Baerg Real Prop. Trust v. Garland Solution, LLC (In re Baerg Real Prop. Trust)

• Decision Date: 30 March 2018
• Docket Number: Adversary No. 16–03160,Case No.: 16–33793–BJH–11
• Citation: 585 B.R. 373
• Parties: IN RE: BAERG REAL PROPERTY TRUST, Debtor. Baerg Real Property Trust, Plaintiff, v. Garland Solution, LLC, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Texas

585 B.R. 373

IN RE: BAERG REAL PROPERTY TRUST, Debtor.Baerg Real Property Trust, Plaintiff,

v.Garland Solution, LLC, Defendant.

Case No.: 16–33793–BJH–11

Adversary No. 16–03160

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Signed March 30, 2018

Joyce W. Lindauer, Joyce W. Lindauer Attorney, PLLC, Dallas, TX, for Plaintiff.

Donald Max Kaiser, Jr., Kaiser Sacco, P.L.L.C., Irving, TX, Ellen Cook Sacco, Kaiser Sacco, PLLC, Arlington, TX, for Defendant.

MEMORANDUM OPINION

(Findings of Fact and Conclusions of Law)

Robert L. Jones, United States Bankruptcy Judge

Commencing on September 25, 2017, and continuing on September 26–29, 2017, October 5–6, 2017, October 25–26, 2017, November 28, 2017, and December 1, 2017, the Court conducted a trial in the above-captioned adversary proceeding. Appearing at trial were counsel for Baerg Real Property Trust, counsel for Garland Solution, LLC, and other appearances as noted in the record. The Court has reviewed and considered the arguments of counsel, the parties' stipulations, the testimony of witnesses, the exhibits admitted into evidence at trial, and the documents and pleadings filed in connection with the adversary. Based upon the record, the Court now finds and concludes as follows, under Federal Rule of Civil Procedure 52, made applicable in the adversary by Federal Rule of Bankruptcy Procedure 7052.

I. Findings of Fact

Parties

1. Plaintiff and Debtor, Baerg Real Property Trust (the "Baerg Trust"), is a California trust; Defendant, Garland Solution, LLC ("Garland Solution"), is a Texas limited liability company. The trustees of Baerg Trust are Hal Baerg and Kathy Baerg. Garland Solution's investors include James Ferrante, Veronica Saldivar, Jacqueline Hughes, and Alan Kuatt.

The Earnest Money Contract

2. The Baerg Trust and Garland Solution entered into an Earnest Money Contract ("Contract") on February 28, 2014. Ex. 1. The Contract provided that the Baerg Trust would sell to Garland Solution four apartment complexes in Dallas County, Texas, two located in Irving (known as "The Woods" and "Oakway Manor") and two located in Garland ("Lakeview" and "Lake Bluff") (collectively, the "Properties"). The Baerg Trust, owner of the Properties, had been negotiating their possible sale to Garland Solution since 2011. By 2014, the Properties were in need of renovations and rehab work, particularly the two Garland complexes.

3. The purchase price under the Contract has four parts: (1) a cash portion of $1,616,577; (2) the payment of the outstanding principal and interest owed by Baerg Trust on the "Loans"—the existing mortgage loans on the apartments owed by the Baerg Trust to M & T Realty Capital Corporation ("M & T Realty"); (3) the satisfaction of the outstanding principal and interest owed by the Baerg Trust to Garland Solution on the "Draw Down Promissory Note" in an amount "up to" $898,500 that was issued on a construction loan made by Garland Solution to the Baerg Trust; and (4) payment of the "Settlement Amount" in the amount of $90,000, which amount was owed under a settlement agreement between the Baerg Trust and Garland Equity Fund, LLC that resolved a lawsuit then pending in the Superior Court of Los Angeles.

4. The mortgage with M & T Realty had a pre-payment penalty clause that, at the time of the Contract, would have been triggered by an outright sale of the Properties.¹ The parties therefore structured the transaction so that Garland Solution could immediately begin the needed rehab work on the Properties but then complete the acquisition of the Properties, with title passing, at a date past the trigger date. To help accommodate these goals, the Contract refers to, and is complemented by, three escrow agreements referred to as Escrow I, Escrow II, and Escrow III that were set-up to account for and manage the so-called escrow deposits from Garland Solution that were required by the Contract.

5. In addition to the escrow agreements, the transaction provided for the following additional instruments between the parties, as defined by the Contract: a Construction Contract, a Loan Agreement, a promissory note (the Draw Down Promissory Note referenced above), and a Purchase and Sale Agreement.

6. Under the Purchase and Sale Agreement, Garland Solution acquired a 1% beneficial interest in the Baerg Trust for the sum of $25,000 ("Trust Interest"). Ex. Z. The Trust Interest was memorialized in a Memorandum of Beneficial Interest filed in the Dallas County Property Records on April 25, 2014. Ex. 18. Under Section 5.D.(6) (Covenants) of the Purchase and Sale Agreement for the 1% Trust Interest, Hal and Kathy Baerg could not resign or refuse to serve as Trustees. Ex. Z.

