In re Johnson

In re: CORD DAVID JOHNSON and SUNNY LEA JOHNSON, Debtors.

Case No. 19-42063-ELM

UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION

March 1, 2021

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

Chapter 7

MEMORANDUM OPINION AND ORDER

Before the Court is the request of the debtors Cord David Johnson ("Cord") and Sunny Lea Johnson ("Sunny" and together with Cord, the "Debtors") for conversion of their pending chapter 7 bankruptcy case to a case under chapter 11 of the Bankruptcy Code, conditioned, however, on the case being authorized to proceed as a joint case under subchapter V of chapter 11. The United States Trustee and the Hill Creditors (as hereafter defined) oppose the request, asserting, among other things, that the Debtors are ineligible for relief under subchapter V of chapter 11.

Thus, the dispute presents the Court with two pivotal questions: first, whether an individual who previously owned and managed certain now-defunct businesses and who, on account of such ownership and involvement, has mostly business-related debts, is "engaged in" commercial or business activities for purposes of eligibility under subchapter V of chapter 11 of the Bankruptcy Code; and second, whether an employed officer of a non-debtor business entity, having no ownership in or ultimate control over the non-debtor business entity, is engaged in "commercial or business activities" for purposes of eligibility under subchapter V of chapter 11 of the Bankruptcy Code. Concluding in each instance under the facts and circumstances of this case that such an individual is not engaged in commercial or business activities for purposes of eligibility under subchapter V of chapter 11, the Court will deny the request for conversion.

PROCEDURAL BACKGROUND

On May 22, 2019 (the "Petition Date"), the Debtors, a married couple, filed their joint voluntary petition for relief under chapter 7 of the Bankruptcy Code. Following several months of informal and formal discovery with respect to the Debtors' assets and financial affairs,¹ William T. Neary, the United States Trustee for Region 6 (the "U.S. Trustee"), initiated an adversary proceeding against the Debtors to object to their chapter 7 discharge.² In response, the Debtors, among other things, filed the current Motion to Convert Their Chapter 7 Case to a Case Under Chapter 11, and For Authority to Elect Treatment Under Subchapter 5, as a Small Business Case [Docket No. 57] (the "Motion"). As bluntly acknowledged by the Debtors, they filed the Motion to avoid the U.S. Trustee's discharge objection.

Both the U.S. Trustee and creditors John Hill, Armadillo Exploration, LLC and Esperanza Energy Corp. (collectively, the "Hill Creditors" and together with the U.S. Trustee, the"Objectors") have timely objected to the Motion.³ The U.S. Trustee opposes conversion for the following three reasons: first, the Debtors are ineligible for relief under subchapter V of chapter 11; second, the Debtors have filed and prosecuted the bankruptcy case in bad faith;⁴ and third, the Debtors will not have sufficient income to fund a plan of reorganization, arguing in connection therewith that the Debtors should be barred by the doctrine of quasi-estoppel from claiming that Cord earns more than he previously disclosed in filings with the Court (the second and third grounds of objection collectively referred to as the "Secondary Objections"). The Hill Creditors, in their objection, simply adopt each of the grounds of objection lodged by the U.S. Trustee. The Debtors have filed a reply in response to the U.S. Trustee's objections.⁵ On August 5 and 13, 2020, the Court conducted an evidentiary hearing on the Motion.

JURISDICTION

The Court has jurisdiction of the proceeding involving the Motion pursuant to 28 U.S.C. §§ 1334 and 157 and the Order of Reference of Bankruptcy Cases and Proceedings Nunc Pro Tunc (Miscellaneous Rule No. 33) of the United States District Court for the Northern District of Texas. Venue of the proceeding in the Northern District of Texas is proper under 28 U.S.C. § 1409. The proceeding constitutes a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O).

FACTUAL BACKGROUND

A. Cord's Prepetition Involvement in the Oil and Gas Industry

Prior to the Petition Date, Cord owned and managed several different oil and gas companies. Specifically, as disclosed in the Debtors' bankruptcy schedules and statement offinancial affairs, between 2006 and 2018 Cord owned the following companies having the following disclosed periods of existence noted parenthetically (collectively, the "Defunct Companies"):⁶

Crooked Oak, LLC (5/30/2006 - 6/1/2018)

Santa Rita Holdings, LLC (4/16/2008 - 2/28/2017)

Jacie Oil Company, LLC (1/31/2014 - 1/27/2017)

R1CDF LLC (7/28/2014 - 1/26/2018)

Comanche Cove Resource Management LLC (9/3/2014 - 1/26/2018)

S. Johnson Family LP (9/8/2014 - 1/26/2018)

JCS Oil and Gas, LLC (3/22/2017 - 1/25/2019)

Each of the Defunct Companies was previously involved in the exploration and production of oil and gas. To fund the drilling costs of wells targeted for development by Cord, Cord successfully raised investment capital through a variety of private placements. Among the investors were the Hill Creditors. While certain of the drilling projects led to the development of commercially viable wells, many others resulted in dry holes or non-commercial wells. According to Cord, the lack of sufficient drilling successes combined with the suppressed oil and gas market ultimately led to the failure of each of the Defunct Companies and none of the Defunct Companies remains in business.

