Trustmark Nat'l Bank v. Encore Lawn & Landscape of Greater Houston, LLC (In re Huff)

625 B.R. 654

IN RE: Casey B. HUFF, Debtor

Trustmark National Bank Plaintiff,

v.Encore Lawn and Landscape of Greater Houston, LLC, et al., Defendants.

CASE NO. 19-36071

ADV. NO. 20-03026

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

Signed: January 27, 2021

Richard L. Fuqua II, Fuqua & Associates PC, Houston, TX, for Debtor.

MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART PARTIAL SUMMARY JUDGMENT

Christopher Lopez, United States Bankruptcy Judge

This litigation arises out of a failed financial arrangement between Trustmark National Bank, Encore Pools, LLC/Encore Lawn and Landscape of Greater Houston, LLC (together, "Encore "), and Encore's owners Michael Kinney and Michael McCaskill (the "Guarantors "). Trustmark loaned Encore $2.5 million. The loan was guaranteed by the Guarantors and secured by Encore's accounts, inventory, equipment, and general intangibles. Encore defaulted on the loan and never repaid Trustmark. Neither did the Guarantors.

In 2017, Trustmark started a lawsuit in Texas state court against Encore, the Guarantors, Casey Huff, 2C Commercial Services, LLC, and Exterior Creations, Inc.¹ Trustmark alleges, among other things, that in 2015 Huff sold, transferred, conveyed, assigned, merged, or combined his interest in 2C with Encore. Thus, 2C's assets and future revenue allegedly became subject to Trustmark's lien. Trustmark also alleges that after Encore defaulted on the loan, Huff fraudulently transferred Encore's assets to 2C and Exterior Creations. Trustmark asserts fraudulent transfer claims against Huff, 2C, and Exterior Creations (together, the "Huff Defendants ") to avoid these alleged transfers. Trustmark also seeks declaratory judgment that its security interest in certain vehicles is superior to any rights held by the Huff Defendants.²

In 2019, 2C filed a chapter 7 bankruptcy case and Huff filed an individual chapter 11 case. Huff removed the state court litigation to this Court. The Huff Defendants then sought partial summary judgment that Huff did not sell, transfer, convey, assign, merge, or combine his interest in 2C with Encore. For the reasons stated below, the Court grants in part and denies in part the Huff Defendants’ summary judgment motion.

Jurisdiction

This is a core proceeding under 28 U.S.C. § 157(b). The parties’ express and implied consent also provides the Court constitutional authority to enter a final judgment under Wellness Int'l Network, Ltd. v. Sharif , 575 U.S. 665, 135 S. Ct. 1932, 1944–47, 191 L.Ed.2d 911 (2015) and In re Delta Produce, L.P. , 845 F.3d 609, 617 (5th Cir. 2016).

Background

In April 2015, Encore executed a Promissory Note to Trustmark in connection with a $1 million revolving line of credit.³ To secure the indebtedness, Encore granted Trustmark a security interest in Encore's chattel paper, accounts, equipment, and general intangibles.⁴ Trustmark perfected its security interest in the collateral by filing a UCC financing statement with the Texas Secretary of State's office.⁵ And the Guarantors executed Commercial Guaranty Agreements.⁶

Kinney testified in deposition that in 2015 McCaskill and Huff "came to an agreement that the two companies [i.e. 2C and Encore] would come together."⁷ Kinney also testified his understanding that, in exchange for assuming 2C's debt, Encore would receive 2C's existing and prospective revenue.⁸ Trustmark believes that 2C's assets and future revenue became subject to Trustmark's lien.

In the summer of 2015, Huff became a salaried employee of Encore.⁹ And Encore Lawn, as lessee, and 2C, as lessor, entered into a three-year lease agreement, effective July 1, 2015, under which Encore Lawn agreed to lease 2C equipment listed on "Attachment A" to the lease.¹⁰ That same month, McCaskill filed with the Fort Bend County Clerk's office an Assumed Name Record (DBA) certifying that he owned 2C.¹¹ In October 2015, Kinney also filed an Assumed Name Record (DBA) certifying that he owned 2C.¹²

In November 2015, Encore executed a Revolving Line of Credit Promissory Note.¹³ This Note renewed and increased the original note from $1 million to $2.5 million.¹⁴ Encore also executed a Letter Loan Agreement under which Trustmark agreed to lend Encore up to $2.5 million.¹⁵ Encore granted Trustmark a security interest in Encore's accounts, inventory, equipment, and general intangibles.¹⁶ Trustmark perfected its security interest in this collateral by filing a UCC financing statement with the Texas Secretary of State's office.¹⁷ And the Guarantors executed new Commercial Guaranty Agreements.¹⁸ After November 2015, 2C had no employees, paid no payroll, and was not paying for expenses related to jobs for vendors or suppliers.¹⁹ Huff testified in deposition that 2C and Encore had an agreement under which 2C/Huff would receive ten percent of the gross revenues on jobs contracted in 2C's name.²⁰