7. Class A Management, LLC was the Escrow Agent under the Contract. Class A Management is managed and solely owned by Cathy Fontana. Cathy Fontana, on behalf of Class A Management, also signed the various agreements on February 28, 2014, including the Contract, the Construction Contract, the Loan Agreement, and the escrow agreements for Escrow I, Escrow II, and Escrow III.

8. The Baerg Trust agreed, by the Construction Contract, that Class A Management was its designated agent (and the contractor) with authority to perform on behalf of the Baerg Trust its obligations and responsibilities under the Construction Contract.

9. Class A Management was also responsible for managing the Properties, paying the bills, and allocating the net positive cash flow from the Properties.

10. The four Properties were cross-collateralized to secure the Loans with M & T Realty; the Loans matured with a balloon payment due on July 1, 2016.

11. Upon the parties signing the Contract, Garland Solution began, in accordance with the Contract, overseeing the operations of the Properties and funding for the rehab and improvements provided by the Contract (via the Construction Contract and Loan Agreement).

12. The Contract was later amended with such amendment stated to be effective on February 28, 2014. Ex. 42. The amendment provides that if Garland Solution defaulted, the Baerg Trust, as seller, could choose the appropriate remedy, at its sole discretion, including termination of the Contract. Id. Under the Contract, as amended, if the Baerg Trust properly terminates the Contract, the outstanding principal balance and unpaid interest owed on the Draw Down Promissory Note is forgiven. Id. And the balances in the Escrow I and Escrow II accounts are refunded to the Baerg Trust. Id.

13. To further facilitate the deal, in February 2014, Garland Solution and the Baerg Trust entered into a $100,000 working capital promissory note whereby Garland Solution made a loan to fund four bank accounts for each of the four Properties from which the then-outstanding payables were to be paid. Ex. X. The Properties' vendor debts were included on an exhibit to the Contract provided by Class A Management. Ex. 6.

14. The $100,000 unsecured promissory note was signed by the Baerg Trust as Maker on February 28, 2014. Ex. X. The interest rate on the note was 10% per annum and provides that it is due the earlier of July 1, 2016, or on the date of closing of the sale by the Baerg Trust to Garland Solution. Id. It provides that if closing occurs under the terms of the Contract, "then this Note shall be paid in full by Maker to Payee on the date of the Closing as a credit allocated by Payee on the closing statement(s) towards Payee's payment to Maker of the purchase price for one or more of the four (4) apartment complexes." Id.15. The Contract and the other documents for the deal were prepared by Jim Ash, counsel for Garland Solution.

16. The Baerg Trust, by Hal Baerg, elected not to employ counsel to advise and assist it in negotiating and preparing the Contract. Hal Baerg is a sophisticated businessman who is experienced in commercial real estate deals. He had worked with lawyers before and was aware of the importance of having counsel.

Closing Date under the Contract

17. Paragraph 5 of the Contract defines the closing date as follows: "Closing shall occur on or before thirty (30) days after the end of the Inspection Period ...." Ex. V at 8.

18. The Inspection Period "means the period commencing on the Effective Date and ending on the date Purchaser notifies Seller that all of Purchaser's Closing Conditions have been satisfied or waived." Id. at 3. The date of the Contract, February 28, 2014, is the defined Effective Date. Id. at 1. The Purchaser's Closing Conditions provide that closing is conditioned upon, as relevant here, the occurrence of the maturity date of the Loans, with the Loans being the outstanding Loans on the Properties with M & T Realty. Id. ¶ 14.C. The maturity date on the Loans was July 1, 2016.

19. The Inspection Period ended on the maturity date of the M & T Realty Loans, July 1, 2016; the outside date to close, therefore, was "on or before" thirty days after July 1, 2016.

Garland Solution's Efforts to Close

(a) The Greystone Commitments

20. In the late spring 2016, Jim Ferrante, for Garland Solution, contracted with a loan broker to assist Garland Solution in obtaining permanent financing for closing the deal per the Contract.

21. The broker arranged for potential financing through Greystone Commercial Lending ("Greystone"). Ferrante, for Garland Solution, completed loan applications with Greystone.

22. Greystone issued three loan commitments for "Fannie Mae" loans and also indicated that it would approve a "bridge" loan for the Lake Bluff complex. Fannie Mae, the Federal National Mortgage Association, would acquire the loans for, presumably, ultimate securitization. And the three Fannie Mae loans, if approved, would be serviced through Greystone, as Greystone is a "DUS," a Delegated Underwriting and Servicing Lender, with Fannie Mae.

23. In particular, the loan commitments were issued by Greystone on June 22, 2016, and June 24, 2016, for three of the four properties. Ex. 217. The commitments reflected loan amounts sufficient for closing of the sale under the...