Callahan v. Roanoke Cnty. (In re Townside Constr., Inc.)

• Decision Date: 14 March 2018
• Docket Number: Case Nos. 16–70629,16–70639
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Virginia
• Parties: IN RE: TOWNSIDE CONSTRUCTION, INC., Debtor. William E. Callahan, Jr., Trustee, and Pinnacle Bank, Successor to Valley Bank, Movants, v. Roanoke County, Virginia, Cundiff Heating & Air, Inc., and Townside Construction, Inc., Respondents. In re: Landmark Properties, Inc., Debtor. William E. Callahan, Jr., Trustee, and Pinnacle Bank, Successor to Valley Bank, Movants, v. Landmark Properties, Inc., Respondent.

582 B.R. 407

IN RE: TOWNSIDE CONSTRUCTION, INC., Debtor.

William E. Callahan, Jr., Trustee, and Pinnacle Bank, Successor to Valley Bank, Movants,

v.Roanoke County, Virginia, Cundiff Heating & Air, Inc., and Townside Construction, Inc., Respondents.

In re: Landmark Properties, Inc., Debtor.

William E. Callahan, Jr., Trustee, and Pinnacle Bank, Successor to Valley Bank, Movants,

v.Landmark Properties, Inc., Respondent.

Case Nos. 16–70629

16–70639

United States Bankruptcy Court, W.D. Virginia, Roanoke Division.

Signed March 14, 2018

Andrew S. Goldstein, Magee Goldstein Lasky & Sayers, P.C., Roanoke, VA, for Debtor.

MEMORANDUM OPINION

Paul M. Black, UNITED STATES BANKRUPTCY JUDGE

The matter before the Court is the Joint Motion for Authority to Compromise and Settle a Dispute and to Sell Certain Property of the Estate (the "Motion").¹ The Motion was filed by William E. Callahan, Jr., Trustee in each of the above referenced bankruptcy cases (the "Trustee"); Pinnacle Bank ("Pinnacle"), successor to Bank of North Carolina ("BNC") and to Valley Bank; and Moss & Rocovich, Attorneys-at-Law, P.C. (the "Foreclosure Trustee"). The Trustee, Pinnacle, and the Foreclosure Trustee are collectively referred to herein as the "Movants."

FACTUAL AND PROCEDURAL BACKGROUND

The pertinent facts in the case are largely undisputed.² Townside Construction, Inc. ("Townside") filed a voluntary petition for relief in this Court under Chapter 11 of the Bankruptcy Code on May 6, 2016 as Case No. 16–70629. Landmark Properties, Inc. ("Landmark") filed a separate voluntary petition for relief in this Court under Chapter 11 of the Bankruptcy Code on May 9, 2016 as Case No. 16–70639. The Court converted both Debtors' cases to cases under Chapter 7 of the Bankruptcy Code by Order entered May 19, 2017.³ William E. Callahan, Jr. was duly appointed Chapter 7 Trustee for both the Townside Case and the Landmark Case. Jerry W. Grubb, Sr. is the sole disclosed equity owner of Landmark. Landmark, ECF No. 18. Jerry W. Grubb, Jr. owns 50% of Townside and Jerry W. Grubb, Sr. owns the other 50%. Townside, ECF No. 18. Townside and Landmark are collectively referred to as the "Debtors."

Pinnacle is and has been at all relevant times a creditor of the Debtors. The Debtors were owners and developers of certain real property in the City of Roanoke and the County of Roanoke. Townside is indebted to Pinnacle as evidenced by the following promissory notes: (1) a note dated September 24, 2004, as modified or amended, in the original principal amount of $850,000.00 ("Note 1"), (2) a note dated September 24, 2004, as modified or amended, in the original principal amount of $900,000.00 ("Note 2"), and (3) a note dated December 21, 2012, as modified or amended, in the original principal amount of $1,250,000.00 ("Note 3"). As alleged in Pinnacle's Motion for Relief, the unpaid balances on the notes as of May 6, 2016 were as follows: $898,443.95 on Note 1, $704,204.16 on Note 2, and $621,651.88 on Note 3.

To secure repayment of obligations evidenced by the notes, Townside and Landmark pledged certain real property pursuant to deeds of trust as follows: (1) a Credit Line Deed of Trust dated September 24, 2004 in the maximum principal amount of $4,000,000.00 granted by Townside and Landmark on 124.37 acres, Cherokee Hills West, in Roanoke County, Virginia, (2) a Credit Line Deed of Trust dated September 24, 2004 in the maximum principal amount of $600,000.00 granted by Townside on 711 5^th Street, in the City of Roanoke, Virginia, and (3) a Credit Line Deed of Trust dated April 26, 2006 in the maximum principal amount of $600,000.00 granted by Townside and Landmark on 104.17 acres, Cherokee Hills West, in Roanoke County, Virginia. The April 26, 2006 Deed of Trust was supplemented on November 11, 2009, adding Lot 27, Section 4, Cherokee Hills, Roanoke County, Virginia. The September 24, 2004 Deed of Trust was supplemented November 11, 2009 by adding the same Lot 27, Section 4, and the September 24, 2004 Deed of Trust was further supplemented on November 12, 2010, adding Lot 3, a 0.268 acre parcel in the City of Roanoke. Stipulation, ¶ 5 and ECF documents referenced therein. As alleged in the Motion for Relief, the total indebtedness owed to Pinnacle from Townside as evidenced by the various notes as of May 6, 2016 was $2,224,299.99, plus interest and fees as provided in the notes. Stipulation, ¶ 7. The Deeds of Trust also secure certain bonds and/or letters of credit issued by Pinnacle for ongoing construction obligations of Townside and Landmark as required by the County of Roanoke. The amounts outstanding on the bonding exposures were, according to the Roanoke County Attorney, $47,791.57 and $283,155.00 respectively as of June 3, 2016. Townside, ECF No. 28–3.

