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In re Bodin Oil

United States District Court, W.D. Louisiana

June 12, 2019

IN RE BODIN OIL, Debtor
v.
BROWN & BROWN OF LA, L.L.C. ENVIRO CAP L.L.C.

         SECTION: "S" (4)

          OPINION

          MARY ANN VIAL LEMMON UNITED STATES DISTRICT JUDGE

         This matter is before the court on appeal from the bankruptcy court's judgment entered on June 13, 2016, dismissing the claims of plaintiff/appellant, EnviroCap L.L.C., and intervenor/ appellant Bodin Oil Recovery, Inc., against Brown & Brown, L.L.C. of Louisiana.[1] For the reasons which follow, the ruling of the bankruptcy court is AFFIRMED.

         BACKGROUND FACTS

         Appellant EnviroCap, L.L.C.'s ("EnviroCap's") principal business is factoring accounts receivable. It had entered into a factoring agreement with debtor, Bodin Oil Recovery, Inc. ("Bodin Oil"), secured by reclaimed oil which Bodin Oil was in the business of extracting and selling. In connection with their agreement, EnviroCap had made loans of $1, 000, 000 on June 2, 2011[2] and $500, 000 on July 27, 2011[3] to Bodin Oil and related entities known as the Triad entities.

         In November 2011 and January 2012, Bodin Oil suffered losses to its facility. In Novermber 2011, a centrifuge used in Bodin's operations broke down. In January 2012, a heater fire damaged Bodin Oil's premises. The losses were insured by Contintental Casualty Company ("CNA"), Certain Underwriter's at Lloyd's of London, and AGCS Marine Insurance Company (among others), under policies purchased through Brown & Brown (hereinafter, "B&B"). The CNA policy covered both repairs and equipment as well as business interruption.

         As of the date of the second loss, CNA had not begun paying insurance proceeds from the first loss. Concerned that payment of the claims would not be timely enough for Bodin Oil to maintain its operations, Bodin Oil president Scott Butaud approached EnviroCap principal Robert Beard regarding a bridge loan to keep operations going until the insurance payments were made. Essentially, EnviroCap would be fronting the insurance proceeds payments, to help keep Bodin Oil afloat until the insurance payments were disbursed.

         In a January 17, 2012 letter to Butaud, Beard set out a proposed bridge loan structure that included potential advances of up to $750, 000 for use to pay future oil deliveries.[4] The proposal included a requirement that EnviroCap be named loss payee on the business interruption policy. Beard explained that EnviroCap was requesting to be named as a loss payee, because "we will be advancing operational money now."[5] It also specified that at the time, the net value of the oil on site was $2, 700, 000, that Bodin Oil would assign its accounts receivable for the oil to EnviroCap, and upon collection of the receivables, EnviroCap would "re-advance additional funds for the following week's used oil purchases plus operating expenses until production of both the oil and Rag materials are fully operational."[6] It was hoped that the insurance company would make payments on the claims so the $500, 000 from EnviroCap would not be needed.[7]

         That is precisely what occurred. On January 17, 2012, Bodin Oil's insurers began paying on its claims.[8] Accordingly, the bridge loan to fund Bodin Oil's operations pending receipt of the insurance proceeds was never finalized. Between January 17, 2012 through May 23, 2012, CNA paid out $77, 223 for repairs and $1, 259, 813 for business interruption losses. Aggregated with the payments of the other insurers, a combined total amount of approximately $1.4 million was paid by all carriers.

         Despite the fact that the loan was never finalized, Butaud had contacted B&B and requested that they name EnviroCap as a loss payee on the policies. B&B agreed, and subsequently, on January 20, 2012, B&B provided new property insurance certificates to EnviroCap reflecting that EnviroCap was a loss payee. The same day, EnviroCap followed up with B&B Vice President David Landry to confirm that it could not be removed as loss payee on the policies without EnviroCap's written consent.[9]

         Subsequently it came to light that B&B had not followed through on making EnviroCap the loss payee. As a result, Bodin Oil affiliate and agent Triad Response Group ("TRG") remained as the primary insured under the policies. Insurance proceeds checks continued to be made payable to TRG. Butaud, who was president of both TRG and Bodin Oil (and in fact, president or controlling member of all the Triad entities), deposited the checks and allocated them as he thought appropriate, for example, to reimburse accounts that had been exhausted pending proceeds payments, or to pay for equipment repairs.[10]

         On March 8, 2012, EnviroCap entered into a forbearance agreement with the Triad entities, including Bodin Oil, in which EnviroCap agreed to forbear from its rights under the June 2011 and July 2011 loan agreements. EnviroCap specifically agreed to "forbear in the exercise of its rights and remedies under the [June and July 2011 loan agreements]. . . with respect to the Defaults."[11] The March 2012 agreement formalized the parties' informal agreement, pursuant to which EnviroCap had forborne collecting from Bodin Oil or putting them in default since November 2011.

         On December 14, 2012, Bodin Oil filed for bankruptcy. EnviroCap filed a proof of claim seeking approximately $1, 159, 913, which was outstanding as of the petition date.[12] In May 2013, EnviroCap settled its claim against Bodin Oil for $925, 000.00.[13] According to EnviroCap, that left a $553, 809.00 deficiency owed to it by B&B, comprised mainly of late fees and attorneys' fees related to EnviroCap's loan and claims.

