In re Dynamis Group, LLC, Bankruptcy No. 09-34645

441 B.R. 841

In re The DYNAMIS GROUP, LLC, et al.¹, Debtors.Naja, LLC, Plaintiff

v.Jack's Company, LLC, et al., Defendants.

Bankruptcy No. 09-34645.

Adversary No. 10-3030.

United States Bankruptcy Court, W.D. Kentucky.

Jan. 3, 2011.

Joseph S. Elder, II, Louisville, KY, for Plaintiff.

David M. Cantor, Seiller Waterman LLC, Tyler Yeager, Louisville, KY, for Defendants.

MEMORANDUM-OPINION

THOMAS H. FULTON, Bankruptcy Judge.

THIS ADVERSARY PROCEEDING is before the Court after the conclusion of the trial on the merits of Plaintiff's complaint for declaratory and other relief. Plaintiff's complaint seeks an order from this Court declaring that certain of the Defendants owe Plaintiff the sum of $1,800,000.00 plus costs, late fees, interest, penalties and attorney's fees; that Plaintiff has an equitable lien on all assets sold pursuant to the Asset Purchase Agreement (the "Asset Purchase Agreement") entered as of July 12, 2004 between Plaintiff, W.P.B. Oil Company, Inc. ("WPB"), The Dynamis Group, LLC ("Dynamis"), Molly Company, LLC ("Molly") and Helmick Oil Company, LLC ("Helmick Oil"); and that such equitable lien is superior to any other lien in such assets. Plaintiff'scomplaint also seeks an order enjoining any of the Defendants from disposing of any of such assets. Plaintiff's presentation of its case at the trial upon the merits and Plaintiff's pre-trial and post-trial briefs make it clear, however, that Plaintiff is at this time seeking only an adjudication that Plaintiff has a first priority equitable lien on the real estate transferred pursuant to the Asset Purchase Agreement for the unpaid portion of the $1,800,000.00 promissory note given by Jack's Company, LLC ("Jack's Company") as part of the consideration for the purchase of such property, plus costs and attorney's fees. By virtue of 28 U.S.C. § 157(b)(2)(K), this is a core proceeding. The following constitutes the Court's Findings of Fact and Conclusions of Law pursuant to Federal Rule of Bankruptcy Procedure 7052.

FINDINGS OF FACT

Jack Helmick ("Mr. Helmick") wears many hats. He is the sole member and manager of each of Debtor/Defendants Jack's Company, Dynamis, Molly and Helmick Oil (these entities are sometimes collectively referred to herein as the "Dynamis Defendants" and each entity is sometimes referred to herein individually as a "Helmick entity"). He is also Senior Vice President of Operations for Road Ranger, a direct competitor of the Dynamis Defendants. ² Moreover, he served as CEO of Plaintiff's affiliate, WPB ³, up through the transaction at question in this Adversary Proceeding.

Sometime during April or May of 2000, Mr. Helmick was assigned by his then employer, Thornton Oil Company, to assist WPB in reorganizing its operations. Jim Thornton, Thornton Oil Company's CEO, had been a friend of the late husband and father of the shareholders of WPB. WPB was at that time experiencing severe financial distress, and Mr. Thornton directed Mr. Helmick to help turn the company around. Mr. Helmick took over the day to day operations of WPB. Eventually, he and WPB's shareholders agreed that he should be hired as CEO of WPB.

As CEO of WPB, Mr. Helmick not only managed the day to day operations of the company, he managed WPB's accounting and controlled all of its financial information and projections. Once Mr. Helmick took over WPB, WPB's shareholders for the most part ceased their direct involvement in the company's affairs, with the sole exception of Jane Retamoza ("Ms. Retamoza") ⁴, who helped maintain relations with the company's creditors.

Ms. Retamoza, however, was not privy to company financial information and, being unsophisticated in business matters, lacked the means fully to understand that information anyway. She relied completely on Mr. Helmick's expertise and judgment in the running of the company.

WPB continued to experience losses and by around 2003 the shareholders wanted to sell the company. According to credible testimony by Ms. Retamoza, Mr. Helmick discouraged the shareholders from marketing the company to third-parties, ostensibly to prevent a "fire sale" situation, and instead proposed that he purchase thecompany's assets.⁵

During roughly the next year, up through July 13, 2004, Mr. Helmick worked to structure the sale transaction with Avery Matiney ("Mr. Matiney"), representative for Ascentia Bank ("Ascentia"), predecessor in interest to Defendant PBI, Inc., and David King ("Mr. King"), a loan broker. Two attorneys who shared offices, Bob Thieman ("Mr. Thieman") and Bill Barth ("Mr. Barth"), ostensibly represented Plaintiff/WPB and the Dynamis Defendants, respectively, during the sale "negotiations." The credible testimony of Ms. Retamoza and Mr. Matiney, however, shows that Mr. Helmick essentially controlled the negotiations for both seller and buyer. Plaintiff's members simply acquiesced to Mr. Helmick's recommendation as to what was the best outcome for all concerned.

