United States District Court, E.D. Kentucky, Southern Division, London
MEMORANDUM OPINION AND ORDER
AMUL R. THAPAR, District Judge.
In this case, two security agreements functioned to take property out of the hands of two judgment debtors-Kentucky Petroleum Operating, LLC ("KPO, LLC") and Kentucky Petroleum Operating, Ltd. ("KPO, Ltd.") (collectively "the KPO debtors")-and out of the reach of their creditors, 7921 Energy, LLC ("7921") and Macar Investments, LLC ("Macar") (collectively "the Macar parties"). Similarly, the five Kentucky Petroleum entities-KPO, LLC; KPO, Ltd.; Kentucky Petroleum Limited Partnership ("KPLP"); Kentucky Petroleum Investment Corp. ("KPIC"); and N.A. Energy Resources Corp. ("N.A. Energy") (collectively, "the KPO entities")-work as alter egos of each other. That is, they are empty, interchangeable shells used to keep money out of the hands of creditors. But neither security instruments nor corporations may operate to defraud creditors. Accordingly, the Court will grant the Macar parties' motion for summary judgment to set aside the security agreements and pierce the corporate veil of the KPO entities, R. 115.
In 2011, the Macar parties executed purchase and sale agreements ("PSAs") to sell oil and gas wells, leases, easements, and related equipment in Laurel County, Kentucky, to the KPO debtors. 7921 Energy, LLC, et al., v. Ky. Petroleum Operating, Ltd., et al. 6:13-cv-00201, D.E. 1-2 (Macar PSA), D.E. 1-3 (7921 PSA). In time, the parties disputed whether the KPO debtors satisfied their obligations under the PSAs and entered arbitration proceedings to resolve this conflict. R. 28-1. The arbitrator held a hearing in April of 2013. Id. In August of 2013, the arbitrator issued an award of $466, 187 in favor of the Macar parties against the KPO debtors. Id. at 5-6.
The Macar parties claim that trouble began in the four months between when the parties began arbitration and the entry of the final arbitration award. They assert that the KPO debtors did not want to have any property that could be used to satisfy an adverse judgment from the arbitration proceeding. To this end, they claim the KPO debtors mortgaged away the leases they bought under the Macar and 7921 PSAs. R. 123-2 at 2 (affidavit of Mehran Ehsan); D.E. 1-15 at 1 (mortgage).
The mortgage gave KPLP-a related Kentucky Petroleum entity under the control of Mehran Ehsan-an interest in the leases to secure a $484, 077 debt the KPO debtors owed to KPLP. Id. In the mortgage, the KPO debtors agreed not to dispose of the leases "whether voluntarily, involuntarily, by operation of law or otherwise" without the written consent of KPLP. D.E. 1-15 at 2. If the KPO debtors did transfer any portion of the leases without KPLP's consent, KPLP could declare the debt immediately due and foreclose on the leases. Id. at 3. Taking a page out of playground negotiation, KPLP essentially called "dibs" on the leases in the event they ever left the KPO debtors' possession. Just to be doubly sure that only KPLP received the fruits of the leases, the KPO debtors assigned all of their "right[s], title[s], revenues, profits, and interests" in and from the leases to KPLP. R. 123-2 at 7-9. KPLP also perfected its security interest in the KPO debtors' leases-the collateral for the mortgage described above-by filing a UCC-1 financing statement with the Kentucky Secretary of State. Id. at 6.
The Macar parties now want to collect their arbitration judgment. They bring two arguments in support of obtaining money from the KPO debtors. First, the Macar parties claim that the KPO debtors fraudulently transferred the leases to KPLP by executing the mortgage in anticipation of the arbitration award. They accordingly seek to invalidate the transfer to reach the assets involved in that transaction. Second, the Macar parties allege that the five KPO entities-KPO, LLC; KPO, Ltd.; KPIC, KPLP, and N.A. Energy-are really alter egos of each other, making up a single corporate entity under the control of Mehran Ehsan. For this reason, the Macar parties seek to pierce the collective KPO corporate veils so they can pursue their arbitration judgment against whichever KPO entity holds the needed assets.
