IN RE: Casey B. HUFF (2021)

MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART PARTIAL SUMMARY JUDGMENT

This litigation arises out of a failed financial arrangement between Trustmark National Bank, Encore Pools, LLC/Encore Lawn and Landscape of Greater Houston, LLC (together, “Encore”), and Encore's owners Michael Kinney and Michael McCaskill (the “Guarantors”). Trustmark loaned Encore $2.5 million. The loan was guaranteed by the Guarantors and secured by Encore's accounts, inventory, equipment, and general intangibles. Encore defaulted on the loan and never repaid Trustmark. Neither did the Guarantors.

In 2017, Trustmark started a lawsuit in Texas state court against Encore, the Guarantors, Casey Huff, 2C Commercial Services, LLC, and Exterior Creations, Inc.¹ Trustmark alleges, among other things, that in 2015 Huff sold, transferred, conveyed, assigned, merged, or combined his interest in 2C with Encore. Thus, 2C's assets and future revenue allegedly became subject to Trustmark's lien. Trustmark also alleges that after Encore defaulted on the loan, Huff fraudulently transferred Encore's assets to 2C and Exterior Creations. Trustmark asserts fraudulent transfer claims against Huff, 2C, and Exterior Creations (together, the “Huff Defendants”) to avoid these alleged transfers. Trustmark also seeks declaratory judgment that its security interest in certain vehicles is superior to any rights held by the Huff Defendants.²

In 2019, 2C filed a chapter 7 bankruptcy case and Huff filed an individual chapter 11 case. Huff removed the state court litigation to this Court. The Huff Defendants then sought partial summary judgment that Huff did not sell, transfer, convey, assign, merge, or combine his interest in 2C with Encore. For the reasons stated below, the Court grants in part and denies in part the Huff Defendants’ summary judgment motion.

Jurisdiction

This is a core proceeding under 28 U.S.C. § 157(b). The parties’ express and implied consent also provides the Court constitutional authority to enter a final judgment under Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 135 S. Ct. 1932, 1944–47, 191 L.Ed.2d 911 (2015) and In re Delta Produce, L.P., 845 F.3d 609, 617 (5th Cir. 2016).

Background

In April 2015, Encore executed a Promissory Note to Trustmark in connection with a $1 million revolving line of credit.³ To secure the indebtedness, Encore granted Trustmark a security interest in Encore's chattel paper, accounts, equipment, and general intangibles.⁴ Trustmark perfected its security interest in the collateral by filing a UCC financing statement with the Texas Secretary of State's office.⁵ And the Guarantors executed Commercial Guaranty Agreements.⁶

Kinney testified in deposition that in 2015 McCaskill and Huff “came to an agreement that the two companies [i.e. 2C and Encore] would come together.”⁷ Kinney also testified his understanding that, in exchange for assuming 2C's debt, Encore would receive 2C's existing and prospective revenue.⁸ Trustmark believes that 2C's assets and future revenue became subject to Trustmark's lien.

In the summer of 2015, Huff became a salaried employee of Encore.⁹ And Encore Lawn, as lessee, and 2C, as lessor, entered into a three-year lease agreement, effective July 1, 2015, under which Encore Lawn agreed to lease 2C equipment listed on “Attachment A” to the lease.¹⁰ That same month, McCaskill filed with the Fort Bend County Clerk's office an Assumed Name Record (DBA) certifying that he owned 2C.¹¹ In October 2015, Kinney also filed an Assumed Name Record (DBA) certifying that he owned 2C.¹²

