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In re Green Field Energy Services, Inc.

United States District Court, D. Delaware

October 16, 2019

IN RE GREEN FIELD ENERGY SERVICES, INC., et al, Debtors.
v.
MICHEL B. MORENO, et al., Defendants. ALAN HALPERIN, AS TRUSTEE OF THE GREEN FIELD LIQUIDATION TRUST, Plaintiff, Adv. No. 15-50262-KG

         Chapter 11

          Robert J. Stark, Marek P. Krzyowski, BROWN RUDNICK LLP, New York, New York; James W. Stoll, Melanie Dahl Burke, Brian M. Alosco, BROWN RUDNICK LLP, Boston, Massachusetts; Joel S. Miliband, BROWN RUDNICK LLP, Irvine, California; Steven K. Kortanek, Patrick A. Jackson, Joseph N. Argentina, Jr., DRINKER BIDDLE & REATH LLP, Wilmington, Delaware, Counsel for Plaintiff

          Jeffrey R. Fine, Alison R. Ashmore, Aaron Kaufman, R. Chris Harvey, DYKEMA GOSSETT PLLC, Dallas, Texas; Marc J. Phillips, MANNING GROSS MASSENBURG, Wilmington, Delaware, Counsel for Defendants

          MEMORANDUM OPINION

          Connolly, Judge

         I. INTRODUCTION

         Pending before the Court is the Bankruptcy Court's Opinion and Findings of Fact and Conclusions of Law, dated September 12, 2018 (Adv. D.I. 53 5)[1] [APP 0002-0127] ("FFCL") and Order, dated September 18, 2018 (Adv. D.I. 540) ("Order"), which together recommend that this Court enter judgment against defendants Michel B. Morena ("Morena") and MOR MGH Holdings, LLC ("MOR MGH")[2] and in favor of plaintiff ("Trustee") on certain Counts of the Complaint in the above-referenced adversary proceeding ("Adversary Proceeding"). The FFCL constitutes the Bankruptcy Court's proposed findings of fact and conclusions of law in support of final judgment, as required by Federal Rule of Bankruptcy Procedure ("Bankruptcy Rule") 7052 and 9033.[3] Defendants Moreno and MOR MGH have filed a limited objection with respect to certain of the proposed FFCL (Adv. D.I. 550) ("Objection") together with a suggestion in support of the Objection (Adv. D.I. 552) ("Suggestion"). Defendants object to the Bankruptcy Court's FFCL only as to Counts 11, 12, and 14.[4] For the reasons set forth herein, the Court sustains Defendants' objection to the Bankruptcy Court's factual finding that the $10 million Moreno diverted to his personal use was "earmarked" for Green Field, overrules Defendants' remaining Objections, and adopts the Bankruptcy Court's proposed FFCL.

         II. BACKGROUND[5]

         This dispute arises in the chapter 11 bankruptcy cases of Green Field Energy Services ("Green Field") and certain of its affiliates (collectively with Green Field, "Debtors"), which were commenced on October 27, 2013. The Trustee commenced the Adversary Proceeding on April 6, 2015, asserting claims against various defendants including Moreno, MOR MGH, and Turbine Generation Services, LLC ("TGS").[6] The Complaint originally pleaded 35 counts, but certain counts were settled or withdrawn. (FFCL 3-5). The issues presented for trial included:

Counts 1, 2, 3, 6, and 7 - Fraudulent transfer, breach of fiduciary duty and corporate waste claims against Moreno and TGS related to the alleged transfer or waiver of the power generation business by Moreno to himself, personally, through TGS.
Counts 11, 12, and 14 - Breach of contract, breach of fiduciary duty, and tortious interference claims against MOR MGH and Moreno related to MOR MGH's alleged breaches of the SPAs (defined below) that required MOR MGH to purchase preferred stock in Green Field, and Moreno's interference with MOR MGH's obligations under those contracts.

