Filed: May 16, 2018
Latest Update: Mar. 03, 2020
Summary: Case: 17-10481 Document: 00514475379 Page: 1 Date Filed: 05/16/2018 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT United States Court of Appeals Fifth Circuit FILED No. 17-10481 May 16, 2018 Lyle W. Cayce Clerk In the Matter of: GARY M. BEACH, Debtor DEEPROCK VENTURE PARTNERS, L.P., Appellant v. GARY M. BEACH; GENTRY BEACH; DIANE G. REED, Chapter 7 Trustee, Appellees Appeal from the United States District Court for the Northern District of Texas USDC No. 3:16-CV-1552 Before STEWART
Summary: Case: 17-10481 Document: 00514475379 Page: 1 Date Filed: 05/16/2018 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT United States Court of Appeals Fifth Circuit FILED No. 17-10481 May 16, 2018 Lyle W. Cayce Clerk In the Matter of: GARY M. BEACH, Debtor DEEPROCK VENTURE PARTNERS, L.P., Appellant v. GARY M. BEACH; GENTRY BEACH; DIANE G. REED, Chapter 7 Trustee, Appellees Appeal from the United States District Court for the Northern District of Texas USDC No. 3:16-CV-1552 Before STEWART,..
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Case: 17-10481 Document: 00514475379 Page: 1 Date Filed: 05/16/2018
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
No. 17-10481 May 16, 2018
Lyle W. Cayce
Clerk
In the Matter of: GARY M. BEACH,
Debtor
DEEPROCK VENTURE PARTNERS, L.P.,
Appellant
v.
GARY M. BEACH; GENTRY BEACH; DIANE G. REED, Chapter 7 Trustee,
Appellees
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:16-CV-1552
Before STEWART, Chief Judge, and HAYNES and WILLETT, Circuit Judges.
PER CURIAM:*
This appeal arises from the bankruptcy of Gary M. Beach, a Dallas oil-
and-gas businessman. The bankruptcy Trustee and DeepRock Venture
Partners, L.P., the largest unsecured creditor of Beach, filed an adversary
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
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No. 17-10481
proceeding claiming that Beach and his son Gentry Beach (collectively, the
“Beaches”) fraudulently transferred assets to shield them from creditors. After
court-ordered mediation, the Trustee and the Beaches agreed to settle the
adversary proceeding, but DeepRock objected. The bankruptcy court approved
the settlement, and the district court affirmed. On appeal, DeepRock argues
the bankruptcy court abused its discretion in approving the settlement. We
AFFIRM.
I. Factual and Procedural Background
In 2005, Beach formed a partnership with DeepRock, a New York
investment firm, to drill for oil. DeepRock provided the capital, and Beach
managed the partnership as its CEO. The partnership soured, however, after
several profitless years; Beach sued DeepRock to seize control of the
partnership’s assets, and DeepRock counterclaimed. A jury found in favor of
DeepRock, and the court entered a judgment against Beach imposing more
than $800,000 in damages. Some months later, in 2011, Beach filed for
bankruptcy.
DeepRock filed a claim in Beach’s bankruptcy case, as well as an
adversary proceeding, alleging that Beach was not entitled to a discharge of
his debts under 11 U.S.C. § 727(a)(2) because he fraudulently transferred
assets. The bankruptcy Trustee initiated a separate adversary proceeding
against the Beaches, seeking to avoid and recover the value of the same
allegedly fraudulently transferred assets. The bankruptcy court subsequently
allowed DeepRock to join the Trustee’s adversary proceeding, and they filed an
amended joint complaint (the “Complaint”), which is at the heart of this appeal.
The Complaint alleged that in 2010, amidst the original lawsuit between
Beach and DeepRock, the Beaches fraudulently transferred assets from a
family trust to shield them from Beach’s creditors. Specifically, the Beaches
allegedly took advantage of Beach’s father, who had severe dementia, by
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essentially fabricating his signature for documents that transferred assets
from the family trust to a newly created trust (the “2010 Trust”). The 2010
Trust made the Beaches the trust’s only beneficiaries and, unlike the family
trust, had a spendthrift provision purporting to insulate Beach’s interest in the
trust from his creditors. The Complaint further alleged that the Beaches spent
freely from the 2010 Trust and then drained it shortly before Beach filed for
bankruptcy, namely by purchasing a home for more than $800,000 in the
Highland Park neighborhood of Dallas (the “Highland Park Home”), in which
Beach and his wife lived.
