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`Case No. 2021-0619-JTL Uy Es}
`
`IN THE COURT OF CHANCERYOF THE STATE OF DELAWARE 220"
`
`Transaction ID 67810221
`
`CA_No. 2021-0619-JTL
`
`PUBLIC VERSION FILED
`JULY 11, 2022
`
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`XRI INVESTMENT HOLDINGS LLC,
`
`Plaintiff,
`
`v.
`
`GREGORY A. HOLIFIELDandGH
`BLUE HOLDINGS,LLC,
`
`Defendants.
`
`PLAINTIFF’S POST-TRIAL BRIEF
`
`OF COUNSEL:
`
`Angela Zambrano (pro hac vice)
`Yolanda Garcia (pro hac vice)
`Margaret Hope Allen (pro hac vice)
`SIDLEY AUSTIN LLP
`2021 McKinney Ave., FL 20
`Dallas, Texas 75201
`(214) 969-3000
`
`Dated: July 1, 2022
`
`A. Thompson Bayliss (#4379)
`John M. Seaman (#3868)
`Eric A. Veres (#6728)
`Daniel J. McBride (#6305)
`ABRAMS & BAYLISS LLP
`20 Montchanin Road, Suite 200
`Wilmington, Delaware 19807
`(302) 778-1000
`
`Attorneysfor Plaintiff
`XRI Investment Holdings LLC
`
`EFiled: Jul 11 2022 09:42PM EDT
`Transaction ID 67810221
`Case No. 2021-0619-JTL
`
`

`

`TABLE OF CONTENTS
`
`PAGE
`
`D.
`E.
`F.
`
`G.
`
`H.
`
`PRELIMINARY STATEMENT ...............................................................................1
`FINDINGS OF FACT ...............................................................................................6
`A.
`XRI’s Creation and 2016 Recapitalization ...........................................6
`B.
`XRI’s Governance.................................................................................7
`C.
`The Company Agreement’s Transfer Restrictions................................8
`1.
`Section 8.01(a) restricts Transfers ..............................................9
`2.
`Section 8.01(a) prohibits Liens and other encumbrances...........9
`XRI’s 2016 Loan to Holifield Through Entia.....................................10
`Holifield’s Financial Condition and Gabriel’s Assignment................11
`Gabriel Cautions Assurance About Holifield’s Financial
`Position in May 2018 ..........................................................................13
`Holifield Seeks to Pledge the XRI Units for the Assurance
`Loan (Plan A)......................................................................................14
`Holifield Structures a Transfer to a Purported “Permitted
`Transferee” (Plan B) ...........................................................................15
`Holifield Sends the XRI Equity Transfer Documents to XRI,
`but Not the Assurance Loan Documents.............................................18
`Holifield and Assurance Execute the Transaction on June 6,
`2018.....................................................................................................20
`Assurance Makes Further Loans to Entia in Early 2019 ....................22
`XRI Learns Additional Facts About the Assurance Loan in March–
`April 2019 ...........................................................................................23
`Entia Defaults on Its Note and XRI Strictly Forecloses on the
`XRI Units ............................................................................................25
`Assurance Files Suit in Texas .............................................................26
`N.
`LEGAL ANALYSIS AND CONCLUSIONS OF LAW ........................................27
`I.
`DEFENDANTS BREACHED SECTION 8.01 OF THE COMPANY
`AGREEMENT ..............................................................................................28
`
`I.
`
`J.
`
`K.
`L.
`
`M.
`
`

`

`A.
`
`B.
`
`II.
`
`III.
`
`The Transfer Restriction and the “Permitted Transferee”
`Exception ............................................................................................28
`1.
`The “without consideration” clause..........................................28
`2.
`The “exclusive right” clause.....................................................38
`The Encumbrance Prohibition ............................................................40
`1.
`The Side Letter and the GH Blue Guaranty..............................40
`2.
`“Right to proceeds”...................................................................42
`DEFENDANTS’ ADDITIONAL BREACHES OF THE COMPANY
`AGREEMENT ..............................................................................................47
`THE CONSEQUENCE OF BREACHES UNDER SECTION 8.03 OF
`THE COMPANY AGREEMENT ................................................................50
`IV. DEFENDANTS’ AFFIRMATIVE DEFENSES...........................................51
`A.
`Parties May Limit Equitable Defenses Through LLC Agreements....52
`B.
`Acquiescence ......................................................................................54
`C.
`Laches .................................................................................................56
`D.
`Unclean Hands ....................................................................................57
`RELIEF .........................................................................................................59
`A.
`XRI’s Declaratory Relief Claim .........................................................59
`B.
`XRI’s Breach of Contract Claim.........................................................59
`CONCLUSION .......................................................................................................60
`
`V.
`
`ii
`
`

