Fiddler's Creek, LLC v. Pepi Capital, L.P. (In re Fiddler's Creek, LLC)

• Decision Date: 10 May 2017
• Docket Number: Case No. 8:10-bk-03846-KRM,Adv. No. 8:11-ap-0809-KRM
• Citation: Fiddler's Creek, LLC v. Pepi Capital, L.P. (In re Fiddler's Creek, LLC), Adv. No. 8:11-ap-0809-KRM, Case No. 8:10-bk-03846-KRM (Bankr. M.D. Fla. May 10, 2017)
• Parties: In re FIDDLER'S CREEK, LLC, ET AL., Debtors. FIDDLER'S CREEK, LLC, ET AL., Plaintiffs/Counter-Defendants, v. PEPI CAPITAL, L.P., Defendant/Counter-Plaintiff and Third-Party Plaintiff.
• Court: U.S. Bankruptcy Court — Middle District of Florida

In re FIDDLER'S CREEK, LLC, ET AL., Debtors.

FIDDLER'S CREEK, LLC, ET AL., Plaintiffs/Counter-Defendants, v. PEPI CAPITAL, L.P., Defendant/Counter-Plaintiff and Third-Party Plaintiff.

Case No. 8:10-bk-03846-KRM

Adv. No. 8:11-ap-0809-KRM

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF FLORIDA TAMPA DIVISION

May 10, 2017

Chapter 11

MEMORANDUM OPINION ON CROSS MOTIONS FOR SUMMARY JUDGMENT (DOC. NOS. 84, 106 AND 113)

The issue before the Court, on cross motions for summary judgment, is whether it was the lender, PEPI Capital, L.P. ("PEPI"), or the borrowers, Fiddler's Creek, LLC, and its 27 subsidiaries (collectively, the "Debtors"), who defaulted under a pre-Chapter 11 loan commitment. Debtors obtained the written commitment in January 2010 (the "Commitment Letter") to be able to fund operations in the Chapter 11 cases that they later filed, on February 23, 2010. Debtors paid PEPI one-half ($405,000) of the commitment fee and $550,000 for PEPI's legal expenses. The parties began negotiating the terms of the final loan documents. Some three and a half weeks later - after at least five drafts of the loan documents were prepared by PEPI, and with the time for the bankruptcy filings approaching - the loan documents were not in conformity with the Commitment Letter.

The Debtors' owner, Aubrey Ferrao,¹ then decided to fund post-petition operations himself and, four days later, Debtors sent a letter (the "Default Letter") alleging multiple defaults by PEPI and demanding return of the $405,000. The next day, February 23, 2010, Debtors filed 28 Chapter 11 petitions; the day after that, they filed an emergency motion to approve a $25 million post-petition credit facility from Gulf Bay Capital, Inc. ("Gulf Bay"), a company owned by Mr. Ferrao.

PEPI filed a $1.4 million claim in the Chapter 11 cases, which Debtors are obligated to pay in full if it is allowed.² The claim is based on this provision of the Commitment Letter:

"All indemnities and obligations of the [Debtors] shall survive the terminationof this Commitment Letter or the commitment of PEPI hereunder, provided however, such indemnities and obligations shall not survive in the event of a default by PEPI hereunder."³

Relying on the same provision, and alleging that PEPI defaulted, Debtors filed this adversary proceeding objecting to PEPI's bankruptcy claim and seeking recovery of all pre-petition payments.

The Court has under consideration Debtors' Motion for Partial Summary Judgment on Counts I and II of the Complaint,⁴ as well as Debtors' Supplement thereto, PEPI's Response, and Debtors' Reply.⁵ The Court also has under consideration PEPI's Motion for Partial Summary Judgment and Debtors' Response.⁶ The Court has considered the submitted exhibits, the affidavit of Jeffrey Fine, PEPI's lead counsel, the deposition testimony of other witnesses, the cases cited, and the arguments advanced by counsel.

For the reasons stated below, the Court concludes that PEPI did breach its obligations under the Commitment Letter because, with knowledge of the Debtors' imminent need to file Chapter 11 petitions, PEPI (1) repeatedly declined to incorporate certain lien enforcement restrictions into the loan documents, as required by the Commitment Letter, and (2) refused to provide a written confirmation that its due diligence investigation had been satisfactorily completed before Debtors filed their Chapter 11 petitions. Thus, Debtor's motion for partial summary judgment is due to be granted. PEPI's motion for summary judgment will be denied.

FACTUAL BACKGROUND

Overview

Fiddler's Creek, LLC, was the developer of a large planned community near Naples, Florida. The "Fiddler's Creek" development encompassed nearly 4,000 acres, including: unplatted parcels with no infrastructure; developed neighborhoods requiring maintenance; a championship golf course; a marina; Gulf Coast condominiums; and homes under construction. Much of the real estate was encumbered by liens for multiple series of bonds issued by two Community Development Districts (the "CDD's"). Some parcels were also encumbered by separate mortgages held by eight lenders (the "Pre-Petition Lenders").