         Moreno became the Chairman of the Board of Directors and CEO of Green Field in October 2011 and remained Chairman and CEO until the company's liquidation. The relationships between certain entities that were either owned by Defendant Moreno or otherwise related to Green Field are relevant to the Bankruptcy Court's findings with respect to the breach of contract and tortious interference claims, and the Court summarizes them as follows, based on findings in the FFCL as to which there is no dispute:

MOR MGH. In 2011, Moreno and his wife formed two Grantor Retained Annuity Trusts ("GRATs") called the MBM 2011 MGH Grantor Retained Annuity Trust and the TCM 2011 MGH Grantor Retained Annuity Trust (collectively, the "MGH GRATs"). (FFCL 17) [APP 0018]. Moreno was responsible for managing the assets and investments of the MGH GRATs. (FFCL 114) [APP 0115]. The sole asset of each MGH GRAT was an equal share of MOR MGH. (FFCL 17) [APP 0018]. MOR MGH was established as a special purpose limited liability company registered in the state of Delaware. (Id.) Its sole asset was stock in Green Field. (Id.) During the relevant time frame, MOR MGH owned 88.9% of Green Field common stock. (Id.) Moreno was the manager of MOR MGH. (FFCL 114) [APP 0115]. Moreno acknowledged that whatever money MOR MGH had in its possession was derived from money he borrowed. (FFCL 112) [APP 0113].
Moody Moreno and Rucks, LLC ("MMR "). MMR was the other Green Field shareholder, along with MOR MGH. (FFCL 19) [APP 0020]. At all relevant times, MMR owned 11.1% of Green Field common stock. (Id.) MMR was equally owned by TMC Investment, L.L.C., Elle Investments, L.L.C., and Rucks Family Limited Partnership. (Id.) Elle Investments, L.L.C. was owned and controlled by Moreno. (Trial Tr. 96:9-97:5) [APP 0952].
MOR DOH Holdings ("MOR DOH"). Similar to the MGH GRATs, Moreno and his wife formed two additional GRATs called the MBM 2011 DOH Grantor Retained Annuity Trust and the TCM 2011 DOH Grantor Retained Annuity Trust (collectively, the "DOH GRATs"). (FFCL 18) [APP 0019]. The sole asset of each DOH GRAT was an equal share of MOR DOH. (Id.) (citing Trial Tr. 68 [APP 0946]). MOR DOH eventually came to own three different entities, including TGS. (Id.)
TGS. TGS was a subsidiary of MOR DOH formed by Moreno in March 2013. (FFCL 21) [APP 0022]. Moreno formed it as a "place-holder" for a joint venture with General Electric ("GE") outside of Green Field. (FFCL 21 -22) [APP 0022-0023]. TGS was at all times a corporate shell with no employees, no capital, and no infrastructure. (Trial Tr. 293:15-20) [APP 1001]. Moreno conceded that TGS was established for the sole purpose of holding a PowerGen[7] business and opportunity. (Id. 843:7-18) [APP 1321].

         The trial involved two conceptually separate sets of claims against Moreno and entities he controlled arising from two discrete, yet parallel factual patterns. The first factual pattern involved the transfer by Green Field to Moreno of PowerGen, a power generation business venture. Green Field was primarily a tracking company, but upon a downturn in the market, Moreno began to explore other potential business ventures, like PowerGen. Ultimately, Moreno decided not to pursue the PowerGen business within Green Field, but rather formed TGS to pursue that opportunity. To effectuate the transfer of the PowerGen business to TGS, Moreno and the other directors of Green Field executed a May 13, 2013 Written Consent of the Stockholders and Directors of Green Field. As a result of the Written Consent, Green Field could not pursue the PowerGen business. After the consent was executed, Moreno focused his own efforts on PowerGen.

         Running parallel with these events are the facts involving two share purchase agreements ("SPAs"). In these agreements, Moreno promised that MOR MGH and MMR would purchase certain amounts of Green Field preferred stock. The first agreement, executed in late 2012, required, among other things, that MOR MGH and MMR purchase on a quarterly basis enough preferred stock to keep Green Field's cash balance at $10 million. Although MOR MGH and MMR initially complied with their obligations under the 2012 SPA, once Moreno decided to focus his efforts on PowerGen instead of Green Field's tracking business, they stopped their purchases of Green Field preferred stock.