`

`TABLE OF AUTHORITIES
`
`Page(s)
`
`Cases
`Absalom Tr. v. Saint Gervais LLC,
`2019 WL 2655787 (Del. Ch. June 27, 2019) ...............................................52, 53
`Achaian, Inc. v. Leemon Family LLC,
`25 A.3d 800 (Del. Ch. 2011) ..............................................................................28
`Assurance Mezzanine Fund III, L.P. v. XRI Inv. Holdings LLC,
`No. 2021-36737 (269th Dist. Ct. Harris County, Texas) ............................passim
`Capital Group Cos., Inc., v. Armour,
`2005 WL 678564 (Del. Ch. Mar. 15, 2005) .......................................................46
`Carr v. New Enter. Assocs., Inc.,
`2018 WL 1472336 (Del. Ch. Mar. 26, 2018) .....................................................34
`Charleston Labs., Inc. v. Ameling,
`2018 WL 1431749 (E.D. Ky. Mar. 22, 2018) ....................................................47
`CompoSecure, L.L.C. v. CardUX, LLC,
`206 A.3d 807 (Del. 2018).................................................................51, 52, 53, 54
`Cont’l Ins. Co. v. Rutledge & Co., Inc.,
`750 A.2d 1219 (Del. Ch. 2000) ..........................................................................54
`Coughlan v. NXP B.V.,
`2011 WL 5299491 (Del. Ch. Nov. 4, 2011).................................................30, 31
`Emerald Partners v. Berlin,
`726 A.2d 1215 (Del. 1999).................................................................................52
`Ensing v. Ensing,
`2017 WL 880884 (Del. Ch. Mar. 6, 2017) .........................................................59
`Eureka VIII LLC v. Niagara Falls Holdings LLC,
`899 A.2d 95 (Del. Ch. 2006) ..............................................................................28
`Fike v. Ruger,
`752 A.2d 112 (Del. 2000)...................................................................................56
`iii
`
`

`

`Gatz v. Ponsoldt,
`925 A.2d 1265 (Del. 2007).................................................................................30
`H-M Wexford LLC v. Encorp, Inc.,
`832 A.2d 129 (Del. Ch. 2003) ............................................................................60
`K&K Screw Prods., L.L.C. v. Emerick Cap. Invs., Inc.,
`2011 WL 3505354 (Del. Ch. Aug. 9, 2011).......................................................57
`Kraft v. WisdomTree Invs., Inc.,
`145 A.3d 969 (Del. Ch. 2016) ............................................................................58
`Lehman Bros. Holdings Inc. v. Spanish Broad. Sys., Inc.,
`2014 WL 718430 (Del. Ch. Feb. 25, 2014),
`aff’d, 105 A.3d 989 (Del. 2014) .........................................................................58
`Liberty Media Corp. v. Bank of New York Mellon Tr. Co., N.A.,
`2011 WL 1632333 (Del. Ch. Apr. 29, 2011)................................................32, 34
`NASDI Holdings, LLC v. N. Am. Leasing, Inc.,
`2019 WL 1515153 (Del. Ch. Apr. 8, 2019),
`aff’d, 2022 WL 1073544 (Del. Apr. 11, 2022)...................................................58
`Noddings Inv. Grp., Inc. v. Capstar Commc’ns, Inc.,
`1999 WL 182568 (Del. Ch. Mar. 24, 1999),
`aff’d, 741 A.2d 16 (Del. 1999) ...........................................................................29
`Solar Reserve CSP Holdings, LLC v. Tonopah Solar Energy, LLC,
`2020 WL 1291638 (Del. Ch. Mar. 18, 2020), vacated on other
`grounds, 258 A.3d 806 (Del. 2021)....................................................................28
`Twin Bridges Ltd. P’ship v. Draper,
`2007 WL 2744609 (Del. Ch. Sept. 14, 2007)...................................30, 31, 33, 34
`Whittington v. Dragon Grp. L.L.C.,
`2010 WL 692584 (Del. Ch. Feb. 16, 2010),
`aff’d and remanded, 998 A.2d 852 (Del. 2010) .................................................57
`Williams Field Servs. Grp., LLC v. Caiman Energy II, LLC,
`2019 WL 4668350 (Del. Ch. Sept. 25, 2019).........................................30, 31, 34
`
`iv
`
`

