886 F.3d 473 (5th Cir. 2018), 17-50893, In re UTSA Apartments 8, L.L.C

Docket Nº:17-50893
Citation:886 F.3d 473, 65 Bankr.Ct.Dec. 132
Opinion Judge:EDWARD C. PRADO, Circuit Judge:
Party Name:In the MATTER OF: UTSA APARTMENTS 8, L.L.C. Debtor UTSA Apartments, L.L.C.; Woodlark UTSA Apartments, L.L.C., Appellants v. UTSA Apartments 8, L.L.C.; UTSA Apartments 5, L.L.C.; UTSA Apartments 9, L.L.C.; UTSA Apartments 12, L.L.C.; UTSA Apartments 13, L.L.C.; UTSA Apartments 19, L.L.C.; UTSA Apartments 23, L.L.C.; UTSA Apartments 24, L.L.C.; U...
Attorney:Stephen W. Sather, Barron & Newburger, P.C., Austin, TX, for Appellants. Sara S. Murray, David S. Gragg, Langley & Banack, Incorporated, Eric B. Terry, San Antonio, TX, for Appellees.
Judge Panel:Before HIGGINBOTHAM, PRADO, and HIGGINSON, Circuit Judges.
Case Date:March 27, 2018
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
SUMMARY

In this consolidated appeal stemming from the bankruptcy of nineteen companies that were tenants-in-common of a student housing development called the Reserve, the Fifth Circuit reversed in part and affirmed in part the bankruptcy court's judgment. The court reversed the bankruptcy court's reduction of UTSA's share of net proceeds from 21.17% to 3.14%, based on serious procedural deficiencies,... (see full summary)

 
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Page 473

886 F.3d 473 (5th Cir. 2018)

65 Bankr.Ct.Dec. 132

In the MATTER OF: UTSA APARTMENTS 8, L.L.C. Debtor UTSA Apartments, L.L.C.; Woodlark UTSA Apartments, L.L.C., Appellants

v.

UTSA Apartments 8, L.L.C.; UTSA Apartments 5, L.L.C.; UTSA Apartments 9, L.L.C.; UTSA Apartments 12, L.L.C.; UTSA Apartments 13, L.L.C.; UTSA Apartments 19, L.L.C.; UTSA Apartments 23, L.L.C.; UTSA Apartments 24, L.L.C.; UTSA Apartments 25, L.L.C.; UTSA Apartments 27, L.L.C.; UTSA Apartments 28, L.L.C.; UTSA Apartments 30, L.L.C.; UTSA Apartments 34, L.L.C.; UTSA Apartments 1, L.L.C.; UTSA Apartments 4, L.L.C.; UTSA Apartments 6, L.L.C.; UTSA Apartments 15, L.L.C.; UTSA Apartments 16, L.L.C.; UTSA Apartments 18, L.L.C., Appellees UTSA Apartments, L.L.C.; Woodlark UTSA Apartments, L.L.C., Appellants

v.

UTSA Apartments 8, L.L.C.; UTSA Apartments 5, L.L.C.; UTSA Apartments 9, L.L.C.; UTSA Apartments 12, L.L.C.; UTSA Apartments 13, L.L.C.; UTSA Apartments 19, L.L.C.; UTSA Apartments 23, L.L.C.; UTSA Apartments 24, L.L.C.; UTSA Apartments 25, L.L.C.; UTSA Apartments 27, L.L.C.; UTSA Apartments 28, L.L.C.; UTSA Apartments 30, L.L.C.; UTSA Apartments 34, L.L.C., Appellees UTSA Apartments, L.L.C.; Woodlark UTSA Apartments, L.L.C., Appellants

v.

UTSA Apartments 8, L.L.C.; UTSA Apartments 5, L.L.C.; UTSA Apartments 9, L.L.C.; UTSA Apartments 12, L.L.C.; UTSA Apartments 13, L.L.C.; UTSA Apartments 19, L.L.C.; UTSA Apartments 23, L.L.C.; UTSA Apartments 24, L.L.C.; UTSA Apartments 25, L.L.C.; UTSA Apartments 27, L.L.C.; UTSA Apartments 28, L.L.C.; UTSA Apartments 30, L.L.C.; UTSA Apartments 34, L.L.C., Appellees

No. 17-50893

United States Court of Appeals, Fifth Circuit

March 27, 2018

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Appeal from the United States District Court for the Western District of Texas, Samuel Fred Biery, Jr., Chief Judge

Stephen W. Sather, Barron & Newburger, P.C., Austin, TX, for Appellants.

Sara S. Murray, David S. Gragg, Langley & Banack, Incorporated, Eric B. Terry, San Antonio, TX, for Appellees.

Before HIGGINBOTHAM, PRADO, and HIGGINSON, Circuit Judges.

OPINION

EDWARD C. PRADO, Circuit Judge:

This is a consolidated appeal stemming from the bankruptcy of nineteen companies that were tenants-in-common of a student housing development in San Antonio, Texas, called The Reserve. Appellants are Woodlark UTSA Apartments, LLC (" Woodlark" ), who was The Reserve’s asset and property manager, and a related entity, UTSA Apartments, LLC (" UTSA" ),1 which also owned an interest in The Reserve. This Court is asked to address the propriety of two rulings by the bankruptcy court concerning: (1) UTSA’s share of net proceeds stemming from the sale of The Reserve to a third party during the bankruptcy proceedings, and (2) Woodlark’s proof of claims against the bankruptcy estate. Appellants raise several issues involving the Bankruptcy Code and Texas fiduciary law. For the following reasons, we REVERSE the bankruptcy court’s reduction of UTSA’s share of net proceeds, but AFFIRM the bankruptcy court’s reduction of Woodlark’s proof of claims.

