Faulkner et al v. Kornman et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
Dennis Faulkner, Plaintiff,
§
§
v.
§
§
Miscellaneous Proceeding
10-301
Gary Kornman, et al, Defendants.
§
§
MEMORANDUM OPINION
This Memorandum Opinion supports the Court’s rulings from the March 7, 2012 hearing.
Certain oral findings and conclusions were made on the record on March 7, 2012. This
Memorandum Opinion supplements those oral findings and conclusions. To the extent of any
conflict, this Memorandum Opinion controls.
Factual Background
Dennis S. Faulkner, Trustee of the Heritage Creditor’s Trust (the “Trustee”), registered in
the Southern District of Texas a final judgment issued by the Bankruptcy Court of the Northern
District of Texas in Adv. Pro. No. 06-03377-bjh. The matter was referred by the District Court
to this Court.
This Court issued an Order for Turnover Relief and Appointment of Receiver (“Original
Turnover Order” on September 16, 2010. (ECF No. 165). The Original Turnover Order
required Gary M. Kornman, Steadfast Investments, L.P., GMK Family Holdings, L.L.C.,
Tikchick Investment Partnership, L.P., Ettman Family Trust I, Strategic Leasing, L.P., Vehicle
Leasing, L.L.C., Executive Air Crews, L.L.C., Executive Aircraft Management, L.L.C., Valiant
Leasing, L.L.C., The Heritage Organization Agency, Inc., Heritage Properties, L.L.C., and
Financial Marketing Services, Inc. (collectively, the “Judgment Debtors”) to turnover, among
ENTERED
03/28/2012
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other things, all nonexempt property to Jeff Mims as permanent Receiver (the “Receiver”).
(ECF No. 165).
Thereafter, Kornman executed a Conveyance of Interest to the Receiver on behalf of
himself and all Judgment Debtors.1 (ECF No. 537-5). The Conveyance of Interest stated that
“each of the Judgment Debtors does hereby turn over, transfer, assign, and convey unto Jeff
Mims, the appointed Permanent Receiver, any and all of his or its right, title, and interest in and
to any property that are described in the attached Exhibits which were filed by the Judgment
Debtors . . . .” (ECF No. 537-5).
In an effort to enforce the registered final judgment, the Trustee identified certain
financial accounts, called Flex-Funds, owned by entities who are not Judgment Debtors.
Although these entities themselves are not Judgment Debtors, many of the Judgment Debtors
owned these entities outright or owned a significant interest in them (and those transferred
interests are now owned by the Receiver after the Conveyance). The Receiver’s ownership
interest in these entities ranges from quite small to 100%. The Trustee filed a Motion to Compel
Turnover of the Flex-Funds Accounts owned by these non-Judgment Debtor entities. (ECF No.
537, 634).
A hearing was held on March 7, 2012, at which the Court made several rulings. The
Court declined to hold that the Receiver, even if he owned 100% of an entity and had sole
control over it, was entitled to use a Flex-Fund Account to satisfy a judgment. That entity, for
example, may have creditors who would be first entitled to the Flex-Fund Account. The Court
did, however, determine those entities in which the Receiver has a 100% ownership interest and
1 Kornman was the President or Trustee of these Judgment Debtor entities.
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those entities over which the Receiver has sole control. A series of rulings were made in open
court, mostly without objection from the parties.
Analysis
Kornman objected to the first three series of rulings by this Court. (ECF No. 666 at 39).
These three rulings comprised the first three bullet points of the Order issued after the hearing.
(ECF No. 660). Kornman acquiesced to the remaining rulings. (ECF No. 666 at 39). The
remaining rulings comprised the last five bullet points of the Order issued after the hearing.
(ECF No. 660). This Memorandum Opinion addresses the contested rulings.
Eagle View Capital Management LLC a/k/a Flagstone Management LLC
The Court ruled that: (i) the Receiver owns 100% of Eagle View Capital Management
LLC (“EVCM LLC”); and (ii) that the Receiver is the sole member and may exercise control of
EVCM LLC. Kornman stipulated that the Receiver owns 100% of the membership interest in
EVCM LLC.2 Only the second portion of this ruling is contested.
Prior to the Conveyance of Interest to the Receiver, there were two members of EVCM
LLC: (i) Kornman, who owned 95%, and (ii) Eagle View Capital Management, Inc., who was
the managing member and owned the remaining 5%. (ECF No. 634-3). These interests were
2 In fact, Kornman stipulated to Mims’s 100% ownership interest in all the disputed entities. The transcript reads:
Mr. Clary: Yeah, I’ve acknowledge[d] the percentages. I don’t have a problem with that, Your Honor.