         In the second agreement, executed in June 2013, Goldman Sachs ("Goldman") required MOR MGH to purchase $10 million in additional Green Field preferred stock, which in turn would be pledged to Goldman as partial security for a loan Goldman had extended to Moreno ostensibly to develop PowerGen.

         Prior to trial, the Bankruptcy Court granted summary judgment against MOR MGH for breach of the SPAs based on MOR MGH's failure to make payments in accordance with each contract's terms. (Adv. D.I. 463).[8] The Bankruptcy Court also ruled that, with respect to damages, the Trustee had the burden of proving not only the amount of the non-payments but also that Green Field would have been in a better "economic position" had MOR MGH fully performed its obligations under the SPAs. (Id. at 40-10) [APP 2097-2098]. Although the Trustee disagreed with the Bankruptcy Court's ruling as to the burden of proof on damages, the Trustee proceeded at trial to establish that Green Field had incurred damages different and distinct from MOR MGH's failure to make its required payments.

         On September 12, 2018, the Bankruptcy Court issued the proposed FFCL. (Adv. D.I. 535) [APP 0002-0127]. The Bankruptcy Court found that Moreno had tortiously interfered with MOR MGH's contractual obligations because he wrongfully diverted monies intended for Green Field to purchase his personal home in Dallas, Texas, and otherwise put his own personal interests before those of MOR MGH. The Bankruptcy Court also found that Moreno interfered with the obligations of MMR, the other Green Field shareholder, under the 2012 SPA. The Court imposed a constructive trust over Moreno's residence based on his diversion of the $10 million to buy his home. Finally, the Bankruptcy Court revisited its prior ruling as to the burden of proof on damages and concluded that it had improperly required Green Field to prove damages beyond the non-payments required under each agreement and that the evidence supported the conclusion that Green Field had in fact been damaged by the non-payments.[9]

         As to the separate and discrete PowerGen-related claims (i.e., actual and constructive fraudulent transfer, breach of fiduciary duty, and corporate waste), the Bankruptcy Court ruled in Defendants' favor. Although there were certain intersections of facts between the two sets of claims, the PowerGen-related tort claims and the SPA-related contract claims are legally distinct with different relevant factual predicates. Defendants' Objection to the proposed FFCL is with respect to the SPA-related claims only, as Defendants prevailed on the PowerGen-related claims.

         On September 18, 2018, the Bankruptcy Court issued the Order, recommending that this Court adopt its FFCL and enter judgment in favor of the Trustee on Counts 11, 12, and 14. Specifically, the Bankruptcy Court recommends that the Court enter judgment on Counts 11 and 12 in favor of the Trustee and against MOR MGH in the amount of $15, 961, 923, plus applicable prejudgment interest, and on Count 14 in favor of the Trustee and against Moreno, personally, in the amount of $16, 607, 081, plus applicable prejudgment interest. The Bankruptcy Court also recommended that this Court impose a constructive trust on Moreno's Dallas residence in favor of the Trustee in the amount of $10 million, plus applicable prejudgment interest, as a result of the Trustee's recommended success on his tortious interference claim against Moreno.

         The Court has considered Defendants' Objection and Suggestions, Trustee's Response (Adv. D.I. 562, 564), Defendants' Reply (Adv. D.I. 567), and Trustee's Sur-Reply (Adv. D.I. 568, Ex. A).[10] The proposed FFCL are now properly before this Court to render final judgment. The Court did not hear oral argument because the facts and legal arguments are adequately presented in the briefs and record, and the decisional process would not be significantly aided by oral argument. For the reasons set forth below, the Court sustains Defendants' objection to the Bankruptcy Court's factual finding that the $10 million Moreno diverted to his personal use was "earmarked" for Green Field, overrules Defendants' remaining Objections, and adopts the Bankruptcy Court's proposed FFCL.

