine, 835 S.W.2d 80, 84 (Tex.1992) (emphasis added) (citations omitted); see also Basic Mgmt., Inc., 402 S.W.3d at 267-68 (applying the standard for lost profits propounded in Holt Atherton in the context of an alleged breach-of-loan-commitment claim).
Here, notably missing from the evidentiary record is any factual basis upon which this Court may calculate the "integral amount" that the Trustee alleges represents lost profits related to the anticipated drilling program. Indeed, when pressed by the Court during closing argument at trial, the Trustee's counsel could not quantify this amount or provide the Court with figures it could use to quantify this amount. Without some form of objective, non-speculative evidence (such as credible evidence regarding the probability
Further, the Court was not able to find, nor has the Trustee cited to, any case law holding that damages for failure to fund under a loan agreement are properly measured by outstanding availability. Instead, in his post-trial brief, the Trustee argues that the unfunded amounts represent benefit-of-the-bargain damages;
Finally, the Court finds that the estate's incurrence of attorneys' fees and expenses
For example, in Stuart v. Bayless, 964 S.W.2d 920, 921 (Tex.1998), the Texas Supreme Court overturned an award of consequential damages, finding that the damages were not foreseeable. Id. There, a law firm sued a former client for non-payment, and argued that, as a result of her non-payment, the firm was unable to finance cases that it would have taken on contingency. Id. The law firm was successful at trial, and the jury awarded the law firm $500,000 for the lost contingency fees that it could have earned. However, the Texas Supreme Court found that such a loss was not foreseeable. Id. ("[I]t would be a rare case in which an attorney or law firm could demonstrate that the failure of a client to pay its bills gave rise to a recovery of contingent fees that might have been earned from other clients."). Similarly, in Petco Animal Supplies, Inc. v. Schuster, 144 S.W.3d 554, 566 (Tex.App.-Austin 2004, no pet.), an action brought by a pet owner to recover damages allegedly incurred when the pet escaped from its groomer and was killed in traffic, the court found that the plaintiff could not recover lost wages as consequential damages because the "[l]ost wages [while searching for the pet] ... ha[d] too attenuated a connection to [the defendant's] conduct under her breach of contract theory."
Here, it is undisputed that Scattered was aware that H & M would use amounts drawn under the DIP Agreement to fund its drilling program. DIP Order [Gr. Ex. I.1] at ¶ F ("H & M, having advised the Court that it intends to undertake a drilling program to increase the value of tis bankruptcy estate....") and p. 12 (reflecting the signature of Scattered's counsel on the DIP Order). The Trustee's requested damages, however, go far beyond those attributable to a potential drilling program and cannot be found to have been foreseeable.
The Trustee's "domino effect" argument on this point may be summarized as follows: (1) Scattered's failure to fund under the DIP Agreement led to non-payment of AFEs; (2) nonpayment of AFEs led to Hibernia Resources issuing notices deeming H & M a non-consenting party with respect to two wells (each a "
Clearly, Prospect's desire to oust Greenblatt as H & M's Manager through the appointment of a trustee arose prior to, and independent of, Scattered's actions as alleged in the Complaint. Thus, there is simply no causal connection between Scattered's actions, as alleged in the Complaint, and H & M's incurrence of attorneys' fees and costs associated with the Trustee's appointment.
Another contributing factor to the fees and costs associated with the Trustee's appointment was H & M's inability to use cash collateral, which occurred after Prospect declared a default under the Second Interim Cash Collateral Order. The alleged default was based on Hibernia Resources issuing a Notice of Non-Consent to H & M due to its failure to prepay completion costs under the JOA. As discussed in § II.B.2.b), infra, however, the JOA did not permit Hibernia Resources to issue the Notice of Non-Consent for failure to prepay completion costs. As such, Prospect declared a breach under the Second Interim Cash Collateral Order based on Hibernia Resources' improper issuance of the Notice of Non-Consent.
For all of these reasons, and based on the record before it, the Court finds that it would be improper to award damages against Scattered for the fees and expenses associated with the litigation surrounding the Trustee's appointment.
The Trustee also seeks to recover from Scattered the $100,000 H & M paid to the Hibernia entities as part of the Court-approved settlement. See § II.B.3, infra for a discussion of the settlement agreement.
Finally, the Trustee seeks to charge Scattered for certain fees and costs incurred in administering H & M's bankruptcy case. What the Trustee's argument fails to recognize, however, is that H & M's estate would need to be administered, and the related costs and expenses of professionals incurred, regardless of Scattered's alleged actions and the Trustee's appointment. There is simply nothing in the record indicating that such costs could have been avoided had Scattered funded the Disputed DIP Requests. Because such costs would have existed regardless of Scattered's actions, the Court finds that it would be improper to award damages against Scattered for the costs of administering H & M's bankruptcy case.
The Court will now turn to Scattered's second argument, which it raised for the first time in its post-trial brief,
DIP Agreement [Gr. Ex. H.1] at § 8.4(c). For the reasons explained below, this Court concludes that Scattered waived this defense by not pleading it or otherwise raising it prior to trial.
Under Federal Rule of Civil Procedure 8(c), as made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7008, waiver is an affirmative defense that is subject to forfeiture and waiver if not properly and timely raised. FED.R.CIV.P. 8(c).
Kariuki v. Tarango, 709 F.3d 495, 508 (5th Cir.2013) (citing Pasco ex rel. Pasco v. Knoblauch, 566 F.3d 572, 577 (5th Cir. 2009)) (internal quotations omitted).
Based on the record before it, the Court finds and concludes that Scattered waived
To prevail and recover damages on his breach of fiduciary duty claim, the Trustee must show that: (1) Greenblatt had a fiduciary relationship with H & M, (2) Greenblatt breached his fiduciary duties to H & M, and (3) Greenblatt's breach resulted in injury to H & M or benefit to Greenblatt.
As an initial matter, the Court notes that the parties do not dispute that Greenblatt served as H & M's Manager from August 1, 2008 to November 14, 2012. JPTO at 11, ¶¶ 22-23. As its Manager, Greenblatt owed fiduciary duties to H & M, including the duties of care and loyalty. To determine whether Greenblatt breached those fiduciary duties, a brief overview of the relevant standard is necessary.