The Complaint, in turn, sought avoidance and recovery of the Beaches’
alleged fraudulent transfers from the trusts under 11 U.S.C. § 548(a)(1)(A) and
(e), § 550(a), and § 544(b) in combination with sections 24.005 and 24.008 of
the Texas Uniform Fraudulent Transfer Act. It also sought the imposition of
a constructive trust over the 2010 Trust’s assets and connected assets. Finally,
it sought a declaratory judgment that the Beaches self-settled the 2010 Trust,
the trusts were Beach’s alter egos, and the bankruptcy estate included Beach’s
interest in the 2010 Trust and connected assets.
The Beaches moved to dismiss. They argued that the Trustee and
DeepRock lacked standing to challenge the 2010 Trust’s validity, that any
asset transfers were not fraudulent transfers, and that the Trustee was
collaterally estopped from challenging the 2010 Trust due to earlier, related
state court litigation. 1
The bankruptcy court denied dismissal and ordered the parties into
mediation. The parties attended a day of mediation in December 2015. No
1 In the earlier, related state court litigation, other beneficiaries of the family trust
challenged the validity of the 2010 Trust. The litigation ultimately settled.
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settlement was reached by the day’s end, but after DeepRock’s representatives
left, the Trustee reached an agreement with the Beaches (the “Settlement”).
The final Settlement provided, in relevant part, as follows: (1) mutual
releases of any claims between the parties and dismissal of the adversary
proceeding; (2) payment of $1 million to the Trustee, using proceeds from the
sale of the Highland Park Home; (3) waiver of Beach’s discharge in bankruptcy
under 11 U.S.C. § 727(a)(10), without admission of fault or wrongdoing; and
(4) delivery to the Trustee of information regarding the finances and assets of
another company involving Beach, Beach Petroleum LLC.
The Settlement further provided that if the Trustee determined that the
2010 Trust’s interest in Beach Petroleum was of more than nominal or minimal
value, then the parties would have good faith discussions as to that value and
how to distribute it. Subsequently, the Trustee received and reviewed financial
information relating to Beach Petroleum, and the parties agreed on an
additional $15,000 payment to the bankruptcy estate, which came from the
$21,000 left in Beach Petroleum’s bank account as of the date of the
Settlement.
Overall, DeepRock was entitled to approximately $775,000 of the
$1,015,000 from the Settlement, reflecting between 92 to 93 percent of its
initial claims against the bankruptcy estate. DeepRock had initially claimed
approximately $822,713, but it amended its claim to approximately $2.5
million three days before the bankruptcy court’s hearing on the Settlement.
Additionally, because the Settlement provided for a waiver of Beach’s
discharge, DeepRock could pursue collection efforts on any unpaid amounts
remaining after the Settlement’s distribution to creditors.
DeepRock objected to the Settlement, raising arguments similar to what
it has raised on appeal, namely that the Settlement did not maximize value for
Beach’s creditors. The bankruptcy court held a hearing over two days and
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approved the Settlement. DeepRock appealed to the district court, which
affirmed.
II. Standard of Review
The bankruptcy court’s approval of a settlement agreement, as affirmed
by the district court, is reviewed for abuse of discretion. Conn. Gen. Life Ins.
Co. v. United Cos. Fin. Corp. (In re Foster Mortg. Corp.), 68 F.3d 914, 917 (5th
Cir. 1995). A trial court abuses its discretion when it makes an error of law or
a clearly erroneous assessment of the evidence. Leonard v. Luedtke (In re
Yorkshire LLC),
540 F.3d 328, 331 (5th Cir. 2008) (per curiam). The
bankruptcy court’s conclusions of law are subject to de novo review, but its
findings of fact may be reversed only if this court is “left with ‘a firm and
definite conviction that a mistake has been committed.’” Foster
Mortg., 68 F.3d
at 917 (quoting Sequa Corp. v. Christopher (In re Christopher),
28 F.3d 512,
514 (5th Cir. 1994)).
III. Discussion
A bankruptcy court may approve an adversary litigation settlement that
is “fair and equitable and in the best interest of the estate.” Foster Mortg., 68
F.3d at 917 & n.2; see also FED. R. BANKR. P. 9019(a). We apply a three-part
balancing test “with a focus on comparing ‘the terms of the compromise with
the likely rewards of litigation.’” Official Comm. of Unsecured Creditors v.
Moeller (In re Age Ref., Inc.),
801 F.3d 530, 540 (5th Cir. 2015) (quoting In re
Jackson Brewing Co.,
624 F.2d 599, 602 (5th Cir. 1980)).
A bankruptcy court must evaluate: (1) the probability of success in
litigating the adversary claim; (2) the complexity and likely duration of
litigation; and (3) “all other factors bearing on the wisdom of the compromise.”