I. BACKGROUND

A. The Parties

Appellees are nineteen Delaware limited liability companies (" Debtor TICs" )2 that— with Appellant UTSA and other limited liability companies that are not parties to this appeal (" Non-Debtor TICs" )— owned undivided tenancy-in-common interests (" TICs" ) in The Reserve, an off-campus student housing project in San Antonio, Texas (the " Property" ). Appellant Woodlark was the Property’s asset manager. In addition, Woodlark was the Property’s property manager, except for the period from February 2012 to April 2015.3 Woodlark and UTSA are separate LLCs,

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but they are commonly owned by Harold Rosenblum through Woodlark Capital, LLC.

B. The Reserve Project and Governing Documents

In 2008, the TICs (the Debtor TICs, Non-Debtor TICs, and UTSA) purchased undivided tenancy-in-common interests in the Property for approximately $45 million. The Property was governed by three agreements: (1) the Declaration of Tenants in Common Agreement (the " Declaration" ), (2) the Asset Management Agreement (the " AMA" ), and (3) the Declaration of Call Agreement (the " Call Agreement" ). While Woodlark, the Debtor TICs, and Non-Debtor TICs, signed and executed all three agreements, UTSA only signed and executed the Declaration and AMA. Despite being listed as a party to the Call Agreement, UTSA did not sign the Call Agreement.

In conjunction with the AMA, the Declaration made Woodlark, as asset manager, " the agent of the [TICs] with respect to overseeing and supervising the management, operation, maintenance and leasing of the Property, and for purposes of interfacing with the Lender." The Declaration also permitted Woodlark to " employ a Third Party Property Manager," as its agent " pursuant to the [AMA], to manage, operate, maintain and lease the Property."

Additionally, in the Declaration, each of the TICs agreed to be responsible for paying their pro rata share of " Property Expenses" 4 to be determined by Woodlark as asset manager. The Declaration provided a process for Woodlark to notify TICs that payment of pro rata expenses was due through payment requests, also known as cash calls. If payment was not made in response to a cash call as specified in the Declaration, " the other Tenants in Common and [Woodlark] [had] the right to purchase the Delinquent Tenant in Common’s interest in the Property in accordance with the terms of the Call Agreement."

The Call Agreement governed the terms under which the Delinquent Tenant in Common’s interest in the Property could be purchased through " Call Rights," which could " be exercised only by the Asset Manager [Woodlark]." Once exercised, however, the other TICs (the non-delinquent and non-dissenting TICs) had the option of purchasing a portion of the delinquent or dissenting TIC’s interest " on a pro rata basis according to their Interests" after providing the required notice. Any interest of the defaulting or dissenting TIC not purchased by the other TICs could " be purchased by the Asset Manager [Woodlark]."

C. Turmoil at The Reserve

As both Appellants and Appellees concede, Woodlark and the TICs had a very contentious and adversarial relationship. After informing the TICs of the Property’s deteriorating financial performance on December 3, 2014, Woodlark sent the first of three requests for funds, or cash calls, to the TICs on December 15, 2014, pursuant to the terms of the Declaration. Woodlark made a second cash call on February 4, 2015, and a third cash call on July 15, 2015. Only two of the TICs, UTSA and TIC11, responded to all three cash calls.

On September 22, 2015, Woodlark sent the TICs another request for funds within

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two business days pursuant to paragraph 4.2(b) of the Declaration. In this cash call, Woodlark sought payment for both the projected cash shortfall and delinquent funds. One week later, on September 29, 2015, Woodlark informed the non-paying TICs that their " failure to pay [their] corresponding pro-rata share of deficit in expenses" in response to the July and September cash calls had rendered them " Defaulting" TICs, also known as " Selling" TICs. Further, Woodlark stated that it was exercising its " Call Rights" pursuant to the Call Agreement and that it intended to purchase the TICs’ ownership interests in the Property. As prescribed by the Call Agreement, any non-defaulting TIC that also intended to purchase the Defaulting TICs’ interests was given 30 days to notify Woodlark of its intention to purchase the Defaulting TICs’ interests.

Only UTSA provided written notice of its intent to purchase the interests of the Defaulting TICs. On November 4, 2015, Woodlark notified the TICs that only UTSA had provided notice of intent to purchase the Defaulting TICs interests and that UTSA had " opted to purchase the entire interests in default" (the " November 4th Letter" ). Pursuant to the Call Agreements provisions for determining the value of selling interests, Woodlark computed that the value of each of the Defaulting TICs interests was " less than zero" with a deficiency owed to Woodlark. Furthermore, Woodlark stated that " [t]he fair market value of the Property ... based on an appraisal performed a few days ago by a prospective capital partner" was $28.1 million (the " CBRE Appraisal" ). Given this appraisal, the outstanding loan balance, the Propertys payables balance, and the total amount of loans/advances provided by Woodlark, Woodlark maintained that no further payment was due to the Defaulting TICs for their ownership interests. Woodlark stated that the closing would take place on November 20, 2015. If the Selling TICs refused to execute the deed transferring ownership, Woodlark made clear that it would exercise the Call Agreements "...

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