In November 2015, Encore executed a Revolving Line of Credit Promissory Note.¹³ This Note renewed and increased the original note from $1 million to $2.5 million.¹⁴ Encore also executed a Letter Loan Agreement under which Trustmark agreed to lend Encore up to $2.5 million.¹⁵ Encore granted Trustmark a security interest in Encore's accounts, inventory, equipment, and general intangibles.¹⁶ Trustmark perfected its security interest in this collateral by filing a UCC financing statement with the Texas Secretary of State's office.¹⁷ And the Guarantors executed new Commercial Guaranty Agreements.¹⁸ After November 2015, 2C had no employees, paid no payroll, and was not paying for expenses related to jobs for vendors or suppliers.¹⁹ Huff testified in deposition that 2C and Encore had an agreement under which 2C/Huff would receive ten percent of the gross revenues on jobs contracted in 2C's name.²⁰

About a year later, in October 2016, Trustmark gave the Guarantors a Notice of Maturity and Demand for Payment.²¹ Later that month, the Guarantors and Trustmark entered into a Temporary Forbearance Agreement.²² In November 2016, the Guarantors executed documents appointing Huff as Encore's Operating Manager.²³

In December 2016, Trustmark gave Huff a Notice of Termination of Temporary Forbearance Period.²⁴ Encore and the Guarantors never repaid Trustmark.²⁵ Huff wrote Trustmark and offered to purchase Encore's assets for $60,000.00.²⁶ Trustmark did not accept this offer.

In or around January 2017, Huff resigned from his position at Encore and returned to self-employment at Exterior Creations.²⁷ That same month Trustmark filed an Original Petition against Encore, the Guarantors, and the Huff Defendants in the 80th Judicial District of Harris County, Texas, Cause No. 2017-04650.

Two years later, in October 2019, 2C started a chapter 7 bankruptcy case, Case No. 19-35697. The 2C case is pending before Judge Eduardo V. Rodriguez. In November 2019, Huff started an individual chapter 11 case, Case No. 19-36071, which is pending before this Court. In January 2020, Huff removed the state court litigation to this Court.

The Huff Defendants then moved for partial summary judgment on the allegation in Trustmark's original petition that “Huff sold, transferred, conveyed, assigned, merged or combined his interest in 2C with Encore, including the assets of 2C and revenues owed to 2C, including any receivables of 2C purportedly owed by Burton, EE Reed, Arch-Con and ICI.”²⁸ Trustmark objects and submitted exhibits that it believes proves summary judgment is not warranted because of alleged material issues of disputed fact that should be addressed at trial.

Summary Judgment Standard

Federal Rule of Civil Procedure 56 permits a party to move for summary judgment, “identifying each claim or defense — or the part of each claim or defense — on which summary judgment is sought.” FED. R. CIV. P. 56(a) (emphasis added). Federal Rule of Bankruptcy Procedure 7056 incorporates Rule 56 in adversary proceedings. The Huff Defendants are entitled to summary judgment if they show “that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Id. “A ‘material’ fact is one ‘that might affect the outcome of the suit under governing law.’ ” Renwick v. PNK Lake Charles, L.L.C., 901 F.3d 605, 611 (5th Cir. 2018) (internal citations omitted). A factual dispute is genuine if the evidence is such that a reasonable factfinder could return a verdict for Trustmark. See Harville v. City of Houston, Mississippi, 945 F.3d 870, 874 (5th Cir. 2019). In determining whether summary judgment is appropriate, all inferences are drawn in Trustmark's favor. Id. If, however, the record could not lead a rational trier of fact to find for Trustmark, summary judgment is appropriate. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

Trustmark bears the burden of proof on its claims at trial. So the Huff Defendants must show the absence of a genuine issue of disputed fact that entitles them to judgment as a matter of law. See Austin v. Kroger Tex., L.P., 864 F.3d 326, 335 (5th Cir. 2017). If successful, the burden shifts to Trustmark to identify specific record evidence and articulate precisely how the evidence supports to defeat summary judgment. See Matson v. Sanderson Farms, Inc., 388 F. Supp. 3d 853, 869 (S.D. Tex. 2019) (quoting Willis v. Cleco Corp., 749 F.3d 314, 317 (5th Cir. 2014)).²⁹

Analysis

The Huff Defendants claim that summary judgment is warranted because Huff did not sell, transfer, convey, assign, merge, or combine his interest in 2C with Encore.³⁰ This narrow issue was confirmed by the Huff Defendants’ counsel at the summary judgment hearing.