`

`Statutes
`Texas Business and Commerce Code Article 9...........................................45, 46, 47
`Other Authorities
`Black’s Law Dictionary (11th ed. 2019) .................................................................40
`Ct. Ch. R. 15(b) .......................................................................................................48
`
`v
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`

`

`Plaintiff XRI Investment Holdings LLC (“XRI”) respectfully submits this
`
`post-trial brief in further support of its claims against Defendants Gregory A.
`
`Holifield (“Holifield”) and GH Blue Holdings, LLC (“GH Blue”).
`
`PRELIMINARY STATEMENT
`XRI is a closely held Delaware limited liability company in the oil and gas
`
`industry. Like many LLCs, XRI adopted in its foundational agreement provisions
`
`that embody Delaware’s “choose your partner” principle by prohibiting the transfer
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`or encumbrance of equity, save in narrowly specified circumstances. XRI filed this
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`action because Defendants have violated those provisions, and under the plain terms
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`of XRI’s Company Agreement, the transaction through which Defendants did so is
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`void. XRI seeks declaratory relief confirming this, as well as damages for
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`Defendants’ breaches of XRI’s Company Agreement.
`
`In 2018, Holifield, one of XRI’s co-founders, transferred his XRI Units to an
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`entity created solely for the purposes of accepting that transfer, GH Blue. The
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`transfer was part of a larger transaction in which the Units held by GH Blue were
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`used as collateral for a $3.5 million loan to Holifield1 from Assurance Mezzanine
`
`Fund III L.P.
`
`1 Pursuant to the Note Purchase Agreement, Assurance made the loan to Entia, LLC;
`however, the loan documents reflect that the loan was made for the benefit of
`Holifield. See JX083.6; JX083.9; JX083.10.
`
`

`

`Defendants did not tell XRI in 2018 that they were transferring Holifield’s
`
`Units to GH Blue to facilitate the loan from Assurance. Defendants deliberately
`
`chose not to disclose the existence of the Assurance loan, its connection with the
`
`transfer of Holifield’s Units to GH Blue, or the multiple ways in which Defendants
`
`had encumbered those Units in the transaction. XRI is not pursuing a fraud claim
`
`against Defendants, but the concealment Defendants practiced shows that they
`
`knowingly and deliberately breached their obligations under the Company
`
`Agreement. Defendants’ breaches were more than technical lapses. Defendants
`
`knew they were violating key provisions of the Company Agreement, so they hid
`
`the true nature of their dealings from XRI.
`
`Holifield’s transfer of his XRI Units violated multiple provisions of Company
`
`Agreement. First, the agreement bars LLC members from transferring both Units
`
`and “Company Interests” save (1) with board consent, or (2) to closely related
`
`parties—“Permitted Transferees”—in transactions that do not involve consideration.
`
`XRI’s board never consented to Holifield’s transfer, and GH Blue was not a
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`Permitted Transferee.
`
`Defendants also violated a second provision of the Company Agreement: the
`
`prohibition of encumbrances on equity or “Company Interests.” By means of
`
`guaranties and a side letter agreement related to the Assurance loan, Defendants
`
`encumbered their XRI Units in numerous ways. This became incontrovertible when
`2
`
`

