In re HL Builders, LLC

IN RE: HL BUILDERS, LLC; aka CD HOMES, LLC Target Debtor

CASE NO: 19-32825

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

February 18, 2020

CHAPTER 11

MEMORANDUM OPINION

Well-advised creditors have reason to be circumspect in filing an involuntary petition. In order to successfully force a debtor into bankruptcy, a petitioning creditor, inter alia, must establish that its particular claim is not contingent as to liability or the subject of a bona fide dispute as to liability or amount, that its unsecured claims aggregate at least $16,750, and must demonstrate that the target debtor is generally not paying its debts as they become due, unless they are the subject of a bona fide dispute as to liability or amount. If unsuccessful, a petitioning creditor may find itself at the receiving end of an adverse award of attorney's fees, costs, and damages.

On May 20, 2019, HOUTEX Builders, LLC ("Houtex"), 2203 Looscan Lane, LLC ("Looscan Lane"), and 415 Shadywood, LLC ("Shadywood"), (collectively, "Petitioning Creditors") filed an involuntary petition against HL Builders, LLC, formally known as CD Homes, LLC ("Target Debtor"). The involuntary petition was subsequently amended on July 11, 2019 and is currently the live pleading before the Court ("Amended Involuntary Petition"). This Court conducted a trial over three days commencing July 16, 2019 and concluding on August 21, 2019. For the reasons stated herein, the Court finds that Petitioning Creditors did not have standing to file the Amended Involuntary Petition. Although Petitioning Creditors' claims meet the statutorily required $16,750 in amount, Houtex's claim with respect to 5325 Lynbrook, Houston, Texas 77056 is contingent as to liability. Nevertheless, each of Petitioning Creditors' claims are the subject of a bona fide dispute as to liability and amount of the claims. Additionally, Petitioning Creditors failed to demonstrate that Target Debtor is generally not paying its debts as they become due. Therefore, an order for relief will not be entered on the Amended Involuntary Petition, and the case is dismissed. Reasonable and necessary attorney's fees and costs will be awarded to Target Debtor and its counsel in an amount to be determined by this Court. A request for an award of damages and punitive damages is denied. Additionally, Petitioning Creditors' Emergency Motion for Joint Administration of Cases and Emergency Motion to Appoint a Chapter 11 Trustee are denied as moot.

I. FINDINGS OF FACT

This Court makes the following findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52, which incorporates Fed. R. Bankr. P. 7052 and 9014. To the extent that any finding of fact constitutes a conclusion of law, it is adopted as such. To the extent that any conclusion of law constitutes a finding of fact, it is adopted as such. This Court made certain oral findings and conclusions on the record. This memorandum opinion supplements those findings and conclusions. If there is an inconsistency, this memorandum opinion controls.

A. Background History

Target Debtor is a home construction company controlled, at least in part, by Robert Parker ("Parker")¹ Each of the Petitioning Creditors are special purpose entities owned by Charles Foster ("Foster") set up to build one or more custom homes with Target Debtor (each a"Project").² Parker and Foster began their business relationship in 2006.³ During 2013 and 2014, Petitioning Creditors entered into a set of contracts with Target Debtor.⁴ These contracts were in connection with four Projects:

i. 415 Shadywood, Houston, Texas 77057 ("415 Shadywood") owned by 415 Shadywood, LLC;

ii. 2203 Looscan Lane, Houston, Texas 77019 ("2203 Looscan Lane") owned by 2203 Looscan Lane, LLC;

iii. 5325 Lynbrook, Houston, Texas 77056 ("5325 Lynbrook") owned by Houtex, LLC; and

iv. 3 Thornblade Circle, Spring, Texas 77389 ("3 Thornblade") owned by Houtex, LLC.

Each of the contracts between Petitioning Creditors and Target Debtor include an investor agreement ("Investor Agreement").⁵ The Investor Agreements set forth how the Projects are to be financed and provide that there will be a construction loan and an equity loan in connection with each Project.⁶ The equity loan is to be provided by the Petitioning Creditor to fund the initial acquisition and equity for the Project.⁷ The construction loan is also to be provided by the Petitioning Creditor to cover the development and construction of the Project, and is personally guaranteed by Foster. Specifically, the Investor Agreements provide that the principal amounts of the equity loans of each Project are as follows:

i. October 24, 2014 in the amount of $405,000 for 415 Shadywood;⁸

ii. August 29, 2014 in the amount of $638,625 for 2203 Looscan;⁹

iii. May 16, 2016 in the amount of $339,000 for 5325 Lynbrook;¹⁰ and

iv. July 2, 2014 in the amount of $459,750 for 3 Thornblade.¹¹

Section 6 of the Investor Agreements provides that any payments in excess of the construction and equity loan for each Project are to be made by the Target Debtor.¹²