The Huff Defendants are right that there was never a legal merger. Under Texas law, for a merger involving a “domestic entity” to become effective, a party must file a certificate of merger with the Texas Secretary of State. See Tex. Bus. Org. Code §§ 10.151(a)(1)(A); 10.153(a). “Domestic entity” includes limited liability companies like Encore and 2C. Id. § 1.002(18) (“domestic entity” means an “organization formed under or the internal affairs of which are governed” by the Texas Business Organizations Code), § 1.002(62) (an “organization” includes limited liability companies). A merger becomes effective at the time provided by the plan of merger or, if a Subchapter D filing is required, when the Texas Secretary of State or county clerk, as appropriate, accepts the filing. Id. § 10.007. Once a merger is effective, the surviving company assumes the liabilities of the merged company and the merged company ceases to legally exist. Id. §§ 10.008(a)(1), (3). Here, that would mean that one of the Encore companies, as the surviving company, assumed 2C's liabilities and business operations, and 2C ceased existing.

The parties have been litigating this case for about four years and discovery closed. Trustmark produced no evidence that Encore and 2C legally merged under Texas law in 2015 or at any other time. For example, there is no plan of merger, no filing about a merger with the Texas Secretary of State or any other government agency. And Trustmark could not identify which Encore entity was the supposed surviving company. Counsel for Trustmark also stated at the summary judgment hearing that there was no documented merger agreement. There is also no documented evidence of a legal sale of 2C assets to Encore or a legal sale of Huff's interest in 2C to Encore in 2015 or at any other time. For example, there is no sale agreement, no plan of exchange to acquire membership interests in 2C, and no receipts or final records evidencing a sale of any 2C asset.

McCaskill also testified in deposition that, despite assumed name filings and what may have been communicated to Trustmark, there was no actual merger, Encore did not assume any 2C debt, and Encore Lawn leased certain assets from 2C under a July 2015 lease agreement:

See McCaskill Dep. Tr., Huff Def. Ex. A., Docket No. 47

Q. And this is part of your document production. Mr. Kinney says: 2C Commercial was a merger of entities whereby Encore assumed the assets and a small amount of debt. The assets and debt are reflected in our consolidated financial statements. The revenue is also included in our P&L I am also attaching the DBAs for both Encore Group and 2C Commercial for your records. Are those true statements?

A. No.

Q. Okay. Tell me the truth.

A. The truth was Casey had a separate entity that says 2C Commercial. Like I said earlier, I'm not sure that's the name. I didn't care. And he came to work for us, him and everybody that worked with him as employees. They had a few trucks and some equipment. And we -- he and I did a lease agreement, and we used his equipment.

Q. You did a lease agreement for what?

A. For the use of the equipment.

65:2–20

Q. Did Encore assume a small amount of debt of 2C?

A. No.

Q. No debt?

A. No.

Q. Okay. Were there not payments due on the equipment, the trucks and the like?

A. I -- it -- while we were using the equipment, if the truck had a payment, I made the payment. But I certainly didn't sign the note, didn't notify anybody that anything was different.

Q. Did Encore make payment on 2C indebtedness?

A. I made payments to 2C, and I made a couple -- some truck payments, possibly, that I -- I mean, I don't remember anything specific. But, no, we didn't -- we didn't buy the company. I didn't know who he owed. I didn't know how much was owed on anything. He told me -- we talked in rough terms about he had a truck or two that had -- or a piece of equipment that had a monthly payment. He told me what the monthly payments were. That was part of the arrangement for him coming to work. You know, as long as I'm using the truck, I'll make the payment on it.

