Daughtrey v. Rivera (In re Daughtrey)

Citation896 F.3d 1255
Decision Date24 July 2018
Docket NumberNo. 15-14544,15-14544
Parties IN RE: Cecil DAUGHTREY, Jr., Patricia A. Daughtrey, Debtors. Cecil Daughtrey, Jr., Patricia A. Daughtrey, Plaintiffs-Appellants, v. Luis E. Rivera, II, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (11th Circuit)

Paul DeCailly, DeCailly, PA, INDIAN SHORES, FL, for Plaintiffs-Appellants.

Lara Roeske Fernandez, Trenam Law, TAMPA, FL, Marie Tomassi, Trenam Kemker, SAINT PETERSBURG, FL, for Defendant-Appellee.

Before TJOFLAT, ROSENBAUM and SENTELLE,* Circuit Judges.

TJOFLAT, Circuit Judge:

In this case, Cecil and Patricia Daughtrey filed a Chapter 7 bankruptcy petition for the sole purpose of preventing the sale of their property in a public auction to be held pursuant to a state court judgment that foreclosed the mortgage on the property. After the public auction was automatically stayed under 11 U.S.C. § 362(a), the trustee of the bankruptcy estate and the judgment creditor, 72 Partners, LLC, entered into a compromise agreement that would grant 72 Partners all of the property except for a portion the Daughtreys would retain as their homestead. The Daughtreys objected to the compromise agreement and moved the Bankruptcy Court to convert their Chapter 7 case to a Chapter 11 proceeding on the representation that the property (with the exception of the homestead) could be sold for a sum substantially in excess of the judgment. The Court, concluding that the Daughtreys could not qualify as Chapter 11 debtors, denied their motion and approved the compromise agreement.

Before us now is the Daughtreys’ appeal of the District Court’s affirmance of the Bankruptcy Court’s decisions denying the motion to convert the case and approving the compromise agreement. We find no merit in their appeal, and accordingly affirm.

I.

The Daughtreys ("Debtors") employed in succession seven law firms in their mortgage foreclosure case and three firms in the bankruptcy proceeding. The litigation has been protracted and contentious. That said, we begin our discussion with the entry of the final judgment in the mortgage foreclosure case and the filing of Debtors’ Chapter 7 petition. From there, we follow the strategies Debtors’ lawyers took to thwart 72 Partners("Creditor") effort to obtain satisfaction of its judgment.

A.

The property consists of 2,500 acres of real estate in Sarasota County, Florida (the "Property"), most of which Mr. Daughtrey inherited from his father.1 This acreage is used mainly to grow sod and for cattle grazing. On June 8, 2010, Debtors obtained a two-year loan for $2,371,840 from BSLF Holdings, LLC, and secured it with a mortgage on the Property. The mortgage note carried an interest rate of 13.5% per annum payable quarterly. It was a "balloon mortgage," in that the principal, $2,371,840 (plus any unpaid interest), was due at maturity.

Debtors made the first interest payment on September 8, 2010, in the sum of $80,049. After they failed to make the payments due on December 8, 2010 and March 8, 2011, BSLF declared the loan in default and on May 25, 2011 brought suit in the Sarasota County Circuit Court to foreclose the mortgage.2 On July 20, 2011, while the case was pending, BSLF assigned the note and mortgage to Creditor.

On May 16, 2013, the Circuit Court entered an order scheduling the case for trial on October 14, 2013.3 When court convened for the trial that day, Debtors failed to appear.4 The trial therefore proceeded without them,5 and the Court, based on Creditor’s submission, entered a final judgment of foreclosure in the sum of $4,267,436.6 The judgment provided that if Debtors failed to satisfy the judgment, the Property would be sold at a public auction held on November 18, 2013.

On October 24, 2013, Debtors moved the Circuit Court to set aside the judgment of foreclosure and for a new trial.7 Two weeks later, on November 7, in an effort to stay the public auction and proceeding without counsel, they petitioned the Bankruptcy Court for relief under Chapter 7 of the Bankruptcy Code.8 Under 11 U.S.C. § 362(a), the filing of the petition operated automatically to stay the public auction scheduled for November 18. Debtors disclosed their assets, income and expenses, and creditors’ claims in the following schedules appended to their petition. Schedule A—Real Property listed the Property as an asset, describing it as "Residential/Commercial," representing that it had a value of $70 million, and claiming that it was subject to a homestead exemption under the Florida Constitution.9

