Ernest v. Harris

• Decision Date: 10 September 2010
• Docket Number: Adversary No. 09-3054.,Bankruptcy No. 09-31182 JPS.
• Citation: 436 B.R. 744
• Parties: In the Matter of James Delmar DUNN, III, Jackie Boyer Dunn, Debtors. Ernest V. Harris, Trustee, Plaintiff v. Panda K. Nelson, Jeffrey L. Nelson, Summit Asset Group, Inc., and Water Oak Properties, LLC, Defendants.
• Court: U.S. Bankruptcy Court — Middle District of Georgia

436 B.R. 744

In the Matter of James Delmar DUNN, III, Jackie Boyer Dunn, Debtors.Ernest V. Harris, Trustee, Plaintiff

v.Panda K. Nelson, Jeffrey L. Nelson, Summit Asset Group, Inc., and Water Oak Properties, LLC, Defendants.

Bankruptcy No. 09-31182 JPS.

Adversary No. 09-3054.

United States Bankruptcy Court,M.D. Georgia,Athens Division.

Sept. 10, 2010.

Ernest V. Harris, Harris & Liken, L.L.P., Athens, GA, for Chapter 7 Trustee.

Christopher D. Phillips, Lamberth, Cifelli, Stokes, Ellis & Nason, P.A., Atlanta, GA, for Defendants Panda Nelson and Jeffrey Nelson.

MEMORANDUM OPINION

JAMES P. SMITH, Bankruptcy Judge.

This matter arises from the Chapter 7 trustee's complaint in which he asks the Court to determine the interests of Debtors' estates in certain proceeds from the prepetition sale of real property. The proceeds are currently held in “escrow” pursuant to agreements signed by the parties who owned the property at the time of the sale. The case was tried on June 24, 2010. ¹ This opinion constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7052.

BACKGROUND

Ernest V. Harris, Trustee, is the Chapter 7 trustee of Debtors' estates. At the trial, Debtor James Delmar Dunn, III (“Mr. Dunn”) testified for Trustee. Frank A. Lightmas, Jr. (“Mr. Lightmas”), who was counsel for Defendants Panda K. Nelson and Jeffrey L. Nelson (the “Nelsons”) in connection with their pre-petition transactions with Debtors, testified for the Nelsons. Except for the purpose of the escrows, the facts are not in dispute.

The Nelsons and Summit Asset Group, Inc. (“Summit”) ² jointly owned real property at 3651 Mars Hills Road, Watkinsville, Georgia (the “Mars Hill Property”). Summit owned a 75% interest and the Nelsons each owned a 12 1/2 percent interest in the property. Each of the Debtors owned a 25 percent interest in Summit, with the remaining 50 percent interest in Summit being owned by Hank Bailey and Mrs. Bailey.

In addition, Water Oak Properties, LLC (“Water Oak”) (in which Mr. Bailey and Mr. Nelson had ownership interests) ³ owned a 75 percent interest and Mr. Dunn owned a 25 percent interest in a condominium in Hilton Head, South Carolina (the “Hilton Head Property”).

The Nelsons and Mr. Bailey also jointly owned another condominium in Hilton Head, South Carolina, and a lake house in South Carolina (collectively the “Other Properties”). Debtors had no interest in the Other Properties.

In the fall of 2006, the Nelsons contacted Mr. Lightmas regarding concerns they had with the accounting of revenues from some of this real property. As time went by, Mr. Lightmas learned that the Nelsons had purchased insurance products from Mr. Bailey and Debtors. Upon investigation, he concluded that Mr. Bailey and Debtors had engaged in alleged fraud in the sale of these products to the Nelsons. Mr. Lightmas further concluded that the Nelsons had significant damages claims against Mr. Bailey and Debtors arising out of these insurance product sales.

In April 2007, Summit and the Nelsons sold the Mars Hills Property. Pursuant to an “ESCROW AGREEMENT” signed by Mr. Dunn (on behalf of Summit) and the Nelsons, proceeds from the sale totaling $43,317.65 were placed in escrow with Calloway Title and Escrow, LLC (“Calloway”). ⁴

Thereafter, in September 2007, Water Oak and Mr. Dunn sold the Hilton Head Property. Pursuant to an “ESCROW AGREEMENT” signed by Mr. Bailey and Mr. Nelson (on behalf of Water Oak), Mrs. Nelson and Mr. Dunn, proceeds from the sale totaling $71,763.44 were placed in escrow with Calloway.

In 2008, the Nelsons, represented by Mr. Lightmas, brought suit against Mr. Bailey, Debtors and various insurance companies in the Superior Court of Fulton County, Georgia (Civil Action File No.2008CV152648) in which they sought to recover damages for alleged fraud, negligent misrepresentation, breach of fiduciary duty, negligence and breach of contract by Mr. Bailey and Debtors in connection with the sale of the insurance products.

Paragraph 4 of each of the escrow agreements, which were substantially identical, provides:

Upon written notification from the Parties that they have agreed as to the disbursement of the above Escrow Funds or upon receipt of a court order instructing Escrow Agent to disburse the above Escrow Funds, Escrow Agent shall deliver to the appropriate parties the appropriate amounts as disclosed by said written notification or said court order.