Townside and Landmark each agreed to consent to relief from stay as to Pinnacle if they could not obtain confirmation of a Chapter 11 plan by March 20, 2017. On March 20, 2017, the Court denied final approval of the Debtors' disclosure statements which terminated their reorganization efforts. Pinnacle obtained relief from stay that day. The Trustee filed a report of no distribution in Landmark's case on June 19, 2017, and, given that the Debtor is not an individual, the case was closed without discharge on July 20, 2017. Landmark, ECF Nos. 89, 90. On June 12, 2017, the Trustee filed a request for an asset notice in the Townside case, and an asset notice was mailed to creditors with a bar date for filing claims.

Pinnacle thereafter moved to foreclose much, but not all, of the Debtors' remaining real property pledged as collateral to the Bank. Foreclosure sales were conducted on February 9, 2017 and May 23, 2017 (the "Foreclosure Sales").⁴ The only real estate owned by Townside which has not been subjected to a completed foreclosure is Lot 49, Section 4, Cherokee Hills ("Lot 49"). Lot 49 is an unbuildable parcel which contains certain drainage facilities necessary for further development of the Cherokee Hills subdivision. The high bidder on two separate parcels at the February 9, 2017 Foreclosure Sale was Pinnacle.⁵ The high bidder on five parcels (the "Five Reynolds Tracts") and five lots (the "Cherokee Hills Lots") included in the May 23, 2017 Foreclosure Sale was Pinnacle as well. The high bidder on an acreage tract (the "Acreage Tract") included in the May 23, 2017 Foreclosure Sale was R. Fralin Companies, Inc., which assigned its rights in the property to RFC2017 Land, LLC. The latter tract sold at foreclosure for $432,000.00.

Neither Townside nor Landmark listed the indebtednesses due to Pinnacle, then BNC, in their schedules as contingent, liquidated, or disputed. Further, neither Townside nor Landmark filed any schedules in either case disclosing any causes of action against Pinnacle or its predecessors in interest as a property interest. No amended schedules to that effect have been filed either.

I. The First State Court Lawsuit

Without the participation of the Trustee, the Debtors filed a state court lawsuit against Pinnacle and the Foreclosure Trustee on or about July 31, 2017, in the Circuit Court for the County of Roanoke, Virginia (the "First Lawsuit"). On August 1, 2017, in conjunction with the filing of the First Lawsuit, the Debtors' counsel in the state court litigation filed a Memorandum of Lis Pendens in the Clerk's Office of the Circuit Court for the County of Roanoke. Pinnacle removed the First Lawsuit to this Court on August 22, 2017. Townside, ECF No. 131.

The First Lawsuit dealt solely with the then pending foreclosure of Lot 49. The Debtors alleged that the proposed foreclosure sale should not go forward because the sale was not properly advertised, the notice of the sale was not properly mailed to the plaintiffs, and that the Foreclosure Trustee did not fulfill its duties to the parties pursuant to the relevant deeds of trust. The sale did not go forward, having been cancelled by either the Foreclosure Trustee or the Bank. Instead, since the Landmark case was closed on July 20, 2017, Pinnacle moved to re-open the case, and on October 18, 2017 the Trustee, Pinnacle and the Foreclosure Trustee moved for the entry of a settlement agreement in connection with Lot 49.

The terms of the proposed settlement are summarized as follows: (1) Pinnacle will pay $29,500.00 to the Trustee after the entry of a final and non-appealable order approving the settlement. In exchange for the settlement funds, (1) the Trustee will convey Lot 49 by Special Warranty Deed and the Declarant Rights in the Cherokee Hills development by Special Warranty Bill of Sale to Pinnacle or its designee. (2) The Trustee will execute a "mutual general release" of Pinnacle, the Foreclosure Trustee, and their respective related entities by which the Trustee will release the released parties from all claims against them, whether asserted or not, by Townside and Landmark and further confirm that the Debtors' respective estates retain no lien, claim, interest, right, or ownership in any of the real property foreclosed pursuant to the Foreclosure Sales. (3) At settlement, the Trustee, on behalf of the Debtors' estates, and their respective officers, directors, successors, assigns, affiliates, agents, heirs, and legal representatives, will release Pinnacle and the Foreclosure Trustee along with their respective officers, directors, agents, and others from any and all claims, demands, causes of actions, whether known or unknown, and "accruing from the beginning of time through the date of the entry of the Approval Order." Townside, ECF No. 137. The release is intended to include, but not be limited to, any and all matters pertaining to Lot 49, but also to any of the Foreclosure Sales and any matters asserted in the First Lawsuit. Id.

II. The Second State Court Lawsuit

Prior to the hearing on the Motion, on or about November 17, 2017, the Debtors filed a second state court lawsuit against Pinnacle, the Foreclosure Trustee, Robert Fralin ("Fralin"), and RFC2017...