Schedule B—Personal Property listed the following assets and their current values10 : "Gilberti Water Company & LandTech Design Engineering Group—Florida," $5.125 million; "Water and Mineral rights on property," $50 million; and "Sarasota Case with RICO counterclaim ... for predatory loan to steal Water rights," $15 million.11 Schedule D—Creditors Holding Secured Claims listed Creditor with a claim of $4,267,436, which was "[i]nvalid" because the judgment on which it was itself based was a "predatory loan";12 and Gilberti Water Company, with a claim of $10,250,000.13 Schedules E—Creditors Holding Unsecured Priority Claim, and F—Creditors Holding Unsecured Nonpriority Claims, both listed Creditor with a claim of $4,267,436.14

Schedule G—Executory Contracts and Unexpired Leases listed a contract with "LandTech Design Group, Inc," for "Consultanting, [sic] Planning and Civil Engineering permits for Water Supply and Development projects." Schedule I—Current Income of Individual Debtor(s) estimated Debtors’ monthly income to be: "Debtor" $2,000, "Spouse" $200. Schedule J—Current Expenditures of Individual Debtor(s), estimated Debtors’ average monthly expenses to be $2,200, excluding taxes and insurance premiums.

The Bankruptcy Court appointed Luis E. Rivera trustee of the bankruptcy estate (the "Trustee"). Meanwhile, on November 12, Creditor moved the Court to lift the § 362(a) stay pursuant to 11 U.S.C. § 362(d).15 The Court granted the motion on December 9, 2013.16 The next day, an attorney, David Lampley, filed a notice of appearance as Debtors’ counsel.

The Trustee scheduled an 11 U.S.C. § 341 meeting of creditors for December 12, 2013.17 Neither Debtors nor their attorney appeared, so the Trustee rescheduled the meeting for January 8, 2014. Again, Debtors and their attorney failed to appear, and the meeting was rescheduled for February 19, 2014.

Meanwhile, on January 10, 2014, the Circuit Court denied Debtors’ October 24 motion to set aside the judgment of foreclosure and for a new trial and scheduled the public auction for March 11, 2014.18 On February 7, 2014, Eric A. Lanigan noted his appearance as Debtors’ counsel in the foreclosure action and filed a notice of appeal to challenge the Circuit Court’s judgment of October 14 and its ruling of January 10 in the Florida District Court of Appeal, Second District ("2DCA").19

On February 20 Debtors, accompanied by their bankruptcy lawyer, Mr. Lampley, appeared at the meeting of creditors and were examined. During the course of the meeting, it became apparent that the Property was worth nothing close to Debtors’ $70 million valuation, but might have some value in excess of the judgment Creditor held. After consulting a real estate agent, the Trustee had reason to believe that the Property had a value in the range of $6 to $12 million. The Trustee, through counsel, therefore moved the Bankruptcy Court to reconsider its December 9, 2013 order granting Creditor relief from the § 362(a) stay.

The Bankruptcy Court heard the motion at a hearing held on March 3.20 At the conclusion of the hearing, the Court granted the motion and reinstated the stay.21

The Court also scheduled an evidentiary hearing for April 16 for the purpose of determining the value of the Property and, thus, whether the bankruptcy estate had any equity in the Property. On March 5, Mr. Lampley moved the Court for leave to withdraw as Debtors’ counsel.22

On April 1, the Trustee objected to Debtors’ assertion that the Property, in its entirety, was subject to a homestead exemption, contending that the Florida Constitution, Article X, § 4 (a)(1), limited their exemption to 160 acres. Debtors did not respond to the objection, and the Court sustained it, limiting the homestead exemption to 160 acres.

On April 8, the Bankruptcy Court granted Mr. Lampley’s motion for leave to withdraw as Debtors’ counsel. Three days later, the Court continued the April 16 valuation hearing to June 2, 2014, to enable the Trustee to determine whether the estate would have to pay a significant capital gains tax—due to Debtors’ negligible tax basis in the Property because it had been inherited—if the Property were to be sold for a price substantially in excess of Creditor’s claim. After consulting multiple real estate brokers, the Trustee found that the Property’s value was not in the $6 to $12 million range. The relatively lower valuation was due to the Property’s location, which was far from a significant highway, and the extended period of time that would be needed to sell it. He also found that the capital gains tax consequences to the estate made a sale of the Property impracticable. He therefore engaged Creditor in negotiations over a possible tax-free disposition of the Property via a compromise settlement.

On May 29, 2014, the Trustee filed a "Motion and Notice of Compromise of Controversy" with Creditor.23 In light of this development, the Court cancelled the June 2 hearing and, on June 11, rescheduled the hearing for July 24, 2014. The terms of the compromise, according to the motion, provided that Debtors would retain 160 acres of the Property as their homestead upon Creditor’s release of its judgment lien on that acreage. The Trustee would (1) agree to the Court’s entry of an order lifting the stay so that Creditor could complete the foreclosure via a public auction, (2) give Creditor a quitclaim deed to the remaining 2,340 acres of the Property,24 and (3) release Debtors’ right to appeal the October 14, 2013...

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