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Mantle v. North Star Energy & Construction LLC

Supreme Court of Wyoming

March 12, 2019

ALEXANDER REED MANTLE and MARJORIE M. MANTLE, Appellants (Plaintiffs),
v.
NORTH STAR ENERGY & CONSTRUCTION LLC; GARY W. GARLAND; RAYMOND W. GARLAND; MATT R. GARLAND; THREE WAY, INC.; HOT IRON, INC.; MGM ENTERPRISES, INC.; GT INVESTMENTS, INC.; and WYODAK ENERGY SERVICES, LLC, Appellees (Defendants). RAYMOND W. GARLAND and THREE WAY, INC., Appellants (Defendants),
v.
ALEXANDER REED MANTLE and MARJORIE M. MANTLE, Appellees (Plaintiffs). GARY W. GARLAND, Appellant (Defendant),
v.
ALEXANDER REED MANTLE and MARJORIE M. MANTLE, Appellees (Plaintiffs).

          Appeal from the District Court of Johnson County The Honorable John G. Fenn, Judge

          Representing Alexander Reed Mantle and Marjorie M. Mantle: Stephen R. Winship, Winship & Winship, PC, Casper, Wyoming. Argument by Mr. Winship.

          Representing Gary W. Garland, Hot Iron, Inc., and GT Investments, Inc.: Kim D. Cannon & Codie D. Henderson, Davis & Cannon, LLP, Sheridan, Wyoming. Argument by Mr. Cannon.

          Representing WyoDak Energy Services, LLC: Greg L. Goddard, Goddard and Vogel, P.C., Buffalo, Wyoming. Argument by Mr. Goddard.

          Representing Raymond W. Garland, Matt R. Garland, Three Way, Inc., and MGM Enterprises, Inc.: Judith A. W. Studer, Schwartz, Bon, Walker & Studer, LLC, Casper, Wyoming. Argument by Ms. Studer.

          Representing North Star Energy & Construction LLC: No Appearance.

          Before DAVIS, C.J., and FOX, KAUTZ, BOOMGAARDEN, and GRAY, JJ.

          FOX, JUSTICE.

         [¶1] This case arose when the parties entered into an ill-conceived business conveyance plan during a downturn in the oil market. The three Garland brothers, Ray, Gary, and Matt, [1] each had separate entities which provided specialized services directly to, or related to, the oil industry in Northeast Wyoming and North Dakota. Upon the advice of their accountant, Karl Killmer, the Garlands formed a new entity in 2011, North Star Energy & Construction, LLC (North Star), with the Garlands' companies as members and the Garlands individually as managers. Alex Mantle, who had previously worked for Ray's company and was Mr. Killmer's friend, was named President of North Star. North Star made a profit at first but struggled with cash flow and took out substantial loans.

         [¶2] In 2014, Mr. Killmer and Mr. Mantle proposed to buy North Star. In conjunction with obtaining the necessary financing, Mr. Killmer, Mr. Mantle, and the Garlands entered into a Memorandum of Understanding (MOU). Among other things, the MOU provided that Mr. Mantle and his wife, Marjorie Mantle, would personally guarantee payment of $6, 110, 000, part of the purchase price. As part of the buyout, North Star obtained a $3-million loan from First Northern Bank (FNB), secured by securities held by Mr. Mantle, Mrs. Mantle, and their trusts.

         [¶3] Later in 2014, after the price of oil had dropped further, and after North Star had suffered significant losses as a result of some poor business practices, Mr. Mantle backed out of the deal. The Garlands took over management of North Star to complete pending jobs, auction equipment, and, by the spring of 2015, liquidate the company. While the wheels were falling off, the Mantles negotiated a new $3-million loan from FNB, and acquired the original North Star loan, stepping into FNB's shoes with regard to its loan to North Star. The scenario gave rise to an assortment of claims and counterclaims, some of which the district court disposed of on summary judgment, with the remainder resolved after a bench trial.