`

`Assurance sued XRI in Texas, asserting an interest in Defendants’ XRI Units. XRI
`
`and Assurance have now agreed to settle the Texas litigation, but the existence of
`
`that matter—and the resulting harm to XRI—demonstrate that Defendants
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`impermissibly encumbered their Units in their dealings with Assurance.
`
`In addition to their multiple breaches of the anti-transfer and anti-
`
`encumbrance provisions, Defendants provided highly confidential information to
`
`Assurance, including customer lists and weekly earnings reports. These actions
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`violated the confidentiality provisions of the Company Agreement; they also reveal
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`that by granting an interest in XRI equity to a third party, Holifield assumed
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`obligations that required him to continue violating pre-existing duties to XRI.
`
`The consequences of Defendants’ numerous breaches are twofold. First,
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`under the terms of the Company Agreement, the transaction through which
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`Defendants committed those breaches is void. Controlling law holds that companies
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`may—as XRI has here—render void ab initio actions that would be merely voidable
`
`under common law. XRI is entitled to a declaration that Defendants’ purported
`
`transfer of the Units is void, as are the guaranties and side letter through which
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`Defendants impermissibly encumbered those Units.
`
`The second consequence of Defendants’ breaches is the significant loss XRI
`
`has incurred in defending against and resolving the Texas litigation. XRI is entitled
`
`to recover for that loss as breach of contract damages.
`3
`
`

`

`In their defense, Defendants argue that (1) Holifield’s transfer of his Units to
`
`GH Blue was proper under the “Permitted Transferee” exception in the Company
`
`Agreement, (2) the encumbrance of the Units was permissible because Assurance
`
`was given merely a right to the proceeds of a potential future sale of the Units, and
`
`(3) the equitable defenses of acquiescence, laches, and unclean hands can redeem
`
`void transactions. Defendants are wrong on all counts.
`
`First, a “Permitted Transferee” is one who receives Units in a transaction
`
`“without consideration.” Holifield received consideration: the $3.5 million
`
`Assurance loan. Defendants argue that when the loan is viewed separately from the
`
`transfer of Holifield’s XRI Units, no consideration was provided. But Delaware’s
`
`“step transaction” doctrine enables the Court to pierce through the appearance of
`
`separate deals created by “sophisticated” lawyering, and to recognize the
`
`simultaneous transfer and loan as the unitary undertaking it was. The two parts of
`
`the transaction were planned and executed together. One part of the transaction
`
`would not have made sense without the other. Holifield’s own counsel testified that
`
`the purpose of the transfer to GH Blue was “to facilitate the Assurance Mezz loan.”
`
`Beyond this, transfer to a “Permitted Transferee” is allowed only when the
`
`parties retain exclusive rights and obligations created by the Company Agreement.
`
`Holifield and GH Blue relinquished important contractual rights and incurred
`
`impermissible obligations. They made their right to dispose of their equity under
`4
`
`

`

`the terms of the Company Agreement subordinate to a newly created duty to repay
`
`the Assurance loan immediately and in cash following any sale of equity. Because
`
`the transfer fell afoul of the exclusive right requirement, GH Blue was not a
`
`“Permitted Transferee.” This is so whether the transfer and the loan are viewed as
`
`separate transactions or as steps in a single unitary transaction.
`
`As to Defendants’ second contention—that they granted Assurance only a
`
`right to proceeds of a possible future sale of the Units—overwhelming evidence
`
`shows that this is wrong. Assurance has repeatedly asserted a security interest in the
`
`Units themselves. It filed the Texas Action on the basis of that purported right. It
`
`has offered sworn testimony in this case that it has a direct claim against the Units
`
`themselves. Assurance’s purported claim shows that Defendants sought to convey
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`far more than a right to the proceeds of a possible later sale.
`
`Even if Defendants had given Assurance only a right to proceeds, moreover,
`
`that would be a prohibited encumbrance under the Company Agreement. The
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`Company Agreement forbids the encumbrance not only of equity but also of
`
`“Company Interests,” which include the right to proceeds of the sale of Units. This
`
`Court has held that the right to proceeds is a “Company Interest” subject to the anti-
`
`transfer and anti-encumbrance provisions in the Company Agreement.
`
`Finally, equitable defenses cannot redeem the void transaction. In granting
`
`Delaware LLCs the right to render voidable transactions void ab initio by way of
`5
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`

