In re Hesed Enters., LLC

IN RE: HESED ENTERPRISES, LLC, Debtor.

CASE NO. 16-10299-rlj7

UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS ABILENE DIVISION

September 29, 2017

The following constitutes the ruling of the court and has the force and effect therein described.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

The Court hereby issues its findings of fact and conclusions of law on the motions of ADM Milling Co. (ADM) seeking dismissal of this chapter 7 case of the debtor, Hesed Enterprises, LLC (Hesed), and sanctions against its counsel, Joyce Lindauer (Lindauer). Hesed, under advice of counsel, first filed this bankruptcy case under chapter 11 of the Bankruptcy Code; ADM's motions for dismissal and sanctions were filed during the pendency of the chapter 11 case. In part to resolve the issues raised by ADM's motions, Hesed, on its own motion, converted the case to chapter 7, the liquidation chapter of the Bankruptcy Code. This did not resolve the issues raised by ADM's motions, however. These matters were jointly heard on June 23, 2017.

FINDINGS OF FACT

A.

Hesed's Forming, the Failed Purchase of Grain Mill from ADM,

and the State Court Suit and Trial

1. Hesed was formed in early 2013 for the purpose of purchasing a grain mill facility in Plainview, Texas from ADM. On March 8, 2013, Hesed, as buyer, and ADM, as seller, entered into a contract for the purchase of the mill; the mill had multiple silos that Hesed intended to use for the storage of frac sand that is used in the oil and gas business. This was a new business venture that was the idea of the owners of Hesed, Donald R. (Reggy) Stover and Jace Harkey. They had no prior experience with such a venture, however. The purchase price was $1.6 million. Hesed put-up a $50,000 escrow and the sale was originally set to close in June 2013. The closing was extended to November 2013, on the premise that an additional $50,000 escrow would be paid.

2. The second $50,000 escrow was never paid, and the sale never closed. This resulted in ADM filing suit against Hesed, Stover, Harkey, and, ultimately, the lawyer that represented them, Robert Holmes (and The Holmes Law Firm, Inc.). The suit was filed in November 2013, and assigned to the 298th Judicial District Court of Dallas County, Texas. After various amendments to the pleadings, including counterclaims filed by Hesed against ADM, ADM's parent company, and three employees of ADM; and after multiple delays and trial settings, the suit was set for trial on May 4, 2015.

3. On October 29, 2014, two days before a hearing on special appearances by the parties under Hesed's counterclaim, Hesed filed its first chapter 11 case with the Court. ADM promptly moved for dismissal and, alternatively, for stay relief. The case was dismissed without prejudice to refiling on January 9, 2015.

4. The state court suit finally went to trial before a jury in August 2016, almost three years after its filing. The jury verdict was rendered on August 16, 2016, in favor of ADM and against the defendants Hesed, Stover, Harkey, Holmes, and The Holmes Law Firm. The jury awarded damages of $1,175,000, jointly and severally against the defendants, with fraud and alter ego findings.

5. The jury verdict included findings that Hesed, Robert Holmes, and The Holmes Law Firm committed fraud against ADM. The jury found that Stover and Harkey were responsible for Hesed's conduct. This finding was based on the jury's determination that (i) they (Stover and Harkey), for their personal benefit, used Hesed for the purpose of perpetrating a fraud on ADM, or (ii) Hesed was a mere tool or business conduit of theirs, and that they, for their personal benefit, caused Hesed to be used to perpetrate a fraud on ADM.

6. The jury found that Hesed, Stover, Harkey, Robert Holmes, and The Holmes Law Firm were all part of a conspiracy that damaged ADM; further, that all but Harkey acted with malice towards ADM.

7. The jury's verdict of exemplary damages is telling. The jury awarded exemplary damages to ADM and against the defendants in the following amounts: Hesed - $425,000; Stover - $250,000; Harkey - $0; Holmes - $800,000; and The Holmes Law Firm - $800,000. Such awards accounted for the degree of culpability and character of the conduct of each defendant, among other factors.

8. Post-verdict motions were filed that delayed entry of judgment in accordance with the jury verdict: ADM filed its motion for judgment; Hesed and the other defendants filed motions asking the presiding judge to disregard the jury findings and for entry of a judgment notwithstanding the verdict. Hearing on these matters was set, first, for October 10, 2016, andthen reset to December 16, 2016, but then, the day before, December 15, Hesed filed the present bankruptcy case. The bankruptcy filing here, Hesed's second, further delayed the entry of judgment, not only against Hesed but against Stover, Harkey, Holmes, and The Holmes Law Firm, as well.

