At first, Sam McFadin thought it would be the perfect business paring.
Omega Capital of Tulsa bought a majority interest of McFadin’s M&M Environmental Oil Services LLC of Conway for $7 million in December 2014. The majority acquisition was supposed to “take us to the next level,” McFadin told Arkansas Business last week. The companies changed the name of the combined firm to the similar M&M Environmental Group LLC.
Instead of soaring under the ownership, M&M Environmental Group, which provided environmental services to the oil and gas industries, went into a tailspin. So did the relationship between McFadin and the Omega Group; eventually the two sides deadlocked on whether to file for bankruptcy protection late last year.
The stalemate caused Faulkner County Circuit Judge Charles E. Clawson Jr. to appoint a receiver, who filed for Chapter 7 bankruptcy liquidation earlier this month. The debt total hasn’t been released yet, but it’s in the millions. Centennial Bank of Conway sued M&M in January over a $3.6 million debt. The company also is a named defendant in at least seven other lawsuits.
And that count doesn’t include the lawsuit between the M&M Group and McFadin, which was filed in Faulkner County Circuit Court in October, shortly after McFadin was fired from the company he founded in 2010.
The M&M Group accused McFadin of fraud, misconduct and other wrongdoing. McFadin has denied the allegations and filed a counterclaim against M&M and Omega Capital, accusing them of breach of the employment agreement, defamation and other counts.
McFadin, in an interview, wouldn’t address the details of Omega’s allegations but called them “smoke and mirrors.” He said Omega has buyer’s remorse because it bought the company at the worst possible time, just as natural gas production in the Fayetteville Shale area was declining.
Omega, however, said in its court filings that McFadin mismanaged the company, including failing to pay nearly $800,000 in state and federal payroll taxes. The M&M Group lost approximately $2.3 million in the first three quarters of 2015 on revenue of $6.5 million, according to Omega.
“The claims of the creditors of M&M Environmental Group are well-detailed in the publicly filed complaints against Mr. McFadin,” Jason Martin, president of Omega, said in an email to Arkansas Business. “As a creditor of the company, Omega Capital intends to see those claims are established and a recovery made.”
He said the company doesn’t comment on pending litigation. M&M’s bankruptcy paused the lawsuit. It will be up to M&M’s trustee, Frederick “Tripp” Wetzel III of Little Rock, to decide whether to move forward with the case, and he didn’t return a call seeking comment.
Building a Business
McFadin said he worked on various oilfield service companies before he “basically figured out a way to start my own business.” With a $5,000 investment and a single power washer, he started M&M Environmental Oil Services in 2010.
The company offered services that included cleaning up the environmental footprint of drill rigs. “There’s a lot of different material created that needs to be disposed correctly, and that’s what we did,” McFadin said.
Revenue soared from $3.4 million in 2011 to $20.7 million in 2013, according to filings in the case. Through the first three quarters of 2014, revenue was $19 million. By the end of 2014, the company had more than 250 employees, an office in Damascus and two offices in Oklahoma.
“I got to the point to where we were getting so big that we were needing a new partner to take us to the next level,” McFadin said.
He was put in touch with Omega Capital in June 2014.
After conducting months of due diligence, Omega agreed in December to acquire a 60 percent interest in M&M Environmental Oil Services, McFadin said. McFadin would own the other 40 percent of the renamed company.
“We are excited to partner with Sam and the rest of the M&M Environmental team,” Martin, president of Omega Capital, said in a Jan. 14, 2015, news release announcing the acquisition. “In addition to expanding our oilfield services business, we plan to offer our suite of environmental services to the steel, coal, construction and waste management industries.”
McFadin stayed with the company as CEO at a contracted annual salary of $300,000 plus an annual bonus of $250,000.
It turned out to be a terrible time, though, to invest in the gas and oil industry, McFadin said in an affidavit filed in the case.
Gas prices were declining and gas production in the Fayetteville Shale area was weakening.
Following the sale on Dec. 12, 2014, “worldwide prices for natural gas continued this decline,” McFadin wrote.
On March 11, 2015, an M&M driver fell asleep and crashed on Highway 64 in Faulkner County. The driver was hauling waste material for M&M’s largest customer, Southwestern Energy Co. of Houston, the parent company of Seeco.