         ISSUES

         [¶4] The parties raise numerous procedural and substantive issues on appeal, which we rephrase:

1. Did the Garlands and their associated entities abandon their counterclaims when they did not refile them after the amended complaint?
2. Was the Memorandum of Understanding an enforceable contract?
3. Did the district court err when it concluded that the Garlands' negligent misrepresentation claim against Mr. Mantle would entitle them to no additional damages?
4. Did the district court err when it found no disputed issues of material fact to support Mantles' claim of actual fraud?
5. Did the district court correctly decide that certain North Star conveyances were fraudulent?
6. Are the Garlands entitled to equitable affirmative defenses?
7. Did the district court correctly conclude that the elements necessary for LLC veil-piercing were absent?
8. Did North Star's members have a fiduciary duty to its creditors?
9. Did the Garlands owe the Mantles a duty of good faith?
10. Should the Garlands' breach of fiduciary duty claim have been brought as a derivative action?
11. Did the district court abuse its discretion when it denied Mantles' attorney fees?

         FACTS[2]

         [¶5] The Garland brothers, Gary, Ray, and Matt, were born and raised in Buffalo, Wyoming. In 1990, Gary formed Hot Iron, Inc., a company that specializes in "underground work, water and sewer, street rehabs." Ray Garland formed a separate entity, Three Way, Inc., which specialized in reclamation work for highways and pipelines. Matt Garland's company, MGM, Inc., specialized in trucking, heavy hauling, laying gravel, and building construction. Each of these businesses was operated independently until 2011, when North Star Energy & Construction, LLC was formed.

         [¶6] Karl Killmer, a Casper CPA, started doing the accounting for Matt in 2004; for Gary and Hot Iron in 2006; and for Ray and Three Way in 2008. Beginning in 2000, Alex Mantle was employed by Three Way. Over time, Mr. Killmer and Mr. Mantle developed a close friendship. In the summer of 2010, the two began to discuss the formation of a company called North Star. When it became operational November 1, 2011, Mr. Mantle was appointed its President; he remained President until December 2014.

         [¶7] North Star offered pipeline construction, roustabout, trucking, material hauling, road building, and underground utility services. Its members were Hot Iron, Three Way, and MGM. Ray and Gary were the initial managers, with Matt added as manager on December 31, 2011. Mr. Killmer was North Star's accountant. He calculated each member's capital contribution and determined each member's equity in North Star: 50% owned by Three Way, 30% by Hot Iron, and 20% by MGM. Mr. Killmer testified North Star had an initial capitalization of $11 million, and he did not consider this to be undercapitalized.

         [¶8] North Star did not immediately generate money. However, North Star's operations in 2012 and 2013 were profitable, with a net income of $2, 063, 086 and $1, 082, 017, respectively. North Star had more than 300 employees during its three years of operations. Up until early 2014, Mr. Killmer prepared monthly financial statements based on the numbers Mr. Mantle supplied, which were provided to the members and reviewed at the company's regular monthly meetings.

         [¶9] The North Star Operating Agreement expressly allowed members and managers to make loans to North Star if revenues were insufficient to pay the company's operating expenses. It also stated that loans would be "repayable by the Company to such Member . . . at such date or dates as the Managers shall determine in his discretion[.]" Mr. Mantle and North Star's managers and members provided occasional short-term loans, and North Star obtained a line of credit from American National Bank (ANB). ANB dealt primarily with Mr. Mantle in its transactions with North Star. ANB and North Star entered into a Commercial Loan Agreement, signed by Mr. Mantle as North Star's managing member, on December 24, 2012. The loan agreement contained several covenants that would become significant: North Star would maintain a Debt/Worth Ratio not to exceed 1.25/1; any ownership changes must be pre-approved by ANB; and no additional debt could be incurred without prior approval by ANB. The 2013 amended agreement contained the same covenants and was also signed and initialed on each page by Alex Mantle.