Furthermore, after a Project is constructed and completed, the Project is sold, the Investor Agreements establish how the net proceeds of the sale of each Project are to be distributed at closing.¹³ Section 8 of the Investor Agreements provide that the net proceeds are to be distributed in the following order:

i. Net Proceeds will be used to repay the outstanding balance of the Loan.

ii. Net Proceeds will be used to repay Investor's equity of [a specified amount for each Project].

iii. Net Proceeds will be used to pay Investor $50,000.

iv. Net Proceeds will be used to pay 15% per annum interest on the Equity Loan.

v. Net Proceeds will be used to pay [Target Debtor] any amount it was required to provide under paragraph 6 of the Agreement.

vi. Net Proceeds will be used to pay [Target Debtor] $50,000. All remaining Net Proceeds will be split equally between Investor and CD.

vii. If Net Proceeds are less than the amount required to make the first through the sixth payments listed above, then [Target Debtor] is to provide at closing the funds necessary to make up for the shortfall.

Accordingly, under section 8 of the Investor Agreements, the required payments by Target Debtor include the amounts required under section 6 of the Investor Agreements (i.e., any funds over the construction Loan and the equity Loan) plus a $50,000 payment to the Petitioning Creditors upon the sale of a Project.¹⁴

As of the filing date of the Amended Involuntary Petition, 415 Shadywood, 2203 Looscan, and 3 Thornblade were sold.¹⁵ 5325 Lynbrook is the only remaining asset held byHoutex.¹⁶ It is stipulated by both parties that at the closing of each Project, Target Debtor did not make a $50,000 payment.¹⁷

B. Filings

On May 20, 2019, Petitioning Creditors filed an involuntary petition ("Initial Petition").¹⁸ The Petitioning Creditors' representative in each instance was Foster. Petitioning Creditors are themselves voluntary Chapter 11 debtors in In re Houtex Builders, et al. ("Foster Entities' Bankruptcy")¹⁹ The Initial Petition was subsequently amended on July 11, 2019 and is currently the live pleading before the Court.²⁰

C. Credibility of Witnesses

In determining whether Petitioning Creditors have established standing under § 303 to file the Amended Involuntary Petition, this Court must, inter alia, assess the credibility of the witnesses. The Fifth Circuit has focused on "an assessment of witnesses' credibilit[y] and other factual considerations" when reviewing the standing of petitioning creditors.²¹ At trial, Petitioning Creditors and Target Debtor each called one witness, Foster and Parker, respectively.²² In many respects, the testimony of the two directly conflicted. For example, Parker's position is that the Investor Agreements became unworkable, and through discussions between him and Foster, the Investor Agreements were materially modified.²³ Foster, whenasked, "did you ever agree to amend or modify the investor agreements associated with any of the petitioning creditors?" responded, "No. I don't remember any of those discussions of anything like that. No, not at all."²⁴ Accordingly, much of this Court's decision relies on the credibility of Foster and Parker.

First, Parker was previously found to be "dishonest and disingenuous" as a witness.²⁵ In that case, the court found that Parker was an unreliable witness where his counsel stated objections in a Rule 2004 examination and instructed Parker not to respond where it was baseless and without merit.²⁶ In contrast, Parker answered all questions at trial without the assistance of counsel. This Court finds that Parker does not lack all credibility. Despite at times lacking in exactitude, Parker's testimony was forthcoming and knowledgeable with respect to his involvement with HL Builders. He recounted with some level of detail the reasons for which modifications to the Investor Agreements occurred, including the fact that Foster had lost money in previous projects the two were doing, and was unable to fund the equity as provided for under the original terms of the Investor Agreements.²⁷ He testified to the increased involvement of Foster in the Projects, and recounted meetings between him, Foster, and the other investors such as Hmaiden.²⁸ Parker's answers cannot be categorized as evasive or without merit. Consequently, although there is reason to be cautious, the Court finds the testimony of Parker to be credible.

Second, this Court must address the credibility of Petitioning Creditors' witness, Foster. While generally responsive, his lack of knowledge or naivete in Petitioning Creditors' businessdealings is concerning to the Court. Foster testified, notwithstanding his background as an attorney and business relationship with Target Debtor, that he was unaware of the contents of documents that he himself signed and denied having met bankers that provided third party loans to the Projects.²⁹ While the Court does not...