Except for this paragraph, the agreements are silent as to the terms, conditions or basis upon which the parties were to reach an agreement as to the disbursement of the funds and provide no other direction to the escrow agent regarding disbursement. Not surprisingly, Trustee and the Nelsons disagree as to the meaning and intent of paragraph 4 of the agreements, the conditions upon which the funds were to be disbursed and whether Debtors' interests in the funds are property of the estate.

Trustee contends that the agreements are not true “escrow” agreements because there was no meeting of the minds with respect to the intent of paragraph 4 of the agreements and because the escrow agreements do not specify the beneficiaries who are to receive the funds. Thus, he contends that Debtors' interests in these funds are property of the estate.

The Nelsons, on the other hand, contend that the sales proceeds were placed in escrow in order to provide a fund against which they could recover from Debtors their damages arising out of the insurance products sales. Accordingly, they contend that the funds in escrow are not property of Debtors' estates.

DISCUSSION

Trustee contends that the interests of Debtors' estates in the funds being held in escrow are property of the estate. Trustee, as plaintiff, has the burden of proof on his claim. Schaffer v. Weast, 546 U.S. 49, 56, 126 S.Ct. 528, 534, 163 L.Ed.2d 387 (2005). The preponderance of evidence standard applies to this proceeding. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

In Dzikowski v. NASD Regulation, Inc. (In re Scanlon), ⁵ the Eleventh Circuit Court of Appeals held:

A debtor's estate in bankruptcy consists of all legal and equitable interests of the debtor in property as of the commencement of the case. The extent and validity of the debtor's interest in property is a question of state law.

239 F.3d at 1197. (citations and internal quotation marks omitted). Applying Florida law, the court explained:

[L]egal title to property placed in an escrow account remains with the grantor until the occurrence of the condition specified in the escrow agreement. Nonetheless, funds that are deposited into an escrow account by a debtor, for the benefit of others, cannot be characterized as property of the estate.

239 F.3d at 1197-98. (citations and internal quotation marks omitted). Florida and Georgia law are identical on the subject of title to funds that are placed in escrow. Georgia Heritage Associates, LP v. Westfields Apartments, LLC ( In re Westfields Apartments, LLC ), 2010 WL 2179622, at *5, n. 6 (Bankr.S.D.Ga., April 27, 2010).

Trustee and the Nelsons disagree as to the enforceability and interpretation of the escrow agreements. In Giddens Construction Co. v. Fickling & Walker Co., ⁶ the court held

‘The cardinal rule of construction [of a contract] is to ascertain the intention of the parties,’ O.C.G.A. § 13-2-3, and ‘[e]scrow agreements will be given a reasonable construction in order to carry out the manifest intentions of the parties,’ 11 EGL, Escrows § 6.

373 S.E.2d at 794. “The intention of the parties may differ among themselves. In such case, the meaning placed on the contract by one party and known to be thus understood by the other party at the time shall be held as the true meaning.” O.C.G.A. § 13-2-4. However, where both sides to a contract have different intentions with respect to an essential term of the contract, no valid and binding contract is created. Tekin v. Whiddon, 233 Ga.App. 645, 504 S.E.2d 722, 725 (1998).

‘A meeting of the minds is the first requirement of the law relative to contracts.’ (Citation and punctuation omitted). Simmons v. McBride, 228 Ga.App. at 753, 492 S.E.2d 738. See OCGA § 13-3-2. ‘(I)f there was in fact an essential part of the contract upon which the minds of the parties had not met, or upon which there was not an agreement it must follow than a valid and binding contract was not made.’ (Citations and punctuation omitted). BellSouth Advertising, etc., Corp. v. McCollum, 209 Ga.App. 441, 445(2) 433 S.E.2d 437 (1993).

504 S.E.2d at 725. See also, Camp v. Peetluk, 262 Ga.App. 345, 585 S.E.2d 704 (2003), cert. denied.

Trustee contends that the escrow agreements are not enforceable because the agreements are silent as to the beneficiaries of the escrows. However, “[i]f only a part of a contract is reduced to writing ... and it is manifest that the writing was not intended to speak the whole contract, then parol evidence is admissible”. O.C.G.A. § 13-2-2(1). Thus, the identity of the beneficiaries could be proved by parol evidence. However, unless the Court finds that the parties had a meeting of the minds with respect to the intent of paragraph 4 of the agreements, the disagreement regarding the beneficiaries of the escrows will be moot.

In explaining his understanding of the escrow agreements, Mr. Dunn testified that he and Mr. Bailey were represented by the law firm of Bird, Loechl, Brittain & McCants (“Bird & Loechl”) in the sale of the Mars Hills Property and the Hilton Head Property. Mr. Dunn testified that, in connection with the closing on the sale of the Mars Hills Property, he was contacted by an attorney at Bird & Loechl and advised that the Nelsons wanted the sale proceeds placed in escrow until a proper accounting of the parties' interests could be conducted to ensure that everyone received their proper amount of the proceeds. Having no objection, Mr. Dunn agreed to the escrow.

With...