United States District Court, W.D. Washington, Tacoma
FINDINGS OF FACT AND CONCLUSIONS OF LAW
RONALD B. LEIGHTON, District Judge.
The Defendant/Debtor BMT-NW was seriously under water financially in 2011. BMT-NW failed to pay many vendors who supplied materials to its production process. These vendors, including Hamer and Walker, were unsecured creditors. They sued BMT-NW, obtained default judgments, conducted supplemental proceedings and finally commenced this action for the purpose of collecting on their judgments.
BMT-NW also had much bigger financial problems. It had a Promissory Note and a Line of Credit Note with Chase Bank which were properly secured and on the verge of default. Ultimately, Chase forced BMT-NW's hand to resolve its financial crisis. Chase Bank was operating as an independent entity, in pursuit of its self-interest. Longboard ultimately purchased the Chase notes as an independent entity pursuing its own self-interest. Charles Travelstead was also acting as an independent party motivated by his own self-interest. The three parties engaged in arms-length transactions to accomplish the following:
a) Longboard, through a separate entity, purchased the notes from Chase at a steep discount that recognized the financial reality of BMT-NW and BMT;
b) Longboard foreclosed on all the assets of BMT-NW;
c) Longboard wanted to purchase a going concern;
d) To do that, Longboard negotiated with Travelstead to work for a salary and a small equity interest in the emerging holding company;
e) The assets of BMT-NW were not sufficient to satisfy its debts; and
f) Many unsecured creditors were left unpaid.
The credible evidence produced at trial fails to establish that Travelstead did anything unlawful to cause assets of BMT-NW to be placed outside of the reach of its unsecured creditors. Therefore, the following Findings of Fact and Conclusions of Law are adopted.
FINDINGS OF FACT
1. Defendant TMB-NW Liquidation, LLC ("BMT-NW) is a limited liability company formed under the laws of New Mexico in 2001. The initial name of the company was Reliable Steel - Eidson - BMT, LLC, and was later changed to Brown Minneapolis Tank-Northwest, LLC. In November, 2011 its name was changed to TMB-NW Liquidation, LLC. Since the formation of BMT-NW, Defendant Charles Travelstead has served as a director and its president, and he has also always been a member. Travelstead and his wife, Ann Travelstead, reside in Albuquerque, New Mexico and are currently the only members of BMT-NW.
2. Plaintiff Hamer Electric, Inc. is a Washington corporation and provides services as an electrical contractor registered under Chapter 18.27 RCW under license number HAMERE1295NBU. Hamer's principal place of business is in Cowlitz County, Washington.
3. Plaintiff Walker Specialty Construction, Inc. ("Walker") is a Washington corporation doing business under UBI XXXXXXXXX offering specialty construction and associated services.
4. BMT-NW was a manufacturer specializing in large steel plate fabrication of tanks and structures. Its corporate headquarters has always been in Albuquerque, New Mexico. BMT-NW operated a facility in the State of Washington.
5. To meet its ongoing financial needs, BMT-NW executed a Credit Agreement and a separate Continuing Security Agreement with J.P. Morgan Chase Bank, N.A. ("Chase") in December, 2009. BMT-NW executed a Term Note and Line of Credit Notes with Chase (collectively the "Chase Notes"). The Term Note was in the amount of $2, 200, 000. The Line of Credit Note was for $1, 200, 000.
6. As part of these agreements, BMT-NW granted Chase a continuing security interest in all of BMT-NW's assets (the "Collateral"). The Collateral was described in the Continuing Security Agreement as:
"accounts"; "chattel paper"; "deposit accounts" and other payment obligations of financial institutions (including the Bank); "documents"; "equipment", including any documents and certificates of title issued with respect to any of the equipment; "general intangibles" and any right to a refund of taxes paid at any time to any governmental entity; "instruments"; "inventory', including any documents and certificates of title issued with respect to any of the inventory; "investment property"; "financial assets"; "letter of credit rights"; all as defined in the UCC, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located. In addition, the term "Collateral" includes all "proceeds", "products" and "supporting obligations" (as such terms are defined in the UCC) of the Collateral, including but not limited to all stock rights, subscription rights, dividends, stock dividends, stock splits, or liquidating dividends, and all cash, accounts, chattel paper, "instruments, " "investment property, " "financial assets." and "general intangibles" (as such terms are defined in the UCC) arising from the sale, rent, lease, casualty loss or other disposition of the Collateral, and any Collateral returned to, repossessed by or stopped in transit by the Borrower, and all insurance claims relating to any of the Collateral. The term "Collateral" further includes all of the Borrower's right, title and interest in and to all books, records and data relating to the Collateral, regardless of the form of media containing such information or data, and all software necessary or desirable to use any of the Collateral or to access, retrieve, or process any of such information or data.
7. The Chase Notes were personally guaranteed by the Travelsteads.
8. On February 4, 2010, Chase filed a UCC-1 financing statement to perfect its security interest in the Collateral. In addition, liens against vehicles were perfected by noting liens on the titles of the vehicles.
