Utah Iron v. Wells Fargo Rail

634 B.R. 122

UTAH IRON, CML Metals Corp., and Gilbert Development Corp., Appellants,

v.WELLS FARGO RAIL and Helm-Pacific Leasing, Appellees.

Case No. 2:18-CV-00962-BSJ

United States District Court, D. Utah.

Signed September 16, 2021

Dana T. Farmer, Dentons Durham Jones & Pinegar PC, Ogden, UT, David J. Jordan, Ellen E. Ostrow, Mark E. Hindley, Stoel Rives, Penrod W. Keith, R. Blake Hamilton, Dentons Durham Jones & Pinegar PC, Ralph R. Mabey, Kirton McConkie, Salt Lake City, UT, for Appellants.

Amy F. Sorenson, Bret R. Evans, Douglas P. Farr, Matthew L. Lalli, Troy J. Aramburu, Snell & Wilmer LLP, Salt Lake City, UT, for Appellees.

MEMORANDUM OPINION AND ORDER ON APPEAL FROM THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF UTAH.

Bruce S. Jenkins, United States Senior District Judge

Before the Court is Appellants Utah Iron, LLC ("Black Iron")¹ , CML Metals Corporation ("CML"), and Gilbert Development Corporation's ("GDC") appeal of the bankruptcy court's memorandum decisions and orders.² The Court heard oral argument on February 5, 2021, by videoconference.³ Mr. David J. Jordan and Ms. Ellen E. Ostrow appeared on behalf of Appellants. Mr. Troy J. Aramburu appeared on behalf of Appellees Wells Fargo Rail⁴ ("Wells Fargo") and Helm-Pacific Leasing ("Helm"). The Court reserved on the matter. Having considered the parties’ briefs, the arguments of counsel, and the relevant law, the Court hereby AFFIRMS the bankruptcy court's memorandum opinions and orders. Specifically, the Court AFFIRMS each of the bankruptcy court's opinion and orders: the summary judgment memorandum opinion and order on storage fees and trespass,⁵ the summary judgment memorandum opinion and order on conversion,⁶ and the decision and order after trial.⁷

BACKGROUND

Factual Background

This case revolves around a struggling mining operation and leased railcars. When the lessee of the rail cars, CML, defaulted on its leases in late 2014, it entered into forbearance negotiations with the lessor, Wells Fargo.⁸ After CML's attempts to market and sell its Assets – the Comstock Mountain Lion Mine ("Mine"), the concentrate plant ("Mill"), and the real property then-owned by CML ("Property") stalled, it entered into an Asset Purchase Agreement ("APA") with GDC, its mining contractor.⁹ GDC then assigned all of its rights under the APA to Black Iron.¹⁰ Shortly after the Assets were assigned to Black Iron, Black Iron informed Wells Fargo it needed to move its rail cars or pay storage fees.¹¹ The ensuing saga of events resulted in years of litigation in the bankruptcy court. For a full account of the facts, see the bankruptcy court's opinions.¹² This Court will give a brief summary.

CML purchased the Mine in 2005.¹³ From 2010 to 2014, CML leased 540 railcars and four locomotives ("the Equipment") from Wells Fargo for the purpose of hauling iron ore.¹⁴ In December of 2013, CML engaged Sagent Advisors, LLC, to market the Mine to potential buyers.¹⁵ In February of 2014, the price of iron ore began to drop precipitously.¹⁶ By October of 2014, CML suspended its operations.¹⁷ Also in October of 2014, CML fell behind on payments to GDC.¹⁸

In November of 2014, CML defaulted under the Leases by failing to make payments to Wells Fargo.¹⁹ Wells Fargo declared a default.²⁰ In response to the default, CML represented it would pursue sub-leasing opportunities and stated that "multiple strategic suitors [were] completing their final diligence and notations of financial terms."²¹ Wells Fargo began negotiating a forbearance agreement with CML in December of 2014 and did not immediately pursue its default remedies.²²

By February of 2015, CML and Wells Fargo had exchanged multiple drafts of a forbearance agreement, but CML had not signed an agreement.²³ In March of 2015, a potential purchaser of the Mine, Evraz, withdrew a non-binding proposal it had furnished to CML in April of 2014.²⁴ CML and GDC then began discussing the sale of the Mine to GDC.²⁵ Over the course of a few days, CML's chairman of the board, Michael Conboy ("Conboy") and the chief principal of GDC, Steve Gilbert ("Steve"), engaged in negotiations over the phone.²⁶ Steve recorded many of the phone conversations.²⁷

Also in March of 2015, Wells Fargo demanded that CML execute the forbearance agreement.²⁸ CML then filed a complaint against Wells Fargo for breach of contract and breach of the implied covenant of good faith and fair dealing.²⁹ Wells Fargo counterclaimed against CML and demanded the return of the Equipment.³⁰