          [¶10] In January 2014, Mr. Mantle requested greater control of North Star, pronouncing, "the days of the 'round table' are over and we will move forward with the 'oblong table' that has a President at the head." He also wanted "to know that I don't have to seek approval for decisions before I make them." He promised to make $5, 000, 000 in profit on $77, 000, 000 of gross revenue in 2014. The Garland brothers agreed to Mr. Mantle's offer "to step back and let him run the company."

         [¶11] North Star operations were "catastrophically unprofitable in 2014." The company began to feel the financial effects of the "Middle Loop" job, a large pipeline installation job for a CO2 recovery project that North Star had significantly underbid. In the last half of 2014, the price of oil declined more than 50%. Mr. Mantle testified that "North Star's future was based on the price of oil[.]" The Garlands received no North Star balance sheets or profit and loss statements after the first quarter of 2014 until late November 2014. Mr. Killmer testified that was "because I wasn't completing it."

         [¶12] In May or June 2014, Mr. Mantle and Mr. Killmer proposed a buyout to the member entities of North Star. Mr. Mantle testified that he only became interested in acquiring North Star because he "believed in Karl Killmer's fairy tale, drank too much of his Kool-Aid." He explained that Mr. Killmer took the lead in proposing the plan, and in the buyout discussions with the Garland brothers. While those discussions continued, Mr. Mantle loaned North Star a total of $1.2 million in several payments between May 1, 2014, and September 2, 2014, even though his authority to incur indebtedness on behalf of North Star was limited to $100, 000. In initial discussions, Mr. Mantle and Mr. Killmer proposed to pay $6.9 million for the members' equity and $7-million "blue sky, "[3] with the first secured and the second unsecured, and a $3-million down payment.

         [¶13] Mr. Mantle and Mr. Killmer applied for a $3-million loan from First Northern Bank (FNB), which would be secured by securities held by Mr. Mantle and Mrs. Mantle. Gary believed that the FNB loan would be made to Mr. Mantle and Mr. Killmer. In an August 11, 2014, email to Mr. Mantle and the three Garlands, Mr. Killmer explained:

- [W]e have not issued the June financials pending the resolution of Middle Loop. Now that this has been settled, I will make adjustments and get June issued. June will show a significant loss.
- Currently waiting to hear from First Northern Bank (Ryan Fieldgrove). This loan is what we are planning on using to fund the down payment and to put $$$$ back into the Company ("Baseball Card loan"). Per Ryan, they should have their Underwriting complete either today or tomorrow.
- Alex and I talked to Ann[] Nelson earlier today and will be talking to her later this afternoon. I will forward under separate e-mail the e-mail I sent to Ann[] on Friday. As you will note in that e-mail, we are trying to access $500, 000 of the guaranteed auction $$$$ as soon as possible. We will also be laying the groundwork on paying-off the Line of Credit . . . the how and when[.]

         [¶14] Initially, the entire $3 million was going to be paid to the North Star members as a down payment. Then, as North Star's finances deteriorated through the summer of 2014, Mr. Mantle and Mr. Killmer asked the members if they could put the $3 million into the company, offering to pay the members interest in the form of a salary, [4] with a payment of $1 million in June 2015, and monthly payments for ten years thereafter. On August 14, 2014, Mr. Mantle received North Star's June financials which showed a $4.69-million year-to-date loss. He did not recall giving the document to either FNB or the Garlands prior to the execution of the MOU and the FNB loan closing. Ryan Fieldgrove at FNB testified that he had not been provided with the June financials, although it would have been important information for the bank to have. The debt schedule which FNB had requested in order to assess the loan request omitted North Star debts to American Express and Mr. Mantle. The final July financials, which were emailed to Mr. Mantle on September 4, 2014, reflected an even greater year-to-date loss of nearly $6 million. Between August 17, 2014, when Mr. Mantle received verbal approval of the FNB loan, and the loan closing on September 17th, Mr. Mantle made loans to North Star totaling $950, 000, without consulting with any of the Garlands. The members were unaware that, by September 17th, Mr. Mantle had loaned North Star $1.2 million. When North Star received the FNB loan, Mr. Mantle repaid $1.2 million to himself, leaving $1.8 million for North Star.

