In re Tamarack Dev. Assocs., LLC

• Decision Date: 29 January 2020
• Docket Number: Case No. BT 16-06117
• Parties: IN RE: TAMARACK DEVELOPMENT ASSOCIATES, LLC, Debtor.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Michigan

611 B.R. 286

IN RE: TAMARACK DEVELOPMENT ASSOCIATES, LLC, Debtor.

Case No. BT 16-06117

United States Bankruptcy Court, W.D. Michigan.

Signed January 29, 2020

Thomas R. Morris, Esq., Farmington Hills, Michigan, attorney for Movant, Richard C. Hermann.

Brace Kern, Esq., Traverse City, Michigan, attorney for Respondent Creditors, Tim and Tonya Cook, Arthur and Jacolyn Breithaupt, Edgar and Janet Boettcher, Steven and Susan Fournier, Gary and Diane Money, Michael Radosa, David MacIntosh, and David Steffey.

OPINION DENYING MOTION TO ENFORCE AUTOMATIC STAY

James W. Boyd, United States Bankruptcy Judge

I. INTRODUCTION AND JURISDICTION.

In this contested matter, Richard C. Hermann ("R.C. Hermann") asserts that Tim and Tonya Cook, Arthur and Jacolyn Breithaupt, Edgar and Janet Boettcher, Steven and Susan Fournier, Gary and Diane Money, Michael Radosa, David MacIntosh, and David Steffey (collectively, the "Respondent Creditors"), along with their attorney, violated the automatic stay by commencing and pursuing two state court lawsuits during the pendency of the bankruptcy case of Tamarack Development Associates, LLC ("Tamarack" or the "Debtor"). The lawsuits, in which R.C. Hermann is one of several named defendants, assert that Mr. Hermann breached the Debtor's operating agreement, oppressed the Respondent Creditors, and tortiously interfered with their contractual relations while serving as the President and Manager of the Debtor. R.C. Hermann argues that many of the allegations in the state court complaint assert derivative claims that became property of the Debtor's estate upon the filing of its bankruptcy case. He asks this court to determine that the Respondent Creditors have violated the automatic stay by pursuing these claims, find the Respondent Creditors in contempt of court, and order them to dismiss all but a handful of delineated allegations in the state court complaints. His current motion does not seek damages for the alleged stay violation under § 362(k) of the Bankruptcy Code¹ but reserves his right to do so in the future.

The Respondent Creditors argue that the causes of action asserted in the state court lawsuits are direct claims, seeking redress for damages done to the Respondent Creditors as shareholders of the Debtor LLC. As such, they argue that their claims are separate and distinct from claims that may be asserted by the Debtor itself or by the Trustee on the Debtor's behalf. The Respondent Creditors contend that the bringing of direct claims for shareholder oppression and other breaches does not constitute an attempt to exercise control over causes of action that are property of the bankruptcy estate in violation of the automatic stay. They also dispute R.C. Hermann's standing to argue otherwise.

The court has jurisdiction over this bankruptcy case. 28 U.S.C. § 1334. The bankruptcy case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a) ; LGenR 3.1(a) (W.D. Mich.). This contested matter is a statutory core proceeding and the court has authority to enter a final order. 28 U.S.C. § 157(b)(2)(A) and (O) ; see In re Nat'l Century Fin. Enters., Inc. , 423 F.3d 567, 573-74 (6th Cir. 2005) (motions to enforce the automatic stay constitute core proceedings).

II. FACTUAL AND PROCEDURAL BACKGROUND.

A. General Background and the Bankruptcy

Filing. ²

Tamarack Development Associates, LLC, was formed by Richard C. Hermann in 2005 to develop and operate a condominium and hotel known as the Tamarack Lodge on East Grand Traverse Bay in Traverse City, Michigan. R.C. Hermann is the sole Class B shareholder of Tamarack and has served as its Manager since its inception. When Tamarack was initially established or shortly thereafter, Hermann solicited investments from approximately twenty individuals or entities who became the LLC's Class A shareholders. In exchange for their investment, and under the terms of the Tamarack Operating Agreement, the Class A members were promised a "Priority Income Return" of twenty-five percent annual, non-compounded yield and a "Priority Return of Capital" such that no other debt, other than Tamarack's construction loan, could be paid before return of the Class A members' investment plus yield. R.C. Hermann personally guaranteed payment of the priority income returns within thirty-six months in a separate Guaranty Agreement dated July 14, 2005.

