Tex-Gas Holdings, LLC v. Lui So Yuk (In re Tex-Gas Holdings, LLC)

IN RE: TEX-GAS HOLDINGS, LLC, Debtor.

TEX-GAS HOLDINGS, LLC, Plaintiff, v. LUI SO YUK and SHAM WAI BUN and JAY L. KRYSTINIK and FORTUNE INSIGHT LIMITED, Defendants.

No. 21-80092

ADVERSARY No. 21-8002

United States Bankruptcy Court, S.D. Texas, Galveston Division

February 24, 2022

CHAPTER 11

MEMORANDUM OPINION

Jeffrey Norman United States Bankruptcy Judge

INTRODUCTION

Dead men tell no tales^[1] and unfortunately, they also do not testify in adversary proceedings. Such is the case here where a potential primary witness, Paul Heffner ("Heffner"), is unavailable due to his suicide or murder on January 1, 2021, in Hong Kong. While typically one would not impugn the reputation of a dead person, here the Court has no such qualms. Heffner was by the evidence a liar conman, forger, ^[2] and manipulator. He was also by strong inference a crook running a Ponzi scheme^[3] that potentially led to his death. Here the Court is asked to pick up parts of the remnants of his fraudulent actions and then determine who should bear the loss that was created by his false financing schemes. This is the Court's best attempt to do so given the convoluted facts in this case. Here, the unavailability of Heffner given his death, mandated that a key witness was unavailable, and therefore some of the facts remained open to reasonable speculation. Ultimately, the Court determines that all parties hereto had a direct affiliation with Heffner and bear responsibility for what has occurred.

While the Court recognizes that arguments were made that Heffner had parties in this litigation that were co-conspirators, the evidence does not support such a holding. If this were the case, the Court notes that the findings in this case would have been different. While all the parties have a close affinity with Heffner, his actions, which at times were detrimental to the plaintiff and then conversely at times detrimental to the defendants, do not support such conclusions by the Court. The connections between the various parties are best described as follows:

Heffner was introduced to various family members of the defendants between 2016 and 2017 as the boyfriend of the aunt of Sham Chi Hin Adrian a/k/a Adrian Sham (hereinafter "Adrian"). Adrian is the son of defendant Sham Wai Bun (hereinafter "Bun") and he is married to the daughter (Rachel) of the defendant, Lui So Yuk (hereinafter "Yuk"). Adrian was the "go between" of Heffner, Bun and Yuk. Adrian speaks English fluently; and Heffner did not speak Cantonese which is the primary language of Bun and Yuk.^[4] Adrian, Heffner, Bun and Yuk are, or were, residents of Hong Kong.

Over time Heffner became a part of Adrian's extended family due to his relationship with Adrian's aunt, trust developed, and Heffner encouraged the family to invest with him. Heffner presented himself as controlling various entities, including Adamas Ping An Opportunity Fund via Adamas Asset Management. Heffner was also connected via various business dealings to the plaintiff/debtor Tex-Gas Holdings, LLC. (hereinafter "Tex-Gas" or "Plaintiff") both as a director of its parent company (Gate Corporation Limited), and in prior business dealings in obtaining financing^[5] to refinance real property and a chemical plant to be used in the recycling of vulcanized rubber. Additionally, Heffner unsuccessfully attempted to obtain additional financing for the operation of the vulcanized rubber recycling facility. Heffner sought various loans^[6] from Bun and Yuk via proposals made to Adrian. As part of these various loans, Bun and Yuk made advances of funds that they believed were for a project called Project Polymer (the vulcanized rubber recycling plant/land), they additionally believed that these loans were secured by this project; i.e., the real property and chemical plant of the Plaintiff. These loans were to fund the future operations of Tex-Gas as a vulcanized rubber recycler. This project was never funded, and the funds advanced by Bun and Yuk were only partially transferred to the parent corporation of Tex-Gas, Gate Corporation Limited ("Gate Corp."). Gate Corp.'s directors included Heffner, and he used that position to guarantee a three-million-dollar loan on Tex-Gas's behalf. The Court finds that all the parties to this adversary were closely affiliated with Heffner. They also all appear to have been duped, at different times, by his various fraudulent actions.