Q. Did Encore use the name 2C Commercial as a DBA?

A. No․

66:20–67:17

Q. Did Encore buy any vehicles from Casey Huff or 2C or ECI?

A. No.

284:5–7

Q. All right. Did you ever have the intent on behalf of Encore companies to purchase 2C or its assets?

A. No.

284:24–285:1

In addition, Jennifer Devine, an independent CPA performing tax and accounting services for Encore, testified in a deposition about the lack of any merger or acquisition between 2C and Encore.

Devine Dep. Tr., Huff Def. Ex. G, Docket No. 47.

Q. And particularly with regard to 2C, did you ever see -- observe any documentation of the transfer of any assets from 2C to either -- either of the Encore companies?

A. I did not.

209:8–12

Furthermore, a month after a merger, asset sale, or sale of Huff's interest in 2C supposedly occurred, 2C and Encore Lawn executed a lease agreement relating to 2C assets.³¹ And in 2019, 2C filed a chapter 7 bankruptcy case. At the summary judgment hearing Trustmark's counsel agreed that Encore was not a debtor in that case, which it would presumably be if the companies had merged. Finally, Trustmark's adversary complaint alleges, in part, that Encore transferred assets to 2C in 2017,³² which is impossible if these companies had merged or if Huff had sold all his interest in 2C to Encore.

Trustmark argues summary judgment is not proper because the issue of whether Huff sold, transferred, conveyed, assigned, merged, or combined his interest in 2C with Encore involves disputed material fact issues. Trustmark relies mainly on Kinney and McCaskill's representations to Trustmark, both verbal and through reports provided to Trustmark, and the assumed name filings.³³

Kinney did testify in a deposition that in June 2015, Encore merged with 2C, that he gave verbal approval to move forward with a merger, and that he recalled that Encore would assume some 2C debt.³⁴ He also testified that he did not recall: (i) the terms of a merger; (ii) ever executing a document related to a merger; (iii) if a purchase agreement was created by an attorney who would have assisted Encore; or (iv) if a merger was ever reduced writing.³⁵

In deciding a summary judgment motion, “the evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his or her favor.” Matson, 388 F. Supp. 3d at 869 (internal citations omitted). “Credibility determinations have no place in summary judgment proceedings because a nonmovant[’]s summary judgment evidence must be taken as true.” Id. (citing Waste Mgmt. of La., L.L.C. v. River Birch, Inc., 920 F.3d 958, 964 (5th Cir. 2019)). But “[w]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no ‘genuine issue for trial.’ ” See Matsushita, 475 U.S. at 587, 106 S.Ct. 1348.

Trustmark's evidence shows that one or more Guarantors represented to Trustmark that 2C and Encore merged, they provided reports to Trustmark purporting to show 2C receivables as Encore future receivables, and filed DBAs stating that they owned 2C. Providing all reasonable inferences in Trustmark's favor, however, after four years of litigation there is still no proof of a legal merger between Encore and 2C, no proof of a legal documented sale of Huff's interest in 2C to Encore, or a legal documented sale of any 2C assets to Encore in 2015 or at any other time. Thus, partial summary judgment is granted as to these issues.

Summary judgment is denied, however, about whether there was a transfer, assignment, conveyance, or combination of Huff's interest in 2C, including any assets or receivables, to Encore.³⁶ After November 2015, 2C had no employees, paid no payroll, and did not pay any expenses for labor or materials in jobs contracted in 2C's name. There are also fact disputes about whether 2C receivables owed by Burton, EE Reed, Arch-Con, and ICI are owed to Encore. Finally, while there is scant evidence about Encore assuming 2C debt, such as a July 2015 lease agreement for certain assets, the Court denies summary judgment on this issue too. All such matters will be litigated at trial.

Therefore, it is ORDERED that partial summary judgment is granted that there was: (i) no legal merger between Encore and 2C; (ii) no legally documented sale of Huff's interest in 2C to Encore; and (iii) no legally documented sale of any 2C assets to Encore. Summary judgment is denied as to all other requests in the Huff Defendants’ Motion at Docket No. 47.