Construction of the Tamarack Lodge was completed in July of 2006, and sales of fractional condominium units initially went well. However, sales declined over the next couple of years. By December of 2008, Hermann informed the Class A members that the Debtor was "underwater" on its loans and in need of more capital. Many of the Class A members, particularly the individual investors from the Traverse City area, declined to invest more money. As a result, they allege that Hermann sought investments from other sources and improperly amended the Debtor's Operating Agreement to establish two new classes of investors, Class AA and Class AAA. According to the Traverse City Class A members, many of the investors included in the new classes had connections to R.C. Hermann. For instance, Class AA consisted of a group of investors from the Chicago area, who were also Class A members and were controlled by, related to, or brought in to the project through Hermann's attorney, Donald J. Russ, Jr. Another Class AA and AAA member, Comodore Homes, LLC, was owned by Hermann's sister, Jean Hermann.

On October 31, 2014, two Traverse City Class A members, Tonya Cook and David Steffey (referred to herein as the "Judgment Creditors"), filed a lawsuit against Tamarack and Hermann individually in the Grand Traverse County Circuit Court. Among other things, the Judgment Creditors asserted that creation of the Class AA and AAA interests and the failure to provide the priority income returns promised to the Class A investors constituted a breach of the Operating Agreement by both Tamarack and Hermann. The Judgment Creditors also asserted that Hermann had breached his separate, personal guaranty that they would receive payment of the "priority returns" within thirty-six months of the date of their investment. The Judgment Creditors prevailed on both these claims in arbitration,³ but a judgment was entered only against Tamarack and not against Hermann personally. Tamarack appealed entry of the judgment against it; the Judgment Creditors appealed the trial court's failure to enter a judgment against Hermann.⁴

This bankruptcy case began shortly thereafter, with the filing of an involuntary chapter 11 petition against Tamarack on December 6, 2016.⁵ (Dkt. No. 1.) The Debtor did not contest the involuntary petition, and an order for relief was entered on January 4, 2017. (Dkt. Nos. 8 & 10.)

Although the Debtor and the Petitioning Creditors believed that the bankruptcy filing was necessary and appropriate, the Judgment Creditors disagreed. On January 20, 2017, they moved to dismiss the chapter 11 case, arguing that the bankruptcy filing was "legal gymnastics" meant to stay the appeal of the prepetition judgment and further the subordination of the Class A interests. (Dkt. No. 33.) The court referred the Motion to Dismiss to its Alternative Dispute Resolution program but attempts to mediate the issues were not successful. Ultimately, the Judgment Creditors withdrew the Motion to Dismiss and consented to conversion of the bankruptcy case from chapter 11 to chapter 7. (Dkt. No. 121.) An order converting the case was entered on October 17, 2017. (Dkt. No. 123.) Kelly M. Hagan was appointed as the Chapter 7 Trustee.

B. Postpetition State Court Litigation.

On December 13, 2017, the Judgment Creditors, joined by several other Class A Members of the Debtor,⁶ filed a lawsuit (the "2017 lawsuit") against Mr. Hermann and a number of other defendants⁷ in the Grand Traverse County Circuit Court. (See Complaint and Demand for Initiation of Arbitration, Case No. 2017-32396-CK, Dkt. No. 225 at Exh. 4.) The 2017 complaint alleges Hermann conspired with the other State Court Defendants to take various actions which were aimed at prioritizing their own "investments, voting strength, returns and likelihood of distributions" while simultaneously "diluting" the Class A rights and voting power and interfering with the priority return of capital that had been promised to the Respondent Creditors. (See 2017 Complaint, at ¶¶ 9, 12 & 13.) Based on these general allegations, the 2017 complaint asserted three legal causes of action: (1) breach of the Tamarack Development Associates, LLC operating agreement; (2) willfully unfair and oppressive conduct toward the Class A Members under the Michigan Limited Liability Company Act, Mich. Comp. Laws, § 450.4515 ; and (3) tortious interference with contractual relations. The state court entered an order dismissing the breach of operating agreement and tortious interference claims against R.C. Hermann on June 21, 2018.⁸ The other claims were dismissed by entry of various orders, the last of which was entered on December 6, 2018. The Respondent Creditors appealed the dismissal, seeking to restore all of their claims against R.C. Hermann and the other defendants.

On August 29, 2018, the Respondent Creditors filed a second lawsuit (the "2018 lawsuit") against Mr. Hermann and the other State Court Defendants in the Grand Traverse County Circuit Court. (See Complaint, Case No. 2018-34575-CK, Dkt. No. 225 at Exh. 4; Amended Complaint, Dkt. No. 287.) The 2018 complaint includes many of the same factual allegations as the 2017 complaint but asserts only one legal cause of action for willfully unfair and oppressive conduct under the Michigan LLC Act., Mich. Comp. Laws § 450.4515. On March 24, 2019, the state court entered an order compelling arbitration of the claim against R.C. Hermann and two other defendants but declining to order arbitration of the claim against the other defendants. The Respondent Creditors appealed the arbitration...