"The duty of care requires officers and directors to manage the company's affairs with diligence and prudence." Roth v. Mims, 298 B.R. 272, 285 (N.D.Tex. 2003) (citing Gearhart Indus., Inc. v. Smith Int'l, Inc., 741 F.2d 707, 719 (5th Cir.1984)). "Due care is defined as that degree of care which a person of ordinary prudence would exercise under the same or similar circumstances." Id. (citations and internal quotations omitted). In general, the duty of care will be satisfied if the officer's actions comport with the standard of the business judgment rule. Gearhart, 741 F.2d at 723 n. 9.
Roth, 298 B.R. at 282-83.
On the other hand, "[t]he duty of loyalty dictates that a corporate officer or director must act in good faith and must not allow his or her personal interest to prevail over the interest of the corporation. The duty of loyalty requires an extreme measure of candor, unselfishness, and good faith on the part of the officer or director." Landon v. S & H Mktg. Grp., 82 S.W.3d 666, 672 (Tex.App.-Eastland 2002, no pet.) (citing Int'l Bankers Life Ins. Co. v. Holloway, 368 S.W.2d 567, 577 (Tex. 1963)). "While the duty of loyalty is generally directed towards a fiduciary's motivations in making a business decision, the duty of care concerns the care taken in the process by which that decision was reached." Kaye v. Lone Star Fund v. (U.S.), L.P., 453 B.R. 645, 680 (N.D.Tex.2011). Further, "interested" transactions are subject to a higher level of scrutiny.
Mims v. Roth (In re Performance Nutrition, Inc.), 239 B.R. 93, 110 (Bankr. N.D.Tex.1999).
With these precedents in mind, the Court will now turn to whether Greenblatt breached the duties of care and loyalty he owed to H & M as its Manager by: (1) failing to timely pay drilling costs, (2) not requesting funds under the DIP Agreement to prepay completion costs, and (3) not taking action against Scattered related to its alleged breach of the DIP Agreement. See Trustee's Post-Trial Brief [Dkt. No. 172] at ¶ 11 (listing alleged breaches).
Before the Court begins its analysis regarding Greenblatt's alleged breaches of fiduciary duty, additional background is required to put the Trustee's arguments into context. On February 4, 2004, H & M Resources, as operator, and Costas Oil & Gas, Ltd., as non-operator, entered into the JOA. H & M and Hibernia Holdings, LLC ("
On August 8, 2012, H & M Resources and Hibernia Resources entered into a Subcontract Agreement whereby Hibernia Resources agreed to serve "as a subcontractor to serve in the nature of a contract operator pursuant to the JOA to drill and complete and rework any oil and gas wells on the Property." Subcontract Agreement [Gr. Ex. C.1] at 1. In its role as contract operator, Hibernia Resources undertook to begin drilling operations on various well sites located on the Martin County property, which included: (1) the Dorothy Faye 319A #5 (the "
As relevant here, the Trustee's breach of fiduciary duty allegations against Greenblatt revolve around Greenblatt, as H & M's Manager, allegedly (1) not timely requesting funds under the DIP Agreement, and/or (2) either directing that H & M late pay, or not pay, AFEs issued to H & M by Hibernia Resources as operator under the JOA. The costs addressed in the AFEs at issue fall into two categories: (1) costs for initially drilling a well (referred to as drilling costs), and (2) costs for completing a well to production (referred to as completion costs). The parties disagree as to when H & M was required to pay each of these costs, as well as the risks to H & M associated with failing to timely pay these costs. With this distinction in mind, the Court will now return to the Trustee's allegations.
The Trustee argues that Greenblatt directed H & M to late-pay multiple AFEs related to drilling costs, which shows a pattern of mismanagement, particularly in light of the multiple risks associated with failing to pay drillings costs, including (1) H & M losing its interests in the underlying properties due to drilling obligations imposed by the leases, (2) Hibernia Resources issuing a Notice of Non-Consent that could, in turn, result in H & M incurring substantial penalties associated with being deemed a non-consenting party under the JOA, (3) potential litigation with Hibernia Resources related to the failure to timely pay, and (4) violations of the DIP Agreement and/or the Second Interim Cash Collateral Order. The Trustee argues that repeated late payments, in light of the risks associated with such late payments, do not reflect the actions of a prudent manager.
As discussed below, the Court disagrees that a pattern of late payments, without any resulting harm, can serve as the basis for a claim of breach of fiduciary duty. At trial, Greenblatt's unrefuted testimony was that he always intended for H & M to pay the drilling costs; it was not a question of if H & M would pay, but when. As testified to by Carl Carter, Chief Financial Officer of Hibernia Holdings (the parent company of Hibernia Resources), the JOA includes notice and grace period provisions that permitted H & M to delay payments without risking the immediate issuance of a Notice of Non-Consent. Indeed, as Carter testified, the JOA gave H & M fifteen days to pay for amounts billed in an AFE. If the payment was not timely received,
As previously detailed, one of the three required elements for a claim of breach of fiduciary duty is injury. Based on the record before it, however, the Court cannot find that Greenblatt's decision to direct H & M to late-pay certain AFEs for drilling costs resulted in injury to H & M. As such, even if the late payments were somehow imprudent, there was no resulting injury to H & M and, without a showing of injury, this Court cannot find a breach of fiduciary duty.