         III. JURISDICTION AND STANDARDS OF REVIEW

         The Court has jurisdiction over this matter under 28 U.S.C. § 1334. Once a bankruptcy court determines that a pending matter is not a core proceeding under 28 U.S.C. § 157(b)(2) but is nonetheless related to a case under title 11, the court shall submit proposed findings of fact and conclusions of law to the district court. See 28 U.S.C. § 157(c)(1). Thereafter, "any final order or judgment shall be entered by the district court judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected." Id. The Federal Rules of Bankruptcy Procedure provide that:

The district judge shall make a de novo review upon the record or, after additional evidence, of any portion of the bankruptcy judge's findings of fact or conclusions of law to which specific written objection has been made in accordance with this rule. The district judge may accept, reject or modify the proposed findings of fact or conclusions of law, receive further evidence, or recommit the matter to the bankruptcy judge with instructions.

Fed. R. Bankr. P. 9033(d). "In conducting a de novo review, the Court must consider all of the Bankruptcy Court's findings and conclusions and afford them no presumption of validity." In re Montgomery Ward & Co., 2004 WL 323095, at *1 (D. Del. Feb. 13, 2004), rev'don other grounds, 428 F.3d 154 (3d Cir. 2005).

         IV. ANALYSIS

         Defendants have identified five "specific objections based on the record" and five "objections to proposed conclusions of law regarding the constructive trust" recommended by the Bankruptcy Court. See Suggestion at i. The Court addresses these objections in turn.

         A. Proposed Findings of Fact

         Objection 1; That Moreno Orchestrated Green Field's Waiver of the PowerGen Business. FFCL 25; Suggestion at 7-8.

         Defendants object to the Bankruptcy Court's finding that "Moreno orchestrated Green Field's waiver of the PowerGen Business in favor of himself personally."[11] (Suggestion, 7-8). Defendants contend that the finding characterizes Moreno's actions and dealings with GE as "an effort to harm Green Field or benefit himself." (Objection, 2). Defendants argue that this proposed finding contradicts what they refer to as the Bankruptcy Court's "more detailed reasoning" in other portions of the FFCL and argue the finding is not supported by the evidentiary record. (Id.) Specifically, Defendants cite the Bankruptcy Court's rulings that: Green Field never obtained a property interest in the PowerGen business or opportunity;[12] the creation of TGS and development of a PowerGen business outside of Green Field was a mandate from GE;[13] "Moreno established TGS for legitimate business reasons aimed to support Green Field, not harm Green Field or create an unfair opportunity for Moreno;"[14] and that negotiations with GE led to a $25 million cash infusion into Green Field -consideration that "would not have been possible but for Moreno's continuous negotiations with GE and extensive efforts to find capital to save Green Field."[15] Additionally, Defendants assert that "the Bankruptcy Court's conclusions of law on the Trustee's breach of fiduciary duty claims detailed the reasons why Moreno's actions were consistent with his fiduciary duties, even under Delaware's highest standard of scrutiny."[16]

         All of these arguments miss the mark. The finding to which Defendants object is relevant only to the SPA claims for the purpose of demonstrating that, as Defendants admit, following execution of the Written Consent on May 13, 2013, the PowerGen business was pursued "outside of Green Field." (Suggestion, 7; JX 61 [APP 0597-0599]). The express terms of the Written Consent provide that Green Field "waived" the opportunity to have an interest in PowerGen. (JX 61) [APP 0597]. While Moreno engaged in transactions in support of the PowerGen business outside of Green Field (in which Green Field had no ownership interest), he neglected the obligations of MOR MGH under the SPAs. The fact that Green Field may have received some ancillary benefits from the pursuit of the PowerGen business in TGS is irrelevant to the SPA claims, which would have provided direct benefits to Green Field.

         Objection 2: That Moreno Caused MOR MGH's Breach of The SPAs. FFCL 27; Suggestion at 8-12.

         Defendants object to the Bankruptcy Court's finding that Moreno caused MOR MGH to breach the SPAs. ...


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