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Segner v. Ruthven Oil & Gas LLC

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

June 28, 2018

MILO H. SEGNER, JR, as Liquidating Trustee of the PR Liquidating Trust, Plaintiff,
v.
RUTHVEN OIL & GAS, LLC, ET AL., Defendants.

          MEMORANDUM OPINION AND ORDER

          JANE J. BOYLE, UNITED STATES DISTRICT JUDGE.

         In this bankruptcy dispute, trustee Milo Segner (Segner) seeks to recover about $21.7 million of fraudulently transferred money from Cianna Resources, Inc (Cianna). The only issue at trial was whether Cianna could avoid liability by showing that it received the money in exchange for value, in good faith, and without knowledge that the transfer was avoidable. A jury returned a verdict for Cianna. And Segner responded by moving for judgment as a matter of law and for a new trial. The Court DENIES both motions.

         I.

         BACKGROUND[1]

A. Factual History

         Provident Royalties, LLC (Provident) engaged Ruthven Oil & Gas, LLC (Ruthven) to help it find and acquire mineral interests. Doc. 299-10, Pl. Mot. New Trial App., Ex. J. Ruthven approached Cianna to help it help Provident by acquiring mineral interests in certain Oklahoma counties Provident specified. Trial Tr. Vol. I, 87-88. In a series of 197 transactions, Cianna acquired the mineral interests and transferred them to Ruthven, Doc. 299-7, Pl. Mot. New Trial App., Ex. G. Corresponding sums of money flowed from Provident to Ruthven to Cianna to the mineral owners. Id. Cianna received $500 per acre acquired in compensation. Trial Tr. Vol. I, 88. Overall, Provident transferred $48, 812, 882.24 to Ruthven, Doc. 100, Adopted Findings of Fact and Conclusions of Law, 2, and Ruthven sent $21, 117, 572.79 to Cianna. Bankr. Doc. 423-1, Am. Ruling, 25.

         B. Procedural History

         Provident filed for bankruptcy in June 2009, Bankr. Doc. 1, Compl., ¶ 24, and, in June 2011, Milo Segner filed this adversary proceeding in the bankruptcy court against Ruthven, Cianna, and others. Id. ¶ 1. The defendants moved in April 2012 to withdraw the reference from the bankruptcy court. Doc. 1, Mot. for Withdrawal of Reference. The case was reassigned to this Court in May 2013, Doc. 34, but the Court referred the case back to the bankruptcy court for pretrial matters to be resolved, Doc. 73, Order of Reference. After de novo review of a report and recommendation of the bankruptcy judge in September 2015, this Court determined that Provident's transfer of the $48, 812, 882.24 to Ruthven and subsequent transfers of that money by Ruthven, including the transfers to Cianna now at issue, are avoidable under 11 U.S.C. § 548(a)(1)(A). Doc. 100, Mem. Op. & Order, 2. And in November 2015, the Court dismissed Segner's claims against all of the defendants except for Cianna pursuant to a settlement agreement. Electronic Order Granting Doc. 105 Motion for Voluntary Dismissal of Claims.

         After the settlement and a summary-judgment ruling establishing that Cianna was a transferee[2] as to the $21, 117, 572.79 it received from Provident via Ruthven, Doc. 242, Mem. Op. & Order, the only remaining issue was whether Cianna could establish the affirmative defense that required it to show that it received the money in exchange for value, in good faith, and without knowledge that the transfers were avoidable. See 11 U.S.C. § 550(b).[3] On that issue, a jury returned a verdict for Cianna. Doc. 296, Jury Verdict. Now, dissatisfied with the verdict and many of the Court's trial-related rulings, Segner has moved for judgment as a matter of law and a new trial. Doc. 297, Mot. J. as Matter of Law; Doc. 300, Mot. New Trial. The motions are ripe for review.

         II.

         LEGAL STANDARD

         A. Rule 50(b): Motion for Judgement as a Matter of Law

         A court should grant a motion for judgment as a matter of law under Federal Rule of Civil Procedure 50(b) only if “there is no legally sufficient evidentiary basis for a reasonable jury to find for that party on that issue.” Cano v. Bexar Co., 280 F.Appx. 404, 406 (5th Cir. 2008) (internal citations omitted). The Court “should consider all of the evidence-not just that evidence which supports the non-mover's case-but in the light and with all reasonable inferences most favorable to the party opposed to the motion.” Mosley v. Excel Corp., 109 F.3d 1006, 1008-09 (5th Cir. 1997). The court must not make credibility decisions or weigh the evidence in making its determination. Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000).

         B. Rule 59: Motion for New Trial

         A Court can “grant a new trial . . . after a jury trial, for any reason for which a new trial has heretofore been granted in an action at law in federal court.” Fed.R.Civ.P. 59(a)(1)(A). In this Circuit, a district court can grant a new trial if “the verdict is against the great weight of the evidence . . . the trial was unfair, or prejudicial error was committed. Smith v. Transworld Drilling Co., 773 F.2d 610, 613 (5th Cir. 1985). Courts are to decide whether to grant a new trial based on their assessment of the fairness of the trial and the reliability of the jury's verdict. Seidman v. Am. Airlines, Inc., 923 F.2d 1134, 1140 (5th Cir. 1991). And the decision whether to grant a new trial is “within the sound discretion of the trial court.” Shows v. Jamison Bedding, Inc., 671 F.2d 927, 930 (5th Cir. 1982)).

         III.