Age. Ref., 801 F.3d at 540. The third prong’s “other factors” include “(i) the best
interests of the creditors, with proper deference to their reasonable views; and
(ii) the extent to which the settlement is truly the product of arms-length
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bargaining, and not of fraud or collusion.” Id. (internal quotations omitted)
(quoting Official Comm. of Unsecured Creditors v. Cajun Elec. Power Coop. ex
rel. Mabey (In re Cajun Elec. Power Coop.),
119 F.3d 349, 356 (5th Cir. 1997)).
The bankruptcy court made findings showing its consideration of these factors,
and we conclude that it did not abuse its discretion in doing so.
A. Probability of Success in Litigating Claims
“[I]t is unnecessary to conduct a mini-trial to determine the probable
outcome of any claims waived in the settlement.” Cajun Elec., 119 F.3d at 356.
Instead, the bankruptcy court “need only apprise [itself] of the relevant facts
and law so that [it] can make an informed and intelligent decision.”
Id.
(quoting LaSalle Nat’l Bank v. Holland (In re Am. Reserve Corp.),
841 F.2d
159, 163 (7th Cir. 1987)).
The bankruptcy court concluded that if the parties litigated out the
adversary proceeding’s claims, the Trustee had a high probability of success in
winning precisely what the Settlement provides. But, the court concluded,
there was a high degree of uncertainty as to whether the Trustee would win
more than that. These findings were not clearly erroneous given the
complexity of the claims and defenses, which the bankruptcy court duly
discussed.
DeepRock argues there was no uncertainty about the merits of the claims
and therefore this factor is immaterial here. It points to Beach’s assertion of
his Fifth Amendment right against self-incrimination in answering the
Complaint, as well as the jury verdict against Beach in his earlier lawsuit with
DeepRock and Beach’s later criminal indictment for bankruptcy fraud.
We are unpersuaded. DeepRock cites no authorities to support its view
that courts need not weigh the uncertainties of litigation under such
circumstances. Additionally, although Beach invoked the Fifth Amendment in
answering the Complaint, the parties vigorously disputed whether Beach
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would have done so at the Settlement hearing if he had been subpoenaed. It
is therefore hardly clear that Beach would invoke the Fifth Amendment at
trial. The Beaches’ standing and estoppel arguments could also lead to
outright dismissal. Finally, Beach’s other legal troubles do not prove that the
Beaches committed the fraudulent transfers alleged here.
B. Complexity and Expense of Litigation
“We need not belabor this factor.” Cajun Elec., 119 F.3d at 357. The
bankruptcy court concluded that litigation would entail a multi-week trial,
which would not proceed for many months and which would cost hundreds of
thousands of dollars in legal and expert witness fees. Again, these findings
were not clearly erroneous.
The Complaint alleged that in order to defraud Beach’s creditors, the
Beaches essentially fabricated the signature of Beach’s father multiple times
while he had profound enough dementia that he could not engage in estate
planning. The Beaches have “vehemently” disputed these allegations. At the
settlement hearing, Gentry Beach testified, contrary to the Complaint, that
Beach’s father voluntarily chose to transfer the family trust’s assets to protect
them from his wife’s family (the “Step Family”).
It was undoubtedly within the bankruptcy court’s discretion to conclude
that these allegations would be complex and costly to litigate, involving
significant trial and witness preparation. Moreover, as the bankruptcy court
noted, Beach’s bankruptcy case, in which DeepRock is the primary creditor,
had already been “very contentious” and pending for four and a half years. The
bankruptcy court could reasonably expect a similarly protracted battle if the
parties litigated, rather than settled, these claims.
C. Other Factors Bearing on the Wisdom of the Settlement
DeepRock argues the Settlement is not in the best interest of Beach’s
creditors because it fails to maximize the value of Beach Petroleum. Under the
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Settlement, Beach Petroleum’s value is assumed to be its remaining $21,000
in cash. Of that, the bankruptcy estate received $15,000.
