In re: BLACK IRON

Summarized by Jaden Banks , Nyemaster Goode, P.C.
2 years 2 months ago

Case Type:

Business

Case Status:

Affirmed in part and Reversed in part

Citation:

21-04116, D.C. No. 2:18-CV-00962-BSJ (10th Circuit, Dec 18,2023) Published

Tag(s):

Ruling:

The Tenth Circuit Court of Appeals affirmed the Bankruptcy Court and District Court for the District of Utah's determination that under Utah law, the Debtor, through its predecessor in interest, and an insider of the Debtor fraudulently transferred an iron ore mine and the Debtor converted a creditor's rail equipment, where the predecessor in interest engaged in forbearance discussions with the Creditor, stalled those discussions, and secretly executed an APA transferring all of the Debtor's assets to a new entity and paying all other creditors, other than the rail equipment creditor.

Procedural context:

In June 2017, Black Iron LLC (the "Debtor") filed for relief under Chapter 11 of the Bankruptcy Code. Thereafter, Wells Fargo Rail Corporation ("Wells Fargo") requested and obtained authorization to remove rail equipment it had leased to the Debtor from the Debtor's real property. Wells Fargo subsequently sold the rail equipment. Thereafter, the Bankruptcy Court granted Wells Fargo summary judgment on the Debtor's claim for storage fees and trespass, granted Wells Fargo summary judgment on its conversion claim against the Debtor, and after a trial, found the Debtor and an insider of the Debtor liable for a fraudulent transfer under Utah's Uniform Fraudulent Transfer Act. The Bankruptcy Court awarded Wells Fargo approximately $2,618,680.44 in damages under the UFTA and $7,885,584 in damages for conversion. The Debtor and insider appealed to the District Court, which affirmed. The Debtor and insider then appealed to the Tenth Circuit.

Facts:

In 2005, the predecessor in interest of CML Metals, Inc. ("CML") purchased an iron mine in Utah. CML Holdings, Inc. solely owned CML. Gilbert Development Corporation ("GDC") owned shares in CML Holdings and operated the mine, while CML Railroad, Inc., also owned by CML Holdings, operated rail tracks between the mine and Union Pacific's railroad tracks. Between 2010 and 2014, CML leased rail cars and locomotives from the predecessor of Wells Fargo Rail Corporation ("Wells Fargo"). CML suspended its operations in October 2014 and fell behind on payments to Wells Fargo. In response, Wells Fargo declared a default, but on request from CML, Wells Fargo agreed to forbear from exercising its remedies to permit CML to be sold as a going concern. During the forbearance negotiations, CML's leadership decided to sell CML's assets rather than the business, because no one else wanted to step into CML's potential liability to Wells Fargo. CML executed an asset purchase agreement with GDC, after which a principal of GDC formed Black Iron LLC (the "Debtor"), to which GDC transferred its rights under the APA. At closing, payments were made to various creditors, but Wells Fargo received nothing, and its equipment remained at the mine. In fact, Wells Fargo knew nothing of the APA and transfer, but sensing CML was stalling, Wells Fargo demanded CML execute the forbearance agreement. In response CML filed a complaint against Wells Fargo in state court for breach of contract, and shortly after Wells Fargo counterclaimed and demanded return of its equipment. Thereafter, the Debtor and Wells Fargo discussed removal of the equipment but shortly before the commencement of the repairs necessary to remove the equipment, Wells Fargo filed suit against the Debtor and GDC alleging the transferred constituted a fraudulent conveyance. Thereafter, the Debtor sent a cease-and-desist email to Well Fargo preventing the repair and removal of the equipment. In the following year Wells Fargo and the Debtor made some effort at continuing the removal process but weeks after the Debtor permitted Wells Fargo to repair the equipment and tracks, the Debtor demanded Wells Fargo pay approximately $23 million in storage costs. Wells Fargo refused and the Debtor refused to allow property access. Almost a year later, the Debtor filed for Chapter 11 relief. Shortly thereafter Wells Fargo obtained permission from the Bankruptcy Court to enter the Debtor's property and remove the equipment. Wells Fargo subsequently sold the equipment. The Bankruptcy Court thereafter entered an order granting Wells Fargo summary judgment on the Debtor's claims for storage fees and trespass. The Bankruptcy Court also granted Wells Fargo summary judgment on its conversion claim against the Debtor and issues an order finding the Debtor and GDC liable for a fraudulent transfer. The Tenth Circuit first explained that the Bankruptcy Court properly granted Wells Fargo summary judgment as to the existence of a contract implied in fact, contract implied in law, and warehouse lien because the Debtor failed to prove each of the essential elements of those claims. The Tenth Circuit then explained that Wells Fargo did not trespass on the Debtor's real property when Wells Fargo recovered its rail equipment because Wells Fargo took reasonable steps to extract its equipment despite the Debtor's imposition of onerous time constraints and efforts to prevent Wells Fargo's recovery of its equipment. The Tenth Circuit then noted that the Bankruptcy Court properly found the Debtor converted Wells Fargo's equipment by sending a cease-and-desist email ad demand for payment, which prevented Wells Fargo from accessing its personal property, without lawful justification. However, the Tenth Circuit observed that the Bankruptcy Court improperly calculated the damages from the Debtor's conversion because it failed to reduce the value of the equipment at the time the conversion occurred to account for the cost to repair said equipment. Finally, the Tenth Circuit observed that the Bankruptcy Court properly concluded that the Debtor's course of conduct, prepetition, demonstrated an actual intent to hinder, delay, or defraud Wells Fargo because the Debtors predecessor in interest dragged on forbearance negotiations so that it could execute an asset purchase agreement transferring all of the Debtor's assets to a new entity while paying all of the predecessor in interest's creditor except for Wells Fargo.

Judge(s):

BACHARACH, BALDOCK, and EBEL

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