The Trustee also alleges that Greenblatt breached his fiduciary duties by failing to direct H & M to timely request funds under the DIP Agreement to prepay completion costs in accordance with the AFEs issued by Hibernia Resources, as a prudent manager would do, particularly in light of the attendant risks (as detailed in § II.B.2.a), supra). The Trustee points to evidence showing that (1) in late September and early October 2012, there were significant amounts due for completion costs, including $923,700.87
In response, Greenblatt argues that the express terms of the JOA do not permit Hibernia Resources to issue a Notice of Non-Consent based solely on H & M's failure to prepay completion costs; instead, the only penalty for non-payment is interest accrual. Further, at trial, Greenblatt testified that his reason for not paying the completion costs under protest was that he believed it was necessary for him to follow the express terms of the JOA, particularly since H & M was in bankruptcy
To determine whether Greenblatt's decision to not prepay completion costs under AFEs issued by Hibernia Resources was a breach of fiduciary duty, the Court must consider the operative documents. As its starting point, the Court will first turn to the Notices of Non-Consent issued by Hibernia Resources to H & M on October 4, 2012, regarding well DF 319 A #5 (Gr. Ex. T.2), and October 10, 2012, regarding well HR 248 #2 (Gr. Ex. M.3). Each of these notices solely and specifically reference JOA § 15.14, which states:
JOA [Gr. Ex. A.1] at § 15.14 (emphasis added). In turn, JOA § 15.13 states:
Id. at § 15.13 (emphasis added).
Although not focused on by the parties, the Court also notes Article VII.B (Liens and Payment Defaults), pursuant to which each non-operator grants to the operator a "lien upon its oil and gas rights in the Contract Area, and a security interest in its share of oil and/or gas when extracted and its interest in all equipment, to secure payment of its share of expenses, together with interest thereon at the rate provided in Exhibit "C." Further pursuant to this section:
Id. at Art. VII.B. Similarly, Article VII.C (Payment and Account), states that:
Id. at Art. VII.C.
With these provisions in mind, the Court will now turn to whether Greenblatt's actions, based upon his interpretation of the JOA, constituted a breach of fiduciary duty. As explained below, the Court concludes that Greenblatt's interpretation of the JOA was correct; thus, his decision to abide by the terms of the JOA was not a breach of fiduciary duty.
Section 15.14 of the JOA permits Hibernia Resources to deem H & M a non-consenting
The JOA is silent as to the distinction between drilling and completion costs. However, Hibernia Resources and H & M Resources also executed the Subcontract Agreement, which was agreed to by H & M. Subcontract Agreement [Gr. Ex. C.1] at 1, 5. Pursuant to § 3.1 of the Subcontract Agreement, "[t]he parties intend this Agreement to be a supplement to and an integral part of the JOA.... This Agreement, together with the JOA, is to be construed as a `Joint Operating Agreement' for all purposes under Texas law, including without limitation, Chapter 127, Texas Civil Practice & Remedies Code." Id. at § 3.1. Pursuant to the Subcontract Agreement, costs for "drilling" and costs for "completion" are separate and distinct costs.
Id. at 1 (emphasis added). While,
Id. (emphasis added).
When read in conjunction, the Court finds the JOA and the Subcontract Agreement to be unambiguous regarding the scenario under which Hibernia Resources may issue a Notice of Non-Consent. Pursuant to § 15.14 of the JOA, Hibernia Resources may only deem H & M to be a non-consenting party in the event that it fails to timely pay drilling costs.
As such, the Court concludes that Greenblatt correctly interpreted the JOA. The Court recognizes that prepaying the completion costs per the AFEs subject to protest was an option available to H & M; however, that course of action also had attendant risks, such as legal costs associated
Further, the Court concludes that Greenblatt's actions in this regard fall within the business judgment rule. Although Greenblatt served as both H & M's Manager and an officer of Scattered, he was not an insider of Hibernia Resources and his dealings with Hibernia Resources were not an "interested" transaction subject to heightened scrutiny. Under the JOA, H & M had two potential options when dealing with Hibernia's issuance of AFEs demanding prepayment of completion costs. Although the Trustee argues that paying the amounts under protest was the "more prudent" course of action, the evidence does not show that Greenblatt's decision to enforce the terms of the JOA lacked a business purpose, was tainted by a conflict of interest, or was the result of an obvious and prolonged failure to exercise oversight or supervision. Thus, the Court finds and concludes that Greenblatt's decision to not prepay completion costs based upon his interpretation of the JOA was the result of his informed business judgment and, as such, was not a breach of the fiduciary duty of care he owed to H & M as its Manager.
The Trustee alleges that Greenblatt breached his fiduciary duties to H & M when he failed to direct that H & M take action against Scattered in relation to its alleged breach of the DIP Agreement. The record, however, clearly shows that action was taken against Scattered, as reflected in the demand letter sent by Anderson Tobin PLLC, on behalf of H & M, to Scattered dated October 12, 2012. Tr. Ex. 85 (the "
Although Greenblatt testified that he first directed that the Demand Letter be sent, he then directed that it be rescinded. But, the Demand Letter had already been sent, and counsel for the Trustee and Scattered stipulated on the record that the Demand Letter was actually received by Scattered. See JPTO at 11, ¶ 40. On November 28, 2012, the Trustee was appointed and Greenblatt was no longer in control of H & M. Order Approving Appointment of Trustee [Gr. Ex. P.1].
Based upon this record, the Court finds that Greenblatt began to take action on behalf of H & M to address Scattered's alleged breach of the DIP Agreement; however, the Trustee's appointment divested Greenblatt of authority to take any further action on behalf of H & M. Moreover, the Court has already found that Scattered did not breach the DIP Agreement. See § II.A.1, supra. Because Scattered did not breach the DIP Agreement, Greenblatt's alleged failure to take action against Scattered for breaching the DIP Agreement cannot constitute a breach of fiduciary duty to H & M.
Although the Court previously found that Greenblatt did not breach the
After entry into the Subcontract Agreement in August 2012, Hibernia Resources generally stepped into H & M Resources' shoes as operator under the JOA. Subcontract Agreement [Gr. Ex. C.1] at 1. In this capacity, Hibernia Resources would send AFEs to H & M, requesting payment or prepayment of expenses that were due after various notice and grace periods. The Trustee argues that H & M's failure to pay AFEs issued for prepayment of completion costs, which was done at Greenblatt's direction, led to Hibernia Resources issuing the Notices of Non-Consent in October 2012 and the resulting "domino effect" that led to H & M incurring the substantial damages that are the subject of this adversary proceeding.