9. All of the assets of BMT-NW were subject to a valid security interest granted to Chase. John Clees, an expert witness appearing for Hamer and Walker, conceded that all of the assets of BMT-NW were subject to a security interest held by Chase.
10. The February 4, 2010 promissory note signed by Mr. Travelstead was never delivered to BMT-NW and was never reported on the balance sheet of BMT-NW as an asset. Even if Mr. Travelstead did owe money to BMT-NW under a promissory note, the promissory note would have been subject to security interest held by Chase under the Continuing Security Agreement. Clees conceded that the definition of Collateral encompassed promissory notes, held by BMT-NW.
11. In 2010, BMT-NW and Chase amended the Line of Credit Note, increasing the principal amount by $500, 000 to $1, 700, 000.
12. Around December 2010, Chase declared that BMT-NW was in default under the Credit Agreement. Chase subsequently withdrew the default and agreed to modify the Chase Notes, twice extending the due dates to May 31, 2011.
13. As of May, 2011, BMT-NW owed Chase almost $2.9 million under the Chase Notes. At the same time, BMT-NW owed unsecured creditors approximately $2.6 million. Of that balance, over 72% was over 90 days past due.
14. In May, 2011, Chase conducted its own, internal analysis of the liquidation value of the BMT-NW assets that secured the Chase Notes. Chase concluded that if the assets of BMT-NW were liquidated, its likely net recovery was $608, 000. Chase also concluded that it was unlikely to recover any amounts under the Travelstead personal guarantees.
15. Throughout 2011, Mr. Travelstead actively sought persons who would purchase, invest in and/or lend funds to BMT-NW. Mr. Travelstead met with over a dozen representatives of investment banks, private equity firms, venture capital firms and commercial banks.
16. In late May, 2011, Chase directed Mr. Travelstead to hire a consultant to evaluate the business and financial condition of BMT-NW. From a list provided by Chase, Mr. Travelstead selected SG Consulting. At the end of May 2011, SG was formally retained to perform its evaluation.
17. SG analyzed BMT-NW's business operations and financial condition and published a report. SG presented Chase with three potential options for BMT-NW, (1) the orderly wind down and sale of the assets of BMT, (2) a Chapter 11 reorganization under the federal bankruptcy code; or (3) the sale of the Chase Notes for a price acceptable to Chase. SG presented its report to Chase on June 7, 2010.
18. At the time SG presented its conclusions to Chase, the secured debt owed by BMT-NW to Chase was $2, 885, 334.
19. SG opined that the filing of a Chapter 11 bankruptcy petition was not a viable option. SG believed that cost of the bankruptcy process together with doubts about the viability of BMT-NW's business made bankruptcy an inappropriate option. A Chapter 11 bankruptcy would not have been viable for BMT-NW.
20. SG estimated the net liquidation value of the assets of BMT-NW at $1.046 million. The SG valuation was an accurate estimate of the fair market value of the assets.
21. Chase decided to sell the notes and related security rights in the assets of BMT-NW. Chase received two offers for the notes. One was from a company known as Aterion. Aterion offered Chase approximately 36% of the face value of the notes, or approximately $1.1 million. Longroad Capital Asset Management offered Chase a higher amount of approximately of 42% of the face value of the notes, or approximately $1.3 million.
22. On June 16, 2011, N.W. Acquisition entered into a Loan Purchase and Sale Agreement with Chase to purchase the Chase Notes and all related security interests and loan documentation. The balance on the Chase Notes was, at the time, $2, 978, 519.96. The purchase price was $1, 352, 127.18. The purchase price for the Chase Notes was over two times the value Chase had placed on the assets of BMT-NW. The purchase price was also 29% higher than the value placed on the BMT-NW assets by SG Consulting.
23. Mr. Travelstead did not participate in the negotiations over the purchase and sale of the Chase Notes.
24. Longroad formed BMT-NW Acquisition, LLC ("NW Acquisition") in Delaware on June 10, 2011. N.W. Acquisition purchased the Chase Notes.
25. N.W. Acquisition's Operating Agreement was signed on June 10, 2011, and amended on June 30, 2011. The Managers of N.W. Acquisition were Leon Komkov, Richard Latto, Anne Whitman, and Steve Zambito.
26. Broad Street Tank Holdings Co., Inc., a Delaware corporation, was the sole member of N.W. Acquisition. The initial board of directors of Broad Street consisted of Leon Komkov, Anne Whitman, Rich Latto, and Steve Zambito.
27. At no time was Mr. Travelstead a member or manager of N.W. Acquisition.
28. As of the time of the purchase of the debt, BMT-NW was running out of cash and was struggling to meet its financial obligations.
29. On June 17, 2011, N.W. Acquisition and BMT-NW amended the terms of the Credit Agreement ("Credit Amendment"). Under this Credit Amendment, N.W. Acquisition advanced $367, 598 to BMT-NW. These additional ...