         To recover that deficiency, EnviroCap sued B&B in the instant adversary proceeding, asserting claims for detrimental reliance and negligence, and alleging that it detrimentally relied on B&B's representation that EnviroCap was a loss payee, and that B&B breached its duty to name it as loss payee on the policies. EnviroCap further alleged that if it had been named loss payee, EnviroCap would have used the insurance proceeds to pay off its loans to Bodin Oil, and would therefore have suffered no losses. Bodin Oil intervened, arguing that had B&B properly named EnviroCap as loss payee, the loans would have been paid off from the insurance proceeds, and it would not have had to pay EnviroCap $925, 000.00 in compromise.

         In response, B&B argued that (1) EnviroCap was not intended to be loss payee on Bodin Oil's insurance policies; (2) EnviroCap was contractually bound not to accept insurance proceeds under a forbearance agreement with Bodin Oil and others; and (3) EnviroCap failed to prove it suffered any damages, because it was paid in full on the July 2011 loan, and the amounts claimed related to the June 2011 loan are late fees and attorneys' fees, which EnviroCap is not entitled to recover. B&B also argued that Bodin Oil failed to prove negligence or damages because it received all proceeds to which it was entitled.

         Following trial, the bankruptcy court found that the record did not support EnviroCap's theory of claims for negligence and detrimental reliance. While the court determined that the naming of EnviroCap as loss payee was not conditioned on the finalization of the bridge loan, and that B&B had breached its obligation to do so, it also held that B&B's failure in this regard did not cause EnviroCap's damages. Noting that "[t]he crux of EnviroCap's damage claim is that [if] it had been named a loss payee, insurance proceeds total[ing] approximately $1.4 million would have flowed through EnviroCap and would have been applied to the outstanding loans," the bankruptcy court concluded, that for a number of reasons, the record simply did not support that conclusion.[14] To the contrary, the bankruptcy court found that absent a default, the applicable loan and security agreement "did not provide EnviroCap with grounds to take the step that was the linchpin of its damage claim - applying the proceeds of the insurance claims to the outstanding loans." This is because the record reflects that from November 2011 through March 2012, EnviroCap and the Triad companies had agreed to an informal forbearance, formalized in March 2012, which prohibited EnviroCap from exercising default remedies and applying any funds it would or could have received from the insurance proceeds to the loan. Put another way, to take the step described with respect to the 2011 loans, EnviroCap would have had to put the Triad companies in default, and during the period the insurance proceeds were being paid out, it was contractually prohibited from doing so, and in fact, did not do so until November 2012.

         The bankruptcy court also found that the record did not support the contention that even if EnviroCap had received the insurance proceeds, it would have applied them to its loans. The court first noted that the loss payee status was originally proposed so that the proceeds would protect the bridge loan, which never occurred. However, as the bankruptcy court noted, the insurance proceeds were specifically designated to fund ongoing operations and repairs, not to pay off loan balances.

         The bankruptcy court also noted, with respect to EnviroCap's suggestion that the loan proceeds would have enabled it to achieve its objective of "getting out of the deal" with Bodin Oil, that that notion is belied by the fact that EnviroCap entered into a new factoring agreement for up to $9, 000, 000 in March 2012, and extended a new bridge loan to Bodin Oil in November 2012. Rather, the bankruptcy court noted that the record reflects that EnviroCap had every intention of continuing to do business with Bodin Oil, and that it was always EnviroCap's intent to look to the Bodin Oil reclaimed oil inventory as collateral for its loans. Further, EnviroCap did not raise the loss payee issue until it learned the collateral had been compromised. In sum, the bankruptcy court found that EnviroCap could not establish that B&B's actions were the cause in fact of any of EnviroCap's losses, and that Bodin Oil's intervention claim was derivative of EnviroCap's, and failed for the same reason.

         Following entry of judgment in favor of B&B, EnviroCap and Bodin Oil filed timely appeals, and B&B cross-appealed.

         ASSIGNMENTS OF ERROR

         EnviroCap argues that the bankruptcy court erred in following particulars: (1) finding that the forbearance agreement foreclosed recovery of insurance proceeds; and (2) finding that EnviroCap would not have applied the insurance proceeds to the indebtedness.[15]

         Bodin Oil argues that the bankruptcy court erred in the following particulars: (1) finding that the conduct of B&B caused no damages to EnviroCap and Bodin Oil; (2) finding that the contracts precluded EnviroCap from liquidating Bodin Oil's debt; (3) finding that EnviroCap's continuous dealings with Bodin Oil precluded liquidation of Bodin Oil's debt; (4) finding that EnviroCap did not intend to apply payments to the Bodin Oil debt; and (5) considering and applying unpled affirmative defenses.

         Citing an abundance of caution, B&B filed a cross-appeal to preserve its right to argue that there were additional bases and/or reasons upon which the bankruptcy court could have reached the same ruling and to cross-appeal certain adverse findings or conclusion in the event all or part of the bankruptcy's judgment is reversed.

         STANDARD OF REVIEW

         District courts of the United States have jurisdiction to hear appeals from orders of the bankruptcy court. See 28 U.S.C. § 158(a). The court reviews factual findings for clear error, and conclusions of law de novo. In re Cueva, 200 Fed.Appx. 334, 335 (5th Cir. 2006). Matters left to the bankruptcy court's discretion are reviewed for abuse. Id. (citing Century Resources Land LLC v. Adobe Energy Inc., 82 Fed App'x 106, 110 (5th Cir. 2003).

         APPLICABLE LAW

         EnviroCap's claims are based on negligence and detrimental reliance. Bodin Oil's claim is derivative of EnviroCap's and ...


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