After the Notices of Non-Consent were issued, however, H & M and Hibernia Resources began discussing potential settlement terms. Both Jones, who negotiated on H & M's behalf, and Carter, the Chief Financial Officer of Hibernia Holdings, testified that H & M and Hibernia Resources reached an agreement in early November 2012, the material terms of which included, among other things, that H & M would convey certain property interests to Hibernia Holdings and receive other property from Hibernia Holdings in exchange. See also email from Jones to David Belzer of Prospect dated November 6, 2012 [Gr. Ex. M.4] (explaining the terms of the proposed conveyance). Jones testified that, because Prospect held a lien on the properties proposed to be conveyed to Hibernia Holdings, Hibernia Holdings was requiring Prospect's consent to the settlement. According to Jones, the exchange of properties was very favorable to H & M and Prospect, which would be granted a lien on the to be acquired property. However, Prospect refused to consent to the settlement, which was never consummated. Soon thereafter, on November 28, 2012, the Trustee was appointed. Order Approving Appointment of Trustee [Gr. Ex. P.1] at 1.
After his appointment, the Trustee entered into negotiations with the Hibernia entities to resolve the issues between the parties. As Carter testified, the Trustee ultimately reached a settlement with the Hibernia entities on terms identical to the Jones-negotiated settlement with one exception — the Trustee's settlement included a $100,000 payment to the Hibernia entities that was not part of the Jones-negotiated settlement. Although Prospect had refused to consent to the Jones-negotiated settlement (which was more favorable to H & M), Carter testified that Prospect did consent to the Trustee-negotiated settlement. The Trustee then filed a motion seeking Court approval of his settlement with the Hibernia entities, which the Court granted.
Here, the record shows that, prior to the Trustee's appointment: (1) H & M had negotiated a favorable settlement that would have resolved all of the issues between H & M and the Hibernia entities, (2) Court approval of that settlement would have stopped the alleged damages at issue here from accruing,
Based upon the facts established at trial, the Court finds that it was not foreseeable that Prospect, an established investment company, would act contrary to its own pecuniary interest and with no apparent business purpose in refusing to consent to the Jones-negotiated Hibernia settlement. Further, the consequences of Prospect's refusal to consent to the Jones-negotiated settlement, including the Trustee's negotiation of a settlement with the Hibernia entities on materially worse terms than those negotiated by H & M and the various fees and costs alleged in the Complaint, were extraordinary and not of the same nature as the damages that would have otherwise arisen from Greenblatt's decision to not prepay completion costs.
Further, as Greenblatt testified at trial, upon resolution of H & M's default under the Second Interim Cash Collateral Order and the DIP Agreement, Scattered would
As such, the Court finds and concludes that (1) Prospect's refusal to consent to the Jones-negotiated settlement was not foreseeable, (2) the consequences resulting from Prospect's actions were unexpected and extraordinary, and (3) Prospect's actions altered the natural sequence of events to produce results that would not otherwise have occurred. Thus, Prospect's decision not to approve the Jones-negotiated settlement was an intervening and superseding cause of H & M's alleged injuries.
As reflected in his Wage Claim, Greenblatt has asserted a claim for compensation for postpetition services rendered as H & M's Manager for the period from H & M's bankruptcy petition date (April 30, 2012) through November 2012. Wage Claim [Gr. Ex. X.1] at 1. According to Greenblatt, his claim is entitled to administrative priority pursuant to 11 U.S.C. § 503(b)(1)(A). Id.
The Trustee objected to Greenblatt's Wage Claim on multiple grounds, including that (1) Greenblatt failed to show he is entitled to the amounts requested, (2) there is no written agreement entitling Greenblatt to the amounts requested, and (3) Greenblatt failed to previously disclose his claim to the Court and parties in interest, including by failing to include such amounts in the budget to the Second Interim Cash Collateral Order.
The Court's analysis of the Trustee's objection must begin with § 503(b) of the Bankruptcy Code. Specifically § 503(b)(1)(A), which governs the allowance of administrative expense claims against a bankruptcy estate, states, in relevant part, that: "[a]fter notice and a hearing, there shall be allowed administrative expenses ..., including — (1)(A) the actual, necessary costs and expenses of preserving the estate including — (i) wages, salaries, and commissions for services rendered
According to the Fifth Circuit,
Total Minatome Corp. v. Jack/Wade Drilling, Inc. (In re of Jack/Wade Drilling, Inc.), 258 F.3d 385, 387 (5th Cir.2001) (request for administrative expense status under § 503(b)(1)(A)); see also Lasky v. Phones For All, Inc. (In re Phones For All, Inc.), 262 B.R. 914, 918 (N.D.Tex.2001) ("Accordingly, an expense is entitled to administrative priority treatment only if (1) it results from a transaction between the claimant and the trustee of the bankruptcy estate or a debtor in possession; and (2) the benefit to the debtor, and hence the right to payment, accrues post-petition."), aff'd, 288 F.3d 730 (5th Cir. 2002). The terms "actual" and "necessary" are to be construed narrowly. NL Indus., Inc. v. GHR Energy Corp., 940 F.2d 957, 966 (5th Cir.1991). Greenblatt bears the burden of proving that his claim is for actual, necessary costs and expenses of preserving the estate. In re TransAmerican Natural Gas Corp., 978 F.2d 1409, 1416 (5th Cir.1992).
The testimony at trial and the stipulations among the parties establish that Greenblatt served as H & M's Manager on an "at will" basis, with no employment contract. During his prepetition service, Greenblatt received a monthly salary of $6,000 per month. JPTO at 12, §§ 22-23. Although Greenblatt continued to serve as H & M's Manager on a postpetition basis, he was not paid a salary by H & M and H & M's postpetition budgets filed with the Court did not disclose any payment or accrual of Greenblatt's salary. Id. at ¶¶ 24-25. As such, the issue becomes whether Greenblatt was entitled to continue to receive his salary on a postpetition basis.
