Sender v. Capital One Business Credit Corp

          ORDER

          Scott T. Varholak United States Magistrate Judge

         This matter is before the Court on the Order to Show Cause issued by the Court on July 23, 2018, which ordered the parties to show cause why this case should not be transferred to the United States Bankruptcy Court for the District of Colorado (the “Bankruptcy Court”).^[1] [#67] The Court has carefully considered the parties' briefing in response to the Order to Show Cause [#70, 71, 74, 75], the case file, and the applicable case law, and has determined that oral argument would not materially assist in the disposition of the Order to Show Cause. For the following reasons, the Order to Show Cause is MADE ABSOLUTE and the Clerk of Court is directed to TRANSFER this case (and all pleadings and documents filed therein) to the United States Bankruptcy Court for the District of Colorado.

         I. BACKGROUND^[2]

         In 2013, Defendants Craig and Diana Obermueller (collectively, the “Obermuellers”) sought to sell Craigs Roustabout Service, Inc. (“CRS”), an oil and gas production services company that was 100 percent owned by the Obermuellers at the time. [#1 at ¶¶ 6, 14-16] The Obermuellers, CRS, and Spindletop Holdings, LLC (“Spindletop”)^[3] entered into a Stock Purchase Agreement dated September 20, 2013 (the “Stock Purchase Agreement”) to effectuate a leveraged buyout (“LBO”) of CRS from the Obermuellers. [Id. at ¶ 18] Pursuant to the Stock Purchase Agreement, the Obermuellers contributed their CRS stock to a newly formed entity called Craig's NewCo, Inc. (“Newco”) and caused CRS to be converted from a Utah S corporation to a Colorado limited liability company called Craig Energy, LLC (“Craig Energy”). [Id. at ¶¶ 19-20] Spindletop, which became Craig Energy Holdings, LLC (“Energy Holdings”), purchased a 100 percent interest in Craig Energy from Newco for $32.5 million in cash subject to post-closing adjustments, a $3.25 million promissory note payable to the Obermuellers, and an earn-out payable to the Obermuellers capped at $6 million. [Id. at ¶ 21]

         To finance the purchase and obtain working capital, Craig Energy obtained separate loans from Defendant Capital One Business Credit Corporation (“Capital One”) and Defendant Medley Opportunity Fund II, LP (“Medley”). [Id. at ¶ 22] Capital One, as agent for certain lenders, entered into a Loan and Security Agreement dated November 26, 2013 with Craig Energy, as borrower, and Energy Holdings, as guarantor, pursuant to which Capital One, as agent, made loans to Craig Energy totaling $32 million (the “Capital One Agreement”). [Id. at ¶ 23] The Capital One loans were due and payable in full on November 26, 2018. [Id. at ¶ 28] In exchange for the Capital One loans, Craig Energy purportedly granted Capital One security interests in substantially all of Craig Energy's assets. [Id. at ¶ 26]

         In addition, Medley, as agent for certain lenders, entered into a Loan and Security Agreement dated November 26, 2013 with Craig Energy, as borrower, and Energy Holdings, as guarantor, pursuant to which Medley, as agent, made a $14 million term loan to Craig Energy (the “Medley Agreement”). [Id. at ¶ 29] The Medley loan was due and payable in full on November 26, 2018. [Id. at ¶ 34] In exchange for the Medley loan, Craig Energy purportedly granted Medley security interests in substantially all of Craig Energy's assets. [Id. at ¶ 31]

         Pursuant to a Management Agreement dated November 26, 2013, Energy Holdings, on behalf of itself and Craig Energy, agreed to pay J2 a monthly fee of $35, 000 to provide advisory, consulting, and other services, and an additional fee for investment banking services. [Id. at ¶¶ 69-72]

         On February 19, 2016, Craig Energy and Energy Holdings each filed voluntary petitions for Chapter 11 bankruptcy in the Bankruptcy Court.^[4] [Id. at ¶ 74] On February 29, 2016, the Bankruptcy Court entered orders granting Craig Energy's and Energy Holdings' motions to convert their cases to cases under Chapter 7 of the Bankruptcy Code. [Id. ¶ 75; see also Craig Energy Bankruptcy, #19; Energy Holdings Bankruptcy, #17] On March 1, 2016, the Bankruptcy Court appointed Harvey Sender (the “Trustee”) as the trustee in both the Craig Energy Bankruptcy and the Energy Holdings Bankruptcy. [Craig Energy Bankruptcy, #20; Energy Holdings Bankruptcy, #18] Capital One filed a proof of claim in the Craig Energy Bankruptcy for $10, 391, 043.24, and Medley filed a proof of claim in the Craig Energy Bankruptcy for $16, 146, 318.82. [#1 at ¶¶ 77, 78]

         On February 16, 2018, the Trustee filed this lawsuit, not individually but solely as the Chapter 7 Trustee for the estates of Craig Energy and Energy Holdings. [#1] The Complaint asserts 19 causes of action and “demands a trial by jury in this case of all issues triable of right by jury” (the “Jury Demand”). [Id. at 42] The Trustee summarizes the claims filed in this lawsuit as follows:

•Against all Defendants: avoidance and recovery of alleged fraudulent transfers and obligations incurred pursuant to 11 U.S.C. §§ 544(b)(1), 550, and 551, Utah Code §§ 25-6-202(1)(b) and 25-6-203(1), and C.R.S.A. §§ 38-8-105 and 38-8-106;

•Against the Obermuellers: breach of fiduciary duty;

• Against Capital One and Medley: declaratory judgment regarding the validity, priority, and extent of their alleged liens in rolling stock;

• Against Capital One and Medley: unjust enrichment; and

• Against J2: avoidance and recovery of alleged preferential transfers pursuant to 11 U.S.C. ...