The bankruptcy court concluded that Beach Petroleum’s value was
speculative at best. DeepRock challenges this conclusion, arguing the
bankruptcy court lacked sufficient evidence to approve the Settlement as “fair
and equitable.” In particular, DeepRock argues the Trustee did not obtain an
expert valuation of Beach Petroleum or otherwise conduct a rigorous analysis
of its worth, and instead relied only on information from Gentry Beach. 2
We conclude the bankruptcy court had sufficient evidence to determine
that Beach Petroleum’s value was speculative and, therefore, to approve the
Settlement. Gentry Beach testified that Beach Petroleum’s existing
investments consist of agreements that have produced no income from oil or
gas leases to date and which are uncertain to do so in the future. Under one
agreement, for example, Beach Petroleum’s interest may never be in the money
because there must first be millions in revenue generated to recoup
development costs—an uncertain prospect given relatively low oil prices. 3
2 DeepRock also argues the bankruptcy court erroneously rejected DeepRock’s
evidence showing that Beach Petroleum was worth more than its remaining cash. We
disagree. DeepRock’s evidence consisted of reports that were ostensibly created by a private
third party, and which DeepRock downloaded from a Louisiana state database. The
bankruptcy court excluded the reports on the ground that they lacked foundation and were
not authenticated. DeepRock argues the reports are self-authenticating. But only certified
copies of public records are self-authenticating. See FED. R. EVID. 902(4). A party may also
produce evidence that a public record “was recorded or filed in a public office as authorized
by law; or . . . from the office where items of this kind are kept.” FED. R. EVID. 901(b)(7). The
record does not show that DeepRock provided a certified copy of the reports or that it provided
any other authenticating evidence. The bankruptcy court thus did not err in excluding them.
See Simmons v. Hoegh Lines, 784 F.2d 1234, 1238 (5th Cir. 1986). Additionally, DeepRock
failed to lay a foundation to admit the reports under an exception to the hearsay rule. See
FED. R. EVID. 801, 803.
3DeepRock argues that, in concluding that Beach Petroleum had speculative value,
the bankruptcy court improperly took judicial notice of certain headwinds facing the oil and
gas industry. The bankruptcy court specifically stated that it would take judicial notice of
“current oil and gas commodity prices, and the prices they have yielded for the past several
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It was within the bankruptcy court’s discretion to credit Gentry Beach’s
testimony, for which there is also supporting documentation in the record, and
DeepRock provided no competent evidence to refute it. See G.H. Leidenheimer
Baking Co., v. Sharp (In re SGSM Acquisition Co., LLC), 439 F.3d 233, 239
(5th Cir. 2006); Robert v. Dennis (In re Dennis),
330 F.3d 696, 701–02 (5th Cir.
2003); Perry v. Dearing (In re Perry),
345 F.3d 303, 309 (5th Cir. 2003). As the
bankruptcy court also observed, Beach Petroleum generated only about $1
million in revenue over several years when oil prices were higher. By
comparison, DeepRock had spent about $800,000 in legal fees on the adversary
proceeding.
The record thus supports the bankruptcy court’s conclusion that Beach
Petroleum had only speculative worth and, in turn, that the Settlement was
“fair and equitable” when considering the likely rewards, costs, and risks of
litigation. See Foster Mortg., 68 F.3d at 917. We also note that the bankruptcy
court heard hours of testimony over two days, reviewed dozens of exhibits, and
directly examined Gentry Beach. The record of the Settlement hearing reflects
the bankruptcy court’s significant engagement with the issues and facts in
dispute before bringing to bear its “informed, independent judgment.” See
United States v. AWECO, Inc. (In re AWECO, Inc.),
725 F.2d 293, 299 (5th Cir.
1984) (quoting Protective Comm. for Indep. Stockholders of TMT Trailer Ferry
v. Anderson,
390 U.S. 414, 424 (1968)).
DeepRock next argues that the Settlement understates damages. The
Trustee calculated damages for the fraudulent transfers by calculating what
Beach would have received from the family trust upon his father’s death in
months.” The bankruptcy court was within its discretion to take notice of such prices. See
FED. R. EVID. 201(b)(2); cf. Catogas v. Cyberonics, Inc., 292 F. App’x 311, 316 (5th Cir. 2008)
(per curiam) (“We can, of course, take judicial notice of stock prices.”).
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2011, and which thus would have been available to creditors, if not for his
allegedly transferring the money to the spendthrift 2010 Trust. Based on $1.7
million left in the family trust at the time of the alleged transfers, the Trustee
calculated Beach would have received $658,100. The Trustee sought an
additional $340,000 in attorneys’ fees for the Trustee and DeepRock.
DeepRock argues that the Trustee wrongly used $1.7 million as the
baseline. Instead, DeepRock argues the Trustee should have looked to the
value of all the assets that would have been in the family trust if not for the
Beaches already having drained it before transferring the balance to the 2010
Trust. DeepRock argues that those assets, when added to the $1.7 million
baseline, total approximately $2.7 million.