Although there is no written employment agreement, Greenblatt alleges that the LLC Regulations permit him to be compensated. Specifically, § 8.06 of the LLC Regulations state that:
LLC Regulations [Sc. Ex. B] at § 8.06. When questioned at trial, however, Greenblatt was unable to offer any evidence showing that H & M's sole member, Anglo American, had approved his salary. As such, the Court cannot find that the LLC Regulations entitle Greenblatt to a set salary of $6,000 per month. Such finding, however, is not conclusive of whether Greenblatt's services qualify for administrative expense status under § 503(b).
At trial, Greenblatt's unrefuted testimony was that, although he received a prepetition salary of $6,000 per month, he stopped taking this salary about a month prepetition "because he didn't want to pick a fight" with Prospect, H & M's prepetition secured lender, whom Greenblatt believed
Finally, the Court does not find persuasive the Trustee's argument that Greenblatt's failure to previously disclose his administrative claim is a ground for disallowance. First, the Court notes that H & M disclosed that Greenblatt served as its prepetition Manager at a salary of $6,000 per month. See Statement of Financial Affairs [Bankr.Case No. 12-32785, Dkt. No. 65] at 8 (question 23). And, although Greenblatt's salary does not appear on any Court-approved budgets, Greenblatt adequately explained why his salary was not budgeted for payment from Prospect's cash collateral and there is nothing in the record indicating that Greenblatt waived his right to seek allowance of an administrative claim for postpetition services rendered. Further, Greenblatt openly appeared before this Court, and other parties in interest, as H & M's Manager. Therefore, there can be no argument that parties were unaware that Greenblatt was continuing to act as H & M's Manager postpetition or that Greenblatt's Wage Claim is contrary to a prior agreement to waive his salary. Thus, the Court finds that Greenblatt's failure to disclose his postpetition salary prior to filing his Wage Claim does not act as a bar to Greenblatt seeking allowance of an administrative claim for postpetition services rendered.
Accordingly, based upon Greenblatt's unrefuted testimony, the Court finds that (1) the $42,000 reflected in the Wage Claim arose from a transaction with H & M as a debtor-in-possession, (2) Greenblatt's services enhanced H & M's ability to function on a postpetition basis, and (3) Greenblatt's services were necessary for H & M to continue to operate on a postpetition basis. Further, the Court finds that a salary of $6,000 per month for the services of the sole Manager of H & M is reasonable compensation under the circumstances of this case. Accordingly, the Wage Claim will be allowed in the amount of $42,000 as an administrative priority claim against H & M's Chapter 11 estate.
In Count 5, the Trustee asks the Court to subordinate Greenblatt's Wage Claim on the grounds that: (1) Greenblatt's alleged breaches of fiduciary duty constitute the inequitable conduct necessary for equitable subordination, and (2) Greenblatt's actions caused substantial damages to H & M. Trustee's Pre-Trial Brief [Dkt. No. 125] at ¶ 55. The basis for the requested subordination is 11 U.S.C. § 510(c), which states, in relevant part, that:
11 U.S.C. § 510(c).
In the Fifth Circuit, courts follow a three-prong test when considering a request for equitable subordination: "(1) the claimant must have engaged in inequitable conduct; (2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and (3) equitable subordination of the claim must not be inconsistent with the provisions of the Bankruptcy Code." Wooley v. Faulkner (In re SI Restructuring, Inc.), 532 F.3d 355, 360 (5th Cir.2008) (citing cases). Further, "a claim should be subordinated only to the extent necessary to offset the harm which the debtor or its creditors have suffered as a result of the inequitable conduct." Id. at 360-61 (citing cases).
As discussed in § II.B.2, supra, the Court previously found that Greenblatt did not breach the fiduciary duties he owed to H & M as its Manager. As such, those allegations cannot serve as a basis for equitable subordination. Further, after a thorough review of the record, the Court could find no other conduct by Greenblatt that would warrant application of § 510(c) to Greenblatt's Wage Claim. Finally, even if Greenblatt had participated in inequitable conduct, there is nothing in the record showing that (1) the alleged improprieties injured either H & M or its creditors, or (2) that Greenblatt benefited from such alleged actions. Thus, the Court finds that the Trustee has failed to carry his burden of proof for equitable subordination of Greenblatt's Wage Claim, and thus concludes that the Trustee's equitable subordination claim fails.
In his Answer and Counterclaim, Greenblatt alleges that he is entitled to indemnification for his attorneys' fees and costs incurred in defending this adversary proceeding under both the LLC Regulations and the DIP Agreement. The Court will address these in turn.
Section 16.02 of the LLC Regulations state that:
LLC Regulations [Sc. Ex. B] at § 16.02 (emphasis added).
In his Post-Trial Brief, the Trustee alleges that Greenblatt is not entitled to indemnification under the LLC Regulations because: (1) he "acted in bad faith and in a manner opposed to the best interest of H & M," and (2) he is liable to H & M for his "gross negligence,[
Because the Court has already found that Greenblatt acted within the scope of his fiduciary duties owed to H & M, and that his actions fell within the scope of the business judgment rule, the Court cannot find that his actions were grossly negligent or constituted willful misconduct. See § II.B.2, supra for this Courts' analysis of the Trustee's breach of fiduciary duty claim. As reflected by the record, and as discussed above, Greenblatt's actions were taken in good faith and in a manner that was not opposed to H & M's best interests. As such, the Court finds and concludes that Greenblatt is entitled to indemnification under LLC Regulations § 16.02 for any "loss, liability or expense, including attorneys' fees, actually and reasonably incurred" in defending against the Complaint.
The Court will now turn to Greenblatt's allegation that he is entitled to indemnification under § 8.4 of the DIP Agreement, which states:
DIP Agreement [Gr. Ex. H.1] at § 8.4(b) (emphasis added). As stipulated by the parties, the indemnity provisions of § 8.4(b) survived termination of the DIP Agreement. JPTO at 15, ¶ 66.