Prior to the execution of the APA between CML and GDC, Conboy suggested Steve create a new entity so GDC could avoid incurring potential environmental liabilities at the Mine.³¹ The parties inserted a provision into the APA that "CML will convey the assets to GDC or, at GDC's direction, GDC's nominee."³² On April 2, 2015, CML and GDC signed the APA.³³ On April 14, 2015, Steve formed Black Iron, a Utah limited liability company.³⁴ On April 29, 2015, GDC and Black Iron entered into an Assignment of Agreement Rights under Asset Purchase Agreement ("the Assignment"), under which GDC assigned all of its rights under the APA to Black Iron.³⁵ The transaction closed on May 5, 2015.³⁶ Under the Assignment, GDC assigned all of its rights under the APA to Black Iron.³⁷ Like the bankruptcy court, this Court will refer to this entire sequence of events as the "Transfer."³⁸

CML did not return the Equipment to Wells Fargo before the Transfer.³⁹ Rather, CML left the Equipment on the Property.⁴⁰ At the closing, the title company disbursed payments to various creditors, but, as had been previously agreed to by Steve and Conboy, no amounts were paid to Wells Fargo.⁴¹ Wells Fargo did not learn about the Transfer until after it had closed.⁴²

On or about May 8, 2015, Black Iron contacted Wells Fargo.⁴³ It asked that the Equipment be removed by June 1, 2015, and stated it would otherwise charge storage fees.⁴⁴ Wells Fargo stated it would remove the Equipment.⁴⁵ From May through August of 2015, Wells Fargo coordinated the removal with repair teams, inspectors, and other personnel.⁴⁶ Much of the Equipment required repairs before it could be moved.⁴⁷ Over the summer, Wells Fargo and Black Iron routinely communicated regarding the removal efforts.⁴⁸ Black Iron never gave Wells Fargo a removal deadline or otherwise indicated it was impatient with Wells Fargo's efforts to remove the Equipment,⁴⁹ Within six weeks of the May 8, 2015 email, Wells Fargo had hired a repair vendor to travel from Missouri to Utah that was set to start work the week of August 24, 2015.⁵⁰

On August 19, 2015, Wells Fargo filed a complaint against Black Iron and GDC claiming the Transfer was a fraudulent conveyance.⁵¹ On August 20, 2015, Black Iron sent Wells Fargo an email instructing it to "cease and desist" its plan to remove the Equipment.⁵² The email stated, "Please be advised due to legal issue [sic] pertaining to storage and security of the rail cars sitting on the Black Iron, LLC property these car [sic] cannot be moved until these issues are resolved."⁵³

From September 2015 through August 2016, the parties attempted to re-engage in removal efforts.⁵⁴ For example, on September 17, 2015, an attorney from Wells Fargo emailed Black Iron seeking to confirm a phone conversation in which Black Iron gave Wells Fargo permission to enter the Property and remove the Equipment.⁵⁵ The parties had outstanding questions involving the ownership of different rail road tracks, some of which required repairs before the Equipment could be moved.⁵⁶ By April of 2016, Black Iron demanded nearly $2.5 million in storage fees from Wells Fargo before it could retrieve its Equipment.⁵⁷ By July 2016, the amount has increased to over $16 million.⁵⁸ And in August, it was $23 million.⁵⁹

In June of 2017, Black Iron filed for Chapter 11 relief.⁶⁰ In April of 2018, Wells Fargo moved the bankruptcy court for permission to enter the Property and remove the Equipment.⁶¹ The bankruptcy court authorized Wells Fargo to remove the Equipment and required it to post a bond of $10 million.⁶² In July of 2018, Wells Fargo sold the Equipment in place (as-is, where-is) to a scrap company for $3,614,416.⁶³ The bond remains in place.⁶⁴

The Bankruptcy Court's Decisions

The bankruptcy court ruled on two motions for summary judgment. The first summary judgment motion was brought by Wells Fargo and sought to have Black Iron's claims against it for storage fees and trespass dismissed.⁶⁵ After a hearing, the bankruptcy court granted Wells Fargo's motion and issued a memorandum decision and order on December 4, 2018 ("Storage Fees and Trespass Order").⁶⁶ The second summary judgment motion was also brought by Wells Fargo and sought the bankruptcy court's ruling on its conversion claim against Black Iron.⁶⁷ After a hearing, the court granted Wells Fargo's motion and issued a memorandum decision and order on December 14, 2018 ("Conversion Order").⁶⁸ Additionally, after a trial, the bankruptcy court issued a memorandum decision and order finding Black Iron and GDC liable for fraudulent transfer ("Decision After Trial") under Utah's Uniform Fraudulent Transfer Act ("UFTA").⁶⁹ The court awarded Wells Fargo damages against Black Iron and GDC under the UFTA in the amount of $2,618,680.44.⁷⁰ The court also awarded Wells Fargo damages against Black Iron for conversion in the amount of $7,885,584.⁷¹

Black Iron and GDC now appeal the bankruptcy court's decisions.⁷²

DISCUSSION

I. Standard of Review

A district court reviews "the bankruptcy court's legal determinations de novo and its factual findings under the clearly erroneous standard." In re Miniscribe Corp. , 309 F.3d 1234, 1240 (10th Cir. 2002) (citation omitted). "A finding of fact is clearly erroneous if it is without factual support in the record or if, after reviewing all of the evidence, we are left with the definite and firm conviction that a mistake has been made." Id. A mixed question of law and fact where the legal analysis predominates is...