DeFlora Lake Dev. Assocs., Inc. v. Hyde Park (In re DeFlora Lake Dev. Assocs., Inc.)
| Decision Date | 19 July 2017 |
| Docket Number | Case No. 17–35318 (CGM),Adv. No. 17–09006 (CGM) |
| Citation | 571 B.R. 587 |
| Parties | IN RE: DEFLORA LAKE DEVELOPMENT ASSOCIATES, INC., Debtor DeFlora Lake Development Associates, Inc., Plaintiff, v. Hyde Park, a Wisconsin Limited Partnership, and Lewis D. Wrobel, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Elizabeth A. Haas, Esq., PLLC, 254 S. Main Street, Suite 302, New City, NY 10956, Counsel for Debtor/Plaintiff, By: Elizabeth A. Haas
Benowich Law, LLP, 1025 Westchester Avenue, White Plains, NY 10604, Counsel for Creditor Hyde Park, LP, By: Leonard Benowich
United States Trustee, 74 Chapel Street, Albany, NY 12207, By: Alicia M. Leonhard
The Debtor–Plaintiff here, DeFlora Lake Development Associates, Incorporated ("Debtor"), filed the instant complaint initiating this adversary proceeding against Defendant Hyde Park, LP's ("Hyde Park") and Lewis D. Wrobel, as Escrow Agent only, seeking a determination that certain escrow funds are property of the bankruptcy estate and turnover of property of the bankruptcy estate pursuant to 11 U.S.C. §§ 541 and 543, a declaratory judgment determining whether Hyde Park has an allowable claim for attorneys' fees, and the nature, extent and validity of Hyde Park's claims against the bankruptcy estate. Am. Compl. ¶¶ 1, 40, 41, ECF No. 8.1 Now pending before the Court is Hyde Park's motion to dismiss the complaint for lack of subject matter jurisdiction, on grounds of res judicata and judicial estoppel. Mot. Dismiss 1–3, ECF No. 12. For the reasons stated below, and upon the record of the hearing held on July 18, 2017, Hyde Park's motion to dismiss is DENIED.
Debtor filed a petition for reorganization under chapter 11 of the Bankruptcy Code on March 2, 2017. See Petition, In re DeFlora Lake Dev. Assocs. , No. 17–35318 (Bankr. S.D.N.Y. Mar. 2, 2017). Debtor is a real estate holding company. Local Bankr. Rule 1007–2 Aff. ¶ 3, In re DeFlora Lake Dev. Assocs. , No. 17–35318. There are two shareholders of the Debtor. Id. ¶ 9. At the time of the filing of the petition, the Debtor had no employees and generated no regular income. Id. ¶¶ 14–15.
The Debtor filed for chapter 11 in order to obtain the benefits of the automatic stay and to recover property for the benefit of the estate that is currently being held in a special escrow account held by Mr. Wrobel as deed escrow agent. Id. ¶ 4; Opp'n to Mot. Dismiss 3–4, ECF No. 14–5. The Debtor's primary asset is a parcel of real estate located in Dutchess, and the monies in the special escrow fund, which are subject to the competing claims of Hyde Park and the subject of this adversary proceeding. See Local Bankr. Rule 1007–2 Aff. ¶ 11, In re DeFlora Lake Dev. Assocs. , No. 17–35318.
Debtor's predecessor, Ceasar DeFlora, and Hyde Park entered into a purchase agreement for the sale of land in 1980 ("the Land Contract"). Pursuant to the Land Contract, Hyde Park was to purchase 480 acres of land from the Debtor's predecessor, subdivided into several lots of land. Am. Compl. ¶ 9. At this time a sale price was established, and Debtor's predecessor agreed to extend the maturity date of the Land Contract upon Hyde Park's execution of a $250,000 note. Opp'n to Mot. Dismiss 2.
The Land Contract was amended several times. In a fifth amendment ("Fifth Amendment") to the Land Contract, executed in December of 1995, the parties agreed that Hyde Park owed Debtor $8,404,989.43 under the Land Contract and that Hyde Park would satisfy this debt solely from the proceeds of the management of the property and from the sale of parcels of the property. Id. ¶ 10; Mot. Dismiss 3. In the Fifth Amendment, the parties agreed that the obligation would be nonrecourse. Am. Compl. ¶ 13; Mot. Dismiss 3. The Fifth Amendment also provided that in satisfaction of Hyde Park's debt, the first $1,800,000 in sales' proceeds from the property would go to the Debtor. Am. Compl. ¶ 14; Mot. Dismiss 3. After the amount of proceeds reached $1,800,000, any additional revenue was to be equally divided between Hyde Park and the Debtor until the entire debt was repaid. Am. Compl. ¶ 14; Mot. Dismiss 3.