About a year later, in October 2016, Trustmark gave the Guarantors a Notice of Maturity and Demand for Payment.²¹ Later that month, the Guarantors and Trustmark entered into a Temporary Forbearance Agreement.²² In November 2016, the Guarantors executed documents appointing Huff as Encore's Operating Manager.²³

In December 2016, Trustmark gave Huff a Notice of Termination of Temporary Forbearance Period.²⁴ Encore and the Guarantors never repaid Trustmark.²⁵ Huff wrote Trustmark and offered to purchase Encore's assets for $60,000.00.²⁶ Trustmark did not accept this offer.

In or around January 2017, Huff resigned from his position at Encore and returned to self-employment at Exterior Creations.²⁷ That same month Trustmark filed an Original Petition against Encore, the Guarantors, and the Huff Defendants in the 80th Judicial District of Harris County, Texas, Cause No. 2017-04650.

Two years later, in October 2019, 2C started a chapter 7 bankruptcy case, Case No. 19-35697. The 2C case is pending before Judge Eduardo V. Rodriguez. In November 2019, Huff started an individual chapter 11 case, Case No. 19-36071, which is pending before this Court. In January 2020, Huff removed the state court litigation to this Court.

The Huff Defendants then moved for partial summary judgment on the allegation in Trustmark's original petition that "Huff sold, transferred, conveyed, assigned, merged or combined his interest in 2C with Encore, including the assets of 2C and revenues owed to 2C, including any receivables of 2C purportedly owed by Burton, EE Reed, Arch-Con and ICI."²⁸ Trustmark objects and submitted exhibits that it believes proves summary judgment is not warranted because of alleged material issues of disputed fact that should be addressed at trial.

Summary Judgment Standard

Federal Rule of Civil Procedure 56 permits a party to move for summary judgment, "identifying each claim or defense — or the part of each claim or defense — on which summary judgment is sought." FED. R. CIV. P. 56(a) (emphasis added). Federal Rule of Bankruptcy Procedure 7056 incorporates Rule 56 in adversary proceedings. The Huff Defendants are entitled to summary judgment if they show "that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Id. "A ‘material’ fact is one ‘that might affect the outcome of the suit under governing law.’ " Renwick v. PNK Lake Charles, L.L.C., 901 F.3d 605, 611 (5th Cir. 2018) (internal citations omitted). A factual dispute is genuine if the evidence is such that a reasonable factfinder could return a verdict for Trustmark. See Harville v. City of Houston, Mississippi , 945 F.3d 870, 874 (5th Cir. 2019). In determining whether summary judgment is appropriate, all inferences are drawn in Trustmark's favor. Id. If, however, the record could not lead a rational trier of fact to find for Trustmark, summary judgment is appropriate. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

Trustmark bears the burden of proof on its claims at trial. So the Huff Defendants must show the absence of a genuine issue of disputed fact that entitles them to judgment as a matter of law. See Austin v. Kroger Tex., L.P. , 864 F.3d 326, 335 (5th Cir. 2017). If successful, the burden shifts to Trustmark to identify specific record evidence and articulate precisely how the evidence supports to defeat summary judgment. See Matson v. Sanderson Farms, Inc. , 388 F. Supp. 3d 853, 869 (S.D. Tex. 2019) (quoting Willis v. Cleco Corp. , 749 F.3d 314, 317 (5th Cir. 2014) ).²⁹

Analysis

The Huff Defendants claim that summary judgment is warranted because Huff did not sell, transfer, convey, assign, merge, or combine his interest in 2C with Encore.³⁰ This narrow issue was confirmed by the Huff Defendants’ counsel at the summary judgment hearing.

The Huff Defendants are right that there was never a legal merger. Under Texas law, for a merger involving a "domestic entity" to become effective, a party must file a certificate of merger with the Texas Secretary of State. See Tex. Bus. Org. Code §§ 10.151(a)(1)(A) ; 10.153(a). "Domestic entity" includes limited liability companies like Encore and 2C. Id. § 1.002(18) ("domestic entity" means an "organization formed under or the internal affairs of which are governed" by the Texas Business Organizations Code), § 1.002(62) (an "organization" includes limited liability companies). A merger becomes effective at the time provided by the plan of merger or, if a Subchapter D filing is required, when the Texas Secretary of State or county clerk, as appropriate, accepts the filing. Id. § 10.007. Once a merger is effective, the surviving company assumes the liabilities of the merged company and the merged company ceases to legally exist. Id. §§ 10.008(a)(1), (3). Here, that would mean that one of the Encore companies, as the surviving company, assumed 2C's liabilities and business operations, and 2C ceased existing.

The parties have been litigating this case for about four years and discovery closed. Trustmark produced no...