Opinion ID: 2655125
Heading Depth: 2
Heading Rank: 1

Heading: Events Prior to Bankruptcy

Text: In April 2009, West Feleciana Acquisition, L.L.C. (“WFA”) purchased a paper mill in Louisiana from its former owner, Tembec USA, LLC (“Tembec”), for $16 million and other consideration (e.g., a multi-year consulting agreement). WFA consisted of two members: PanAmerican Capital Partners, LLC and Caoba Capital (“Caoba”). WFA relied heavily on the money of others to purchase the mill, including a $4 million economic-development grant from the State of Louisiana (the “State”) and a $2 million loan from the State. It used that money as a down payment and signed promissory notes to Tembec for the remaining $10 million of the purchase price. The State loan and Tembec loan were secured by mortgages on the paper mill, all of which were recorded. The State’s mortgage ranked first and was followed by Tembec’s mortgages. WFA contracted with Fluor Enterprises, Inc. (“Fluor”) in June 2009 to operate the mill. WFA encountered operational difficulties, and Fluor left the mill in October 2009. Fluor and its subcontractors filed over $17 million in liens against the mill between September 1 and October 19, 2009. WFA terminated the Fluor contract. WFA continued to operate the mill and approached Amzak Capital Management, LLC (“Amzak”), a venture-capital firm, about a loan workout and restructuring. Meanwhile, WFA was losing money on the mill. Amzak and WFA negotiated a credit agreement that would provide WFA a maximum of $15 million, but only if the State’s $2 million loan, a prior mortgage on the mill, was paid off first. Otherwise, Amzak would lend WFA a maximum of $13 million and would charge its borrower 14% interest. The paper mill would secure the debt. Amzak’s mortgage was to be junior to the State but senior to Tembec through a subordination agreement. Amzak 2 Case: 13-30675 Document: 00512546787 Page: 3 Date Filed: 02/27/2014 No. 13-30675 retained Stewart Title of Louisiana (“STL”) as its title agent and local counsel. Amzak expected STL to draft and record the mortgage documents and to issue a $15 million title-insurance policy to Amzak. The loan closed on August 25, 2009, and Amzak disbursed $8.1 million under the credit agreement the next day. After this, Amzak’s lawyer, Maria Acevedo (“Acevedo”), sent STL the “fully executed” mortgage and subordination documents for filing, which lacked an attached property description. Although the cover letter was silent, there was evidence that Acevedo told STL on the phone, days earlier, that the property description would not be included in these documents and that STL should physically attach the description to both filings. Ken Moran (“Moran”), an STL employee, claimed that he did not recall any such discussion. Moran sent the executed documents to the West Feliciana Parish Clerk of Court, who recorded them on September 1, 2009. As recorded, the documents lacked a property description. At Amzak’s request, STL sent Amzak a copy of the recorded security documents on October 7, 2009. This copy reflected that a property description was lacking. Upon learning of Amzak’s dissatisfaction with the title policy and the form in which the mortgage and subordination agreement were recorded, STL revised and then re-issued a final title policy to Amzak on October 19, 2009. Amzak did not voice objection. Amzak stopped receiving payments from WFA, which breached a covenant in the parties’ credit agreement. Amzak formally put WFA in default in October 2009. Defaulting on the loan triggered penalty interest on the $12.6 million balance at the rate of 20%, which pushed WFA closer to insolvency. Fluor’s liens and WFA’s failure to make certain payments prompted Amzak to issue two more letters of default to WFA in November and December. No forbearance agreement was reached between WFA and Amzak. 3 Case: 13-30675 Document: 00512546787 Page: 4 Date Filed: 02/27/2014 No. 13-30675 According to Amzak, by mid-December 2009, Caoba, the majority owner of WFA, and Amzak had verbally agreed that Caoba would invest an additional $3 million to $10 million in capital in WFA through Amzak’s mortgage. The ability to use Amzak’s mortgage, which was believed to be valid, as the vehicle for Caoba’s capital infusion was important, because Caoba assumed it had priority over the Tembec mortgage as well as any intervening liens. Caoba’s capital would be secured by the mortgage but be junior to Amzak’s loan. Caoba discovered the title defect in the mortgage as negotiations proceeded and backed away from making the capital infusion. In late December 2009, Caoba informed Amzak “that there are deficiencies in your mortgage that do not allow us to put money through your existing structure.” In early January 2010, Amzak submitted a written notice of claim to Stewart Title Guaranty Company (“STG”), STL’s underwriter, based on the title policy. STL acknowledged the title defect and submitted the matter “to [its] claim [department] . . . because of the problem.” WFA’s counsel advised WFA’s principals that they had a fiduciary duty to WFA’s unsecured creditors to file for bankruptcy within 90 days of the October 19 recording, to preserve WFA’s ability to avoid it as a preference in bankruptcy.