         [¶15] The Garlands understood that Mr. Mantle and Mr. Killmer were obtaining the $3-million loan, and that the main source of collateral was to be the Mantles' securities. Mr. Mantle testified that the collateral for the loan was North Star equipment and assets, and the securities held by him and his wife, with loan guarantees from him, his wife, and Mr. Killmer.

          [¶16] On August 24, 2014, at what became known as the "white board meeting, "[5]Mr. Killmer and Mr. Mantle informed the Garlands that North Star had an operating loss of $4.6 million for the first six months, with $3.5 million attributable to the Middle Loop project. They forecasted a $1-million profit for the remainder of the year. Mr. Mantle and Mr. Killmer asked to split the losses with the Garlands and proposed a reduced purchase price. Mr. Killmer testified that he arrived at a $6, 110, 000 figure based on his valuation of the net equity and hard assets, using a valuation asset approach he had previously used. Mr. Mantle and Mr. Killmer were to personally guarantee the purchase amount of $6, 110, 000. In a September 2, 2014 email to his daughter, Ray explained:

As of the 1st of September Alex and Karl asked Gary, Matt and I to stand aside as the business sale was imminent by mid-September or early October. They felt they needed us out of the picture to gain more credibility. We agreed to their requests as a result and based on the following:
1. They could not pay a down payment at this time. They will pay a partial the first of July.
2. They will pay no payments until the first of July. They have to pay Matt, Gary and myself a wage until then.
3. They will no longer pay for our pickups etc.
4. We agreed to let them auction off another $3, 200, 000.00 worth of equipment that they have a guarantee price from the Auction Co. on. These funds were to be used to pay off the line of credit and equipment debt.
5. We agree to leave our personal CD investment that belongs to Gary, Alex and myself that amounts to $500, 000.00 at the bank for a year. This helps with the covenants.
6. We had to participate in the year to date loss and take it off the total value that was based on 12/31/2013.
So what is the trade off and why would we agree to this[:]
1. The company value had decreased in value almost five million from the first of the year. Largely because of Salt Creek [Middle Loop]. . . .
2. To bolster the company Alex would put in $3, 000, 000.00 cash.
3. Matt, Gary and I will be kept on the payroll until payments start coming in which will be the original figures used except they will probably be higher because we asked for the payment schedule to be cut by two years as trade off.
4. There will be a guaranteed floor of value that is to be maintained or else we take over and Alex loses his $3, 000, 000.00.
5. Karl has to personally guarantee and put up Kilmer and [A]ssociates plus his other assets as collateral.
6. Alex has to personally guarantee the purchase. (I am suspect the Mantle-Marjorie Investment account is larger than the $3 Mill.)
7. NS was to get rid of several overhead items such as: High dollar non-productive people. Excess pickups sent back to Enterprise. Move out of high dollar rental shop in Watford. (Gary has already sold this concurrently as we speak and will have a new shop, which is smaller and less expensive ready by 12/8/14. This will be much cheaper.)
8. The people who are gone so far are Andy Dennis Salt Creek, Tim Wheatly SC, all the rest of the S.C. crew, John Abseth maintenance super. Daniel Duncan. I will update as I learn more.
9. The bottom line of all these transactions are a more solid company with low debt to equity.

         [¶17] The transaction ultimately took shape as a leveraged buyout, which Mr. Killmer defined as "using the company's assets and equity and earning st[r]eam to buy out the shareholders and its seller-financed debt. It's not paid for with equity or equity contributions." Mr. Mantle would be a 51% owner; Mr. Killmer 24%, and neither one would contribute any money of his own.