The Trustee attacks Greenblatt's claim for indemnification under the DIP Agreement on multiple fronts, including that: (1) the indemnity provision does not extend to Greenblatt as H & M's Manager; (2) the acts alleged in the Complaint do not fall within the scope of the indemnity provision; (3) the indemnification does not comply with the fair notice requirements of Texas law; and (4) Scattered's breach of the DIP Agreement bars Greenblatt's indemnification claim. Trustee's Pre-Trial Brief [Dkt. No. 125] at ¶¶ 60-71. Because the Court previously found that Scattered did not breach the DIP Agreement, see § II.A.1, supra, this Memorandum Opinion will only address the first three of the Trustee's arguments.
The Trustee argues that the indemnification provision does not extend to Greenblatt, in his capacity as H & M's Manager, for several reasons. First, the Trustee argues that, in his Counterclaim, Greenblatt only claimed indemnification as an officer of Scattered; however, Greenblatt has been sued in his capacity as H & M's Manager. Second, the Trustee argues that his breach of fiduciary duty claim against Greenblatt arises independent of the DIP Agreement and the parties' performance thereunder. Finally, the Trustee argues that the indemnity provision does not comply with applicable law. The Court will address these arguments in turn.
The Trustee argues first that, in his counterclaim, Greenblatt has only alleged indemnification as an officer of Scattered. Specifically, the Trustee cites to "Def.'s Countercl. 12,"
Amended Answer and Counterclaim [Dkt. No. 63] at 12, ¶¶ 117-120.
Accordingly, the Court finds that Greenblatt has alleged that he is entitled to indemnification under § 8.4(b) of the DIP Agreement as a "Related Party" indemnitee. As such, the relevant inquiry now becomes whether Greenblatt does, in fact, qualify as an Indemnitee under the express terms of the DIP Agreement.
Section 8.4(b) of the DIP Agreement states that "[t]he Debtors shall indemnify the Lender [Scattered] and each Related Party of the Lender (each such Person being called an `Indemnitee')...." DIP Agreement [Gr. Ex. H.1] at § 8.4(b). As such, the Court's analysis must focus on the parameters of the term "Related Party." Of relevance here, the DIP Agreement contains the following definitions:
As stipulated by the parties, H & M is owned 100% by Anglo American and Anglo American is owed 100% by Scattered.
Next, the Trustee argues that Greenblatt's alleged breaches of fiduciary duty arise independently from the DIP Agreement and, as such, do not fall within the scope of DIP Agreement's indemnity provision. To analyze this argument, the Court must consider the relevant provisions of the DIP Order, the DIP Agreement, and the Complaint.
The DIP Order shows that the primary purpose of the DIP Agreement was to provide funding for H & M's drilling program. "H & M, having advised the Court that it intends to undertake a drilling program to increase the value of its bankruptcy estate, does not have sufficient available sources of working capital or cash to operate its business without the proposed DIP Financing from [Scattered].... Given the need to undertake drilling to maintain lease rights, absent the granting of relief as requested herein, the Debtors and their estates will suffer immediate and irreparable harm." DIP Order [Gr. Ex. I.1] at ¶ F.
Turning next to the DIP Agreement, § 8.4(b) states, in relevant part, that:
DIP Agreement [Gr. Ex. H.1] at § 8.4(b) (emphasis added). The plain and unambiguous language of this provision contains an indemnification for damages and liabilities, including attorneys' fees and expenses, "arising out of, in connection with, or as a result of" the parties' performance under the DIP Agreement.
Finally, a review of the Complaint shows that each of Greenblatt's alleged breaches arise out of, in connection with, or as a result of H & M's performance under the DIP Agreement while Greenblatt was its Manager. Indeed, the Trustee summarizes the alleged breaches in his post-trial brief, generally as follows: (1) failing to timely pay for drilling costs [from funds drawn under the DIP Agreement], (2) failing to timely request funds under the DIP Agreement to pay drilling and completion costs, (3) instructing Jones to delay the first draw under the DIP Agreement, (4) allowing H & M to be declared a non-consenting party for failure to prepay expenses [from funds drawn under the DIP Agreement], (5) subjecting H & M to significant
Accordingly, based upon the plain and unambiguous language of the DIP Agreement, the Court finds and concludes that Greenblatt is an "Indemnitee" under the DIP Agreement and that his alleged actions arose out of, in connection with, or as a result of H & M's performance under the DIP Agreement, while Greenblatt was acting as its Manager, and fall under the scope of the indemnity provisions of § 8.4(b) of the DIP Agreement. Thus, Greenblatt is entitled to indemnification for "all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel" incurred in defending against the Trustee's claims against him. DIP Agreement [Gr. Ex. H.1] at § 8.4(b).
Now that the Court has determined that Greenblatt qualifies as an Indemnitee under the DIP Agreement and that the Trustee's claims are within the scope of § 8.4(b) of the DIP Agreement, it must determine whether § 8.4(b) is enforceable under applicable law. In arguing that § 8.4(b) is not enforceable, the Trustee alleges that: (1) the DIP Agreement is an ambiguous contract that must be construed against Scattered and in favor of H & M, and (2) the indemnity provisions do not comport with the "fair notice" requirements under Texas law. The Court will address these arguments in turn.
First, the Trustee argues that the DIP Agreement, particularly the indemnity provision, is ambiguous and should be construed against Scattered and in favor of H & M. Trustee's Pre-Trial Brief [Dkt. No. 125] at ¶¶ 62, 64-65. When pressed at trial, however, the Trustee's counsel admitted that his allegations of ambiguity were not pleaded in the Complaint or in his answer to the Answer and Counterclaim. Further, although the issue of ambiguity is found in the JPTO, it was included with the express annotation that both Scattered and Greenblatt objected to its inclusion because it was outside the scope of the Trustee's pleadings. JPTO at 45, ¶ 183 ("Contested Issues of Law")
Given the Trustee's failure to plead ambiguity and the Defendants' objection to its inclusion in the JPTO, the Court concludes that the Trustee waived his argument that the DIP Agreement is ambiguous. Arsement v. Spinnaker Exploration, Co., LLC, 400 F.3d 238, 246 (5th Cir.2005) ("It goes without saying that a pre-trial order controls the scope and course of trial; a claim or issue not included in the order is waived, unless presented at trial without objection"). Nonetheless, the Court has reviewed the DIP Agreement and finds that the document, including the indemnity provision, is not ambiguous and will, therefore, decline the Trustee's request that the
The Trustee next argues that, under Texas law, the indemnity provision of the DIP Agreement is unenforceable. Trustee's Pre-Trial Brief [Dkt. No. 125] at ¶¶ 66-71. According to the Trustee, to be enforceable, the indemnity provision must satisfy the "fair notice" requirements, which include: (1) the "express negligence rule," and (2) the conspicuousness requirement. Dresser Indus. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993). As summarized by the Texas Supreme Court:
Storage Processors, Inc. v. Reyes, 134 S.W.3d 190, 192 (Tex.2004) (footnote omitted).
