RPA Asset Mgmt. Servs. v. Siffin (In re MTE Holdings LLC)

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In re: MTE HOLDINGS LLC, et al., Reorganized Debtors.

RPA Asset Management Services, LLC, Plaintiff, v. Mark Siffin, MDC Acquisition LLC Maefield Development Corporation, and MDCE Investments LLC, Defendants.

No. 19-12269 (CTG)

Adv. Proc. No. 21-51255 (CTG)

United States Bankruptcy Court, D. Delaware

June 14, 2024

Chapter 11

(Jointly Administered)

Related Docket No. 24

PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW

CRAIG T. GOLDBLATT UNITED STATES BANKRUPTCY JUDGE

MTE Holdings and its affiliates were in the business of oil and gas exploration and development. The debtors entered bankruptcy in late 2019 after defaulting under two loan agreements.^[1] After almost two years in bankruptcy, the debtors confirmed a plan in September 2021. That plan established a litigation trust to pursue estate causes of action.^[2] The trustee of the litigation trust sued Mark Siffin the debtors' former principal owner and CEO, as well as entities that Siffin controlled.^[3] The suit is fundamentally about two sets of prepetition transfers that the debtors made. First, in a series of transfers, debtor MDC Energy paid $8.5 million to an entity that Siffin owned and that the parties refer to as "Acquisition." The trustee asserts that this transfer is avoidable against Siffin as a constructive fraudulent conveyance under the Texas Uniform Fraudulent Transfer Act ("TUFTA") and recoverable against both Acquisition and Siffin (as the party for whose benefit the transfer was made) under § 550 of the Bankruptcy Code. The trustee also asserts that Siffin breached his fiduciary duties to MDC Energy by directing that this transfer be made.

Second, Siffin diverted to Acquisition a $9.1 million receivable that debtor MDC Energy would have otherwise been paid. Acquisition ultimately used at least some of that $9.1 million to pay valid debts owed by MDC Energy. The trustee nevertheless seeks to avoid the transfer to Acquisition under § 548(a) of the Bankruptcy Code, on the ground that the purpose of the diversion was to hinder, delay, or defraud the debtors' lenders, who could have swept the cash had it been deposited in one of the debtors' bank accounts.

The Court conducted a trial in this adversary proceeding in January 2024. The Court now issues these proposed findings of fact and conclusions of law. In short, the transfers totaling $8.5 million from MDC Energy to Acquisition constitute constructive fraudulent conveyances under TUFTA. As such, the transfers can be avoided under § 550 of the Bankruptcy Code against Acquisition, as well as against Siffin. In addition, Siffin's causing MDC Energy to transfer those funds to Acquisition for his ultimate benefit was a breach of his fiduciary duties as CEO of MDC Energy.

The Court also concludes that the $9.1 million transfer diverted from MDC Energy to Acquisition is avoidable as an intentional fraudulent conveyance under 11 U.S.C. § 548(a)(1)(A). That transfer may be recovered against Acquisition. While the trustee contends that Maefield and/or MDCE Investments, both of which are also affiliated companies controlled by Siffin, may also be liable as subsequent transferees, the trustee has not pointed to evidence in the existing record that would support such a conclusion. Nor does the record contain evidence to support claims against Maefield, Acquisition, or MDCE Investments on theories of conspiracy or aiding and abetting breaches of fiduciary duty. Finally, even if the law recognized a claim for aiding and abetting a fraudulent conveyance, no such claim has been established.^[4]

Factual and Procedural Background 1. Mark Siffin and the founding of MDC Energy

Siffin was the founder and chief executive officer of MDC Energy and its subsidiaries. While Siffin had been interested in geophysics and petrophysics since his time as a student in the 1960s, his first professional involvement in the oil and gas industry began when he visited Midland, Texas in 2012.^[5] There, he met people with deep knowledge and experience in the exploration and development of oil and gas in the Permian Basin, including John Cooper.^[6] At that time, Cooper worked for a company known as Cambrian Management, for which he was responsible for running 11 oil rigs.^[7]

Siffin and Cooper would go on to form MDC Energy. Siffin took principal responsibility for raising capital, while Cooper had the hands-on knowledge to run the day-to-day operations of the company's business - the exploration, development, and production of oil and gas.^[8] Production began with MDC Energy's first acquisition of land in the Midland Basin.^[9] The company grew over time. At its peak, MDC Energy would produce approximately 20,000 barrels of oil day.^[10]