         ANALYSIS

         If a transfer is avoidable under the Bankruptcy Code, as the transfers to Cianna are, “the trustee may recover, for the benefit of the estate, the property transferred . . . from (1) the initial transferee of such transfer or . . . (2) any immediate or mediate transferee of such initial transferee.” 11 U.S.C. § 550(a). But “[t]he trustee may not recover under section (a)(2) of this section from (1) a transferee that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided.” § 550(b)(1). Cianna bore the burden at trial of establishing the elements of § 550(b)(1).

         A. Rule 50(b): Motion for Judgment as a Matter of Law

         Segner argues that the Court should award it judgment as a matter of law on Cianna's § 550(b) defense for five[4] reasons.

         1. Oklahoma Documentary Stamp Act and Cianna's Good Faith

         Segner argues that its evidence that Cianna violated the Oklahoma Documentary Stamp Tax Act (ODSTA) establishes as a matter of law that Cianna did not receive the money from Ruthven in good faith. Doc. 298, Pl. Mot. J. as Matter of Law Br., 1. But Segner's argument ignores that Cianna's good faith hinged on what it knew or should have known about Provident. See In re Am. Hous. Found., 785 F.3d 143, 164 (5th Cir. 2015) (noting in fraudulent-transfer case that good-faith inquiry looks “to whether the [transferee] was on notice of the debtor's insolvency or the fraudulent nature of the transaction”). That Cianna overstated on ODSTA documents the value of the interests it transferred does not establish as a matter of law that Cianna knew or should have known that Provident was defrauding its investors. Of course, Segner characterized Cianna's stamp-tax misrepresentations as evidence that Cianna was part of, knew of, or should have known of Provident's scheme, but the jury disagreed. The Court will not disturb the jury's decision.

         Segner now says the UCC's definition of good faith governs this case rather than the good-faith standard in the jury charge. Doc. 298, Pl. Mot. J. as Matter of Law Br., 2. But Segner waived this argument by not asking for the UCC definition to be included in the jury charge. See Doc. 228, Pl. Proposed Jury Instructions, 12.

         Even if Segner did not waive this argument, the UCC's definition does not govern this case. Untethered from a transferee's knowledge of the bankrupt's relationship with its creditors, the UCC definition of good faith requires only honesty in fact and observance of reasonable commercial standards. Doc. 298, Pl. Mot. J. as Matter of Law Br., 2. The bankruptcy code does not include the UCC's definition, and Courts in this circuit have applied a definition of good faith tied to a transferee's knowledge or constructive knowledge of the bankrupt's financial situation, Am. Hous., 785 F.3d at 164. The Court thus declines to apply the UCC's definition of good faith. Doc. 298, Pl. Mot. J. as Matter of Law Br., 2.

         Segner's argument fails even under the UCC standard. Segner seems to propose a rule under which, if a party violates a law in the process of entering into a transaction, a court must find as a matter of law that the party did not enter into that transaction in good faith. Doc. 298, Pl. Mot. J. as Matter of Law Br., 4. Segner's rule is untenable. Surely a contracting party who violated the speed limit while driving to a contract closing would not transact bad faith by driving too fast.

         Nor do the cases Segner cites support its conclusion that Cianna acted in bad faith. In Rudiger Charolais Ranches v. Van de Graaf Ranches, a rancher sold cattle to a merchant, who sold the cattle to a buyer. 994 F.2d 670, 671 (9th Cir. 1993). The buyer paid for and received the cattle but did not verify that the merchant owned the cattle. Id. After the merchant never paid the Rancher for the cattle, the rancher sought to recover from the buyer. Id. For the buyer to have held good title under Washington law, he had to have received the cattle in good faith. Id. at 672. And to have received the cattle in good faith, the buyer must have observed reasonable commercial standards when he purchased it. Id. The court found as a matter of law that the buyer did not observe reasonable commercial standards because he violated a Washington cattle-rustling-prevention statute by taking possession of the cattle without verifying that the merchant owned the cattle. Id. at 673. Segner says Cianna cannot have acted in good faith because, like the buyer, it violated the law-by lying on the ODSTA. Doc. 298, Pl. Mot. J. as Matter of Law Br., 6.

         This case is different from Rudiger. In Rudiger, the statute the rancher sought to enforce allowed buyers to keep stolen property if they observed reasonable commercial standards when they purchased the property. Rudiger, 994 F.2d at 672. Another statute required cattle buyers to take title papers with the purchased cattle to prevent cattle rustling. Id. Here, like in Rudiger, § 550(b) allows Cianna to keep what it received from Ruthven if it received the property in good faith. But unlike the cattle-rustling statute in Rudiger, the ODSTA is irrelevant to the question of whether a purchaser is receiving something to which another person might actually be entitled; it merely imposes a tax on transactions. This case would be like Rudiger had Cianna violated a statute requiring it to determine whether the funds it received might be claimed by anyone else, such as Provident's creditors. Because the ODSTA imposed no such obligation on Cianna, Segner's reliance on Rudiger is misguided.

         So is Segner's reliance on Philadelphia Gear Corp. v. Central Bank, 717 F.2d 230 (5th Cir. 2001). There, a bank issued a letter of credit to a company. Id. at 232. To use the credit, the company had to submit drafts to the bank, and the drafts had to conform to the letter of credit's requirements. Id. The company submitted a number of drafts to the bank that did not follow the letter's requirements, and the company knew the drafts did not comply with the letter. Id. at 233. When the bank refused to honor the drafts, the company sued. Id. State law incorporated a duty of good faith into every contract and provided that, by presenting a draft, a beneficiary of a letter of credit warranted that the draft complied with the letter of credit. Id. at 238. The Fifth Circuit held that the company breached both duties by knowingly submitting nonconforming drafts and therefore could not recover. Id. Segner contends ...


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