As to the conspicuousness requirement, an indemnity clause must satisfy the standard of conspicuousness in the Texas Business and Commerce Code. Dresser, 853 S.W.2d at 511 ("We thus adopt the standard for conspicuousness contained in the [Business & Commerce] Code for indemnity agreements.... When a reasonable person against whom a clause is to operate ought to have noticed it, the clause is conspicuous."); Enron Corp. Sav. Plan. v. Hewitt Assocs., L.L.C., 611 F.Supp.2d 654, 672 (S.D.Tex.2009). Pursuant to the Texas version of the Uniform Commercial Code:
TEX. BUS. & COMM.CODE § 1.201(10).
The indemnification provision at issue here is found in Article 8 of the DIP Agreement titled "Miscellaneous," which contains a hodgepodge of 12 sections addressing matters ranging from where notices should be sent and the validity of the electronic transmission of documents to execution of the document in multiple counterparts and the severability of provisions. Tucked in among these is § 8.4, which is titled "Expenses: Indemnity: Damage Waiver." The text of Section 8.4(b) is neither in capitals nor bold. Instead, the font matches that contained in various other provisions of the DIP Agreement, including the more mundane provisions of Article 8. There is simply nothing in the text or presentation of § 8.4(b) that sets it apart from the remainder of the agreement or that would otherwise draw a reasonable person's notice.
Accordingly, the Court finds that § 8.4(b) fails to meet the conspicuousness requirement under Texas law. And, because the fair notice elements are interpreted in the conjunctive, the Court need not address whether the provision meets the express negligence rule. Thus, unless an exception to the fair notice requirements applies, the indemnification provision is not enforceable under Texas law.
As stated above, however, an exception to the fair notice requirements exists when the indemnitor had actual notice or knowledge of the indemnification provision. Cleere Drilling Co. v. Dominion Expl. & Prod., Inc., 351 F.3d 642, 647 (5th Cir. 2003) ("Even if we assume ... that the pertinent language of the Contract is not sufficiently conspicuous to meet the second prong of the subject test, we are convinced that the requirement of fair notice — both elements, i.e., express negligence and conspicuousness — is irrelevant in the face of Dominion's actual knowledge of the subject provisions of the Contract."); Dresser, 853 S.W.2d at 508 n. 2. This exception is a question of fact. Enron, 611 F.Supp.2d. at 674. "Actual notice or knowledge is in the nature of an affirmative defense to a claim of lack of fair notice." U.S. Rentals, 901 S.W.2d at 793. Therefore, the indemnitee bears the burden of proving notice or knowledge of the agreement. Id. Types of evidence that an indemnitee can use to meet its burden include evidence of specific negotiation of the indemnity, evidence of prior dealings of the parties, or "proof that the provision had been brought to the indemnitor's attention." Enron, 611 F.Supp.2d. at 673.
Here, there is no doubt in the Court's mind that H & M was aware of the indemnification provision in the DIP Agreement. Notably, the DIP Agreement was approved by this Court at H & M's specific request. See DIP Order [Gr. Ex. I.1] at 1 ("Came on to be considered the Debtor's Application...."); JPTO at 12, ¶ 26 ("On July 2, 2012, H & M sought the Court's approval to enter into a post-petition loan agreement with Scattered [Doc. No. 87]."). Indeed, the motion for approval of the DIP Agreement was filed and prosecuted on H & M's behalf by its bankruptcy counsel, Anderson Tobin, PLLC, a firm with a not insignificant bankruptcy practice. See id. at 12 (reflecting signature of attorney Aaron Tobin of Anderson Tobin, PLLC on H & M's behalf). Indemnity provisions, like the one contained in the DIP Agreement, are almost always included in debtor-in-possession financing agreements, as any experienced bankruptcy counsel knows. Further, although the Trustee himself may not have had actual knowledge of § 8.4(b) of the DIP Agreement, because negotiation and execution of the document occurred prior to his appointment, it is H &
After careful consideration of the facts, the Court finds that H & M, acting through Greenblatt as its Manager, had actual knowledge of the indemnification provision set forth in the DIP Agreement. Thus, the Court concludes that the indemnification provision found at § 8.4(b) of the DIP Agreement is enforceable and need not comply with the fair notice requirements.
The Court will now turn to the amount and priority of Greenblatt's claims for indemnification. Initially, Greenblatt requested indemnification for his attorneys' fees incurred in defending against the Trustee's claims in the amount of $427,227.50 and $28,861.10 in related expenses, plus prospective fees in the event that a judgment in Greenblatt's favor is appealed.
Based upon its independent review of Gr. Ex. R.4.C, the Court finds that an additional $565.00 in fee reductions is appropriate, as follow:
Date Timekeeper Rate Hours Reduction 11/14/13 NMN $225 .1 $22.50 11/15/13 NMN $225 1.1 $247.50 11/18/13 NMN $225 .2 $45.00 12/05/13 NMN $225 .5 112.50 12/10/13 NMN $225 .5 $112.50 01/29/14 NMN $250 .1 $25.0Total: $565.00
With this additional reduction, the Court finds that Greenblatt is entitled to indemnification for $420,145 in attorneys' fees incurred in defending against the Trustee's claims and $28,831.40 in related expenses, plus the following amounts should the Trustee appeal the judgment to be entered in accordance with this Memorandum Opinion: (1) $30,000 for post-trial motions before this Court, (2) $35,000 for an appeal to the district court, (3) $25,000 for an appeal to the Fifth Circuit, (4) $25,000 for an application for writ of certiorari to the U.S. Supreme Court, and (5) $15,000 if that writ is granted. Further, the Court finds that such amounts represent reasonable attorneys' fees and expenses in relation to this adversary proceeding and any resulting appeal.
