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DeepRock Venture Partners LP v. Beach

United States District Court, N.D. Texas, Dallas Division

April 4, 2017

DEEPROCK VENTURE PARTNERS LP, Appellant,
v.
GARY M. BEACH, et al., Appellees.

          MEMORANDUM OPINION AND ORDER

          BARBARA M. G. LYNN CHIEF JUDGE

         Before the Court is Appellant DeepRock Venture Partners, L.P.'s (“DeepRock”) appeal of the bankruptcy court's grant of the Trustee's Motion to Approve Settlement of Adversary Proceedings [ECF No. 1]. DeepRock filed its Brief on October 7, 2016 [ECF No. 17]. Gentry Beach, individually and as co-trustee of the Beach 2010 Trust, and Diane G. Reed, Chapter 7 Trustee of the estate of Gary M. Beach (“Debtor”), filed Appellees' Briefs on December 14, 2016 [ECF Nos. 21, 23]. For the reasons stated below, the decision of the bankruptcy court is AFFIRMED.

         1. Factual and Procedural Background [1]

         This bankruptcy appeal arises from an adversary proceeding filed on December 2, 2011, by the Chapter 7 Trustee, Diane G. Reed, and DeepRock, in the bankruptcy case of Debtor Gary M. Beach (the “Adversary Proceeding”). The Amended Complaint in the Adversary Proceeding alleges that Debtor Gary Beach and his son, Gentry Beach, fraudulently transferred assets from a family trust (the “1991 Trust”) to shield those assets from the Debtor's creditors in bankruptcy.

         Debtor initially filed for bankruptcy in December of 2011. DeepRock was and currently is the primary creditor in Debtor's bankruptcy; according to the Trustee, DeepRock's liquidated claim against the Debtor represents over 93% of the allowed unsecured claims in this case. R. 390. DeepRock's claims in the bankruptcy stem from a partnership agreement between Debtor and DeepRock. In 2005, prior to bankruptcy, DeepRock and Debtor had entered into a partnership, Playa Oil & Gas, LP (“Playa”), to drill for oil on properties supposedly controlled by Debtor and his son, Gentry Beach. DeepRock provided millions of dollars in capital to Playa and Debtor served as Playa's CEO and managed the partnership. Playa's drilling activities were largely unprofitable, and in 2008, Debtor filed suit against DeepRock, seeking to take control of Playa's remaining assets. DeepRock counterclaimed. In February 2011, a jury rendered a verdict against Debtor on all of his claims, and damages on DeepRock's counterclaims against Debtor and Debtor's company, Beach Capital, for breach of fiduciary duty and breach of contract. Judgment in the Playa litigation was entered on August 29, 2011.

         Trustee and DeepRock allege that before and during the Playa litigation, Debtor and Gentry Beach, took “steps to liquidate the assets of a management trust established by Debtor's father and stepmother, Tommie Beach and Jenny Beach, to dispossess other family members of their rights under the trust, and . . . to ensure that the Debtor's creditors could not pursue his interest in trust assets.” R. 1857. The management trust in question, the 1991 Trust, provided that upon the first to die of Tommie and Jenny Beach, the survivor would become the sole trustee, with Gentry Beach and Jenny Beach's niece serving as successor co-trustees. After Jenny Beach died in 2010, Debtor and Gentry Beach allegedly took advantage of Tommie Beach's dementia and mental incapacity to fraudulently gain access to assets of the 1991 Trust, then containing $1.72 million, to have a new will executed for Tommie Beach that removed Jenny Beach's relatives as beneficiaries of 1991 Trust, to have warranty deeds allegedly executed by Tommie Beach that transferred property to the 1991 Trust and Debtor, and to liquidate securities held in the 1991 Trust. In September of 2010, while suffering from profound dementia, Tommie Beach purportedly created the 2010 Trust for the benefit of Debtor and Gentry Beach. The beneficial owners and trustees of the 2010 Trust are Debtor, who owns a 55% interest in the 2010 Trust, and Gentry Beach, who owns a 45% interest. Unlike the 1991 Trust, the 2010 Trust documents contain a spendthrift provision that protects Debtor's interest in the 2010 Trust from creditors. Assets from the 1991 Trust were then transferred into the 2010 Trust for the Debtor's and Gentry Beach's benefit. Debtor allegedly spent funds from the 2010 Trust and Gentry Beach received distributions from trust assets in a claimed violation of the 2010 Trust document, which he then transferred back to Debtor. Trustee and DeepRock claimed that the Debtor forged Tommie Beach's signature to create and fund the 2010 Trust, and maintain that the 2010 Trust was self-settled and merely an alter ego of the Debtor, and that assets of the 2010 Trust are thus not protected by the spendthrift provision.