"Summary judgment is appropriate when the record, viewed in the light most favorable to the nonmoving party, reveals that there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law." Laster v. City of Kalamazoo, 746 F.3d 714, 726 (6th Cir. 2014) (citing Fed.R.Civ.P. 56 (c)). The moving parties-here, the Macar parties-bear the initial burden of demonstrating the absence of any genuine issue of material fact. Mosholder v. Barnhardt, 679 F.3d 443, 448 (6th Cir. 2012). If the Macar parties satisfy this burden, then the nonmoving parties-the KPO entities-must "set forth specific facts showing a triable issue of material fact." Id.
The parties disagree about what portions of the record the Court should view. Thus, before turning to merits of the Macar parties' fraudulent transfer and corporate veil claims, the Court must first resolve the evidentiary disputes.
I. Evidentiary Issues
The KPO debtors argue that the Court should disregard a number of the Macar parties' factual claims as lacking support in the record. Specifically the KPO debtors assert that the Court should not consider KPIC's and KPLP's Offering Memoranda filed with the British Columbia Securities Commission ("BCSC"), D.E. 1-9. The KPO debtors also claim that the Court should disregard the KPO debtors-KPLP mortgage, R. 1-15. Why? Because the documents represent inadmissible hearsay and they are "unauthenticated documents" attached as exhibits to the Macar parties' complaint. R. 123 at 14. Both objections lack merit.
The Federal Rules of Evidence define "hearsay" as a statement that (a) the declarant makes outside of the present trial or hearing, which is (b) offered to prove the truth of the matter asserted in the statement. Fed.R.Evid. 801(c). However, statements that constitute verbal acts-like the words of a contract-are not hearsay. See McCormick On Evid. § 249 (7th ed. 2013). The mortgage is a contract that outlines the rights of the KPO debtors and KPLP. As a result, it is a verbal act and not hearsay. Preferred Properties, Inc. v. Indian River Estates, Inc., 276 F.3d 790, 799 n.5 (6th Cir. 2002) ("The verbal acts doctrine applies where legal consequences flow from the act that words were said, e.g. the words of offer and acceptance which create a contract.") (internal quotation marks omitted); Schindler v. Seiler, 474 F.3d 1008, 1010 (7th Cir. 2007) ("Statements that constitute verbal acts (e.g., words of contract or slander) are not hearsay because they are not offered for their truth.") (citing Advisory Committee Notes to Fed. R. Evidence 801(c)); Stuart v. UNUM Life Ins. Co. of Am., 217 F.3d 1145, 1154 (9th Cir. 2000) (holding that an insurance contract is not hearsay "because it is a legally operative document that defines the rights and liabilities of the parties in this case.").
While the BCSC filings are out-of-court statements offered for the truth of their contents, not all such statements are hearsay. A statement is not hearsay if it is offered against an opposing party and made by (a) a person the party authorized to make the statement, or (b) the party's agent or employee on a matter within the scope of that relationship. Fed.R.Evid. 801(d)(2). Under Rule 801(d)(2), the BCSC filings are not hearsay. The Macar Parties seek to introduce the filings against their opponents-the KPO Entities. And Mehran Ehsan made the statements in the BCSC filings as the KPO Entities' agent. Ehsan controls the BCSC filings for all of the KPO entities. R. 91-2 at 11 (KPIC); R. 91-3 at 10 (KPLP); R. 91-4 at 12 (N.A. Energy); R. 90-5 at 14 (KPO, Ltd.), 27 (KPO, LLC). He signed the Offering Memoranda on behalf of the KPO entities. D.E. 1-9 at 64, 207. Furthermore, he manages all of the KPO entities in some capacity. He is President and CEO of KPIC, and controls N.A. Energy. R. 91-2 at 12 (KPIC); R. 91-4 at 11 (N.A. Energy). He is President and CEO of KPO, Ltd. which wholly owns KPO, LLC and serves as the "only officer" of KPLP. R. 90-5 at 14 (unanswered requests for admission served on KPO, Ltd.); R. 90-5 at 27 (unanswered requests for admission served on KPO, LLC); R. 91-3 at ...