2. The debtors' corporate and capital structure

The principal operating company in the MTE corporate family was MDC Energy.^[11] The company's original operations were financed by a $70 million loan from Fortress.^[12] Thereafter, in 2016, Apollo extended $170 million in further credit, some of which appears to have been used to take out the Fortress loan.^[13]

In 2017, however, the company required access to additional capital. The company had reached agreements to obtain new financing from two lender groups. One loan was a reserve-based loan (or "RBL") for which Natixis, New York Branch served as administrative agent. As the name implies, this loan was secured by the company's oil reserves. Siffin testified at trial that he believed, based on the reserves, that the loan's borrowing base was $300 million.^[14] The company was permitted, however, to draw only $60 million on this loan.^[15]

The borrower on the second loan was MDC Energy's parent company, MTE Holdings. This was in the form of a term loan, for which Riverstone Credit Management served as administrative agent.^[16] This loan provided for a total availability of $475 million, of which MTE Holdings ultimately drew $410 million.^[17]Because the borrower on this loan was the parent holding company, whose principal assets were the shares of MDC Energy, this term loan was structurally subordinated to the Natixis RBL loan.

Both loans were expected to close on June 1, 2018. Just days before the scheduled closing, however, Cooper died in a plane crash near Midland, Texas. As a result, the two loans did not close until September 17, 2018.^[18]

The loan agreements contained several requirements that are key in this dispute. Under the terms of the Natixis loan, MDC Energy was not permitted to make "restricted payments," which included any payment of management fees, advisory fees, or the like to anyone who held equity in MDC Energy or its affiliates.^[19]This provision operated to preclude the company from paying Siffin for the work he performed as CEO.^[20]

The agreements also contained a series of financial covenants, requiring that the companies' "EBITDAX" - earnings before interest, depreciation, amortization and exploration costs - be at least two times their interest expense and not less than one-fourth of the companies' total indebtedness.^[21] The companies' current assets were also required to be equal to or greater than their current liabilities.^[22] The agreements granted the lenders the ability to sweep funds in the bank accounts in the event of a default, and contained cross-default provisions providing that a default under one of the loan agreements would amount to an event of default under the other.^[23] 3. Siffin's vision to monetize saltwater disposal

The process of producing oil and gas creates, as a byproduct, a form of brine that is commonly referred to as saltwater. For each barrel of oil produced, it is typical to generate eight to ten barrels of saltwater. Disposing of that saltwater is one of the most significant costs associated with oil and gas exploration.^[24]

Siffin testified that he believed that MDC Energy would be able to develop its own saltwater disposal capabilities that would be less expensive than it would otherwise cost to pay a third party to dispose of the saltwater.^[25] Indeed, he testified that he believed that an MDC Energy saltwater disposal system could be an affirmative source of revenue for the company as it could charge other oil exploration companies in the Permian Basin for the disposal of their saltwater.^[26] Siffin thus began work on developing such such a program in the summer of 2018.^[27] That work included obtaining the necessary land rights and lobbying the Texas Railroad Commission to obtain the required permits.

Siffin thereafter entered into negotiations with several third parties, including a company known as Waterbridge, over a potential transaction to monetize MDC Energy's saltwater disposal capabilities. While MDC Energy and Waterbridge exchanged offers, the parties were never able to reach an agreement on the terms of a transaction.^[28]

4. MDC Energy encounters financial distress

As described above, the closing of the Natixis and Riverstone loans was delayed from June until September 17, 2018 following Cooper's death. The loan agreements were drafted, however, so that the borrowers' compliance with the covenants was measured at the end of each quarter. As a result of the delayed closing, MDC Energy found itself in default under the covenants at the end of September 2018, just 13 days after the loans had closed, albeit one that the lenders themselves described as a "technical" default.^[29] Even so, the borrowers were required to negotiate waivers with the lenders and were unable to draw on the loans until the waivers were finalized and executed. Because those negotiations dragged on for months, until February 2019, the company's only source of funds to pay its vendors in the meantime were the revenues generated from oil production.^[30]

In February 2019, MDC Energy...