B.Hesed's Chapter 11 Case

9. As of the filing date, December 15, 2016, Hesed had no tangible assets—it had no land or facility to be used for the contemplated storage business; it had no contracts for acquiring frac sand or, for that matter, any other commodity or product; it had no money and no bank account; it had no capital and no loan commitment; it had no books and records. In short, it had no business operations and thus no way to generate income. Its bankruptcy schedules listed the $50,000 escrow deposit as an account receivable, though it obviously did not arise from the sale of goods or services.

10. Hesed's bankruptcy schedules included a contingent claim against a "third-party under [a] disputed, oral agreement" as an asset. Stover testified that the third party was Robert Holmes's son. A potential claim against ADM was listed, as well.

11. The schedules identified three creditors, all of which were labeled as unsecured creditors: ADM for an "unknown" amount; "Carl Joe Williams, RPLS," with a business debt of $8,660; and DRS Trucking, LLC for $40,250, from a loan. DRS Trucking was, and apparently still is, owned by Reggy Stover.

12. Hesed filed amended schedules on January 18, 2017. By this time, ADM had filed motions seeking dismissal of the bankruptcy case for bad faith and for sanctions against Hesed and its bankruptcy counsel.¹ The amended schedules were filed four hours after ADM filed itsbrief in support of its motion for sanctions. The amended schedules reflect that Hesed then had $200 in cash, a bank account, and a few office items (a desk, a chair, and a computer). Stover admitted that he put-in the $200 to open-up a bank account with and that the three office items were his. These items were transferred to Hesed after the case was filed.

13. The amended schedules added creditor Burchell, Denson & Morrison, P.C. for $1,200 for accounting fees, and claims of the law firms that represented Hesed and the other defendants in the state court action, The Holmes Law Firm and the firm Shamoun & Norman, for $20,000 and $100,347.20, respectively. The schedules added "other property," as follows: a claim against ADM; a claim against Reggy Stover based on a "[f]inding of responsibility for conduct of Hesed against Reggie [sic] Stover in state court"; and possible claims against "co-defendants" in the state court lawsuit. Stover, when testifying, was unable to elaborate on or provide explanations of these added claims.

C.Hesed's Conversion to Chapter 7

14. On February 23, 2017, in response to ADM's volley of motions seeking dismissal, stay relief, and sanctions—see Findings 15-25—Hesed filed its motion to convert the case to chapter 7. An order so converting the case was entered on February 28, 2017.

D.Motions for Dismissal, Stay Relief, Sanctions

15. On January 12, 2017, ADM filed both its motion to dismiss and its motion to lift stay. Stay relief was sought as an alternative to dismissal of the case, i.e., in the event the case was not dismissed, stay relief was requested. Both motions, however, were premised upon Hesed's alleged bad faith in having filed a chapter 11 case and the futility of attempting to prosecute aconfirmable chapter 11 plan. For both motions, Hesed's bad faith constituted "cause" warranting the requested relief, whether dismissal or relief from the bankruptcy stay.

16. ADM's motion to dismiss referred to its brief, filed the same day, for the factual and legal basis for the requested dismissal. As a then-pending chapter 11 case, dismissal was sought under § 1112(b) of the Bankruptcy Code.² Dismissal, according to ADM, was required because of Hesed's bad faith and its inability to propose and obtain confirmation of a viable chapter 11 plan. ADM argues that Hesed's chapter 11 filing was a litigation tactic, a ploy to delay and frustrate ADM in its efforts to obtain a judgment on the jury verdict that had been issued in the state court action.

17. Given the timing of ADM's dismissal motion and the circumstances of the case that then existed, the motion could not have been based on post-filing conduct of Hesed, save for any futile efforts to propose a plan when it had no real assets, no real creditors other than ADM, and no real prospects.

18. ADM filed its motion for sanctions on January 18, 2017, seeking sanctions against Hesed and Lindauer. As with the motions seeking dismissal and for stay relief, this motion, too, is based on Hesed's bad faith filing of the chapter 11 case. ADM submits that the case was filed for an improper purpose, that it caused unnecessary delays, and increased litigation costs. In effect, ADM submits that Lindauer should have performed more due diligence and should have known better than to have attempted to prosecute a hopeless chapter 11 case. She was acting in concert with principals and their attorney, Robert Holmes, and should have known that there was no prospect of obtaining confirmation of a chapter 11 plan.

19. On February 24, 2017, in reply to Hesed and in support of its then three pending motions—to dismiss, to...