`

`contract, the Delaware Supreme Court has allowed parties to eliminate equitable
`
`defenses that might otherwise save such transactions. XRI’s Company Agreement
`
`did exactly that.
`
`The Court should issue an order declaring void the transfer of Holifield’s
`
`Units to GH Blue, along with the guaranties and side letter that were executed as
`
`part of the same transfer/loan transaction. The Court should also award XRI
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`damages for the losses it has sustained as a result of Defendants’ breaches and
`
`reimbursement of all fees advanced to Holifield.
`
`FINDINGS OF FACT
`XRI’s Creation and 2016 Recapitalization
`In 2013, Holifield and Matthew Gabriel (“Gabriel”) co-founded the
`
`A.
`1.
`
`predecessor to XRI, a Delaware LLC, engaged in the exploration and production of
`
`non-potable water sources for the oil and gas industry. PTO ¶ 8; JX001; Gabriel Tr.
`
`63:5–64:3.
`
`2.
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`Gabriel is the company’s CEO and was at all relevant times a member
`
`of its board of directors. Gabriel Tr. 63:5–14.
`
`3.
`
`On August 8, 2016, XRI recapitalized in connection with a major
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`investment by Morgan Stanley and affiliated investment funds (collectively,
`
`“Morgan Stanley”). PTO ¶ 15.
`
`6
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`

`

`4.
`
`XRI’s members, including Holifield, executed the Amended and
`
`Restated Limited Liability Company Agreement effective August 8, 2016. JX001.
`
`B.
`5.
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`XRI’s Governance
`The Company Agreement divides XRI’s members into several classes.
`
`Id. at 18–22 § 2.01.
`
`6.
`
`Morgan Stanley became the “Class A” member,2 and Gabriel and
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`Holifield became “Class B” members. The Company issued 18,346 Class B units
`
`to Holifield (the “XRI Units”). Id. at Schedule A; PTO ¶ 17.
`
`7.
`
`The Company Agreement establishes a five-member board of directors,
`
`comprised of three representatives designated by the Class A member and two
`
`representatives designated by the Class B members. Id. at § 4.01(a).
`
`8.
`
`The Class A member appointed Morgan Stanley employees John Moon,
`
`Mark Bye, and Logan Burt (“Burt”) as its representatives. Id. at 33.
`
`9.
`
`The Class B Members appointed Holifield and Gabriel. Id.
`
`10.
`
`Section 4.01(d) of the Company Agreement states that “[w]ith respect
`
`to any matter submitted for approval of, or action to be taken by, the Board at any
`
`time . . . all actions by the Board shall require the affirmative vote or consent of at
`
`least a majority of the voting power of all Representatives.” Id. at § 4.01(d).
`
`2 References herein to the Class A member entity will mean NH XRI Investments
`LLC.
`
`7
`
`

`

`C.
`11.
`
`The Company Agreement’s Transfer Restrictions
`The Company Agreement restricts members’ ability to “Transfer” any
`
`“Unit” or other “Company Interests.” Id. at § 8.01(a).
`
`12.
`
`The transfer restriction was important to XRI and Morgan Stanley in
`
`making their investment. See Gabriel Dep. 149:20–23 (JX138); Burt Dep. 75:15–
`
`19 (JX137). According to Burt, “the point of this provision is so that the company
`
`and its members, its partners, know who its partners are and have a role in deciding
`
`who those partners are. And so it restricts the ability of members to freely transfer
`
`their units for that reason.” Burt Tr. 15:23–16:14.
`
`13.
`
`The Company Agreement defines “Unit” as “a Class A Unit, Class B
`
`Unit, Class C Unit or any other unit or equity interest representing a Company
`
`Interest issued after the Effective Date pursuant to this Agreement.” JX001 at § 1.01.
`
`14.
`
`“Transfer” is defined as “any direct or indirect sale, transfer,
`
`assignment, pledge or other disposition.” Id.
`
`15.
`
`“Company Interest” is defined as “the interest of a Member in the
`
`Company, which may be evidenced by Units or other interests, including rights to
`
`distributions (liquidating or otherwise), allocations, notices and information, and all
`
`other rights, benefits and privileges enjoyed by that Member.” Id.
`
`16.
`
`Transfers made in violation of Section 8.01(a) of the Company
`
`Agreement are “void,” not voidable. Id. at § 8.03; Burt Tr. 39:15–20.
`8
`
`

