Grossman v. Durham Commercial Capital Corp. (In re Ablitt)

• Decision Date: 04 April 2018
• Docket Number: Adv. Pro. 16–01163,Case No. 14–14164–JNF
• Citation: 585 B.R. 644
• Court: U.S. Bankruptcy Court — District of Massachusetts
• Parties: IN RE CONNOLLY GEANEY ABLITT & WILLARD, P.C., Debtor Stewart Grossman, Chapter 7 Trustee of Connolly Geaney Ablitt & Willard, P.C., Plaintiff v. Durham Commercial Capital Corp. and Maasai Holdings, LLC, Defendants

585 B.R. 644

IN RE CONNOLLY GEANEY ABLITT & WILLARD, P.C., Debtor

Stewart Grossman, Chapter 7 Trustee of Connolly Geaney Ablitt & Willard, P.C., Plaintiff

v.Durham Commercial Capital Corp. and Maasai Holdings, LLC, Defendants

Case No. 14–14164–JNF

Adv. Pro. 16–01163

United States Bankruptcy Court, D. Massachusetts.

Signed April 4, 2018

David J. Reier, Posternak Blankstein & Lund LLP, Lee Harrington, Nixon Peabody LLP, Boston, MA, for Plaintiff.

Lee Harrington, Nixon Peabody LLP, Boston, MA, for Defendants.

MEMORANDUM

Joan N. Feeney, United States Bankruptcy Judge

I. INTRODUCTION

The matter before the Court for determination is the Motion for Summary Judgment filed by Maasai Holdings, LLC ("Maasai"). In connection with the motion, the Court must determine an issue of law as to whether Maasai's prepetition lien extends to any recoveries obtained by Stewart Grossman, the Chapter 7 Trustee (the "Trustee" or the "Plaintiff"), of the estate of Connolly Geaney Ablitt & Willard, P.C. (the "Debtor"). The Plaintiff sets forth four counts in his Complaint, namely Count I under 11 U.S.C. § 548(a)(1) through which he seeks avoidance of transfers and the entry of a judgment against Durham Commercial Capital Corp. ("Durham") and Maasai with respect to "Unfactored Collections, Cash Transfer and Assigned Accounts," less the "Rebate," defined in the Complaint, in the amount of $1,057,137.75; Count II under 11 U.S.C. § 544(b) and Mass. Gen. Laws ch. 109, §§ 5 and 6 through which he seeks avoidance of transfers and the entry of a judgment against Durham and Maasai with respect to "Unfactored Collections, Cash Transfer and Assigned Accounts," less the "Rebate," defined in the Complaint, in the amount of $1,057,137.75; Count III under 11 U.S.C. § 550 through which he seeks entry of judgment against Durham and Maasai, as initial transferees of "Unfactored Collections, Cash Transfer and Assigned Accounts" in the amount of $1,057,137.75 against Durham and in the amount of $1,024,799.48 against Maasai; and Count IV under Mass. Gen. Laws ch. 93A, §§ 2 and 11 through which he seeks the entry of judgment against Durham and Maasai in an amount no less than $1,057,137.75, trebled, plus interest from the date the "DCR Transfers," as defined in the Complaint, were made, and attorneys' fees.

On February 22, 2018, the Plaintiff filed a motion to dismiss Count V of his Complaint for Equitable Subordination against Maasai. The Court granted the motion on February 26, 2018.

The issues presented by the Motion for Summary Judgment are whether there are material facts in dispute, and, in particular, whether Maasai's prepetition lien attaches to avoidance power recoveries or to any recovery by the Trustee with respect to his claim under Mass. Gen. Laws ch. 93A, §§ 2 and 11.

The Court heard the summary judgment motion on February 27, 2018. At the conclusion of the hearing, the Court directed Maasai to file a supplemental brief regarding the avoidance power recovery issue by March 9, 2018 and the Plaintiff to file a response by March 16, 2018. After obtaining a brief extension of time to file briefs, both parties complied with this Court's order.

For the reasons set forth below, the Court shall enter an order denying Maasai's Motion for Summary Judgment as the Court concludes there are material facts in dispute. In addition, the Court rejects Maasai's contention that the Trustee's pursuit of fraudulent transfer causes of action against it and Durham are an exercise in futility because the receivables the Debtor allegedly transferred and which the Trustee seeks to recover would be paid, if recovered, to Maasai in partial satisfaction of its prepetition secured claim. The Court concludes, as the Trustee argued, that Maasai's prepetition lien does not attach to avoidance power recoveries or to any recovery under Mass. Gen. Laws ch. 93A.