The accident caused an unknown amount of “drill cuttings” to be released.
Southwestern Energy, which represented about 75 percent of M&M’s revenue, abruptly ended its contract for environmental and trucking services and well completions as a result of the accident. M&M immediately laid off 200 employees.
McFadin told Arkansas Business in March 2015 that Southwestern told him the accident had caused too much “exposure” for the company. Omega said in its filings that it later learned that there had been other “historic safety issues” with Southwestern that McFadin failed to disclose.
M&M was left with about 50 employees between its offices in Arkansas and Oklahoma. McFadin said he planned for M&M to pursue other opportunities in commercial construction that the company had had to pass up when its employees were busy with the Southwestern contract.
McFadin added long-haul trucking to the company’s portfolio of services in the summer of 2015. “It was successful,” he told Arkansas Business. “It wasn’t what our partners wanted.”
Omega said in its court filings, though, that McFadin bought trucking equipment through one of his own companies and leased that equipment to the M&M Group “at above-market rates and in excess of” McFadin’s or his company’s costs.
The M&M Group’s financial condition continued to sour.
In October, “even though M&M Group was experiencing financial difficulties and Omega was infusing cash to finance M&M Group’s operations (such as to make payroll), Sam McFadin purported to enter M&M Group into an Aviation Lease … without notifying Omega or the other members of M&M Group’s Board of Directors,” M&M Group said in its filing.
On Oct. 26, the M&M Group fired McFadin, citing breach of fiduciary duty, violation of company policy, misuse and misappropriation of corporate assets.
McFadin told Arkansas Business the move to fire him was “disheartening.”
“I injected almost $1 million of my own personal capital back into the business,” McFadin said. “I broke my back for the company, and I bought assets to try to start a new business.
“And they thought they could do it better, and, honestly, from the moment they released me, it just bled dry,” he said.
When M&M sued McFadin on Oct. 28, he was no longer CEO but was still a member of the board of directors.
During board meetings in November, Martin, the Omega president, sounded the death knell.
Between Sept. 21 and Nov. 13, Omega Capital loaned the M&M Group $540,000 to cover payroll and other expenses, according to the Nov. 23 board minutes filed as a court exhibit.
McFadin told Arkansas Business that M&M no longer has any employees, but he’s not sure when the company laid off the 50 or so that remained at end of October.
Martin also told the board of the company’s “substantial negative cash flow, previously undisclosed accounts payable, assets misappropriated by the former CEO of the company, declining asset values and negative net worth,” the minutes said.
Martin said the only thing to do was to “wind the Company down in an orderly fashion.”
The problem for the Omega ownership group was that McFadin wouldn’t go along. Under the company’s operating agreement, the board needed a 75 percent vote to file for bankruptcy, and McFadin and his representative held 40 percent of the vote and wouldn’t approve it at a Nov. 25 meeting.
In a letter to Martin the same day, McFadin offered to buy out Omega’s 60 percent interest in the M&M Group.
“As we have discussed M&M has no net value at this time as an operating entity and should probably be placed in bankruptcy,” McFadin wrote. The letter didn’t suggest a purchase price.
The M&M Group and Omega took the offer as an attempted “hostile takeover” of M&M Group’s remaining operations and assets. Omega asked Judge Clawson to appoint a receiver, and Clawson chose attorney Charles T. Coleman of the Wright Lindsey & Jennings firm in Little Rock.
Coleman said in his Feb. 10 report to Clawson that the members of M&M “are at an impasse in making decisions as to how the business and assets of M&M should be managed or liquidated. This has resulted in serious problems related to the operation of the business and defense of the pending lawsuits.”
Coleman’s recommendation was to file Chapter 7 liquidation since the company didn’t have any employees or operations to reorganize under Chapter 11.
M&M Group “is hopelessly insolvent and unable to continue operations and that creditors have already started the ‘race to the courthouse’ to dismantle M&M piecemeal,” Coleman wrote.
On Feb. 12, M&M Environmental Group filed for Chapter 7 in U.S. District Bankruptcy Court in Little Rock, where the case is pending.