B. Cord's Prepetition Transition to El Reno

On June 9, 2017, Lloyd Johnson ("Lloyd"), Cord's father, organized El Reno Energy, LLC ("El Reno"), a member-managed Texas limited liability company.⁷ El Reno was to conduct business in both the oil and gas industry and the trucking industry. At all times prior to Lloyd's death, Lloyd was the sole owner and managing member of El Reno.⁸

Shortly after organizing El Reno, Lloyd was diagnosed with pulmonary fibrosis. In the latter part of 2017, as Lloyd's health began to decline and the remainder of Cord's companies collapsed, Cord began to focus his attention on El Reno, initially assisting his father with El Reno's oil and gas operations. In 2018, as Cord's involvement with El Reno increased, Lloyd added Cord to El Reno's regular payroll. Thereafter, as Lloyd's health continued to decline, Cord's level of involvement in all aspects of El Reno's business increased.

On November 7, 2018, Lloyd passed away.⁹ Pursuant to the terms of Lloyd's Last Will and Testament, Lloyd's 100% ownership interest in El Reno was bequeathed to Haven Johnson ("Haven"), Lloyd's wife and Cord's mother.¹⁰ Upon transfer of the ownership, Haven became the new sole managing member of El Reno.¹¹ In such capacity, Haven obtained (and continues to have) ultimate control of El Reno and its operations, including the ability to hire and fire officers and employees at will. Following Lloyd's death, Haven maintained Cord's employment by El Reno.

C. The Debtors' Bankruptcy Filing and Postpetition Employment

Despite Cord's effort to obtain renewed financial stability in his new role with El Reno, Cord was unable to escape the trail of damage caused by the failure of the Defunct Companies. Many creditors of the Defunct Companies remained unpaid and, among other things, certain drilling project investors, including the Hill Creditors, initiated litigation against Cord (and others) to pursue claims for fraudulent investment solicitation.¹² Facing a June 2019 trial in the investorlitigation and believing that their assets remained exposed to certain outstanding debts of the Defunct Companies, on May 22, 2019, the Debtors filed for protection under chapter 7 of the Bankruptcy Code.

As disclosed by the Debtors in their bankruptcy filings, and as acknowledged at the hearing, as of the Petition Date neither of the Debtors owned an interest in any operating businesses and neither of the Debtors was engaged in any business of his/her own. This remains the case to this date. The Debtors do not sell any goods or services of their own, they do not have any employees, and they do not have any personal business expenses outside of the possible residual liability related to the Defunct Companies. Since before the Petition Date, the Debtors' sole source of income has come from their status as W-2 employees.

In Cord's case, Cord has remained a full-time employee of El Reno. At the time of the bankruptcy filing, Cord held the position of Drilling Manager.¹³ However, shortly after the Petition Date, on June 14, 2019, Haven appointed him to the position of President.¹⁴ In such capacity, Cord has been managing the day-to-day business affairs of El Reno. As recognized by both Cord and Haven, however, Cord has consistently served at the pleasure of Haven and his employment has remained terminable at will by her. Cord has never been issued any ownership interest in El Reno and control of the company has rested, and continues to rest, solely and exclusively with Haven.

In Sunny's case, Sunny has been employed throughout the entirety of the bankruptcy proceeding as a full-time medical/surgical nurse at Harris Methodist Southwest Hospital in Fort Worth, Texas.¹⁵ She has had zero involvement with the business of El Reno.

D. The Discharge Objection and Request for Conversion

On March 13, 2020, the U.S. Trustee filed a complaint against the Debtors to object to their chapter 7 discharge pursuant to 11 U.S.C. §§ 727(a)(2)(A) (fraudulent prepetition transfer of property and concealment), 727(a)(2)(B) (unauthorized post-petition transfer of estate property and concealment), and 727(a)(4)(A) (false oath or account in connection with the case).¹⁶ As previously indicated, on May 4, 2020, the Debtors filed the Motion with the objective of avoiding the discharge objection.

Importantly, the...