         [¶18] After the white board meeting but before the $3-million loan was obtained, Robb Bischoff, North Star's Controller, sent Mr. Killmer and Mr. Mantle the "tweaked cash management spreadsheet." After taking into consideration a $3-million FNB loan, together with receipt of $3.3 million from anticipated equipment sales, North Star was still projected to lose $5 million beginning in October 2014. The next day, on August 28, 2014, Mr. Mantle wrote to his friend: "I can see a profitable future I'm just not sure there is enough gas in the tank to get us there. I may have just bought a really nice state room on the Titanic." The following day, Lori Zink, North Star's accounting manager, sent Mr. Mantle an email regarding "cranky utility vendor payments." These documents were not given to the Garlands or FNB prior to the loan closing.

         [¶19] Mr. Mantle and Mr. Killmer took immediate steps to effectuate their "purchase" of North Star. On September 3, 2014, Mr. Mantle sent an email to the Garlands with the subject "Purchase Announcement," explaining that "I have begun to announce the news of our purchase of North Star." The next day, September 4th, Mr. Mantle informed the Garland brothers by email that their North Star credit cards "have been cancelled," and advised them to "transition[] your phone off the North Star plan." The Garlands moved out of their offices.

         [¶20] In a North Star newsletter dated September 19, 2014, Alex Mantle announced:

NORTH STAR CHANGES OWNERSHIP! On behalf of Karl Killmer, Josh Miller, Bryan Garland, Rafael Del Toro, Chris Knudson and myself we wish to announce as of September 1, 2014 we have purchased North Star from Ray, Gary, and Matt. We are very grateful for the opportunity and the trust the Garlands have placed in us. We are also very grateful for all of the outstanding employees dedicated to North Star. We look forward to a long and prosperous future.
Mr. Mantle gave himself the title of CEO.

         [¶21] On September 4, 2014, Lori Zink sent Mr. Mantle the final figures for July showing losses of $718, 933.35 for the month. The year-to-date losses were $5, 902, 900.29. The members' equity had eroded to $1, 889, 668.84. Mr. Mantle did not provide this financial information to FNB or the Garlands, although it was known to him before he signed the MOU and guarantee of the FNB loan. By September 2014, North Star was insolvent.

          [¶22] North Star held three equipment auctions in 2014, the last and largest of which was September 23, 2014. Of the combined net proceeds of $4.53 million, only $1 million went to North Star for general operating purposes, and the remainder was used to pay secured creditors, primarily ANB.

         [¶23] Despite North Star's dire financial condition, Mr. Mantle and Mr. Killmer proceeded with the buyout. As a condition to making the $3-million loan, FNB requested various documents and assurances, including: 1) a copy of the purchase agreement or a MOU setting forth the terms of the parties' agreement; 2) Mantles' securities, worth $3 million, to be placed in an FNB Trust account as collateral for the loan; 3) sale of some North Star equipment; 4) a second position lien on remaining North Star equipment; 5) debt subordination agreements by the Garlands; 6) a corporate resolution granting Mr. Mantle the authority to sign financial documents, including loans for the company; and 7) an explanation of the new ANB loan terms.[6]

         [¶24] Accordingly, on September 17, 2014, the parties executed the following documents:

• The MOU
• North Star's promissory note in the amount of $3 million, signed by Alex Mantle as President of North Star
• A security agreement executed by Alex Mantle, the Marjorie M. Mantle Revocable Living Trust Agreement, Marjorie McWhorter Mantle, and the Alexander R. Mantle Revocable Living Trust Agreement
• Security agreement from North Star
• Personal guarantees of Alex Mantle, Marjorie Mantle, and Karl Killmer
• Subordination agreements by the Garlands
• FNB Loan Agreement
• Consent form to allow Alex Mantle to sign the loan paperwork as President on behalf of North Star