Assuming, arguendo, that the allegedly dissipated assets would be
recoverable as fraudulent transfers, we conclude that the bankruptcy court
properly exercised its discretion in assessing the evidence as to any associated
damages. See SGSM, 439 F.3d at 239. Gentry Beach testified at the
Settlement hearing that the Step Family was responsible for taking a
significant portion of the disputed amounts. Another significant portion,
according to Gentry Beach, was never in the family trust and so would not have
been among the assets allegedly transferred into the 2010 Trust to be shielded
from creditors. We defer to the bankruptcy court’s credibility determinations
as to Gentry Beach’s testimony; DeepRock does not point to any competent
evidence in the record that requires us to find it not credible, nor does the
record reflect any such evidence. See
Perry, 345 F.3d at 309.
DeepRock also argues the Settlement is not in the best interests of
Beach’s creditors because it fails to seek recovery of profits and appreciation
on the alleged fraudulently transferred assets. This includes the appreciation
of the Highland Park Home and Beach Petroleum’s purported $1 million in
profits, which DeepRock alleges one or both of the Beaches dissipated. Again,
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there is no abuse of discretion. See COLLIER ON BANKRUPTCY ¶ 550.02[3][a]
(Richard Levin & Henry J. Sommer eds., 16th ed. 2017) (describing it as a
thorny issue whether an estate should be entitled to an increase in the value
of transferred property under 11 U.S.C. § 550(a)); Tex. Bus. & Com. Code
§ 24.009(c)(1) (providing that creditors may recover “the value of the asset
transferred,” which “must be for an amount equal to the value of the asset at
the time of the transfer, subject to adjustment as the equities may require”
(emphasis added)).
As to the Highland Park Home, the Settlement gives Beach’s creditors a
guaranteed $1,015,000, which is personally backstopped by Gentry Beach,
even if the home sale fails to raise that amount. In exchange, the creditors
give up a limited amount of potential upside should the home ultimately sell
at its full list price of $1.5 million. 4 Comparing “the terms of the compromise
with the likely rewards of litigation,” Age Ref., 801 F.3d at 540 (quoting
Jackson
Brewing, 624 F.2d at 602), we see no clear error, and DeepRock points
to no controlling authority indicating that such an exchange is inherently
unfair.
As to Beach Petroleum’s purported dissipated profits, DeepRock appears
to argue that the bankruptcy estate is entitled to the profits because the
Beaches used fraudulently transferred assets to create or fund Beach
Petroleum. The Beaches, however, dispute that allegation, and DeepRock
4 DeepRock acknowledged at the Settlement hearing that, under one plausible theory
of the case, the bankruptcy estate is entitled to only 55 percent of the Highland Park Home’s
value, because the home is technically an asset of the 2010 Trust, and Beach has only a 55
percent interest in its assets (Gentry Beach has a 45 percent interest). By this measure, if
the Highland Park Home sold at its full list price of $1.5 million, less a 6 percent real estate
commission, the bankruptcy estate would get approximately $775,500. By comparison, the
Settlement calculates actual damages of $658,100 (not including $15,000 for Beach
Petroleum, $2,000 in miscellany, and $340,000 in attorneys’ fees).
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again does not point to any evidence in the record supporting it. 5 Thus,
assuming, arguendo, that the purportedly dissipated profits would be
recoverable, the bankruptcy court did not err on this point.
DeepRock lastly argues that the Settlement unfairly allows Gentry
Beach to retain two disputed assets: (1) excess sale proceeds from the Highland
Park Home (i.e., proceeds in excess of the Settlement amount); and (2)
ownership of Beach Petroleum. We disagree. DeepRock’s argument regarding
the Highland Park Home’s excess sale proceeds is a variant of its argument
that the Settlement should have accounted for the home’s appreciation. We
have already rejected this argument.
Regarding Beach Petroleum, we have already concluded that the
bankruptcy court did not clearly err in determining that Beach Petroleum’s
value was speculative. It also, therefore, did not abuse its discretion in
approving a Settlement that exchanges an asset of speculative value for 30
cents on the dollar to creditors, as well as a waiver of discharge. The
bankruptcy court emphasized its need to weigh the overall costs and benefits
of this exchange, and in doing so, it did not make any legal errors or clearly
erroneous factual findings or assessments of the evidence.
IV. Conclusion
For the foregoing reasons, we AFFIRM the bankruptcy court’s judgment
approving the Settlement.
5 Insofar as DeepRock advances some other theory of recovery, it has waived that
argument due to inadequate briefing. See SEC v. Life Partners Holdings, Inc., 854 F.3d 765,
778 n.7 (5th Cir. 2017).
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