JURISDICTION

Jurisdiction is conferred on this court by 28 U.S.C. § 157(a) and 1334(b). The parties have entered into a Joint Pretrial Stipulation (ECF No. 93), which the Court adopts. The parties agree that this is a core proceeding, and this Court has authority to render a final judgment in this proceeding.^[7]

PROCEDURAL BACKGROUND

This adversary proceeding No. 21-8002 was filed on June 1, 2021 (ECF No. 1) by plaintiff/debtor, Tex-Gas Holdings, LLC. An Amended Complaint was filed on June 29, 2021. An answer was filed on July 14, 2021, by defendants, Sham Wai Bun (also known as "Albert Sham" or "Bun") and Lui So Yuk (also known as "Ida" or "Yuk"). No answer was filed by defendant Fortune Insight Limited.^[8] Thereafter, Plaintiff filed a Second Amended Complaint on November 5, 2021 (ECF No. 59), the live pleading, seeking a declaratory judgment resolving the dispute as to whether a lien existed regarding Yuk and Bun's efforts to foreclose on a deed of trust, and Fortune Insight's failure to abide by its financing obligations under the Promissory Note, Loan Agreement, and Deed of Trust. Yuk and Bun filed their answer and affirmative defenses on November 19, 2021 (ECF No. 62). On January 7, 2022, this Court entered a Default Judgment against Fortune Insight Limited for its failure to appear in this adversary proceeding. The remaining defendants are Bun and Yuk.

Plaintiff now seeks expungement and release of the lien, and disallowance of the proofs of claims filed by Yuk and Bun as set forth in its objections to their claims, which have been consolidated with this adversary proceeding. Plaintiff also requests a declaratory judgment regarding the lien asserted by Yuk and Bun, avoidance of any lien asserted by Yuk and Bun against the real property and plant of the plaintiff, a judgment against Yuk and Bun for breach of contract, and an award of attorney's fees and costs against Yuk and Bun.

FACTS

As set forth above, the parties are acquainted through Paul Heffner. Paul Heffner, the president of Fortune Insight, and the founder of Adamas Asset Management ("Adamas"). Heffner also controlled Adamas Ping An Opportunities Fund ("Adamas Ping An"), as well as Net Effect Limited ("Net Effect'), and was a resident of Hong Kong. Heffner represented that Adamas was an investment management company which assisted clients in locating and providing structured private funding in Asia. Heffner was the sole party that controlled Adamas, Adamas Ping An, and Net Effect. As presented to this Court through the testimony of the witnesses, it has become clear that Paul Heffner was responsible for the failed financial transactions faced by all the parties involved. By all appearances to all parties to this litigation, Heffner was a successful investment manager. Representing himself to be a commercial investor Heffner utilized funds from the defendants, who considered him someone they could trust, promised that the funds would be used for loans that were secured by collateral, and promised returns with high interest rates.

Beginning in 2017, Gate Corporation Limited, a Hong Kong based entity, along with its U.S. based affiliates, including plaintiff, Tex-Gas Holdings, LLC, sought financing from domestic and international investors to provide general financing for ongoing operations. Heffner introduced Gate Corp, to multiple entities for purposes of securing financing in an amount up to $500, 000, 000 (USD). As a condition to his assistance, Heffner became a member of the board of directors of Gate Corp. on March 28, 2018.^[9] Net Effect thereafter obtained and transferred to Gate Corp. funds from Bun and Yuk as follows: $1, 570, 000 (HKD) on October 24, 2019, $2, 355, 000 (HKD) on November 4, 2019, $400, 000 (HKD) on January 10, 2020, $400, 000 (HKD) on January 20, 2020, $100, 000 (HKD) on January 21, 2020, and $400, 000 (HKD) on September 30, 2020. A total of $688, 300 as converted to USD per historical exchange rates on the dates of transfer. Elroy Fimrite testified that a portion of these funds were allocated to the purchase of royalty units of EFG, with the remaining funds to be used at Gate Corp.'s discretion. These funds were never repaid to Heffner, Net Effect, Bun or Yuk.

On May 06, 2020, East Breifne LLC made a loan to Gate Corp., EF Global, EFG America, LLC, and Tex-Gas LLC (the "East Brefine Loan"). The proceeds of this loan were used to retire a prior lien on the Plaintiff's real property, and to pay for operational expenses. This was secured by a deed on the property in Matagorda County, Texas, and filed and recorded in the real property records of Matagorda County, Texas.^[10] This loan was guaranteed by Paul Heffner.

During this same time, Yuk and Bun began investing with Heffner, with Adrian Chi Hin Sham, the son of Bun and son-in-law of Yuk, the main point of contact between Paul Heffner and Yuk and Bun. Bun asserts he began investing with Heffner in 2017. On May 15, 2019, Bun and Net Effect entered into a loan agreement wherein Bun would loan Net Effect $23, 200, 000 (HKD) (equivalent to approximately $2, 978, 532 (USD)). Heffner personally guaranteed the loan.^[11] Net Effect's bank statements confirm a deposit of $2, 799, 985.00 (HKD) on May 15, 2019.^[12] Bun had previously given $19, 000, 985.00 (HKD) to Net Effect on April 15, 2019.^[13]

Yuk asserts she invested with Net Effect...