FOOTNOTES

1.   Huff owns 2C and Exterior Creations.

2.   Trustmark also asserts a breach of promissory note claim against Encore, a breach of guaranty agreement claim against Kinney, a conspiracy to commit fraud claim against Huff, 2C, Encore, and the Guarantors, a fraud claim against Huff and the Guarantors, a fraudulent transfer claim involving Kinney, and exceptions to discharge claims against Huff.In April 2017, McCaskill filed a chapter 7 bankruptcy case in this District and was non-suited from this case. In August 2018, the bankruptcy court entered an agreed final judgment in McCaskill's case providing a non-dischargeable judgment against him for about $2.86 million, plus post-judgment interest.

3.   Trustmark Exs. A and B, Docket No. 65.

4.   Trustmark Ex. C.

5.   Trustmark Ex. D.

6.   Trustmark Ex. E.

7.   Trustmark Ex. 13, Kinney Dep. Tr. 78:16–24.

8.   Kinney Dep. Tr., 82:2–8.

9.   Trustmark Ex. 3, McCaskill Dep. Tr. 29:2–6.

10.   Huff Ex. M, Docket No. 47.

11.   Trustmark Ex. 5.

12.   Trustmark Ex. 4, McCaskill 02233.

13.   Trustmark Ex. F.

14.   Id.

15.   Trustmark Ex. G.

16.   Trustmark Ex. H.

17.   Trustmark Ex. I.

18.   Trustmark Ex. J.

19.   Trustmark Ex. 2, Huff Dep. Tr. 27:4–22; 28:22–29:2.

20.   Id., 29:21–24.

21.   Trustmark Ex. K.

22.   Trustmark Ex. M.

23.   Trustmark Ex. V.

24.   Trustmark Ex. N.

25.   Trustmark Ex. P.

26.   Trustmark Ex. W.

27.   Trustmark Ex. 2, Huff Dep. Tr. 53:24–54:3.

28.   Huff Ex. D-3, Docket No. 54; Trustmark Ninth Amended Original Petition ¶ 32; see also Trustmark Tenth Amended Original Petition, ¶ 36, Docket No. 59.

29.   Partial summary judgment hearings allow courts to analyze issues and ascertain the claims to be adjudicated at trial. See Wildhorse Res. Mgmt. Co., LLC v. G&C Constr. Int'l, LLC, No. CV H-18-2456, 2019 WL 5684228, at *n.9 (S.D. Tex. Oct. 31, 2019) (citing F.D.I.C. v. Massingill, 24 F.3d 768, 774 (5th Cir. 1994)). Because partial summary judgment motions are interlocutory, a court may revise its decision without the preclusive effect of res judicata. See Avondale Shipyards, Inc. v. Insured Lloyd's, 786 F.2d. 1265, 1270 (5th Cir. 1986).

30.   Huff Defendants’ Motion at 7–9; 31–32, Docket No. 47; see also Trustmark Ninth Amended Original Petition, ¶ 32; Trustmark Tenth Amended Original Petition, ¶ 36.

31.   Huff Ex. M.

32.   See, e.g., Huff Ex. D-3; Trustmark Ninth Amended Original Petition, ¶ 101, Docket No. 54; Trustmark Tenth Amended Original Petition, ¶ 117.

33.   See, e.g., Trustmark's Response to Huff Defendants’ Motion at 2–3, Docket No. 65; Trustmark Exs. 3, 13.

34.   Kinney Dep. Tr., 78:19–21; 79:19–80:1; 81:11–22.

35.   Id., 78:19–81:4.

36.   The Huff Defendants did not seek summary judgment on Trustmark's fraudulent transfer claim. Ruling on summary judgment as to no “transfer” is effectively ruling on the fraudulent transfer claim itself. The Court also makes no finding about the legality, meaning, or relevance of an assignment, conveyance, or combination of interest between 2C and Encore.

Christopher Lopez, United States Bankruptcy Judge