`

`Section 8.01(a) restricts Transfers
`1.
`The first sentence of Section 8.01(a) places significant restrictions on
`
`17.
`
`Transfers. Subject to exceptions not relevant here, a Transfer may be made only (1)
`
`with written consent of the Board, or (2) to a “Permitted Transferee”:
`
`Unless expressly contemplated by another provision of this Agreement,
`no Member may Transfer any of its Units or other Company Interests
`except . . . (iii) to a Permitted Transferee, [or] (iv) with the written
`consent of the Board . . . .
`Id. at § 8.01(a).
`
`18.
`
`Section 1.01 of
`
`the Company Agreement defines “Permitted
`
`Transferee” as follows:
`
`[W]ith respect to any Class B Member or Management Member, any
`Person meeting all of the following requirements: (a) such Person is . . .
`(iii) any trust, family partnership or limited liability company, the sole
`beneficiaries, partners or members of which are such Member . . . (b)
`the applicable Transfer to such Person is made without consideration
`and (c) such Member . . . [has] at all times (including after the subject
`Transfer) the exclusive right to exercise and perform all rights and
`duties under this Agreement[.]
`Id. at § 1.01 (emphases added).
`
`Section 8.01(a) prohibits Liens and other encumbrances
`2.
`The second sentence of Section 8.01(a) prohibits all encumbrances on
`
`19.
`
`any Unit or Company Interest:
`
`Notwithstanding the foregoing or any other provision of this
`Agreement, no Member shall pledge, borrow against, collateralize,
`otherwise encumber or allow any Liens to exist on any of the Units or
`Company Interests except (x) with the written consent of the Board or
`9
`
`

`

`(y) in connection with a pledge of Units to the Company as collateral
`to secure such Member’s obligations under a promissory note or
`guarantee of indebtedness to the Company approved by the Board.
`Id. at § 8.01(a).
`
`20.
`
`The Company Agreement defines “Liens” as “all royalties, burdens,
`
`profit interests, production payments, pledges, encumbrances, restrictions, charges,
`
`security agreements, leases, title retention agreements, mortgages, hypothecations,
`
`liens, charges, assignments, claims, security interests, options, imperfections of title
`
`and other adverse claims or restrictions, of any kind or character whatsoever.” Id.
`
`at § 1.01.
`
`21.
`
`This restriction applies both to members’ “Units” and to all “Company
`
`Interests” associated with those units. Id. at § 8.01(a).
`
`D.
`22.
`
`XRI’s 2016 Loan to Holifield Through Entia
`In conjunction with the 2016 recapitalization, Holifield, through his
`
`company Entia Holdings LLC (“Entia”), borrowed approximately $10.6 million
`
`from XRI (the “XRI-Entia Loan”) under a secured promissory note (the “XRI-Entia
`
`Note”) executed on August 8, 2016. JX002 (XRI-Entia Note); Gabriel Dep. 21:12–
`
`25 (JX138).
`
`23.
`
`Entia had no assets and no employees. Gabriel Tr. 67:9–21; Ellis Dep.
`
`Tr. 83:22. Entia was created to serve as a brand for interests Gabriel and Holifield
`
`10
`
`

`

`owned in what were called “portfolio companies.” Entia did not itself own any
`
`interest in any portfolio company. Id.
`
`24. Gabriel held a minority ownership interest in Entia, but Holifield
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`controlled Entia entirely. Gabriel Tr. 67:22–68:1.
`
`25.
`
`The XRI-Entia Note required Entia to repay the $10.6 million loan plus
`
`interest in one balloon payment on August 8, 2020. JX002; Burt Tr. 20:1–10.
`
`26.
`
`The XRI-Entia Loan was secured by Holifield’s 18,346 Units. When
`
`he entered in the XRI-Entia Loan agreement, Holifield also executed a personal
`
`guaranty (“XRI-Holifield Guaranty”) and unit pledge agreement (“XRI-Holifield
`
`Pledge”) through which he pledged the XRI Units as collateral for the XRI-Entia
`
`Note. JX004 (XRI-Holifield Guaranty); JX003 (XRI-Holifield Pledge).
`
`27. Holifield did not use the $10.6 million to benefit Entia or any of the
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`portfolio companies, but instead immediately transferred those funds to his personal
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`Goldman Sachs account. Gabriel Tr. 68:2–8.
`
`Holifield’s Financial Condition and Gabriel’s Assignment
`E.
`28. By early 2018, Holifield and several of the Entia portfolio companies
`
`were experiencing financial difficulties. Gabriel Tr. 69:21–70:10.
`
`29.
`
`In early 2018, Holifield approached both Morgan Stanley and Gabriel
`
`individually about buying out his XRI Units. Id. at 70:11–71:14.
`
`11
`
`

