Appeal from the 190th District Court Harris County, Texas
Trial Court Cause No. 2013-44749
consists of Justices Busby, Brown, and Donovan.
OPINION ON MOTION
W. BROWN JUSTICE.
O.C.T.G., L.L.P. (OCTG) moved for review of the trial
court's net worth determination pursuant to Rule 24 of
the Texas Rules of Appellate Procedure. Appellee Laguna
Tubular Products Corporation (Laguna) filed a response. For
the reasons stated herein, we require that the amount of
security necessary to supersede the trial court's
judgment be decreased and remand to the trial court for that
determination. To this extent, we grant in part the Rule
24.4(a) motion filed by OCTG; otherwise, we deny this motion.
We lift our stay of execution on the trial court's
Factual and Procedural Background
Trial Judgment & Supersedeas Bond
case stems from a contract dispute. After a trial on the
merits, the trial court signed a final judgment in favor of
the plaintiffs/appellees. The trial court ordered that Laguna
recover from OCTG: (1) actual damages of $1, 562, 127.00; (2)
prejudgment interest of $181, 646.08; and (3) court costs and
post-judgment interest. The trial court also ordered that LTP
Real Estate, LLC, recover from Sojourn Partners, L.L.C.
("Sojourn"): (1) actual damages of $405, 000; (2)
prejudgment interest of $47, 093.91; and (3) court costs and
entry of judgment, both defendants deposited cash in lieu of
a supersedeas bond. Sojourn deposited one cashier's check
for actual damages and interest, and OCTG deposited a
cashier's check for one-half its claimed net worth ($168,
638.14), along with a net-worth affidavit. After the clerk
accepted the bond, Laguna objected to the net-worth
affidavit. OCTG responded to the objection and alternatively
moved to reduce the amount of supersedeas bond based upon
substantial economic harm.
2016, the trial court held an evidentiary hearing on
Laguna's objection to OCTG's net-worth affidavit.
OCTG called its general counsel and CFO, David Cragle, as its
first witness. Cragle testified that he prepared the
affidavit with respect to OCTG's net worth, in which he
stated OCTG's net worth was $337, 276.27 as of January
31, 2016. Cragle stated that, in addition to current assets
and liabilities, OCTG's detailed balance sheet included
the amount of the judgment, prejudgment interest, and costs
and legal fees associated with the instant case as a
contingent liability. According to Cragle, under generally
accepted accounting principles (GAAP),  both contingent
liabilities and contingent assets need to be included if the
loss or gain is "probable." Cragle cited Accounting
Standards Codification (ASC) 450, which provides: "An
estimated loss from a loss contingency is recognized only if
the available information indicates that (1) it is probable
that an asset has been impaired or a liability has been
incurred at the reporting date and (2) the amount of the loss
can be reasonably estimated." Thus, according to Cragle,
when the judgment in this case was rendered in December 2015,
it became a probable liability.
to Cragle, OCTG's net worth "substantially
deteriorated further" after he prepared the January
affidavit. Without reconciling the accounts for the month of
May, Cragle testified that OCTG had a current loss for the
year of approximately $1, 668, 000. Cragle noted the downturn
in the oil and gas industry and stated that OCTG had
downsized from a staff of about 250 to a staff of eight. OCTG
did not run a single service job - threading or inspection -
in May, and the only revenue line came from rack service
charges. Accounting for the current losses, Cragle estimated
OCTG's current net worth at the time of the hearing at
approximately -$938, 000.
also addressed Laguna's contention that OCTG had a net
worth of approximately $6.5 million as of May 2015. According
to Cragle, May 2015 was OCTG's last operational month to
produce positive results and the second half of the year saw
approximately $1.3 million in net losses. Additionally, OCTG
wrote off prior investments in oil and gas-related projects
that had "effectively become worthless, " which
accumulated to approximately $600, 000. Finally, the judgment
in this case further diminished OCTG's net worth.
testified as to attempts made by OCTG to secure a bond in
this case in the full amount of $1, 875, 000. According to
Cragle, OCTG "scoured lending sources" both before
and after the trial. Once the judgment was rendered, OCTG
contacted its commercial insurance broker for assistance in
obtaining bonds. Despite multiple attempts with multiple bond
underwriters, no one would underwrite a bond unless OCTG
provided cash or an irrevocable letter of credit in the full
amount, which Cragle testified OCTG could not do. According
to Cragle, lenders would not loan funds to OCTG because the
company did not have "sufficient cash flow."
further stated that OCTG used its available cash to pay
employment wages, taxes, worker's compensation insurance
"and the like" in order to remain operational.
Cragle also testified with regard to OCTG's assets
serving as potential security for obtaining funds to post
bond. According to Cragle, significant assets are pledged to
Capital One and Wells Fargo. Cragle conceded that some assets
- namely, equipment - were not pledged currently, but they
were essential to conducting business and also difficult to
sell given their specialized nature.
also testified that even if OCTG could somehow post the
security required to supersede the judgment, it would be
rendered unable to pay for the appeal from the judgment.
cross-examination, Cragle noted that he serves as general
counsel for the "group" that includes OCTG, Tubular
Ultrasound, Sojourn Partners, Tejas Gas, and ZEN Oil, as well
as a few, smaller project companies. According to Cragle,
these companies generally have common control but not
entirely common ownership. In addition to Cragle, four other
individuals have ownership interests in the various companies
- David Siverling, Bill McWhorter, Bruce Maxfield, and Laura
request of their lenders, OCTG asked an independent
accounting firm to review financial statements of OCTG and
its affiliates as of December 31, 2013, and prepare
consolidated financials. Cragle conceded that a reviewed
financial statement is not as reliable as an audited
also testified that Tubular Ultrasound and ZEN Oil, the two
upstream 50 percent owners of OCTG, are guarantors on the
Capital One indebtedness. However, the guaranty is not booked
on any of the balance sheets because it has not been called.
Cragle also stated that he has personal guarantees on the
Wells Fargo indebtedness. McWhorter and Siverling also have
personal guarantees as to Wells Fargo. Siverling additionally
has a personal guarantee on all of the Capital One
Partners owns the land and buildings from which OCTG's
operations run. In addition to having a 50 percent interest
in OCTG, Tubular Ultrasound has some legacy assets. ZEN Oil
is Tubular Ultrasound's general partner and makes all of
the management decisions. Siverling, who serves as president
of OCTG, owns 80 percent of ZEN.
acknowledged that none of the eight remaining staff employed
by OCTG would be involved in an inspection or threading job.
If OCTG got such a job, it would have to create a crew by
calling back previously laid-off employees.
questioned about how OCTG was paying for selling, general,
and administrative expenses (SG&A expenses) if the
company had no revenue, Cragle explained they were using cash
that was being collected still from prior service months.
Additionally, they have loaned money ...