II. FACTS

For purposes of resolving the issue identified above, the Court accepts Maasai's statement of undisputed facts gleaned from the Plaintiff's Complaint which it set forth in its Supplemental Memorandum of Law in Support of its Motion for Summary Judgment. In his Response to Maasai's brief, the Trustee did not dispute the facts set forth in Maasai's supplemental brief. The Court paraphrases those facts below. That said, Maasai also references facts in its brief that it only mentioned in passing in its initial submissions in support of its Motion for Summary Judgment, in particular, a mortgage securing an obligation that was not owed by the Debtor that was referenced in an Amended and Restated Forbearance Agreement, the interpretation of which the parties dispute.¹

On or about December 21, 2007 Ablitt & Charlton P.C. (a predecessor to the Debtor) executed and delivered to Sovereign Bank a certain promissory note (the "Note" or the "DCR Note") in the principal amount of $1,500,000.00. In connection with the transaction, the Debtor pledged as collateral, inter alia, all of the Debtor's present and future accounts receivable. On or about September 14, 2010, Sovereign Bank, as the seller, and DCR Mortgage IV Sub I, LLC ("DCR Sub I"), as the purchaser, entered into an Asset Sale Agreement, whereby DCR Sub I purchased all of Sovereign Bank's right, title, and interest in outstanding obligations owed by the Debtor. On or about January 28, 2013, DCR Sub I, as the assignor, and DCR Mortgage IV Sub III, LLC ("DCR Sub III"), as the assignee, entered into an "Assignment of Loan Documents and Assumption Agreement," whereby DCR Sub I assigned to DCR Sub III all of DCR Sub I's right, title, and interest in outstanding obligations owing by the Debtor.

On or about February 7, 2013, DCR Sub III ("DCR"), as the seller, and Maasai as the purchaser, entered into a Loan Sale Contract, whereby DCR sold to Maasai all of its rights, title, and interest in outstanding obligations owing by the Debtor under the various loan documents (the "Loan Documents"). The loan was secured by a first position lien covering all assets of the Debtor pursuant to UCC–1 Financing Statement # 200705764210 recorded December 21, 2007 and assigned to Maasai by UCC–3 # 201312192320; and UCC–1 Financing Statement # 201110049970 recorded June 21, 2011 and assigned to Maasai by UCC–3 # 201312192230. The collateral securing the debt expressly included all "General Intangibles," "including, without limitation, all choses in action, causes of action," and "[a]ll products and proceeds of the foregoing ..."²

Maasai also sets forth in its brief the following: 1) the Debtor was in default of its obligations to its secured lenders and had absolutely no ability to obtain financing from any source; 2) the Debtor's secured lender had accelerated both the $1.5 million revolving credit facility debt and a $4 million mortgage obligation, each of which were cross-defaulted and cross-collateralized; 3) Maasai stepped in to purchase or resolve these debts in default as part of the Note purchased from DCR and "[t]hereafter, in addition to access to $3 million in new capital and a two-year debt forbearance on the $1.5 million the Note, the Debtor was also relieved of a $4 million guaranty obligation secured by a lien on all of the Debtor's assets" pursuant to an Amended and Restated Forbearance Agreement. Maasai explains:

The Trustee challenged the value of the mortgage release because the mortgage was not in the Debtor's name but rather in an entity wholly-owned by Debtor principal Steven Ablitt ("Ablitt"), SAA Group, LLC ("SAA"). However, the Debtor had guaranteed SAA's mortgage obligation and pledged all of its assets as collateral. The Debtor's assets were relieved of the $4 million guaranty in connection with Maasai's debt purchase. Thus $5.5 million in debt was lifted off the Debtor's receivables so it could use these receivables for working capital. Even assuming the facts as alleged, the Debtor received at least reasonably equivalent value for the transfers at issue.

Further the Trustee admits in his complaint that the Debtor transferred accounts receivable to Durham, not cash. Without the release of security in the amount of $5.5 million Debtor would never have been able to transfer the receivables in the first place. All of the receivables transferred to Durham were subject to DCR's first lien at the time of transfer.

According to Maasai, the revolving line of credit amount under the loan agreement was $1,493,612.61, plus an additional $263,964.82 disbursed at closing, for a total loan amount of $1,757,577.43. It adds that additional sums were then disbursed to the Debtor. For example, according to Maasai, Durham advanced: $1,215,185.47 to the Debtors in February 2013;³ $659,543.18 in March 2013; $877,217.30 in April 2013; and $1,057,003.11 in May 2013. Maasai maintains that these advances continued through June of 2014. It further states that as a result of the Debtor's breach of the Loan Documents, it became entitled to collect from the Debtor's clients all monies owing to the Debtor for provision of legal services. It contends that the total amount due to it under Loan Documents as of the date the Debtor commenced its bankruptcy case was $3,006,493.72, together with such interest, fees and costs that continue to accrue after the petition date as allowable under applicable law and the Loan Documents.

III. POSITIONS OF THE PARTIES

A. Maasai

Maasai maintains that it is not disputed that all of the receivables allegedly fraudulently transferred by the Debtor to Durham and/or Maasai were subject to DCR's lien at the time of transfer and that Maasai holds a valid, perfected security interest in all of the Debtor's assets as successor to DCR. That security interest, it contends, expressly includes a lien on "causes of action" and all "products and proceeds" thereof. Thus, it asserts the only issue is whether that prepetition lien attaches to any recovery the Trustee might realize under his fraudulent transfer causes of action or cause of action under Mass. Gen. Laws ch. 93A.

Maasai references 11...