In 1999, Debtor informed Hyde Park that Debtor intended to sell three parcels of land for $900,000. Am. Compl. ¶ 16; Mot. Dismiss 3–4 (quoting DeFlora Lake Dev. Assocs. v. Hyde Park , No. 08–cv–8155, slip op. at 3–4 (S.D.N.Y. Mar. 30, 2011). Hyde Park objected on the grounds the sale price was too low. Am. Compl. ¶ 16; Mot. Dismiss 3–4 (quoting DeFlora Lake Dev. Assocs. v. Hyde Park , No. 08–cv–8155, slip op. at 3–4 (S.D.N.Y. Mar. 30, 2011). Hyde Park allowed the sale to go through on the condition that the Debtor deposit $207,116 in escrow with Mr. Wrobel as Escrow Agent. See Opp'n to Mot. Dismiss Ex. 2, ECF No. 14–2. Mr. Wrobel deposited the funds into two separate accounts, one for Hyde Park and one for the Debtor, each with separate tax I.D. numbers. Am. Compl. ¶ 23; Mot. Dismiss 4. The funds have remained in escrow with Mr. Wrobel since that time. See Am. Compl. ¶¶ 21–24. There was no written escrow agreement, only a collection of four letters from Hyde Park, the Debtor, and Mr. Wrobel confirming receipt of the funds and advising that he would be depositing the funds into two separate escrow accounts. See Am. Compl. ¶ 24; Opp'n to Mot. Dismiss Ex. 2.
In 2008, Debtor filed suit in the District Court for the Southern District of New York ("District Court"), claiming Hyde Park had breached the Fifth Amendment to the Land Contract and seeking a declaration that Debtor was entitled to the special escrow funds. Am. Compl. ¶ 25; DeFlora Lake Dev. Assocs., Inc., v. Hyde Park , No. 08–cv–8155 (S.D.N.Y. filed Sept. 22, 2008) ("DeFlora I"). The District Court found that both the Debtor and Hyde Park's breach of contract claims to the special escrow funds were time barred by the New York statute of limitations. Id. ¶ 26; Mot. Dismiss Ex. 2 at 7–8. The District Court ruled that the alleged breach of contract had occurred in 1999 when Debtor deposited the $207,116 into escrow with Mr. Wrobel, which occurred over six years before either Debtor or Hyde Park brought suit in the District Court. Id.
In 2013, Debtor brought a second suit in the District Court seeking essentially the same relief.
DeFlora Lake Dev. Assocs., Inc., v. Hyde Park , 13–cv–04811 (S.D.N.Y. filed July 11, 2013) ("DeFlora II"). Am. Compl. ¶ 27. In DeFlora II, Debtor alleged a different breach of contract claim against Hyde Park based on new facts. Mot. Dismiss Ex. 4 at 8:5–6, ECF No. 12–5. In 2012, Debtor alleged that it attempted to sell the final parcel of land subject to the Land Contract, and that Hyde Park had refused to release the parcel in violation of Debtor's right to do so under the Land Contract. Id. at 8:7–9:3. Debtor argued a new breach of contract theory based on the escrow letters sent to Mr. Wrobel. Mot. Dismiss at Ex. 5 at 7:19–8:7, ECF No. 12–6. The Debtor alleged the escrow letters evidenced an intent by the parties to settle the dispute over the escrow funds after the last parcel of land was sold. Id. at 8:3–20. On a motion to dismiss by Hyde Park, the District Court dismissed Debtor's new breach of contract theory, finding that the escrow letters did not provide a plausible basis to conclude the parties intended to settle the dispute over the fair market value of the parcels sold in 1999 after the sale of the last parcel. Id. at 22:22–24:8. In the alternative, the Court ruled that Debtor would also have been estopped from making this arguments based on DeFlora I. Id. at 24:9–14.
While the District Court dismissed the breach of contract claim, the District Court also specifically found that with respect to the special escrow funds, Id. at 23:10–12. The District Court also indicated that the parties retained the power to negotiate and agree on the disposition of the escrow funds. Otherwise, the funds were at risk of escheating to the state. See Mot. Dismiss Ex. 4 at 27. Hyde Park sought, and was awarded, attorneys' fees as the prevailing party. Am. Compl. ¶¶ 29–30.
After the District Court dismissed the DeFlora II action, Hyde Park sought an order enforcing the award of attorneys' fees, and turnover of the Debtor's interest in the special escrow funds to satisfy the fee award pursuant to New York Civil Practice Law and Rules § 5225 and § 5227. Mot. Dismiss Ex. 10 at 3, 11, ECF No. 12–11. The District Court granted Hyde Park's motion as to the attorneys' fees, and denied the motion for a turnover order. Id. at 5, 11–12. The District Court held that the attorneys' fees were to be paid by the Debtor "now" and not to be credited against Hyde Park's debt to the Debtor under the Land Contract as a non-recourse debt. Id. at 5. The District Court denied Hyde Park's motion for turnover on the grounds that Debtor did not have a "claim" to the escrow funds. See id. at 11–12. The Debtor appealed the District Court's determination that the non-recourse nature of the Land Contract prohibited a setoff of attorneys' fees against the special escrow fund. Hyde Park appealed the denial of that part of the motion seeking turnover of the special escrow funds. In separate summary orders, the Second Circuit affirmed the District Court's rulings on both issues. See Deflora Lake Dev. Assocs. v. Hyde Park , Nos. 15–2653–cv, 16–3436–cv, 689 Fed.Appx. 99, 2017 WL 1735245, 2017 U.S. App. LEXIS 7814 (2d Cir. May 3, 2017) ; DeFlora Lake Dev. Assocs. v. Park , No. 16-2214-cv, 689 Fed.Appx. 93, 2017 WL 1732045, 2017 U.S. App. LEXIS 7823 (2d Cir. May 3, 2017). In rejecting Hyde Park's arguments that it should be entitled to turnover of the fee award, the Second Circuit specifically held that neither parties' respective interests in the escrow funds had been determined. See DeFlora , 689 Fed.Appx. at 94–95, 2017...
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