A Pulaski County Circuit Court judge ruled in April that Thomas Chapin must pay his former business partner more than $1 million, setting off a string of court losses that included a ruling that Chapin’s bankruptcy was filed to delay his jury trial.
Judge Herbert Wright also judicially expelled Chapin, of Pulaski County, membership in the Little Rock real estate investment LLCs he had owned with Matthew Lamb.
In 2021, the Arkansas Legislature repealed the state’s statute involving LLCs and replaced it with the Uniform Limited Liability Company Act. Under the new LLC act, LLC members can be judicially expelled. Chapin’s judicial expulsion marks one of the first rulings under the 2021 act.
Lamb and Chapin were each 50% owners of Central Arkansas House Buyers LLC and CAHB Operating LLC. The LLCs were in the business of buying and rehabilitating homes in central Arkansas. The companies then either leased or sold the homes. Between 2018 and 2022, CAHB acquired about 250 investment properties.
Around May 2022, the partners wanted to split, and soon accusations of wrongdoing started flying.
Lamb filed a lawsuit against Chapin in 2022 with allegations that included breaches of fiduciary duty, fraud, conversion and civil conspiracy.
Chapin denied those allegations and filed a counterclaim accusing Lamb of breach of fiduciary duty, conversion and violation of the Arkansas Trade Secrets Act.
As the case moved toward a trial, Lamb asked Wright to rule on the conversion claim and on Lamb’s request to have Chapin judicially expelled as a member of the LLCs before the case went to trial.
Lamb accused Chapin of transferring more than $1 million from the bank accounts of their LLCs into accounts that were controlled by Chapin and that Lamb could not access.
Lamb alleged that Chapin was working behind his back to start a company that would also be involved in the business of buying, rehabilitating and selling homes in central Arkansas.
Wright found in his April order that by transferring money from CAHB to Chapin’s other company, “Chapin breached his obligations” under CAHB’s operating agreement.
Wright ordered a $1.1 million judgment against Chapin.
The order also said that Chapin had engaged in conduct that warranted “judicial expulsion” as a member of both LLCs. That means Chapin will receive distributions, when the other members order it, but not much else, said Carol Goforth, a professor at the University of Arkansas School of Law. (See sidebar)
After Wright’s order, a jury trial on the other allegations and counterclaim was set to begin on Sept. 4. But the day before the trial, Chapin filed for Chapter 11 bankruptcy reorganization. He also filed Chapter 11 for his related companies, Ultra Holdings LLC, Ultra Properties PM LLC and Chapin Team LLC.
Chapin’s bankruptcy filing prevented the jury trial from moving forward.
Delay Alleged
Lamb, however, filed an objection to the bankruptcy case, saying it was a tactic to stall the jury trial.
Lamb said in the bankruptcy filing that on Aug. 20 the Chapin defendants “took the bold step of filing a motion for recusal” of Judge Wright. Chapin alleged that Wright failed to rule in a timely manner on various motions and that he was biased in favor of Lamb, Lamb’s filing said.
Wright denied the motion to recuse.
Chapin denied any wrongdoing in filing for bankruptcy protection on the day before the trial.
Instead, the bankruptcies for reorganization were filed in a “good faith effort to preserve and protect their assets,” Chapin’s filing said.
But U.S. Bankruptcy Judge Richard Taylor disagreed.
On Nov. 4, Taylor dismissed Chapin and his LLCs from bankruptcy court for cause, which included bad faith.
“There is no question but that the filings were designed to avoid the pending jury trial and done on the eve of that trial,” Taylor said during a hearing on Nov. 4.
Chapin and his three companies were barred from filing another bankruptcy case for 180 days starting Nov. 4.
Chapin’s attorney, Mark Hodge of the Barber Law Firm of Little Rock, told Arkansas Business last week that his firm’s policy is not to comment on pending litigation.
In addition to the upcoming jury trial scheduled for late February for the case involving Lamb, Chapin has appealed several of Wright’s decisions to the Arkansas Court of Appeals.
Meanwhile, since Chapin’s judicial expulsion from CAHB, Lamb “has worked directly with the court appointed receiver to protect the interests of CAHB while the litigation is ongoing,” an attorney for Lamb, Dylan Potts of Gill Ragon Owen of Little Rock, said in an email to Arkansas Business last week.
Lamb also is managing his real estate investment company, REI Realty of Little Rock.
“We look forward to continuing our prosecution of Defendant Chapin at the February trial, and will vigorously defend Mr. Lamb against the baseless claims asserted against him,” Potts wrote.
Potts said his advice to members of an LLC to avoid a similar situation is to “allow your attorney to organize the limited liability company including drafting of the operating agreement.”
No Agreement Reached
Chapin and Lamb worked together at the real estate company Standard Listing in Little Rock, where they discussed buying houses. In 2018, they formed Central Arkansas House Buyers.
Chapin said in his court filings that when the company was created, Chapin had lent the LLC money and borrowed money from his family and friends.
Chapin said in the filing that they agreed that they would pay the private lenders an annual interest rate of at least 10%.
CAHB’s business took off. By the spring of 2022, CAHB had about $10.7 million in note receivables and $1.7 million in rental or other investment properties, according to Lamb’s filing.
Also around that time, CAHB had more than $10 million in liabilities that required monthly payments.
But problems started in 2022.
“Despite the companies’ success — or perhaps because of it — in April 2022, Chapin began transferring funds from the bank accounts of CAHB and CAHB Operating without Lamb’s knowledge or consent to bank accounts held by” Ultra Holdings LLC and Ultra Properties PM, which Chapin has a 50% ownership interest in, according to a filing by Lamb’s attorneys.
“In many cases, Chapin’s transfer of the funds reduced the CAHB and CAHB Operating bank accounts to $0.00,” the bankruptcy filing said. “Chapin then used the funds to purchase several properties in the name of Ultra Holdings.”
Lamb said he didn’t know about the transfers at the time.
Lamb said in filings that Chapin and his LLCs “perpetuated throughout this case — that the CAHB funds converted by Chapin were used to repay CAHB private lenders.”
But Lamb said that wasn’t the case and the money wasn’t used for that.
“Chapin and I never reached an agreement regarding the future of CAHB or the use or division of its funds and/or assets,” Lamb said in affidavit signed Oct. 16, 2023.
He said he filed the lawsuit on July 15, 2022, after some of the alleged misconduct came to light.
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