         The Amended Complaint further asserts that after receiving an adverse judgment in the Playa litigation, Debtor created a Nevada limited liability company, Beach Petroleum LLC, which is owned by the 2010 Trust. The Amended Complaint alleges that Debtor received thousands of dollars of payments from Beach Petroleum, and Black Horse Resources, LLC, although Beach Petroleum was not engaging in any actual business. In April 2011, Beach Petroleum entered into an agreement (the “Participation Agreement”) with Black Horse Resources, which was managed by Debtor's brother-in-law. R. 1458-61. Under the Participation Agreement, Black Horse agreed to pay all land, lease, geophysical, seismic, drilling, completion, production, and operating costs of all activities relating to a plot of land in Louisiana, subject to receiving 100% of the net revenue attributable to all oil, gas, and mineral production on the land, until Black Horse recouped its costs. R. 1458-59. The Participation Agreement provided for a monthly $15, 000 payment to the 2010 Trust as compensation for services provided by Debtor. R. 1459. In September 2014, the Participation Agreement was amended to delete the $15, 000 fee, in exchange for Beach Petroleum receiving Black Horse's interest in Pecos Permian Partners, LLC, which were subsequently sold for $375, 000 and the proceeds deposited in the 2010 Trust. R. 1541; 1208-09.

         Around August 19, 2015, the Participation Agreement was terminated and Beach Petroleum entered into an agreement with Black Horse and TP Panther Dome, LLC (the “2015 Agreement”). R. 1766-93. Under the 2015 Agreement, in exchange for $175, 000 paid to Beach Petroleum, TP Panther Dome had the choice to select one of three options for future oil and gas production activities, one of which was an option to not engage in production. R. 1771-73. Separately, TP Panther Dome assigned a 1.75% overriding royalty interest to Beach Petroleum. R. 1795.

         In October 2011, Debtor and Gentry Beach, in their capacities as trustees of the 2010 Trust, distributed the entire balance of the trust account, $928, 223.83, to a Texas real estate escrow company. Just days before filing for bankruptcy, Debtor and Gentry Beach purchased, in cash, a home in Dallas, using $867, 500 of the escrowed funds. On December 2, 2011, one business day before a contempt hearing in the Playa litigation on Debtor's failure to satisfy the judgment in favor of DeepRock, Debtor filed for bankruptcy protection.

         On April 20, 2015, the Trustee and DeepRock filed the Amended Complaint in the Adversary Proceeding, primarily seeking to avoid and recover the value of all fraudulent transfers by the Debtor of assets transferred from the 1991 Trust to the 2010 Trust, and certain transfers to Gentry Beach from the 1991 Trust and the 2010 Trust. The Trustee and DeepRock also sought other remedies associated with recovery of the fraudulent transfers, including costs, the imposition of a constructive trust on certain assets of the 2010 Trust, and a declaratory judgment that the 2010 Trust was settled by the Debtor and Gentry Beach themselves, and not by Tommie Beach, that the 1991 Trust and the 2010 Trust are alter egos of the Debtor, and that the Debtor's bankruptcy estate includes the Debtor's interest in all assets that presently make up the corpus of the 2010 Trust.