         [¶25] After September 17th, all parties continued to conduct themselves as though Mr. Mantle and Mr. Killmer had acquired North Star. Mr. Mantle testified that, after September 17th, the Garlands had no North Star operational duties. Gary and Ray testified that they believed Mr. Mantle and Mr. Killmer owned North Star after the MOU was signed. Ray testified that he agreed that Mr. Mantle and Mr. Killmer could auction $3.2-million-worth of North Star equipment "[b]ecause they are the owners." In October, Mr. Mantle signed the PACCAR Equipment Lease Agreement as "Member" of North Star, and Mr. Killmer sent out the minutes for the October meeting (which was not attended by any of the Garlands), signing them "Your new Partner." On November 3, 2014, Marjorie Mantle sent Mr. Mantle an email saying:

I just want to reiterate how proud I am of you for taking the chance and making the move to become owner & CEO of Northstar. I know you have a vision for this company along with Karl and in order to reach this vision there are going to be times of financial anxiety. We are now experiencing the first wave of this anxiety and we will weather it in order to see the good decision in buying this company and making it a viable contender in the energy and reclamation field. I believe in your abilities to turn this company around and so do many other people. Everyone has signed on knowing the uphill climb because we all know there will be a turn around and success is in Northstar's future.

Winter is Coming

         [¶26] Success was not in North Star's future and, in fact, the forces for its demise were already in place. In the fall of 2014, the price of oil was dropping, and North Star depended on oil field work. On October 26th, Ann Nelson at ANB had emailed Mr. Mantle requesting updates on:

• Monthly financials (The latest the bank has received is 6/30/2014. We are missing July statements on.)
• Monthly Borrowing Bases
• Covenant Compliance
• Updated equipment listing and new appraisal on all equipment following the 9/23/2014 auction
• Status of pending MOU and pending sale of NS. This will also trigger certain portions of existing ANB loan agreements.

         Ms. Nelson testified that, when she sent this email, it was her understanding from her earlier conversations with Mr. Mantle that the MOU was still being negotiated "to determine the particulars of a sale if it were to happen. And that was the document or something of that nature that ANB would need to review prior to."

         [¶27] On November 21, 2014, ANB obtained North Star's financials. Ann Nelson forwarded them to her colleagues with the following email:

As I mentioned in our board meeting, both Alex Mantle and Karl Kil[l]mer are on vacation until 12/1. However, I was able (with a little convincing) to talk with their CFO, Robb Bischoff. He did some arm twisting of his own to obtain authorization to release the attached financials to the bank Friday afternoon.
Once you review them, you'll understand why North Star hasn't provided them earlier. The results are a disaster with a loss through 9/30 of $7.6mm. Robb also shared (off the record) that while October numbers aren't final yet, he anticipates that loss to widen to $8mm. He summed it up by saying that while NS has reduced revenues it has failed to correspondingly reduce its expenses, primarily direct payroll expenses.
I've responded to North Star that these numbers are significantly worse than what had been represented in our conversations over the past weeks and months. Previous representations from Alex and Karl were that July would have a $100-$300 loss, August would be breakeven up to a $100K loss, and September would have a $200k profit. Clearly that hasn't happened. I've asked for a meeting to discuss our next course of action. I'm waiting to hear back. While all NS loans are current, our only responsible course of action is a speedy, orderly exit from this relationship as soon as possible.

         [¶28] The Garlands had also received the disastrous financial information, by email from Mr. Killmer on November 20, 2014, (conveying financial statements he and Alex Mantle had received November 7th). These were the first financial statements that the Garlands had received from Mr. Mantle or Mr. Killmer since March 2014. On November 22nd, the Garlands received a lengthy email from Mr. Killmer, which began: "As you are aware, we have continued to experience operating losses through September." He described various facets of the business and steps he and Mr. Mantle were taking to increase revenues and decrease costs and debt, and he assured the Garlands "that both Alex and I are still 'in' on buying the Company." He acknowledged, "We are currently 'in default' on paying Three-Way the balance of their income taxes for 2013," and he conceded it was unlikely they would be able to meet the payment schedule under the MOU. "Therefore, we ask you to consider a payment of $500, 000 on July 1 and a payment of $500, 000 on October 31 in lieu of the $1, 000, 000 payment on July 1st. To overstate the obvious, this will give us more 'healing time' to gather the $$$$$." Further, "[w]e ask that you consider releasing us from the personal guarantee." The Garlands did not release Mr. Mantle and Mr. Killmer from the personal guarantee obligation.