`

`30. Ultimately, both Morgan Stanley and Gabriel declined to buy out
`
`Holifield’s XRI Units. Id.
`
`31. Gabriel did not believe that Entia or the portfolio companies were
`
`financially able to take on more debt. Id. at 71:15–72:11 (“my feeling was
`
`borrowing against any of the non-XRI companies was a mistake because they were
`
`struggling, and I felt personally that the management of those companies needed to
`
`be improved more than just raising more debt. Putting debt on companies that can’t
`
`repay their debts tends not to lead to good outcomes.”).
`
`32.
`
`In 2018, Gabriel experienced “growing anxiety around some of the
`
`financial strain” at Entia, and he “made the challenging decision to assign [his]
`
`equity [to Holifield] for a dollar.” Id. at 68:9–69:15.
`
`33. Gabriel believed that this assignment would help Holifield find
`
`additional funding. Id. at 93:3–94:6 (“I felt giving him my equity got me out of the
`
`way for him to close a loan . . . on those companies.”).
`
`34. Vendors and former employees of Holifield have filed at least 19
`
`lawsuits against Holifield and various entities within the Entia portfolio for unpaid
`
`invoices, wages, and loans. JX172.
`
`35. At least one of these lawsuits resulted in a default judgment against
`
`Holifield. Id. at 259:18–21.
`
`12
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`

`

`F.
`
`36.
`
`Gabriel Cautions Assurance About Holifield’s Financial Position
`in May 2018
`In early 2018, Holifield entered into discussions with Assurance
`
`Mezzanine Fund III L.P. (“Assurance”), a lender with whom Holifield had a prior
`
`business relationship. Ellis Dep. 21:23–22:12 (JX136).
`
`37. Assurance had previously loaned money to XRI and had achieved
`
`above-market returns on its investment during the 2016 recapitalization. Ellis Dep.
`
`76:8–19 (JX136); JX14.1.
`
`38.
`
`In loaning money to Holifield in 2018, Assurance hoped to obtain
`
`similar returns, and sought a security interest in Holifield’s XRI Units. Ellis Dep.
`
`77:15–78:6 (JX136) (agreeing that “Assurance expects a return of capital in the next
`
`24 months with an IPR of 27.4 to 33 percent, and a return on invested capital of 66
`
`percent to 69 percent”), 73:1–6 (agreeing that “Assurance’s plan was to loan Entia
`
`money and to have that loan secured by a pledge of the XRI units”); see also JX014.1
`
`(investment memorandum for Assurance); JX16.1 (term sheet from Assurance).
`
`39. On May 6, 2018, Seth Ellis, Managing Director at Assurance, contacted
`
`Gabriel, seeking a credit reference for Holifield. JX010 (email from Ellis); Gabriel
`
`Tr. 73:8–14.
`
`40.
`
`Ellis told Gabriel that Holifield had sought a loan from Assurance. See
`
`id.; Ellis Dep. 21:6–20 (JX136).
`
`13
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`

`

`41. Gabriel told Ellis that Holifield “was struggling financially,” and that
`
`Ellis should “proceed with caution.” Gabriel Tr. 73:8–74:5; Ellis Dep. 155: 3–15
`
`(JX136).
`
`42. After this conversation, Ellis told Gabriel that Assurance had
`
`“performed a diligence review,” and had concluded that “Greg had nice or strong
`
`financial stability.” Gabriel was “shocked.” Gabriel Tr. 74:6–17; Ellis Dep. 155:9–
`
`23 (JX136).
`
`G. Holifield Seeks to Pledge the XRI Units for the Assurance Loan
`(Plan A)
`43. On May 21, 2018, Holifield told Burt that he intended to obtain a loan
`
`from Assurance (“Assurance Loan”). Holifield Tr. 216:19–217:1. As security for
`
`the Assurance Loan, Holifield proposed that he give Assurance a second lien
`
`position in the XRI Units he had previously pledged as collateral for the XRI-Entia
`
`Loan. JX017; Burt Dep. 12:24–16:22 (JX137); Burt Tr. 24:23–25:19.
`
`44.
`
`Specifically, Holifield sent Burt an email stating that “[Assurance has]
`
`approved providing funding for additional growth in Entia, but they require I provide
`
`a second position pledge of my XRI Blue B Shares.” PTO ¶ 31; JX017.
`
`45. Holifield attached to his email a draft unit pledge agreement that, if
`
`approved by the Board, would have allowed Holifield to pledge the XRI Units as
`
`collateral for the Assurance Loan. Id.
`
`14
`
`

