Crescent Res. Litig. Trust By v. Duke Energy Corp.

500 B.R. 464

CRESCENT RESOURCES LITIGATION TRUST by and through Dan BENSIMON, Trustee, Plaintiff,

v.DUKE ENERGY CORPORATION; Duke Ventures, LLC; Spectra Energy Capital, LLC f/k/a Duke Capital, LLC; Duke Ventures, Inc.; Duke Energy Carolinas, LLC; Duke Energy Carolinas; B. Keith Trent; Jim W. Mogg; Arthur W. Fields; and R. Wayne McGee, Defendants.

No. A–12–CA–009–SS.

United States District Court,

W.D. Texas,

Austin Division.

Oct. 4, 2013.

Arley D. Finley, III, Diamond McCarthy Taylor & Finley, L.L.P., B. Russell Horton, D. Douglas Brothers, Gary L. Lewis, Sommer L. Coutu, George Brothers Kincaid & Horton, L.L.P., Joseph D. Martinec, Martinec Winn Vickers & McElroy, P.C., Austin, TX, Benjamin R. Garry, Diamond McCarthy, LLP, Houston, TX, James D. McCarthy, Diamond McCarthy, LLP, Dallas, TX, for Plaintiff.

Daniel R. Brody, Bartlit Beck Herman Palenchar & Scott LLP, Denver, CO, J. Scott McBride, Peter B. Bensinger, Jr., Bartlit Beck Herman Palenchar & Scott LLP, Chicago, IL, Berry D. Spears, Carlos R. Rainer, Darryl Anderson, Gerard G. Pecht, Daniel M. McClure, Fulbright & Jaworski LLP, Houston, TX, Marcy Hogan Greer, Fulbright & Jaworski, L.L.P., Austin, TX, James R. Kelley, Neal & Harwell, PLC, Nashville, TN, Patrick H. Autry, Branscomb PC, San Antonio, TX, for Defendants.

ORDER

SAM SPARKS, District Judge.

BE IT REMEMBERED on the 19th of September, 2013, the Court called a hearing in the above-styled cause, and the parties appeared by and through counsel. Pending before the Court are the following summary judgment motions: Duke Energy Corporation, Duke Ventures, LLC, and Spectra Energy Capital, LLC (collectively, Duke)'s Motion for Summary Judgment [# 157], Plaintiff Crescent Resources Litigation Trust's Sealed Response [# 181], Duke's Reply [# 185], the Trust's post-hearing Letter Brief [# 191], and Duke's post-hearing Letter Brief [# 192]; Duke's Motion for Leave to Exceed Page Limit [# 184]; and Defendant Arthur W. Fields's Corrected Motion for Summary Judgment [# 165], and the Trust's Motion for Leave to File Sealed Document (Trust's Response) [# 193].¹

Also pending are the following Daubert motions: Fields's Motion to Exclude Expert Testimony of K.C. Conway [# 122]; Fields's Motion to Exclude Expert Testimony of Patricia Caldwell [# 123]; Fields's Motion to Exclude Expert Testimony of D. Paul Regan [# 129]; Duke's Motion to Exclude Expert Testimony of Patricia Caldwell [# 133], the Trust's Sealed Response [# 146], and Duke's Reply [# 153]; Duke's Motion to Exclude Expert Testimony of Charles Graham [# 134], the Trust's Sealed Response [# 148], and Duke's Reply [# 152]; Duke's Motion to Exclude Expert Testimony of K.C. Conway [# 135], the Trust's Sealed Response [# 147], and Duke's Reply [# 151]; Duke's Motion to Exclude Expert Testimony of D. Paul Regan [# 137], the Trust's Sealed Response [# 150], and Duke's Reply [# 154]; Duke's Motion to Exclude Expert Testimony of Stephen Becker [# 162], the Trust's Sealed Response [# 176], and Duke's Reply [# 174]; Duke's Motion to Exclude Supplemental Opinions of K.C. Conway [# 178], the Trust's Response [# 183], and Duke's Reply [# 188]; and Fields's Motion to Exclude Supplemental Opinions of K.C. Conway [# 179], and the Trust's Response [# 183]. Having reviewed the documents, the arguments of the parties at the hearing, the governing law, and the file as a whole, the Court now enters the following opinion and orders.

Background

A. The Duke Transaction

In he 1960s, Duke Energy Corporation acquired approximately 300,000 acres of land in rural areas of North Carolina and South Carolina. Beginning in 1969, Duke Energy Corporation contributed this land to Crescent Resources' predecessor-in-interest, Crescent Land and Timber Company. Since then, Crescent Resources has developed, owned, leased, managed, and sold real estate. Prior to September 2006, Crescent Resources, LLC was a wholly owned indirect subsidiary of Duke Energy Corporation. Duke Energy Corporation wholly owned Duke Capital, LLC, which wholly owned Duke Ventures, LLC, which wholly owned Crescent Resources. Over the years, the Crescent enterprise branched out into additional geographic areas and acquired additional properties. The core of Crescent Resources' business was to take large parcels of real estate, install extensive infrastructure and capital-intensive amenities, and then sell the lots to homebuilders or individuals. Crescent Resources eventually expanded geographically and into the development of commercial and retail projects. Customarily, Crescent Resources created single-purpose entities for each of its developments, and as a result, in 2006, Crescent Resources operated roughly 100 projects through approximately 120 entities, many of which are debtors in this proceeding.