Now that the Court has determined the amount of Greenblatt's indemnification claim, it will turn to the priority of such claim. Greenblatt argues, and the Trustee agrees, that any allowed indemnification claim arising under the DIP Agreement should be entitled to priority as an administrative claim against H & M's Chapter 11 bankruptcy estate, while any allowed indemnification claim arising under the LLC Regulations should be classified as a general unsecured claim. See Plaintiff Douglass J. Brickley's Post-Trial Brief [Dkt. No. 172] at ¶ 22 ("Thus, if this Court finds that Mr. Greenblatt is entitled to indemnification under the DIP Agreement, it would appear that Mr. Greenblatt would be entitled to assert a Chapter 11 administrative expense claim.... Similarly, if the Court concludes that Mr. Greenblatt is entitled only to indemnification under H & M's Amended Regulations, ... then Mr. Greenblatt's indemnification claim should be an unsecured claim."); Leon A. Greenblatt, III's Post Trial Brief [Dkt. No. 172] at ¶ 31 ("Greenblatt's indemnification claim under the DIP Agreement is asserted as a Chapter 11 administrative expense claim....", while indemnification under the LLC regulations would be a general unsecured claim.). Despite the parties' agreement on this issue, the Court will nonetheless analyze the asserted priority for each claim.
As explained in § II.C, supra, to be entitled to administrative expense priority, a claim must meet the requirements of 11 U.S.C. § 503(b). According to the Fifth Circuit,
Total Minatome Corp. (In the Matter of Jack/Wade Drilling, Inc.), 258 F.3d 385, 387 (5th Cir.2001); see also Lasky, 262 B.R. at 918 (N.D.Tex.2001) ("Accordingly, an expense is entitled to administrative priority treatment only if (1) it results from a transaction between the claimant and the trustee of the bankruptcy estate or a debtor in possession; and (2) the benefit
First, it is undisputed that Greenblatt's indemnification claim under the DIP Agreement arises from a postpetition transaction between debtor-in-possession H & M and Scattered. See JPTO at 12, ¶¶ 26-28. Further, as discussed in § II.E.2.b), supra, the Trustee's allegations against Greenblatt all arise out of, in connection with, or as a result of H & M's performance under the DIP Agreement while Greenblatt was its Manager. Thus, the Court finds that Greenblatt has satisfied the first prong.
Second, the purpose behind H & M and Scattered entering into the DIP Agreement was to supplement H & M's use of cash collateral so that it could undertake its drilling program. As reflected in the DIP Order, which was agreed to by H & M's counsel, "[t]he ability of the Debtors to immediately obtain sufficient working capital and liquidity through the DIP Financing is vital to the preservation and maximization of the value of the Debtors' assets and properties.... Given the need to undertake drilling to maintain lease rights, absent the granting of the relief as requested herein, the Debtors and their estates will suffer immediately and irreparable harm." DIP Order [Gr. Ex. I.1] at ¶ F. Further, the evidence shows that (1) H & M requested $800,000 in advances, (2) Scattered funded the full amount requested, and (3) the funds advanced by Scattered to H & M were of benefit to the estate. Although the fees and expenses incurred by Greenblatt did not themselves benefit the estate, Scattered's lending under the DIP Agreement clearly did and the postpetition agreement to indemnify was incurred so that H & M could receive the funding it required. Thus, the Court finds that Greenblatt has also met the second prong. Accordingly, the Court concludes that Greenblatt's indemnification claim under the DIP Agreement should be allowed as an administrative expense of H & M's Chapter 11 estate.
As noted previously, Greenblatt also alleges that he is entitled to indemnification under the terms of the LLC Regulations. Because Greenblatt does not allege that this claim is entitled to priority, the Court need not analyze the claim under 11 U.S.C. § 503(b). See Greenblatt's Post-Trial Brief [Dkt. No. 170] at ¶ 31. Accordingly, and in the event that this Court erred in allowing Greenblatt's indemnification claim under the DIP Agreement, the Court concludes that Greenblatt's indemnification claim under the LLC Regulations should be allowed as a general unsecured claim in H & M's bankruptcy case.
For the reasons explained herein, the Trustee takes nothing by his Complaint. Greenblatt is entitled to a judgment in his favor on his counterclaim for indemnification under the DIP Agreement in the amount of $448,976.40, plus prospective costs in the event that such judgment is appealed in the following amounts: (1) $30,000 for post-trial motions before this Court, (2) $35,000 for an appeal to the district court, (3) $25,000 for an appeal to the Fifth Circuit, (4) $25,000 for an application for writ of certiorari to the U.S. Supreme Court, and (5) $15,000 if that writ is granted, which shall be allowed as an administrative expense claim against H & M's Chapter 11 bankruptcy estate. Alternatively, if the Court erred in allowing Greenblatt's indemnification claim under the DIP Agreement, Greenblatt is entitled to a judgment in his favor on his counterclaim for indemnification under the LLC
A judgment reflecting this ruling shall be entered separately. The Court hereby directs the parties' counsel to confer with each other and attempt to submit an agreed form of judgment consistent with this Memorandum Opinion to the Court within ten days of the entry of this Memorandum Opinion on the Court's docket. If no agreement can be reached, each party shall submit its own proposed form of judgment on or before the tenth day after entry of this Memorandum Opinion on the Court's docket, along with an explanation of why the other side's proposed judgment is improper.
TEX. CIV. PRAC. & REM.CODE § 41.001(11); see also e2 Creditors Trust v. Stephens, Inc. (In re e2 Communications, Inc.), 354 B.R. 368, 404 (Bankr.N.D.Tex.2006) (relying on the definition of "gross negligence" contained in § 41.001 when analyzing indemnity provisions).
