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O.C.T.G., L.L.P v. Laguna Tubular Products Corp.

Court of Appeals of Texas, Fourteenth District

June 6, 2017

O.C.T.G., L.L.P AND SOJOURN PARTNERS, L.L.C., Appellants
v.
LAGUNA TUBULAR PRODUCTS CORPORATION AND LTP REAL ESTATE, LLC, Appellees

         On Appeal from the 190th District Court Harris County, Texas Trial Court Cause No. 2013-44749

          Panel consists of Justices Busby, Brown, and Donovan.

          OPINION ON MOTION

          MARC W. BROWN JUSTICE.

         Appellant 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 judgment.

         I. Factual and Procedural Background

         A. Trial Judgment & Supersedeas Bond

         This 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 post-judgment interest.

         Following 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.

         B. Net-Worth Hearing

         In June 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), [1] 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.

         According 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.

         Cragle 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.

         Cragle 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."

         Cragle 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.

         Cragle 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.

         On 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 Cragle.

         At the 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 financial statement.

         Cragle 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 indebtedness.

         Sojourn 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.

         Cragle 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.

         When 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 ...


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