On September 7, 2006, a Formation and Sale Agreement was entered into by Duke Ventures, LLC, Crescent Resources, and several Morgan Stanley real estate investment entities whereby the parties agreed: (a) Crescent Resources had, pre-transaction, an enterprise value of $2,075 billion; (b) Duke would form Crescent Holdings and contribute all of its membership interests in Crescent Resources to Crescent Holdings; (c) Crescent Holdings would contribute all of its membership interests in itself to Duke Ventures; (d) Crescent Resources would enter into the 2006 Credit Agreement (defined below), from which $1,187 billion in term loan proceeds would be distributed to Crescent Holdings, with Crescent Holdings then distributing such proceeds directly to Duke; ² (e) Morgan Stanley Real Estate Fund (MSREF) would purchase 49% of the membership interests in Crescent Holdings from Duke for $414 million; and (f) Crescent Holdings would enter into an employment agreement with Arthur Fields which provided, among other things, for the issuance to Fields of 2% of the membership interests in Crescent Holdings. At the time, the parties referred to this arrangement as “Project Galaxy.” The project has since lost some of its cosmic luster, and the parties now refer to the deal as the more antiseptic “2006 Duke Transaction.”

As part of the 2006 Duke Transaction, Crescent Holdings and certain of its subsidiaries entered into the above-mentioned 2006 Credit Agreement among Bank of America, N.A. as administrative agent and collateral agent, the lenders' party thereto from time to time as lenders, Crescent Resources as the borrower, and Crescent Holdings and certain of its subsidiaries as guarantors, whereby Crescent Resources received: (a) $1,225 billion in term loan proceeds; (b) a $200 million unfunded revolving credit commitment; and (c) a letter of credit subfacility commitment not to exceed $100 million. From the proceeds of the $1,225 billion in term loans, $1,187 billion was distributed to Duke as described above, with such proceeds being ultimately distributed to its parent, Duke Capital, LLC. The original lenders under the 2006 Duke Transaction also sold portions of the loan to numerous other syndicate lenders. As a continuation of the 2006 Duke Transaction, liens were granted to Crescent Resources' pre-petition lenders on depository accounts in 2007, and mortgages on real property of Crescent Resources and certain subsidiaries were created in 2008. The Trust alleges this entire transaction put $1.6 billion in cash into the pockets of Duke and simultaneously rendered Crescent Resources insolvent.

B. Arthur Fields's Involvement

Fields joined the Crescent enterprise in 1988. By 1991 he had become President of the predecessor company which would go on to become Crescent Resources in 2000. In 2002, Fields became Chief Executive Officer of Crescent Resources. Fields was also one of three members of Duke Ventures's Board of Managers. Finally, Fields was involved in the 2006 Duke Transaction, as he received an ownership stake in Crescent Holdings under the terms of the transaction. The “Action by Written Consent of the Board of Managers of Crescent Resources” dated September 7, 2006—the paperwork approving the 2006 Duke Transaction on behalf of Crescent Resources—expressly acknowledged Fields's conflict of interest in the transaction. Pl.'s Resp. [# 193–1], Ex. AE, at 3.

As CEO of Crescent Resources, Fields's approval of the 2006 Duke Transaction was necessary for the completion of the project. Fields represents he relied on his decades of experience in the industry in evaluating the 2006 Duke Transaction, as well as Morgan Stanley's valuation of Crescent Resources, and concluded the numbers made sense and the transaction could move forward. Fields also states he evaluated alternative ways of structuring the transaction. Based exclusively on his own statements in his affidavit, Fields contends he acted in good faith and made reasonably informed business decisions after fairly considering all the information available to him at the time.

Fields's role in the 2006 Duke Transaction cannot be fully understood without some examination of his prior dealings with Duke and Crescent Resources. In 1998, Fields and Crescent entered into an “Amended and Restated Employment Agreement.” Id., Ex. AA. The 1998 Employment Agreement was structured to provide Fields with, as a portion of his compensation, a percentage of “Net Cash Flow” and “Net Proceeds” of each “Company Project.” Id. ¶ 2.7. Company projects included “real estate development venture[s]” which were “commenced” during Fields's tenure, but excluded “sale[s] of undeveloped land.” Id.

On September 7, 2006, Fields, Crescent Resources, and Duke entered into a new Employment Agreement. Id., Ex. AB. This new agreement extinguished Fields's prior agreement, and provided him with a credit of $37,796,000.00 to his Duke retirement account and the two percent stake in Crescent Holdings in exchange for his continued employment. Id. Fields represents Duke independently determined he was owed $55 million based upon termination of the 1998 Employment Agreement, and subtracted roughly $17 million from that...