Mr. Bracken: So you stipulate that 100 percent of the membership interest in the –
The Court: The Valiant entities, in Eagle View and in Gallant.
(ECF Doc. 666 at 25). This portion of the transcript does not reflect Mr. Clary’s non-verbal assents, but they are
noted by the Court. Moreover, those portions of the transcript where the entities are discussed separately indicate
that on each occasion Mr. Clary (Kornman’s counsel) recognized that Mims owned 100% of the membership
interest. (ECF Doc. 666 at 6, 20, 22).
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assigned to the Receiver by the Conveyance of Interest.3 The Receiver, even as an assignee of
100% of the membership interest may not automatically become a member. TEX. BUS. ORG.
CODE § 101.108(b)(2)(B). “An assignee of a membership interest in a limited liability company
is entitled to become a member of the company on the approval of all of the company’s
members.” TEX. BUS. ORG. CODE § 101.109(b).
Kornman did not merely assign his 95% membership interest in EVCM LLC. Kornman
assigned all of his rights as a member of the EVCM LLC. (ECF No. 537-5). That the Texas
Business Organizations Code recognizes such a distinction is ascertained from the text of
§ 101.111(a): “An assignor of a membership interest in a limited liability company continues to
be a member of the company and is entitled to exercise any unassigned rights or powers of a
member of the company until the assignee becomes a member of the company.” TEX. BUS. ORG.
CODE § 101.111(a) (emphasis added). Kornman assigned all of his rights as a member,
including the ability to approve the admission of new members. This is in addition to, and
separate from, the assignment of his membership interest.
The only other member was Eagle View Capital Management, Inc. Kornman was the
100% shareholder of this corporation, but assigned all his interest to the Receiver. (ECF No.
537-5). The Receiver, as the 100% shareholder, is entitled to control the actions of the
corporation, either directly or through the company’s board. As the sole shareholder, the
Receiver could declare his control through a shareholders’ agreement that “eliminates the board
of directors and authorizes the business and affairs of the corporation to be managed, wholly or
3 Kornman’s directly held a 95% in EVCM LLC. (ECF No. 537-5 at 12; there listed as Flagstone Management
LLC). Kornman was also the 100% shareholder of Eagle View Capital Management, Inc, which owned the
remaining 5% of EVCM LLC. Kornman’s 100% interest in Eagle View Capital Management, Inc. was assigned to
the Receiver in the same Conveyance of Interest. (ECF No. 537-5 at 11).
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partly, by one or more of its shareholders . . . .” TEX BUS. ORG. CODE § 21.101(a)(2).4 The
Receiver may manage the business and affairs of Eagle View Capital Management, Inc.
The Receiver owns 100% of the membership interest in EVCM LLC. Of the two
members of EVCM LLC, one (Kornman) is no longer entitled to object to the admission of the
Receiver as a member and his approval need not be sought. The other member (Eagle View
Capital Management, Inc.) is 100% owned by the Receiver, who is entitled to manage its
business and affairs. The Receiver, on behalf of Eagle View Capital Management, Inc., may
approve the admission of himself as a member of EVCM LLC.
The Receiver may exercise control over EVCM LLC. In addition to being its 100% sole
owner, the Receiver manages the business and affairs of both of EVCM LLC’s members (his
own and those of Eagle View Capital Management, Inc.).
The Court’s March 7, 2012 Order will be amended to reflect that the Receiver is the “sole
owner” rather than the “sole member” of EVCM LLC. In fact, the Receiver and Eagle View
Capital Management, Inc. are both members.
Various Valiant Investments L.P.’s
This Court ruled that: (i) the Receiver owns 100% of Valiant Investments 94-1, L.P.,
Valiant Investments 94-2, L.P., Valiant Investments 95-2, L.P., Valiant Investments 94-3, L.P.,
Valiant Investments 95-5, L.P., Valiant Investments 94-6, L.P., and Valiant Investments 95-7;
L.P.; and (ii) the Receiver is the sole person who controls these limited partnerships. (ECF No.
660). Kornman stipulated to the Receiver’s 100% ownership interest. (See supra note 2). Only
the latter portion of this second ruling is at issue.
4 Such a shareholder’s agreement must be written and made known to the corporation. TEX. BUS. ORG. CODE
§ 21.101(b)(1)(B). The Court accepts the substance of these pleadings as constituting such a written agreement.
The Court believes that a shareholder’s agreement executed by the sole 100% shareholder, which states that this
shareholder will manage the corporation instead of the nonexistent board of directors and nonexistent officers, is
sufficiently “made known to the corporation” at such a hearing.
