Hill v. New Concept Energy, Inc. (In Re Yazoo Pipeline Co.)
459 B.R. 636
Bankr. S.D. Tex.2011Background
- Debtors Yazoo Pipeline Co., LP; Sterling and Matagorda filed Chapter 11, later converted to Chapter 7, with a joint adversary proceeding against New Concept Energy, Coastland, Gulf Coast, Dave Morgan, Charles Cheatham, and John Thibeaux.
- The plaintiffs allege pre- and post-conversion misconduct including asset diversion, misrepresentation of NCE's interest, lease mismanagement, data/cash collateral misuses, and improper budgets and reports.
- A central dynamic was a proposed sale/delivery of NCE funding to reorganize the estates, which ultimately never closed and led to conversion to Chapter 7.
- Cheatham was removed from management after a show-cause hearing disclosed misappropriation of estate assets in Cheatham’s personal bankruptcy case.
- Budgets in the case repeatedly overstated cash flow and understated expenses, leading to improper use of cash collateral and post-petition debt beyond authorized limits.
- The court granted some motions to dismiss, settled some claims, and then allowed a Second Amended Complaint; the court now grants in part and denies in part the plaintiffs' motion to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standing and scope for fraud claims | Trustee has standing to bring estate-based fraud claims. | Standing or scope may be limited by in pari delicto and pre/post-petition timing. | Fraud claims pleaded in Second Amended Complaint insufficient; Trustee may amend to replead. |
| Fraud pleading sufficiency and reliance | Misrepresentations to the Court/estate support fraud claims. | Specific reliance by the estate is not adequately pleaded. | Fraud claims lack specific reliance and injury; amended fraud claims granted to replead with proper elements. |
| Conversion of seismic data | Seismic data stored electronically constitutes tangible property; defendant's copying violated rights. | Seismic data is intangible; no conversion unless merged into a document. | Seismic data stored on computers constitutes tangible property; conversion claim allowed to proceed. |
| Conversion of cash collateral | Unauthorized uses of cash collateral violated estate rights. | Use aligned with orders/security agreements; potential for conversion disputed. | Conversion claim for cash collateral viable; court vacates dismissal and allows amendment. |
| Usurpation of corporate opportunities and aiding/abetting | De facto officers/participants usurped corporate opportunities and aided breaches. | Only Cheatham clearly a fiduciary; Morgan lacks officer status; de facto status not shown. | Plaintiffs may replead to show Morgan as de facto officer; liable if facts prove usurpation and aiding/abetting. |
Key Cases Cited
- St. Paul Fire & Marine Ins. Co. v. Labuzan, 579 F.3d 533 (5th Cir. 2009) (trustee exclusive standing for estate claims)
- In re Educators Group Health Trust, 25 F.3d 1281 (5th Cir. 1994) (trustee standing governs estate claims)
- Hunt v. Baldwin, 68 S.W.3d 117 (Tex.App.-Houston [14th Dist.] 2001) (conversion elements and damages)
- Howard v. Fid. & Dep. Co. of Md. (In re Royale Airlines, Inc.), 98 F.3d 852 (5th Cir. 1996) (in pari delicto; equitable defenses)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility standard; Rule 8 pleading requirement)
- 7979 Airport Garage, L.L.C. v. Dollar Rent A Car Sys., 245 S.W.3d 488 (Tex. App.-Houston [14th Dist.] 2007) (fraud elements and duties; nondisclosure framing)