Debtors plausibly assert that they were compelled to seek Chapter 11 relief after the real estate crisis in 2008 severely impacted their cash flow. In turn, they determined that they would need a credit facility to fund operations after the Chapter 11 filings (a transaction commonly referred to as a debtor-in-possession loan, or "DIP Loan").⁷

Through the fall of 2009 and January of 2010, the parties negotiated the terms of the Commitment Letter and a term sheet.⁸ The Commitment Letter was signed on January 27, 2010, but dated as of December 31, 2009. It called for PEPI to provide up to $27 million, to be drawn as needed in accordance with an 18-month budget.⁹ The DIP Loan was to be secured by a first mortgage on all of the Debtors' assets. As to some parcels, this lien would "prime" the existingmortgages of the Pre-Petition Lenders.¹⁰ The parties anticipated that the initial borrowing would be about $2 million.¹¹ The Commitment Letter incorporated a final term sheet and multiple due diligence checklists.

PEPI was to provide the DIP Loan documents, as to which the Commitment Letter required:

"The terms and conditions of the documentation of the Credit Facility shall be substantially the same as those set forth herein and in the Term Sheet and such documentation shall not contain additional terms, covenants, conditions, representations and warranties materially different than those required herein."¹²

For nearly three weeks, the parties engaged in numerous email exchanges and conference calls to address substantive issues. The Debtors worked with PEPI to clear the numerous items on the due diligence checklists.¹³

Ultimately, the parties were unable to agree on whether certain provisions of the Commitment Letter, particularly those that would restrict the lender's enforcement of its real estate liens after a default, could be omitted from the loan documents or restated in terms that materially differed from the Commitment Letter.

The Commitment Letter and the Parties' Negotiations

The Commitment Letter called for an escrow mechanism (the "Escrow Provision") by which consent foreclosure judgments and deeds in lieu of foreclosure would be held in escrow,with a related "valuation mechanism" to establish credits to reduce the debt as the properties were acquired by PEPI from the escrow:

"[T]he final loan documentation for the Credit Facility shall provide (i) for an escrow mechanism to hold consent judgments to any foreclosure in the order of priority in the waterfall below to speed the judgment and foreclosure process, and (ii) for deeds in lieu of foreclosure to be held in escrow, and (iii) for a valuation mechanism so that if property is acquired through a deed that the debt is reduced accordingly."¹⁴

The Commitment Letter also established an agreed sequence by which PEPI would collect its debt from the mortgaged real estate (the "Waterfall Provision"):

"[T]he final loan documentation for the Credit Facility shall provide that [PEPI, as] the Agent and Lender agrees [sic] that it will not foreclose on real property described in a numbered item in the following list unless it has previously used commercially reasonable efforts to first collect out of the property described in the numbered items before it in the below list."¹⁵

PEPI's commitment was subject to several conditions, including its "completion of and reasonable satisfaction in all material respects with a due diligence investigation of the [Debtors] . . . ."¹⁶ According to the supporting affidavit of Attorney Fine, PEPI and its team "methodically completed" the dozens of items on the due diligence checklists.¹⁷

PEPI's obligation to lend was stated to expire on February 8, 2010, less than two weeks after the parties signed the Commitment Letter.¹⁸ That deadline would be reset, however, to adate that was three business days after PEPI notified Debtors that its due diligence investigation was complete; Debtors could then extend PEPI's funding obligation by another 90 days by filing their Chapter 11 petitions within that three-day period:

"The obligations of [PEPI] to provide the Credit Facility under this Commitment Letter if timely accepted and agreed to by the [Debtors], will terminate upon the earlier to occur of: 1) the closing of business on February 8, 2010 (or such later date that is 3 business days after [PEPI] has advised [Debtors] that it has completed its due diligence), unless the [Debtors have] instituted the Bankruptcy Cases on or before that date, and 2) 90 days after the filing of the Bankruptcy Cases unless the . . . Bankruptcy Court overseeing the Bankruptcy Cases has entered an interim order or final order authorizing and approving the Credit Facility on or prior to such date."¹⁹

On January 27, 2010, after the Commitment Letter was signed, Paul Battista (Debtors' lead attorney) sent the following inquiry to Attorney Fine:

"Jeff, thank you for all of your help in getting us to this point. I assume that you and your team are now commencing due diligence in earnest so that we can get to the filing in the next several days. Please let us know what we still need to get to you in order to keep the process moving."²⁰

The Escrow Provision was included, in part, in PEPI's first draft of the loan documents, circulated on February 2, 2010.²¹ So, too, was the Waterfall Provision. Section 10.4 of the draft loan agreement provided that PEPI's "rights and remedies" against any parcel of real estate be restricted to using "commercially reasonable efforts to exercise its rights with respect to each piece of the Reserved Collateral in the order in which it is listed [in the Waterfall] before commencing the exercise of its rights against the next piece of [collateral]."²²

On February 5, 2010, Mr. Battista asked Mr. Fine for an "update on the status of the due diligence and the expected...