         [¶29] Sometime in late November, Mr. Mantle made the decision that "this was not a good deal." In a November 29, 2014 email to a friend, Mr. Mantle said "North Star is not profitable and I'm struggling to figure things out and am running out of time. . . . The falling price of oil also weighs heavily on my mind." This may explain why, when the renewal notice came for the errors and omissions policy which might have covered the Garlands' legal expenses in this litigation, Mr. Mantle did not renew it.

         [¶30] On December 1, 2014, Mr. Mantle and Mr. Killmer received an email from ANB's general counsel notifying them that the $3-million FNB note on North Star's balance sheet "concerns us because the covenants in North Star's loans with ANB prohibit North Star from incurring any additional debt without ANB's consent, and ANB has not consented to any such indebtedness." The Garlands did not learn that ANB was calling North Star's loans until they received a letter from the bank on December 3rd. Meanwhile, at a December 2, 2014 meeting with the Garlands and Mr. Killmer, Mr. Mantle refused to sign the personal guarantees. He stated that if he owned the company without the requirement of personal guarantees, his next move would be to liquidate. But then, in response to a December 4, 2014 email from Matt Garland, Mr. Mantle pushed back on demands Matt had made, saying "Do Karl and I work for you guys or did we buy the company? I thought all we did was postpone paperwork until June."

         [¶31] Disaster followed disaster and, by letter dated December 15, 2014, ANB declared North Star's four outstanding loans in default, demanding payment in full on all loans by February 28, 2015. The same day, Mr. Mantle informed the Garlands that North Star could not make payroll or payroll taxes. Ray agreed to "put in $90, 000 cash today to take care of tax deposit . . . but I want it right back."

         [¶32] On December 16th, the Garlands, Mr. Mantle, and Mr. Killmer met with ANB representatives in Cheyenne. The North Star principles indicated they could not pay off the four loans by February 28th. However, they proposed to sell North Star equipment at auction in March and April, to yield enough to pay off the first three notes, totaling $2.1 million; and to pay off the fourth note, secured by North Star's commercial property in Gillette (1401 Oil Drive), which had an outstanding balance of $568, 000. Accordingly, on December 30, 2014, Mr. Mantle, signing as President of North Star, signed the document stating that North Star "agrees to sell the property at 1401 Oil Drive composed of shop, office, yard, welding shop to GT Investments for the sum of $650, 000.00."[7] The property had been appraised in October 2013 at a value of $1, 260, 000, with a December 30, 2014 market condition analysis at the same value. (North Star purchased the property from MGM in 2013 for $750, 000.) The same day, Mr. Mantle signed the Warranty Deed conveying the property to GT Investments.[8] None of the members of North Star had any interest in GTI at that time.

         The Huge Hole

         [¶33] Also in December 2014, the Garlands took over the management of North Star, demoting Mr. Mantle to Controller. Although the Garlands knew that North Star was insolvent, Ray still believed that, considering the company's equipment value, they could rebuild with hard work. Gary took over as North Star's President, and he determined to stop making payments on the FNB loan. He explained that he considered that loan to be an obligation of Mr. Mantle and Mr. Killmer as owners of North Star, and he chose instead to pay other North Star loans and debts, some of which were owed to or guaranteed by the Garlands or their entities. North Star's balance sheet showed a loss of $8, 899, 031.07 for 2014.

         [¶34] In January 2015, the Garlands negotiated a modification to North Star's ANB loans that gave North Star additional time to pay them off. In exchange, ANB required that North Star's line of credit be secured by a cash deposit, which the Garlands complied with by obtaining a $500, 000 loan from the Bank of Buffalo and purchasing a CD which they deposited at ANB. North Star made the monthly payments on the Bank of Buffalo loan, which totaled $37, 792.52. When ANB's loans had been paid off, it released the funds back to the Garlands.