Mr. Helmick, Mr. Matiney and Mr. King structured the transaction in the complicated fashion reflected in the Asset Purchase Agreement solely to enable Mr. Helmick and Ascentia to take advantage of loan guarantees from the U.S. Department of Agriculture (the "USDA"). In simplified terms, if certain criteria were met, the USDA would guarantee approximately 70% of the Ascentia loans that permitted Mr. Helmick's companies to purchase Plaintiff's and WPB's assets.

Most significantly, the USDA required that the borrowers have "20% equity," i.e., a 80/20 debt/equity ratio. In this case, however, because the borrowers had no assets prior to the transaction in question ⁶, certain of the assets purchased from Plaintiff and/or WPB would have to remain unencumbered, at least to the USDA's eyes. Accordingly, Messrs. Helmick, Matiney and King devised a deal structure in which certain of Mr. Helmick's entities, Dynamis, Molly and Helmick Oil ⁷, would pay a majority of the purchase price for the assets in cash borrowed from Ascentia on a secured basis, while a separate Helmick entity, Jack's Company, would give Plaintiff an ostensibly unsecured note for $1.8 million of the purchase price (the "Jack's Note"). The $1.8 million note amount was chosen because it equated to the 20% net worth required by the USDA. In other words, upon execution of the Asset Purchase Agreement and the related loan documents between Ascentia and the Helmick entities, Dynamis, Molly and Helmick Oil would collectively own substantially all of Plaintiff's and WPB's assets but would have encumbered only 80% of the value of the same-again, at least to the USDA's eyes. The maker of the Jack's Note, Jack's Company, would not have any assets and would not generate income of its own. Rather, the three operating entities, Dynamis, Molly and Helmick Oil, would provide Jack's Company with the funds necessary to pay the Jack's Note. Jack's Company would simply act as a conduit of funds from the other three Helmick entities.

The closing of the transaction took place on July 13, 2004. Subsequently, although a few payments were made on the Jack's Note by one or another of the Dynamis Defendants, Jack's Company ultimately defaulted on the Jack's Note. In late 2008,Plaintiff filed suit against the Dynamis Defendants in Jefferson County, Kentucky, Circuit Court alleging, among other things, default on the Jack's Note and breach of the Asset Purchase Agreement, and seeking, among other relief, recission of the Asset Purchase Agreement and return of the assets transferred thereunder.⁸ At approximately the same time, Plaintiff recorded lis pendens notices (the "NAJA Lis Pendens Notices") regarding that suit and the property in question in the appropriate public records of several Kentucky counties.

Debtors filed their Chapter 11 bankruptcy petitions on September 11, 2009 and Plaintiff filed this Adversary Proceeding on April 16, 2010.

CONCLUSIONS OF LAW

A. Equitable Lien

The real estate issue presented in this Adversary Proceeding requires that the Court consider Kentucky state law. See Butner v. U.S., 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Plaintiff asserts that under Kentucky law, specifically Bolen v. Bolen, 169 S.W.3d 59 (Ky.App.2005), it holds an equitable lien on the real estate transferred in accordance with the Asset Purchase Agreement. In Bolen, the Kentucky Court of Appeals noted that "[l]ongstanding Kentucky case law is that as between vendor and vendee, a vendor has a lien on granted premises for the unpaid purchase money even if no lien was expressly reserved in the deed." Id. at 63. Plaintiff argues that the failure of Jack's Company and other Dynamis Defendants to pay the Jack's Note left the purchase money for the real estate unpaid, thereby giving Plaintiff a lien on the real estate for the unpaid balance.

The Dynamis Defendants, on the other hand, argue that Plaintiff in fact received full consideration for the real property—that the Jack's Note in itself constituted consideration whether or not it was ultimately paid. They also argue, alternatively, that Bolen does not apply here because the maker of the Jack's Note, Jack's Company, was not one of the record "vendees" of the real estate.

The Court finds the Dynamis Defendants' first argument unpersuasive and concludes that Plaintiff failed to receive full consideration for the real estate. In broadest outline, Bolen addressed the situation presented in this Adversary Proceeding. A seller agreed to sell real estate to a buyer in exchange for a promise of future payment, which was not made. While the Court will discuss below the ramifications of the differences in details between this case and Bolen, the fundamental point is that a promise to pay clearly does not constitute full and final payment of purchase money. In this regard, the Court also agrees with Plaintiff's reading of KRS 355.3-310(2)(b), Kentucky's version of Uniform Commercial Code ("UCC") § 3-310(b)(2), and Official Comment 3 to UCC § 3-310(b). Tender of a promissory note does not...