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These limited partnerships each have the same structure. Prior to the Conveyance of
Interest, Kornman Corporation had a 1% ownership interest in each of these limited partnerships
and was the general partner. (ECF 634-2). The remaining 99% was owned by the Ettman
Family Trust I as a limited partner. (ECF No. 634-2).
Kornman was the 100% shareholder of Kornman Corporation. (ECF 634-2). All of
Kornman’s interest in Kornman Corporation was assigned to the Receiver in the Conveyance of
Interest. (ECF No. 537-5). As with Eagle View Capital Management, Inc., the Receiver may
himself manage the business and affairs of Kornman Corporation. (See supra note 4 and
accompanying text).
The remaining 99% of all of the Valiant Investment L.P.’s was owned by Ettman Family
Trust I as a limited partner. (ECF No. 634-2). Ettman Family Trust I is a Judgment Debtor and
assigned all its interests in the various Valiant Investment L.P.’s to the Receiver in the
Conveyance of Interest. (ECF No. 537-5 at 8). Nevertheless, the Receiver, as assignee of
Ettman Family Trust I’s limited partnership interest, is not automatically entitled to become a
partner. TEX. BUS. ORG. CODE § 153.251(b)(2).
The assignment caused Ettman Family Trust I to cease to be a limited partner as a matter
of law. An assignment for the benefit of a creditor is an event of withdrawal. TEX. BUS. ORG.
CODE § 152.501(b)(6)(B). “A person ceases to be a partner on the occurrence of an event of
withdrawal.” TEX. BUS. ORG. CODE § 152.501(a).
These withdrawal provisions are from Chapter 152, which deals with General
Partnerships. However, “[e]xcept as provided by [§ 153.003(b)], in a case not provided for by
[Chapter 153 – Limited Partnerships] and the other limited partnership provisions, the provisions
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of Chapter 152 governing partnerships that are not limited partnerships and the rules of law and
equity govern [limited partnerships].” TEX BUS. ORG. CODE § 153.003(a).
Chapter 153 does not have provisions that separately deal with the withdrawal of a
limited partner as a matter of law.5 There is only a provision which deals with the voluntary
withdrawal of a limited partner. TEX. BUS. ORG. CODE § 153.110. There is not a superseding
provision which deals with withdrawal of a limited partner as a matter of law. Accordingly, the
above portions of Chapter 152 are applicable to limited partnerships. Ettman Family Trust I is no
longer a partner of the Valiant Investments L.P.’s.
The Receiver, as an assignee of Ettman Family Trust I’s limited partnership interests,
may become a limited partner if all partners consent. TEX. BUS. ORG. CODE § 153.253(a)(2).
Prior to the Conveyance of Interest, there was one general partner (Kornman Corporation) and
one limited partner (Ettman Family Trust I) for each of the Valiant Investments L.P. As set forth
above, Ettman Family Trust I is no longer a partner. The Receiver owns and manages the
business and affairs of the only remaining partner (Kornman Corporation) and may admit
himself as a partner.6
The Receiver owns 100% of the membership interest of the Valiant Investments L.P.’s.
The Receiver is one of two partners, and he manages the business and affairs of the other partner.
The Receiver is the sole person who controls these partnerships.
5 There is a provision dealing with withdrawal of a general partner as a matter of law. TEX. BUS. ORG. CODE
§ 153.155.
6 This analysis differs from that discussed during the hearing. As set forth above, this Memorandum Opinion
controls.
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Gallant Corporation
This Court’s third ruling was that “Mims owned 100% of the stock of Gallant
Corporation and may elect all of its directors.”
The Court includes this third ruling in the Memorandum Opinion out of an abundance of
caution. It is likely that this ruling is not truly contested.7 If this ruling is still contested, the
Court completely fails to understand the argument. A 100% shareholder of a corporation is
entitled to elect its directors (TEX. BUS. ORG. CODE § 21.405) or (as set forth above) to control
the corporation directly via a shareholders’ agreement.
Conclusion
The Court has issued an amended order.
SIGNED March 28, 2012.
___________________________________
Marvin Isgur
UNITED STATES BANKRUPTCY JUDGE
7 That Mims owns 100% of the corporate stock is not contested. (See supra note 2). As to the other portion of the
ruling, at the hearing Clary (Kornman’s counsel) stated: “If he’s the shareholder, he can certainly – 100 percent
shareholder, he can elect the board of directors. That’s never been in dispute.” (ECF No. 666 at 20). Later in the
hearing, however, the transcript read as follows:
Court: Mr. Clary, I know as to the first three series of rulings I made that you take exception to those.
Clary: That’s correct, Your Honor.
(ECF No. 666 a 39).
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