         On December 21, 2015, the parties attended mediation pursuant to the bankruptcy court's order. R. 56-57; 1176-78; 3159. No agreement was reached at mediation, but in additional conversations after DeepRock's representatives left, the Trustee, Gary Beach, and Gentry Beach, reached an agreement to settle the Adversary Proceeding. R. 998-99; 1177-78; 1754-55. An initial term sheet was drawn up that same evening, which was further refined and incorporated into a Settlement Agreement dated January 19, 2016. R. 1754-55; 392-408. Among other things, the Settlement Agreement provided that in exchange for mutual releases between the Trustee and Defendants and dismissal of the Adversary Proceeding with prejudice, Defendants would pay the Trustee $1, 000, 000.00 in cash, Debtor would waive his discharge in bankruptcy pursuant to 11 U.S.C. § 722(a)(11), without any admissions of fault or wrongdoing, and Defendants would provide information to the Trustee regarding the whereabouts of certain assets and financial information of Beach Capital, Beach Petroleum, and another family trust. R. 392-408. The Settlement Agreement further provided that should the Trustee find that the 2010 Trust's interest in Beach Petroleum have more than nominal value, the parties would engage in good faith discussions as to how to distribute that value.[2] R. 395. After reviewing Beach Petroleum's operations and financial condition, the Trustee concluded that due to depressed oil prices, the lack of ongoing operations or income by Beach Petroleum, and its inability to explore efficiently due to the cost of exploration, Beach Petroleum lacked value apart from what was in Beach Petroleum's bank account, which was $21, 000. R. 1005-08. Following additional negotiations between the Trustee and Defendants, an additional settlement payment of $15, 000 was agreed to be added to the $1, 000, 000.00 payment as a fair allocation for the current value of Beach Petroleum. R. 1008. On February 11, 2016, an Addendum to the Settlement Agreement was executed, amending the Settlement Agreement to reflect that Defendants' total payment to the Trustee would be $1, 015, 000.00, to be paid from the proceeds of the house purchased pre-bankruptcy by Defendants with proceeds of the 2010 Trust. R. 405- 08.

         On February 11, 2016, the Trustee filed the Motion to Approve Settlement of Adversary Proceeding (the “Settlement Motion”). R. 383. On March 30, 2016, DeepRock objected to the Settlement Motion. R. 414. The bankruptcy court held hearings on the Settlement Motion on May 12 and May 24, 2016. Both Gentry Beach and the Trustee testified in support of the Settlement Motion. R. 995-1065; 1085-1263. At the end of the hearing on May 24, 2016, the bankruptcy court informed the parties that she would issue a bench ruling on the Settlement Motion the following day. R. 1327.

         On May 25, 2016, just before the bankruptcy court issued its bench ruling, counsel for DeepRock informed the bankruptcy court that DeepRock had made an offer to purchase from the Trustee the Trustee's claim in the Adversary Proceeding for $275, 000.[3] R. 1333. DeepRock's counsel asked the bankruptcy court to defer issuing its bench ruling on the Settlement Motion to let the Trustee consider DeepRock's offer. R. 1333. The bankruptcy court declined DeepRock's late request, overruled DeepRock's objection to the proposed settlement, and granted the Settlement Motion. R. 1335-38. The bankruptcy court invited DeepRock to later submit a motion on its effort to purchase the Trustee's claim from the Trustee, but it never did so. DeepRock appeals.

         2. Basis of Appellate Jurisdiction

         This Court has jurisdiction to hear this appeal under 28 U.S.C. § 158. The bankruptcy court's Order granting the Trustee's Motion to Approve Settlement of Adversary Proceedings qualifies as a “final order” from which the district court can hear an appeal. “[A]n order which ends a discrete judicial unit in the larger case concludes a bankruptcy proceeding and is a final judgment . . . .” England v. FDIC, 975 F.2d 1168, 1171 (5th Cir. 1992). “Finality in bankruptcy cases is contingent upon the conclusion of an adversarial proceeding within the bankruptcy case, rather than the conclusion of the entire litigation.” Id.

         3. Legal Standard

         a. Standard of Review

         This Court applies the same general standard of review that the Fifth Circuit applies in reviewing a bankruptcy court's findings of fact and conclusions of law. In re SI Restructuring, Inc., 542 F.3d 131, 134 (5th Cir. 2008). Under this standard, “a bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo.” Id. This Court “may affirm for any reason supported by the record, even if not [explicitly] relied on by the [bankruptcy] court.” United States v. Gonzalez, 592 F.3d 675, 681 (5th Cir. 2009).

         A bankruptcy court's “findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous.” Fed.R.Bankr.P. 8013. A finding is clearly erroneous and reversible only if, based on the entire evidence, the reviewing court is left “with the definite and firm conviction that a mistake has been made.” In re Dennis, 330 F.3d 696, 701 (5th Cir. 2003) (citation omitted). When reviewing a bankruptcy court's approval of a compromise settlement, an appellate court reviews for abuse of discretion. In re Bodenheimer, Jones, Szwak, & Winchell LLP, 592 F.3d 664, 668 (5th Cir. 2009). A bankruptcy court does not abuse its discretion unless its ruling is based on an erroneous review of the law or on a clearly erroneous assessment of the evidence.” In re Yorkshire, LLC, 540 F.3d 328, 331 (5th Cir. 2008) (quoting Chaves v. M/V Medina Star, 47 F.3d 153, 156 (5th Cir. 1995)).

         b. ...


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