         [¶35] Meanwhile, the Garlands continued their attempts to dig out of the "huge hole." In December 2014, Hot Iron made two loans to North Star totaling $45, 000 so that it could make payroll. Those loans were repaid to Hot Iron on March 4, 2015. Hot Iron made another loan to North Star to cover payroll in January 2015, this time for $50, 000, which was also repaid in March.

         [¶36] In the fall of 2014, North Star had begun a project for the City of Sheridan. The job was shut down for the winter and was scheduled to resume in April 2015. However, North Star was unable to resume the work because it was required to sell its equipment to satisfy ANB's lien. Hot Iron, which had obtained the bond for the project, stepped in to complete the job. Hot Iron charged North Star $325, 000 for mobilization costs, which included purchasing equipment and materials, transporting equipment, paying supervisors, and obtaining financing. North Star paid Hot Iron for those mobilization costs in March and April 2015.

         [¶37] By March 2015, North Star's financial condition had continued to deteriorate, and it was apparent that the company could not survive. Mr. Mantle resigned as Controller. In February and March 2015, North Star could no longer pay for its employees' health insurance. Gary testified that it was important to keep North Star employees to finish the jobs it had in the works, "instead of just picking up and walking off. And if we did that, [customers] would not have paid the money that we still had coming." So, Hot Iron put the North Star employees on its payroll to maintain their health insurance. North Star reimbursed the $59, 952.82 associated with that cost to Hot Iron in May 2015. Finally, Hot Iron paid $25, 000 to facilitate the sale of a crane, which enabled North Star to sell the crane and reduce its debt by approximately $385, 000. North Star reimbursed Hot Iron the $25, 000 in July 2015.

         [¶38] North Star's Operating Agreement provided for its members and affiliates to make loans to the company, and from its inception, Ray, Gary, and Mr. Mantle did so. After they took back management of North Star, repayments of the loans to the Garlands accelerated. Gary was repaid $370, 166.91 in 2015. Ray was repaid $190, 000. Mr. Mantle testified he noticed a pattern of paying vendor debt guaranteed by the Garlands. North Star's accounting manager, Lori Zink, testified that, in early 2015, the Garlands requested a list of creditors they had personally guaranteed. She said it seemed that those creditors were getting paid after the list was produced. Gary agreed that some debts that had been personally guaranteed by him and his brothers were paid off after he took over as President of North Star. In contrast, in March 2015, North Star stopped paying the PACCAR truck leases, which had been guaranteed by Mr. Mantle and Mr. Killmer, and one of the employee credit cards, guaranteed by Mr. Mantle. On August 5, 2015, North Star's members executed its Plan of Liquidation.

         WyoDak

         [¶39] In the fall and winter of 2014, it had become clear to some employees of North Star that the company would fail. In March 2015, North Star employees Chris Knudson and Josh Miller, along with numerous other North Star employees, began searching for new employment. Around that same time, Mr. Knudson, Mr. Miller, and Gary Garland began discussing the possibility of forming a new company, WyoDak, whose purpose would be to employ North Star employees who were going to be out of work and to provide oil and gas roustabout services on a small scale. WyoDak was formed on April

          3, 2015. Mr. Knudson, Mr. Miller, and Gary were the company's members, and each contributed $75, 000. Mr. Knudson and Mr. Miller served as WyoDak's managers; Gary did not participate in managing the company. In May of 2015, WyoDak began hiring employees, almost all of whom had been North Star employees. In a series of transactions, WyoDak acquired various pieces of equipment that had previously been owned or leased by North Star. One such purchase was for 16 pickup trucks that North Star had leased from Enterprise. Enterprise had intended to repossess these and other trucks it leased to North Star before North Star could liquidate them in an equipment auction because North Star was not current on its lease payments. Before Enterprise repossessed them from North Star, Mr. Knudson contacted Enterprise and agreed to pay the remaining North Star lease balances to purchase ...


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