`

`46. Burt forwarded Holifield’s email to the other Morgan Stanley Board
`
`members, writing that “[a]ny pledge of these securities would require XRI board
`
`approval.” Id.
`
`47.
`
`Thereafter, Burt told Holifield that the Board would not consent to a
`
`second position pledge to Assurance. Burt Dep. 75:7–19 (JX137); Burt Tr. 25:20–
`
`26:21 (“I communicated to him at that time that I didn’t see that as something that
`
`was going to be likely to garner board approval, because those units had already
`
`been [p]ledged in respect to the existing outstanding note.”); Holifield Tr. 218:9–13
`
`(Q. “. . . [Y]ou could not give Assurance a security interest in the units themselves
`
`because Mr. Burt told you no. Right?” A. “Yes, ma’am.”)
`
`H. Holifield Structures a Transfer to a Purported “Permitted
`Transferee” (Plan B)
`48. Holifield therefore needed to provide some alternative form of security
`
`acceptable to Assurance to collateralize the loan he sought. As Holifield testified,
`
`“[w]e had gotten a no on Plan A.” Holifield Tr. 221:19–222:5. To solve this
`
`problem, Holifield and his legal team came up with the idea of creating a new entity
`
`and transferring Holifield’s Units to it. Entia’s general counsel, Monica Rothbaum,
`
`testified that the purpose of the transfer was “[t]o facilitate the Assurance Mezz
`
`loan.” Holifield Tr. 226:21–227:2 (video clip of Rothbaum Dep. (JX140)).
`
`15
`
`

`

`49. Holifield’s outside counsel, Jackie Camp of Womble Bond Dickinson,
`
`outlined the arrangement in a May 24, 2018 email. Holifield would transfer his XRI
`
`Units to a “new limited purpose SPV” (that is, GH Blue); Assurance would loan $3.5
`
`million to Entia; the SPV “would assign its right to the proceeds of the XRI equity
`
`to Entia”; and following a sale of XRI, Entia would use those proceeds “to repay
`
`Assurance.” JX026.
`
`50. Holifield revealed only part of this arrangement to XRI. Holifield told
`
`Burt that he was transferring his Units to a new entity without disclosing that the
`
`transfer was designed to facilitate a loan from Assurance. Burt Tr. 29:8–30:6.
`
`Instead, Holifield told Burt that he “was going to make a transfer for estate planning
`
`purposes and that he planned to exercise rights available to him under the documents
`
`without a request for board approval.” Id. Holifield also claimed that GH Blue was
`
`a Permitted Transferee under the terms of the Company Agreement. Id.
`
`51.
`
`In the event of a transfer to a Permitted Transferee, the Company
`
`Agreement requires members to execute and provide “documentation reasonably
`
`acceptable to the Board documenting [the] Transfer,” including “material contracts
`
`. . . of the Permitted Transferee.” JX001 at § 8.01(e). One such “material contract”
`
`was the newly created GH Blue operating agreement. Because the Company
`
`Agreement required Holifield to provide that operating agreement to XRI, Camp
`
`expressed reservations about including any reference to the Assurance Loan and
`16
`
`

`

`Assurance’s right to repayment, because doing so “may be inviting trouble with
`
`Morgan Stanley.” JX028 (May 29, 2018 email). Camp wrote: “[Holifield] was
`
`concerned, however, about mentioning Assurance in a ‘waterfall’ in the Operating
`
`Agreement.” Id.; PTO ¶¶ 33-34. Camp continued: “[W]e’d rather not have any
`
`mention of the loan or repayment in the docs that Morgan Sta